Exhibit 10.1

 

MASTER EXCHANGE AGREEMENT

 

THIS MASTER EXCHANGE AGREEMENT (this “Agreement”), dated as of May 2, 2016, by
and among Net Element, Inc., a Delaware corporation, with headquarters located
at 3363 NE 163rd Street, Suite 705, North Miami Beach, Florida (the “Company”)
and Crede CG III, Ltd., an exempted company incorporated under the laws of
Bermuda (the “Creditor”).

 

WHEREAS, the Company and the Creditor are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
either by Section 4(a)(2) of the Securities Act of 1933, as amended (the
“Securities Act”), or by Section 3(a)(9) of the Securities Act and Rule
144(d)(3)(ii) of the Securities Act, as promulgated by the United States
Securities and Exchange Commission (the “SEC”) under the Securities Act.

 

WHEREAS, as of the date hereof, the Creditor holds and has the right to transfer
$3,965,000 in principal amount and unpaid interest of promissory notes of the
Company or its direct or indirect subsidiaries (the “Existing Debt”, and the
amount owing pursuant thereto, the “Debt Amount”), which Existing Debt the
Creditor purchased from RBL Capital Group, LLC (the “Original Creditor”),
pursuant to a Note Purchase Agreement, dated as of May 2, 2016, between the
Creditor and the Original Creditor.

 

WHEREAS, the Company and the Creditor desire to enter into this Agreement,
pursuant to which, among other things, the Creditor shall exchange, as set forth
herein, in whole or in part, the Existing Debt for shares of the Company’s
common stock, $0.0001 par value per share (the “Common Stock”), as provided
hereunder in reliance on the exemption from registration provided either by
Section 4(a)(2) of the Securities Act or Section 3(a)(9) of the Securities Act.

 

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises hereinafter set forth, the Company and the Creditor hereby agree as
follows:

 

1. EXCHANGES OF EXISTING DEBT.  At any time during the period commencing on the
date hereof and ending on the date no Existing Debt remains outstanding (the
“Exchange Period”), the Creditor agrees, subject to Section 1(d) below, to
exchange in tranches (each such tranche shall be in an amount of $100,000,
except that the last installment shall be reduced to equal the then remaining
unexchanged Debt Amount; each, a “Tranche” and, collectively, the “Tranches”) on
the date hereof with respect to the first Tranche (the Company and Creditor
agree that the first Tranche will be $281,142.47 and thereafter on the dates
when the Company instructs (as described below) the Creditor to exchange other
Tranches (each, an “Exchange”) all (reduced only as set forth in Section 1(d)
below) of the Existing Debt into validly issued, fully paid and non-assessable
shares of Common Stock (as defined below) (collectively, the “Exchange Shares”),
on the terms and conditions set forth in this Section 1.  If, with respect to
any Exchange, the Company requests that any Tranche shall be in an amount less
or more than $100,000 by stating such higher or lower amount in the Exchange
Notice (as defined below), the Creditor shall use its good faith efforts to
accommodate such request by sending the Company, within the period set forth in
Section 1(c)(i) below, an acknowledgment, in the form attached hereto in Exhibit
I, of receipt of such Exchange Notice to the Creditor. Certain capitalized terms
used herein are defined in Section 1(g).

 

(a) Exchange Right and Obligation. Subject to the provisions of Section 1(d), at
any time or times from the date hereof up to December 31, 2016 (the “Outside
Date”), the Creditor shall be obligated to exchange upon the Company issuing an
Exchange Notice (as defined below) the Tranche (in the amount specified in the
Exchange Notice representing a portion of the outstanding and unpaid Existing
Debt into validly issued, fully paid and non-assessable shares of Common Stock
in accordance with Section 1(c), at the Exchange Rate (as defined below).  The
Company shall not issue any fraction of a share of Common Stock upon any
Exchange.  If the issuance would result in the issuance of a fraction of a share
of Common Stock, the Company shall round such fraction of a share of Common
Stock up to the nearest whole share. The Company shall pay any and all transfer,
stamp, issuance and similar taxes that may be payable with respect to the
issuance and delivery of Common Stock upon Exchange of Existing Debt.

 

 

 

 

(b) Exchange Rate. The number of shares of Common Stock issuable upon exchange
of any Tranche pursuant to Section 1(a) shall be determined by dividing (x) the
Exchange Amount with respect to the applicable Tranche by (y) the Exchange Price
(the “Exchange Rate”).

 

(i) “Exchange Amount” means, with respect to such Existing Debt to be exchanged
hereunder in each Tranche, the aggregate of the Debt Amount of the Existing Debt
to be exchanged hereunder in such Tranche plus the Interest Amount with respect
thereto.

 

(iii) “Exchange Price” means, for any date of determination, the lower of (A)
the Closing Bid Price on the date of the applicable Exchange Notice and (B) (x)
the average of the three (3) lowest daily VWAPs of Common Stock during the
consecutive seven (7) Trading Days ending on (and including) the date of the
applicable Exchange Notice less (y) twelve percent (12%) of such average of the
three (3) lowest daily VWAPs of Common Stock. All such determinations will be
appropriately adjusted for any stock split, stock dividend, reverse stock split,
stock combination or other similar transaction during any such measuring period.

 

(iv) “Interest Amount” means, with respect to any portion of Existing Debt as of
any Exchange Date, any accrued and unpaid interest with respect to the principal
of such Existing Debt outstanding as of such Exchange Date under the terms of
such Existing Debt less any interest paid to the Original Creditor and the
Creditor with respect to such Existing Debt prior to such Exchange Date.

 

(c) Mechanics of Exchange.

 

(i) Exchange. To exchange any Exchange Debt into shares of Common Stock on any
date during the Exchange Period (a “Exchange Date”), the Company shall deliver
(whether via facsimile or otherwise), for receipt after 4:00 p.m. and on or
prior to 11:59 p.m., New York time, on the date that is one (1) Business Day
prior to the Exchange Date, a copy of an executed notice of exchange in the form
attached hereto as Exhibit I and specifying the amount of the Tranche to be
exchanged on such Exchange Date (the “Exchange Notice”) to the Creditor.  The
Company shall calculate and state in the Exchange Notice the Exchange Price and
the number of shares of Common Stock issuable upon exchange of the applicable
Tranche specified in the Exchange Notice and shall deliver the instruction to
issue such shares of Common Stock to the Company’s transfer agent (the “Transfer
Agent”). On or before the third (3rd) Trading Day following the date of an
Exchange Notice, the Creditor shall transmit by email to Steven Wolberg and
Jonathan New an acknowledgment, in the form attached hereto in Exhibit I, of
receipt of such Exchange Notice to the Creditor. On or before the third (3rd)
Trading Day following the receipt of such acknowledgement, substantially in the
form of Exhibit I, the Company shall, (A) provided that the Transfer Agent is
participating in The Depository Trust Company’s (the “DTC”) Fast Automated
Securities Transfer (“FAST”) Program, credit such aggregate number of shares of
Common Stock to which the Creditor shall be entitled to the Creditor’s balance
account with DTC through its Deposit/Withdrawal at Custodian system or (B) if
the Transfer Agent is not participating in the DTC FAST Program, issue and send
(via reputable overnight courier) to the address as specified in the Exchange
Notice, a certificate, registered in the name of the Creditor, for the number of
shares of Common Stock to which the Creditor shall be entitled. The Person or
Persons entitled to receive the shares of Common Stock issuable upon an Exchange
of the Existing Debt shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on the Exchange Date.  

