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THE
SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE
OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE
EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED
THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED.
SECURED CONVERTIBLE DEMAND NOTE
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$_______
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September 7,
2017
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New York, New
York
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For
value received, root9B Holdings, Inc., a Delaware corporation (the
“Company”), promises to
pay to _______ (the “Holder”), or its
registered assigns, in lawful money of the United States of America
the principal amount of One Hundred Thousand Dollars ($_______).
Interest shall accrue from the date of this Secured Convertible
Demand Note (this “Note”) on the unpaid
principal amount at a rate equal to 18.00% per annum simple
interest. Interest on this Note shall accrue and, unless otherwise
converted in accordance with Section 2 below, shall be due and
payable in full upon demand in writing by the Holder. This Note is
one of a series of up to $1,200,000 of aggregate principal amount
of Notes issued or to be issued as described on Schedule I hereto
(collectively, the “September 2017
Notes”).
This
Note is subject to the following terms and conditions:
1. Payments.
(a) Repayment.
If this Note is not earlier converted pursuant to Section 2, the
entire then-outstanding and unpaid principal amount of this Note,
together with any accrued but unpaid interest thereon (the
“Outstanding
Amount”), shall be due and payable in full upon demand
in writing by the Holder. All payments shall be made, at the
Holder’s option, in either (i) lawful money of the United
States of America at such place as the Holder hereof may from time
to time designate in writing to the Company or (ii) shares of the
Company’s common stock, par value $0.001 (the
“Common
Stock”) pursuant to Section 2(b) below. Subject to
Section 2 below, interest shall accrue on this Note but shall not
be due and payable until demand is made in accordance with this
Section 1.
(b) Interest
Payment. The Interest Payment shall be paid by the Company
on each Payment Date. The Interest Payment shall be payable in, at
the option of the Holder, either (i) lawful money of the United
States of America at such place as the Holder hereof may from time
to time designate in writing to the Company or (ii) such number of
shares of Common Stock (the “Interest Shares”) equal
to the quotient obtained by dividing (i) the Interest Payment by
(ii) Interest Conversion Rate (the “Interest Payment Type”).
Notwithstanding the foregoing, Holder may not request the Interest
Payment to be paid in Interest Shares if such issuance shall result
in a Share Reserve Failure. Holder shall notify the Company in
writing no fewer than three (3) business days prior to the
applicable Payment Date the Interest Payment Type such
Holder’s Interest Payment shall be payable in on the
applicable Payment Date. Notwithstanding any other provision of
this Note, all interest, fees, and charges payable by reason of the
indebtedness evidenced by this Note shall not exceed the maximum,
if any, permitted by applicable laws. If by virtue of applicable
laws, sums in excess of such maximum would otherwise be payable,
then such excess sums shall be construed as having been immediately
applied by Holder to the principal balance of this Note when
received.
(c) Prepayment.
The Company shall have the right at any time prior to the twelve
month anniversary (the “Anniversary Date”) of the
date of issuance of this Note, with the prior written consent of
the Holder, to prepay all or some of the outstanding Principal
Amount of this Note together with accrued interest then due (the
“Prepayment
Amount”) by paying to the Holder an amount equal to
(1) the unpaid principal to be repaid plus (2) any accrued but unpaid
interest plus (3) an amount
equal to the interest which has not accrued as of the Optional
Prepayment Date (as defined below) but would accrue on the
principal to be repaid during the period beginning on the Optional
Prepayment Date and ending on the Anniversary Date (the
“Early Prepayment
Price”). Following the Anniversary Date, the Company
shall have the right, exercisable on not less than three (3)
Trading Days prior written notice to the Holder of the Note, to
prepay all or some of the outstanding Principal Amount of this Note
together with accrued interest then due by paying to the Holder an
amount equal to (1) the unpaid principal to be repaid plus (2) any accrued but unpaid
interest plus (3) an amount
equal to one-half of the interest which has not accrued as of the
Optional Prepayment Date (as defined below) but would accrue on the
principal to be repaid during the period beginning on the Optional
Prepayment Date and ending on the twenty-four month anniversary of
the date of issuance of this Note (the “Subsequent Prepayment
Price” and, together with the Early Prepayment Price,
the “Prepayment
Price”). Any notice of prepayment hereunder (an
“Optional Prepayment
Notice”) shall be delivered to the Holder at its
registered address and shall state: (1) that the Company is
exercising its right to prepay the Note, (2) the Prepayment Amount,
(3) the applicable Prepayment Price and (4) the date of prepayment
which shall be not more than three (3) Trading Days from the date
of the Optional Prepayment Notice. On the date fixed for prepayment
(the “Optional
Prepayment Date”), the Company shall make payment of
the applicable Prepayment Amount and Prepayment Price to or upon
the order of the Holder as specified by the Holder in writing to
the Company at least one (1) business day prior to the Optional
Prepayment Date. The Company covenants and agrees that it will
honor all Notices of Conversion (as defined below) tendered from
the time of delivery of the Optional Prepayment Notice through the
date all amounts owing thereon are due and paid in full.
