Document:

Exhibit 10.1

  DRAFT 5
 

 AGREEMENT
 Re WORLDWIDE RIGHTS ACQUISITION and INVESTMENT
 For the films to be produced by Eagle Productions LLC
 This rights acquisition and investment agreement (“Agreement”) is between Fonu2, Inc. (“F2”) (“Party”) of 331 East Commercial Blvd, Ft. Lauderdale, FL 33334 and Eagle Productions, LLC of 135 Goshen Road Extension, Rincon, GA 31326 (“EP”) (“Party”) (together “Parties”) with a view to F2 investing in, co-producing and exploiting the motion picture currently titled “Effa” (Picture”) to be produced by EP. The Picture is based on a screenplay (“Screenplay”) written by Jeffrey Miller and Byron Motley (“Owners”) based on the book entitled “Queen of the Negro Leagues: Effa Manley and the Newark Eagles” written by James Overmyer and under option by the Owners (“Underlying Rights”).
 Parties acknowledge that they may substitute another picture (“Substitute Picture”) for the Picture. Such Substitute Picture shall be subject to broadly similar terms and conditions as contained herein re the Picture (subject to items ordinarily associated with the motion picture industry, including but not limited to budget, talent, exploitation potential...). Any Substitute Picture and the terms and conditions attaching thereto shall be subject to the approval of F2 at its absolute discretion.
 F2 is willing to acquire the worldwide distribution rights and invest in the Picture on the following terms and conditions:
 1)
 Purpose of Acquisition
 To co-produce and acquire an equity stake in the Picture and all secure worldwide distribution rights in all media for the Picture.
 

 2)
 Picture 
 The Picture shall be live action (not animated), photographed in color, in the English language, of first-class technical quality, completely finished, fully edited and titled and fully synchronized with language, dialogue, sound and music, and in all respects ready and suitable for presentation to the public in first class theatres worldwide that charge general admission.  The Picture consists, or shall consist, of a connected and continuous series of scenes telling or presenting a story, and is or shall be produced substantially and materially in accordance with, and shall not vary from, the final Screenplay approved in writing by F2, except only for such minor changes as the exigencies of production may require, and except for such other changes as F2 may approve in writing. The Picture shall have a rating of not more restrictive than “R” and shall have a running time (including titles and credits) of between 90 and 120 minutes.
 

 3)
 Budget
 The budget of the Picture(s) (“Budget”) shall not exceed US$20Million (US$20,000,000). The Budget shall include all expenditure ordinarily associated with a motion picture produced independently.
 

 4)
 Screenplay
 The Screenplay shall be the screenplay written by Jeffrey Miiller and Byron Motley dated [          ], subject to minor alterations to accommodate the exigencies of production of the Picture.
 

 5)
 Advance
 F2 shall advance the Budget(s) of the Picture(s) not to exceed US$10Million (US$10,000,000) (“Advance”). The Advance shall be provided by the issuance by F2 of Ten Million Dollars  ($10,000,000]) of common stock of F2 (“Stock”) to be issued upon the execution of this Agreement.  F2 agrees to file a registration statement which shall include the Stock and shall use its best efforts to have such registration statement declared effective by the Securities and Exchange Commission as soon as practicable.  For as long as EP is the beneficial owner of these shares, the voting rights of the F2 shares shall be pledged to the Chairman of the Board of F2.
 6)
 Conditions Precedent
 F2’s obligations to fund the Advance in accordance with the terms hereof are subject to the following having been satisfied and delivered to F2 (all in form and substance satisfactory to F2) not later than a date to be negotiated by the Parties in good faith, or such later date as [      ] and F2 may hereafter agree to in writing. (“Conditions Satisfaction Date”): 
 
 (a)
 F2's receipt of fully-executed copies of this Agreement;
 
 (b)
 F2’s approval of all chain of title documentation;
 
 (c)
 F2’s approval of any specific projects of which these funds shall be expended); 
 

 1)
 Other Finance
 Parties will jointly seek third party finance to include but not limited to third party equity, presales, tax credits, “soft monies” and the like... to co-finance the Picture. Any third party finance shall be on terms and conditions to be approved by F2 at its absolute discretion. 
 

