Exhibit 4.10
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
PRINCIPAL AMOUNT: $37,500.00 ISSUE DATE: NOVEMBER 11, 2013
PURCHASE PRICE: $37,500.00
CONVERTIBLE PROMISSORY NOTE
FOR VALUE RECEIVED, RED GIANT ENTERTAINMENT, INC., a Nevada corporation
(hereinafter called the "Borrower"), hereby promises to pay to the order of
ASHER ENTERPRISES, INC., a Delaware corporation, or registered assigns (the
"Holder") the sum of $37,500.00 together with any interest as set forth herein,
on August 13, 2014 (the "Maturity Date"), and to pay interest on the unpaid
principal balance hereof at the rate of eight percent (8%) (the "Interest Rate")
per annum from the date hereof (the "Issue Date") until the same becomes due and
payable, whether at maturity or upon acceleration or by prepayment or otherwise.
This Note may not be prepaid in whole or in part except as otherwise explicitly
set forth herein. Any amount of principal or interest on this Note which is not
paid when due shall bear interest at the rate of twenty two percent (22%) per
annum from the due date thereof until the same is paid ("Default Interest").
Interest shall commence accruing on the date that the Note is fully paid and
shall be computed on the basis of a 365-day year and the actual number of days
elapsed. All payments due hereunder (to the extent not converted into common
stock, $0.0001 par value per share (the "Common Stock") in accordance with the
terms hereof) shall be made in lawful money of the United States of America. All
payments shall be made at such address as the Holder shall hereafter give to the
Borrower by written notice made in accordance with the provisions of this Note.
Whenever any amount expressed to be due by the terms of this Note is due on any
day which is not a business day, the same shall instead be due on the next
succeeding day which is a business day and, in the case of any interest payment
date which is not the date on which this Note is paid in full, the extension of
the due date thereof shall not be taken into account for purposes of determining
the amount of interest due on such date. As used in this Note, the term
"business day" shall mean any day other than a Saturday, Sunday or a day on
which commercial banks in the city of New York, New York are authorized or
required by law or executive order to remain closed. Each capitalized term used
herein, and not otherwise defined, shall have the meaning ascribed thereto in
that certain Securities Purchase Agreement dated the date hereof, pursuant to
which this Note was originally issued (the "Purchase Agreement").
This Note is free from all taxes, liens, claims and encumbrances with
respect to the issue thereof and shall not be subject to preemptive rights or
other similar rights of shareholders of the Borrower and will not impose
personal liability upon the holder thereof.
The following terms shall apply to this Note:
Article I. CONVERSION RIGHTS
1.1 Conversion Right. The Holder shall have the right from time to time, and at
any time during the period beginning on the date which is one hundred eighty
(180) days following the date of this Note and ending on the later of: (i) the
Maturity Date and (ii) the date of payment of the Default Amount (as defined in
Article III) pursuant to Section 1.6(a) or Article III, each in respect of the
remaining outstanding principal amount of this Note to convert all or any part
of the outstanding and unpaid principal amount of this Note into fully paid and
non- assessable shares of Common Stock, as such Common Stock exists on the Issue
Date, or any shares of capital stock or other securities of the Borrower into
which such Common Stock shall hereafter be changed or reclassified at the
conversion price (the "Conversion Price") determined as provided herein (a
"Conversion"); provided, however, that in no event shall the Holder be entitled
to convert any portion of this Note in excess of that portion of this Note upon
conversion of which the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and its affiliates (other than shares of Common
Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the Notes or the unexercised or unconverted portion of
any other security of the Borrower subject to a limitation on conversion or
exercise analogous to the limitations contained herein) and (2) the number of
shares of Common Stock issuable upon the conversion of the portion of this Note
with respect to which the determination of this proviso is being made, would
result in beneficial ownership by the Holder and its affiliates of more than
9.99% of the outstanding shares of Common Stock. For purposes of the proviso 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
(the "Exchange Act"), and Regulations 13D-G thereunder, except as otherwise
provided in clause (1) of such proviso, provided, further, however, that the
limitations on conversion may be waived by the Holder upon, at the election of
the Holder, not less than 61 days' prior notice to the Borrower, and the
provisions of the conversion limitation shall continue to apply until such 61st
day (or such later date, as determined by the Holder, as may be specified in
such notice of waiver). The number of shares of Common Stock to be issued upon
each conversion of this Note shall be determined by dividing the Conversion
Amount (as defined below) by the applicable Conversion Price then in effect on
the date specified in the notice of conversion, in the form attached hereto as
Exhibit A (the "Notice of Conversion"), delivered to the Borrower by the Holder
in accordance with Section 1.4 below; provided that the Notice of Conversion is
submitted by facsimile or e-mail (or by other means resulting in, or reasonably
expected to result in, notice) to the Borrower before 6:00 p.m., New York, New
York time on such conversion date (the "Conversion Date"). The term "Conversion
Amount" means, with respect to any conversion of this Note, the sum of (1) the
principal amount of this Note to be converted in such conversion plus (2) at the
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Holder's option, accrued and unpaid interest, if any, on such principal amount
at the interest rates provided in this Note to the Conversion Date, plus (3) at
the Holder's option, Default Interest, if any, on the amounts referred to in the
immediately preceding clauses (1) and/or (2) plus (4) at the Holder's option,
any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof.
1.2 Conversion Price.
(a) Calculation of Conversion Price. The conversion price (the "Conversion
Price") shall equal the Variable Conversion Price (as defined herein) (subject
to equitable adjustments for stock splits, stock dividends or rights offerings
by the Borrower relating to the Borrower's securities or the securities of any
subsidiary of the Borrower, combinations, recapitalization, reclassifications,
extraordinary distributions and similar events). The "Variable Conversion Price"
shall mean 58% multiplied by the Market Price (as defined herein) (representing
a discount rate of 42%). "Market Price" means the average of the lowest three
(3) Trading Prices (as defined below) for the Common Stock during the ten (10)
Trading Day period ending on the latest complete Trading Day prior to the
Conversion Date. "Trading Price" means, for any security as of any date, the
closing bid price on the Over-the-Counter Bulletin Board, or applicable trading
market (the "OTCBB") as reported by a reliable reporting service ("Reporting
Service") designated by the Holder (i.e. Bloomberg) or, if the OTCBB is not the
principal trading market for such security, the closing bid price of such
security on the principal securities exchange or trading market where such
security is listed or traded or, if no closing bid price of such security is
available in any of the foregoing manners, the average of the closing bid prices
of any market makers for such security that are listed in the "pink sheets" by
the National Quotation Bureau, Inc. If the Trading Price cannot be calculated
for such security on such date in the manner provided above, the Trading Price
shall be the fair market value as mutually determined by the Borrower and the
holders of a majority in interest of the Notes being converted for which the
calculation of the Trading Price is required in order to determine the
Conversion Price of such Notes. "Trading Day" shall mean any day on which the
Common Stock is tradable for any period on the OTCBB, or on the principal
securities exchange or other securities market on which the Common Stock is then
being traded.
