Exhibit 10.26
 
NEITHER THE ISSUANCE NOR SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
 

Principal Amount: $250,000
Purchase Price: $250,000
 Issue Date: December 16, 2014

 

CONVERTIBLE PROMISSORY NOTE
 
FOR VALUE RECEIVED, NATIONAL AUTOMATED SERVICES, INC., a NEVADA corporation
(hereinafter called the “Borrower”), hereby promises to pay to the order of
MAGNA EQUITIES II, LLC, a New York corporation, or registered assigns (the
“Holder”) the sum of Two Hundred and Fifty Thousand Dollars ($250,000), on
December 10, 2015 (the “Maturity Date”), and to pay interest on the unpaid
principal balance hereof at the rate of twelve percent (12%) (the “Interest
Rate”) per annum from the date hereof (the “Issue Date”) until the same becomes
due and payable, whether at maturity or upon acceleration or by prepayment or
otherwise, compounded on a monthly basis. This Note may not be prepaid in whole
or in part except as otherwise explicitly set forth in Section 1.9 hereof. Any
amount of principal or interest on this Note which is not paid when due shall
bear interest at the rate of twenty two percent (22%) per annum from the due
date thereof until the same is paid (“Default Interest”). Interest shall
commence accruing on the Issue Date, shall be computed on the basis of a 365-day
year and the actual number of days elapsed. All payments due hereunder (to the
extent not converted into common stock, (the “Common Stock”) in accordance with
the terms hereof) shall be made in lawful money of the United States of America.
All payments shall be made at such address as the Holder shall hereafter give to
the Borrower by written notice made in accordance with the provisions of this
Note. Whenever any amount expressed to be due by the terms of this Note is due
on any day which is not a business day, the same shall instead be due on the
next succeeding day which is a business day and, in the case of any interest
payment date which is not the date on which this Note is paid in full, the
extension of the due date thereof shall not be taken into account for purposes
of determining the amount of interest due on such date. As used in this Note,
the term “business day” shall mean any day other than a Saturday, Sunday or a
day on which commercial banks in the city of New York, New York are authorized
or required by law or executive order to remain closed. Each capitalized term
used herein, and not otherwise defined, shall have the meaning ascribed thereto
in that certain Securities Purchase Agreement dated the date hereof, pursuant to
which this Note was originally issued (the “Purchase Agreement”).
 
This Note is free from all taxes, liens, claims and encumbrances with respect to
the issue thereof and shall not be subject to preemptive rights or other similar
rights of shareholders of the Borrower and will not impose personal liability
upon the holder thereof.
 
The following terms shall apply to this Note:
 
 
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ARTICLE I. CONVERSION RIGHTS
 
1.1          Conversion Right. The Holder shall have the right from time to
time, and at any time during the period beginning 60 calendar days after the
date of this Note and ending on the later of (i) the Maturity Date and (ii) the
date of payment of the Default Amount (as defined in Article III) pursuant to
Section 1.6(a) or Article III, each in respect of the remaining outstanding
principal amount of this Note to convert all or any part of the outstanding and
unpaid principal amount of this Note into fully paid and non-assessable shares
of Common Stock, as such Common Stock exists on the Issue Date, or any shares of
capital stock or other securities of the Borrower into which such Common Stock
shall hereafter be changed or reclassified at the conversion price (the
“Conversion Price”) determined as provided herein (a “Conversion”); provided,
however, that in no event shall the Holder be entitled to convert any portion of
this Note in excess of that portion of this Note upon conversion of which the
sum of (1) the number of shares of Common Stock beneficially owned by the Holder
and its affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the unconverted portion of the Notes
or the unexercised or unconverted portion of any other security of the Borrower
subject to a limitation on conversion or exercise analogous to the limitations
contained herein) and (2) the number of shares of Common Stock issuable upon the
conversion of the portion of this Note with respect to which the determination
of this proviso is being made, would result in beneficial ownership by the
Holder and its affiliates of more than 4.99% of the outstanding shares of Common
Stock. For purposes of the proviso to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and
Regulations 13D-G thereunder, except as otherwise provided in clause (1) of such
proviso, provided, further, however, that the limitations on conversion may be
waived by the Holder upon, at the election of the Holder, not less than 61 days’
prior notice to the Borrower and the provisions of the conversion limitation
shall continue to apply until such 61st day (or such later date, as determined
by the Holder, as may be specified in such notice of waiver). The number of
shares of Common Stock to be issued upon each conversion of this Note shall be
determined by dividing the Conversion Amount (as defined below) by the
applicable Conversion Price then in effect on the date specified in the notice
of conversion, in the form attached hereto as Exhibit A (the “Notice of
Conversion”), delivered to the Borrower by the Holder in accordance with Section
1.4 below; provided that the Notice of Conversion is submitted by facsimile (or
by other means resulting in, or reasonably expected to result in, notice) to the
Borrower before 6:00 p.m., New York, New York time on such conversion date (the
“Conversion Date”). The term “Conversion Amount” means, with respect to any
conversion of this Note, the sum of (1) the principal amount of this Note to be
converted in such conversion plus (2) at the Borrower’s option, accrued and
unpaid interest, if any, on such principal amount at the interest rates provided
in this Note to the Conversion Date, provided, however, that the Company shall
have the right to pay any or all interest in cash plus (3) at the Borrower’s
option, Default Interest, if any, on the amounts referred to in the immediately
preceding clauses (1) and/or (2) plus (4) at the Holder’s option, any amounts
owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof.
 
Should the closing Market Price of Common Stock of the Company fall below $1.00
for two (2) consecutive Trading Days, then the conversion restrictions outlined
in the paragraph above shall be removed and the Holder shall have the right to
convert at any  time.

1.2              Conversion Price.
 
(a)          Calculation of Conversion Price. The conversion price (the
“Conversion Price”) shall be the Conversion Price (as defined herein)(subject to
equitable adjustments for stock splits, stock dividends or rights offerings by
the Borrower relating to the Borrower’s securities or the securities of any
subsidiary of the Borrower, combinations, recapitalization, reclassifications,
extraordinary distributions and similar events). The “Conversion Price” shall
mean a fixed price of $2.00 per share; however, if at any point after seven
months from the Issue Date the stock closes below $2.50 for three trading days
within a 30 day period, the Holder may convert at a 40% discount from the lowest
daily Trading Price in the five (5) trading days prior to conversion. “Trading
Price” means, for any security as of any date, the lowest trading price on the
Over-the- Counter Bulletin Board, or applicable trading market (the “OTCQB”) as
reported by a reliable reporting service (“Reporting Service”) mutually
acceptable to Borrower and Holder (i.e. Bloomberg). If the Trading Price cannot
be calculated for such security on such date in the manner provided above, the
Trading Price shall be the fair market value as mutually determined by the
Borrower and the holders of a majority in interest of the Notes being converted
for which the calculation of the Trading Price is required in order to determine
the Conversion Price of such Notes. “Trading Day” shall mean any day on which
the Common Stock is traded for any period on the OTCQB, or on the principal
securities exchange or other securities market on which the Common Stock is then
being traded. If the Issuer’s Common stock is chilled for deposit at DTC and/or
becomes chilled at any point while this Agreement remains outstanding, an
additional 8% discount will be attributed to the Conversion Price defined
hereof. If the Borrower is unable to issue any shares under this provision due
to the fact that there is an insufficient number of authorized and unissued
shares available, the Holder promises not to force the Borrower to issue these
shares or trigger an Event of Default, provided that Borrower takes immediate
steps required to get the appropriate level of approval from shareholders or the
board of directors, where applicable to raise the number of authorized shares to
satisfy the Notice of Conversion.
 
