Document:

Exhibit 4.2

Pharmos Corporation

99 Wood Avenue South, Suite 311

Iselin, New Jersey  08830

 

January 3, 2008

 

New Enterprise Associates 10, Limited Partnership

 

Lloyd I. Miller, III

 

Robert F. Johnston

 

	
             
 	
            Re:
 	
            Additional Debenture Investment
 

 

Gentlemen:

 

Reference is made herein to the Securities Purchase Agreement (the “Purchase Agreement”), dated as of the date hereof, by and between Pharmos Corporation (the “Company”) and the purchasers identified on the signature pages thereto (the “Purchasers”) relating to, among other things, the Purchasers’ subscription of Debentures of the Company.  All capitalized terms used herein and not otherwise defined shall have the meaning ascribed thereto in the Purchase Agreement.

 

The undersigned (collectively, the “Investors”) hereby acknowledge that the Company intends to sell an aggregate of $8,000,000 in principal amount of Debentures.  Each of the Investors severally, but not jointly, agrees that if the Second Closing Date shall occur no later than 45 days from the date hereof, such Investor shall purchase at the Second Closing (or shall cause one of more of his or its Affiliates to purchase) the following principal amount of Debentures, provided that five days’ advance notice is given:

 

One third (up to $166,667 each, an aggregate of $500,000 among the three Investors) of that amount equal to the difference between (x) $4,500,000 and (y) the sum of (A) the principal amount of Debentures issued at the First Closing and (B) the principal amount of Debentures issued at the Second Closing to those Purchasers who did not purchase any Debentures at the First Closing, subject and pursuant to all of the terms and conditions of the Purchase Agreement and the documents and agreements delivered thereunder.

 

The Company hereby agrees that upon receipt of the purchase price from each Investor for any additional Debenture to be acquired at the Second Closing in accordance with this agreement, the Company shall issue such Debenture to such Investor.

 

This letter agreement is not intended to amend or modify any of the provisions set forth in the Purchase Agreement or any of the documents contemplated to be executed in connection therewith.

 

	
             
 	
            Sincerely,
 

 

	
             
 	
            PHARMOS CORPORATION
 

 

 

	
             
 	
            By: __________________________
 

	
             
 	
            Name:  S. Colin Neill
 

	
             
 	
            Title:  
 	
            Chief Financial Officer
 

 

 

 

Acknowledged and Agreed:

 

NEW ENTERPRISE ASSOCIATES 10, LIMITED PARTNERSHIP

 

By:  NEA PARTNERS 10, LIMITED PARTNERSHIP, its General Partner

 

By:___________________________

A General Partner

 

 

	___________________________________

Lloyd I. Miller, III

 

	___________________________________

      Robert F. Johnston

 

 

 

 

2Exhibit 4.3

 

 

NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OF THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES

 

Date of Issuance: January 3, 2008

 

$_______________

 

10% CONVERTIBLE DEBENTURE

DUE NOVEMBER 1, 2012

 

THIS DEBENTURE is one of a series of duly authorized and issued 10% Convertible Debentures of Pharmos Corporation, a Nevada corporation, having a principal place of business at  99 Wood Avenue South, Suite 311, Iselin, New Jersey 08830 (the “Company”), designated as its 10% Convertible Debenture, due November 1, 2012 (the “Debentures”).

 

FOR VALUE RECEIVED, the Company promises to pay to ________________________ or its registered assigns (the “Holder”), the principal sum of $_______________ on November 1, 2012 or such earlier Company Sale Date (as defined herein) or other date as the Debentures are required or permitted to be repaid as provided hereunder (the “Maturity Date”), and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Debenture at the rate of 10% per annum, payable (i) semi-annually on January 15 and July 15, beginning on July 15, 2008, (ii) on each Conversion Date (as to that principal amount then being converted) and (iii) on the Maturity Date (except that, if any such date is not a Business Day, then such payment shall be due on the next
succeeding Business Day) (each such date, an “Interest Payment Date”) in cash or shares of Common Stock at the Interest Conversion Rate, or a combination thereof; provided, however, payment in shares of Common Stock may only occur if:  (i) there is an effective Registration Statement pursuant to which the Holder is permitted to utilize the prospectus thereunder to resell all of the shares 

