THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN
OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO
THE MAKER THAT THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION
HEREOF MAY BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION
FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.
KRONOS ADVANCED TECHNOLOGIES, INC.
Secured Convertible Promissory Note
due December 31, 2007
June 19, 2007 $859,000
Belmont, Massachusetts
For value received, Kronos Advanced Technologies, Inc., a Nevada
corporation whose principal office is located at 464 Common Street, Box 301,
Belmont, Massachusetts 02478 (the "Maker"), hereby promises to pay to the order
of Sands Brothers Venture Capital LLC, a New York limited liability company
("Sands I"), Sands Brothers Venture Capital II LLC, a New York limited liability
company ("Sands II"), Sands Brothers Venture Capital III LLC, a New York limited
liability company ("Sands III"), Sands Brothers Venture Capital IV LLC, a New
York limited liability company ("Sands IV") and Critical Capital Growth Fund,
L.P., a Delaware limited partnership and a debenture licensed U.S. Small
Business Investment Company ("CCGF") (Sands I, Sands II, Sands III, Sands IV,
and CCGF, together with their respective successors, representatives, and
permitted assigns, are collectively referred to as, the "Holder"), in accordance
with the terms hereinafter provided, the principal amount of Eight Hundred
Fifty-Nine Thousand Dollars ($859,000.00) or so much thereof as may be advanced
by the Holder to Maker in accordance with the provisions of the Funding
Agreement, together with interest thereon. This Secured Convertible Promissory
Note (this "Note") is one of the duly authorized Notes of Maker issued in
connection with that Funding Agreement of even date herewith by and among the
Maker and the Lenders (the "Funding Agreement").
All payments under or pursuant to this Note shall be made in United
States Dollars in immediately available funds to the Holder at the address of
the Holder first set forth above or at such other place as the Holder may
designate from time to time in writing to the Maker or by wire transfer of funds
to the Holder's account, instructions for which are attached hereto as Exhibit
A. The outstanding principal balance of this Note and all accrued interest
hereon shall be due and payable on December 31, 2007 (the "Maturity Date") or at
such earlier time as provided herein.
ARTICLE I
GENERAL
Section 1.1 Definitions. Capitalized terms used but not otherwise defined
shall have the meanings ascribed to terms in the Funding Agreement.
Section 1.2 Interest. Beginning on the issuance date of this Note (the "Issuance
Date"), the outstanding principal balance of this Note shall bear interest, in
arrears, at a rate per annum equal to twelve percent (12%), payable in cash
commencing on July 1, 2007 and on the first business day of each following
month. Interest shall be computed on the basis of a 360-day year of twelve (12)
30-day months and shall accrue commencing on the Issuance Date. Furthermore,
upon the occurrence of an Event of Default (as defined in Section 2.1 hereof),
then to the extent permitted by law, the Maker will pay interest in cash to the
Holder, payable on demand, on the outstanding principal balance of this Note
from the date of the Event of Default until such Event of Default is cured at
the rate of the lesser of eighteen percent (18%) per annum and the maximum
applicable legal rate per annum.
Section 1.3 Security. This Note and the amounts due hereunder are secured by the
Collateral, as defined in that Security Agreement dated of even date herewith
among the Maker and the Lenders.
Section 1.4 Payment on Non-Business Days. Whenever any payment to be made
hereunder shall be due on a Saturday, Sunday or a public holiday under the laws
of the State of New York, such payment may be due on the next succeeding
business day and such next succeeding day shall be included in the calculation
of the amount of accrued interest payable on such date.
Section 1.5 Transfer. Subject to the provisions of Section 4.8 of this Note,
this Note may be transferred or sold or pledged, hypothecated or otherwise
granted as security by the Holder.
Section 1.6 Replacement. Upon receipt of a duly executed, notarized and
unsecured written statement from the Holder with respect to the loss, theft or
destruction of this Note (or any replacement hereof) and a standard indemnity,
or, in the case of a mutilation of this Note, upon surrender and cancellation of
such Note, the Maker shall issue a new Note, of like tenor and amount, in lieu
of such lost, stolen, destroyed or mutilated Note.
Section 1.7 Record Keeping. The Holder shall maintain a record of all advances
made to Maker under this Note, and such record shall be conclusive evidence of
the amounts disbursed to Maker under this Note.
