Exhibit 10.2
THE SECURITIES REPRESENTED BY THIS INSTRUMENT, TOGETHER WITH ANY SECURITIES
ISSUABLE UPON ITS CONVERSION, IF ANY, HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("1933 ACT"), OR QUALIFIED UNDER APPLICABLE
STATE SECURITIES LAWS. SUCH SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE BEEN
ACQUIRED FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO, OR IN CONNECTION
WITH, THE SALE OR DISTRIBUTION THEREOF. NO SALE OR DISPOSITION OF THIS
CONVERTIBLE NOTE OR THE SECURITIES ISSUABLE UPON ITS CONVERSION, IF ANY, MAY BE
EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN
OPINION OF COUNSEL FOR THE HOLDER, SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM
THE SECURITIES AND EXCHANGE COMMISSION
$______________ NOVEMBER __, 2007
HC INNOVATIONS, INC.
TWELVE-MONTH 10% SECURED CONVERTIBLE NOTE
DUE: NOVEMBER __, 2008
For value received, HC INNOVATIONS, INC. (the "Company"), a Delaware
corporation, hereby promises to pay ___________, or their assigns ("Holder") the
principal sum of _______________US Dollars ($_____________) in lawful money of
the United States with interest on the outstanding principal balance at the rate
of ten percent (10%) per annum payable on November __, 2008 (the "Maturity
Date"), as provided herein, unless converted to an ownership interest in the
Company or unless this Note becomes earlier due and payable, as indicated below.
All interest due under this Note shall accrue and be capitalized hereunder until
repayment or conversion as provided herein and shall be calculated on the basis
of a 360-day year. Upon an Event of Default, subject to any applicable notice
and grace periods, in addition to any other rights or remedies of the
Noteholder, interest shall accrue on the unpaid principal balance of this Note
from and beginning on the date due until paid in full at a rate equal to the
lesser of twelve percent (12.0%) per annum or the maximum rate allowable under
applicable law.
1. CONVERSION.
1.1 OPTIONAL CONVERSION. At any time, and from time to time, prior
to the Maturity Date, the Holder shall have the option to convert all or a
portion of the principal and accrued but unpaid interest with respect to this
Note into shares of the Company's Common Stock at the Conversion Price (as
defined herein) on or prior to the Maturity Date. The "Conversion Price" is
equal to seventy percent (70%) of the average of the lowest bid prices for the
Company's common stock for the consecutive twenty (20) trading days immediately
prior to the Conversion Date (as
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defined below); provided, however, the Conversion Price shall not be lower than
$1.00 per share. Further, upon the closing of a Qualified Financing (as defined
herein), the Holder shall have the right to either: (i) tender all or a portion
of this Note (in lieu of cash) for securities issued in the Qualified Financing,
receiving credit for all unpaid principal and interest then due on this Note, or
(ii) have all or a portion of the unpaid principal and interest then due on the
Note paid in full. In the event of an Optional Conversion pursuant to Section
1.1(i) above, the Holder may convert the principal and unpaid interest due under
this Note at a price equal to the lower of (a) a thirty percent (30%) discount
to the issue price of the new securities offered in the Qualified Financing; or
(b) a thirty percent (30%) discount to the average of the lowest bid prices for
the Company's common stock for the consecutive twenty (20) trading days prior to
the announcement of the issue of new securities in the Qualified Financing;
provided, however, that the tender price pursuant to this provision (b) shall
not be lower than $1.00 per share.
A "Qualified Financing" is defined as the sale for cash by the Company
in a transaction or series of related transactions of debt, equity,
equity-linked securities or any combination thereof (the "SECURITIES")
generating gross proceeds to the Company (excluding the principal amount of any
Notes tendered in connection therewith) of at least $10,000,000.
1.2 TERMS OF CONVERSION. Any conversion hereunder shall occur on
the date the Holder tenders notice to the Company of Holder's election to
convert (the "Conversion Date") and shall be upon the following terms and
conditions:
(a) To effect optional conversion, Holder shall, on or
prior to the Maturity Date, deliver to Company at its principal office Holder's
written notice of conversion, a copy of which is attached hereto as Exhibit A.
