** **

**NEITHER THE ISSUANCE AND SALE OF THESECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTEREDUNDER 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 SECURITIESACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLEFORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDINGTHE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENTSECURED BY THE SECURITIES.**

** **

 

**CONVERTIBLE PROMISSORY NOTE**

 

**FOR VALUE RECEIVED**,**ALL AMERICAN PET COMPANY, INC.**, a Maryland corporation (hereinafter called the “Borrower”), hereby promisesto pay to the order of **ASHER ENTERPRISES, INC.**, a Delaware corporation, or registered assigns (the “Holder”)the sum of $75,000.00 together with any interest as set forth herein, on November 14, 2011 (the “Maturity Date”), andto pay interest on the unpaid principal balance hereof at the rate of eight percent (8%) (the “Interest Rate”) perannum from the date hereof (the “Issue Date”) until the same becomes due and payable, whether at maturity or upon accelerationor 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”). Interestshall commence accruing on the date that the Note is fully paid and shall be computed on the basis of a 365-day year andthe actual number of days elapsed. All payments due hereunder (to the extent not converted into common stock, $0.001 par valueper share (the “Common Stock”) in accordance with the terms hereof) shall be made in lawful money of the United Statesof America. All payments shall be made at such address as the Holder shall hereafter give to the Borrower by written notice madein accordance with the provisions of this Note. Whenever any amount expressed to be due by the terms of this Note is due on anyday 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 caseof any interest payment date which is not the date on which this Note is paid in full, the extension of the due date thereof shallnot be taken into account for purposes of determining the amount of interest due on such date. As used in this Note, the term “businessday” shall mean any day other than a Saturday, Sunday or a day on which commercial banks in the city of New York, New Yorkare 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 whichthis Note was originally issued (the “Purchase Agreement”).

 

 

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

 

The following termsshall apply to this Note:

 

ArticleI. CONVERSION RIGHTS

 

1.1           ConversionRight. The Holder shall have the right from time to time, and at any time during the period beginning on the date which isone hundred eighty (180) days following the date of this Note and ending on the later of: (i) the Maturity Date and (ii) the dateof payment of the Default Amount (as defined in Article III) pursuant to Section 1.6(a) or Article III, each in respect of theremaining outstanding principal amount of this Note to convert all or any part of the outstanding and unpaid principal amount ofthis Note into fully paid and non- assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any sharesof capital stock or other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified atthe 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 ofthis Note upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and itsaffiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portionof the Notes or the unexercised or unconverted portion of any other security of the Borrower subject to a limitation on conversionor exercise analogous to the limitations contained herein) and (2) the number of shares of Common Stock issuable upon the conversionof the portion of this Note with respect to which the determination of this proviso is being made, would result in beneficial ownershipby the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock. For purposes of the proviso to theimmediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities ExchangeAct 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 Holderupon, at the election of the Holder, not less than 61 days’ prior notice to the Borrower, and the provisions of the conversionlimitation shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be specified insuch notice of waiver). The number of shares of Common Stock to be issued upon each conversion of this Note shall be determinedby dividing the Conversion Amount (as defined below) by the applicable Conversion Price then in effect on the date specified inthe notice of conversion, in the form attached hereto as Exhibit A (the “Notice of Conversion”), delivered to the Borrowerby 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 Yorktime on such conversion date (the “Conversion Date”). The term “Conversion Amount” means, with respectto 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 providedin this Note to the Conversion Date, plus (3) at the Borrower’s option, Default Interest, if any, on the amounts referredto in the immediately preceding clauses (1) and/or (2) plus (4) at the Holder’s option, any amounts owed to the Holderpursuant to Sections 1.3 and 1.4(g) hereof.

