Document:

Exhibit 10.26

 

 

HIGHLY CONFIDENTIAL

Amended & Restated Offer Letter

 

March 10, 2015

 

By Email

Michael.McFerran@gmail.com

 

Mr. Michael McFerran

330 Mission Bay Blvd N.

Unit 702

San Francisco, CA 94158

 

Re:                             Amended & Restated Letter

 

Dear Mike:

 

We at Ares Management LLC (the “Company” or the “Firm”) are pleased to present this offer of employment to you as Chief Financial Officer (“CFO”) of Ares Management, L.P. (“Ares Parent”)(1) which, as you know, recently went public by successfully completing its initial public offering in May 2014.  In that regard and as you are further aware, Ares Parent, together with the Company and its affiliated managers (collectively, “Ares”) oversees a number of investment vehicles and managed accounts across the Firm’s investment platform comprised of private equity, tradable credit, private debt and real estate investment oriented mandates (collectively, “Ares Sponsored Funds”).  A copy of the Firm’s organizational structure is attached for informational purposes as Annex A.

 

We are excited about your interest in us and are confident that you will be an important addition to our team.  This Amended and Restated Offer Letter (“Letter”) supersedes any prior understanding, arrangement, letter or agreement between you and Ares, verbal or in writing, and formally presents the specifics of our offer of employment, including the initial Offer Letter dated November 13, 2014 between you and Ares.

 

Position and Responsibilities

 

You will be based out of the Company’s Los Angeles office.  You will report principally to the Company’s executive management (including the members of the board of Ares Partners Holdco LLC, the sole member of the general partner of Ares Parent).  As CFO of Ares your initial direct reports will consist of finance and accounting, tax and divisional chief financial officers of Ares’ investment groups.  In addition, we expect that you will become a member of the Firm’s Management Committee, which consists of certain of the Firm’s senior partners.  Your start date (the “Commencement Date”) is expected to be as mutually agreed but expected to be not later than March 31, 2015.

 

(1) The actual employing entity for the Firm will be Ares Operations LLC, a wholly-owned subsidiary of the Company.

 

 

During the term of your employment (herein, the “Term”) you will devote your energies, attention and best efforts and full and exclusive business time to the business and affairs of Ares, and you will not engage in any outside business activities without the prior written consent of the Firm, it being understood, that the foregoing will not preclude you from engaging in personal investment activities or charitable, professional and community activities, in each case (i) consistent with the Firm’s Code of Ethics and other policies, including conflict of interest and investment policies and (ii) so long as such activities do not materially conflict or interfere with the proper performance of your responsibilities to the Firm.

 

You further acknowledge and agree that consistent with your responsibilities and Ares’ applicable policies, during the Term, (i) you will make full disclosure of all Relevant Opportunities directly or indirectly made available to you or any of your affiliates or immediate family members, (ii) you will not (and will not permit any of your affiliates or immediate family members to) directly or indirectly appropriate any Relevant Opportunities , and (iii) you will not, without the prior written consent of Ares, receive any direct or indirect compensation or financial benefit for services rendered to any person or entity other than Ares.  For purposes of this Letter, “Relevant Opportunity” means any business opportunity that pertains to (or could reasonably be anticipated to pertain to) (i) any business of Ares or any Ares Sponsored Fund or (ii) any business in which Ares or any Ares Sponsored Fund invests.

 

You also agree at all times during the Term you will (i) comply with all laws, policies, rules and regulations applicable to you, including all applicable securities laws, policies, rules and regulations and (ii) not engage in any activities related to your responsibilities to the Firm without the requisite qualification, licenses and applicable registrations related to such activities.

 

Compensation

 

1.              Base Salary:  You will be paid a base salary (“Base Salary”) at the annual rate of $1,000,000.  Your Base Salary will be paid bi-monthly on the 15th and last day of the month (or the first previous business day if that day is not a business day) pursuant to the Company’s regular payroll policy.  Your Base Salary will be guaranteed for the calendar year ending December 31, 2015 unless your employment is terminated as a result of your resignation for any reason, your death or disability or by Ares for Cause.

 

For purposes of this Letter and consistent with Ares’ general policies, “Cause” shall mean the following:

 

·                  your persistent refusal or willful failure to competently perform substantially the duties and responsibilities assigned to you;

·                  your misconduct (including, but not limited to, physical assault, insubordination, falsification or misrepresentation of facts, fraud, dishonesty, willful destruction

 

 

of the Company’s property or assets, harassment, or violation of the Company’s policies);

·                  your conviction of or plea of nolo contendere to a felony or any crime involving moral turpitude;

·                  your intentional failure to comply with any lawful directive of the Company;

·                  your violation of law in connection with a transaction involving the purchase or sale of a security;

·                  your intentional taking of any improper action or the intentional omission to take any proper action that has caused or substantially contributed to (or could reasonably be expected to cause or substantially contribute to) a material deterioration of the business or reputation of Ares or any Ares Sponsored Fund or that was (or could reasonably be expected to be) materially disruptive of the business affairs of Ares or any Ares Sponsored Fund;

·                  your material dishonesty, bad faith, gross negligence, willful misconduct or willful or reckless disregard of duties in connection with the performance of any service to or on behalf of Ares or any Ares Sponsored Fund;

·                  your intentional violation of any written policies of Ares, this Letter or any other agreement with Ares or any Ares Sponsored Fund; and

·                  your engaging in a competitive business practice or business that is (or could reasonably be expected to be) materially adverse to Ares or any Ares Sponsored Fund.

