Document:

exv10w41a

 

Exhibit 10.41A

THIS NOTE, AND THE SHARES OF PREFFERED STOCK ISSUABLE UPON CONVERSION HEREOF, HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS
AND MAY NOT BE REOFFERED, SOLD, TRANSFERRED, PLEDGED, OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO
(1) REGISTRATION UNDER SUCH ACT OR LAWS OR (2) AN OPINION OF COUNSEL FOR THE COMPANY OR OTHER
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION IS NOT
REQUIRED.

AVALON PHARMACEUTICALS, INC.

UNSECURED CONVERTIBLE PROMISSORY NOTE

$6,000,000

February 4, 2005 (the “First Closing Date”)

February 24, 2005 (the “Second Closing Date”)

February 4, 2006 (the “Maturity Date”)

FOR VALUE RECEIVED, Avalon Pharmaceuticals, Inc., a Delaware corporation (the “Company”), promises
to pay to the order of the payees listed as of the First Closing Date or as of the Second Closing
Date on Exhibit A (each a “Payee” and collectively, the “Payees”), at the address and in the pro
rata amount of each Payee listed on Schedule A, or at such other place as a Payee may designate in
writing, the aggregate principal sum of Six Million Dollars ($6,000,000), or so much thereof as
shall be advanced (the “Principal Amount”) on the terms set forth below. Interest on the unpaid
principal balance shall accrue at a rate of fifteen percent (15%) per annum from the First Closing
Date through and until the earlier of the Second Closing Date or February 24, 2005 and thereafter
at a rate of eight percent (8%) per annum. All interest will be computed on the basis of a 360-day
year consisting of twelve 30-day months. All payments of interest and principal hereunder shall be
made in U.S. currency. In addition, as further inducement for the loan, the Company shall deliver a
Warrant(s) to the Payees representing a right to purchase certain Capital Stock in the Company on
the terms and conditions described below.

     This Note is made in connection with that certain Summary of Term Sheet dated as of February
1, 2005 prepared by Company and delivered to Payees (the “Term Sheet”). This Note shall be an
unsecured obligation of the Company, ranking pari passu with all other unsecured
obligations of the Company.

     1. Definitions. Capitalized terms not defined herein shall have the same meaning as set forth
in the Term Sheet. The following terms shall have the meanings herein specified:

     “Capital Stock” means any of the current or future authorized class or series of capital stock
of the Company.

     “Conversion Notice” shall have the meaning set forth in Section 2(a).

     “Conversion Price” shall mean the per share price(s) at which all of the Principal Amount
plus all accrued interest thereon is converted or convertible pursuant to Section 2, and in all
cases as adjusted pursuant to Section 2(d).

 

 

     “Conversion Shares” means the shares of Series C Preferred, or such other shares of
Capital Stock, issuable upon conversion of this Note.

     “Event of Default” means an event specified in Section 4 hereof.

     “Future Equity Securities” shall have the meaning set forth in Section 2(a).

     “Holder” means the Payee, and each endorsee, pledgee, assignee, owner and holder of this
Note, as such. Notwithstanding the foregoing, the Company may treat the registered holder of this
Note as the Holder for all purposes.

     “Liquidity Event” means as such is defined in the Company’s Amended and Restated Certificate
of Incorporation.

     “Principal Amount” shall have the meaning set forth in the initial paragraph.

     “Person” means an individual, trust, partnership, firm, association, corporation or other
organization or a government or governmental authority.

     “Qualified Financing” shall mean a sale of equity securities or convertible debt securities,
including pursuant to an initial public offering, a Future Equity Financing or an offering of
Series C Stock in the Company, by the Company (or a successor in the event of a Liquidity Event)
for an aggregate cash purchase price of not less than $7,500,000 (including the amount resulting
from the conversion of this Note). Securities issued pursuant to the conversion of the Note shall
be on the same terms and have the same liquidation and other preferences as all securities issued
in a Qualified Financing.

     “Series C Preferred Stock” shall mean a newly created preferred stock of the Company with
terms and conditions substantially similar to the Company’s existing Series B Convertible
Preferred Stock except that the Series C Preferred Stock shall rank senior to all current
preferred stock of the Company including but not limited to the Series B Convertible Preferred
Stock.

     “Warrant” shall have the meaning set forth in Section 3(d).

     Words of one gender include the other gender; the singular includes the plural; and the
plural includes the singular, unless the context otherwise requires.

