Exhibit 10.02

 

EXECUTION COPY

 

ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS NOTE HAS 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 (B) AN OPINION
OF COUNSEL TO THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY
ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
(II) UNLESS SOLD OR ELIGIBLE TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER
SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD
CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTIONS 12(a) HEREOF. THE
PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE MAY BE LESS THAN THE AMOUNTS SET FORTH
ON THE FACE HEREOF PURSUANT TO SECTION 7 OF THIS NOTE.

 

WPCS International Incorporated

 

Promissory Note

 

Issuance Date:  ___________, 2014 Original Principal Amount: $        

 

FOR VALUE RECEIVED, WPCS International Incorporated, a Delaware corporation (the
“Company”), hereby promises to pay to the order of ________________________ or
registered assigns (“Holder”) the amount set out above as the Original Principal
Amount (as reduced pursuant to the terms hereof pursuant to redemption or
otherwise, the “Principal”) when due, whether upon the Maturity Date (as defined
below), acceleration, redemption or otherwise (in each case in accordance with
the terms hereof) and to pay interest (“Interest”) on any outstanding Principal
at a rate equal to the applicable Interest Rate (as defined below), from the
date set out above as the Issuance Date (the “Issuance Date”) until the same
becomes due and payable, whether upon an Interest Date (as defined below), the
Maturity Date, acceleration, redemption or otherwise (in each case in accordance
with the terms hereof). This Note (including any Note issued in exchange,
transfer or replacement hereof, this “Note”) is the Note issued pursuant to that
certain Amendment, Waiver and Exchange Agreement, dated as of ______________,
2014, by and between the Company and the Holder (the “Exchange Agreement”) on
the Closing Date (as defined in the Exchange Agreement). Certain capitalized
terms used herein are defined in Section 24.

 

1.          MATURITY DATE. On the Maturity Date, the Company shall pay to the
Holder an amount in cash representing all outstanding Principal, accrued and
unpaid Interest and accrued and unpaid Late Charges on such Principal and
Interest (collectively, the “Obligations Amount”).

 

 

 

 

2.          INTEREST; INTEREST RATE. Except as otherwise set forth herein, no
Interest on this Note shall accrue prior to the Maturity Date. From and after
the occurrence and during the continuance of any Event of Default or from and
after the Maturity Date, to the extent this Note remains outstanding, as
applicable, the interest on this Note shall commence accruing daily at an
interest rate of twenty-five percent (25%) (the “Interest Rate”) on the
Obligations Amount from time to time, shall be computed on the basis of a
360-day year comprised of twelve (12) thirty (30) day months and shall be
payable in arrears on the first Trading Day (as defined in the Second Securities
Purchase Agreement) of each Quarter (each, an “Interest Date”) and shall
compound each calendar month and shall be payable in accordance with the terms
of this Note.

 

3.          RIGHTS UPON EVENT OF DEFAULT.

 

(a)          Event of Default. Each of the following events shall constitute an
“Event of Default”:

 

(i)          the Company’s or any Subsidiary’s (as defined in the Second
Securities Purchase Agreement) failure to pay to the Holder any amount of
Principal, Interest, Late Charges or other amounts when and as due under this
Note (including, without limitation, the Company’s or any Subsidiary’s failure
to pay any redemption payments or amounts hereunder), the Exchange Agreement or
any other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated hereby and thereby, except, in the
case of a failure to pay Interest and Late Charges when and as due, in which
case only if such failure remains uncured for a period of at least five (5)
days;

 

(ii)         the occurrence of any default under, redemption of or acceleration
prior to maturity of any Indebtedness (as defined in the Second Securities
Purchase Agreement) of the Company or any of its Subsidiaries, other than any
amounts not in excess of an aggregate of $25,000; (other than a Subsidiary in
connection with the financing arrangement with Zurich American Insurance Company
described on Schedule 4(a)(viii) attached hereto (the “Zurich Matter”));

 

(iii)        bankruptcy, insolvency, reorganization or liquidation proceedings
or other proceedings for the relief of debtors shall be instituted by or against
the Company or any Subsidiary and, if instituted against the Company or any
Subsidiary by a third party, shall not be dismissed within thirty (30) days of
their initiation

 

(iv)        the commencement by the Company or any Subsidiary of a voluntary
case or proceeding under any applicable federal, state or foreign bankruptcy,
insolvency, reorganization or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to
the entry of a decree, order, judgment or other similar document in respect of
the Company or any Subsidiary in an involuntary case or proceeding under any
applicable federal, state or foreign bankruptcy, insolvency, reorganization or
other similar law or to the commencement of any bankruptcy or insolvency case or
proceeding against it, or the filing by it of a petition or answer or consent
seeking reorganization or relief under any applicable federal, state or foreign
law, or the consent by it to the filing of such petition or to the appointment
of or taking possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Subsidiary or of
any substantial part of its property, or the making by it of an assignment for
the benefit of creditors, or the execution of a composition of debts, or the
occurrence of any other similar federal, state or foreign proceeding, or the
admission by it in writing of its inability to pay its debts generally as they
become due, the taking of corporate action by the Company or any Subsidiary in
furtherance of any such action or the taking of any action by any Person to
commence a UCC foreclosure sale or any other similar action under federal, state
or foreign law;

 

