Exhibit 10.1



 


Exhibit 10.1


 


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: $47,500.00	Issue Date: February 27, 2012
	Purchase Price: $47,500.00	 


 


CONVERTIBLE PROMISSORY NOTE


 


FOR
VALUE RECEIVED, THE PAWS PET COMPANY, INC., an Illinois corporation (hereinafter called the
“Borrower”), hereby promises to pay to the order of ASHER ENTERPRISES, INC., a Delaware corporation, or
registered assigns (the “Holder”) the sum of $47,500.00 together with any interest as set forth herein, on
November 29, 2012 (the “Maturity Date”), and to pay interest on the unpaid principal balance hereof at the rate
of eight percent (8%) (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. Any amount of principal or interest on this
Note which is not paid when due shall bear interest at the rate of twenty two percent (22%) per annum from the due date
thereof until the same is paid (“Default Interest”). Interest shall commence accruing
on the 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, no 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:


 



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Article
I. CONVERSION RIGHTS


 


1.1          Conversion
Right. The Holder shall have the right from time to time, and at any time during the period beginning on the date which is
one hundred eighty (180) days following the date of this Note and ending on the later of: (i) the Maturity Date and (ii) the date
of payment of the Default Amount (as defined in Article III) pursuant to Section 1.6(a) or Article III, each in respect of the
remaining outstanding principal amount of this Note to convert all or any part of the outstanding and unpaid principal amount of
this Note into fully paid and non- assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares
of capital stock or other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified at
the conversion price (the “Conversion Price”) determined as provided herein (a “Conversion”); provided,
however, that in no event shall the Holder be entitled to convert any portion of this Note in excess of that portion of
this Note upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its
affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion
of the Notes or the unexercised or unconverted portion of any other security of the Borrower subject to a limitation on conversion
or exercise analogous to the limitations contained herein) and (2) the number of shares of Common Stock issuable upon the conversion
of the portion of this Note with respect to which the determination of this proviso is being made, would result in beneficial ownership
by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), and Regulations 13D-G thereunder, except as otherwise provided in clause
(1) of such proviso, provided, further, however, that the limitations on conversion may be waived by the Holder
upon, at the election of the Holder, not less than 61 days’ prior notice to the Borrower, and the provisions of the conversion
limitation shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be specified in
such notice of waiver). The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined
by dividing the Conversion Amount (as defined below) by the applicable Conversion Price then in effect on the date specified in
the notice of conversion, in the form attached hereto as Exhibit A (the “Notice of Conversion”), delivered to the Borrower
by the Holder in accordance with Section 1.4 below; provided that the Notice of Conversion is submitted by facsimile or 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 Borrower’s option, accrued and unpaid interest, if any, on such principal amount at the interest rates provided
in this Note to the Conversion Date, plus (3) at the Borrower’s option, Default Interest, if any, on the amounts referred
to in the immediately preceding clauses (1) and/or (2) plus (4) at the Holder’s option, any amounts owed to the Holder
pursuant to Sections 1.3 and 1.4(g) hereof.


 


1.2          Conversion
Price.


 


(a)          Calculation
of Conversion Price. The conversion price (the “Conversion Price”) shall equal 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
58% multiplied by the Market Price (as defined herein) (representing a discount rate of 42%).  “Market
Price” means the average of the lowest three (3) Trading Prices (as defined below) for the Common Stock during the ten (10)
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 closing bid price on the Over-the-Counter Bulletin Board, or applicable trading market (the “OTCQB”)
as reported by a reliable reporting service (“Reporting Service”) designated by the Holder (i.e. Bloomberg) or, if
the OTCQB 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. 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 OTCQB, or on the principal securities exchange or other securities market on which the Common
Stock is then being traded.


 



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


 


1.3          Authorized
Shares. The Borrower covenants that during the period the conversion right exists, the Borrower will reserve from its authorized
and unissued Common Stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of Common Stock
upon the full conversion of this Note issued pursuant to the Purchase Agreement. The Borrower is required at all times to have
authorized and reserved five times the number of shares that is actually issuable upon full conversion of the Note (based on the
Conversion Price of the Notes in effect from time to time)(the “Reserved Amount”). The Reserved Amount shall be increased
from time to time in accordance with the Borrower’s obligations pursuant to Section 4(g) of the Purchase Agreement. The Borrower
represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. In addition, if the
Borrower shall issue any securities or make any change to its capital structure which would change the number of shares of Common
Stock into which the Notes shall be convertible at the then current Conversion Price, the Borrower shall at the same time make
proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free
from preemptive rights, for conversion of the outstanding Notes. The Borrower (i) acknowledges that it has irrevocably instructed
its transfer agent to issue certificates for the Common Stock issuable upon conversion of this Note, and (ii) agrees that
its issuance of this Note shall constitute full authority to its officers and agents who are charged with the duty of executing
stock certificates to execute and issue the necessary certificates for shares of Common Stock in accordance with the terms and
conditions of this Note.