(b) Holder shall, within five (5) Business Days (as
defined below) after the Conversion Date, surrender to the Company at its
principal office this Note with power attached duly endorsed by Holder for
transfer and cancellation. In the event of partial conversion of this Note as
provided herein, the Company shall issue a replacement note for any amount of
this Note not so converted. Upon surrender and cancellation of this Note, in
whole or in part, and after compliance with all applicable federal and state
securities laws, Holder shall, without further act of Holder or the Company,
become the owner of the Company's Common Stock (the "Securities") into which the
Note converts for all purposes, and the Company at its expense will cause to be
issued in the name of and delivered to Holder certificates representing the
Securities and any money or other property that Holder is entitled to receive
upon conversion under the terms of this Note. Holder shall not have any rights
of a shareholder with regard to the Securities into which the Note converts and
shall not receive any dividends or other distributions payable on the Securities
until such time as Holder surrenders the Note or any portion thereof (or an
affidavit of lost promissory note with indemnities satisfactory to the Company).
Upon conversion of only a portion of the outstanding balance of this Note,
pursuant to section1.1, the Company shall issue and deliver to Noteholder a
replacement convertible note, in the form of this Note, effective as of the date
first set forth above for remaining principal balance. "Business
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Day" shall mean any day other than a Saturday, Sunday or a day on which
commercial banks in the City of New York are authorized or required by law or
executive order to remain closed.
1.3 EFFECT OF CONVERSION. In the event of a conversion hereof,
this Note, to the extent converted, shall be of no further force or effect as of
the close of business on the date such conversion occurs.
1.4 FRACTIONAL SHARES. No fractional shares of Common Stock or
scrip shall be issued upon conversion of the Note. In lieu of any fractional
shares of Common Stock which would otherwise be issuable upon conversion, the
Company may, at its option, pay a cash adjustment in respect of such fractional
interest.
1.5 RESERVATION OF SHARES. Until the amounts due under this Note
are paid, in full, the Company shall reserve out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the Note, sufficient shares of Common Stock to provide for the conversion of the
Note.
1.6 VALID ISSUANCES. All shares of Common Stock which may be
issued upon conversion of the Note will upon issuance by the Company be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof, and the Company shall take no
action which will cause a contrary result.
2. PAYMENTS OF PRINCIPAL AND INTEREST.
2.1 PAYMENT OF PRINCIPAL AND INTEREST. Principal and Interest
shall be payable in a single lump sum on the Maturity Date, unless converted to
an ownership interest in the Company or unless this Note becomes earlier due and
payable, as indicated herein. All interest due under this Note shall accrue and
be capitalized hereunder until repayment or conversion as provided herein and
shall be calculated daily on the basis of a 360-day year.
2.2 PREPAYMENT OF NOTE. The Company has the option to repay all,
but not less than all, unpaid principal and accrued interest due on this Note at
any time prior to the Maturity Date, without penalty or premium, provided that
the Company shall deliver to the Holders written notice of any intended
prepayment at least thirty (30) calendar days prior to the date of such
prepayment ("Prepayment Notice"). The Holder may convert all, but not less than
all, unpaid principal and accrued interest due on this Note as provided herein
at any time beginning on the date of the Prepayment Notice and ending on the
thirtieth (30th) calendar day thereafter.
2.3 TAXES. The Company may withhold and pay over to the relevant
authorities any backup withholding from any interest payment to be made to the
Holder to the extent that such withholding is required by the Internal Revenue
Code or any other applicable federal law, rule, or regulation.
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3 DEFAULT. The entire unpaid principal balance of this Note shall, at the
election of the Holder, become immediately due and payable upon the occurrence
of any of the following events of default:
(a) The failure of the Company to make payment in full of
interest and principal on or before the Maturity Date.
(b) The filing by the Company of a voluntary petition in
bankruptcy, arrangement, or other such relief under federal bankruptcy
law, or a voluntary petition for the appointment of a receiver or for
such other relief under the laws of any State, or the making by the
Company of an assignment of all or substantially all of its assets for
the benefit of creditors.
(c) The dissolution of the Company by operation of law,
shareholder or board of directors' action, or otherwise.
(d) The adjudication of the Company as bankrupt or
insolvent, the appointment of a receiver for all or substantially all
of the Company's assets if such adjudication, order, or appointment is
made upon a petition filed against the Company and is not within sixty
(60) days after it is made, vacated, or stayed on appeal or otherwise,
or if the Company by any action or failure to act signifies its
approval thereof, consent thereto and acquiescence therein.
(e) an event of default occurs, which is not cured within
the time period allowed, under the Security Agreement entered into
between the Company and the Holder.
Notwithstanding this Section 3, the Holder may, at its option, deem the
death of the Company's Chief Executive Officer, David Chess, to be an event of
default as provided herein.
The Company agrees to pay Holder the reasonable paralegal fees,
attorneys' fees and costs, incurred by Holder for the services of counsel
employed after maturity or default to collect this Note or any principal or
interest due hereunder, including, but not limited to any of the foregoing
incurred in connection with any trial, or appellate proceedings, or in any
proceedings under the United States Bankruptcy Code or in any post judgment
proceedings.