     2. Conversion of the Note.

     (a) Election to Convert. Immediately upon the receipt by the Company of a written request (or
at such other time or upon the occurrence of any event specified in such request) signed by
holders of at least a majority of the aggregate principal amount of this outstanding Note
(“Conversion Notice”), or in the event of a closing of a Qualified Financing, the entire Principal
Amount of, and accrued and unpaid interest on, this Note, shall automatically be converted into
shares of either:

     (i) the Company’s Series C Preferred Stock; the number of shares of Series C Preferred Stock
to be issued to the Holder upon such conversion shall be equal to the quotient obtained by dividing
(i) the entire Principal Amount of this Note plus accrued and unpaid interest hereon by (ii) 100%
of the Series C Preferred Stock Redemption Price (as such term is defined in the Series C
Certificate) (subject to adjustment in the event of any stock splits, stock dividends or other

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recapitalization of Series C Preferred or Capital Stock subsequent to the date of such
sale or issuance); or

     (ii) the Company’s equity securities (the “Future Equity Securities”) issued and sold at the
close of any future equity financing of the Company in single transactions or series of related
transactions consummated within any 180-day period yielding gross proceeds to the Company of at
least $7,500,000 in the aggregate, including conversion of the Notes ( “Future Equity
Financing”); the number of shares of any Future Equity Securities to be issued to the Holder upon
such conversion shall be equal to the quotient obtained by dividing (i) the entire Principal
Amount of this Note plus accrued and unpaid interest hereon by (ii) 100% of the price per share
of the Future Equity Securities, and the issuance of such shares upon such conversion shall be
upon the terms and subject to the conditions applicable to such Future Equity Financing (subject
to adjustment in the event of any stock splits, stock dividends or other recapitalization of said
Future Equity Securities or Capital Stock subsequent to the date of such sale or issuance).

          (b) Delivery of Conversion Shares. The Capital Stock issued on conversion of this Note
(the “Conversion Shares”) shall be delivered as follows: As promptly as practicable after
conversion, the Company shall deliver to Holder, or to such person or persons as are
designated
by Holder in the Conversion Notice, a certificate or certificates representing the number of
shares
of Capital Stock into which this Note or portion thereof is to be converted in such name or
names
as are specified in the Conversion Notice, together with, in the case of conversion of the
entire
remaining principal balance hereof, any cash payable in respect of a fractional share. Such
conversion shall be deemed to have been effected at the close of business on the date when
this
Note shall have been surrendered to the Company for conversion, so that the person entitled to
receive such Conversion Shares shall be treated for all purposes as having become the record
holder of such Conversion Shares at such time.

          (c) Reservation of Shares. The Company agrees that, during the period within which this
Note may be converted, the Company will at all times have authorized and in reserve, and will
keep available solely for delivery upon the conversion of this Note, Capital Stock and other
securities and properties as from time to time shall be receivable upon the conversion of this
Note, free and clear of all restrictions on issuance, sale or transfer other than those
imposed by
law and free and clear of all pre-emptive rights. The Company agrees that the Conversion
Shares
shall, at the time of such delivery, be validly issued and
outstanding, fully paid and non-passessable, and the Company will take all such action as may be necessary to assure that the
stated value or par value per share of the Conversion Shares is at all times equal to or less
than the
Conversion Price.

          (d) Protection Against Dilution.

          (A) In the event of any consolidation with or merger of the Company with or into another
corporation (other than a merger or consolidation in which the Company is the surviving or
continuing corporation) or any sale, lease or conveyance to another corporation of the property of
the Company as an entirety or substantially as an entirety, in either case while any principal or
accrued interest remains outstanding under this Note, then such successor, leasing or purchasing
corporation, as the case may be, shall (i) execute with the Holder an agreement providing that the
Holder shall have the right thereafter to receive upon conversion of this Note solely the kind and
amount of shares of stock and other securities, property, cash or any combination thereof
receivable upon such consolidation, merger, sale, lease or conveyance by a holder of the number of
shares of Capital Stock for which this Note might have been converted immediately prior to such
consolidation, merger, sale, lease or conveyance, (ii) make effective provision in its articles

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of incorporation or otherwise, if necessary, in order to effect such agreement, and (iii)
set aside or reserve, for the benefit of the Holder, the stock, securities, property and cash to
which the Holder would be entitled upon conversion of this Note.

          (B) In the event of any reclassification or change of the Capital Stock into which this Note
may be converted (other than a change in par value or from no par value to a specified par
value,
or as a result of a subdivision or combination, but including any change in the shares into
two or
more classes or series of shares), or in the event of any consolidation or merger of another
corporation into the Company in which the Company is the continuing corporation and in which
there is a reclassification or change (including a change to the right to receive cash or
other
property) of the Capital Stock into which this Note may be converted (other than a change in
par
value, or from no par value to a specified par value, or as a result of a subdivision or
combination,
but including any change in the shares into two or more classes or series of shares), in
either case
while any principal or accrued interest remains outstanding under this Note, then the Holder
shall
have the right thereafter to receive upon conversion of this Note solely the kind and amount
of shares of stock and other securities, property, cash or any combination thereof receivable
upon
such reclassification, change, consolidation or merger by a holder of the number of shares of
Capital Stock for which this Note might have been converted immediately prior to such
reclassification, change, consolidation or merger.

          (C) If, subsequent to any issuance of Future Equity Securities including but not limited to
the issuance of a Series C Preferred Stock upon which the calculation of the Conversion Price
is
based and while any principal or accrued interest remains outstanding under this Note, the
Company distributes to holders of such class or series of Capital Stock any assets (excluding
ordinary cash dividends) or debt securities or any rights or warrants to purchase debt
securities,
assets or other securities, the Conversion Price shall be adjusted in accordance with the
formula:

	 	 	 	 	 
	
	 	C1 = Cx [(O x M) - F]
	 	 
	
	 	 	 	 
	
	 	O x M	 	 

               where:

               C1 = the adjusted Conversion Price.

