CONVERTIBLE NOTE DUE AUGUST 11, 2010 OF NETSOL TECHNOLOGIES, INC.
NEITHER
THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
THIS
NOTE DOES NOT REQUIRE PHYSICAL SURRENDER OF THE NOTE IN THE EVENT OF A PARTIAL
REDEMPTION OR CONVERSION. AS A RESULT, FOLLOWING ANY REDEMPTION OR
CONVERSION OF ANY PORTION OF THIS NOTE, THE OUTSTANDING PRINCIPAL AMOUNT
REPRESENTED BY THIS NOTE MAY BE LESS THAN THE PRINCIPAL AMOUNT AND ACCRUED
INTEREST SET FORTH BELOW.
CONVERTIBLE NOTE DUE AUGUST
11, 2010
OF
NETSOL TECHNOLOGIES,
INC.
This
Note (“Note”) is one of a duly
authorized issue of Notes of NETSOL TECHNOLOGIES,
INC., a corporation duly organized and existing under the laws of the
State of Nevada (the “Company”), designated as the
Company's Convertible Notes Due August 11, 2010 (as may be extended pursuant to
the terms hereof, the “Maturity
Date”) in an aggregate principal amount (when taken together with the
original principal amounts of all other Notes) which does not exceed Two Million
U.S. Dollars (U.S. $2,000,000) (the “Notes”).
For
Value Received, the
Company hereby promises to pay to the order of THE TAIL WIND FUND LTD. or its registered
assigns or successors-in-interest (“Holder”) the principal sum of
One Million Eight Hundred Thousand Dollars (U.S. $1,800,000), together with all
accrued but unpaid interest thereon, if any, on the Maturity Date, to the extent
such principal amount and interest has not been repaid or converted into the
Company's Common Stock, $0.001 par value per share (the “Common Stock”), in accordance
with the terms hereof. Interest on the unpaid principal balance
hereof shall accrue at the rate of 9% per annum from the date of original
issuance hereof (the “Issuance
Date”) until the same becomes due and payable on the Maturity Date, or
such earlier date upon acceleration or by conversion or redemption in accordance
with the terms hereof or of the other Agreements. Interest on this
Note shall accrue daily commencing on the Issuance Date and shall be computed on
the basis of a 360-day year, 30-day months and actual days elapsed and shall be
payable in accordance with Section 1 hereof. Notwithstanding anything
contained herein, this Note shall bear interest on the due and unpaid Principal
Amount from and after the occurrence and during the continuance of an Event of
Default pursuant to Section 4(a) at the rate (the “Default Rate”) equal to the
lower of eighteen (18%) per annum or the highest rate permitted by
law. Unless otherwise agreed or required by applicable law, payments
will be applied first to any unpaid collection costs, then to unpaid interest
and fees and any remaining amount to principal.
All
payments of principal and interest on this Note shall be made in lawful money of
the United States of America by wire transfer of immediately available funds to
such account as the Holder may from time to time designate by written notice in
accordance with the provisions of this Note or by Company check. This
Note may not be prepaid in whole or in part except as otherwise provided
herein. Whenever any amount expressed to be due by the terms of this
Note is due on any day which is not a Business Day (as defined below), the same
shall instead be due on the next succeeding day which is a Business
Day.
Capitalized
terms used herein and not otherwise defined shall have the meanings set forth in
the Purchase Agreement dated on or about the Issuance Date pursuant to which the
Notes were originally issued (the “Purchase Agreement”). For
purposes hereof the following terms shall have the meanings ascribed to them
below:
“Bankruptcy
Event” means any of the following events: (a) the Company or any
subsidiary commences a case or other proceeding under any bankruptcy,
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction relating to the
Company or any subsidiary thereof; (b) there is commenced against the Company or
any subsidiary any such case or proceeding that is not dismissed within 60 days
after commencement; (c) the Company or any subsidiary is adjudicated insolvent
or bankrupt or any order of relief or other order approving any such case or
proceeding is entered; (d) the Company or any subsidiary suffers any appointment
of any custodian or the like for it or any substantial part of its property that
is not discharged or stayed within 60 days; (e) the Company or any subsidiary
makes a general assignment for the benefit of creditors; (f) the Company or any
subsidiary fails to pay, or states that it is unable to pay or is unable to pay,
its debts generally as they become due; (g) the Company or any subsidiary calls
a meeting of its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (h) the Company or any subsidiary, by any act or
failure to act, expressly indicates its consent to, approval of or acquiescence
in any of the foregoing or takes any corporate or other action for the purpose
of effecting any of the foregoing.
“Business
Day” shall mean any day other than a Saturday, Sunday or a day on which
commercial banks in the City of New York are authorized or required by law or
executive order to remain closed.
