Dated: ____________

 

NEITHER THIS NOTE NOR THE SECURITIES INTO WHICH THIS NOTE IS 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.

 

QUANTUMSPHERE, INC.

 

CONVERTIBLE PROMISSORY NOTE

  

This convertible promissory note (the "Note") is issued by QUANTUMSPHERE, INC.,
a California corporation (the "Company"), to ____________________ (the
"Holder").

 

FOR VALUE RECEIVED, the Company hereby promises to pay to the Holder the
principal amount of ______________________________ DOLLARS ($__________) (the
"Loan") together with accrued but unpaid interest on or before the Maturity Date
in accordance with the provisions hereof. In conjunction with the issuance of
the Note, the Company hereby issues a common stock purchase warrant (the
“Warrant”) to Holder in the form attached hereto as Exhibit A.

 

1.Definitions

 

In addition to the terms defined elsewhere in this Note, the following terms
have the meanings indicated:

 

(a)"Bankruptcy Event" means any of the following events: (i) the Company
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; (ii)
there is commenced against the Company any such case or proceeding that is not
dismissed within 60 calendar days after commencement; (iii) the Company is
adjudicated insolvent or bankrupt or any order of relief or other order
approving any such case or proceeding is entered; (iv) the Company 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 calendar days; or (v) the
Company makes a general assignment for the benefit of creditors;

 

(b)"Business Day" means any day except Saturday, Sunday and any day which shall
be a federal legal holiday or a day on which banking institutions in the State
of Nevada are authorized or required by law or other governmental action to
close;

 

(c)"Event of Default" has the meaning ascribed thereto in Section 4(a);

 

 

 

 

(d)"Maturity Date" means ninety (90) days from the date hereof, unless earlier
paid pursuant to Section 2 hereof, or converted pursuant to Section 3 hereof;
and

 

(e)"Person" means an individual or corporation, partnership, trust, incorporated
or unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other entity
of any kind.

 

2.Interest; Principal; Make Good Provision

 

(a)Interest. The Note shall bear simple interest at the rate of ten percent
(10%) per annum, commencing on the date of issuance ("Interest"). Interest will
be paid in full on the Maturity Date, unless Holder elects to convert the Note
and all interest accrued hereunder per Section 3 below.

 

(b)Principal. Unless earlier converted pursuant to Section 3 hereinbelow, the
Loan shall be repaid on the ninety (90) day anniversary hereof.

 

(c)Application of Payments. Except as otherwise expressly provided herein, each
payment under this Note shall be applied (i) first to the payment of all accrued
but unpaid Interest, and (iii) then to the reduction of the principal amount.

 

(d)Make Good Provision. In the event the Company elects, on or before the
earlier of the 90-day anniversary of this Note or repayment thereof, to offer
more favorable bridge financing terms to a third party investor, then in such
event the terms hereof shall be modified to reflect the more favorable bridge
financing terms.

 

3.Conversion

 

The principal amount of this Note and all accrued but unpaid Interest is
convertible as follows:

 

(a)Conversion. Holder shall have the right, at any time prior to the payment in
full of the Note, to convert the outstanding principal and accrued interest on
the Note into shares of common stock of the Company at the conversion rate of
$0.7159 per share. Holder shall have the right to payment of accrued interest on
the Note in the form of cash in lieu of conversion into shares of common stock
per this Section 3(a).

 

(b)The Company shall deliver, at least five (5) Business Days before repayment
of the Note, written notice informing the Holder of its intent to repay the Note
and offering Holder the right to convert the Note per the terms set forth herein
and specifying (I) the outstanding principal amount of the Loan and all accrued
but unpaid Interest, (II) the number of shares of common stock that the Holder
would receive upon conversion, and (III) the date on which such conversion would
occur. The Holder shall provide written notice of its intent to convert the Note
within three (3) Business Days of receipt of the notice. The Holder shall
surrender the Note to the Company at the location designated in Section 6 hereof
on or before the date of conversion or repayment, as the case may be, and Holder
shall receive, (A) on the effective date of conversion, if applicable, a common
stock certificate in the number of shares of common stock represented by (i) the
then outstanding principal and accrued Interest under the Note (assuming Holder
is converting the accrued interest), divided by (B) $0.7159 per share, or (b) in
the case of repayment of the Note, a check made payable to Holder in the amount
of the then outstanding principal and accrued interest.

 

1

 

 

4.Event of Default

 

(a)An "Event of Default", wherever used herein, means any one of the following
events:

 

(i)any default in the payment of the principal of, Interest on or other charges
in respect of this Note, as and when the same shall become due and payable
(whether on the Maturity Date or by acceleration or otherwise);

 

(ii)the occurrence of a Bankruptcy Event; or

 

(iii)the Company shall commit any material breach or default of any material
provision of this Note (except as set forth in Section 4(a)(i)), which is not
cured within thirty (30) Business Days following written notice to the Company
from the Holder specifying in reasonable detail such breach or default.

 

(b)Upon and during the continuance of an Event of Default, the Interest rate
shall be increased to 18% per annum, compounded monthly.

