Blueprint





 







Exhibit 10.2

 



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

 


 

 


 

 




Principal Amount:
US$112,500.00            




Issue Date: November 20, 2017





 



Purchase Price: US$112,500.00

 


CONVERTIBLE PROMISSORY NOTE

 


FOR VALUE RECEIVED, SINCERITY APPLIED MATERIALS HOLDINGS
CORP., a Nevada corporation (hereinafter called the
“Borrower”), hereby promises to pay to the order of
AUCTUS FUND, LLC, a Delaware
limited liability company, or registered assigns (the
“Holder”) the sum of US$112,500.00 together with any
interest as set forth herein, on August 20, 2018 (the
“Maturity Date”), and to pay interest on the unpaid
principal balance hereof at the rate of twelve percent (12%) (the
“Interest Rate”) per annum from the date hereof (the
“Issue Date”) until the same becomes due and payable,
whether at maturity or upon acceleration or by prepayment or
otherwise. This Note may not be prepaid in whole or in part except
as otherwise explicitly set forth herein with the written consent
of the Holder which may be withheld for any reason or for no
reason. Any amount of principal or interest on this Note which is
not paid when due shall bear interest at the rate of the lesser of
(i) twenty four percent (24%) per annum or (ii) the maximum amount
allowed by law from the due date thereof until the same is paid
(the “Default Interest”). Interest shall commence accruing on the date that
the Note is fully paid and shall be computed on the basis of a
365-day year and the actual number of days elapsed. All
payments due hereunder (to the extent not converted into common
stock, $0.001 par value per share (the “Common Stock”)
in accordance with the terms hereof) shall be made in lawful money
of the United States of America. All payments shall be made at such
address as the Holder shall hereafter give to the Borrower by
written notice made in accordance with the provisions of this Note.
Whenever any amount expressed to be due by the terms of this Note
is due on any day which is not a business day, the same shall
instead be due on the next succeeding day which is a business day
and, in the case of any interest payment date which is not the date
on which this Note is paid in full, the extension of the due date
thereof shall not be taken into account for purposes of determining
the amount of interest due on such date. As used in this Note, the
term “business day” shall mean any day other than a
Saturday, Sunday or a day on which commercial banks in the city of
New York, New York are authorized or required by law or executive
order to remain closed. Each capitalized term used herein, and not
otherwise defined, shall have the meaning ascribed thereto in that
certain Securities Purchase Agreement dated the date hereof,
pursuant to which this Note was originally issued (the
“Purchase Agreement”).

 




 








 






 


This
Note is free from all taxes, liens, claims and encumbrances with
respect to the issue thereof and shall not be subject to preemptive
rights or other similar rights of shareholders of the Borrower and
will not impose personal liability upon the holder
thereof.


 


The
following terms shall apply to this Note:


 



ARTICLE
I.        


CONVERSION
RIGHTS






 

1.1 Conversion Right. The Holder
shall have the right from time to time, and at any time following
the Issue Date and ending on the later of (i) the Maturity Date and
(ii) the date of payment of the Default Amount (as defined in
Article III) pursuant to Section 1.6(a) or Article III, each in
respect of the remaining outstanding principal amount of this Note
to convert all or any part of the outstanding and unpaid principal
amount of this Note into fully paid and non-assessable shares of
Common Stock, as such Common Stock exists on the Issue Date, or any
shares of capital stock or other securities of the Borrower into
which such Common Stock shall hereafter be changed or reclassified
at the Conversion Price (as defined below) determined as provided
herein (a “Conversion”); provided, however, that in no event shall
the Holder be entitled to convert any portion of this Note in
excess of that portion of this Note upon conversion of which the
sum of (1) the number of shares of Common Stock beneficially owned
by the Holder and its affiliates (other than shares of Common Stock
which may be deemed beneficially owned through the ownership of the
unconverted portion of the Notes or the unexercised or unconverted
portion of any other security of the Borrower subject to a
limitation on conversion or exercise analogous to the limitations
contained herein) and (2) the number of shares of Common Stock
issuable upon the conversion of the portion of this Note with
respect to which the determination of this proviso is being made,
would result in beneficial ownership by the Holder and its
affiliates of more than 4.99% of the outstanding shares of Common
Stock. For purposes of the proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), and Regulations 13D-G
thereunder, except as otherwise provided in clause (1) of such
proviso, provided,
further,
however, that the
limitations on conversion may be waived by the Holder (up to a
maximum of 9.99%) upon, at the election of the Holder, not less
than 61 days’ prior notice to the Borrower, and the
provisions of the conversion limitation shall continue to apply
until such 61st day (or such later date, as determined by the
Holder, as may be specified in such notice of waiver). The number
of shares of Common Stock to be issued upon each conversion of this
Note shall be determined by dividing the Conversion Amount (as
defined below) by the applicable Conversion Price then in effect on
the date specified in the notice of conversion, in the form
attached hereto as Exhibit A (the “Notice of
Conversion”), delivered to the Borrower by the Holder in
accordance with Section 1.4 below; provided that the Notice of
Conversion is submitted by facsimile or e-mail (or by other means
resulting in, or reasonably expected to result in, notice) to the
Borrower before 6:00 p.m., New York, New York time on such
conversion date (the “Conversion Date”). The term
“Conversion Amount” means, with respect to any
conversion of this Note, the sum of (1) the principal amount of
this Note to be converted in such conversion plus (2) at the Holder’s
option, accrued and unpaid interest, if any, on such principal
amount at the interest rates provided in this Note to the
Conversion Date, provided however, that the Borrower shall have the
right to pay any or all interest in cash plus (3) at the Holder’s
option, Default Interest, if any, on the amounts referred to in the
immediately preceding clauses (1) and/or (2) plus (4) at the Holder’s
option, any amounts owed to the Holder pursuant to Sections 1.3 and
1.4(g) hereof.


 




 

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1.2 Conversion Price.


 


Calculation of Conversion
Price. Subject to the adjustments described herein,
the conversion price (the
“Conversion Price”) shall equal the lesser of (i) the
lowest Trading Price (as defined below) during the previous
twenty-five (25) Trading Day period ending on the latest complete
Trading Day prior to the date of this Note and (ii) the Variable
Conversion Price (as defined herein) (subject to equitable
adjustments for stock splits, stock dividends or rights offerings
by the Borrower relating to the Borrower’s securities or the
securities of any subsidiary of the Borrower, combinations,
recapitalization, reclassifications, extraordinary distributions
and similar events). The “Variable Conversion
Price” shall mean 50%
multiplied by the Market Price (as defined herein) (representing a
discount rate of 50%). “Market
Price” means the lowest Trading Price for the Common Stock
during the twenty-five (25) Trading Day period ending on the latest
complete Trading Day prior to the Conversion Date. “Trading
Price” means, for any security as of any date, the lesser of:
(i) the lowest trade price on the OTC Pink, OTCQB or applicable
trading market as reported by a reliable reporting service
(“Reporting Service”) designated by the Holder or, if
the OTC Pink is not the principal trading market for such security,
the trading price of such security on the principal securities
exchange or trading market where such security is listed or traded
or, if no trading price of such security is available in any of the
foregoing manners, the average of the trading prices of any market
makers for such security that are listed in the “pink
sheets” by the National Quotation Bureau, Inc., or (ii) the
closing bid price on the OTC Pink, OTCQB or applicable trading
market as reported by a Reporting Service designated by the Holder
or, if the OTC Pink is not the principal trading market for such
security, the closing bid price of such security on the principal
securities exchange or trading market where such security is listed
or traded or, if no closing bid price of such security is available
in any of the foregoing manners, the average of the closing bid
prices of any market makers for such security that are listed in
the “pink sheets” by the National Quotation Bureau,
Inc. To the
extent the Conversion Price of the Borrower’s Common Stock
closes below the par value per share, the Borrower will take all
steps necessary to solicit the consent of the stockholders to
reduce the par value to the lowest value possible under law. The
Borrower agrees to honor all conversions submitted pending this
adjustment. Furthermore, the Conversion Price may be adjusted downward if,
within three (3) business days of the transmittal of the Notice of
Conversion to the Borrower, the Common Stock has a closing bid
which is 5% or lower than that set forth in the Notice of
Conversion. If the shares of the Borrower’s Common Stock have
not been delivered within three (3) business days to the Borrower,
the Notice of Conversion may be rescinded. At any time after the
Closing Date, if in the case that the Borrower’s Common Stock
is not deliverable by DWAC (including if the Borrower’s
transfer agent has a policy prohibiting or limiting delivery of
shares of the Borrower’s Common Stock specified in a Notice
of Conversion), an additional 10% discount will apply for all
future conversions under all Notes. If in the case that the
Borrower’s Common Stock is “chilled” for deposit
into the DTC system and only eligible for clearing deposit, an
additional 15% discount shall apply for all future conversions
under all Notes while the “chill” is in effect. 
If in the case of both of the above, an additional cumulative 25%
discount shall apply. Additionally, if the Company ceases to be a
reporting company pursuant to the 1934 Act or if the Note cannot be
converted into free trading shares after one hundred eighty-one
(181) days from the Issue Date, an additional 30% discount will be
attributed to the Conversion Price. If the Trading Price cannot be
calculated for such security on such date in the manner provided
above, the Trading Price shall be the fair market value as mutually
determined by the Borrower and the holders of a majority in
interest of the Notes being converted for which the calculation of
the Trading Price is required in order to determine the Conversion
Price of such Notes. “Trading Day” shall mean any day
on which the Common Stock is tradable for any period on the OTC
Pink, OTCQB or on the principal securities exchange or other
securities market on which the Common Stock is then being
traded. The Borrower shall be responsible for the fees of
its transfer agent and all DTC fees associated with any such
issuance. Holder shall be entitled to deduct $500.00 from the
conversion amount in each Notice of Conversion to cover
Holder’s deposit fees associated with each Notice of
Conversion. If at any time the Conversion Price as determined
hereunder for any conversion would be less than the par value of
the Common Stock, then at the sole discretion of the Holder, the
Conversion Price hereunder may equal such par value for such
conversion and the Conversion Amount for such conversion may be
increased to include Additional Principal, where “Additional
Principal” means such additional amount to be added to the
Conversion Amount to the extent necessary to cause the number of
conversion shares issuable upon such conversion to equal the same
number of conversion shares as would have been issued had the
Conversion Price not been adjusted by the Holder to the par value
price.