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(v)         the entry by a court of (i) a decree, order, judgment or other
similar document in respect of the Company or any Subsidiary of a voluntary or
involuntary case or proceeding under any applicable federal, state or foreign
bankruptcy, insolvency, reorganization or other similar law or (ii) a decree,
order, judgment or other similar document adjudging the Company or any
Subsidiary as bankrupt or insolvent, or approving as properly filed a petition
seeking liquidation, reorganization, arrangement, adjustment or composition of
or in respect of the Company or any Subsidiary under any applicable federal,
state or foreign law or (iii) a decree, order, judgment or other similar
document appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Subsidiary or of
any substantial part of its property, or ordering the winding up or liquidation
of its affairs, and the continuance of any such decree, order, judgment or other
similar document or any such other decree, order, judgment or other similar
document unstayed and in effect for a period of thirty (30) consecutive days
(other than the Zurich Matter);

 

(vi)        a final judgment or judgments for the payment of money aggregating
in excess of $100,000 are rendered against the Company and/or any of its
Subsidiaries and which judgments are not, within forty-five (45) days after the
entry thereof, bonded, discharged or stayed pending appeal, or are not
discharged within thirty (30) days after the expiration of such stay; provided,
however, any judgment which is covered by insurance or an indemnity from a
credit worthy party shall not be included in calculating the $100,000 amount set
forth above so long as the Company provides the Holder a written statement from
such insurer or indemnity provider (which written statement shall be reasonably
satisfactory to the Holder) to the effect that such judgment is covered by
insurance or an indemnity and the Company or such Subsidiary (as the case may
be) will receive the proceeds of such insurance or indemnity within forty-five
(45) days of the issuance of such judgment;

 

(vii)       except with respect to the Zurich Matter, the Company and/or any
Subsidiary, individually or in the aggregate, either (i) fails to pay, when due,
or within any applicable grace period, any payment with respect to any
Indebtedness in excess of $100,000 due to any third party (other than, with
respect to unsecured Indebtedness only, payments contested by the Company and/or
such Subsidiary (as the case may be) in good faith by proper proceedings and
with respect to which adequate reserves have been set aside for the payment
thereof in accordance with GAAP) or is otherwise in breach or violation of any
agreement for monies owed or owing in an amount in excess of $100,000, which
breach or violation permits the other party thereto to declare a default or
otherwise accelerate amounts due thereunder, or (ii) suffer to exist any other
circumstance or event that would, with or without the passage of time or the
giving of notice, result in a default or event of default under any agreement
binding the Company or any Subsidiary, which default or event of default would
or is likely to have a material adverse effect on the business, assets,
operations (including results thereof), liabilities, properties, condition
(including financial condition) or prospects of the Company or any of its
Subsidiaries, individually or in the aggregate;

 

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(viii)      other than as specifically set forth in another clause of this
Section 3(a), the Company or any Subsidiary breaches any representation,
warranty, covenant or other term or condition of any Transaction Document,
except, in the case of a breach of a covenant or other term or condition that is
curable, only if such breach remains uncured for a period of three (3)
consecutive Trading Days; or

 

(ix)         any Material Adverse Effect (as defined in the Second Securities
Purchase Agreement) occurs.

 

(b)          Notice of an Event of Default; Redemption Right. Upon the
occurrence of an Event of Default with respect to this Note or any Other Note,
the Company shall within one (1) Business Day deliver written notice thereof via
facsimile and overnight courier (with next day delivery specified) (an “Event of
Default Notice”) to the Holder. At any time after the earlier of the Holder’s
receipt of an Event of Default Notice and the Holder becoming aware of an Event
of Default, the Holder may require the Company to redeem (regardless of whether
such Event of Default has been cured) all or any portion of this Note by
delivering written notice thereof (the “Event of Default Redemption Notice”) to
the Company, which Event of Default Redemption Notice shall indicate the portion
of this Note the Holder is electing to have the Company redeem. Each portion of
this Note subject to redemption by the Company pursuant to this Section 3(b)
shall be redeemed by the Company at a price equal to the product of (A) the
aggregate portion of the Obligations Amount to be redeemed multiplied by (B) the
Redemption Premium (the “Event of Default Redemption Price”). Redemptions
required by this Section 3(b) shall be made in accordance with the provisions of
Section 7. To the extent redemptions required by this Section 3(b) are deemed or
determined by a court of competent jurisdiction to be prepayments of this Note
by the Company, such redemptions shall be deemed to be voluntary prepayments. In
the event of the Company’s redemption of any portion of this Note under this
Section 3(b), the Holder’s damages would be uncertain and difficult to estimate
because of the parties’ inability to predict future interest rates and the
uncertainty of the availability of a suitable substitute investment opportunity
for the Holder. Accordingly, any redemption premium due under this Section 3(b)
is intended by the parties to be, and shall be deemed, a reasonable estimate of
the Holder’s actual loss of its investment opportunity and not as a penalty.

 

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4.          RIGHTS UPON FUNDAMENTAL TRANSACTION.

