EXHIBIT 10.2
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE 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 AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
Original Issue Date: November __, 2018
$---------
10% ORIGINAL ISSUE DISCOUNT
5% SENIOR CONVERTIBLE NOTE
DUE NOVEMBER __, 2019
THIS 10% SENIOR CONVERTIBLE NOTE is one of a series of duly authorized and
validly issued 5% Senior Convertible Notes issued at a 10% original issue
discount by Esports Entertainment Group, Inc., a Nevada corporation (the
"Company") (this note, the "Note" and, collectively with the other notes of such
series, the "Notes").
FOR VALUE RECEIVED, the Company promises to pay to ____________________, or
its registered assigns (the "Holder"), or shall have paid pursuant to the terms
hereunder, the principal sum of $__________ on the date that is the one year
anniversary of the Original Issue Date, or November __, 2019 (the "Maturity
Date") or such earlier date as this Note is required or permitted to be repaid
as provided hereunder, and to pay interest to the Holder on the aggregate
unconverted and then outstanding principal amount of this Note in accordance
with the provisions hereof. This Note is subject to the following additional
provisions:
Section 1. Definitions. For the purposes hereof, (a) capitalized terms not
otherwise defined herein shall have the meanings set forth in the Purchase
Agreement and (b) the following terms shall have the following meanings:
"Alternate Consideration" shall have the meaning set forth in Section 5(e).
"Bankruptcy Event" means any of the following events: (a) the Company or
any Significant Subsidiary (as such term is defined in Rule 1-02(w) of
Regulation S-X) thereof 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 Significant Subsidiary thereof, (b) there is
commenced against the Company or any Significant Subsidiary thereof any such
case or proceeding that is not dismissed within 60 days after commencement, (c)
the Company or any Significant Subsidiary thereof is adjudicated insolvent or
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bankrupt or any order of relief or other order approving any such case or
proceeding is entered, (d) the Company or any Significant Subsidiary thereof
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 calendar days
after such appointment, (e) the Company or any Significant Subsidiary thereof
makes a general assignment for the benefit of creditors, (f) the Company or any
Significant Subsidiary thereof calls a meeting of its creditors with a view to
arranging a composition, adjustment or restructuring of its debts or (g) the
Company or any Significant Subsidiary thereof, 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.
"Base Conversion Price" shall have the meaning set forth in Section 5(b).
"Beneficial Ownership Limitation" shall have the meaning set forth in
Section 4(e).
"Black Scholes Value" means the value of the outstanding principal amount
of this Note, plus all accrued and unpaid interest hereon based on the Black and
Scholes Option Pricing Model obtained from the "OV" function on Bloomberg L.P.
("Bloomberg") determined as of the day of consummation of the applicable
Fundamental Transaction for pricing purposes and reflecting (A) a risk-free
interest rate corresponding to the U.S. Treasury rate for a period equal to the
time between the date of the public announcement of the applicable Fundamental
Transaction and the Maturity Date, (B) an expected volatility equal to the
greater of 100% and the 100 day volatility obtained from the HVT function on
Bloomberg as of the Trading Day immediately following the public announcement of
the applicable Fundamental Transaction, (C) the underlying price per share used
in such calculation shall be the sum of the price per share being offered in
cash, if any, plus the value of any non-cash consideration, if any, being
offered in such Fundamental Transaction and (D) a remaining option time equal to
the time between the date of the public announcement of the applicable
Fundamental Transaction and the Maturity Date.
"Business Day" means any day except any Saturday, any Sunday, any day which
is a federal legal holiday in the United States or any day on which banking
institutions in the State of New York are authorized or required by law or other
governmental action to close.
"Buy-In" shall have the meaning set forth in Section 4(c)(v).
"Change of Control Transaction" means the occurrence after the date hereof
of any of (a) an acquisition after the date hereof by an individual or legal
entity or "group" (as described in Rule 13d-5(b)(1) promulgated under the
Exchange Act) of effective control (whether through legal or beneficial
ownership of capital stock of the Company, by contract or otherwise) of in
excess of 50% of the voting securities of the Company (other than by means of
conversion, exercise or exchange of the Notes or the Securities issued together
with the Notes), (b) the Company merges into or consolidates with any other
Person, or any Person merges into or consolidates with the Company and, after
giving effect to such transaction, the shareholders of the Company immediately
prior to such transaction own less than 50% of the aggregate voting power of the
Company or the successor entity of such transaction, (c) the Company sells or
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transfers all or substantially all of its assets to another Person, (d) a
replacement at one time or within a three year period of more than one-half of
the members of the Board of Directors which is not approved by a majority of
those individuals who are members of the Board of Directors on the Original
Issue Date (or by those individuals who are serving as members of the Board of
Directors on any date whose nomination to the Board of Directors was approved by
a majority of the members of the Board of Directors who are members on the date
hereof), or (e) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the events set
forth in clauses (a) through (d) above.
"Collateral Agent" means the party appointed agent on behalf of all
Purchasers in the Security Agreement dated October 16, 2018 by and between the
Company and the Collateral Agent.
"Conversion" shall have the meaning ascribed to such term in Section 4.
"Conversion Date" shall have the meaning set forth in Section 4(a).
"Conversion Price" shall have the meaning set forth in Section 4(b).
"Conversion Shares" means, collectively, the shares of Common Stock
issuable upon conversion of this Note in accordance with the terms hereof.
"Default Conversion Price" shall have the meaning set forth in Section
4(c).
"Default Interest Rate" shall have the meaning set forth in Section 2(a).
"Dilutive Issuance" shall have the meaning set forth in Section 5(b).
"Dilutive Issuance Notice" shall have the meaning set forth in Section
5(b).
"DWAC" means the Deposit or Withdrawal at Custodian system at The
Depository Trust Company.
"Event of Default" shall have the meaning set forth in Section 7(a).
"Exempt Issuance" shall have the meaning set forth in the Purchase
Agreement.
"Fundamental Transaction" shall have the meaning set forth in Section 5(e).
"Indebtedness" shall have the meaning set forth in the Purchase Agreement.
"Liens" shall have the meaning set forth in the Purchase Agreement.
"Mandatory Default Amount" means the sum of (a) (i) 130% of the outstanding
principal amount of this Note plus (ii) accrued and unpaid interest hereon,
including Default Interest, and (b) all other amounts, costs, expenses and
liquidated damages due in respect of this Note.
"New York Courts" shall have the meaning set forth in Section 8(e).
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"Note Register" shall have the meaning set forth in Section 3(c).
"Notice of Conversion" shall have the meaning set forth in Section 4(a).
"Option Value" means the value of a Common Stock Equivalent based on the
Black Scholes Option Pricing model obtained from the "OV" function on Bloomberg
determined as of (A) the Trading Day prior to the public announcement of the
issuance of the applicable Common Stock Equivalent, if the issuance of such
Common Stock Equivalent is publicly announced or (B) the Trading Day immediately
following the issuance of the applicable Common Stock Equivalent if the issuance
of such Common Stock Equivalent is not publicly announced, for pricing purposes
and reflecting (i) a risk-free interest rate corresponding to the U.S. Treasury
rate for a period equal to the remaining term of the applicable Common Stock
Equivalent as of the applicable date of determination, (ii) an expected
volatility equal to the greater of 100% and the 100 day volatility obtained from
the HVT function on Bloomberg as of (A) the Trading Day immediately following
the public announcement of the applicable Common Stock Equivalent if the
issuance of such Common Stock Equivalent is publicly announced or (B) the
Trading Day immediately following the issuance of the applicable Common Stock
Equivalent if the issuance of such Common Stock Equivalent is not publicly
announced, (iii) the underlying price per share used in such calculation shall
be the highest VWAP of the Common Stock during the period beginning on the
Trading Day prior to the execution of definitive documentation relating to the
issuance of the applicable Common Stock Equivalent and ending on (A) the Trading
Day immediately following the public announcement of such issuance, if the
issuance of such Common Stock Equivalent is publicly announced or (B) the
Trading Day immediately following the issuance of the applicable Common Stock
Equivalent if the issuance of such Common Stock Equivalent is not publicly
announced, (iv) a zero cost of borrow and (v) a 360 day annualization factor.
