Exhibit 10.3

 

PAYMENT OF THE SUBORDINATED CONVERTIBLE PROMISSORY NOTE IS SUBJECT TO A
SUBORDINATION AGREEMENT DATED APRIL 4, 2016, BETWEEN HERCULES CAPITAL, INC., THE
COMPANY AND HOLDER, AND NO PAYMENTS THEREOF MAY BE MADE EXCEPT AS PROVIDED IN
SUCH SUBORDINATION AGREEMENT AND AS SET FORTH HEREIN. A COPY OF THE
SUBORDINATION AGREEMENT IS AVAILABLE FROM THE COMPANY ON WRITTEN REQUEST.

 

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: April 4, 2016 Original Principal Amount: $1,000,000 Note:
SCPN-No - 1  

 

SUBORDINATED CONVERTIBLE PROMISSORY NOTE

 

THIS SUBORDINATED CONVERTIBLE PROMISSORY NOTE is a duly authorized and validly
issued Convertible Note of Amedica Corporation, a Delaware corporation, (the
“Company”), having its principal place of business at 1885 West 2100 South, Salt
Lake City, UT 84119, designated as its Subordinated Convertible Promissory Note
(this “Note”, or the “Note”).

 

FOR VALUE RECEIVED, the Company promises to pay to Riverside Merchant Partners,
LLC or its registered assigns (the “Holder”), or shall have paid pursuant to the
terms hereunder, the principal sum of $1,000,000 on demand after the Senior Debt
Maturity Date (defined below) (the “Maturity Date”), 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, in addition to the terms
defined elsewhere in this Note, (a) capitalized terms not otherwise defined
herein shall have the meanings set forth in the Exchange Agreement (as defined
below) or the Warrant (as defined below) and (b) the following terms shall have
the following meanings:

 

   

 

 

“Agent” means Hercules Capital, Inc., a Maryland corporation.

 

“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
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
Subsidiary thereof, (b) there is commenced against the Company or any Subsidiary
thereof any such case or proceeding that is not dismissed within 60 days after
commencement, (c) the Company or any Subsidiary thereof 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 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 Subsidiary thereof makes a general
assignment for the benefit of creditors, or (f) the Company or any 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.

 

“Beneficial Ownership Limitation” shall have the meaning set forth in Section
4(e).

 

“Buy-In” shall have the meaning set forth in Section 4(b)(v).

 

“Closing Bid Price” shall mean for any security as of any date, the last closing
bid price for such security on the Trading Market, as reported by Bloomberg, or,
if the Trading Market begins to operate on an extended hours basis and does not
designate the closing bid price, then the last bid price of such security prior
to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the Trading
Market is not the principal securities exchange or trading market for such
security, the last closing bid price of such security on the principal
securities exchange or trading market where such security is listed or traded as
reported by Bloomberg, or if the foregoing do not apply, the last closing bid
price of such security in the over-the-counter market on the electronic bulletin
board for such security as reported by Bloomberg, or, if no closing bid price is
reported for such security by Bloomberg, the average of the bid prices of any
market makers for such security as reported in the OTC Link or “pink sheets” by
OTC Markets Group Inc. (formerly the Pink OTC Markets Inc.). If the Closing Bid
Price cannot be calculated for a security on a particular date on any of the
foregoing bases, the Closing Bid Price of such security on such date shall be
the fair market value as mutually determined by the Company and the Holder.

 

“Common Stock Equivalents” means any securities of the Company or any of its
subsidiaries which would entitle the holder thereof to acquire at any time
shares of Common Stock, including, without limitation, any debt, preferred
stock, rights, options, warrants or other instrument that is at any time
convertible into or exercisable or exchangeable for, or otherwise entitles the
Holder to receive, Common Stock.

 

  2 

 

 

“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 Schedule” means the Conversion Schedule in the form of Schedule 1
attached hereto.

 

“Conversion Shares” means, collectively, the shares of Common Stock issuable
upon conversion of this Note in accordance with the terms hereof.

 

“Default Redemption Amount” means the product of (i) 120% multiplied by (ii) the
sum of (x) the aggregate principal amount outstanding of this Note through and
including the Default Redemption Date; (y) all accrued but unpaid principal due
on this Note including, but not limited to, as provided in the last sentence of
Section 6 hereof, and (z) all other amounts owed under this Note including, but
not limited to, Late Fees and liquidated damages, all through and including the
date all amounts herein are paid in cash to the Holder.

 

“DTC” means the Depository Trust Company.

 

“DTC/FAST Program” means the DTC’s Fast Automated Securities Transfer Program.