 

(ii) Company’s Failure to Timely Exchange. If the Company shall fail to issue to
the Creditor within three (3) Trading Days after the Exchange Date (the “Share
Delivery Deadline”), a certificate for the number of shares of Common Stock to
which the Creditor is entitled or to credit the Creditor’s balance account with
DTC for such number of shares of Common Stock to which the Creditor is entitled
upon the Creditor’s exchange of the applicable Tranche of Existing Debt (as the
case may be) (a “Exchange Failure”), then, as the sole and exclusive remedy
available to the Creditor, the portion of the Existing Debt with respect to
which the Exchange Failure (such portion, “Defaulted Portion”) occurred shall
become due and payable on the date of such Exchange Failure and shall bear a
default interest rate of 20% per annum from the date of such Exchange Failure
until such Defaulted Portion is either, at the Company’s option, paid to the
Creditor or exchanged into Common Stock pursuant to the terms hereof, except
that the Exchange Price for such Defaulted Portion shall be, for any date of
determination, the lower of (A) the Closing Bid Price on the date of such
exchange and (B) (x) the average of the three (3) lowest daily VWAPs of Common
Stock during the seven (7) Trading Days immediately preceding such exchange less
(y) twenty-seven percent (27%) of such average of the three (3) lowest daily
VWAPs of Common Stock. All such determinations will be appropriately adjusted
for any stock split, stock dividend, reverse stock split, stock combination or
other similar transaction during any such measuring period.

 

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(iii) Book-Entry.  Notwithstanding anything to the contrary set forth in this
Section 1, following Exchange of any portion of the Existing Debt in accordance
with the terms hereof, the Creditor shall not be required to physically
surrender any certificate evidencing the Existing Debt to the Company unless (A)
the full Exchange Amount represented by the Existing Debt is being exchanged (in
which event the Existing Debt shall be delivered to the Company following
exchange thereof as contemplated by Section 1(c)(i)) or (B) the Creditor has
provided the Company with prior written notice requesting reissuance of a
certificate with respect to the Existing Debt upon physical surrender of a
certificate with respect to the Existing Debt. The Creditor shall provide the
Company with written partial releases relating to all Exchanges of the Existing
Debt. The Creditor and the Company shall maintain records showing the amount of
the Existing Debt exchanged and/or paid and/or adjusted (as the case may be) and
the dates of such exchanges and/or payments and/or adjustments (as the case may
be) or shall use such other method, reasonably satisfactory to the Creditor and
the Company, so as not to require physical surrender of any certificate with
respect to the Existing Debt upon any Exchange until the Existing Debt being
Exchanged has been fully satisfied.

 

(iv)  Pro Rata Exchange; Disputes. In the event of a dispute as to the number of
shares of Common Stock issuable to the Creditor in connection with an Exchange
of the Existing Debt, the Company shall issue to the Creditor the number of
shares of Common Stock not in dispute and resolve such dispute in accordance
with Section 1(e).

 

(v) The Creditor agrees that neither it nor its Affiliates, agents or
representatives shall at any time engage in any short sales of, or sell put
options or similar instruments with respect to, the Company's Common Stock or
any other Company’s securities.

 

(vi) The Company will not require the Creditor to effectuate an Exchange if (A)
the Closing Bid Price on the applicable Exchange Date is less than $0.10 per
share or (B) upon an Exchange Notice issued to the Creditor, the original
Creditor did not sell the applicable portion of the Existing Debt to the
Creditor within three (3) days of the Exchange Notice.

   

(d) Limitations on Exchanges.  Notwithstanding anything to the contrary
contained in the Existing Debt, the Existing Debt shall not be exchangeable by
the Creditor hereof, and the Company shall not effect any exchange of the
Existing Debt or otherwise issue any shares of Common Stock pursuant hereto, to
the extent (but only to the extent) that after giving effect to such exchange or
other share issuance hereunder the Creditor (together with its Affiliates) would
beneficially own in excess of 9.99% (the “Maximum Percentage”) of the
Common Stock.  To the extent the above limitation applies, the determination of
whether the Existing Debt shall be exchangeable (vis-à-vis other convertible,
exercisable or exchangeable securities owned by the Creditor or any of its
Affiliates) and of which such securities shall be convertible, exercisable or
exchangeable (as among all such securities owned by the Creditor and its
Affiliates) shall, subject to such Maximum Percentage limitation, be determined
on the basis of the first submission to the Company for conversion, exercise or
exchange (as the case may be). No prior inability to exchange the Existing Debt,
or to issue shares of Common Stock, pursuant to this paragraph shall have any
effect on the applicability of the provisions of this paragraph with respect to
any subsequent determination of exchangeability. For purposes of this paragraph,
beneficial ownership and all determinations and calculations (including, without
limitation, with respect to calculations of percentage ownership) shall be
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder (the
“Exchange Act”).  The provisions of this paragraph shall be implemented in a
manner otherwise than in strict conformity with the terms of this paragraph to
correct this paragraph (or any portion hereof) which may be defective or
inconsistent with the intended Maximum Percentage beneficial ownership
limitation herein contained or to make changes or supplements necessary or
desirable to properly give effect to such Maximum Percentage limitation. For any
reason at any time until the Existing Debt has been exchanged, upon the written
or oral request of the Creditor, the Company shall within one (1) Business Day
confirm orally and in writing to the Creditor the number of shares of Common
Stock then outstanding, including by virtue of any prior conversion, exchange or
exercise of convertible or exercisable securities into Common Stock, including,
without limitation, pursuant to the Existing Debt or securities issued pursuant
to this Exchange Agreement. In addition, under no circumstances whatsoever may
the aggregate number shares of Common Stock issued to Creditor in connection
with the exchange of the Existing Debt at any time exceed 19.99% of the total
number of shares of Common Stock outstanding or of the voting power unless the
Company has obtained either (i) its stockholders’ approval of the issuance of
more than such number of shares of Common Stock pursuant to NASDAQ Marketplace
Rule 5635(d) or (ii) a waiver from The NASDAQ Stock Market of the Company’s
compliance with Rule 5635(d).

 

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(e) Dispute Resolution. In the case of a dispute as to the determination of any
Exchange Price, the Closing Bid Price, the Closing Sale Price or fair market
value (as the case may be), the Company or the Creditor (as the case may be)
shall submit the disputed determinations or arithmetic calculations (as the case
may be) via facsimile or e-mail (i) within two (2) Business Days after receipt
of the applicable notice giving rise to such dispute to the Company or the
Creditor (as the case may be) or (ii) if no notice gave rise to such dispute, at
any time after the Company or the Creditor learned of the circumstances giving
rise to such dispute. If the Creditor and the Company are unable to agree upon
such determination or calculation within two (2) Business Days of such disputed
determination or arithmetic calculation (as the case may be) being submitted to
the Company or the Creditor (as the case may be), then the Company and Creditor
shall, within two (2) Business Days, submit via facsimile or e-mail the disputed
determination of any Exchange Price, the Closing Bid Price, the Closing Sale
Price or fair market value (as the case may be) to an independent, reputable
investment bank selected by the Company. The Company and the Creditor shall
cause the investment bank to perform the determinations or calculations (as the
case may be) and notify the Company and the Creditor of the results no later
than ten (10) Business Days from the time it receives such disputed
determinations or calculations (as the case may be). Such investment bank’s
determination or calculation (as the case may be) shall be binding upon all
parties absent demonstrable error. The party whose determinations are furthest
from such investment bank’s determination shall pay the expenses of such
investment bank.

 

(f) Initial Exchange.  As of the date hereof (the “Initial Exchange Date”), the
Creditor shall be deemed to have delivered an Exchange Notice one (1) day prior
to the Initial Exchange Date to effect an Exchange with respect to the initial
Exchange Amount for the first Tranche and such initial Exchange Price as set
forth on the signature page of the Creditor.    

 

(g) Certain Definitions.  For purposes of this Agreement, the following terms
shall have the following meanings:

 

(i) “Affiliate” means any person directly or indirectly controlling or
controlled by or under direct or indirect common control with such specified
person. For the purposes of this definition, “control,” when used with respect
to any specified person, means the power to direct the management and policies
of such person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms “controlling” and
“controlled” have correlative meanings.

 

(ii) “Bloomberg” means Bloomberg, L.P.

 

(iii) “Business Day” means any day other than Saturday, Sunday or other day on
which commercial banks in The City of New York are authorized or required by law
to remain closed.