"Original Issue Date" means the date of the first issuance of the Notes,
regardless of any transfers of any Note and regardless of the number of
instruments which may be issued to evidence such Notes.
"Permitted Indebtedness" means (a) the indebtedness evidenced by the Notes,
(b) capital lease obligations and purchase money indebtedness incurred in
connection with the acquisition of machinery and equipment as long as such
capital leases and indebtedness are approved in advance by the Collateral Agent
and (c) any indebtedness set forth on Schedule 3.1(aa) to the Purchase
Agreement.
"Permitted Lien" means the individual and collective reference to the
following: (a) Liens for taxes, assessments and other governmental charges or
levies not yet due or Liens for taxes, assessments and other governmental
charges or levies being contested in good faith and by appropriate proceedings
for which adequate reserves (in the good faith judgment of the management of the
Company) have been established in accordance with GAAP, (b) Liens imposed by law
which were incurred in the ordinary course of the Company's business, such as
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carriers', warehousemen's and mechanics' Liens, statutory landlords' Liens, and
other similar Liens arising in the ordinary course of the Company's business,
and which (x) do not individually or in the aggregate materially detract from
the value of such property or assets or materially impair the use thereof in the
operation of the business of the Company and its consolidated Subsidiaries or
(y) are being contested in good faith by appropriate proceedings, which
proceedings have the effect of preventing for the foreseeable future the
forfeiture or sale of the property or asset subject to such Lien, (c) Liens
incurred in connection with Permitted Indebtedness under clauses (a) and (b)
thereunder, and Liens set forth on Schedule 3.1(aa) to the Purchase Agreement.
"Purchase Agreement" means the Securities Purchase Agreement, dated as of
October 16, 2018 among the Company and the original Holders, as amended,
modified or supplemented from time to time in accordance with its terms.
"Qualified Financing" means a registered public offering of shares of the
Company's Common Stock (and warrants if included in a Qualified Financing), from
which the Company receives gross proceeds of not less than $5,000,000 and the
Company's Trading Market is a national securities exchange.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Share Delivery Date" shall have the meaning set forth in Section 4(c)(ii).
"Successor Entity" shall have the meaning set forth in Section 5(e).
"Trading Day" means a day on which the principal Trading Market is open for
trading.
"Trading Market" means any of the following markets or exchanges on which
the Common Stock is listed or quoted for trading on the date in question: the
NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq
Global Select Market, the New York Stock Exchange, or any market of the OTC
Markets, Inc. (or any successors to any of the foregoing).
"VWAP" means, for any date, the price determined by the first of the
following clauses that applies: (a) if the Common Stock is then listed or quoted
on a Trading Market, the daily volume weighted average price of the Common Stock
for such date (or the nearest preceding date) on the Trading Market on which the
Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a
Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City
time)) (or a similar organization or agency succeeding to its functions of
reporting prices), (b) if no volume weighted average price of the Common Stock
is reported for the Trading Market, the most recent bid price per share of the
Common Stock so reported, or (c) 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 Holders of a majority of the outstanding principal amount of the
Notes then outstanding and reasonably acceptable to the Company, the fees and
expenses of which shall be paid by the Company.
Section 2. Interest/Prepayment.
(a) Interest. Interest shall accrue to the Holder on the aggregate
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unconverted and then outstanding principal amount of this Note at the rate of
five percent (5%) per annum, calculated on the basis of a 360-day year and shall
accrue daily commencing on the Original Issue Date until payment in full of the
outstanding principal (or conversion to the extent applicable), together with
all accrued and unpaid interest, liquidated damages and other amounts which may
become due hereunder, has been made. During the existence of an Event of
Default, interest shall accrue at the lesser of (i) the rate of 18% per annum,
or (ii) the maximum amount permitted by law (the lesser of clause (i) or (ii),
the "Default Interest Rate").
(b) Prepayment. The Notes may be prepaid: (i) at any time until the 180th
day following the Original Issue Date at an amount equal to 110% of outstanding
principal balance of the Note and accrued and unpaid interest, and (ii) anytime
after the 180th day following the Original Issue Date at an amount equal to 125%
of outstanding principal balance of the Notes and accrued and unpaid interest.
In order to prepay the Notes, the Company shall provide twenty (20) Trading Days
prior written notice to the Holder, during which time the Holder may convert the
Notes in whole or in part at the Conversion Price.
Section 3. Registration of Transfers and Exchanges.
(a) Different Denominations. This Note is exchangeable for an equal
aggregate principal amount of Notes of different authorized denominations, as
requested by the Holder surrendering the same. No service charge will be payable
for such registration of transfer or exchange.
(b) Investor Representations. This Note has been issued subject to certain
investment representations of the original Holder set forth in the Purchase
Agreement and may be transferred or exchanged only in compliance with the
Purchase Agreement and applicable federal and state securities laws and
regulations.
(c) Reliance on Note Register. Prior to due presentment for transfer to the
Company of this Note, the Company and any agent of the Company may treat the
Person in whose name this Note is duly registered on the Note Register as the
owner hereof for the purpose of receiving payment as herein provided and for all
other purposes, whether or not this Note is overdue, and neither the Company nor
any such agent shall be affected by notice to the contrary.
Section 4. Conversion.
(a) Voluntary Conversion. After the Original Issue Date until this Note is
no longer outstanding, this Note shall be convertible, in whole or in part, at
any time, and from time to time, into shares of Common Stock at the option of
the Holder. The Holder shall effect conversions by delivering to the Company a
Notice of Conversion, the form of which is attached hereto as Annex A (each, a
"Notice of Conversion"), specifying therein the principal amount of this Note to
be converted and the date on which such conversion shall be effected (such date,
the "Conversion Date"). If no Conversion Date is specified in a Notice of
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Conversion, the Conversion Date shall be the date that such Notice of Conversion
is delivered hereunder. No ink-original Notice of Conversion shall be required,
nor shall any medallion guarantee (or other type of guarantee or notarization)
of any Notice of Conversion form be required. To effect conversions hereunder,
the Holder shall not be required to physically surrender this Note to the
Company unless the entire principal amount of this Note, plus all accrued and
unpaid interest thereon, has been so converted. Conversions hereunder shall have
the effect of lowering the outstanding principal amount of this Note in an
amount equal to the applicable conversion. The Holder and the Company shall
maintain records showing the principal amount(s) converted in each conversion,
the date of each conversion, and the Conversion Price in effect at the time of
each conversion. The Company may deliver an objection to any Notice of
Conversion within one Business Day of delivery of such Notice of Conversion. In
the event of any dispute or discrepancy, the records of the Holder shall be
controlling and determinative in the absence of manifest error. The Holder, and
any assignee by acceptance of this Note, acknowledge and agree that, by reason
of the provisions of this paragraph, following conversion of a portion of this
Note, the unpaid and unconverted principal amount of this Note may be less than
the amount stated on the face hereof.
