Document:

Document No.: DA101A110025-2

Maximum Pledge Contract

(Applicable to Non-Quota Contracts)

[Seal Hubei Minkang Pharmaceutical Co., Ltd. Department of Administration]

Bank of Communications Co., Ltd

October, 2007

 

	
Translator’s Declaration:

 

I, Certify that I have carefully read the original Simplified Chinese document AND I confirm that this translation is a true and accurate English version of such original to the best of my knowledge and belief.

 

Zhao Zheng           /s/ Zhao Zheng                       

Certified Translator (Canada)

Certified Member in good standing Status: Society of Translators and Interpreters of British Columbia (S.T.I.B.C. www.stibc.org),

Membership Number No: 04-10-2471    

  

  

  

Document No.: DA101A110025-2

Maximum Pledge Contract

	
IMPORTANT NOTICE

PLEDGOR PLEASE CAREFULLY READ ALL ARTICLES IN THIS CONTRACT, ESPECIALLY ARTICLES MARKED WITH ▲▲. FOR ANY QUESTION, PLEASE REFER TO PLEDGEE FOR EXPLANATIONS IN A TIMELY MANNER.

Pledgor: Hubei Minkang Pharmaceutical Co., Ltd

Legal representative (Principal): GU Shuhua

ID type: Institutional Code Certificate  ID No.: 75700395-9

Statutory (Household) address: No.51 Bingjiang Road, Xiba, Yichang City

Mailing address: Same as above              Postal code: 443000

Contact Phone: 13687275276

Pledgee: Bank of Communications Co., Ltd, Yichang Branch

Principal: YE Fenggao

Mailing address: No.22 Fourth Shengli Road, Yichang City

Whereas, Pledgee (Creditor) has offered or will offer to Hubei Minkang Pharmaceutical Co., Ltd (hereinafter referred to as the “Debtor”) a series of credit facilities, in order to ensure the realization of Creditor’s right of the Pledgee, the Pledgor is willing to create a maximum pledge against assets which it has rights to dispose of for the Creditor’s right of the Pledgee on the basis of such credit facilities to the Debtor.

Translator’s Declaration: Refer to the title page of this 11 page document “Maximum Pledge Contract”

  

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To clarify the rights and obligations of both parties, the Pledgor and Pledgee hereby enter into this Contract on the basis of mutual consent.

Article 1         Pledged assets

	
  

	
1.1

	
The Pledged assets provided by Pledgor shall be: the right to use land (hereinafter referred to as “collateral”).

	
  

	
1.2

	
Details of pledged properties shall be subject to Schedule of Collateral attached hereto.

	
  

	
1.3

	
The effect of right to pledge shall extend to collateral and ancillary components, accessory rights, attachments, adhesions, processed items, interests and substitutes.

Article 2         Guarantee liabilities

2.1 The Pledgor shall provide maximum pledge guarantee for all master contracts entered into between the Pledgee and Debtor during the period from May 1st, 2011 to May 1st, 2013.

The master contract referred to in the preceding paragraph shall mean the credit facility contract entered into between the Pledgee and Debtor in connection with loan for issuance of bank accepted bill of exchange. The currency, principal amount, interest rate of Creditor’s right of the Pledgee as well as the performance period of the debt for the Debtor shall be governed by the terms and conditions of the master contract.

2.2 The maximum Creditor’s right guaranteed by the collateral shall be (currency and amount in written form) RMB SEVEN MILLION AND EIGHT HUNDRED THOUSAND YUAN ONLY.

2.3 The scope guaranteed by the pledge shall include the principal amount of Creditor’s right and interest thereof, compound interest, default interest, breach of contract penalty, compensations, and costs for the realization of Creditor’s right and right to pledge under each master contract. The costs for realization of Creditor’s right and right to pledge include, without limitation to costs and expenses for recovering accounts receivable, litigation (or arbitration), disposition of collateral, transfer, preservation, proclamation, execution, legal, business travel and other fees.