4. REPRESENTATIONS AND WARRANTIES OF HOLDER. For the purpose of complying
with applicable securities laws, Holder makes the following representations and
warranties.
4.1. PURCHASE FOR OWN ACCOUNT. Holder represents that he is
acquiring this Note and will acquire any Securities solely for Holder's own
account and beneficial interest for investment
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and not for sale or with a view to distribution of the Securities or any part
thereof, have no present intention of selling (in connection with a distribution
or otherwise), granting any participation in, or otherwise distributing the
same, and does not presently have reason to anticipate a change in such
intention.
4.2. INFORMATION. Holder acknowledges that he has received all the
information he has requested from the Company and he considers necessary or
appropriate for deciding whether to acquire the Securities. Holder represents
that he has had an opportunity to ask questions and receive answers from the
Company regarding the terms and conditions of the offering of the Securities and
to obtain any additional information necessary to verify the accuracy of the
information given Holder.
4.3. ABILITY TO BEAR ECONOMIC RISK. Holder acknowledges that
investment in the Securities involves a high degree of risk, and represents that
he is able, without materially impairing his financial condition, to hold the
Securities for an indefinite period of time and to suffer a complete loss of his
investment.
4.4. FURTHER LIMITATIONS ON DISPOSITION. Without in any way
limiting the representations set forth above, Holder further agrees not to make
any disposition of all or any portion of the Securities unless and until:
4.4.1. There is then in effect a Registration Statement
under the 1933 Act covering such proposed disposition and such disposition is
made in accordance with such Registration Statement; or
4.4.2. Holder shall have notified the Company of the
proposed disposition, and if reasonably requested by the Company, Holder shall
have furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company, that such disposition will not require registration under the
1933 Act or any applicable state securities laws; or
4.5 PERMITTED TRANSFERS. Notwithstanding the provisions of
paragraphs (4.4.1) and (4.4.2) above, no such registration statement or opinion
of counsel shall be necessary for a transfer by Holder by gift, will or
intestate succession to any spouse or lineal descendants or ancestors, if all
transferees agree in writing to be subject to the terms hereof to the same
extent as if they were Lender hereunder.
4.6. EXPERIENCE. Holder is a) an "accredited investor" (as defined
in Regulation D promulgated under the 1933 Act) and b) either alone or with his
duly appointed "purchaser representative" (as defined in Regulation D
promulgated under the 1933 Act), has such knowledge and experience in financial
and business matters that Holder is able to evaluate the merits and risks of an
investment in the Notes or has a pre-existing personal or business relationship
with the Company or one of its officers or directors which is of a nature and
duration
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that Holder is in a position to evaluate the character, the business acumen, and
the general business and financial circumstances of the Company and its
subsidiaries.
4.7. FURTHER ASSURANCES. Holder agrees and covenants that at any
time and from time to time he will promptly execute and deliver to the Company
such further instruments and documents and take such further action as the
Company may reasonably require in order to carry out the full intent and purpose
of this Agreement.
5. SECURITY INTEREST. The Company's obligations under this Note are
secured by that certain Security Agreement, dated the date hereof, made by the
Company in favor of the Holder.
6. RANKING
6.1. SUBORDINATION. The obligations of the Company hereunder shall
be subordinated to all other current secured debt of the Company (the "Senior
Indebtedness"), as more fully described in that certain Subscription Agreement
for the Purchase of Securities, entered into between the Company and the Holder
on the date hereof. The Company will not incur new lines of credit, credit
facilities or otherwise incur any additional indebtedness without the consent of
the Holder, which consent may be withheld in the sole discretion of the
undersigned; provided, however, that such prohibition shall not apply to the
Qualified Financing, and trade payables incurred in the ordinary course of
business.
6.2. EQUAL PRIORITY WITH OTHER NOTES. The security interest under
this Note shall have equal priority with security interests granted under the
other Notes.
6.3. DISTRIBUTION ON DISSOLUTION, LIQUIDATION, AND REORGANIZATION.
In the event of any payment or distribution of assets or securities of the
Company, whether in cash, property, or securities, to creditors upon any
dissolution or winding up or total or partial liquidation, or reorganization of
the Company, whether voluntary or involuntary and whether in bankruptcy,
insolvency, or receivership proceedings or upon an assignment of the benefit of
creditors or any other marshaling of the assets or liabilities of the Company,
all Senior Indebtedness shall first be paid in full, or due provision made for
such payment, in accordance with terms of such Senior Indebtedness, before any
payment is made on account of the Notes.