 

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(iv) “Closing Bid Price” and “Closing Sale Price” means, for any security as of
any date, the last closing bid price and last closing trade price, respectively,
for such security on the Principal Market, as reported by Bloomberg, or, if the
Principal Market begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price (as the case may be)
then the last bid price or last trade price, respectively, of such security
prior to 4:00:00 p.m., New York time, as reported by Bloomberg, or, if the
Principal Market is not the principal securities exchange or trading market for
such security, the last closing bid price or last trade price, respectively, of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price or last trade price, respectively, of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market makers
for such security as reported in the “pink sheets” by OTC Markets Group Inc.
(formerly Pink Sheets LLC).

 

(v) “Common Stock” means (A) the Company’s common stock, $0.001 par value per
share, and (B) any capital stock into which such common stock shall have been
changed or any share capital resulting from a reclassification of such common
stock.

 

(vi) “Person” means any individual, partnership, firm, corporation, limited
liability company, joint venture, corporation, association trust, unincorporated
organization, government or any department or agency thereof, or any other
entity, as well as any syndicate or group that would be deemed to be a person
under Section 13(d) of the Exchange Act.

 

(vii) “SEC” means the United States Securities and Exchange Commission or the
successor thereto.

 

(viii) “Trading Day” means any day on which the Common Stock is traded on the
principal securities exchange or securities market on which the Common Stock is
then traded, provided that “Trading Day” shall not include any day on which the
Common Stock is scheduled to trade on such exchange or market for less than 4.5
hours or any day that the Common Stock is suspended from trading during the
final hour of trading on such exchange or market (or if such exchange or market
does not designate in advance the closing time of trading on such exchange or
market, then during the hour ending at 4:00:00 p.m., New York time) unless such
day is otherwise designated as a Trading Day in writing by the Creditor.

 

(ix) “VWAP” means, for any security as of any date, the dollar volume-weighted
average price for such security on the principal securities exchange or
securities market on which such security is then traded during the period
beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York
time, as reported by Bloomberg through its “Volume at Price” function or, if the
foregoing does not apply, the dollar volume-weighted average price of such
security in the over-the-counter market on the electronic bulletin board for
such security during the period beginning at 9:30:01 a.m., New York time, and
ending at 4:00:00 p.m., New York time, as reported by Bloomberg, or, if no
dollar volume-weighted average price is reported for such security by Bloomberg
for such hours, the average of the highest closing bid price and the lowest
closing ask price of any of the market makers for such security as reported in
the “pink sheets” by OTC Markets Group Inc. (formerly Pink Sheets LLC).  If the
VWAP cannot be calculated for such security on such date on any of the foregoing
bases, the VWAP of such security on such date shall be the fair market value as
mutually determined by the Company and the Creditor. If the Company and the
Creditor are unable to agree upon the fair market value of such security, then
such dispute shall be resolved in accordance with the procedures in Section
1(e). All such determinations shall be appropriately adjusted for any stock
dividend, stock split, reverse stock split, stock combination, recapitalization
or other similar transaction during such period.

 

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2. REPRESENTATIONS AND WARRANTIES

 

(a)  Company's Representations.  The Company hereby represents and warrants and
covenants to the Creditor, as of the date hereof and each other date in which
the Company issues Exchange Shares to the Creditor, as follows:

 

(i) The Company is duly organized and validly existing and in good standing
under the laws of the State of Delaware, and have the requisite power and
authorization to own their properties and to carry on their business as now
being conducted and as presently proposed to be conducted.  

 

(ii) The Company has the requisite power and authority to enter into and perform
its obligations under this Agreement and each of the other agreements entered
into by the parties hereto in connection with the transactions contemplated by
this Agreement (collectively, the “Exchange Documents”) and to issue the
Exchange Shares in accordance with the terms hereof and thereof.  The execution
and delivery of the Exchange Documents by the Company and the consummation by
the Company of the transactions contemplated hereby and thereby, including,
without limitation, the issuance of the Exchange Shares have been duly
authorized by the Company's Board of Directors and no further filing (other than
Form 8-K and the Nasdaq Listing of Additional Shares Notification), consent, or
authorization is required by the Company, its Board of Directors or its
stockholders.  This Agreement and the other Exchange Documents have been duly
executed and delivered by the Company, and constitute the legal, valid and
binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, except as such enforceability may be
limited by general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of applicable creditors' rights and
remedies and except as rights to indemnification and to contribution may be
limited by federal or state securities laws.

 

(iii) The execution, delivery and performance of the Exchange Documents by the
Company and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, each Exchange and the
reservation and issuance of the Exchange Shares) will not (A) result in a
violation of the Certificate of Incorporation (as defined below) or other
organizational documents of the Company or any of its subsidiaries, any share
capital of the Company or any of its subsidiaries or Bylaws (as defined below)
of the Company or any of its subsidiaries, (B) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its subsidiaries is a party, or (C) result in a violation
of any law, rule, regulation, order, judgment or decree (including foreign,
federal and state securities laws and regulations and the rules and regulations
of The NASDAQ Capital Market (the “Principal Market”) applicable to the Company
or any of its subsidiaries or by which any property or asset of the Company or
any of its subsidiaries is bound or affected except, in the case of clause (B)
or (C) above, to the extent such violations that could not reasonably be
expected to have a Material Adverse Effect. As used in this Agreement, “Material
Adverse Effect” means any material adverse effect on (x) the business,
properties, assets, liabilities, operations (including results thereof),
condition (financial or otherwise) or prospects of the Company and its
subsidiaries taken as a whole, or (y) the authority or ability of the Company to
perform any of its obligations under any of the Exchange Documents.

 

(iv) The Company is not required to obtain any consent from, authorization or
order of, or make any filing (other than Form 8-K and the Nasdaq Listing of
Additional Shares Notification) or registration with, any court, governmental
agency or any regulatory or self-regulatory agency or any other Person in order
for it to execute, deliver or perform any of its respective obligations under or
contemplated by the Exchange Documents, in each case, in accordance with the
terms hereof or thereof. All consents, authorizations, orders, filings (other
than Form 8-K and the Nasdaq Listing of Additional Shares Notification) and
registrations which the Company is required to obtain pursuant to the preceding
sentence have been obtained or effected on or prior to the applicable Closing
Date, and neither the Company nor any of its subsidiaries are aware of any facts
or circumstances which might prevent the Company or any of its subsidiaries from
obtaining or effecting any of the registration, application or filings
contemplated by the Exchange Documents.

 

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(v) On each date the Company issues Exchange Shares to the Creditor, all share
transfer or other taxes (other than income or similar taxes) which are required
to be paid in connection with the issuance of the Exchange Shares to be
exchanged with the Creditor hereunder on such date will be, or will have been,
fully paid or provided for by the Company, and all laws imposing such taxes will
be or will have been complied with.

 

(vi) The Company filed current Form 10 information with the SEC over 12 months
ago and has filed all reports and other materials required to be filed by
Section 13 or 15(d) of the Securities Exchange Act, as applicable, during the
preceding 12 months (other than certain Form 8-K reports) (all of the foregoing
filed prior to the date hereof and all exhibits included therein and financial
statements, notes and schedules thereto and documents incorporated by reference
therein being hereinafter referred to as the “SEC Documents”).