(b) Mandatory Conversion. This Note (and any accrued or unpaid interest)
shall automatically convert into the Company's common stock, or into the
Company's common stock and warrants (if warrants are included in the Qualified
Financing), upon the closing of a Qualified Financing at a price per share equal
to the lower of (i) the Conversion Price and (ii) 80% of the offering price in
the Qualified Financing. At least five days prior to the closing of the
Qualified Financing, the Company will notify the Holder in writing of the terms
of the Qualified Financing. By way of example, if Notes in the principal amount
of $2,000,000 are sold in this offering, and units consisting of one share of
common stock and one warrant are sold in the Qualified Financing at a price of
$1.00 per unit, the Note Holders, as a group, would receive 3,333,333 shares of
common stock and 3,333,333 warrants upon the conversion of the Notes (excluding
shares and warrants which would be issued for accrued interest). The Warrants
issued upon conversion would have the same terms as the warrants sold in the
Qualified Offering.
(c) Conversion Price. The "Conversion Price" in effect on any Conversion
Date means, as of any Conversion Date or other date of determination, sixty
cents ($0.60) per share (subject to adjustment as provided herein), provided,
however, that if an Event of Default has occurred, regardless of whether such
Event of Default has been cured or remains ongoing, the Note shall be
convertible at 80% of the lowest closing price during the prior twenty (20)
Trading Days of the Common Stock as reported on the Trading Market (the "Default
Conversion Price").
(d) Mechanics of Conversion or Prepayment.
(i) Conversion Shares Issuable Upon Conversion of Principal Amount.
The number of Conversion Shares issuable upon a conversion hereunder shall
be determined by the quotient obtained by dividing (x) the outstanding
principal amount of this Note to be converted by (y) the Conversion Price
in effect at the time of such conversion.
(ii) Delivery of Certificate Upon Conversion. Not later than two (2)
Trading Days after each Conversion Date (the "Share Delivery Date"), the
Company shall deliver, or cause to be delivered, to the Holder any
certificate or certificates required to be delivered by the Company under
this Section 4(d) which, on or after the six month anniversary of the
Original Issue Date, shall be free of restrictive legends and trading
restrictions (other than those which may then be required by the Purchase
Agreement) and such shares shall be delivered electronically through the
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Depository Trust Company or another established clearing corporation
performing similar functions provided the Holder has provided to the
Company complete delivery instructions as required by the Notice of
Conversion.
(iii) Failure to Deliver Certificates. If, in the case of any Notice
of Conversion, such certificate or certificates are not delivered to or as
directed by the applicable Holder by the Share Delivery Date, the Holder
shall be entitled to elect by written notice to the Company at any time on
or before its receipt of such certificate or certificates, to rescind such
Conversion, in which event the Company shall promptly return to the Holder
any original Note delivered to the Company and the Holder shall promptly
return to the Company the Common Stock certificates issued to such Holder
pursuant to the rescinded Notice of Conversion.
(iv) Obligation Absolute; Partial Liquidated Damages. The Company's
obligations to issue and deliver the Conversion Shares upon conversion of
this Note in accordance with the terms hereof, are absolute and
unconditional, irrespective of any action or inaction by the Holder to
enforce the same, any waiver or consent with respect to any provision
hereof, the recovery of any judgment against any Person or any action to
enforce the same, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder or any other
Person of any obligation to the Company or any violation or alleged
violation of law by the Holder or any other Person, and irrespective of any
other circumstance which might otherwise limit such obligation of the
Company to the Holder in connection with the issuance of such Conversion
Shares; provided, however, that such delivery shall not operate as a waiver
by the Company of any such action the Company may have against the Holder.
In the event the Holder of this Note shall elect to convert any or all of
the outstanding principal amount hereof, the Company may not refuse
conversion based on any claim that the Holder or anyone associated or
affiliated with the Holder has been engaged in any violation of law,
agreement or for any other reason, unless an injunction from a court, on
notice to Holder, restraining and or enjoining conversion or prepayment of
all or part of this Note shall have been sought and obtained, and the
Company posts a surety bond for the benefit of the Holder in the amount of
150% of the outstanding principal amount of this Note, which is subject to
the injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the underlying dispute and the proceeds of which
shall be payable to the Holder to the extent it obtains judgment. In the
absence of such injunction, the Company shall issue Conversion Shares upon
a properly noticed conversion. If the Company fails for any reason to
deliver to the Holder such certificate or certificates pursuant to Section
4(d)(ii) by the Share Delivery Date, the Company shall pay to the Holder,
in cash, as liquidated damages and not as a penalty, for each $1,000 of
principal amount being converted, $10 per Trading Day (increasing to $20
per Trading Day on the fifth (5th) Trading Day after such Conversion Date)
for each Trading Day after such Share Delivery Date until such certificates
are delivered or Holder rescinds such conversion. In no event shall
liquidated damages for any one conversion exceed $1,000 for the first ten
(10) Trading Days. Nothing herein shall limit a Holder's right to pursue
actual damages or declare an Event of Default pursuant to Section 7 hereof
for the Company's failure to deliver Conversion Shares within the period
specified herein and the Holder shall have the right to pursue all remedies
available to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief. The
exercise of any such rights shall not prohibit the Holder from seeking to
enforce damages pursuant to any other Section hereof or under applicable
law.
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(v) Compensation for Buy-In on Failure to Timely Deliver Certificates
Upon Conversion. In addition to any other rights available to the Holder,
if the Company fails for any reason to deliver to the Holder such
certificate or certificates by the Share Delivery Date pursuant to Section
4(d)(ii), and if after such Share Delivery Date the Holder is required by
its brokerage firm to purchase (in an open market transaction or
otherwise), or the Holder's brokerage firm otherwise purchases, shares of
Common Stock to deliver in satisfaction of a sale by the Holder of the
Conversion Shares which the Holder was entitled to receive upon the
conversion relating to such Share Delivery Date (a "Buy-In"), then the
Company shall (A) pay in cash to the Holder (in addition to any other
remedies available to or elected by the Holder) the amount, if any, by
which (x) the Holder's total purchase price (including any brokerage
commissions) for the Common Stock so purchased exceeds (y) the product of
(1) the aggregate number of shares of Common Stock that the Holder was
entitled to receive from the conversion at issue multiplied by (2) the
actual sale price at which the sell order giving rise to such purchase
obligation was executed (including any brokerage commissions) and (B) at
the option of the Holder, either reissue (if surrendered) this Note in a
principal amount equal to the principal amount of the attempted conversion
(in which case such conversion shall be deemed rescinded) or deliver to the
Holder the number of shares of Common Stock that would have been issued if
the Company had timely complied with its delivery requirements under
Section 4(d)(ii). 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 this Note with respect to which the actual sale
price of the Conversion Shares (including any brokerage commissions) giving
rise to such purchase obligation was a total of $10,000 under clause (A) of
the immediately preceding sentence, the Company shall be required to pay
the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In and,
upon request of the Company, evidence of the amount of such loss. 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
Company's failure to timely deliver certificates representing shares of
Common Stock upon conversion of this Note as required pursuant to the terms
hereof.