 

2.              Bonus:  You will be eligible to earn an annual discretionary bonus tied to performance as determined by the Company (“Bonus Compensation”) in its sole discretion, payable in cash, provided that you are employed by the Company and are in good standing (including, for example, being in compliance with Ares’ general employee policies and procedures) on the date that such bonus is paid, which will be no later than March 15th after the end of the applicable performance year. As discussed, the targeted Bonus Compensation for the 2015 performance year and following performance years during the Term is expected to be between 50% and 100% of your Base Salary, with the actual amount of any Bonus Compensation contingent on (i) your performance, the performance of the Firm, and (iii) any other factors as are determined by the Company.

 

3.              Equity Awards:  Subject to your execution of the Fair Competition Agreement (described below), your execution of applicable award documentation and approval by the board of the general partner of Ares Parent respecting the Restricted Unit Awards and Options, each as described below, you will be eligible to receive the following:

 

1.              Restricted Unit Awards.  Effective upon your Commencement Date and pursuant to Ares’ 2014 Equity Incentive Plan (“Ares’ Equity Plan”) you will be awarded Ares restricted units (“RSUs”) in the notional or principal amount of $500,000 based on the price of underlying Ares common units (“Common Units”).  Thereafter, on each of the 1st, 2nd, 3rd and 4th

 

 

anniversaries of your Commencement Date, subject to your continued employment in good standing, you will be awarded additional RSUs in the notional or principal value amounts of $500,000 based on the price of underlying Common Units on the respective award dates (an aggregate award value of $2,500,000).

 

i.                  RSUs will represent unfunded, unsecured rights to receive Common Units of Ares on their vesting dates.

 

ii.               RSUs will be net settled on their vesting dates whereby the Ares’ Equity Plan Administrator (the “Plan Administrator”) will withhold a number of the underlying Common Units to cover taxes and deliver of the remaining Common Units.

 

iii.            Each RSU grant will vest in three equal installments (without partial vesting) on the 3rd, 4th and 5th anniversaries of the respective award date.

 

iv.           All unvested RSUs will be forfeited on termination of your employment for any reason, provided that 11% and 22% of the RSUs will vest if employment is terminated without Cause or on account of death or disability (x) after the 1st and prior to the 2nd anniversaries of the grant date or (y) on or after the 2nd and prior to the 3rd anniversaries of the grant date, respectively.

 

v.              You will receive an amount with respect to your outstanding granted RSUs equal to distributions paid with respect to underlying Common Units at the time such distributions are paid to holders of Common Units, notwithstanding the vesting status of the RSUs.

 

vi.           RSUs may not be sold, assigned or transferred.  Moreover, until the 5th anniversary of their award date and except for sales by the Plan Administrator to cover taxes upon vesting of RSUs, Common Units received on vesting of RSUs may not be sold, assigned or transferred.

 

vii.        The above terms and conditions respecting the RSUs are a summary only and subject to important exceptions and qualifications.  Your RSUs will be governed by your award letter and Ares’ Equity Plan, and such underlying legal documentation control in all respects.

 

2.              Options.  Effective upon your Commencement Date, you will be awarded options (“Options”) pursuant to Ares’ Equity Plan with an exercise price equal to the then current price per Common Unit on the date of grant.  Such Options will be in an amount having an aggregate spread value of $5 million above the aggregate exercise price (before giving effect to any taxes) if the price per Common Unit was $38.00 (as to which, there is no assurance).

 

 

i.                  Options will vest and become exercisable in three equal installments (without partial period vesting) on the 3rd, 4th and 5th anniversaries of the date of award.

 

ii.               Options may be exercised upon payment of the exercise price in cash.

 

iii.            Options may not be sold, assigned or transferred.  Moreover, notwithstanding the exercise of Options, underlying Common Units received upon exercise may not be sold, assigned or transferred until the 5th anniversary of the date of award.

 

iv.           All unvested Options will be forfeited on termination of your employment for any reason.

 

v.              The above terms and conditions respecting the Options are a summary only and subject to important exceptions and qualifications.  You also acknowledge that notwithstanding the targeted spread value above, there is no guaranty or assurance that the referenced Common Unit price will be attained.  Your options will be governed by your award letter and Ares’ Equity Plan, and such underlying legal documentation shall control in all respects.

 

3.              Carried Interest.  So long as you are employed and in good standing, on or before the twelve month anniversary of your Commencement Date, you will be awarded participation interests (the “Participations”) in the carried interest and/or other performance compensation (collectively, “Carried Interest”) associated with the profits of one or more existing and/or to be formed Ares Sponsored Funds selected by Ares.  The Participations may be in the form of equity interests in holding vehicles formed to receive the Carried Interest from an Ares Sponsored Fund, as an annual award or bonus related to the annual incentive fee payable by an Ares Sponsored Fund, or as otherwise determined by Ares.  While such Participations will have no value at the time of award, the aggregate potential value of the Participations at the time of grant is intended to be equal to at least $2.5 million (the “Target Amount”) based on Ares’ determination of potential value at such time, consistent with industry practices.  The award to you of the Participations is subject to execution by you of Ares’ standard constituent documents governing the corresponding Carried Interest program as generally offered to other program participants, including vesting, dilution, forfeiture and guaranty of any claw-back obligations, as well as confidentiality and other covenants.  You acknowledge that this is merely a summary of the award and terms of the Participations, and that the terms and conditions of your Participations will be set forth in the constituent documents governing the applicable corresponding Carried Interest programs, which agreements shall control the terms of your Participations.  You acknowledge and agree that there is no guaranty or assurance that

 

 

distributions or other payments to you in respect of the Participations will actually be realized and, if so, that they will equal the Target Amount.  Thus, the ultimate distributions or payments to you in respect of the Participations could be more or less than the Target Amount.

 

4.              Withholding:  As a general matter, you understand that all Base Salary, Bonus Compensation and other compensation will be subject to normal withholding allowances and deductions.

