Exhibit 10.3
 
THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAWS.  NEITHER THIS NOTE NOR SUCH SHARES OF COMMON STOCK MAY BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAW OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUING
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.

Principal Amount:  $108,000.00
 
Issue Date:  June 17, 2009

10 % CONVERTIBLE PROMISSORY NOTE DUE OCTOBER 15, 2009
 
FOR VALUE RECEIVED, ThermoEnergy Corporation, a Delaware corporation (the
“Borrower”), hereby promise to pay to the order of The Focus Fund (the
“Holder”), the sum of One Hundred Eight Thousand Dollars ($108,000.00) on
October 15, 2009 (the “Maturity Date”).
 
Interest on the outstanding principal balance shall be paid at the rate of ten
percent (10%) per annum, payable on the Maturity Date.  Interest shall be
computed on the basis of a 365-day year, using the number of days actually
elapsed.
 
The Holder shall have the right at any time and from time to time until the
principal and interest on this Note shall have been paid in full, to convert the
principal and any interest due under this Note into shares of the Borrower’s
Common Stock, par value $0.001 per share (the “Common Stock”).  If the Holder
exercises his right of conversion, the Holder shall give the Borrower a Notice
of Conversion in the form annexed to this Note, setting forth the amount of
principal, interest and Deferral Fee which the Holder is converting into Common
Stock (the “Conversion Amount”) at the Conversion Price in effect on the date of
such notice.  The date of such notice is referred to as the “Conversion
Date.”  Within five (5) business days after the Conversion Date (such fifth day
being the “Delivery Date”), the Borrower shall deliver irrevocable instructions
to the transfer agent for the Common Stock to issue and deliver to the Holder a
certificate for that number of shares of Common Stock into which the Conversion
Amount is being converted.  Except to the extent that the entire unpaid
principal balance of this Note is being presented for conversion, the Holder
shall not be required to present this Note in order to effect conversion, and
the Holder shall maintain a ledger setting forth each conversion of principal
and interest on this Note and such ledger shall, absent manifest error, be
deemed to be binding and conclusive on the Borrower.
 
This Note may be prepaid, in whole or in part, at any time without premium or
penalty upon ten (10) days’ prior written notice to the Holder.  Partial
prepayments shall be applied (i) first to any unpaid Deferral Fee, (ii) then to
accrued and unpaid interest, and (iii) the balance to principal.
 
1.1.          Conversion Price.  The Conversion Price shall be $0.36 per share
of Common Stock; provided, however, that the Conversion Price is subject to
adjustment as set forth in Section 1.2 of this Note.  The number of shares of
Common Stock to be issued upon each conversion of this Note shall be determined
by dividing the Conversion Amount by the Conversion Price in effect on the
Conversion Date.

 
 

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1.2.           Adjustment to the Conversion Price. The Conversion Price and
number and kind of shares or other securities to be issued upon conversion shall
be subject to adjustment from time to time upon the happening of certain events
while this conversion right remains outstanding, as follows:
 
1.2.1.
Stock Dividends, Subdivisions and Combinations.    If the Borrower shall at any
time:

 
(a)           declare or pay to the holders of its Common Stock a dividend
payable in, or other distribution of, shares of Common Stock or in securities
convertible into shares of Common Stock (“Convertible Securities”); or
 
(b)           subdivide its outstanding shares of Common Stock into a larger
number of shares of Common Stock; or
 
(c)           combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock;
 
then (i) the number of shares of Common Stock into which this Note is
convertible immediately after the occurrence of any such event shall be adjusted
to equal the number of shares of Common Stock which a record holder of the same
number of shares of Common Stock into which this Note is convertible immediately
prior to the occurrence of such event would own or be entitled to receive after
the occurrence of such event, and (ii) the then-current Conversion Price shall
be adjusted to equal (A) the then-current Conversion Price multiplied by the
number of shares of Common Stock into which this Note is convertible immediately
prior to the adjustment divided by (B) the number of shares into which this Note
is convertible immediately after such adjustment.

