THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE AND
THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO WIZZARD SOFTWARE CORP.THAT SUCH REGISTRATION IS NOT
REQUIRED.
CONVERTIBLE NOTE
FOR VALUE RECEIVED, WIZZARD SOFTWARE CORP., a Colorado corporation
(hereinafter called "Borrower"), hereby promises to pay to ALPHA CAPITAL
AKTIENGESELLSCHAFT, Pradafant 7, 9490 Furstentums, Vaduz, Lichtenstein, Fax:
011-42-32323196 (the "Holder") or order, without demand, the sum of Eight
Hundred Thousand Dollars ($800,000.00) ("Principal"), with simple interest
accruing at the annual rate of five percent (5%) on June 22, 2006 (the
"Maturity Date").
This Note has been entered into pursuant to the terms of a subscription
agreement between the Borrower and the Holder, dated of even date herewith
(the "Subscription Agreement"), and shall be governed by the terms of such
Subscription Agreement. Unless otherwise separately defined herein, all
capitalized terms used in this Note shall have the same meaning as is set
forth in the Subscription Agreement. The following terms shall apply to this
Note:
ARTICLE I
GENERAL PROVISIONS
1.1 Interest Rate. Simple interest payable on this Note shall
accrue at the annual rate of five percent (5%) and be payable upon each
conversion, commencing April 1, 2005 and semi-annually thereafter, and on the
Maturity Date, accelerated or otherwise, when the principal and remaining
accrued but unpaid interest shall be due and payable, or as described below.
1.2 Manner of Payment. Borrower may elect to pay sixty percent
of the regular one-half yearly interest due on this Note by delivering
unlegended registered Common Stock in lieu of cash not later than the due date
of such interest payment. Such Common Stock will be valued at the average
closing price of the Common Stock for the trading day immediately preceding
the relevant payment due date.
1.3 Payment Grace Period. The Borrower shall have a ten (10)
day grace period to pay any monetary amounts due under this Note, after which
grace period a default interest rate of fifteen percent (15%) per annum shall
apply to the amounts owed hereunder.
ARTICLE II
CONVERSION RIGHTS
The Holder shall have the right to convert the principal due under this
Note into Shares of the Borrower's Common Stock as set forth below.
2.1. Conversion into the Borrower's Common Stock.
(a) The Holder shall have the right from and after the date of the
issuance of this Note and then at any time until this Note is fully paid, to
convert any outstanding and unpaid Principal portion of this Note and accrued
interest, at the election of the Holder (the date of giving of such notice of
conversion being a "Conversion Date") into fully paid and nonassessable shares
of Common Stock as such stock exists on the date of issuance of this Note, or
any shares of capital stock of Borrower into which such Common Stock shall
hereafter be changed or reclassified, at the conversion price as defined in
Section 2.1(b) hereof (the "Conversion Price"), determined as provided herein.
Upon delivery to the Borrower of a Notice of Conversion as described in
Section 7 of the Subscription Agreement of the Holder's written request for
conversion, Borrower shall issue and deliver to the Holder within four (4)
business days from the Conversion Date ("Delivery Date") that number of shares
of Common Stock for the portion of the Note converted in accordance with the
foregoing. At the election of the Holder, the Borrower will deliver accrued
but unpaid interest on the Note in the manner provided in Section 1.2 through
the Conversion Date directly to the Holder on or before the Delivery Date (as
defined in the Subscription Agreement). The number of shares of Common Stock
to be issued upon each conversion of this Note shall be determined by dividing
that portion of the principal of the Note and interest to be converted, by the
Conversion Price.
Subject to adjustment as provided in Section 2.1(c) hereof, the
Conversion Price per share shall be $1.50 ("Maximum Base Price").
(c) The Maximum Base Price and number and kind of shares or other
securities to be issued upon conversion determined pursuant to Section 2.1(a),
shall be subject to adjustment from time to time upon the happening of certain
events while this conversion right remains outstanding, as follows:
A. Merger, Sale of Assets, etc. If the Borrower at any time shall
consolidate with or merge into or sell or convey all or substantially all its
assets to any other corporation, this Note, as to the unpaid principal portion
thereof and accrued interest thereon, shall thereafter be deemed to evidence
the right to purchase such number and kind of shares or other securities and
property as would have been issuable or distributable on account of such
consolidation, merger, sale or conveyance, upon or with respect to the
securities subject to the conversion or purchase right immediately prior to
such consolidation, merger, sale or conveyance. The foregoing provision shall
similarly apply to successive transactions of a similar nature by any such
successor or purchaser. Without limiting the generality of the foregoing, the
anti-dilution provisions of this Section shall apply to such securities of
such successor or purchaser after any such consolidation, merger, sale or
conveyance.