 
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(b)         Conversion Price During Major Announcements. Notwithstanding
anything contained in Section 1.2(a) to the contrary, in the event the Borrower
(i) makes a public announcement that it intends to consolidate or merge with any
other corporation (other than a merger in which the Borrower is the surviving or
continuing corporation and its capital stock is unchanged) or sell or transfer
all or substantially all of the assets of the Borrower or (ii) any person, group
or entity (including the Borrower) publicly announces a tender offer to purchase
50% or more of the Borrower’s Common Stock (or any other takeover scheme) (the
date of the announcement referred to in clause (i) or (ii) is hereinafter
referred to as the “Announcement Date”), then the Conversion Price shall,
effective upon the Announcement Date and continuing through the Adjusted
Conversion Price Termination Date (as defined below), be equal to the lower of
(x) the Conversion Price which would have been applicable for a Conversion
occurring on the Announcement Date and (y) the Conversion Price that would
otherwise be in effect. From and after the Adjusted Conversion Price Termination
Date, the Conversion Price shall be determined as set forth in this Section
1.2(a). For purposes hereof, “Adjusted Conversion Price Termination Date” shall
mean, with respect to any proposed transaction or tender offer (or takeover
scheme) for which a public announcement as contemplated by this Section 1.2(b)
has been made, the date upon which the Borrower (in the case of clause (i)
above) or the person, group or entity (in the case of clause (ii) above)
consummates or publicly announces the termination or abandonment of the proposed
transaction or tender offer (or takeover scheme) which caused this Section
1.2(b) to become operative.
 
1.3         Authorized Shares. The Borrower covenants that during the period the
conversion right exists, the Borrower will reserve from its authorized and
unissued Common Stock a sufficient number of shares, free from preemptive
rights, to provide for the issuance of Common Stock upon the full conversion of
this Note issued pursuant to the Purchase Agreement. The Borrower is required at
all times to have authorized and reserved five times the number of shares that
is actually issuable upon full conversion of the Note (based on the Conversion
Price of the Notes in effect from time to time) (the “Reserved Amount”). The
Reserved Amount shall be increased from time to time in accordance with the
Borrower’s obligations pursuant to Section 4(g) of the Purchase Agreement.
Commencing on the expiration of the first month from the issue date of this
Note, the Reserved Amount shall be recalculated each month based upon the
Variable Conversion Price and the Company shall notify the Transfer Agent and
the Holder in writing by the fifth day of the following month of the new
Reserved Amount. In the event the Company does not notify the Transfer Agent of
the new Reserved Amount in a timely manner, the Holder shall have the absolute
right to notify the Transfer Agent, without any further action by the Company.
Notwithstanding the foregoing, in no event shall the Reserved Amount be lower
than the initial Reserved Amount, regardless of any prior conversions. The
Borrower represents that upon issuance, such shares will be duly and validly
issued, fully paid and non-assessable. In addition, if the Borrower shall issue
any securities or make any change to its capital structure which would change
the number of shares of Common Stock into which the Notes shall be convertible
at the then current Conversion Price, the Borrower shall at the same time make
proper provision so that thereafter there shall be a sufficient number of shares
of Common Stock authorized and reserved, free from preemptive rights, for
conversion of the outstanding Notes. The Borrower (i) acknowledges that it has
irrevocably instructed its transfer agent to issue certificates for the Common
Stock issuable upon conversion of this Note, and (ii) agrees that its issuance
of this Note shall constitute full authority to its officers and agents who are
charged with the duty of executing stock certificates to execute and issue the
necessary certificates for shares of Common Stock in accordance with the terms
and conditions of this Note.
 
If, at any  time  the Borrower  does  not maintain  the Reserved  Amount  it
will be considered  an Event  of Default under Section 3.2 of the Note.

1.4           Method of Conversion.

 
(a)           Mechanics  of
 Conversion.  Subject  to  Section  1.1,  this  Note  may  be  converted  by  the
Holder in whole or in part at any time from time to time after the Issue Date,
by : (A) submitting to the Borrower a Notice of Conversion (by facsimile, e-mail
or other reasonable means of communication dispatched on the Conversion Date
prior to 6:00 p.m.,  New  York,  New  York  time)  and  (B) subject  to
Section  1.4(b),  surrendering  this  Note  at the principal  office  of the
Borrower.
 
(b)           Surrender of Note Upon Conversion.  Notwithstanding  anything to
the contrary set forth herein,  upon  conversion  of this  Note  in
accordance  with  the terms  hereof,  the Holder  shall  not be required  to
physically surrender this Note to the Borrower unless the entire unpaid
principal amount of this Note is so converted.  The Holder and the Borrower
shall maintain records showing the principal amount so converted and the dates
of such conversions or shall use such other method, reasonably satisfactory to
the Holder and the Borrower, so as not to require physical surrender of this
Note upon
each  such  conversion.  In  the  event  of  any  dispute  or  discrepancy,  such  records  of  the  Borrower  shall,  prima
 facie,  be controlling and determinative in the absence of manifest error.
Notwithstanding the foregoing, if any portion of this Note is converted  as
aforesaid,  the Holder may not transfer this Note unless the Holder first
physically  surrenders  this Note to the Borrower,  whereupon  the Borrower will
forthwith issue and deliver upon the order of the Holder a new Note of like
tenor, registered  as the  Holder  (upon  payment  by  the  Holder  of
any  applicable  transfer  taxes)  may  request,  representing  in the aggregate
the remaining unpaid principal amount of this Note. 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 represented by this
Note may be less than the amount stated on the face hereof.
 
 
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(c)           Payment  of Taxes.  The  Borrower  shall  not  be required  to
pay  any  tax  which  may  be payable in respect of any transfer involved in the
issue and delivery of shares of Common Stock or other securities or property on
conversion of this Note in a name other than that of the Holder (or in street
name), and the Borrower shall not be required to issue or deliver any such
shares or other securities or property unless and until the person or persons
(other than the Holder or the custodian in whose street name such shares are to
be held for the Holder’s account) requesting the issuance thereof shall have
paid to the Borrower the amount of any such tax or shall have established to the
satisfaction of the Borrower that such tax has been paid.
 
(d)           Delivery  of Common  Stock Upon Conversion.  Upon receipt by the
Borrower  from the Holder of a facsimile transmission or e-mail (or other
reasonable means of communication) of a Notice of Conversion meeting the
requirements for conversion as provided in this Section 1.4, the Borrower shall
issue and deliver or cause to be issued and delivered to or upon the order of
the Holder certificates for the Common Stock issuable upon such conversion
within three (3) business days after such receipt ( but in any event the fifth
(5th) business day being hereinafter referred to as the “Deadline”) (and, solely
in the case of conversion of the entire unpaid principal amount hereof,
surrender of the this Note) in accordance with the terms hereof and the Purchase
Agreement.
 
(e)           Obligation of Borrower to Deliver Common Stock. Upon receipt by
the Borrower of a Notice of Conversion, the Holder shall be deemed to be the
holder of record of the Common Stock issuable upon such conversion, the
outstanding principal amount and the amount of accrued and unpaid interest on
this Note shall be reduced to reflect such conversion, and, unless the Borrower
defaults on its obligations under this Article I, all rights with respect to the
portion of this Note being so converted shall forthwith terminate except the
right to receive the Common Stock or other securities, cash or other assets, as
herein provided, on such conversion. If the Holder shall have given a Notice of
Conversion as provided herein, the Borrower’s obligation to issue and deliver
the certificates for Common Stock shall be absolute and unconditional,
irrespective of the absence of any action by the Holder to enforce the same, any
waiver or consent with respect to any provision thereof, the recovery of any
judgment against any person or any action to enforce the same, any failure or
delay in the enforcement of any other obligation of the Borrower to the holder
of record, or any setoff, counterclaim, recoupment, limitation or termination,
or any breach or alleged breach by the Holder of any obligation to the Borrower,
and irrespective of any other circumstance which might otherwise limit such
obligation of the Borrower to the Holder in connection with such conversion. The
Conversion Date specified in the Notice of Conversion shall be the Conversion
Date so long as the Notice of Conversion is received by the Borrower before 6:00
p.m., New York, New York time, on such date.
 
