Document:

f8k022210ex10i_neonode.htm

     

    
      EXHIBIT
10.1

      

      CONVERTIBLE LOAN
AGREEMENT

      

      THIS CONVERTIBLE LOAN
AGREEMENT (this “Agreement”) is entered into as
of the __ day of January 2010, by and between Neonode, Inc., a Delaware
Company (the “Company”),
and each of the entities set forth in Exhibit
A hereto (each, an “Investor”; and collectively,
the “Investors”).

      

      WHEREAS, the Company requires
an infusion of funds in order to finance the operations of the Company as set
forth herein; and

      

      WHEREAS, the Investors are
willing to make available a convertible loan to the Company on the terms and
conditions set forth in this Agreement.

      

      NOW, THEREFORE, the parties
hereto hereby agree as follows:

      

      1.           Convertible
Loan.

      

      1.1           Each
of the Investors agrees to lend to the Company the amount set forth opposite its
name in Exhibit
A hereto (the “Investment Amount”), for an
aggregate amount of up to $1,000,000 hereunder (the “Loan”), subject to the terms
and conditions of this Agreement.

      

      1.2           Each
of the Investors will transfer its respective Investment Amount to the Company,
in accordance with the wire transfer instructions provided in writing by the
Company to the Investors, on the first business day following the approval of
this Agreement by the Company’s Board of Directors (the “Closing”).

      

      1.3           The
Loan will bear interest at a rate of 7% per year.  The accrued
interest will be payable on June 30th and
December 31st.

      

      1.4           Subject
to Section 2 below, the Loan will be repaid in cash on December 31, 2010 (the
“Due
Date”).

      

      1.5           As
security for the repayment of the Loan and accrued interest when due, the
Company hereby grants the Investors a security interest in the intellectual
property owned by the Company.  The security interest in the Company’s
intellectual property shall terminate upon either (a) the Company’s complete
repayment of the Loan and accrued interest, or (b) conversion of the aggregate
Investment Amount into the Restricted Shares.

      

      1.6           Grant of
Warrants.   Simultaneously with the execution of this
Agreement, the Company shall deliver to each Investor a Warrant Agreement (the
“Warrant Agreement”)
between each Investor and the Company substantially in the form attached hereto
as Schedule 1.6, providing the Investors
with a right to purchase an aggregate amount of up to
___________________________ fully-paid and non-assessable restricted shares of
common stock of the Company, at a price of $0.04 per share, (the “Warrant Shares”). In case the
Company borrows additional amounts from the Investors under this Agreement, then
the Company shall issue additional Warrant Agreements to each Investor as
specified above.

      

      
        
           

        

        
          1

          
            

          

        

        
           

        

      

      

      2.           Conversion

      

      2.1           Optional Conversion.
Each of the Investors shall have at any time prior to the Due Date the option to
convert its portion of the Investment Amount into fully-paid and non-assessable
restricted shares of common stock of the Company, at a price of $0.02 per share,
(the “Restricted
Shares”).

      

      2.2           Adjustment of Conversion
Price.   Upon issuance of additional common stock of the
Company at a price per share less than $0.02 per share at a subsequent round of
financing prior to the conversion or repayment in full of the Investment Amount,
the conversion price for the Restricted Shares will be reduced, for no
additional consideration, to an amount equal to the price per share paid for the
common stock of the Company at such subsequent financing round.

      

      2.3           The
Company shall, promptly upon any conversion of any Investor’s Investment Amount,
issue and deliver to such Investor a certificate representing the number of
shares of the Restricted Shares to which such Investor shall be entitled upon
conversion of such Investor’s Investment Amount (bearing such legends as are
required under applicable law, in the opinion of counsel of the
Company).

       
 

      3.           Registration.   The
Company shall make an effort to file with the SEC a registration statement under
the Securities Act after the filing of its Annual Report on Form 10-K for the
fiscal year ending December 31, 2009 (the “Registration
Statement”).  Subject to the Investors timely providing the Company
with all Investor information reasonably necessary for the inclusion of the
Investors’ Restricted Shares and Warrant Shares in the Registration Statement,
the Company shall take all reasonable action under its power and control to
include such shares in the Registration Statement so as to permit the
disposition of the shares so registered.  Notwithstanding the
foregoing, if the Registration Statement is pursuant to an underwritten offering
and the managing underwriter advises the Company in writing that marketing
factors require a limitation of the number of shares to be underwritten, then
there shall be excluded from such Registration Statement such number of
Restrictive Shares and Warrant Shares as agreed to by the Board of Directors and
the managing underwriter.  If any of the
Investors are affiliates of the Company (as defined in Rule 405) then the
inclusion of such Investors’ Restricted Shares and Warrant Shares in the
Registration Statement will be limited so that the aggregate amount of shares of
Affiliates included in the Registration Statement shall be no more than 9.99% of
the aggregate market value of the Company’s outstanding stock held by
non-affiliates.