 

 

1.2           ConversionPrice.

 

(a)          Calculationof Conversion Price. The conversion price (the “Conversion Price”) shall equal the VariableConversion Price (as defined herein) (subject to equitable adjustments for stock splits, stock dividends or rights offerings bythe 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 mean60% multiplied by the Market Price (as defined herein) (representing a discount rate of 40%).  “MarketPrice” 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, forany security as of any date, the closing bid price on the Over-the-Counter Bulletin Board, or applicable trading market (the “OTCBB”)as reported by a reliable reporting service (“Reporting Service”) designated by the Holder (i.e. Bloomberg) or, ifthe OTCBB is not the principal trading market for such security, the closing bid price of such security on the principal securitiesexchange or trading market where such security is listed or traded or, if no closing bid price of such security is available inany 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 onsuch date in the manner provided above, the Trading Price shall be the fair market value as mutually determined by the Borrowerand the holders of a majority in interest of the Notes being converted for which the calculation of the Trading Price is requiredin order to determine the Conversion Price of such Notes. “Trading Day” shall mean any day on which the Common Stockis tradable for any period on the OTCBB, or on the principal securities exchange or other securities market on which the CommonStock is then being traded.

 

(b)          ConversionPrice 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 whichthe Borrower is the surviving or continuing corporation and its capital stock is unchanged) or sell or transfer all or substantiallyall of the assets of the Borrower or (ii) any person, group or entity (including the Borrower) publicly announces a tender offerto purchase 50% or more of the Borrower’s Common Stock (or any other takeover scheme) (the date of the announcement referredto in clause (i) or (ii) is hereinafter referred to as the “Announcement Date”), then the Conversion Price shall, effectiveupon the Announcement Date and continuing through the Adjusted Conversion Price Termination Date (as defined below), be equal tothe 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, theConversion Price shall be determined as set forth in this Section 1.2(a). For purposes hereof, “Adjusted Conversion PriceTermination Date” shall mean, with respect to any proposed transaction or tender offer (or takeover scheme) for which a publicannouncement 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 abandonmentof the proposed transaction or tender offer (or takeover scheme) which caused this Section 1.2(b) to become operative.

 

 

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

 

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

 

1.4           Methodof Conversion.

 

(a)          Mechanicsof Conversion. Subject to Section 1.1, this Note may be converted by the Holder in whole or in part at any time from time totime after the Issue Date, by (A) submitting to the Borrower a Notice of Conversion (by facsimile, e-mail or other reasonablemeans of communication dispatched on the Conversion Date prior to 6:00 p.m., New York, New York time) and (B) subject to Section1.4(b), surrendering this Note at the principal office of the Borrower.

 

(b)          Surrenderof Note Upon Conversion. Notwithstanding anything to the contrary set forth herein, upon conversion of this Note in accordancewith the terms hereof, the Holder shall not be required to physically surrender this Note to the Borrower unless the entire unpaidprincipal amount of this Note is so converted. The Holder and the Borrower shall maintain records showing the principal amountso 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, suchrecords of the Borrower shall, *prima**facie,* be controllingand determinative in the absence of manifest error. Notwithstanding the foregoing, if any portion of this Note is converted asaforesaid, the Holder may not transfer this Note unless the Holder first physically surrenders this Note to the Borrower, whereuponthe Borrower will forthwith issue and deliver upon the order of the Holder a new Note of like tenor, registered as the Holder (uponpayment by the Holder of any applicable transfer taxes) may request, representing in the aggregate the remaining unpaid principalamount of this Note. The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisionsof this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note representedby this Note may be less than the amount stated on the face hereof.

 

 

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

 

(d)          Deliveryof Common Stock Upon Conversion. Upon receipt by the Borrower from the Holder of a facsimile transmissionor e-mail (or other reasonable means of communication) of a Notice of Conversion meeting the requirements for conversion as providedin this Section 1.4, the Borrower shall issue and deliver or cause to be issued and delivered to or upon the order of the Holdercertificates for the Common Stock issuable upon such conversion within three (3) business days after such receipt (but in any eventthe fifth (5th) business day being hereinafter referred to as the “Deadline”) (and, solely in the case of conversionof the entire unpaid principal amount hereof, surrender of this Note) in accordance with the terms hereof and the Purchase Agreement.

 

(e)          Obligationof Borrower to Deliver Common Stock. Upon receipt by the Borrower of a Notice of Conversion, the Holder shall be deemed tobe the holder of record of the Common Stock issuable upon such conversion, the outstanding principal amount and the amount of accruedand unpaid interest on this Note shall be reduced to reflect such conversion, and, unless the Borrower defaults on its obligationsunder this Article I, all rights with respect to the portion of this Note being so converted shall forthwith terminate except theright to receive the Common Stock or other securities, cash or other assets, as herein provided, on such conversion. If the Holdershall have given a Notice of Conversion as provided herein, the Borrower’s obligation to issue and deliver the certificatesfor 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 enforcethe 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 connectionwith such conversion. The Conversion Date specified in the Notice of Conversion shall be the Conversion Date so long as the Noticeof Conversion is received by the Borrower before 6:00 p.m., New York, New York time, on such date.