B. Reclassification, etc. If the Borrower at any time shall, by
reclassification or otherwise, change the Common Stock into the same or a
different number of securities of any class or classes that may be issued or
outstanding, this Note, as to the unpaid principal portion thereof and accrued
interest thereon, shall thereafter be deemed to evidence the right to purchase
an adjusted number of such securities and kind of securities as would have
been issuable as the result of such change with respect to the Common Stock
immediately prior to such reclassification or other change.
C. Stock Splits, Combinations and Dividends. If the shares of
Common Stock are subdivided or combined into a greater or smaller number of
shares of Common Stock, or if a dividend is paid on the Common Stock in shares
of Common Stock, the Conversion Price shall be proportionately reduced in case
of subdivision of shares or stock dividend or proportionately increased in the
case of combination of shares, in each such case by the ratio which the total
number of shares of Common Stock outstanding immediately after such event
bears to the total number of shares of Common Stock outstanding immediately
prior to such event.
D. Share Issuance. If at any time this Note is outstanding the
Borrower shall issue or agree to issue any common stock or securities
convertible into or exercisable for shares of common stock (or modify any of
the foregoing which may be outstanding) except for the Excepted Issuances (as
defined in the Subscription Agreement) for a consideration less than the
Conversion Price in effect at the time of such issue, then, and thereafter
successively upon each such issue, the Conversion Price shall be reduced to
such other lower issue price. For purposes of this adjustment, the issuance
of any security carrying the right to convert such security into shares of
Common Stock or of any warrant, right or option to purchase Common Stock shall
result in an adjustment to the Conversion Price upon the issuance of security
and again upon the issuance of shares of Common Stock at any time upon
exercise of such conversion or purchase rights if such issuance is at a price
lower than the then applicable Conversion Price.
(d) Whenever the Conversion Price is adjusted pursuant to Section
2.1(c) above, the Borrower shall promptly mail to the Holder a notice setting
forth the Conversion Price after such adjustment and setting forth a brief
statement of the facts requiring such adjustment.
(e) During the period the conversion right exists, Borrower will
reserve from its authorized and unissued Common Stock a sufficient number of
shares to provide for the issuance of Common Stock upon the full conversion of
this Note. Borrower represents that upon issuance, such shares will be duly
and validly issued, fully paid and non-assessable. Borrower agrees that its
issuance of this Note shall constitute full authority to its officers, agents,
and transfer agents who are charged with the duty of executing and issuing
stock certificates to execute and issue the necessary certificates for shares
of Common Stock upon the conversion of this Note.
2.2 Method of Conversion. This Note may be converted by the
Holder in whole or in part as described in Section 2.1(a) hereof and the
Subscription Agreement. Upon partial conversion of this Note, a new Note
containing the same date and provisions of this Note shall, at the request of
the Holder, be issued by the Borrower to the Holder for the principal balance
of this Note and interest which shall not have been converted or paid.
2.3 Mandatory Conversion. Provided an Event of Default has not
occurred, then, commencing after the Actual Effective Date, the Borrower will
have the option by written notice to the Holder ("Notice of Mandatory
Conversion") of compelling the Holder to convert all or a portion of the
outstanding and unpaid principal of the Note and accrued interest, thereon,
into Common Stock at the Conversion Price then in affect ("Mandatory
Conversion"). The Notice of Mandatory Conversion, which notice must be given
on the first day following a consecutive seven (7) day trading period during
which the closing bid price for the Company's Common Stock as reported by
Bloomberg, LP for the Principal Market shall be more than $3.00 each day with
an average daily trading volume of 80,000 shares. The date the Notice of
Mandatory Conversion is given is the "Mandatory Conversion Date." The Notice
of Mandatory Conversion shall specify the aggregate principal amount of the
Note which is subject to Mandatory Conversion, which amount may not exceed in
the aggregate, for all Holders who received Notes similar in term and tenure
as this Note, the dollar volume of Common Stock traded on the Principal Market
during the seven (7) trading days immediately preceding the Mandatory
Conversion Date. Mandatory Conversion Notices must be given proportionately to
all Holders of Notes who received Notes similar in term and tenure as this
Note. The Borrower shall reduce the amount of Note principal and interest
subject to a Notice of Mandatory Conversion by the amount of Note Principal
and interest for which the Holder had delivered a Notice of Conversion to the
Borrower during the twenty (20) trading days preceding the Mandatory
Conversion Date. Each Mandatory Conversion Date shall be a deemed Conversion
Date and the Borrower will be required to deliver the Common Stock issuable
pursuant to a Mandatory Conversion Notice in the same manner and time period
as described in Section 2.2 above.