Notwithstanding the provisions of this Section 1(c), the Company
shall only be permitted to prepay this Note if concurrently with
such prepayment the Company prepays all of the September 2017
Notes, August 2017 Notes and the SPA Notes (as defined below) on a
pro-rata basis.
(d) Security.
Subject to the execution of that certain Joinder and Amendment to
Security Agreement and Waiver of Secured Convertible Promissory
Notes in the form attached hereto as Exhibit A, the payment
obligations arising under this Note are secured pursuant to the
terms of that certain Security Agreement, dated September 9, 2016,
by and among the Company and the investors parties thereto (as
amended from time to time, the “Security Agreement”).
Reference hereby is made to the Security Agreement for a
description of the nature and extent of the collateral serving as
security for this Note and the rights of the Holder with respect to
such security.
(e) Ranking. The
Note shall rank pari passu
with the secured convertible promissory notes (as amended and
restated, the “SPA
Notes”) issued pursuant to that certain Securities
Purchase Agreement, dated September 9, 2016, by and among the
Company and the investors party thereto, as amended, and senior in
all respects to indebtedness, liabilities or obligations of the
Company to other parties outstanding as of the date of this Note,
and shall rank pari passu
with each of the August 2017 Notes (as defined below) and the
September 2017 Notes. Reference to the “August 2017
Notes” means the series of notes issued by the Company in
August 2017 in the aggregate amount of $2,300,000 and which are
secured by the Security Agreement.
(f) Definitions.
(i) “Interest Conversion Rate”
means a per share price equal to 85% of the quotient of the sum of
the VWAP of the Common Stock as of each Trading Day during the five
(5) consecutive Trading Day period ending and including the
Trading Day ended immediately prior to such Payment Date, divided
by five (5), but in no event less than $10.00 per
share.
(ii) “Interest
Payment” means an amount equal to any accrued but
unpaid interest under this Note as of each Payment
Date.
(iii) “Payment
Date” means each March 31, June 30, September 30 and
December 31, commencing September 30, 2017 or, in each case, if
such day is not a business day, the first business day immediately
thereafter until the earlier of (i) the Outstanding Amount is
repaid pursuant to Section
1(a) or (ii) the Outstanding Amount is converted pursuant to
Section
2.
(iv) “Trading
Day” means a day on which the principal Trading Market
is open for trading.
(v) “Trading Market” means any
of the following markets or exchanges on which the Common Stock is
listed or quoted for trading on the date in question: the NYSE MKT,
the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq
Global Select Market, the New York Stock Exchange, the OTC Bulletin
Board or the “Pink Sheets” published by Pink OTC
Markets, Inc. (or a similar organization or agency succeeding to
its functions of reporting prices) (or any successors to any of the
foregoing).
(vi) “VWAP”
means, for any date, the price determined by the first of the
following clauses that applies: (a) if the Common Stock is
then listed or quoted on a Trading Market, the daily volume
weighted average price of the Common Stock for such date (or the
nearest preceding date) on the Trading Market on which the Common
Stock is then listed or quoted as reported by Bloomberg L.P. (based
on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m.
(New York City time)), (b) if the OTC Bulletin Board is not a
Trading Market, the volume weighted average price of the Common
Stock for such date (or the nearest preceding date) on the OTC
Bulletin Board, (c) if the Common Stock is not then listed or
quoted for trading on the OTC Bulletin Board and if prices for the
Common Stock are then reported in the “Pink Sheets”
published by Pink OTC Markets, Inc. (or a similar organization or
agency succeeding to its functions of reporting prices), the most
recent bid price per share of the Common Stock so reported, or
(d) in all other cases, the fair market value of a share of
Common Stock as determined by an independent appraiser selected in
good faith by the holders of a majority in interest of the
aggregate amount outstanding under the September 2017 Notes and
reasonably acceptable to the Company, the fees and expenses of
which shall be paid by the Company.
2. Conversion.
(a) Conversion.
Subject to the limitations set forth in Section 2(d) and Section 3 below, at any time on
or after December 31, 2017, unless the Outstanding Amount has
previously been repaid or converted as provided herein, the Holder
may elect to convert, in whole or in part, the Outstanding Amount
into fully paid and non-assessable shares of Common Stock. The
number of shares of Common Stock to be issued upon conversion of
this Note pursuant to this Section 2(a) shall be equal to
the quotient obtained by dividing (i) the Outstanding Amount
elected by the Holder to be converted, by (ii) $10.00 (subject to
appropriate adjustment in the event of any stock dividend, stock
split, combination or similar recapitalization affecting such
shares) (the “Conversion Price”),
rounded down to the nearest whole share.