(b) Conversion Price During Major Announcements. Notwithstanding anything
contained in Section 1.2(a) to the contrary, in the event the Borrower (i) makes
a public announcement that it intends to consolidate or merge with any other
corporation (other than a merger in which the Borrower is the surviving or
continuing corporation and its capital stock is unchanged) or sell or transfer
all or substantially all of the assets of the Borrower or (ii) any person, group
or entity (including the Borrower) publicly announces a tender offer to purchase
50% or more of the Borrower's Common Stock (or any other takeover scheme) (the
date of the announcement referred to in clause (i) or (ii) is hereinafter
referred to as the "Announcement Date"), then the Conversion Price shall,
effective upon the Announcement Date and continuing through the Adjusted
Conversion Price Termination Date (as defined below), be equal to the lower of
(x) the Conversion Price which would have been applicable for a Conversion
occurring on the Announcement Date and (y) the Conversion Price that would
otherwise be in effect. From and after the Adjusted Conversion Price Termination
Date, the Conversion Price shall be determined as set forth in this Section
1.2(a). For purposes hereof, "Adjusted Conversion Price Termination Date" shall
mean, with respect to any proposed transaction or tender offer (or takeover
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scheme) for which a public announcement as contemplated by this Section 1.2(b)
has been made, the date upon which the Borrower (in the case of clause (i)
above) or the person, group or entity (in the case of clause (ii) above)
consummates or publicly announces the termination or abandonment of the proposed
transaction or tender offer (or takeover scheme) which caused this Section
1.2(b) to become operative.
1.3 Authorized Shares. The Borrower covenants that during the period the
conversion right exists, the Borrower will reserve from its authorized and
unissued Common Stock a sufficient number of shares, free from preemptive
rights, to provide for the issuance of Common Stock upon the full conversion of
this Note issued pursuant to the Purchase Agreement. The Borrower is required at
all times to have authorized and reserved five times the number of shares that
is actually issuable upon full conversion of the Note (based on the Conversion
Price of the Notes in effect from time to time)(the "Reserved Amount"). The
Reserved Amount shall be increased from time to time in accordance with the
Borrower's obligations hereunder. The Borrower represents that upon issuance,
such shares will be duly and validly issued, fully paid and non-assessable. In
addition, if the Borrower shall issue any securities or make any change to its
capital structure which would change the number of shares of Common Stock into
which the Notes shall be convertible at the then current Conversion Price, the
Borrower shall at the same time make proper provision so that thereafter there
shall be a sufficient number of shares of Common Stock authorized and reserved,
free from preemptive rights, for conversion of the outstanding Notes. The
Borrower (i) acknowledges that it has irrevocably instructed its transfer agent
to issue certificates for the Common Stock issuable upon conversion of this
Note, and (ii) agrees that its issuance of this Note shall constitute full
authority to its officers and agents who are charged with the duty of executing
stock certificates to execute and issue the necessary certificates for shares of
Common Stock in accordance with the terms and conditions of this Note.
If, at any time the Borrower does not maintain the Reserved Amount it will
be considered an Event of Default under Section 3.2 of the Note.
1.4 Method of Conversion.
(a) Mechanics of Conversion. Subject to Section 1.1, this Note may be
converted by the Holder in whole or in part at any time from time to time after
the Issue Date, by (A) submitting to the Borrower a Notice of Conversion (by
facsimile, e-mail or other reasonable means of communication dispatched on the
Conversion Date prior to 6:00 p.m., New York, New York time) and (B) subject to
Section 1.4(b), surrendering this Note at the principal office of the Borrower.
(b) Surrender of Note Upon Conversion. Notwithstanding anything to the
contrary set forth herein, upon conversion of this Note in accordance with the
terms hereof, the Holder shall not be required to physically surrender this Note
to the Borrower unless the entire unpaid principal amount of this Note is so
converted. The Holder and the Borrower shall maintain records showing the
principal amount so converted and the dates of such conversions or shall use
such other method, reasonably satisfactory to the Holder and the Borrower, so as
not to require physical surrender of this Note upon each such conversion. In the
event of any dispute or discrepancy, such records of the Borrower shall, PRIMA
FACIE, be controlling and determinative in the absence of manifest error.
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Notwithstanding the foregoing, if any portion of this Note is converted as
aforesaid, the Holder may not transfer this Note unless the Holder first
physically surrenders this Note to the Borrower, whereupon the Borrower will
forthwith issue and deliver upon the order of the Holder a new Note of like
tenor, registered as the Holder (upon payment by the Holder of any applicable
transfer taxes) may request, representing in the aggregate the remaining unpaid
principal amount of this Note. The Holder and any assignee, by acceptance of
this Note, acknowledge and agree that, by reason of the provisions of this
paragraph, following conversion of a portion of this Note, the unpaid and
unconverted principal amount of this Note represented by this Note may be less
than the amount stated on the face hereof.
(c) Payment of Taxes. The Borrower shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock or other securities or property on conversion
of this Note in a name other than that of the Holder (or in street name), and
the Borrower shall not be required to issue or deliver any such shares or other
securities or property unless and until the person or persons (other than the
Holder or the custodian in whose street name such shares are to be held for the
Holder's account) requesting the issuance thereof shall have paid to the
Borrower the amount of any such tax or shall have established to the
satisfaction of the Borrower that such tax has been paid.
(d) Delivery of Common Stock Upon Conversion. Upon receipt by the Borrower
from the Holder of a facsimile transmission or e-mail (or other reasonable means
of communication) of a Notice of Conversion meeting the requirements for
conversion as provided in this Section 1.4, the Borrower shall issue and deliver
or cause to be issued and delivered to or upon the order of the Holder
certificates for the Common Stock issuable upon such conversion within three (3)
business days after such receipt (the "Deadline") (and, solely in the case of
conversion of the entire unpaid principal amount hereof, surrender of this Note)
in accordance with the terms hereof and the Purchase Agreement.
(e) Obligation of Borrower to Deliver Common Stock. Upon receipt by the
Borrower of a Notice of Conversion, the Holder shall be deemed to be the holder
of record of the Common Stock issuable upon such conversion, the outstanding
principal amount and the amount of accrued and unpaid interest on this Note
shall be reduced to reflect such conversion, and, unless the Borrower defaults
on its obligations under this Article I, all rights with respect to the portion
of this Note being so converted shall forthwith terminate except the right to
receive the Common Stock or other securities, cash or other assets, as herein
provided, on such conversion. If the Holder shall have given a Notice of
Conversion as provided herein, the Borrower's obligation to issue and deliver
the certificates for Common Stock shall be absolute and unconditional,
irrespective of the absence of any action by the Holder to enforce the same, any
waiver or consent with respect to any provision thereof, the recovery of any
judgment against any person or any action to enforce the same, any failure or
delay in the enforcement of any other obligation of the Borrower to the holder
of record, or any setoff, counterclaim, recoupment, limitation or termination,
or any breach or alleged breach by the Holder of any obligation to the Borrower,
and irrespective of any other circumstance which might otherwise limit such
obligation of the Borrower to the Holder in connection with such conversion. The
Conversion Date specified in the Notice of Conversion shall be the Conversion
Date so long as the Notice of Conversion is received by the Borrower before 6:00
p.m., New York, New York time, on such date.