 




 

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While
this Note is outstanding, each time any 3rd party has the right
to convert monies owed to that 3rd party (or receive
shares pursuant to a settlement or otherwise), including but not
limited to under Section 3(a)(9) and Section 3(a)(10), at a
discount to market greater than the Conversion Price in effect at
that time (prior to all other applicable adjustments in the Note),
then the H1older, in Holder’s sole discretion, may utilize
such greater discount percentage (prior to all applicable
adjustments in this Note) until this Note is no longer outstanding.
While this Note is outstanding, each time any 3rd party has a look
back period greater than the look back period in effect under the
Note at that time, including but not limited to under Section
3(a)(9) and Section 3(a)(10), then the Holder, in Holder’s
sole discretion, may utilize such greater number of look back days
until this Note is no longer outstanding. The Borrower shall give
written notice to the Holder within one (1) business day of
becoming aware of any event that could permit the Holder to make
any adjustment described in the two immediately preceding
sentences.

 

(a) Conversion Price During Major
Announcements. Notwithstanding anything contained in Section
1.2(a) to the contrary, in the event the Borrower (i) makes a
public announcement that it intends to consolidate or merge with
any other corporation (other than a merger in which the Borrower is
the surviving or continuing corporation and its capital stock is
unchanged) or sell or transfer all or substantially all of the
assets of the Borrower or (ii) any person, group or entity
(including the Borrower) publicly announces a tender offer to
purchase 50% or more of the Borrower’s Common Stock (or any
other takeover scheme) (the date of the announcement referred to in
clause (i) or (ii) is hereinafter referred to as the
“Announcement Date”), then the Conversion Price shall,
effective upon the Announcement Date and continuing through the
Adjusted Conversion Price Termination Date (as defined below), be
equal to the lower of (x) the Conversion Price which would have
been applicable for a Conversion occurring on the Announcement Date
and (y) the Conversion Price that would otherwise be in effect.
From and after the Adjusted Conversion Price Termination Date, the
Conversion Price shall be determined as set forth in this Section
1.2(a). For purposes hereof, “Adjusted Conversion Price
Termination Date” shall mean, with respect to any proposed
transaction or tender offer (or takeover scheme) for which a public
announcement as contemplated by this Section 1.2(b) has been made,
the date upon which the Borrower (in the case of clause (i) above)
or the person, group or entity (in the case of clause (ii) above)
consummates or publicly announces the termination or abandonment of
the proposed transaction or tender offer (or takeover scheme) which
caused this Section 1.2(b) to become operative.


 

(b) Pro Rata Conversion; Disputes.
In the event of a dispute as to the number of shares of Common
Stock issuable to the Holder in connection with a conversion of
this Note, the Borrower shall issue to the Holder the number of
shares of Common Stock not in dispute and resolve such dispute in
accordance with Section 4.13.


 

1.3 Authorized Shares. The Borrower
covenants that during the period the conversion right exists, the
Borrower will reserve from its authorized and unissued Common Stock
a sufficient number of shares, free from preemptive rights, to
provide for the issuance of Common Stock upon the full conversion
of this Note issued pursuant to the Purchase Agreement. The
Borrower is required at all times to have authorized and reserved
10 times the number of shares that is actually issuable upon full
conversion of the Note (based on the Conversion Price of the Notes
in effect from time to time) (the “Reserved Amount”).
The Reserved Amount shall be increased from time to time in
accordance with the Borrower’s obligations pursuant to
Section 3(d) of the Purchase Agreement. The Borrower represents
that upon issuance, such shares will be duly and validly issued,
fully paid and non-assessable. In addition, if the Borrower shall
issue any securities or make any change to its capital structure
which would change the number of shares of Common Stock into which
the Notes shall be convertible at the then current Conversion
Price, the Borrower shall at the same time make proper provision so
that thereafter there shall be a sufficient number of shares of
Common Stock authorized and reserved, free from preemptive rights,
for conversion of the outstanding Notes. The Borrower (i)
acknowledges that it has irrevocably instructed its transfer agent
to issue certificates for the Common Stock issuable upon conversion
of this Note, and (ii) agrees that its issuance of this Note
shall constitute full authority to its officers and agents who are
charged with the duty of executing stock certificates to execute
and issue the necessary certificates for shares of Common Stock in
accordance with the terms and conditions of this Note.
Notwithstanding the foregoing, in no event shall the Reserved
Amount be lower than the initial Reserved Amount, regardless of any
prior conversions.


 




 

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If, at any time the Borrower does not maintain or
replenish the Reserved Amount within three (3) business days of the
request of the Holder, the principal amount of the Note
shall increase by Five Thousand and No/100 United States Dollars
($5,000) (under Holder’s and Borrower’s expectation
that any principal amount increase will tack back to the Issue
Date) per
occurrence.


 

1.4 Method of
Conversion.


 

(a) Mechanics of Conversion.
Subject to Section 1.1, this Note may be converted by the Holder in
whole or in part at any time from time to time after the Issue
Date, by (A) submitting to the Borrower a Notice of Conversion
(by facsimile, e-mail or other reasonable means of communication
dispatched on the Conversion Date prior to 5:00 p.m., New York, New
York time) and (B) subject to Section 1.4(b), surrendering
this Note at the principal office of the Borrower.


 

(b) Surrender of Note Upon
Conversion. Notwithstanding anything to the contrary set
forth herein, upon conversion of this Note in accordance with the
terms hereof, the Holder shall not be required to physically
surrender this Note to the Borrower unless the entire unpaid
principal amount of this Note is so converted. The Holder and the
Borrower shall maintain records showing the principal amount so
converted and the dates of such conversions or shall use such other
method, reasonably satisfactory to the Holder and the Borrower, so
as not to require physical surrender of this Note upon each such
conversion. In the event of any dispute or discrepancy, such
records of the Borrower shall, prima facie, be controlling and
determinative in the absence of manifest error. Notwithstanding the
foregoing, if any portion of this Note is converted as aforesaid,
the Holder may not transfer this Note unless the Holder first
physically surrenders this Note to the Borrower, whereupon the
Borrower will forthwith issue and deliver upon the order of the
Holder a new Note of like tenor, registered as the Holder (upon
payment by the Holder of any applicable transfer taxes) may
request, representing in the aggregate the remaining unpaid
principal amount of this Note. The Holder and any assignee, by
acceptance of this Note, acknowledge and agree that, by reason of
the provisions of this paragraph, following conversion of a portion
of this Note, the unpaid and unconverted principal amount of this
Note represented by this Note may be less than the amount stated on
the face hereof.