 


If, at any time the Borrower
does not maintain the Reserved Amount it will be considered an Event of Default under Section 3.2 of the Note.


 


1.4          Method
of Conversion.


 


(a)          Mechanics
of Conversion. Subject to Section 1.1, this Note may be converted by the Holder in whole or in part at any time from time to
time after the Issue Date, by (A) submitting to the Borrower a Notice of Conversion (by facsimile, e-mail or other reasonable
means of communication dispatched on the Conversion Date prior to 6:00 p.m., New York, New York time) and (B) subject to Section
1.4(b), surrendering this Note at the principal office of the Borrower.


 


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


 



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


 


(d)          Delivery
of Common Stock Upon Conversion. Upon receipt by the Borrower from the Holder of a facsimile transmission
or e-mail (or other reasonable means of communication) of a Notice of Conversion meeting the requirements for conversion as provided
in this Section 1.4, the Borrower shall issue and deliver or cause to be issued and delivered to or upon the order of the Holder
certificates for the Common Stock issuable upon such conversion within three (3) business days after such receipt (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.


 


(e)          Obligation
of Borrower to Deliver Common Stock. Upon receipt by the Borrower of a duly and properly executed Notice of Conversion, the
Holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, the outstanding principal
amount and the amount of accrued and unpaid interest on this Note shall be reduced to reflect such conversion, and, unless the
Borrower defaults on its obligations under this Article I, all rights with respect to the portion of this Note being so converted
shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided,
on such conversion. If the Holder shall have given a Notice of Conversion as provided herein, the Borrower’s obligation to
issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any action
by the Holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against
any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Borrower to
the holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the
Holder of any obligation to the Borrower, and irrespective of any other circumstance which might otherwise limit such obligation
of the Borrower to the Holder in connection with such conversion. The Conversion Date specified in the Notice of Conversion shall
be the Conversion Date so long as the Notice of Conversion is received by the Borrower before 6:00 p.m., New York, New York time,
on such date.


 


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


 


(g)          Failure
to Deliver Common Stock Prior to Deadline.Without in any way limiting the Holder’s right to
pursue other remedies, including actual damages and/or equitable relief, the parties agree that if delivery of the Common Stock
issuable upon conversion of this Note is not delivered by the Deadline (other than a failure due to the circumstances described
in Section 1.3 above, which failure shall be governed by such Section) the Borrower shall pay to the Holder $1,000 per day in cash,
for each day beyond the Deadline that the Borrower fails to deliver such Common Stock through willful acts designed to hinder the
delivery of Common Stock to the Holder. Such cash amount shall be paid to Holder by the fifth day of the month following the month
in which it has accrued or, at the option of the Holder (by written notice to the Borrower by the first day of the month following
the month in which it has accrued), shall be added to the principal amount of this Note, in which event interest shall accrue thereon
in accordance with the terms of this Note and such additional principal amount shall be convertible into Common Stock in accordance
with the terms of this Note. The Borrower agrees that the right to convert is a valuable right to the Holder. The damages resulting
from a failure, attempt to frustrate, interference with such conversion right are difficult if not impossible to qualify. Accordingly
the parties acknowledge that the liquidated damages provision contained in this Section 1.4(g) are justified.


 



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


 


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


 


The
legend set forth above shall be removed and the Borrower shall issue to the Holder a new certificate therefore free of any transfer
legend if (i) the Borrower or its transfer agent shall have received an opinion of counsel in the form of the Form of Opinion attached
as Exhibit B to this Note, which opinion shall not be issued until the 6 month anniversary from the date this note is funded by
the Holder, which opinion shall be accepted by the Company so that the sale or transfer is effected (provided the Borrower or counsel
will have a 24 hour window in which can question the calculation of the Conversion Price)_ or (ii) in the case of the Common Stock
issuable upon conversion of this Note, such security is registered for sale by the Holder under an effective registration statement
filed under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of
a particular date that can then be immediately sold. In the event that the Company does not accept the opinion of counsel provided
by the Buyer with respect to the transfer of Securities pursuant to an exemption from registration, such as Rule 144 or 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.