“Change in Control
Transaction” will be deemed to exist if (i) there occurs any
consolidation, merger or other business combination of the Company with or into
any other corporation or other entity or person (whether or not the Company is
the surviving corporation), or any other corporate reorganization or transaction
or series of related transactions in which in any of such events the voting
stockholders of the Company prior to such event cease to own 50% or more of the
voting power, or corresponding voting equity interests, of the surviving
corporation after such event (including without limitation any “going private”
transaction under Rule 13e-3 promulgated pursuant to the Exchange Act or tender
offer by the Company under Rule 13e-4 promulgated pursuant to the Exchange Act
for 20% or more of the Company's Common Stock), (ii) any person (as defined in
Section 13(d) of the Exchange Act), together with its affiliates and associates
(as such terms are defined in Rule 405 under the Act), beneficially owns or is
deemed to beneficially own (as described in Rule 13d-3 under the Exchange Act
without regard to the 60-day exercise period) in excess of 35% of the Company's
voting power, (iii) there is a replacement of more than one-half of the members
of the Company’s Board of Directors which is not approved by those individuals
who are members of the Company's Board of Directors on the date thereof, (iv) in
one or a series of related transactions, there is a sale or transfer of all or
substantially all of the assets of the Company, determined on a consolidated
basis, or (v) the Company enters into any agreement providing for an event set
forth in (i), (ii), (iii) or (iv) above.
2
“Conversion
Ratio” means, at any time, a fraction, of which the numerator is the
entire outstanding Principal Amount of this Note (or such portion thereof that
is being redeemed or repurchased), and of which the denominator is the
Conversion Price as of the date such ratio is being determined.
“Conversion
Price” shall equal $0.63 (which Conversion Price shall be subject to
adjustment as set forth herein).
“Convertible
Securities” means any convertible securities, warrants, options or other
rights to subscribe for or to purchase or exchange for, shares of Common
Stock.
“Effective
Date” means the date on which a Registration Statement covering all the
Underlying Shares and other Registrable Securities (as defined in the Investor
Rights Agreement) is declared effective by the SEC.
“Eligible
Market” means the Nasdaq Stock Market, the New York Stock Exchange or the
American Stock Exchange.
“Exchange
Act” shall mean the Securities Exchange Act of 1934, as
amended.
“Market
Price” shall equal the average of the daily VWAPs over the ten (10)
consecutive Trading Days immediately preceding the date on which the Market
Price is being determined.
“MFN
Transaction” shall mean a transaction in which the Company issues or
sells any securities in a capital raising transaction or series of related
transactions (the “MFN
Offering”) which grants to the investor (the “MFN Investor”) the right to
receive additional securities based upon future capital raising transactions of
the Company on terms more favorable than those granted to the MFN Investor in
the MFN Offering.
“Payment
Date” shall mean each October 1, 2009, January 1, 2010, March 1, 2010 and
July 1, 2010, provided that if any such day is not a Trading Day, then such
Payment Date shall mean the next succeeding day which is a Trading
Day.
3
“Per Share Selling
Price” shall include the amount actually paid by third parties for each
share of Common Stock in a sale or issuance by the Company, after the deduction
of all expenses incurred in connection therewith. In the event a fee
is paid by the Company in connection with such transaction directly or
indirectly to any individual or entity, any such fee shall be deducted from the
selling price pro rata to all shares sold in the transaction to arrive at the
Per Share Selling Price. A sale of shares of Common Stock shall
include the sale or issuance of Convertible Securities, and in such
circumstances the Per Share Selling Price of the Common Stock covered thereby
shall also include the exercise, exchange or conversion price thereof (in
addition to the consideration received by the Company upon such sale or issuance
less the fee amount as provided above). In case of any such security
issued in a transaction in which the purchase price or the conversion, exchange
or exercise price is directly or indirectly subject to adjustment or reset based
on a future date, future trading prices of the Common Stock, specified or
contingent events directly or indirectly related to the business of the Company
or the market for the Common Stock, or otherwise (but excluding standard stock
split anti-dilution provisions or weighted-average anti-dilution provisions
similar to that set forth herein, provided that any actual reduction of such
price under any such security pursuant to such weighted-average anti-dilution
provision shall be included and cause a adjustment hereunder), the Per Share
Selling Price shall be deemed to be the lowest conversion, exchange, exercise or
reset price at which such securities are converted, exchanged, exercised or
reset or might have been converted, exchanged, exercised or reset, or the lowest
adjustment, as the case may be, over the life of such securities. If
shares are issued for a consideration other than cash, the Per Share Selling
Price shall be the fair value of such consideration as determined in good faith
by independent certified public accountants mutually acceptable to the Company
and the Holder. In the event the Company directly or indirectly
effectively reduces the conversion, exercise or exchange price for any
Convertible Securities which are currently outstanding, then the Per Share
Selling Price shall equal such effectively reduced conversion, exercise or
exchange price.
“Principal
Amount” shall refer to the sum of (i) the original principal amount of
this Note, (ii) all accrued but unpaid interest hereunder, and (iii) any default
payments owing under the Agreements but not previously paid or added to the
Principal Amount.
“Principal
Market” shall mean the Nasdaq Stock Market or such other principal market
or exchange on which the Common Stock is then listed for trading.
“Registration
Statement” shall have the meaning set forth in the Investor Rights
Agreement.
“Securities
Act” shall mean the Securities Act of 1933, as amended.
“Trading
Day” shall mean a day on which there is trading on the Principal
Market.
“Underlying
Shares” means the shares of Common Stock into which the Notes are
convertible (including interest or principal payments in Common Stock as set
forth herein) in accordance with the terms hereof and the Purchase
Agreement.