(b) Rights, Preferences
and Privileges of Common Stock. Upon conversion of this Note
pursuant to this Section
2, the Company shall issue shares of Common Stock (the
“Conversion
Shares”) which shall have the rights, preferences and
privileges set forth in the Company’s Certificate of
Incorporation, as amended from time to time and then in
effect.
(c) Mechanics and
Effect of Conversion.
This Note may be converted by the Holder in whole or in part
pursuant to Section
2(a), on any Trading Day, by submitting to the Company a
notice (by facsimile, e-mail or other reasonable means of
communication dispatched on the date of conversion prior to 4:00
p.m., New York, New York time) specifying the Outstanding Amount to
be so converted (the “Notice of Conversion”).
Any Notice of Conversion submitted after 4:00 p.m., New York, New
York time, shall be deemed to have been delivered and received on
the next Trading Day. No fractional shares of the Common Stock will
be issued upon conversion of this Note. In lieu of any fractional
share to which the Holder would otherwise be entitled, the Company
will pay to the Holder in cash the amount of the unconverted
outstanding and unpaid principal amount of this Note that would
otherwise be converted into such fractional share. Upon conversion
of this Note pursuant to this Section 2, the Holder
shall surrender this Note, duly endorsed, at the principal offices
of the Company or any transfer agent of the Company. At its
expense, the Company will, as soon as practicable thereafter, issue
and deliver to such Holder, at such principal office, a certificate
or certificates for the number of shares to which such Holder is
entitled upon such conversion, together with any other securities
and property to which the Holder is entitled upon such conversion
under the terms of this Note, including a check payable to the
Holder for any cash amounts payable as described herein. Upon
conversion of this Note, the Company will be forever released from
all of its obligations and liabilities under this Note with regard
to that portion of the principal amount being converted including
without limitation the obligation to pay such portion of the
principal amount.
(d) Limitations on
Exercise. This Note shall not be converted by the Holder to
the extent (but only to the extent) that, following such
conversion, the Holder or any of its affiliates would beneficially
own in excess of 9.99% (the “Maximum Percentage”) of
the Outstanding Shares of Common Stock (as defined below). No prior
limitation on the number of shares of Common Stock subject to this
Note or the inability to convert this Note pursuant to this
Section 2 shall
have any effect on the applicability of the provisions of this
Section 2 with
respect to any subsequent determinations of the number of shares
subject to the Note or the conversion hereof. For the purpose of
this Section 2(d),
beneficial ownership and all determinations and calculations
(including, without limitation, with respect to calculations of
percentage ownership) shall be determined in accordance with
Section 13(d) of the Securities Exchange Act. For clarification,
the foregoing calculation of beneficial ownership shall take into
account all securities which give rise to beneficial ownership by
the Holder or its Affiliates of such Common Stock under such rules
and regulations and not solely this Note. The provisions of this
Section 2(d) shall
be implemented in a manner otherwise than in strict conformity with
the terms of this Section
2(d) in order to correct this Section 2(d) or any portion
hereof which may be defective or inconsistent with the intended
Maximum Percentage beneficial ownership limitation herein contained
or to make changes or supplements necessary or desirable to
properly give effect to such Maximum Percentage limitation. The
limitations contained in this Section 2(d) shall apply to a
successor holder of this Note. “Affiliate” means, with
respect to any Person, any other Person that, directly or
indirectly through one or more intermediaries, controls, is
controlled by or is under common control with such Person, as such
terms are used in and construed under Rule 405 under the Securities
Act of 1933, as amended. With respect to the Holder, any investment
fund or managed account that is managed on a discretionary basis by
the same investment manager Holder will be deemed to be an
Affiliate of Holder. “Person” means any
individual, firm, corporation, partnership, limited liability
company, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or
political subdivision thereof, or other entity of any kind and
includes any successor (by merger or otherwise) of such entity.
“Outstanding Shares
of Common Stock” means, as of any particular
measurement time, the sum of (i) the total number of outstanding
shares of Common Stock of the Company as of such time, and (ii) the
total number of shares of Common Stock which Holder has the right
to acquire beneficial ownership of within sixty days of such
measurement time (to the extent not included in (i)), including but
not limited to any right to acquire shares of Common Stock through
the exercise of any option, warrant or right or through the
conversion of another security (including this Note).
“Exchange
Act” means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Securities and
Exchange Commission thereunder.
(e) No Rights as
Stockholder. This Note does not by itself entitle the Holder
to any voting rights or other rights as a stockholder of the
Company. In the absence of conversion of this Note, no provisions
of this Note, and no enumeration herein of the rights or privileges
of the Holder shall cause the Holder to be a stockholder of the
Company for any purpose.
3. Share
Reserve.