 

a)             Relocation Allotment: The Firm has engaged Odyssey Relocation Management (together with its affiliates, “Odyssey”) to administer the Firm’s relocation program.  Odyssey will assign a consultant to coordinate all logistics and expense tracking of your relocation benefits subject to the Company’s Travel and Relocation Policies and provided you execute the enclosed “Relocation Repayment Agreement”. You will be eligible to receive the following in connection with your relocation from New York to the Company’s Los Angeles office (collectively, the “Relocation Allotment”).

 

b)             Settling In Services:  You may require assistance in understanding what Los Angeles has to offer, its various neighborhoods, transit, traffic patterns, etc.  Odyssey will be engaged to assist you with your move and will oversee the process to help make the transition as seamless as possible for you and your family.  Once on the ground in Los Angeles, Odyssey will provide guidance on the housing and rental markets, among other things.  A representative from Odyssey will be in touch with you shortly after your execution of this Letter to begin the process and learn about your particular needs and preferences.

 

c)              Home Finding Trip:  The Company will pay the reasonable cost for up to two trips (i.e., roundtrip business airfare tickets) for you and your spouse to the Los Angeles area and accompanying hotel stay, and transportation to/from the airport during 2015.  These trips will be arranged through Odyssey in conjunction with Worldview Travel (the Firm’s travel agency). The duration of each trip shall not exceed four (4) days.

 

d)             Household Goods Shipment:  The Company will pay the reasonable cost for the shipment and up to 30 days of storage of your household goods from your primary residence in New York to the Los Angeles area.  The shipment and storage of household goods will be coordinated through your Odyssey consultant.  Insurance coverage will be provided and based on actual cash values of the items.  Expense coverage for the household goods shipment shall be the lesser of actual expenses incurred or $50,000.  The movement of goods must be completed during 2015.

 

e)              Travel to New Location:  The Company will pay for the reasonable cost of your final air transportation arrangements en route to the Los Angeles area.  Arrangements will be made through your Odyssey consultant in conjunction with the Company’s preferred travel agency.

 

 

f)               Reimbursement:  You agree to reimburse the Company for relocation expenses paid to you in accordance with the Company’s Relocation Program as outlined in the Addendum accompanying this Letter.

 

Please note that you must submit itemized, original receipts for reimbursements of costs actually incurred pursuant to the Relocation Allotment within twelve (12) months of your hire date. The Relocation Allotment cannot be used for any purposes other than as described above. If the Company determines, in its sole and absolute discretion, that any of the expenses relating to any of the above Relocation Allotments are unreasonable, then the Company shall only reimburse you for the portion of your expenses that it deems to be reasonable.  Furthermore, in order to be reimbursed for any of these expenses, you must receive prior written approval from the Company before incurring such expenses.

 

Benefits

 

1.                                      Medical / Dental / Vision:  The Company currently offers optional health coverage through Aetna (Medical/Dental) and VSP (Vision) for all employees and their dependents.  Eligibility for coverage will begin the first day of the month following the Commencement Date.  More detailed information regarding these benefits is contained in plan booklets, group insurance policies and the Company’s official plan documents.  If there is any conflict between the information set forth herein and the terms, conditions, or limitations of the official plan documents, the provisions of the official plan documents will control.  You are encouraged to review the official plan documents available through Human Resources for further information.

 

2.                                      Vacation, Sick Days, & Holidays:  As a senior professional, you will not accrue vacation benefits and are encouraged to take appropriate and reasonable time away from the office. You will continue to receive your salary during these times as long as the time is reasonable and you ensure that all responsibilities and obligations of your position are being met. Ares currently observes 11 paid holidays each calendar year.

 

3.                                      Modification, Amendment or Termination of Benefits.  You acknowledge that the Company maintains the right to modify, amend and/or terminate, without prior notice, the benefits set forth in this Letter, and any other benefits, at any time in its sole and absolute discretion.

 

Co-Investments — Ares Sponsored Funds

 

During the Term of your employment, to the extent permitted by applicable securities and other laws, you may be permitted (but not obligated) to make personal investments in one or more employee sponsored co-investment programs (“Co-Invest Programs”) providing for indirect co-investments in Ares Sponsored Funds.  Generally, Co-Invest Programs are not subject to management fees or carried interest of the applicable Ares Sponsored Fund.  The amount available for such personal investment by you and the

 

 

other terms and conditions applicable to any such investment will be determined by the Firm in a manner consistent with policies established for such Co-Invest Program and as generally applicable to other executives of Ares and subject to Ares’ standard documentation.

 

At-Will Employment

 

Your employment will be “at-will” and will continue only so long as continued employment is mutually agreeable to you and the Company.  Either you or the Company can terminate the employment relationship at any time, for any reason or no reason at all, with or without notice.  In addition, your employment will be subject to the Company’s employment policies and procedures as are in effect from time to time, including without limitation its policies and procedures respecting confidentiality, personal trading and mandatory dispute resolution procedures.  You will be given a copy of the Company’s current policies and procedures applicable to you and your employment. Our hope is that you will enjoy your experience at the Company and that our relationship will be long standing.  On the other hand, either you or Ares can terminate the employment relationship at any time, for any reason or no reason at all, with or without notice or Cause.  As such, neither this Letter, including, without limitation, the provisions under “Compensation” above, nor any written material issued by the Company constitutes a contract between you and the Company for employment, express or implied, for any specific duration.

 

Fair Competition Agreement

 

Prior to your Commencement Date you will execute a Fair Competition Agreement (the “Fair Competition Agreement”) in the form provided to you.  Failure to comply with the Fair Competition Agreement may result in, among other remedies, the forfeiture of all vested and unvested Ares equity interests.  You acknowledge and agree that the terms and conditions of the Fair Competition Agreement are fair and reasonable in light of your expected duties and activities as CFO.