 

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

 

 

(g)          Failureto Deliver Common Stock Prior to Deadline. Without in any way limiting the Holder’s rightto pursue other remedies, including actual damages and/or equitable relief, the parties agree that if delivery of the Common Stockissuable upon conversion of this Note is not delivered by the Deadline (other than a failure due to the circumstances describedin 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. Such cash amount shall be paid to Holderby the fifth day of the month following the month in which it has accrued or, at the option of the Holder (by written notice tothe Borrower by the first day of the month following the month in which it has accrued), shall be added to the principal amountof this Note, in which event interest shall accrue thereon in accordance with the terms of this Note and such additional principalamount shall be convertible into Common Stock in accordance with the terms of this Note. The Borrower agrees that the right toconvert is a valuable right to the Holder. The damages resulting from a failure, attempt to frustrate, interference with such conversionright are difficult if not impossible to qualify. Accordingly the parties acknowledge that the liquidated damages provision containedin this Section 1.4(g) are justified.

 

1.5           Concerningthe Shares. The shares of Common Stock issuable upon conversion of this Note may not be sold or transferred unless (i) suchshares are sold pursuant to an effective registration statement under the Act or (ii) the Borrower or its transfer agent shallhave been furnished with an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counselin comparable transactions) to the effect that the shares to be sold or transferred may be sold or transferred pursuant to an exemptionfrom 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 Borrowerwho 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 provisionsset forth below), until such time as the shares of Common Stock issuable upon conversion of this Note have been registered underthe Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particulardate that can then be immediately sold, each certificate for shares of Common Stock issuable upon conversion of this Note thathas not been so included in an effective registration statement or that has not been sold pursuant to an effective registrationstatement or an exemption that permits removal of the legend, shall bear a legend substantially in the following form, as appropriate:

 

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

** **

 

Thelegend set forth above shall be removed and the Borrower shall issue to the Holder a new certificate therefore free of any transferlegend if (i) the Borrower or its transfer agent shall have received an opinion of counsel, in form, substance and scope customaryfor opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Common Stock may be madewithout registration under the Act, which opinion shall be accepted by the Company 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 Holderunder an effective registration statement filed under the Act or otherwise may be sold pursuant to Rule 144 without any restrictionas to the number of securities as of a particular date that can then be immediately sold. In the event that the Company does notaccept 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           Effectof Certain Events.

 

(a)          Effectof Merger, Consolidation, Etc. At the option of the Holder, the sale, conveyance or disposition of all or substantially allof the assets of the Borrower, the effectuation by the Borrower of a transaction or series of related transactions in which morethan 50% of the voting power of the Borrower is disposed of, or the consolidation, merger or other business combination of theBorrower with or into any other Person (as defined below) or Persons when the Borrower is not the survivor shall either: (i) bedeemed to be an Event of Default (as defined in Article III) pursuant to which the Borrower shall be required to pay to the Holderupon 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 liabilitycompany, partnership, association, trust or other entity or organization.

 

(b)          AdjustmentDue to Merger, Consolidation, Etc. If, at any time when this Note is issued and outstanding and prior to conversion of allof the Notes, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similarevent, as a result of which shares of Common Stock of the Borrower shall be changed into the same or a different number of sharesof another class or classes of stock or securities of the Borrower or another entity, or in case of any sale or conveyance of allor 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 theterms 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 convertedin full immediately prior to such transaction (without regard to any limitations on conversion set forth herein), and in any suchcase appropriate provisions shall be made with respect to the rights and interests of the Holder of this Note to the end that theprovisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and of the number of sharesissuable upon conversion of the Note) shall thereafter be applicable, as nearly as may be practicable in relation to any securitiesor assets thereafter deliverable upon the conversion hereof. The Borrower shall not affect any transaction described in this Section1.6(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 recorddate, the consummation of, such merger, consolidation, exchange of shares, recapitalization, reorganization or other similar eventor sale of assets (during which time the Holder shall be entitled to convert this Note) and (b) the resulting successor or acquiringentity (if not the Borrower) assumes by written instrument the obligations of this Section 1.6(b). The above provisions shall similarlyapply to successive consolidations, mergers, sales, transfers or share exchanges.