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(f) Delivery of Common Stock by Electronic Transfer. In lieu of delivering
physical certificates representing the Common Stock issuable upon conversion,
provided the Borrower is participating in the Depository Trust Company ("DTC")
Fast Automated Securities Transfer ("FAST") program, upon request of the Holder
and its compliance with the provisions contained in Section 1.1 and in this
Section 1.4, the Borrower shall use its best efforts to cause its transfer agent
to electronically transmit the Common Stock issuable upon conversion to the
Holder by crediting the account of Holder's Prime Broker with DTC through its
Deposit Withdrawal Agent Commission ("DWAC") system.
(g) Failure to Deliver Common Stock Prior to Deadline. Without in any way
limiting the Holder's right to pursue other remedies, including actual damages
and/or equitable relief, the parties agree that if delivery of the Common Stock
issuable upon conversion of this Note is not delivered by the Deadline (other
than a failure due to the circumstances described in Section 1.3 above, which
failure shall be governed by such Section) the Borrower shall pay to the Holder
$2,000 per day in cash, for each day beyond the Deadline that the Borrower fails
to deliver such Common Stock. Such cash amount shall be paid to Holder by the
fifth day of the month following the month in which it has accrued or, at the
option of the Holder (by written notice to the Borrower by the first day of the
month following the month in which it has accrued), shall be added to the
principal amount of this Note, in which event interest shall accrue thereon in
accordance with the terms of this Note and such additional principal amount
shall be convertible into Common Stock in accordance with the terms of this
Note. The Borrower agrees that the right to convert is a valuable right to the
Holder. The damages resulting from a failure, attempt to frustrate, interference
with such conversion right are difficult if not impossible to qualify.
Accordingly the parties acknowledge that the liquidated damages provision
contained in this Section 1.4(g) are justified.
1.5 Concerning the Shares. The shares of Common Stock issuable upon
conversion of this Note may not be sold or transferred unless (i) such shares
are sold pursuant to an effective registration statement under the Act or (ii)
the Borrower or its transfer agent shall have been furnished with an opinion of
counsel (which opinion shall be in form, substance and scope customary for
opinions of counsel in comparable transactions) to the effect that the shares to
be sold or transferred may be sold or transferred pursuant to an exemption from
such registration or (iii) such shares are sold or transferred pursuant to Rule
144 under the Act (or a successor rule) ("Rule 144") or (iv) such shares are
transferred to an "affiliate" (as defined in Rule 144) of the Borrower who
agrees to sell or otherwise transfer the shares only in accordance with this
Section 1.5 and who is an Accredited Investor (as defined in the Purchase
Agreement). Except as otherwise provided in the Purchase Agreement (and subject
to the removal provisions set forth below), until such time as the shares of
Common Stock issuable upon conversion of this Note have been registered under
the Act or otherwise may be sold pursuant to Rule 144 without any restriction as
to the number of securities as of a particular date that can then be immediately
sold, each certificate for shares of Common Stock issuable upon conversion of
this Note that has not been so included in an effective registration statement
or that has not been sold pursuant to an effective registration statement or an
exemption that permits removal of the legend, shall bear a legend substantially
in the following form, as appropriate:
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"NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE
OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF
(A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH
COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE
FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING
THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA
FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY
THE SECURITIES."
The legend set forth above shall be removed and the Borrower shall issue to
the Holder a new certificate therefore free of any transfer legend if (i) the
Borrower or its transfer agent shall have received an opinion of counsel, in
form, substance and scope customary for opinions of counsel in comparable
transactions, to the effect that a public sale or transfer of such Common Stock
may be made without registration under the Act, which opinion shall be accepted
by the Company so that the sale or transfer is effected or (ii) in the case of
the Common Stock issuable upon conversion of this Note, such security is
registered for sale by the Holder under an effective registration statement
filed under the Act or otherwise may be sold pursuant to Rule 144 without any
restriction as to the number of securities as of a particular date that can then
be immediately sold. In the event that the Company does not accept the opinion
of counsel provided by the Buyer with respect to the transfer of Securities
pursuant to an exemption from registration, such as Rule 144 or Regulation S, at
the Deadline, it will be considered an Event of Default pursuant to Section 3.2
of the Note.
1.6 Effect of Certain Events.
(a) Effect of Merger, Consolidation, Etc. At the option of the Holder, the
sale, conveyance or disposition of all or substantially all of the assets of the
Borrower, the effectuation by the Borrower of a transaction or series of related
transactions in which more than 50% of the voting power of the Borrower is
disposed of, or the consolidation, merger or other business combination of the
Borrower with or into any other Person (as defined below) or Persons when the
Borrower is not the survivor shall either: (i) be deemed to be an Event of
Default (as defined in Article III) pursuant to which the Borrower shall be
required to pay to the Holder upon the consummation of and as a condition to
such transaction an amount equal to the Default Amount (as defined in Article
III) or (ii) be treated pursuant to Section 1.6(b) hereof. "Person" shall mean
any individual, corporation, limited liability company, partnership,
association, trust or other entity or organization.
(b) Adjustment Due to Merger, Consolidation, Etc. If, at any time when this
Note is issued and outstanding and prior to conversion of all of the Notes,
there shall be any merger, consolidation, exchange of shares, recapitalization,
reorganization, or other similar event, as a result of which shares of Common
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Stock of the Borrower shall be changed into the same or a different number of
shares of another class or classes of stock or securities of the Borrower or
another entity, or in case of any sale or conveyance of all or substantially all
of the assets of the Borrower other than in connection with a plan of complete
liquidation of the Borrower, then the Holder of this Note shall thereafter have
the right to receive upon conversion of this Note, upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore issuable upon conversion, such stock, securities or
assets which the Holder would have been entitled to receive in such transaction
had this Note been converted in full immediately prior to such transaction
(without regard to any limitations on conversion set forth herein), and in any
such case appropriate provisions shall be made with respect to the rights and
interests of the Holder of this Note to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion
Price and of the number of shares issuable upon conversion of the Note) shall
thereafter be applicable, as nearly as may be practicable in relation to any
securities or assets thereafter deliverable upon the conversion hereof. The
Borrower shall not affect any transaction described in this Section 1.6(b)
unless (a) it first gives, to the extent practicable, thirty (30) days prior
written notice (but in any event at least fifteen (15) days prior written
notice) of the record date of the special meeting of shareholders to approve, or
if there is no such record date, the consummation of, such merger,
consolidation, exchange of shares, recapitalization, reorganization or other
similar event or sale of assets (during which time the Holder shall be entitled
to convert this Note) and (b) the resulting successor or acquiring entity (if
not the Borrower) assumes by written instrument the obligations of this Section
1.6(b). The above provisions shall similarly apply to successive consolidations,
mergers, sales, transfers or share exchanges.
(c) Adjustment Due to Distribution. If the Borrower shall declare or make
any distribution of its assets (or rights to acquire its assets) to holders of
Common Stock as a dividend, stock repurchase, by way of return of capital or
otherwise (including any dividend or distribution to the Borrower's shareholders
in cash or shares (or rights to acquire shares) of capital stock of a subsidiary
(i.e., a spin-off)) (a "Distribution"), then the Holder of this Note shall be
entitled, upon any conversion of this Note after the date of record for
determining shareholders entitled to such Distribution, to receive the amount of
such assets which would have been payable to the Holder with respect to the
shares of Common Stock issuable upon such conversion had such Holder been the
holder of such shares of Common Stock on the record date for the determination
of shareholders entitled to such Distribution.