 

Certain Compliance Matters

 

As a registered investment adviser, the Company is required to maintain and enforce a Code of Ethics (the “Code”).  The principal provisions of the Code relate to personal securities holdings and trading.  One of the requirements is that you report all brokerage and other securities accounts and all holdings of “Covered Securities” within ten (10) days of the start of your employment, including accounts and holdings of family members living in your household.  The term “Covered Securities” means all securities except open-end mutual funds (including money market funds), U.S. government securities, bank certificates of deposit, investments in qualified tuition programs established pursuant to Section 529 of the Internal Revenue Code and certain other securities.  The Company utilizes an online personal trading compliance solution, Personal Trading Assistant (PTA), in connection with the administration of its Code.  We have arrangements with certain brokers to electronically transmit the account and holdings information directly into PTA.  A list of such brokers is included at the end of this Letter as Annex B.  If you hold any Covered Securities with a broker that is not on this list, you must either transfer such

 

 

Covered Securities holdings to one of these brokers within three months of the commencement of your employment or make alternative arrangements with Human Resources and your current broker to help the Company ensure compliance in this area.  Please bring your account information, including your most recent account statements, with you on your first day of employment.

 

Section 409A

 

It is intended that compensation paid and benefits delivered to you pursuant to this Letter shall be either paid in compliance with, or exempt from, Section 409A of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder (collectively, “Section 409A”) so as not to subject you to payment of interest or any tax under Section 409A, and this Letter shall be construed, interpreted and administered accordingly.  In no event will the Company be liable for any additional tax, interest or penalties that may be imposed on you by Section 409A or for any damages for failing to comply with Section 409A.  For purposes of Section 409A, each payment under this Letter shall be treated as a separate payment.  If this Letter or any compensation paid or benefits delivered to you hereunder is deemed to be subject to Section 409A, the Company shall adopt such conforming amendments as the Company deems necessary, in its discretion, to comply with Section 409A and avoid the imposition of taxes under Section 409A.  If, upon your separation from service within the meaning of Section 409A, you are then a “specified employee” (as defined in Section 409A), then solely to the extent necessary to comply with Section 409A and avoid the imposition of taxes under Section 409A, the Company shall defer payment of “nonqualified deferred compensation” subject to Section 409A that is payable as a result of and within six months following such separation from service under this Letter until the earlier of (i) your death or (ii) the first business day of the seventh month following your separation from service.  Any such delayed payments shall be made without interest.  Any reimbursements or in-kind benefits provided under this Letter will be made or provided in accordance with the requirements of Section 409A, including, where applicable, the requirement that (i) the amount of expenses eligible for reimbursement, or in kind benefits provided, during a calendar year may not affect the expenses eligible for reimbursement, or in kind benefits to be provided, in any other calendar year, (ii) the reimbursement of an eligible expense will be made no later than the last day of the calendar year following the year in which the expense is incurred, and (iii) the right to reimbursement or in kind benefits is not subject to liquidation or exchange for another benefit.

 

Governing Law

 

This Letter, the offer of employment contained herein, and your employment with the Company will be governed by the laws of the State of California without regard to principles of conflicts of laws, to the extent they would require the application of the laws of another jurisdiction.

 

 

General

 

This offer expires within five (5) calendar days of the date of this Letter, unless the Company receives a signed copy within that period.  This offer is conditioned upon:

 

(1) your accepting and returning a signed original of this Letter and enclosed Relocation Repayment Agreement;

 

(2) your satisfactory completion and return to the Company of your Form I-9; and

 

(3) the results of the background check and disclosure documents described below being satisfactory to the Company in its sole and absolute discretion.

 

By accepting this offer, you represent, acknowledge and agree that:

 

(1)           you will comply with the terms and conditions of the Company’s employment policies and procedures as provided to you from time to time;

 

(2)           you consent to background checks at any time before and during the Term and you will complete all disclosure documents requested by the Company (including an Eligible Employee questionnaire);

 

(3)           the Company may rescind this offer and/or terminate your employment without any obligation if the results of any such background checks or disclosure documents are not satisfactory to the Company in its sole and absolute discretion whenever they are completed; and

 

(4)           you will (a) not bring with you or otherwise disclose to the Company any confidential or proprietary information belonging to any of your previous employers or any other person and (b) refrain from disclosing to us, or using while employed by us, any such confidential or proprietary information. This offer is further predicated on your acknowledgement that there are no contractual impediments or other legal obligations (including, but not limited to, restrictive covenants with your prior employers) that restrict your ability to accept this offer of employment and to perform your duties for the Company.

 

The Company expressly reserves the right to amend or modify the terms and conditions of your employment set forth in this Letter at any time.

 

 

We are delighted to extend this offer of employment to you and sincerely feel that we can provide you with the opportunity to achieve rewarding results.  Please contact me at (310) 201-4140 with any questions.  We look forward to working with you.