 

“DWAC Eligible” means that (a) the Common Stock is eligible at DTC for full
services pursuant to DTC’s Operational Arrangements, including without
limitation transfer through DTC’s DWAC system, (b) the Company has been approved
(without revocation) by the DTC’s underwriting department, (c) the Transfer
Agent is approved as an agent in the DTC/FAST Program, (d) the Conversion Shares
are otherwise eligible for delivery via DWAC, and (e) the Transfer Agent does
not have a policy prohibiting or limiting delivery of the Conversion Shares via
DWAC.

 

“Equity Conditions” means, during the period in question, (a) no Event of
Default shall have occurred, (b) the Company has timely filed (or obtain
extensions in respect thereof and file within the applicable grace period) all
reports other than Form 8-K reports required to be filed by the Company after
the date hereof pursuant to the Exchange Act, (c) on any date that the Company
desires to make a payment of interest and/or principal with stock and a
condition of such payment is the existence of an Equity Condition, the average
daily dollar volume of the Common Stock for the previous twenty (20) consecutive
trading days must be greater than $60,000, (d) the shares of Common Stock must
be DWAC Eligible and not subject to a “DTC Freeze,” or a “DTC chill” (or other
similar term), (e) the Conversion Shares are (i) neither “restricted shares” nor
“control shares” as defined pursuant to Rule 144 of the Securities Act, and (ii)
may be sold (x) pursuant to Rule 144 without restriction and/or volume
limitation; or (y) pursuant to an effective Registration Statement, in both
cases, however, sales shall be limited pursuant to the Beneficial Ownership
Limitations. If there is an Equity Condition, the Company will cause its
securities counsel to deliver any legal opinion to the Company’s transfer agent
as is required to remove any restrictive legends after Holder delivers standard
representation letter to the Company.

 

  3 

 

 

“Event of Default” shall have the meaning set forth in Section 6(a).

 

“Exchange Agreement” means the Exchange Agreement dated April 4, 2016,
(including all exhibits thereto), by and between the Company and Riverside
Merchant Partners, LLC (“Riverside”) pursuant to which Riverside agreed to
exchange up to $3,000,000 of the outstanding principal of the Term Loan held by
Holder solely for certain other securities of the Company.

 

“Fundamental Transaction” shall have the meaning set forth in Section 5(e).

 

“Late Fees” shall have the meaning set forth in Section 2(c).

 

“Mandatory Default Amount” means the payment of 120% of the outstanding
principal amount of this Note and accrued and unpaid interest hereon, in
addition to the payment of all other amounts, costs, expenses, late fees, and
liquidated damages due in respect of this Note.

 

“New York Courts” shall have the meaning set forth in Section 8(d).

 

“Note Register” shall have the meaning set forth in Section 2(b).

 

“Notice of Conversion” shall have the meaning set forth in Section 4(a).

 

“Obligations” shall have the meaning provided in the Term Loan.

 

“Original Issue Date” means the date of the first issuance of this Note,
regardless of any transfers of any Note and regardless of the number of
instruments which may be issued to evidence such Notes.

 

“Person” means any individual, sole proprietorship, partnership, joint venture,
trust, unincorporated organization, association, corporation, institution,
entity, party or government (whether national, federal, state, county, city,
municipal or otherwise including, without limitation, any instrumentality,
division, agency, body or department thereof).

 

“Qualified Public Offering” means an offering that qualifies as a “public
offering” pursuant to IM-5635-3 of the Nasdaq Marketplace Rules.

 

  4 

 

 

“Registration Statement” means a registration statement covering the resale of
the Conversion Shares by each Holder.

 

“Restricted Person” shall have the meaning set forth in Section 9(a).

 

“Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.

 

“Senior Debt Maturity Date” means 91 days after all Senior Lender Obligations
have been paid in full.

 

“Senior Lender Obligations” mean the Obligations owed to Hercules Technology
III, L.P., a Delaware limited partnership and Hercules Capital, Inc. (f/k/a,
Hercules Technology Growth Capital, Inc.), a Maryland corporation.

 

“Term Loan” means that certain Loan and Security Agreement dated as of June 30,
2014, by and among the Company, Hercules Technology III, L.P., a Delaware
limited partnership and Hercules Capital, Inc. (f/k/a, Hercules Technology
Growth Capital, Inc.), a Maryland corporation, as such agreement may be amended
from time to time.

 

“Share Delivery Date” shall have the meaning set forth in Section 4(d)(ii).

 

“Successor Entity” shall have the meaning set forth in Section 5(e).

 

“Trading Market” means any of the following markets or exchanges on which the
Common Stock (or any other common stock of any other Person that references the
Trading Market for its common stock) is listed or quoted for trading on the date
in question: the OTC Bulletin Board, The NASDAQ Global Market, The NASDAQ Global
Select Market, The NASDAQ Capital Market, the New York Stock Exchange, NYSE
Arca, the NYSE MKT, or the OTCQX Marketplace, the OTCQB Marketplace, the OTCPink
Marketplace or any other tier operated by OTC Markets Group Inc. (or any
successor to any of the foregoing).