(a) Notwithstanding
anything herein to the contrary, the Holder acknowledges and agrees
that this Note may not be converted nor any shares issued in
payment of accrued interest pursuant to Section 1(b), if, at the time
of such conversion or share payment, as applicable, the Company
does not have a sufficient number of authorized shares of Common
Stock pursuant to the Company’s Certificate of Incorporation
(the “Certificate of
Incorporation”), as in effect as of such date, to
cover such issuance (a “Share Reserve Failure”).
The Company will at all times reserve and keep available out of its
authorized but unissued stock, solely for the issuance and delivery
upon the conversion of the Notes or issuance of shares as provided
in Section 1(b),
and free of preemptive rights, such number of its duly authorized
shares of Common Stock as from time to time shall be issuable upon
the conversion of the Notes or issuance of shares as provided in
Section 1(b)
without regard to any limitation on exercise set forth herein or
therein. All of the shares of Common Stock issuable upon the
conversion of the Notes or issuance of shares as provided in
Section 1(b), when
issued and delivered in accordance with the terms hereof and
thereof, will be duly authorized, validly issued, fully paid and
non-assessable, subject to no lien or other encumbrance other than
restrictions on transfer arising under applicable securities laws
and restrictions imposed hereof.
4. Events of
Default. Promptly following the Company becoming aware of an
occurrence of any Event of Default, the Company shall furnish to
the Holder written notice of the occurrence thereof. The occurrence
of any of the following shall constitute an “Event of Default” under
this Note:
(a) Failure to
Pay. The Company shall fail to pay (i) when due any
outstanding and unpaid principal amount on any due date hereunder
or (ii) any other payment required under the terms of this
Note on the date due, and in the case of (ii), such payment shall
not have been made within five (5) business days following the
Company’s receipt of Holder’s written notice to the
Company of such failure to pay;
(b) Voluntary
Bankruptcy or Insolvency Proceedings. The Company shall
(i) apply for or consent to the appointment of a receiver,
trustee, liquidator or custodian of itself or of all or a
substantial part of its property, (ii) make a general
assignment for the benefit of its or any of its creditors, or
(iii) commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself
or its debts under any bankruptcy, insolvency or other similar law
now or hereafter in effect or consent to any such relief or to the
appointment of or taking possession of its property by any official
in an involuntary case or other proceeding commenced against
it;
(c) Involuntary
Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of a
receiver, trustee, liquidator or custodian of the Company or of all
or a substantial part of the property thereof, or an involuntary
case or other proceedings seeking liquidation, reorganization or
other relief with respect to the Company or the debts thereof under
any bankruptcy, insolvency or other similar law now or hereafter in
effect shall be commenced and an order for relief entered or such
proceeding shall not be challenged, dismissed or discharged within
sixty (60) days of commencement;
(d) Dissolution.
The dissolution or winding up of the Company;
(e) Cessation or
Suspension of Trading. The Common Stock is (i) no longer
listed for trading or authorized for quotation (as the case may be)
on a Trading Market or (ii) suspended from trading on a Trading
Market for a period of five (5) consecutive Trading Days or for
more than an aggregate of ten (10) Trading Days in any 365-day
period;
(f) Failure to Deliver
Shares. The Company shall fail to timely deliver any shares
of Common Stock when so required pursuant to the terms of this
Note;
(g) Cross-Default.
There shall have occurred an “Event of Default” (or
other comparable event) under any currently or future existing
indebtedness of the Company and such “Event of Default”
(or other comparable event) shall be continuing and not subject to
forbearance. For clarity, a default under any promissory note
whereby the Company is the issuer of such promissory note shall
constitute a default under this Section 4(g);
(h) Breach of
Representations, Warranties or Covenants. Any representation
or warranty of the Company in this Note or any other document or
agreement delivered by the Company to the Holder shall not be true
and complete, or the Company shall fail to observe or perform any
other covenant, obligation, condition or agreement contained in
this Note or any other document or agreement delivered by the
Company to the Holder;
(i)
Working
Capital. The Company, excluding IPSA International, Inc.,
the Company’s wholly-owned subsidiary (“IPSA”), shall fail to
maintain positive Working Capital (at least $1) as of each month
end. For purposes of this Note, “Working Capital” shall
mean cash plus accounts
receivable within 60 days old minus accounts payable more than 60
days old of a measurement date; or
(j)
Payroll
Requirement. The Company, excluding IPSA, shall fail to have
sufficient cash on hand (“COH”) equal to or greater
than 1.0 times the largest salary payroll paid during the preceding
90 days, as adjusted for any reductions in force. COH will be
computed at the end of each calendar month and equal to the average
COH for that month. For purposes of clarity, this payroll amount is
exclusive of any severance, bonus or commission payments made but
shall include payroll taxes on salary.
5. Rights of Holder
upon Default.