“Variable Rate
Transaction” shall mean a transaction in which the Company issues or
sells, or agrees to issue or sell (a) any debt or equity securities that are
convertible into, exchangeable or exercisable for, or include the right to
receive additional shares of, Common Stock either (x) at a conversion, exercise
or exchange rate or other price that is based upon and/or varies with the
trading prices of or quotations for the Common Stock at any time after the
initial issuance of such debt or equity securities, (y) with a fixed conversion,
exercise or exchange price that is subject to being reset at some future date
after the initial issuance of such debt or equity security or upon the
occurrence of specified or contingent events directly or indirectly related to
the business of the Company or the market for the Common Stock (but excluding
standard stock split anti-dilution provisions), or (z) under a warrant
exercisable for a number of shares based upon and/or varying with the trading
prices of or quotations for the Common Stock at any time after the initial
issuance of such warrant, or (b) any securities of the Company pursuant to an
“equity line” structure which provides for the sale, from time to time, of
securities of the Company which are registered for sale or resale pursuant to
the Securities Act (which for the purpose of this definition shall include a
sale of the Company’s securities “off the shelf” in a registered offering,
whether or not such offering is underwritten).
4
“VWAP”
shall mean the daily dollar volume-weighted average sale price for the Common
Stock on the Principal Market on any particular Trading Day during the period
beginning at 9:30 a.m., New York City Time (or such other time as the Principal
Market publicly announces is the official open of trading), and ending at 4:00
p.m., New York City Time (or such other time as the Principal Market publicly
announces is the official close of trading), as reported by Bloomberg through
its "Volume at Price" functions or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on
the electronic bulletin board for such security during the period beginning at
9:30 a.m., New York City Time (or such other time as the Principal Market
publicly announces is the official open of trading), and ending at 4:00 p.m.,
New York City Time (or such other time as the Principal Market publicly
announces is the official close of trading), as reported by Bloomberg, or, if no
dollar volume-weighted average price is reported for such security by Bloomberg
for such hours, the average of the highest closing bid price and the lowest
closing ask price of any of the market makers for such security as reported in
the "pink sheets" by the National Quotation Bureau, Inc. If the VWAP
cannot be calculated for such security on such date on any of the foregoing
bases, the VWAP of such security on such date shall be the fair market value as
mutually determined by the Company and the holders of at least a majority of the
aggregate Principal Amount outstanding under the Notes. All such
determinations of VWAP shall to be appropriately and equitably adjusted in
accordance with the provisions set forth herein for any stock dividend, stock
split, stock combination or other similar transaction occurring during any
period used to determine the Conversion Price or Market Price (or other period
utilizing VWAPs).
The
following terms and conditions shall apply to this Note:
Section 1.
Payments of Principal
and Interest.
(a) Interest Only
Payments. On each Payment Date and on the Maturity Date, the
Company shall pay in cash to the Holder all interest accrued but unpaid to date
on the entire Principal Amount of this Note (“Interest
Amount”).
(b) Certain Additional Payments by the
Company. Any payment by the Company to the Holder hereunder,
whether for principal, interest or otherwise, shall not be subject to any
deduction, withholding or offset for any reason whatsoever except to the extent
required by law, and the Company represents that to its best knowledge no
deduction, withholding or offset is so required for any tax or any other
reason. Notwithstanding any term or provision of this Note to the
contrary, if it shall be determined that any payment by the Company to or for
the benefit of the Holder (whether for principal, interest or otherwise and
whether paid or payable or distributed or distributable, actual or deemed,
pursuant to the terms of this Note or otherwise) (a “Payment”) would be or is
subject to any deduction, withholding or offset due to any duty or tax (such
duty or tax, together with any interest and/or penalties related thereto,
hereinafter collectively referred to as the “Payment Tax”), then the Company
shall, in addition to all sums otherwise payable hereunder, pay to the Holder an
additional payment (a “Gross-Up Payment”) in an amount such that after all such
Payment Taxes (whether by deduction, withholding, offset or payment) (including
any interest or penalties with respect to such taxes), including without
limitation any Payment Taxes (and any interest and penalties imposed with
respect thereto) imposed upon any Gross-Up Payment, Holder actually receives an
amount of Gross-Up Payment equal to the Payment Tax imposed upon the Payment
(i.e., the Holder receives a net amount equal to the Payment).
5
(c) Maturity Date. The
Maturity Date hereunder shall be automatically extended until the date which is
to two (2) years following the initial Maturity Date, unless prior to such
initial Maturity Date either the Holder or the Company sends written notice to
the other party electing not to so extend the Maturity Date.
Section
2. Senior
Debt. So long as any
Principal Amount of Notes is outstanding, the Company and its subsidiaries shall
not directly or indirectly, without the affirmative vote of the holders of at
least 75% of the outstanding Principal Amount of the Notes then outstanding,
incur or permit to exist additional indebtedness which is senior to the Notes,
or incur, assume or permit to exist any lien, mortgage, security interest or
encumbrance (other than statutory liens imposed by law incurred in the ordinary
course of business for sums not yet delinquent or being contested in good faith,
if such reserve or other appropriate provision, if any, as shall be required by
GAAP shall have been made in respect thereof) on any of its assets, except for
capital leases, financing for equipment and purchase money security
interests.