(f)           Delivery   of  Common   Stock   by
 Electronic   Transfer.  In  lieu  of  delivering   physical certificates
representing the Common Stock issuable upon conversion, provided the Borrower’s
transfer agent is participating in the Depository Trust Company (“DTC”) Fast
Automated Securities Transfer (“FAST”) program, upon request of the Holder and
its compliance with the provisions contained in Section 1.1 and in this Section
1.4, the Borrower shall use its best efforts to cause its transfer agent to
electronically  transmit the Common Stock issuable upon conversion to the Holder
by crediting the account of Holder’s Prime Broker with DTC through its Deposit
Withdrawal Agent Commission (“DWAC”) system.
 
(g)           Failure  to Deliver  Common  Stock  Prior
 to Deadline.  Without  in any way  limiting  the Holder’s right to pursue other
remedies, including actual damages and/or equitable relief, the parties agree
that if delivery of the Common Stock issuable upon conversion of this Note is
not delivered by the Deadline (other than a failure due to the circumstances
described in Section 1.3 above, which failure shall be governed by such Section)
the Borrower shall pay to the Holder $2,000 per day in cash, for each day beyond
the Deadline that the Borrower fails to deliver such Common Stock.  Such cash
amount shall be paid to Holder by the fifth day of the month following the month
in which it has accrued or, at the option of the Holder (by written notice to
the Borrower by the first day of the month following the month in which it has
accrued), shall be added to the principal amount of this Note, in which event
interest shall accrue thereon in accordance with the terms of this Note and such
additional principal amount shall be convertible into Common Stock in accordance
with the terms of this Note. The Borrower agrees that the right to convert is a
valuable right to the Holder. The damages resulting from a failure, attempt to
frustrate, interference  with such conversion right are difficult if not
impossible to qualify. Accordingly  the parties acknowledge that the liquidated
damages provision contained in this Section 1.4(g) are justified.
 
 
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1.5           Concerning the Shares.  The shares of Common Stock issuable upon
conversion of this Note may not be sold or transferred unless  (i) such shares
are sold pursuant to an effective registration statement under the Act or (ii)
the Borrower or its transfer agent shall have been furnished with an opinion of
counsel (which opinion shall be in form, substance and scope customary for
opinions of counsel in comparable transactions) to the effect that the shares to
be sold or transferred may be sold or transferred pursuant to an exemption from
such registration or (iii) such shares are sold or transferred pursuant to Rule
144 under the Act (or a successor rule) (“Rule 144”) or (iv) such shares are
transferred to an “affiliate” (as defined in Rule 144) of the Borrower who
agrees to sell or otherwise transfer the shares only in accordance with this
Section 1.5 and who is an Accredited Investor (as defined in the Purchase
Agreement).  Except as otherwise provided in the Purchase Agreement
(and  subject  to  the  removal  provisions  set  forth  below),  until  such  time  as  the  shares  of  Common  Stock  issuable  upon
conversion  of this  Note  have  been  registered  under  the Act  or
otherwise  may  be sold  pursuant  to Rule  144  without  any restriction as to
the number of securities as of a particular date that can then be immediately
sold, each certificate for shares of Common Stock issuable upon conversion  of
this Note that has not been so included in an effective registration  statement
or that has not been sold pursuant to an effective registration statement or an
exemption that permits removal of the legend, shall bear a legend substantially
in the following form, as appropriate:
 
“NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”
 
The legend set forth above shall be removed and the Borrower  shall issue to the
Holder a new certificate therefore free of any transfer legend if (i) the
Borrower or its transfer agent shall have received an opinion of counsel, in
form, substance and scope customary for opinions of counsel in comparable
transactions, to the effect that a public sale or transfer of such Common Stock
may be made without registration under the Act, which opinion shall be accepted
by the Company so that the sale or transfer is effected or (ii) in the case of
the Common Stock issuable upon conversion of this Note, such security is
registered for sale by the Holder under an effective registration statement
filed under the Act or otherwise may be sold pursuant to Rule 144 without any
restriction as to the number of securities as of a particular date that can then
be immediately sold. In the event that the Company  does not accept  the
opinion  of counsel  provided  by the Buyer  with respect  to the transfer  of
Securities pursuant to an exemption from registration, such as Rule 144 or
Regulations S, at the Deadline, it will be considered an Event of Default
pursuant to Section 3.2 of the Note.
 
1.6              Effect of Certain Events.
 
(a)           Effect of Merger, Consolidation, Etc. At the option of the Holder,
the sale, conveyance or disposition of all or substantially all of the assets of
the Borrower, the effectuation by the Borrower of a transaction or series of
related transactions in which more than 50% of the voting power of the Borrower
is disposed of, or the consolidation, merger or other business combination of
the Borrower with or into any other Person (as defined below) or Persons when
the Borrower is not the survivor  shall either:  (i) be deemed  to be an
Event  of Default  (as defined  in Article  III) pursuant  to which  the
Borrower shall be required to pay to the Holder upon the consummation  of and as
a condition to such transaction an amount equal to the Default Amount (as
defined in Article III) or (ii) be treated pursuant to Section 1.6(b)
hereof.  “Person” shall mean any individual, corporation, limited liability
company, partnership, association, trust or other entity or organization.
 
 
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(b)         Adjustment Due to Merger, Consolidation, Etc. If, at any time when
this Note is issued and outstanding and prior to conversion of all of the Notes,
there shall be any merger, consolidation, exchange of shares, recapitalization,
reorganization, or other similar event, as a result of which shares of Common
Stock of the Borrower shall be changed into the same or a different number of
shares of another class or classes of stock or securities of the Borrower or
another entity, or in case of any sale or conveyance of all or substantially all
of the assets of the Borrower other than in connection with a plan of complete
liquidation of the Borrower, then the Holder of this Note shall thereafter have
the right to receive upon conversion of this Note, upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore issuable upon conversion, such stock, securities or
assets which the Holder would have been entitled to receive in such transaction
had this Note been converted in full immediately prior to such transaction
(without regard to any limitations on conversion set forth herein), and in any
such case appropriate provisions shall be made with respect to the rights and
interests of the Holder of this Note to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion
Price and of the number of shares issuable upon conversion of the Note) shall
thereafter be applicable, as nearly as may be practicable in relation to any
securities or assets thereafter deliverable upon the conversion hereof. The
Borrower shall not affect any transaction described in this Section 1.6(b)
unless (a) it first gives, to the extent practicable, thirty (30) days prior
written notice (but in any event at least fifteen (15) days prior written
notice) of the record date of the special meeting of shareholders to approve, or
if there is no such record date, the consummation of, such merger,
consolidation, exchange of shares, recapitalization, reorganization or other
similar event or sale of assets (during which time the Holder shall be entitled
to convert this Note) and (b) the resulting successor or acquiring entity (if
not the Borrower) assumes by written instrument the obligations of this Section
1.6(b). The above provisions shall similarly apply to successive consolidations,
mergers, sales, transfers or share exchanges.
 
(c)         Adjustment Due to Distribution. If the Borrower shall declare or
make any distribution of its assets (or rights to acquire its assets) to holders
of Common Stock as a dividend, stock repurchase, by way of return of capital or
otherwise (including any dividend or distribution to the Borrower’s shareholders
in cash or shares (or rights to acquire shares) of capital stock of a subsidiary
(i.e., a spin-off)) (a “Distribution”), then the Holder of this Note shall be
entitled, upon any conversion of this Note after the date of record for
determining shareholders entitled to such Distribution, to receive the amount of
such assets which would have been payable to the Holder with respect to the
shares of Common Stock issuable upon such conversion had such Holder been the
holder of such shares of Common Stock on the record date for the determination
of shareholders entitled to such Distribution, but only if such Distribution
occurs within 365 days of the date of this Note.
 