 

“VWAP” means, for or as of any date, the dollar volume-weighted average price
for such security on the Trading Market (or, if the Trading Market is not the
principal trading market for such security, then on the principal securities
exchange or securities market on which such security is then traded) during the
period beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New
York time, as reported by Bloomberg through its “HP” function (set to weighted
average) 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 9:30:01 a.m., New York
time, and ending at 4:00:00 p.m., New York time, 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 OTC Markets Group Inc. (formerly Pink Sheets
LLC). 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 Holder. All such
determinations shall be appropriately adjusted for any stock dividend, stock
split, stock combination, recapitalization or other similar transaction during
such period.

 

  5 

 

 

“Warrant” means the Common Stock Purchase Warrant relating to 100,000 warrant
shares issued by the Company to Holder, with an initial issuance date of April
4, 2016.

 

Section 2. Interest.

 

a) Payment of Interest in Cash or Kind. The Company shall pay interest to the
Holder on the aggregate unconverted and then outstanding principal amount of
this Note at the rate of 6% per annum, of which interest amount for a period of
twelve (12) months shall be guaranteed and the total amount of interest due on
the Note for a period of twelve (12) months shall be deemed earned as of the
Original Issue Date. All interest hereunder will be payable in cash, or subject
to satisfaction of all of the Equity Conditions, in cash or Common Stock in the
Company’s discretion. Interest paid in Common Stock will be converted at
ninety-four percent (94%) of the Conversion Price. In the event that the
interest due hereunder has not been paid in full prior to the Maturity Date, the
balance shall be paid in cash, or subject to satisfaction of all of the Equity
Conditions, in cash or Common Stock in the Holder’s discretion, on the Maturity
Date.

 

b) Interest Calculations. Interest shall be calculated on the basis of a 360-day
year, consisting of twelve 30 calendar day periods, and shall accrue and
compound daily commencing on the Original Issue Date until payment in full of
the outstanding principal, together with all accrued and unpaid interest,
liquidated damages and other amounts which may become due hereunder, has been
made. Interest hereunder will be paid to the Person in whose name this Note is
registered on the records of the Company regarding registration and transfers of
this Note (the “Note Register”).

 

c) Late Fee. All overdue accrued and unpaid interest to be paid hereunder shall
entail a late fee at an interest rate equal to the lesser of 18% per annum or
the maximum rate permitted by applicable law (the “Late Fees”) which shall
accrue daily from the date such interest is due hereunder through and including
the date of actual payment in full.

 

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) Investment Representations. This Note has been issued subject to certain
investment representations of the original Holder set forth in the Exchange
Agreement and may be transferred or exchanged only in compliance with therewith
and applicable federal and state securities laws and regulations.

 

  6 

 

 

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. At any time after the Original Issue Date until all
amounts due under this have been paid in full, this Note shall be convertible,
in whole or in part, into shares of Common Stock at the option of the Holder, at
any time and from time to time (subject to the conversion limitations set forth
in Section 4(e) hereof). 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 and/or any other amounts due under 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
Conversion, the Conversion Date shall be the date that such Notice of Conversion
is deemed 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, all
accrued and unpaid interest thereon and all other amounts due under this Note
have been so converted. Conversions hereunder shall have the effect of lowering
the outstanding principal and interest of this Note in an amount equal to the
applicable conversion amount. The Holder and the Company shall maintain a
Conversion Schedule showing the principal amount(s) and/or any other amounts due
under this Note converted and the date of such conversion(s). The Company may
deliver an objection to any Notice of Conversion within one (1) 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) Conversion Price. The conversion price shall be equal to $1.43 (the
“Conversion Price”).

 

c) [Reserved]

 

d) Mechanics of Conversion.

 

  7 

 

 

i. Conversion Shares Issuable Upon a Conversion. The number of Conversion Shares
issuable upon a conversion hereunder shall be determined by the quotient
obtained by dividing (x) the sum of all outstanding (i) principal, (ii)
interest, and (iii) any other amount due under this Note to be converted as
provided in the applicable Notice of Conversion by (y) the Conversion Price.

 

