**Exhibit 10.3**

 

**THESECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED UNDER THESECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. ANYTRANSFER OF SUCH SECURITIES WILL BE INVALID UNLESS A REGISTRATION STATEMENTUNDER THE ACT AND AS REQUIRED BY BLUE SKY LAWS IS IN EFFECT AS TO SUCH TRANSFEROR IN THE OPINION OF COUNSEL SATISFACTORY TO THE BORROWER SUCH REGISTRATION ISUNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE ACT AND BLUE SKYLAWS.**

 

**DynTek, Inc.**

 

**Junior Secured Convertible Promissory Note**

 
| Note No.          |               |
|----------------------------------------------------------------|--------------------|
| $3,000,000.00                                                  | March 8, 2006 |

 

FOR VALUE RECEIVED,subject to the terms and conditions of this Junior Secured ConvertiblePromissory Note (the “Note”), DynTek, Inc., a Delaware corporationwith its principal offices located at 19700 Fairchild Road, Suite 230,Irvine, California (the “Borrower”), hereby promises to pay to the orderof Trust A-4 - Lloyd I. Miller, located at 4550 Gordon Drive, Naples, Florida34102 (the “Holder”), the principal sum of Three Million Dollars($3,000,000.00), in lawful money of the United States and in immediatelyavailable funds on March 1, 2011 or, if such day is not a regular businessday, on the next business day thereafter, with all accrued but unpaid interest(as provided below) to such date (the “Maturity Date”). Subject to theterms and conditions of this Note (including without limitation Section 7(f)),the Borrower also promises to pay to the Holder interest accrued on theoutstanding unpaid principal amount hereof until such principal amount is paid(or converted as provided herein) at the rate of ten percent (10%) per annum,compounding quarterly, from the date hereof. The said interest shall become duequarterly in arrears and shall be payable on the last day of each fiscalquarter (each, an “Interest Payment Date”) in respect of the immediatelypreceding completed fiscal quarter. The first Interest Payment Date will be June 30,2006. At the Borrower’s sole option, all interest payments due and payablebefore June 30, 2009 may be paid in kind at the rate of fourteenpercent (14%) per annum, compounding quarterly, in which case the accruedinterest will be added to the principal amount of the Note on the applicableInterest Payment Date, and interest will accrue on the aggregate principalamount. All interest payments due and payable on and after June 30, 2009must be paid in cash.

 

This Note is being issuedpursuant to that certain Note Purchase Agreement dated as of the date hereof,by and between the Borrower and the purchasers thereto, including the Holderhereto, (the “Note Purchase Agreement”), and shall be entitled to thebenefits thereof. This Note is secured by a security interest in all of theassets of Borrower as described more fully in that certain Security and PledgeAgreement

 

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(the “SecurityAgreement”) executed by Borrower and the holders thereto and dated as ofthe date hereof.

 

Until March 1, 2010,the Borrower may not prepay the Note in whole or in part without theprior written consent of the Holder, which may be given or withheld inHolder’s sole discretion. At anytime after March 1, 2010 until theMaturity Date, the Borrower may prepay this Note in whole or in part atany time without penalty.

 

1.                                       Definitions.Unless the context otherwise requires, the following terms shall have thefollowing respective meanings:

 

“Act” means theSecurities Act of 1933, as amended.

 

“Blue Sky Laws”means applicable state securities laws.

 

“Base Share Price”shall have the meaning ascribed to such term in Section 4(f)(i) hereof.

 

“Board” shall meanthe Borrower’s Board of Directors.

 

“Borrower” shallhave the meaning ascribed to such term in the first paragraph of this Note.

 

“Common Stock”shall mean shares of the Borrower’s Common Stock, par value $0.0001 per share.

 

“Conversion Date”shall be the date upon which the Holder exercises its right to convert theoutstanding amounts under this Note into shares of Borrower’s Common Stock inaccordance with Section 3(a) of this Note, or the date such amountsare automatically converted in accordance with the terms hereof.