 

 

(c)          AdjustmentDue 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 ordistribution 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 thisNote after the date of record for determining shareholders entitled to such Distribution, to receive the amount of such assetswhich would have been payable to the Holder with respect to the shares of Common Stock issuable upon such conversion had such Holderbeen the holder of such shares of Common Stock on the record date for the determination of shareholders entitled to such Distribution.

 

(d)          AdjustmentDue to Dilutive Issuance. If, at any time when any Notes are issued and outstanding, the Borrower issues or sells, or in accordancewith this Section 1.6(d) hereof is deemed to have issued or sold, any shares of Common Stock for no consideration or for a considerationper 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 “DilutiveIssuance”), then immediately upon the Dilutive Issuance, the Conversion Price will be reduced to the amount of the considerationper share received by the Borrower in such Dilutive Issuance.

 

The Borrower shallbe deemed to have issued or sold shares of Common Stock if the Borrower in any manner issues or grants any warrants, rights oroptions (not including employee stock option plans), whether or not immediately exercisable, to subscribe for or to purchase CommonStock 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”) andthe price per share for which Common Stock is issuable upon the exercise of such Options is less than the Conversion Price thenin effect, then the Conversion Price shall be equal to such price per share. For purposes of the preceding sentence, the “priceper 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 minimumaggregate amount of additional consideration, if any, payable to the Borrower upon the exercise of all such Options, plus, in thecase of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional considerationpayable 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 conversionof Convertible Securities, if applicable). No further adjustment to the Conversion Price will be made upon the actual issuanceof such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable uponexercise of such Options.

 

 

Additionally, the Borrowershall 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 pershare for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price then in effect, thenthe Conversion Price shall be equal to such price per share. For the purposes of the preceding sentence, the “price per sharefor 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 minimumaggregate amount of additional consideration, if any, payable to the Borrower upon the conversion or exchange thereof at the timesuch Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stockissuable upon the conversion or exchange of all such Convertible Securities. No further adjustment to the Conversion Price willbe made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities.

 

(e)          PurchaseRights. If, at any time when any Notes are issued and outstanding, the Borrower issues any convertible securities or rightsto purchase stock, warrants, securities or other property (the “Purchase Rights”) pro rata to the record holders ofany class of Common Stock, then the Holder of this Note will be entitled to acquire, upon the terms applicable to such PurchaseRights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of CommonStock acquirable upon complete conversion of this Note (without regard to any limitations on conversion contained herein) immediatelybefore 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)          Noticeof Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price as a result of the events describedin this Section 1.6, the Borrower, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnishto the Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustmentor readjustment is based. The Borrower shall, upon the written request at any time of the Holder, furnish to such Holder a likecertificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the numberof shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversionof the Note.

 

 

1.7           TradingMarket Limitations. Unless permitted by the applicable rules and regulations of the principal securitiesmarket on which the Common Stock is then listed or traded, in no event shall the Borrower issue upon conversion of or otherwisepursuant to this Note and the other Notes issued pursuant to the Purchase Agreement more than the maximum number of shares of CommonStock that the Borrower can issue pursuant to any rule of the principal United States securities market on which the Common Stockis 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 ShareAmount has been issued, if the Borrower fails to eliminate any prohibitions under applicable law or the rules or regulations ofany stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Borrower or anyof its securities on the Borrower’s ability to issue shares of Common Stock in excess of the Maximum Share Amount, in lieuof any further right to convert this Note, this will be considered an Event of Default under Section 3.3 of the Note.