 2)
 Distribution Rights
 Through its Advance, F2 shall secure worldwide distribution rights in all media in the Picture. 
 The “Rights” are hereby defined as any and all rights (on a sole and exclusive basis) in and to the Picture of whatsoever kind and nature, including without limitation all copyrights therein (and all renewals and extension thereof) and all allied, ancillary, incidental and subsidiary rights of every kind and nature whatsoever therein, under copyright and otherwise throughout the universe, in perpetuity, in any and all languages, in any and all media, known or unknown, it being acknowledged that, the Rights shall include, without limitation, the exclusive rights to exhibit, distribute, advertise, promote, publicize, market and otherwise exploit any Picture based on the Screenplay throughout the world in perpetuity in any and all languages, in all media and by all means and methods now or hereafter known, including, but not by way of limitation, all forms of theatrical, non-theatrical, television, home video (encompassing videocassettes, videodiscs, DVD’s and all other forms of videograms whether now or hereafter known), interactive games and devices, electronically read, digitized, interactive and computer-based or computer-assisted systems and devices such as but not limited to CD-ROM, CD-I, video-on-demand, video dial-tone, interactive cable, the Internet, the World-Wide Web and America On-Line, CompuServe, Prodigy, NETCOM and any other on-line or other service (now or hereafter existing) which makes such transmissions, or up-loads, down-loads or otherwise makes such material available electronically for either a subscription, per-use fee or other fee, or free of charge, and all allied and ancillary rights in the Picture such as, by way of illustration, derivative works such as remakes, prequels, sequels, mini-series, episodic series, movies of the week, spin-off or television programs, merchandising, theme park rights, live stage, music, music publishing, novelization, soundtrack rights, screenplay publishing, and any and all advertising, publicity, promotional rights with respect to the foregoing. 
 Terms of such distribution by F2 shall be negotiated in good faith, subject to approval (not to be unreasonably withheld) by EP and third party equity participants (if any).
 

 3)
 Collection Agent
 All receipts from the exploitation of the Picture shall be administered by a Collection Agent. Fintage House is approved as the Collection Agent whose fee shall not exceed 1%.
 

 4)
 Recoupment 
 i)
 Collection Agent Fees
 ii)
 Sales Agency Commission (if applicable)
 iii)
 Sales Agency expenses (if applicable and not included in the Budget)
 iv)
 F2 interest on its Advance in the amount of 20% flat (“Interest”)
 v)
 F2 Advance
 vi)
 Deferments (if any)
 vii)
 Once F2 has recouped in full, F2 and EP shall share in Net Profits (as ordinarily defined in the motion picture industry) in the following percentages:
 

 F2
 99% (“F2 Net Profits”) to include ant third party finance.
 E P
 1% (“EP Net Profits”)
 Net Profits allocated to “talent” and Producers (approved by F2) shall be borne from the F2 Net Profits.
 1)
 Fees
 F2 shall charge a 5% fee calculated on its total Advance, to be included in and payable from the Budget.
 Three Executive Producer Fees in accordance with industry norm to be negotiated in good faith.
 Two Producer Fees in accordance with industry norm to be negotiated in good faith.
 All F2 fees are to be included in and payable from the Budget of the Picture.
 

 2)
 Other F2 Costs
 Costs ordinarily associated with an investment of this type shall be included in and payable from the Budget. Such costs include but are not limited to legal fees and expenses, travel and accommodation....
 

 3)
 Credits
 F2 shall be afforded the following credits world-wide:
 F2 corporate presentation credit
 F2 (or designee) production credit
 F2 presentation credit as distributor
 Three Executive Producer Credits
 Two Producer credits
 Five further “back end” credits to include (but not limited to legal representation...).
 