(d) Adjustment Due to Dilutive Issuance. If, at any time when any Notes are
issued and outstanding, the Borrower issues or sells, or in accordance with this
Section 1.6(d) hereof is deemed to have issued or sold, any shares of Common
Stock for no consideration or for a consideration per share (before deduction of
reasonable expenses or commissions or underwriting discounts or allowances in
connection therewith) less than the Conversion Price in effect on the date of
such issuance (or deemed issuance) of such shares of Common Stock (a "Dilutive
Issuance"), then immediately upon the Dilutive Issuance, the Conversion Price
will be reduced to the amount of the consideration per share received by the
Borrower in such Dilutive Issuance.
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The Borrower shall be deemed to have issued or sold shares of Common Stock
if the Borrower in any manner issues or grants any warrants, rights or options
(not including employee stock option plans), whether or not immediately
exercisable, to subscribe for or to purchase Common Stock or other securities
convertible into or exchangeable for Common Stock ("Convertible Securities")
(such warrants, rights and options to purchase Common Stock or Convertible
Securities are hereinafter referred to as "Options") and the price per share for
which Common Stock is issuable upon the exercise of such Options is less than
the Conversion Price then in effect, then the Conversion Price shall be equal to
such price per share. For purposes of the preceding sentence, the "price per
share for which Common Stock is issuable upon the exercise of such Options" is
determined by dividing (i) the total amount, if any, received or receivable by
the Borrower as consideration for the issuance or granting of all such Options,
plus the minimum aggregate amount of additional consideration, if any, payable
to the Borrower upon the exercise of all such Options, plus, in the case of
Convertible Securities issuable upon the exercise of such Options, the minimum
aggregate amount of additional consideration payable upon the conversion or
exchange thereof at the time such Convertible Securities first become
convertible or exchangeable, by (ii) the maximum total number of shares of
Common Stock issuable upon the exercise of all such Options (assuming full
conversion of Convertible Securities, if applicable). No further adjustment to
the Conversion Price will be made upon the actual issuance of such Common Stock
upon the exercise of such Options or upon the conversion or exchange of
Convertible Securities issuable upon exercise of such Options.
Additionally, the Borrower shall be deemed to have issued or sold shares of
Common Stock if the Borrower in any manner issues or sells any Convertible
Securities, whether or not immediately convertible (other than where the same
are issuable upon the exercise of Options), and the price per share for which
Common Stock is issuable upon such conversion or exchange is less than the
Conversion Price then in effect, then the Conversion Price shall be equal to
such price per share. For the purposes of the preceding sentence, the "price per
share for which Common Stock is issuable upon such conversion or exchange" is
determined by dividing (i) the total amount, if any, received or receivable by
the Borrower as consideration for the issuance or sale of all such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Borrower upon the conversion or exchange thereof at the time
such Convertible Securities first become convertible or exchangeable, by (ii)
the maximum total number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities. No further adjustment to the
Conversion Price will be made upon the actual issuance of such Common Stock upon
conversion or exchange of such Convertible Securities.
(e) Purchase Rights. If, at any time when any Notes are issued and
outstanding, the Borrower issues any convertible securities or rights to
purchase stock, warrants, securities or other property (the "Purchase Rights")
pro rata to the record holders of any class of Common Stock, then the Holder of
this Note will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such Holder could have
acquired if such Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Note (without regard to any limitations on
conversion contained herein) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
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(f) Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price as a result of the events described in this
Section 1.6, the Borrower, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to the Holder a certificate
setting forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Borrower shall, upon
the written request at any time of the Holder, furnish to such Holder a like
certificate setting forth (i) such adjustment or readjustment, (ii) the
Conversion Price at the time in effect and (iii) the number of shares of Common
Stock and the amount, if any, of other securities or property which at the time
would be received upon conversion of the Note.
1.7 Trading Market Limitations. Unless permitted by the applicable rules
and regulations of the principal securities market on which the Common Stock is
then listed or traded, in no event shall the Borrower issue upon conversion of
or otherwise pursuant to this Note and the other Notes issued pursuant to the
Purchase Agreement more than the maximum number of shares of Common Stock that
the Borrower can issue pursuant to any rule of the principal United States
securities market on which the Common Stock is then traded (the "Maximum Share
Amount"), which shall be 9.99% of the total shares outstanding on the Closing
Date (as defined in the Purchase Agreement), subject to equitable adjustment
from time to time for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring after
the date hereof. Once the Maximum Share Amount has been issued, if the Borrower
fails to eliminate any prohibitions under applicable law or the rules or
regulations of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Borrower or any of its
securities on the Borrower's ability to issue shares of Common Stock in excess
of the Maximum Share Amount, in lieu of any further right to convert this Note,
this will be considered an Event of Default under Section 3.3 of the Note.
1.8 Status as Shareholder. Upon submission of a Notice of Conversion by a
Holder, (i) the shares covered thereby (other than the shares, if any, which
cannot be issued because their issuance would exceed such Holder's allocated
portion of the Reserved Amount or Maximum Share Amount) shall be deemed
converted into shares of Common Stock and (ii) the Holder's rights as a Holder
of such converted portion of this Note shall cease and terminate, excepting only
the right to receive certificates for such shares of Common Stock and to any
remedies provided herein or otherwise available at law or in equity to such
Holder because of a failure by the Borrower to comply with the terms of this
Note. Notwithstanding the foregoing, if a Holder has not received certificates
for all shares of Common Stock prior to the tenth (10th) business day after the
expiration of the Deadline with respect to a conversion of any portion of this
Note for any reason, then (unless the Holder otherwise elects to retain its
status as a holder of Common Stock by so notifying the Borrower) the Holder
shall regain the rights of a Holder of this Note with respect to such
unconverted portions of this Note and the Borrower shall, as soon as
practicable, return such unconverted Note to the Holder or, if the Note has not
been surrendered, adjust its records to reflect that such portion of this Note
has not been converted. In all cases, the Holder shall retain all of its rights
and remedies (including, without limitation, (i) the right to receive Conversion
Default Payments pursuant to Section 1.3 to the extent required thereby for such
Conversion Default and any subsequent Conversion Default and (ii) the right to
10
have the Conversion Price with respect to subsequent conversions determined in
accordance with Section 1.3) for the Borrower's failure to convert this Note.
1.9 Prepayment. Notwithstanding anything to the contrary contained in this
Note, at any time during the period beginning on the Issue Date and ending on
the date which is thirty (30) days following the issue date, the Borrower shall
have the right, exercisable on not less than three (3) Trading Days prior
written notice to the Holder of the Note to prepay the outstanding Note
(principal and accrued interest), in full, in accordance with this Section 1.9.