(vi) Reservation of Shares Issuable Upon Conversion. The Company
covenants that it will reserve and keep available out of its authorized and
unissued shares of Common Stock for the purpose of issuances upon
conversion of this Note (and other purposes further detailed in the
Purchase Agreement), free from preemptive rights or any other actual
contingent purchase rights of Persons other than the Holder (and the other
holders of the Notes), not less than the amount of shares designated in
Section 4.9 of the Purchase Agreement. The Company covenants that all
shares of Common Stock that shall be so issuable shall, upon issue, be duly
authorized, validly issued, fully paid and nonassessable.
(vii) Fractional Shares. No fractional shares or scrip representing
fractional shares shall be issued upon the conversion of this Note. As to
any fraction of a share which the Holder would otherwise be entitled to
purchase upon such conversion, the Company shall at its election, either
pay a cash adjustment in respect of such final fraction in an amount equal
to such fraction multiplied by the Conversion Price or round up to the next
whole share.
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(viii) Transfer Taxes and Expenses. The issuance of certificates for
shares of the Common Stock on conversion of this Note shall be made without
charge to the Holder hereof for any documentary stamp or similar taxes that
may be payable in respect of the issue or delivery of such certificates,
provided that, the Company shall not be required to pay any tax that may be
payable in respect of any transfer involved in the issuance and delivery of
any such certificate upon conversion in a name other than that of the
Holder of this Note so converted and the Company shall not be required to
issue or deliver such certificates unless or until the Person or Persons
requesting the issuance thereof shall have paid to the Company the amount
of such tax or shall have established to the satisfaction of the Company
that such tax has been paid. The Company shall pay all Transfer Agent fees
required for same-day processing of any Notice of Conversion and all fees
to the Depository Trust Company (or another established clearing
corporation performing similar functions) required for same-day electronic
delivery of the Conversion Shares.
(e) Holder's Conversion Limitations. The Company shall not effect any
conversion of this Note, and a Holder shall not have the right to convert any
portion of this Note, to the extent that after giving effect to the conversion
set forth on the applicable Notice of Conversion, the Holder (together with the
Holder's Affiliates, and any Persons acting as a group together with the Holder
or any of the Holder's Affiliates) would beneficially own in excess of the
Beneficial Ownership Limitation (as defined below). For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned by
the Holder and its Affiliates shall include the number of shares of Common Stock
issuable upon conversion of this Note with respect to which such determination
is being made, but shall exclude the number of shares of Common Stock which are
issuable upon (i) conversion of the remaining, unconverted principal amount of
this Note beneficially owned by the Holder or any of its Affiliates and (ii)
exercise or conversion of the unexercised or unconverted portion of any other
securities of the Company subject to a limitation on conversion or exercise
analogous to the limitation contained herein (including, without limitation, any
other Notes or the Warrants) beneficially owned by the Holder or any of its
Affiliates. Except as set forth in the preceding sentence, for purposes of this
Section 4(e), beneficial ownership shall be calculated in accordance with
Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder. To the extent that the limitation contained in this Section 4(e)
applies, the determination of whether this Note is convertible (in relation to
other securities owned by the Holder together with any Affiliates) and of which
principal amount of this Note is convertible shall be in the sole discretion of
the Holder, and the submission of a Notice of Conversion shall be deemed to be
the Holder's determination of whether this Note may be converted (in relation to
other securities owned by the Holder together with any Affiliates) and which
principal amount of this Note is convertible, in each case subject to the
Beneficial Ownership Limitation. To ensure compliance with this restriction, the
Holder will be deemed to represent to the Company each time it delivers a Notice
of Conversion that such Notice of Conversion has not violated the restrictions
set forth in this paragraph and the Company shall have no obligation to verify
or confirm the accuracy of such determination. In addition, a determination as
to any group status as contemplated above shall be determined in accordance with
Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder. For purposes of this Section 4(e), in determining the number of
outstanding shares of Common Stock, the Holder may rely on the number of
outstanding shares of Common Stock as stated in the most recent of the
following: (i) the Company's most recent periodic or annual report filed with
the SEC, as the case may be, (ii) a more recent public announcement by the
10
Company, or (iii) a more recent written notice by the Company or the Company's
transfer agent setting forth the number of shares of Common Stock outstanding.
Upon the written or oral request of a Holder, the Company shall within two
Trading Days confirm orally and in writing to the Holder the number of shares of
Common Stock then outstanding. In any case, the number of outstanding shares of
Common Stock shall be determined after giving effect to the conversion or
exercise of securities of the Company, including this Note, by the Holder or its
Affiliates since the date as of which such number of outstanding shares of
Common Stock was reported. The "Beneficial Ownership Limitation" shall be 4.99%
of the number of shares of the Common Stock outstanding immediately after giving
effect to the issuance of shares of Common Stock issuable upon conversion of
this Note held by the Holder. The Holder, upon not less than 61 days' prior
notice to the Company, may increase the Beneficial Ownership Limitation
provisions of this Section 4(e) solely with respect to the Holder's Note,
provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of
the number of shares of Common Stock outstanding immediately after giving effect
to the issuance of shares of Common Stock upon conversion of this Note held by
the Holder and the provisions of this Section 4(e) shall continue to apply. Any
such increase or decrease will not be effective until the 61st day after such
notice is delivered to the Company. The Holder may also decrease the Beneficial
Ownership Limitation provisions of this Section 4(e) solely with respect to the
Holder's Note at any time, which decrease shall be effectively immediately upon
delivery of notice to the Company. The Beneficial Ownership Limitation
provisions of this paragraph shall be construed and implemented in a manner
otherwise than in strict conformity with the terms of this Section 4(e) to
correct this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended Beneficial Ownership Limitation contained herein
or to make changes or supplements necessary or desirable to properly give effect
to such limitation. The limitations contained in this paragraph shall apply to a
successor holder of this Note.
Section 5. Certain Adjustments.
(a) Stock Dividends and Stock Splits. If the Company, at any time while
this Note is outstanding: (i) pays a stock dividend or otherwise makes a
distribution or distributions payable in shares of Common Stock on shares of
Common Stock or any Common Stock Equivalents (which, for avoidance of doubt,
shall not include any shares of Common Stock issued by the Company upon
conversion of, or payment of interest on, the Notes or pursuant to any of the
other Transaction Documents), (ii) subdivides outstanding shares of Common Stock
into a larger number of shares, (iii) combines (including by way of a reverse
stock split) outstanding shares of Common Stock into a smaller number of shares
or (iv) issues, in the event of a reclassification of shares of the Common
Stock, any shares of capital stock of the Company, then the Conversion Price
shall be multiplied by a fraction of which the numerator shall be the number of
shares of Common Stock (excluding any treasury shares of the Company)
outstanding immediately before such event, and of which the denominator shall be
the number of shares of Common Stock outstanding immediately after such event.
Any adjustment made pursuant to this Section shall become effective immediately
after the record date for the determination of shareholders entitled to receive
such dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or re-classification.
(b) Subsequent Equity Sales. If, at any time, for so long as the Note or
any amounts accrued and payable thereunder remain outstanding, the Company or
11
any Subsidiary, as applicable, sells or grants any option to purchase or sells
or grants any right to reprice, or otherwise disposes of or issues (or announces
any sale, grant or any option to purchase or other disposition), any Common
Stock or Common Stock Equivalents entitling any Person to acquire shares of
Common Stock at an effective price per share that is lower than the Conversion
Price then in effect (such lower price, the "Base Conversion Price" and each
such issuance or announcement a "Dilutive Issuance"), then the Conversion Price
shall be immediately reduced to equal the Base Conversion Price. Such adjustment
shall be made whenever such Common Stock or Common Stock Equivalents are issued.
