8% Convertible Subordinated Secured Promissory Note dated August 22, 2013 issued by Issuer Direct Corporation to Red Oak Partners LP

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

 

U.S. $2,500,000

August 22, 2013

THIS 8.0% CONVERTIBLE SUBORDINATED SECURED PROMISSORY NOTE (this “Note”) is issued by Issuer Direct Corporation, a Delaware corporation, having a principal place of business at 500 Perimeter Park Dr., Morrisville, NC 27560 (the “Company”), and is due two years from the original issue date (the “Note”).

FOR VALUE RECEIVED, the Company promises to pay to Red Oak Partners or its registered assigns (the “Holder”), the principal sum of $2,500,000 on the date that is two years from the original issue date set forth above or such earlier date as this Note is required or permitted to be repaid as provided hereunder (the “Maturity Date”) (other than such amounts converted pursuant to Section 4 below) and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Note (“Interest”) in accordance with the provisions hereof.  On the Maturity Date, the Holder, at its option, shall receive the amounts due under this Note in cash or Note Shares (as defined below).  This Note is subject to the following additional provisions:

  

Section 1. Definitions.  For the purposes hereof, in addition to the terms defined elsewhere in this Note: (a) capitalized terms not otherwise defined herein have the meanings given to such terms in the Purchase Agreement, and (b) the following terms shall have the following meanings:

“Applicable Conversion Price” shall have the meaning set forth in Section 4(b) hereof.

 

“Bankruptcy Event” means any of the following events: (i) the Company or any Significant Subsidiary (as such term is defined in Rule 1.02(s) of Regulation S-X) thereof 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 Significant Subsidiary thereof; (ii) there is commenced against the Company or any Significant Subsidiary thereof any such case or proceeding that is not dismissed within 60 days after commencement; (iii) the Company or any Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered; (iv) the Company or any Significant Subsidiary thereof 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; (v) the Company or any Significant Subsidiary thereof makes a general assignment for the benefit of creditors; (vi) the Company or any Significant Subsidiary thereof calls a meeting of substantially all of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or (vii) the Company or any Significant Subsidiary thereof, 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.

“Board” means the Board of Directors of the Company.

 

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

“Change of Control Transaction” means the occurrence after the date hereof of any of (i) an acquisition after the date hereof by an individual or legal entity or “group” (as described in Rule 13d5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of in excess of 50% of the voting securities of the Company, or (ii) the execution by the Company of an agreement to which the Company  is a party or by which it is bound, providing for any of the events set forth above in (i).

 

“Common Stock” means shares of the common stock of the Company, $0.001 par value per share.

 

“Compliance Certificate” shall have the meaning set forth in the Purchase Agreement.

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

“Event of Default” shall have the meaning set forth in Section 6 hereof.

“Fundamental Transaction” shall have the meaning set forth in Section 7 hereof.

“Original Issue Date” shall mean the date of the first issuance of this Note as provided on the cover page hereof, regardless of the number of transfers of this Note and regardless of the number of instruments which may be issued to evidence this Note.

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

“Purchase Agreement” means the Securities Purchase Agreement between the Holder and the Company, pursuant to which this Note is initially purchased, as amended, modified or supplemented from time to time in accordance with its terms.

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

“Senior Debt” shall mean the current credit line of the Company with Fifth Third Bank, which shall not be in excess of $2,000,000.

 

“Transaction Documents” means this Agreement, the Purchase Agreement, the Security Agreement, the Co-Sale Agreement, the Voting Agreement and any other documents or agreements executed by the Holder in connection with the transactions contemplated hereby.

Section 2. Interest.

 

d) Prepayment. Other than as specifically permitted by the Holder, the Company may not prepay any portion of the outstanding principal amount of this Note and accrued and unpaid Interest.

Section 3.  Registration of Transfers and Exchanges.

 

a) Different Denominations. This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Holder surrendering the same.  No service charge will be made for such registration of transfer or exchange.

b) Investment Representations. This Note has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal and state securities laws and regulations.

c) Reliance on Note Register. Prior to due presentment to the Company for transfer of this Note, the Company and any agent of the Company may treat the Person in whose name this Note is duly registered on the Note Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.

Section 4.Conversion.

 

a) Voluntary Conversion. The Notes may be converted, at any time after the date of issuance, provided that the Holder provides notice to the Company of its intent to convert (“Notice of Conversion”) at least 3 days prior to the date of conversion (“Conversion Date”).  The Notice of Conversion, the form of which is provided in Annex A, must include the total number of shares of Common Stock or Preferred Stock, as the case may be, of the Company that the Holder would be deemed to directly or beneficially own as of the Conversion Date.  For the avoidance of doubt, to the extent that Preferred Stock of the Company has been issued, the decision to receive Preferred Stock of Common Stock shall be at the sole and absolute discretion of the Holder.  To effect conversions hereunder, the Holder shall not be required to physically surrender Notes to the Company unless the entire principal amount of this Note plus all accrued and unpaid interest thereon has been so converted. Conversions hereunder shall have the effect of lowering the outstanding principal amount of this Note in an amount equal to the applicable conversion.  The Holder and the Company shall maintain records showing the principal amount converted and the date of such conversions.  The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note may be less than the amount stated on the face hereof.

 

b) Conversion Price.  The conversion price on any Conversion Date shall be (i) $3.99 per share of Common Stock, or (ii) if there are any outstanding shares of Preferred Stock, and the Holder wishes to convert the Notes into Preferred Stock, the lowest issuance price as of the date of conversion for any issuance of Preferred Stock, in either case subject to adjustment as provided in Section 5 hereof (the “Applicable Conversion Price”).