Any notice of prepayment hereunder (an "Optional Prepayment Notice") shall be
delivered to the Holder of the Note at its registered addresses and shall state:
(1) that the Borrower is exercising its right to prepay the Note, and (2) the
date of prepayment which shall be not more than three (3) Trading Days from the
date of the Optional Prepayment Notice. On the date fixed for prepayment (the
"Optional Prepayment Date"), the Borrower shall make payment of the Optional
Prepayment Amount (as defined below) to or upon the order of the Holder as
specified by the Holder in writing to the Borrower at least one (1) business day
prior to the Optional Prepayment Date. If the Borrower exercises its right to
prepay the Note, the Borrower shall make payment to the Holder of an amount in
cash (the "Optional Prepayment Amount") equal to 120%, multiplied by the sum of:
(w) the then outstanding principal amount of this Note plus (x) accrued and
unpaid interest on the unpaid principal amount of this Note to the Optional
Prepayment Date plus (y) Default Interest, if any, on the amounts referred to in
clauses (w) and (x) plus (z) any amounts owed to the Holder pursuant to Sections
1.3 and 1.4(g) hereof. If the Borrower delivers an Optional Prepayment Notice
and fails to pay the Optional Prepayment Amount due to the Holder of the Note
within two (2) business days following the Optional Prepayment Date, the
Borrower shall forever forfeit its right to prepay the Note pursuant to this
Section 1.9.
Notwithstanding anything to the contrary contained in this Note, at any
time during the period beginning on the date which is thirty-one (31) days
following the issue date and ending on the date which is sixty (60) days
following the issue date, the Borrower shall have the right, exercisable on not
less than three (3) Trading Days prior written notice to the Holder of the Note
to prepay the outstanding Note (principal and accrued interest), in full, in
accordance with this Section 1.9. Any Optional Prepayment Notice shall be
delivered to the Holder of the Note at its registered addresses and shall state:
(1) that the Borrower is exercising its right to prepay the Note, and (2) the
date of prepayment which shall be not more than three (3) Trading Days from the
date of the Optional Prepayment Notice. On the Optional Prepayment Date, the
Borrower shall make payment of the Second Optional Prepayment Amount (as defined
below) to or upon the order of the Holder as specified by the Holder in writing
to the Borrower at least one (1) business day prior to the Optional Prepayment
Date. If the Borrower exercises its right to prepay the Note, the Borrower shall
make payment to the Holder of an amount in cash (the "Second Optional Prepayment
Amount") equal to 125%, multiplied by the sum of: (w) the then outstanding
principal amount of this Note plus (x) accrued and unpaid interest on the unpaid
principal amount of this Note to the Optional Prepayment Date plus (y) Default
Interest, if any, on the amounts referred to in clauses (w) and (x) plus (z) any
amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the
Borrower delivers an Optional Prepayment Notice and fails to pay the Second
Optional Prepayment Amount due to the Holder of the Note within two (2) business
days following the Optional Prepayment Date, the Borrower shall forever forfeit
its right to prepay the Note pursuant to this Section 1.9.
11
Notwithstanding anything to the contrary contained in this Note, at any
time during the period beginning on the date which is sixty-one (61) days
following the issue date and ending on the date which is ninety (90) days
following the issue date, the Borrower shall have the right, exercisable on not
less than three (3) Trading Days prior written notice to the Holder of the Note
to prepay the outstanding Note (principal and accrued interest), in full, in
accordance with this Section 1.9. Any Optional Prepayment Notice shall be
delivered to the Holder of the Note at its registered addresses and shall state:
(1) that the Borrower is exercising its right to prepay the Note, and (2) the
date of prepayment which shall be not more than three (3) Trading Days from the
date of the Optional Prepayment Notice. On the Optional Prepayment Date, the
Borrower shall make payment of the Third Optional Prepayment Amount (as defined
below) to or upon the order of the Holder as specified by the Holder in writing
to the Borrower at least one (1) business day prior to the Optional Prepayment
Date. If the Borrower exercises its right to prepay the Note, the Borrower shall
make payment to the Holder of an amount in cash (the "Third Optional Prepayment
Amount") equal to 130%, multiplied by the sum of: (w) the then outstanding
principal amount of this Note plus (x) accrued and unpaid interest on the unpaid
principal amount of this Note to the Optional Prepayment Date plus (y) Default
Interest, if any, on the amounts referred to in clauses (w) and (x) plus (z) any
amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the
Borrower delivers an Optional Prepayment Notice and fails to pay the Third
Optional Prepayment Amount due to the Holder of the Note within two (2) business
days following the Optional Prepayment Date, the Borrower shall forever forfeit
its right to prepay the Note pursuant to this Section 1.9.
Notwithstanding any to the contrary stated elsewhere herein, at any time
during the period beginning on the date that is ninety-one (91) day from the
issue date and ending one hundred twenty (120) days following the issue date,
the Borrower shall have the right, exercisable on not less than three (3)
Trading Days prior written notice to the Holder of the Note to prepay the
outstanding Note (principal and accrued interest), in full, in accordance with
this Section 1.9. Any Optional Prepayment Notice shall be delivered to the
Holder of the Note at its registered addresses and shall state: (1) that the
Borrower is exercising its right to prepay the Note, and (2) the date of
prepayment which shall be not more than three (3) Trading Days from the date of
the Optional Prepayment Notice. On the Optional Prepayment Date, the Borrower
shall make payment of the Fourth Optional Prepayment Amount (as defined below)
to or upon the order of the Holder as specified by the Holder in writing to the
Borrower at least one (1) business day prior to the Optional Prepayment Date. If
the Borrower exercises its right to prepay the Note, the Borrower shall make
payment to the Holder of an amount in cash (the "Fourth Optional Prepayment
Amount") equal to 135%, multiplied by the sum of: (w) the then outstanding
principal amount of this Note plus (x) accrued and unpaid interest on the unpaid
principal amount of this Note to the Optional Prepayment Date plus (y) Default
Interest, if any, on the amounts referred to in clauses (w) and (x) plus (z) any
amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the
Borrower delivers an Optional Prepayment Notice and fails to pay the Fourth
Optional Prepayment Amount due to the Holder of the Note within two (2) business
days following the Optional Prepayment Date, the Borrower shall forever forfeit
its right to prepay the Note pursuant to this Section 1.9.
Notwithstanding any to the contrary stated elsewhere herein, at any time
during the period beginning on the date that is one hundred twenty-one (121) day
from the issue date and ending one hundred fifty (150) days following the issue
12
date, the Borrower shall have the right, exercisable on not less than three (3)
Trading Days prior written notice to the Holder of the Note to prepay the
outstanding Note (principal and accrued interest), in full, in accordance with
this Section 1.9. Any Optional Prepayment Notice shall be delivered to the
Holder of the Note at its registered addresses and shall state: (1) that the
Borrower is exercising its right to prepay the Note, and (2) the date of
prepayment which shall be not more than three (3) Trading Days from the date of
the Optional Prepayment Notice. On the Optional Prepayment Date, the Borrower
shall make payment of the Fifth Optional Prepayment Amount (as defined below) to
or upon the order of the Holder as specified by the Holder in writing to the
Borrower at least one (1) business day prior to the Optional Prepayment Date. If
the Borrower exercises its right to prepay the Note, the Borrower shall make
payment to the Holder of an amount in cash (the "Fifth Optional Prepayment
Amount") equal to 140%, multiplied by the sum of: (w) the then outstanding
principal amount of this Note plus (x) accrued and unpaid interest on the unpaid
principal amount of this Note to the Optional Prepayment Date plus (y) Default
Interest, if any, on the amounts referred to in clauses (w) and (x) plus (z) any
amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the
Borrower delivers an Optional Prepayment Notice and fails to pay the Fifth
Optional Prepayment Amount due to the Holder of the Note within two (2) business
days following the Optional Prepayment Date, the Borrower shall forever forfeit
its right to prepay the Note pursuant to this Section 1.9.