Section
3. Conversion.
(a) Conversion
Right. Subject to the terms hereof and restrictions and
limitations contained herein, the Holder shall have the right, at such Holder's
option, at any time and from time to time, to convert the outstanding Principal
Amount under this Note in whole or in part by delivering to the Company a fully
executed notice of conversion in the form of conversion notice attached hereto
as Exhibit A
(the “Conversion
Notice”), which may be transmitted by
facsimile. Notwithstanding anything to the contrary herein, this Note
and the outstanding Principal Amount hereunder shall not be convertible into
Common Stock to the extent that such conversion would result in the Holder
hereof exceeding the limitations contained in, or otherwise violating the
provisions of, Section 3(i) below.
(b) Common Stock Issuance upon
Conversion.
(i) Conversion Date
Procedures. Upon conversion of this Note pursuant to Section
3(a) above, the outstanding Principal Amount hereunder shall be converted into
such number of fully paid, validly issued and non-assessable shares of Common
Stock, free of any liens, claims and encumbrances, as is determined by dividing
the outstanding Principal Amount being converted by the then applicable
Conversion Price. The date of any Conversion Notice hereunder and any
Payment Date shall be referred to herein as the “Conversion
Date”. If a conversion under this Note cannot be effected in
full for any reason, or if the Holder is converting less than all of the
outstanding Principal Amount hereunder pursuant to a Conversion Notice, the
Company shall promptly deliver to the Holder (but no later than five Trading
Days after the Conversion Date) a Note for such outstanding Principal Amount as
has not been converted if this Note has been surrendered to the Company for
partial conversion. The Holder shall not be required to physically
surrender this Note to the Company upon any conversion or hereunder unless the
full outstanding Principal ▇▇▇▇▇▇ represented by this Note is being converted or
repaid. The Holder and the Company shall maintain records showing the
outstanding Principal Amount so converted and repaid and the dates of such
conversions or repayments or shall use such other method, reasonably
satisfactory to the Holder and the Company, so as not to require physical
surrender of this Note upon each such conversion or repayment.
6
(ii) Stock Certificates or
DWAC. The Company will deliver to the Holder not later than
three (3) Trading Days after the Conversion Date, a certificate or certificates
(which shall be free of restrictive legends and trading restrictions if a
Registration Statement has been declared effective covering such shares or such
shares may be resold pursuant to Rule 144), representing the number of shares of
Common Stock being acquired upon the conversion of this Note. In lieu
of delivering physical certificates representing the shares of Common Stock
issuable upon conversion of this Note, provided the Company's transfer agent is
participating in the Depository Trust Company (“DTC”) Fast Automated
Securities Transfer (“FAST”) program, upon request
of the Holder, the Company shall use commercially reasonable efforts to cause
its transfer agent to electronically transmit such shares issuable upon
conversion to the Holder (or its designee), by crediting the account of the
Holder’s (or such designee’s) prime broker with DTC through its Deposit
Withdrawal Agent Commission system (provided that the same time periods herein
as for stock certificates shall apply). If in the case of any
conversion hereunder, such certificate or certificates are not delivered to or
as directed by the Holder by the third Trading Day after the Conversion Date,
the Holder shall be entitled by written notice to the Company at any time on or
before its receipt of such certificate or certificates thereafter, to rescind
such conversion, in which event the Company shall immediately return this Note
tendered for conversion. If the Company fails to deliver to the
Holder such certificate or certificates (or shares through DTC) pursuant to this
Section 3(b) (free of any restrictions on transfer or legends, if such shares
have been registered) in accordance herewith, prior to the sixth Trading Day
after the Conversion Date, the Company shall pay to the Holder, in cash, an
amount equal to 1% of the Principal Amount per month.
(c) Conversion Price
Adjustments.
(i) Stock Dividends, Splits and
Combinations. If the Company or any of its subsidiaries, at
any time while the Notes are outstanding (A) shall pay a stock dividend or
otherwise make a distribution or distributions on any equity securities
(including instruments or securities convertible into or exchangeable for such
equity securities) in shares of Common Stock, (B) subdivide outstanding Common
Stock into a larger number of shares, or (C) combine outstanding Common Stock
into a smaller number of shares, then each Affected Conversion Price (as defined
below) shall be multiplied by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding before such event and the
denominator of which shall be the number of shares of Common Stock outstanding
after such event. Any adjustment made pursuant to this Section
3(c)(i) shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision or combination.
7
As used
herein, the Affected Conversion Prices (each an “Affected Conversion Price”)
shall refer to: (i) the Conversion Price; and (ii) each reported VWAP
occurring on any Trading Day included in the period used for determining the
Market Price or Conversion Price, as the case may be, which Trading Day occurred
before the record date in the case of events referred to in clause (A) of this
subparagraph 3(c)(i) and before the effective date in the case of the events
referred to in clauses (B) and (C) of this subparagraph 3(c)(i).