1.2.2.
Certain Other Distributions.  If at any time the Borrowers shall declare or pay
to the holders of its Common Stock any dividend or other distribution of:

 
(a)           cash;
 
(b)           any evidences of its indebtedness, any shares of its stock or any
other securities or property of any nature whatsoever (other than cash,
Convertible Securities or additional shares of Common Stock); or
 
(c)           any warrants or other rights to subscribe for or purchase any
evidences of its indebtedness, any shares of its stock or any other securities
or property of any nature whatsoever (other than cash, Convertible Securities or
additional shares of Common Stock);

then, upon conversion of this Note, the Holder shall be entitled to receive such
dividend or distribution as if the Holder had converted the Conversion Amount
prior to the date of such dividend or distribution.  A reclassification of the
Common Stock (other than a change in par value, or from par value to no par
value or from no par value to par value) into shares of Common Stock and shares
of any other class of stock shall be deemed a distribution by the Company to the
holders of its Common Stock of such shares of such other class of stock within
the meaning of this Section 1.2.1 and, if the outstanding shares of Common Stock
shall be changed into a larger or smaller number of shares of Common Stock as a
part of such reclassification, such change shall be deemed a subdivision or
combination, as the case may be, of the outstanding shares of Common Stock
within the meaning of Section 1.2.1.

 
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1.2.3        Reorganization, Reclassification, Merger, Consolidation or
Disposition of Assets.    In case the Borrower shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another Person
(where the Borrower is not the survivor or where there is a change in or
distribution with respect to the Common Stock), or sell, convey, transfer or
otherwise dispose of all or substantially all its property, assets or business
to another Person, or effectuate a transaction or series of related transactions
in which more than 50% of the voting power of the Borrower is disposed of (each,
a “Fundamental Corporate Change”) and, pursuant to the terms of such Fundamental
Corporate Change, shares of common stock of the successor or acquiring
corporation, or any cash, shares of stock or other securities or property of any
nature whatsoever (including warrants or other subscription or purchase rights)
in addition to or in lieu of common stock of the successor or acquiring
corporation (“Other Property”), are to be received by or distributed to the
holders of Common Stock, then the Holder shall have the right thereafter to
receive, upon conversion of this Note, such number of shares of common stock of
the successor or acquiring corporation or of the Borrower, if it is the
surviving corporation, and Other Property as is receivable upon or as a result
of such Fundamental Corporate Change by a holder of the number of shares of
Common Stock into which this Note is convertible immediately prior to such
Fundamental Corporate Change.  In case of any such Fundamental Corporate Change,
the successor or acquiring corporation (if other than the Borrower) shall
expressly assume the due and punctual observance and performance of each and
every covenant and condition of this Note to be performed and observed by the
Borrower and all the obligations and liabilities hereunder, subject to such
modifications as may be deemed appropriate (as determined by resolution of the
Board of Directors of the Borrower) in order to provide for adjustments of
shares of Common Stock into which this Note is convertible which shall be as
nearly equivalent as practicable to the adjustments provided for in this Section
1.2.  For purposes of this Section 1.2.3, “common stock of the successor or
acquiring corporation” shall include stock of such corporation of any class
which is not preferred as to dividends or assets over any other class of stock
of such corporation and which is not subject to redemption and shall also
include any evidences of indebtedness, shares of stock or other securities which
are convertible into or exchangeable for any such stock, either immediately or
upon a specified date or upon the happening of a specified event, and any
warrants or other rights to subscribe for or purchase any such stock.  The
foregoing provisions of this Section 1.2 shall similarly apply to any successive
Fundamental Corporate Change of the successor corporation.
 
1.2.4       Other Action Affecting Common Stock.  In case at any time or from
time to time the Borrower shall take any action in respect of the Common Stock,
other than any action described in this Section 1.2, which would have a
materially adverse effect upon the rights of the Holder, the number of shares of
Common Stock into which this Note is convertible and/or the Conversion Price
shall be adjusted in such manner as may be equitable in the circumstances, as
determined in good faith by the Board of Directors of the Borrower.
 
1.2.5       Certain Limitations.  Notwithstanding anything herein to the
contrary, the Borrower agrees not to enter into any transaction which, by reason
of any adjustment hereunder, would cause the Conversion Price to be less than
the par value per share of Common Stock.
 
1.3.           Notice of Adjustment.  Whenever the Conversion Price is adjusted
pursuant to Section 1.2 of this Note, the Borrower shall promptly mail to the
Holder a notice setting forth the Conversion Price after such adjustment and
setting forth a statement of the facts requiring such adjustment.

 
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1.4.           Mechanics of Conversion.
 
1.4.1.       Delivery of Certificate Upon Conversion. Except as otherwise set
forth herein, not later than the Delivery Date, the Borrower shall deliver to
the Holder (a) a certificate or certificates representing the number of shares
of Common Stock being acquired upon the conversion of the Note (which
certificate or certificates shall bear a legend indicating that such shares have
been issued in reliance on an exemption from the registration requirements of
the Securities Act of 1933 (the “Securities Act” and may not be sold,
transferred or otherwise disposed of except pursuant to an effective
registration statement under the Securities Act or in reliance on an exemption
to the registration requirements of the Securities Act), and (b) a bank check in
the amount of accrued and unpaid interest on the portion of the Note being
converted unless the Holder converts such interest into Common Stock.  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 Delivery Date, the
Holder shall be entitled to elect by written notice to the Borrower at any time
on or before its receipt of such certificate or certificates thereafter, to
rescind such conversion, in which event the conversion shall be deemed void ab
initio.
 