 4)
 Approvals
 F2 shall have approvals ordinarily associated with its Advance to include (but not limited to) -
 i)
 Chain of Title
 ii)
 Script
 iii)
 Director (Penny Marshall is hereby approved) 
 iv)
 Material contracts including but not limited to Director, Producers, Cast, Heads of Department...
 v)
 Producers (Wendi Laski is hereby approved) 
 vi)
 Cast. F2 shall have absolute approval over the top five lead characters. 
 vii)
 Sales Agent (if any)
 viii)
 Sales Agent (if any) expenses and fees
 ix)
 Any third party finance used to fund the Budget of the Picture (including but not limited to equity, licence fees, presales, debt, banking, cash flowing of National or State tax credit...) and the terms and conditions attached thereto.
 x)
 Key production personnel. However DOP, First Assistant Director, Second Unit Director, Editor, Wardrobe and Production Designer are subject to the final approval of the director.
 xi)
 Laboratory - Deluxe and Technicolor are pre-approved
 xii)
 Locations 
 xiii)
 Composer. 
 xiv)
 Budget (to include the 5% finance fee on F2 total Investment and F2 Fees). 
 xv)
 Cash Flow Schedule
 xvi)
 Production schedule
 xvii)
 Deferred payments (if any)
 xviii)
 Completion Bond 
 xix)
 Collection Agent (Fintage House is pre-approved)
 xx)
 Rating
 xxi)
 Other Credits. 
 

 1)
 Proposed Dates
 It is proposed that the Picture commences principal photography on or about [             ]and is delivered on or about late [      ]
 

 2)
 Ownership
 F2 shall be the sole and exclusive owner of the Picture for all purposes (including under U.S. Copyright laws), in perpetuity and throughout the universe, including without limitation, all distribution, exhibition, exploitation, allied, ancillary and/or subsidiary rights with respect to the Picture.  All of EP’s services and contributions with regard to the Picture and the results and proceeds thereof shall be a "work made for hire" for F2 prepared within the scope of EP's engagement and/or as a work specially ordered or commissioned for use as a part of a motion picture or other audio-visual work.
 

 3)
 Security Interest
 F2 shall be entitled to a continuing first priority (subject to customary guild liens) security interest in and to all of EP's right, title and interest in and to the Picture and any and all proceeds in connection therewith.  EP agrees promptly to execute and deliver to F2 such documents as F2 shall reasonably request to establish, perfect and maintain the above first priority security interest, including, without limitation, a security agreement, a mortgage and assignment of copyright and UCC financing statements.
 

 4)
 Insurance
 EP will obtain and keep in full force and effect in amount, coverage, kind and form reasonably satisfactory to F2, all types of insurance that is typically obtained for motion pictures and motion picture productions, including, without limitation, cast, negative and faulty stock insurance; customary errors and omissions insurance and comprehensive liability insurance; “essential element” insurance per industry norm for the express benefit of F2 as named insured or additional insured. The cost of said insurance shall be included in and paid from the Budget. 
 

 5)
 Assignment
 F2 shall be entitled to assign the benefits and liabilities contained herein to a third party, subject to the approval (not to be unreasonably withheld) of EP. EP shall not be able to assign the benefits and liabilities contained herein to a third party unless approved in writing by F2.
 

 6)
 No Partnership or Joint Venture
 Nothing contained herein shall establish a partnership or joint venture or similar relationship.
 

 7)
 No Loss
 F2 cannot be held liable for any loss should the proposed transaction not proceed for any reason. However, F2 agrees to bear the loss (if any) arising from the following -
 
 i)
 Initial payment of $75,000 re the director services of Penny Marshall; 
 
 ii)
 Issuance of stock in the value of $425,000 for the services of the director;
 
 iii)
 Initial payment of $75,000 to Wendi Laski under the terms or her producing agreement; and
 
 iv)
 Initial payment of $8,000 made to the writers of the screenplay
 

 1)
 Representations and Warranties
 EP hereby represents and warrants that:
 
 i)
 it is a duly organized company in good standing in its state/country   of organization;
 
 ii)
 it has the right to enter into and fully perform this Agreement, the
 consent of no other person or entity is required in connection herewith, and it is capable of, and there is no impediment to, performance of its obligations hereunder, or with respect to the Picture;
 
 iii)
 it owns and controls all rights, or will own and control all rights, and has not previously assigned to any third party or encumbered any of its rights, in the screenplay or the Picture.; and
 
 iv)
 there are no actual or, to the best of its knowledge, threatened 
 claims with respect to the Picture or screenplay.
 
 v)
 that the proceeds of the Advance shall be used solely for the production of the Picture.
 vi)
 that EP is and will remain a special purpose vehicle formed and operated solely for the purpose of the production of the Picture.
 F2 hereby represents and warrants that it has the right to enter and fully perform   this Agreement, the consent of no other person or entity is required in connection herewith, and it is capable of, and there is no impediment to, the performance of its obligations hereunder.
 