(ii) Distributions. If
the Company or any of its subsidiaries, at any time while the Notes are
outstanding, shall distribute to all holders of Common Stock evidences of its
indebtedness or assets or cash or rights or warrants to subscribe for or
purchase any security of the Company or any of its subsidiaries (excluding those
referred to in Section 3(c)(i) above), then concurrently with such distributions
to holders of Common Stock in each such case the Conversion Price shall be
adjusted by multiplying such Conversion Price in effect immediately prior to the
record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the VWAP determined
as of the record date mentioned above, and of which the numerator shall be such
VWAP on such record date less the then fair market value at such record date of
the portion of such assets, rights or evidence of indebtedness so distributed
applicable to 1 outstanding share of the Common Stock as determined in good
faith by the Company and a majority-in-interest of Holders of
Notes. In either case the adjustments shall be described in a
statement delivered to the Holder describing the portion of assets, rights or
evidences of indebtedness so distributed or such subscription rights applicable
to 1 share of Common Stock. Such adjustment shall be made whenever
any such distribution is made and shall become effective immediately after the
record date mentioned above. If the Company and Holders of Notes are
unable to agree upon the determination of the fair market value of such assets,
rights or evidence of indebtedness so distributed, then the Company shall
promptly submit (via email or facsimile) such disputed determination or
calculation to a reputable investment bank or valuation company which shall be
independent of all parties and selected jointly by the Company and a
majority-in-interest of Holders of Notes.
(iii) Common Stock
Issuances. In the event that the Company or any of its
subsidiaries (A) issues or sells any Common Stock or Convertible Securities, or
(B) directly or indirectly effectively reduces the conversion, exercise or
exchange price for any Convertible Securities which are currently outstanding
(other than pursuant to terms existing on the date hereof), at or to an
effective Per Share Selling Price which is less than the greater of (I)
the closing sale price per share of the Common Stock on the principal market on
which the Common Stock is traded the Trading Day next preceding such issue or
sale or, in the case of issuances to holders of its Common Stock, the date fixed
for the determination of stockholders entitled to receive such warrants, rights,
or options (“Fair Market
Price”), or (II) the
Conversion Price, then in each such case the Conversion Price in effect
immediately prior to such issue or sale or record date, as applicable, shall be
automatically reduced effective concurrently with such issue or sale to an
amount determined by multiplying the Conversion Price then in effect by a
fraction, (x) the numerator of which shall be the sum of (1) the number of
shares of Common Stock outstanding immediately prior to such issue or sale, plus
(2) the number of shares of Common Stock which the aggregate consideration
received by the Company for such additional shares would purchase at such Fair
Market Price or Conversion Price, as the case may be, and (y) the denominator of
which shall be the number of shares of Common Stock of the Company outstanding
immediately after such issue or sale.
8
The foregoing provision shall not apply
to any issuances or sales of Common Stock or Convertible Securities (i) pursuant
to any Convertible Securities currently outstanding on the date hereof in
accordance with the terms of such Convertible Securities in effect on the date
hereof, or (ii) to any officer, director or employee of the Company pursuant to
a bona fide option or equity incentive plan duly adopted by the
Company. The Company shall give to the each Holder of Notes written
notice of any such sale of Common Stock within 24 hours of the closing of any
such sale and shall within such 24 hour period issue a press release announcing
such sale if such sale is a material event for, or otherwise material to, the
Company.
For the purposes of the foregoing
adjustments, in the case of the issuance of any Convertible Securities, the
maximum number of shares of Common Stock issuable upon exercise, exchange or
conversion of such Convertible Securities shall be deemed to be
outstanding.
For purposes of this Section 3(c)(iii),
if an event occurs that triggers more than one of the above adjustment
provisions, then only one adjustment shall be made and the calculation method
which yields the greatest downward adjustment in the Conversion Price shall be
used.
(iv) Rounding of Adjustments. All calculations under
this Section 3 or Section 1 shall be made to the nearest cent or the nearest
1/100th of a share, as the case may be.
(v) Notice of Adjustments. Whenever any Affected
Conversion Price is adjusted pursuant to Section 3(c)(i), (ii) or (iii) above,
the Company shall promptly deliver to each holder of the Notes, a notice setting
forth the Affected Conversion Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment, provided that any
failure to so provide such notice shall not affect the automatic adjustment
hereunder.
(vi) Change in Control
Transactions. In case of any Change in Control Transaction,
the Holder shall have the right thereafter to, at its option, (A) convert this
Note, in whole or in part, at the lower of the Conversion Price and the then applicable Market
Price into the shares of stock and other securities, cash and/or property
receivable upon or deemed to be held by holders of Common Stock following such
Change in Control Transaction, and the Holder shall be entitled upon such event
to receive such amount of securities, cash or property as the shares of the
Common Stock of the Company into which this Note could have been converted
immediately prior to such Change in Control Transaction would have been entitled
if such conversion were permitted, subject to such further applicable
adjustments set forth in this Section 3 or (B) require the Company or its
successor to redeem this Note, in whole or in part, at a redemption price equal
to the greater of (i) 125% of the outstanding Principal Amount being redeemed
and (ii) the product of (x) the average of the Fair Market Price for the five
(5) Trading Days immediately preceding the Holder's election to have its Notes
redeemed and (y) the Conversion Ratio. The terms of any such Change
in Control Transaction shall include such terms so as to continue to give to the
Holders the right to receive the amount of securities, cash and/or property upon
any conversion or redemption following such Change in Control Transaction to
which a holder of the number of shares of Common Stock deliverable upon such
conversion would have been entitled in such Change in Control Transaction, and
interest payable hereunder shall be in cash or such new securities and/or
property, at the Holder’s option. This provision shall similarly
apply to successive reclassifications, consolidations, mergers, sales, transfers
or share exchanges.