1.4.2.       Obligation Absolute. The Borrower’s obligations to issue and
deliver the Common Stock 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 Borrower 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 Borrower to the
Holder in connection with the issuance of such shares.  In the event the Holder
shall elect to convert any or all of this Note, The Borrower may not refuse
conversion based on any claim that such Holder or any one associated or
affiliated with the Holder of has been engaged in any violation of law,
agreement or for any other reason unless an injunction from a court, on notice,
restraining and or enjoining conversion of all or part of this Note shall have
been sought and obtained.  In the absence of an injunction precluding the same,
the Borrower shall issue the Common Stock or, if applicable, cash, upon a
properly noticed conversion.
 
1.4.3.       Fractional Shares. Upon a conversion hereunder, the Borrower shall
not be required to issue stock certificates representing fractions of shares of
the Common Stock. All fractional shares shall be carried forward and any
fractional shares which remain after a Holder converts all of this Note shall be
rounded up to the next whole number of shares.
 
1.4.4.       Transfer Taxes.  The issuance of certificates for shares of the
Common Stock on conversion of this Note shall be made without charge to the
Holder thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Borrower
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 and the Borrower
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
Borrower the amount of such tax or shall have established to the satisfaction of
the Borrower that such tax has been paid.
 
Section 2.               Events of Default.
 
2.1.           The entire unpaid principal amount of this Note, together with
interest thereon shall, on written notice from the Holder, forthwith become and
be due and payable if any one or more Events of Default shall have occurred (for
any reason whatsoever and whether such happening shall be voluntary or
involuntary or be affected or come about by operation of law pursuant to or in
compliance with any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body) and be continuing.

 
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2.2.           The occurrence of any one or more of the following events or
conditions shall constitute an “Event of Default” under this Agreement:
 
2.2.1.       Borrower’s failure to make any payment of principal or interest or
any other sums within fifteen (15) days of the date when due on this Note,
unless the Borrower timely gives a Deferral Notice and pays the required
Deferral Fee with respect to such payment; or
 
2.2.2.       Any representation or warranty or other statement made or furnished
to the Holder by or on behalf of the Borrower in any document or instrument
furnished in connection with this Note proves to have been false or misleading
in any material respect when made or furnished; or
 
2.2.3.       Breach of or failure in the due observance or performance in any
material respect of any covenant, condition or agreement on the part of the
Borrower to be observed or performed pursuant to this Note and the failure to
cure (if curable) any such breach or failure within fifteen (15) days after
receipt of written notice thereof from the Holder; or
 
2.2.4.       If the Borrower shall (a) apply for or consent to the appointment
of a receiver, trustee or liquidator of all or a substantial part of any of its
assets; (b) be unable, or admit in writing its inability, to pay its debts as
they mature; (c) file or permit the filing of any petition, case arrangement,
reorganization, or the like under any insolvency or bankruptcy law, or the
adjudication of it as a bankrupt, or the making of an assignment for the benefit
of creditors or the consenting to any form or arrangement for the satisfaction,
settlement or delay of debt or the appointment of a receiver for all or any part
of its properties; or (d) any action shall be taken by the Borrower for the
purpose of effecting any of the foregoing; or
 
2.2.5.       An order, judgment or decree shall be entered, or a case shall be
commenced, against the Borrower, without its application, approval or consent by
any court of competent jurisdiction, approving a petition or permitting the
commencement of a case seeking reorganization or liquidation of the Borrower or
appointing a receiver, trustee or liquidator of the Borrower, or of all or a
substantial part of the assets of the Borrower, and the Borrower, by any act,
indicate its approval thereof, consent thereto, or acquiescence therein, or such
order, judgment, decree or case shall continue unstayed and in effect for any
period of 90 consecutive days or an order for relief in connection therewith
shall be entered; or
 
2.2.6.       If the Borrower shall dissolve or liquidate, or be dissolved or
liquidated, or cease to legally exist, or merge or consolidate, or be merged or
consolidated, with or into any other corporation.
 