 

1.8           Statusas 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 Amountor Maximum Share Amount) shall be deemed converted into shares of Common Stock and (ii) the Holder’s rights as a Holder ofsuch converted portion of this Note shall cease and terminate, excepting only the right to receive certificates for such sharesof Common Stock and to any remedies provided herein or otherwise available at law or in equity to such Holder because of a failureby the Borrower to comply with the terms of this Note. Notwithstanding the foregoing, if a Holder has not received certificatesfor all shares of Common Stock prior to the tenth (10th) business day after the expiration of the Deadline with respect to a conversionof any portion of this Note for any reason, then (unless the Holder otherwise elects to retain its status as a holder of CommonStock by so notifying the Borrower) the Holder shall regain the rights of a Holder of this Note with respect to such unconvertedportions of this Note and the Borrower shall, as soon as practicable, return such unconverted Note to the Holder or, if the Notehas not been surrendered, adjust its records to reflect that such portion of this Note has not been converted. In all cases, theHolder shall retain all of its rights and remedies (including, without limitation, (i) the right to receive Conversion DefaultPayments pursuant to Section 1.3 to the extent required thereby for such Conversion Default and any subsequent Conversion Defaultand (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.

 

1.9           Prepayment.Notwithstanding anything to the contrary contained in this Note, so long as the Borrower has not received a Notice of Conversionfrom the Holder, then at any time during the period beginning on the Issue Date and ending on the date which is sixty (60) daysfollowing the issue date, the Borrower shall have the right, exercisable on not less than three (3) Trading Days prior writtennotice to the Holder of the Note to prepay the outstanding Note (principal and accrued interest), in full, in accordance with thisSection 1.9. Any notice of prepayment hereunder (an “Optional Prepayment Notice”) shall be delivered to the Holderof 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 OptionalPrepayment Amount (as defined below) to or upon the order of the Holder as specified by the Holder in writing to the Borrower atleast one (1) business day prior to the Optional Prepayment Date. If the Borrower exercises its right to prepay the Note, the Borrowershall make payment to the Holder of an amount in cash (the “Optional Prepayment Amount”) equal to 125%, multipliedby the sum of: (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaidprincipal amount of this Note to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referredto 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 Borrowerdelivers 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 pursuantto this Section 1.9.

 

 

Notwithstandinganything to the contrary contained in this Note, so long as the Borrower has not received a Notice of Conversion from the Holder,then at any time during the period beginning on the date which is sixty-one (61) days following the issue date and ending on thedate which is one hundred twenty (120) days following the issue date, the Borrower shall have the right, exercisable on not lessthan three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding Note (principal and accruedinterest), in full, in accordance with this Section 1.9. Any Optional Prepayment Notice shall be delivered to the Holder of theNote at its registered addresses and shall state: (1) that the Borrower is exercising its right to prepay the Note, and (2) thedate of prepayment which shall be not more than three (3) Trading Days from the date of the Optional Prepayment Notice. On theOptional Prepayment Date, the Borrower shall make payment of the Second Optional Prepayment Amount (as defined below) to or uponthe order of the Holder as specified by the Holder in writing to the Borrower at least one (1) business day prior to the OptionalPrepayment Date. If the Borrower exercises its right to prepay the Note, the Borrower shall make payment to the Holder of an amountin cash (the “Second Optional Prepayment Amount”) equal to 130%, multiplied by the sum of: (w) the then outstandingprincipal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this Note to theOptional 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 PrepaymentNotice and fails to pay the Second Optional Prepayment Amount due to the Holder of the Note within two (2) business days followingthe Optional Prepayment Date, the Borrower shall forever forfeit its right to prepay the Note pursuant to this Section 1.9.

 

Notwithstandinganything to the contrary contained in this Note, so long as the Borrower has not received a Notice of Conversion from the Holder,then at any time during the period beginning on the date which is one hundred twenty-one (121) days following the issue date andending on the date which is one hundred fifty (150) days following the issue date, the Borrower shall have the right, exercisableon not less than three (3) Trading Days prior written notice to the Holder of the Note to prepay the outstanding Note (principaland accrued interest), in full, in accordance with this Section 1.9. Any Optional Prepayment Notice shall be delivered to the Holderof 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) toor upon the order of the Holder as specified by the Holder in writing to the Borrower at least one (1) business day prior to theOptional Prepayment Date. If the Borrower exercises its right to prepay the Note, the Borrower shall make payment to the Holderof an amount in cash (the “Third Optional Prepayment Amount”) equal to 140%, multiplied by the sum of: (w) the thenoutstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of thisNote 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 OptionalPrepayment Notice and fails to pay the Third Optional Prepayment Amount due to the Holder of the Note within two (2) business daysfollowing the Optional Prepayment Date, the Borrower shall forever forfeit its right to prepay the Note pursuant to this Section1.9.