ARTICLE II
EVENTS OF DEFAULT; REMEDIES
Section 2.1 Events of Default. The occurrence of any of the following events
shall be an "Event of Default" under this Note:
2
(a) the Maker shall fail to make any principal or interest payments on the date
such payments are due and such default is not fully cured within seven (7)
business days after the occurrence thereof; or
(b) the suspension from listing, without subsequent listing on any one of, or
the failure of the Common Stock of the Maker (the "Common Stock") to be listed
or quoted on at least one of the NASD Over-The-Counter Bulletin Board (the "OTC
Bulletin Board"), the American Stock Exchange, the NASDAQ National Market, the
Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market
or The New York Stock Exchange, Inc.; or
(c) the Maker's notice to the Holder, including by way of public announcement,
at any time, of Maker's inability to comply (including for any of the reasons
described in Section 3.6(a) hereof) or its intention not to comply with proper
requests for conversion of this Note into shares of Common Stock; or
(d) the Maker shall fail to (i) timely deliver the shares of Common Stock upon
conversion of the Note, (ii) file a registration statement in accordance with
the terms of the Registration Rights Agreement or (iii) make the payment of any
fees and/or liquidated damages under this Note, the Funding Agreement, the
Registration Rights Agreement or other Transaction Documents, which failure in
the case of items (i) and (iii) of this Section 2.1(d) is not remedied within
ten (10) business days after the incurrence thereof and, solely with respect to
item (iii) above, after the Holder delivers written notice to the Maker of the
occurrence thereof; or
(e) while a registration statement is required to be maintained effective
pursuant to the terms of the Registration Rights Agreement, the effectiveness of
such registration statement lapses for any reason (including, without
limitation, the issuance of a stop order) or is unavailable to the Holder for
sale of the Registrable Securities (as defined in the Registration Rights
Agreement) in accordance with the terms of the Registration Rights Agreement,
and such lapse or unavailability continues for a period of ten (10) consecutive
Trading Days; or
(f) default shall be made in the performance or observance of (i) any covenant,
condition or agreement contained in this Note (other than as set forth in clause
(f) of this Section 2.1) and such default is not fully cured within twenty (20)
business days after the Holder delivers written notice to the Maker of the
occurrence thereof or (ii) any covenant, condition or agreement contained in the
Funding Agreement, the Registration Rights Agreement or any other Transaction
Document which is not covered by any other provisions of this Section 2.1 and
such default is not fully cured within twenty (20) business days after the
Holder delivers written notice to the Maker of the occurrence thereof; or
(g) any material representation or warranty made by the Maker herein or in the
Funding Agreement, the Registration Rights Agreement, or any other Transaction
Document shall prove to have been false or incorrect or breached by Maker and
the Holder delivers written notice to the Maker of the occurrence thereof; or
3
(h) the Maker shall (A) default in any payment of any amount or amounts of
principal of or interest on any Indebtedness (other than the Indebtedness
hereunder) the aggregate principal amount of which Indebtedness is in excess of
$50,000 or (B) default in the observance or performance of any other agreement
or condition relating to any Indebtedness or contained in any instrument or
agreement evidencing, securing or relating thereto, or any other event shall
occur or condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders or beneficiary or
beneficiaries of such Indebtedness to cause with the giving of notice if
required, such Indebtedness to become due prior to its stated maturity; or
(i) the Maker shall (i) apply for or consent to the appointment of, or the
taking of possession by, a receiver, custodian, trustee or liquidator of itself
or of all or a substantial part of its property or assets, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary case
under the United States Bankruptcy Code (as now or hereafter in effect) or under
the comparable laws of any jurisdiction (foreign or domestic), (iv) file a
petition seeking to take advantage of any bankruptcy, insolvency, moratorium,
reorganization or other similar law affecting the enforcement of creditors'
rights generally, (v) acquiesce in writing to any petition filed against it in
an involuntary case under United States Bankruptcy Code (as now or hereafter in
effect) or under the comparable laws of any jurisdiction (foreign or domestic),
(vi) issue a notice of bankruptcy or winding down of its operations or issue a
press release regarding same, or (vii) take any action under the laws of any
jurisdiction (foreign or domestic) analogous to any of the foregoing; or
(j) a proceeding or case shall be commenced in respect of the Maker, without its
application or consent, in any court of competent jurisdiction, seeking (i) the
liquidation, reorganization, moratorium, dissolution, winding up, or composition
or readjustment of its debts, (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like of it for all or any substantial part of its
assets in connection with the liquidation or dissolution of the Maker or (iii)
similar relief in respect of it under any law providing for the relief of
debtors, and such proceeding or case described in clause (i), (ii) or (iii)
shall continue undismissed, or unstayed and in effect, for a period of thirty
(30) days or any order for relief shall be entered in an involuntary case under
United States Bankruptcy Code (as now or hereafter in effect) or under the
comparable laws of any jurisdiction (foreign or domestic) against the Maker or
action under the laws of any jurisdiction (foreign or domestic) analogous to any
of the foregoing shall be taken with respect to the Maker and shall continue
undismissed, or unstayed and in effect for a period of thirty (30) days; or
(k) the failure of the Maker to instruct its transfer agent to remove any
legends from shares of Common Stock eligible to be sold under Rule 144 of the
Securities Act and issue such unlegended certificates to the Holder within five
(5) business days of the Holder's request so long as the Holder has provided
reasonable assurances to the Maker that such shares of Common Stock can be sold
pursuant to Rule 144; or
(l) the Maker ceases to operate its business as a going concern; or
(m) the Security Agreement, or any other security agreement, pledge agreement,
collateral assignment, mortgage, control agreement or other grants or transfers
for security executed and delivered by Maker or any other obligor creating (or
purporting to create) a Lien in favor of the Holder (collectively, the "Security
Documents"), at any time for any reason cease to be in full force and effect, or
shall cease to grant to the Holder the Liens, rights, powers and privileges
purported to be created thereby, superior to and prior to the rights of all
third Persons other than the holders of Permitted Liens and subject to no other
Liens other than Permitted Liens; or
4
(n) the Maker or any other obligor, directly or indirectly, contest in any
manner the effectiveness, validity, binding nature or enforceability of the
Security Agreement or any of the other Security Documents.