 

(vii) As of the date hereof, the authorized share capital of the Company
consists of (A) 300,000,000 shares of Common Stock, of which, 113,273,897 shares
are issued and outstanding and (B) 1,000,000 preferred shares, of which no
shares are issued and outstanding.  As of the date hereof, the Company has
reserved from its duly authorized capital stock 20,833,333 shares of Common
Stock for issuance as Exchange Shares.  All of such outstanding shares are duly
authorized and have been, or upon issuance will be, validly issued and are fully
paid and nonassessable.  Except as disclosed in SEC Documents and/or in Schedule
2(a)(vii) hereof: (A) none of the Company’s or any subsidiary’s share capital is
subject to preemptive rights or any other similar rights or any liens or
encumbrances suffered or permitted by the Company or any subsidiary; (B) there
are no outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any share capital of the
Company or any of its subsidiaries, or contracts, commitments, understandings or
arrangements by which the Company or any of its subsidiaries is or may become
bound to issue additional share capital of the Company or any of its
subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any share capital of the
Company or any of its subsidiaries; (C) except for the Existing Debt and all
other debt securities, notes, credit agreements, credit facilities or other
agreements, documents or instruments disclosed in the SEC Documents, there are
no outstanding debt securities, notes, credit agreements, credit facilities or
other agreements, documents or instruments evidencing Indebtedness of the
Company or any of its subsidiaries or by which the Company or any of its
subsidiaries is or may become bound; (D) other than with respect of the current
indebtedness of the Company or any of its subsidiaries, there are no financing
statements securing obligations in any amounts filed in connection with the
Company or any of its subsidiaries; (E) there are no current agreements or
arrangements under which the Company is obligated to register the sale of any of
their securities under the Securities Act; (F) there are no outstanding
securities or instruments of the Company or any of its subsidiaries which
contain any redemption or similar provisions, and there are no contracts,
commitments, understandings or arrangements by which the Company or any of its
subsidiaries is or may become bound to redeem a security of the Company or any
of its subsidiaries; (G) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Exchange Shares; (H) neither the Company nor any subsidiary has any stock
appreciation rights or “phantom stock” plans or agreements or any similar plan
or agreement; and (I) neither the Company nor any of its subsidiaries have any
liabilities or obligations required to be disclosed in the SEC Documents which
are not so disclosed in the SEC Documents, other than those incurred in the
ordinary course of the Company’s or its subsidiaries’ respective businesses and
which, individually or in the aggregate, do not or could not have a Material
Adverse Effect. The Company will furnish to the Creditor upon Creditor’s written
request copies of the Company’s Certificate of Incorporation, as amended and as
in effect on the date hereof (the “Certificate of Incorporation”), and the
Company’s bylaws, as amended and as in effect on the date hereof (the “Bylaws”),
and the terms of all securities convertible into, or exercisable or exchangeable
for, shares of Common Stock and the material rights of the holders thereof in
respect thereto that have not been disclosed in the SEC Documents.

 

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(viii) The Company confirms that neither it nor any other Person acting on its
behalf has provided the Creditor or its agents or counsel with any information
that constitutes or could reasonably be expected to constitute material,
non-public information concerning the Company or any of its subsidiaries, other
than the existence of the transactions contemplated by this Agreement and the
other Agreements. The Company understands and confirms that the Creditor will
rely on the foregoing representations in effecting transactions in securities of
the Company.

 

(ix) The issuance of the Exchange Shares are duly authorized and upon issuance
in accordance with the terms hereof shall be validly issued and outstanding,
fully paid and nonassessable, free and clear of all liens, encumbrances and
rights of refusal of any kind.  Upon issuance in accordance herewith and subject
to the representations and warranties and covenants of the Creditor set forth in
Section 2(b) having been and remaining at such issuance true and correct, the
Exchange Shares will be exempt from the registration requirements of the
Securities Act under either Section 4(a)(2) or 3(a)(9) of the Securities Act and
all of such Exchange Shares, even though initially issuable subject to
restrictions on trading, will be caused by the Company to be freely transferable
and freely tradable by the Creditor without restriction pursuant to Rule 144,
including, without limitation Rule 144(d)(3)(ii), of the Securities Act by
requesting the Transfer Agent to remove restrictive legends from the Exchange
Shares.  After such restrictive legends removal, neither any Exchange Shares
issuable hereunder nor any certificates evidencing any of such Exchange Shares
(if a certificate therefor is requested in writing by the Creditor) shall bear
any restrictive or other legends or notations.  The Company shall not, and the
Company shall cause all other persons to not, issue any stop-transfer order,
instruction or other restriction with respect to any such Exchange Shares. The
Company shall cause an opinion of counsel to be issued to the Company’s Transfer
Agent, if requested by the Transfer Agent, to the effect of the foregoing (the
“Opinion”). The Creditor shall cooperate with the Company in timely providing
the Company and its counsel with customary non-affiliate seller opinion reliance
certificates for the timely issuance of the Opinion(s).

 

(x)  The Company represents that it has not paid, and shall not pay, any
commissions or other remuneration, directly or indirectly, to any third party
for the solicitation of any Exchange pursuant to this Agreement. Other than the
applicable Exchange of Existing Debt, the Company has not received and will not
receive any consideration from the Creditor for the Exchange Shares to be issued
in an Exchange.

 

(xi) To the Company’s knowledge, neither the Creditor nor the Original
Creditors, nor any of their respective Affiliates, (i) is or was an officer,
director, 10% shareholder, control person, or Affiliate of the Company within
the last 90 days or (ii) has or will, directly or indirectly, provide any
consideration to or invest in any manner in the Company in exchange or
consideration for, or otherwise in connection with, the sale or satisfaction of
the Existing Debt, other than pursuant to this Agreement.

 

(xii) The Company acknowledges and agrees that (A) the issuance of Exchange
Shares pursuant to this Agreement may have a dilutive effect, which may be
substantial, (B) neither the Company nor any of the Company’s Affiliates has or
will provide the Creditor with any material non-public information regarding the
Company or its securities, and (C) the Creditor has no obligation of
confidentiality to the Company and may sell any of its Exchange Shares issued
pursuant to this Agreement at any time but subject to compliance with applicable
laws and regulations.

 

(xiii) The Company acknowledges and agrees that with respect to this Agreement
and the transactions contemplated hereby, (A) the Creditor is acting solely in
an arm’s length capacity, (B) the Creditor does not make and has not made any
representations or warranties, other than those specifically set forth in this
Agreement, (C) the Creditor has not and is not acting as a legal, financial,
accounting or tax advisor to the Company, or agent or fiduciary of the Company,
or in any similar capacity, and (D) any statement made by the Creditor or any of
the Creditor’s representatives, agents or attorneys is not advice or a
recommendation to the Company.

 

 8 

 

 

 

(xiv) The Company is an issuer identified in, or subject to, Rule 144(i) under
the Securities Act.

 

(xv) The Company, through its Transfer Agent, currently participates in the DTC
FAST Program of DTC’s Deposit/Withdrawal At Custodian (“DWAC”) system, and the
shares of Common Stock may be issued and transferred electronically to third
parties via the DTC FAST Program of DTC’s DWAC system. The Company has not, in
the 12 months preceding the date of this Agreement, received any notice from DTC
to the effect that a suspension of, or restriction on, accepting additional
deposits of the shares of Common Stock, or electronic trading or settlement
services with respect to the shares of Common Stock are being imposed or are
contemplated by DTC.

 

(xvi) The Company and its board of directors have taken all necessary action, if
any, in order to render inapplicable any control share acquisition, interested
stockholder, business combination, or other similar antitakeover provision under
the certificate of incorporation, bylaws or other organizational documents of
the Company, as currently in effect, or the laws of the jurisdiction of its
incorporation or otherwise which is or could become applicable as a result of
the transactions contemplated by this Agreement, including, without limitation,
the Company’s issuance of Exchange Shares hereunder and the Creditor’s ownership
of such Exchange Shares, together with all other securities now or hereafter
owned or acquired by the Creditor.  The Company and its board of directors have
taken all necessary action, if any, in order to render inapplicable any
shareholder rights plan or similar arrangement relating to accumulations of
beneficial ownership of Exchange Shares or a change in control of the Company or
any of its subsidiaries.

 

(xvii) The Company shall take such action as the Creditor shall reasonably
determine is necessary in order to qualify the Exchange Shares issuable to the
Creditor hereunder under applicable securities or “blue sky” laws of the states
of the United States for the issuance to the Creditor hereunder and for resale
by the Creditor to the public (or to obtain an exemption from such
qualification).  Without limiting any other obligation of the Company hereunder,
the Company shall timely make all filings and reports relating to the offer and
issuance of such Exchange Shares required under all applicable securities laws
(including, without limitation, all applicable federal securities laws and all
applicable state securities or “blue sky” laws), and the Company shall comply
with all applicable federal, state, local and foreign laws, statutes, rules,
regulations and the like relating to the offering and issuance of such Exchange
Shares to the Creditor.

