MODIFICATION AGREEMENT
This MODIFICATION AGREEMENT (this "Agreement") is dated as of March 1,
2006 and is entered into by and among AXM PHARMA, INC., a Nevada corporation
(the "Company"), and the noteholders listed below (collectively, the "Holders")
who are signatories hereto, with reference to the following:
WHEREAS, the Company issued separate secured convertible promissory
notes ( the "Notes") to the Holders pursuant to a Note and Warrant Purchase
Agreement dated as of April 19, 2005 (the "Purchase Agreement"), by and among
the Company and the Holders and also entered into certain other Transaction
Documents ( as defined in the Purchase Agreement), dated as of such date;
WHEREAS, the parties now wish to modify the Notes and certain of the
Transaction Documents, and;
WHEREAS, unless the context otherwise requires, all capitalized terms
in this Agreement shall have the meanings set forth herein.
NOW, THEREFORE, in consideration of the covenants and other provisions
set forth below, the parties agree as follows:
ARTICLE I
The Closing
Section 1.1 Note and Warrant Issuances Subject to the terms
hereof, on or before 10 a.m. on April 28, 2006 at the offices of ▇▇▇▇ ▇▇▇▇, P.C.
(the "Company's Outside Counsel") at ▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇ (the "Closing "), the Company shall:
(a) issue and deliver to the Holders, Amended and
Restated Secured Convertible Secured Notes, in the form of EXHIBIT 1
hereto (the "Amended Notes"), in an aggregate principal amount not to
exceed Three Million Seven Hundred and Ninety Four Thousand and Forty
Five Dollars ($3,794,045), with individual Amended Notes to the Holders
being issued for the respective principal amounts set forth in
Schedules A (1) or A (2) opposite their names, in accordance with
Sections 1.3(b) and (c) below:
(b) issue and deliver to the Holders, Amended and
Restated Series B Warrants, for an aggregate of 2,055,000 shares of
Common Stock, which warrants shall replace the existing outstanding
Series B Warrants for a like number of shares and shall be exercisable
at $.50 per share, with the individual Warrants being issued for the
number of shares set forth in Schedule B opposite the respective names
of the Holders;
(c) issue and deliver to the Holders, Amended and
Restated Series A Warrants for an aggregate of 455,000 shares of Common
Stock, which warrants shall replace the existing outstanding Series A
Warrants for a like number of shares and shall be exercisable at $.50
per share, with the individual Warrants being issued for the number of
shares set forth in Schedule B opposite the respective names of the
Holders, ( the Amended and Restated Series A Warrants and the Amended
and Restated Series B Warrants being collectively referred to
hereinafter as the "Amended Warrants"; and the Amended Warrants and the
Amended Notes being sometimes collectively referred to hereinafter as
the "Amended Documents").
Section 1.2 Cashless Exercise for Warrants The Amended Warrants to be
issued pursuant to Section 1.1 shall provide that cashless exercises may only be
made after April 19,, 2006 and only if there is no registration statement in
effect with respect to the Amended Warrants at such time.
Section 1.3 Notes, Warrants and Certificates from Holders.
(a) Subject to the terms hereof, at or before the Closing, the Holders
shall deliver to the Company's Outside Counsel the Notes and the Series A and B
Warrants being amended and restated pursuant to Section 1.1 above (collectively,
the "Primary Closing Documents").
(b) Each Holder delivering its Primary Closing Documents, at or before
the Closing shall receive Notes in the principal amount set forth opposite its
name on Schedule A (1).
(c) Each Holder delivering both its Primary Closing Documents and its
September Certificates, as defined in Section 1.3 (d) below, shall receive a
Note in the principal amount set forth opposite its name on Schedule A(2).
(d) As used herein, "September Certificates" shall mean the share
certificates issued by the Company to a Holder in September 2005 as payment for
the principal and interest payment due to the Holder on September 19, 2005.
Section 1.4 Other Warrants. Except as specifically provided herein, no
modifications or anti-dilution adjustments shall be made to any of the Holders'
other outstanding Warrants as a result of the issuance of the Amended Notes and
the Amended Warrants.
Section 1.5 Stockholder Approval. The Holders are aware that the
Company has not yet obtained the stockholder approval (the "Stockholder
Approval") of the transactions contemplated by this Agreement, as required by
the applicable rules and regulations of the American Stock Exchange (or any
successor entity) in order to issue shares of Common Stock in excess of the
Issuable Maximum, as defined in Section 3.4(c) of the Amended Notes.
Accordingly, the Company shall issue to each Holder requesting partial
conversion of its Amended Note, a number of shares of Common Stock which will
not exceed such Holder's pro rata-portion of the Issuable Maximum, calculated
based on the principal amount of the Notes originally purchased by the
respective Holders as of April 19, 2005. In addition, the Company agrees to
obtain, by no later than September 1, 2006, any Stockholder Approval necessary
to permit the Company's issuance, pursuant to the Notes, of the remaining Common
Stock in excess of the Issuable Maximum.
Section 1.6 Public Disclosure. Following the execution of this
Agreement, the Company shall file with the Securities and Exchange Commission,
on a timely basis, a Current Report on Form 8-K disclosing the material terms of
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the transactions contemplated hereby and shall attach this Agreement as an
exhibit. The Company shall also provide to each Holder, prior to the issuance
thereof, a copy of the proposed press release with respect to the transactions
contemplated by this Agreement.
Section 1.7 Waiver. The Holders hereby waive the Company's inability
to repay the principal and interest due to Shanghai Pudong Development Bank
("Pudong") on its loan from such bank, as set forth in Schedule C hereto, in
February 2006 and its inability to repay the amount of approximately $400,000
plus interest due to private investors , as disclosed in the Company's Form 10-Q
for the quarter ended September 30, 2005; provided that this waiver shall expire
automatically without any notice to the Company and no longer have any effect if
Pudong or the private investors, give a written default notice to the Company
with respect to its loan. The Company represents and warrants that neither
lender has given written notice to the Company that it considers its loan to the
Company to be in default.
Section 1.8. Incorporation of Terms. The covenants made in Article III
of the Purchase Agreement by the Company to the Holders with respect to the
Notes and Warrants issued under the Purchase Agreement (and the shares of Common
Stock underlying such Notes and Warrants), shall be fully applicable to the
Amended Notes and Amended Warrants (and the shares of Common Stock underlying
the Amended Notes and Warrants), provided that Sections 3.11, 3.16, 3.19, and
3.20 of the Purchase Agreement shall not be applicable. In addition, the
Company's Irrevocable Transfer Agent Instruction to be furnished pursuant to
Section 3.17 shall be subject to the Company's confirming to its transfer agent
the correctness of the Conversion Price calculations furnished by the Holders
with respect to the Common Stock issuable upon conversion of the Amended Notes
and, Section 3.22(c) notwithstanding, the Company may engage in a Subsequent
Financing, including a Variable Rate Transaction, as long as the Company
complies with the First Refusal Rights procedures set forth in Section 3.22(b).
The Holders also acknowledge, in connection with Section 3.2, that AMEX has
initiated a delisting process and, in connection with Section 3.10, that the
Company's filing obligation with respect to the Form 10-K for the year ended
December 31, 2005 shall be to use its reasonable best efforts to file such form
prior to the expiration of the current Rule 12b-25 extension period.
Section 1.9 Definition of Notes. As used in any of the Transaction
Documents, unless the context otherwise requires, the term "Notes" shall
hereafter mean the Amended Notes.
ARTICLE I1
Modification of Transaction Documents
Section 2.1 Registration Rights Agreement. At the Closing, the
parties shall execute and deliver the Registration Rights Agreement in the form
of EXHIBIT 2 hereto (the "Registration Rights Agreement").
Section 2.2 Pledge and Security Agreement; Mortgage
(a) The parties hereby amend the Pledge and Security Agreement
(the "Pledge Agreement") as of the date hereof in the following
respects:
(1) The Holders hereby consent to
the Company's relocating its principal place of business to
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▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇. ▇▇▇▇▇ ▇▇▇, ▇▇▇▇ ▇▇ ▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇.
If requested by any of the Holders at least one business day
prior to the Closing, at the Closing the Company shall deliver
to the Holders a fully executed amended UCC-1 financing
statement with respect to the Collateral (as defined in the
Pledge Agreement), reflecting such change of address;
(2) Schedules 3.3 and 3.4 to the Pledge
Agreement, respectively, are hereby modified to read in full
as set forth in Schedules C and D attached hereto; and
(3) The following language shall be deemed
added at the end of Section 3.3 of the Pledge Agreement:
"In addition, the Secured Parties agree to
subordinate the Security Interest to additional financing
consisting of a minimum of $3,000,000 and a maximum of
$8,500,000 of new debt; provided that such financing (i) is
provided by a commercial bank, investment bank or similar
financial institution whose primary business is not the
purchase and sale of securities (including but not limited to
PIPE or hedge funds), (ii) does not include any equity or
equity linked component and (iii) is subject to a written
subordination agreement which does not require the Secured
Parties to forego any of their rights to convert their Notes
and collect interest or any penalties due under the Notes and
does not restrict the Secured Parties' entitlement to enforce
such rights, including by specific performance or restrict the
Secured Parties' ability to otherwise retain any of their
conversion benefits."
(b) The parties hereby amend Section 2 of the Mortgage
Agreement (the "Mortgage") as of the date hereof by adding the
following language:
"In addition, the Mortgagee agrees to subordinate its rights
hereunder to additional financing consisting of a minimum of $3,000,000 and a
maximum of $8,500,000 of new debt; provided that such financing (i) is provided
by a commercial bank, investment bank or similar financial institution whose
primary business is not the purchase and sale of securities (including but not
limited to PIPE or hedge funds), (ii) does not include any equity or equity
linked component and (iii) is subject to a written subordination agreement which
does not require the secured parties to forego any of their rights to convert
their Notes and collect interest or any penalties due under the Notes and does
not restrict the secured parties' entitlement to enforce such rights, including
by specific performance or restrict the secured parties' ability to otherwise
retain any of their conversion benefits."
ARTICLE III
Representation and Warranties
Section 3.1 Representations and Warranties of the Company. The Company
hereby gives the following representations, warranties and acknowledgements to
the Holders, as of the date hereof and the Closing Date:
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(a) Organization and Good Standing. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Nevada and has the requisite corporate power to own, lease and operate its
properties and assets and to conduct its business as it is now being conducted.
(b) Authorization; Enforcement. The Company has the requisite corporate
power and authority to enter into and perform this Agreement, including to issue
the Amended Documents. The execution, delivery and performance of this
Agreement, including the Amended Documents, and the consummation by it of the
transactions contemplated thereby have been duly and validly authorized by all
necessary corporate action and, except for the Stockholder Approval described in
Section 1.5, no further consent or authorization of the Company, its Board of
Directors or stockholders is required. When executed and delivered by the
Company, this Agreement and the Amended Documents shall constitute valid and
binding obligations of the Company enforceable against the Company in accordance
with their terms, except as such enforceability may be limited by applicable
bankruptcy, reorganization, moratorium, liquidation, conservatorship,
receivership or similar laws relating to, or affecting generally the enforcement
of, creditor's rights and remedies or by other equitable principles of general
application.
(c) Independent Nature of Holders. The Company acknowledges that the
obligations of each Holder under this Agreement are several and not joint with
the obligations of any other Holder, and no Holder shall be responsible in any
way for the performance of the obligations of any other Holder. The Company also
acknowledges that the decision of each Holder to enter into this Agreement has
been made by such Holder independently of any other Holder. The Company
acknowledges that nothing contained herein, and no action taken by any Holder
pursuant hereto, shall be deemed to constitute the Holders as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Holders are in any way acting in concert or as a group with
respect hereto.
Section 3.2 Representations and Warranties of the Holders. Each of the
Holders hereby represents and warrants to the Company with respect solely to
itself and not with respect to any other Holder as of the date hereof and as of
the Closing Date, as follows:
(a) Organization and Standing of the Holders. If the Holder is
an entity, such Holder is a corporation, limited liability company or
partnership duly incorporated or organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation
or organization.
(b) Authorization and Power. Each Holder has the requisite
power and authority to enter into the Agreement and perform its
obligations thereunder. The execution, delivery and performance of the
Agreement by each Holder and the consummation by it of the transactions
contemplated hereby have been duly authorized by all necessary
corporate or partnership action, and no further consent or
authorization of such Holder or its Board of Directors, stockholders,
or partners, as the case may be, is required. When executed and
delivered by the Holders, this Agreement and the Amended Documents
shall constitute valid and binding obligations of each Holder
enforceable against such Holder in accordance with their terms, except
5
as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation, conservatorship,
receivership or similar laws relating to, or affecting generally the
enforcement of, creditor's rights and remedies or by other equitable
principles of general application.
(c) Accredited Investor. Each Holder is an "accredited
investor" (as defined in Rule 501 of Regulation D), and has such
experience in business and financial matters that it is capable of
evaluating the merits and risks of the transactions contemplated
hereby.
ARTICLE IV
MISCELLANEOUS
Section 4.1 Venue and Governing Law. The parties agree that venue for
any dispute arising under this Agreement will lie exclusively in the state or
federal courts located in New York County, New York, and the parties irrevocably
waive any right to raise forum non conveniens or any other argument that New
York is not the proper venue. The parties irrevocably consent to personal
jurisdiction in the state and federal courts of the state of New York. The
Company and each Holder consent 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 this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing in
this Section 4.1 shall affect or limit any right to serve process in any other
manner permitted by law. The Company and the Holders hereby agree that the
prevailing party in any suit, action or proceeding arising out of or relating to
this Modification Agreement shall be entitled to reimbursement for reasonable
legal fees from the non-prevailing party. The parties hereby waive all rights to
a trial by jury. This Agreement 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 Agreement shall not be interpreted
or construed with any presumption against the party causing this Agreement to be
drafted.
Section 4.2 Entire Agreement; Amendment. This Agreement (including the
schedules and exhibits hereto) and the Transaction Documents, as amended,
contain the entire understanding and agreement of the parties with respect to
the matters covered hereby and supersede all prior understandings,
representations and agreements with respect to such matters. No provision of
this Agreement or the Transaction Documents may be waived or amended other than
by a written instrument signed by the Company and the Holders holding at least a
majority of the principal amount of the Amended Notes then outstanding. Any
amendment or waiver effected in accordance with this Section 4.2 shall be
binding upon the parties.
Section 4.3 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 by facsimile 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
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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 Company: AXM Pharma, Inc.
.. ▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇. ▇▇▇▇▇ ▇▇▇,
▇▇▇▇ ▇▇ ▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇.