(d)          Adjustment Due to Dilutive Issuance. If, at any time when any Notes
are issued and outstanding, the Borrower issues or sells, or in accordance with
this Section 1.6(d) hereof is deemed to have issued or sold, any shares of
Common Stock for no consideration or for a consideration per share (before
deduction of reasonable expenses or commissions or underwriting discounts or
allowances in connection therewith) less than the Conversion Price in effect on
the date of such issuance (or deemed issuance) of such shares of Common Stock (a
“Dilutive Issuance”), then immediately upon the Dilutive Issuance, the
Conversion Price will be reduced to the amount of the consideration per share
received by the Borrower in such Dilutive Issuance, but in no event shall the
Conversion Price be above the original Conversion Price.
 
The Borrower shall be deemed to have issued or sold shares of Common Stock if
the Borrower in any manner issues or grants any warrants, rights or options (not
including employee stock option plans), whether or not immediately exercisable,
to subscribe for or to purchase Common Stock or other securities convertible
into or exchangeable for Common Stock (“Convertible Securities”) (such warrants,
rights and options to purchase Common Stock or Convertible Securities are
hereinafter referred to as “Options”) and the price per share for which Common
Stock is issuable upon the exercise of such Options is less than the Conversion
Price then in effect, then the Conversion Price shall be equal to such price per
share. For purposes of the preceding sentence, the “price per share for which
Common Stock is issuable upon the exercise of such Options” is determined by
dividing (i) the total amount, if any, received or receivable by the Borrower as
consideration for the issuance or granting of all such Options, plus the minimum
aggregate amount of additional consideration, if any, payable to the Borrower
upon the exercise of all such Options, plus, in the case of Convertible
Securities issuable upon the exercise of such Options, the minimum aggregate
amount of additional consideration payable upon the conversion or exchange
thereof at the time such Convertible Securities first become convertible or
exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon the exercise of all such Options (assuming full conversion of
Convertible Securities, if applicable). No further adjustment to the Conversion
Price will be made upon the actual issuance of such Common Stock upon the
exercise of such Options or upon the conversion or exchange of Convertible
Securities issuable upon exercise of such Options.
 
 
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Additionally, the Borrower shall be deemed to have issued or sold shares of
Common Stock if the Borrower in any manner issues or sells any Convertible
Securities, whether or not immediately convertible (other than where the same
are issuable upon the exercise of Options), and the price per share for which
Common Stock is issuable upon such conversion or exchange is less than the
Conversion Price then in effect, then the Conversion Price shall be equal to
such price per share. For the purposes of the preceding sentence, the “price per
share for which Common Stock is issuable upon such conversion or exchange” is
determined by dividing (i) the total amount, if any, received or receivable by
the Borrower as consideration for the issuance or sale of all such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Borrower upon the conversion or exchange thereof at the time
such Convertible Securities first become convertible or exchangeable, by (ii)
the maximum total number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities.  No further adjustment to the
Conversion Price will be made upon the actual issuance of such Common Stock upon
conversion or exchange of such Convertible Securities.
 
(e)           Purchase Rights.  If, at any time when any Notes are issued and
outstanding, the Borrower issues any convertible securities or rights to
purchase stock, warrants, securities or other property (the “Purchase Rights”)
pro rata to the record holders of any class of Common Stock, then the Holder of
this Note will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such Holder could have
acquired if such Holder had held the number of shares of Common Stock acquirable
upon complete conversion of this Note (without regard to any limitations on
conversion contained herein) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
 
(f)         Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price as a result of the events described in this
Section 1.6, the Borrower, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to the Holder of a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Borrower
shall, upon the written request at any time of the Holder, furnish to such
Holder a like certificate setting forth (i) such adjustment or readjustment,
(ii) the Conversion Price at the time in effect and (iii) the number of shares
of Common Stock and the amount, if any, of other securities or property which at
the time would be received upon conversion of the Note.
 
(g)      Reasonable compensation made to employees, officers, agents,
consultants and directors of Borrower; for services rendered to Borrower, and
paid in the form of issued Common Stock, options or warrants; shall not be
considered  a “Dilutive  Issuance”  or otherwise  an issuance under this Section
1.6.   No valuation  or right of purchase  of the Holder  of this  Note  may  be
based  on the value  used  by Borrower  for such  Common  Stock,  options  or
warrants  paid  as compensation.   Such compensation may be issued and
transferred without regard to whether such compensation  is for a past, present
or future time period of service.  An existing contractual obligation of
Borrower (entered into more than 90 days prior to the date of this Note,
whether  presently  known  or unknown  to Borrower),  if any, that would
require  Borrower  to issue Common Stock, options or warrants at a discounted
rate exceeding a 40% discount from fair market value, shall not establish a
valuation or right to purchase for the Holder of this Note under this Section
1.6.
 
1.7           Trading  Market
 Limitations.  Unless  permitted  by  the  applicable  rules  and  regulations  of  the
principal securities  market on which the Common  Stock is then listed or
traded, in no event shall the Borrower  issue upon conversion of or otherwise
pursuant to this Note and the other Notes issued pursuant to the Purchase
Agreement more than the maximum number of shares of Common Stock that the
Borrower can issue pursuant to any rule of the principal United States
securities market on which the Common Stock is then traded (the “Maximum  Share
Amount”), which shall be 9.99% of the total shares outstanding on the Closing
Date (as defined in the Purchase Agreement), subject to equitable adjustment
from time to time for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring after
the date hereof. Once the Maximum Share Amount has been issued, if the Borrower
fails to eliminate any prohibitions under applicable law or the rules or
regulations of any stock exchange, interdealer quotation system or other self-
regulatory organization with jurisdiction over the Borrower or any of its
securities on the Borrower’s ability to issue shares of Common  Stock  in
excess  of the  Maximum  Share  Amount,  in lieu  of any  further  right  to
convert  this  Note,  this  will  be considered an Event of Default under
Section 3.3 of the Note.
 
 
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1.8           Status  as Shareholder.  Upon  submission  of a Notice  of
Conversion  by a Holder,  (i) the shares covered  thereby  (other than the
shares, if any, which cannot be issued because  their issuance  would
exceed  such Holder’s allocated portion of the Reserved  Amount or
Maximum  Share Amount) shall be deemed converted  into shares of Common Stock
and (ii) the Holder’s rights as a Holder of such converted portion of this Note
shall cease and terminate, excepting only the right to receive certificates for
such shares of Common Stock and to any remedies provided herein or otherwise
available at law or in equity to such Holder because of a failure by the
Borrower to comply with the terms  of this Note.  Notwithstanding the foregoing,
if a Holder has not received certificates for all shares of Common Stock prior
to the tenth (10th) business day after the expiration of the Deadline with
respect to a conversion of any portion of this Note for any reason, then (unless
the Holder otherwise elects to retain its status as a holder of Common Stock by
so notifying the Borrower) the Holder shall regain the rights of a Holder of
this Note with respect to such unconverted portions of this Note and the
Borrower shall, as soon as practicable, return such unconverted  Note to the
Holder or, if the Note has not been surrendered,  adjust its records to reflect
that  such  portion  of this  Note  has not been  converted.  In all cases,  the
Holder  shall  retain  all of its rights  and  remedies
(including,  without  limitation,  (i) the  right  to
receive  Conversion  Default  Payments  pursuant  to Section  1.3  to
the  extent required thereby for such Conversion Default and any subsequent
Conversion Default and (ii) the right to have the Conversion Price with respect
to subsequent conversions determined in accordance with Section 1.3) for the
Borrower’s failure to convert this Note.
 