ii. Delivery of Certificate Upon Conversion. Not later than three (3) Trading
Days after each Conversion Date (the “Share Delivery Date”), the Company shall
deliver, or cause to be delivered, to the Holder (A) a certificate or
certificates representing the Conversion Shares which, if the resale of such
Conversion Shares are covered by and are being sold pursuant to an effective
Registration Statement or such Conversion Shares are eligible to be sold under
Rule 144 without the need for current public information and the Company has
received an opinion of counsel to such effect reasonably acceptable to the
Company (which opinion the Company will be responsible for obtaining at its own
cost), shall be free of restrictive legends and trading restrictions (other than
those which may then be required by the Exchange Agreement) representing the
number of Conversion Shares being acquired or being sold, as the case may be,
upon the conversion of this Note, and (B) a bank check in the amount of accrued
and unpaid interest (if the Company has elected to pay accrued interest in
cash). All certificate or certificates required to be delivered by the Company
under this Section 4(d) shall be delivered electronically through DTC or another
established clearing corporation performing similar functions, unless the
Company or its Transfer Agent does not have an account with DTC and/or is not
participating in the DTC Fast Automated Securities Transfer Program, then the
Company shall issue and deliver to the address as specified in such Conversion
Notice, a certificate (or certificates), registered in the name of the Holder or
its designee, for the number of Conversion Shares to which the Holder shall be
entitled. If the Conversion Shares are not being sold pursuant to an effective
Registration Statement or if the Conversion Date is prior to the date on which
such Conversion Shares are eligible to be sold under Rule 144 without the need
for current public information, the Conversion Shares shall bear a restrictive
legend in the following form, as appropriate:

 

“NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”

 

  8 

 

 

Notwithstanding the foregoing, commencing on such date that the Conversion
Shares are eligible for sale under Rule 144 subject to current public
information requirements, the Company, upon request and at the Company’s
expense, shall obtain a legal opinion to allow for such sales under Rule 144.

 

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
Conversion Notice.

 

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 or interest 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 of all or part of this Note shall have been sought. If the
injunction is not granted, the Company shall promptly comply with all conversion
obligations herein. If the injunction is obtained, the Company must post 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 seeking such
injunction, the Company shall issue Conversion Shares or, if applicable, cash,
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, $1,000 per Trading Day for
each Trading Day after such Share Delivery Date until such certificates are
delivered or Holder rescinds such conversion. Nothing herein shall limit a
Holder’s right to pursue actual damages or declare an Event of Default pursuant
to Section 6 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.

 

  9 

 

 

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 at all times reserve and keep available out of its authorized and
unissued shares of Common Stock a number of shares of Common Stock at least
equal to [________] for the sole purpose of issuance upon conversion of this
Note and payment of interest on this Note, each as herein provided, 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 such
aggregate number of shares of the Common Stock as shall (subject to the terms
and conditions set forth in the Exchange Agreement) be issuable (taking into
account the adjustments and restrictions of Section 5, but ignoring any
Beneficial Ownership Limitations or other restrictions and/or limitations on
conversions set forth herein or elsewhere) upon the conversion of the then
outstanding principal amount of this Note and payment of interest hereunder. 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, and, at such times as a Registration Statement covering such
shares is then effective under the Securities Act, will be registered for public
resale in accordance with such Registration Statement.

 

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.

 

  10 

 

 

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.

 

e) Holder’s Conversion Limitations. The Company shall not effect any conversion
of principal and/or interest of this Note, and a Holder shall not have the right
to convert any principal and/or interest 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) 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 Commission, as the case may be, (ii) a more recent public
announcement by the 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 or decrease the
Beneficial Ownership Limitation provisions of this Section 4(e), provided that
the Beneficial Ownership Limitation in no event exceeds 19.99% of the number of
shares of the 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 Beneficial Ownership Limitation 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 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.

 

  11 

 

 

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), (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 stockholders 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) True Up Shares. If the VWAP of the Common Stock on any of the twenty (20)
Trading Days immediately following the date of issuance of this Note (the
“Subsequent Pricing Period”), is below the Conversion Price (after all
adjustments herein provided for in this Section 5), then the Company shall issue
150,000 shares of Common Stock to the Holder (the “True-Up Shares”). The True-Up
Shares shall be issued within two (2) Trading Days of the Investor’s notice to
the Company requesting the issuance of the True-Up Shares. For the avoidance of
doubt, the maximum amount of shares of Common Stock that the Company may be
required to issue pursuant to this Section 5(b) is 150,000.

 

  12 

 

 

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 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 exercise 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) Intentionally omitted.

 

e) Fundamental Transaction. 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, or (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, at the option of the Holder (without regard to any
limitation in Section 4(d) 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 in Section 4(d) 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 (1) 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. Notwithstanding anything to the contrary, in the event of a
Fundamental Transaction that is (1) an all cash transaction, (2) a “Rule 13e-3
transaction” as defined in Rule 13e-3 under the Exchange Act, or (3) a
Fundamental Transaction involving a person or entity not traded on a national
securities exchange and only if such Fundamental Transaction is within the
Company’s control, the Company or any Successor Entity (as defined below) shall,
at the Holder’s option, exercisable at any time concurrently with, or within
thirty (30) days after, the consummation of the Fundamental Transaction,
purchase this Note from the Holder by paying to the Holder an amount of cash
equal to the Black Scholes Value of the remaining unconverted portion of this
Note on the date of the consummation of such Fundamental Transaction; provided,
however, if the Fundamental Transaction is not within the Company’s control,
including not approved by the Company’s Board of Directors, Holder shall not
have the option to require the Company to purchase its Note. 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
in accordance with the provisions of this Section 5(e) pursuant to written
agreements 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. For the avoidance of doubt, if, at any time while this Note is
outstanding, a Fundamental Transaction occurs, pursuant to the terms of this
Section 5(e), the Holder shall not be entitled to receive more than one of (i)
the 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, (ii) an amount of
cash equal to the Black Scholes Value of the remaining unconverted portion of
this Note on the date of the consummation of such Fundamental Transaction, or
(iii) the assumption by the Successor Entity of all of the obligations of the
Company under this Note and the other Transaction Documents and the option to
receive a security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to this Note.