Section 2.2 Remedies Upon An Event of Default. If an Event of Default shall have
occurred and shall be continuing, the Holder of this Note may at any time at its
option, (a) declare the entire unpaid principal balance of this Note, together
with all interest accrued hereon, due and payable, and thereupon, the same shall
be accelerated and so be due and payable, without presentment, demand, protest,
or notice, all of which are hereby expressly unconditionally and irrevocably
waived by the Maker, (b) demand that the principal amount of this Note then
outstanding shall be converted into shares of Common Stock at a Conversion Price
per share calculated pursuant to Section 3.1 hereof assuming that the date that
the Event of Default occurs is the Conversion Date (as defined in Section 3.1
hereof), or (c) exercise or otherwise enforce any one or more of the Holder's
rights, powers, privileges, remedies and interests under this Note, the Funding
Agreement, the Security Agreement, the Registration Rights Agreement, the
Security Documents, any other Transaction Document or applicable law. No course
of delay on the part of the Holder shall operate as a waiver thereof or
otherwise prejudice the right of the Holder. No remedy conferred hereby shall be
exclusive of any other remedy referred to herein or now or hereafter available
at law, in equity, by statute or otherwise.
ARTICLE III
CONVERSION; ANTIDILUTION; PREPAYMENT
Section 3.1 Conversion Option. In the event that all of the principal and
accrued interest due hereunder is not paid in full on or prior to the Maturity
Date, the Holder shall have the right to convert this Note at any time after the
Maturity Date into such number of fully paid and non-assessable shares of Common
Stock as is determined by dividing (x) that portion of the outstanding principal
balance under this Note as of such date that the Holder elects to convert by (y)
the Conversion Price (as defined in Section 3.2(a) hereof) then in effect on the
date on which the Holder faxes a notice of conversion in the form attached
hereto (the "Conversion Notice"), duly executed, to the Maker (facsimile number
(617) 364-5085 Attn.: Chief Executive Officer) (the "Conversion Date"),
provided, however, that the Conversion Price shall be subject to adjustment as
described in Section 3.4 of this Note. The Holder shall deliver this Note to the
Maker at the address designated in the Funding Agreement at such time that this
Note is fully converted. With respect to partial conversions of this Note, the
Maker shall keep written records of the amount of this Note converted as of each
Conversion Date. Notwithstanding anything contained herein to the contrary, the
Holder shall have no right to convert this Note into shares of Common Stock
unless the Maker fails to pay all of the principal and accrued interest due
hereunder on or prior to the Maturity Date.
5
Section 3.2 Conversion Price. The term "Conversion Price" shall mean $0.0028,
subject to adjustment under Section 3.4 hereof.
Section 3.3 Mechanics of Conversion.
(a) Not later than three (3) Trading Days after any Conversion Date (the
"Delivery Date"), the Maker shall deliver to the Holder by (i) express courier a
certificate or certificates representing the number of shares of Common Stock
being acquired upon the conversion of all or part of this Note, or (ii) provided
that Maker's designated transfer agent participates in the DTC Fast Automated
Securities Transfer Program, at all times after the Holder has notified the
Maker that this clause (ii) shall apply, credit the number of shares of Common
Stock to which the Holder shall be entitled to the Holder's or its designee's
balance account with The Depository Trust Corporation through its Deposit
Withdrawal Agent Commission System. If in the case of any Conversion Notice such
certificate, certificates or shares are not delivered to or as directed by the
Holder by the Delivery Date, the Holder shall be entitled by written notice to
the Maker at any time on or before its receipt of such certificate or
certificates thereafter, to rescind such conversion, in which event the Maker
shall immediately return this Note tendered for conversion, whereupon the Maker
and the Holder shall each be restored to their respective positions immediately
prior to the delivery of such notice of revocation, except that any amounts
described in Sections 3.3(b) shall be payable through the date notice of
rescission is given to the Maker. The Maker shall upon request of the Holder,
use its best efforts to deliver Conversion Shares hereunder electronically
through the Depository Trust Company.