 

(xviii) The Company shall promptly secure the listing or designation for
quotation (as the case may be) of all of the Exchange Shares to be issued to the
Creditor pursuant to this Agreement on each national securities exchange and
automated quotation system, if any, on which the shares of Common Stock are
listed or designated for quotation (as the case may be) and shall use its
reasonable best efforts to maintain such listing or designation for quotation
(as the case may be) of all such Exchange Shares on such national securities
exchange or automated quotation system for so long as the Creditor or any of its
Affiliates holds any Exchange Shares. The Company shall pay all fees and
expenses in connection with satisfying its obligations under this Section
2(a)(xix).

 

(b) Creditor Representations. The Creditor hereby makes the following
representations, warranties and covenants, as of the date hereof and each other
date in which the Creditor exchanges all or any portion of the Existing Debt
into the Exchange Shares or transfers or disposes the Exchange Shares, to the
Company:

 

(i) The Creditor is an entity duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization with the
requisite power and authority to enter into and to consummate the transactions
contemplated hereby to which it is a party and otherwise to carry out its
obligations hereunder and thereunder.

 

 9 

 

 

 

(ii) The Creditor understands that the Exchange Shares are being offered and
sold to it in reliance on specific exemptions from the registration requirements
of United States federal and state securities laws and that the Company is
relying in part upon the truth and accuracy of, and the Creditor’s compliance
with, the representations, warranties, agreements, acknowledgments and
understandings of the Creditor set forth herein in order to determine the
availability of such exemptions and the eligibility of the Creditor to acquire
the Exchange Shares.

 

(iii) This Agreement has been duly and validly authorized, executed and
delivered on behalf of the Creditor and constitute the legal, valid and binding
obligations of the Creditor enforceable against the Creditor in accordance with
their respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation and other similar laws relating to, or affecting
generally, the enforcement of applicable creditors’ rights and remedies.

 

(iv) The execution, delivery and performance by the Creditor of this Agreement
and the consummation by the Creditor of the transactions contemplated hereby and
thereby will not (i) result in a violation of the organizational documents of
the Creditor or (ii) conflict with, or constitute a default (or an event which
with notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of,
any agreement, indenture or instrument to which the Creditor is a party, or
(iii) result in a violation of any law, rule, regulation, order, judgment  or
decree (including federal and state securities laws) applicable to the Creditor,
except in the case of clauses (ii) and (iii) above, for such conflicts,
defaults, rights or violations which would not, individually or in the
aggregate, reasonably be expected to have a material adverse effect on the
ability of the Creditor to perform its obligations hereunder.

 

(v) As of the date of this Agreement and during the 90 calendar days prior to
the date of this Agreement, neither the Creditor nor any Affiliate thereof is or
was an officer, director, or 10% or more shareholder of the Company.

 

(vi) For so long as the Creditor or any of its Affiliates holds any Exchange
Shares, neither the Creditor nor any of its Affiliates will: (A) vote any shares
of Common Stock owned or controlled by it, or solicit any proxies or seek to
advise or influence any person with respect to any voting securities of the
Company; or (B) engage or participate in any actions, plans or proposals that
relate to or would result in (1) the Creditor or any of its Affiliates acquiring
additional securities of the Company, alone or together with any other person,
which would result in the Creditor and its Affiliates collectively beneficially
owning, or being deemed to beneficially own, more than 9.99% of the shares of
Common Stock or other voting securities of the Company (as calculated pursuant
to Section 13(d) of the Exchange Act and the rules and regulations thereunder),
(2) an extraordinary corporate transaction, such as a merger, reorganization or
liquidation, involving the Company or any of its subsidiaries, (3) a sale or
transfer of a material amount of assets of the Company or any of its
subsidiaries, (4) any change in the present board of directors or management of
the Company, including any plans or proposals to change the number or term of
directors or to fill any existing vacancies on the board, (5) any material
change in the present capitalization or dividend policy of the Company, (6) any
other material change in the Company’s business or corporate structure, (7)
changes in the Company’s charter, bylaws or instruments corresponding thereto or
other actions which may impede the acquisition of control of the Company by any
person, except with respect to any vote to increase the authorized capital of
the Company to meet the Company’s obligations to the Creditor hereunder, (8)
causing a class of securities of the Company to be delisted from a national
securities exchange or to cease to be authorized to be quoted in an inter-dealer
quotation system of a registered national securities association, (9) causing a
class of equity securities of the Company to become eligible for termination of
registration pursuant to Section 12(g)(4) of the Exchange Act or (10) taking any
action, intention, plan or arrangement similar to any of those enumerated above.

 

 10 

 

 

 

(vii)  Creditor represents that it has not paid, and shall not pay, any
commissions or other remuneration, directly or indirectly, to any third party
for the solicitation of any Exchange pursuant to this Agreement and no
additional consideration from the Creditor was received or will be received by
the Company for the Exchange Shares.

 

(viii) Creditor understands and acknowledges that the issuance and transfer to
it of the shares of Common Stock (the "Shares") has not been reviewed by the
United States Securities and Exchange Commission or any state securities
regulatory authority because such transaction is intended to be exempt from the
registration requirements of the Securities Act, and applicable state securities
laws. Creditor understands that the Company is relying upon the truth and
accuracy of, and Creditor’s compliance with, the representations, warranties,
acknowledgments and understandings of Creditor set forth herein in order to
determine the availability of such exemptions and the eligibility of Creditor to
acquire the Shares.

 

(ix) Creditor has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of Creditor’s
investment in the Company through Creditor’s acquisition of the Shares. Creditor
is able to bear the economic risk of its investment in the Company through
Creditor’s acquisition of the Shares for an indefinite period of time. At the
present time, Creditor can afford a complete loss of such investment and has no
need for liquidity in such investment.

 

(x) Creditor recognizes that its acquisition of the Shares involves a high
degree of risk in that: (a) an investment in the Company is highly speculative
and only Creditor who can afford the loss of their entire investment should
consider investing in the Company and securities of the Company; (b)
transferability of the Shares is limited; (c) the Company has experienced
recurring losses and it must raise substantial additional capital in order to
continue operating its business; (d) subsequent equity financings will dilute
the ownership and voting interests of Creditor and equity securities issued by
the Company to other persons or entities may have rights, preferences or
privileges senior to the rights of Creditor; (e) any debt financing that may be
obtained by the Company must be repaid regardless of whether the Company
generates revenues or cash flows from operations and may be secured by
substantially all of the Company’s assets; (f) there is absolutely no assurance
that any type of financing on terms acceptable to the Company will be available
to the Company or otherwise obtained by the Company; and (g) if the Company is
unable to obtain additional financing or is unable to obtain additional
financing on terms acceptable to it, then the Company may be unable to implement
its business plans or take advantage of business opportunities, which could have
a Material Adverse Effect on the Company’s business prospects, financial
condition and results of operations and may ultimately require the Company to
suspend or cease operations.

 

(xi) Creditor acknowledges that it has prior investment experience and that it
recognizes and fully understands the highly speculative nature of Creditor’s
investment in the Company pursuant to its acquisition of the Shares. Creditor
acknowledges that it, either alone or together with its professional advisors,
has the capacity to protect its own interests in connection with this
transaction.

 

(xii) Creditor acknowledges that it has carefully reviewed the this Agreement
and the Company’s filings with the United States Securities and Exchange
Commission, which are available on the Internet at www.sec.gov, all of which
documents and filings Creditor acknowledges have been made available to it.
Creditor has been given the opportunity to ask questions of, and receive answers
from, the Company concerning this Agreement, the issuance to it of the Shares,
and the Company’s business, operations, financial condition and prospects, and
Creditor has been given the opportunity to obtain such additional information,
to the extent the Company possesses such information or can acquire it without
unreasonable effort or expense, necessary to verify the accuracy of same as
Creditor reasonably desires in order to evaluate its investment in the Company
pursuant its acquisition of the Shares. Creditor fully understands all of such
documents and filings and has had the opportunity to discuss any questions
regarding any of such documents or filings with its legal counsel and tax,
investment and other advisors. Creditor acknowledges that it does not desire to
receive any further information from the Company or any other person or entity
in order to make a fully informed decision of whether or not to execute this
Agreement and accept the Shares.