      

      4.           Information on the Company;
Legal Proceedings

      

      4.1           Information on the
Company. Each Investor has been furnished with or has had access at the
EDGAR website of the U.S. Securities and Exchange Commission (the “SEC”) to the Company's Form
10-K filed on April 15, 2009 for the fiscal year ended December 31, 2008 and the
financial statements included therein for the year ended December 31, 2008
together with all subsequent filings made with the SEC available at the EDGAR
website.  Each Investor has been informed that due to the Company’s
current lack of cash resources, it was unable to obtain a review by its
registered independent accountants of the interim financial statements for the
three month period ended March 31, 2009, the six month period ended June 30,
2009, and the nine month period ended September 30, 2009.  In
addition, each Investor has received in writing from the Company such other
information concerning its operations, financial condition and other matters as
such Investor has requested in writing and considered all factors such Investor
deems material in deciding on the advisability of the Loan and investing in the
Restricted Shares.

       

       

      
        
           

        

        
          2

          
            

          

        

        
           

        

      

      
 

      4.2           Legal
Proceedings.

      

      4.2.1         
Empire Asset
Management. On December 9, 2008, Empire Asset Management (“Empire”), a
broker dealer that acted as the Company’s financial advisor and exclusive
placement agent in previous private placement transactions, initiated a law suit
against the Company in the Supreme Court of the State of New York alleging that
the Corporation misrepresented the success of its business to induce Empire’s
customers to invest in the Company. Empire is seeking compensatory damages in an
unspecified amount for the harm allegedly suffered. The Company believes that
the action has no merit and intends to defend vigorously against the action. The
Company’s Directors and Officer (D&O) insurance provider has extended
coverage and will cover the costs of legal representation, subject to the
payment by the Company of the retention amount of $150,000.

      

      4.2.2           Mr. David Berman. On
May 11, 2009, Mr. David Berman initiated a law suit against the Company in the
Supreme Court of the State of New York alleging that the Corporation
misrepresented the success of its business to induce Mr. Berman to invest in the
Company.  Mr. Berman, who was a client of Empire, invested $549,860.00 in
the Company’s private placement offerings on March 4, 2008 and May 16, 2008 and
purchased an additional 162,900 shares totaling $251,081.69 in the aftermarket.
The Company believes that the action has no merit and intends to defend
vigorously against the action. The Company’s D&O insurance provider has
extended coverage and will cover the costs of legal representation, subject to
the payment by the Company of the retention amount of $150,000

      

      4.2.3           Xerox Corporation. On
October 2, 2009, Xerox Corporation (“Xerox”) initiated a law suit against the
Company in the Superior Court of California alleging that the Company breached
an equipment lease agreement with Xerox and demanding payment of $108,592.81
plus interest and late payment charges.  The Company intends to defend
vigorously against the action. 

      

      5.           Representations, Warranties
and Covenants of the Company

      

      The
Company hereby represents, warrants and covenants as follows:

      

      5.1           Organization and
Qualification.  The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and has the requisite corporate power to own its properties and to carry on its
business as it is now being conducted.

      

      5.2           Authorization,
Enforceability.  (i) The Company has the requisite corporate
power and authority to enter into this Agreement and to perform its obligations
hereunder in accordance with the terms hereof; (ii) the execution and delivery
of this Agreement by the Company and the consummation by it of the transactions
contemplated hereby have been duly authorized by the Company’s Board of
Directors and further consent or authorization of the Company by its Board of
Directors is not required; and (iii) upon the execution and delivery of this
Agreement by the Company, this Agreement will constitute valid and binding
obligations of the Company enforceable against the Company in accordance with
their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of creditors’ rights and
remedies or by other equitable principles of general application.

       

       

      
        
           

        

        
          3

          
            

          

        

        
           

        

      

      
 

      5.3           Issuance of the Restricted
Shares.  The Restricted Shares to be issued, sold and delivered
by the Company hereunder, when so issued, sold and delivered, will be duly and
validly issued, fully paid and nonassessable and will be issued in reliance upon
applicable exemptions from the registration and qualification provisions of all
applicable securities laws of the United States and each state whose securities
laws may be applicable thereto.  All Restricted Shares will be issued
free of any preemptive or similar right and free and clear of any claim, lien,
security interest or other encumbrance.  Assuming the accuracy of the
Investors’ representations and warranties hereunder, the issuance to the
Investors of the Restricted Shares will be exempt from the registration
requirements of the Securities Act and will be made in reliance upon applicable
exemptions from the registration and qualification provisions of all applicable
state securities laws.