Attention: ▇▇▇▇▇ ▇▇▇▇▇, Acting Chief Financial
Officer
Tel. No.: (▇▇▇) ▇▇▇-▇▇▇▇
Fax No.: (▇▇▇) ▇▇▇-▇▇▇▇
With a copy to: ▇▇▇▇ ▇▇▇▇, P.C.
▇▇▇ ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇, #▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Tel. No.: (▇▇▇) ▇▇▇-▇▇▇▇
Fax No.: (▇▇▇) ▇▇▇-▇▇▇▇
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice. Notices to the Holders shall be sent to their addresses set
forth on the signature page hereto, with notices also to be sent to counsel as
follows:
In the case of Sibex Capital Fund, Inc, to:
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, Esq.
Sichenzia ▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ LLP
1065 Avenue of the America, ▇▇▇▇ ▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
Tel. No.: (▇▇▇) ▇▇▇-▇▇▇▇
Fax No.: (▇▇▇) ▇▇▇-▇▇▇▇
In the case of Truk Opportunity Fund, LLC and Truk International Fund, LP, to:
▇▇▇▇▇▇ ▇▇▇▇▇▇▇, Esq.
▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ LLP
▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
Tel. No.: (▇▇▇) ▇▇▇-▇▇▇▇
Fax No.: (▇▇▇) ▇▇▇ ▇▇▇▇
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Section 4.4 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their successors and permitted
assigns and shall inure to the benefit of each Holder and its successors and
permitted assigns.
Section 4.5 Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. If any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same, with the same force and
effect as if such facsimile signature were the original thereof.
Section 4.6 Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
Section 4.7 Severability. If any term, provision, covenant or
restriction of this Agreement is held to be invalid, illegal, void or
unenforceable in any respect, the remainder of the terms, provisions, covenants
and restrictions set forth herein shall remain in full force and effect and
shall in no way be affected, impaired or invalidated.
Section 4.8 Headings. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
Section 4.9 Mutual Releases. Subject to the terms hereof, including the
issuance of the Amended Documents to replace the Notes and the Series A and
Series B Warrants issued as of April 19, 2005, the Company on the one hand, and
the Holders executing this Agreement on the other hand, mutually release each
other from any and all claims, disputes, damages and expenses (collectively, the
"Claims"), arising prior to the date hereof with respect to the Notes and the
Series A and Series B Warrants issued as of April 19, 2005 based in any way on
financial information disseminated by the Company or its management which was
accurately disclosed in the Amended Form 10-Q filed for the quarter ended June
30, 2005. In addition, within three (3) business days after the Closing, the
Holders shall file dismissals with prejudice of any actions pending against the
Company as of the Closing.
Section 4.10 Equal Treatment of Holders; Effectiveness. In order to
confirm that the Company has not discriminated among the Holders, the Company
represents and warrants that the terms of this Agreement have been offered to
each Holder and that no agreement or consideration has been offered or paid to
any Holder other than as specifically set forth in this Agreement. Each of the
Holders executing this Agreement expressly confirms that its entry into this
Agreement is not contingent upon the execution of this Agreement by any other
Holder. Similarly, by executing this Agreement the Company agrees to be bound by
the terms hereof to each Holder executing and delivering this Agreement to the
Company, even if all Holders do not do so.
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IN WITNESS WHEREOF, the parties hereto have caused this Modification
Agreement to be duly executed by their respective authorized officers as of the
date first above written.
AXM PHARMA, INC.
By: ________________________________
Name:
Title:
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HOLDERS:
Cranshire Capital LP
By: _______________________________________
Name:
Title:
Address: ______________________________
______________________________
Sibex Capital Fund, Inc.
By: _______________________________________
Name:
Title:
Address: ______________________________
______________________________
Enable Growth Partners, LLP
Enable Opportunity Partners, LLP
By: _______________________________________
Name:
Title:
Address: ______________________________
______________________________
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Nite Capital LP
By: _______________________________________
Name:
Title:
Address: ______________________________
______________________________
Alpha Capital AG
By: _______________________________________
Name:
Title:
Address: ______________________________
______________________________
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SRG Capital, LLC
By: _______________________________________
Name:
Title:
Address: ______________________________
______________________________
Truk Opportunity Fund LLC
By: _______________________________________
Name:
Title:
Address: ______________________________
______________________________
Truk International Fund LP
By: _______________________________________
Name:
Title:
Address: ______________________________
______________________________
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Noteholder New Principal Amount
---------- --------------------
Cranshire Capital LP $ 254,184
Sibex Capital Fund, Inc. $1,016,738
Enable Growth Partners, LLP $ 406,695
Enable Opportunity Partners, LLP $ 76,256
Nite Capital LP $ 406,695
Alpha Capital AG $ 305,021
SRG Capital, LLC $ 254,184
Truk Opportunity Fund LLC $ 716,800
Truk International Fund LP $ 45,754
----------
Total $3,482,327
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SCHEDULE A (1)
Noteholder New Principal Amount
Cranshire Capital LP $ 276,938
Sibex Capital Fund, Inc. $1,107,750
Enable Growth Partners, LLP $ 443,100
Enable Opportunity Partners, LLP $ 83,081
Nite Capital LP $ 443,100
Alpha Capital AG $ 332,325
SRG Capital, LLC $ 276,938
Truk Opportunity Fund LLC $ 780,964
Truk International Fund LP $ 49,849
----------
Total $3,794,045
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SCHEDULE A (2)
A&B WARRANTS TO BE ISSUED AS OF MARCH 1, 2006
---------------------------------------------
Noteholder A Warrants B Warrants
Cranshire Capital LP 33,212 150,000
Sibex Capital Fund, Inc. 132,847 600,000
Enable Growth Partners, LLP 53,139 240,000
Enable Opportunity Partners, LLP 9,664 45,000
Nite Capital LP 53,139 240,000
Alpha Capital AG 39,854 180,000
SRG Capital, LLC 33,212 150,000
Truk Opportunity Fund, LLC 93,657 423,000
Truk International Fund, LP 5,976 27,000
--------- ---------
Total 455,000 2,055,000
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SCHEDULE B
----------
SCHEDULE 3.3
EXISTING LIENS
Shenyang Branch of Shanghai Pudong Development Bank-loan for up to approximately
25,000,000 RMB (approximately US$3,000,000) to AXM Shenyang, which is secured by
a lien on the real property of AXM Shenyang.
SCHEDULE C
----------
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SCHEDULE 3.4
ABSENCE OF OTHER LIENS
Shenyang Branch of Shanghai Pudong Development Bank- loan for up to
approximately 25,000,000 RMB (approximately US$3,000,000) to AXM Shenyang, which
is secured by a lien on the real property of AXM Shenyang.
SCHEDULE D
----------
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EXHIBIT 1
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD,
TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR
RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN THE FORM, SUBSTANCE AND SCOPE
REASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE MAY BE SOLD, TRANSFERRED, OR
OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND
SUCH STATE SECURITIES LAWS.
AXM PHARMA, INC.
Amended and Restated Secured Convertible Promissory Note
due March 1, 2009
No. _______
Dated: As of March 1, 2006 (the "Amendment Date")
--------------
For value received, AXM PHARMA, INC., a Nevada corporation (the
"Maker"), hereby promises to pay to the order of _______________________
(together with its successors, representatives, and permitted assigns, the
"Holder"), in accordance with the terms hereinafter provided, the principal
amount of ________________________ ($______________), together with interest
thereon. Concurrently with the issuance of this Note, the Maker is amending and
restating its separate secured convertible promissory notes (the "Other Notes")
issued to separate purchasers (the "Other Holders") pursuant to the Purchase
Agreement (as defined in Section 1.1 hereof).
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 set forth below 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 shall be due and payable on March 1,
2009 (the "Maturity Date") or at such earlier time as provided herein.
ARTICLE I
Section 1.1 Purchase Agreement. This Note amends and restates the
original Note dated as of April 19, 2005 executed and delivered to the Holder
pursuant to the Note and Warrant Purchase Agreement dated as of April 19, 2005
(the "Purchase Agreement") by and among the Maker and the purchasers listed
therein. Capitalized terms used and not otherwise defined herein shall have the
meanings set forth for such terms in the Purchase Agreement, provided that any
references herein to any of the Transaction Documents shall , unless the context
otherwise requires, be deemed to be references to such Transaction Documents, as
amended as of March 1, 2006.
Section 1.2 Interest; Installments. Beginning as of the date hereof
(the "Amendment Date"), the outstanding principal balance of this Note shall
bear interest, in arrears, at a rate per annum equal to nine percent (9 %).
Interest shall be payable in installments, with the first installment due and
payable on the earlier of (a) January 1, 2007 or (b) ten (10) days after the
Effectiveness Date of a Registration Statement on Form SB-2, as defined in the
Registration Rights Agreement. Subsequent installments shall be due and payable
on the first day of each successive calendar quarter following the due date of
the initial interest installment amount. (Each interest installment amount, an
"Interest Installment Amount"; and each payment date for an Interest Installment
Amount, an "Interest Payment Date.") Interest shall be computed on the basis of
a 360-day year of twelve (12) 30-day months and shall accrue commencing as of
the Amendment Date. Furthermore, upon the occurrence of an Event of Default (as
defined in Section 2.1 hereof), to the extent permitted by law, the Maker will
pay interest to the Holder, payable on demand, on the outstanding principal
balance of the Note from the date of the Event of Default until such Event of
Default is cured, at the rate of the lesser of fifteen percent (15%) and the
maximum applicable legal rate per annum.
Section 1.3 Form of Interest Payments
(a) Each Interest Installment Amount may, at the option of the
Maker, be paid in cash or in registered shares of common stock, par
value $0.001 per share (the "Common Stock") If the Maker elects to pay
an Interest Installment Amount in cash, such amount shall be wired in
immediately available funds on the Interest Payment Date; provided,
however, that if the Holder has delivered a Conversion Notice to the
Maker or delivers a Conversion Notice at least fifteen (15) prior to
the Interest Payment Date which requests that the next Interest
2
Installment Amount be paid in registered shares of Common Stock, the
Maker shall pay such Interest Installment Amount in registered shares.
The Maker shall provide irrevocable written notice to the Holder of the
form of payment of the Interest Installment Amount on the tenth (10th)
business day prior to each Interest Payment Date (the "Announcement
Date").
(b) If the Maker elects to pay the Interest Installment Amount
in registered shares of Common Stock, the number of registered shares
of Common Stock to be issued to the Holder shall be an amount equal to
the Interest Installment Amount divided by the lesser of (a) $2.10 (the
"Fixed Conversion Price")or (b) eighty two and a half percent (82.5%)
of the average of the VWAP (as defined in Section 1.3(c) hereof) for
the twenty (20) Trading Days immediately preceding the Interest Payment
Date. Notwithstanding the foregoing to the contrary, the Maker may
elect to pay the Interest Installment Amount in registered shares of
Common Stock on any Interest Payment Date only if (A) the registration
statement providing for the resale of the shares of Common Stock
issuable upon conversion of this Note is effective and has been
effective, without lapse or suspension of any kind, for a period of ten
(10) consecutive calendar days, or the shares of Common Stock into
which this Note can be converted may be offered for sale to the public
pursuant to Rule 144(k) under the Securities Act, (B) trading in the
Common Stock shall not have been suspended by the Securities and
Exchange Commission or the American Stock Exchange (or other exchange
or market on which the Common Stock is trading), (C) the Maker is in
material compliance with the terms and conditions of this Note and the
other Transaction Documents, and (D) the issuance of shares of Common
Stock on the Interest Payment Date does not violate the provisions of
Section 3.4 hereof.
3
(c) For purposes hereof, "VWAP" means, for any date, (i) the
daily volume weighted average price of the Common Stock for such date
on the American Stock Exchange as reported by Bloomberg Financial L.P.
(based on a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m.
Eastern Time); (ii) if the Common Stock is not then listed or quoted on
the American Stock Exchange and if prices for the Common Stock are then
quoted on the OTC Bulletin Board, the volume weighted average price of
the Common Stock for such date on the OTC Bulletin Board; (iii) if the
Common Stock is not then listed or quoted on the OTC Bulletin Board and
if prices for the Common Stock are then reported in the "Pink Sheets"
published by the Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid
price per share of the Common Stock so reported; or (iv) in all other
cases, the fair market value of a share of Common Stock as determined
by an independent appraiser selected in good faith by the Holder and
reasonably acceptable to the Maker.
Section 1.4 Security Agreement and Mortgage Agreement. The obligations
of the Maker hereunder are secured by a continuing security interest in certain
assets and real property of the Maker pursuant to the terms of a security
agreement dated as of April 19, 2005 and a mortgage agreement dated as of April
19, 2005 All payments due under this Note shall rank senior to all other
indebtedness of the Maker except that all payments due under this Note shall be
subordinated and made junior, in all respects to the payment in full of all
principal, all interest accrued thereon and all other amounts due on any
indebtedness outstanding under the mortgage agreement and related loan
agreements between AXM Pharma (Shenyang) Inc., the Maker's wholly owned
subsidiary, and Shanghai Pudong Development Bank.
Section 1.5 Payment on Non-Business Days. Whenever any payment to be
made 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
4
day and such next succeeding day shall be included in the calculation of the
amount of accrued interest payable on such date.
Section 1.6 Transfer. This Note may be transferred or sold, subject to
the provisions of Section 4.8 of this Note, or pledged, hypothecated or
otherwise granted as security by the Holder.
Section 1.7 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 without requiring an
indemnity bond or other security, 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.