▲▲2.4 Both parties hereto specifically agree that the effect of this Contract shall be independent of each master contract, and the ineffectiveness of any master contract or any relevant provisions under this contract shall not affect the effect of this Contract. The Pledgor shall be jointly responsible for the return or indemnification of the Debtor in the event of the invalidation of applicable master contract.

Translator’s Declaration: Refer to the title page of this 11 page document “Maximum Pledge Contract”

  

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Article 3         Determination of Creditor’s right Guaranteed

3.1 The principal Creditor’s right guaranteed under this contract shall be determined on the earliest occurrence date among the following dates (the “determination date”):

(1)     The occurrence date of last principal Creditor’s right under all the master contracts;

(2)     Where the collateral are suspended or seized during the pledged period, the date on which the Pledgee receives notice from the authority executing the suspension or seizure;

(3)     The date on which the Debtor or Pledgor is declared bankrupt or revoked;

(4)     The time when the Pledgee exercises its right to pledge in accordance with Article 8 under this contract.

3.2 Principal Creditor’s right that occurs on or before the determination date and the interest (including compound interest, overdue and penalty interest for non-compliance) accrued thereof until the assumption of liabilities by the Pledgor as well as costs for realization of Creditor’s right and right to pledge by the Pledgee specified under Article 2.3 shall all fall within the scope guaranteed under this contract.

Occurrence of principal Creditor’s right shall mean the issuance of loan, financing or issuance of bank accepted bill of exchange, letter of credit, letter of guarantee (including standby letter of credit, similarly hereinafter).

3.3 Where the Pledgee assigns part of the Creditor’s right under the master contract before the determination of principal Creditor’s right, whether the maximum right to pledge will be assigned or not and how the rights will be assigned shall be subject to a written notice by the Pledgee to Pledgor at the time.

Article 4         Registration of Collateral

After the execution of this Contract, the Pledgor shall immediately carry out the pledge registration procedures with registration authority for the collateral under this contract, and deliver, within three days after the completion of the registration procedures, the Certificate of another Party’s Right, Original Pledge Registration Certificate and Original Title Certificate of Collateral to the Pledgee for its safekeeping.

Translator’s Declaration: Refer to the title page of this 11 page document “Maximum Pledge Contract”

  

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Article 5         Insurance

5.1 The Pledgor shall have the collateral insured in the amount and term requested by the Pledgee, and shall designate the Pledgee as the first beneficiary of insured benefits.

The Pledgor shall deliver the Original Insurance Policy to the Pledgee for its safekeeping after completing the insurance procedures.

5.2 During the term of this Contract, the Pledgor shall pay all the premiums on time and perform other duties necessary for maintaining the valid continuation of the insurance.

5.3 Where the Pledgor fails to effect or renew the insurance, the Pledgee shall, at its own discretion, have the right to effect and renew insurance, pay premiums on pledgor’s behalf or take other measures necessary for maintaining insurance. The Pledgor shall provide all necessary assistance and be responsible for the premiums and relevant costs thus incurred by the Pledgee.

▲▲Article 6      Representations and warranties by Pledgor

6.1 The Pledgor has the legal civil capacity and full capacity for civil conduct (where the Pledgor is a natural person). The Pledgor is duly incorporated and exists with all necessary capacity for rights (where the Pledgor is not a natural person), and is able to perform its debts under this contract and assume civil liabilities in its own name.

6.2 Execution and performance of this Contract shall reflect the truthful intentions of the Pledgor and all necessary consent, approvals and authorizations have been obtained lawfully.

6.3 All the documents, materials and information provided by the Pledgor to the Pledgee during the execution and performance of this Contract are true, correct, complete and valid.

6.4 Pledgor has full rights of disposition of the collateral; where the collateral are jointly owned, all necessary consent and approvals for the disposition thereof have been acquired.

6.5 There is no defect in the collateral and the collateral have not been suspended,, seized, under scrutiny and controlled in accordance with the law and there are no disputes, pledge, , litigation (arbitration) with respect to the collateral.

6.6 When this Contract is signed, the Debtor is not pledgor’s shareholder or the “actual controller” within the definition under the Company Law.