 

(c) Payment of Taxes. The Borrower
shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issue and delivery of
shares of Common Stock or other securities or property on
conversion of this Note in a name other than that of the Holder (or
in street name), and the Borrower shall not be required to issue or
deliver any such shares or other securities or property unless and
until the person or persons (other than the Holder or the custodian
in whose street name such shares are to be held for the
Holder’s account) requesting the issuance thereof shall have
paid to the Borrower the amount of any such tax or shall have
established to the satisfaction of the Borrower that such tax has
been paid.


 

(d) Delivery of Common Stock Upon
Conversion. Upon receipt by the
Borrower from the Holder of a facsimile transmission or e-mail (or
other reasonable means of communication) of a Notice of Conversion
meeting the requirements for conversion as provided in this Section
1.4, the Borrower shall issue and deliver or cause to be issued and
delivered to or upon the order of the Holder certificates for the
Common Stock issuable upon such conversion within three (3)
business days after such receipt (the “Deadline”) (and,
solely in the case of conversion of the entire unpaid principal
amount hereof, surrender of this Note) in accordance with the terms
hereof and the Purchase Agreement.


 




 

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(e) Obligation of Borrower to Deliver
Common Stock. Upon receipt by the Borrower of a Notice of
Conversion, the Holder shall be deemed to be the holder of record
of the Common Stock issuable upon such conversion, the outstanding
principal amount and the amount of accrued and unpaid interest on
this Note shall be reduced to reflect such conversion, and, unless
the Borrower defaults on its obligations under this Article I, all
rights with respect to the portion of this Note being so converted
shall forthwith terminate except the right to receive the Common
Stock or other securities, cash or other assets, as herein
provided, on such conversion. If the Holder shall have given a
Notice of Conversion as provided herein, the Borrower’s
obligation to issue and deliver the certificates for Common Stock
shall be absolute and unconditional, irrespective of the absence of
any action by the Holder to enforce the same, any waiver or consent
with respect to any provision thereof, the recovery of any judgment
against any person or any action to enforce the same, any failure
or delay in the enforcement of any other obligation of the Borrower
to the holder of record, or any setoff, counterclaim, recoupment,
limitation or termination, or any breach or alleged breach by the
Holder of any obligation to the Borrower, and irrespective of any
other circumstance which might otherwise limit such obligation of
the Borrower to the Holder in connection with such conversion. The
Conversion Date specified in the Notice of Conversion shall be the
Conversion Date so long as the Notice of Conversion is received by
the Borrower before 5:00 p.m., New York, New York time, on such
date.


 

(f) Delivery of Common Stock by Electronic
Transfer. In lieu of delivering physical certificates
representing the Common Stock issuable upon conversion, provided
the Borrower is participating in the Depository Trust Company
(“DTC”) Fast Automated Securities Transfer
(“FAST”) program, upon request of the Holder and its
compliance with the provisions contained in Section 1.1 and in this
Section 1.4, the Borrower shall use its commercially reasonable
best efforts to cause its transfer agent to electronically transmit
the Common Stock issuable upon conversion to the Holder by
crediting the account of Holder’s Prime Broker with DTC
through its Deposit Withdrawal At Custodian (“DWAC”)
system.


 

(g) DTC Eligibility & Market
Loss. If the Borrower fails to maintain its status as
“DTC Eligible” for any reason, or, if the Conversion
Price is less than $0.01 at any time while this Note is
outstanding, the principal amount of the Note shall increase by
Fifteen Thousand and No/100 United States Dollars ($15,000) (under
Holder’s and Borrower’s expectation that any principal
amount increase will tack back to the Issue Date). In addition, the
Variable Conversion Price shall be redefined to mean forty percent
(40%) multiplied by the Market Price, subject to adjustment as
provided in this Note.


 

(h) Failure to Deliver Common Stock Prior
to Delivery Deadline. Without
in any way limiting the Holder’s right to pursue other
remedies, including actual damages and/or equitable relief, the
parties agree that if delivery of the Common Stock issuable upon
conversion of this Note is not delivered by the Deadline (other
than a failure due to the circumstances described in Section 1.3
above, which failure shall be governed by such Section) the
Borrower shall pay to the Holder $2,000 per day in cash, for each
day beyond the Deadline that the Borrower fails to deliver such
Common Stock until the Borrower issues and delivers a
certificate to the Holder or credit the Holder's balance account
with OTC for the number of shares of Common Stock to which the
Holder is entitled upon such Holder's conversion of any Conversion
Amount (under Holder's and Borrower's expectation that any damages
will tack back to the Issue Date)..
Such cash amount shall be paid to Holder by the fifth day of the
month following the month in which it has accrued or, at the option
of the Holder (by written notice to the Borrower by the first day
of the month following the month in which it has accrued), shall be
added to the principal amount of this Note, in which event interest
shall accrue thereon in accordance with the terms of this Note and
such additional principal amount shall be convertible into Common
Stock in accordance with the terms of this Note. The Borrower
agrees that the right to convert is a valuable right to the Holder.
The damages resulting from a failure, attempt to frustrate,
interference with such conversion right are difficult if not
impossible to qualify. Accordingly the parties acknowledge that the
liquidated damages provision contained in this Section 1.4(h) are
justified.


 




 

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(i) Rescindment of a
Notice of Conversion.  If
(i) the Borrower fails to respond to Holder within one (1) business
day from the Conversion Date confirming the details of Notice of
Conversion, (ii) the Borrower fails to provide any of the shares of
the Borrower’s Common Stock requested in the Notice of
Conversion within three (3) business days from the date of receipt
of the Note of Conversion, (iii) the Holder is unable to procure a
legal opinion required to have the shares of the Borrower’s
Common Stock issued unrestricted and/or deposited to sell for any
reason related to the Borrower’s standing, (iv) the Holder is
unable to deposit the shares of the Borrower’s Common Stock
requested in the Notice of Conversion for any reason related to the
Borrower’s standing, (v) at any time after a missed Deadline,
at the Holder’s sole discretion, or (vi) if OTC Markets
changes the Borrower's designation to ‘Limited
Information’ (Yield), ‘No Information’ (Stop
Sign), ‘Caveat Emptor’ (Skull & Crossbones),
‘OTC’, ‘Other OTC’ or ‘Grey
Market’ (Exclamation Mark Sign) or other trading restriction
on the day of or any day after the Conversion Date, the Holder
maintains the option and sole discretion to rescind the Notice of
Conversion (“Rescindment”) with a “Notice of
Rescindment.”


 

1.5 Concerning the Shares. The
shares of Common Stock issuable upon conversion of this Note may
not be sold or transferred unless (i) such shares are sold pursuant
to an effective registration statement under the Act or (ii) the
Borrower or its transfer agent shall have been furnished with an
opinion of counsel (which opinion shall be in form, substance and
scope customary for opinions of counsel in comparable transactions)
to the effect that the shares to be sold or transferred may be sold
or transferred pursuant to an exemption from such registration or
(iii) such shares are sold or transferred pursuant to Rule 144
under the Act (or a successor rule) (“Rule 144”) or
(iv) such shares are transferred to an “affiliate” (as
defined in Rule 144) of the Borrower who agrees to sell or
otherwise transfer the shares only in accordance with this Section
1.5 and who is an Accredited Investor (as defined in the Purchase
Agreement). Except as otherwise provided in the Purchase Agreement
(and subject to the removal provisions set forth below), until such
time as the shares of Common Stock issuable upon conversion of this
Note have been registered under the Act or otherwise may be sold
pursuant to Rule 144 without any restriction as to the number of
securities as of a particular date that can then be immediately
sold, each certificate for shares of Common Stock issuable upon
conversion of this Note that has not been so included in an
effective registration statement or that has not been sold pursuant
to an effective registration statement or an exemption that permits
removal of the legend, shall bear a legend substantially in the
following form, as appropriate:


 


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


 




 

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The legend set forth above shall be removed and
the Borrower shall issue to the Holder a new certificate therefore
free of any transfer legend if (i) the Borrower or its transfer
agent shall have received an opinion of counsel, in form, substance
and scope customary for opinions of counsel in comparable
transactions, to the effect that a public sale or transfer of such
Common Stock may be made without registration under the Act, which
opinion shall be reasonably accepted by the Borrower so that the
sale or transfer is effected or (ii) in the case of the Common
Stock issuable upon conversion of this Note, such security is
registered for sale by the Holder under an effective registration
statement filed under the Act or otherwise may be sold pursuant to
Rule 144 without any restriction as to the number of securities as
of a particular date that can then be immediately sold. In the
event that the Borrower does not accept the opinion of counsel
provided by the Buyer with respect to the transfer of Securities
pursuant to an exemption from registration, such as Rule 144 or
Regulation S, at the Deadline, it will be considered an Event of
Default pursuant to Section 3.2 of the Note.