9
(vii) Notice of Certain
Events. If:
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A.
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the
Company shall declare a dividend (or any other distribution) on its Common
Stock; or
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B.
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the
Company shall declare a special nonrecurring cash dividend on or a
redemption of its Common Stock; or
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C.
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the
Company shall authorize the granting to all holders of the Common Stock
rights or warrants to subscribe for or purchase any shares of capital
stock of any class or of any rights;
or
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D.
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the
approval of any stockholders of the Company shall be required in
connection with any reclassification of the Common Stock of the Company,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, of any
compulsory share of exchange whereby the Common Stock is converted into
other securities, cash or property;
or
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E.
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the
Company shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the
Company;
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then the
Company shall cause to be filed at each office or agency maintained for the
purpose of conversion of this Note, and shall cause to be mailed to the Holder
at its last address as it shall appear upon the books of the Company, on or
prior to the date notice to the Company's stockholders generally is given, a
notice stating (x) the date on which a record is to be taken for the purpose of
such dividend, distribution, redemption, rights or warrants, or if a record is
not to be taken, the date as of which the holders of Common Stock of record to
be entitled to such dividend, distributions, redemption, rights or warrants are
to be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange.
(d) Reservation and Issuance of
Underlying Securities. The Company covenants that it will at
all times reserve and keep available out of its authorized and unissued Common
Stock solely for the purpose of issuance upon conversion of this Note (including
repayments in stock), free from preemptive rights or any other actual contingent
purchase rights of persons other than the holders of the Notes, not less than
such number of shares of Common Stock as shall (subject to any additional
requirements of the Company as to reservation of such shares set forth in the
Purchase Agreement) be issuable (taking into account the adjustments under this
Section 3 but without regard to any ownership limitations contained herein) upon
the conversion of this Note hereunder in Common Stock (including repayments in
stock). The Company covenants that all shares of Common Stock that
shall be so issuable shall, upon issue, be duly authorized, validly issued,
fully paid, nonassessable and freely tradeable.
10
(e) No
Fractions. Upon a conversion hereunder the Company shall not
be required to issue stock certificates representing fractions of shares of
Common Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the closing price of a share of Common
Stock at such time. If the Company elects not, or is unable, to make
such a cash payment, the Holder shall be entitled to receive, in lieu of the
final fraction of a share, one whole share of Common Stock.
(f) Charges, Taxes and
Expenses. Issuance of certificates for shares of Common Stock
upon the conversion of this Note (including repayment in stock) shall be made
without charge to the holder hereof for any issue or transfer tax or other
incidental expense in respect of the issuance of such certificate, all of which
taxes and expenses shall be paid by the Company, and such certificates shall be
issued in the name of the Holder or in such name or names as may be directed by
the Holder; provided, however, that in the
event certificates for shares of Common Stock are to be issued in a name other
than the name of the Holder, this Note when surrendered for conversion shall be
accompanied by an assignment form; and provided further, that the
Company shall not be required to pay any tax or taxes which may be payable in
respect of any such transfer.
(g) Cancellation. After
all of the Principal Amount (including accrued but unpaid interest and default
payments at any time owed on this Note) have been paid in full or converted into
Common Stock, this Note shall automatically be deemed canceled and the Holder
shall promptly surrender the Note to the Company at the Company’s principal
executive offices.
(h) Notices
Procedures. Any and all notices or other communications or
deliveries to be provided by the Holder hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by confirmed facsimile, or by a nationally recognized overnight courier service
to the Company at the facsimile telephone number or address of the principal
place of business of the Company as set forth in the Purchase
Agreement. Any and all notices or other communications or deliveries
to be provided by the Company hereunder shall be in writing and delivered
personally, by facsimile, or by a nationally recognized overnight courier
service addressed to the Holder at the facsimile telephone number or address of
the Holder appearing on the books of the Company, or if no such facsimile
telephone number or address appears, at the principal place of business of the
Holder. Any notice or other communication or deliveries hereunder
shall be deemed delivered (i) upon receipt, when delivered personally, (ii) when
sent by facsimile, upon receipt if received on a Business Day prior to 5:00 p.m.
(Eastern Time), or on the first Business Day following such receipt if received
on a Business Day after 5:00 p.m. (Eastern Time) or (iii) upon receipt, when
deposited with a nationally recognized overnight courier service.
(i) Conversion
Limitation.
(i) Beneficial Ownership
Cap. Notwithstanding anything to the contrary contained
herein, the number of shares of Common Stock that may be acquired by the Holder
upon conversion pursuant to the terms hereof shall not exceed a number that,
when added to the total number of shares of Common Stock deemed beneficially
owned by such Holder (other than by virtue of the ownership of securities or
rights to acquire securities (including the Notes) that have limitations on the
Holder’s right to convert, exercise or purchase similar to the limitation set
forth herein), together with all shares of Common Stock deemed beneficially
owned at such time (other than by virtue of the ownership of securities or
rights to acquire securities that have limitations on the right to convert,
exercise or purchase similar to the limitation set forth herein) by the holder’s
“affiliates” at such time (as defined in Rule 144 of the Act) (“Aggregation Parties”) that
would be aggregated for purposes of determining whether a group under Section
13(d) of the Securities Exchange Act of 1934 as amended, exists, would exceed
9.9% of the total issued and outstanding shares of the Common Stock (the “Restricted Ownership
Percentage”). Each holder shall have the right (w) at any time
and from time to time to reduce its Restricted Ownership Percentage immediately
upon notice to the Company and (x) (subject to waiver) at any time and from time
to time, to increase its Restricted Ownership Percentage immediately in the
event of the announcement as pending or planned, of a Change in Control
Transaction.