 

 11 

 

 

 

(xiii) Creditor acknowledges that the issuance to it of the Shares may involve
tax consequences to Creditor. Creditor acknowledges and understands that
Creditor must retain its own professional advisors to evaluate the tax and other
consequences of Creditor’s receipt of the Shares.

 

(xiv) Creditor understands and acknowledges that the Company is under no
obligation to register the resale of the Shares under the Securities Act or any
state securities laws.

 

(xv) Creditor understands that, subject to delivery to the Transfer Agent of
legal opinion of counsel, acceptable to the Transfer Agent, with respect to
removal of restrictive legends in compliance with Rule 144 in connection with
impending disposition of such Shares by the Creditor, and the removal of such
restrictive legends, the certificate(s) representing the Shares shall initially,
(upon exchange under either Rule 4(a)(2) or 3(a)(9) of the Securities Act) bear
a restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of the Shares):

 

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT 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 APPLICABLE STATE SECURITIES LAWS, OR (B)
AN OPINION OF COUNSEL, IN A REASONABLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS, OR (II) UNLESS SOLD
PURSUANT TO RULE 144 UNDER SAID ACT.

 

(xvi) The legend set forth above will be removed, and the Company will issue and
deliver the Shares without such legend to Creditor in the manner set forth in
Section 1(c) of this Agreement.

 

(xvii) Creditor represents and warrants that it was not induced to invest in the
Company (pursuant to the issuance to it of the Shares) by any form of general
solicitation or general advertising, including, but not limited to, the
following: (a) any advertisement, article, notice or other communication
published in any newspaper, magazine or similar media (including via the
Internet) or broadcast over the news or radio; (b) any registration statement;
or (c) any seminar or meeting whose attendees were invited by any general
solicitation or advertising.

 

(xviii) Creditor is either a “qualified institutional buyer” (as defined in Rule
144A(a)(1) of the Securities Act) or an “accredited investor” (as defined in
Rule 501(a)(3) of Regulation D of the Securities Act).

 

3. CONDITIONS PRECEDENT. The Creditor’s obligation to exchange Existing Debt
into the shares of Common Stock shall be subject the following conditions
precedent:

 

(a) performance by the Company of all its material obligations contained in the
Agreement;

 

(b) no election by the Company to require an Exchange, by delivery of an
Exchange Notice, has occurred for at least three (3) Trading Days since the
prior Exchange Date;

 

(c) the Company’s Common Stock is listed on the Principal Market (or traded on
other exchange or market, including OTC Markets Group Inc., reasonably
acceptable to the Purchaser);

 

(d) no suspension of trading of the Company's Common Stock has occurred;

 

 12 

 

 

 

(e) no injunctions or other legal proceeding relating to the Exchange has
occurred;

 

(f) the number of shares of Company’s Common Stock issuable to the Creditor in
aggregate will not (1) be greater than 20% of the daily trading volume on the
Principal Market as reported by Bloomberg using the AQR or other similar
function, (2) result in the Creditor, together with its Affiliates, becoming the
beneficial owner of more than 9.9% of the Company's Common Stock or (3) result
in the total number of shares issuable pursuant to the transactions contemplated
herein exceeding 19.9% of the shares of the Company's outstanding common stock
or voting power;

 

(g) no war, terrorist acts, insurrection, strikes, walkouts, riots, floods,
earthquakes, casualties, acts of God, restrictions imposed or mandated by
governmental entities, in each case beyond the reasonable control of the parties
hereto, has occurred;

 

(h) an Opinion has been delivered to the Transfer Agent if the Transfer agent so
required; and

 

(i) the Company, through its Transfer Agent, is eligible to issue and transfer
shares of Common Stock electronically to third parties via the DTC FAST Program
of DTC’s DWAC system.

 

4. CREDITOR RIGHT. The Creditor may unilaterally terminate its obligation
hereunder to effectuate an Exchange prior to the Outside Date in the (a) event a
non-Affiliate that is not a shareholder of the Company acquires over 50% of the
voting securities of the Company and replaces the entire board of directors of
the Company or (b) an event occurs that has a Material Adverse Effect.

 

5. DISCLOSURE.

 

(a) Prior to the earlier of (i) the opening time for trading stocks on public
securities exchanges located in New York City on the first Trading Day
immediately following the date of this Agreement and (ii) the initial Share
Delivery Deadline, time being of the essence, the Company shall file a Current
Report on Form 8-K with the SEC pursuant to Section 13 or Section 15(d) of the
Exchange Act disclosing all of the material terms of this Agreement, and
disclosing all other material, nonpublic information (if any) delivered to the
Creditor (or the Creditor’s representatives or agents) by the Company or any of
its officers, directors, employees, agents or representatives, if any, in
connection with the Existing Debt, any Exchange, the Original Creditors or the
transactions contemplated by this Agreement, and attaching a copy of this
Agreement as an exhibit thereto (the “8-K Filing”).  From and after the 8-K
Filing, neither the Company nor any of its officers, directors, employees,
agents or representatives shall disclose any material non-public information
about the Company to the Creditor (or the Creditor’s representatives or agents),
unless prior thereto the Company shall have filed a Current Report on Form 8-K
with the SEC pursuant to Section 13 or Section 15(d) of the Exchange Act
disclosing all such material non-public information. 

 

(b) Neither the Company, its subsidiaries nor the Creditor shall issue any press
releases or any other public statements with respect to the transactions
contemplated hereby; provided, however, the Company shall be entitled, without
the prior approval of the Creditor, to issue any press release or make other
public disclosure with respect to such transactions (i) in substantial
conformity with the 8-K Filing and contemporaneously therewith and (ii) as is
required by applicable law and regulations.

 

6. INDEMNIFICATION.

 

(a) In consideration of the Creditor’s execution and delivery of the Exchange
Documents to which it is a party and acquiring the Securities thereunder and in
addition to all of the Company’s other obligations under the Exchange Documents,
the Company shall indemnify the Creditor and all of their shareholders,
partners, members, officers, directors, employees (collectively, the “Creditor
Indemnitees”) from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith, and including reasonable attorneys’ fees and disbursements
(the “Indemnified Liabilities”) incurred by any Creditor Indemnitee as a result
of, or arising out of, or relating to (a) any material misrepresentation or
breach of any representation or warranty made by the Company in any of the
Exchange Documents or (b) any material breach, uncured within 30 days of such
breach, of any covenant, agreement or obligation of the Company contained in any
of the Exchange.

 

 13 

 

 

 

(b) In consideration of the Company’s execution and delivery of the Exchange
Documents to which it is a party and agreeing to issue (subject to the terms
hereof) the Securities thereunder and in addition to all of the Creditor’s other
obligations under the Exchange Documents, the Creditor shall indemnify the
Company and all of their shareholders, partners, members, officers, directors,
employees and counsel (collectively, the “Company Indemnitees”) from and against
any and all Indemnified Liabilities incurred by any Company Indemnitee as a
result of, or arising out of, or relating to (a) any misrepresentation or breach
of any representation or warranty made by the Creditor in any of the Exchange
Documents, (b) any material breach, uncured within 30 days of such breach, of
any covenant, agreement or obligation of the Creditor contained in any of the
Exchange.  