 



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


 


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


 


(d)          Adjustment
Due to Dilutive Issuance. If, at any time when any Notes are issued and outstanding, the Borrower issues or sells, or in accordance
with this Section 1.6(d) hereof is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration
per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith)
less than the Conversion Price in effect on the date of such issuance (or deemed issuance) of such shares of Common Stock (a “Dilutive
Issuance”), then immediately upon the Dilutive Issuance, the Conversion Price will be reduced to the amount of the consideration
per share received by the Borrower in such Dilutive Issuance.


 


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 options or other awards granted under the Borrower’s 2012 Stock Incentive Plan)), whether or not immediately
exercisable, to subscribe for or to purchase Common Stock or other securities convertible into or exchangeable for Common Stock
(“Convertible Securities”) (such warrants, rights and options to purchase Common Stock or Convertible Securities are
hereinafter referred to as “Options”) and the price per share for which Common Stock is issuable upon the exercise
of such Options is less than the Conversion Price then in effect, then the Conversion Price shall be equal to such price per share.
For purposes of the preceding sentence, the “price per share for which Common Stock is issuable upon the exercise of such
Options” is determined by dividing (i) the total amount, if any, received or receivable by the Borrower as consideration
for the issuance or granting of all such Options, plus the minimum aggregate amount of additional consideration, if any, payable
to the Borrower upon the exercise of all such Options, plus, in the case of Convertible Securities issuable upon the exercise of
such Options, the minimum aggregate amount of additional consideration payable upon the conversion or exchange thereof at the time
such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon the exercise of all such Options (assuming full conversion of Convertible Securities, if applicable). No further
adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon the exercise of such Options
or upon the conversion or exchange of Convertible Securities issuable upon exercise of such Options.


 



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


 


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


 


(f)          Notice
of Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price as a result of the events described
in this Section 1.6, the Borrower, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish
to the Holder 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          Trading
Market Limitations.Unless permitted by the applicable rules and regulations of the principal securities
market on which the Common Stock is then listed or traded, in no event shall the Borrower issue upon conversion of or otherwise
pursuant to this Note and the other Notes issued pursuant to the Purchase Agreement more than the maximum number of shares of Common
Stock that the Borrower can issue pursuant to any rule of the principal United States securities market on which the Common Stock
is then traded (the “Maximum Share Amount”), which shall be 4.99% of the total shares outstanding on the Closing Date
(as defined in the Purchase Agreement), subject to equitable adjustment from time to time for stock splits, stock dividends, combinations,
capital reorganizations and similar events relating to the Common Stock occurring after the date hereof. Once the Maximum Share
Amount has been issued, if the Borrower fails to eliminate any prohibitions under applicable law or the rules or regulations of
any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Borrower or any
of its securities on the Borrower’s ability to issue shares of Common Stock in excess of the Maximum Share Amount, in lieu
of any further right to convert this Note, this will be considered an Event of Default under Section 3.3 of the Note.


 


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.


 



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1.9          Prepayment.
Notwithstanding anything to the contrary contained in this Note, 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, in accordance with this Section 1.9. 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 Optional Prepayment Amount (as defined below) 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 exercises its right to prepay
the Note, the Borrower shall make payment to the Holder of an amount in cash (the “Optional Prepayment Amount”) 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 to the Optional Prepayment Date plus (y) Default Interest, if any,
on the amounts referred to in clauses (w) and (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g)
hereof. If the Borrower delivers an Optional Prepayment Notice and fails to pay the Optional 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.


 


Notwithstanding anything
to the contrary contained in this Note, at any time during the period beginning on the date which is ninety-one (91) days following
the issue date and ending on the date which is one hundred twenty (120) 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, in accordance with this Section 1.9. Any 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 Optional Prepayment Date, the Borrower shall make payment of the Second Optional Prepayment Amount (as defined below)
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 exercises its right to prepay the Note, the Borrower shall make payment to the Holder
of an amount in cash (the “Second Optional Prepayment Amount”) equal to 140%, 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 to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referred to in clauses (w) and (x)
plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the Borrower delivers an Optional
Prepayment Notice and fails to pay the Second Optional 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.


 


Notwithstanding
anything to the contrary contained in this Note, at any time during the period beginning on the date which is one hundred
twenty-one (121) days following the issue date and ending on the date which is one hundred fifty (150) 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, in accordance with this
Section 1.9. Any 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 Optional Prepayment Date, the
Borrower shall make payment of the Third Optional Prepayment Amount (as defined below) 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 exercises its right to prepay the Note, the Borrower shall make payment to the Holder of an amount in cash (the
“Third Optional Prepayment Amount”) equal to 145%, 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 to the
Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referred to in clauses (w) and (x) plus
(z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the Borrower delivers an Optional
Prepayment Notice and fails to pay the Third Optional 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.