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:
(a) the Maker shall fail to make the Interest
Installment Amount on an Interest Payment Date and such
default is not fully cured within one (1) business day after
the occurrence thereof; or
(b) the failure of the Registration Statement to be
declared effective by the Securities and Exchange Commission
on or prior to November 1, 2006; or
(c) the suspension from listing, without subsequent
listing on any one of, or the failure of the Common Stock to
be listed on at least one of the American Stock Exchange,
Nasdaq National Market, Nasdaq SmallCap Market, The New York
Stock Exchange, Inc. or OTC Bulletin Board for a period of
five (5) consecutive Trading Days,; or
(d) the Maker's notice to the Holder, including by
way of public announcement, at any time, of its inability to
5
comply (including for any of the reasons described in Section
3.8(a) hereof) or its intention not to comply with proper
requests for conversion of this Note into shares of Common
Stock; or
(e) the Maker shall fail to (i) timely deliver the
shares of Common Stock upon conversion of the Note or any
interest accrued and unpaid (ii) cause the Registration
Statement to become effective by the Effectiveness Date or
(iii) make the payment of any fees and/or liquidated damages
under this Note, the Purchase Agreement or the Registration
Rights Agreement, which failure in the case of items (i) and
(iii) of this Section 2.1(e) is not remedied within three (3)
business days after the incurrence thereof; or
(f) while the Registration Statement is required to
be maintained effective pursuant to the terms of the
Registration Rights Agreement, the effectiveness of the
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, provided that the
Maker has not exercised its rights pursuant to Section 3(n) of
the Registration Rights Agreement and the cause of such lapse
or unavailability is not due to factors primarily within the
control of Holder; or
(g) default shall be made in the performance or
observance of (i) any material 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 five (5) business days after the occurrence
thereof or (ii) any material covenant, condition or agreement
contained in the Purchase Agreement, the Other Notes, the
6
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 five
(5) business days after the occurrence thereof; or
(h) any material representation or warranty made by
the Maker herein, in the Modification Agreement dated as of
March 1, 2006 between Maker and Holders or in the Registration
Rights Agreement between such parties, dated as of March 1,
2006 shall prove to be false or incorrect or breached in a
material respect on the date as of which made; or
(i) 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 and the
Indebtedness to the Pudong Development Bank and to private
investors , as described in the Maker's 10-Q for the quarter
ended September 30, 2005) the aggregate principal amount of
which Indebtedness is in excess of $100,000 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, provided that, in the case of the
Indebtedness to Pudong Bank and the private lenders referenced
above in this Section 2(i), either lender's giving a written
default notice to the Company shall be deemed to be an Event
of Default under this Section; or
(j) 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
7
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
(k) 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 or of 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 sixty
(60) 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 sixty (60) days; or
8
(l) 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 three
(3) 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 resold pursuant to Rule
144; or
(m) the failure of the Maker to pay any amounts due
to the Holder herein or in the Purchase Agreement or the
Registration Rights Agreement within three (3) business days
of receipt of notice to the Maker; or
(n) the occurrence of an Event of Default under the
Other Notes.
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 due and payable, without presentment,
demand, protest, or notice, all of which are hereby expressly unconditionally
and irrevocably waived by the Maker; provided, however, that upon the occurrence
of an Event of Default described in (i) Sections 2.1 (j) or (k), the outstanding
principal balance and accrued interest hereunder shall be automatically due and
payable and (ii) Sections 2.1 (b)-(i), demand the prepayment of this Note
pursuant to Section 3.7 hereof, (b) demand that the principal amount of this
Note then outstanding and all accrued and unpaid interest thereon shall be
converted into shares of Common Stock at the Conversion Price or (c) exercise or
otherwise enforce any one or more of the Holder's rights, powers, privileges,
remedies and interests under this Note, the Purchase Agreement, the Registration
Rights Agreement 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.
9
ARTICLE III
CONVERSION; PREPAYMENT
Section 3.1 Conversion Option.
(a) At any time on or after the Amendment Date, this Note shall,
subject to Section 3.2 (a) and the other provisions hereof, be convertible (in
whole or in part), at the option of the Holder (the "Conversion Option"), into
such number of fully paid and non-assessable shares of Common Stock (the
"Conversion Rate") as is determined by dividing (x) that portion of the
outstanding principal balance plus any accrued but unpaid interest 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 (the "Conversion Notice"), duly
executed, to the Maker (facsimile number (▇▇▇) ▇▇▇-▇▇▇▇ , Attn.: Chief Financial
Officer) (the "Conversion Date"), provided, however, that the Fixed Conversion
Price as defined in section 3.2 (a) below, shall be subject to adjustment as
described in Section 3.6 below.")., The Holder shall deliver this Note to the
Maker at the address designated in the Purchase 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.
(b) On the Mandatory Conversion Date (as defined below), the Maker may
cause the principal amount of this Note plus all accrued and unpaid interest to
convert into a number of fully paid and nonassessable shares of Common Stock
equal to the quotient of (i) the principal amount of this Note plus all accrued
and unpaid interest outstanding on the Mandatory Conversion Date divided by (ii)
the Conversion Price in effect on the Mandatory Conversion Date by providing
five (5) days prior written notice of such Mandatory Conversion Date. As used
herein, a "Mandatory Conversion Date" shall be the date in which the Closing Bid
Price (as defined below) exceeds $5.00 (as may be adjusted for any stock splits,
combinations or recapitalizations of the Common Stock) for a period of twenty
(20) consecutive Trading Days; provided, that (A) the registration statement
providing for the resale of the shares of Common Stock issuable upon conversion
of this Note is effective and has been effective, without lapse or suspension of
any kind, for a period ten (10) consecutive calendar days immediately preceding
the Mandatory Conversion Date, (B) trading in the Common Stock shall not have
been suspended by the Securities and Exchange Commission or the American Stock
10
Exchange (or other exchange or market on which the Common Stock is trading), (C)
the Maker is in material compliance with the terms and conditions of this Note
and the other Transaction Documents, and (D) the issuance of shares of Common
Stock on the Mandatory Conversion Date pursuant to such mandatory conversion
does not violate the provisions of Section 3.4 hereof.
Section 3.2 Conversion Price.
(a) The term "Conversion Price" shall mean the lesser
of (i) $2.10 (the "Fixed Conversion Price") or (ii) eighty two
and a half percent (82.5%) of the average of the VWAP (as
defined in Section 1.3(c) hereof) for the twenty (20) Trading
Days immediately preceding a Conversion Date, provided that
during such twenty (20) day period, such Holder severally and
not jointly with the other Holders, covenants that neither it
nor any Affiliate acting on its behalf or pursuant to any
understanding with it, shall engage in any Short Sales, except
on those days (each a "Permitted Day") on which the aggregate
short position with respect to the Common Stock of such Holder
prior to giving effect to any Short Sales by such Holder on
such Permitted Day does not exceed such Holder's Permitted
Share Position (as defined below) on such Permitted Day;
provided, however, that a Holder will only be entitled to
engage in transactions that constitute Short Sales on a
Permitted Day to the extent that following such transaction,
the aggregate short position with respect to the Common Stock
of such Holder does not exceed such Holder's Permitted Share
Position. For purposes of this Section 3.2 (a), a Holder's
"Permitted Share Position" means, with respect to any date of
determination, the number of shares of Common Stock owned by
such Holder (including Conversion Shares, Warrant Shares and
shares purchased in the open market or otherwise) plus the sum
of (i) the maximum number of Conversion Shares then issuable
under the terms of this Note (including as to portions of the
Note not yet converted and without regard to any exercise caps
or other exercise restrictions applicable to the Note, assuming
the lowest possible Conversion Price based on the Conversion
Price that would be applicable on the date in question) to such
Holder and (ii) the maximum number of Warrants Shares then
issuable (including as to portions of the Warrants not yet
exercised and without regard to any exercise caps or other
exercise restrictions applicable to the Warrants) to such
Holder.
11
(b) Notwithstanding any of the foregoing to the
contrary, if during any period (a "Black-out Period"), a Holder
is unable to trade any Common Stock issued or issuable upon
conversion of this Note immediately due to the postponement of
filing or delay or suspension of effectiveness of a
registration statement or because the Maker has otherwise
informed such Holder that an existing prospectus cannot be used
at that time in the sale or transfer of such Common Stock
(provided that such postponement, delay, suspension or fact
that the prospectus cannot be used is not due to factors solely
within the control of the Holder of this Note or due to the
Maker exercising its rights under Section 3(n) of the
Registration Rights Agreement), such Holder shall have the
option but not the obligation on any Conversion Date within ten
(10) Trading Days following the expiration of the Black-out
Period of using the Conversion Price applicable on such
Conversion Date or any Conversion Price selected by such Holder
that would have been applicable had such Conversion Date been
at any earlier time during the Black-out Period or within the
ten (10) Trading Days thereafter. In no event shall the
Black-out Period have any effect on the Maturity Date of this
Note.
Section 3.3 Mechanics of Conversion
(a) Not later than three (3) Trading Days after any
Conversion Date the Maker or its designated transfer agent, as
applicable, shall issue and deliver to the Depository Trust
Company ("DTC") account on the Holder's behalf via the Deposit
Withdrawal Agent Commission System ("DWAC") as specified in the
Conversion Notice, registered in the name of the Holder or its
designee, for the number of shares of Common Stock to which the
Holder shall be entitled. In the alternative, not later than
three (3) Trading Days after any Conversion Date, the Maker
shall deliver to the applicable Holder by express courier a
certificate or certificates which shall be free of restrictive
legends and trading restrictions (other than those required by
Section 5.1 of the Purchase Agreement) representing the number
of shares of Common Stock being acquired upon the conversion of
this Note (the "Delivery Date"). Notwithstanding the foregoing
to the contrary, the Maker or its transfer agent shall only be
obligated to issue and deliver the shares to the DTC on the
Holder's behalf via DWAC (or certificates free of restrictive
legends) if such conversion is in connection with a sale and
the Holder has complied with the applicable prospectus delivery
12
requirements. If in the case of any Conversion Notice such
certificate or certificates are not delivered to or as directed
by the applicable 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) and (c) shall be payable through
the date notice of rescission is given to the Maker.
(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 such
shares via DWAC or a certificate or certificates pursuant to
this Section hereunder by the Delivery Date, the Maker shall
pay to such Holder, in cash, an amount per Trading Day for
each Trading Day until such shares are delivered via DWAC or
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) (i) 1% of the aggregate principal amount of the
Notes requested to be converted for the first five (5) Trading
Days after the Delivery Date and (ii) 2% of the aggregate
principal amount of the Notes 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 such 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.
13
(c) In addition to any other rights available to the
Holder, if the Maker fails to cause its transfer agent to
transmit to the Holder a certificate or certificates
representing the shares of Common Stock issuable upon
conversion of this Note on or before the Delivery Date, and if
after such date the Holder is required by its broker to
purchase (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by the Holder
of the shares of Common Stock issuable upon conversion of this
Note which the Holder anticipated receiving upon such exercise
(a "Buy-In"), then the Maker shall (1) pay in cash to the
Holder the amount by which (x) the Holder's total purchase
price (including brokerage commissions, if any) for the shares
of Common Stock so purchased exceeds (y) the amount obtained by
multiplying (A) the number of shares of Common Stock issuable
upon conversion of this Note that the Maker was required to
deliver to the Holder in connection with the conversion at
issue times (B) the price at which the sell order giving rise
to such purchase obligation was executed, and (2) at the option
of the Holder, either reinstate the portion of the Note and
equivalent number of shares of Common Stock for which such
conversion was not honored or deliver to the Holder the number
of shares of Common Stock that would have been issued had the
Maker timely complied with its conversion and delivery
obligations hereunder. For example, if the Holder purchases
Common Stock having a total purchase price of $11,000 to cover
a Buy-In with respect to an attempted conversion of shares of
Common Stock with an aggregate sale price giving rise to such
purchase obligation of $10,000, under clause (1) of the
immediately preceding sentence the Maker shall be required to
pay the Holder $1,000. The Holder shall provide the Maker
written notice indicating the amounts payable to the Holder in
respect of the Buy-In, together with applicable confirmations
and other evidence reasonably requested by the Maker. Nothing
herein shall limit a Holder's right to pursue any other
remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance
and/or injunctive relief with respect to the Maker's failure to
timely deliver certificates representing shares of Common Stock
upon conversion of this Note as required pursuant to the terms
hereof.
14
Section 3.4 Ownership Cap and Certain Conversion Restrictions
(a) Notwithstanding anything to the contrary set forth in Section 3 of
this Note, at no time may the Holder convert all or a portion of this Note if
the number of shares of Common Stock to be issued pursuant to such conversion
would exceed, when aggregated with all other shares of Common Stock owned by the
Holder at such time, the number of shares of Common Stock which would result in
the Holder beneficially owning (as determined in accordance with Section 13(d)
of the Exchange Act and the rules thereunder) more than 4.9% of all of the
Common Stock outstanding at such time; provided, however, that upon the Holder
providing the Maker with sixty-one (61) days notice (pursuant to Section 4.1
hereof) (the "Waiver Notice") that the Holder would like to waive this Section
3.4(a) with regard to any or all shares of Common Stock issuable upon conversion
of this Note, this Section 3.4(a) will be of no force or effect with regard to
all or a portion of the Note referenced in the Waiver Notice; provided, further,
that this provision shall be of no further force or effect during the sixty-one
(61) days immediately preceding the Maturity Date.
(b) Notwithstanding anything to the contrary set forth in Section 3 of
this Note, at no time may the Holder convert all or a portion of this Note if
the number of shares of Common Stock to be issued pursuant to such conversion
would exceed, when aggregated with all other shares of Common Stock owned by the
Holder at such time, would result in the Holder beneficially owning (as
determined in accordance with Section 13(d) of the Exchange Act and the rules
thereunder) in excess of 9.9% of the then issued and outstanding shares of
Common Stock outstanding at such time; provided, however, that upon the Holder
providing the Maker with a Waiver Notice that the Holder would like to waive
Section 3.4(b) of this Note with regard to any or all shares of Common Stock
issuable upon conversion of this Note, this Section 3.4(b) shall be of no force
or effect with regard to all or a portion of the Note referenced in the Waiver
Notice; provided, further, that this provision shall be of no further force or
effect during the sixty-one (61) days immediately preceding the Maturity Date
(c) Notwithstanding anything to the contrary set forth herein in this
Section 3. 4 or elsewhere in this Note,, the Maker shall not be obligated to
issue in excess of an aggregate of 4,258,557 shares of Common Stock
(the"Issuable Maximum" upon conversion of the Notes and exercise of the Warrants
and any shares of Common Stock issuable in connection with the Modification
Agreementdated as of March 1, 2006 between the Company and the Holder of this
15
Note. The Issuable Maximum equals 19.99% of the number of shares of Common Stock
outstanding immediately prior to the Amendment Date. If on any Conversion Date
(A) the Common Stock is listed for trading on the American Stock Exchange, (B)
the Conversion Price then in effect is such that the aggregate number of shares
of Common Stock previously issued at a discount upon conversion of Notes or
exercise of the Warrants or otherwise issued in connection with the Purchase
Agreement, would equal or exceed the Issuable Maximum, and (C) the Maker shall
not have previously obtained the vote of stockholders (the "Stockholder
Approval"), if any, as may be required by the applicable rules and regulations
of the American Stock Exchange (or any successor entity) applicable to approve
the issuance of shares of Common Stock in excess of the Issuable Maximum
pursuant to the terms hereof, then the Maker shall issue to the Holder so
requesting such number of shares of Common Stock equal to such Holder's pro rata
portion of the Issuable Maximum as of the initial purchase date and, with
respect to the remainder of shares of Common Stock which would result in an
issuance of shares of Common Stock in excess of the Issuable Maximum (the
"Excess Shares"), the Maker shall obtain the Stockholder Approval applicable to
such issuance by not later than September 1, 2006 The Maker and the Holder
understand and agree that shares of Common Stock issued to and then held by the
Holder as a result of conversion of the Notes or as a result of exercise of the
Warrants shall not be entitled to cast votes on any resolution to obtain
Stockholder Approval. In the event that any requisite Stockholder Approval has
not been obtained by such date, the Holder shall have the right to have the
Maker prepay in cash such portion of the outstanding principal amount of this
Note plus all accrued but unpaid interest that would result in the issuance of
shares of Common Stock upon conversion in excess of the Holder's pro rata
portion of the Issuable Maximum. In the event that the Holder exercises this
prepayment right, the Holder shall provide written notice to the Maker and the
Maker shall pay in cash the prepayment price within five (5) business days
following receipt of such written request by the Holder.