7. WAIVERS. Except as otherwise expressly set forth herein, the Company,
to the extent permitted by applicable law, waives presentment for payment,
protest and demand, and notice of protest, demand and/or dishonor and nonpayment
of this Note and all other notices or demands otherwise required by law that the
Company may lawfully waive. No failure to accelerate the Loan evidenced hereby
by reason of an Event of Default, nor any acceptance of a past due payment or
granting of any indulgence from time to time, shall be construed: (A) as a
novation of this Note or a reinstatement of the indebtedness evidenced hereby,
or as a waiver of such right of acceleration or of the right of the Holder
thereafter to insist upon strict compliance under the terms of this Note: or (B)
to prevent the exercise of such right of acceleration or any other right
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granted hereunder or under any statute or rule of law or equity now or hereafter
in effect. No renewal or extension of this Note shall operate to release,
discharge, modify, change or affect the original liability of the Company under
this Note, either in whole or in part, unless the Holder expressly agrees
otherwise in writing. No provision of this Note may be changed, waived,
discharged or terminated except in accordance with terms of this Note. No single
or partial exercise by the Holder of any right hereunder, under the Security
Agreement or any other agreements between the Company and the Holder will
preclude any further or other exercise thereof or the exercise of any other
rights. No delay or omission on the part of the Holder in exercising any right
hereunder will operate as a waiver of such right or of any other right under
this Note.
8. REMEDIES CUMULATIVE. No right or remedy conferred upon or reserved to
Holder, or now or hereafter existing at law or in equity or by statute or other
legislative enactment, is intended to be exclusive of any other right or remedy,
and each and every such right or remedy shall be cumulative and concurrent, and
shall be in addition to every other such right or remedy, and may be pursued
singly, concurrently, successively or otherwise, at the sole discretion of
Holder, and shall not be exhausted by any one exercise thereof, but may be
exercised as often as occasion therefor shall occur. No act of Holder shall be
deemed or construed as an election to proceed under any one such right or remedy
to the exclusion of any other such right or remedy. Furthermore, each such right
or remedy of Holder shall be separate, distinct and cumulative and none shall be
given effect to the exclusion of any other.
9. MISCELLANEOUS.
9.1. BINDING AGREEMENT. The terms and conditions of this Note,
Subscription Agreement for the Purchase of Securities, Warrant, Registration
Rights Agreement and Security Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the Company and Holder.
Nothing in this Note, express or implied, is intended to confer upon any third
party any rights, remedies, obligations, or liabilities under or by reason of
this Note, except as expressly provided in this Note.
9.2 AMENDMENT. No modification to this Note, nor any waiver of any
rights, shall be effective unless assented to in writing by the party to be
charged, and the waiver of any breach or default shall not constitute a waiver
of any other right or any subsequent breach or default. Any provision of this
Note requiring the consent, election or approval of a Majority in Interest,
shall not be modified or waived without the approval of a Majority in Interest.
Notwithstanding the foregoing, if before this Note is either paid in full or
converted into equity, any additional note is issued by the Company on terms
more favorable to the holder than the terms of this Note, then to the fullest
extent permitted by law, this Note shall automatically and without further
action of any party be amended to contain such more favorable terms. The
"Majority in Interest" shall mean those persons who have loaned the Company over
50% of the amount borrowed by it under this Note and any other notes issued by
the Company on substantially the same terms as this Note (collectively, the
"Notes").
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9.3. GOVERNING LAW, JURISDICTION AND VENUE. THIS NOTE WILL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE
WITHOUT REGARD TO ANY CONFLICTS OF LAWS PROVISIONS THEREOF THAT WOULD OTHERWISE
REQUIRE THE APPLICATION OF THE LAW OF ANY OTHER JURISDICTION.
(i) JURISDICTION. The Company irrevocably submits to the
jurisdiction of any State or Federal Court sitting in the State of New York,
County of New York, over any suit, action, or proceeding arising out of or
relating to this Note. The Company irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of the venue of any such suit, action, or proceeding brought in such a court and
any claim that suit, action, or proceeding has been brought in an inconvenient
forum. The Company agrees that the service of process upon it mailed by
certified or registered mail, postage prepaid and return receipt requested (and
service so made shall be deemed complete three days after the same has been
posted as aforesaid) or by personal service shall be deemed in every respect
effective service of process upon it in any such suit or proceeding. Nothing
herein shall affect Holder's right to serve process in any other manner
permitted by law. The Company agrees that a final non-appealable judgment in any
such suit or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on such judgment or in any other lawful manner.