(b) The Maker understands that a delay in the delivery of the shares of Common
Stock upon conversion of this Note beyond the Delivery Date could result in
economic loss to the Holder. If the Maker fails to deliver to the Holder a
certificate or certificates pursuant to this Section by the Delivery Date, the
Maker shall pay to the Holder, in cash, an amount per Trading Day for each
Trading Day until such certificates are delivered, together with interest on
such amount at a rate of 10% per annum, accruing until such amount and any
accrued interest thereon is paid in full, equal to the greater of (A) the sum of
(i) 1% of the aggregate principal amount of this Note requested to be converted
for the first five (5) Trading Days after the Delivery Date and (ii) 2% of the
aggregate principal amount of this Note requested to be converted for each
Trading Day thereafter and (B) $2,000 per day (which amount shall be paid as
liquidated damages and not as a penalty). Nothing herein shall limit a Holder's
right to pursue actual damages for the Maker's failure to deliver certificates
representing shares of Common Stock upon conversion within the period specified
herein and the Holder shall have the right to pursue all remedies available to
it at law or in equity (including, without limitation, a decree of specific
performance and/or injunctive relief). Notwithstanding anything to the contrary
contained herein, the Holder shall be entitled to withdraw a Conversion Notice,
and upon such withdrawal the Maker shall only be obligated to pay the liquidated
damages accrued in accordance with this Section 3.3(b) through the date the
Conversion Notice is withdrawn.
Section 3.4 Adjustment of Conversion Price.
(a) The Conversion Price shall be subject to adjustment from time to time as
follows:
6
(i) Adjustments for Additional Issuances of Common Stock. In the event that the
Maker at any time after the First Closing Date issues additional shares of
Common Stock (including additional shares of Common Stock deemed to be issued)
without consideration or for a consideration per share less than the Conversion
Price then in effect, then the Conversion Price shall be reduced, concurrently
with such issuance, to a price (calculated to the nearest hundredth of one cent)
equal to the consideration per share received by the Maker upon such issuance of
additional shares of Common Stock. For purposes of this Section 3.4, shares of
Common Stock shall be deemed to be issued if the Maker or any of its
subsidiaries issues additional shares of Common Stock or rights, warrants,
options or other securities or debt convertible, exercisable or exchangeable for
shares of Common Stock or otherwise entitling any Person to acquire shares of
Common Stock (collectively, "Common Stock Equivalents"). For purposes of this
Section 3.4, in connection with any issuance or deemed issuance of any Common
Stock, (A) the maximum number of shares of Common Stock potentially issuable at
any time upon conversion, exercise or exchange of such Common Stock Equivalents
(the "Deemed Number") the shall be deemed to be outstanding upon issuance of
such Common Stock Equivalents, (B) the consideration deemed to have been
received by the Maker applicable to such Common Stock shall equal the minimum
dollar value of consideration payable to the Maker to purchase such Common Stock
Equivalents and to convert, exercise or exchange them into Common Stock (net of
any discounts, fees, commissions and other expenses), divided by the Deemed
Number, and (C) no further adjustment shall be made to the Conversion Price upon
the actual issuance of Common Stock upon conversion, exercise or exchange of
such Common Stock Equivalents.
(ii) Adjustments for Subdivisions, Common Stock Dividends, Combinations or
Consolidations of Common Stock. In the event the outstanding shares of Common
Stock shall be subdivided or increased, by stock split or stock dividend, into a
greater number of shares of Common Stock, the Conversion Price then in effect
shall concurrently with the effectiveness of such subdivision or payment of such
stock dividend, be proportionately decreased. In the event the outstanding
shares of Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Conversion Price
then in effect shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately increased.
(iii) Adjustments for Reclassification, Exchange and Substitution. If the Common
Stock shall be changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination or shares
provided for above), the Conversion Price then in effect shall, concurrently
with the effectiveness of such reorganization or reclassification, be
proportionately adjusted such that the Common Stock issuable upon conversion of
this Note shall be convertible into, in lieu of the number of shares of Common
Stock which the Holder would otherwise have been entitled to receive, a number
of shares of such other class or classes of stock equivalent to the number of
shares of Common Stock that would have been subject to receipt by the Holder
upon conversion of this Note immediately before that change.
7
(iv) Adjustments for Merger, Sale, Lease or Conveyance. In the event of any
consolidation with or merger of the Maker with or into another entity, or in
case of any sale, lease or conveyance to another person or entity of the assets
of the Maker as an entirety or substantially as an entirety, the Common Stock
issuable upon conversion of this Note shall after the date of such
consolidation, merger, sale, lease or conveyance be convertible into the number
of shares of stock or other securities or property (including cash) to which the
Common Stock issuable (at the time of such consolidation, merger, sale, lease or
conveyance) upon conversion of this Note would have been entitled upon such
consolidation, merger, sale, lease or conveyance; and in any such case, if
necessary, the provisions set forth herein with respect to the rights and
interests thereafter of the Holder shall be appropriately adjusted so as to be
applicable, as nearly as may reasonably be, to any shares of stock or other
securities or property thereafter deliverable on the conversion of this Note.
(v) Other Provisions Applicable to Adjustment Under this Section. The following
provisions will be applicable to the adjustments in Conversion Price as provided
in this Section 3.4:
(1) The number of shares of Common Stock at any time outstanding shall not
include any shares thereof then directly or indirectly owned or held by or for
the account of the Maker.