 

issuable pursuant to the Transaction Documents, including shares of Common Stock to be issued in lieu of cash (and the Company believes, in good faith, that such effectiveness will continue uninterrupted for the foreseeable future), (ii) there is a sufficient number of authorized but unissued and otherwise unreserved shares of Common Stock for the issuance of all of the shares issuable pursuant to the Transaction Documents, including the shares to be issued for interest in lieu of cash, (iii) there is then existing no Event of Default or event which, with the passage of time or the giving of notice, would constitute an Event of Default and (iv) the issuance of such shares, when added to the shares issued or issuable upon conversion of the Debentures in full would not violate the limitations set forth in Section 4(a)(i). Subject to the terms and conditions herein, the decision whether to pay interest
hereunder in shares of Common Stock or cash shall be at the sole discretion of the Company. Not less than 10 Trading Days prior to each Interest Payment Date, the Company shall provide the Holder with written notice of its election to pay interest hereunder either in cash or shares of Common Stock (the Company may indicate in such notice that the election contained in such notice shall continue for later periods until revised). Within 10 Trading Days prior to an Interest Payment Date, the Company’s election (whether specific to an Interest Payment Date or continuous) shall be irrevocable as to such Interest Payment Date. Subject to the aforementioned conditions, failure to timely provide such written notice shall be deemed an election by the Company to pay the interest on such Interest Payment Date in cash. Interest shall be calculated on the basis of a 360-day year and shall accrue daily commencing on the Original Issue Date until payment in full of the principal sum, together
with all accrued and unpaid interest and other amounts which may become due hereunder, has been made. Payment of interest in shares of Common Stock shall otherwise occur pursuant to Section 4(b) and only for purposes of the payment of interest in shares, the Interest Payment Date shall be deemed the Conversion Date. Interest shall cease to accrue with respect to any principal amount converted, provided that the Company in fact delivers the Underlying Shares within the time period required by Section 4(b)(i). Interest hereunder will be paid to the Holder in whose name this Debenture is registered on the records of the Company regarding registration and transfers of Debentures (the “Debenture Register”). Except as otherwise provided herein, if at any time the Company pays interest partially in cash and partially in shares of Common Stock, then such payment shall be distributed ratably among the Holders based upon the principal
amount of Debentures held by each Holder. All overdue accrued and unpaid interest to be paid hereunder shall entail a late fee at the rate of 15% per annum (or such lower maximum amount of interest permitted to be charged under applicable law) (“Late Fee”) which will accrue daily, from the date such interest is due hereunder through and including the date of payment. Notwithstanding anything to the contrary contained herein, if on any Interest Payment Date the Company has elected to pay interest in Common Stock and is not able to pay accrued interest in the form of Common Stock because it does not then satisfy the conditions for payment in the form of Common Stock set forth above, then the Company, in lieu of delivering shares of Common Stock pursuant to Section 4 hereof, shall pay the regularly scheduled cash interest payment, plus any Late Fee, if payment is then overdue.

 

This Debenture is subject to the following additional provisions:

 

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Section 1.          This Debenture is exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holder surrendering the same.

 

Section 2.          This Debenture has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal and state securities laws and regulations. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the Holder in whose name this Debenture is duly registered on the Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.

 

	
             
 	
            Section 3.
 	
            Events of Default.
 

 

a)         “Event of Default”, wherever used herein, shall have the meaning ascribed to it in the Purchase Agreement.

 

b)        If any Event of Default occurs and is continuing, the Holder shall have all of the rights and remedies set forth in Section 4.13 under the Purchase Agreement.

 

	
             
 	
            Section 4.
 	
            Conversion.
 

 

a)         i)         Conversion Prior to November 1, 2009. At any time on or after November 1, 2008 until the earlier of (A) November 1, 2009 and (B) the date this Debenture is no longer outstanding, up to $3,500,000 in aggregate principal amount of the Debentures shall be convertible into shares of Common Stock at the option of the Holder, in whole or in part (in increments of at least $100,000 principal amount) at any time and from time to time, but only to the extent that after giving effect to such conversion, the Holder (together with the Holder’s affiliates), as set forth on the applicable Notice of Conversion (as defined below), would not beneficially own in excess of 4.99% of the total number of shares of the Common Stock outstanding
immediately after giving effect to such conversion. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon conversion of this Debenture with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) conversion of the remaining, nonconverted portion of this Debenture beneficially owned by the Holder or any of its affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Debentures) 

 

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subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 4(a)(i), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act.  To the extent that the limitation contained in this section applies, the determination of whether this Debenture is convertible (in relation to other securities owned by the Holder) and of which a portion of this Debenture is convertible shall be in the sole discretion of such Holder. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a Notice of Conversion that such Notice of Conversion has not violated the restrictions set forth in this paragraph and the Company shall have no obligation to
verify or confirm the accuracy of such determination. For purposes of this Section 4(a)(i), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company’s most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company’s Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Debenture, by the Holder or its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported.