 

1.6 Effect of Certain
Events.


 

(a) Effect of Merger, Consolidation,
Etc. At the option of the Holder, the sale, conveyance or
disposition of all or substantially all of the assets of the
Borrower, the effectuation by the Borrower of a transaction or
series of related transactions in which more than 50% of the voting
power of the Borrower is disposed of, or the consolidation, merger
or other business combination of the Borrower with or into any
other Person (as defined below) or Persons when the Borrower is not
the survivor shall either: (i) be deemed to be an Event of Default
(as defined in Article III) pursuant to which the Borrower shall be
required to pay to the Holder upon the consummation of and as a
condition to such transaction an amount equal to the Default Amount
(as defined in Article III) or (ii) be treated pursuant to Section
1.6(b) hereof. “Person” shall mean any individual,
corporation, limited liability company, partnership, association,
trust or other entity or organization.


 

(b) Adjustment Due to Merger,
Consolidation, Etc. If, at any time when this Note is issued
and outstanding and prior to conversion of all of the Notes, there
shall be any merger, consolidation, exchange of shares,
recapitalization, reorganization, or other similar event, as a
result of which shares of Common Stock of the Borrower shall be
changed into the same or a different number of shares of another
class or classes of stock or securities of the Borrower or another
entity, or in case of any sale or conveyance of all or
substantially all of the assets of the Borrower other than in
connection with a plan of complete liquidation of the Borrower,
then the Holder of this Note shall thereafter have the right to
receive upon conversion of this Note, upon the basis and upon the
terms and conditions specified herein and in lieu of the shares of
Common Stock immediately theretofore issuable upon conversion, such
stock, securities or assets which the Holder would have been
entitled to receive in such transaction had this Note been
converted in full immediately prior to such transaction (without
regard to any limitations on conversion set forth herein), and in
any such case appropriate provisions shall be made with respect to
the rights and interests of the Holder of this Note to the end that
the provisions hereof (including, without limitation, provisions
for adjustment of the Conversion Price and of the number of shares
issuable upon conversion of the Note) shall thereafter be
applicable, as nearly as may be practicable in relation to any
securities or assets thereafter deliverable upon the conversion
hereof. The Borrower shall not affect any transaction described in
this Section 1.6(b) unless (a) it first gives, to the extent
practicable, thirty (30) days prior written notice (but in any
event at least fifteen (15) days prior written notice) of the
record date of the special meeting of shareholders to approve, or
if there is no such record date, the consummation of, such merger,
consolidation, exchange of shares, recapitalization, reorganization
or other similar event or sale of assets (during which time the
Holder shall be entitled to convert this Note) and (b) the
resulting successor or acquiring entity (if not the Borrower)
assumes by written instrument the obligations of this Section
1.6(b). The above provisions shall similarly apply to successive
consolidations, mergers, sales, transfers or share
exchanges.


 




 

8








 






 

(c) Adjustment Due to Distribution.
If the Borrower shall declare or make any distribution of its
assets (or rights to acquire its assets) to holders of Common Stock
as a dividend, stock repurchase, by way of return of capital or
otherwise (including any dividend or distribution to the
Borrower’s shareholders in cash or shares (or rights to
acquire shares) of capital stock of a subsidiary (i.e., a
spin-off)) (a “Distribution”), then the Holder of this
Note shall be entitled, upon any conversion of this Note after the
date of record for determining shareholders entitled to such
Distribution, to receive the amount of such assets which would have
been payable to the Holder with respect to the shares of Common
Stock issuable upon such conversion had such Holder been the holder
of such shares of Common Stock on the record date for the
determination of shareholders entitled to such
Distribution.


 

(d) Adjustment Due to Dilutive
Issuance. If, at any time when any Notes are issued and
outstanding, the Borrower issues or sells, or in accordance with
this Section 1.6(d) hereof is deemed to have issued or sold, except
for shares of Common Stock issued directly to vendors or suppliers
of the Borrower in satisfaction of amounts owed to such vendors or
suppliers (provided, however, that such vendors or suppliers shall
not have an arrangement to transfer, sell or assign such shares of
Common Stock prior to the issuance of such shares), any shares of
Common Stock for no consideration or for a consideration per share
(before deduction of reasonable expenses or commissions or
underwriting discounts or allowances in connection therewith) less
than the Conversion Price in effect on the date of such issuance
(or deemed issuance) of such shares of Common Stock (a
“Dilutive Issuance”), then immediately upon the
Dilutive Issuance, the Conversion Price will be reduced to the
amount of the consideration per share received by the Borrower in
such Dilutive Issuance.


 


The
Borrower shall be deemed to have issued or sold shares of Common
Stock if the Borrower in any manner issues or grants any warrants,
rights or options (not including employee stock option plans),
whether or not immediately exercisable, to subscribe for or to
purchase Common Stock or other securities convertible into or
exchangeable for Common Stock (“Convertible
Securities”) (such warrants, rights and options to purchase
Common Stock or Convertible Securities are hereinafter referred to
as “Options”) and the price per share for which Common
Stock is issuable upon the exercise of such Options is less than
the Conversion Price then in effect, then the Conversion Price
shall be equal to such price per share. For purposes of the
preceding sentence, the “price per share for which Common
Stock is issuable upon the exercise of such Options” is
determined by dividing (i) the total amount, if any, received or
receivable by the Borrower as consideration for the issuance or
granting of all such Options, plus the minimum aggregate amount of
additional consideration, if any, payable to the Borrower upon the
exercise of all such Options, plus, in the case of Convertible
Securities issuable upon the exercise of such Options, the minimum
aggregate amount of additional consideration payable upon the
conversion or exchange thereof at the time such Convertible
Securities first become convertible or exchangeable, by (ii) the
maximum total number of shares of Common Stock issuable upon the
exercise of all such Options (assuming full conversion of
Convertible Securities, if applicable). No further adjustment to
the Conversion Price will be made upon the actual issuance of such
Common Stock upon the exercise of such Options or upon the
conversion or exchange of Convertible Securities issuable upon
exercise of such Options.


 




 

9








 






 


Additionally, the
Borrower shall be deemed to have issued or sold shares of Common
Stock if the Borrower in any manner issues or sells any Convertible
Securities, whether or not immediately convertible (other than
where the same are issuable upon the exercise of Options), and the
price per share for which Common Stock is issuable upon such
conversion or exchange is less than the Conversion Price then in
effect, then the Conversion Price shall be equal to such price per
share. For the purposes of the preceding sentence, the “price
per share for which Common Stock is issuable upon such conversion
or exchange” is determined by dividing (i) the total amount,
if any, received or receivable by the Borrower as consideration for
the issuance or sale of all such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any,
payable to the Borrower upon the conversion or exchange thereof at
the time such Convertible Securities first become convertible or
exchangeable, by (ii) the maximum total number of shares of Common
Stock issuable upon the conversion or exchange of all such
Convertible Securities. No further adjustment to the Conversion
Price will be made upon the actual issuance of such Common Stock
upon conversion or exchange of such Convertible
Securities.


 

(e) Purchase Rights. If, at any
time when any Notes are issued and outstanding, the Borrower issues
any convertible securities or rights to purchase stock, warrants,
securities or other property (the “Purchase Rights”)
pro rata to the record holders of any class of Common Stock, then
the Holder of this Note will be entitled to acquire, upon the terms
applicable to such Purchase Rights, the aggregate Purchase Rights
which such Holder could have acquired if such Holder had held the
number of shares of Common Stock acquirable upon complete
conversion of this Note (without regard to any limitations on
conversion contained herein) immediately before the date on which a
record is taken for the grant, issuance or sale of such Purchase
Rights or, if no such record is taken, the date as of which the
record holders of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights.


 

(f) Notice of Adjustments. Upon the
occurrence of each adjustment or readjustment of the Conversion
Price as a result of the events described in this Section 1.6, the
Borrower, at its expense, shall promptly compute such adjustment or
readjustment and prepare and furnish to the Holder a certificate
setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The
Borrower shall, upon the written request at any time of the Holder,
furnish to such Holder a like certificate setting forth (i) such
adjustment or readjustment, (ii) the Conversion Price at the time
in effect and (iii) the number of shares of Common Stock and the
amount, if any, of other securities or property which at the time
would be received upon conversion of the Note.


 

1.7 [Intentionally
Omitted].