 

(a)          Assumption. The Company shall not enter into or be party to a
Fundamental Transaction unless (i) the Successor Entity assumes in writing all
of the obligations of the Company under this Note and the other Transaction
Documents in accordance with the provisions of this Section 4(a) pursuant to
written agreements in form and substance satisfactory to the Holder and approved
by the Holder prior to such Fundamental Transaction, including agreements to
deliver to the Holder in exchange for such Note a security of the Successor
Entity evidenced by a written instrument substantially similar in form and
substance to the Note, including, without limitation, having a principal amount
and interest rate equal to the principal amounts then outstanding and the
interest rates of the Note held by such holder and having similar ranking to the
Note, and satisfactory to the Holder and (ii) the Successor Entity (including
its Parent Entity) is a publicly traded corporation whose common stock is quoted
on or listed for trading on an Eligible Market. Upon the occurrence of any
Fundamental Transaction, the Successor Entity shall succeed to, and be
substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Note and the other Transaction Documents
referring to the “Company” shall refer instead to the Successor Entity), and may
exercise every right and power of the Company and shall assume all of the
obligations of the Company under this Note and the other Transaction Documents
with the same effect as if such Successor Entity had been named as the Company
herein. Notwithstanding the foregoing, the Holder may elect, at its sole option,
by delivery of written notice to the Company to waive this Section 4(a) to
permit the Fundamental Transaction without the assumption of this Note. The
provisions of this Section 4 shall apply similarly and equally to successive
Fundamental Transactions.

 

(b)          Notice of a Fundamental Transaction; Redemption Right. No sooner
than twenty (20) Trading Days nor later than ten (10) Trading Days prior to the
consummation of a Fundamental Transaction, but not prior to the public
announcement of such Fundamental Transaction, the Company shall deliver written
notice thereof via facsimile and overnight courier to the Holder (a “Fundamental
Transaction Notice”). At any time during the period beginning after the Holder’s
receipt of a Fundamental Transaction Notice or the Holder becoming aware of a
Fundamental Transaction if a Fundamental Transaction Notice is not delivered to
the Holder in accordance with the immediately preceding sentence (as applicable)
and ending on the later of twenty (20) Trading Days after (A) consummation of
such Fundamental Transaction or (B) the date of receipt of such Fundamental
Transaction Notice, the Holder may require the Company to redeem all or any
portion of this Note by delivering written notice thereof (“Fundamental
Transaction Redemption Notice”) to the Company, which Fundamental Transaction
Redemption Notice shall indicate the aggregate portion of the Obligations Amount
the Holder is electing to redeem. The portion of this Note subject to redemption
pursuant to this Section 4 shall be redeemed by the Company in cash at a price
equal to the product of (w) the Fundamental Transaction Redemption Premium
multiplied by (y) the aggregate portion of the Obligations Amount being redeemed
(the “Fundamental Transaction Redemption Price”). Redemptions required by this
Section 4 shall be made in accordance with the provisions of Section 7 and shall
have priority to payments to stockholders in connection with such Fundamental
Transaction. To the extent redemptions required by this Section 4(b) are deemed
or determined by a court of competent jurisdiction to be prepayments of this
Note by the Company, such redemptions shall be deemed to be voluntary
prepayments. In the event of the Company’s redemption of any portion of this
Note under this Section 4(b), the Holder’s damages would be uncertain and
difficult to estimate because of the parties’ inability to predict future
interest rates and the uncertainty of the availability of a suitable substitute
investment opportunity for the Holder. Accordingly, any redemption premium due
under this Section 4(b) is intended by the parties to be, and shall be deemed, a
reasonable estimate of the Holder’s actual loss of its investment opportunity
and not as a penalty.

 

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5.          NONCIRCUMVENTION. The Company hereby covenants and agrees that the
Company will not, by amendment of its Certificate of Incorporation (as defined
in the Second Securities Purchase Agreement), Bylaws (as defined in the Second
Securities Purchase Agreement) or through any reorganization, transfer of
assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale
of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Note, and will at all
times in good faith carry out all of the provisions of this Note and take all
action as may be required to protect the rights of the Holder of this Note.

 

6.          OPTIONAL AND MANDATORY REDEMPTIONS

 

(a)          Company Optional Redemption. The Company shall have the right at
any time to redeem all or any aggregate portion of the Obligations Amount then
remaining under this Note (an “Optional Redemption”). The portion of this Note
subject to redemption pursuant to this Section 6(a) shall be redeemed by the
Company in cash at a price equal to the product of (i) the aggregate portion of
the Obligations Amount being redeemed to, but excluding, the applicable date of
redemption and (ii) the Default Redemption Premium, if any (the “Optional
Redemption Price”). The Company may exercise its redemption right under this
Section 6(a) by delivering a written notice thereof by confirmed facsimile and
overnight courier to all, but not less than all, of the record holders of Note
(the “Optional Redemption Notice” and the date such notice is delivered to all
the record holders is referred to as the “Optional Redemption Notice Date”). The
Optional Redemption Notice shall be irrevocable. The Optional Redemption Notice
shall state (A) the date on which the Optional Redemption shall occur (the
“Optional Redemption Date”) which date shall be not less than three (3) Business
Days after the Optional Redemption Notice Date and (B) the aggregate portion of
the Obligations Amount of the Note which the Company has elected to be subject
to Optional Redemption from the Holder pursuant to this Section on the Optional
Redemption Date. Redemptions made pursuant to this Section 6(a) shall be made in
accordance with Section 7.