 

  13 

 

 

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 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 stockholders 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 twenty (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, the Company shall simultaneously file such notice with the
Commission pursuant to a Current Report on Form 8-K. 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.

 

 

  14 

 

 

Section 6. 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, liquidated damages, Late Fees and other amounts owing to a Holder on
any Note, as and when the same shall become due and payable (whether on a
Conversion 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 three (3) Trading Days;

 

ii. the Company shall fail to observe or perform any other material covenant or
agreement contained in the Notes (and 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 (ix) below) which failure is not cured, if
possible to cure, within the earlier to occur of (A) five (5) Trading Days after
notice of such failure sent by the Holder or by any other Holder to the Company
and (B) ten (10) Trading Days after the Company has become or should have become
aware of such failure;

 

iii. a material default or material 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/or which any of their respective assets are subject to or bound
by (and not covered by clause (vi) below);

 

iv. any representation or warranty made in this Note, any other Transaction
Documents, 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 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 $50,000, 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;

 

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 five Trading Days or the transfer of shares of Common
Stock through the Depository Trust Company System is no longer available,
“frozen” or “chilled”;

 

viii. [Reserved]

 

ix. the Company does not meet the current public information requirements under
Rule 144 in respect of the Conversion Shares or the Warrant Shares;

 

x. the Company shall fail for any reason to deliver certificates to a Holder
prior to the third Trading Day after a Conversion Date pursuant to Section 4(c)
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;

 

  15 

 

 

xi. the Company fails to file with the Commission any required reports under
Section 13 or 15(d) of the Exchange Act such that it is not in compliance with
Rule 144(c)(1) (or Rule 144(i)(2), if applicable);

 

xii. the Company or any Subsidiary shall: (i) apply for or consent to the
appointment of a receiver, trustee, custodian or liquidator of it or any of its
properties, (ii) admit in writing its inability to pay its debts as they mature,
(iii) make a general assignment for the benefit of creditors, (iv) be
adjudicated a bankrupt or insolvent or be the subject of an order for relief
under Title 11 of the United States Code or any bankruptcy, reorganization,
insolvency, readjustment of debt, dissolution or liquidation law or statute of
any other jurisdiction or foreign country, or (v) file a voluntary petition in
bankruptcy, or a petition or an answer seeking reorganization or an arrangement
with creditors or to take advantage or any bankruptcy, reorganization,
insolvency, readjustment of debt, dissolution or liquidation law or statute, or
an answer admitting the material allegations of a petition filed against it in
any proceeding under any such law, or (vi) take or permit to be taken any action
in furtherance of or for the purpose of effecting any of the foregoing;

 

xiii. if any order, judgment or decree shall be entered, without the
application, approval or consent of the Company or any Subsidiary, by any court
of competent jurisdiction, approving a petition seeking liquidation or
reorganization of the Company or any Subsidiary, or appointing a receiver,
trustee, custodian or liquidator of the Company or any Subsidiary, or of all or
any substantial part of its assets, and such order, judgment or decree shall
continue unstayed and in effect for any period of sixty (60) days;

 

xiv. the occurrence of any levy upon or seizure or attachment of, or any
uninsured loss of or damage to, any property of the Company or any Subsidiary
having an aggregate fair value or repair cost (as the case may be) in excess of
$150,000 individually or in the aggregate, and any such levy, seizure or
attachment shall not be set aside, bonded or discharged within thirty (30) days
after the date thereof;

 

xv. the Company shall fail to maintain sufficient reserved shares pursuant to
the Purchase Agreement;

 

xvi. 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 $150,000, and such judgment, writ or similar final
process shall remain unvacated, unbonded or unstayed for a period of 45 calendar
days;

 

xvii. the Company, without the written consent of the Holders, shall 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;

 

  16 

 

 

xviii. the Company, without the written consent of the Holders, shall 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; or

 

xix. the Company enters into any transaction with any Affiliate of the Company
which would be required to be disclosed in any public filing with the
Commission.