 

“Conversion Option”shall have the meaning ascribed to such term in Section 3(a) hereof.

 

“Conversion Price”shall have the meaning ascribed to such term in Section 3(a) of thisNote.

 

“Event of Default”shall have the meaning ascribed to such term in Section 5(a) of thisNote.

 

“Fair Market Value”shall mean the fair market value of a share of the Common Stock as mutuallydetermined in good faith by the Holder and the Board.

 

“Holder” shallhave the meaning ascribed to such term in the first paragraph of this Note.

 

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“Interest Payment Date”shall have the meaning ascribed to such term in the first paragraph of thisNote.

 

“Maturity Date”shall have the meaning ascribed to such term in the first paragraph of thisNote.

 

“Newly Issued Shares”shall have the meaning ascribed to such term in Section 4(f)(i) hereof.

 

“Note” shall havethe meaning ascribed to such term in the first paragraph of this instrument.

 

“Note PurchaseAgreement” shall have the meaning ascribed to such term in the secondparagraph of this Note.

 

“Security Agreement”shall have the meaning ascribed to such term in the second paragraph of thisNote.

 

2.                                       AccountingTerms. All accounting terms not specifically defined in this Note shall beconstrued in accordance with United States generally accepted accountingprinciples and, if applicable, consistent with those applied in the preparationof the financial statements of the Borrower.

 

3.                                       Conversion.

 

(a)                                  VoluntaryConversion. At any time until the Note has been paid in full, the Holderhas the right, at its option, to convert all or any part of theoutstanding principal amount (including any accrued but unpaid interest on suchprincipal amount) (the “Conversion Principal Amount”) of this Note intoshares of Common Stock (in accordance with the procedures described under Section 3(b) ofthis Note) (the “Conversion Option”). The number of shares of CommonStock into which the Conversion Principal Amount is convertible is equal to (i) theConversion Principal Amount divided by (ii) the Conversion Price (asdefined below) in effect at the time of conversion. The “Conversion Price”shall initially be $0.02, subject to adjustment pursuant to Sections 3 and 4.

 

(b)                                 ConversionMechanics. The Holder shall exercise its right to convert by surrender ofthis Note, duly endorsed, at the office of the Borrower, accompanied by writtennotice of conversion. The Borrower shall forthwith issue and deliver to theHolder certificates for the number of shares of Common Stock to which Holder isentitled (bearing such legends as may be required by applicable state andfederal securities laws). If on any conversion of this Note a fraction of ashare results, then the Borrower will pay the Holder the cash value of thatfractional share (based upon the Fair Market Value). All Common Stock issuedupon the conversion of this Note shall be validly issued, fully paid andnon-assessable. Any conversion shall be deemed to have

 

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occurredas of the Conversion Date, and the Holder shall be treated for all purposes asthe record holder of such Common Stock as of that date. Upon conversion of thisNote into Common Stock, Holder shall surrender this Note, duly endorsed, at theprincipal offices of Borrower. Borrower will, as soon as practicablethereafter, issue and deliver to Holder a certificate for the number of sharesof Common Stock to which Holder is entitled upon such conversion, plus a checkpayable to Holder for any cash amounts payable for fractional shares andaccrued but unpaid interest. If the Holder converts less than all of theindebtedness evidenced by this Note upon such conversion, then the Borrowershall also issue a convertible promissory note of like tenor for the amount ofindebtedness not so converted.

 

(c)                                  ConversionCovenants. Subject to the terms herein, the Borrower covenants that it willat all times promptly do any and all lawful things necessary (i) to effectthe conversion of this Note, or any part thereof, as provided in this Noteand, including, without limitation, by proper corporate action taking all stepsnecessary to have available at all times during which this Note remainsoutstanding all Common Stock issuable upon the conversion of this Note and (ii) toensure that the shares of Common Stock issuable upon conversion of this Noteare registered under the Act and are freely transferable in the hands of theHolder, subject to the terms and conditions of the registration provisionscontained in the Note Purchase Agreement.