(2) In case the Maker shall take any action affecting the outstanding number of
shares of Common Stock other than an action described in any of the foregoing
subsections above, inclusive, which would have an inequitable effect on the
Holder, the Conversion Price shall be adjusted in such manner and at such time
as the Board of Directors of the Maker on the advice of the Maker's independent
public accountants may in good faith determine to be equitable in the
circumstances.
(3) No adjustment of the Conversion Price shall be made if the amount of any
such adjustment would be an amount less than one percent (1%) of the Conversion
Price then in effect, but any such amount shall be carried forward and an
adjustment with respect thereof shall be made at the time of and together with
any subsequent adjustment which, together with such amount and any other amount
or amounts so carried forward, shall aggregate an increase or decrease of one
percent (1%) or more.
(4) The Conversion Price shall not be adjusted upward except in the event of a
combination of the outstanding shares of Common Stock into a smaller number of
shares of Common Stock.
(b) Record Date. In the event that the Maker shall propose at any time:
(i) to declare any dividend or distribution (other than by purchase of Common
Stock of employees, officers and directors pursuant to the termination of such
persons or pursuant to the Maker's exercise of rights of first refusal with
respect to Common Stock held by such persons) upon its Common Stock, whether in
cash, property, stock or other securities, whether or not a regular cash
dividend and whether or not out of earnings or earned surplus;
(ii) to effect any reclassification or recapitalization of its Common Stock
shares outstanding involving a change in the Common Stock; or
8
(iii) to merge or consolidate with or into any other entity, or sell, lease or
convey all or substantially all its property or business, or to liquidate,
dissolve or wind up; then, in connection with each such event, this Maker shall
send to the Holder:
(1) at least twenty (20) days' prior written notice of the date on which a
record shall be taken for such dividend or distribution (and specifying the date
on which the holders of Common Stock shall be entitled thereto) or for
determining rights to vote in respect of the matters referred to in (i) and (ii)
above; and
(2) in the case of the matters referred to in (ii) and (iii) above, at least
twenty (20) days' prior written notice of the date when the same shall take
place (and specifying the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon the occurrence of such event).
Each such written notice shall be given by first class mail, postage prepaid,
addressed to the Holder at the address first set forth above. Any such action
shall at all times be subject to the voting rights and other rights, preferences
and privileges of the Holder set forth herein.
(c) No Impairment. The Maker shall not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action
(other than actions taken in good faith), avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Maker but will at
all times in good faith assist in carrying out all the provisions of this
Section 3.4 and in taking all such action as may be necessary or appropriate in
order to protect the conversion rights of the Holder against impairment.
(d) Certificates as to Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price pursuant to this section, the Maker at its
expense shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and furnish to the Holder a certificate setting forth such
adjustment or readjustment in accordance with the terms hereof and showing in
detail the facts upon which such adjustment or readjustment is based. The Maker
shall, upon the written request at any time of the Holder, furnish or cause to
be furnished to the Holder a like certificate setting forth (A) such adjustments
and readjustments, (B) the Conversion Price at the time in effect, and (C) the
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of this Note.
(e) Issue Taxes. The Maker shall pay any and all issue and other taxes,
excluding federal, state or local income taxes, that may be payable in respect
of any issue or delivery of shares of Common Stock on conversion of this Note
pursuant thereto; provided, however, that the Maker shall not be obligated to
pay any transfer taxes resulting from any transfer requested by the Holder in
connection with any such conversion.
9
(f) Fractional Shares. No fractional shares of Common Stock shall be issued upon
conversion of this Note. In lieu of any fractional shares to which the Holder
would otherwise be entitled, the Maker shall pay cash equal to the product of
such fraction multiplied by the average of the Closing Bid Price of the Common
Stock into which this Note is convertible for the five (5) consecutive Trading
Days immediately preceding the Conversion Date. The term "Closing Bid Price"
shall mean, on any particular date (i) the last closing bid price per share of
the Common Stock on such date on the OTC Bulletin Board or another registered
national stock exchange on which the Common Stock is then listed, or if there is
no such price on such date, then the last closing bid price on such exchange or
quotation system on the date nearest preceding such date, or (ii) if the Common
Stock is not listed then on the OTC Bulletin Board or any registered national
stock exchange, the last trading price for a share of Common Stock in the
over-the-counter market, as reported by the OTC Bulletin Board or in the
National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices) at the close of business on
such date, or (iii) if the Common Stock is not then reported by the OTC Bulletin
Board or the National Quotation Bureau Incorporated (or similar organization or
agency succeeding to its functions of reporting prices), then the average of the
"Pink Sheet" quotes for the relevant conversion period, as determined in good
faith by the Holder, or (iv) if the Common Stock is not then publicly traded the
fair market value of a share of Common Stock as determined by the Holder and
reasonably acceptable to the Maker.
(g) Reservation of Common Stock.