 1)
 Expiry
 This Agreement has an offer period of ten (10) business days from the date hereof. Should it not be accepted within that period, it shall be deemed to have expired.
 

 2)
 Confidentiality
 The terms and conditions of this Agreement shall remain confidential between F2 and EP and should not be disclosed to any third party or used in any way without the express written consent of F2.
 

 3)
 Law
 This Agreement shall be subject to the law and jurisdiction of the state of Georgia, US.
 

 4)
 Entire Agreement
 This Agreement shall supersede any other term sheet or agreement or the like, whether oral or written that may have been entered into relating to matters contemplated hereby and thereby, and constitutes the full and entire understanding of the Parties hereto. The Parties hereto recognize that they intend to enter into a more formal agreement, and until that agreement is entered into, this Agreement shall constitute the understanding of the Parties.
 SIGNATURE PAGE TO FOLLOW
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 The Parties hereby agree to the terms and conditions herein. 
 

 ________________________________
 FONU2, INC
 

 By: _____________________________Date:____________________
 

 _______________________________
 EAGLE PRODUCTIONS, LLC
 

 By: _____________________________Date:_____________________
     
 

 oExhibit
4.1

 

NEITHER
 THE
ISSUANCE 
NOR
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: $200,000	Issue Date: [______], 2015
	Purchase Price: $200,000	 

 

CONVERTIBLE
PROMISSORY
NOTE

 

FOR
 VALUE 
RECEIVED,
 EFACTOR
 GROUP
 CORP.,
a  NEVADA 
corporation
 (hereinafter
 called 
the “Borrower”),
 hereby
promises
 to pay
to the
order
of MAGNA
 EQUITIES
 I,
LLC, a
New York
corporation,
 or registered
assigns (the
“Holder”)
the sum
of Two
Hundred Thousand
Dollars
($200,000),
on February
12, 2016 (the
“Maturity
Date”), and
to pay
interest
on the
unpaid principal
balance
hereof
at the
rate of
ten percent
(10%)
(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,
compounded
on a monthly
 basis.
This 
Note  may
 not be prepaid
 in whole
or in part
except
as otherwise
explicitly
set forth
in Section
1.9
hereof.
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
Issue
Date,
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,
(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
Exchange
Agreement
dated the
date hereof,
pursuant
to which
this
Note was
originally
issued
(the
“Exchange
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:

 

    	1

    	 

    

 

ARTICLE
I. CONVERSION
RIGHTS

 

1.1           Conversion
 Right.
 The Holder
shall
have
the
right
from
time
to time,
and
at any
time,
except
as defined
in the
subsequent
 paragraph,
 during
the
period
beginning
on 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
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,
provided,
however,
that
the
Company
shall
have
the
right
to pay
any or
all interest
in cash 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.

 

Notwithstanding
 anything
 contained
 in the
 paragraph
 above,
 the
 Holder
 agrees
 that
 should
 the
 daily
 Volume
 Weighted
Average
Price
(“VWAP)
fall below
a price of
$0.04
for
any Trading
Day (the
“Trigger
Event”),
the
Company
shall
have
ten (10)
trading
days
following
 the
 Trigger
Event
(the “Trigger
 Period”)
 to repay
the  Holder
 the
 remaining
balance
plus
prepayment
and interest
on the
Note during
which
time
the Holder
shall
agree
not to convert
the Note
at a Conversion
Price less than
$0.04
per
share
of Common
Stock
of the
Company.
If after
10 Trading
Day the
Holder
has not
been
repaid
in full,
the Holder
shall
have
the
ability
to continue
 to convert
the
outstanding
 balance
of the
Note
as further
outlined
 above.
For the
avoidance
of any
doubt, the
Trigger
Event
and the
subsequent
Trigger
Period
shall
be a one-time
restriction
of conversion
for the
Holder
and
any
change
in stock
price after
the Trigger
Event
shall
not restrict
the Holder
from any
subsequent
conversions
after the
end of
the
Trigger
Period.