 

(c) Promptly after receipt by a Company Indemnitee or Creditor Indemnity (as
applicable) under this Section 6 of notice of the commencement of any action or
proceeding (including any governmental action or proceeding) involving an
Indemnified Liability, such Company Indemnitee or Creditor Indemnity (as
applicable) shall, (i) if an Indemnified Liability in respect thereof is to be
made against the Company under this Section 6, deliver to the Company a written
notice of the commencement thereof, and the Company shall have the right to
participate in, and, to the extent the Company so desires, to assume control of
the defense thereof with counsel mutually satisfactory to the Company and the
Creditor Indemnitee; provided, however, that a Creditor Indemnitee shall have
the right to retain its own counsel at its own expense, if, in the reasonable
opinion of counsel retained by the Company, the representation by such counsel
of the Indemnitee and the Company would be inappropriate due to actual or
potential differing interests between such Creditor Indemnitee and any other
party represented by such counsel in such proceeding. In the case of a Creditor
Indemnitee, legal counsel referred to in the immediately preceding sentence
shall be selected by the Creditor. The Creditor Indemnitee shall cooperate fully
with the Company in connection with any negotiation or defense of any such
Indemnified Liability by the Company and shall furnish to the Company all
information reasonably available to the Creditor Indemnitee which relates to
such Indemnified Liability.  The Company shall keep the Creditor Indemnitee
reasonably apprised at all times as to the status of the defense or any
settlement negotiations with respect thereto.  The Company shall not be liable
for any settlement of any action, claim or proceeding effected without its prior
written consent, provided, however, that the Company shall not unreasonably
withhold, delay or condition its consent.  The Company shall not, without the
prior written consent of the Creditor Indemnitee, consent to entry of any
judgment or enter into any settlement or other compromise which does not include
as an unconditional term thereof the giving by the claimant or plaintiff to such
Creditor Indemnitee of a release from all liability in respect to such
Indemnified Liability. Following indemnification as provided for hereunder, the
Company shall be subrogated to all rights of the Creditor Indemnitee with
respect to all third parties, firms or corporations relating to the matter for
which indemnification has been made. The failure to deliver written notice to
the Company within a reasonable time of the commencement of any such action
shall not relieve the Company of any liability to the Indemnitee under this
Section 6, except to the extent that the Company is prejudiced in its ability to
defend such action; and (ii) if an Indemnified Liability in respect thereof is
to be made against the Creditor under this Section 6, deliver to the Creditor a
written notice of the commencement thereof, and the Creditor shall have the
right to participate in, and, to the extent the Creditor so desires, to assume
control of the defense thereof with counsel mutually satisfactory to the
Creditor and the Indemnitee; provided, however, that a Company Indemnitee shall
have the right to retain its own counsel at its expense, if, in the reasonable
opinion of counsel retained by the Company, the representation by such counsel
of the Company Indemnitee and the Company would be inappropriate due to actual
or potential differing interests between such Company Indemnitee and any other
party represented by such counsel in such proceeding. In the case of a Company
Indemnitee, legal counsel referred to in the immediately preceding sentence
shall be selected by the Company. The Company Indemnitee shall cooperate fully
with the Creditor in connection with any negotiation or defense of any such
Indemnified Liability by the Creditor and shall furnish to the Creditor all
information reasonably available to the Company Indemnitee which relates to such
Indemnified Liability.  The Creditor shall keep the Company Indemnitee
reasonably apprised at all times as to the status of the defense or any
settlement negotiations with respect thereto.  The Creditor shall not be liable
for any settlement of any action, claim or proceeding effected without its prior
written consent, provided, however, that the Creditor shall not unreasonably
withhold, delay or condition its consent.  The Creditor shall not, without the
prior written consent of the Company Indemnitee, consent to entry of any
judgment or enter into any settlement or other compromise which does not include
as an unconditional term thereof the giving by the claimant or plaintiff to such
Company Indemnitee of a release from all liability in respect to such
Indemnified Liability. Following indemnification as provided for hereunder, the
Creditor shall be subrogated to all rights of the Company Indemnitee with
respect to all third parties, firms or corporations relating to the matter for
which indemnification has been made. The failure to deliver written notice to
the Creditor within a reasonable time of the commencement of any such action
shall not relieve the Creditor of any liability to the Indemnitee under this
Section 6, except to the extent that the Creditor is prejudiced in its ability
to defend such action.

 

 14 

 

 

 

(d) Notwithstanding any other provisions of this Agreement, the Company shall
not be obligated to indemnify any person or entity to the extent that the
aggregate of all Indemnified Liabilities subject to the indemnification by the
Company exceeds the Debt Amount.

 

(e) The indemnification required by this Section 6 shall be the sole and
exclusive remedy of the Company Indemnitees and the Creditor Indemnitees.

 

7. RESERVATION OF SHARES.

   

(a) Reservation. The Company shall initially reserve 20,833,333 shares of its
authorized and unissued Common Stock (appropriately adjusted for any stock
split, stock dividend, reverse stock split, stock combination or other similar
transaction), solely for the purpose of effecting Exchanges of the Existing
Debt.  So long as any of the Existing Debt remains outstanding and is held by
the Creditor, the Company shall take all action necessary to reserve and keep
available out of its authorized and unissued Common Stock, solely for the
purpose of effecting Exchanges of such Existing Debt, a number of authorized and
unissued shares of Common Stock, as of any date of determination, of at least
150% of the number of authorized and unissued shares of Common Stock as shall
from time to time be necessary to effect the exchange of all of the Existing
Debt then outstanding and held by the Creditor (without regard to any
limitations on exchanges) (the “Required Reserve Amount”).  

 

(b) Insufficient Authorized Shares. If, notwithstanding Section 7(a), and not in
limitation thereof, at any time while the Existing Debt remains outstanding the
Company does not have a sufficient number of authorized and unreserved shares of
Common Stock to satisfy its obligation to reserve for issuance upon exchange of
the Existing Debt held by the Creditor of at least a number of shares of Common
Stock equal to the Required Reserve Amount (appropriately adjusted for any stock
split, stock dividend, reverse stock split, stock combination or other similar
transaction), then the Company may take action necessary to increase the
Company’s authorized shares of Common Stock to an amount sufficient to allow the
Company to reserve the Required Reserve Amount (appropriately adjusted for any
stock split, stock dividend, reverse stock split, stock combination or other
similar transaction) for such Existing Debt. During the period when the Company
is prohibited from issuing shares of Common Stock upon any exchange due
insufficient shares of Common Stock available out of the authorized but unissued
shares of Common Stock, the Company shall not issue any Exchange Notices until
such time as Company’s authorized shares of Common Stock is sufficient to allow
the Company to reserve the Required Reserve Amount (appropriately adjusted for
any stock split, stock dividend, reverse stock split, stock combination or other
similar transaction).

 

8. MISCELLANEOUS. 

 

(a) Legal Opinion To Transfer Agent.  The Company shall be responsible for the
delivery of any legal opinion required by the transfer agent in connection with
the issuance of the Exchange Shares without any restricted legend and the fees
and expenses of counsel with respect to any such legal opinion.

 

(b) Further Assurances; Additional Documents.  The parties shall take any
actions and execute any other documents that may be necessary or desirable to
the implementation and consummation of this Agreement upon the reasonable
request of the other party.

 

 15 

 

 

 

(c) No Oral Modification.  This Agreement may only be amended in writing signed
by the Company and by the Creditor.  All waivers relating to any provision of
this Agreement must be in writing and signed by the waiving party.

 

(d) Expenses.  The Company shall reimburse Creditor or its designee(s) $10,000
for all legal fees, costs and expenses incurred by it or its Affiliates in
connection with the transactions contemplated by the Exchange Documents,
including in connection with post-Closing filings with the SEC, which amount was
previously advanced by the Company to Creditor. Except as otherwise set forth in
this Agreement, each party to this Agreement shall bear its own expenses in
connection with transactions contemplated hereby.    

 

(e) Governing Law; Jurisdiction; Jury Trial.  All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of New York.  Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in the County of New York, New York, for the adjudication of any
dispute hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein, and hereby irrevocably waives, and agrees not to
assert in any suit, action or proceeding, any claim that it is not personally
subject to the jurisdiction of any such court, that such suit, action or
proceeding is brought in an inconvenient forum or that the venue of such suit,
action or proceeding is improper.  Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action
or proceeding by mailing a copy thereof to such party at the address for such
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
manner permitted by law.   EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY
HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY
DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY
TRANSACTION CONTEMPLATED HEREBY.