               C = the Conversion Price prior to
adjustment pursuant to this subsection.

               M = the fair market value per share of such class or series of Capital Stock before the
record date mentioned below, as reasonably determined by the Company’s Board of Directors with the
advice of the Company’s investment banker.

               O = the number of shares of such class or series of Capital Stock outstanding on the record
date mentioned below.

               F = the fair market value on the record date of the aggregate of all assets, securities,
rights or warrant distributed, as reasonably determined by the Company’s Board of Directors with
the advice of the Company’s investment banker.

               The adjustment shall be made successively whenever any such distribution is made and shall
become effective immediately after the record date for the determination of stockholders entitled
to receive the distribution.

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               The above provisions of this Section 2 shall similarly apply to successive
reclassifications and changes of Capital Stock and to successive consolidations, mergers, sales,
leases or conveyances.

               Notice of such consolidation, merger, sale, distribution, reclassification or reorganization
and of such provisions so proposed to be made, shall be mailed to the Holder not less than fifteen
(15) days prior to such event.

     3. Payment of this Note - Principal and Interest and Warrant

          (a) Maturity Date. All principal and interest that has not been converted into Capital Stock
pursuant to Section 2 above or paid earlier as a result of an Event of Default pursuant to
Section 4
below, shall be due and payable on the “Maturity Date” which is the one year anniversary of
the First Closing Date of this Note, and shall be automatically converted into Series C Preferred
Stock pursuant to Section 2 except that the convertible per share price to be used in the
conversion formula set forth in Section 2 shall be the fair market value of the Series C
Preferred Stock as determined in good faith by the Board of Directors, as may be adjusted by Section
2(d) above and, in addition to any outstanding interest, the holders of the Note shall be entitled
to receive two times the outstanding principal amount of this Note.

          (b) Payment on an Event of Default. If an Event of Default occurs and is continuing, then
the Payees of this Note may, by written notice to the Company, declare this Note immediately
due and payable and demand immediate conversion of all principal and interest that has not
been converted into Capital Stock pursuant to Section 2 above, and, at any time thereafter, the
Holder may proceed to cause such unconverted principal and accrued interest to be converted in
accordance with the terms and conditions of this Note. If the Event of Default is a Liquidity
Event not involving a Qualified Financing prior to the Maturity Date, in addition to any outstanding
interest, the holders of the Note shall be entitled to receive two times the outstanding
principal amount of this Note and demand immediate conversion.

          (c) No Prepayment. This Note shall not be prepayable in whole or in part buy may be
convertible as set forth herein.

          (d) Warrant. Upon the occurrence of each draw of funds by the Company pursuant to this
Note, the Company will issue to each Payee a five year warrant to purchase, on a pro rata
basis, that amount of Capital Stock of the Company equal to 50% of the amount drawn hereunder. The
Capital Stock available for purchase under the Warrant shall either be Series C Preferred
Stock or Future Equity Securities. Depending upon what is offered by the Company in its next equity
financing, the exercise price of the Warrant shall equal either the (i) initial per share
price of the Series C Preferred Stock or (ii) the initial per share price of the Future Equity Securities.
The Warrant shall be in a form substantially similar to that set forth at Exhibit A. The Company
and Payees agree that the cumulative fair market value (“FMV”) of the aggregate warrant granted as
inducement to the granting of the loan is nominal given market conditions and the financial
condition of the Company. The parties agree that this nominal value is equal to $10,000 for
the aggregate warrant. The parties agree that this FMV shall be used for all purposes including
financial statements and tax reporting until required to do otherwise by either a government
agency or their respective auditors.

     4. Events of Default. The existence of any of the following conditions shall constitute an
Event of Default:

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          (a) Commencement of proceedings under any bankruptcy or insolvency law or other law for
the reorganization, arrangement, composition or similar relief or aid of debtors or creditors if
such proceeding remains undismissed and unstayed for a period of 60 days following notice to the
Company by the Holder.

          (b) If the Company shall dissolve, liquidate or wind up its affairs or sell substantially all
of its assets or such other Liquidity Event.

          (c) One or more final judgments are entered against the Company involving aggregate unpaid
liability not covered by insurance in excess of $1,000,000, and such amounts are not paid in full
within 30 days.

          (d) Attachment or similar process of execution is levied against a material portion of the
Company’s assets and such process is not terminated and any orders issued pursuant thereto canceled
within 90 calendar days.

          (e) The Company is in material breach of any provision of this Note, which breach (other than
a breach described in Section 4(a) above) continues for more than 30 calendar days following notice
to the Company by the Holder.

          5. Representations and Warranties of the Company. The Company hereby represents and
warrants the following as of the date hereof, and as of the date of each subsequent borrowing:

          (a) Organization
and Standing. The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and has all requisite corporate power
and authority to carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each jurisdiction in
which the failure to so qualify is reasonably likely to have a material adverse effect on its
business or its properties.