      

      6.           Representations, Warranties,
Acknowledgments, of the Investors

      

      Each
Investor hereby represents, warrants, acknowledges, understands and agrees (as
the case may be) to the following, and acknowledges that the Company's reliance
on exemption from registration pursuant to a registration statement under the
Securities Act of 1933, as amended (the “Securities Act”) is predicated upon the
representations of each Investor set forth herein:

      

      6.1           Authorization.   The
Investor has full power and authority to enter into this Agreement, and the
Agreement has been duly executed by the Investor, and such authorization
constitutes a valid and legally binding obligation of the Investor, enforceable
in accordance with its terms.

      

      6.2           The Restricted Shares Are
Not Registered.  The Investor hereby acknowledges that the
Restricted Shares will not be issued by the Company pursuant to a registration
statement under the Securities Act, and therefore the Investor may be required
to hold the Restricted Shares for an indeterminate period.  The
Restricted Shares are issued pursuant hereto in reliance upon a specific
exemption from the registration requirement of the Securities Act which depends,
in part, upon the accuracy of the representations, warranties, and agreements of
each Investor set forth in this Agreement.

      

      6.3           Investment
Intent.  The Investor is acquiring the Restricted Shares for
the Investor’s own account as principal, not as a nominee or agent, for
investment purposes only, and not with a view to, or for, resale, distribution
or fractionalization thereof, in whole or in part, which resale, distribution or
fractionalization would violate the Securities Act.  The Investor
agrees that a legend to the foregoing effect may be placed upon any and all
certificates issued representing the Restricted Shares.  Further, the
Investor does not have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participations to such person or to any
third person, with respect to the Restricted Shares, for which the Investor is
purchasing.  The Investor acknowledges that he has been afforded the
opportunity to ask questions of, and to obtain any information from, the Company
and its Board of Directors as he or she deems necessary to determine the
suitability and advisability of, and the merits and risk of, investing in the
Company pursuant hereto.

      
 

      
        
           

        

        
          4

          
            

          

        

        
           

        

         

      

      6.4           Risk.   The
Investor is aware that: (i) investment in the Company involves a high degree of
risk, may result in a lack liquidity, and places substantial restrictions on
transferability of interest; and (ii) no Federal or state agency has made any
finding or determination as to the fairness for investment by the public, nor
has made any recommendation or endorsement, of the Restricted
Shares.

       

      6.5           ­Financial
Ability.  The Investor has sufficient financial resources
available to support the loss of all or a portion of Investor’s investment in
the Company, has no need for liquidity in the investment in the Company, and is
able to bear the economic risk of the investment.  The Investor is
sophisticated and experienced in investment matters, and, as a result, is in a
position to evaluate an investment in the Company.

      

      6.6           ­Information.  The
Investor has been furnished with any and all materials that he has requested
relating to the Company or the offering of the Restricted Shares, and the
Investor has been afforded the opportunity to ask questions of the senior
management and directors of the Company concerning the terms and conditions of
the offering and to obtain any additional information necessary to verify the
accuracy of the information provided to the Investor.  The Investor
understands that such material is current information about the Company and does
not in any way guarantee future performance or the completion of future proposed
events discussed in such material.  The Investor, either alone or with
his professional advisors, has the capacity to protect his own interests in
connection with this transaction.

      

      6.7           Regulation S
Exemption.  If the Investor is not a U.S. Person, the Investor
understands that that the Restricted Shares are being offered and sold to him in
reliance on an exemption from the registration requirements of United States
federal and the state securities laws under Regulation S promulgated under the
Securities Act, and that the Company is relying upon the truth and accuracy of
the representations, warranties, agreements, acknowledgments, and understandings
of the Investor to determine the applicability of such exemptions and the
suitability of the Investor to acquire the Restricted Shares.

      

      6.8           The
Investor consents to the Company making a notation on its records or giving
instructions to any transfer agent of the Company in order to implement the
restrictions on transfer of the Restricted Shares set forth in this Section
6.