(i) In the event that at anytime when this Note shall be outstanding, the Maker
shall not have sufficient authorized but unissued Common Stock for the purpose
of effecting the conversion of all amounts outstanding under this Note at such
time (without regard to any limitations on conversion) (an "Authorized Share
Failure"), it shall immediately reserve and keep available such number of its
duly authorized shares of Common Stock as is in fact available as of that date
and shall immediately take all action necessary to increase the number of its
authorized shares of Common Stock until such time as the Maker's Certificate of
Incorporation shall have been amended to increase the number of authorized
shares of Common Stock to such number as would, at a minimum, permit the
reservation by the Maker of sufficient shares to allow conversion of all amounts
outstanding under this Note as provided herein. Without limiting the generality
of the foregoing sentence, as soon as practicable after the occurrence of an
Authorized Share Failure, but in no event later than 60 days after the
occurrence of such Authorized Share Failure, the Maker shall (A) hold a meeting
of its stockholders or (B) obtain a majority written consent of its
stockholders, for the authorization of an increase in the number of authorized
shares of Common Stock. In connection with such meeting, the Maker shall provide
each stockholder with a proxy statement and shall use its best efforts to
solicit its stockholders' approval of such increase in authorized shares of
Common Stock and to cause its board of directors to recommend to the
stockholders that they approve such proposal. The inability of the Maker to
reserve the required number of shares of Common Stock required by this Section
3.4(g) shall have no impact on the rank, rights, preferences and privileges of
this Note, which shall be interpreted and applied as if the Maker had sufficient
shares of Common Stock authorized but unissued to effect any conversion. Before
taking any action which would cause an adjustment reducing the Conversion Price
below the then par value of the shares of Common Stock issuable upon conversion
of this Note or which would cause the effective purchase price for the Common
Stock to be less than the par value of the shares of Common Stock, the Maker
shall take any and all corporate action which may, in the opinion of its
counsel, be necessary in order that the Maker may validly and legally issue
fully paid and nonassessable shares of such Common Stock at such adjusted
Conversion Price or effective purchase price, as the case may be.
10
(h) Regulatory Compliance. If any shares of Common Stock to be reserved for the
purpose of conversion of this Note require registration or listing with or
approval of any governmental authority, stock exchange or other regulatory body
under any federal or state law or regulation or otherwise before such shares may
be validly issued or delivered upon conversion, the Maker shall, at its sole
cost and expense, in good faith and as expeditiously as possible, endeavor to
secure such registration, listing or approval, as the case may be.
Section 3.5 Preemptive Rights.
(a) Except as set forth in Section 3.5(c), the Maker shall not issue or sell any
shares of Common Stock or other securities, or any rights or options to purchase
Common Stock or other securities, or any debt or shares convertible into or
exchangeable for Common Stock or other securities, whether now or hereafter
authorized and whether unissued or in the treasury (collectively, "Preemptive
Shares"), unless the Holder shall first have been given the right to acquire, at
a price no less favorable than that at which such Preemptive Shares are to be
offered to others, a portion of the Preemptive Shares, as provided in Section
3.5(b).
(b) The Maker shall give the Holder prior written notice of any proposed
issuance or sale described in Section 3.5(a), including the price at which such
securities are to be offered and the time period for the offering, and the
Holder shall have thirty (30) days from the giving of such notice within which
to elect to acquire that number of the Preemptive Shares equal to the product of
the total number of Preemptive Shares being offered and a fraction, determined
as of the time immediately prior to the issuance of the Preemptive Shares, the
numerator of which is equal to the sum of (i) the number of shares of Common
Stock then outstanding as a result of the conversion of this Note, and (ii) the
number of shares of Common Stock into which this Note could be converted, and
the denominator of which is equal to the sum of (x) the number of shares of
Common Stock then outstanding, (y) the number of shares of Common Stock into
which this Note could be converted, and (z) the number of shares of Common Stock
issuable upon conversion or exercise of all outstanding options, warrants and
other rights for the purchase of capital stock of the Company, and all
outstanding shares of all series of preferred stock (such number of Preemptive
Shares being referred to herein as the "Common Stock Preemptive Shares"). The
Holder may acquire that portion of the Common Stock Preemptive Shares being
offered equal to its percentage ownership of the outstanding Common Stock
immediately preceding the issuance of the Preemptive Shares. If any transaction
specified by the Maker in any such notice shall not be consummated within one
hundred twenty (120) days from the date of such notice, the Corporation shall
again comply with the provisions of this Section 3.5 with respect to such
transaction, and the Holder shall again have preemptive rights hereunder with
respect to the transaction, regardless of whether any such stockholder had
previously exercised or failed to exercise such rights. Any purchase of
securities pursuant to the exercise of preemptive rights shall be consummated
simultaneously with, and shall be conditioned upon, consummation of the
transaction proposed by the Maker.
(c) The restrictions contained in, and preemptive rights granted under,
this Section 3.5 shall not apply to:
(i) shares of Common Stock issued upon conversion of this Note;
11
(ii) shares of capital stock of the Maker issued in a public offering occurring
after the date hereof that results in aggregate gross proceeds to the Maker of
at least Fifty Million Dollars ($50,000,000); or
(iii) shares of Common Stock issued upon the exercise or conversion of
outstanding options, warrants or other Common Stock equivalents in existence on
the Issuance Date.