 

ii)        Conversion on or after November 1, 2009.  At any time on or after November 1, 2009 until this Debenture is no longer outstanding, this Debenture shall be convertible into shares of Common Stock at the option of the Holder, in whole or in part (in increments of at least $100,000 principal amount) at any time and from time to time.

 

iii)       Procedure for Conversion by Holder. The Holder shall effect conversions by delivering to the Company the form of Notice of Conversion attached hereto as Annex A (a “Notice of Conversion”), specifying therein the principal amount of Debentures to be converted and the date on which such conversion is to be effected (a “Conversion Date”). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion is provided hereunder. To effect conversions hereunder, the Holder shall not be required to physically surrender Debentures to the Company unless the entire
principal amount of this Debenture is converted. Conversions hereunder shall have the effect of lowering the outstanding principal amount of this Debenture in an amount equal to the applicable conversion. The 

 

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Holder and the Company shall maintain records showing the principal amount converted and the date of such conversions. The Company shall deliver any objection to any Notice of Conversion within 1 Business Day of receipt of such notice. In the event of any dispute or discrepancy, the records of the Company shall be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Debenture, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Debenture, the unpaid and unconverted principal amount of this Debenture may be less than the amount stated on the face hereof.

 

iv)       Mandatory Conversion by Company. At any time on or after November 1, 2009, if the Closing Price on thirty consecutive Trading Days is at least 200% of the Set Price, the Company can require the Holder to convert the entire principal amount of this Debenture by delivering to the Holder written notice of such mandatory conversion (a “Mandatory Conversion Notice”). The Holder shall physically surrender this Debenture to the Company no later than five Business Days after receipt of a Mandatory Conversion Notice. The date of such surrender of this Debenture shall be the Conversion Date for purposes of a mandatory conversion pursuant to this Section 4(a)(iv).

 

v)        Conversion upon Sale of the Company. The Company shall notify the Holder in writing (a “Company Sale Notice”) no fewer than 15 Trading Days prior to a proposed Company Sale Date. Notwithstanding the provisions of Sections 4(a)(i) and 4(a)(ii) hereof, within 10 Trading Days of receipt by the Holder of a Company Sale Notice, until this Debenture is no longer outstanding, this Debenture shall be convertible into shares of Common Stock at the option of the Holder, in whole or in part (in increments of at least $100,000 principal amount).

 

vi)       Shares Issuable Upon Conversion. The number of shares of Common Stock issuable upon a conversion (without taking into account the payment of accrued interest or conversion thereof into shares of Common Stock, which is governed by Section 4(d) hereof) shall be determined by the quotient obtained by dividing the outstanding principal amount of this Debenture by the Set Price.

 

(b)       i)          Not later than three Trading Days after any Conversion Date, the Company will deliver to the Holder a certificate or certificates representing the Conversion Shares which shall be free of restrictive legends and trading restrictions (other than those required by the Purchase Agreement) representing the number of shares of Common Stock being acquired upon the conversion of Debentures (including, if so elected by the Company pursuant to Section 4(d), shares of Common Stock representing the payment of accrued interest) and (B) a 

 

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bank check in the amount of accrued and unpaid interest (if the Company has timely elected or is required to pay accrued interest in cash). The Company shall, if available and if allowed under applicable securities laws, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. If the conversion is pursuant to a Notice of Conversion (and not a Mandatory Conversion Notice) and such certificate or certificates are not delivered to Holder (in the case of paper certificates) or made available under the electronic DWAC system by the Company’s transfer agent for access by the Holder’s broker designated in the Notice of Conversion as directed by the applicable Holder by the third Trading Day
after a Conversion Date, the Holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the certificates representing the principal amount of Debentures tendered for conversion. 