Section 3.5 Preservation of Conversion Price Available Prior to
Stockholder Approval: Conversion Procedures
(a) If the Holder has acquired, upon conversion of this Note, its
entire pro-rata share of the Issuable Maximum ( as defined in Section 3.4(c),
then for the period of ten (10) days immediately following the Company's giving
notice to the Holder that requisite Stockholder Approval had been obtained , the
Holder shall, at its option, be entitled to convert all or any portion of the
balance of this Note into Common Stock at either (i) the current Conversion
16
Price determined pursuant to Section 3.2 or (ii) the Conversion Price in effect
on the date on which the Holder obtained the share of Common Stock which
resulted in its acquiring its pro-rata share of the Issuable Maximum.
(b) No Impairment. In the event a Holder shall elect to
convert any Notes as provided herein, the Maker cannot refuse conversion based
on any claim that such Holder or any one associated or affiliated with such
Holder has been engaged in any violation of law, violation of an agreement to
which such Holder is a party or for any reason whatsoever, unless, an injunction
from a court, or notice, restraining and or adjoining conversion of all or of
said Notes shall have issued and the Maker posts a surety bond for the benefit
of such Holder in an amount equal to one hundred thirty percent (130%) of the
amount of the Notes the Holder has elected to convert, which bond shall remain
in effect until the completion of arbitration/litigation of the dispute and the
proceeds of which shall be payable to such Holder in the event it obtains
judgment.
(c) 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.
(d) 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 Conversion Price of the Common
Stock on the Conversion Date.
Section 3.6 Adjustments to Fixed Conversion Price.
(a) The Fixed Conversion Price shall be subject to adjustment from time
to time as follows:
(i) Adjustments for Stock Splits and Combinations. If the
Maker shall at any time or from time to time after the Issuance Date,
effect a stock split of the outstanding Common Stock, the applicable
Conversion Price in effect immediately prior to the stock split shall
be proportionately decreased. If the Maker shall at any time or from
17
time to time after the Issuance Date, combine the outstanding shares of
Common Stock, the applicable Conversion Price in effect immediately
prior to the combination shall be proportionately increased. Any
adjustments under this Section 3.6(a) (i) shall be effective at the
close of business on the date the stock split or combination occurs
(ii) Adjustments for Certain Dividends and Distributions. If
the Maker shall at any time or from time to time after the Issuance
Date, make or issue or set a record date for the determination of
holders of Common Stock entitled to receive a dividend or other
distribution payable in shares of Common Stock, then, and in each
event, the applicable Conversion Price in effect immediately prior to
such event shall be decreased as of the time of such issuance or, in
the event such record date shall have been fixed, as of the close of
business on such record date, by multiplying, the applicable Conversion
Price then in effect by a fraction:
(1) the numerator of which shall be the total number
of shares of Common Stock issued and outstanding immediately
prior to the time of such issuance or the close of business on
such record date; and
(2) the denominator of which shall be the total
number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of
business on such record date plus the number of shares of
Common Stock issuable in payment of such dividend or
distribution.
(iii) Adjustment for Other Dividends and Distributions. If the
Maker shall at any time or from time to time after the Issuance Date,
make or issue or set a record date for the determination of holders of
Common Stock entitled to receive a dividend or other distribution
payable in other than shares of Common Stock, then, and in each event,
an appropriate revision to the applicable Conversion Price shall be
made and provision shall be made (by adjustments of the Conversion
Price or otherwise) so that the holders of this Note shall receive upon
conversions thereof, in addition to the number of shares of Common
Stock receivable thereon, the number of securities of the Maker which
they would have received had this Note been converted into Common Stock
on the date of such event and had thereafter, during the period from
the date of such event to and including the Conversion Date, retained
such securities (together with any distributions payable thereon during
such period), giving application to all adjustments called for during
such period under this Section 3.6(a)(iii) with respect to the rights
of the holders of this Note and the Other Notes; provided, however,
that if such record date shall have been fixed and such dividend is not
fully paid or if such distribution is not fully made on the date fixed
therefor, the Conversion Price shall be adjusted pursuant to this
18
paragraph as of the time of actual payment of such dividends or
distributions.
(iv) Adjustments for Reclassification, Exchange or
Substitution. If the Common Stock issuable upon conversion of this Note
at any time or from time to time after the Issuance Date shall be
changed to the same or different number of shares of any class or
classes of stock, whether by reclassification, exchange, substitution
or otherwise (other than by way of a stock split or combination of
shares or stock dividends provided for in Sections 3.6(a)(i), (ii) and
(iii), or a reorganization, merger, consolidation, or sale of assets
provided for in Section 3.6(a)(v)), then, and in each event, an
appropriate revision to the Conversion Price shall be made and
provisions shall be made (by adjustments of the Conversion Price or
otherwise) so that the Holder shall have the right thereafter to
convert this Note into the kind and amount of shares of stock and other
securities receivable upon reclassification, exchange, substitution or
other change, by holders of the number of shares of Common Stock into
which such Note might have been converted immediately prior to such
reclassification, exchange, substitution or other change, all subject
to further adjustment as provided herein.
(v) Adjustments for Reorganization, Merger, Consolidation or
Sales of Assets. If at any time or from time to time after the Issuance
Date there shall be a capital reorganization of the Maker (other than
by way of a stock split or combination of shares or stock dividends or
distributions provided for in Section 3.6(a)(i), (ii) and (iii), or a
reclassification, exchange or substitution of shares provided for in
Section 3.6(a)(iv)), or a merger or consolidation of the Maker with or
into another corporation where the holders of outstanding voting
securities prior to such merger or consolidation do not own over fifty
percent (50%) of the outstanding voting securities of the merged or
consolidated entity, immediately after such merger or consolidation, or
the sale of all or substantially all of the Maker's properties or
assets to any other person (an "Organic Change"), then as a part of
such Organic Change an appropriate revision to the Conversion Price
shall be made and provision shall be made (by adjustments of the
Conversion Price or otherwise) so that the Holder shall have the right
thereafter to convert such Note into the kind and amount of shares of
stock and other securities or property of the Maker or any successor
corporation resulting from Organic Change. In any such case,
appropriate adjustment shall be made in the application of the
provisions of this Section 3.6(a)(v) with respect to the rights of the
Holder after the Organic Change to the end that the provisions of this
Section 3.6(a)(v) (including any adjustment in the applicable
Conversion Price then in effect and the number of shares of stock or
other securities deliverable upon conversion of this Note and the Other
19
Notes) shall be applied after that event in as nearly an equivalent
manner as may be practicable.
(vi) Adjustments for Issuance of Additional Shares of Common
Stock.
(1) In the event the Maker, shall, at any time, from
time to time, issue or sell any shares of additional shares of
common stock (otherwise than as provided in the foregoing
subsections (i) through (v) of this Section 3.6(a) or pursuant
to Common Stock Equivalents (hereafter defined) granted or
issued prior to the Issuance Date) ("Additional Shares of
Common Stock"), at a price per share less than the Conversion
Price then in effect or without consideration, then the
Conversion Price upon each such issuance shall be adjusted to
that price (rounded to the nearest cent) determined by
multiplying each of the Conversion Price then in effect by a
fraction:
(A) the numerator of which shall be equal to
the sum of (x) the number of shares of Common Stock
outstanding immediately prior to the issuance of such
Additional Shares of Common Stock plus (y) the number
of shares of Common Stock (rounded to the nearest
whole share) which the aggregate consideration for
the total number of such Additional Shares of Common
Stock so issued would purchase at a price per share
equal to the Conversion Price then in effect, and
(B) the denominator of which shall be equal
to the number of shares of Common Stock outstanding
immediately after the issuance of such Additional
Shares of Common Stock.
(2) The provisions of paragraph (1) of Section 3.6(a)
(vi) shall not apply to any issuance of Additional Shares of
Common Stock for which an adjustment is provided under Section
3.6(a) (vii). No adjustment of the number of shares of Common
Stock for which this Note shall be convertible shall be made
under paragraph (1) of Section 3.6(a) (vi) upon the issuance
of any Additional Shares of Common Stock which are issued
pursuant to the exercise of any Common Stock Equivalents, if
any such adjustment shall previously have been made upon the
issuance of such Common Stock Equivalents pursuant to Section
3.6(a) (vii).
(vii) Issuance of Common Stock Equivalents. If the
Maker, at any time after the Issuance Date, shall issue any
securities convertible into or exchangeable for, directly or
indirectly, Common Stock ("Convertible Securities"), other
20
than the Notes, or any rights or warrants or options to
purchase any such Common Stock or Convertible Securities,
shall be issued or sold (collectively, the "Common Stock
Equivalents") and the aggregate of the price per share for
which Additional Shares of Common Stock may be issuable
thereafter pursuant to such Common Stock Equivalent, plus the
consideration received by the Maker for issuance of such
Common Stock Equivalent divided by the number of shares of
Common Stock issuable pursuant to such Common Stock Equivalent
(the "Aggregate Per Common Share Price") shall be less than
the applicable Conversion Price then in effect, or if, after
any such issuance of Common Stock Equivalents, the price per
share for which Additional Shares of Common Stock may be
issuable thereafter is amended or adjusted, and such price as
so amended shall make the Aggregate Per Share Common Price be
less than the applicable Conversion Price in effect at the
time of such amendment or adjustment, then the applicable
Conversion Price upon each such issuance or amendment shall be
adjusted as provided in the first sentence of subsection (vi)
of this Section 3.6(a) on the basis that (1) the maximum
number of Additional Shares of Common Stock issuable pursuant
to all such Common Stock Equivalents shall be deemed to have
been issued (whether or not such Common Stock Equivalents are
actually then exercisable, convertible or exchangeable in
whole or in part) as of the earlier of (A) the date on which
the Maker shall enter into a firm contract for the issuance of
such Common Stock Equivalent, or (B) the date of actual
issuance of such Common Stock Equivalent. No adjustment of the
applicable Conversion Price shall be made under this
subsection (vii) upon the issuance of any Convertible Security
which is issued pursuant to the exercise of any warrants or
other subscription or purchase rights therefor, if any
adjustment shall previously have been made to the exercise
price of such warrants then in effect upon the issuance of
such warrants or other rights pursuant to this subsection
(vii). No adjustment shall be made to the Conversion Price
upon the issuance of Common Stock pursuant to the exercise,
conversion or exchange of any Convertible Security or Common
Stock Equivalent where an adjustment to the Conversion Price
was made as a result of the issuance or purchase of any
Convertible Security or Common Stock Equivalent.
(viii) Consideration for Stock. In case any shares of
Common Stock or any Common Stock Equivalents shall be issued
or sold:
(1) in connection with any merger or
consolidation in which the Maker is the surviving
corporation (other than any consolidation or merger
in which the previously outstanding shares of Common
Stock of the Maker shall be changed to or exchanged
21
for the stock or other securities of another
corporation), the amount of consideration therefor
shall be, deemed to be the fair value, as determined
reasonably and in good faith by the Board of
Directors of the Maker, of such portion of the assets
and business of the nonsurviving corporation as such
Board may determine to be attributable to such shares
of Common Stock, Convertible Securities, rights or
warrants or options, as the case may be; or
(2) in the event of any consolidation or
merger of the Maker in which the Maker is not the
surviving corporation or in which the previously
outstanding shares of Common Stock of the Maker shall
be changed into or exchanged for the stock or other
securities of another corporation, or in the event of
any sale of all or substantially all of the assets of
the Maker for stock or other securities of any
corporation, the Maker shall be deemed to have issued
a number of shares of its Common Stock for stock or
securities or other property of the other corporation
computed on the basis of the actual exchange ratio on
which the transaction was predicated, and for a
consideration equal to the fair market value on the
date of such transaction of all such stock or
securities or other property of the other
corporation. If any such calculation results in
adjustment of the applicable Conversion Price, or the
number of shares of Common Stock issuable upon
conversion of the Notes, the determination of the
applicable Conversion Price or the number of shares
of Common Stock issuable upon conversion of the Notes
immediately prior to such merger, consolidation or
sale, shall be made after giving effect to such
adjustment of the number of shares of Common Stock
issuable upon conversion of the Notes. In the event
Common Stock is issued with other shares or
securities or other assets of the Maker for
consideration which covers both, the consideration
computed as provided in this Section 3.6(viii) shall
be allocated among such securities and assets as
determined in good faith by the Board of Directors of
the Maker.
(b) Record Date. In case the Maker shall take record of the
holders of its Common Stock for the purpose of entitling them to
subscribe for or purchase Common Stock or Convertible Securities, then
the date of the issue or sale of the shares of Common Stock shall be
deemed to be such record date.
(c) Certain Issues Excepted. Anything herein to the contrary
notwithstanding, the Maker shall not be required to make any adjustment
to the Conversion Price in connection with (i) securities issued (other
than for cash) in connection with a merger, acquisition, or
consolidation, (ii) securities issued pursuant to a bona fide firm
underwritten public offering of the Maker's securities, (iii)
securities issued pursuant to the conversion or exercise of convertible
or exercisable securities issued or outstanding on or prior to the date
hereof or issued pursuant to the Purchase Agreement, (iv) the shares of
22
Common Stock issuable upon the exercise of Warrants, (v) securities
issued in connection with strategic license agreements or other
partnering arrangements so long as such issuances are not for the
purpose of raising capital, (vi) Common Stock issued or options to
purchase Common Stock granted or issued pursuant to the Maker's stock
option plans and employee stock purchase plans as they now exist, (vii)
any warrants issued to the placement agent and its designees for the
transactions contemplated by the Purchase Agreement, and (viii) the
payment of any principal and accrued interest in shares of Common Stock
pursuant to this Note.