 

Sincerely,

 

 

	
/s/   Michael D. Weiner
    	
 
    
	
Michael   D. Weiner
    	
 
    
	
General   Counsel, Ares Management LLC
    	
 
    

 

 

Employment under the terms offered herein is accepted

 

 

	
/s/   Michael McFerran
    	
 
    
	
Michael   McFerran
    	
 
    
	
 
    	
 
    
	
DATE:
    	
 
    
	
 
    	
 
    
	
March 10,   2015THIS
12% CONVERTIBLE NOTE IS BEING ISSUED PURSUANT TO THAT CERTAIN SECURITIES PURCHASE AGREEMENT (“PURCHASE AGREEMENT”)
DATED AS OF DECEMBER 31, 2014 (“ORIGINAL ISSUANCE DATE”) BETWEEN THE COMPANY AND HOLDER (AS SUCH TERMS ARE DEFINED
BELOW) IN AN EXCHANGE OF ALL THE SHARES (AS DEFINED IN THE PURCHASE AGREEMENT) FOR THIS NOTE WITHOUT ANY ADDITIONAL CONSIDERATION
AS CONTEMPLATED IN SECTION 6 OF THE PURCHASE AGREEMENT. FOR PURPOSES OF RULE 144 PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, THIS NOTE SHALL BE DEEMED TO HAVE BEEN ISSUED ON THE ORIGINAL ISSUANCE DATE.

 

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

 

	Principal
    Amount: $125,000	 	Issue
    Date: December 31, 2014

 

12%
CONVERTIBLE NOTE

 

FOR
VALUE RECEIVED, OSL HOLDINGS, INC., a Nevada corporation (“Borrower” or “Company”), hereby
promises to pay to the order of EMA FINANCIAL, LLC, a Delaware limited liability company, or its registered assigns (the
“Holder”), on date which is six months following the issue date hereof (subject to extension as set forth below, the
“Maturity Date”), the sum of $125,000 as set forth herein, and to pay interest on the unpaid principal balance hereof
at the rate of twelve percent (12%) per annum (the “Interest Rate”) from the date of issuance hereof until this Note
plus any and all accrued interest is paid in full. Interest shall be computed on the basis of a 365-day year and the actual number
of days elapsed. Any amount of principal or interest on this Note which is not paid when due shall bear interest at the rate of
twenty-four (24%) per annum from the due date thereof until the same is paid (“Default Interest”). All payments due
hereunder shall be made in lawful money of the United States of America. All payments shall be made at such address as the Holder
shall hereafter give to the Borrower by written notice made in accordance with the provisions of this Note. Whenever any amount
expressed to be due by the terms of this Note is due on any day which is not a business day, the same shall instead be due on
the next succeeding day which is a business day and, in the case of any interest payment date which is not the date on which this
Note is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount
of interest due on such date. As used in this Note, the term “business day” shall mean any day other than a Saturday,
Sunday or a day on which commercial banks in the city of New York, New York are authorized or required by law or executive order
to remain closed. Each capitalized term used herein, and not otherwise defined, shall have the meaning ascribed thereto in that
certain Securities Purchase Agreement entered into by and between the Company and Holder dated on or about December 29, 2014,
pursuant to which the shares of Common Stock were originally issued for which this Note is being exchanged (the “Purchase
Agreement”). The Holder may, by written notice to the Borrower at least five (5) days before the Maturity Date (as may have
been previously extended), extend the Maturity Date to up to one (1) year following the date of the original Maturity Date hereunder.

 

    	 

    	 

    

 

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

 

The
following terms shall apply to this Note:

 

ARTICLE
I. CONVERSION RIGHTS

 

1.1. Conversion
Right. The Holder shall have the right, in its sole and absolute discretion, at any time and from time to time to
convert all or any part of the outstanding amount due under 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 4.9% 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 Regulation 13D-G
thereunder, except as otherwise provided in clause (1) of such
proviso, provided, further, however, that the limitations on conversion may be waived by
the Holder upon, at the election of the Holder, not less than 61 days’ prior notice to the Borrower, and the provisions
of the conversion limitation shall continue to apply until such 61st day (or such later date, as determined by the Holder, as
may be specified in such notice of waiver). The number of shares of Common Stock to be issued upon each conversion of this
Note shall be determined by dividing the Conversion Amount (as defined below) by the applicable Conversion Price then in
effect on the date specified in the notice of conversion, in the form attached hereto as Exhibit A (the “Notice of
Conversion”), delivered to the Borrower by the Holder in accordance with Section 1.4 below; provided that the Notice of
Conversion is submitted by facsimile or e-mail (or by other means resulting in, or reasonably expected to result in, notice)
to the Borrower before 11:59 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) accrued and unpaid interest, if any, on
such principal amount being converted at the interest rates provided in this Note to the Conversion Date, plus (3)
at the Holder’s option, Default Interest, if any, on the amounts referred to in the immediately preceding clauses (1)
and/or (2) plus (4) at the Holder’s option, any amounts owed to the Holder pursuant to Sections 1.3
and 1.4(g) hereof.

 

    	 

    	 

    

 

1.2. Conversion
Price.

 

a) Calculation
of Conversion Price. The conversion price hereunder (the “Conversion Price”) shall equal the lower of either
(i) $0.0075 or (ii) 70% of the lowest trade price of Common Stock on the Principal Market during the twenty (20) consecutive Trading
Days immediately preceding the Conversion Date. However, if Company’s share price at any time loses the bid (ex: 0.0001
on the ask with zero market makers on the bid on level 2), then the Conversion Price may, in the Holder’s sole and absolute
discretion, be reduced to a fixed conversion price of 0.00001 (if lower than the conversion price otherwise). If such Common Stock
is not traded on the OTCBB, OTCQB, Nasdaq or NYSE, then such sale price shall be the sale price of such security on the principal
securities exchange or trading market where such security is listed or traded or, if no sale price of such security is available
in any of the foregoing manners, the average of the closing bid prices of any market makers for such security that are listed
in the “pink sheets” by the National Quotation Bureau, Inc. If such sale price cannot be calculated for such security
on such date in the manner provided above, such price shall be the fair market value as mutually determined by the Borrower and
the Holder. If the Borrower’s Common stock is chilled for deposit at DTC, becomes chilled at any point while this Note remains
outstanding or deposit or other additional fees are payable due to a Yield Sign, Stop Sign or other trading restrictions, or if
the closing sale price at any time falls below 0.01, then such 70% figure specified in clause 1.2(a)(ii) above shall be reduced
to 55%. Additionally, the Borrower acknowledges that it will take all reasonable steps necessary or appropriate, including providing
a board of directors resolution authorizing the issuance of common stock and an opinion of counsel confirming the rights of Holder
to sell shares of Common Stock issuable or issued to Holder on conversion of this Note pursuant to Rule 144 as promulgated by
the SEC (“Rule 144”), as such Rule may be in effect from time to time. If the Borrower does not promptly provide a
board of directors’ resolution and an opinion from Company counsel, and so long as the requested sale may be made pursuant
to Rule 144, the Company agrees to accept an opinion of counsel to the Holder which opinion will be issued at the Company’s
expense and the conversion dollar amount will be reduced by $750.00 to cover the cost of such legal opinion. “Trading Day”
shall mean any day on which the Common Stock is tradable for any period on the OTCQB, or on the principal securities exchange
or other securities market on which the Common Stock is then being traded. Additionally, if the Company ceases to be a reporting
company pursuant to the 1934 Act or if the Note cannot be converted into free trading shares after 181 days from the issuance
date, an additional 15% discount will be attributed to the Conversion Price.