Translator’s Declaration: Refer to the title page of this 11 page document “Maximum Pledge Contract”

  

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▲▲Article 7    Obligations of the Pledgor

7.1 The Pledgor shall be liable for costs in connection with the evaluation, registration, notarization, appraisal, insurance, safekeeping, preservation and care of the collateral under this contract.

7.2 The Pledgor shall use and keep the collateral in a reasonable manner, refrain from using the collateral in any irregular way, maintain and take care to ensure the collateral are in good condition on a regular basis, and have the collateral insured as requested by the Pledgee.

7.3 Without written consent of the Pledgee, the Pledgor shall not act in any way to impair or possibly impair the value of the collateral, dispose of the collateral by assignment, gift, renting, to set up guarantee rights or in any other ways.

7.4 The Pledgor shall cooperate with the Pledgee in the inspection of use, safekeeping, preservation conditions and title of the collateral.

7.5 The Pledgor shall immediately notify Pledgee and provide new guarantee as requested by the Pledgee in the event of any of the following circumstances:

(1) The collateral may be damaged or its value may be obviously impaired;

(2) The sound and good conditions of the collateral are affected or may be affected adversely;

(3) The title to the collateral is disputed;

(4) During the pledged period, the collateral are subject to property preservation or enforcement measures or other mandatory measures such as closure and seizure;

(5) Rights to the pledge are infringed or may be infringed by any third party;

(6) Significant changes to the job or income of the Pledgor (where the Pledgor is a natural person);

(7) The Pledgor (where the Pledgor is not a natural person) is shut down, dissolved, suspended for reorganization of the business; its business license is revoked or cancelled; the Pledgor applies for or is being applied for bankruptcy.

Translator’s Declaration: Refer to the title page of this 11 page document “Maximum Pledge Contract”

  

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7.6 Before the Debtor repays all the debts under all the master contracts to the Pledgee, the Pledgor shall not exercise its recovery rights available as a result of performance of this Contract with respect to the Debtor or other guarantors.

7.7 If the Debtor becomes the shareholder or actual controller of the Pledgor before the Debtor repays all the debts under each master contract in full, the Pledgor shall immediately notify the Pledgee, and provide the resolution of shareholder’s meeting (general meeting of shareholders) that approves such provision of guarantee.

7.8 The Pledgor shall assist the Pledgee with the realization of the right to pledge and shall not set up any obstructions.

▲▲Article 8     Realization of the right to pledge

8.1 The Pledgee shall have the right to have the collateral auctioned or sold off in accordance with law in the event of any of the following circumstances:

(1) The Debtor fails to repay in full the principal of loan or financing funds, amounts advanced by the Pledgee or applicable interest under any master contract in a timely manner;

(2) The Pledgor fails to otherwise provide guarantee as specified under Article 7.5.

8.2 Money obtained from auction or sale of the collateral in accordance with law shall be used to:

(1) Repay Debtor’s debts due;

(2) For any Debtor’s debts not due, the balance after repayment will be deposited into a security account designated by the Pledgee; if the Debtor fails to repay applicable debt when it becomes due, then the Pledgee shall have the right to deduct such amount from the security account for repayment of such debt.

8.3 The Pledgor shall agree that where the Creditor’s right guaranteed under this contract is also guaranteed by other guarantee contracts at the same time, the Pledgee shall have the right to, at his own discretion, decide the sequence of the exercise of the rights, and the Pledgee shall have the right to directly exercise the right to pledge without claiming right to other guarantors first; where Pledgee waives its security rights under other guarantee contracts or priority of rights, or changes its security rights, the Pledgor shall still assume guarantee liabilities under this contract without any exemptions.

Translator’s Declaration: Refer to the title page of this 11 page document “Maximum Pledge Contract”

  

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▲▲Article 9      Guarantee clause

9.1 Where the right to pledge is made invalid or ineffective for any of the following reasons, the Pledgor shall provide maximum guarantee for the debts of Debtor under each master contract:

(1) The Pledgor fails to carry out registration procedures for the collateral in accordance with the provisions under Article 4;

(2) Representations and warranties made by the Pledgor under Article 6 are not true;

(3) Other reasons on account of the Pledgor.