 

1.8 Status as Shareholder. Upon
submission of a Notice of Conversion by a Holder, (i) the shares
covered thereby (other than the shares, if any, which cannot be
issued because their issuance would exceed such Holder’s
allocated portion of the Reserved Amount or Maximum Share Amount)
shall be deemed converted into shares of Common Stock and (ii) the
Holder’s rights as a Holder of such converted portion of this
Note shall cease and terminate, excepting only the right to receive
certificates for such shares of Common Stock and to any remedies
provided herein or otherwise available at law or in equity to such
Holder because of a failure by the Borrower to comply with the
terms of this Note. Notwithstanding the foregoing, if a Holder has
not received certificates for all shares of Common Stock prior to
the tenth (10th) business day after the expiration of the Deadline
with respect to a conversion of any portion of this Note for any
reason, then (unless the Holder otherwise elects to retain its
status as a holder of Common Stock by so notifying the Borrower)
the Holder shall regain the rights of a Holder of this Note with
respect to such unconverted portions of this Note and the Borrower
shall, as soon as practicable, return such unconverted Note to the
Holder or, if the Note has not been surrendered, adjust its records
to reflect that such portion of this Note has not been converted.
In all cases, the Holder shall retain all of its rights and
remedies (including, without limitation, (i) the right to receive
Conversion Default Payments pursuant to Section 1.3 to the extent
required thereby for such Conversion Default and any subsequent
Conversion Default and (ii) the right to have the Conversion Price
with respect to subsequent conversions determined in accordance
with Section 1.3) for the Borrower’s failure to convert this
Note.


 




 

10








 






 

1.9 Prepayment.
Notwithstanding anything to the contrary contained in this Note,
the Borrower may prepay the amounts outstanding hereunder pursuant
to the following terms and conditions:


 

(a) At any time during
the period beginning on the Issue Date and ending on the date which
is ninety (90) days following the Issue Date, the Borrower shall
have the right, exercisable on not less than three (3) Trading Days
prior written notice to the Holder of the Note to prepay the
outstanding Note (principal and accrued interest), in full by
making a payment to the Holder of an amount in cash equal to 135%,
multiplied by the sum of: (w) the then outstanding principal amount
of this Note plus
(x) accrued and unpaid interest on the unpaid principal amount
of this Note plus
(y) Default Interest, if any.

 

(b) At any time during
the period beginning the day which is ninety one (91) days
following the Issue Date and ending on the date which is one
hundred eighty (180) days following the Issue Date, the Borrower
shall have the right, exercisable on not less than three (3)
Trading Days prior written notice to the Holder of the Note to
prepay the outstanding Note (principal and accrued interest), in
full by making a payment to the Holder of an amount in cash equal
to 150%, multiplied by the sum of: (w) the then outstanding
principal amount of this Note plus (x) accrued and
unpaid interest on the unpaid principal amount of this Note
plus (y) Default
Interest, if any.

 

(c) After
the expiration of one hundred eighty (180) days following the date
of the Note, the Borrower shall have no right of
prepayment.

 

1.10 Any
notice of prepayment hereunder (an “Optional Prepayment
Notice”) shall be delivered to the Holder of the Note at its
registered addresses and shall state: (1) that the Borrower is
exercising its right to prepay the Note, and (2) the date of
prepayment which shall be not more than three (3) Trading Days from
the date of the Optional Prepayment Notice. On the date fixed for
prepayment (the “Optional Prepayment Date”), the
Borrower shall make payment of the applicable prepayment amount to
or upon the order of the Holder as specified by the Holder in
writing to the Borrower at least one (1) business day prior to the
Optional Prepayment Date. If the Borrower delivers an Optional
Prepayment Notice and fails to pay the applicable prepayment amount
due to the Holder of the Note within two (2) business days
following the Optional Prepayment Date, the Borrower shall forever
forfeit its right to prepay the Note pursuant to this Section
1.9.


 



ARTICLE
II.       


CERTAIN
COVENANTS






 

2.1 Distributions on Capital Stock.
So long as the Borrower shall have any obligation under this Note,
the Borrower shall not without the Holder’s written consent
(a) pay, declare or set apart for such payment, any dividend or
other distribution (whether in cash, property or other securities)
on shares of capital stock other than dividends on shares of Common
Stock solely in the form of additional shares of Common Stock or
(b) directly or indirectly or through any subsidiary make any other
payment or distribution in respect of its capital stock except for
distributions pursuant to any shareholders’ rights plan which
is approved by a majority of the Borrower’s disinterested
directors.


 

2.2 Restriction on Stock
Repurchases. So long as the Borrower shall have any
obligation under this Note, the Borrower shall not without the
Holder’s written consent redeem, repurchase or otherwise
acquire (whether for cash or in exchange for property or other
securities or otherwise) in any one transaction or series of
related transactions any shares of capital stock of the Borrower or
any warrants, rights or options to purchase or acquire any such
shares.


 




 

11








 






 

2.3 Borrowings. So long as the Borrower shall have any obligation
under this Note, the Borrower shall not, without the Holder’s
written consent, create, incur, assume guarantee, endorse,
contingently agree to purchase or otherwise become liable upon the
obligation of any person, firm, partnership, joint venture or
corporation, except by the endorsement of negotiable instruments
for deposit or collection, or suffer to exist any liability for
borrowed money, except (a) borrowings in existence or committed on
the date hereof and of which the Borrower has informed Holder in
writing prior to the date hereof, (b) indebtedness to trade
creditors financial institutions or other lenders incurred in the
ordinary course of business or (c) borrowings, the proceeds of
which shall be used to repay this Note.


 

2.4 Sale of Assets. So long as the
Borrower shall have any obligation under this Note, the Borrower
shall not, without the Holder’s written consent, sell, lease
or otherwise dispose of any significant portion of its assets
outside the ordinary course of business. Any consent to the
disposition of any assets may be conditioned on a specified use of
the proceeds of disposition.


 

2.5 Advances and Loans. So long as
the Borrower shall have any obligation under this Note, the
Borrower shall not, without the Holder’s written consent,
lend money, give credit or make advances to any person, firm, joint
venture or corporation, including, without limitation, officers,
directors, employees, subsidiaries and affiliates of the Borrower,
except loans, credits or advances (a) in existence or committed on
the date hereof and which the Borrower has informed Holder in
writing prior to the date hereof, (b) made in the ordinary course
of business or (c) not in excess of $100,000.


 

2.6 Section 3(a)(9) or 3(a)(10)
Transaction. So long as this Note is outstanding, the
Borrower shall not enter into any transaction or arrangement
structured in accordance with, based upon, or related or pursuant
to, in whole or in part, either Section 3(a)(9) of the Securities
Act (a “3(a)(9) Transaction”) or Section 3(a)(l0) of
the Securities Act (a “3(a)(l0) Transaction”). In the
event that the Borrower does enter into, or makes any issuance of
Common Stock related to a 3(a)(9) Transaction or a 3(a)(l0)
Transaction while this note is outstanding, a liquidated damages
charge of 25% of the outstanding principal balance of this Note,
but not less than Fifteen Thousand Dollars $15,000, will be assessed and will become
immediately due and payable to the Holder at its election in the
form of cash payment or addition to the balance of this
Note.


 

2.7 Preservation
of Existence, etc. The Borrower
shall maintain and preserve, and cause each of its Subsidiaries to
maintain and preserve, its existence, rights and privileges, and
become or remain, and cause each of its Subsidiaries (other than
dormant Subsidiaries that have no or minimum assets) to
become or remain, duly qualified and
in good standing in each jurisdiction in which the character of the
properties owned or leased by it or in which the transaction of its
business makes such qualification necessary.


 

2.8 Non-circumvention.
The Borrower hereby covenants and agrees that the Borrower will
not, by amendment of its Certificate or Articles of Incorporation
or Bylaws, 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 the
provisions of this Note and take all action as may be required to
protect the rights of the Holder.


 




 

12








 






 


2.9
Repayment from
Proceeds. While any portion of this Note is outstanding, if
the Company receives cash proceeds from any source or series of
related or unrelated sources, including but not limited to, from
payments from customers, the issuance of equity or debt, the
conversion of outstanding warrants of the Borrower, the issuance of
securities pursuant to an equity line of credit of the Borrower or
the sale of assets, the Borrower shall, within one (1) business day
of Borrower’s receipt of such proceeds, inform the Holder of
such receipt, following which the Holder shall have the right in
its sole discretion to require the Borrower to immediately apply
all or any portion of such proceeds to repay all or any portion of
the outstanding amounts owed under this Note. Failure of the
Borrower to comply with this provision shall constitute an Event of
Default. In the event that such proceeds are received by the Holder
prior to the Maturity Date, the required prepayment shall be
subject to the terms of Section 1.9 herein.