          (b) Authorization. All corporate action on the part of the Company, its officers and
directors necessary for the authorization, execution and delivery of this Note and the Warrants,
and performance of all obligations of the Company hereunder and thereunder, has been or shall be
taken prior to the Closing, and this Note and the Warrants, when executed and delivered, shall
constitute the valid and legally binding obligations of the Company, enforceable in accordance with
their terms.

          (c) Consents. No consent, approval, order or authorization of, or registration, qualification,
designation, declaration or filing with any third party or any federal, state or provincial
governmental authority on the part of the Company is required in connection with the consummation
of the transactions contemplated herein, other than consents of the Company’s Board, current
shareholders and M & T Bank.

          (d) No Conflicts. Neither the execution and delivery of this Note and the Warrants, by the
Company nor the consummation by the Company of the transactions contemplated herein will (i)
conflict with or result in any breach of any provision of the Certificate of Incorporation, as
amended or Bylaws of the Company, (ii) violate in any material respect any statute, rule,
regulation, order, writ, injunction, decree or arbitration award applicable to the Company or its

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assets, or (iii) breach in any material respect any other material agreement,
undertaking, contract, or security agreement to which the Company is subject.

     6. Representations and Warranties of the Payees. Each Payee represents and warrants to the
Company as follows:

          (a) Investment. It is acquiring this Note to be delivered by the Company to it, the Warrants
to be issued by the Company to it, and any equity in the Company which it may receive therefrom
as result of conversion, for investment for its own account, not as a nominee or agent, and not
with the view to, or for resale in connection with, any distribution thereof in violation of the
Securities Act of 1933, as amended (the “Securities Act”). It understands that this Note, the
Warrants to be issued by the Company to it, and equity of the Company to be purchased or received
have not been, and will not be, registered under the Securities Act, by reason of a specific
exemption from the registration provisions of the Securities Act, which depends upon, among other
things, the bona fide nature of the investment intent and the accuracy of the Payee’s
representations as expressed herein. It has substantial experience in evaluating and investing in
securities in companies similar to the Company so that it is capable of evaluating the merits and
risks of its investment in the Company and has the capacity to protect its own interests. It must
bear the economic risk of this investment indefinitely unless the shares to be issued to it
pursuant to the Warrants to be issued by the Company to it and its conversion rights under the
Note to be sold by the Company to it are registered pursuant to the Securities Act of 1933, as
amended, or an exemption from registration is available.

     7. Transfer.

          (a) Transfer of this Note shall be subject to prior delivery by the proposed transferee to the
Company of an opinion of counsel that such transfer is in compliance
with all federal and all
applicable securities laws. In order to transfer this Note, the Holder, or its duly authorized
attorney, shall surrender this Note at the office of the Company, accompanied by an assignment duly
executed by the Holder hereof.

          (b) This Note is, and each certificate representing Conversion Shares and Warrant shall be,
stamped or otherwise imprinted with a legend substantially in the following form:

               “The securities represented hereby have not been registered under the Securities Act of
1933, as amended or applicable state securities laws and may not be reoffered, sold, transferred,
pledged, or otherwise disposed of except pursuant to (1) registration under such act or laws or
(2) an opinion of counsel for the Company or other counsel reasonably acceptable to the Company
to the effect that such registration is not required.”

     8. Loss or Mutilation of Note. Upon receipt by the Company of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Note, together with an indemnity
reasonably satisfactory to the Company, in the case of loss, theft, or destruction, or the
surrender and cancellation of this Note, in the case of mutilation, the Company shall execute and
deliver to the Payee(s) a new Note of like tenor and denomination as this Note.

     9. Holder not Shareholder. This Note does not confer upon the Payee(s) any right to vote or
to consent or to receive notice as a shareholder of the Company, as such, in respect of any
matters whatsoever, or any other rights or liabilities as a shareholder, prior to the conversion
hereof.

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     10.  Waivers.  The
failure of Payee(s) to enforce at any time of the provisions of this
Note shall not, absent an express written waiver signed by Payee(s)
specifying the provision being waived, be construed to be a waiver of
any such provision, nor in any way to affect the validity of this
Note or any part hereof or the right of Holder thereafter to enforce
each and every such provision. No waiver of any breach of this Note
shall be held to be a waiver of any other or subsequent breach.

     11.  Taxes.  The
Company agrees that it will pay, when due and payable, any and all
stamp, original issue or similar taxes which may be payable in
respect of the issue of this Note and/or any Conversion Shares or
certificates therefor. The Company shall not, however, be required to
pay any stamp, original issue or similar tax which may be payable in
respect of any transfer involved in the transfer and delivery of
stock certificates to a person other than of the Payee.

     12.  Notices.  All
notices or other communications to a party required or permitted
hereunder shall be in writing and shall be delivered personally or by
facsimile (receipt confirmed electronically) to such party (or, in
the case of an entity, to an executive officer of such party) or
shall be sent by a reputable express delivery service or by certified
mail, postage prepaid with return receipt requested, addressed as
follows:

If to Payee(s) to: SEE SCHEDULE A

if to the Company to:

Avalon Pharmaceuticals, Inc.