9.2 The Maximum Creditor’s right guaranteed by Pledgor shall be (currency and amount in written form) RMB SEVEN MILLION EIGHT HUNDRED THOUSAND YUAN ONLY and the mode of guarantee shall be joint liability guarantee.

9.3 The scope of the master contract guaranteed by the maximum guarantee is consistent with that of the master contract guaranteed by pledge under this contract, namely, the master contract guaranteed by the Pledgor is the master contract specified under Article 2.1 of this contract. The scope guaranteed by the Pledgor shall include the principal and interest, compound interest, default interest, breach of contract penalty, damage compensations, and costs for the realization of Creditor’s right under each master contact. The costs for realization of Creditor’s right include without limitation to the costs and expenses for recovering accounts receivable, litigation (or arbitration), preservation, proclamation, execution, legal, business travel and other fees.

9.4 The term of guarantee shall be calculated respectively in accordance with the term for the performance of the debts (under issuance of bank accepted bill of exchange/letter of credit/letter of guarantee, in accordance with the date on which the Creditor advances payments, similarly hereinafter) agreed to under each master contract. The term of guarantee under each master contract shall be counted from the date on which the term for the performance of the debts agreed to under such master contract expires (or the date on which the Creditor advances payments), until two years after the date on which the term for the performance of the debts agreed to under such master contract as expires last among the expiration of all the master contracts (or the date on which the Creditor advances payments).

Where the master contract provides for the performance of debts in installment by the Debtor, then the term of guarantee for each installment debt under such master contract shall be calculated respectively, and the term of guarantee for each installment debt shall be counted from the date on which the term for performance of such installment debts expires, till two years after the date on which the term for performance of last installment debts under such master contract expires (or the date on which the Creditor advances payments).

Translator’s Declaration: Refer to the title page of this 11 page document “Maximum Pledge Contract”

  

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Where the Creditor declares early expiry for debts under the master contract, then the early expiry date declared shall be the date on which the term for performance of debts expires.

9.5 This guarantee clause shall be valid independently of the remaining clauses under this contract, and the entry into force of this guarantee clause shall be conditional upon the invalidation or annulment of the right to pledge under this contract as a result of reasons listed under Article 9.1.

▲▲Article 10   Dispute settlement

Disputes in connection with this contract shall be settled through lawsuit filed with a competent Court of Pledgee’s domicile. During the dispute period, both parties shall continue to perform other clauses not involved in the dispute.

Article 11      Miscellaneous

▲▲11.1 The Pledgee shall not assume any obligations to provide the Debtor with credit facilities as a result of this Contract.

11.2 The attached Schedule of collateral shall constitute an integral part of this Contract.

11.3 This Contract shall go into effect on the date on which all following conditions have been satisfied: 1) the legal representative (principal) or authorized representative of the Pledgor signs (or stamps) and affixes official seal on this Contract; where the Pledgor is a natural person, the Pledgor signs this Contract; and 2) the principal or authorized representative of Pledgee signs (or stamps) and affixes official seal on this Contract.

 

11.4 This Contract shall be executed in three originals with the Pledgor and Pledgee each holding one copy and the registration authority of collateral, holding another copy.

Article 12 Other matters agreed-to

	
/

	
/

	
/

 

Translator’s Declaration: Refer to the title page of this 11 page document “Maximum Pledge Contract”

  

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The pledgor has carefully read the foregoing articles and the Pledgee has made explanations as per pledgor. The pledgor agrees with all the content under this Contract.

 

	
Pledgor (Official seal /signature)

[Seal] Hubei Minkang Pharmaceutical Co., Ltd.