 



ARTICLE
III.   


EVENTS OF
DEFAULT






 


If any
of the following events of default (each, an “Event of
Default”) shall occur:


 

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


 

3.2 Conversion
and the Shares. The Borrower
(i) fails to issue shares of Common Stock to the Holder (or
announces or threatens in writing that it will not honor its
obligation to do so) upon exercise by the Holder of the conversion
rights of the Holder in accordance with the terms of this Note,
(ii) fails to transfer or cause its transfer agent to transfer
(issue) (electronically or in certificated form) any certificate
for shares of Common Stock issued to the Holder upon conversion of
or otherwise pursuant to this Note as and when required by this
Note, (iii) directs its transfer agent not to transfer or delays,
impairs, and/or hinders its transfer agent in transferring (or
issuing) (electronically or in certificated form) any certificate
for shares of Common Stock to be issued to the Holder upon
conversion of or otherwise pursuant to this Note as and when
required by this Note, (iv) fails to remove (or directs its
transfer agent not to remove or impairs, delays, and/or hinders its
transfer agent from removing) any restrictive legend (or to
withdraw any stop transfer instructions in respect thereof) on any
certificate for any shares of Common Stock issued to the Holder
upon conversion of or otherwise pursuant to this Note as and when
required by this Note (or makes any written announcement, statement
or threat that it does not intend to honor the obligations
described in this paragraph) and any such failure shall continue
uncured (or any written announcement, statement or threat not to
honor its obligations shall not be rescinded in writing) for three
(3) business days after the Holder shall have delivered a Notice of
Conversion, (v) fails to remain current in its obligations to its
transfer agent, (vi) causes a conversion of this Note is delayed,
hindered or frustrated due to a balance owed by the Borrower to its
transfer agent, (vii) fails to repay Holder, within forty eight
(48) hours of a demand from the Holder, any amount of funds
advanced by Holder to Borrower’s transfer agent in order to
process a conversion, and/or (viii) fails to maintain the Reserved
Amount.


 

3.3 Failure to Deliver Transaction Expense
Amount. The Borrower fails to
deliver the Transaction Expense Amount (as defined in the Purchase
Agreement) to the Holder within three (3) business days of the date
such amount is due.


 

3.4 Breach of Covenants. The
Borrower breaches any material covenant or other material term or
condition contained in this Note and any collateral documents
including but not limited to the Purchase Agreement and such breach
continues for a period of ten (10) days after written notice
thereof to the Borrower from the Holder.


 




 

13








 






 

3.5 Breach of Representations and
Warranties. Any representation or warranty of the Borrower
made herein or in any agreement, statement or certificate given in
writing pursuant hereto or in connection herewith (including,
without limitation, the Purchase Agreement), shall be false or
misleading in any material respect when made and the breach of
which has (or with the passage of time will have) a material
adverse effect on the rights of the Holder with respect to this
Note or the Purchase Agreement.


 

3.6 Receiver or Trustee. The
Borrower or any subsidiary of the Borrower shall make an assignment
for the benefit of creditors or commence proceedings for its
dissolution, or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its
property or business, or such a receiver or trustee shall otherwise
be appointed for the Borrower or for a substantial part of its
property or business without its consent and shall not be
discharged within sixty (60) days after such
appointment.


 

3.7 Judgments. Any money judgment,
writ or similar process shall be entered or filed against the
Borrower or any subsidiary of the Borrower or any of its property
or other assets for more than $50,000, and shall remain unvacated,
unbonded or unstayed for a period of twenty (20) days unless
otherwise consented to by the Holder, which consent will not be
unreasonably withheld.


 

3.8 Bankruptcy. Bankruptcy,
insolvency, reorganization or liquidation proceedings or other
proceedings, voluntary or involuntary, for relief under any
bankruptcy law or any law for the relief of debtors shall be
instituted by or against the Borrower or any subsidiary of the
Borrower, or the Borrower admits in writing its inability to pay
its debts generally as they mature, or have filed against it an
involuntary petition for bankruptcy relief, all under federal or
state laws as applicable or the Borrower admits in writing its
inability to pay its debts generally as they mature, or have filed
against it an involuntary petition for bankruptcy relief, all under
international, federal or state laws as applicable.


 

3.9 Delisting of Common Stock. The
Borrower shall fail to maintain the listing of the Common Stock on
at least one of the OTC Pink, OTCQB, Nasdaq National Market, Nasdaq
Small Cap Market, New York Stock Exchange, NYSE MKT, or an
equivalent replacement exchange


 

3.10 Failure
to Comply with the Exchange Act. The Borrower shall fail to
comply with the reporting requirements of the Exchange Act
(including but not limited to becoming delinquent in its filings);
and/or the Borrower shall cease to be subject to the reporting
requirements of the Exchange Act.


 

3.11 Liquidation.
Any dissolution, liquidation, or winding up of Borrower or any
substantial portion of its business.


 

3.12 Cessation
of Operations. Any cessation of operations by Borrower or
Borrower admits it is otherwise generally unable to pay its debts
as such debts become due, provided, however, that any disclosure of
the Borrower’s ability to continue as a “going
concern” shall not be an admission that the Borrower cannot
pay its debts as they become due.


 

3.13 Maintenance
of Assets. The failure by Borrower to maintain any material
intellectual property rights, personal, real property or other
assets which are necessary to conduct its business (whether now or
in the future), or any disposition or conveyance of any material
asset of the Company.


 




 

14








 






 

3.14 Financial
Statement Restatement. The restatement of any financial
statements filed by the Borrower with the SEC for any date or
period from two years prior to the Issue Date of this Note and
until this Note is no longer outstanding, if the result of such
restatement would, by comparison to the unrestated financial
statement, have constituted a material adverse effect on the rights
of the Holder with respect to this Note or the Purchase
Agreement.


 

3.15 Reverse
Splits. The Borrower effectuates a reverse split of its
Common Stock without twenty (20) days prior written notice to the
Holder.


 


3.16           Replacement
of Transfer Agent. In the event
that the Borrower proposes to replace its transfer agent, the
Borrower fails to provide, prior to the effective date of such
replacement, a fully executed Irrevocable Transfer Agent
Instructions in a form as initially delivered pursuant to the
Purchase Agreement (including but not limited to the provision to
irrevocably reserve shares of Common Stock in the Reserved Amount)
signed by the successor transfer agent to Borrower and the
Borrower.

 


3.17           Cessation
of Trading. Any cessation of trading of the Common Stock on
at least one of the OTC Pink, OTCQB, Nasdaq National Market, Nasdaq
Small Cap Market, New York Stock Exchange, NYSE MKT, or an
equivalent replacement exchange, and such cessation of trading
shall continue for a period of five consecutive (5) Trading
Days.


 


3.18           Cross-Default. 
Notwithstanding anything to the contrary contained in this Note or
the other related or companion documents, a breach or default by
the Borrower of any covenant or other term or condition contained
in any of the Other Agreements (as defined herein), after the
passage of all applicable notice and cure or grace periods, shall,
at the option of the Holder, be considered a default under this
Note and the Other Agreements, in which event the Holder shall be
entitled (but in no event required) to apply all rights and
remedies of the Holder under the terms of this Note and the Other
Agreements by reason of a default under said Other Agreement or
hereunder. “Other Agreements” means, collectively, all
agreements and instruments between, among or by: (1) the Borrower,
and, or for the benefit of, (2) the Holder (and any affiliate
of the Holder) or any other third party, including, without
limitation, promissory notes; provided, however, the term
“Other Agreements” shall not include the agreements and
instruments defined as the Documents. Each of the loan transactions
will be cross-defaulted with each other loan transaction and with
all other existing and future debt of Borrower to the
Holder.


 


3.19           Bid
Price. The Borrower shall lose
the “bid” price for its Common Stock
($0.0001 on the “Ask” with zero market makers on the
“Bid” per Level 2) and/or
a market (including the OTC Pink, OTCQB or an equivalent
replacement exchange).


 


3.20           OTC
Markets Designation. OTC
Markets changes the Borrower’s designation to ‘No
Information’ (Stop Sign), ‘Caveat Emptor’ (Skull
and Crossbones), or ‘OTC’, ‘Other OTC’ or
‘Grey Market’ (Exclamation Mark
Sign).