If any Common Stock Equivalent is amended or adjusted, and such price as so
amended shall be less than the Conversion Price in effect at the time of such
amendment or adjustment, then the Conversion Price shall be adjusted upon each
such issuance or amendment as provided in this Section 5(b). In case any Common
Stock Equivalent is issued in connection with the issue or sale of other
securities of the Company, together comprising one integrated transaction, (x)
the Common Stock Equivalents will be deemed to have been issued for the Option
Value of such Common Stock Equivalents and (y) the other securities issued or
sold in such integrated transaction shall be deemed to have been issued or sold
for the difference of (I) the aggregate consideration received by the Company
less any consideration paid or payable by the Company pursuant to the terms of
such other securities of the Company, less (II) the Option Value. If any shares
of Common Stock or Common Stock Equivalents are issued or sold or deemed to have
been issued or sold for cash, the amount of such consideration received by the
Company will be deemed to be the net amount received by the Company therefor. If
any shares of Common Stock or Common Stock Equivalents are issued or sold for a
consideration other than cash, the amount of such consideration received by the
Company will be the fair value of such consideration, except where such
consideration consists of publicly traded securities, in which case the amount
of consideration received by the Company will be the VWAP of such public traded
securities on the date of receipt. If any shares of Common Stock or Common Stock
Equivalents are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such shares of Common Stock or Common Stock Equivalents, as the case may be.
If the holder of Common Stock or Common Stock Equivalents outstanding on
the Original Issue Date or issued after the Original Issuance Date shall at any
time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights per share which are issued in connection with such
issuance, be entitled to receive shares of Common Stock at an effective price
per share that is lower than the Conversion Price then in effect, such issuance
shall be deemed to have occurred for less than the Conversion Price on such date
and such issuance shall be deemed to be a Dilutive Issuance.
If the Company enters into a Variable Rate Transaction despite the
prohibition set forth in the Purchase Agreement, the Company shall be deemed to
have issued Common Stock or Common Stock Equivalents at the lowest possible
conversion price at which such securities may be converted or exercised under
the terms of such Variable Rate Transaction.
The Company shall notify the Holder in writing, no later than the Trading
Day following the issuance of any Common Stock or Common Stock Equivalents
subject to this Section 5(b), indicating therein the applicable issuance price,
12
or applicable reset price, exchange price, conversion price and other pricing
terms (such notice, the "Dilutive Issuance Notice"). For purposes of
clarification, whether or not the Company provides a Dilutive Issuance Notice
pursuant to this Section 5(b), upon the occurrence of any Dilutive Issuance, the
Holder is entitled to receive a number of Conversion Shares based upon the Base
Conversion Price on or after the date of such Dilutive Issuance, regardless of
whether the Holder accurately refers to the Base Conversion Price in the Notice
of Conversion.
The provisions of this Section 5(b) shall apply each time a Dilutive
Issuance occurs after the Original Issue Date for so long as the Note or any
amounts accrued and payable thereunder remain outstanding, but any adjustment of
the Conversion Price pursuant to this Section 5(b) shall be downward only.
Notwithstanding the foregoing, no adjustment will be made under this Section
5(b) in respect of an Exempt Issuance.
(c) Subsequent Rights Offerings. In addition to any adjustments
pursuant to Section 5(a) above, if at any time the Company grants, issues
or sells any Common Stock, Common Stock Equivalents or rights to purchase
stock, warrants, securities or other property pro rata to the record
holders of any class of shares of Common Stock (the "Purchase Rights"),
then the Holder will be entitled to acquire, upon the terms applicable to
such Purchase Rights, the aggregate Purchase Rights which the Holder could
have acquired if the Holder had held the number of shares of Common Stock
acquirable upon complete conversion of this Note (without regard to any
limitations on conversion hereof, including without limitation, the
Beneficial Ownership Limitation) immediately before the date on which a
record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
shares of Common Stock are to be determined for the grant, issue or sale of
such Purchase Rights (provided, however, to the extent that the Holder's
right to participate in any such Purchase Right would result in the Holder
exceeding the Beneficial Ownership Limitation, then the Holder shall not be
entitled to participate in such Purchase Right to such extent (or
beneficial ownership of such shares of Common Stock as a result of such
Purchase Right to such extent) and such Purchase Right to such extent shall
be held in abeyance for the Holder until such time, if ever, as its right
thereto would not result in the Holder exceeding the Beneficial Ownership
Limitation).
(d) Pro Rata Distributions. During such time as this Note is
outstanding, if the Company shall declare or make any dividend or other
distribution of its assets or rights or warrants to acquire its assets, or
subscribe for or purchase any security other than Common Stock, to holders
of shares of Common Stock, by way of return of capital or otherwise
(including, without limitation, any distribution of cash, stock or other
securities, property or options by way of a dividend, spin off,
reclassification, corporate rearrangement, scheme of arrangement or other
similar transaction) (a "Distribution"), at any time after the issuance of
this Note, then, in each such case, the Holder shall be entitled to
participate in such Distribution to the same extent that the Holder would
have participated therein if the Holder had held the number of shares of
Common Stock acquirable upon complete conversion of this Note (without
regard to any limitations on exercise hereof, including without limitation,
the Beneficial Ownership Limitation) immediately before the date of which a
record is taken for such Distribution, or, if no such record is taken, the
date as of which the record holders of shares of Common Stock are to be
determined for the participation in such Distribution (provided, however,
to the extent that the Holder's right to participate in any such
13
Distribution would result in the Holder exceeding the Beneficial Ownership
Limitation with respect to the Company or any other publicly-traded
corporation subject to Section 13(d) of the Exchange Act, then the Holder
shall not be entitled to participate in such Distribution to such extent
(or in the beneficial ownership of any shares of common stock as a result
of such Distribution to such extent) and the portion of such Distribution
shall be held in abeyance for the benefit of the Holder until such time, if
ever, as its right thereto would not result in the Holder exceeding the
Beneficial Ownership Limitation with respect to the Company or any other
publicly-traded corporation subject to Section 13(d) of the Exchange Act).