 

1.2           Conversion
Price.

 

(a)           Calculation
 of Conversion
 Price.
 The 
conversion
 price
 (the
 “Conversion
 Price”)
 shall
 be 
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 40%
discount
from the
lowest
daily
trading
price
in five
(5)
trading
days
prior
to conversion..
“Trading
Price” means,
for
any security
as of any
date,
the lowest
trading
price
on the
Over-the-Counter
 Bulletin
Board,
or applicable
 trading
market
(the “OTCQB”)
as reported
by a reliable
reporting
service
(“Reporting
Service”)
mutually
acceptable
to Borrower
and
Holder
(i.e. Bloomberg).
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 traded
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.
If the
Issuer’s
Common
stock
is chilled
for
deposit
at DTC and/or
becomes
chilled
at any
point
while this
Agreement
remains
outstanding,
an additional
8% discount
will
be attributed
to the
Conversion
Price defined
hereof.
If the
Borrower
is unable
to issue
any
shares
under this
provision
due to
the fact
that
there
is an
insufficient
number
of authorized
and unissued
shares
available,
the
Holder
promises
 not 
to  force
 the
 Borrower
to  issue
 these
 shares
or trigger
 an 
Event of
Default,
provided
 that
Borrower
takes
immediate
steps
required
to get
the appropriate
level
of approval
from
shareholders
or the
board
of directors,
where applicable
to raise the
number of
authorized
shares
to satisfy the
Notice of
Conversion.

 

    	2

    	 

    

 

(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
Exchange
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
Exchange
Agreement.
Commencing
 on the
expiration
of the
first month
from the
issue date
of this
Note, the
Reserved
Amount shall
be recalculated
each month
based upon
the Variable
Conversion
Price and
the Company
 shall
notify the
Transfer
Agent
and the
Holder
in writing
by the
fifth day
of the
following
 month
of the
new Reserved
Amount.
In the
event
the
Company
does
not notify
the
Transfer
Agent
of the
new Reserved
Amount
in a timely
manner, the
Holder
shall
have the
absolute
 right
to notify
the
Transfer
Agent,
without
any further
action
by the
Company. Notwithstanding
the foregoing,
in no event
shall
the Reserved
Amount
be lower
than
the initial
Reserved
Amount,
regardless
of any
prior
conversions.
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.

 

    	3

    	 

    

 

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

 

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

 

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

 

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

 

    	4

    	 

    

 

(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
$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 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.

 

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
Exchange
Agreement).
 Except
as otherwise
provided
in the
Exchange
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 form,
substance
and scope
customary
for opinions
of counsel
in comparable
transactions,
to the
effect that
a public sale
or transfer
of such
Common Stock
may be made
without
registration
under the
Act, which
opinion
shall
be 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
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 Regulations
S, at the
Deadline,
it will
be considered
an Event
of Default
pursuant
to Section
3.2 of
the Note.

 

    	5

    	 

    

 

1.6           Effect
of Certain
Events.

 

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

 

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

 

(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,
but in
no event
shall
the Conversion
Price be
above
the
original
Conversion
Price.

 

    	6

    	 

    

 

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

 

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
of  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
Exchange
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 9.99%
of the
total
shares
outstanding
on the
Closing
Date (as
defined
in the
Exchange
 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.

 

    	7

    	 

    

 

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.

 

1.9           Prepayment.
 Notwithstanding
 anything
 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
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
address
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
and 
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.

 

ARTICLE
II.  CERTAIN
COVENANTS

 

2.1
 Negative
Covenants
 As
long
as any
portion
of this
Note
remains
outstanding,
unless
the
holders
of all
of the
outstanding
Notes shall
have
otherwise
given
prior
written consent,
the Borrower
shall
not,
and
shall
not permit
any of its subsidiaries
(whether
or not a subsidiary
on the
Issue
Date)
to, directly
or indirectly:

 

(a)
 other
than
indebtedness
existing
as of
the
Initial
Date
or incurred
in the
ordinary
course
of business
for
trade
expenses
(not
borrowed
money)
or an
offering
presently
being
marketed
by Axiom
Capital
Management,
 Inc.
in an
amount up
 to $5,000,000
(“Permitted
 Indebtedness”),
 enter
into,
create, incur,
assume,
guarantee
or suffer
to exist
any indebtedness
 for
borrowed
money 
of any
kind,
including,
but not
limited
 to,
a guarantee,
on or
with respect
 to any
of its property
 or assets
now owned
or  hereafter
 acquired
 or 
any interest
therein
or  any
income
or  profits
therefrom,
 which
indebtedness
shall
be senior
is respect
to security
to this
Note;