 

b) 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 (as defined
below) the Borrower shall pay to the Holder $1,000.00 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, 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 this Note is a valuable right to
the Holder. The damages resulting from a failure, attempt to frustrate, or interference with such conversion right are difficult
if not impossible to quantify. Accordingly the parties acknowledge that the liquidated damages provision contained in this Section
are justified.

 

    	 

    	 

    

 

1.3. Authorized
Shares. The Borrower covenants that the Borrower will at all times while this Note is outstanding 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. The Borrower is required at all times to have authorized and reserved three (3) times the
number of shares that is actually issuable upon full conversion of this Note (based on the Conversion Price of the Notes in effect
from time to time)(the “Reserved Amount”). Initially, the Company will instruct the Transfer Agent to reserve forty
million (40,000,000) shares of common stock in the name of the Holder for issuance upon conversion hereof. 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 this Note 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 this Note in full. 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 and from time
to time after the Issue Date, by 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 11:59 p.m., New York, New York time).

 

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

 

    	 

    	 

    

 

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

 

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

 

e) Obligation
of Borrower to Deliver Common Stock. Upon receipt by the Borrower of a duly and properly executed Notice of Conversion, the
Holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, the outstanding principal
amount and the amount of accrued and unpaid interest on this Note shall be reduced to reflect such conversion, and, unless the
Borrower defaults on its obligations under this Article I, all rights with respect to the portion of this Note being so converted
shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided,
on such conversion. If the Holder shall have given a Notice of Conversion as provided herein, the Borrower’s obligation
to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any
action by the Holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment
against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Borrower
to the holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by
the Holder of any obligation to the Borrower, and irrespective of any other circumstance which might otherwise limit such obligation
of the Borrower to the Holder in connection with such conversion. The Conversion Date specified in the Notice of Conversion shall
be the Conversion Date so long as the Notice of Conversion is received by the Borrower before 11:59 p.m., New York, New York time,
on such date.

 

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

 

    	 

    	 

    

 

g) Failure
to Deliver Common Stock Prior to Deadline. Without in any way limiting the Holder’s right to pursue other remedies,
including actual damages and/or equitable relief, the parties agree that if delivery of the Common Stock issuable upon conversion
of this Note is not delivered by the Deadline, the Borrower shall pay to the Holder $1,000.00 per day in cash, for each day beyond
the Deadline that the Borrower fails to deliver such Common Stock to the Holder. Such cash amount shall be paid to Holder by the
fifth day of the month following the month in which it has accrued or, at the option of the Holder, 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, or 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.

 

h) The
Borrower acknowledges that it will take all reasonable steps necessary or appropriate, including providing an opinion of counsel
confirming the rights of Holder to sell shares of Common Stock issued to Holder on conversion of the Note pursuant to Rule 144
as promulgated by the SEC (“Rule 144”), as such Rule may be in effect from time to time. If the Borrower does not
promptly provide an opinion from Borrower counsel, and so long as the requested sale may be made pursuant to Rule 144, the Borrower
agrees to accept an opinion of counsel to the Holder which opinion will be issued at the Borrower’s expense.

 

1.5. Restricted
Securities. The shares of Common Stock issuable upon conversion of this Note may not be sold or transferred unless (i) such
shares are sold pursuant to an effective registration statement under the Act or (ii) the Borrower or its transfer agent shall
have been furnished with an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of
counsel in comparable transactions) to the effect that the shares to be sold or transferred may be sold or transferred pursuant
to an exemption from such registration or (iii) such shares are sold or transferred pursuant to Rule 144 under the Act (or a successor
rule) (“Rule 144”) or (iv) such shares are transferred to an “affiliate” (as defined in Rule 144) of the
Borrower who agrees to sell or otherwise transfer the shares only in accordance with this Section 1.5 and who is an Accredited
Investor (as defined in the Purchase Agreement). Any legend set forth on any stock certificate evidencing any Conversion Shares
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 form, substance and scope customary for opinions of counsel
in comparable transactions, to the effect that a public sale or transfer of such Common Stock may be made without registration
under the Act, which opinion shall be reasonably acceptable to the Company, or (ii) in the case of the Common Stock issued or
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.

 

    	 

    	 

    

 

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, for clarification, the Holder shall be entitled to convert this Note) and
(b) the resulting successor or acquiring entity 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. Such assets shall be held in escrow by the Company pending any such conversion.

 

    	 

    	 

    

 

d) 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.