 

b) Remedies Upon Event of Default. Subject to the Beneficial Ownership
Limitation as set forth in Section 4(e) and subject to the last sentence of this
Subsection, if any Event of Default occurs after the Senior Debt Maturity Date,
then 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. After the occurrence of
any Event of Default that results in the eventual acceleration of this Note, the
interest rate on this Note shall accrue at an additional interest rate equal to
the lesser of 1.5% per month (18% per annum) or the maximum rate permitted under
applicable law, provided however, that any such increase shall be added to the
principal 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 6(b). No such
rescission or annulment shall affect any subsequent Event of Default or impair
any right consequent thereon. Alternatively, at the election of the Holder, the
Holder may require the Company to (i) redeem all of the Notes then held by such
Holder through the issuance to such Holder of such number of shares of Common
Stock equal to the quotient of (x) the Default Redemption Amount, divided by the
Conversion Price; or (ii) increase the dividend rate on all of the outstanding
Notes held by such Holder retroactively to the initial Closing Date to 18% per
annum thereafter provided however that any such increase shall be added to the
principal amount. The Default Redemption Amount, whether payable in cash or in
shares, shall be due and payable or issuable, as the case may be, within five
(5) Trading Days of the date on which the notice for the payment therefor is
provided by a Holder the (“Default Redemption Payment Date”). If the Company
fails to pay in full the Default Redemption Amount hereunder on the date such
amount is due in accordance with this Section (whether in cash or shares of
Common Stock), the Company will pay interest thereon at a rate equal to the
lesser of 18% per annum or the maximum rate permitted by applicable law,
accruing and compounding daily from such date until the Default Redemption
Amount, plus all such interest thereon, is paid in full, provided however, that
any such interest shall be added to the principal amount. Notwithstanding
anything to the contrary contained in this Section 6(b), any cash payment(s)
(including without limitation, any and all applicable penalties and late fees),
including without limitation the Mandatory Default Amount and the Default
Redemption Amount, that the Company shall be required to make to Holder under
this Section 6(b) shall be deferred until all obligations to lenders under the
Term Loan are paid in full.

 

  17 

 

 

Section 7. Prepayment

 

After the Senior Lender Maturity Date, at any time upon five (5) days prior
written notice to the Holder, but subject to the Holder’s conversion rights set
forth herein, the Company may prepay any portion of the principal amount of this
Note, all accrued and unpaid interest relating to such prepaid portion of the
principal and all other amounts due under this Note. The written notice shall,
among other items, state the date such Prepayment Amount (as defined below) is
to be paid to the Holder, which shall not in any event be later than five (5)
days from the date of mailing of the prepayment notice to the Holder (“the
Prepayment Date”). If the Company exercises its right to prepay the Note, the
Company shall make payment to the Holder of an amount in cash equal to the
product of (i) the sum of (x) the then outstanding principal amount of this
Note, (y) all accrued but unpaid interest and (z) all other amounts owed
pursuant to this Note including, but not limited to, all Late Fees and
liquidated damages (collectively the “Prepayment Amount”), multiplied by (ii)
(x) 115%. The Holder may continue to convert the Note from the date notice of
the prepayment is given until the date the Holder receives in full, the
Prepayment Amount. If the entire Prepayment Amount is not received by the Holder
in immediately available funds by wire transfer pursuant to wire transfer
instructions provided to the Company by the Holder, on or before the Prepayment
Date, such shall, (at the election of the Holder) be an Event of Default of the
payment of principal pursuant to Section 6(a)(1) hereof.

 

Section 8. Participation in Qualified Public Offering

 

Subject to compliance with all applicable laws and the rules of the applicable
Trading Market, if the Company engages in a Qualified Public Offering while this
Note is outstanding, at the Company’s option, Holder shall have the right to
participate in such offering by applying any or all of the outstanding principal
amount of this Note (the “Applied Principal”), plus a prepayment penalty of an
additional 20% of the Applied Principal, to the Holder’s purchase of the
securities offered in the Qualified Public Offering and reducing the outstanding
principal under this Note by the Applied Principal. Holder agrees to be subject
to the same rights and obligations of any investor in such Qualified Public
Offering.

 

Section 9 . No Short Sales; Volume Restrictions

 

a) No Short Sales. So long as the Note remains outstanding, neither Holder nor
any of its affiliates nor any entity managed or controlled by the Holder
(collectively, the “Restricted Persons” and each of the foregoing is referred to
herein as a “Restricted Person”) shall, directly or indirectly, engage in any
Short Sales involving the Company’s securities. Notwithstanding the foregoing,
it is expressly understood and agreed that nothing contained herein shall
(without implication that the contrary would otherwise be true) prohibit any
Restricted Person from: (1) selling “long” (as defined under Rule 200
promulgated under Regulation SHO) the Securities; or (2) selling a number of
shares of Common Stock equal to the number of Conversion Shares and/or Warrant
Shares, as applicable, that such Restricted Person is entitled to receive under
a pending Conversion Notice and/or Exercise Notice but has not yet taken
possession of so long as such Restricted Person delivers the Conversion Shares
purchased pursuant to such Conversion Notice and/or the Warrant Shares purchased
pursuant to such Exercise Notice, as applicable, to the purchaser thereof;
provided, however, such Restricted Person shall not be required to so deliver
any such Conversion Shares subject to such Conversion Notice or the Warrant
Shares purchased pursuant to such Exercise Notice, as applicable, if the Company
fails for any reason to deliver such Conversion Shares to Holder on the
applicable settlement date upon the terms and subject to the provisions of the
Note and/or such Warrant Shares to Holder on the applicable settlement date upon
the terms and subject to the provisions of the Warrants, as applicable.