1.9           Prepayment Option-Notwithstanding  anything to the contrary
contained in this Note, so long as the Borrower has not received a Notice of
Conversion from the Holder, the Borrower shall have the right, exercisable in
ten (10) Business Days post written notice to the Holder of the Note to prepay
the outstanding Note with principal and accrued interest.  Any notice of
prepayment herein (Optional Prepayment Notice) hereunder shall be delivered to
the Holder of the Note at its registered address and shall state: (1) that the
Borrower is exercising its right to prepay the Note, and (2) the date of
prepayment which shall be not more than Five (5) Business Days from the date of
the Optional Prepayment Notice (the Optional Prepayment Date) (3) the calculated
interest and principle due on the Date of the Optional Prepayment Notice, (4)
the title and address of payment per section 8(f) of this Agreement.   If the
Borrower exercises its right to prepay the Note, the Borrower shall make payment
to the Holder of an amount (the “Optional Prepayment Amount”) equal to 135%
,multiplied by the sum of: (A) the then outstanding principal amount of this
Note plus (B) accrued and unpaid interest on the unpaid principal amount of this
Note to the Optional Prepayment Notice.  If the Company delivers the Optional
Prepayment Notice and fails to pay the Optional Prepayment due to the Buyer of
the Note within two (2) business days following the Optional Prepayment Date,
the Company shall forfeit its right to prepay the Note.
 
ARTICLE II.  CERTAIN COVENANTS
 
2.1          Negative Covenants  As long as any portion of this Note remains
outstanding, unless the holders of all of the outstanding Notes shall have
otherwise given prior written consent, the Borrower shall not, and shall not
permit any of its subsidiaries (whether or not a subsidiary on the Issue Date)
to, directly or indirectly:
 
(a)          other than indebtedness existing as of the Initial Date or incurred
in the ordinary course of business for trade expenses (not borrowed money)
(“Permitted Indebtedness”),  enter into, create, incur, assume, guarantee or
suffer to exist any indebtedness for borrowed money of any kind, including, but
not limited to, a guarantee, on or with respect to any of its property  or
assets  now  owned  or hereafter  acquired  or any  interest  therein  or
any  income  or profits  therefrom,  which indebtedness shall be senior is
respect to security to this Note;
 
(b)            other than Permitted Liens (as defined below), enter into,
create, incur, assume or suffer to exist any liens, charges or encumbrances of
any kind or nature (“Liens”), on or with respect to any of its property or
assets now owned or hereafter acquired or any interest therein or any income or
profits therefrom. “Permitted Lien” means the individual and collective
reference to the following: (a) Liens for taxes, assessments and other
governmental charges or levies not yet due or Liens for taxes, assessments and
other governmental charges or levies being contested in good faith and by
appropriate proceedings for which adequate reserves (in the good faith judgment
of the management of the Borrower) have been established in accordance with
GAAP; (b) Liens imposed by law which were incurred in the ordinary course of the
Borrower’s business, such as carriers’, warehousemen’s and mechanics’ Liens,
statutory landlords’ Liens, and other similar Liens arising in the ordinary
course of the Borrower’s business, and which (x) do not individually or in the
aggregate materially detract from the value of such property or assets or
materially impair the use thereof in the operation of the business of the
Borrower and its consolidated subsidiaries or (y) are being contested in good
faith by appropriate proceedings, which proceedings have the effect of
preventing for the foreseeable future the forfeiture or sale of the property or
asset subject to such Lien; (c) Liens incurred in connection with Permitted
Indebtedness under clauses (a), and (b) thereunder; and (d) Liens incurred in
connection with Permitted Indebtedness under clause (c) thereunder, provided
that such Liens are not secured by assets of the Borrower or its subsidiaries
other than the assets so acquired or leased. Other permitted liens: Borrower and
its subsidiaries may incur liens and indebtedness for purchase of equipment and
property that will be used in the ordinary course of Borrower's or its
subsidiaries' businesses, providing that such liens and indebtedness are of a
limited purpose for such a purchase, and such equipment or property has a fair
market value greater than 60% of the debt or lien incurred.
 
(c)          amend  its  charter  documents,  including,  without  limitation,  its  certificate  of  incorporation  and
bylaws, in any manner that materially and adversely affects any rights of the
Holder;
 
 
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(d)          repay, repurchase or offer to repay, repurchase or otherwise
acquire more than a de minimis number of shares of its Common Stock or Common
Stock equivalents;
 
(e)          repay, repurchase or offer to repay, repurchase or otherwise
acquire any indebtedness, other than the Notes if on a pro-rata basis, other
than regularly scheduled principal and interest payments as such terms are in
effect as of the Issue Date, provided that such payments shall not be
permitted  if, at such time, or after giving effect to such payment, any Event
of Default exist or occur;

(f)           pay cash dividends or distributions on any equity securities of
the Borrower;
 
(g)          sell, lease or otherwise dispose of any portion of its assets
outside the ordinary course of business, other  than  de minimis  sales.   Any
consent  to the disposition  of any assets  may  be conditioned  on a
specified  use of the proceeds of disposition;
 
(h)          so long as the Borrower shall have any obligation under this Note,
the Borrower shall not, without the Holder’s  written  consent,  lend
money,  give credit or make advances  to any person,  firm, joint venture  or
corporation, including, without limitation, officers, directors, employees,
subsidiaries and affiliates of the Borrower, except loans, credits or advances
(a) in existence or committed on the date hereof and which the Borrower has
informed Holder in writing prior to the date hereof, (b) made in the ordinary
course of business or (c) not in excess of $1,000;
 
(i)           enter into any transaction with any affiliate of the Borrower
which would be required to be disclosed in any public filing with the
Commission, unless such transaction is made on an arm’s length basis and
expressly approved by a majority of the disinterested directors of the Borrower
(even if less than a quorum otherwise required for board approval); or

(j)           enter into any agreement with respect to any of the foregoing.

ARTICLE III.  EVENTS OF DEFAULT
 
If any of the following events of default (each, an “Event of Default”) shall
occur:

3.1           Failure  to Pay  Principal  or Interest.  The  Borrower  fails  to
pay  the  principal  hereof  or interest thereon when due on this Note, whether
at maturity, upon acceleration or otherwise.

3.2           Conversion and the Shares.  The Borrower fails to issue shares of
Common Stock to the Holder (or announces or threatens in writing that it will
not honor its obligation to do so) upon exercise by the Holder of the conversion
rights of the Holder in accordance with the terms of this Note, fails to
transfer or cause its transfer agent to transfer (issue) (electronically or in
certificated form) any certificate for shares of Common Stock issued to the
Holder upon conversion of or otherwise pursuant to this Note as and when
required by this Note, the Borrower directs its transfer agent not to transfer
or delays, impairs, and/or hinders its transfer agent in transferring (or
issuing( electronically or in certificated form) any certificate for shares of
Common Stock to be issued to the Holder upon conversion  of or otherwise
pursuant to this Note as and when required  by this Note, or fails to remove  (
or directs its transfer  agent not to remove  or impairs,  delays, and/or
hinders its transfer agent from removing) any restrictive legend (or to withdraw
any stop transfer instructions in respect thereof) on any certificate for any
shares of Common Stock issued to the Holder upon conversion of or otherwise
pursuant to this Note as and when  required  by this Note (or makes  any
written  announcement,  statement  or threat  that it does not intend  to
honor  the obligations described in this paragraph) and any such failure shall
continue uncured (or any written announcement,  statement or threat not to honor
its obligations shall not be rescinded in writing) for three (3) business days
after the Holder shall have delivered a Notice of Conversion.
 