20358 Senaca Meadows Parkway

Germantown, MD 20876

 

Attention: Gary Lessing, CFO

Telephone: 301.556.9900

Fax: 301.556.9910

with a copy to:

 

Mark I Gruhin, Esq.

Schmeltzer, Aptaker & Shepard, P.C.

The Watergate

2600 Virginia Avenue, N.W.

Suite 1000

Washington, D.C. 20037

Telephone: 202-333-8800

Fax: 202-342-3434

     Any
party may change the above specified recipient and/or mailing address
by notice to all other parties given in the manner herein prescribed.
All notices shall be deemed given on the day when actually delivered
as provided above (if delivered personally or by facsimile, provided
that any such facsimile is received during regular business hours at
the recipient’s location) or on the day shown on the return
receipt (if delivered by mail or delivery service).

     13.  Headings.  The
titles and headings to the Sections herein are inserted for the
convenience of reference only and are not intended to be a part of or
to affect the meaning or interpretation of this

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Note. This Note shall be construed without regard to any presumption or other
rule requiring construction hereof against the party causing this Note to be drafted.

     14.
Applicable Law and Jurisdiction. The legality, validity, enforceability and
interpretation of this Note and the relationship of the parties hereunder shall be governed by the
laws of the State of Delaware, without giving effect to the principles of conflict of laws. Any
claim, cause of action, suit or demand allegedly arising out of or related to this Note, or the
relationship of the parties, shall be brought exclusively in the state or federal courts located
in Greenbelt, Maryland, and the parties irrevocably consent to the exclusive jurisdiction and
venue of such courts and waive any objections they may have at any time to such exclusive
jurisdiction and venue. The Company promises to pay all costs of collection, including reasonable
attorney fees, upon default in the payment of the principal of this Note or interest hereon when
due, whether at maturity, as herein provided, or by reason of acceleration of maturity under the
terms hereof, whether suit be brought or not.

     15. Subordination. The Company covenants and agrees, and the Payees, by their acceptance of
this Note, hereby covenant and agree as follows:

	 	(a)  	The indebtedness evidenced by this Note, as it may be amended, modified,
extended, renewed or substituted from time to time, and all obligations of the
Company to pay the principal of and interest on this Note, and all other amounts and
liabilities under this Note, whether such indebtedness, obligations and liabilities
are now existing or hereafter arising (collectively, the “Subordinated Obligations”)
are hereby expressly subordinated to and in favor of the indefeasible and
full payment in cash of all of the Senior Indebtedness, as hereinafter defined, to
the extent and in the manner hereinafter set forth.
	 
	 	(b)  	As used herein, the term Senior Indebtedness shall mean indebtedness, liabilities and obligations of the Company to Manufacturers and Traders Trust
Company (“Bank”) of every kind and nature whatsoever, whether now existing or
hereafter arising or created any time, including without limitation, all
indebtedness, liabilities and obligations of the Company to the Bank which are
direct, indirect, contingent, primary, secondary, alone, jointly with others, due,
to become due, unsecured, secured, or future advances and including, without
limitation, all liabilities, indebtedness and obligations of the Company to the Bank
	 
	 	(c)  	Until the Senior Indebtedness has been fully and indefeasibly paid in
cash, the Payees shall not, without prior written consent of the Bank, ask for,
demand, accelerate, declare a default under, sue for, set off, accept or receive any
payment of all or any part of the Subordinated Obligations except that the Payee may
receive securities that are subordinate to the Senior Indebtedness to at least the
same extent as this Note.
	 
	 	(d)  	The Payees and the Company agree, represent and warrant that
the Subordinated Obligations are not secured in any way, directly or
indirectly, including, without limitation, by security agreement, pledge
agreement, guaranty agreement, mortgage, deed of trust, or any other
document, lien, encumbrance or otherwise.

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	 	(e)  	In the event of any distribution, division or application, partial or complete, voluntary or
involuntary, by operation of law or otherwise, of all or any part of the assets of the Company
or the proceeds thereof to creditors of the Company or to any indebtedness, liabilities and
obligations of the Company, by reason of the liquidation, dissolution or other winding up of
the Company or the Company’s business, or in the event of any sale, receivership, insolvency
or bankruptcy proceeding, or assignment for the benefit of creditors, or any proceeding by or
against the Company for any relief under any bankruptcy or insolvency law, then any payment or
distributions of any kind or character, either in cash, securities or other property, which
shall be payable or deliverable upon or with respect to all or any part of the Subordinated
Obligations shall be paid or delivered directly to the Bank for application to the Senior
Indebtedness (whether due or not due and in such order and manner as the Bank may elect; and
including, without limitation, any interest accruing subsequent to the commencement of any
such event or proceeding) until the Senior Indebtedness shall have been fully paid and
satisfied. The Payees hereby irrevocably authorize and empower the Bank, and irrevocably
appoints the Bank the Attorneys-in fact for the Payees to demand, sue for, collect and receive
every such payment or distribution and give acquittance therefor and to file claims and take
such other proceedings in the name of the Bank or in the names of the Payees or otherwise, as
the Bank may deem necessary or advisable to carry out the provisions
hereof.
	 