(d) 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, avoid or seek to 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 the
carrying out of all the provisions of this Section 3.6 and in the
taking of all such action as may be necessary or appropriate in order
to protect the Conversion Rights of the Holder against impairment. In
the event a Holder shall elect to convert any Notes as provided herein,
the Maker cannot refuse conversion based on any claim that such Holder
or any one associated or affiliated with such Holder has been engaged
in any violation of law, violation of an agreement to which such Holder
is a party or for any reason whatsoever, unless, an injunction from a
court, or notice, restraining and or adjoining conversion of all or of
said Notes shall have issued and the Maker posts a surety bond for the
benefit of such Holder in an amount equal to one hundred thirty percent
(130%) of the amount of the Notes the Holder has elected to convert,
which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall
be payable to such Holder in the event it obtains judgment.
(e) Certificates as to Adjustments. Upon occurrence of each
adjustment or readjustment of the Conversion Price or number of shares
of Common Stock issuable upon conversion of this Note pursuant to this
Section 3.6, 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 and
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based. The Maker shall, upon written request of the
Holder, at any time, furnish or cause to be furnished to the Holder a
like certificate setting forth such adjustments and readjustments, the
applicable Conversion Price in effect at the time, and 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 the conversion of
this Note. Notwithstanding the foregoing, the Maker shall not be
23
obligated to deliver a certificate unless such certificate would
reflect an increase or decrease of at least one percent (1%) of such
adjusted amount.
(f) 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.
(g) 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 Prices of the Common Stock for the twenty
(20) consecutive Trading Days immediately preceding the Conversion
Date. The term "Closing Bid Price" shall mean, means on any particular
date (i) the closing bid price per share of the Common Stock on such
date on the American Stock Exchange 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 average of the 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 American
Stock Exchange or any registered national stock exchange, the closing
bid 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.
(h) Reservation of Common Stock. The Maker shall at all times
when this Note shall be outstanding, reserve and keep available out of
its authorized but unissued Common Stock, such number of shares of
Common Stock as shall from time to time be sufficient to effect the
conversion of this Note and all interest accrued thereon; provided that
the number of shares of Common Stock so reserved shall at no time be
less than one hundred twenty percent (120%) of the number of shares of
24
Common Stock for which this Note and all interest accrued thereon are
at any time convertible. The Maker shall, from time to time in
accordance with the Nevada General Corporation Law, increase the
authorized number of shares of Common Stock if at any time the unissued
number of authorized shares shall not be sufficient to satisfy the
Maker's obligations under this Section 3.6(h).
(i) Regulatory Compliance. If any shares of Common Stock to be
reserved for the purpose of conversion of this Note or any interest
accrued thereon 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.
(j) Reservation of Common Stock. The Maker confirms that as of
the date hereof its authorized Common Stock consists of 50,000,000
shares, of which 21,303, 439 shares are issued and outstanding. If
there are not sufficient authorized shares of Common Stock available at
any time to permit the Holder to convert all or any portion of this
Note into Common Stock to which it is otherwise fully entitled to
obtain by conversion hereunder, then on ninety (90) days written notice
from Holder, Maker shall seek the stockholder approval of the increase
in the Company's authorized capital necessary to enable such conversion
to occur.
Section 3.7 Prepayment.
(a) Prepayment Upon an Event of Default. Notwithstanding anything to
the contrary contained herein, upon the occurrence of an Event of Default
described in Sections 2.1(b)-(k) hereof, the Holder shall have the right, at
such Holder's option, to require the Maker to prepay in cash all or a portion of
this Note at a price equal to the Triggering Event Prepayment Price (as defined
in Section 3.7(c) below) applicable at the time of such request (the "Event of
Default Prepayment Price"). Nothing in this Section 3.7(a) shall limit the
Holder's rights under Section 2.2 hereof.
(b) Prepayment Option Upon Major Transaction. In addition to all other
rights of the Holder contained herein, simultaneous with the occurrence of a
Major Transaction (as defined below), the Holder shall have the right, at the
Holder's option, to require the Maker to prepay all or a portion of the Holder's
Notes at a price equal to one hundred percent (100%) of the aggregate principal
25
amount of this Note plus all accrued and unpaid interest (the "Major Transaction
Prepayment Price"); provided that the Holder shall have the sole option to
receive payment of the Major Transaction Prepayment Price in cash or shares of
Common Stock. If the Holder elects to receive payment of the Major Transaction
Prepayment Price in shares of Common Stock, the price per share shall be based
upon the Conversion Price then in effect on the day preceding the date of
delivery of the Notice of Prepayment at Option of Holder Upon Major Transaction
(as hereafter defined) and the Holder shall have "piggy-back" registration
rights with respect to such shares.
(c) Prepayment Option Upon Triggering Event. In addition to all other
rights of the Holder contained herein, after a Triggering Event (as defined
below), the Holder shall have the right, at the Holder's option, to require the
Maker to prepay all or a portion of this Note in cash at a price equal to the
sum of (i) the greater of (A) one hundred twenty percent (120%) of the aggregate
principal amount of this Note plus all accrued and unpaid interest and (B) in
the event at such time the Holder is unable to obtain the benefit of its
conversion rights through the conversion of this Note and resale of the shares
of Common Stock issuable upon conversion hereof in accordance with the terms of
this Note and the other Transaction Documents, the aggregate principal amount of
this Note plus all accrued but unpaid interest hereon, divided by the Conversion
Price on (x) the date the Prepayment Price (as defined below) is demanded or
otherwise due or (y) the date the Prepayment Price is paid in full, whichever is
less, multiplied by the VWAP on (x) the date the Prepayment Price is demanded or
otherwise due, and (y) the date the Prepayment Price is paid in full, whichever
is greater, and (ii) all other amounts, costs, expenses and liquidated damages
due in respect of this Note and the other Transaction Documents (the "Triggering
Event Prepayment Price," and, collectively with the "Major Transaction
Prepayment Price," the "Prepayment Price").
(d) Intentionally Omitted.
(e) "Major Transaction." A "Major Transaction" shall be deemed to have
occurred at such time as any of the following events:
(i) the consolidation, merger or other business combination of
the Maker with or into another Person (as defined in Section 4.13
hereof) (other than (A) pursuant to a migratory merger effected solely
for the purpose of changing the jurisdiction of incorporation of the
Maker or (B) a consolidation, merger or other business combination in
which holders of the Maker's voting power immediately prior to the
transaction continue after the transaction to hold, directly or
26
indirectly, the voting power of the surviving entity or entities
necessary to elect a majority of the members of the board of directors
(or their equivalent if other than a corporation) of such entity or
entities).
(ii) the sale or transfer of more than fifty percent (50%) of
the Maker's assets (based on the fair market value as determined in
good faith by the Maker's Board of Directors) other than inventory in
the ordinary course of business in one or a related series of
transactions; or
(iii) closing of a purchase, tender or exchange offer made to
the holders of more than fifty percent (50%) of the outstanding shares
of Common Stock in which more than fifty percent (50%) of the
outstanding shares of Common Stock were tendered and accepted.
(f) "Triggering Event." A "Triggering Event" shall be deemed to have
occurred at such time as any of the following events:
(i) so long as any Notes are outstanding, the effectiveness of
the Registration Statement, after it becomes effective, (i) lapses for
any reason (including, without limitation, the issuance of a stop
order) or (ii) is unavailable to the Holder for sale of the shares of
Common Stock, and such lapse or unavailability continues for a period
of twenty (20) consecutive Trading Days, and the shares of Common Stock
into which the Holder's Notes can be converted cannot be sold in the
public securities market pursuant to Rule 144(k), provided that the
cause of such lapse or unavailability is not due to factors primarily
within the control of the Holder of the Notes; and provided further
that a Triggering Event shall not have occurred if and to the extent
the Maker exercised its rights set forth in Section 3(n) of the
Registration Rights Agreement;
(ii) the suspension from listing, without subsequent listing
on any one of, or the failure of the Common Stock to be listed on at
least one of the American Stock Exchange, Nasdaq National Market,
Nasdaq SmallCap Market, The New York Stock Exchange, Inc. or OTC
Bulletin Board, for a period of five (5) consecutive Trading Days;
(iii) the Maker's notice to any holder of the Notes, including
by way of public announcement, at any time, of its inability to comply
(including for any of the reasons described in Section 3.8) or its
intention not to comply with proper requests for conversion of any
Notes into shares of Common Stock; or
27
(iv) the Maker's failure to comply with a Conversion Notice
tendered in accordance with the provisions of this Note within ten (10)
business days after the receipt by the Maker of the Conversion Notice.
(g) Intentionally Omitted.
(h) Mechanics of Prepayment at Option of Holder Upon Major Transaction.
No sooner than fifteen (15) days nor later than ten (10) days prior to the
consummation of a Major Transaction, but not prior to the public announcement of
such Major Transaction, the Maker shall deliver written notice thereof via
facsimile and overnight courier ("Notice of Major Transaction") to the Holder of
this Note. At any time after receipt of a Notice of Major Transaction (or, in
the event a Notice of Major Transaction is not delivered at least ten (10) days
prior to a Major Transaction, at any time within ten (10) days prior to a Major
Transaction), any holder of the Notes then outstanding may require the Maker to
prepay, effective immediately prior to the consummation of such Major
Transaction, all of the holder's Notes then outstanding by delivering written
notice thereof via facsimile and overnight courier ("Notice of Prepayment at
Option of Holder Upon Major Transaction") to the Maker, which Notice of
Prepayment at Option of Holder Upon Major Transaction shall indicate (i) the
number of Notes that such holder is electing to prepay and (ii) the applicable
Major Transaction Prepayment Price, as calculated pursuant to Section 3.7(b)
above.
(i) Mechanics of Prepayment at Option of Holder Upon Triggering Event.
Within one (1) business day after the occurrence of a Triggering Event, the
Maker shall deliver written notice thereof via facsimile and overnight courier
("Notice of Triggering Event") to each holder of the Notes. At any time after
the earlier of a holder's receipt of a Notice of Triggering Event and such
holder becoming aware of a Triggering Event, any holder of this Note and the
Other Notes then outstanding may require the Maker to prepay all of the Notes on
a pro rata basis by delivering written notice thereof via facsimile and
overnight courier ("Notice of Prepayment at Option of Holder Upon Triggering
Event") to the Maker, which Notice of Prepayment at Option of Holder Upon
Triggering Event shall indicate (i) the amount of the Note that such holder is
electing to have prepaid and (ii) the applicable Triggering Event Prepayment
Price, as calculated pursuant to Section 3.7(c) above. A holder shall only be
permitted to require the Maker to prepay the Note pursuant to Section 3.7 hereof
for the greater of a period of ten (10) days after receipt by such holder of a
Notice of Triggering Event or for so long as such Triggering Event is
continuing.
(j) Intentionally Omitted.
28
(k) Payment of Prepayment Price. Upon the Maker's receipt of a
Notice(s) of Prepayment at Option of Holder Upon Triggering Event or a Notice(s)
of Prepayment at Option of Holder Upon Major Transaction from any holder of the
Notes, the Maker shall immediately notify each holder of the Notes by facsimile
of the Maker's receipt of such Notice(s) of Prepayment at Option of Holder Upon
Triggering Event or Notice(s) of Prepayment at Option of Holder Upon Major
Transaction and each holder which has sent such a notice shall promptly submit
to the Maker such holder's certificates representing the Notes which such holder
has elected to have prepaid. The Maker shall deliver the applicable Triggering
Event Prepayment Price, in the case of a prepayment pursuant to Section 3.7(i),
to such holder within five (5) business days after the Maker's receipt of a
Notice of Prepayment at Option of Holder Upon Triggering Event and, in the case
of a prepayment pursuant to Section 3.7(h), the Maker shall deliver the
applicable Major Transaction Prepayment Price immediately prior to the
consummation of the Major Transaction; provided that a holder's original Note
shall have been so delivered to the Maker; provided further that if the Maker is
unable to prepay all of the Notes to be prepaid, the Maker shall prepay an
amount from each holder of the Notes being prepaid equal to such holder's
pro-rata amount (based on the number of Notes held by such holder relative to
the number of Notes outstanding) of all Notes being prepaid. If the Maker shall
fail to prepay all of the Notes submitted for prepayment (other than pursuant to
a dispute as to the arithmetic calculation of the Prepayment Price), in addition
to any remedy such holder of the Notes may have under this Note and the Purchase
Agreement, the applicable Prepayment Price payable in respect of such Notes not
prepaid shall bear interest at the rate of two percent (2%) per month (prorated
for partial months) until paid in full. Until the Maker pays such unpaid
applicable Prepayment Price in full to a holder of the Notes submitted for
prepayment, such holder shall have the option (the "Void Optional Prepayment
Option") to, in lieu of prepayment, require the Maker to promptly return to such
holder(s) all of the Notes that were submitted for prepayment by such holder(s)
under this Section 3.7 and for which the applicable Prepayment Price has not
been paid, by sending written notice thereof to the Maker via facsimile (the
"Void Optional Prepayment Notice"). Upon the Maker's receipt of such Void
Optional Prepayment Notice(s) and prior to payment of the full applicable
Prepayment Price to such holder, (i) the Notice(s) of Prepayment at Option of
Holder Upon Triggering Event or the Notice(s) of Prepayment at Option of Holder
Upon Major Transaction, as the case may be, shall be null and void with respect
to those Notes submitted for prepayment and for which the applicable Prepayment
Price has not been paid, (ii) the Maker shall immediately return any Notes
submitted to the Maker by each holder for prepayment under this Section 3.7(k)
and for which the applicable Prepayment Price has not been paid and (iii) the
29
Conversion Price of such returned Notes shall be adjusted to the lesser of (A)
the Conversion Price as in effect on the date on which the Void Optional
Prepayment Notice(s) is delivered to the Maker and (B) the lowest Closing Bid
Price during the period beginning on the date on which the Notice(s) of
Prepayment of Option of Holder Upon Major Transaction or the Notice(s) of
Prepayment at Option of Holder Upon Triggering Event, as the case may be, is
delivered to the Maker and ending on the date on which the Void Optional
Prepayment Notice(s) is delivered to the Maker; provided that no adjustment
shall be made if such adjustment would result in an increase of the Conversion
Price then in effect. A holder's delivery of a Void Optional Prepayment Notice
and exercise of its rights following such notice shall not effect the Maker's
obligations to make any payments which have accrued prior to the date of such
notice. Payments provided for in this Section 3.7 shall have priority to
payments to other stockholders in connection with a Major Transaction.