3.3           Breach
 of Covenants.  The  Borrower  breaches  any  material  covenant  or
other  material  term  or condition contained in this Note and any collateral
documents including but not limited to the Purchase Agreement and such breach
continues for a period of ten (10) days after written notice thereof to the
Borrower from the Holder;
 
 
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3.4         Breach of Representations and Warranties. Any representation or
warranty of the Borrower made herein or in any agreement, statement or
certificate given in writing pursuant hereto or in connection herewith
(including, without limitation, the Purchase Agreement), shall be false or
misleading in any material respect when made and the breach of which has (or
with the passage of time will have) a material adverse effect on the rights of
the Holder with respect to this Note or the Purchase Agreement;
 
3.5         Bankruptcy, Receiver or Trustee. The Borrower or any subsidiary of
the Borrower shall commence, or there shall be commenced against the Borrower or
any subsidiary of the Borrower under any applicable bankruptcy or insolvency
laws as now or hereafter in effect or any successor thereto, or the Borrower or
any subsidiary of the Borrower commences any other proceeding under any
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction whether now or
hereafter in effect relating to the Borrower or any subsidiary of the Borrower
or there is commenced against the Borrower or any subsidiary of the Borrower any
such bankruptcy, insolvency or other proceeding which remains undismissed for a
period of 61 days; or the Borrower or any subsidiary of the Borrower is
adjudicated insolvent or bankrupt; or any order of relief or other order
approving any such case or proceeding is entered; or the Borrower or any
subsidiary of the Borrower suffers any appointment of any custodian, private or
court appointed receiver or the like for it or any substantial part of its
property which continues undischarged or unstayed for a period of sixty one (61)
days; or the Borrower or any subsidiary of the Borrower makes a general
assignment for the benefit of creditors; or the Borrower or any subsidiary of
the Borrower shall fail to pay, or shall state that it is unable to pay, or
shall be unable to pay, its debts generally as they become due; or the Borrower
or any subsidiary of the Borrower shall call a meeting of its creditors with a
view to arranging a composition, adjustment or restructuring of its debts; or
the Borrower or any subsidiary of the Borrower shall by any act or failure to
act expressly indicate its consent to, approval of or acquiescence in any of the
foregoing; or any corporate or other action is taken by the Borrower or any
subsidiary of the Borrower for the purpose of effecting any of the foregoing;
 
3.6            Judgments.  Any  money  judgment,  writ  or
similar  process  shall  be entered  or filed  against  the Borrower  or any
subsidiary  of the Borrower  or any of its property  or other assets for more
than $50,000, and shall remain unvacated, unbonded or unstayed for a period of
twenty (20) days unless otherwise consented to by the Holder, which consent will
not be unreasonably withheld;
 
3.7            Indebtedness Default.   The Borrower or any subsidiary of the
Borrower shall default in any of its obligations under any other Note or any
mortgage, credit agreement or other facility, indenture agreement, factoring
agreement or other instrument  under which there may be issued, or by which
there may be secured or evidenced  any indebtedness  for borrowed money or money
due under any long term leasing or factoring arrangement of the Borrower or any
subsidiary of the Borrower in an amount exceeding $25,000, whether such
indebtedness now exists or shall hereafter be created and such default shall
result in such indebtedness  becoming or being declared due and payable prior to
the date on which it would otherwise become due and payable, and Borrower or any
subsidiary of Borrower fails to timely cure said default upon reasonable notice
of default.   If Borrower  is contesting  that a default occurred on any other
Note or any mortgage,  credit agreement  or other
facility,  indenture  agreement,  factoring  agreement  or  other  instrument  under  which  there  may  be  issued,  it  shall  not  be
considered  a default of this Note until such default is determined  to exist
and be valid by binding arbitration  or a court of competent jurisdiction.
 
3.8            Delisting  of Common  Stock; DTC Chill.  The Borrower  shall fail
to maintain  the listing  of the Common Stock on at least one of the OTCQB or an
equivalent replacement exchange, the Nasdaq National Market, the Nasdaq SmallCap
Market, the New York Stock Exchange, or the American Stock Exchange or there
shall be no bid price for the stock for a period of one business day OR the
Depository Trust Company places a chill on new deposits of Common Stock, which
is not removed within ten (10) trading days;
 
3.9             Failure to Comply with the Exchange Act. The Borrower shall fail
to comply with the reporting requirements of the Exchange Act; and/or the
Borrower shall cease to be subject to the reporting requirements of the Exchange
Act.
 
3.10           Liquidation. Any dissolution, liquidation, or winding up of
Borrower or any substantial portion of its business.
 
3.11           Cessation  of  Operations.
Any  cessation  of  operations  by  Borrower  or  Borrower  admits  it  is
otherwise generally unable to pay its debts as such debts become due, provided,
however, that any disclosure of the Borrower’s ability to continue as a “going
concern” shall not be an admission that the Borrower cannot pay its debts as
they become due.
 
 
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3.12           Maintenance  of Assets.  The failure by Borrower  to
maintain  any material  intellectual  property rights, personal, real property
or other assets which are necessary to conduct its business (whether now or in
the future).

3.13           Financial Statement Restatement. The restatement of any financial
statements filed by the Borrower with the SEC for any date or period from two
years prior to the Issue Date of this Note and until this Note is no longer
outstanding, if the result of such restatement would, by comparison to the
unrestated financial statement, have constituted a material adverse effect on
the rights of the Holder with respect to this Note or the Purchase Agreement.
 
3.14          Reverse Splits. The Borrower effectuates a reverse split of its
Common Stock without twenty (20) days prior written notice to the Holder.
 
3.15           Replacement  of Transfer  Agent. In the event that the
Borrower  proposes  to replace  its transfer agent, the Borrower fails to
provide, prior to the effective date of such replacement, fully executed
Irrevocable Transfer Agent Instructions in a form as initially delivered
pursuant to the Purchase Agreement (including but not limited to the provision
to irrevocable reserve shares of Common Stock in the Reserved Amount) signed by
the successor transfer agent to Holder and the Borrower.
 
3.16          Failure to Pay Post-Closing  Expenses. The failure by Borrower to
pay any and all Post-Closing Expenses as defined in section 4.6.
 
3.17         Delisting. From and after the initial trading, listing or quotation
of the Common Stock on a Principal Market, an event resulting  in the
Common  Stock no longer being traded, listed or quoted on a Principal  Market;
failure to comply with the requirements for continued quotation on a Principal
Market; or notification from a Principal Market that the Borrower is not in
compliance with the conditions for such continued quotation and such
non-compliance  continues for seven (7) trading days following such
notification.
 
3.18          Cross-Default.
Notwithstanding  anything  to  the  contrary  contained  in  this  Note  or  the  other
related or companion documents, a breach or default by the Borrower of any
covenant or other term or condition contained in any of the Other
Agreements,  after the passage of all applicable notice and cure or grace
periods, shall, at the option of the Borrower, be considered a default under
this Note and the Other Agreements, in which event the Holder shall be entitled
(but in no event required) to apply all rights and remedies of the Holder under
the terms of this Note and the Other Agreements by reason of a default under
said Other Agreement or hereunder. “Other Agreements” means collectively, all
agreements and instruments between, among or by: (1) the Borrower, and, or for
the benefit of, (2) the Holder and any affiliate of the Holder, including,
without limitation, promissory notes; provided, however, the term “Other
Agreements” shall not include the related or companion documents to this Note.
Each of the loan transactions  will be cross-defaulted  with each other loan
transaction and with all other existing and future debt of Borrower to the
Holder.
 
3.19          Consecutive Late Filings. If the Company files a late notification
(NT 10-Q or NT 10-K) for any quarterly or annual report for any two (2)
consecutive periods.
 
3.20.         Change of SEC Legal Counsel. If the Company fails to appoint a new
legal counsel by January 31st, 2015. For the avoidance of any doubt, prior to
appointment of such counsel, the Company must notify the Holder of
the  candidate to be appointed as the Issuer’s SEC Legal Counsel, whom the
Holder shall have up to three days to provide written  consent to such
appointment.
 