11
(ii) Overall Limit on Common Stock
Issuable. Notwithstanding anything herein or in the other
Notes to the contrary, if the Company has not obtained Shareholder Approval (as
defined below), then the Company may not issue, upon conversion of the Notes, a
number of shares of Common Stock in excess of the amount of shares of Common
Stock which may be issued upon conversion of the Notes (the “Issuable Maximum”) without
causing the Company to breach its obligations under the rules or regulations of
the Nasdaq Stock Market (including without limitation Section 5635(d) of the
NASDAQ Stock Market Rules). Each Holder of Notes shall be entitled to
a portion of the Issuable Maximum equal to the quotient obtained by dividing (x)
the aggregate principal amount of the Notes issued and sold to such Holder by
(y) the aggregate principal amount of all Notes issued and sold by the
Company. If any Holder shall no longer hold any Notes, then such
Holder’s remaining portion of the Issuable Maximum, if any, shall be reallocated
pro-rata among the other Holders. “Shareholder Approval” means
approval by the shareholders of the Company, in accordance with the applicable
rules and regulations of the Nasdaq Stock Market (including without limitation
Section 5635(e) of the NASDAQ Stock Market Rules) and Nevada corporate law, of
the transactions contemplated by the Purchase Agreement and the Notes (as
amended hereby), including without limitation the issuance of all of the
Conversion Shares under the Notes in excess of the Issuable
Maximum. To the extent any portion of the Principal Amount of Notes
is not convertible due to the Issuable Maximum, such portion shall bear interest
at the Default Rate.
Section
4. Defaults and
Remedies.
(a) Events of
Default. An “Event of Default”
is: (i) a default in payment of any amount due hereunder which
default continues for more than 5 business days after the due date thereof; (ii)
a default in the timely issuance of Underlying Shares upon and in accordance
with terms hereof, which default continues for five Business Days after the
Company has received written notice informing the Company that it has failed to
issue shares or deliver stock certificates within the fifth day following the
Conversion Date; (iii) failure by the Company for fifteen (15) days after
written notice has been received by the Company to comply with any material
provision of any of the Notes, the Purchase Agreement or the Investor Rights
Agreement (including without limitation the failure to issue the requisite
number of shares of Common Stock upon conversion hereof and the failure to
redeem Notes upon the Holder’s request following a Change in Control Transaction
pursuant to Section 3(c)(vi); (iv) a material breach by the Company of its
representations or warranties in the Purchase Agreement or Investor Rights
Agreement; (v) if at any time the Company is not subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act or has failed to file
all reports required to be filed thereunder during the then preceding 12 months;
(vi) if at any time the Common Stock shall not be listed or quoted for trading
on a the New York Stock Exchange, Alternext, the NASDAQ Stock Market or the
Over-The-Counter Bulletin Board; (vii) any default after any cure period under,
or acceleration prior to maturity of, any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any indebtedness for money borrowed by the Company for in excess of $25,000 or
for money borrowed the repayment of which is guaranteed by the Company for in
excess of $25,000, whether such indebtedness or guarantee now exists or shall be
created hereafter; or (viii) if the Company is subject to any Bankruptcy
Event.
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(b) Remedies. If
an Event of Default occurs and is continuing with respect to any of the Notes,
the Holder may declare all of the then outstanding Principal Amount of this Note
and all other Notes held by the Holder, including any interest due thereon, to
be due and payable immediately, except that in the case of an Event of Default
arising from events described in clauses (vii) and (viii) of Section 4(a), this
Note shall become due and payable without further action or
notice. In the event of such acceleration, the amount due and owing
to the Holder shall be the greater of (1) 125% of the outstanding Principal
Amount of the Notes held by the Holder (plus all accrued and unpaid interest, if
any) and (2) the product of (A) the highest closing price for the five (5)
Trading days immediately preceding the Holder’s acceleration and (B) the
Conversion Ratio. In either case the Company shall pay interest on
such amount in cash at the Default Rate to the Holder if such amount is not paid
within 7 days of Holder’s request. The remedies under this Note shall
be cumulative.
Section
5. General.
(a) Payment of
Expenses. The Company agrees to pay all reasonable charges and
expenses, including attorneys' fees and expenses, which may be incurred by the
Holder in successfully enforcing this Note and/or collecting any amount due
under this Note.