	 	(f)  	The Company and the Payees agree that the Bank is a third-party beneficiary of the
subordination provisions of this Note and shall be entitled to enforce such provisions by
proceedings at law or in equity or otherwise. If any of the Senior Indebtedness should be
transferred or assigned by the Bank, the provisions of this Note will inure to the benefit of
the transferee and assignee to the extent of such transfer or assignment, provided that the
Bank shall continue to have the unimpaired right to enforce the provisions of this Note as to
any of the Senior Indebtedness not so transferred or assigned. The subordinate provisions of
this Note shall be binding upon the Payees and the Company and their respective successors and
assigns. None of the subordinate provisions of this Note may be waived, modified or amended
without the prior written consent of the Bank, or if any of the Senior Indebtedness has then
been transferred or assigned, by the then holders or obliges of all of the Senior
Indebtedness.
	 
	 	(g)  	The Company shall provide written notice to the Payees as to any additional Senior
Indebtedness incurred by or agreed to by the Company after the date hereof and during such
time that any amounts are outstanding under this Note.

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     IN
WITNESS WHEREOF, Avalon Pharmaceuticals, Inc. has caused this Unsecured Convertible
Promissory Note to be signed in its name by the signature of its duly authorized
representative.

	 	 	 	 	 
	

	 	Avalon Pharmaceuticals, Inc.	 	 
	 
	 	 	 	 
	

	 	/s/ Dr. Kenneth Carter
	 	 
	

	 	 	 	 
	

	 	By: Dr. Kenneth Carter	 	 
	

	 	Its: Chief Executive Officer	 	 

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     IN WITNESS WHEREOF, Avalon Pharmaceuticals, Inc. has caused this Unsecured Convertible
Promissory Note to be signed in its name by the signature of its duly authorized representative.

	 	 	 	 	 
	

	 	Avalon Pharmaceuticals, Inc.	 	 
	 
	 	 	 	 
	

	 	/s/ Kenneth C. Carter,
	 	 
	

	 	 	 	 
	

	 	By: Kenneth C. Carter, Ph.D.	 	 
	

	 	Its: President and CEO	 	 

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AVALON PHARMACEUTICALS, INC.

SCHEDULE A TO UNSECURED CONVERTIBLE PROMISSORY NOTE

LIST OF PAYEES

	 	 	 	 	 
	AIG Horizon Partners Fund, LP

AIG Global Investment Group

Richard Drake, VP

599 Lexington Avenue, 25th floor

New York, NY 10022
	 	 	120,430.00	 
	 
	 	 	 	 
	AIG Horizon Side-by-Side Fund, LP

AIG Global Investment Group

Richard Drake, VP

599 Lexington Avenue, 25th floor

New York, NY 10022
	 	 	97,270.00	 
	 
	 	 	 	 
	AIG Private Equity Portfolio, LP

AIG Global Investment Group

Richard Drake, VP

599 Lexington Avenue, 25* floor

New York, NY 10022
	 	 	46,319.00	 
	 
	 	 	 	 
	Commerce & Industry Insurance Company

AIG Global Investment Group

Richard Drake, VP

599 Lexington Avenue, 25th floor

New York, NY 10022
	 	 	199,173.00	 
	 
	 	 	 	 
	Bradley G. Lorimier

7807 Foxgate Court

Bethesda, MD 20817

	 	 	4,668.00	 
	 
	 	 	 	 
	EuclidSR Biotechnology Partners, L.P.

Euclid SR Partners

Raymond Whitaker

General Partner

45 Rockefeller Plaza, Ste 3240

New York, NY 10111
	 	 	264,681.00	 
	 
	 	 	 	 
	EuclidSR Partners, L.P.

Euclid SR Partners

Raymond Whitaker

General Partner

45 Rockefeller Plaza, Ste 3240

New York, NY 10111
	 	 	264,681.00	 

 

 

	 	 	 	 	 
	Forward Ventures IV, B, L.P.

Forward Ventures

Ivor Royston, Managing Member

9393 Towne Centre Drive, Ste 200

San Diego, C A 92121
	 	 	39,537.00	 
	 
	 	 	 	 
	Forward Ventures IV, L.P.

Forward Ventures

Ivor Royston, Managing Member

9393 Towne Centre Drive, Ste 200

San Diego, CA 92121

	 	 	466,381.00	 
	 
	 	 	 	 
	GIMV NV

GIMV

Patrick Van Beneden

Vice President, Life Sciences

Karel Oomsstraat 37

B-2108 Antwerpen

Belgium, Germany
	 	 	694,181.00	 
	 
	 	 	 	 
	Adviesbeheer GIMV Life Sciences NV

GIMV

Patrick Van Beneden

Vice President, Life Sciences

Karel Oomsstraat 37

B-2108 Antwerpen

Belgium, Germany
	 	 	122,502.00	 
	 
	 	 	 	 
	GeneChemTherapeutics Venture Fund

GeneChem Management, Inc.

Martial Lacroix, Ph.D., Vice President

1001 de Maisonneuve Quest, Suite 920

Montreal, Quebec

Canada H3A 3C8
	 	 	264,681.00	 
	 
	 	 	 	 
	H&Q Healthcare Investors

H&Q Capital Management, Inc.