Notwithstanding any to the contrary stated elsewhere herein, at any time
during the period beginning on the date that is one hundred fifty-one (151) day
from the issue date and ending one hundred eighty (180) days following the issue
date, the Borrower shall have the right, exercisable on not less than three (3)
Trading Days prior written notice to the Holder of the Note to prepay the
outstanding Note (principal and accrued interest), in full, in accordance with
this Section 1.9. Any Optional Prepayment Notice shall be delivered to the
Holder of the Note at its registered addresses and shall state: (1) that the
Borrower is exercising its right to prepay the Note, and (2) the date of
prepayment which shall be not more than three (3) Trading Days from the date of
the Optional Prepayment Notice. On the Optional Prepayment Date, the Borrower
shall make payment of the Sixth Optional Prepayment Amount (as defined below) to
or upon the order of the Holder as specified by the Holder in writing to the
Borrower at least one (1) business day prior to the Optional Prepayment Date. If
the Borrower exercises its right to prepay the Note, the Borrower shall make
payment to the Holder of an amount in cash (the "Sixth Optional Prepayment
Amount") equal to 150%, multiplied by the sum of: (w) the then outstanding
principal amount of this Note plus (x) accrued and unpaid interest on the unpaid
principal amount of this Note to the Optional Prepayment Date plus (y) Default
Interest, if any, on the amounts referred to in clauses (w) and (x) plus (z) any
amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the
Borrower delivers an Optional Prepayment Notice and fails to pay the Sixth
Optional Prepayment Amount due to the Holder of the Note within two (2) business
days following the Optional Prepayment Date, the Borrower shall forever forfeit
its right to prepay the Note pursuant to this Section 1.9.
After the expiration of one hundred eighty (180) following the date of the
Note, the Borrower shall have no right of prepayment.
13
Article II. CERTAIN COVENANTS
2.1 Distributions on Capital Stock. So long as the Borrower shall have any
obligation under this Note, the Borrower shall not without the Holder's written
consent (a) pay, declare or set apart for such payment, any dividend or other
distribution (whether in cash, property or other securities) on shares of
capital stock other than dividends on shares of Common Stock solely in the form
of additional shares of Common Stock or (b) directly or indirectly or through
any subsidiary make any other payment or distribution in respect of its capital
stock except for distributions pursuant to any shareholders' rights plan which
is approved by a majority of the Borrower's disinterested directors.
2.2 Restriction on Stock Repurchases. So long as the Borrower shall have
any obligation under this Note, the Borrower shall not without the Holder's
written consent redeem, repurchase or otherwise acquire (whether for cash or in
exchange for property or other securities or otherwise) in any one transaction
or series of related transactions any shares of capital stock of the Borrower or
any warrants, rights or options to purchase or acquire any such shares.
2.3 Borrowings. So long as the Borrower shall have any obligation under
this Note, the Borrower shall not, without the Holder's written consent, create,
incur, assume guarantee, endorse, contingently agree to purchase or otherwise
become liable upon the obligation of any person, firm, partnership, joint
venture or corporation, except by the endorsement of negotiable instruments for
deposit or collection, or suffer to exist any liability for borrowed money,
except (a) borrowings in existence or committed on the date hereof and of which
the Borrower has informed Holder in writing prior to the date hereof, (b)
indebtedness to trade creditors or financial institutions incurred in the
ordinary course of business or (c) borrowings, the proceeds of which shall be
used to repay this Note.
2.4 Sale of Assets. So long as the Borrower shall have any obligation under
this Note, the Borrower shall not, without the Holder's written consent, sell,
lease or otherwise dispose of any significant portion of its assets outside the
ordinary course of business. Any consent to the disposition of any assets may be
conditioned on a specified use of the proceeds of disposition.
2.5 Advances and Loans. So long as the Borrower shall have any obligation
under this Note, the Borrower shall not, without the Holder's written consent,
lend money, give credit or make advances to any person, firm, joint venture or
corporation, including, without limitation, officers, directors, employees,
subsidiaries and affiliates of the Borrower, except loans, credits or advances
(a) in existence or committed on the date hereof and which the Borrower has
informed Holder in writing prior to the date hereof, (b) made in the ordinary
course of business or (c) not in excess of $100,000.
Article III. EVENTS OF DEFAULT
If any of the following events of default (each, an "Event of Default")
shall occur:
14
3.1 Failure to Pay Principal or Interest. The Borrower fails to pay the
principal hereof or interest thereon when due on this Note, whether at maturity,
upon acceleration or otherwise.
3.2 Conversion and the Shares. The Borrower fails to issue shares of Common
Stock to the Holder (or announces or threatens in writing that it will not honor
its obligation to do so) upon exercise by the Holder of the conversion rights of
the Holder in accordance with the terms of this Note, fails to transfer or cause
its transfer agent to transfer (issue) (electronically or in certificated form)
any certificate for shares of Common Stock issued to the Holder upon conversion
of or otherwise pursuant to this Note as and when required by this Note, the
Borrower directs its transfer agent not to transfer or delays, impairs, and/or
hinders its transfer agent in transferring (or issuing) (electronically or in
certificated form) any certificate for shares of Common Stock to be issued to
the Holder upon conversion of or otherwise pursuant to this Note as and when
required by this Note, or fails to remove (or directs its transfer agent not to
remove or impairs, delays, and/or hinders its transfer agent from removing) any
restrictive legend (or to withdraw any stop transfer instructions in respect
thereof) on any certificate for any shares of Common Stock issued to the Holder
upon conversion of or otherwise pursuant to this Note as and when required by
this Note (or makes any written announcement, statement or threat that it does
not intend to honor the obligations described in this paragraph) and any such
failure shall continue uncured (or any written announcement, statement or threat
not to honor its obligations shall not be rescinded in writing) for three (3)
business days after the Holder shall have delivered a Notice of Conversion. It
is an obligation of the Borrower to remain current in its obligations to its
transfer agent. It shall be an event of default of this Note, if a conversion of
this Note is delayed, hindered or frustrated due to a balance owed by the
Borrower to its transfer agent. If at the option of the Holder, the Holder
advances any funds to the Borrower's transfer agent in order to process a
conversion, such advanced funds shall be paid by the Borrower to the Holder
within forty eight (48) hours of a demand from the Holder.
3.3 Breach of Covenants. The Borrower breaches any material covenant or
other material term or condition contained in this Note and any collateral
documents including but not limited to the Purchase Agreement and such breach
continues for a period of ten (10) days after written notice thereof to the
Borrower from the Holder.
3.4 Breach of Representations and Warranties. Any representation or
warranty of the Borrower made herein or in any agreement, statement or
certificate given in writing pursuant hereto or in connection herewith
(including, without limitation, the Purchase Agreement), shall be false or
misleading in any material respect when made and the breach of which has (or
with the passage of time will have) a material adverse effect on the rights of
the Holder with respect to this Note or the Purchase Agreement.