Legal representative (principal) or authorized representative

(Signature /stamp)

[Seal] Seal of Gu Shuhua

Execution date: May 1st, 2011

	
Pledgee (Official stamp)

[Seal] Special Seal for Contracts of Bank of Communications Co., Ltd. Yichang Branch

Principal or authorized representative

(Signature /stamp)

[Seal] Seal of Ye Fenggao

Execution date: May 1st, 2011

Articles of joint owner statement (Applicable to circumstances in which collateral are jointly owned):

As the joint owner of the collateral, I (name:       /               ID type:            /           ID No.:                 /               ) have carefully read and confirmed all the articles under this Contract. I acknowledge and agree to Pledgor’s provision of guarantee to Pledgee on the collateral provided.

Signature of the joint owner

MM/DD/YYYY

Translator’s Declaration: Refer to the title page of this 11 page document “Maximum Pledge Contract”

  

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Schedule of Collateral of Bank of Communications Yichang Branch

May 1st, 2011

	
Pledgor

Title/name: Hubei Minkang Pharmaceutical Co., Ltd

 

	
Name of Debtor: Hubei Minkang Pharmaceutical Co., Ltd.

	
Pledge Contract No.: DA101A110025-2

	
Name

	
Unit of

measurement

	
Quantity

	
Title

certificate

No.

	
Location

	
Insurance

certificate

number

	
Land

	
Square meter

	
4680.21

	  	
Within the factory zone

	  
	
According to the assessment report[(Yichang)Xincheng(2010)(Illegible)No.010] issued by Yichang Xincheng Real Estate Valuation Consulting Co., Ltd. at[Illegible date] December 2010, the value of the land is RMB10,896,000 Yuan

11,257,600 Yuan

[Seal: Yichang Branch, Bank of Communications Co., Ltd. special seal for contract (1)

	
Official seal/signature of the Pledgor:

[seal] Hubei Minkang Pharmaceutical Co., Ltd.

Case worker:

[seal] Seal of GU Shuhua

	
Official seal of the Pledgee:

[seal] Special Seal for Contracts of Bank of Communications Co., Ltd. Yichang Branch

Case worker: ZOU Jie

 

Translator’s Declaration: Refer to the title page of this 11 page document “Maximum Pledge Contract”

  

10Exhibit 4.1

NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “1933 ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE 1933 ACT.

CONVERTIBLE PROMISSORY NOTE

	
New York, New York

	
$__________

Issue Date: __________, 2011

FOR VALUE RECEIVED, EMERALD DAIRY INC., a Nevada corporation (hereinafter called the “Borrower”), hereby promises to pay to the order of _________________________, a ___________, or its registered assigns (the “Holder”) the sum of ____________________________ and 00/100 Dollars ($__________) (“Principal Amount”), on __________, 2012 (the “Maturity Date”), and to pay interest on the unpaid principal balance hereof at the rate of fifteen percent (15%) per annum until the same becomes due and payable, whether at maturity or upon acceleration or by prepayment or otherwise.  Any amount of principal or interest on this Convertible Promissory Note (hereinafter, the “Note”) which is not paid when due shall bear interest at the rate of seventeen percent (17%) per annum from the due date thereof until the same is paid (“Default Interest”).  Interest shall be computed on the basis of a 365-day year and the actual number of days elapsed and shall be payable at the Maturity Date.  All payments due hereunder shall be made in lawful money of the United States of America; provided, however, that any accrued and unpaid interest due hereunder may be payable, at the election of the Borrower, (a) in cash, or (b) by delivery of such number of shares of Common Stock of the Borrower determined by dividing the amount of interest and/or Default Interest to be converted by the Conversion Price (as defined in Section 2.1 (c) hereof). 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.  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.  This Note is being issued, pursuant to a Securities Purchase Agreement (the “Purchase Agreement”), dated as of even date herewith. Each capitalized term used herein, and not otherwise defined, shall have the meaning ascribed thereto in the Purchase Agreement.

  

 

  

           The following terms shall apply to this Note:

ARTICLE I.