2.4 Maximum Conversion. The Holder shall not be entitled to
convert on a Conversion Date that amount of the Note in connection with that
number of shares of Common Stock which would be in excess of the sum of (i)
the number of shares of Common Stock beneficially owned by the Holder and its
affiliates on a Conversion Date, (ii) any Common Stock issuable in connection
with the unconverted portion of the Note, and (iii) the number of shares of
Common Stock issuable upon the conversion of the Note with respect to which
the determination of this provision is being made on a Conversion Date, which
would result in beneficial ownership by the Holder and its affiliates of more
than 4.99% of the outstanding shares of Common Stock of the Borrower on such
Conversion Date. For the purposes of the provision to the immediately
preceding sentence, beneficial ownership shall be determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended, and
Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not
be limited to aggregate conversions of only 4.99% and aggregate conversion by
the Holder may exceed 4.99%. The Holder shall have the authority and
obligation to determine whether the restriction contained in this Section 2.4
will limit any conversion hereunder and to the extent that the Holder
determines that the limitation contained in this Section applies, the
determination of which portion of the Notes are convertible shall be the
responsibility and obligation of the Holder.
ARTICLE III
EVENT OF DEFAULT
The occurrence of any of the following events of default ("Event of
Default") shall, at the option of the Holder hereof, make all sums of
Principal, interest and Premium then remaining unpaid hereon and all other
amounts payable hereunder immediately due and payable, upon demand, without
presentment, or grace period, all of which hereby are expressly waived, except
as set forth below:
3.1 Failure to Pay Principal or Interest. The Borrower fails to
pay any installment of Principal, interest, or other sum due under this Note
when due and such failure continues for a period of fifteen (15) days after
the due date.
3.2 Breach of Covenant. The Borrower breaches any material
covenant or other term or condition of the Subscription Agreement or this Note
in any material respect and such breach, if subject to cure, continues for a
period of fifteen (15) business days after written notice to the Borrower from
the Holder.
3.3 Breach of Representations and Warranties. Any material
representation or warranty of the Borrower made herein, in the Subscription
Agreement, or in any agreement, statement or certificate given in writing
pursuant hereto or in connection therewith shall be false or misleading in any
material respect as of the date made and the Closing Date.
3.4 Receiver or Trustee. The Borrower shall make an assignment
for the benefit of creditors, or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business; or such a receiver or trustee shall otherwise be appointed.
3.5 Judgments. Any money judgment, writ or similar final
process shall be entered or filed against Borrower or any of its property or
other assets for more than $50,000, and shall remain unvacated, unbonded or
unstayed for a period of forty-five (45) days.
3.6 Bankruptcy. Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings or relief under any bankruptcy
law or any law, or the issuance of any notice in relation to such event, for
the relief of debtors shall be instituted by or against the Borrower and if
instituted against Borrower are not dismissed within 45 days of initiation.
3.7 Delisting. Delisting of the Common Stock from the OTC
Bulletin Board ("OTCBB") or such other principal exchange on which the Common
Stock is listed for trading; failure to comply with the requirements for
continued listing on the OTCBB for a period of three consecutive trading days;
or notification from the OTC Bulletin Board or any Principal Market that the
Borrower is not in compliance with the conditions for such continued listing
on the OTCBB or other Principal Market.
3.8 Stop Trade. An SEC or judicial stop trade order or
Principal Market trading suspension that lasts for five or more consecutive
trading days.
3.9 Failure to Deliver Common Stock or Replacement Note.
Borrower's failure to timely deliver Common Stock to the Holder pursuant to
and in the form required by this Note and Sections 7 and 11 of the
Subscription Agreement, or, if required, a replacement Note.
3.10 Non-Registration Event. The occurrence of a Non-
Registration Event as described in Section 11.4 of the Subscription Agreement.
3.11 Cross Default. A default by the Borrower first occurring
after the date of this Note of a material term, covenant, warranty or
undertaking of any other agreement to which the Borrower and Holder are
parties, or the initial occurrence after the date of this Note of a material
event of default under any such other agreement, in each case, which is not
cured after any required notice and/or cure period.