(a) Rights upon Default. Upon the
occurrence or existence of any Event of Default (other than an
Event of Default referred to in Sections 4(b), 4(c), or 4(h)) and
at any time thereafter during the continuance of such Event of
Default, following the applicable cure or grace period, the Holder,
may, by written notice to the Company, declare all Outstanding
Amounts hereunder to be immediately due and payable without
presentment, demand, protest or any other notice of any kind, all
of which are hereby expressly waived, anything contained herein to
the contrary notwithstanding. Upon the occurrence or existence of
any Event of Default described in Sections 4(b), 4(c) or 4(h),
immediately and without notice, all Outstanding Amounts payable by
the Company hereunder shall automatically become immediately due
and payable, without presentment, demand, protest or any other
notice of any kind, all of which are hereby expressly waived,
anything contained herein to the contrary notwithstanding. In
addition to the foregoing remedies, upon the occurrence or
existence of any Event of Default, and following the applicable
cure or grace period (if any), Holder may exercise any other right
power or remedy granted to it by this Note or otherwise permitted
to it by law, either by suit in equity or by action at law, or
both. Any payment made by the Company upon an Event of Default
shall be made on a pro-rata, pari
passu basis to each Holder of an September 2017 Notes,
August 2017 Notes, and the SPA Notes.
(b) [Reserved.]
(c) Right
of First Refusal. In addition to any other right or remedy,
upon the occurrence or existence of any Event of Default, until
such Event of Default is cured, Holder shall have a right of first
refusal to match any Deal offered by a third party (which may
include directors, officers or stockholders, or affiliates or
associates thereof). A “Deal” shall mean any
written proposal or offer involving (i) a debt or equity financing
transaction involving the receipt by the Company of at least
$2,000,000, or (ii) the sale or exclusive license of substantially
all of the Company’s assets or acquisition of control of the
Company in whatever form. The Company shall provide to Holder
written notice of the Company’s receipt of any proposal
relating to a Deal that the Company receives after the occurrence
of an Event of Default until such Event of Default is cured, which
Holder shall maintain in confidence until publicly disclosed by the
Company. If more than one Holder of an September 2017 Note, August
2017 Note or SPA Note exercises its right of first refusal, then
the right shall be apportioned based on the principal owed to each
Holder. Holder must provide written notice of its desire to match
any proposal relating to a Deal within 7 business days of its
receipt of written notice of such proposal, and if one or more
holders of Notes elects to match such proposal, the parties shall
endeavor to close any such Deal as promptly as practicable
thereafter.
6. Rights Upon a
Fundamental Transaction. As a condition of the consummation
of any Fundamental Transaction occurring at any time prior to the
repayment or conversion in full of the Outstanding Amount, the
Company shall cause any Successor Entity in a Fundamental
Transaction to assume in writing all of the obligations of the
Company under this Note in accordance with the provisions of this
Section 6 pursuant to written agreements in form and
substance reasonably satisfactory to the Holder, including
agreements to deliver to the Holder in exchange for this Note a
security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to this Note,
including, without limitation, which is, at the time of
consummation of the Fundamental Transaction, convertible into a
corresponding number of shares of capital stock equivalent to the
shares of Common Stock acquirable and receivable upon conversion of
this Note (without regard to any limitations on the conversion of
this Note) prior to such Fundamental Transaction, and with a
conversion price equal to the Conversion Price (but taking into
account the relative value of the shares of Common Stock pursuant
to such Fundamental Transaction and the value of such shares of
capital stock, such adjustments to the number of shares of capital
stock and such exercise price being for the purpose of protecting
the economic value of this Note immediately prior to the
consummation of such Fundamental Transaction). Upon the
consummation of each Fundamental Transaction, the Successor Entity
shall succeed to, and be substituted for (so that from and after
the date of the applicable Fundamental Transaction, the provisions
of this Note referring to the “Company” shall refer
instead to the Successor Entity), and may exercise every right and
power of the Company and shall assume all of the obligations of the
Company under this Note with the same effect as if such Successor
Entity had been named as the Company herein. Notwithstanding
anything to the contrary, the Company or any Successor Entity
shall, at the Holder’s option, exercisable at any time
concurrently with, or within 30 days after, the consummation of the
Fundamental Transaction, purchase all or any portion of the
Outstanding Amount under this Note from the Holder by paying to the
Holder an amount of cash equal to the applicable Prepayment Amount
set forth is Section
1(c) above. The foregoing provisions of this Section 6 shall
similarly apply to successive Fundamental
Transactions.
(a) Definitions.