 

 

Notwithstanding any tothe contrary stated elsewhere herein, at any time during the period beginning on the date that is one hundred fifty-one (151) dayfrom the issue date and ending one hundred eighty (180) days following the issue date, the Borrowershall have the right, exercisable on not less than three (3) Trading Days prior written notice to the Holder of the Note to prepaythe outstanding Note (principal and accrued interest), in full, in accordance with this Section 1.9. Any Optional Prepayment Noticeshall be delivered to the Holder of the Note at its registered addresses and shall state: (1) that the Borrower is exercising itsright to prepay the Note, and (2) the date of prepayment which shall be not more than three (3) Trading Days from the date of theOptional Prepayment Notice. On the Optional Prepayment Date, the Borrower shall make payment of the Fourth Optional PrepaymentAmount (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 shallmake payment to the Holder of an amount in cash (the “Fourth Optional Prepayment Amount”) equal to 150%, multipliedby the sum of: (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaidprincipal amount of this Note to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referredto 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 Borrowerdelivers an Optional Prepayment Notice and fails to pay the Fourth Optional Prepayment Amount due to the Holder of the Note withintwo (2) business days following the Optional Prepayment Date, the Borrower shall forever forfeit its right to prepay the Note pursuantto this Section 1.9.

 

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

 

ArticleII.  CERTAIN COVENANTS

 

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

 

2.2           Restrictionon Stock Repurchases. So long as the Borrower shall have any obligation under this Note, the Borrower shall not without theHolder’s written consent redeem, repurchase or otherwise acquire (whether for cash or in exchange for property or other securitiesor 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 theHolder’s written consent, create, incur, assume guarantee, endorse, contingently agree to purchase or otherwise become liableupon the obligation of any person, firm, partnership, joint venture or corporation, except by the endorsement of negotiable instrumentsfor deposit or collection, or suffer to exist any liability for borrowed money, except (a) borrowings in existence or committedon the date hereof and of which the Borrower has informed Holder in writing prior to the date hereof, (b) indebtedness to tradecreditors or financial institutions incurred in the ordinary course of business or (c) borrowings, the proceeds of which shallbe used to repay this Note.

 

2.4           Saleof Assets. So long as the Borrower shall have any obligation under this Note, the Borrower shall not, without the Holder’swritten 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           Advancesand Loans. So long as the Borrower shall have any obligation under this Note, the Borrower shall not, without the Holder’swritten consent, lend money, give credit or make advances to any person, firm, joint venture or corporation, including, withoutlimitation, 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.

 

ArticleIII.  EVENTS OF DEFAULT

 

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

 

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

 

3.2           Conversionand the Shares. The Borrower fails to issue shares of Common Stock to the Holder (or announces orthreatens in writing that it will not honor its obligation to do so) upon exercise by the Holder of the conversion rights of theHolder in accordance with the terms of this Note, fails to transfer or cause its transfer agent to transfer (issue) (electronicallyor in certificated form) any certificate for shares of Common Stock issued to the Holder upon conversion of or otherwise pursuantto this Note as and when required by this Note, the Borrower directs its transfer agent not to transfer or delays, impairs, and/orhinders its transfer agent in transferring (or issuing) (electronically or in certificated form) any certificate for shares ofCommon 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 ofCommon Stock issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note (or makesany written announcement, statement or threat that it does not intend to honor the obligations described in this paragraph) andany such failure shall continue uncured (or any written announcement, statement or threat not to honor its obligations shall notbe rescinded in writing) for three (3) business days after the Holder shall have delivered a Notice of Conversion.

 

 

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

 

3.4           Breachof Representations and Warranties. Any representation or warranty of the Borrower made herein or in any agreement, statementor 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           Receiveror Trustee. The Borrower or any subsidiary of the Borrower shall make an assignment for the benefit of creditors, or applyfor or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or sucha 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 orany 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 underany bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any subsidiary of theBorrower.

 

3.8           Delistingof Common Stock. The Borrower shall fail to maintain the listing of the Common Stock on at least one of the OTCBB or an equivalentreplacement exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the American StockExchange.