(e) Fundamental Transaction. (1) If, at any time while this Note is
outstanding, (i) the Company, directly or indirectly, in one or more
related transactions effects any merger or consolidation of the Company
with or into another Person, (ii) the Company, directly or indirectly,
effects any sale, lease, license, assignment, transfer, conveyance or other
disposition of all or substantially all of its assets in one or a series of
related transactions, (iii) any, direct or indirect, purchase offer, tender
offer or exchange offer (whether by the Company or another Person) is
completed pursuant to which holders of Common Stock are permitted to sell,
tender or exchange their shares for other securities, cash or property and
has been accepted by the holders of 50% or more of the outstanding Common
Stock, (iv) the Company, directly or indirectly, in one or more related
transactions effects any reclassification, reorganization or
recapitalization of the Common Stock or any compulsory share exchange
pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property, (v) the Company, directly
or indirectly, in one or more related transactions consummates a stock or
share purchase agreement or other business combination (including, without
limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person whereby such other Person acquires more
than 50% of the outstanding shares of Common Stock (not including any
shares of Common Stock held by the other Person or other Persons making or
party to, or associated or affiliated with the other Persons making or
party to, such stock or share purchase agreement or other business
combination) (each a "Fundamental Transaction"), then, upon any subsequent
conversion of this Note, the Holder shall have the right to receive, for
each Conversion Share that would have been issuable upon such conversion
immediately prior to the occurrence of such Fundamental Transaction
(without regard to any limitation on the conversion of this Note), the
number of shares of Common Stock of the successor or acquiring corporation
or of the Company, if it is the surviving corporation, and any additional
consideration (the "Alternate Consideration") receivable as a result of
such Fundamental Transaction by a holder of the number of shares of Common
Stock for which this Note is convertible immediately prior to such
Fundamental Transaction (without regard to any limitation on the conversion
of this Note). For purposes of any such conversion, the determination of
the Conversion Price shall be appropriately adjusted to apply to such
Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of one share of Common Stock in such Fundamental
Transaction, and the Company shall apportion the Conversion Price among the
Alternate Consideration in a reasonable manner reflecting the relative
value of any different components of the Alternate Consideration. If
holders of Common Stock are given any choice as to the securities, cash or
property to be received in a Fundamental Transaction, then the Holder shall
be given the same choice as to the Alternate Consideration it receives upon
any conversion of this Note following such Fundamental Transaction. The
Company shall not effect a Fundamental Transaction unless it gives the
Holder at least ten (10) Trading Days prior notice together with sufficient
details so the Holder can make an informed decision as to whether it elects
to accept the Alternative Consideration. If a public announcement of the
Fundamental Transaction has not been made, the notice to the Holder may not
be given until the Company files a Form 8-K or other report disclosing the
Fundamental Transaction. (2) Notwithstanding anything to the contrary, in
the event of a Fundamental Transaction that is (x) an all cash transaction,
(y) a "Rule 13e-3 transaction" as defined in Rule 13e-3 under the Exchange
Act, or (z) a Fundamental Transaction involving a person or entity not
traded on a national securities exchange or trading market (with such
exchange or market including, without limitation, the Nasdaq Global Select
Trading Market, the Nasdaq Global Market, or the Nasdaq Capital Market, The
New York Stock Exchange, Inc., the NYSE American or the OTCQB), the Company
or any Successor Entity (as defined below) shall, at the Holder's option,
concurrently with the consummation of the Fundamental Transaction, purchase
this Note from the Holder by paying to the Holder the higher of (i) an
amount of cash equal to the Black Scholes Value of the outstanding
principal of this Note on the date of the consummation of such Fundamental
Transaction, or (ii) the product of (a) the number of Conversion Shares
issuable upon full conversion of this Note (without regard to any
limitation on conversion of this Note) and (b) the positive difference
between the cash per share paid in such Fundamental Transaction minus the
14
then in effect Conversion Price. (3) If Section 5(e)(1) and (2) are not
applicable, the Company shall cause any successor entity in a Fundamental
Transaction in which the Company is not the survivor (the "Successor
Entity") to assume in writing all of the obligations of the Company under
this Note and the other Transaction Documents (as defined in the Purchase
Agreement) in accordance with the provisions of this Section 5(e) pursuant
to written agreements in form and substance reasonably satisfactory to the
Holder and approved by the Holder (without unreasonable delay) prior to
such Fundamental Transaction and shall, at the option of the Holder,
deliver to the Holder in exchange for this Note a security of the Successor
Entity evidenced by a written instrument substantially similar in form and
substance to this Note which is convertible for a corresponding number of
shares of capital stock of such Successor Entity (or its parent entity)
equivalent to the shares of Common Stock acquirable and receivable upon
conversion of this Note (without regard to any limitations on the
conversion of this Note) prior to such Fundamental Transaction, and with a
conversion price which applies the Conversion Price hereunder to such
shares of capital stock (but taking into account the relative value of the
shares of Common Stock pursuant to such Fundamental Transaction and the
value of such shares of capital stock, such number of shares of capital
stock and such conversion price being for the purpose of protecting the
economic value of this Note immediately prior to the consummation of such
Fundamental Transaction), and which is reasonably satisfactory in form and
substance to the Holder. Upon the occurrence of any such Fundamental
Transaction, the Successor Entity shall succeed to, and be substituted for
(so that from and after the date of such Fundamental Transaction, the
provisions of this Note and the other Transaction Documents referring to
the "Company" shall refer instead to the Successor Entity), and may
exercise every right and power of the Company and shall assume all of the
obligations of the Company under this Note and the other Transaction
Documents with the same effect as if such Successor Entity had been named
as the Company herein. Notwithstanding anything in this Section 5(e), an
Exempt Issuance (as defined in the Purchase Agreement) shall not be deemed
a Fundamental Transaction.
(f) Calculations. All calculations under this Section 5 shall be made
to the nearest cent or the nearest 1/100th of a share, as the case may be.
For purposes of this Section 5, the number of shares of Common Stock deemed
15
to be issued and outstanding as of a given date shall be the sum of the
number of shares of Common Stock (excluding any treasury shares of the
Company) issued and outstanding.
(g) Notice to the Holder.
(i) Adjustment to Conversion Price. Whenever the Conversion Price is
adjusted pursuant to any provision of this Section 5, the Company shall
promptly deliver to each Holder a notice setting forth the Conversion Price
after such adjustment and setting forth a brief statement of the facts
requiring such adjustment.
(ii) Notice to Allow Conversion by Holder. If (A) the Company shall
declare a dividend (or any other distribution in whatever form) on the
Common Stock, (B) the Company shall declare a special nonrecurring cash
dividend on or a redemption of the Common Stock, (C) the Company shall
authorize the granting to all holders of the Common Stock of rights or
warrants to subscribe for or purchase any shares of capital stock of any
class or of any rights, (D) the approval of any shareholders of the Company
shall be required in connection with any reclassification of the Common
Stock, 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,
or any compulsory share exchange whereby the Common Stock is converted into
other securities, cash or property or (E) the Company shall authorize the
voluntary or involuntary dissolution, liquidation or winding up of the
affairs of the Company, then, in each case, 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 delivered to the Holder at its last
address as it shall appear upon the Note Register, at least 20 calendar
days prior to the applicable record or effective date hereinafter
specified, 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 the 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 the Common Stock of
record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange, provided that the
failure to deliver such notice or any defect therein or in the delivery
thereof shall not affect the validity of the corporate action required to
be specified in such notice. To the extent that any notice provided
hereunder constitutes, or contains, material, non-public information
regarding the Company or any of the Subsidiaries (as determined in good
faith by the Company), the Company or its successor shall simultaneously
file such notice with the SEC pursuant to a Current Report on Form 8-K. If
the Company does not simultaneously file the required Form 8-K, the Holder
shall be entitled penalties in accordance with Section 4.6 of the Purchase
Agreement. The Holder shall remain entitled to convert this Note during the
20-day period commencing on the date of such notice through the effective
date of the event triggering such notice except as may otherwise be
expressly set forth herein.