 

e) Stock
Dividends and Stock Splits. If the Company, at any time while this Note is outstanding: (A) pays a stock dividend or otherwise
makes a distribution or distributions payable in shares of Common Stock on shares of Common Stock or any securities convertible
into or exercisable for Common Stock; (B) subdivides outstanding shares of Common Stock into a larger number of shares; (C) combines
(including by way of a reverse stock split) outstanding shares of Common Stock into a smaller number of shares; or (D) issues,
in the event of a reclassification of shares of the Common Stock, any shares of capital stock of the Company, then the Conversion
Price (and each sale or bid price used in determining the Conversion Price) shall be multiplied by a fraction, of which the numerator
shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator shall be
the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to this Section shall
become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

 

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

 

1.7. Revocation.
If any Conversion Shares are not received by the Deadline, the Holder may revoke the applicable Conversion pursuant to which such
Conversion Shares were issuable. This Note shall remain convertible after the Maturity Date hereof until this Note is repaid or
converted in full.

 

1.8. No
Prepayment. This Note may not be prepaid in whole or in part.

 

    	 

    	 

    

 

ARTICLE
II. CERTAIN COVENANTS

 

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

 

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

 

2.3. Borrowings;
Liens. So long as the Borrower shall have any obligation under this Note, the Borrower shall not (i) create, incur, assume
guarantee, endorse, contingently agree to purchase or otherwise become liable upon the obligation of any person, firm, partnership,
joint venture or corporation, except by the endorsement of negotiable instruments for deposit or collection, or suffer to exist
any liability for borrowed money, except (a) borrowings in existence or committed on the date hereof and of which the Borrower
has informed Holder in writing prior to the date hereof, or (b) indebtedness to trade creditors or financial institutions incurred
in the ordinary course of business, or (ii) enter into, create or incur any liens, claims or encumbrances of any kind, 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,
securing any indebtedness occurring after the date hereof.

 

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

 

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

 

2.6. Charter.
So long as the Borrower shall have any obligations under this Note, the Borrower shall not 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.

 

    	 

    	 

    

 

ARTICLE
III. EVENTS OF DEFAULT

 

Any
one or more of the following events which shall occur and/or be continuing shall constitute an event of default (each, an “Event
of Default”):

 

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

 

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

 

3.3. Breach
of Covenants. The Borrower breaches any material covenant or other material term or condition contained in this Note and any
collateral documents including but not limited to the Purchase Agreement and such breach continues for a period of seven (7) days
after written notice thereof to the Borrower from the Holder.

 

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

 

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

 

    	 

    	 

    

 

3.6. Judgments.
Any money judgment, writ or similar process shall be entered or filed against the Borrower or any subsidiary of the Borrower or
any of its property or other assets for more than $50,000.00, and shall remain unvacated, unbonded or unstayed for a period of
twenty (20) days unless otherwise consented to by the Holder, which consent will not be unreasonably withheld.

 

3.7. Bankruptcy.
Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings, voluntary or involuntary, for relief under
any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any subsidiary of the
Borrower.

 

3.8. Delisting
of Common Stock. The Borrower shall fail to maintain the listing of the Common Stock on at least one of the OTCQB or an equivalent
replacement exchange, Nasdaq, the NYSE or AMEX.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

    	 

    	 

    

 

Upon
the occurrence and during the continuation of any Event of Default specified in Section 3.1 (solely with respect to failure to
pay the principal hereof or interest thereon when due at the Maturity Date), the Note shall become immediately due and payable
and the Borrower shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Default Sum
(as defined herein). UPON THE OCCURRENCE AND DURING THE CONTINUATION OF ANY EVENT OF DEFAULT SPECIFIED IN SECTION 3.2, THE NOTE
SHALL BECOME IMMEDIATELY DUE AND PAYABLE AND THE BORROWER SHALL PAY TO THE HOLDER, IN FULL SATISFACTION OF ITS OBLIGATIONS HEREUNDER,
AN AMOUNT EQUAL TO: (Y) THE DEFAULT SUM (AS DEFINED HEREIN); MULTIPLIED BY (Z) TWO (2). Upon the occurrence and during the continuation
of any Event of Default specified in Sections 3.1 (solely with respect to failure to pay the principal hereof or interest thereon
when due on this Note upon a Trading Market Prepayment Event pursuant to Section 1.7 or upon acceleration), 3.3, 3.4, 3.6, 3.8,
3.9, 3.11, 3.12, 3.13, 3.14, and/or 3. 15 exercisable through the delivery of written notice to the Borrower by such Holders (the
“Default Notice”), and upon the occurrence of an Event of Default specified 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 a breach in respect of a specific Conversion Date in which case such Conversion Date shall be the
Conversion Date), multiplied by (b) the highest Closing Price for the Common Stock during the period beginning
on the date of first occurrence of the Event of Default and ending one day prior to the Mandatory Prepayment Date (the “Default
Amount”) and all other amounts payable hereunder shall immediately become due and payable, all without demand, presentment
or notice, all of which hereby are expressly waived, together with all costs, including, without limitation, legal fees and expenses,
of collection, and the Holder shall be entitled to exercise all other rights and remedies available at law or in equity.

 

If
the Borrower fails to pay the Default Amount within five (5) business days of written notice that such amount is due and payable,
then the Holder shall have the right at any time, so long as the Borrower remains in default (and so long and to the extent that
there are sufficient authorized shares), to require the Borrower, upon written notice, to immediately issue, in lieu of the Default
Amount, the number of shares of Common Stock of the Borrower equal to the Default Amount divided by the Conversion Price then
in effect. The Holder may still convert any amounts due hereunder, including without limitation the Default Sum, until such time
as this Note has been repaid in full.