 



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Notwithstanding
any to the contrary stated elsewhere herein, at any time during the period beginning on the date that is one hundred
fifty-one (151) day from the issue date and ending 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, in accordance with this Section 1.9. Any
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 Optional Prepayment Date, the Borrower shall make
payment of the Fourth Optional Prepayment Amount (as defined below) 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
exercises its right to prepay the Note, the Borrower shall make payment to the Holder of an amount in cash (the
“Fourth Optional Prepayment Amount”) 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 to the
Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referred to in clauses (w) and (x) plus
(z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the Borrower delivers an Optional
Prepayment Notice and fails to pay the Fourth Optional 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.


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


 


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.


 


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 or financial institutions 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.


 



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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.


 


Article
III.  EVENTS OF DEFAULT


 


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


 


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


 


3.2          Conversion
and the Shares. The Borrower fails to issue shares of Common Stock to the Holder (or announces or
threatens in writing that it will not honor its obligation to do so) upon exercise by the Holder of the conversion rights of the
Holder in accordance with the terms of this Note,fails to transfer or cause its transfer agent to transfer (issue) (electronically
or in certificated form) any certificate for shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant
to this Note as and when required by this Note, the Borrower directs its transfer agent not to transfer or delays, impairs, and/or
hinders its transfer agent in transferring (or issuing) (electronically or in certificated form) any certificate for shares of
Common Stock to be issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note,
or fails to remove (or directs its transfer agent not to remove or impairs, delays, and/or hinders its transfer agent from removing)
any restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate for any shares of
Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note (or makes
any written announcement, statement or threat that it does not intend to honor the obligations described in this paragraph) and
any such failure shall continue uncured (or any written announcement, statement or threat not to honor its obligations shall not
be rescinded in writing) for five (5) business days after the Holder shall have delivered a Notice of Conversion. It is an obligation
of the Borrower to remain current in its obligations to its transfer agent. It shall be an event of default of this Note, if a
conversion of this Note is delayed, hindered or frustrated due to a balance owed by the Borrower to its transfer agent. If at the
option of the Holder, the Holder advances any funds to the Borrower’s transfer agent in order to process a conversion, such
advanced funds shall be paid by the Borrower to the Holder within forty eight (48) hours of a demand from the Holder.


 


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


 


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


 


3.5          Receiver
or Trustee. The Borrower or any subsidiary of the Borrower shall make an assignment for the benefit of creditors, 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.


 


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


 


3.7          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.



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3.8          Delisting
of Common Stock. The Borrower shall fail to maintain the listing of the Common Stock on at least one of the OTCQB or an equivalent
replacement exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the American Stock
Exchange.


 


3.9          Failure
to Comply with the Exchange Act. The Borrower shall fail to comply in any material respect with the reporting requirements
of the Exchange Act; and/or the Borrower shall cease to be subject to the reporting requirements of the Exchange Act.


 


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


 


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


 


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


 


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


 


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


 


3.15           Replacement
of Transfer Agent. In the event that the Borrower proposes to replace its transfer agent, the Borrower fails to provide, prior
to the effective date of such replacement, 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.


 


3.16          Cross-Default. 
Notwithstanding anything to the contrary contained in this Note or the other related or companion documents, a breach or default
by the Borrower of any covenant or other term or condition contained in any of the Other Agreements, after the passage of all applicable
notice and cure or grace periods, shall, at the option of the 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, including, without limitation, promissory notes;
provided, however, the term “Other Agreements” shall not include the related or companion documents to this Note. Each
of the loan transactions will be cross-defaulted with each other loan transaction and with all other existing and future debt of
Borrower to the Holder.