(b) Savings
Clause. In case any provision of this Note is held by a court
of competent jurisdiction to be excessive in scope or otherwise invalid or
unenforceable, such provision shall be adjusted rather than voided, if possible,
so that it is enforceable to the maximum extent possible, and the validity and
enforceability of the remaining provisions of this Note will not in any way be
affected or impaired thereby. In no event shall the amount of
interest paid hereunder exceed the maximum rate of interest on the unpaid
principal balance hereof allowable by applicable law. If any sum is
collected in excess of the applicable maximum rate, the excess collected shall
be applied to reduce the principal debt. If the interest actually
collected hereunder is still in excess of the applicable maximum rate, the
interest rate shall be reduced so as not to exceed the maximum allowable under
law.
(c) Amendment. Neither
this Note nor any term hereof may be amended, waived, discharged or terminated
other than by a written instrument signed by the Company and the
Holder.
(d) Assignment,
Etc. The Holder may assign or transfer this Note to any
transferee only with the prior written consent of the Company, which may not be
unreasonably withheld or delayed, provided that (i) the Holder may assign or
transfer this Note to any of such ▇▇▇▇▇▇'s affiliates without the consent of the
Company and (ii) upon any Event of Default, the Holder may assign or
transfer this Note without the consent of the Company. The Holder
shall notify the Company of any such assignment or transfer
promptly. This Note shall be binding upon the Company and its
successors and shall inure to the benefit of the Holder and its successors and
permitted assigns.
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(e) No
Waiver. No failure on the part of the Holder to exercise, and
no delay in exercising any right, remedy or power hereunder, shall operate as a
waiver thereof, nor shall any single or partial exercise by the Holder of any
right, remedy or power hereunder preclude any other or future exercise of any
other right, remedy or power. Each and every right, remedy or power
hereby granted to the Holder or allowed it by law or other agreement shall be
cumulative and not exclusive of any other, and may be exercised by the Holder
from time to time.
(f) Governing Law;
Jurisdiction.
(i) Governing
Law. THIS NOTE WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ANY CONFLICTS OF LAWS
PROVISIONS THEREOF THAT WOULD OTHERWISE REQUIRE THE APPLICATION OF THE LAW OF
ANY OTHER JURISDICTION.
(ii) Jurisdiction. The
Company irrevocably submits to the exclusive jurisdiction of any State or
Federal Court sitting in the State of New York, County of New York, or San Jose,
California, over any suit, action, or proceeding arising out of or relating to
this Note. The Company irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of the venue of any such suit, action, or proceeding brought in such a court and
any claim that suit, action, or proceeding has been brought in an inconvenient
forum.
The
Company agrees that the service of process upon it mailed by certified or
registered mail (and service so made shall be deemed complete three days after
the same has been posted as aforesaid) or by personal service shall be deemed in
every respect effective service of process upon it in any such suit or
proceeding. Nothing herein shall affect Holder's right to serve
process in any other manner permitted by law. The Company agrees that
a final non-appealable judgement in any such suit or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on such judgment
or in any other lawful manner.
(iii) NO JURY TRIAL. THE
COMPANY HERETO KNOWINGLY AND VOLUNTARILY WAIVES ANY AND ALL RIGHTS IT MAY HAVE
TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION BASED ON, OR ARISING OUT OF,
UNDER, OR IN CONNECTION WITH, THIS NOTE.
(g) Replacement
Notes. This Note may be exchanged by Holder at any time and
from time to time for a Note or Notes with different denominations representing
an equal aggregate outstanding Principal Amount, as reasonably requested by
▇▇▇▇▇▇, upon surrendering the same. No service charge will be made
for such registration or exchange. In the event that ▇▇▇▇▇▇ notifies
the Company that this Note has been lost, stolen or destroyed, a replacement
Note identical in all respects to the original Note (except for registration
number and Principal Amount, if different than that shown on the original Note),
shall be issued to the Holder, provided that the Holder executes and delivers to
the Company an agreement reasonably satisfactory to the Company to indemnify the
Company from any loss incurred by it in connection with the Note.
[Signature
Page Follows]
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IN WITNESS WHEREOF, the
Company has caused this Note to be duly executed on the day and in the year
first above written.
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NETSOL
TECHNOLOGIES,
INC.
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By:
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/s/ ▇▇▇▇▇▇ ▇▇▇▇▇▇
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Name:
▇▇▇▇▇▇ ▇▇▇▇▇▇
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Title:
Chief Executive Officer
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Attest:
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Sign:
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/s/ ▇▇▇▇▇ ▇.▇.
▇▇▇▇▇▇▇▇▇
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Print
Name: ▇▇▇▇▇ ▇.▇. ▇▇▇▇▇▇▇▇▇
15
EXHIBIT
A
FORM
OF CONVERSION NOTICE
(To be
executed by the Holder
in order
to convert a Note)
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Re:
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Note
(this “Note”) issued by NETSOL TECHNOLOGIES, INC. to THE TAIL WIND FUND
LTD. on or about August 11, 2009 in the original principal amount of
$1,800,000.
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The
undersigned hereby elects to convert the aggregate outstanding Principal Amount
(as defined in the Note) indicated below of this Note into shares of Common
Stock, $0.001 par value per share (the “Common Stock”), of NETSOL TECHNOLOGIES, INC. (the
“Company”) according to the conditions hereof, as of the date written
below. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.
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Conversion
information:
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Date
to Effect Conversion
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Aggregate
Principal Amount of Note Being Converted
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Number
of Shares of Common Stock to be Issued
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Applicable
Conversion Price
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Signature
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Name
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Address
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