 

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(b)          Subsequent Placement Offerings. Following the consummation of an
Subsequent Placement Offering, the Company shall redeem 17% of the Note with the
net proceeds of such Subsequent Placement Offering. Promptly after the
consummation of an Subsequent Placement Offering, but in no event later than
three (3) Business Days thereafter, the Company shall deliver written notice
thereof via facsimile and overnight courier to the Holder (the “Subsequent
Placement Offering Redemption Notice” and the date such notice is delivered to
all the record holders is referred to as the “Subsequent Placement Offering
Redemption Notice Date”) which notice shall (A) describe the terms of such
Subsequent Placement Offering including (1) the date of consummation of such
sale, (2) the number of Common Shares sold in such Subsequent Placement Offering
and (3) the sale price per Common Share (the “Sale Price”), (B) state that the
Company shall redeem (an “Subsequent Placement Offering Redemption”) all or a
portion of this Note in accordance with this Section 6(b), (C) state the date on
which the Subsequent Placement Offering Redemption shall occur (the “Subsequent
Placement Offering Redemption Date”) which date shall not be less than two (2)
Business Days nor more than the earlier of (x) five (5) Business Days after the
Subsequent Placement Offering Redemption Notice Date and (y) three (3) Business
Days after date of consummation of the Subsequent Placement Offering and (D)
state the aggregate portion of the Obligations Amount of the Note which the
Company shall redeem pursuant to an Subsequent Placement Offering Redemption.
Each portion of this Note subject to redemption by the Company pursuant to this
Section 6(b) shall be redeemed by the Company at a price equal to the product of
(i) aggregate portion of the Obligations Amount being redeemed to, but
excluding, the date of redemption and (ii) the applicable Default Redemption
Premium, if any (the “Subsequent Placement Offering Redemption Price”).
Redemptions required by this Section 6(b) shall be made in accordance with the
provisions of Section 7.

 

7.          REDEMPTIONS.

 

(a)          Mechanics. The Company shall deliver the applicable Event of
Default Redemption Price to the Holder in cash within five (5) Business Days
after the Company’s receipt of the Holder’s Event of Default Redemption Notice.
If the Holder has submitted a Fundamental Transaction Redemption Notice in
accordance with Section 4(b), the Company shall deliver the applicable
Fundamental Transaction Redemption Price to the Holder in cash concurrently with
the consummation of such Fundamental Transaction if such notice is received
prior to the consummation of such Fundamental Transaction and within five (5)
Business Days after the Company’s receipt of such notice otherwise. The Company
shall deliver in cash (i) the applicable Optional Redemption Price to the Holder
on the Optional Redemption Date and (ii) the applicable Subsequent Placement
Offering Redemption Price to the Holder on the Subsequent Placement Offering
Redemption Date. In the event of a redemption of less than all of the
Obligations Amount of this Note, the Company shall promptly cause to be issued
and delivered to the Holder a new Note (in accordance with Section 12(d))
representing the aggregate portion of the Obligations Amount which has not been
redeemed. In the event that the Company does not pay the applicable Redemption
Price to the Holder within the time period required, at any time thereafter and
until the Company pays such unpaid Redemption Price in full, the Holder shall
have the option, in lieu of redemption, to require the Company to promptly
return to the Holder all or any portion of this Note representing the aggregate
portion of the Obligations Amount that was submitted for redemption and for
which the applicable Redemption Price (together with any Late Charges thereon)
has not been paid. Upon the Company’s receipt of such notice, (x) the applicable
Redemption Notice shall be null and void with respect to such aggregate portion
of the Obligations Amount, (y) the Company shall immediately return this Note,
or issue a new Note (in accordance with Section 12(d)), to the Holder. The
Holder’s delivery of a notice voiding a Redemption Notice and exercise of its
rights following such notice shall not affect the Company’s obligations to make
any payments of Late Charges which have accrued prior to the date of such notice
with respect to the aggregate portion of the Obligations Amount subject to such
notice.

 

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8.          VOTING RIGHTS. The Holder shall have no voting rights as the holder
of this Note, except as required by law (including, without limitation, the
Delaware General Corporation Law) and as expressly provided in this Note.

 

9.          [Intentionally Omitted]

 

10.         AMENDING THE TERMS OF THIS NOTE. The prior written consent of the
Holder shall be required for any change or amendment to this Note.

 

11.         TRANSFER. This Note may be offered, sold, assigned or transferred by
the Holder without the consent of the Company, subject only to the provisions of
Section 2(g) of the Second Securities Purchase Agreement.

 

12.         REISSUANCE OF THIS NOTE.

 

(a)          Transfer. If this Note is to be transferred, the Holder shall
surrender this Note to the Company, whereupon the Company will forthwith issue
and deliver upon the order of the Holder a new Note (in accordance with Section
12(d)), registered as the Holder may request, representing the outstanding
Principal being transferred by the Holder and, if less than the entire
outstanding Principal is being transferred, a new Note (in accordance with
Section 12(d)) to the Holder representing the outstanding Principal not being
transferred. The Holder and any assignee, by acceptance of this Note,
acknowledge and agree that, by reason of the provisions of Section 7 following
redemption of any portion of this Note, the outstanding Principal represented by
this Note may be less than the Principal stated on the face of this Note.