Daniel Omstead

30 Rowes Wharf, Ste 430

Boston, MA 02110-3328
	 	 	198,511.00	 
	 
	 	 	 	 
	H&Q Life Sciences Investors

H&Q Capital Management, Inc.

Daniel Omstead

30 Rowes Wharf, Ste 430

Boston, MA 02110-3328
	 	 	132,340,00	 
	 
	 	 	 	 
	Jonathan Cool

521 Nails Dairy Court

Great Falls, VA 22066
	 	 	6,419.00	 

 

 

	 	 	 	 	 
	State of Maryland

Department of Business & Economic Development

Investment Financing Group

217 East Redwood Street, 11th floor

Baltimore, MD 21202

	 	 	45,720.00	 
	 
	 	 	 	 
	Mulligan BioCapital AG

Mulligan BioCapital AG

Jens Klein, Principal

Stubbenhuk 7

20359 Hamburg

GERMANY
	 	 	15,053.00	 
	 
	 	 	 	 
	OrbiMed Associates L.L.C.

Orbimed Advisors

Michael Sheffery

767 Third Avenue, 6th floor

New York, NY 10017
	 	 	2,779.00	 
	 
	 	 	 	 
	PW Juniper Crossover Fund LLC

Orbimed Advisors

Michael Sheffery

767 Third Avenue, 6th floor

New York, NY 10017
	 	 	62,730.00	 
	 
	 	 	 	 
	Caduceus Private Investments, L.P.

Orbimed Advisors

Michael Sheffery

767 Third Avenue, 6th floor

New York, NY 10017
	 	 	133,002.00	 
	 
	 	 	 	 
	Novartis BioVenture Fund

Dr. Peter Bissinger

Novartis Services, Inc

10675 John Jay Hopkins Drive

San Diego, CA 92121-1125
	 	 	26,468.00	 
	 
	 	 	 	 
	Oxford Bioscience Partners (Adjunct) III

Oxford Bioscience Partners

Alan G. Walton, Ph.D.

315 Post Road West

Westport, CT 06880
	 	 	58,182.25	 
	 
	 	 	 	 
	Oxford Bioscience Partners (Bermuda) III

Oxford Bioscience Partners

Alan G. Walton, Ph.D.

315 Post Road West

Westport, CT 06880
	 	 	77,324.89	 

 

 

	 	 	 	 	 
	Oxford Bioscience Partners III

Oxford Bioscience Partners

Alan G. Walton, Ph.D.

315 Post Road West

Westport, CT 06880
	 	 	542,548.75	 
	 
	 	 	 	 
	mRNA Fund

Oxford Bioscience Partners

Alan G. Walton, Ph.D.

315 Post Road West

Westport, CT 06880
	 	 	6,441.12	 
	 
	 	 	 	 
	Paul Millman Revocable Trust

Millman, Paul

Chroma Technology Group

P.O. Box 489

10 Imtec Lane

Rockingham, VT 05101
	 	 	8,403.00	 
	 
	 	 	 	 
	Sofinov
Société Financière D’Innovation

CDP Capital-Technology Ventures (Sofinov)

c/o Annette Bianchi

VantagePoint Venture Partners

1001 Bayhill Drive, Ste 300

San Bruno, CA 94066

	 	 	529,362.00	 
	 
	 	 	 	 
	Susan
Bierman Gruhin & Mark I. Gruhin, JT. TEN.

Gruhin, Mark

Schmeltzer, Aptaker & Shepard

The Watergate

2600 Virginia Ave., N.W. Ste 1000

Washington, DC 20037-1905
	 	 	5,836.00	 
	 
	 	 	 	 
	Royal Bank of Canada

RBC Capital Partners

Robert Bechard, Partner

1 Place Ville-Marie

9th Floor, South Wing

Montreal, Quebec

H3C 3A9

CANADA
	 	 	50,488.00	 

 

 

	 	 	 	 	 
	2001 RBCP Canadian GP
Limited
RBC Capital Partners

Robert Bechard, Partner 

1 Place Ville-Marie
9th Floor, South Wing
Montreal, Quebec 
H3C 3A9

CANADA
	 	 	280,363.00	 
	 
	 	 	 
	 
	 	$	4,766,475.01exv10w41b

 

Exhibit 10.41B

APRIL 21, 2005

AVALON PHARMACEUTICALS, INC.

FIRST AMENDMENT TO UNSECURED CONVERTIBLE PROMISSORY NOTE

THIS FIRST AMENDMENT TO UNSECURED CONVERTIBLE PROMISSORY NOTE (“First Amendment” ) is hereby
executed by Avalon Pharmaceuticals, Inc. (the “Maker”) as of April 21, 2005, and as consented to by
each of the holders identified on Schedule A to that certain Unsecured Convertible Promissory Note,
previously executed by Maker and maturing February 4, 2006 (the “Promissory Note”).

Capitalized terms used in this First Amendment and not otherwise defined herein shall have the
meanings assigned to such terms in the Promissory Note.