(i) “Fundamental Transaction”
means that the Company shall, directly or indirectly, in one or
more related transactions, (i) consolidate or merge with or into
(whether or not the Company is the surviving corporation) another
Person or Persons, if the holders of the Voting Stock (not
including any shares of Voting Stock held by the Person or Persons
making or party to, or associated or affiliated with the Persons
making or party to, such consolidation or merger) immediately prior
to such consolidation or merger shall hold or have the right to
direct the voting of less than 50% of the Voting Stock or such
voting securities of such other surviving Person immediately
following such transaction, or (ii) sell, assign, transfer, convey
or otherwise dispose of all or substantially all of the properties
or assets of the Company to another Person, or (iii) allow another
Person to make a purchase, tender or exchange offer that is
accepted by the holders of more than the 50% of the outstanding
shares of Voting Stock of the Company (not including any shares of
Voting Stock held by the Person or Persons making or party to, or
associated or affiliated with the Persons making or party to, such
purchase, tender or exchange offer), or (iv) consummate a stock
purchase agreement or other business combination (including,
without limitation, a reorganization, recapitalization, spin-off or
scheme of arrangement) with another Person whereby such other
Person acquires more than the 50% of the outstanding shares of
Voting Stock of the Company (not including any shares of Voting
Stock held by the other Person or other Persons making or party to,
or associated or affiliated with the other Persons making or party
to, such stock purchase agreement or other business combination),
(v) reorganize, recapitalize or reclassify its Common Stock (other
than pursuant to the Amendment, if approved) or (vi) any
“person” or “group” (as these terms are
used for purposes of Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended) is or shall become the
“beneficial owner” (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended), directly or
indirectly, of 50% of the aggregate ordinary voting power
represented by issued and outstanding Common Stock.
(ii) “Successor
Entity” means the Person formed by, resulting from or
surviving any Fundamental Transaction or the Person with which such
Fundamental Transaction shall have been entered into.
(iii) “Voting
Stock” of a Person means capital stock of such Person
of the class or classes pursuant to which the holders thereof have
the general voting power to elect, or the general power to appoint,
at least a majority of the board of directors, managers or trustees
of such Person (irrespective of whether or not at the time capital
stock of any other class or classes shall have or might have voting
power by reason of the happening of any contingency).
7. Negative
Covenants. Until the Note has been converted, redeemed or
otherwise satisfied in accordance with their terms, the Company
shall not and, the Company shall not permit any of its
subsidiaries, without the prior written consent of the Holder to,
directly or indirectly
(a) incur or guarantee,
assume or suffer to exist any indebtedness senior or pari passu to the Note;
(b) allow or suffer to
exist any mortgage, lien, pledge, charge, security interest or
other encumbrance upon or in any property or assets (including
accounts and contract rights) owned by the Company or any of its
subsidiaries (collectively, “Liens”) other than (i)
the Liens contemplated by the Security Agreement, (ii) any Lien for
taxes not yet due or delinquent or being contested in good faith by
appropriate proceedings for which adequate reserves have been
established in accordance with United States generally accepted
accounting principles, consistently applied during the periods
involved, (iii) any statutory Lien arising in the ordinary course
of business by operation of law with respect to a liability that is
not yet due or delinquent, (iv) any Liens created by that certain
Factoring and Security Agreement by and between IPSA and Advance
Payroll Funding Ltd., as amended, (v) any Lien created by operation
of law, such as materialmen’s liens, mechanics’ liens
and other similar liens, arising in the ordinary course of business
with respect to a liability that is not yet due or delinquent or
that are being contested in good faith by appropriate proceedings,
(vi) Liens (A) upon or in any equipment acquired or held by the
Company or any of its subsidiaries to secure the purchase price of
such equipment or indebtedness incurred solely for the purpose of
financing the acquisition or lease of such equipment, or (B)
existing on such equipment at the time of its acquisition, provided
that the Lien is confined solely to the property so acquired and
improvements thereon, and the proceeds of such equipment, (vii)
Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type
described in clause (v) above, provided that any extension, renewal
or replacement Lien shall be limited to the property encumbered by
the existing Lien and the principal amount of the Indebtedness
being extended, renewed or refinanced does not increase, (viii)
leases or subleases and licenses and sublicenses granted to others
in the ordinary course of the Company’s business, not
interfering in any material respect with the business of the
Company and its subsidiaries taken as a whole, (ix) Liens in favor
of customs and revenue authorities arising as a matter of law to
secure payments of custom duties in connection with the importation
of goods, and (x) Liens arising from judgments, decrees or
attachments in circumstances not constituting an Event of
Default;
(c) redeem, defease,
repurchase, repay or make any payments in respect of, by the
payment of cash or cash equivalents (in whole or in part, whether
by way of open market purchases, tender offers, private
transactions or otherwise), all or any portion of (i) any
indebtedness of the Company which is junior in priority to the
Note, (ii) the SPA Notes or August 2017 Notes, or (iii) any
indebtedness if at the time such payment is due or is otherwise
made or, after giving effect to such payment, an event
constituting, or that with the passage of time and without being
cured would constitute, an Event of Default has occurred and is
continuing, in each case, whether by way of payment in respect of
principal of (or premium, if any) or interest on, such
indebtedness;
(d) redeem or
repurchase for cash the Common Stock;
(e) declare or pay any
cash dividend on the Common Stock;
(f) enter into any
agreement that conflicts with any provision set forth in this Note
and/or restricts or prohibits the Company’s compliance with
any provision of this Note; or
(g) amend any of the
term of any of the September 2017 Notes, August 2017 Notes or the
SPA Notes to be, individually or in the aggregate, more favorable
than the terms of this Note.
