Exhibit 10.26

CONVERTIBLE PROMISSORY NOTE

     
$1,300,000
  December 3, 2003

     FOR VALUE RECEIVED, the undersigned, ENTRX CORPORATION, a Delaware
corporation (the “Maker”), hereby promises to pay to the order of Pandora Select
Partners L.P., a British Virgin Islands limited partnership, or its assigns (the
“Payee”), at such place as the Payee may designate in writing, the principal sum
of One Million Three Hundred Thousand Dollars ($1,300,000), under the terms set
forth herein.

1.      Interest. The unpaid principal balance hereof from time to time
outstanding shall bear interest from the date hereof at the rate of ten percent
(10%) per annum.

2.      Payment. The principal and interest hereof is payable as follows:

     (a) Payments in cash of interest only are payable in arrears on December
15, 2003 and on January 15, February 15, March 15 and April 15, 2004; and

     (b) Commencing on May 15, 2004, and on the 15th day of each of the
following 32 months, Maker shall pay amortized principal and interest on this
Note of $45,221.45 (the “Monthly Scheduled Payment”).

3.      Optional Payment in Stock.

     (a) In lieu of making a cash payment under subsection 2(b) above, Maker may
pay the Monthly Scheduled Payment, or any portion thereof, but only to the
extent permitted by this subsection (a), by the issuance of shares of its $0.10
par value common stock (the “Common Stock”), the per share value of which is
computed as provided in Subsection (b) below. Despite the foregoing, the number
of shares of Common Stock which may be issued to pay all or any portion of a
particular Monthly Scheduled Payment may not exceed the lesser of (i) 8% of the
aggregate number of traded shares of Common Stock reported on the NASDAQ System
(or if not then traded on the NASDAQ System, on the OTC Bulletin Board as
reported by bigcharts.com, or if this service is discontinued, such other
reporting service acceptable to Payee) for the 20 trading days immediately
preceding such Monthly Scheduled Payment due or (ii) a number of shares of
Common Stock which, when added to the number of shares of Common Stock owned of
record together by Payee and its affiliates, would not cause Payee and its
affiliates together to own of record more than 4.99% of the Maker’s outstanding
Common Stock. In computing under this subsection (a) the aggregate number of
traded shares during any time period, the Maker shall exclude (i) shares sold by
or for the account or at the direction of the Maker, officers or directors of
Maker or any members of their immediate families or any affiliates of Maker and
(ii) shares determined solely by Payee (for which Payee shall so inform the
Maker in writing) to represent unlawful or potentially unlawful sales. Maker may
pay the Monthly Scheduled Payment, or any portion thereof, by the issuance of
Common Stock only if, at the time of such payment, Maker has in effect a
registration statement on Form S-2 with the SEC and applicable state securities
laws covering the original issuance of such shares by the Maker or the resale of
such shares by the Payee. Further, Maker may not pay a Monthly Scheduled
Payment, or any portion thereof, by the issuance of Common Stock if, at the time
of such payment, the per share value of the Maker’s Common Stock (as computed in
accordance with subsection (b) below) is less than $0.72 per share.

     (b) The per share value of the Common Stock as of a specified Scheduled
Monthly Payment date for the purposes of this Section 3 is 90% (rounded to the
nearest $.01) of the average (rounded to the nearest $.01) of the high closing
bid prices of Maker’s Common Stock on the NASDAQ System (or if not then traded
on the NASDAQ System, then on the OTC Bulletin Board as reported by
bigcharts.com, or if this service is discontinued, such other reporting service
acceptable to Payee) for the 20 trading days immediately preceding the
particular Scheduled Monthly Payment date.

 

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     (c) Payment by Common Stock shall be deemed to be made by Maker by giving
written notice to the Payee of the number of shares being issued in such
payment, and the Maker’s calculation of the per share market value under
subsection (b) above; provided that certificates representing those shares are
delivered to Payee within 20 days of the due date of the Scheduled Monthly
Payment.

4.      Conversion.

     (a) At any time while any portion of the principal or interest of this Note
is outstanding (including during the notice period prior to any optional cash
prepayment by the Maker), the Payee may give the Maker written notice of its
intention to convert all or any portion of the outstanding principal and/or
accrued, but unpaid interest on this Note into shares of the Maker’s Common
Stock based on $1.35 per share (the “Conversion Rate”). Upon receipt of the
Payee’s notice, the Maker shall immediately cause certificates representing
these shares to be delivered to Payee within 20 days of, and Payment shall be
deemed to have been made on, the date of such notice.