 

5.Covenants

 

(a)Financial Statements. Prior to the repayment of the Note in full, or
conversion of this Note pursuant to Section 3, the Company shall provide the
Holder with (i) quarterly unaudited financial statements of the Company,
including a balance sheet, income statement and a statement of cash flows,
within 45 calendar days of the end of each fiscal quarter, and (ii) annual
unaudited financial statements of the Company within 90 calendar days of the end
of each fiscal year.

 

6.Notices

 

Any notice, demand or request which may be permitted, required or desired to be
given in connection with herewith shall be given in writing and directed to the
parties hereto as follows:

 

 

If to the Company, addressed as follows:

QuantumSphere, Inc.

2905 Tech Center Dr.

Santa Ana, CA 92705
Attention: Kevin D. Maloney
Facsimile No.: (714) 545-6265

      If to the Holder, addressed as follows:                         Facsimile
No.:   

 

2

 

 

Notices shall be deemed properly delivered and received when delivered to the
primary notice party (without regard to the copied parties) (i) if personally
delivered, upon receipt or refusal to accept delivery, (ii) if sent via
facsimile, upon mechanical confirmation of successful transmission thereof
generated by the sending telecopy machine, (iii) if sent by a commercial
overnight courier for delivery on the next business day, on the first business
day after deposit with such courier service (or the third business day if sent
to an address not in the United States), or (iv) if sent by registered or
certified mail, five Business Days after deposit thereof in the U.S. mail. Any
party may change its address for delivery of notices by properly notifying the
others pursuant to this Section 6.

 

7.General

 

(a)Amendments; Waivers. No provision of this Note may be waived or amended
except in a written instrument signed, in the case of an amendment, by the
Company and the Holder or, in the case of a waiver, by the party against whom
enforcement of any such waiver is sought. No waiver of any default with respect
to any provision, condition or requirement of this Note shall be deemed to be a
continuing waiver in the future or a waiver of any subsequent default or a
waiver of any other provision, condition or requirement hereof, nor shall any
delay or omission of either party to exercise any right hereunder in any manner
impair the exercise of any such right. In the event that there is more than one
Note holder, any amendments or waivers with respect to the Notes may be made
with the approval of a majority in interest of the Note holders.

 

(b)Construction. The headings herein are for convenience only, do not constitute
a part of this Agreement and shall not be deemed to limit or affect any of the
provisions hereof. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent, and no rules of
strict construction will be applied against any party.

 

(c)Successors and Assigns. This Note shall be binding upon and inure to the
benefit of the parties and their successors and permitted assigns. Neither the
Company nor the Holder may assign this Note or any rights or obligations
hereunder without the prior written consent of the other party.

 

(d)Severability. If any provision of this Note is held to be invalid or
unenforceable in any respect, the validity and enforceability of the remaining
terms and provisions of this Note shall not in any way be affected or impaired
thereby and the parties will attempt to agree upon a valid and enforceable
provision that is a reasonable substitute therefor, and upon so agreeing, shall
incorporate such substitute provision in this Note.

 

3

 

 

(e)Replacement of the Note. If any certificate or instrument evidencing this
Note is mutilated, lost, stolen or destroyed, the Company shall issue or cause
to be issued in exchange and substitution for and upon cancellation thereof, or
in lieu of and substitution therefor, a new certificate or instrument, but only
upon receipt of evidence reasonably satisfactory to the Company of such loss,
theft or destruction and customary and reasonable indemnity, if requested. The
applicants for a new certificate or instrument under such circumstances shall
also pay any reasonable third-party costs associated with the issuance of such
replacement Note.

 

(f)Usury. To the extent it may lawfully do so, the Company hereby agrees not to
insist upon or plead or in any manner whatsoever claim, and will resist any and
all efforts to be compelled to take the benefit or advantage of, usury laws
wherever enacted, now or at any time hereafter in force, in connection with any
claim, action or proceeding that may be brought by the Holder in order to
enforce any right or remedy under this Note. Notwithstanding any provision to
the contrary contained in this Note, it is expressly agreed and provided that
the total liability of the Company under this Note for payments in the nature of
interest shall not exceed the maximum lawful rate authorized under applicable
law (the "Maximum Rate"), and, without limiting the foregoing, in no event shall
any rate of interest or default interest, or both of them, when aggregated with
any other sums in the nature of interest that the Company may be obligated to
pay under this Note exceed such Maximum Rate. It is agreed that if the maximum
contract rate of interest allowed by law and applicable to this Note is
increased or decreased by statute or any official governmental action subsequent
to the date hereof, the new maximum contract rate of interest allowed by law
will be the Maximum Rate of interest applicable to this Note from the effective
date forward, unless such application is precluded by applicable law.

 

(g)Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of this Note shall be governed by and construed
and enforced in accordance with the internal laws of the State of California,
without regard to the principles of conflicts of law thereof.

 

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by duly
authorized officer as of the date first written above.

 

  QUANTUMSPHERE, INC.               By:    Kevin D. Maloney     Chief Executive
Officer & President

 

4