 

    	8

    	 

    

 

(b)
 other
than
Permitted
Liens
(as defined
below),
enter
into,
create, incur,
assume
or suffer
to exist
any liens,
charges
or encumbrances
 of
any
kind
or nature
(“Liens”),
on or
with respect
to any
of its
property
or assets
now owned
or hereafter
acquired
or any
interest
therein
or any
income
or profits
therefrom.
“Permitted
Lien”
means
the individual
and collective
reference
to the
following:
(a) Liens
for taxes,
assessments
and
other
governmental
charges
or levies
not yet
due or Liens
 for
 taxes,
 assessments
and other
 governmental
charges
or levies
 being
 contested
 in 
good  faith
 and
by  appropriate
proceedings
for 
which  adequate
reserves
(in  the
 good  faith
judgment
of the
 management
of the
 Borrower)
 have
been established
in accordance
with GAAP;
(b)
Liens
imposed
by law
which
were
incurred
in the
ordinary
course
of the
Borrower’s
business,
such
as carriers’,
warehousemen’s
and
mechanics’
Liens,
statutory
landlords’
Liens,
and
other
similar
Liens
arising
in the
ordinary
course
of the
Borrower’s
business,
and which
(x) do
not individually
or in
the aggregate
materially detract
from the
value
of such
property
or assets
or materially
impair
the
use
thereof
in the
operation
of the
business
of the
Borrower
and its
consolidated
subsidiaries
or (y)
are being
contested
 in good
faith by appropriate
 proceedings,
 which
 proceedings
have
the effect
of preventing
for the
foreseeable
 future
the forfeiture
 or sale
of the
property
 or asset
subject
to such
Lien;
(c) Liens
incurred
in connection
with Permitted
Indebtedness
under
clauses
(a), and
(b)
thereunder;
and (d)
Liens
incurred
in connection
with
Permitted
Indebtedness
under clause
(c)
thereunder,
provided
that
such
Liens
are not
secured
by assets
of the
Borrower
or its
subsidiaries
other
than
the assets
so acquired
or leased.

 

(c)
 except
for
an increase
in the
Borrower’s
authorized
shares,
amend
its charter
documents,
including,
without
limitation,
its certificate
of incorporation
and
bylaws,
in any
manner
that
materially
and
adversely
affects any
rights
of the
Holder;

 

(d)
 repay,
repurchase
or offer
to repay,
repurchase
or otherwise
acquire
more
than
a de
minimis
number of
shares
of its
Common Stock
or Common
Stock
equivalents;

 

(e)
 repay,
repurchase
or offer
to repay,
repurchase
or otherwise
acquire
any
indebtedness,
other
than
the Notes
if on
a pro-rata
basis,
other
than
regularly
scheduled
principal
and
interest
payments
as such
terms
are in
effect as
of the
Issue Date,
provided
that
such
payments
shall
not be permitted
 if, at such
time,
or after giving
effect to such
payment,
any Event
of Default
exist
or occur;

 

(f)           pay
cash dividends
or distributions
on any
equity
securities
of the
Borrower;

 

(g)
 sell,
lease
or otherwise
dispose
of any
portion
of its
assets
outside
the
ordinary
course
of business,
other
 than
de minimis
 sales. 
Any consent
to the
disposition
of any
assets may
be conditioned
on a specified
use of
the proceeds
of disposition;

 

(h)
 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 $1,000;

 

(i)           enter
into
any
transaction
with
any
affiliate of
the
Borrower
which
would
be required
to be
disclosed
in any
public filing
with the
Commission,
unless such
transaction
is made
on an arm’s
length
basis
and expressly
approved
by a majority
of the
disinterested
directors
of the
Borrower
(even
if less
than
a quorum
otherwise
required
for
board approval);
or

 

(j)           enter
into
any
agreement
with
respect
to any
of the
foregoing.

 

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.

 

    	9

    	 

    

 

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 three
(3) business
days
after the
Holder
shall
have
delivered
a Notice
of Conversion.