Section 6. Negative Covenants. As long as any portion of this Note remains
outstanding, unless the holders of at least 75% in principal amount of the then
outstanding Notes shall have otherwise given prior written consent, the Company
shall not, and shall not permit any of the Subsidiaries to, directly or
indirectly:
16
(a) other than Permitted Indebtedness, enter into, create, incur, assume,
guarantee or suffer to exist any indebtedness for borrowed money of any kind,
including, but not limited to, a guarantee, on or with respect to any of its
property or assets now owned or hereafter acquired or any interest therein or
any income or profits therefrom;
(b) other than Permitted Liens, enter into, create, incur, assume or suffer
to exist any Liens of any kind, on or with respect to any of its property or
assets now owned or hereafter acquired or any interest therein or any income or
profits therefrom;
(c) amend its charter documents, including, without limitation, its
certificate of incorporation and bylaws, in any manner that materially and
adversely affects any rights of the Holder;
(d) other than with respect to Permitted Indebtedness, repay, repurchase or
offer to repay, repurchase or otherwise acquire more than a de minimis number of
shares of its Common Stock or Common Stock Equivalents other than as to the
Conversion Shares or Warrant Shares as permitted or required under the
Transaction Documents;
(e) other than with respect to Permitted Indebtedness repay, repurchase or
offer to repay, repurchase or otherwise acquire any Indebtedness, other than the
Notes if on a pro-rata basis, other than regularly scheduled principal and
interest payments as such terms are in effect as of the Original Issue Date,
provided that such payments shall not be permitted if, at such time, or after
giving effect to such payment, any Event of Default exists or occurs;
(f) pay cash dividends or distributions on any equity securities of the
Company;
(g) enter into any transaction with any Affiliate of the Company which
would be required to be disclosed in any public filing with the SEC assuming
that the Company is subject to the Securities Act or the Exchange Act, unless
such transaction is made on an arm's-length basis and expressly approved by a
majority of the disinterested directors of the Company (even if less than a
quorum otherwise required for board approval);
(h) issue any equity securities of the Company other than pursuant to the
provisions of the Purchase Agreement or an Exempt Issuance; or
(i) enter into any agreement with respect to any of the foregoing.
Section 7. Events of Default.
(a) "Event of Default" means, wherever used herein, any of the following
events (whatever the reason for such event and whether such event shall be
voluntary or involuntary or effected by operation of law or pursuant to any
judgment, decree or order of any court, or any order, rule or regulation of any
administrative or governmental body):
(i) any default in the payment of (A) the principal amount of any Note
or (B) interest, late fees, liquidated damages and other amounts owing to a
17
Holder on any Note, as and when the same shall become due and payable
(whether on a Conversion Date, Payment Date or the Maturity Date, or by
acceleration or otherwise) which default, solely in the case of an interest
payment or other default under clause (B) above, is not cured within five
Trading Days;
(ii) the Company shall fail to observe or perform any other covenant
or agreement contained in the Notes (other than a breach by the Company of
its obligations to deliver shares of Common Stock to the Holder upon
conversion, which breach is addressed in clause (xi) below) or any
Transaction Document which failure is not cured, if possible to cure,
within the earlier to occur of (A) seven Trading Days after notice of such
failure is sent by the Holder or by any other Holder to the Company and (B)
10 Trading Days after the Company has become aware of such failure;
(iii) a default or event of default (subject to any grace or cure
period provided in the applicable agreement, document or instrument) shall
occur under (A) any of the Transaction Documents or (B) any other material
agreement, lease, document or instrument to which the Company or any
Subsidiary is obligated (and not covered by any other clause of this
Section 7) which default or event of default if not cured, if possible to
cure, within the earlier to occur of (i) seven Trading Days after notice of
such default sent by Holder or by any other holder to the Company and (ii)
10 Trading Days after the Company has become aware of such default;
(iv) any representation or warranty made in this Note, any other
Transaction Document, any written statement pursuant hereto or thereto or
any other report, financial statement or certificate made or delivered to
the Holder or any other Holder shall be untrue or incorrect in any material
respect as of the date when made or deemed made;
(v) the Company or any Significant Subsidiary (as such term is defined
in Rule 1-02(w) of Regulation S-X) shall be subject to a Bankruptcy Event;
(vi) the Company or any Subsidiary shall default on any of its
obligations under any mortgage, credit agreement or other facility,
indenture agreement, factoring agreement or other instrument under which
there may be issued, or by which there may be secured or evidenced, any
indebtedness for borrowed money or money due under any long term leasing or
factoring arrangement that (a) involves an obligation greater than
$100,000, whether such indebtedness now exists or shall hereafter be
created, and (b) results in such indebtedness becoming or being declared
due and payable prior to the date on which it would otherwise become due
and payable and such default is not cured within the earlier to occur of
(i) seven Trading Days after notice of such default sent by Holder or by
any other holder to the Company and (ii) 10 Trading Days after the Company
has become aware of such default;
(vii) the Common Stock shall not be eligible for listing or quotation
for trading on a Trading Market and shall not be eligible to resume listing
or quotation for trading thereon within 10 Trading Days;
18
(viii) Except for an Exempt Issuance, the Company shall be a party to
any Change of Control Transaction or shall agree to sell or dispose of all
or in excess of 50% of its assets in one transaction or a series of related
transactions (whether or not such sale would constitute a Change of Control
Transaction); (ix) from and after the Original Issue Date, the Company
fails to have authorized and reserved the amount of shares designated in
Section 4.9 of the Purchase Agreement (without regard to any limitations on
conversion hereof, including without limitation, the Beneficial Ownership
Limitation) and shall not have cured such failure within 10 Trading Days of
such failure;
(x) the Company shall fail for any reason, except if caused by the
action or inaction of the Holder to deliver certificates to a Holder prior
to the second (2nd) Trading Day after a Conversion Date pursuant to Section
4(d) or the Company shall provide at any time notice to the Holder,
including by way of public announcement, of the Company's intention to not
honor requests for conversions of any Notes in accordance with the terms
hereof; or
(xi) any monetary judgment, writ or similar final process shall be
entered or filed against the Company, any Subsidiary or any of their
respective property or other assets for more than $100,000, and such
judgment, writ or similar final process shall remain unvacated, unbonded or
unstayed for a period of 10 calendar days.
(b) Remedies Upon Event of Default. If any Event of Default occurs, the
outstanding principal amount of this Note, plus accrued but unpaid interest,
liquidated damages and other amounts owing in respect thereof through the date
of acceleration, shall become, at the Holder's election, immediately due and
payable in cash at the Mandatory Default Amount. Upon the payment in full of the
Mandatory Default Amount, the Holder shall promptly surrender this Note to or as
directed by the Company. In connection with such acceleration described herein,
the Holder need not provide, and the Company hereby waives, any presentment,
demand, protest or other notice of any kind, and the Holder may immediately and
without expiration of any grace period enforce any and all of its rights and
remedies hereunder and all other remedies available to it under applicable law.
Such acceleration may be rescinded and annulled by Holder at any time prior to
payment hereunder and the Holder shall have all rights as a holder of the Note
until such time, if any, as the Holder receives full payment pursuant to this
Section 7(b). No such rescission or annulment shall affect any subsequent Event
of Default or impair any right consequent thereon.
(c) Interest Rate Upon Event of Default. Commencing on the occurrence of
any Event of Default and until such Event of Default is cured, this Note shall
accrue interest at an interest rate equal to the Default Interest Rate.
(d) Conversion Price Upon Event of Default. Commencing on the occurrence of
any Event of Default and until such Event of Default is cured, this Note shall
be convertible at the Default Conversion Price.
Section 8. Miscellaneous.
(a) No Rights as Stockholder Until Conversion. This Note does not entitle
the Holder to any voting rights, dividends or other rights as a stockholder of
the Company prior to the conversion hereof other than as explicitly set forth in
Section 5.