 



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Upon the occurrence and during the continuation
of any Event of Default specified in Section 3.1 (solely with respect to failure to pay the principal hereof or interest thereon
when due at the Maturity Date), the Note shall become immediately due and payable and the Borrower shall pay to the Holder, in
full satisfaction of its obligations hereunder, an amount equal to the Default Sum (as defined herein).  UPON THE OCCURRENCE
AND DURING THE CONTINUATION OF ANY EVENT OF DEFAULT SPECIFIED IN SECTION 3.2, THE NOTE SHALL BECOME IMMEDIATELY DUE AND PAYABLE
AND THE BORROWER SHALL PAY TO THE HOLDER, IN FULL SATISFACTION OF ITS OBLIGATIONS HEREUNDER, AN AMOUNT EQUAL TO: (Y) THE DEFAULT
SUM (AS DEFINED HEREIN); MULTIPLIED BY (Z) TWO (2). Upon the occurrence and during the continuation of any Event of Default specified
in Sections 3.1 (solely with respect to failure to pay the principal hereof or interest thereon when due on this Note upon a Trading
Market Prepayment Event pursuant to Section 1.7 or upon acceleration), 3.3, 3.4, 3.6, 3.8, 3.9, 3.11, 3.12, 3.13, 3.14, and/or
3. 15 exercisable through the delivery of written notice to the Borrower by such Holders (the “Default Notice”), and
upon the occurrence of an Event of Default specified the remaining sections of Articles III (other than failure to pay the principal
hereof or interest thereon at the Maturity Date specified in Section 3,1 hereof), the Note shall become immediately due and payable
and the Borrower shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the greater of
(i) 150% times the sum of (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid
interest on the unpaid principal amount of this Note to the date of payment (the “Mandatory Prepayment Date”) plus
(y) Default Interest, if any, on the amounts referred to in clauses (w) and/or (x) plus (z) any amounts owed to the Holder
pursuant to Sections 1.3 and 1.4(g) hereof (the then outstanding principal amount of this Note to the date of payment plus
the amounts referred to in clauses (x), (y) and (z) shall collectively be known as the “Default Sum”) or (ii) the “parity
value” of the Default Sum to be prepaid, where parity value means (a) the highest number of shares of Common Stock issuable
upon conversion of or otherwise pursuant to such Default Sum in accordance with Article I, treating the Trading Day immediately
preceding the Mandatory Prepayment Date as the “Conversion Date” for purposes of determining the lowest applicable
Conversion Price, unless the Default Event arises as a result of 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 Closing Price for the Common Stock during
the period beginning on the date of first occurrence of the Event of Default and ending one day prior to the Mandatory Prepayment
Date (the “Default Amount”) and all other amounts payable hereunder shall immediately become due and payable, all without
demand, presentment or notice, all of which hereby are expressly waived, together with all costs, including, without limitation,
legal fees and expenses, of collection, and the Holder shall be entitled to exercise all other rights and remedies available at
law or in equity. 


 


If the Borrower fails
to pay the Default Amount within five (5) business days of written notice that such amount is due and payable, then the Holder
shall have the right at any time, so long as the Borrower remains in default (and so long and to the extent that there are sufficient
authorized shares), to require the Borrower, upon written notice, to immediately issue, in lieu of the Default Amount, the number
of shares of Common Stock of the Borrower equal to the Default Amount divided by the Conversion Price then in effect.


 


Article
IV. MISCELLANEOUS


 


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


 


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


 


If to the Borrower,
to:


 


THE
PAWS PET COMPANY, INC.


2001
Gateway Place - Suite 410


San
Jose, CA 95110


Attn:
DAN WIESEL, Chief Executive Officer


facsimile:


 



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


 


Sichenzia
Ross Friedman Ference LLP


Attn:
Greg Sichenzia, Esq.


61
Broadway, 32nd Floor


New
York, NY 10006


facsimile:
(212) 930-9725


 


If
to the Holder:


ASHER
ENTERPRISES, INC.


1
Linden Pl., Suite 207


Great
Neck, NY. 11021


Attn:
Curt Kramer, President


facsimile:
516-498-9894


 


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


Naidich
Wurman Birnbaum & Maday, LLP


80
Cuttermill Road, Suite 410


Great
Neck, NY 11021


Attn:
Bernard S. Feldman, Esq.


facsimile:
516-466-3555


 


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 bonafide margin account or other lending arrangement.


 


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


 


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


 



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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.


 


4.10          Remedies.
The Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating
the intent and purpose of the transaction contemplated hereby. Accordingly, the Borrower acknowledges that the remedy at law for
a breach of its obligations under this Note will be inadequate and agrees, in the event of a breach or threatened breach by the
Borrower of the provisions of this Note, that the Holder shall be entitled, in addition to all other available remedies at law
or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing
any breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity of showing economic
loss and without any bond or other security being required.


 


IN WITNESS WHEREOF, Borrower
has caused this Note to be signed in its name by its duly authorized officer this February 27, 2012.


 


	 	THE PAWS PET COMPANY, INC.
	 	 	 
	 	By:	 
	 	 	DAN WIESEL
	 	 	Chief Executive Officer


 



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