 

ii)         If the Company fails for any reason to deliver to the Holder such certificate or certificates pursuant to Section 4(b)(i) by the third Trading Day after the Conversion Date, the Company shall pay to such Holder, in cash, as liquidated damages and not as a penalty, for each $5,000 of principal amount being converted, $50 per Trading Day for each Trading Day after such third Trading Day until such certificates are delivered; provided, however, that such liquidated damages payable to any Holder shall not exceed 25% of the aggregate principal amount being converted. The Company’s obligations to issue and deliver the Conversion Shares upon conversion of this Debenture in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of such Conversion Shares; provided, however, such delivery shall not operate as a waiver by the Company of any such action the Company may have against the Holder. In the event a Holder of this Debenture shall elect to convert any or all of the outstanding principal amount hereof, the
Company may not refuse conversion based on any claim that the 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 Debenture shall have been sought and obtained and the Company posts a surety bond for the benefit of the Holder in 

 

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the amount of 150% of the principal amount of this Debenture outstanding, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such Holder to the extent it obtains judgment. In the absence of an injunction precluding the same, the Company shall issue Conversion Shares or, if applicable, cash, upon a properly noticed conversion. Nothing herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 3 herein for the Company’s failure to deliver Conversion Shares within the period specified herein and such Holder shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights
shall not prohibit the Holders from seeking to enforce damages pursuant to any other Section hereof or under applicable law.

 

(iii)      In addition to any other rights available to the Holder, if the Company fails for any reason to deliver to the Holder such certificate or certificates pursuant to Section 4(b)(i) by the third Trading Day after the Conversion Date, and if after such third Trading Day the Holder is required by its brokerage firm to purchase (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by such Holder of the Conversion Shares which the Holder anticipated receiving upon such conversion (a “Buy-In”), then the Company shall (A) pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) the amount by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the Common Stock so purchased, and any
related margin interest costs incurred by Holder, exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such Holder anticipated receiving from the conversion at issue multiplied by (2) the actual sale price of the Common Stock at the time of the sale (including brokerage commissions, if any) giving rise to such purchase obligation and (B) at the option of the Holder, either reissue Debentures in principal amount equal to the principal amount of the attempted conversion or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its delivery requirements under Section 4(b)(i). For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of Debentures with respect to which the actual sale price of the Conversion Shares at the time of the sale (including brokerage commissions, if any, and margin interest
costs) giving rise to such purchase obligation was a total of $10,000 under clause (A) of the immediately preceding sentence, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In. Notwithstanding anything contained herein to the contrary, if a Holder requires the Company to make payment in respect of a Buy-In for the failure to timely deliver certificates 

 

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hereunder and the Company timely pays in full such payment, the Company shall not be required to pay such Holder liquidated damages under Section 4(b)(ii) in respect of the certificates resulting in such Buy-In.

 

(c)       i)          The conversion price in effect on any Conversion Date shall be equal to $0.70 (subject to adjustment herein) (the “Set Price”).

 

ii)        If the Company, at any time while the Debentures are outstanding: (A) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company pursuant to this Debenture, including as interest thereon), (B) subdivide outstanding shares of Common Stock into a larger number of shares, (C) combine (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (D) issue by reclassification of shares of the Common Stock any shares of capital stock of the Company, then the Set Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

iii)       All calculations under this Section 4 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 4, the number of shares of Common Stock outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) outstanding.

 

iv)       Whenever the Set Price is adjusted pursuant to any of Section 4(c)(ii) - (iii), the Company shall promptly mail to each Holder a notice setting forth the Set Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.

 

v)        If (A) the Company shall declare a dividend (or any other distribution) on the Common Stock; (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock; (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or 

 

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merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of the Debentures, and shall cause to be mailed to the Holders at their last addresses as they shall appear upon the stock books of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be
taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange. Holders are entitled to convert Debentures during the 20-day period commencing the date of such notice to the effective date of the event triggering such notice.

 

(d)       For any conversion hereunder, the Company may, at its sole option, pay any accrued but unpaid interest on the principal amount of the Debenture being converted in shares of Common Stock at the Interest Conversion Rate or in cash.

 

(e)       The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock solely for the purpose of issuance upon conversion of the Debentures and payment of interest on the Debenture, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders, not less than such number of shares of the Common Stock as shall (subject to any additional requirements of the Company as to reservation of such shares set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 4(b)) upon the conversion of the outstanding principal amount of the Debentures and payment of interest hereunder. The Company covenants that all shares of Common Stock that shall be so
issuable shall, upon issue, be duly and validly authorized and issued and fully paid, nonassessable and, if the Registration Statement is then effective under the Securities Act, registered for public sale in accordance with such Registration Statement.

 

(f)        Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of the Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share 

 

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based on the Closing Price at such time. If the Company elects not, or is unable, to make such a cash payment, the Holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock.

 

(g)       The issuance of certificates for shares of the Common Stock on conversion of the Debentures shall be made without charge to the Holders 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 Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such Debentures so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

 

(h)       Any and all notices or other communications or deliveries to be provided by the Holders hereunder, including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service, addressed to the Company, at the address set forth above, facsimile number (732) 452-9557, Attn: Chief Financial Officer, or such other address or facsimile number as the Company may specify for such purposes by notice to the Holders delivered in accordance with this Section. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service addressed to each
Holder at the facsimile telephone number or address of such Holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:30 p.m. (New York City time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the second Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to
be given.

 

Section 5.        Prepayment. At any time on or after November 1, 2011, the outstanding principal amount of this Debenture, together with any accrued and unpaid interest thereon (the “Prepayment Amount”), may be prepaid, in whole or in part, in cash without any premium or penalty, at the option of the Company. Such whole or partial prepayment shall be made on a pro rata basis among all of the Debentures then outstanding. In order to effect a prepayment, the Company shall first deliver to all Holders of the Debentures then outstanding, at least 30 days 

 

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prior to the proposed prepayment date, a notice of prepayment identifying the date of prepayment (the “Prepayment Date”) and, if a partial prepayment is to be made, the amount of principal to be prepaid for each Debenture(a “Prepayment Notice”). Each Holder may at his or its option then elect either to convert his or its Debenture prior to the Prepayment Date in accordance with the provisions of Section 4 hereof, in which case any outstanding interest will be paid by the Company in the form of cash or shares of Common Stock pursuant to Section 4(d) hereof, or to receive the prepayment of outstanding principal and accrued interest. Absent any affirmative election to convert during such 30 day period, a Holder’s Debenture will be prepaid in cash. If the Company has elected in its Prepayment Notice to make a partial prepayment, and one or
more Holders then elects to convert all or part of his or its Debentures, the Company shall make the partial prepayment on the remaining outstanding unconverted Debentures (the “Remaining Debentures”) in the amounts originally specified in the Prepayment Notice, and following such partial prepayment, may elect to make an additional prepayment by delivering another Prepayment Notice in accordance with the provisions of this Section 5 (except that the advance notice period for an additional prepayment shall be reduced from 30 days to 10 days). In the event of any whole prepayment of the Debentures, each Holder (if he or it does not elect to convert) shall physically surrender his or its Debenture to the Company no later than five Business Days after receipt of a Prepayment Notice, and the Company shall thereafter pay to such Holder the Prepayment Amount within one Business Day.

 

Section 6.        Definitions. For the purposes hereof, in addition to the terms defined elsewhere in this Debenture: (a) capitalized terms not otherwise defined herein have the meanings given to such terms in the Purchase Agreement, and (b) the following terms shall have the following meanings:

 

“Business Day” means any day except Saturday, Sunday and any day which shall be a federal legal holiday in the United States or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close.

 

“Commission” means the Securities and Exchange Commission.

 

“Common Stock” means the common stock, $0.03 par value per share, of the Company and stock of any other class into which such shares may hereafter have been reclassified or changed.

 

“Company Sale Date” means the date on which the Company consummates a Company Sale Transaction.

 

 “Conversion Date” shall have the meaning set forth in Section 4(a)(iii) hereof.

 

“Conversion Shares” means the shares of Common Stock issuable upon conversion of Debentures in accordance with the terms hereof.

 

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“Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

“Interest Conversion Rate” means the greatest of (i) the average of the 5 Closing Prices immediately prior to the applicable Interest Payment Date, (ii) the Closing Price on the date of the Second Closing, if there is such a Closing, and (iii) the Closing Price on the date of the First Closing.

 

“Late Fees” shall have the meaning set forth in the second paragraph to this Debenture.

 

“Mandatory Prepayment Amount” for any Debentures shall equal the sum of (i) the principal amount of Debentures to be prepaid, plus all accrued and unpaid interest thereon and all other accrued and unpaid amounts due hereunder, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of such Debentures.

 

“Original Issue Date” shall mean the date of the first issuance of the Debentures regardless of the number of transfers of any Debenture and regardless of the number of instruments which may be issued to evidence such Debenture.

 

“Person” means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency.

 

“Purchase Agreement” means the Securities Purchase Agreement, dated as of January 3, 2008, to which the Company and the original Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms.