 

(b)          Lost, Stolen or Mutilated Note. Upon receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Note (as to which a written certification and the
indemnification contemplated below shall suffice as such evidence), and, in the
case of loss, theft or destruction, of any indemnification undertaking by the
Holder to the Company in customary and reasonable form and, in the case of
mutilation, upon surrender and cancellation of this Note, the Company shall
execute and deliver to the Holder a new Note (in accordance with Section 12(d))
representing the outstanding Principal.

 

(c)          Note Exchangeable for Different Denominations. This Note is
exchangeable, upon the surrender hereof by the Holder at the principal office of
the Company, for a new Note or Notes (in accordance with Section 12(d) and in
principal amounts of at least $1,000) representing in the aggregate the
outstanding Principal of this Note, and each such new Note will represent such
portion of such outstanding Principal as is designated by the Holder at the time
of such surrender.

 

(d)          Issuance of New Notes. Whenever the Company is required to issue a
new Note pursuant to the terms of this Note, such new Note (i) shall be of like
tenor with this Note, (ii) shall represent, as indicated on the face of such new
Note, the Principal remaining outstanding (or in the case of a new Note being
issued pursuant to Section 12(a) or Section 12(c), the Principal designated by
the Holder which, when added to the principal represented by the other new Notes
issued in connection with such issuance, does not exceed the Principal remaining
outstanding under this Note immediately prior to such issuance of new Notes),
(iii) shall have an issuance date, as indicated on the face of such new Note,
which is the same as the Issuance Date of this Note, (iv) shall have the same
rights and conditions as this Note, and (v) shall represent accrued and unpaid
Interest and Late Charges on the Principal and Interest of this Note, from the
Issuance Date.

 

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13.         REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND
INJUNCTIVE RELIEF. The remedies provided in this Note shall be cumulative and in
addition to all other remedies available under this Note and any of the other
Transaction Documents at law or in equity (including a decree of specific
performance and/or other injunctive relief), and nothing herein shall limit the
Holder’s right to pursue actual and consequential damages for any failure by the
Company to comply with the terms of this Note. The Company covenants to the
Holder that there shall be no characterization concerning this instrument other
than as expressly provided herein. Amounts set forth or provided for herein with
respect to payments and the like (and the computation thereof) shall be the
amounts to be received by the Holder and shall not, except as expressly provided
herein, be subject to any other obligation of the Company (or the performance
thereof). The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder and that the remedy at law
for any such breach may be inadequate. The Company therefore agrees that, in the
event of any such breach or threatened breach, the Holder shall be entitled, in
addition to all other available remedies, to an injunction restraining any such
breach or any such threatened breach, without the necessity of showing economic
loss and without any bond or other security being required. The Company shall
provide all information and documentation to the Holder that is requested by the
Holder to enable the Holder to confirm the Company’s compliance with the terms
and conditions of this Note.

 

14.         PAYMENT OF COLLECTION, ENFORCEMENT AND OTHER COSTS. If (a) this Note
is placed in the hands of an attorney for collection or enforcement or is
collected or enforced through any legal proceeding or the Holder otherwise takes
action to collect amounts due under this Note or to enforce the provisions of
this Note or (b) there occurs any bankruptcy, reorganization, receivership of
the Company or other proceedings affecting Company creditors’ rights and
involving a claim under this Note, then the Company shall pay the reasonable
costs incurred by the Holder for such collection, enforcement or action or in
connection with such bankruptcy, reorganization, receivership or other
proceeding, including, without limitation, attorneys’ fees and disbursements.
The Company expressly acknowledges and agrees that no amounts due under this
Note shall be affected, or limited, by the fact that the purchase price paid for
this Note was less than the original Principal amount hereof.

 

15.         CONSTRUCTION; HEADINGS. This Note shall be deemed to be jointly
drafted by the Company and the Holder and shall not be construed against any
Person as the drafter hereof. The headings of this Note are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Note. Terms used in this Note but defined in the other Transaction Documents
shall have the meanings ascribed to such terms on the Closing Date in such other
Transaction Documents unless otherwise consented to in writing by the Holder.

 

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16.         FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such power, right or privilege preclude other or further exercise thereof or of
any other right, power or privilege. No waiver shall be effective unless it is
in writing and signed by an authorized representative of the waiving party.

 

17.         DISPUTE RESOLUTION. In the case of a dispute as to the arithmetic
calculation of any Redemption Price, the Company shall submit the disputed
determinations or arithmetic calculations via facsimile within one (1) Business
Day of receipt, or deemed receipt, of the applicable Redemption Notice or other
event giving rise to such dispute, as the case may be, to the Holder. If the
Holder and the Company are unable to agree upon such calculation within one (1)
Business Day of such disputed arithmetic calculation being submitted to the
Holder, then the Company shall, within one (1) Business Day submit via facsimile
the disputed arithmetic calculation of such Redemption Price to the Company's
independent, outside accountant. The Company, at the Company's expense, shall
cause the accountant to perform the determinations or calculations and notify
the Company and the Holder of the results no later than five (5) Business Days
from the time it receives the disputed calculations. Such accountant's
calculation shall be binding upon all parties absent demonstrable error.