      

      6.9           Legend.   The
certificates representing the Restricted Shares shall contain a legend
substantially as follows:

      

      “THE
SECURITIES WHICH ARE REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
HYPOTHECATED OR OTHERWISE DISPOSED OF UNTIL A REGISTRATION STATEMENT WITH
RESPECT THERETO IS DECLARED EFFECTIVE UNDER SUCH ACT, OR NEONODE, INC. RECEIVES
AN OPINION OF COUNSEL FOR THE HOLDER REASONABLY SATISFACTORY TO COUNSEL FOR
NEONODE, INC. THAT AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT
IS AVAILABLE.”

       

      
        
           

        

        
          5

          
            

          

        

        
           

        

      

       

      
 

      7.           Miscellaneous.

      

      7.1           Each
of the parties hereto shall perform such further acts and execute such further
documents as may reasonably be necessary to carry out and give full effect to
the provisions of this Agreement and the intentions of the parties as reflected
thereby.

      

      7.2           This
Agreement shall be governed by and construed according to the laws of the State
of New York, without regard to the conflict of laws provisions
thereof.

      

      7.3           Except
as otherwise expressly limited herein, the provisions hereof shall inure to the
benefit of, and be binding upon, the successors, assigns, heirs, executors, and
administrators of the parties hereto.

      

      7.4           This
Agreement and the Exhibits hereto constitute the full and entire understanding
and agreement between the parties with regard to the subject matters hereof and
thereof and supersede any prior agreement, understand or contract, written or
oral, with respect to the subject matter hereof and thereof.

      

      7.5           No
delay or omission to exercise any right, power, or remedy accruing to any party
upon any breach or default under this Agreement, shall be deemed a waiver of any
other breach or default theretofore or thereafter occurring. All remedies,
either under this Agreement or by law or otherwise afforded to any of the
parties, shall be cumulative and not alternative.

      

      7.6           If
any provision of this Agreement is held by a court of competent jurisdiction to
be unenforceable under applicable law, then such provision shall be excluded
from this Agreement and the remainder of this Agreement shall be interpreted as
if such provision were so excluded and shall be enforceable in accordance with
its terms; provided, however, that in such event this Agreement shall be
interpreted so as to give effect, to the greatest extent consistent with and
permitted by applicable law, to the meaning and intention of the excluded
provision as determined by such court of competent jurisdiction.

      

      7.7           This
Agreement may be executed in counterparts.

      

      IN WITNESS WHEREOF the parties have
signed this Convertible Loan Agreement in one or more counterparts as of the
date first hereinabove set forth.

       

       

      
        
           

        

        
          6

          
            

          

        

        
           

        

      

      
 

      For the Company:

      

      Neonode
Inc.

      

      

      By:           ____________________

      Name:     ____________________

      Title:       ____________________

      

      For the
Investors:

       

      
        
          
            	
                     

                  	 	
                     

                  	 	
                     

                  
	By: 	 	By: 	 	By: 
	 	 	 	 	 
	
                     

                  	 	
                     

                  	 	
                     

                  
	
                    By:   

                  	 	By: 	 	By: 

          

           

        

      

      
        
           

        

        
          7

          
            

          

        

        
           

        

      

       

      
 

      EXHIBIT
A

      

      LIST OF
INVESTORS

       

      
 

      
        
          	
                  Investor:

                	
                  Portion
      of Investment Amount

                	
                  Address

                
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      

        

      

      

     

     

     

     

     

     

     

     

     

    
      

      
        
           

        

        
          8

          
            

          

        

        
           

        

      

       

       

      SCHEDULE
1.6

      

      WARRANT
AGREEMENT

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

      9f8k022210ex10ii_neonode.htm

     

    EXHIBIT
10.2

    

    

    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 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:
      $_______    	 Issue Date:
      _______________

    

     

    
 

    

    CONVERTIBLE PROMISSORY
NOTE

    

    FOR VALUE
RECEIVED, NEONODE INC., a Delaware corporation (hereinafter called “Borrower”),
hereby promises to pay ___________________________ (the “Holder”) or its
registered assigns or successors in interest or order, without demand, the sum
of _________________________________Dollars ($________) (“Principal Amount”), on
December 31, 2010 (the “Maturity Date”), if not sooner paid.

    

    This Note
has been entered into pursuant to the terms of a Convertible Note Agreement
between the Borrower and the Holder, dated of even date herewith (the
“Convertible Note Agreement”), and shall be governed by the terms of such
Convertible Note Agreement. Unless otherwise separately defined herein, all
capitalized terms used in this Note shall have the same meaning as is set forth
in the Convertible Note Agreement. The following terms shall apply to the
Note:

     

    ARTICLE
I

    

    INTEREST;
AMORTIZATION

    

    
      	
              1.1.  