 

  18 

 

 

b) Volume Restriction. Unless otherwise mutually agreed by the Company and
Holder, Holder shall not sell Conversion Shares of the Company issued to Holder
in conjunction herewith in an amount, in the aggregate, exceeding 20% of the
composite aggregate dollar trading volume of the Common Stock of the Company as
reported on Bloomberg, L.P. on any Trading Day; provided, however, that during
the Subsequent Pricing Period, the Holder shall not sell Conversion Shares in an
amount, in the aggregate, exceeding 5% of the composite aggregate dollar trading
volume of the Common Stock of the Company as reported on Bloomberg, L.P. on any
Trading Day, which restriction shall terminate at the end of the Subsequent
Pricing Period. Notwithstanding the foregoing, if the Common Stock closes below
$1.25 or above $3.25 or an Event of Default occurs and is continuing, the
foregoing restrictions (the “Restrictions”) shall be removed. If the Common
Stock subsequently closes between $1.25 and $3.25 or the Company cures any Event
of Default, the Restrictions shall be reinstated.

 

Section 10. Share Issuance Cap. In connection with the conversion of this Note
and the Second Exchange Note, collectively, the Company shall not be required to
issue in the aggregate more than 19.99% of the number of shares of Common Stock
or 19.99% of the voting power of the Company issued and outstanding immediately
prior to the date hereof, and in no event shall the Company be required to pay
any penalties or fees of any kind due to the operation of the provisions
contained in this Section 10.

 

Section 11. Qualified Public Offering. In the event that (i) the Company
conducts a Qualified Public Offering while this Note is outstanding or (ii) the
Holder converts three million dollars ($3,000,000) (the “Minimum Conversion
Amount”) of the outstanding principal under this Note and the Second Exchange
Note, collectively, prior to the three month anniversary of the issuance of this
Note and the Company conducts a Qualified Public Offering during the six month
period following the date on which the aggregate conversions by the Holder
equals the Minimum Conversion Amount, then the Company agrees that, at the
Holder’s option, it shall engage Aegis Capital Corp. as the joint book-runner or
co-lead placement agent, and it further agrees that Aegis Capital Corp. shall
receive standard industry compensation in connection therewith.

 

Section 12. Future Exchange Transactions. The Company and the Holder agree that:

 

a) During the period commencing on the date hereof and for so long as either
this Note remains outstanding and/or until the Second Exchange Note is no longer
outstanding, neither the Company nor any of its affiliates or Subsidiaries, nor
any of its or their respective officers, employees, directors, agents or other
representatives, will, without the prior written consent of the Holder (which
consent may be withheld, delayed or conditioned in the Holder’s sole
discretion), directly or indirectly: solicit, initiate, encourage or accept any
other inquiries, proposals, or offers from any Person (other than the Holder)
relating to any exchange of the Term Loan for any other security of the Company
or any of its Subsidiaries; provided, however, that in the event that (i) the
Second Exchange has occurred prior to May 3, 2016 or (ii) the Second Exchange
has not occurred prior to May 3, 2016 and the Company and the Holder are unable,
in good faith, to agree on an extension of time beyond such date, then the
Company shall not be required to obtain consent of the Holder after a date that
is twenty (20) Trading Days after May 3, 2016 (the “Consent Termination”).

 

  19 

 

 

b) During the period commencing on the Consent Termination and continuing until
neither this Note nor the Second Exchange Note remains outstanding (the “ROFR
Period”), the Company shall not enter into any agreement or consummate any
transaction relating to the exchange of any portion of the Term Loan for any
other security of the Company or any of its Subsidiaries, except to the extent
(x) consummated pursuant to an exchange registered under a registration
statement of the Company filed pursuant to the Securities Act and declared
effective by the U.S. Securities and Exchange Commission or (y) such exchange is
exempt from registration pursuant to an exemption provided under the Securities
Act (other than Sections 3(a)(9) or 3(a)(10) of the Securities Act) (any such
transaction an “Exchange Transaction”) except in compliance with the terms of
this Section 12.