(l) Maker Prepayment Option. At any time following the date hereof, the
Maker may prepay in cash all or any portion of the outstanding principal amount
of this Note together with all accrued and unpaid interest thereon upon thirty
(30) days prior written notice to the Holder (the "Maker's Prepayment Notice")
at a price equal to 110% of the aggregate principal amount of this Note plus any
accrued but unpaid interest (the "Maker's Prepayment Price"); provided, however,
that if a holder has delivered a Conversion Notice to the Maker or delivers a
Conversion Notice within such thirty (30) day period following delivery of the
Maker's Prepayment Notice, the principal amount of the Notes plus any accrued
but unpaid interest designated to be converted may not be prepaid by the Maker
and shall be converted in accordance with Section 3.3 hereof; provided further
that if during the period between delivery of the Maker's Prepayment Notice and
the Maker's Prepayment Date (as defined below), a holder shall become entitled
to deliver a Notice of Prepayment at Option of Holder Upon Major Transaction or
Notice of Prepayment at Option of Holder upon Triggering Event, then the such
rights of the holders shall take precedence over the previously delivered Maker
Prepayment Notice. The Maker's Prepayment Notice shall state the date of
prepayment which date shall be the thirty-first (31st) day after the Maker has
delivered the Maker's Prepayment Notice (the "Maker's Prepayment Date"), the
Maker's Prepayment Price and the principal amount of Notes plus any accrued but
unpaid interest to be prepaid by the Maker. The Maker shall deliver the Maker's
Prepayment Price on the Maker's Prepayment Date, provided, that if the holder(s)
delivers a Conversion Notice before the Maker's Prepayment Date, then the
portion of the Maker's Prepayment Price which would be paid to prepay the Notes
covered by such Conversion Notice shall be returned to the Maker upon delivery
30
of the Common Stock issuable in connection with such Conversion Notice to the
holder(s). On the Maker's Prepayment Date, the Maker shall pay the Maker's
Prepayment Price, subject to any adjustment pursuant to the immediately
preceding sentence, to the holder(s) on a pro rata basis. If the Maker fails to
pay the Maker's Prepayment Price by the thirty-first (31st) day after the Maker
has delivered the Maker's Prepayment Notice, the prepayment will be declared
null and void and the Maker shall lose its right to serve a Maker's Prepayment
Notice pursuant to this Section 3.7(l) in the future. Notwithstanding the
foregoing to the contrary, the Maker may effect a prepayment pursuant to this
Section 3.7(l) only if (A) the registration statement providing for the resale
of the shares of Common Stock issuable upon conversion of this Note is effective
and has been effective, without lapse or suspension of any kind, for a period
sixty (60) consecutive calendar days immediately preceding the Maker's
Prepayment Notice through the Maker's Prepayment Date, or the shares of Common
Stock into which this Note can be converted may be offered for sale to the
public pursuant to Rule 144(k) under the Securities Act, (B) trading in the
Common Stock shall not have been suspended by the Securities and Exchange
Commission or the American Stock Exchange (or other exchange or market on which
the Common Stock is trading), and (C) the Maker is in material compliance with
the terms and conditions of this Note and the other Transaction Documents.
Section 3.8 Inability to Fully Convert.
(a) Holder's Option if Maker Cannot Fully Convert. If, upon the Maker's
receipt of a Conversion Notice, the Maker cannot issue shares of Common Stock
registered for resale under the Registration Statement for any reason,
including, without limitation, because the Maker (w) does not have a sufficient
number of shares of Common Stock authorized and available, (x) is, subsequent to
October 1, 2006 otherwise prohibited by applicable law or by the rules or
regulations of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Maker or any of its
securities from issuing all of the Common Stock which is to be issued to the
Holder pursuant to a Conversion Notice or (y) fails subsequent to November 1,
2006, to have a sufficient number of shares of Common Stock registered for
resale under the Registration Statement, then the Maker shall issue as many
shares of Common Stock as it is able to issue in accordance with the Holder's
Conversion Notice and, with respect to the unconverted portion of this Note, the
Holder, solely at Holder's option, can elect to:
(i) require the Maker to prepay that portion of this Note for
which the Maker is unable to issue Common Stock in accordance with the
31
Holder's Conversion Notice (the "Mandatory Prepayment") at a price per
share equal to the Triggering Event Prepayment Price as of such
Conversion Date (the "Mandatory Prepayment Price")
(ii) if the Maker's inability to fully convert is pursuant to
Section 3.8(a) (x) above, require the Maker to issue restricted shares
of Common Stock in accordance with such holder's Conversion Notice;
(iii) void its Conversion Notice and retain or have returned,
as the case may be, this Note that was to be converted pursuant to the
Conversion Notice (provided that the Holder's voiding its Conversion
Notice shall not effect the Maker's obligations to make any payments
which have accrued prior to the date of such notice).
In the event a Holder shall elect to convert any portion of its Notes as
provided herein, the Maker cannot refuse conversion based on any claim that such
Holder or any one associated or affiliated with such Holder has been engaged in
any violation of law, violation of an agreement to which such Holder is a party
or for any reason whatsoever, unless, an injunction from a court, on notice,
restraining and or adjoining conversion of all or of said Notes shall have been
issued and the Maker posts a surety bond for the benefit of such Holder in an
amount equal to 130% of the principal amount of the Notes the Holder has elected
to convert, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be payable
to such Holder in the event it obtains judgment.
(b) Mechanics of Fulfilling Holder's Election. The Maker shall
immediately send via facsimile to the Holder, upon receipt of a facsimile copy
of a Conversion Notice from the Holder which cannot be fully satisfied as
described in Section 3.8(a) above, a notice of the Maker's inability to fully
satisfy the Conversion Notice (the "Inability to Fully Convert Notice"). Such
Inability to Fully Convert Notice shall indicate (i) the reason why the Maker is
unable to fully satisfy such holder's Conversion Notice, (ii) the amount of this
Note which cannot be converted and (iii) the applicable Mandatory Prepayment
Price. The Holder shall notify the Maker of its election pursuant to Section
3.8(a) above by delivering written notice via facsimile to the Maker ("Notice in
Response to Inability to Convert").
(c) Payment of Prepayment Price. If the Holder shall elect to have its
Notes prepaid pursuant to Section 3.8(a)(i) above, the Maker shall pay the
Mandatory Prepayment Price to the Holder within thirty (30) days of the Maker's
32
receipt of the Holder's Notice in Response to Inability to Convert, provided
that prior to the Maker's receipt of the Holder's Notice in Response to
Inability to Convert the Maker has not delivered a notice to the Holder stating,
to the satisfaction of the Holder, that the event or condition resulting in the
Mandatory Prepayment has been cured and all Conversion Shares issuable to the
Holder can and will be delivered to the Holder in accordance with the terms of
this Note. If the Maker shall fail to pay the applicable Mandatory Prepayment
Price to the Holder on a timely basis as described in this Section 3.8(c) (other
than pursuant to a dispute as to the determination of the arithmetic calculation
of the Prepayment Price), in addition to any remedy the Holder may have under
this Note and the Purchase Agreement, such unpaid amount shall bear interest at
the rate of two percent (2%) per month (prorated for partial months) until paid
in full. Until the full Mandatory Prepayment Price is paid in full to the
Holder, the Holder may (i) void the Mandatory Prepayment with respect to that
portion of the Note for which the full Mandatory Prepayment Price has not been
paid, (ii) receive back such Note, and (iii) require that the Conversion Price
of such returned Note be adjusted to the lesser of (A) the Conversion Price as
in effect on the date on which the Holder voided the Mandatory Prepayment and
(B) the lowest Closing Bid Price during the period beginning on the Conversion
Date and ending on the date the Holder voided the Mandatory Prepayment.
(d) Pro-rata Conversion and Prepayment. In the event the Maker receives
a Conversion Notice from more than one holder of the Notes on the same day and
the Maker can convert and prepay some, but not all, of the Notes pursuant to
this Section 3.8, the Maker shall convert and prepay from each holder of the
Notes electing to have its Notes converted and prepaid at such time an amount
equal to such holder's pro-rata amount (based on the principal amount of the
Notes held by such holder relative to the principal amount of the Notes
outstanding) of all the Notes being converted and prepaid at such time.
(e) The term "Closing Bid Price" shall mean, on any particular date (i)
the closing bid price per share of the Common Stock on such date on the American
Stock Exchange 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
average of the 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 American Stock Exchange or any registered national stock exchange, the
closing bid 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
33
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.
Section 3.9 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 by facsimile at the address or
number designated in the Purchase Agreement (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 Maker will give written notice to the
Holder at least ten (10) days prior to the date on which the Maker takes a
record (x) with respect to any dividend or distribution upon the Common Stock,
(y) with respect to any pro rata subscription offer to holders of Common Stock
or (z) for determining rights to vote with respect to any Organic Change,
dissolution, liquidation or winding-up and in no event shall such notice be
provided to such holder prior to such information being made known to the
public. The Maker will also give written notice to the Holder at least ten (10)
days prior to the date on which any Organic Change, dissolution, liquidation or
winding-up will take place and in no event shall such notice be provided to the
Holder prior to such information being made known to the public. The Maker shall
34
promptly notify the Holder of this Note of any notices sent or received, or any
actions taken with respect to the Other Notes.
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.
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.
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 assigns of each such
party, whether or not such successors or assigns are permitted by the terms
hereof.
35
Section 4.7 Amendments. This Note may not be modified or amended in any
manner except in 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 HAS 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 MAY BE SOLD,
TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN
EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH STATE
SECURITIES LAWS."
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 Purchase 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
36
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.
Section 4.13 Definitions. For the purposes hereof, the following terms
shall have the following meanings:
37
"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 American Stock Exchange, or (b) if the Common Stock is not listed on the
American Stock Exchange, a day on which the Common Stock is traded on any other
registered national stock exchange, or (c) if the Common Stock is not traded on
any other registered national stock exchange, a day on which the Common Stock is
traded on the OTC Bulletin Board, or (d) 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), (b) or (c) 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.
AXM PHARMA, INC.
By: ______________________________
Name:
Title:
38
EXHIBIT A
WIRE INSTRUCTIONS.
Payee: _____________________________________________________
Bank: _____________________________________________________
Address: ___________________________________________________
___________________________________________________
Bank No.: __________________________________________________
Account No.: ______________________________________________
Account Name: ______________________________________________
39
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 AXM
Pharma, 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:__________________________________________________________________
__________________________________________________________________
40
EXHIBIT 2
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made
and entered into as of March 1, 2006, by and among AXM Pharma, Inc., a Nevada
corporation (the "Company"), and the holders listed on Schedule I hereto (the
"Holders").
This Agreement is being entered into pursuant to the
Modification Agreement dated as of the date hereof among the Company and the
Holders (the "Modification Agreement") and supersedes the Registration Rights
Agreement dated April 19, 2005 (the "2005 Agreement") among the parties hereto,
which the parties are terminating, as provided below.
The Company and the Holders hereby agree as follows:
1. Definitions.
Capitalized terms used and not otherwise defined herein shall
have the meanings given such terms in the Purchase Agreement entered into as of
April 19, 2005 among the parties hereto (the "Purchase Agreement"), as modified,
where applicable, by the Modification Agreement. As used in this Agreement, the
following terms shall have the following meanings:
"Advice" shall have meaning set forth in Section 3(m).
"Affiliate" means, with respect to any Person, any other
Person that directly or indirectly controls or is controlled by or under common
control with such Person. For the purposes of this definition, "control," when
used with respect to any Person, means the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms of "affiliated," "controlling" and "controlled" have
meanings correlative to the foregoing.
"Board" shall have meaning set forth in Section 3(n).
"Business Day" means 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 generally are authorized or required by law or other
government actions to close.
"Closing Date" means the closing date contemplated by the
Modification Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, par value
$.001 per share.
"Effectiveness Date" means with respect to the Registration
Statement the earlier of November 1, 2006 or the date which is within three (3)
business days of the date on which the Commission informs the Company that the
Commission (i) will not review the Registration Statement or (ii) that the
Company may request the acceleration of the effectiveness of the Registration
Statement.
"Effectiveness Period" shall have the meaning set forth in
Section 2.
"Event" shall have the meaning set forth in Section 7(e).
"Event Date" shall have the meaning set forth in Section 7(e).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
. "Holder" or "Holders" means the holder or holders, as the case may
be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in
Section 5(c).
"Indemnifying Party" shall have the meaning set forth in
Section 5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"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.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference in such Prospectus.
"Registrable Securities" means (i) the shares of Common Stock
issuable upon conversion of the principal amount of the Notes and any interest
accrued thereon and all shares issued to the Holders in connection with the
Company's August, 2005 financing, (ii) the shares of Common Stock issuable upon
exercise of the Warrants (as defined below) (iii) the shares of Common Stock
issued or issuable as dividend payments on the Company's Series C Convertible
Preferred Stock; and (iv) the shares registered on the Company's most recent
Form S-3 Registration Statement, which became effective in June, 2005.
"Registration Statement" means the registration statements and
any additional registration statements contemplated by Section 2, including (in
each case) the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference in such
registration statement.
-2-
"Rule 144" means Rule 144 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 158" means Rule 158 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 424" means Rule 424 promulgated by the Commission
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Warrants" means the Amended and Restated Series A and Series
B Warrants to purchase shares of Common Stock issued to the Holders pursuant to
the Purchase Agreement, as amended by the Modification Agreement; all other
warrants issued in connection with the Company's April 19, 2005 and August, 2005
financing; and any additional Warrants issued to any of the Holders in
connection with any private offering which closes within the six month following
the date hereof.
The Company shall prepare and file with the Commission a
"resale" Registration Statement covering all Registrable Securities for an
offering to be made on a continuous basis pursuant to Rule 415. The Registration
Statement shall be on Form SB-2. The Company shall (i) not permit any securities
other than the Registrable Securities and the securities listed on Schedule II
hereto to be included in the Registration Statement] and (ii) use its best
efforts to cause the Registration Statement to be declared effective under the
Securities Act as promptly as possible after the filing thereof, but in any
event prior to the Effectiveness Date, and to keep such Registration Statement
continuously effective under the Securities Act until such date as is the
earlier of (x) the date when all Registrable Securities covered by such
Registration Statement have been sold or (y) the date on which the Registrable
Securities may be sold without any restriction pursuant to Rule 144(k) under the
Securities Act as determined by counsel to the Company pursuant to a written
opinion letter, addressed to the Company's transfer agent to such effect (the
"Effectiveness Period"). If at any time and for any reason, an additional
Registration Statement is required to be filed because at such time the actual
number of shares of Common Stock into which the Notes are convertible and the
Warrants are exercisable exceeds the number of shares of Registrable Securities
remaining under the Registration Statement, the Company shall have twenty (20)
Business Days to file such additional Registration Statement, and the Company
shall use its best efforts to cause such additional Registration Statement to be
declared effective by the Commission as soon as possible.