(II) NO JURY TRIAL. THE COMPANY HEREBY KNOWINGLY AND
VOLUNTARILY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A TRIAL BY JURY WITH
RESPECT TO ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR IN CONNECTION
WITH, THIS NOTE.
9.4. CONSTRUCTION. The titles and subtitles used in this Note are
used for convenience only and are not to be considered in construing or
interpreting this Note. The language of this Note shall be construed according
to its fair meaning and not strictly for or against any party.
9.5. NOTICES. All notices, requests, demands and other
communications under this Note shall be in writing and shall be deemed to have
been duly received on the date of service if served personally or by facsimile
(with electronically verified receipt) on the party to whom notice is to be
given, or on the third day after mailing if mailed to the party to whom notice
is to be given by registered or certified mail, postage prepaid, and properly
addressed as follows:
To Holder:
-----------------------
-----------------------
To the Company:
HC Innovations, Inc.
10 Progress Drive, Suite 200
Shelton, CT 06484
Attn: David Chess, MD, CEO
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With a copy to:
Gersten Savage, LLP
600 Lexington, Avenue, 9th Floor
New York, NY 10022
Attention: Jay M. Kaplowitz, Esq.
Any party may change its address for purposes of this Section by giving
the other parties written notice of the new address in the manner set forth
above.
9.6. SEVERABILITY. If any of the provisions of this Note are
determined to be invalid, illegal, or unenforceable, such provisions shall be
modified to the minimum extent necessary to make such provisions enforceable,
and the validity, legality, and enforceability of the remaining provisions of
this Note shall continue in full force and effect to the extent the economic
benefits conferred upon the Company and Holder by this Note remain substantially
unimpaired.
9.7. RESOLUTION OF DISPUTES. All claims and disputes between or
among the parties relating in any way to this Note or its performance,
interpretation, validity, breach or to any other rights, duties, or obligations
between the Company and Holder whether or not arising under this Note (the
"Dispute") shall be subject to a good faith effort at resolution through
non-binding mediation before any litigation may be commenced. Either party may
tender the Dispute to mediation with a third party impartial mediator agreed to
by both parties. In the event the parties do not agree on the mediator within
thirty (30) days of a request by either party for mediation of the Dispute,
either party may submit the Dispute to JAMS in New York, New York and the
parties agree that JAMS may select the mediator to mediate the Dispute. Any
mediation fee shall be divided equally among the parties.
9.8. ATTORNEYS' FEES. Should any litigation be commenced between
the Company and Holder concerning the rights or obligations under this Note, the
party prevailing in such litigation shall be entitled, in addition to such other
relief as may be granted, to a reasonable sum as and for its attorneys' fees,
experts' fees, costs and expenses in such litigation. This amount shall be
determined by the court in such litigation or in a separate action brought for
that purpose.
9.9. POST JUDGMENT. In addition to any amount received as
attorneys' fees, the prevailing party also shall be entitled to receive from the
party held to be liable, an amount equal to the attorneys' fees and costs
incurred in enforcing any judgment against such party. This Section is severable
from the other provisions of this Note and survives any judgment and is not
deemed merged into any judgment.
9.10. ENTIRE AGREEMENT. This Note constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and no party shall be liable or
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bound to any other in any manner by any representations, warranties, covenants
and agreements except as specifically set forth herein.
9.11 SUCCESSORS AND ASSIGNS. This Note inures to the benefit of
Holder and binds Company, its successors and assigns, and the words "Holder" and
"Company" whenever occurring herein shall be deemed and construed to include
such respective heirs, successors and assigns.
Executed on November __, 2007.
HC INNOVATIONS, INC.
By:
---------------------------
Name:
Title:
Agreed and Acknowledged
-------------------------------
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NOTICE OF CONVERSION
Pursuant to Section 1 of that certain Twelve-Month 10% Secured Convertible Note
(the "Note") issued to ________________________, the undersigned hereby
exercises his/her/its right to convert the full principal amount of the Note
into shares of HC Innovations, Inc. (the "Company") Common Stock. As per the
Note, the undersigned understands that the Conversion Price (as defined in the
Note) will be equal to $____.
Date of Note:
Amount:
Maturity Date:
By:
-------------------------------------------------------------
[Names of Debenture Holder]
Date:
-----------------------------
1) ENCLOSE ORIGINAL SIGNED DEBENTURE AND RETURN TO:
- ---------------------------------------------------
JEFFREY L. ZWICKER
CHIEF FINANCIAL OFFICER
HC INNOVATIONS, INC.
10 PROGRESS DRIVE, SUITE 200
SHELTON, CT 06484
2) PREPAID FEDEX ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE