CONVERTIBLE NOTE DUE JULY 31, 2011 OF NETSOL TECHNOLOGIES, INC.
NEITHER
THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION 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.
THIS
NOTE DOES NOT REQUIRE PHYSICAL SURRENDER OF THE NOTE IN THE EVENT OF A PARTIAL
REDEMPTION OR CONVERSION. AS A RESULT, FOLLOWING ANY REDEMPTION OR CONVERSION
OF
ANY PORTION OF THIS NOTE, THE OUTSTANDING PRINCIPAL AMOUNT REPRESENTED BY THIS
NOTE MAY BE LESS THAN THE PRINCIPAL AMOUNT AND ACCRUED INTEREST SET FORTH
BELOW.
CONVERTIBLE
NOTE DUE JULY 31, 2011
OF
NETSOL
TECHNOLOGIES, INC.
This
Note
(“Note”)
is one
of a duly authorized issue of Notes of NETSOL
TECHNOLOGIES,
INC.,
a
corporation duly organized and existing under the laws of the State of Nevada
(the
“Company”),
designated as the Company's Convertible Notes Due July 31, 2011
(as may
be extended pursuant to the terms hereof, the “Maturity
Date”)
in
an
aggregate principal amount (when taken together with the original principal
amounts of all other Notes) which does not exceed Six Million U.S. Dollars
(U.S.
$6,000,000) (the “Notes”).
For
Value
Received,
the
Company hereby promises to pay to the order of THE TAIL WIND FUND
LTD. or
its
registered assigns or successors-in-interest (“Holder”)
the
principal sum of Four Million Two Hundred Fifty Thousand Dollars (U.S.
$4,250,000.00), together with all accrued but unpaid interest thereon,
if any,
on the Maturity Date, to the extent such principal amount and interest
has not
been repaid or converted into the Company's Common Stock, $0.001 par value
per
share (the “Common
Stock”),
in
accordance with the terms hereof. Interest on the unpaid principal balance
hereof shall accrue at the rate of 7% per annum from the date of original
issuance hereof (the “Issuance
Date”)
until
the same becomes due and payable on the Maturity Date, or such earlier
date upon
acceleration or by conversion or redemption in accordance with the terms
hereof
or of the other Agreements. Interest on this Note shall accrue daily commencing
on the Issuance Date and shall be computed on the basis of a 360-day year,
30-day months and actual days elapsed and shall be payable in accordance
with
Section 1 hereof. Notwithstanding anything contained herein, this Note
shall
bear interest on the due and unpaid Principal Amount from and after the
occurrence and during the continuance of an Event of Default pursuant to
Section
4(a) at the rate (the “Default
Rate”)
equal
to the lower of eighteen (18%) per annum or the highest rate permitted
by law.
Unless otherwise agreed or required by applicable law, payments will be
applied
first to any unpaid collection costs, then to unpaid interest and fees
and any
remaining amount to principal.
All
payments of principal and interest on this Note shall be made in lawful money
of
the United States of America by wire transfer of immediately available funds
to
such account as the Holder may from time to time designate by written notice
in
accordance with the provisions of this Note or by Company check. This Note
may
not be prepaid in whole or in part except as otherwise provided herein. Whenever
any amount expressed to be due by the terms of this Note is due on any day
which
is not a Business Day (as defined below), the same shall instead be due on
the
next succeeding day which is a Business Day.
Capitalized
terms used herein and not otherwise defined shall have the meanings set forth
in
the Purchase Agreement dated on or about the Issuance Date pursuant to which
the
Notes were originally issued (the “Purchase
Agreement”).
For
purposes hereof the following terms shall have the meanings ascribed to them
below:
“Bankruptcy
Event”
means
any of the following events: (a) the Company or any subsidiary commences
a case
or other proceeding under any bankruptcy, reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or liquidation
or
similar law of any jurisdiction relating to the Company or any subsidiary
thereof; (b) there is commenced against the Company or any subsidiary any
such
case or proceeding that is not dismissed within 60 days after commencement;
(c)
the Company or any subsidiary is adjudicated insolvent or bankrupt or any
order
of relief or other order approving any such case or proceeding is entered;
(d)
the Company or any subsidiary suffers any appointment of any custodian or
the
like for it or any substantial part of its property that is not discharged
or
stayed within 60 days; (e) the Company or any subsidiary makes a general
assignment for the benefit of creditors; (f) the Company or any subsidiary
fails
to pay, or states that it is unable to pay or is unable to pay, its debts
generally as they become due; (g) the Company or any subsidiary calls a meeting
of its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (h) the Company or any subsidiary, by any
act or
failure to act, expressly indicates its consent to, approval of or acquiescence
in any of the foregoing or takes any corporate or other action for the purpose
of effecting any of the foregoing.
“Business
Day”
shall
mean any day other than a Saturday, Sunday or a day on which commercial banks
in
the City of New York are authorized or required by law or executive order
to
remain closed.
“Change
in Control Transaction”
will
be
deemed to exist if (i) there occurs any consolidation, merger or other business
combination of the Company with or into any other corporation or other entity
or
person (whether or not the Company is the surviving corporation), or any
other
corporate reorganization or transaction or series of related transactions
in
which in any of such events the voting stockholders of the Company prior
to such
event cease to own 50% or more of the voting power, or corresponding voting
equity interests, of the surviving corporation after such event (including
without limitation any “going private” transaction under Rule 13e-3 promulgated
pursuant to the Exchange Act or tender offer by the Company under Rule 13e-4
promulgated pursuant to the Exchange Act for 20% or more of the Company's
Common
Stock), (ii) any person (as defined in Section 13(d) of the Exchange Act),
together with its affiliates and associates (as such terms are defined in
Rule
405 under the Act), beneficially owns or is deemed to beneficially own (as
described in Rule 13d-3 under the Exchange Act without regard to the 60-day
exercise period) in excess of 35% of the Company's voting power, (iii) there
is
a replacement of more than one-half of the members of the Company’s Board of
Directors which is not approved by those individuals who are members of the
Company's Board of Directors on the date thereof, (iv) in one or a series
of
related transactions, there is a sale or transfer of all or substantially
all of
the assets of the Company, determined on a consolidated basis, or (v) the
Company enters into any agreement providing for an event set forth in (i),
(ii),
(iii) or (iv) above.
2
“Conversion
Ratio”
means,
at any time, a fraction, of which the numerator is the entire outstanding
Principal Amount of this Note (or such portion thereof that is being redeemed
or
repurchased), and of which the denominator is the Conversion Price as of
the
date such ratio is being determined.
“Conversion
Price”
shall
equal $3.00 (which Conversion Price shall be subject to adjustment as set
forth
herein).
“Convertible
Securities”
means
any convertible securities, warrants, options or other rights to subscribe
for
or to purchase or exchange for, shares of Common Stock.
“Effective
Date”
means
the date on which a Registration Statement covering all the Underlying Shares
and other Registrable Securities (as defined in the Investor Rights Agreement)
is declared effective by the SEC.
“Eligible
Market”
means
the Nasdaq Stock Market, the New York Stock Exchange or the American Stock
Exchange.
“Equity
Conditions”
means,
during the period in question, (i) the Company shall have duly honored all
conversions and redemptions scheduled to occur or occurring by virtue of
one or
more Conversion Notices of the Holder, if any, (ii) the Company shall have
paid
all liquidated damages and other amounts owing to the Holder in respect of
this
Note, (iii) all of the shares of Common Stock issued or issuable pursuant
to the
Notes may be sold by the Holder pursuant to either (a) clause (i) or (ii)
of
Section (b)(1) of Rule 144 and, with respect to such clause (i), the Company
has
been subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act for the then preceding 90 days and has filed all reports required
to be filed thereunder during the then preceding 12 months (or such shorter
period that the Company was required to file such reports) or (b) an effective
Registration Statement (and the Company believes, in good faith, that such
effectiveness will continue uninterrupted for the foreseeable future), (iv)
the
Common Stock is trading on an Eligible Market and, if applicable, all of
the
shares issuable pursuant to the Notes are listed or quoted for trading on
the
Principal Market (and the Company believes, in good faith, that trading of
the
Common Stock on an Eligible Market will continue uninterrupted for the
foreseeable future), (v) 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 Notes, (vi) there is no existing Event of
Default or no existing event which, with the passage of time or the giving
of
notice, would constitute an Event of Default, (vii) the issuance of the shares
in question to the Holder would not violate the limitations set forth in
Section
3(i) below, (viii) if the Company has previously publicly announced a pending
or
proposed Change in Control Transaction, such transaction was consummated
prior
to such period, (ix) the Holder is not in possession of any information provided
by the Company that constitutes, or may constitute, material non-public
information, (x) there has been no Bankruptcy Event, (xi) the Company is
not
insolvent, and (xii) the average closing price per share of Common Stock
on the
Trading Market for such period shall be greater than $1.00 (as appropriately
and
equitably adjusted for reverse stock splits and similar
events).
3
“Exchange
Act”
shall
mean the Securities Exchange Act of 1934, as amended.
“Market
Price”
shall
equal the average of the daily VWAPs over the ten (10) consecutive Trading
Days
immediately preceding the date on which the Market Price is being
determined.
“MFN
Transaction”
shall
mean a transaction in which the Company issues or sells any securities in
a
capital raising transaction or series of related transactions (the “MFN
Offering”)
which
grants to the investor (the “MFN
Investor”)
the
right to receive additional securities based upon future capital raising
transactions of the Company on terms more favorable than those granted to
the
MFN Investor in the MFN Offering.
“Payment
Date”
shall
mean each January 1st
and July
1st
of each
year, provided that if any such day is not a Trading Day, then such Payment
Date
shall mean the next succeeding day which is a Trading Day.
“Per
Share Selling Price”
shall
include the amount actually paid by third parties for each share of Common
Stock
in a sale or issuance by the Company, after the deduction of all expenses
incurred in connection therewith. In the event a fee is paid by the Company
in
connection with such transaction directly or indirectly to any individual
or
entity, any such fee shall be deducted from the selling price pro rata to
all
shares sold in the transaction to arrive at the Per Share Selling Price.
A sale
of shares of Common Stock shall include the sale or issuance of Convertible
Securities, and in such circumstances the Per Share Selling Price of the
Common
Stock covered thereby shall also include the exercise, exchange or conversion
price thereof (in addition to the consideration received by the Company upon
such sale or issuance less the fee amount as provided above). In case of
any
such security issued in a transaction in which the purchase price or the
conversion, exchange or exercise price is directly or indirectly subject
to
adjustment or reset based on a future date, future trading prices of the
Common
Stock, specified or contingent events directly or indirectly related to the
business of the Company or the market for the Common Stock, or otherwise
(but
excluding standard stock split anti-dilution provisions or weighted-average
anti-dilution provisions similar to that set forth herein, provided that
any
actual reduction of such price under any such security pursuant to such
weighted-average anti-dilution provision shall be included and cause a
adjustment hereunder), the Per Share Selling Price shall be deemed to be
the
lowest conversion, exchange, exercise or reset price at which such securities
are converted, exchanged, exercised or reset or might have been converted,
exchanged, exercised or reset, or the lowest adjustment, as the case may
be,
over the life of such securities. If shares are issued for a consideration
other
than cash, the Per Share Selling Price shall be the fair value of such
consideration as determined in good faith by independent certified public
accountants mutually acceptable to the Company and the Holder. In the event
the
Company directly or indirectly effectively reduces the conversion, exercise
or
exchange price for any Convertible Securities which are currently outstanding,
then the Per Share Selling Price shall equal such effectively reduced
conversion, exercise or exchange price.
4
“Principal
Amount”
shall
refer to the sum of (i) the original principal amount of this Note, (ii)
all
accrued but unpaid interest hereunder, and (iii) any default payments owing
under the Agreements but not previously paid or added to the Principal
Amount.
“Principal
Market”
shall
mean the Nasdaq Stock Market or such other principal market or exchange on
which
the Common Stock is then listed for trading.
“Registration
Statement”
shall
have the meaning set forth in the Investor Rights Agreement.
“Securities
Act”
shall
mean the Securities Act of 1933, as amended.
“Trading
Day”
shall
mean a day on which there is trading on the Principal Market.
“Underlying
Shares”
means
the shares of Common Stock into which the Notes are convertible (including
interest or principal payments in Common Stock as set forth herein) in
accordance with the terms hereof and the Purchase Agreement.
“Variable
Rate Transaction”
shall
mean a transaction in which the Company issues or sells, or agrees to issue
or
sell (a) any debt or equity securities that are convertible into, exchangeable
or exercisable for, or include the right to receive additional shares of,
Common
Stock either (x) at a conversion, exercise or exchange rate or other price
that
is based upon and/or varies with the trading prices of or quotations for
the
Common Stock at any time after the initial issuance of such debt or equity
securities, (y) with a fixed conversion, exercise or exchange price that
is
subject to being reset at some future date after the initial issuance of
such
debt or equity security or upon the occurrence of specified or contingent
events
directly or indirectly related to the business of the Company or the market
for
the Common Stock (but excluding standard stock split anti-dilution provisions),
or (z) under a warrant exercisable for a number of shares based upon and/or
varying with the trading prices of or quotations for the Common Stock at
any
time after the initial issuance of such warrant, or (b) any securities of
the
Company pursuant to an “equity line” structure which provides for the sale, from
time to time, of securities of the Company which are registered for sale
or
resale pursuant to the Securities Act (which for the purpose of this definition
shall include a sale of the Company’s securities “off the shelf” in a registered
offering, whether or not such offering is underwritten).
“VWAP”
shall
mean the daily dollar volume-weighted average sale price for the Common Stock
on
the Principal Market on any particular Trading Day during the period beginning
at 9:30 a.m., New York City Time (or such other time as the Principal Market
publicly announces is the official open of trading), and ending at 4:00 p.m.,
New York City Time (or such other time as the Principal Market publicly
announces is the official close of trading), as reported by Bloomberg through
its "Volume at Price" functions or, if the foregoing does not apply, the
dollar
volume-weighted average price of such security in the over-the-counter market
on
the electronic bulletin board for such security during the period beginning
at
9:30 a.m., New York City Time (or such other time as the Principal Market
publicly announces is the official open of trading), and ending at 4:00 p.m.,
New York City Time (or such other time as the Principal Market publicly
announces is the official close of trading), as reported by Bloomberg, or,
if no
dollar volume-weighted average price is reported for such security by Bloomberg
for such hours, the average of the highest closing bid price and the lowest
closing ask price of any of the market makers for such security as reported
in
the "pink sheets" by the National Quotation Bureau, Inc. If the VWAP cannot
be
calculated for such security on such date on any of the foregoing bases,
the
VWAP of such security on such date shall be the fair market value as mutually
determined by the Company and the holders of at least a majority of the
aggregate Principal Amount outstanding under the Notes. All such determinations
of VWAP shall to be appropriately and equitably adjusted in accordance with
the
provisions set forth herein for any stock dividend, stock split, stock
combination or other similar transaction occurring during any period used
to
determine the Conversion Price or Market Price (or other period utilizing
VWAPs).
5
The
following terms and conditions shall apply to this Note:
Section
1. Payments
of Principal and Interest.
(a) Interest
Only Payments.
Subject
to the terms of Section 1(b) below, on each Payment Date and on the Maturity
Date, the Company shall pay to the Holder all interest accrued to date on
the
entire Principal Amount of this Note (“Interest
Amount”),
in
either cash or in shares of Common Stock at the Company’s option, in accordance
with this Section 1.
(i) Certain
Additional Payments by the Company.
Any
payment by the Company to the Holder hereunder, whether for principal, interest
or otherwise, shall not be subject to any deduction, withholding or offset
for
any reason whatsoever except to the extent required by law, and the Company
represents that to its best knowledge no deduction, withholding or offset
is so
required for any tax or any other reason. Notwithstanding any term or provision
of this Note to the contrary, if it shall be determined that any payment
by the
Company to or for the benefit of the Holder (whether for principal, interest
or
otherwise and whether paid or payable or distributed or distributable, actual
or
deemed, pursuant to the terms of this Note or otherwise) (a “Payment”) would be
or is subject to any deduction, withholding or offset due to any duty or
tax
(such duty or tax, together with any interest and/or penalties related thereto,
hereinafter collectively referred to as the “Payment Tax”), then the Company
shall, in addition to all sums otherwise payable hereunder, pay to the Holder
an
additional payment (a “Gross-Up Payment”) in an amount such that after all such
Payment Taxes (whether by deduction, withholding, offset or payment) (including
any interest or penalties with respect to such taxes), including without
limitation any Payment Taxes (and any interest and penalties imposed with
respect thereto) imposed upon any Gross-Up Payment, Holder actually receives
an
amount of Gross-Up Payment equal to the Payment Tax imposed upon the Payment
(i.e., the Holder receives a net amount equal to the Payment).
(ii) Cash
or Common Stock.
Subject
to the terms hereof, the Company shall either (i) pay the Interest Amount
in
full in cash on each Payment Date or (ii) issue shares of Common Stock in
satisfaction of such Interest Amount in accordance with the terms hereof,
but
not both, at the Company’s option. Prior to each Payment Date the Company shall
deliver to all the holders of Notes a written irrevocable notice electing
to pay
such Interest Amount in cash or Common Stock on such Payment Date. Such notice
shall be delivered at least ten (10) Trading Days prior to the applicable
Payment Date but no more than twenty (20) days prior to such Payment Date.
If
such notice is not delivered within the prescribed period set forth in the
preceding sentence, then the Interest Amount shall be paid in cash. If the
Company elects to pay any Interest Amount in cash on an Payment Date, then
on
such date the Company shall pay to the Holder an amount equal to the Interest
Amount due in satisfaction of such obligation. If the Company elects to pay
such
Interest Amount in shares of Common Stock, the number of such shares to be
issued for such Payment Date shall be the number determined by dividing (x)
the
Interest Amount due, by (y) 87.5% of the lower of (i) the Market Price
determined as of the Closing Date and (ii) the Market Price determined as
of the
applicable Payment Date. Such shares shall be issued and delivered within
three
(3) Trading Days following such Payment Date and shall be duly authorized,
validly issued, fully paid, non-assessable and free and clear of all
encumbrances, restrictions and legends. If any Holder does not receive the
requisite number of shares of Common Stock in the form required above within
such three Trading Day period, the Holder shall have the option of either
(a)
requiring the Company to issue and deliver all or a portion of such shares
or
(b) canceling such election to pay in Common Stock (in whole or in part),
in
which case the Company shall immediately pay in cash the Interest Amount
due
hereunder or such portion as the Holder specifies is to be paid in cash instead
of being converted. Except as otherwise provided in this Section 1, all holders
of Notes must be treated equally with respect to such payment of Interest
Amounts. Any payment of the Interest Amount hereunder in shares of Common
Stock
pursuant to the terms hereof shall constitute and be deemed a conversion
of such
portion of the Principal Amount of this Note for all purposes under this
Note
(except that such conversion shall be at the rate set forth above and except
as
otherwise provided herein).
6
(iii) Limitations
to Payment in Common Stock.
Notwithstanding anything to the contrary herein, the Company shall be prohibited
from exercising its right to pay any Interest Amount hereunder in shares
of
Common Stock (and must deliver cash in respect thereof) on the applicable
Payment Date (1) if at any time within ten (10) Trading Days prior to the
Payment Date any of the Equity Conditions fails to be satisfied or an
Event
of
Default hereunder exists or occurs,
unless
otherwise waived in writing by the Holder in whole or in part at the Holder’s
option, and (2) to the extent, and only to the extent, that such issuance
of
shares of Common Stock would result in the Holder hereof exceeding the
limitations contained in Section 3(i) below.
(b) Maturity
Date.
At the
Holder’s option, the Maturity Date hereunder may be extended, on one occasion,
to a date up to two (2) years following the initial Maturity Date upon written
notice to the Company by the Holder.
Section
2. Senior
Debt.
So long
as any Principal Amount of Notes is outstanding, the Company and its
subsidiaries shall not directly or indirectly, without the affirmative vote
of
the holders of at least 75% of the outstanding Principal Amount of the Notes
then outstanding, incur or permit to exist additional indebtedness which
is
senior to the Notes, or incur, assume or permit to exist any lien, mortgage,
security interest or encumbrance (other than statutory liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being
contested in good faith, if such reserve or other appropriate provision,
if any,
as shall be required by GAAP shall have been made in respect thereof) on
any of
its assets, except for capital leases, financing for equipment and purchase
money security interests.
7
Section
3. Conversion.
(a) Conversion
Right.
Subject
to the terms hereof and restrictions and limitations contained herein, the
Holder shall have the right, at such Holder's option, at any time and from
time
to time to convert the outstanding Principal Amount under this Note in whole
or
in part by delivering to the Company a fully executed notice of conversion
in
the form of conversion notice attached hereto as Exhibit
A
(the
“Conversion
Notice”),
which
may be transmitted by facsimile. Notwithstanding anything to the contrary
herein, this Note and the outstanding Principal Amount hereunder shall not
be
convertible into Common Stock to the extent that such conversion would result
in
the Holder hereof exceeding the limitations contained in, or otherwise violating
the provisions of, Section 3(i) below.
(b) Common
Stock Issuance upon Conversion.
(i) Conversion
Date Procedures.
Upon
conversion of this Note pursuant to Section 3(a) above, the outstanding
Principal Amount hereunder shall be converted into such number of fully paid,
validly issued and non-assessable shares of Common Stock, free of any liens,
claims and encumbrances, as is determined by dividing the outstanding Principal
Amount being converted by the then applicable Conversion Price. The date
of any
Conversion Notice hereunder and any Payment Date shall be referred to herein
as
the “Conversion
Date”.
If a
conversion under this Note cannot be effected in full for any reason, or
if the
Holder is converting less than all of the outstanding Principal Amount hereunder
pursuant to a Conversion Notice, the Company shall promptly deliver to the
Holder (but no later than five Trading Days after the Conversion Date) a
Note
for such outstanding Principal Amount as has not been converted if this Note
has
been surrendered to the Company for partial conversion. The Holder shall
not be
required to physically surrender this Note to the Company upon any conversion
or
hereunder unless the full outstanding Principal Xxxxxx represented by this
Note
is being converted or repaid. The Holder and the Company shall maintain records
showing the outstanding Principal Amount so converted and repaid and the
dates
of such conversions or repayments or shall use such other method, reasonably
satisfactory to the Holder and the Company, so as not to require physical
surrender of this Note upon each such conversion or repayment.
(ii) Stock
Certificates or DWAC.
The
Company will deliver to the Holder not later than three (3) Trading Days
after
the Conversion Date, a certificate or certificates (which shall be free of
restrictive legends and trading restrictions if a Registration Statement
has
been declared effective covering such shares or such shares may be resold
pursuant to Rule 144), representing the number of shares of Common Stock
being
acquired upon the conversion of this Note. In lieu of delivering physical
certificates representing the shares of Common Stock issuable upon conversion
of
this Note, provided the Company's transfer agent is participating in the
Depository Trust Company (“DTC”)
Fast
Automated Securities Transfer (“FAST”)
program, upon request of the Holder, the Company shall use commercially
reasonable efforts to cause its transfer agent to electronically transmit
such
shares issuable upon conversion to the Holder (or its designee), by crediting
the account of the Holder’s (or such designee’s) prime broker with DTC through
its Deposit Withdrawal Agent Commission system (provided that the same time
periods herein as for stock certificates shall apply). If in the case of
any
conversion hereunder, such certificate or certificates are not delivered
to or
as directed by the Holder by the third Trading Day after the 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 this
Note
tendered for conversion. If the Company fails to deliver to the Holder such
certificate or certificates (or shares through DTC) pursuant to this Section
3(b) (free of any restrictions on transfer or legends, if such shares have
been
registered) in accordance herewith, prior to the sixth Trading Day after
the
Conversion Date, the Company shall pay to the Holder, in cash, an amount
equal
to 1% of the Principal Amount per month.
8
(c) Conversion
Price Adjustments.
(i) Stock
Dividends, Splits and Combinations.
If the
Company or any of its subsidiaries, at any time while the Notes are outstanding
(A) shall pay a stock dividend or otherwise make a distribution or distributions
on any equity securities (including instruments or securities convertible
into
or exchangeable for such equity securities) in shares of Common Stock, (B)
subdivide outstanding Common Stock into a larger number of shares, or (C)
combine outstanding Common Stock into a smaller number of shares, then each
Affected Conversion Price (as defined below) shall be multiplied by a fraction,
the numerator of which shall be the number of shares of Common Stock outstanding
before such event and the denominator of which shall be the number of shares
of
Common Stock outstanding after such event. Any adjustment made pursuant to
this
Section 3(c)(i) 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 or combination.
As
used
herein, the Affected Conversion Prices (each an “Affected
Conversion Price”)
shall
refer to: (i) the Conversion Price; and (ii) each reported VWAP occurring
on any
Trading Day included in the period used for determining the Market Price
or
Conversion Price, as the case may be, which Trading Day occurred before the
record date in the case of events referred to in clause (A) of this subparagraph
3(c)(i) and before the effective date in the case of the events referred
to in
clauses (B) and (C) of this subparagraph 3(c)(i).
(ii) Distributions.
If the
Company or any of its subsidiaries, at any time while the Notes are outstanding,
shall distribute to all holders of Common Stock evidences of its indebtedness
or
assets or cash or rights or warrants to subscribe for or purchase any security
of the Company or any of its subsidiaries (excluding those referred to in
Section 3(c)(i) above), then concurrently with such distributions to holders
of
Common Stock, the Company shall distribute to holders of the Notes the amount
of
such indebtedness, assets, cash or rights or warrants which the holders of
Notes
would have received had all their Notes been converted into Common Stock
at the
lower of the Conversion Price and the then
applicable Market Price immediately prior to the record date for such
distribution.
(iii) Common
Stock Issuances.
In the
event that the Company or any of its subsidiaries (A) issues or sells any
Common
Stock or Convertible Securities, or (B) directly or indirectly effectively
reduces the conversion, exercise or exchange price for any Convertible
Securities which are currently outstanding (other than pursuant to terms
existing on the date hereof), at or to an effective Per Share Selling Price
which is less than the Conversion Price, then the Conversion Price in effect
immediately prior to such issue or sale or record date, as applicable, shall
be
automatically reduced effective concurrently with such issue or sale to equal
such Per Share Selling Price.
9
The
foregoing provision shall not apply to any issuances or sales of Common Stock
or
Convertible Securities (i) pursuant to any Convertible Securities currently
outstanding on the date hereof in accordance with the terms of such Convertible
Securities in effect on the date hereof, or (ii) to any officer, director
or
employee of the Company pursuant to a bona fide option or equity incentive
plan
duly adopted by the Company. The Company shall give to the each Holder of
Notes
written notice of any such sale of Common Stock within 24 hours of the closing
of any such sale and shall within such 24 hour period issue a press release
announcing such sale if such sale is a material event for, or otherwise material
to, the Company.
For
the
purposes of the foregoing adjustments, in the case of the issuance of any
Convertible Securities, the maximum number of shares of Common Stock issuable
upon exercise, exchange or conversion of such Convertible Securities shall
be
deemed to be outstanding.
For
purposes of this Section 3(c)(iii), if an event occurs that triggers more
than
one of the above adjustment provisions, then only one adjustment shall be
made
and the calculation method which yields the greatest downward adjustment
in the
Conversion Price shall be used.
(iv) Rounding
of Adjustments. All
calculations under this Section 3 or Section 1 shall be made to the nearest
cent
or the nearest 1/100th of a share, as the case may be.
(v) Notice
of Adjustments. Whenever
any Affected Conversion Price is adjusted pursuant to Section 3(c)(i), (ii)
or
(iii) above, the Company shall promptly deliver to each holder of the Notes,
a
notice setting forth the Affected Conversion Price after such adjustment
and
setting forth a brief statement of the facts requiring such adjustment, provided
that any failure to so provide such notice shall not affect the automatic
adjustment hereunder.
(vi) Change
in Control Transactions.
In case
of any Change in Control Transaction, the Holder shall have the right thereafter
to, at its option, (A) convert this Note, in whole or in part, at the lower
of
the Conversion Price and the then
applicable Market Price into the shares of stock and other securities, cash
and/or property receivable upon or deemed to be held by holders of Common
Stock
following such Change in Control Transaction, and the Holder shall be entitled
upon such event to receive such amount of securities, cash or property as
the
shares of the Common Stock of the Company into which this Note could have
been
converted immediately prior to such Change in Control Transaction would have
been entitled if such conversion were permitted, subject to such further
applicable adjustments set forth in this Section 3 or (B) require the Company
or
its successor to redeem this Note, in whole or in part, at a redemption price
equal to the greater of (i) 125% of the outstanding Principal Amount being
redeemed and (ii) the product of (x) the average of the Fair Market Price
for
the five (5) Trading Days immediately preceding the Holder's election to
have
its Notes redeemed and (y) the Conversion Ratio. The terms of any such Change
in
Control Transaction shall include such terms so as to continue to give to
the
Holders the right to receive the amount of securities, cash and/or property
upon
any conversion or redemption following such Change in Control Transaction
to
which a holder of the number of shares of Common Stock deliverable upon such
conversion would have been entitled in such Change in Control Transaction,
and
interest payable hereunder shall be in cash or such new securities and/or
property, at the Holder’s option. This provision shall similarly apply to
successive reclassifications, consolidations, mergers, sales, transfers or
share
exchanges.
10
(vii) Notice
of Certain Events.
If:
|
A.
|
the
Company shall declare a dividend (or any other distribution) on
its Common
Stock; or
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B.
|
the
Company shall declare a special nonrecurring cash dividend on or
a
redemption of its Common Stock; or
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C.
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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;
or
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D.
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the
approval of any stockholders of the Company shall be required in
connection with any reclassification of the Common
Stock of the Company, any consolidation or 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 of exchange whereby the Common
Stock
is converted into other securities, cash or property;
or
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E.
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the
Company shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the
Company;
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then
the
Company shall cause to be filed at each office or agency maintained for the
purpose of conversion of this Note, and shall cause to be mailed to the Holder
at its last address as it shall appear upon the books of the Company, on
or
prior to the date notice to the Company's stockholders generally is given,
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 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 Common Stock
of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange.
(d) Reservation
and Issuance of Underlying Securities.
The
Company covenants that it will at all times reserve and keep available out
of
its authorized and unissued Common Stock solely for the purpose of issuance
upon
conversion of this Note (including repayments in stock), free from preemptive
rights or any other actual contingent purchase rights of persons other than
the
holders of the Notes, not less than such number of shares of 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 under this Section 3 but without regard to any ownership
limitations contained herein) upon the conversion of this Note hereunder
in
Common Stock (including repayments in stock). The Company covenants that
all
shares of Common Stock that shall be so issuable shall, upon issue, be duly
authorized, validly issued, fully paid, nonassessable and freely
tradeable.
11
(e) No
Fractions.
Upon a
conversion hereunder the Company shall not be required to issue stock
certificates representing fractions of shares of Common Stock, but may if
otherwise permitted, make a cash payment in respect of any final fraction
of a
share based on the closing price of a share of Common Stock 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.
(f) Charges,
Taxes and Expenses.
Issuance of certificates for shares of Common Stock upon the conversion of
this
Note (including repayment in stock) shall be made without charge to the holder
hereof for any issue or transfer tax or other incidental expense in respect
of
the issuance of such certificate, all of which taxes and expenses shall be
paid
by the Company, and such certificates shall be issued in the name of the
Holder
or in such name or names as may be directed by the Holder; provided,
however,
that in
the event certificates for shares of Common Stock are to be issued in a name
other than the name of the Holder, this Note when surrendered for conversion
shall be accompanied by an assignment form; and provided further,
that
the Company shall not be required to pay any tax or taxes which may be payable
in respect of any such transfer.
(g) Cancellation.
After
all of the Principal Amount (including accrued but unpaid interest and default
payments at any time owed on this Note) have been paid in full or converted
into
Common Stock, this Note shall automatically be deemed canceled and the Holder
shall promptly surrender the Note to the Company at the Company’s principal
executive offices.
(h) Notices
Procedures.
Any and
all notices or other communications or deliveries to be provided by the Holder
hereunder, including, without limitation, any Conversion Notice, shall be
in
writing and delivered personally, by confirmed facsimile, or by a nationally
recognized overnight courier service to the Company at the facsimile telephone
number or address of the principal place of business of the Company as set
forth
in the Purchase Agreement. 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, or by a nationally recognized overnight
courier service addressed to the Holder at the facsimile telephone number
or
address of the 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 delivered (i) upon receipt, when delivered personally,
(ii) when sent by facsimile, upon receipt if received on a Business Day prior
to
5:00 p.m. (Eastern Time), or on the first Business Day following such receipt
if
received on a Business Day after 5:00 p.m. (Eastern Time) or (iii) upon receipt,
when deposited with a nationally recognized overnight courier
service.
(i) Conversion
Limitation.
Notwithstanding anything to the contrary contained herein, the number of
shares
of Common Stock that may be acquired by the Holder upon conversion pursuant
to
the terms hereof shall not exceed a number that, when added to the total
number
of shares of Common Stock deemed beneficially owned by such Holder (other
than
by virtue of the ownership of securities or rights to acquire securities
(including the Notes) that have limitations on the Holder’s right to convert,
exercise or purchase similar to the limitation set forth herein), together
with
all shares of Common Stock deemed beneficially owned at such time (other
than by
virtue of the ownership of securities or rights to acquire securities that
have
limitations on the right to convert, exercise or purchase similar to the
limitation set forth herein) by the holder’s “affiliates” at such time (as
defined in Rule 144 of the Act) (“Aggregation
Parties”)
that
would be aggregated for purposes of determining whether a group under Section
13(d) of the Securities Exchange Act of 1934 as amended, exists, would exceed
9.9% of the total issued and outstanding shares of the Common Stock (the
“Restricted
Ownership Percentage”).
Each
holder shall have the right (w) at any time and from time to time to reduce
its
Restricted Ownership Percentage immediately upon notice to the Company and
(x)
(subject to waiver) at any time and from time to time, to increase its
Restricted Ownership Percentage immediately in the event of the announcement
as
pending or planned, of a Change in Control Transaction.
12
Section
4. Defaults
and Remedies.
(a) Events
of Default. An
“Event
of Default”
is:
(i)
a default in payment of any amount due hereunder which default continues
for
more than 5 business days after the due date thereof; (ii) a default in the
timely issuance of Underlying Shares upon and in accordance with terms hereof,
which default continues for five Business Days after the Company has received
written notice informing the Company that it has failed to issue shares or
deliver stock certificates within the fifth day following the Conversion
Date;
(iii) failure by the Company for fifteen (15) days after written notice has
been
received by the Company to comply with any material provision of any of the
Notes, the Purchase Agreement or the Investor Rights Agreement (including
without limitation the failure to issue the requisite number of shares of
Common
Stock upon conversion hereof and the failure to redeem Notes upon the Holder’s
request following a Change in Control Transaction pursuant to Section 3(c)(vi);
(iv) a material breach by the Company of its representations or warranties
in
the Purchase Agreement or Investor Rights Agreement; (v) any default after
any
cure period under, or acceleration prior to maturity of, any mortgage, indenture
or instrument under which there may be issued or by which there may be secured
or evidenced any indebtedness for money borrowed by the Company for in excess
of
$25,000 or for money borrowed the repayment of which is guaranteed by the
Company for in excess of $25,000, whether such indebtedness or guarantee
now
exists or shall be created hereafter; or (vi) if the Company is subject to
any
Bankruptcy Event.
(b) Remedies.
If an
Event of Default occurs and is continuing with respect to any of the Notes,
the
Holder may declare all of the then outstanding Principal Amount of this Note
and
all other Notes held by the Holder, including any interest due thereon, to
be
due and payable immediately, except that in the case of an Event of Default
arising from events described in clauses (v) and (vi) of Section 4(a), this
Note
shall become due and payable without further action or notice. In the event
of
such acceleration, the amount due and owing to the Holder shall be the greater
of (1) 125% of the outstanding Principal Amount of the Notes held by the
Holder
(plus all accrued and unpaid interest, if any) and (2) the product of (A)
the
highest closing price for the five (5) Trading days immediately preceding
the
Holder’s acceleration and (B) the Conversion Ratio. In either case the Company
shall pay interest on such amount in cash at the Default Rate to the Holder
if
such amount is not paid within 7 days of Holder’s request. The remedies under
this Note shall be cumulative.
13
Section
5. General.
(a) Payment
of Expenses.
The
Company agrees to pay all reasonable charges and expenses, including attorneys'
fees and expenses, which may be incurred by the Holder in successfully enforcing
this Note and/or collecting any amount due under this Note.
(b) Savings
Clause.
In case
any provision of this Note is held by a court of competent jurisdiction to
be
excessive in scope or otherwise invalid or unenforceable, such provision
shall
be adjusted rather than voided, if possible, so that it is enforceable to
the
maximum extent possible, and the validity and enforceability of the remaining
provisions of this Note will not in any way be affected or impaired thereby.
In
no event shall the amount of interest paid hereunder exceed the maximum rate
of
interest on the unpaid principal balance hereof allowable by applicable law.
If
any sum is collected in excess of the applicable maximum rate, the excess
collected shall be applied to reduce the principal debt. If the interest
actually collected hereunder is still in excess of the applicable maximum
rate,
the interest rate shall be reduced so as not to exceed the maximum allowable
under law.
(c) Amendment.
Neither
this
Note nor any term hereof may be amended, waived, discharged or terminated
other
than by a written instrument signed by the Company and the Holder.
(d) Assignment,
Etc.
The
Holder may assign or transfer this Note to any transferee only with the prior
written consent of the Company, which may not be unreasonably withheld or
delayed, provided that (i) the Holder may assign or transfer this Note to
any of
such Xxxxxx's affiliates without the consent of the Company
and
(ii) upon any Event of Default, the Holder may assign or transfer this
Note
without
the consent of the Company. The
Holder
shall notify the Company of any such assignment or transfer promptly. This
Note
shall be binding upon the Company and its successors and shall inure to the
benefit of the Holder and its successors and permitted assigns.
(e) No
Waiver.
No
failure on the part of the Holder to exercise, and no delay in exercising
any
right, remedy or power hereunder, shall operate as a waiver thereof, nor
shall
any single or partial exercise by the Holder of any right, remedy or power
hereunder preclude any other or future exercise of any other right, remedy
or
power. Each and every right, remedy or power hereby granted to the Holder
or
allowed it by law or other agreement shall be cumulative and not exclusive
of
any other, and may be exercised by the Holder from time to time.
(f) Governing
Law; Jurisdiction.
(i) Governing
Law. THIS
NOTE
WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF
NEW YORK WITHOUT REGARD TO ANY CONFLICTS OF LAWS PROVISIONS THEREOF THAT
WOULD
OTHERWISE REQUIRE THE APPLICATION OF THE LAW OF ANY OTHER
JURISDICTION.
(ii) Jurisdiction.
The
Company irrevocably submits to the exclusive jurisdiction of any State or
Federal Court sitting in the State of New York, County of New York, or San
Jose,
California, over any suit, action, or proceeding arising out of or relating
to
this Note.
The
Company irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of the venue of
any
such suit, action, or proceeding brought in such a court and any claim that
suit, action, or proceeding has been brought in an inconvenient
forum.
14
The
Company agrees that the service of process upon it mailed by certified or
registered mail (and service so made shall be deemed complete three days
after
the same has been posted as aforesaid) or by personal service shall be deemed
in
every respect effective service of process upon it in any such suit or
proceeding. Nothing herein shall affect Holder's right to serve process in
any
other manner permitted by law. The Company agrees that a final non-appealable
judgement in any such suit or proceeding shall be conclusive and may be enforced
in other jurisdictions by suit on such judgment or in any other lawful
manner.
(iii) NO
JURY TRIAL.
THE
COMPANY
HERETO
KNOWINGLY AND VOLUNTARILY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A TRIAL
BY
JURY WITH RESPECT TO ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR
IN
CONNECTION WITH, THIS NOTE.
(g) Replacement
Notes.
This
Note may be exchanged by Holder at any time and from time to time for a Note
or
Notes with different denominations representing an equal aggregate outstanding
Principal Amount, as reasonably requested by Xxxxxx, upon surrendering the
same.
No service charge will be made for such registration or exchange. In the
event
that Xxxxxx notifies the Company that this Note has been lost, stolen or
destroyed, a replacement Note identical in all respects to the original Note
(except for registration number and Principal Amount, if different than that
shown on the original Note), shall be issued to the Holder, provided that
the
Holder executes and delivers to the Company an agreement reasonably satisfactory
to the Company to indemnify the Company from any loss incurred by it in
connection with the Note.
[Signature
Page Follows]
15
IN
WITNESS WHEREOF,
the
Company has caused this Note to be duly executed on the day and in the year
first above written.
|
NETSOL
TECHNOLOGIES, INC.
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||||
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By:
|
||||
|
Name:
|
Xxxxxx
Xxxxxx
|
|||
|
Title:
|
Chief
Executive Officer
|
|||
|
Attest:
|
||||
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Sign:
|
||||
|
Print
Name:
|
16
EXHIBIT
A
FORM
OF CONVERSION NOTICE
(To
be
executed by the Holder
in
order
to convert a Note)
| Re: |
Note
(this “Note”) issued by NETSOL TECHNOLOGIES, INC. to ___________________
on or about July 31, 2008 in the original principal amount of
$___________.
|
The
undersigned hereby elects to convert the aggregate outstanding Principal
Amount
(as defined in the Note) indicated below of this Note into shares of Common
Stock, $0.001 par value per share (the “Common Stock”), of NETSOL
TECHNOLOGIES, INC.
(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 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.
|
Conversion
information:
|
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Date
to Effect Conversion
|
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Aggregate
Principal Amount of Note Being Converted
|
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Number
of Shares of Common Stock to be Issued
|
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Applicable
Conversion Price
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Signature
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Name
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Address
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