 

4.                                       Dilution.The number of shares of Common Stock issuable under Section 3(a) ofthis Note shall be subject to adjustment from time to time upon the happeningof certain events as follows:

 

(a)                                  Adjustmentfor Stock Splits and Combinations. If the Borrower at any time or from timeto time after the date of this Note effects a subdivision of shares of itsCommon Stock, the number of shares of Common Stock issuable to Holderimmediately before that subdivision shall be proportionately increased, andconversely, if the Borrower at any time or from time to time after the date ofthis Note combines shares of Common Stock into a smaller number of shares, thenumber of shares of Common Stock issuable to Holder immediately before thecombination shall be proportionately decreased. In either case, the ConversionPrice will be proportionately adjusted as well. Any adjustment under thisclause (a) shall become effective at the close of business on the date thesubdivision or combination becomes effective.

 

(b)                                 Adjustmentfor Certain Dividends and Distributions. If the Borrower at any time orfrom time to time after the date of this Note makes, or fixes a record date forthe determination of holders of shares of Common Stock entitled to receive adividend or other distribution payable in additional shares of Common Stock,then and in each such event, the number of shares of Common Stock issuable toHolder shall be increased as of the time of such issuance, or, in the eventsuch record date is fixed, as of the close of business on such record date, bymultiplying the maximum number of shares of Common Stock issuable to Holder bya fraction (i) the numerator of

 

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whichshall be the total number of shares of Common Stock issued and outstandingimmediately prior to the time of such issuance or the close of business on suchrecord date plus the number of shares of Common Stock issuable inpayment of such dividend or distribution plus the number of shares of CommonStock issuable upon the conversion or exercise of the Borrower’s outstandingconvertible securities, warrants and options, and (ii) the denominator ofwhich is the total number of shares of Common Stock issued and outstandingimmediately prior to the time of such issuance or the close of business on suchrecord date, plus the number of shares of Common Stock issuable upon theconversion or exercise of the Borrower’s outstanding convertible securities,warrants and options.

 

(c)                                  Adjustmentsfor Other Dividends and Distributions. In the event the Borrower at anytime or from time to time after the date of this Note makes, or fixes a recorddate for the determination of holders of shares of Common Stock entitled toreceive a dividend or other distribution payable in securities of the Borrowerother than the shares of Common Stock, then and in each such event, provisionshall be made so that the Holder, upon conversion of this Note, shall receiveupon conversion thereof, in addition to the number of shares of Common Stockreceivable thereupon, the amount of securities of the Borrower which the Holderwould have received had Holder been a holder of Common Stock on the date ofsuch event and had thereafter, during the period from the date of such event toand including the Conversion Date, retained such securities receivable asaforesaid during such period, subject to all other adjustments called forduring such period under this Section 4 with respect to the rights of theHolder.

 

(d)                                 Adjustmentfor Reorganization, Consolidation, Merger. In the event of anyreorganization of the Borrower (or any other corporation, the stock or othersecurities of which are at the time receivable upon the conversion of thisNote) after the date hereof, or if, after such date, the Borrower (or any suchother corporation) shall consolidate with or merge into another corporation orconvey all or substantially all its assets to another corporation, and to theextent any such transaction does not result in the automatic conversion of thisNote in accordance with the terms hereof, then and in each such case Holder,upon the conversion hereof as provided herein, at any time after theconsummation of such reorganization, consolidation, merger or conveyance, shallbe entitled to receive, in lieu of the stock receivable upon the conversion ofthis Note prior to such consummation, the stock or other securities or propertyto which such Holder would have been entitled upon such consummation if such Holderhad converted this Note immediately prior thereto. In the event of such areorganization, consolidation or merger, the corporation whose stock or othersecurities or property to which Holder would be entitled shall execute anddeliver to Holder no later than the closing of such transaction an instrumentor other writing, reasonably satisfactory to Holder, acknowledging itsobligation to issue such stock or other securities or other property upon theconversion of this Note.