8. Transfer;
Successors and Assigns. The terms and conditions of this Note
shall inure to the benefit of and be binding upon the respective
successors and permitted assigns of the parties. Notwithstanding
the foregoing, neither the Company nor the Holder may assign or
transfer any of its obligations or rights under this Note without
the prior written approval of the other party hereto. Subject to
the preceding sentence, this Note may be transferred only upon
surrender of the original Note for registration of transfer, duly
endorsed, or accompanied by a duly executed written instrument of
transfer in form satisfactory to the Company. Thereupon, a new note
for the same principal amount and interest will be issued to, and
registered in the name of, the transferee. Interest and principal
are payable only to the Holder of this Note. The Company shall
maintain at its offices a register for the recordation of the names
and addresses of each Holder and assignee or transferee of such
Holder, and the principal amounts (and stated interest) under the
Note owing to, the Holder or any such assignee or transferee
pursuant to the terms hereof from time to time (the
“Register”). The entries
in the Register shall be conclusive absent manifest error, and the
Company, the Holder and any such assignee or transferee shall treat
each Person whose name is recorded in the Register pursuant to the
terms hereof as a Holder for all purposes hereunder.
9. Governing
Law. This Note and
all acts and transactions pursuant hereto and the rights and
obligations of the parties hereto shall be governed, construed and
interpreted in accordance with the laws of the State of Delaware,
without giving effect to principles of conflicts of
law.
10. Notices.
All notices and other communications given or made pursuant to this
Note shall be in writing and shall be deemed effectively given upon
the earlier of actual receipt or: (i) personal delivery to the
party to be notified, (ii) when sent, if sent by electronic mail or
facsimile during normal business hours of the recipient, and if not
sent during normal business hours, then on the recipient’s
next business day, provided that in either case it is followed
promptly by a confirming copy of the notice given via another
authorized means for that recipient, (iii) two (2) business days
after deposit with a nationally recognized overnight courier,
freight prepaid for delivery, specifying next business day
delivery, with written verification of receipt, addressed to the
party to be notified at such party’s address as set forth on
the signature page hereto, or as subsequently modified by written
notice, and if to the Company, with a copy to DLA Piper LLP (US),
2525 East Camelback Road, Suite 1000, Phoenix, Arizona 85016,
Attention: Steven D. Pidgeon.
11. Amendments and
Waivers. Any term of
this Note may be amended only with the written consent of the
Company and the Holder. Any amendment or waiver effected in
accordance with this Section 11 shall be binding
upon the Company, the Holder and each transferee of the Note. No
consideration shall be offered or paid to the Holder or any holder
of any September 2017 Note (other than this Note) (together, the
“Other
Notes”) to amend or consent to a waiver or
modification of any provision of this Note and/or the Other Notes
unless the same consideration is also offered to the Holder and all
holders of Other Notes.
12. Entire
Agreement. This Note
constitutes the entire agreement between the parties hereto
pertaining to the subject matter hereof, and any and all other
written or oral agreements relating to the subject matter hereof
existing between the parties hereto are expressly
canceled.
13. Counterparts;
Electronic Delivery.
This Note may be executed in two (2) counterparts, each of which
shall be deemed an original, but both of which together shall
constitute one and the same instrument. Counterparts may be
executed electronically and delivered via facsimile, electronic
mail (including pdf or any electronic signature complying with the
U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other
transmission method and any counterpart so delivered shall be
deemed to have been duly and validly delivered and be valid and
effective for all purposes.
14. Stockholders,
Officers and Directors Not Liable. In no event shall any stockholder,
officer or director of the Company be liable for any amounts due or
payable pursuant to this Note.
15. Company
Covenants.
(a) On or before August
11, 2017 at 4:00pm Eastern Time, and within fifteen (15) days
following each month end thereafter, the Company shall deliver to
Holder a certificate setting forth the Company’s Working
Capital at the end of such month (or, in the case of the
certificate delivered on August 11, 2017, with respect to July
2017) certified by the Company’s chief financial officer and
accompanied by reasonable supporting documentation. The
Company’s (i) failure to timely provide Holder with a
certification pursuant to this section or (ii) failure to provide a
certification pursuant to this section that is accurate in all
respects shall constitute an “Event of Default”
pursuant to Section 4(h).