 

    	 

    	 

    

 

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, email 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 or email, with accurate confirmation generated by the transmitting
facsimile machine or computer, at the address, email or number designated in the Purchase Agreement (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.

 

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

 

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

 

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

 

    	 

    	 

    

 

4.6. Governing
Law. This Note shall be governed by and construed in accordance with the laws of the
State of New York without regard to conflicts of laws principles that would result in the application of the substantive laws
of another jurisdiction. Any action brought by either party against the other concerning the transactions contemplated by
this Agreement must be brought only in the civil or state courts of New York or in the federal courts located in the State and
county of New York. Both parties and the individual signing this Agreement on behalf of the Borrower agree to submit to the jurisdiction
of such courts. 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 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 unenforceability of any other provision of this Note. Nothing contained herein shall be deemed or operate to preclude
the Holder from bringing suit or taking other legal action against the Borrower in any other jurisdiction to collect on the Borrower’s
obligations to Holder, to realize on any collateral or any other security for such obligations, or to enforce a judgment or other
decision in favor of the Holder. This Note shall be deemed an unconditional obligation of Borrower for the payment of money
and, without limitation to any other remedies of Holder, may be enforced against Borrower by summary proceeding pursuant to New
York Civil Procedure Law and Rules Section 3213 or any similar rule or statute in the jurisdiction where enforcement is sought.
For purposes of such rule or statute, any other document or agreement to which Holder and Borrower are parties or which Borrower
delivered to Holder, which may be convenient or necessary to determine Holder’s rights hereunder or Borrower’s obligations
to Holder are deemed a part of this Note, whether or not such other document or agreement was delivered together herewith or was
executed apart from this Note.

 

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. Disclosure.
Upon receipt or delivery by the Company of any notice in accordance with the terms of this Note, unless the Company has in good
faith determined that the matters relating to such notice do not constitute material, non-public information relating to the Company
or any of its Subsidiaries, the Company shall within one (1) Trading Day after any such receipt or delivery, publicly disclose
such material, non-public information on a Current Report on Form 8-K or otherwise. In the event that the Company believes that
a notice contains material, non-public information relating to the Company or any of its Subsidiaries, the Company so shall indicate
to such Holder contemporaneously with delivery of such notice, and in the absence of any such indication, the Holder shall be
allowed to presume that all matters relating to such notice do not constitute material, non-public information relating to the
Company or its Subsidiaries.

 

    	 

    	 

    

 

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. Usury.
To the extent it may lawfully do so, the Borrower hereby agrees not to insist upon or plead or in any manner whatsoever claim,
and will resist any and all efforts to be compelled to take the benefit or advantage of, usury laws wherever enacted, now or at
any time hereafter in force, in connection with any claim, action or proceeding that may be brought by the Holder in order to
enforce any right or remedy under the Note. Notwithstanding any provision to the contrary contained in herein or under the Note,
it is expressly agreed and provided that the total liability of the Borrower under the Note for payments in the nature of interest
shall not exceed the maximum lawful rate authorized under applicable law (the “Maximum Rate”), and, without
limiting the foregoing, in no event shall any rate of interest or default interest, or both of them, when aggregated with any
other sums in the nature of interest that the Borrower may be obligated to pay under the Note or herein exceed such Maximum Rate.
It is agreed that if the maximum contract rate of interest allowed by law and applicable to the Note is increased or decreased
by statute or any official governmental action subsequent to the date hereof, the new maximum contract rate of interest allowed
by law will be the Maximum Rate applicable to the Note from the effective date forward, unless such application is precluded by
applicable law. If under any circumstances whatsoever, interest in excess of the Maximum Rate is paid by the Borrower to the Holder
with respect to indebtedness evidenced by the Note, such excess shall be applied by the Holder to the unpaid principal balance
of any such indebtedness or be refunded to the Borrower, the manner of handling such excess to be at the Holder’s election.

 

(Remainder
of Page intentionally left blank)

 

    	 

    	 

    

 

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

 

OSL
HOLDINGS, INC.

 

	By:	 	 
	 	Name:
    Robert Rothenberg	 
	 	Title:
    CEO	 

 

    	 

    	 

    

 

EXHIBIT
A

 

NOTICE
OF CONVERSION

 

The
undersigned hereby elects to convert principal under the 12% Convertible Note of OSL HOLDINGS, INC., a Nevada corporation (the
Company”), into shares of common stock (the “Common Stock”), of the Company according to the conditions
hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a person other than the undersigned,
the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions
as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except
for such transfer taxes, if any.

 

By
the delivery of this Notice of Conversion the undersigned represents and warrants to the Company that its ownership of the Common
Stock does not exceed the amounts specified under Section 1.1 of this Note, as determined in accordance with Section 13(d) of
the Exchange Act.

 

The
undersigned agrees to comply with the prospectus delivery requirements under the applicable securities laws in connection with
any transfer of the aforesaid shares of Common Stock pursuant to any prospectus.

 

Conversion
calculations:

 

	 	Date
    to Effect Conversion:__________________________
	 	 
	 	Conversion
    Price: _________________________________
	 	 
	 	Principal
    Amount of Note to be Converted: _____________
	 	 
	 	Interest
    Accrued on Account
	 	of Conversion at Issue: _____________________________
	 	 
	 	Number of shares
of Common Stock to be issued: _______
	 	________________________________________________
	 	 
	 	Signature:
_______________________________________    
	 	 
	 	Name:
    __________________________________________
	 	 
	 	Address for Delivery
of Common Stock Certificates: _____
	 	________________________________________________
	 	________________________________________________
	 	 
	 	Or
	 	 
	 	DWAC
    Instructions:
	 	Broker
    No:________________
	 	Account
    No:_______________

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