     (b) The Conversion Rate shall be adjusted proportionally for any subsequent
stock dividend or split, stock combination or other similar recapitalization,
reclassification or reorganization of or affecting Maker’s Common Stock. In case
of any consolidation or merger to which the Maker is a party other than a merger
or consolidation in which the Maker is the continuing corporation, or in case of
any sale or conveyance to another corporation of the property of the Maker as an
entirety or substantially as an entirety, or in the case of any statutory
exchange of securities with another corporation (including any exchange effected
in connection with a merger of a third corporation into the Maker), then instead
of receiving shares of Maker’s Common Stock, Payee shall have the right
thereafter to receive the kind and amount of shares of stock and other
securities and property which the Payee would have owned or have been entitled
to receive immediately after such consolidation, merger, statutory exchange,
sale or conveyance had the same portion of this Note been paid or converted
immediately prior to the effective date of such consolidation, merger, statutory
exchange, sale or conveyance and, in any such case, if necessary, appropriate
adjustment shall be made in the application of the provisions set forth in this
Section with respect to the rights and interests thereafter of the Payee, to the
end that the provisions set forth in this Section shall thereafter
correspondingly be made applicable, as nearly as may reasonably be, in relation
to any shares of stock and other securities and property thereafter deliverable
in connection with this Note. The provisions of this subsection shall similarly
apply to successive consolidations, mergers, statutory exchanges, sales or
conveyances.

     (c) Despite anything above to the contrary, the Payee may not convert this
Note into Common Stock under this Section 4 during the time period and to the
extent that the shares of Maker’s Common Stock that the Payee could acquire upon
the conversion would cause Payee’s Beneficial Ownership of Maker’s Common Stock
to exceed 4.99% of Maker’s outstanding Common Stock; provided, however, that the
limitations on the right to exercise a Warrant for 400,000 shares of Common
Stock being issued to Payee in connection with this Note, as provided by such
Warrant, shall first reduce Payee’s Beneficial Ownership of Maker’s Common Stock
before limitation of Payee’s conversion rights hereunder; and provided further,
that the limitation of Payee’s conversion rights hereunder shall first reduce
Payee’s Beneficial Ownership before limiting the number of shares that Maker may
issue to Payee as payment hereunder pursuant to Section 3(a) above. The Payee
will, at the request of Maker, from time to time, notify Maker of Payee’s
computation of Payee’s Beneficial Ownership. The parties shall compute Payee’s
“Beneficial Ownership” of Maker’s Common Stock in accordance with U.S.
Securities and Exchange Commission (“SEC”) Rule 13d-3.

5.      Security. The full and timely payment of this Note (together with the
Maker’s obligations under a Purchase Agreement of this date among Maker, Payee
and Whitebox Advisors, LLC) shall be secured by a Pledge Agreement of this date
(the “Pledge Agreement”).

6.      Optional Prepayments. The Maker may prepay this Note, in whole or in
part, and in cash, without penalty by Maker upon fifteen days written notice to
Payee. Prepayments shall be applied first to accrued but unpaid interest and
then to principal.

 

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7.      Default. The occurrence of any one or more of the following events shall
constitute an event of default, upon which Payee may declare the entire
principal amount of this Note, together with all accrued but unpaid interest, to
be immediately due and payable in cash (despite provisions otherwise for payment
with Common Stock):

     (a) The Maker shall fail to make any required payment of principal or
interest when due, and in its proper form (i.e., in cash, in stock or by a
combination thereof), and such failure shall continue for 10 days after the due
date thereof.

     (b) The Maker shall be in default of any term or provision of the Pledge
Agreement, the Registration Rights Agreement of this date between Maker and
Payee or the Warrant being issued on the date hereof by Maker to Payee.

     (c) Wayne W. Mills shall be in default of any term or provision of the
Guaranty Agreement being entered into by him on the date hereof for the benefit
of the Payee.

     (d) The Maker shall become insolvent or any bankruptcy, reorganization,
debt arrangement or other proceeding under any bankruptcy or insolvency law
shall be instituted by or against the Maker.

     Without limiting the above, the Maker acknowledges that payments on the
various scheduled due dates in Sections 2 and 3(c) are of essence and that any
failure to timely pay any installment of principal or interest (whether as
permitted by cash, with stock or by a combination thereof and within any
permitted grace period above) permits Payee to declare this Note immediately due
in cash in its entirety without any prior notice of any kind to Maker.

8.      Applicable Law. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THE
NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT
GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF.

9.      Waivers. The Maker hereby waives presentment for payment, notice of
dishonor, protest and notice of payment and all other notices of any kind in
connection with the enforcement of this Note.

10.      No Setoffs. The Maker shall pay principal and interest under the Note
without any deduction for any setoff or counterclaim.

11.      Costs of Collection. If this Note is not paid when due, the Maker shall
pay Payee’s reasonable costs of collection, including reasonable attorney’s
fees.

             

      ENTRX CORPORATION
 
           

      By

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    Wayne W. Mills, Chief Executive Officer