 

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
Exchange
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 Exchange
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
Exchange
Agreement;

 

3.5           Bankruptcy,
 Receiver
 or 
Trustee.
 The 
Borrower
 or 
any subsidiary
 of 
the 
Borrower
 shall
commence,
 or there
 shall
 be 
commenced  against
 the
 Borrower
 or 
any  subsidiary
 of  the
 Borrower
 under any
 applicable
bankruptcy
or insolvency
laws
as now
or hereafter
in effect
or any
successor
thereto,
or the
Borrower
or any
subsidiary
of the
Borrower
commences
any 
other
proceeding
 under
 any
 reorganization,
arrangement,
adjustment
 of debt,
 relief of
debtors,
dissolution,
insolvency
 or
liquidation
 or
similar
law of
any jurisdiction
whether
now  or
hereafter 
in effect
 relating
 to
the Borrower
or any
subsidiary
of the
Borrower
or there
is commenced
against
the Borrower
or any
subsidiary
of the
Borrower
any such
bankruptcy,
insolvency
or other
proceeding
which
remains
undismissed
for
a period
of 61
days; or
the
Borrower
or any subsidiary
of the
Borrower
is adjudicated
insolvent
or bankrupt;
or any
order
of relief
or other
order
approving
any
such
case or
proceeding
is entered;
or the
Borrower
or any
subsidiary
of the
Borrower
suffers
any appointment
of any
custodian,
private
or court
appointed
receiver
or the
like for
it or
any substantial
part of
its property
which continues
undischarged
or unstayed
for
a period
of sixty
one (61)
days;
or the
Borrower
or any
subsidiary
of the
Borrower
makes
a general
assignment
for
the
benefit
of creditors;
or the
Borrower
or any
subsidiary
of the
Borrower
shall
fail to
pay,
or shall
state that
it is unable
to pay,
or shall
be unable
to pay,
its debts
generally
as they
become
due; or
the Borrower
or any
subsidiary
of the
Borrower
shall
call a meeting
of its creditors
with a view
to arranging
a composition,
adjustment
or restructuring
of its debts;
or the
Borrower
or any
subsidiary
of the
Borrower
shall
by any
act or
failure
to act expressly
indicate
its consent
to, approval
of or acquiescence
in any
of the
foregoing;
or any
corporate
 or other
action
is taken
by the
Borrower
 or any
subsidiary
of the
Borrower
 for
the purpose
of effecting
any of
the
foregoing;

 

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           Indebtedness
Default.
The Borrower
or any
subsidiary
of the
Borrower
shall
default
in any
of its
obligations
under
any
other
Note
or any
mortgage,
credit
agreement
or other
facility, indenture
agreement,
factoring
agreement
or other
instrument
under which
there
may
be issued,
or by which
there
may
be secured
or evidenced
any indebtedness
for borrowed
money or
money due
under any
long term
leasing or
factoring
arrangement
of the
Borrower
or any
subsidiary
of the
Borrower
in an amount
exceeding
$25,000,
whether
such
indebtedness
now exists
or shall
hereafter be
created and
such
default
shall
result
in such
indebtedness
becoming
or being
declared
due and payable
prior
to the
date on
which
it would
otherwise
become
due and
payable;

 

    	10

    	 

    

  

3.8           Delisting
 of Common
 Stock;
 DTC Chill.
 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
 the
New
York
Stock
Exchange,
or the
NYSE MKT
or there
shall
be no
bid price
for the
stock for
a period
of one
business
day OR the
Depository
Trust
Company
places a chill
on new
deposits
of Common
Stock,
which is
not removed
within
ten (10)
trading
days;

 

3.9           Failure
to Comply
with
the
Exchange
Act. The
Borrower
shall
fail to
comply
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 Exchange
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,
fully
executed
Irrevocable
Transfer
Agent
Instructions
in a form
as initially
delivered
pursuant
to the
Exchange
Agreement
(including
but not
limited
to the
provision
to irrevocable
reserve
shares
of Common
Stock
in the
Reserved
Amount) signed
by the
successor
transfer
agent
to Holder
and
the Borrower.

 

3.16           Failure
to Pay
Post-Closing
 Expenses.
The failure
by Borrower
to pay
any
and
all Post-Closing

Expenses
as defined
in section
4.6.