Section 3.               Miscellaneous
 
3.1.           Usury Saving Provision.  All payment obligations arising under
this Note are subject to the express condition that at no time shall the
Borrower be obligated or required to pay interest at a rate which could subject
the Holder to either civil or criminal liability as a result of being in excess
of the maximum rate which the Borrower is permitted by law to contract or agree
to pay.  If by the terms of this Note, the Borrower is at any time required or
obligated to pay interest at a rate in excess of such maximum rate, the
applicable rate of interest shall be deemed to be immediately reduced to such
maximum rate, and interest thus payable shall be computed at such maximum rate,
and the portion of all prior interest payments in excess of such maximum rate
shall be applied and shall be deemed to have been payments in reduction of
principal.

 
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3.2.           Failure or Indulgence Not Waiver.  No failure or delay on the
part of the Holder hereof in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege.  All rights and
remedies existing hereunder are cumulative to, and not exclusive of, any rights
or remedies otherwise available.
 
3.3.           Governing Law.  This Agreement and the rights of the parties
shall be construed and enforced in accordance with the laws of the State of New
York applicable to agreements executed and to be performed wholly within such
state and without regard to principles of conflicts of law.  Each party
irrevocably (a) consents to the jurisdiction of the federal and state courts
situated in Pulaski County, Arkansas in any action that may be brought pursuant
to this Agreement, and (b) submits to and accepts, with respect to its
properties and assets, generally and unconditionally, the in personam
jurisdiction of the aforesaid courts, waiving any defense that such court is not
a convenient forum.  In any such litigation to the extent permitted by
applicable law, each party waives personal service of any summons, complaint or
other process, and agrees that the service thereof may be made either (i) in the
manner for giving of notices provided in Section 3.5 of this Note (other than by
telecopier) or (ii) in any other manner permitted by law.
 
3.4.           Waiver of Right to Trial by Jury.  BORROWER HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT TO A TRIAL BY JURY IN RESPECT OF
ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE
AND WAIVE ANY RIGHT TO BRING A COUNTERCLAIM AGAINST THE HOLDER IN ANY ACTION TO
ENFORCE THIS NOTE.  THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR HOLDER TO
ACCEPT THIS NOTE.
 
3.5.           Notice.  All notices, requests or other communications required
or permitted to be given under this Agreement to any party shall be in writing
and shall be deemed to have been sufficiently given when delivered by personal
service or sent by registered mail, overnight courier services with provided
evidence of delivery or attempted delivery, or facsimile, to the Borrower at 124
West Capitol Avenue, Suite 880, Little Rock, Arkansas 72201 (fax: 501-375-5249)
or to the Holder at its principal place of business.  Either party may, be like
notice, change the address or telecopy number or the person to whom notice is to
be given.  Notice shall be deemed given when received or when attempted delivery
is made (based on evidence of attempted delivery by the United States Postal
Service or an overnight courier or a messenger service), provided that notice by
telecopier shall be deemed given when receipt is acknowledged by the recipient.
 
3.6.           Amendment.  This Note may be amended or supplemented only by the
written agreement of the Holder and the Borrower.
 
3.7.           Assignability.  This Note shall be binding upon the Borrower and
its successors and assigns, and shall inure to the benefit of the Holder and its
successors and assigns.  The Borrower may not assign any of its obligations
under this Note without the consent of the Holder.

 
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3.8.           Cost of Collection.  If default is made in the payment of this
Note, the Borrower shall pay the Holder hereof reasonable costs of collection,
including reasonable attorneys’ fees, regardless of whether the Holder commenced
litigation in order to enforce its rights under this Note.
 
3.9.           Stockholder Status.  The Holder shall not have rights as a
stockholder of the Borrower with respect to unconverted portions of this
Note.  However, from and after the Conversion Date, the Holder will have all the
rights of a shareholder of the Borrower with respect to the shares of Common
Stock to be received by Holder after delivery by the Holder of a Conversion
Notice to the Borrower regardless of whether physical certificates shall have
been delivered.
 
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and
delivered by its duly authorized Executive Vice President and Chief Financial
Officer as of the date and year first above written.

 ThermoEnergy Corporation    
By:
  /s/ Andrew T. Melton  
 
   Andrew T. Melton
 
   Executive Vice President and CFO

 
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NOTICE OF CONVERSION

(To be executed by the Holder in order to convert the Note)

The undersigned hereby elects to convert $_________ of the principal and
$_________ of the interest due on the Note issued by ThermoEnergy Corporation on
___________2009 into shares of Common Stock of ThermoEnergy Corporation
according to the conditions set forth in such Note, as of the date written
below.

Date of Conversion:__________________________________

Conversion Price:____________________________________

Number of Shares To Be Delivered:_______________________________

Signature:________________________________________

Print Name and
Title:______________________________________________________________
 
Address: 
         

 

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