PREPAYMENT

1.1            Borrower’s Prepayment Option.  Notwithstanding anything to the contrary contained herein, at Borrower’s option at any time, upon fifteen (15) days prior written notice, the Borrower shall have the right to prepay the entire Principal Amount of the Note (the “Prepayment Option”).  On the 16th day following such notice, the Borrower shall make payment to the Holder of an amount in cash equal to the sum of (a) the Principal Amount of the Note outstanding on such day plus (b) accrued and unpaid interest on such unpaid Principal Amount plus (c) Default Interest, if any, on the amounts referred to in clauses (a) and (b) (the “Prepayment Amount”).  If the Borrower fails to make such payment within one (1) business day of such date the Borrower shall be subject to a penalty of .005 multiplied by the Prepayment Amount for every additional business day on which such payment is not made.

1.2            Pledge Agreement.  The Borrower’s obligations to repay this Note are secured by a pledge of ____________________ (__________) shares of Common Stock of the Borrower beneficially owned by Yang Yong Shan, the Borrower’s Chief Executive Officer (the “Pledgor”), as further set forth in the Pledge Agreement (“Pledge Agreement”), dated of even date herewith, by and among the Pledgor, the Borrower, the Holder and Legend Merchant Group, Inc., as Pledge Agent on behalf of the Holder.

ARTICLE II.

CONVERSION

2.1            Conversion.

(a)           After the Issue Date, the Holder shall have the right (the “Conversion Right”), on the terms set forth in this Section 2.1, to convert the Principal Amount of this Note and the accrued and unpaid interest thereon into Common Stock on the terms and conditions hereinafter set forth.

(b)           In the event that the Holder elects to convert all or any portion of this Note into Common Stock, the Holder shall give written notice of such election by delivering to the Borrower an executed and completed notice of conversion (the “Notice of Conversion”), such Notice of Conversion shall provide a breakdown in reasonable detail of the Principal Amount, accrued and unpaid interest being converted.  On each Conversion Date (as hereinafter defined) and in accordance with the Notice of Conversion, the Holder shall make the appropriate reduction to the Principal Amount and accrued and unpaid interest as entered in its records and shall provide written notice thereof to the Borrower within two (2) business days after the Conversion Date.  Each date on which a Notice of Conversion is delivered or telecopied to the Borrower in accordance with the provisions hereof shall be deemed, for all purposes of this Note, to be the “Conversion Date”.  Pursuant to the terms of the Notice of Conversion, the Borrower will issue instructions to the transfer agent (together with such other documents as the transfer agent may request) within two (2) business days of the date of the delivery to the Borrower of the Notice of Conversion.  The Borrower shall use its best efforts to cause its transfer agent to transmit the certificates representing the Common Stock issuable upon full or partial conversion of this Note to any address or depositary directed by the Holder within five (5) business days after receipt by the Borrower of the Notice of Conversion.

  

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(c)           The number of shares of Common Stock to be issued upon any conversion of this Note (the “Conversion Shares”) shall be determined by dividing that portion of the Principal Amount and accrued and unpaid interest and/or Default Interest to be converted, if any, by a price equal to the greater of (i) $1.00, or (ii) 75% of the offering price for the securities offered by the Company in its next offering of equity securities (including securities exercisable for or convertible into equity securities but not including the conversion of this Note) which, unless such minimum amount is waived by the Holder, shall result in cumulative gross offering proceeds to the Company from the sale of equity securities by the Company after the date hereof of at least $2,000,000 (the “Conversion Price”).

(d)           The Conversion Price and number and kind of shares or other securities to be issued upon conversion is subject to adjustment from time to time upon the occurrence of certain events, as follows:

(i)           Reclassification, etc.  If the Borrower at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes, the Principal Amount of this Note, and any accrued and unpaid interest thereon and fees incurred hereunder, shall thereafter be deemed to evidence the right to purchase an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the Common Stock immediately prior to such reclassification or other change.

(ii)           Stock Splits, Combinations and Dividends.  If the shares of Common Stock outstanding at any time after the date hereof are subdivided or combined into a greater or smaller number of shares of Common Stock, or if a dividend is paid on the Common Stock in shares of Common Stock, the Conversion Price or the Conversion Shares to be issued, as the case may be, shall be proportionately reduced in case of subdivision of shares or stock dividend or proportionately increased in the case of combination of shares, in each such case by the ratio which the total number of shares of Common Stock outstanding immediately after such event bears to the total number of shares of Common Stock outstanding immediately prior to such event.