 

c) If at any time during the ROFR Period, the Company desires to pursue an
Exchange Transaction with a third party, prior to entering into such Exchange
Transaction, the Company shall first notify Holder in writing (the “Offer
Notice”) of the identity of the proposed parties to such Exchange Transaction
and the material financial and other terms and conditions of such Exchange
Transaction (the “Material Terms”). Each Offer Notice constitutes an offer made
by the Company to enter into an agreement on the same Material Terms of such
Exchange Transaction (the “ROFR Notice”).

 

d) At any time prior to the expiration of the 10 day period following Holder’s
receipt of the Offer Notice (the “Exercise Period”), Holder may accept the ROFR
Offer by delivery to the Company of a binding letter of intent containing the
Material Terms, executed by Holder.

 

e) If, by the expiration of the Exercise Period, Holder has not accepted the
ROFR Offer, and provided that the Company has complied with all of the
provisions of this Section 12, at any time during the thirty (30) day period
following the expiration of the Exercise Period, the Company may consummate the
Exchange Transaction with the counterparty identified in the applicable Offer
Notice, on Material Terms that are the same or more favorable to the Company as
the Material Terms set forth in the Offer Notice. If such Exchange Transaction
is not consummated within such thirty (30) day period, the terms and conditions
of this Section 12 will again apply and the Company shall not enter into any
Exchange Transaction during the ROFR Period without affording Holder the right
of first refusal on the terms and conditions of this Section 12.

 

  20 

 

 

Section 13. Miscellaneous.

 

a) Notices. Any and all notices or other communications or deliveries to be
provided by the Holder hereunder, including, without limitation, any Notice of
Conversion, shall be in writing and delivered personally, by facsimile, or sent
by a nationally recognized overnight courier service, addressed to the Company,
at 1885 West 2100 South, Salt Lake City, UT 84119, or such other facsimile
number or address as the Company may specify for such purposes by notice to the
Holder delivered in accordance with this Section 8(a). 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 sent by a nationally
recognized overnight courier service addressed to each Holder at the facsimile
number or address of the Holder appearing on the books of the Company, or if no
such facsimile number or address appears on the books of the Company, at the
principal place of business of such Holder, as set forth in the Exchange
Agreement. Any notice or other communication or deliveries hereunder shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile number
set forth on the signature pages attached hereto prior to 12:00 p.m. (New York
City time) on any date, (ii) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number set forth on the signature pages attached hereto on a day that
is not a Trading Day or later than 12:00 p.m. (New York City time) on any
Trading Day, (iii) the second Trading Day following the date of mailing, if sent
by U.S. nationally recognized overnight courier service or (iv) upon actual
receipt by the party to whom such notice is required to be given.

 

b) 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, 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 terms set forth herein.

 

c) 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.

 

  21 

 

 

d) 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 be commenced in the state and
federal courts sitting in the City of New York, Borough of Manhattan (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 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.
If any party shall commence an action or proceeding to enforce any provisions of
this Note, then the prevailing party in such action or proceeding shall be
reimbursed by the other party for its attorneys’ fees and other costs and
expenses incurred in the investigation, preparation and prosecution of such
action or proceeding.

 

e) 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.

 

f) 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.

 

  22 

 

 

g) 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
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 may 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.

 

h) 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.

 

i) 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.

 

*********************

 

(Signature Pages Follow)

 

  23 

 

 

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.

 

  Amedica Corporation       By:     Name:   Title:                             
  Facsimile No. for delivery of Notices:_______________________

 

[Signature Page to Subordinated Convertible Promissory Note]

 

   

 

 

ANNEX A

 

NOTICE OF CONVERSION

 

The undersigned hereby elects to convert principal, accrued but unpaid interest
and/or any of amounts due under the Subordinated Convertible Promissory Note of
Amedica Corporation, a Delaware 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, if the resale of any such shares of Common Stock are
covered by and are being sold pursuant to an effective Registration Statement.

 

Conversion calculations:

 

  Date to Effect Conversion: __________________________       Principal Amount
of Note to be Converted: ______________       Payment of Interest in Common
Stock __ yes __ no   If yes, $_____ of Interest Accrued on Account of Conversion
at Issue.       Other Amounts Owed Under this Note to be Converted including
Late Fees: _______________________________     Number of shares of Common Stock
to be issued: ______     Signature: _______________________________________    
Name: __________________________________________     Delivery Instructions:

 

   

 

 

Schedule 1

 

CONVERSION SCHEDULE

 

This Subordinated Convertible Promissory Note in the original principal amount
of $1,000,000 is issued by Amedica Corporation, a Delaware corporation. This
Conversion Schedule reflects conversions made under Section 4 of the above
referenced Note.

 

Dated:

 

Date of Conversion

(or for first entry,
Original Issue Date)

  Amount of
Conversion  

Aggregate Principal
Amount Remaining
Subsequent to
Conversion

(or original Principal Amount)

  Company Attest