(b) On or before August
11, 2017 at 4:00pm Eastern Time, and within fifteen (15) days
following each month end thereafter, the Company shall provide
written notice to Holder, the Company shall deliver to Holder a
certificate, certified by the Company’s chief financial
officer and accompanied by reasonable supporting documentation,
stating that the Company has sufficient cash on hand
(“COH”) equal to or greater than 1.0 times the largest
salary payroll paid during the preceding 90 days, as adjusted for
any reductions in force and excluding IPSA. In addition the Company
shall provide written notice to Holder, within twenty four hours of
a determination by the Company, excluding IPSA, that it ceases to
have sufficient COH equal to or greater than 1.0 times the largest
salary payroll paid during the preceding 90 days, as adjusted for
any reductions in force. COH will be computed at the end of each
calendar month (or, in the case of the certificate delivered on
August 11, 2017, with respect to July 2017) and equal to the
average COH for that month. For purposes of clarity, this payroll
amount is exclusive of any severance, bonus or commission payments
made but shall include payroll taxes on salary. The Company’s
(i) failure to timely provide Holder with a certification pursuant
to this section or (ii) failure to provide a certification pursuant
to this section that is accurate in all respects shall constitute
an “Event of Default” pursuant to Section
4(h).
(c) The
Company hereby acknowledges that it is in breach, as of the date of
this Note of Sections 4(h),(i), and (j) of this Note, and such
breaches constitute an “Event of Default” hereunder,
and that issuing this Note to the Holder, and Holder lending the
amount contemplated herein, shall not constitute a waiver or
release of such Events of Default by the Holder in favor of the
Company, and that Holder shall continue to have any and all rights
Holder has under this Note.
16. Registration
Rights.
(a) At any time on or
prior to December 31, 2017, the Company shall file a registration
statement covering the resale of the Conversion Shares by the
Holder. The Company shall use its commercially reasonable efforts
to cause the registration statement to be declared effective by the
Commission as promptly as possible after the filing thereof and
shall use commercially reasonable efforts to keep the registration
statement continuously effective under the Securities Act until the
earlier of (i) the date that all securities covered by such
registration statement have been sold or may be sold without volume
or manner-of-sale restrictions pursuant to Rule 144 and without the
requirement for the Company to be in compliance with the current
public information requirement under Rule 144 or (ii) August 10,
2022. The Company shall notify the Purchasers in writing promptly
(and in any event within two business days) after receiving
notification from the Commission that the Registration Statement
has been declared effective.
(b) The Company may, by
written notice to Holder, suspend sales under the registration
statement after the effective date thereof and/or require that
Holder immediately cease the sale of shares of Common Stock
pursuant thereto and/or defer the filing of the registration
statement if the Company is engaged in a material merger,
acquisition or sale or any other pending development that the
Company believes may be material, and the Board of Directors
determines in good faith, by appropriate resolutions, that, as a
result of such activity, (A) it would be materially detrimental to
the Company (other than as relating solely to the price of the
Common Stock) to maintain the registration statement at such time
or (B) it is in the best interests of the Company to suspend sales
under such registration at such time. Upon receipt of such notice,
Holder agrees to immediately discontinue any sales of the
Conversion Shares pursuant to the registration statement until
Holder is advised in writing by the Company that the current
prospectus or amended prospectus, as applicable, may be used. In no
event, however, shall this right be exercised to suspend sales
beyond the period during which (in the good faith determination of
the Board of Directors) the failure to require such suspension
would be materially detrimental to the Company. The Company’s
rights under this Section 16(b) may be exercised for a period of no
more than 20 business days at a time with a subsequent permitted
trading window of at least 90 business days, and not more than two
times in any twelve-month period. Immediately after the end of any
suspension period under this Section 16(b), the Company shall take
all necessary actions (including filing any required supplemental
prospectus) to restore the effectiveness of the registration
statement and the ability of Holder to publicly resell the
Conversion Shares pursuant to the effective registration
statement.
(c) All expenses, other
than underwriting discounts and commissions relating to the
Conversion Shares and the fees and disbursements of any counsel for
Holder, incurred in connection with registrations, filings or
qualifications pursuant to Section 16 for Holder, including
(without limitation) all registration, filing and qualification
fees, printers’ and accounting fees, fees and disbursements
of counsel for the Company shall be borne by the
Company.
[Remainder of Page
Intentionally Left Blank]
The
Company has caused this Note to be issued as of the date first
written above.
COMPANY:
ROOT9B
HOLDINGS, INC.
By:
__________________________
Title:
Chief Financial
Officer
AGREED TO AND ACCEPTED:
Exhibit A
Joinder
and Amendment to Security Agreement and Waiver of Secured
Convertible Promissory Note
Schedule I