 

18.         NOTICES; CURRENCY; PAYMENTS.

 

(a)          Notices. Whenever notice is required to be given under this Note,
unless otherwise provided herein, such notice shall be given in accordance with
Section 9(f) of the Second Securities Purchase Agreement. The Company shall
provide the Holder with prompt written notice of all actions taken pursuant to
this Note, including in reasonable detail a description of such action and the
reason therefore. Without limiting the generality of the foregoing, the Company
will give written notice to the Holder at least twenty (20) days prior to the
date on which the Company closes its books or takes a record for determining
rights to vote with respect to any Fundamental Transaction, dissolution or
liquidation, provided that such information shall be made known to the public
prior to or in conjunction with such notice being provided to the Holder.

 

(b)          Currency. All dollar amounts referred to in this Note are in United
States Dollars (“U.S. Dollars”), and all amounts owing under this Note shall be
paid in U.S. Dollars. All amounts denominated in other currencies (if any) shall
be converted in the U.S. Dollar equivalent amount in accordance with the
Exchange Rate on the date of calculation (each, a “US Dollar Equivalent”).
“Exchange Rate” means, in relation to any amount of currency to be converted
into U.S. Dollars pursuant to this Note, the U.S. Dollar exchange rate as
published in the Wall Street Journal on the relevant date of calculation (it
being understood and agreed that where an amount is calculated with reference
to, or over, a period of time, the date of calculation shall be the final date
of such period of time).

 

10

 

 

(c)          Payments. Whenever any payment of cash is to be made by the Company
to any Person pursuant to this Note, unless otherwise expressly set forth
herein, such payment shall be made in lawful money of the United States of
America by a certified check drawn on the account of the Company and sent via
overnight courier service to such Person at such address as previously provided
to the Company in writing (which address, in the case of each of the Buyers,
shall initially be as set forth on the Schedule of Buyers attached to the Second
Securities Purchase Agreement), provided that the Holder may elect to receive a
payment of cash via wire transfer of immediately available funds by providing
the Company with prior written notice setting out such request and the Holder’s
wire transfer instructions. Whenever any amount expressed to be due by the terms
of this Note is due on any day which is not a Business Day, the same shall
instead be due on the next succeeding day which is a Business Day. Any amount of
Principal or other amounts due under the Transaction Documents which is not paid
when due shall result in a late charge being incurred and payable by the Company
in an amount equal to interest on such amount at the rate of fifteen percent
(15%) per annum from the date such amount was due until the same is paid in full
(“Late Charge”).

 

19.         CANCELLATION. After all Principal, accrued Interest, Late Charges
and other amounts at any time owed on this Note have been paid in full, this
Note shall automatically be deemed canceled, shall be surrendered to the Company
for cancellation and shall not be reissued.

 

20.         WAIVER OF NOTICE. To the extent permitted by law, the Company hereby
irrevocably waives demand, notice, presentment, protest and all other demands
and notices in connection with the delivery, acceptance, performance, default or
enforcement of this Note and the Securities Purchase Agreement.

 

21.         GOVERNING LAW. This Note shall be construed and enforced in
accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Note shall be governed by, the internal
laws of the State of Illinois, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of Illinois or any other
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of Illinois. The Company hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in Chicago,
Illinois, 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. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. In the event that any provision
of this Note is invalid or unenforceable under any applicable statute or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute or
rule of law. Any such provision which may prove invalid or unenforceable under
any law shall not affect the validity or enforceability of any other provision
of this Note. Nothing contained herein shall be deemed or operate to preclude
the Holder from bringing suit or taking other legal action against the Company
in any other jurisdiction to collect on the Company’s obligations to the Holder,
to realize on any collateral or any other security for such obligations, or to
enforce a judgment or other court ruling in favor of the Holder. THE COMPANY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH
OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

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22.         JUDGMENT CURRENCY.

 

(a)          If for the purpose of obtaining or enforcing judgment against the
Company in any court in any jurisdiction it becomes necessary to convert into
any other currency (such other currency being hereinafter in this Section 22
referred to as the “Judgment Currency”) an amount due in U.S. dollars under this
Note, the conversion shall be made at the Exchange Rate prevailing on the
Trading Day immediately preceding:

 

(i)          the date actual payment of the amount due, in the case of any
proceeding in the courts of Illinois or in the courts of any other jurisdiction
that will give effect to such conversion being made on such date: or

 

(ii)         the date on which the foreign court determines, in the case of any
proceeding in the courts of any other jurisdiction (the date as of which such
conversion is made pursuant to this Section 22(a)(ii) being hereinafter referred
to as the “Judgment Conversion Date”).

 

(b)          If in the case of any proceeding in the court of any jurisdiction
referred to in Section 22(a)(ii) above, there is a change in the Exchange Rate
prevailing between the Judgment Conversion Date and the date of actual payment
of the amount due, the applicable party shall pay such adjusted amount as may be
necessary to ensure that the amount paid in the Judgment Currency, when
converted at the Exchange Rate prevailing on the date of payment, will produce
the amount of US dollars which could have been purchased with the amount of
Judgment Currency stipulated in the judgment or judicial order at the Exchange
Rate prevailing on the Judgment Conversion Date.

 

(c)          Any amount due from the Company under this provision shall be due
as a separate debt and shall not be affected by judgment being obtained for any
other amounts due under or in respect of this Note.

 

23.         MAXIMUM PAYMENTS. Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law. In the event that the rate of
interest required to be paid or other charges hereunder exceed the maximum
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Company to the Holder and thus refunded to the
Company.