3.5 Receiver or Trustee. The Borrower or any subsidiary of 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.
3.6 Judgments. Any money judgment, writ or similar process shall be entered
or filed against the Borrower or any subsidiary of the Borrower or any of its
15
property or other assets for more than $50,000, and shall remain unvacated,
unbonded or unstayed for a period of twenty (20) days unless otherwise consented
to by the Holder, which consent will not be unreasonably withheld.
3.7 Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings, voluntary or involuntary, for relief under any
bankruptcy law or any law for the relief of debtors shall be instituted by or
against the Borrower or any subsidiary of the Borrower.
3.8 Delisting of Common Stock. The Borrower shall fail to maintain the
listing of the Common Stock on at least one of the OTCBB or an equivalent
replacement exchange, the Nasdaq National Market, the Nasdaq SmallCap Market,
the New York Stock Exchange, or the American Stock Exchange.
3.9 Failure to Comply with the Exchange Act. The Borrower shall fail to
comply with the reporting requirements of the Exchange Act; and/or the Borrower
shall cease to be subject to the reporting requirements of the Exchange Act.
3.10 Liquidation. Any dissolution, liquidation, or winding up of Borrower
or any substantial portion of its business.
3.11 Cessation of Operations. Any cessation of operations by Borrower or
Borrower admits it is otherwise generally unable to pay its debts as such debts
become due, provided, however, that any disclosure of the Borrower's ability to
continue as a "going concern" shall not be an admission that the Borrower cannot
pay its debts as they become due.
3.12 Maintenance of Assets. The failure by Borrower to maintain any
material intellectual property rights, personal, real property or other assets
which are necessary to conduct its business (whether now or in the future).
3.13 Financial Statement Restatement. The restatement of any financial
statements filed by the Borrower with the SEC for any date or period from two
years prior to the Issue Date of this Note and until this Note is no longer
outstanding, if the result of such restatement would, by comparison to the
unrestated financial statement, have constituted a material adverse effect on
the rights of the Holder with respect to this Note or the Purchase Agreement.
3.14 Reverse Splits. The Borrower effectuates a reverse split of its Common
Stock without twenty (20) days prior written notice to the Holder.
3.15 Replacement of Transfer Agent. In the event that the Borrower proposes
to replace its transfer agent, the Borrower fails to provide, prior to the
effective date of such replacement, a fully executed Irrevocable Transfer Agent
Instructions in a form as initially delivered pursuant to the Purchase Agreement
(including but not limited to the provision to irrevocably reserve shares of
Common Stock in the Reserved Amount) signed by the successor transfer agent to
Borrower and the Borrower.
16
3.16 Cross-Default. Notwithstanding anything to the contrary contained in
this Note or the other related or companion documents, a breach or default by
the Borrower of any covenant or other term or condition contained in any of the
Other Agreements, after the passage of all applicable notice and cure or grace
periods, shall, at the option of the Holder, be considered a default under this
Note and the Other Agreements, in which event the Holder shall be entitled (but
in no event required) to apply all rights and remedies of the Holder under the
terms of this Note and the Other Agreements by reason of a default under said
Other Agreement or hereunder. "Other Agreements" means, collectively, all
agreements and instruments between, among or by: (1) the Borrower, and, or for
the benefit of, (2) the Holder and any affiliate of the Holder, including,
without limitation, promissory notes; provided, however, the term "Other
Agreements" shall not include the related or companion documents to this Note.
Each of the loan transactions will be cross-defaulted with each other loan
transaction and with all other existing and future debt of Borrower to the
Holder.
Upon the occurrence and during the continuation of any Event of Default
specified in Section 3.1 (solely with respect to failure to pay the principal
hereof or interest thereon when due at the Maturity Date), the Note shall become
immediately due and payable and the Borrower shall pay to the Holder, in full
satisfaction of its obligations hereunder, an amount equal to the Default Sum
(as defined herein). UPON THE OCCURRENCE AND DURING THE CONTINUATION OF ANY
EVENT OF DEFAULT SPECIFIED IN SECTION 3.2, THE NOTE SHALL BECOME IMMEDIATELY DUE
AND PAYABLE AND THE BORROWER SHALL PAY TO THE HOLDER, IN FULL SATISFACTION OF
ITS OBLIGATIONS HEREUNDER, AN AMOUNT EQUAL TO: (Y) THE DEFAULT SUM (AS DEFINED
HEREIN); MULTIPLIED BY (Z) TWO (2). Upon the occurrence and during the
continuation of any Event of Default specified in Sections 3.1 (solely with
respect to failure to pay the principal hereof or interest thereon when due on
this Note upon a Trading Market Prepayment Event pursuant to Section 1.7 or upon
acceleration), 3.3, 3.4, 3.6, 3.8, 3.9, 3.11, 3.12, 3.13, 3.14, and/or 3. 15
exercisable through the delivery of written notice to the Borrower by such
Holders (the "Default Notice"), and upon the occurrence of an Event of Default
specified the remaining sections of Articles III (other than failure to pay the
principal hereof or interest thereon at the Maturity Date specified in Section
3,1 hereof), the Note shall become immediately due and payable and the Borrower
shall pay to the Holder, in full satisfaction of its obligations hereunder, an
amount equal to the greater of (i) 150% times the sum of (w) the then
outstanding principal amount of this Note plus (x) accrued and unpaid interest
on the unpaid principal amount of this Note to the date of payment (the
"Mandatory Prepayment Date") plus (y) Default Interest, if any, on the amounts
referred to in clauses (w) and/or (x) plus (z) any amounts owed to the Holder
pursuant to Sections 1.3 and 1.4(g) hereof (the then outstanding principal
amount of this Note to the date of payment plus the amounts referred to in
clauses (x), (y) and (z) shall collectively be known as the "Default Sum") or
(ii) the "parity value" of the Default Sum to be prepaid, where parity value
means (a) the highest number of shares of Common Stock issuable upon conversion
of or otherwise pursuant to such Default Sum in accordance with Article I,
treating the Trading Day immediately preceding the Mandatory Prepayment Date as
the "Conversion Date" for purposes of determining the lowest applicable
Conversion Price, unless the Default Event arises as a result of a breach in
respect of a specific Conversion Date in which case such Conversion Date shall
be the Conversion Date), multiplied by (b) the highest Closing Price for the
17
Common Stock during the period beginning on the date of first occurrence of the
Event of Default and ending one day prior to the Mandatory Prepayment Date (the
"Default Amount") and all other amounts payable hereunder shall immediately
become due and payable, all without demand, presentment or notice, all of which
hereby are expressly waived, together with all costs, including, without
limitation, legal fees and expenses, of collection, and the Holder shall be
entitled to exercise all other rights and remedies available at law or in
equity.
If the Borrower fails to pay the Default Amount within five (5) business
days of written notice that such amount is due and payable, then the Holder
shall have the right at any time, so long as the Borrower remains in default
(and so long and to the extent that there are sufficient authorized shares), to
require the Borrower, upon written notice, to immediately issue, in lieu of the
Default Amount, the number of shares of Common Stock of the Borrower equal to
the Default Amount divided by the Conversion Price then in effect.