 

(f) Headings; Gender. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement. Unless the context clearly indicates otherwise, each pronoun herein
shall be deemed to include the masculine, feminine, neuter, singular and plural
forms thereof. The terms “including,” “includes,” “include” and words of like
import shall be construed broadly as if followed by the words “without
limitation.” The terms “herein,” “hereunder,” “hereof” and words of like import
refer to this entire Agreement instead of just the provision in which they are
found.

 

(g) Withdrawal Right. Notwithstanding anything to the contrary contained in (and
without limiting any similar provisions of) the Exchange Documents, whenever the
Creditor exercises a right, election, demand or option under an Exchange
Document and the Company does not timely perform its related obligations within
the periods therein provided, then the Creditor may rescind or withdraw, in its
sole discretion from time to time upon written notice to the Company, any
relevant notice, demand or election in whole or in part without prejudice to its
future actions and rights.

 

(i) Currency. Unless otherwise expressly indicated, all dollar amounts referred
to in this Agreement and the other Exchange Documents are in United States
Dollars (“US Dollars”), and all amounts owing under this Agreement and all other
Exchange Documents shall be paid in US Dollars. All amounts denominated in other
currencies shall be converted in the US Dollar equivalent amount in accordance
with the Dollar Exchange Rate on the date of calculation. “Dollar Exchange Rate”
means, in relation to any amount of currency to be converted into US Dollars
pursuant to this Agreement, the US Dollar exchange rate as published in the Wall
Street Journal on the relevant date of calculation.

 

(j) Counterparts.  This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party; provided that a facsimile signature shall be
considered due execution and shall be binding upon the signatory thereto with
the same force and effect as if the signature were an original, not a facsimile
signature.

 

 16 

 

 

 

(k) Survival.  The representations, warranties, agreements and covenants in this
Agreement shall survive the execution and delivery hereof until the consummation
of the transactions contemplated hereby or termination or expiration of this
Agreement by its terms.

 

(l) Headings.  The headings of this Agreement are for convenience of reference
and shall not form part of, or affect the interpretation of, this Agreement.

 

(m) Severability; Usury.  If any term or provision of this Agreement is
determined by a court of competent jurisdiction to be invalid, illegal or
incapable of being enforced by any rule of law or public policy, all other terms
and provisions of this Agreement shall nevertheless remain in full force and
effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party.  Upon determination that any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to attempt to agree on a modification of this Agreement
so as to effect the original intent of the parties as closely as possible to the
fullest extent permitted by law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the greatest extent possible.
Notwithstanding anything to the contrary contained in this Agreement or any
other Exchange Document (and without implication that the following is required
or applicable), it is the intention of the parties that in no event shall
amounts and value paid by the Company, or payable to or received by the
Creditor, under the Exchange Documents, including without limitation, any
amounts that would be characterized as “interest” under applicable law, exceed
amounts permitted under any such applicable law. Accordingly, if any obligation
to pay, payment made to the Creditor, or collection by the Creditor pursuant the
Exchange Documents is finally judicially determined to be contrary to any such
applicable law, such obligation to pay, payment or collection shall be deemed to
have been made by mutual mistake of the Creditor and the Company and such amount
shall be deemed to have been adjusted with retroactive effect to the maximum
amount or rate of interest, as the case may be, as would not be so prohibited by
the applicable law. Such adjustment shall be effected, to the extent necessary,
by reducing or refunding, at the option of the Creditor, the amount of interest
or any other amounts which would constitute unlawful amounts required to be paid
or actually paid to the Creditor under the Exchange Documents. For greater
certainty, to the extent that any interest, charges, fees, expenses or other
amounts required to be paid to or received by the Creditor under any of the
Exchange Documents or related thereto are held to be within the meaning of
“interest” or another applicable term to otherwise be violative of applicable
law, such amounts shall be pro-rated over the period of time to which they
relate.

 

(n) No Third Party Beneficiaries.  This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns, and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person.

 

(o) Further Assurances.  Each party shall do and perform, or cause to be done
and performed, all such further acts and things, and shall execute and deliver
all such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.

 

(p) No Strict Construction.  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.

 

(q) Successors and Assigns.  This Agreement shall be binding upon and inure to
the benefit of the parties and their respective successors and assigns.

 

 17 

 

 

 

(r) Notices.  Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered:  (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one business day after deposit with an overnight
courier service, in each case properly addressed to the party to receive the
same.  The addresses and facsimile numbers for such communications shall be (x)
if to the Company, at the address set forth on its signature page attached
hereto or (y) if to the Creditor, at the address set forth on its signature page
attached hereto, or to such other address and/or facsimile number and/or to the
attention of such other Person as the recipient party has specified by written
notice given to each other party five (5) days prior to the effectiveness of
such change.  Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender's facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by an overnight courier service shall be rebuttable
evidence of personal service, receipt by facsimile or receipt from an overnight
courier service in accordance with clause (i), (ii) or (iii) above,
respectively.

 

[Signature Page Follows] 

 

 

 18 

 

 

IN WITNESS WHEREOF, the Creditor and the Company have caused their respective
signature page to this Exchange Agreement to be duly executed as of the date
first written above.

 

  COMPANY:           NET ELEMENT, INC.             By: /s/ Oleg Firer      
Name:  Oleg Firer       Title:    CEO             Address: 3363 NE 163rd Street,
Suite 705, North Miami Beach, Florida  

 

 

 

 

 

IN WITNESS WHEREOF, the Creditor and the Company have caused their respective
signature page to this Exchange Agreement to be duly executed as of the date
first written above.

 

  CREDITOR:           CREDE CG III, LTD.             By: /s/  Terren Peizer    
  Name:  Terren Peizer       Title:    Managing Member          

 

 

Initial Exchange Price (with respect to initial Exchange Amount):

 

$281,142.47

 

 

Number of Shares to be Issued in the Initial Exchange:

 

 

 

Address:

 

CREDE CG III, LTD.

11601 Wilshire Blvd.

Suite 950

Los Angeles, CA 90025

Attention: Michael Wachs

(310) 444-4346 Office

(310) 444-4359 fax

E-mail: michael@credecg.com

 

 

 

 

 

 

 

EXHIBIT I

 

EXCHANGE NOTICE

 

Reference is made to (a) that certain Master Exchange Agreement, dated as of May
2, 2016 (the “Exchange Agreement”), by and between the undersigned and Net
Element, Inc., a Delaware corporation (the “Company”) and (b) certain Existing
Debt (as defined in the Exchange Agreement) held by the undersigned as of the
date hereof.  In accordance with and pursuant to the Exchange Agreement, the
undersigned hereby elects to cause CREDE CG III, LTD. to exchange the Tranche in
aggregate of the Exchange Amount (as defined in the Exchange Agreement)
indicated below into shares of Common Stock, $0.001 par value per share (the
“Common Stock”), of the Company, at the Exchange Rate (as defined in the
Exchange Agreement, as of the date specified below).  Capitalized terms not
defined herein shall have the meaning as set forth in the Exchange Agreement.

 

Date of Exchange (the date that is one (1) Business Days after

the date of this Exchange Notice): ___________________

 

Exchange Price: ___________________ 

 

Aggregate Exchange Amount of the Tranche to be exchanged:   ____________ _______

 

The Company shall direct the Transfer Agent to issue the applicable number of
shares of Common Stock in accordance with the Transfer Agent Instructions from
the Company.

 

Date of this Exchange Notice:
_____________                                              

 

NET ELEMENT, INC.

 

By: ____________________

Name: _________________

Title: ___________________

 

 

ACKNOWLEDGMENT

 

CREDE CG III, LTD. hereby acknowledges this Exchange Notice and shall provide
the Company with the following information on the next Business Day after the
date hereof:

 

DTC Participant:   DTC Number:   Account Number:  

 

      ________________________

Name of Registered Holder

 

By: ______________________

Name:

Title:

Tax ID:___________________

Facsimile:__________________