The rights granted to the Holder under this Section 3.5 may be waived with
respect to any Preemptive Shares by a written waiver executed by the Holder.
Section 3.6 Prepayment. The Maker shall be permitted to prepay some or all of
the principal and accrued interest outstanding under this Note at any time prior
to the Maturity Date, without penalty. In the event that the Maker prepays some,
but not all, of the principal and accrued interest outstanding under this Note,
such prepaid amount shall be applied first to the amount owing on the date on
which the Maker's final payment is due hereunder and then to amounts owing on
any preceding dates on which the Maker is required to make payments hereunder.
Section 3.7 No Rights as Shareholder. Nothing contained in this Note shall be
construed as conferring upon the Holder, prior to the conversion of this Note,
the right to vote or to receive dividends or to consent or to receive notice as
a shareholder in respect of any meeting of shareholders for the election of
directors of the Maker or of any other matter, or any other rights as a
shareholder of the Maker.
ARTICLE IV
MISCELLANEOUS
Section 4.1 Notices. Any notice, demand, request, waiver or other communication
required or permitted to be given hereunder shall be in writing and shall be
effective (a) upon hand delivery, telecopy or facsimile at the address or number
first set forth above (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.
Section 4.2 Governing Law. This Note shall be governed by and construed in
accordance with the internal laws of the State of New York, without giving
effect to any of the conflicts of law principles which would result in the
application of the substantive law of another jurisdiction. This Note shall not
be interpreted or construed with any presumption against the party causing this
Note to be drafted.
Section 4.3 Headings. Article and section headings in this Note are included
herein for purposes of convenience of reference only and shall not constitute a
part of this Note for any other purpose.
12
Section 4.4 Remedies, Characterizations, Other Obligations, Breaches and
Injunctive Relief. The remedies provided in this Note shall be cumulative and in
addition to all other remedies available under this Note, at law or in equity
(including, without limitation, a decree of specific performance and/or other
injunctive relief), no remedy contained herein shall be deemed a waiver of
compliance with the provisions giving rise to such remedy and nothing herein
shall limit a Holder's right to pursue actual damages for any failure by the
Maker to comply with the terms of this Note. Amounts set forth or provided for
herein with respect to payments, conversion and the like (and the computation
thereof) shall be the amounts to be received by the Holder thereof and shall
not, except as expressly provided herein, be subject to any other obligation of
the Maker (or the performance thereof). The Maker acknowledges that a breach by
it of its obligations hereunder will cause irreparable and material harm to the
Holder and that the remedy at law for any such breach may be inadequate.
Therefore the Maker agrees that, in the event of any such breach or threatened
breach, the Holder shall be entitled, in addition to all other available rights
and remedies, at law or in equity, to seek and obtain such equitable relief,
including but not limited to an injunction restraining any such breach or
threatened breach, without the necessity of showing economic loss and without
any bond or other security being required.
Section 4.5 Enforcement Expenses. The Maker agrees to pay all costs and expenses
of enforcement of this Note, including, without limitation, reasonable
attorneys' fees and expenses.
Section 4.6 Binding Effect. The obligations of the Maker and the Holder set
forth herein shall be binding upon the successors and permitted assigns of each
such party.
Section 4.7 Amendments. This Note may not be modified or amended in any manner
except in a writing executed by the Maker and the Holder.
Section 4.8 Compliance with Securities Laws. The Holder of this Note
acknowledges that this Note is being acquired solely for the Holder's own
account and not as a nominee for any other party, and for investment, and that
the Holder shall not offer, sell or otherwise dispose of this Note. This Note
and any Note issued in substitution or replacement therefor shall be stamped or
imprinted with a legend in substantially the following form:
THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON
CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR RECEIPT
BY THE MAKER OF AN OPINION OF COUNSEL IN THE FORM, SUBSTANCE
AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THIS
NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION
HEREOF HAVE MAY BE SOLD, TRANSFERRED, HYPOTHECATED OR
OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION
UNDER THE ACT AND SUCH STATE SECURITIES LAWS.
13
Section 4.9 Consent to Jurisdiction. Each of the Maker and the Holder (i) hereby
irrevocably submits to the exclusive jurisdiction of the United States District
Court sitting in the Southern District of New York and the courts of the State
of New York located in New York county for the purposes of any suit, action or
proceeding arising out of or relating to this Note and (ii) hereby waives, and
agrees not to assert in any such suit, action or proceeding, any claim that it
is not personally subject to the jurisdiction of such court, that the suit,
action or proceeding is brought in an inconvenient forum or that the venue of
the suit, action or proceeding is improper. Each of the Maker and the Holder
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address in effect for notices to it
under the Funding Agreement and agrees that such service shall constitute good
and sufficient service of process and notice thereof. Nothing in this Section
4.9 shall affect or limit any right to serve process in any other manner
permitted by law. Each of the Maker and the Holder hereby agree that the
prevailing party in any suit, action or proceeding arising out of or relating to
this Note shall be entitled to reimbursement for reasonable legal fees from the
non-prevailing party.