19
(b) Notices. All notices, offers, acceptance and any other acts under this
Agreement (except payment) shall be in writing, and shall be sufficiently given
if delivered to the addressees in person, by Federal Express or similar
receipted next business day delivery, as follows:
If to the Company: Esports Entertainment Group, Inc.
Commercial Centre, Jolly Harbour
St. Mary's, Antigua and Barbuda
Attention: Chief Executive Officer
with a copy to: Hart & Hart, LLC
(which shall not 1624 N. Washington Street
constitute notice) Denver, CO 80203
Attention: William Hart
If to Holder: ____________________
____________________
Attention: ___________
or to such other address as any of them, by notice to the other may designate
from time to time. Time shall be counted to, or from, as the case may be, the
date of delivery.
(c) Absolute Obligation. Except as expressly provided herein, no provision
of this Note shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of, liquidated damages and
accrued interest and late fees, as applicable, on this Note at the time, place,
and rate, and in the coin or currency, herein prescribed. This Note is a direct
debt obligation of the Company. This Note ranks pari passu with all other Notes
now or hereafter issued under the Purchase Agreement.
(d) Lost or Mutilated Note. If this Note shall be mutilated, lost, stolen
or destroyed, the Company shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Note, or in lieu of or in
substitution for a lost, stolen or destroyed Note, a new Note for the principal
amount of this Note so mutilated, lost, stolen or destroyed, but only upon
receipt of evidence of such loss, theft or destruction of such Note, and of the
ownership hereof, reasonably satisfactory to the Company.
(e) Exclusive Jurisdiction; Governing Law. All questions concerning the
construction, validity, enforcement and interpretation of this Note shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York, without regard to the principles of conflict of laws
thereof. Each party agrees that all legal proceedings concerning the
interpretation, enforcement and defense of the transactions contemplated by any
of the Transaction Documents (whether brought against a party hereto or its
respective Affiliates, directors, officers, shareholders, employees or agents)
shall only be commenced in the state and federal courts sitting in New York
County, New York (the "New York Courts"). Each party hereto hereby irrevocably
submits to the exclusive jurisdiction of the New York Courts for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (including with respect to
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the enforcement of any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of such New York Courts,
or such New York Courts are improper or inconvenient venue for such proceeding.
Each party hereby irrevocably waives personal service of process and consents to
process being served in any such suit, action or proceeding by mailing a copy
thereof via registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under this
Note and agrees that such service shall constitute good and sufficient service
of process and notice thereof. Nothing contained herein shall be deemed to limit
in any way any right to serve process in any other manner permitted by
applicable law. Each party hereto hereby irrevocably waives, to the fullest
extent permitted by applicable law, any and all right to trial by jury in any
legal proceeding arising out of or relating to this Note or the transactions
contemplated hereby.
(f) Waiver. Any waiver by the Company or the Holder of a breach of any
provision of this Note shall not operate as or be construed to be a waiver of
any other breach of such provision or of any breach of any other provision of
this Note. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Note on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Note on any other
occasion. Any waiver by the Company or the Holder must be in writing.
(g) Severability. If any provision of this Note is invalid, illegal or
unenforceable, the balance of this Note shall remain in effect, and if any
provision is inapplicable to any Person or circumstance, it shall nevertheless
remain applicable to all other Persons and circumstances. If it shall be found
that any interest or other amount deemed interest due hereunder violates the
applicable law governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum rate of interest permitted
under applicable law. The Company covenants (to the extent that it may lawfully
do so) that it shall not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay, extension or
usury law or other law which would prohibit or forgive the Company from paying
all or any portion of the principal of or interest on this Note as contemplated
herein, wherever enacted, now or at any time hereafter in force, or which may
affect the covenants or the performance of this Note, and the Company (to the
extent it may lawfully do so) hereby expressly waives all benefits or advantage
of any such law, and covenants that it will not, by resort to any such law,
hinder, delay or impede the execution of any power herein granted to the Holder,
but will suffer and permit the execution of every such as though no such law has
been enacted.
(h) 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 and any of the other Transaction
Documents at law or in equity (including a decree of specific performance and/or
other injunctive relief), and nothing herein shall limit the Holder's right to
pursue actual and consequential damages for any failure by the Company to comply
with the terms of this Note. The Company covenants to the Holder that there
shall be no characterization concerning this instrument other than as expressly
provided herein. 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 and shall not, except as expressly provided
herein, be subject to any other obligation of the Company (or the performance
21
thereof). The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder and that the remedy at law
for any such breach would be inadequate. The Company therefore agrees that, in
the event of any such breach or threatened breach, the Holder shall be entitled,
in addition to all other available remedies, to an injunction restraining any
such breach or any such threatened breach, without the necessity of showing
economic loss and without any bond or other security being required. The Company
shall provide all information and documentation to the Holder that is requested
by the Holder to enable the Holder to confirm the Company's compliance with the
terms and conditions of this Note.
(i) Next Business Day. Whenever any payment or other obligation hereunder
shall be due on a day other than a Business Day, such payment shall be made on
the next succeeding Business Day.
(j) Headings. The headings contained herein are for convenience only, do
not constitute a part of this Note and shall not be deemed to limit or affect
any of the provisions hereof.
(k) Piggy-back Registration. After the Original Issue Date until this Note
is no longer outstanding, the Holder shall have the right, to include the
Conversion Shares issuable upon the conversion of this Note as part of any
registration of securities filed by the Company (other than pursuant to Form
S-4, Form S-8, or any equivalent form, or any Form S-1 that the Company files
with the SEC on or before January 31, 2019 with respect to a firm commitment
underwritten offering). The Company shall bear all fees and expenses related to
registering the Conversion Shares pursuant to this Section 8(k), but the Holder
shall pay any and all underwriting commissions and the expenses of any legal
counsel selected by the Holder to represent it in connection with the sale of
the Conversion Shares. In the event of such a proposed registration, the Company
shall furnish the then Holder with not less than thirty (30) days written notice
prior to the proposed date of filing of such registration statement. The Holder
shall exercise the "piggy-back" rights provided for herein by giving written
notice within ten (10) days of the receipt of the Company's notice of its
intention to file a registration statement.
(Signature Pages Follow)
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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by
a duly authorized officer as of the date first above indicated.
ESPORTS ENTERTAINMENT GROUP, INC.
By:_____________________________
Name: Grant Johnson
Title: Chief Executive Officer
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ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the 10% Senior
Convertible Note due November ________, 2019 of Esports Entertainment Group,
Inc., a Nevada corporation (the "Company"), into shares of common stock (the
"Common Stock"), of the Company according to the conditions hereof, as of the
date written below. If shares of Common Stock are to be issued in the name of a
person other than the 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.
By the delivery of this Notice of Conversion the undersigned represents and
warrants to the Company that its ownership of the Common Stock does not exceed
the amounts specified under Section 4 of this Note, as determined in accordance
with Section 13(d) of the Exchange Act.
The undersigned agrees to comply with the prospectus delivery requirements
under the applicable securities laws in connection with any transfer of the
aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
--------------------------
Principal Amount of Note to be Converted:
-----------
Number of shares of Common Stock to be issued:
Signature:
------------------------------
Name:
-----------------------------------
DWAC Instructions:
Broker No:
-------------------------------
Account No:
------------------------------
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