(e)           Notwithstanding anything contained herein to the contrary, pursuant to the terms of this Note, the Holder shall not be entitled to convert this Note into that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock actually owned by the Holder and its Affiliates,  and (ii) the number of shares of Common Stock issuable upon the conversion of this Note held by such Holder and its Affiliates with respect to which the determination of this proviso is being made which would result in beneficial ownership by the Holder and its affiliates of more than 4.9% of the outstanding shares of Common Stock of the Borrower.  For the purposes of the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the 1934 Act and Regulation 13d-3 thereunder.  Notwithstanding anything to the contrary contained herein, the limitation on exercise of this Warrant may be waived by written agreement between the Holder and the Borrower; provided, however, such waiver may not be effective less than sixty-one (61) days from the date thereof.

  

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(f)           The Borrower shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of providing for the conversion of the Note, such number of shares of Common Stock as shall from time to time equal the Conversion Shares issuable from time to time.

ARTICLE III.

CERTAIN COVENANTS

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

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

ARTICLE IV.

EVENTS OF DEFAULT

4.1          Events of Default.  Each of the following events shall be deemed an “Event of Default” under this Note:

(a)           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.

(b)           Breach of Covenants.  The Borrower breaches any material covenant or other material term or condition contained herein, or in the Purchase Agreement, and such breach continues for a period of thirty (30) days after written notice thereof to the Borrower from the Holder.

  

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

(d)           Receiver or Trustee.  The Borrower or any subsidiary of the Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed;

(e)           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 $250,000, and shall remain un-vacated, un-bonded or un-stayed for a period of twenty (20) days unless otherwise consented to by the Holder, which consent will not be unreasonably withheld;

(f)           Bankruptcy.  Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any subsidiary of the Borrower and if instituted against Borrower is not dismissed within sixty (60) days; or

4.2           Effect of Event of Default.  Upon the happening of any Event of Default, as set forth in Section 4.1 above, then, or at any time thereafter, and in each and every such case, unless such Event of Default shall have been waived in writing by the Holder (which waiver shall not serve as a waiver of any subsequent default) at the option of the Holder and in the Holder’s sole discretion, the Holder may consider this Note immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, anything herein notwithstanding, and the Holder may immediately enforce any and all of the Holder’s rights and remedies provided herein or any other right or remedy afforded by law.

ARTICLE V.

MISCELLANEOUS

5.1           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.

  

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5.2           Notices.  Any notice herein required or permitted to be given shall be in writing and may be personally served or delivered by courier or sent by United States mail and shall be deemed to have been given upon receipt if personally served (which shall include telephone line facsimile transmission) or sent by courier or three (3) days after being deposited in the United States mail, certified, with postage pre-paid and properly addressed, if sent by mail.  For the purposes hereof, the address of the Holder shall be as shown on the records of the Borrower; and the address of the Borrower shall be 11990 Market Street, Suite 205, Reston, VA 20190, Fax #: (678) 868-0633.  Both the Holder and the Borrower may change the address for service by service of written notice to the other as herein provided.

5.3           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 as originally executed, or if later amended or supplemented, then as so amended or supplemented.

5.4           Assignability.  This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to 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.

5.5           Governing Law.  THIS NOTE SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS.  THE BORROWER HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS NOTE, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING.  BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING.  NOTHING HEREIN SHALL AFFECT EITHER PARTY’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.  BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER.  THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS NOTE SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING REASONABLE ATTORNEYS’ FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE.

5.6           Denominations.  At the request of the Holder, upon surrender of this Note, the Borrower shall promptly issue new Notes in the aggregate outstanding Principal Amount hereof, in the form hereof, in such denominations as the Holder shall request.

  

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

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IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its duly authorized representative this ____ day of __________, 2011.

	  	
EMERALD DAIRY INC.

	  	  	  
	  	
By: 

	
  

	  	  	
Name:

	  	  	
Title:

  

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