 
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Upon the occurrence and during the continuation of any Event of Default
specified in Section 3.1 (solely with respect to failure to pay the principal
hereof or interest thereon when due at the Maturity Date), the Note shall become
immediately  due and payable  and the Borrower  shall pay to the Holder,  in
full satisfaction  of its obligations  hereunder,  an amount  equal to the
Default Sum (as defined herein). UPON THE OCCURRENCE AND DURING THE
CONTINUATION  OF ANY EVENT OF DEFAULT  SPECIFIED  IN SECTION  3.2, THE NOTE
SHALL BECOME  IMMEDIATELY  DUE AND PAYABLE  AND THE BORROWER  SHALL PAY TO THE
HOLDER, IN FULL SATISFACTION  OF ITS OBLIGTAIONS  HEREUNDER, AN AMOUNT  EQUAL
TO: (Y) THE DEFAULT  SUM (AS DEFINED HEREIN); MULTIPLIED  BY (Z) TWO (2). Upon
the occurrence and during the continuation of any Event of Default specified in
Sections 3.1 (solely with respect to failure to pay the principal  hereof  or
interest  thereon  when  due on this Note upon a
Trading  Market  Prepayment  Event  pursuant  to Section  1.7  or
upon  acceleration),  3.3,  3.4,  3.6,  3.8,  3.9,  3.11,  3.12,  3.13,  3.14,  3.15,  3.16,  3.17,  3.18,  3.19,  and/or  3.20
exercisable  through  the delivery  of written  notice  to the Borrower  by
such  Holders  (the  “Default  Notice”),  and  upon  the occurrence  of an Event
of Default specified in the remaining  sections of Articles III (other than
failure to pay the principal hereof or interest thereon at the Maturity Date
specified in Section 3.1 hereof), the Borrower must remedy or cure the Default
described within the Default Notice within ten (10) business days or theNote
shall become immediately due and payable and the Borrower shall pay to the
Holder, in full satisfaction of its obligations hereunder, an amount equal to
the greater of (i) 150% times the sum of (w) the then outstanding  principal
amount of this Note plus (x) accrued and unpaid interest on the unpaid principal
amount of this Note to the date of payment (the “Mandatory Prepayment Date”)
plus (y) Default Interest, if any, on the amounts referred to in clauses (w)
and/or (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and
1.4(g) hereof (the then outstanding principal amount of this Note to the date of
payment plus the amounts referred to in clauses (x), (y) and (z) shall
collectively be known as the “Default Sum”) or (ii) the “parity value” of the
Default Sum to be prepaid, where parity value means (a) the highest number of
shares of Common Stock issuable upon conversion of or otherwise pursuant to such
Default Sum in accordance  with Article I, treating the Trading Day
immediately  preceding the Mandatory  Prepayment Date as the “Conversion Date”
for purposes of determining the lowest applicable Conversion Price, unless the
Default Event arises as a result of such breach in respect of a specific
Conversion  Date in which case such Conversion  Date shall be the Conversion
Date, multiplied by (b) the highest Closing Price for the Common Stock during
the period beginning on the date of first occurrence of the Event of Default and
ending one day prior to the Mandatory Prepayment Date (the “Default Amount”) and
all other  amounts  payable  hereunder  shall immediately  become  due and
payable,  all without  demand,  presentment  or notice, all of which hereby are
expressly waived, together with all costs, including, without limitation, legal
fees and expenses, of collection, and the Holder shall be entitled to exercise
all other rights and remedies available at low or in equity.
 
If the Borrower fails to pay the Default Amount within   ten (10) business days
of written notice that such amount is due and payable, then the Holder shall
have the right at any time, so long as the Borrower remains in default (and so
long and to the extent that there are sufficient authorized shares), to require
the Borrower, upon written notice, to immediately issue, in lieu of the Default
Amount, the number of shares of Common Stock of the Borrower equal to the
Default Amount divided by the Conversion Price then in effect.

ARTICLE IV. MISCELLANEOUS

4.1           Failure or Indulgence Not Waiver.  No failure or delay on the part
of the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privileges.  All rights and remedies existing
hereunder are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
 
4.2           Notices.  All notices, demands, requests, consents, approvals, and
other communications  required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with
charges  prepaid,  or (iv) transmitted  by hand delivery,  telegram,  or
facsimile,  addressed  as set forth below or to such other address as such party
shall have specified  most recently by written notice.  Any notice or other
communication  required  or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation  generated  by the transmitting  facsimile machine, at the address
or number designated  below (if delivered on a business  day
during  normal  business  hours  where  such  notice  is to be received),  or
the first business  day following  such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur.  The addresses for such
communications shall be:
 
If to the Borrower, to:
NATIONAL AUTOMATED SERVICES, INC.
8965 S. EASTERN #120E
LAS VEGAS, NV 89123
Attn: Mr. Robert Chance, CEO

If to the Holder:
MAGNA GROUP
5 HANOVER SQUARE
NEW YORK, NY 10004

Attn: Joshua Sason, Managing Member

 
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4.3          Amendments.  This  Note  and  any  provision  hereof  may  only  be  amended  by  an  instrument  in
writing signed by the Borrower and the Holder.  The term “Note” and all
reference thereto, as used throughout this instrument, shall mean this
instrument (and the other Notes issued pursuant to the Purchase Agreement) as
originally executed, or if later amended or supplemented, then as so amended or
supplemented.
 
4.4          Assignability.  This Note shall be binding upon the Borrower and
its successors and assigns, and shall inure to be the benefit of the Holder and
its successors and assigns.  Each transferee of this Note must be an “accredited
investor” (as defined in Rule 501(a) of the 1933 Act).  Notwithstanding anything
in this Note to the contrary, this Note may be pledged as collateral in
connection with a bona fide margin account or other lending arrangement.
 
4.5          Cost of Collection.  If default  is made  in the payment  of this
Note, the Borrower  shall pay the Holder hereof costs of collection, including
reasonable attorneys’ fees.
 
4.6          Post-Closing Expenses.  The Issuer will bear any and all
miscellaneous expenses that may arise as a result of this
Agreement  post-closing.  These expenses  include,  but are not limited  to, the
cost of legal opinion  production, transfer agent fees, equity issuance fees,
etc. The failure to pay any and all Post-Closing Expenses will be deemed a
default as described in Section 2.6.10 herein.
 
4.6          Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York without regard to principles
of conflicts of laws. Any action brought by either party against the other
concerning the transactions contemplated by this Note shall be brought only in
the state courts of New York or in the federal courts located in the state and
county of New York. The parties to this Note hereby irrevocably waive any
objection to jurisdiction and venue of any action instituted hereunder and shall
not assert any defense based on lack of jurisdiction or venue or based upon
forum non conveniens. The Borrower and Holder waive trial by jury. The
prevailing party shall be entitled to recover from the other party its
reasonable attorney's fees and costs. In the event that any provision of this
Note or any other agreement delivered in connection herewith is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any such
provision which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision of any agreement.
Each party hereby irrevocably waives personal service of process and consents to
process being served in any suit, action or proceeding in connection with this
Agreement or any other Transaction Document by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Agreement
and agrees that such service shall constitute good and sufficient service of
process and notice thereof. Nothing contained herein shall be deemed to limit in
any way any right to serve process in any other manner permitted by law.
 
4.7          Certain Amounts.  Whenever pursuant to this Note the Borrower is
required to pay an amount in excess of the outstanding  principal amount (or the
portion thereof required to be paid at that time) plus accrued and unpaid
interest plus Default Interest on such interest, the Borrower and the Holder
agree that the actual damages to the Holder from the receipt of cash payment on
this Note may be difficult to determine and the amount to be so paid by the
Borrower represents stipulated damages and not a penalty and is intended to
compensate the Holder in part for loss of the opportunity to convert this Note
and to earn a return from the sale of shares of Common Stock acquired upon
conversion of this Note at a price in excess of the price  paid  for
such  shares  pursuant  to this  Note.  The  Borrower  and  the
Holder  hereby  agree  that  such  amount  of stipulated damages is not plainly
disproportionate to the possible loss to the Holder from the receipt of a cash
payment without the opportunity to convert this Note into shares of Common
Stock.
 
4.8          Purchase
 Agreement.  By  its  acceptance  of  this  Note,  each  party  agrees  to  be  bound  by  the
applicable terms of the Purchase Agreement.
 