 


3.21           Inside
Information. Any
attempt by the Borrower or its officers, directors, and/or
affiliates to transmit, convey, disclose, or any actual
transmittal, conveyance, or disclosure by the Borrower or its
officers, directors, and/or affiliates of, material non-public
information concerning the Borrower, to the Holder or its
successors and assigns, which is not immediately cured by
Borrower’s filing of a Form 8-K pursuant to Regulation FD on
that same date.


 




 

15








 






 


3.22           Unavailability
of Rule 144. If, at any time on or after the date which is
six (6) months after the Issue Date, the Holder is unable to obtain
a standard “144 legal opinion letter” from an attorney
reasonably acceptable to the Holder, the Holder’s brokerage
firm, and the Company’s transfer agent in order to facilitate
the Holder’s conversion of any portion of the Note into free
trading shares of the Borrower’s Common Stock pursuant to
Rule 144, and thereupon deposit such shares into the Holder’s
brokerage account.


 


3.23           Failure
to Register. The Borrower fails to (1) file a registration
statement covering the Holder’s resale of the common stock
underlying the Note (the “Registration Statement”)
within sixty (60) days following the Issue Date (with the
understanding that the minimum amount of shares of the
Borrower’s common stock to be registered in the Registration
Statement with respect to the Holder shall be equal to or greater
than the Reserved Amount at that time), (ii) cause the Registration
Statement to become effective within one hundred eighty (180) days
following the Issue Date, (iii) cause the Registration Statement to
remain effective until the Note is satisfied in full, or (iv)
comply with the registration rights agreement between the Borrower
and Holder entered into in connection with the issuance of this
Note.

 


Upon the occurrence of any Event of Default
specified in Sections 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 3.8, 3.9,
3.10, 3.11, 3.12, 3.13, 3.14, 3.15, 3.16. 3.17, 3.18, 3.19, 3.20,
3.21, 3.22, and/or 3.23 exercisable through the delivery of written
notice to the Borrower by such Holders (the “Default
Notice”), the Note shall become immediately due and payable
and the Borrower shall pay to the Holder, in full satisfaction of
its obligations hereunder, an amount equal to (i) 150% (EXCEPT WITH
RESPECT TO SECTION 3.2, 3.22 AND/OR 3.23, IN WHICH CASE 150% SHALL
BE REPLACED WITH 200%) times
the sum
of (w) the then outstanding principal
amount of this Note plus
(x) accrued and unpaid interest on the
unpaid principal amount of this Note to the date of payment (the
“Mandatory Prepayment Date”) plus
(y) Default Interest, if any, on the
amounts referred to in clauses (w) and/or (x) plus
(z) any amounts owed to the Holder
pursuant to Sections 1.3 and 1.4(g) hereof (the then outstanding
principal amount of this Note to the date of payment
plus
the amounts referred to in clauses
(x), (y) and (z) shall collectively be known as the “Default
Sum”) or (ii) at the option of the Holder, the “parity
value” of the Default Sum to be prepaid, where parity value
means (a) the highest number of shares of Common Stock issuable
upon conversion of or otherwise pursuant to such Default Sum in
accordance with Article I, treating the Trading Day immediately
preceding the Mandatory Prepayment Date as the “Conversion
Date” for purposes of determining the lowest applicable
Conversion Price, unless the Default Event arises as a result of a
breach in respect of a specific Conversion Date in which case such
Conversion Date shall be the Conversion Date), multiplied by
(b) the highest Trading Price for the
Common Stock during the period beginning on the date of first
occurrence of the Event of Default and ending one day prior to the
Mandatory Prepayment Date (the “Default Amount”) and
all other amounts payable hereunder shall immediately become due
and payable, all without demand, presentment or notice, all of
which hereby are expressly waived, together with all costs,
including, without limitation, legal fees and expenses, of
collection, and the Holder shall be entitled to exercise all other
rights and remedies available at law or in equity. Further, if a
breach of Sections 3.9, 3.10 and/or 3.19 occurs or is continuing
after the six (6) month anniversary of this Note, then the
principal amount of the Note shall increase by Fifteen Thousand and
No/100 United States Dollars ($15,000) (under Holder’s and
Borrower’s expectation that any principal amount increase
will tack back to the Issue Date) and the Holder shall be entitled to use the lowest
Trading Price during the delinquency period as a base price for the
conversion with the Variable Conversion Price shall be
redefined to mean forty percent (40%) multiplied by the Market
Price (at the option of the Holder), subject to adjustment as
provided in this Note. For example, if
the lowest Trading Price during the delinquency period is $0.01 per
share and the conversion discount is 50%, then the Holder may elect
to convert future conversions at $0.005 per share. If this
Note is not paid at Maturity Date, then the outstanding principal
due under this Note shall increase by Fifteen Thousand and No/100
United States Dollars ($15,000).

 




 

16








 






 



The Holder shall have the right at any time, to require the
Borrower to immediately issue, in lieu of the Default Amount, the
number of shares of Common Stock of the Borrower equal to the
Default Amount divided by the Conversion Price then in effect,
subject to the terms of this Note. This requirement by the
Borrower shall automatically apply upon the occurrence of an Event
of Default without the need for any party to give any notice or
take any other action.

 


If the
Holder shall commence an action or proceeding to enforce any
provisions of this Note, including, without limitation, engaging an
attorney, then if the Holder prevails in such action, the Holder
shall be reimbursed by the Borrower for its attorneys' fees and
other costs and expenses incurred in the investigation, preparation
and prosecution of such action or proceeding.


 



ARTICLE
IV.        


MISCELLANEOUS






 

4.1 Failure or Indulgence Not
Waiver. No failure or delay on the part of the Holder in the
exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privileges. All
rights and remedies existing hereunder are cumulative to, and not
exclusive of, any rights or remedies otherwise
available.


 

4.2 Notices. All notices, demands,
requests, consents, approvals, and other communications required or
permitted hereunder shall be in writing and, unless otherwise
specified herein, shall be (i) personally served, (ii) deposited in
the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service
with charges prepaid, or (iv) transmitted by hand delivery,
telegram, or facsimile, addressed as set forth below or to such
other address as such party shall have specified most recently by
written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon
hand delivery or delivery by facsimile, with accurate confirmation
generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during
normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than
on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the
date of mailing by express courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing,
whichever shall first occur. The addresses for such communications
shall be:


 


If to
the Borrower, to:


 


Sincerity Applied
Materials Holdings Corp.


Level
4, 10 Yarra Street


South
Yarra, Australia VIC 3141


Attn: Zhang Yiwen


E-mail:
info@sincerityplastics.com


 




 

17








 






 


If to
the Holder:


 


Auctus
Fund, LLC


177
Huntington Avenue, 17th Floor


Boston,
MA 02115


Attn:
Lou Posner


Facsimile: (617)
532-6420


 


With a
copy to (which copy shall not constitute notice):


 


Chad
Friend, Esq., LL.M.


Legal
& Compliance, LLC


330
Clematis Street, Suite 217


West
Palm Beach, FL 33401


e-mail:
CFriend@LegalandCompliance.com


 

4.3 Amendments. This Note and any
provision hereof may only be amended by an instrument in writing
signed by the Borrower and the Holder. The term “Note”
and all reference thereto, as used throughout this instrument,
shall mean this instrument (and the other Notes issued pursuant to
the Purchase Agreement) as originally executed, or if later amended
or supplemented, then as so amended or supplemented.


 

4.4 Assignability. This Note shall
be binding upon the Borrower and its successors and assigns, and
shall inure to be the benefit of the Holder and its successors and
assigns. Each transferee of this Note must be an “accredited
investor” (as defined in Rule 501(a) of the 1933 Act).
Notwithstanding anything in this Note to the contrary, this Note
may be pledged as collateral in connection with a bona fide margin account or
other lending arrangement. The Holder
and any assignee, by acceptance of this Note, acknowledge and agree
that following conversion of a portion of this Note, the unpaid and
unconverted principal amount of this Note represented by this Note
may be less than the amount stated on the face
hereof.


 

4.5 Cost of Collection. If default
is made in the payment of this Note, the Borrower shall pay the
Holder hereof reasonable costs of collection, including reasonable
attorneys’ fees.