Section 4.10 Parties in Interest. This Note shall be binding upon, inure to the
benefit of and be enforceable by the Maker, the Holder and their respective
successors and permitted assigns.
Section 4.11 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 privilege.
Section 4.12 Maker Waivers. Except as otherwise specifically provided herein,
the Maker and all others that may become liable for all or any part of the
obligations evidenced by this Note, hereby waive presentment, demand, notice of
nonpayment, protest and all other demands' and notices in connection with the
delivery, acceptance, performance and enforcement of this Note, and do hereby
consent to any number of renewals of extensions of the time or payment hereof
and agree that any such renewals or extensions may be made without notice to any
such persons and without affecting their liability herein and do further consent
to the release of any person liable hereon, all without affecting the liability
of the other persons, firms or Maker liable for the payment of this Note, AND DO
HEREBY WAIVE TRIAL BY JURY.
(a) No delay or omission on the part of the Holder in exercising its rights
under this Note, or course of conduct relating hereto, shall operate as a waiver
of such rights or any other right of the Holder, nor shall any waiver by the
Holder of any such right or rights on any one occasion be deemed a waiver of the
same right or rights on any future occasion.
(b) THE MAKER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS
A COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY
WAIVES ITS RIGHT TO NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY
WHICH THE HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE TO USE.
14
Section 4.13 Definitions. For the purposes hereof, the following terms
shall have the following meanings:
"business day" means any day other than a Saturday, Sunday or
other day on which banks in New York City, New York are authorized or required
by law to close.
"Indebtedness" of any Person means without duplication (A) all
indebtedness for borrowed money, (B) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services (other than trade
payables entered into in the ordinary course of business), (C) all reimbursement
or payment obligations with respect to letters of credit, surety bonds and other
similar instruments, (D) all obligations evidenced by notes, bonds, debentures
or similar instruments, including obligations so evidenced incurred in
connection with the acquisition of property, assets or businesses, (E) all
indebtedness created or arising under any conditional sale or other title
retention agreement, or incurred as financing, in either case with respect to
any property or assets acquired with the proceeds of such indebtedness (even
though the rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such property), (F) all
monetary obligations under any leasing or similar arrangement which, in
connection with GAAP, is classified as a capital lease, (G) all indebtedness
referred to in clauses (A) through (F) above secured by (or for which the holder
of such Indebtedness has an existing right, contingent or otherwise, to be
secured by) any Lien upon or in any property or assets (including accounts and
contract rights) owned by any Person, even though the Person which owns such
assets or property has not assumed or become liable for the payment of such
indebtedness, and (H) all Contingent Obligations in respect of indebtedness or
obligations of others of the kinds referred to in clauses (A) through (G) above.
For purposes of the definition of Indebtedness, "Contingent Obligation" means,
as to any Person, any direct or indirect liability, contingent or otherwise, of
that Person with respect to any indebtedness, lease, dividend or other
obligation of another Person if the primary purpose or intent of the Person
incurring such liability, or the primary effect thereof, is to provide assurance
to the obligee of such liability that such liability will be paid or discharged,
or that any agreements relating thereto will be complied with, or that the
holders of such liability will be protected (in whole or in part) against loss
with respect thereto.
"Person" means an individual or a corporation, partnership,
trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or political
subdivision thereof) or other entity of any kind.
"Trading Day" means (a) a day on which the Common Stock is
traded on the OTC Bulletin Board, or (b) if the Common Stock is not traded on
the OTC Bulletin Board, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices); provided, however, that in the event that the Common Stock is
not listed or quoted as set forth in (a) or (b) hereof, then Trading Day shall
mean any day except Saturday, Sunday and any day which shall be a legal holiday
or a day on which banking institutions in the State of New York are authorized
or required by law or other government action to close.
15
IN WITNESS WHEREOF, this Note is executed and delivered by a duly authorized and
empowered officer of the Maker as of the date first written above.
KRONOS ADVANCED TECHNOLOGIES, INC.
By: /s/ Richard F. Tusing
---------------------------
Name: Richard F. Tusing
Title: Chief Operating Officer
EXHIBIT A
WIRE INSTRUCTIONS
Payee: _______________________________________________
Bank: _______________________________________________
Address: _______________________________________________
_______________________________________________
Bank No.: _______________________________________________
Account No.: _______________________________________________
Account Name: _______________________________________________
FORM OF
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the Note)
The undersigned hereby irrevocably elects to convert $ ________________ of the
principal amount of the above Note No. ___ into shares of Common Stock of Kronos
Advanced Technologies, Inc. (the "Maker") according to the conditions hereof, as
of the date written below.
Date of Conversion _____________________________________________
Applicable Conversion Price _____________________________________________
Number of shares of Common Stock beneficially owned or deemed beneficially owned
by the Holder on the Date of Conversion: ________
Signature ______________________________________________________
[Name]
Address: ______________________________________________________
______________________________________________________