ARTICLE IV
MISCELLANEOUS
4.1 Failure or Indulgence Not Waiver. No failure or delay on
the part of Holder hereof in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege. All rights and
remedies existing hereunder are cumulative to, and not exclusive of, any
rights or remedies otherwise available.
4.2 Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be
in writing and, unless otherwise specified herein, shall be (i) personally
served, (ii) deposited in the mail, registered or certified, return receipt
requested, postage prepaid, (iii) delivered by reputable air courier service
with charges prepaid, or (iv) transmitted by hand delivery, telegram, or
facsimile, addressed as set forth below or to such other address as such party
shall have specified most recently by written notice. Any notice or other
communication required or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address
or number designated below (if delivered on a business day during normal
business hours where such notice is to be received), or the first business day
following such delivery (if delivered other than on a business day during
normal business hours where such notice is to be received) or (b) on the
second business day following the date of mailing by express courier service,
fully prepaid, addressed to such address, or upon actual receipt of such
mailing, whichever shall first occur. The addresses for such communications
shall be: (i) if to the Borrower to: Wizzard Software Corporation, 5001 Baum
Boulevard, Suite 770, Pittsburgh, PA 15213, Attn: Christopher J. Spencer,
President and Chief Executive Officer, telecopier: (412) 621-2625, with a copy
by telecopier only to: Burningham & Burningham, 455 East 500 South, Suite 205,
Salt Lake City, Utah 84111, Attn: Leonard W. Burningham, Esq. and Branden T.
Burningham, Esq., telecopier: (801) 355-7126; and (ii) if to the Holder, to
the name, address and telecopy number set forth on the front page of this
Note, with a copy by telecopier only to Grushko & Mittman, P.C., 551 Fifth
Avenue, Suite 1601, New York, New York 10176, telecopier number: (212) 697-
3575.
4.3 Amendment Provision. The term "Note" and all reference
thereto, as used throughout this instrument, shall mean this instrument as
originally executed, or if later amended or supplemented, then as so amended
or supplemented.
4.4 Assignability. This Note shall be binding upon the Borrower
and its successors and assigns, and shall inure to the benefit of the Holder
and its successors and assigns.
4.5 Cost of Collection. If default is made in the payment of
this Note, Borrower shall pay the Holder hereof reasonable costs of
collection, including reasonable attorneys' fees.
4.6 Governing Law. This Note shall be governed by and construed
in accordance with the laws of the State of New York. Any action brought by
either party against the other concerning the transactions contemplated by
this Agreement shall be brought only in the state courts of New York or in the
federal courts located in the state of New York. Both parties and the
individual signing this Agreement on behalf of the Borrower agree to submit to
the jurisdiction of such courts. The prevailing party shall be entitled to
recover from the other party its reasonable attorney's fees and costs.
4.7 Maximum Payments. Nothing contained herein shall be deemed
to establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate
of interest required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Borrower to the Holder and thus refunded
to the Borrower.
4.8 Redemption. This Note may not be redeemed or paid before or
after the Maturity Date except as described in the Subscription Agreement.
4.9 Shareholder Status. The Holder shall not have rights as a
shareholder of the Borrower with respect to unconverted portions of this Note.
However, the Holder will have the right of a shareholder of the Borrower with
respect to the Shares of Common Stock to be received after delivery by the
Holder of a Conversion Notice to the Borrower.
[THIS SPACE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by
an authorized officer on this 21 day of January, 2005.
WIZZARD SOFTWARE CORP.
By: /s/ Christopher J. Spencer
---------------------------
Name: Christopher J. Spencer
Title: President
WITNESS:
/s/ Kathleen Neal
- -----------------
NOTICE OF CONVERSION
(To be executed by the Registered Holder in order to convert the Note)
The undersigned hereby elects to convert $_________ of the principal and
$_________ of the interest due on the Note issued by WIZZARD SOFTWARE CORP. on
January ___, 2005 into Shares of Common Stock of WIZZARD SOFTWARE CORP.(the
"Borrower") according to the conditions set forth in such Note, as of the date
written below.
Date of
Conversion:___________________________________________________________________
Conversion
Price:______________________________________________________________________
Shares To Be
Delivered:_________________________________________________________________
Signature:___________________________________________________________________
Print
Name:________________________________________________________________________
Address:____________________________________________________________________
____________________________________________________________________________