 
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4.9          Notice of Corporate Events. Except as otherwise provided below, the
Holder of this Note shall have no rights as a Holder of Common Stock unless and
only to the extent that it converts this Note into Common Stock. The Borrower
shall provide the Holder with prior notification of any meeting of the
Borrower’s shareholders (and copies of proxy materials and other information
sent to shareholders). In the event of any taking by the Borrower of a record of
its shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation,
reclassification or recapitalization) any share of any class or any other
securities or property, or to receive any other right, or for the purpose of
determining shareholders who are entitled to vote in connection with any
proposed sale, lease or conveyance of all or substantially all of the assets of
the Borrower or any proposed liquidation, dissolution or winding up of the
Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20)
days prior to the record date specified therein (or thirty (30) days prior to
the consummation of the transaction or event, whichever is earlier), of the date
on which any such record is to be taken for the purpose of such dividend,
distribution, right or other event, and a brief statement regarding the amount
and character of such dividend, distribution, right or other event to the extent
known at such time. The Borrower shall make a public announcement of any event
requiring notification to the Holder hereunder substantially simultaneously with
the notification to the Holder in accordance with the terms of this Section 4.9.
 
4.10           Remedies.  The Borrower acknowledges that a breach by it of its
obligations hereunder will cause irreparable  harm to the Holder, by vitiating
the intent and purpose of the
transaction  contemplated  hereby.  Accordingly,  the Borrower acknowledges that
the remedy at law for a breach of its obligations under this Note will be
inadequate and agrees, in the event of a breach or threatened breach by the
Borrower of the provisions of this Note, that the Holder shall be entitled, in
addition to all other available remedies at law or in equity, and in addition to
the penalties assessable herein, to an injunction or
injunctions  restraining,  preventing  or curing  any  breach  of
this  Note  and  to enforce  specifically  the terms  and  provisions
thereof,  without  the necessity  of showing  economic  loss and without  any
bond or other security  being required.   Both the Borrower and the Holder may
seek specific performance of the terms and provisions herein.
 
4.11        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
shall violate applicable  laws governing  usury, the applicable  rate of
interest due hereunder shall automatically  be lowered to equal the maximum
permitted rate of interest. The Borrower covenants (to the extent that it may
lawfully do so) that it shall not at any time insist upon, plead, or in any
manner whatsoever  claim or take the benefit or advantage  of, any stay,
extension  or usury  law or other  law which  would  prohibit  or forgive  the
Borrower  from  paying  all or any portion  of the principal of or interest on
this Note as contemplated herein, wherever enacted, now or at any time hereafter
in force, or which may affect the covenants or the performance of this
indenture, and the Borrower (to the extent it may lawfully do so) hereby
expressly waives all benefits or advantage of any such law, and covenants that
it will not, by resort to any such law, hinder, delay or impeded the execution
of any power herein granted to the Holder, but will suffer and permit the
execution of every such as though no such law has been enacted.
 
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by
its duly authorized officer this December 16, 2014.
 

 
NATIONAL AUTOMATED SERVICES, INC.
           
By:
/s/ Robert Chance
    Robert Chance, CEO                    
MAGNA EQUITIES. LLC
           
By:
s/ Joshua Sason
 
   Joshua Sason, Managing Member                             

 
 
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Exhibit A.  
 
 
 
NOTICE OF CONVERSION

 
The undersigned hereby elects to convert $___________________of the principal
amount of the Note (defined below) into Shares of Common Stock of NATIONAL
AUTOMATED SERVICES, INC., a(n) NEVADA Corporation (the “Borrower”) according to
the conditions of the Convertible Note of the Borrower dated as of December 16,
2014 (the “Note”). No fee will be charged to the Holder or Holder’s Custodian
for any conversion, except for transfer taxes, if any.
 
Box Checked as to applicable instructions:
 

 
o
The Borrower shall electronically transmit the Common Stock issuable pursuant to
this Notice of Conversion to the account of the undersigned or its nominee with
DTC through its Deposit Withdrawal Agent Commission system (“DWAC Transfer”).

 
Name of DTC Prime
Broker:                                                                                                                
 
Account Number:
                                                                                                                          
 

 
o
The undersigned hereby requests that the Borrower issue a certificate or
certificates for the number of shares of Common Stock set forth below (which
numbers are based on the Holder’s calculation attached hereto) in the name(s)
specified immediately below:

 
Magna Equities II, LLC
EIN #: 45-2043511
 
 
Date of Conversion:
             
Conversion Price:
             
Shares to Be Delivered:
     
Remaining Principal Balance Due  
             
After This Conversion:
                             
Signature
                                     
Print Name:
Joshua Sason
   

 
 
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FORM OF LEGAL OPINION
 
1.            The Company is a corporation duly organized, validly existing and
in good standing under the laws of [                     ].  The Company has all
requisite power and authority, and all material governmental licenses,
authorizations, consents  and approvals,  that are required  to own and
operate  its properties  and assets and to carry on its business  as now
conducted and as proposed to be conducted (all as described in the Company’s
filings with the SEC). The Company is duly qualified to transact business and is
in good standing in each jurisdiction in which the failure to qualify could have
a Material Adverse Effect on the Company.

2.            Each  of  the  following  subsidiaries  of  the  Company  (the  “Subsidiaries”)  is  a  corporation,  duly
organized and in good standing under the laws of its state of organization, as
noted:  [                      ].
 
3.           The Company has all requisite power and authority (i) to execute,
deliver and perform the Transaction Documents, (ii) to issue, sell and deliver
the Notes, and the Underlying Shares pursuant to the Transaction Documents and
(iii) to carry out and perform its obligations under, and to consummate the
transactions contemplated by, the Transaction Documents.

4.           All action on the part of the Company, its directors and its
stockholders necessary for the authorization, execution and delivery by the
Company of the Transaction Documents, the authorization, issuance, sale and
delivery of the Notes pursuant to the Agreement, the issuance and delivery the
Underlying Shares and the consummation by the Company of the transactions
contemplated by the Transaction Documents has been duly taken. The Transaction
Documents have been duly and validly executed and delivered by the Company and
constitute the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with their terms, except that (a) such
enforceability may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors’ rights in general and (b) the remedies
of specific performance and injunctive and other forms of injunctive relief may
be subject to equitable defenses.
 
5.            To our knowledge, the Company has filed all reports (the
“SEC Reports”) required to be filed by it under Sections 13(a) and 15(d) of the
Exchange Act of 1934, as amended (the “Exchange Act”).  As of their respective
filing dates, the SEC Reports complied in all material respects as to form with
the requirements  of the Exchange Act and the rules and regulations of the
Commission promulgated thereunder.

6.            Based in part upon the representations of the Purchasers contained
in the Agreement, the Notes and the Underlying Shares may be issued to the
Purchasers without registration under the Securities Act of 1933, as amended.

7.            The execution, delivery and performance by the Company of, and the
compliance by the Company with the terms  of, the Transaction  Documents  and
the issuance,  sale and delivery  of the Notes and the Underlying  Shares
pursuant to the Agreement do not (a) conflict with or result in a violation of
any provision of law, rule or regulation applicable to the Company or its
Subsidiaries or of the certificate of incorporation or by-laws or other similar
organizational documents of the Company or its Subsidiaries, (b) conflict with,
result in a breach of or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or result in or permit the
termination or modification of, any agreement, instrument, order, writ, judgment
or decree known to us to which the Company of its Subsidiaries is a party or is
subject or (c) result in the creation or imposition of any lien, claim or
encumbrance on any of the assets or properties of the Company or its
Subsidiaries.
 
8.            To our knowledge, except as set forth in the Agreement, there is
no claim, action, suit, proceeding, arbitration, investigation or inquiry,
pending or threatened, before any court or governmental or administrative body
or agency, or any private arbitration tribunal, against the Company or its
Subsidiaries, or any of the officers, directors or employees (in
connection  with the discharge  of their duties  as officers,  directors  and
employees)  of the Company  or its Subsidiaries,  or affecting any of its
properties or assets.

9.           In connection with the valid execution, delivery and performance by
the Company of the Transaction Documents, or the offer, sale, issuance or
delivery of the Notes and the Underlying Shares or the consummation of the
transactions contemplated thereby, no consent, license, permit, waiver, approval
or authorization of, or designation, declaration, registration or filing with,
any court, governmental or regulatory authority, or self-regulatory
organization, is required.
 
 
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