 

24.         CERTAIN DEFINITIONS. For purposes of this Note, the following terms
shall have the following meanings:

 

12

 

 

(a)          “Bankruptcy Proceeding” means, with respect to any Person, (i) the
occurrence of a voluntary case or proceeding under any applicable federal, state
or foreign bankruptcy, insolvency, reorganization or other similar law or of any
other case or proceeding to be adjudicated a bankrupt or insolvent, or the
consent by it to the entry of a decree, order, judgment or other similar
document in respect of such Person in an involuntary case or proceeding under
any applicable federal, state or foreign bankruptcy, insolvency, reorganization
or other similar law or to the commencement of any bankruptcy or insolvency case
or proceeding against it, or the filing by it of a petition or answer or consent
seeking reorganization or relief under any applicable federal, state or foreign
law, or the consent by it to the filing of such petition or to the appointment
of or taking possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of such Person or of any substantial part
of its property, or the making by it of an assignment for the benefit of
creditors, or the execution of a composition of debts, or the occurrence of any
other similar federal, state or foreign proceeding, or the admission by it in
writing of its inability to pay its debts generally as they become due, the
taking of corporate action by such Person in furtherance of any such action or
the taking of any action by any Person to commence a UCC foreclosure sale or any
other similar action under federal, state or foreign law or (ii) the entry by a
court of (A) a decree, order, judgment or other similar document in respect of
such Person of a voluntary or involuntary case or proceeding under any
applicable federal, state or foreign bankruptcy, insolvency, reorganization or
other similar law or (B) a decree, order, judgment or other similar document
adjudging such Person as bankrupt or insolvent, or approving as properly filed a
petition seeking liquidation, reorganization, arrangement, adjustment or
composition of or in respect of such Person under any applicable federal, state
or foreign law or (C) a decree, order, judgment or other similar document
appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or
other similar official of such Person or of any substantial part of its
property, or ordering the winding up or liquidation of its affairs, and the
continuance of any such decree, order, judgment or other similar document or any
such other decree, order, judgment or other similar document unstayed and in
effect for a period of thirty (30) consecutive days.

 

(b)          “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.

 

(c)          “Default Redemption Premium” means, as of any date of determination
(i) if such date of determination occurs after October 5, 2015, 125% or (ii) if
such date of determination occurs on or prior to October 5, 2015, 100%.

 

(d)           “Fundamental Transaction” means that (i) the Company or any of its
Subsidiaries shall, directly or indirectly, in one or more related transactions,
(1) consolidate or merge with or into (whether or not the Company or any of its
Subsidiaries is the surviving corporation) any other Person, or (2) sell, lease,
license, assign, transfer, convey or otherwise dispose of all or substantially
all of its respective properties or assets to any other Person, or (3) allow any
other Person to make a purchase, tender or exchange offer that is accepted by
the holders of more than 50% of the outstanding shares of Voting Stock of the
Company (not including any shares of Voting Stock of the Company held by the
Person or Persons making or party to, or associated or affiliated with the
Persons making or party to, such purchase, tender or exchange offer), or (4)
consummate a stock or share purchase agreement or other business combination
(including, without limitation, a reorganization, recapitalization, spin-off or
scheme of arrangement) with any other Person whereby such other Person acquires
more than 50% of the outstanding shares of Voting Stock of the Company (not
including any shares of Voting Stock of the Company held by the other Person or
other Persons making or party to, or associated or affiliated with the other
Persons making or party to, such stock or share purchase agreement or other
business combination), or (5) reorganize, recapitalize or reclassify the Common
Stock, or (ii) any “person” or “group” (as these terms are used for purposes of
Sections 13(d) and 14(d) of the 1934 Act and the rules and regulations
promulgated thereunder) is or shall become the “beneficial owner” (as defined in
Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% of the aggregate
ordinary voting power represented by issued and outstanding Voting Stock of the
Company.

 

13

 

 

(e)          “Fundamental Transaction Redemption Premium” means 125%.

 

(f)          “GAAP” means United States generally accepted accounting
principles, consistently applied.

 

(g)          “Maturity Date” shall mean September 30, 2015; provided, however,
the Maturity Date may be extended at the option of the Holder in the event that,
and for so long as, an Event of Default shall have occurred and be continuing or
any event shall have occurred and be continuing that with the passage of time
and the failure to cure would result in an Event of Default.

 

(h)          “Parent Entity” of a Person means an entity that, directly or
indirectly, controls the applicable Person and whose common stock or equivalent
equity security is quoted or listed on an Eligible Market, or, if there is more
than one such Person or Parent Entity, the Person or Parent Entity with the
largest public market capitalization as of the date of consummation of the
Fundamental Transaction.

 

(i)          “Person” means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization, any other entity or a government or any department or agency
thereof.

 

(j)          “Quarter” means each of: (i) the period beginning on and including
February 1 and ending on and including April 30; (ii) the period beginning on
and including May 1 and ending on and including July 31; (iii) the period
beginning on and including August 1 and ending on and including October 31; and
(iv) the period beginning on and including November 1 and ending on and
including January 31.

 

(k)          “Redemption Notices” means, collectively, Event of Default
Redemption Notices, the Optional Redemption Notice, the Subsequent Placement
Offering Redemption Notice and the Fundamental Transaction Redemption Notices,
and each of the foregoing, individually, a “Redemption Notice.”