Article IV. MISCELLANEOUS
4.1 Failure or Indulgence Not Waiver. No failure or delay on the part of
the Holder 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 privileges. 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:
If to the Borrower, to:
RED GIANT ENTERTAINMENT, INC.
614 E. Highway 50 - Suite 235
Clermont, FL 34711
Attn: BENNY R. POWELL, Chief Executive Officer
facsimile:
18
With a copy by fax only to (which copy shall not constitute notice):
[enter name of law firm]
Attn: [attorney name]
[enter address line 1]
[enter city, state, zip]
facsimile: [enter fax number]
If to the Holder:
ASHER ENTERPRISES, INC.
1 Linden Pl., Suite 207
Great Neck, NY. 11021
Attn: Curt Kramer, President
facsimile: 516-498-9894
With a copy by fax only to (which copy shall not constitute notice):
Naidich Wurman Birnbaum & Maday, LLP
80 Cuttermill Road, Suite 410
Great Neck, NY 11021
Attn: Bernard S. Feldman, Esq.
facsimile: 516-466-3555
4.3 Amendments. This Note and any provision hereof may only be amended by
an instrument in writing signed by the Borrower and the Holder. The term "Note"
and all reference thereto, as used throughout this instrument, shall mean this
instrument (and the other Notes issued pursuant to the Purchase Agreement) 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 be the benefit of the Holder and its
successors and assigns. Each transferee of this Note must be an "accredited
investor" (as defined in Rule 501(a) of the 1933 Act). Notwithstanding anything
in this Note to the contrary, this Note may be pledged as collateral in
connection with a bona fide margin account or other lending arrangement.
4.5 Cost of Collection. If default is made in the payment of this Note, the
Borrower shall pay the Holder hereof 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 without regard to principles
of conflicts of laws. Any action brought by either party against the other
concerning the transactions contemplated by this Note shall be brought only in
the state courts of New York or in the federal courts located in the state and
county of Nassau. The parties to this Note hereby irrevocably waive any
objection to jurisdiction and venue of any action instituted hereunder and shall
not assert any defense based on lack of jurisdiction or venue or based upon
FORUM NON CONVENIENS. The Borrower and Holder waive trial by jury. The
prevailing party shall be entitled to recover from the other party its
reasonable attorney's fees and costs. In the event that any provision of this
Note or any other agreement delivered in connection herewith is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
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shall be deemed modified to conform with such statute or rule of law. Any such
provision which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision of any agreement.
Each party hereby irrevocably waives personal service of process and consents to
process being served in any suit, action or proceeding in connection with this
Agreement or any other Transaction Document by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit in
any way any right to serve process in any other manner permitted by law.
4.7 Certain Amounts. Whenever pursuant to this Note the Borrower is
required to pay an amount in excess of the outstanding principal amount (or the
portion thereof required to be paid at that time) plus accrued and unpaid
interest plus Default Interest on such interest, the Borrower and the Holder
agree that the actual damages to the Holder from the receipt of cash payment on
this Note may be difficult to determine and the amount to be so paid by the
Borrower represents stipulated damages and not a penalty and is intended to
compensate the Holder in part for loss of the opportunity to convert this Note
and to earn a return from the sale of shares of Common Stock acquired upon
conversion of this Note at a price in excess of the price paid for such shares
pursuant to this Note. The Borrower and the Holder hereby agree that such amount
of stipulated damages is not plainly disproportionate to the possible loss to
the Holder from the receipt of a cash payment without the opportunity to convert
this Note into shares of Common Stock.
4.8 Purchase Agreement. By its acceptance of this Note, each party agrees
to be bound by the applicable terms of the Purchase Agreement.
4.9 Notice of Corporate Events. Except as otherwise provided below, the
Holder of this Note shall have no rights as a Holder of Common Stock unless and
only to the extent that it converts this Note into Common Stock. The Borrower
shall provide the Holder with prior notification of any meeting of the
Borrower's shareholders (and copies of proxy materials and other information
sent to shareholders). In the event of any taking by the Borrower of a record of
its shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation,
reclassification or recapitalization) any share of any class or any other
securities or property, or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection with any
proposed sale, lease or conveyance of all or substantially all of the assets of
the Borrower or any proposed liquidation, dissolution or winding up of the
Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20)
days prior to the record date specified therein (or thirty (30) days prior to
the consummation of the transaction or event, whichever is earlier), of the date
on which any such record is to be taken for the purpose of such dividend,
distribution, right or other event, and a brief statement regarding the amount
and character of such dividend, distribution, right or other event to the extent
known at such time. The Borrower shall make a public announcement of any event
requiring notification to the Holder hereunder substantially simultaneously with
the notification to the Holder in accordance with the terms of this Section 4.9.
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4.10 Remedies. The Borrower acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder, by vitiating the intent and
purpose of the transaction contemplated hereby. Accordingly, the Borrower
acknowledges that the remedy at law for a breach of its obligations under this
Note will be inadequate and agrees, in the event of a breach or threatened
breach by the Borrower of the provisions of this Note, that the Holder shall be
entitled, in addition to all other available remedies at law or in equity, and
in addition to the penalties assessable herein, to an injunction or injunctions
restraining, preventing or curing any breach of this Note and to enforce
specifically the terms and provisions thereof, without the necessity of showing
economic loss and without any bond or other security being required.
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name
by its duly authorized officer this November 11, 2013.
RED GIANT ENTERTAINMENT, INC.
By: /s/ Benny R. Powell
-------------------------------
BENNY R. POWELL
Chief Executive Officer
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EXHIBIT A -- NOTICE OF CONVERSION
The undersigned hereby elects to convert $_________________ principal
amount of the Note (defined below) into that number of shares of Common Stock to
be issued pursuant to the conversion of the Note ("Common Stock") as set forth
below, of RED GIANT ENTERTAINMENT, INC., a Nevada corporation (the "Borrower")
according to the conditions of the convertible note of the Borrower dated as of
November 11, 2013 (the "Note"), as of the date written below. No fee will be
charged to the Holder for any conversion, except for transfer taxes, if any.
Box Checked as to applicable instructions:
[ ] The Borrower shall electronically transmit the Common Stock issuable
pursuant to this Notice of Conversion to the account of the undersigned or
its nominee with DTC through its Deposit Withdrawal Agent Commission system
("DWAC Transfer").
Name of DTC Prime Broker:
Account Number:
[ ] The undersigned hereby requests that the Borrower issue a certificate or
certificates for the number of shares of Common Stock set forth below
(which numbers are based on the Holder's calculation attached hereto) in
the name(s) specified immediately below or, if additional space is
necessary, on an attachment hereto:
ASHER ENTERPRISES, INC.
1 Linden Pl., Suite 207
Great Neck, NY. 11021
Attention: Certificate Delivery
(516) 498-9890
Date of Conversion: _____________
Applicable Conversion Price: $_____________
Number of Shares of Common Stock to be Issued
Pursuant to Conversion of the Notes: _____________
Amount of Principal Balance Due remaining
Under the Note after this conversion: ____________
ASHER ENTERPRISES, INC.
By:_____________________________
Name: Curt Kramer
Title: President
Date: ______________
1 Linden Pl., Suite 207
Great Neck, NY. 11021
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