 

3.17      
   Delisting.
From
and
after the
initial
trading,
listing
or quotation
of the
Common Stock
on a
Principal
Market, an event
resulting  in
the Common
Stock no
longer being
traded,
listed or quoted
on a Principal
 Market;
failure
to comply
with
the requirements
for continued
quotation
on a Principal
Market;
or notification
from
a Principal
Market
that
the Borrower
is not
in compliance
with the
conditions
for such
continued
quotation
and such
non-compliance
 continues
for seven
(7) trading
days
following
such
notification.

 

3.18           Cross-Default.
Notwithstanding
 anything
 to 
the  contrary
 contained
 in 
this 
Note 
or the
 other
related or
companion
documents,
a breach
or default
by the
Borrower
of any
covenant
or other
term or
condition
contained
in any
of the
Other
Agreements,
 after the
passage
of all
applicable
notice 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
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.

 

    	11

    	 

    

 

3.19
 Intentionally
Omitted.

 

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
OBLIGTAIONS
 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,
3.15,
3.16,
3.17,
3.18,
3.19,
and/or
3.20
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
in 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  such
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 low
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:

 

    	12

    	 

    

 

If
to the
Borrower,
to: EFACTOR
GROUP CORP.

1177
Avenue
of the
Americas

Suite
5060

New
York,
NY 10036
USA

Attn:
Ms.
Marion
Freijsen,
COO

 

If
to the
Holder:

MAGNA
EQUITIES
I, LLC

5 HANOVER
SQUARE NEW
YORK, NY
10004

 

Attn:
Joshua
Sason,
Managing
Member

 

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
Exchange
Agreement)
as originally
executed,
or if later
amended
or supplemented,
then
as so
amended
or supplemented.

 

4.4           Assignability.
 This
Note
shall
be binding
upon the
Borrower
and
its successors
and
assigns,
and shall
inure
to be
the
benefit of
the
Holder
and its
successors
and assigns.
Each
transferee
of this
Note
must
be an
“accredited
investor”
(as defined
in Rule
501(a) of
the
1933 Act).
Notwithstanding
anything
in this
Note
to the
contrary,
this
Note may
be pledged
as collateral
in connection
with a bona
fide margin
account or
other
lending
arrangement.

 

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          
Post-Closing
Expenses.
 The
Issuer
will
bear
any
and
all miscellaneous
expenses
that
may
arise as
a result
of this
Agreement
post-closing.
 These
expenses
include,
 but are
not limited
to,
the cost
of legal
opinion
 production,
transfer
agent
fees, equity
issuance
fees, etc. The
failure
to pay
any and
all Post-Closing
Expenses
will be
deemed
a default
as described
in Section
2.6.10
herein.

 

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 New
York.
 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.

 

    	13

    	 

    

 

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

 

4.11        
 Severability.
 If
any
provision
of this
Note
is invalid,
illegal
or unenforceable,
 the
balance
of this
Note
shall
remain
in effect, and
if any
provision
is inapplicable
to any
person
or circumstance,
it shall
nevertheless
remain
applicable
to all other
persons
and
circumstances.
 If
it shall
be found
that
any
interest
or other
amount deemed
interest
due hereunder
shall
violate
applicable
laws governing
usury,
the
applicable
rate of
interest
due hereunder
shall
automatically
be lowered
to equal
the maximum
permitted
rate of interest.
The Borrower
covenants
(to the
extent
that
it may
lawfully
do so)
that it
shall
not at
any
time insist
upon, plead,
or in any
manner
whatsoever
 claim
or take
the
benefit
or advantage
of, any
stay, extension
 or usury
 law or other
law which
 would 
prohibit
or forgive
the Borrower
 from
paying
all or any
portion
of the
principal
of or interest
on this
Note as
contemplated
herein,
wherever
enacted,
now or at
any time
hereafter
in force,
or which
may affect
the covenants
or the
performance
of this
indenture,
and the
Borrower
(to the
extent
it may
lawfully
do so)
hereby
expressly
waives
all benefits
or advantage
of any
such
law, and
covenants
that
it will
not,
by resort
to any
such
law, hinder,
delay
or impeded
the execution
of any
power
herein granted
to the
Holder,
but will
suffer
and
permit
the execution
of every
such as though
no such
law has
been enacted.

 

    	14

    	 

    

 

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

[____], 2015.

 

	 	Marion  Fr1isen,  COO

 

    	15

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