 

(l)          “Redemption Premium” means (i) in the case of the Events of Default
described in Section 3(a) (other than Sections 3(a)(iii) through 3(a)(v)), 125%
or (ii) in the case of the Events of Default described in Sections 3(a)(iii)
through 3(a)(v), 100%.

 

(m)          “Redemption Prices” means, collectively, Event of Default
Redemption Prices, the Fundamental Transaction Redemption Prices, the Optional
Redemption Prices and the Subsequent Placement Offering Redemption Prices, and
each of the foregoing, individually, a “Redemption Price.”

 

14

 

 

(n)          “Second Securities Purchase Agreement” shall have the meaning as
set forth in the Exchange Agreement.

 

(o)          “Subsequent Placement Offering” means the sale, lease, conveyance
or other disposition, directly or indirectly, by the Company of any securities
of the Company or any of its Subsidiaries in a Subsequent Placement (as defined
in the Second Securities Purchase Agreement) (other than (i) account receivables
facilities and credit lines that, in either case, do not include the issuance of
any common equity, Convertible Securities (as defined in the Second Securities
Purchase Agreement), Options (as defined in the Second Securities Purchase
Agreement) or are not otherwise equity-linked to any securities of the Company
or any of its Subsidiaries and (ii) Excluded Securities (as defined in the
Second Securities Purchase Agreement).

 

(p)          “Subsidiaries” shall have the meaning as set forth in the Second
Securities Purchase Agreement.

 

(q)          “Successor Entity” means the Person (or, if so elected by the
Holder, the Parent Entity) formed by, resulting from or surviving any
Fundamental Transaction or the Person (or, if so elected by the Holder, the
Parent Entity) with which such Fundamental Transaction shall have been entered
into.

 

(r)           “Voting Stock” of a Person means capital stock of such Person of
the class or classes pursuant to which the holders thereof have the general
voting power to elect, or the general power to appoint, at least a majority of
the board of directors, managers, trustees or other similar governing body of
such Person (irrespective of whether or not at the time capital stock of any
other class or classes shall have or might have voting power by reason of the
happening of any contingency).

 

25.         DISCLOSURE. Upon receipt or delivery by the Company of any notice in
accordance with the terms of this Note, unless the Company has in good faith
determined that the matters relating to such notice do not constitute material,
non-public information relating to the Company or any of its Subsidiaries, the
Company shall within one (1) Business Day after any such receipt or delivery
publicly disclose such material, non-public information on a Current Report on
Form 8-K or otherwise. In the event that the Company believes that a notice
contains material, non-public information relating to the Company or any of its
Subsidiaries, the Company so shall indicate to such Holder contemporaneously
with delivery of such notice, and in the absence of any such indication, the
Holder shall be allowed to presume that all matters relating to such notice do
not constitute material, non-public information relating to the Company or its
Subsidiaries. Nothing contained in this Section 25 shall limit any obligations
of the Company, or any rights of the Holder, under Section 4(i) of the Second
Securities Purchase Agreement.

 

[signature page follows]

 

15

 

 

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed as of
the Issuance Date set out above.

 

  WPCS International Incorporated       By:       Name: Sebastian Giordano    
Title:  Chief Executive Officer

 

 

 

 

SCHEDULE 4(A)(VIII)

 

Description of Zurich Matter

 

On July 12, 2012, the Company executed the Surety Financing and Confession of
Judgment Agreement (the Zurich Agreement) with Zurich American Insurance Company
(Zurich). The Company is not in compliance with the terms of the Zurich
Agreement. Zurich advanced the Company $793,927 for the payment of labor and
labor-related benefits to assist in completing the project contract with the
Camden County Improvement Authority for work at the Cooper Medical Center in New
Jersey (the Owner or Cooper Project). The Cooper Project is a $15.1 million
project that was completed by WPCS International-Trenton, Inc. Zurich and its
affiliate Fidelity and Deposit Company of Maryland (F&D), as surety, have issued
certain performance and payment bonds on behalf of the Owner in regard to the
Company’s work on this project. The Company was to repay Zurich the financial
advances pursuant to the following repayment schedule: (1) $397,000 on or about
August 3, 2012; and (2) the balance of $396,927 on or about September 7, 2012.
As a condition precedent to the financial advance, the Company executed two
letters which are held by Zurich: (1) a letter to the Owner voluntarily
terminating its contract for reason of the Company’s default and assigning the
contract to Zurich, and (2) a letter of direction to the Owner. The letters may
be forwarded to the Owner in an Event of Default. An Event of Default under the
Zurich Agreement includes: (a) the Company’s failure to make repayments to
Zurich in accordance with the repayment schedule; (b) Zurich, at the Company’s
request, advances more than $888,000; (c) Zurich pays any of the Company’s
vendors, subcontractors, suppliers or material men pursuant to Zurich’s
obligations under its payment bond or any other reason; or (d) the Company uses
any of the funds advanced by Zurich for any reason other than the payment of
labor and labor benefits incurred in regard to the Cooper Project. The Company
is in default under the Zurich Agreement as it has not repaid Zurich the
$793,927. As a result, a letter of direction was sent to the Owner, requesting
that all current and future amounts to be paid on the contract be assigned and
paid to Zurich directly.