 

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(e)                                  Adjustmentfor Reclassification, Exchange and Substitution. In the event that at anytime or from time to time after the date of this Note, the shares of CommonStock are changed into the same or a different number of shares of any class ofstock, whether by recapitalization, reclassification or otherwise (other than asubdivision or combination of shares or stock dividend or a reorganization,merger, consolidation or sale of assets, provided for elsewhere in this Section 4),then and in any such event the kind and amount of stock and other securitiesand property receivable upon such recapitalization, reclassification or otherchange shall be used for calculation of the number of shares of Common Stockissuable to the Holder, all subject to further adjustment as provided in thisNote.

 

(f)                                    Saleof Shares Below Conversion Price.

 

(i)                                     Incase at any time on or after the date first written above, the Borrower shallissue or sell shares of its Common Stock or instruments convertible into orexercisable for Common Stock (collectively, the “Newly Issued Shares”),at a price below the Conversion Price in effect at the time of such issuance(the “Base Share Price”), then the Conversion Price shall be reduced toequal the Base Share Price. In each such case, the Conversion Price shall bereduced as of the opening of business on the date immediately following suchissue or sale of Newly Issued Shares. In no instance shall an adjustment bemade under this Section 4(f)(i) if it would cause the ConversionPrice to be increased.

 

(ii)                                  Notwithstandingthe foregoing, no adjustment shall be made under this Section 4(f) byreason of:

 

(1)                                  theissuance, sale, and transfer to any person of any shares of Common Stock of theCompany in connection with (i) the Private Placement (as defined in theNote Purchase Agreement), (ii) execution and consummation of the terms ofthe Conversion and Settlement Agreements (as defined in the Note PurchaseAgreement), or (iii) settlement of unsecured trade debt pursuant to thosecertain Settlement and Release Agreements (as defined in the Note PurchaseAgreement) dated as of the date hereof;

 

(2)                                  theissuance by the Borrower of the Warrants (as defined in that certain NotePurchase Agreement dated as of the date hereof, by and between the Borrower andthe purchasers named therein (the “Note Purchase Agreement”)) or theissuance by the Borrower of shares of Common Stock upon the exercise of theWarrants in accordance with the terms of the Note Purchase Agreement;

 

(3)                                  theissuance by the Borrower of shares of Common Stock upon the exercise orconversion of securities of the Borrower outstanding as of the date of thisAgreement; and

 

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(4)                                  theissuance by the Borrower of shares of Common Stock or options or other rightsto purchase Common Stock pursuant to any equity incentive plan in effect on thedate hereof.

 

(g)                                 Certificateas to Adjustment. In each case of an adjustment of the Conversion Price orthe number of shares of Common Stock issuable upon conversion of the Notes,upon the request of the Holder, the Borrower shall compute such adjustment inaccordance with the provisions of this Note and prepare a letter or certificatesetting forth such adjustment, and showing in detail the facts upon which suchadjustment is based. Notwithstanding the delivery of such letter orcertificate, Holder shall have the right to dispute the calculation of suchadjustment by written notice to Borrower setting forth Holder’s alternativecalculation of such adjustment.

 

5.                                       Eventsof Default.

 

(a)                                  EventsConstituting An Event of Default. Any of the events set forth in Section 1.15of the Note Purchase Agreement, which section is incorporated herein byreference, shall constitute an “Event of Default” under this Note.

 

(b)                                 Consequencesof an Event of Default. Upon the occurrence of an Event of Default or atany time thereafter, the registered holder of the Note may, by notice to theBorrower, declare the entire unpaid principal amount of the Note, all interestaccrued and unpaid thereon and all other amounts payable under this Note to beforthwith due and payable, whereupon the Note, all such accrued interest andall such amounts will become and be forthwith due and payable (unless therewill have occurred an Event of Default under subsection 1.15(e) ofthe Note Purchase Agreement,  in whichcase all such amounts will automatically become due and payable) without offsetor counterclaim of any kind and without presentment, demand, protest or furthernotice of any kind, and without regard to the running of the statute oflimitations, all of which are by this Note expressly waived by the Borrower.