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3. Registration Procedures.
In connection with the Company's registration obligations
hereunder, the Company shall:
(a) Prepare and file with the Commission, a Registration
Statement on Form SB-1 or S-1 in accordance with the method or methods of
distribution thereof as specified by the Holders (except if otherwise directed
by the Holders) and in accordance with applicable law, and cause the
Registration Statement to become effective and remain effective as provided
herein; provided, however, that not less than three (3) Business Days prior to
the filing of the Registration Statement or any related Prospectus or any
amendment or supplement thereto, the Company shall (i) furnish to the Holders
and any counsel retained by them , copies of all such documents proposed to be
filed, which documents will be subject to the review of such Holders and such
counsel, and (ii) cause its officers and directors, counsel and independent
certified public accountants to respond to such inquiries as shall be necessary,
in the reasonable opinion of such counsel, to conduct a reasonable review of
such documents. The Company shall not file the Registration Statement or any
such Prospectus or any amendments or supplements thereto to which the Holders of
a majority of the Registrable Securities shall reasonably object in writing
within three (3) Business Days of their receipt thereof.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective as to the
applicable Registrable Securities for the Effectiveness Period and prepare and
file with the Commission such additional Registration Statements as necessary in
order to register for resale under the Securities Act all of the Registrable
Securities; (ii) cause the related Prospectus to be amended or supplemented by
any required Prospectus supplement, and as so supplemented or amended to be
filed pursuant to Rule 424 (or any similar provisions then in force) promulgated
under the Securities Act; (iii) respond as promptly as possible, but in no event
later than ten (10) business days, to any comments received from the Commission
with respect to the Registration Statement or any amendment thereto and as
promptly as possible provide the Holders true and complete copies of all
correspondence from and to the Commission relating to the Registration
Statement; and (iv) comply in all material respects with the provisions of the
Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by the Registration Statement during the
applicable period in accordance with the intended methods of disposition by the
Holders thereof set forth in the Registration Statement as so amended or in such
Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities and any
counsel as promptly as possible (and, in the case of (i)(A) below, not less than
three (3) days prior to such filing) and (if requested by any such Person)
confirm such notice in writing no later than two (2) Business Days following the
day (i)(A) when a Prospectus or any Prospectus supplement or post-effective
amendment to the Registration Statement is filed; (B) when the Commission
notifies the Company whether there will be a "review" of such Registration
Statement and whenever the Commission comments in writing on such Registration
Statement and (C) with respect to the Registration Statement or any
post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to the Registration Statement or Prospectus or for
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additional information; (iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement covering any or
all of the Registrable Securities or the initiation or threatening of any
Proceedings for that purpose; (iv) if at any time any of the representations and
warranties of the Company contained in any agreement contemplated hereby ceases
to be true and correct in all material respects; (v) of the receipt by the
Company of any notification with respect to the suspension of the qualification
or exemption from qualification of any of the Registrable Securities for sale in
any jurisdiction, or the initiation of any Proceeding for such purpose; and (vi)
of the occurrence of any event that makes any statement made in the Registration
Statement or Prospectus or any document incorporated or deemed to be
incorporated therein by reference untrue in any material respect or that
requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
(d) Use its best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of, as promptly as possible, (i) any order
suspending the effectiveness of the Registration Statement or (ii) any
suspension of the qualification (or exemption from qualification) of any of the
Registrable Securities for sale in any jurisdiction.
(e) If requested by the Holders of a majority in interest of
the Registrable Securities, (i) promptly incorporate in a Prospectus supplement
or post-effective amendment to the Registration Statement such information as
the Company reasonably agrees should be included therein and (ii) make all
required filings of such Prospectus supplement or such post-effective amendment
as soon as practicable after the Company has received notification of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment.
(f) If requested by any Holder, furnish to such Holder and any
Special Counsel, without charge, at least one conformed copy of each
Registration Statement and each amendment thereto, including financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested by
such Person (including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.
(g) Promptly deliver to each Holder and any Special Counsel,
without charge, as many copies of the Prospectus or Prospectuses (including each
form of prospectus) and each amendment or supplement thereto as such Persons may
reasonably request; and subject to the provisions of Section 3(n), the Company
hereby consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders in connection with the offering and sale
of the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.
(h) Prior to any public offering of Registrable Securities,
use its best efforts to register or qualify or cooperate with the selling
Holders and any Special Counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or Blue Sky laws
of such jurisdictions within the United States as any Holder requests in
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writing, to keep each such registration or qualification (or exemption
therefrom) effective during the Effectiveness Period and to do any and all other
acts or things necessary or advisable to enable the disposition in such
jurisdictions of the Registrable Securities covered by a Registration Statement;
provided, however, that the Company shall not be required to qualify generally
to do business in any jurisdiction where it is not then so qualified or to take
any action that would subject it to general service of process in any such
jurisdiction where it is not then so subject or subject the Company to any
material tax in any such jurisdiction where it is not then so subject.
(i) Cooperate with the Holders to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold pursuant to a Registration Statement, which certificates, to the extent
permitted by the Purchase Agreement and applicable federal and state securities
laws, shall be free of all restrictive legends, and to enable such Registrable
Securities to be in such denominations and registered in such names as any
Holder may request in connection with any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section
3(c)(vi), as promptly as possible, prepare a supplement or amendment, including
a post-effective amendment, to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
(k) Use its best efforts to cause all Registrable Securities
relating to the Registration Statement to be listed on the American Stock
Exchange or any other securities exchange, quotation system or market, if any,
on which similar securities issued by the Company are then listed.
(l) Comply in all material respects with all applicable rules
and regulations of the Commission and make generally available to its security
holders earning statements satisfying the provisions of Section 11(a) of the
Securities Act and Rule 158 not later than 45 days after the end of any 12-month
period (or 90 days after the end of any 12-month period if such period is a
fiscal year) commencing on the first day of the first fiscal quarter of the
Company after the effective date of the Registration Statement, which statement
shall conform to the requirements of Rule 158.
(m) The Company may require each selling Holder to furnish to
the Company information regarding such Holder and the distribution of such
Registrable Securities as is required by law to be disclosed in the Registration
Statement, Prospectus, or any amendment or supplement thereto, and the Company
may exclude from such registration the Registrable Securities of any such Holder
who unreasonably fails to furnish such information within a reasonable time
after receiving such request.
Each Holder covenants and agrees that (i) it will not sell any
Registrable Securities under the Registration Statement until it has received
copies of the Prospectus as then amended or supplemented as contemplated in
Section 3(g) and notice from the Company that such Registration Statement and
any post-effective amendments thereto have become effective as contemplated by
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Section 3(c) and (ii) it and its officers, directors or Affiliates, if any, will
comply with the prospectus delivery requirements of the Securities Act as
applicable to them in connection with sales of Registrable Securities pursuant
to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable
Securities that, upon receipt of a notice from the Company of the occurrence of
any event of the kind described in Section 3(c)(ii), 3(c)(iii), 3(c)(iv),
3(c)(v), 3(c)(vi) or 3(n), such Holder will forthwith discontinue disposition of
such Registrable Securities under the Registration Statement until such Holder's
receipt of the copies of the supplemented Prospectus and/or amended Registration
Statement contemplated by Section 3(j), or until it is advised in writing (the
"Advice") by the Company that the use of the applicable Prospectus may be
resumed, and, in either case, has received copies of any additional or
supplemental filings that are incorporated or deemed to be incorporated by
reference in such Prospectus or Registration Statement.
(n) If (i) there is material non-public information regarding
the Company which the Company's Board of Directors (the "Board") reasonably
determines not to be in the Company's best interest to disclose and which the
Company is not otherwise required to disclose, or (ii) there is a significant
business opportunity (including, but not limited to, the acquisition or
disposition of assets (other than in the ordinary course of business) or any
merger, consolidation, tender offer or other similar transaction) available to
the Company which the Board reasonably determines not to be in the Company's
best interest to disclose, then the Company may postpone or suspend filing or
effectiveness of a registration statement for a period not to exceed 20
consecutive days, provided that the Company may not postpone or suspend its
obligation under this Section 3(n) for more than 45 days in the aggregate during
any 360 day period; provided, however, that no such postponement or suspension
shall be permitted for consecutive 20 day periods, arising out of the same set
of facts, circumstances or transactions.
4. Registration Expenses.
(a)The fees and expenses incident to the performance of or
compliance with this Agreement by the Company, except as and to the extent
specified in Section 4, shall be borne by the Company, whether or not the
Registration Statement is filed or becomes effective and whether or not any
Registrable Securities are sold pursuant to the Registration Statement. The fees
and expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without limitation,
fees and expenses (A) with respect to filings required to be made with each
securities exchange or market on which Registrable Securities are required
hereunder to be listed, (B) with respect to filing fees required to be paid to
the National Association of Securities Dealers, Inc. and the NASD Regulation,
Inc. and (C) in compliance with state securities or Blue Sky laws (including,
without limitation, fees and disbursements of counsel for the Holders in
connection with Blue Sky qualifications of the Registrable Securities and
determination of the eligibility of the Registrable Securities for investment
under the laws of such jurisdictions as the Holders of a majority of Registrable
Securities may designate)), (ii) printing expenses (including, without
limitation, expenses of printing certificates for Registrable Securities and of
printing prospectuses if the printing of prospectuses is requested by the
holders of a majority of the Registrable Securities included in the Registration
Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and
disbursements of counsel for the Company, (v) Securities Act liability
insurance, if the Company so desires such insurance and (vii) fees and expenses
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of all other Persons retained by the Company in connection with the consummation
of the transactions contemplated by this Agreement, including, without
limitation, the Company's independent public accountants (including the expenses
of any comfort letters or costs associated with the delivery by independent
public accountants of a comfort letter or comfort letters).
5. Indemnification.
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents, brokers (including brokers who
offer and sell Registrable Securities as principal as a result of a pledge or
any failure to perform under a margin call of Common Stock), investment advisors
and employees of each of them, each Person who controls any such Holder (within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) and the officers, directors, agents and employees of each such controlling
Person, to the fullest extent permitted by applicable law, from and against any
and all losses, claims, damages, liabilities, costs (including, without
limitation, costs of preparation and attorneys' fees) and expenses
(collectively, "Losses"), as incurred, arising out of or based upon any untrue
or alleged untrue statement of a material fact contained in the Registration
Statement, any Prospectus or any form of prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or based
upon any omission or alleged omission of a material fact required to be stated
therein or necessary to make the statements therein (in the case of any
Prospectus or form of prospectus or supplement thereto), in the light of the
circumstances under which they were made, not misleading, except to the extent,
but only to the extent, that such untrue statements or omissions arise out of or
are based upon information regarding the Holders or such other Indemnified Party
furnished in writing to the Company by a Holder expressly for use therein, which
information was reasonably relied on by the Company for use therein or to the
extent that such information relates to a Holder or such Holder's proposed
method of distribution of Registrable Securities and was reviewed and expressly
approved in writing by a Holder expressly for use in the Registration Statement,
such Prospectus or such form of Prospectus or in any amendment or supplement
thereto. The Company shall notify the Holders promptly of the institution,
threat or assertion of any Proceeding of which the Company is aware in
connection with the transactions contemplated by this Agreement.
(b) Indemnification by Holders. Each Holder shall, severally
and not jointly, indemnify and hold harmless the Company, its directors,
officers, agents and employees, each Person who controls the Company (within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act),
and the directors, officers, agents or employees of such controlling Persons, to
the fullest extent permitted by applicable law, from and against all Losses, as
incurred, arising out of or based upon any untrue or alleged untrue statement of
a material fact contained in the Registration Statement, any Prospectus, or any
form of prospectus, or in any amendment or supplement thereto or in any
preliminary prospectus, or arising out of or based upon any omission or alleged
omission of a material fact required to be stated therein or necessary to make
the statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto), in the light of the circumstances under which they were
made, not misleading, to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder or other Indemnified Party to the Company expressly for use therein
and that such information was reasonably relied upon by the Company for use
therein, or to the extent that such information relates to such Holder or such
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Holder's proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder expressly for use in
the Registration Statement, such Prospectus or such form of Prospectus or any
amendment or supplement thereto. Notwithstanding anything to the contrary
contained herein, the Holders shall be liable under this Section 5(b) for only
that amount as does not exceed the lesser of (i) the dollar amount of the net
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation and (ii) the aggregate purchase
price paid by the Holder for the Notes pursuant to the Purchase Agreement.
(c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an "Indemnified Party"), such Indemnified Party promptly shall notify the
Person from whom indemnity is sought (the "Indemnifying Party) in writing, and
the Indemnifying Party shall be entitled to assume the defense thereof,
including the employment of counsel reasonably satisfactory to the Indemnified
Party and the payment of all fees and expenses incurred in connection with
defense thereof; provided, that the failure of any Indemnified Party to give
such notice shall not relieve the Indemnifying Party of its obligations or
liabilities pursuant to this Agreement, except (and only) to the extent that it
shall be finally determined by a court of competent jurisdiction (which
determination is not subject to appeal or further review) that such failure
shall have proximately and materially adversely prejudiced the Indemnifying
Party.
An Indemnified Party shall have the right to employ separate counsel in
any such Proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party or
Parties unless: (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; or (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such parties shall have
been advised by counsel that a conflict of interest is likely to exist if the
same counsel were to represent such Indemnified Party and the Indemnifying Party
(in which case, if such Indemnified Party notifies the Indemnifying Party in
writing that it elects to employ separate counsel at the expense of the
Indemnifying Party, the Indemnifying Party shall not have the right to assume
the defense thereof and such counsel shall be at the expense of the Indemnifying
Party). The Indemnifying Party shall not be liable for any settlement of any
such Proceeding effected without its written consent, which consent shall not be
unreasonably withheld or delayed. No Indemnifying Party shall, without the prior
written consent of the Indemnified Party, effect any settlement of any pending
or threatened Proceeding in respect of which any Indemnified Party is a party
and indemnity has been sought hereunder, unless such settlement includes an
unconditional release of such Indemnified Party from all liability on claims
that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within ten (10)
Business Days of written notice thereof to the Indemnifying Party (regardless of
whether it is ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnified Party shall reimburse
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all such fees and expenses to the extent it is finally judicially determined
that such Indemnified Party is not entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section
5(a) or 5(b) is due but unavailable to an Indemnified Party because of a failure
or refusal of a governmental authority to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise), then each
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses, in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party and Indemnified Party in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such Indemnifying
Party and Indemnified Party shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission of a material fact,
has been taken or made by, or relates to information supplied by, such
Indemnifying, Party or Indemnified Party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action, statement or omission. The amount paid or payable by a party as a result
of any Losses shall be deemed to include, subject to the limitations set forth
in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses
incurred by such party in connection with any Proceeding to the extent such
party would have been indemnified for such fees or expenses if the
indemnification provided for in this Section was available to such party in
accordance with its terms.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation. Notwithstanding the
provisions of this Section 5(d) to the contrary, no Holder shall be required to
contribute, in the aggregate, the lesser of (i) the aggregate purchase price
paid by the Holder for the Notes pursuant to the Purchase Agreement, and (ii)
any amount in excess of the amount by which the net proceeds actually received
by such Holder from the sale of the Registrable Securities subject to the
Proceeding exceeds the amount of any damages that such Holder has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission, except in the case of fraud by such Holder.