 

3.9           Failureto Comply with the Exchange Act. The Borrower shall fail to comply with the reporting requirements of the Exchange Act; and/orthe 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         Cessationof Operations.    Any cessation of operations by Borrower or Borrower admits it is otherwise generally unable to pay itsdebts 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         Maintenanceof Assets. The failure by Borrower to maintain any material intellectualproperty rights, personal, real property or other assets which are necessary to conduct its business (whether now or in the future).

 

3.13         FinancialStatement Restatement.The restatement of any financial statementsfiled 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 Noteis no longer outstanding, if the result of such restatement would, by comparison to the unrestated financial statement, have constituteda material adverse effect on the rights of the Holder with respect to this Note or the Purchase Agreement.

 

3.14         ReverseSplits.	The Borrower effectuates a reverse split of its CommonStock without twenty (20) days prior written notice to the Holder.

 

3.15         Replacementof Transfer Agent. In the event that the Borrower proposes to replace its transfer agent, the Borrower fails to provide, priorto the effective date of such replacement, a fully executed Irrevocable Transfer Agent Instructions in a form as initially deliveredpursuant to the Purchase Agreement (including but not limited to the provision to irrevocably reserve shares of Common Stock inthe 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 defaultby the Borrower of any covenant or other term or condition contained in any of the Other Agreements, after the passage of all applicablenotice and cure or grace periods, shall, at the option of the Borrower, 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 theterms 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. Eachof the loan transactions will be cross-defaulted with each other loan transaction and with all other existing and future debt ofBorrower to the Holder.

 

 

Upon the occurrence and during the continuationof any Event of Default specified in Section 3.1 (solely with respect to failure to pay the principal hereof or interest thereonwhen due at the Maturity Date), the Note shall become immediately due and payable and the Borrower shall pay to the Holder, infull satisfaction of its obligations hereunder, an amount equal to the Default Sum (as defined herein).  UPON THE OCCURRENCEAND DURING THE CONTINUATION OF ANY EVENT OF DEFAULT SPECIFIED IN SECTION 3.2, THE NOTE SHALL BECOME IMMEDIATELY DUE AND PAYABLEAND THE BORROWER SHALL PAY TO THE HOLDER, IN FULL SATISFACTION OF ITS OBLIGATIONS HEREUNDER, AN AMOUNT EQUAL TO: (Y) THE DEFAULTSUM (AS DEFINED HEREIN); MULTIPLIED BY (Z) TWO (2). Upon the occurrence and during the continuation of any Event of Default specifiedin Sections 3.1 (solely with respect to failure to pay the principal hereof or interest thereon when due on this Note upon a TradingMarket 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/or3. 15 exercisable through the delivery of written notice to the Borrower by such Holders (the “Default Notice”), andupon the occurrence of an Event of Default specified the remaining sections of Articles III (other than failure to pay the principalhereof or interest thereon at the Maturity Date specified in Section 3,1 hereof), the Note shall become immediately due and payableand 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 unpaidinterest 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 Holderpursuant to Sections 1.3 and 1.4(g) hereof (the then outstanding principal amount of this Note to the date of payment plusthe amounts referred to in clauses (x), (y) and (z) shall collectively be known as the “Default Sum”) or (ii) the “parityvalue” of the Default Sum to be prepaid, where parity value means (a) the highest number of shares of Common Stock issuableupon conversion of or otherwise pursuant to such Default Sum in accordance with Article I, treating the Trading Day immediatelypreceding the Mandatory Prepayment Date as the “Conversion Date” for purposes of determining the lowest applicableConversion Price, unless the Default Event arises as a result of a breach in respect of a specific Conversion Date in which casesuch Conversion Date shall be the Conversion Date), multiplied by (b) the highest Closing Price for the Common Stock duringthe period beginning on the date of first occurrence of the Event of Default and ending one day prior to the Mandatory PrepaymentDate (the “Default Amount”) and all other amounts payable hereunder shall immediately become due and payable, all withoutdemand, 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 atlaw or in equity. 

 

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

 

ArticleIV. MISCELLANEOUS

 

4.1           Failureor Indulgence Not Waiver. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereundershall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude otheror further exercise thereof or of any other right, power or privileges. All rights and remedies existing hereunder are cumulativeto, 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 writingand, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, returnreceipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmittedby hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specifiedmost recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemedeffective (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 tobe received), or the first business day following such delivery (if delivered other than on a business day during normal businesshours 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 forsuch communications shall be:

 

If to theBorrower, to:

ALL AMERICAN PET COMPANY, INC.