 

6.                                       Registration.Pursuant to the terms and conditions of the Note Purchase Agreement, the CommonStock to be issued to the Holder upon conversion will be registered with theSecurities and Exchange Commission under a registration statement on Form S-1or any other form then availableto the Company under applicable SEC rules and regulations and willnot be subject to any restrictions on transfer.

 

7.                                       GeneralMatters.

 

(a)                                  ApplicableLaw. This Note shall be governed by the internal laws (and not the law ofconflicts) of the State of California.

 

(b)                                 Feesand Expenses. In the event that any suit or action is instituted to enforceany provision under this  Note, theprevailing party in such dispute shall be entitled to recover from the losingparty all fees, costs and expenses of enforcing

 

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anyright of such prevailing party under or with respect to this Agreement,including without limitation, such reasonable fees and expenses of attorneysand accountants, which shall include, without limitation, all fees, costs andexpenses of appeals. Notwithstanding the foregoing, the Borrower agrees to payand hold Holder harmless against liability for the payment of the reasonablefees and expenses of Holder (including, without limitation, attorneys’ fees andexpenses and out of pocket expenses of Holder and its representatives,including, without limitation, fees and expenses for travel, backgroundinvestigations and outside consultants) arising in connection with anyrefinancing or restructuring of the credit arrangements provided under thisNote in the nature of a “work-out” or pursuant to any insolvency or bankruptcyproceedings.

 

(c)                                  Amendmentor Waiver. Any term of this Note may be amended, and the observance ofany term of this Note may be waived (either generally or in a particularinstance and either retroactively or prospectively) only by the written consentof the Holder.

 

(d)                                 Headings.The headings in this Note are for purposes of convenience of reference only,and shall not be deemed to constitute a part of this Note.

 

(e)                                  Notices.All notices, requests, consents and other communications required or permittedhereunder shall be in writing (including telecopy or similar writing) and shallbe sent to the address of the party set forth in the Note Purchase Agreement. Anynotice, request, consent or other communication hereunder shall be deemed tohave been given and received on the day on which it is delivered (by any meansincluding personal delivery, overnight air courier, United States mail) ortelecopied (or, if such day is not a business day or if the notice, request, consentor communication is not telecopied during business hours of the intendedrecipient, at the place of receipt, on the next following business day). Any ofthe parties hereto may, by notice given hereunder, designate any further ordifferent address and/or number to which subsequent notices or othercommunications shall be sent. Unless and until such written notice is received,the addresses and numbers as provided herein shall be deemed to continue ineffect for all purposes hereunder.

 

(f)                                    UsuryLimitation. In no event shall the amount paid or agreed to be paid to theHolder for the use or forbearance of money to be advanced hereunder exceed thehighest lawful rate permissible under the then applicable usury laws. If it ishereafter determined by a court of competent jurisdiction that the interestpayable hereunder is in excess of the amount which the Holder may legallycollect under the then applicable usury laws, such amount which would beexcessive interest shall be applied to the payment of the unpaid principalbalance due hereunder and not to the payment of interest or, if all principalshall previously have been paid, promptly repaid by the Holder to the Borrower.

 

(g)                                 Severability.Every provision of this Note is intended to be severable. If any term orprovision hereof is declared by a court of competent jurisdiction

 

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to beillegal or invalid, such illegal or invalid term or provision shall not affectthe balance of the terms and provisions hereof, which terms and provisionsshall remain binding and enforceable.

 

[**Remainder of Page Intentionally Left Blank**]

 

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IN WITNESS WHEREOF, theBorrower has caused this Note to be executed as of the day and year first abovewritten.

 
|   | DYNTEK, INC., a  Delaware corporation |
|--------|--------------------------------------------|
|   |                                       |
|   | By:                                        | /s/ Casper Zublin, Jr. |   |
|   |                                       |   |   |
|   | Name:                                      | Casper Zublin, Jr. |   |
|   |                                       |   |   |
|   | Title:                                     | Chief Executive Officer |   |
|        |                                            |  |  |  |  |  |

 

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