The indemnity and contribution agreements contained in this Section are
in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties pursuant to the law.
6. Rule 144.
As long as any Holder owns Notes, Conversion Shares, Warrants or
Warrant Shares, the Company will use its best efforts to timely file (or obtain
extensions in respect thereof and file within the applicable grace period) all
reports required to be filed by the Company after the date hereof pursuant to
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Section 13(a) or 15(d) of the Exchange Act. As long as any Holder owns Notes,
Conversion Shares, Warrants or Warrant Shares, if the Company is not required to
file reports pursuant to Section 13(a) or 15(d) of the Exchange Act, it will use
its best efforts to prepare and furnish to the Holders and make publicly
available in accordance with Rule 144(c) promulgated under the Securities Act
annual and quarterly financial statements, together with a discussion and
analysis of such financial statements in form and substance substantially
similar to those that would otherwise be required to be included in reports
required by Section 13(a) or 15(d) of the Exchange Act, as well as any other
information required thereby, in the time period that such filings would have
been required to have been made under the Exchange Act. The Company further
covenants that it will take such further action as any Holder may reasonably
request, all to the extent required from time to time to enable such Person to
sell Conversion Shares and Warrant Shares without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144
promulgated under the Securities Act. In connection therewith , the Company
hereby confirms that the Holders will be entitled to "tacking" treatment for the
Amended Note and Amended Warrants and that on and after April 19, 2006, subject
to the Holder's providing customary non-affiliate or other representations ,the
Company will cause its counsel to instruct the Company's transfer agent to (i)
remove legends from shares issued upon conversion of the Notes or to (ii) issue
unlegended shares upon the Holder's requests for conversion, provided in both
cases that the volume, manner of sale and current public information and related
requirements of Rule 144 are satisfied. In addition, if the transfer agent
requires a written legal opinion to effect the Rule 144 sales, the Company will
cause its counsel to provide the transfer agent with such an opinion, subject to
compliance with the above-enumerated criteria. Upon the request of any Holder,
the Company shall deliver to such Holder a written certification of a duly
authorized officer as to whether it has complied with such requirements.
7. Miscellaneous.
(a) Remedies. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, such Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.
(b) No Inconsistent Agreements. Neither the Company nor any of
its subsidiaries has, as of the date hereof entered into and currently in
effect, nor shall the Company or any of its subsidiaries, on or after the date
of this Agreement, enter into any agreement with respect to its securities that
is inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. Except as disclosed in Schedule
2.1(c) of the Purchase Agreement or on Schedule II attached hereto, neither the
Company nor any of its subsidiaries has previously entered into any agreement
currently in effect granting any registration rights with respect to any of its
securities to any Person. Without limiting the generality of the foregoing,
without the written consent of the Holders of a majority of the then outstanding
Registrable Securities, the Company shall not grant to any Person the right to
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request the Company to register any securities of the Company under the
Securities Act unless the rights so granted are subject in all respects to the
prior rights in full of the Holders set forth herein, and are not otherwise in
conflict with the provisions of this Agreement.
(c) No Piggyback on Registrations. Neither the Company nor any
of its security holders (other than the Holders in such capacity pursuant hereto
or as disclosed in Schedule 2.1(c) of the Purchase Agreement or Schedule II
attached hereto) may include securities of the Company in the Registration
Statement, and the Company shall not after the date hereof enter into any
agreement providing such right to any of its securityholders, unless the right
so granted is subject in all respects to the prior rights in full of the Holders
set forth herein, and is not otherwise in conflict with the provisions of this
Agreement.
(d) Piggy-Back Registrations. If at any time when there is not
an effective Registration Statement covering (i) Conversion Shares or (ii)
Warrant Shares, the Company shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own account
or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, the Company shall send to each holder of Registrable Securities
written notice of such determination and, if within thirty (30) days after
receipt of such notice, or within such shorter period of time as may be
specified by the Company in such written notice as may be necessary for the
Company to comply with its obligations with respect to the timing of the filing
of such registration statement, any such holder shall so request in writing,
(which request shall specify the Registrable Securities intended to be disposed
of by the Holders), the Company will cause the registration under the Securities
Act of all Registrable Securities which the Company has been so requested to
register by the holder, to the extent requisite to permit the disposition of the
Registrable Securities so to be registered, provided that if at any time after
giving written notice of its intention to register any securities and prior to
the effective date of the registration statement filed in connection with such
registration, the Company shall determine for any reason not to register or to
delay registration of such securities, the Company may, at its election, give
written notice of such determination to such holder and, thereupon, (i) in the
case of a determination not to register, shall be relieved of its obligation to
register any Registrable Securities in connection with such registration (but
not from its obligation to pay expenses in accordance with Section 4 hereof),
and (ii) in the case of a determination to delay registering, shall be permitted
to delay registering any Registrable Securities being registered pursuant to
this Section 7(d) for the same period as the delay in registering such other
securities. The Company shall include in such registration statement all or any
part of such Registrable Securities such holder requests to be registered;
provided, however, that the Company shall not be required to register any
Registrable Securities pursuant to this Section 7(d) that are eligible for sale
pursuant to Rule 144(k) of the Securities Act. In the case of an underwritten
public offering, if the managing underwriter(s) or underwriter(s) should
reasonably object to the inclusion of the Registrable Securities in such
registration statement, then if the Company after consultation with the managing
underwriter should reasonably determine that the inclusion of such Registrable
Securities would materially adversely affect the offering contemplated in such
registration statement, and based on such determination recommends inclusion in
such registration statement of fewer or none of the Registrable Securities of
the Holders, then (x) the number of Registrable Securities of the Holders
included in such registration statement shall be reduced pro-rata among such
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Holders (based upon the number of Registrable Securities requested to be
included in the registration), if the Company after consultation with the
underwriter(s) recommends the inclusion of fewer Registrable Securities, or (y)
none of the Registrable Securities of the Holders shall be included in such
registration statement, if the Company after consultation with the
underwriter(s) recommends the inclusion of none of such Registrable Securities;
provided, however, that if Securities are being offered for the account of other
persons or entities as well as the Company, such reduction shall not represent a
greater fraction of the number of Registrable securities intended to be offered
by the Holders than the fraction of similar reductions imposed on such other
persons or entities (other than the Company).
(e) Failure to File Registration Statement and Other Events.
The Company and the Holders agree that the Holders will suffer damages if the
Registration Statement is not declared effective by the Commission on or prior
to November 1, 2006 and maintained in the manner contemplated herein during the
Effectiveness Period or if certain other events occur. The Company and the
Holders further agree that it would not be feasible to ascertain the extent of
such damages with precision. Accordingly, if, except as set forth in Section
3(n), (A) the Registration Statement is not declared effective by the Commission
on or prior to November 1, 2006 (or in the event an additional Registration
Statement is filed because the actual number of shares of Common Stock into
which the Notes are convertible and the Warrants are exercisable exceeds the
number of shares of Common Stock initially registered is not filed and declared
effective with the time periods set forth in Section 2), or (B) the Company
fails to file with the Commission a request for acceleration in accordance with
Rule 461 promulgated under the Securities Act within three (3) Business Days of
the date that the Company is notified (orally or in writing, whichever is
earlier) by the Commission that a Registration Statement will not be "reviewed,"
or is not subject to further review, or (C) the Registration Statement is filed
with and declared effective by the Commission but thereafter ceases to be
effective as to all Registrable Securities at any time prior to the expiration
of the Effectiveness Period, without being succeeded immediately by a subsequent
Registration Statement filed with and declared effective by the Commission in
accordance with Section 2 hereof or (D) the Company has breached Section 3(n),
or (E) trading in the Common Stock shall be suspended or if the Common Stock is
delisted from the American Stock Exchange (or other principal exchange on which
the Common Stock is traded) for any reason for more than three Business Days in
the aggregate (any such failure or breach being referred to as an "Event," and
for purposes of clause (A) the date on which such Event occurs, or for purposes
of clause (B) the date on which such three (3) Business Day period is exceeded,
or for purposes of clause (C) after more than twenty (20) Business Days, or for
purposes of clause (E) the date on which such three (3) Business Day period is
exceeded, being referred to as "Event Date"), the Company shall pay an amount as
liquidated damages to each Holder equal to 1.0% for each calendar month or
portion thereof of the Holder's initial investment in the Notes from the Event
Date, less any principal amount of the Notes that has been converted and sold by
such Holder, until the applicable Event is cured. Notwithstanding anything to
the contrary in this paragraph (e), if (I) any of the Events described in
clauses (A)or (B) shall have occurred, (II) on or prior to the applicable Event
Date, the Company shall have exercised its rights under Section 3(n) hereof and
(III) the postponement or suspension permitted pursuant to such Section 3(n)
shall remain effective as of such applicable Event Date, then the applicable
Event Date shall be deemed instead to occur on the second Business Day following
the termination of such postponement or suspension.
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(f) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of a majority of the Registrable Securities outstanding.
(g) 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 by facsimile 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 with respect
to each Holder at its address set forth under its name on Schedule I attached
hereto, or with respect to the Company, addressed to:
AXM Pharma, Inc.
▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇. ▇▇▇▇▇ ▇▇▇,
▇▇▇▇ ▇▇ ▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇.
Attention: ▇▇▇▇▇ ▇▇▇▇▇, CFO
Tel. No.: (▇▇▇) ▇▇▇-▇▇▇▇
Fax No.: (▇▇▇) ▇▇▇-▇▇▇▇
With a copy to: ▇▇▇▇ ▇▇▇▇, P.C.
▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Tel. No.: (▇▇▇) ▇▇▇-▇▇▇▇
Fax No.: (▇▇▇) ▇▇▇-▇▇▇▇
or to such other address or addresses or facsimile number or numbers as any such
party may most recently have designated in writing to the other parties hereto
by such notice.
(h) Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their successors and permitted
assigns and shall inure to the benefit of each Holder and its successors and
assigns. The Company may not assign this Agreement or any of its rights or
obligations hereunder without the prior written consent of each Holder. Each
Holder may assign its rights hereunder in the manner and to the Persons as
permitted under the Purchase Agreement.
(i) Assignment of Registration Rights. The rights of each
Holder hereunder, including the right to have the Company register for resale
Registrable Securities in accordance with the terms of this Agreement, shall be
automatically assignable by each Holder to any Affiliate of such Holder or any
other Holder or Affiliate of any other Holder of all or a portion of the Notes
or the Registrable Securities if: (i) the Holder agrees in writing with the
transferee or assignee to assign such rights, and a copy of such agreement is
furnished to the Company within a reasonable time after such assignment, (ii)
the Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of (a) the name and address of such transferee or
assignee, and (b) the securities with respect to which such registration rights
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are being transferred or assigned, (iii) following such transfer or assignment
the further disposition of such securities by the transferee or assignees is
restricted under the Securities Act and applicable state securities laws, (iv)
at or before the time the Company receives the written notice contemplated by
clause (ii) of this Section, the transferee or assignee agrees in writing with
the Company to be bound by all of the provisions of this Agreement, and (v) such
transfer shall have been made in accordance with the applicable requirements of
the Purchase Agreement. In addition, each Holder shall have the right to assign
its rights hereunder to any other Person with the prior written consent of the
Company, which consent shall not be unreasonably withheld provided that such
assignment shall be in accordance with applicable securities laws. The rights to
assignment shall apply to the Holders (and to subsequent) successors and
assigns.
(j) Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement. In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile signature were the original
thereof.
(k) Governing Law. This Agreement 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 Agreement
shall not be interpreted or construed with any presumption against the party
causing this Agreement to be drafted.
(l) Cumulative Remedies. The remedies provided herein are
cumulative and not exclusive of any remedies provided by law.
(m) Severability. If any term, provision, covenant or
restriction of this Agreement is held to be invalid, illegal, void or
unenforceable in any respect, the remainder of the terms, provisions, covenants
and restrictions set forth herein shall remain in full force and effect and
shall in no way be affected, impaired or invalidated, and the parties hereto
shall use their reasonable efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
(n) Headings. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
(o) Shares Held by the Company and its Affiliates. Whenever
the consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than any Holder or transferees or successors or assigns
thereof if such Holder is deemed to be an Affiliate solely by reason of its
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
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(p) Company's 2005 Registration Rights Agreement. The parties
hereby terminate the 2005 Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be duly executed by their respective authorized persons as
of the date first indicated above.
AXM PHARMA, INC.
By:_____________________________________
Name:
Title:
HOLDER
By:_____________________________________
Name:
Title:
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Schedule I
Holders
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Schedule II
Securities Permitted to be Included on the Registration Statement
1. Shares of Common Stock issuable upon the exercise of warrants issued to the
placement agent and its designees in connection with the transactions
contemplated by the Purchase Agreement, the August, 2005 financing or the
Modification Agreement entered into between the parties hereto .
2. [350,000] shares of Common stock held by Madden Consulting, Inc.
3. 350,000 shares of Common Stock granted to Newbridge Securities Corporation
(250,000 of which represent shares underlying warrants).
4. 25,000 shares of Common Stock granted to ▇▇▇▇▇▇▇▇ Consulting Group, Inc.
5. 105,926 shares of Common Stock representing the dividends distributed to
the Company's Series C shareholders on January 19, 2005; 125% of the
dividends due and payable on June 24, 2005; and any subsequent dividends
that may be payable in shares of Common Stock to the Company's Series C
shareholders.
6. Shares issuable to ▇▇▇▇ ▇▇▇▇, P.C., for legal services rendered to the
Company, pursuant to a Convertible Note in the principal amount of
approximately $60,000.
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