A.       The Promissory Note is hereby amended as follows:

          1.       The phrase “February 4, 2006 (the “Maturity Date”)” on the first page of the Promissory Note is
replaced with the phrase “January 1, 2006 (the “Maturity Date”)”.

          2.       The last sentence of the first introductory paragraph reading, “In addition, as further
inducement for the loan, the Company shall deliver a Warrant(s) to the Payees representing a right
to purchase certain Capital Stock in the Company on the terms and conditions described below,” is
hereby deleted.

          3.       Section 1 of the Promissory Note is amended to replace the definition of “Liquidity Event” with
the following:

                  “Liquidity Event” means a liquidation, dissolution or winding up of the Company, as defined in
the Company’s Amended and Restated Certificate of Incorporation, but excluding from such definition
of a liquidation, dissolution or winding up of the Company the right of holders of at least sixty
percent (60%) of the Company’s then outstanding Series B Preferred Stock to determine not to treat
an event otherwise constituting a liquidation, dissolution or winding up of the Company as such
under the Company’s Amended and Restated Certificate of Incorporation.

          4.       Section 1 of the Promissory Note is further amended to delete the definitions of “Conversion
Notice,” “Future Equity Securities,” “Qualified Financing” and “Warrants” thereunder.

          5.       Section 1 of the Promissory Note is further amended to replace the definition of “Series C
Preferred Stock” in its entirety with the following:

 

               “Series C Preferred Stock” shall mean a newly created preferred stock of the Company with
terms and conditions substantially similar to the Company’s existing Series B Preferred Stock
except that the Series C Preferred Stock shall rank senior to all current preferred stock of the
Company, including but not limited to the Series B Preferred Stock, and shall have a liquidation
preference equal to four times (4x) its original issue price in the event of a Liquidity Event.

     6.       Section 2(a) of the Promissory Note is amended and restated in its entirety as follows:

     (a)       Pre-Maturity Conversions. The entire Principal Amount of, and accrued and unpaid interest
on, this Note (the “Conversion Amount”), shall automatically convert into Capital Stock of the
Company upon the first to occur of any of the following events in accordance with the following
terms:

               (i)       in the event the Company closes a firm commitment underwritten public offering pursuant to
an effective registration statement under the Securities Act of 1933, as amended (an “IPO”) prior
to the Maturity Date, the respective Conversion Amount for each Holder shall convert into a number
of shares of the Company’s common stock, par value $0.01 per share, determined by dividing the
Conversion Amount for such Holder by the “Public offering price” of the IPO as set forth on the
cover page of the final prospectus for the IPO; and

               (ii)       in the event of a Liquidity Event prior to the Maturity Date, the respective Conversion
Amount for each Holder shall convert, immediately prior to such Liquidity Event, into a number of
shares of Series C Preferred Stock determined by dividing the Conversion Amount for such Holder by
the fair market value of the Series C Preferred Stock as determined in good faith by the Board of
Directors or a pricing committee thereof.

     7.       Section 3(a) of the Promissory Note is amended and restated in its entirety as follows:

     (a)       Maturity Date; Conversion at Maturity. All principal and interest that has not been
converted into Capital Stock pursuant to Section 2 above or paid earlier as a result of an Event of
Default pursuant to Section 4 below, shall be due and payable on the “Maturity Date,” which is
January 1, 2006. Upon the Maturity Date the respective Conversion Amount for each Holder shall
convert into a number of shares of Series C Preferred Stock determined by dividing the respective
Conversion Amount for such Holder by the fair market of the Series C Preferred Stock as determined
in good faith by the Board of Directors, as may be adjusted by Section 2(d) above.

     8.       The first sentence of Section 3(b) of the Promissory Note is amended to insert the words “into
Series C Preferred Stock” immediately prior to the phrase “in accordance with the terms and
conditions of this Note.”

 

     9.       Section 3(b) of the Promissory Note is further amended to delete the second sentence of such
section.

     10.       Section 3(d) of the Promissory Note is hereby deleted.

     11.       Section 4(b) is amended to delete the phrase “or sell substantially all of its assets or such
other Liquidity Event.”

     12.       Section 5 of the Promissory Note is hereby amended to delete the phrase “and the Warrants”
wherever it appears in such section.

     13.       Section 6(a) of the Promissory Note is hereby amended to delete the phrase “the Warrants to be
issued by the Company to it,” wherever it appears in such section.

     14.       Section 7(b) of the Promissory Note is amended to delete the words “and Warrant” therein.

B.       Except as amended hereby, all other provisions of the Promissory Note shall remain in full force
and effect.

	 	 	 	 	 
	 	MAKER

Avalon Pharmaceuticals, Inc.

 	 
	 	By:  	 	 
	 	 	 	 
	 	 	Dr. Kenneth Carter, President 	 
	 

 

CONSENT:

Each of the holders identified on Schedule A to the Promissory Note hereby consent

to this First Amendment to the Promissory Note as reflected by their respective

signatures next to their name.

	 	 	 	 	 
	HOLDER:

	 
	 	 
	 
	 	 
	 
	Name of Holder

	 
	 	 
	 
	 	 
	By:
	 	 
	 
	 	   Authorized Signature
	 
	 	 
	Dated: As of the first date above written

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