9601 Wilshire Boulevard - SuiteM200

Beverly Hills, CA 90210

Attn:BARRY SCHWARTZ, President

facsimile:

 

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

[entername of law firm]

Attn: [attorneyname]

[enteraddress line 1]

[entercity, state, zip]

facsimile:[enter fax number]

 

If to theHolder:

ASHER ENTERPRISES, INC.

1 LindenPl., Suite 207

Great Neck,NY. 11021

Attn:Curt Kramer, President

facsimile:516-498-9894

 

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

Naidich WurmanBirnbaum & Maday, LLP

80 CuttermillRoad, Suite 410

Great Neck,NY 11021

Attn: BernardS. 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 Notesissued 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 andits 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 witha bonafide margin account or other lending arrangement.

 

 

4.5           Costof 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           GoverningLaw. This Note shall be governed by and construed in accordance with the laws of the State of New York without regard to principlesof conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Noteshall be brought only in the state courts of New York or in the federal courts located in the state and county of Nassau. The partiesto this Note hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall notassert any defense based on lack of jurisdiction or venue or based upon *forum non conveniens*. The Borrower and Holder waivetrial 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 unenforceableunder any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflicttherewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalidor unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. Each partyhereby irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding inconnection with this Agreement or any other Transaction Document by mailing a copy thereof via registered or certified mail orovernight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement andagrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shallbe deemed to limit in any way any right to serve process in any other manner permitted by law.

 

4.7           CertainAmounts. 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 difficultto determine and the amount to be so paid by the Borrower represents stipulated damages and not a penalty and is intended to compensatethe Holder in part for loss of the opportunity to convert this Note and to earn a return from the sale of shares of Common Stockacquired upon conversion of this Note at a price in excess of the price paid for such shares pursuant to this Note. The Borrowerand the Holder hereby agree that such amount of stipulated damages is not plainly disproportionate to the possible loss to theHolder from the receipt of a cash payment without the opportunity to convert this Note into shares of Common Stock.

 

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

 

 

4.9           Noticeof Corporate Events. Except as otherwise provided below, the Holder of this Note shall have no rights as a Holder of CommonStock unless and only to the extent that it converts this Note into Common Stock. The Borrower shall provide the Holder with priornotification 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 areentitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (includingby 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 proposedsale, lease or conveyance of all or substantially all of the assets of the Borrower or any proposed liquidation, dissolution orwinding up of the Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20) days prior to the record datespecified therein (or thirty (30) days prior to the consummation of the transaction or event, whichever is earlier), of the dateon which any such record is to be taken for the purpose of such dividend, distribution, right or other event, and a brief statementregarding the amount and character of such dividend, distribution, right or other event to the extent known at such time. The Borrowershall make a public announcement of any event requiring notification to the Holder hereunder substantially simultaneously withthe 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 vitiatingthe intent and purpose of the transaction contemplated hereby. Accordingly, the Borrower acknowledges that the remedy at law fora breach of its obligations under this Note will be inadequate and agrees, in the event of a breach or threatened breach by theBorrower of the provisions of this Note, that the Holder shall be entitled, in addition to all other available remedies at lawor in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curingany breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity of showing economicloss 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 11, 2011.

 

 

 

**EXHIBIT A**

 

NOTICEOF CONVERSION 

 

The undersigned herebyelects to convert $_________________****principal amount of the Note (defined below) into that numberof shares of Common Stock to be issued pursuant to the conversion of the Note (“Common Stock”) as set forthbelow, of ALL AMERICAN PET COMPANY, INC., a Maryland corporation (the “Borrower”) according to the conditions of theconvertible note of the Borrower dated as of February 11, 2011 (the “Note”), as of the date written below. No fee willbe charged to the Holder for any conversion, except for transfer taxes, if any.

 

Box Checked as to applicableinstructions:

 

 

Name of DTC Prime Broker:

Account Number:

 

 

ASHER ENTERPRISES, INC.

1 LindenPl., Suite 207

Great Neck,NY. 11021

Attention:Certificate Delivery

(516) 498-9890