 

“Registration Rights Agreement” means the Registration Rights Agreement, dated as of the date of the Purchase Agreement, to which the Company and the original Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms.

 

“Registration Statement” means a registration statement meeting the requirements set forth in the Registration Rights Agreement, covering among other things the resale of the Conversion Shares and naming the Holder as a “selling stockholder” thereunder.

 

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

 

“Set Price” shall have the meaning set forth in Section 4(c)(i).

 

12

 

 

“Trading Day” means (a) a day on which the shares of Common Stock are traded on a Trading Market on which the shares of Common Stock are then listed or quoted, or (b) if the shares of Common Stock are not quoted on a Trading Market, a day on which the shares of Common Stock are quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices); provided, that in the event that the shares of Common Stock are not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall mean a Business Day.

 

“Transaction Documents” shall have the meaning set forth in the Purchase Agreement.

 

Section 7. If this Debenture shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or destroyed Debenture, a new Debenture for the principal amount of this Debenture so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Company.

 

Section 8. All questions concerning the construction, validity, enforcement and interpretation of this Debenture shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan (the “New York Courts”). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for
the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or such New York Courts are improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Debenture and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Debenture or the transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this Debenture, then the prevailing party in such action or proceeding shall be reimbursed by the 

 

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other party for its attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.

 

Section 9. Any waiver by the Company or the Holder of a breach of any provision of this Debenture shall not operate as or be construed to be a waiver of any other breach of such provision or of  any breach of any other provision of this Debenture. The failure of the Company or the Holder to insist upon strict adherence to any term of this Debenture on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Debenture. Any waiver must be in writing.

 

Section 10. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates applicable laws governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum permitted rate of interest. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or
interest on this Debenture as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this indenture, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impeded the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted.

 

Section 11. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.

 

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

14

 

 

IN WITNESS WHEREOF, the Company has caused this Convertible Debenture to be duly executed by a duly authorized officer as of the date first above indicated.

 

PHARMOS CORPORATION

 

By:_________________________________________

Name:

Title:

 

 

	
             
 	
            ANNEX A
 

 

	
             
 	
            NOTICE OF CONVERSION
 

 

 

The undersigned hereby elects to convert principal under the 10% Convertible Debenture of Pharmos Corporation (the “Company”), due on November 1, 2012 into shares of common stock, $0.03 par value per share (the “Common Stock”), of the Company according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any.

 

By the delivery of this Notice of Conversion the undersigned represents and warrants to the Company that its ownership of the Company’s Common Stock does not exceed the amounts determined in accordance with Section 13(d) of the Exchange Act, specified under Section 4 of this Debenture.

 

The undersigned agrees to comply with the prospectus delivery requirements under the applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock. 

 

	
            Conversion calculations:
 

Date to Effect Conversion:

 

Principal Amount of Debentures to be Converted:

 

Number of shares of Common Stock to be issued:

 

                                          
                                          
                                          
                                          
                                   

Signature:

 

Name:

 

Address:

 

	
             
 	
            Schedule 1
 

 

	
             
 	
            CONVERSION SCHEDULE
 

 

10% Convertible Debentures due on November 1, 2012, in the aggregate principal amount of $8,000,000 issued by Pharmos Corporation. This Conversion Schedule reflects conversions made under Section 4 of the above referenced Debenture.

 

	
             
 	
            Dated:
 

 

 

	
             

Date of Conversion

(or for first entry,  Original Issue Date)
  	
             

Amount of Conversion
  	
             

Aggregate Principal Amount Remaining Subsequent to Conversion

(or original Principal Amount)
  	
             

Company Attest
  
	
             

 

 
 	
             

 
 	
             

 
 	
             

 
 
	
             

 

 
 	
             

 
 	
             

 
 	
             

 
 
	
             

 

 
 	
             

 
 	
             

 
 	
             

 
 
	
             

 

 
 	
             

 
 	
             

 
 	
             

 
 
	
             

 

 
 	
             

 
 	
             

 
 	
             

 
 
	
             

 

 
 	
             

 
 	
             

 
 	
             

 
 
	
             

 

 
 	
             

 
 	
             

 
 	
             

 
 
	
             

 

 
 	
             

 
 	
             

 
 	
             

 
 
	
             

 

 
 	
             

 
 	
             

 
 	
             

 
 

 

 

 

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