 

4.6 Governing Law. This Note shall
be governed by and construed in accordance with the laws of the
State of Nevada without regard to principles of conflicts of laws.
Any action brought by either party against the other concerning the
transactions contemplated by this Note shall be brought only in the
state courts of Massachusetts or in the federal courts located in
the Commonwealth of Massachusetts. The parties to this Note hereby
irrevocably waive any objection to jurisdiction and venue of any
action instituted hereunder and shall not assert any defense based
on lack of jurisdiction or venue or based upon forum non conveniens. THE BORROWER 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. The prevailing party shall be entitled to recover
from the other party its reasonable attorney's fees and costs. In
the event that any provision of this Note or any other agreement
delivered in connection herewith is invalid or unenforceable under
any applicable statute or rule of law, then such provision shall be
deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of
law. Any such provision which may prove invalid or unenforceable
under any law shall not affect the validity or enforceability of
any other provision of any agreement. Each party hereby irrevocably
waives personal service of process and consents to process being
served in any suit, action or proceeding in connection with this
Agreement or any other Transaction Document by mailing a copy
thereof via registered or certified mail or overnight delivery
(with evidence of delivery) to such party at the address in effect
for notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any
way any right to serve process in any other manner permitted by
law.


 




 

18








 






 

4.7 Certain Amounts. Whenever
pursuant to this Note the Borrower is required to pay an amount in
excess of the outstanding principal amount (or the portion thereof
required to be paid at that time) plus accrued and unpaid interest
plus Default Interest on such interest, the Borrower and the Holder
agree that the actual damages to the Holder from the receipt of
cash payment on this Note may be difficult to determine and the
amount to be so paid by the Borrower represents stipulated damages
and not a penalty and is intended to compensate the Holder in part
for loss of the opportunity to convert this Note and to earn a
return from the sale of shares of Common Stock acquired upon
conversion of this Note at a price in excess of the price paid for
such shares pursuant to this Note. The Borrower and the Holder
hereby agree that such amount of stipulated damages is not plainly
disproportionate to the possible loss to the Holder from the
receipt of a cash payment without the opportunity to convert this
Note into shares of Common Stock.


 

4.8 Purchase Agreement. By its
acceptance of this Note, each party agrees to be bound by the
applicable terms of the Purchase Agreement.


 

4.9 Notice of Corporate Events.
Except as otherwise provided below, the Holder of this Note shall
have no rights as a Holder of Common Stock unless and only to the
extent that it converts this Note into Common Stock. The Borrower
shall provide the Holder with prior notification of any meeting of
the Borrower’s shareholders (and copies of proxy materials
and other information sent to shareholders). In the event of any
taking by the Borrower of a record of its shareholders for the
purpose of determining shareholders who are entitled to receive
payment of any dividend or other distribution, any right to
subscribe for, purchase or otherwise acquire (including by way of
merger, consolidation, reclassification or recapitalization) any
share of any class or any other securities or property, or to
receive any other right, or for the purpose of determining
shareholders who are entitled to vote in connection with any
proposed sale, lease or conveyance of all or substantially all of
the assets of the Borrower or any proposed liquidation, dissolution
or winding up of the Borrower, the Borrower shall mail a notice to
the Holder, at least twenty (20) days prior to the record date
specified therein (or thirty (30) days prior to the consummation of
the transaction or event, whichever is earlier), of the date on
which any such record is to be taken for the purpose of such
dividend, distribution, right or other event, and a brief statement
regarding the amount and character of such dividend, distribution,
right or other event to the extent known at such time. The Borrower
shall make a public announcement of any event requiring
notification to the Holder hereunder substantially simultaneously
with the notification to the Holder in accordance with the terms of
this Section 4.9 including, but not limited to, name changes,
recapitalizations, etc. as soon as possible under law.


 

4.10 Usury.
If it shall be found that any interest or other amount deemed
interest due hereunder violates the applicable law governing usury,
the applicable provision shall automatically be revised to equal
the maximum rate of interest or other amount deemed interest
permitted under applicable law. The Borrower covenants (to the
extent that it may lawfully do so) that it will not seek to claim
or take advantage of any law that would prohibit or forgive the
Borrower from paying all or a portion of the principal or interest
on this Note.


 

4.11 Remedies.
The Borrower acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder, by vitiating
the intent and purpose of the transaction contemplated hereby.
Accordingly, the Borrower acknowledges that the remedy at law for a
breach of its obligations under this Note will be inadequate and
agrees, in the event of a breach or threatened breach by the
Borrower of the provisions of this Note, that the Holder shall be
entitled, in addition to all other available remedies at law or in
equity, and in addition to the penalties assessable herein, to an
injunction or injunctions restraining, preventing or curing any
breach of this Note and to enforce specifically the terms and
provisions thereof, without the necessity of showing economic loss
and without any bond or other security being required. No provision
of this Note shall alter or impair the obligation of the Borrower,
which is absolute and unconditional, to pay the principal of, and
interest on, this Note at the time, place, and rate, and in the
form, herein prescribed.


 




 

19








 






 

4.12 Severability.
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 provision hereof which may prove
invalid or unenforceable under any law shall not affect the
validity or enforceability of any other provision
hereof.


 

4.13 Dispute
Resolution. In the case of a dispute as to the determination
of the Conversion Price, Conversion Amount, any prepayment amount
or Default Amount, Default Sum, Closing or Maturity Date, the
closing bid price, or fair market value (as the case may be) or the
arithmetic calculation of the Conversion Price or the applicable
prepayment amount(s) (as the case may be), the Borrower or the
Holder shall submit the disputed determinations or arithmetic
calculations via facsimile (i) within two (2) Business Days after
receipt of the applicable notice giving rise to such dispute to the
Borrower or the Holder or (ii) if no notice gave rise to such
dispute, at any time after the Holder learned of the circumstances
giving rise to such dispute. If the Holder and the Borrower 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 Borrower or
the Holder, then the Borrower shall, within two (2) Business Days,
submit via facsimile (a) the disputed determination of the
Conversion Price, the closing bid price, the or fair market value
(as the case may be) to an independent, reputable investment bank
selected by the Borrower and approved by the Holder or (b) the
disputed arithmetic calculation of the Conversion Price, Conversion
Amount, any prepayment amount or Default Amount, Default Sum to an
independent, outside accountant selected by the Holder that is
reasonably acceptable to the Borrower. The Borrower shall cause at
its expense the investment bank or the accountant to perform the
determinations or calculations and notify the Borrower and the
Holder of the results no later than ten (10) Business Days from the
time it receives such disputed determinations or calculations. Such
investment bank’s or accountant’s determination or
calculation shall be binding upon all parties absent demonstrable
error.

 

4.14 Terms
of Future Financings.  So long as this Note is
outstanding, upon any issuance by the Borrower or any of its
subsidiaries of any security with any term more favorable to the
holder of such security or with a term in favor of the holder of
such security that was not similarly provided to the Holder in this
Note, then the Borrower shall notify the Holder of such additional
or more favorable term and such term, at Holder’s option,
shall become a part of the transaction documents with the Holder.
 The types of terms contained in another security that may be
more favorable to the holder of such security include, but are not
limited to, terms addressing conversion discounts, prepayment rate,
conversion lookback periods, interest rates, original issue
discounts, stock sale price, private placement price per share, and
warrant coverage.

 

 


[signature
page follows]

 




 

20








 






 

 


 


IN
WITNESS WHEREOF, Borrower has caused this Note to be signed in its
name by its duly authorized officer as of the date first above
written.


 


 


SINCERITY
APPLIED MATERIALS HOLDINGS CORP.

 


 


By:
/s/ Zhang
Yiwen


Name:
Zhang Yiwen


Title:
Chief Executive Officer


 


 




 








 






 


EXHIBIT
A


NOTICE
OF CONVERSION


 


The
undersigned hereby elects to convert $_________________principal
amount of the Note (defined below) together with $________________
of accrued and unpaid interest thereto, totaling $_____________
into that number of shares
of Common Stock to be issued pursuant to the conversion of the
Note (“Common Stock”) as set forth below, of
Sincerity Applied Materials Holdings Corp., a Nevada corporation
(the “Borrower”), according to the conditions of the
convertible note of the Borrower dated as of November 20, 2017 (the
“Note”), as of the date written below. No fee will be
charged to the Holder for any conversion, except for transfer
taxes, if any.


 


Box
Checked as to applicable instructions:


 



[
] 

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






 


Name of
DTC Prime Broker:


Account
Number:


 



[
] 

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






 


Name:
[NAME]


Address:
[ADDRESS]


 




Date of
Conversion:                    



_____________







Applicable
Conversion
Price:                   



$____________






Number
of Shares of Common Stock to be Issued



    Pursuant
to Conversion of the
Notes:                      



______________






Amount
of Principal Balance Due remaining 


Under
the Note after this
conversion:                                                          
______________



Accrued and unpaid
interest
remaining:                    



______________






 


[HOLDER]


 


 


By:_____________________________



Name:                       

[NAME]







Title:                       

[TITLE]






Date:
[DATE]