 

c) Mechanics of Conversion.

 

i. Note Shares Issuable Upon Conversion.  The number of shares of Common Stock or Preferred Stock, as the case may be, issuable upon a conversion (“Note Shares”) hereunder shall be determined by the quotient obtained by dividing (x) the outstanding principal amount of this Note to be converted plus all accrued and unpaid interest thereon by (y) the Applicable Conversion Price.

ii. Delivery of Certificate Upon Conversion.  Not later than 5 Business Days after any Conversion Date, the Company will deliver to the Holder a certificate or certificates representing the number of shares of Note Shares being acquired upon the conversion of this Note or a portion of this Note.

iii. Reservation of Certificates. Certificates for the Note Shares on conversion of this Note shall be made without charge to the Holder for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of this Note so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

 

Section 5. Certain Adjustments.

 

a) Stock Splits.  If the Company, at any time while this Note is outstanding, shall: (A) subdivide outstanding shares of Common Stock into a larger number of shares, (B) combine (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (C) issue by reclassification of shares of the Common Stock any shares of capital stock of the Company, then the Applicable Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event.  Any adjustment made pursuant to this Section shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

 

b) Dividends In Kind.  In the event that the Company issues a dividend or distribution in equity, property or any other form other than cash during the period of time that a Note is outstanding, and the Note is later converted into Common Stock or Preferred Stock, the Holder shall receive at the time of conversion, in addition to shares of Common Stock or Preferred Stock, such equity, property or other assets that such Holder would have received had the Note been converted into Common Stock immediately prior to such distribution or dividend.

c) Notice to Holders.

i. Adjustment to Applicable Conversion Price.  Whenever the Applicable Conversion Price is adjusted pursuant to any of this Section 5, the Company shall promptly mail to the Holder a notice setting forth the Applicable Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.

 

ii. Notice to Allow Conversion by Holder.  If (A) the Company shall declare a dividend (or any other distribution) on the Common Stock; (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock; (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; (D) the approval of any stockholders of the Company shall be required in connection with any matter including a reclassification of the Common Stock, 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 exchange whereby the Common Stock is converted into other securities, cash or property; or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of this Note, and shall cause to be mailed to the Holder at the Holder’s last address appearing on the  stock books of the Company, for receipt at least 15 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange, of Change of Control is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange.  The Holder is entitled to convert this Note during the 15-day period commencing the date of such notice to the effective date of the event triggering such notice.

 

d) Calculations. All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be.  For purposes of this Section 5, the number of shares of Common Stock outstanding as of a given date shall be the sum of the aggregate number of issued and to be converted shares of Common Stock (excluding treasury shares, if any) outstanding.

Section 6. Security Interest; Subordination.  This Note is secured by a lien on all assets of the Company, as evidenced in a Security Agreement between the Company and Holder; provided, however, that such security interest is subordinate and secondary to the Company’s Senior Debt.

Section 7.Events of Default.

a) “Event of Default”, wherever used herein, means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):

 

 

Section 7. Fundamental Transactions.

Section 8Use of Proceeds. The proceeds of this Note shall be used to fund the acquisition by the Company of PrecisionIR Group, Inc.

Section 9Miscellaneous.

 

a) Notices.  Any and all notices or other communications or deliveries to be provided by the Holder hereunder, including, without limitation, any Notice of Conversion, shall be in writing and delivered either personally, by facsimile or sent by a nationally recognized overnight courier service, addressed to the Company at the address set forth on the signature page or such other address or facsimile number as the Company may specify for such purposes by notice to the Holder delivered in accordance with this Section, with any fax delivery followed up by overnight delivery service.  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 sent 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, then at the principal place of business of the Holder, if any.

b) Absolute Obligation. Except as expressly provided herein, no provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal and interest of this Note at the time, place, rate, and currency, herein prescribed.  This Note is a direct debt obligation of the Company.  

 

c) Lost or Mutilated Note.  If this Note shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed Note, a new Note for the principal amount of this Note (as adjusted for any conversions) so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Note, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Company.

d) Governing Law.  Any and all actions brought by the Company or Holder under this Note shall be brought in the state or federal courts located in the New York, NY.  If either party shall commence an action to enforce any provisions of the Transaction Documents, then the prevailing party in such action shall be reimbursed by the other party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such proceeding.

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

f) Severability.  If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances.  If it shall be found that any interest or other amount deemed interest due hereunder violates applicable laws governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum permitted rate of interest.

 

g) Next Business Day.  Whenever any payment hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.

h) Headings.  The headings contained herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit or affect any of the provisions hereof.

i) Amendment; Dissenters Rights.  This Note and the Transaction Documents may be modified or amended or provisions hereof waived with the written consent of the Company and the Holder(s) of a majority of the then outstanding principal amount of all of the Notes. In the event that any material term in this Note or any of the Transaction Documents is amended by such majority and the Holder objects to such amendment, notwithstanding anything contained herein to the contrary, the Holder shall have the right to accelerate the repayment of this Note and demand repayment of all outstanding principal and accumulated and unpaid interest owing at such time plus an additional payment equal to ten percent of the then outstanding principal.  Such repayment right shall only be exercisable by the Holder during the thirty (30) day period following receipt of notice from the Company of such amendment.

 

 

 

 

 

 

 

 

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