            	
              1.1               Interest
      Rate.   Interest on the outstanding Principal Amount
      shall accrue from the date of the Note and shall be payable in arrears on
      December 31, and on June 30 of each year as long as the Note is
      outstanding and on the Maturity Date, accelerated or otherwise, when the
      principal and remaining accrued but unpaid interest shall be due and
      payable. Interest on the outstanding principal balance of this Note shall
      accrue at a rate of seven percent (7.0%) per annum (the “Interest Rate”).
      Interest on the outstanding principal balance of the Note shall be
      computed on the basis of the actual number of days elapsed and a year of
      three hundred and sixty (360) days.

            

    

     

    1.2.              Default Interest
Rate.  Following the occurrence and during the continuance of
an Event of Default (as defined in Article IV), which, if susceptible to cure is
not cured within twenty (20) days, otherwise then from the first date of such
occurrence, the annual interest rate on this Note shall be ten percent
(10%).  Such interest shall be due and payable together with regular
scheduled payments of interest.

     

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

    
 

    1.3.              Conversion
Privileges.  The Conversion Privileges set forth herein shall
remain in full force and effect immediately from the date hereof and until the
Note is paid in full regardless of the occurrence of an Event of
Default.  The Note shall be payable in full on the Maturity Date,
unless previously converted into Common Stock.

    

    ARTICLE
II

    

    OPTIONAL
REDEMPTION

    

    2.1.              Optional Redemption of
Principal Amount.  Provided an Event of Default or an event
which with the passage of time on the giving of notice could become an Event of
Default has not occurred, unless such Event of Default has been cured, then
commencing six months (6) after the Issue Date of this Note, the Borrower will
have the option of prepaying the outstanding Principal Amount of this Note
("Optional Redemption"), in whole or in part, by paying to the Holder a sum of
money equal to one hundred and twenty percent (120%) of the Principal Amount to
be redeemed, together with accrued but unpaid interest thereon and any and all
other sums due, accrued or payable to the Holder arising under this Note or any
Transaction Document through the Redemption Payment Date as defined below (the
"Redemption Amount").  Borrower’s election to exercise its right to
prepay must be by notice in writing (“Notice of Redemption”).  The
Notice of Redemption shall specify the date for such Optional Redemption (the
"Redemption Payment Date"), which date shall be thirty (30) business days after
the date of the Notice of Redemption (the "Redemption Period"). A Notice of
Redemption shall not be effective with respect to any portion of the Principal
Amount for which the Holder has a pending election to convert pursuant to
Section 3.1.   A Redemption Notice may be given not more than two
times.  On the Redemption Payment Date, the Redemption Amount, less
any portion of the Redemption Amount against which the Holder has previously
exercised its rights pursuant to Section 3.1, shall be paid in good funds to the
Holder. In the event the Borrower fails to pay the Redemption Amount on the
Redemption Payment Date as set forth herein, then (i) at the Holder’s election,
such Notice of Redemption will be null and void, (ii) Borrower will not have the
right to deliver another Notice of Redemption, and (iii) Borrower’s failure may
be deemed by Holder to be a non-curable Event of Default.  A Notice of
Redemption may be cancelled at the option of the Holder, if at any time during
the Redemption Period an Event of Default, or an event which with the passage of
time or giving of notice could become an Event of Default (whether or not such
Event of Default has been cured), occurs. If the Borrower gives notice of to the
Holder of Redemption of the Note, the Holder has the option of converting the
Note pursuant to Section 3.1.

    

    ARTICLE
III

    

    CONVERSION
RIGHTS

     

    3.1.              Holder’s Conversion
Rights.   Subject to Section 3.2, the Holder shall have
the right, but not the obligation, to convert all or any portion of the then
aggregate outstanding Principal Amount of this Note, together with interest, if
any, into shares of Common Stock, subject to the terms and conditions set forth
in this Article III, at the rate of $0.02 per share of Common
Stock (“Conversion Price”), as the same may be adjusted pursuant to this
Note.  The Holder may exercise such right by delivery to the Borrower
of a written Notice of Conversion pursuant to Section 3.3.

     

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    
 

    3.2.           
 Conversion
Limitation.   Neither Holder nor the Borrower may convert
on any date that amount of the Note Principal or interest in connection with
that number of shares of Common Stock which would be in excess of the sum of (i)
the number of shares of Common Stock beneficially owned by the Holder and its
affiliates on a Conversion Date, (ii) any Common Stock issuable in connection
with the unconverted portion of the Note, and (iii) the number of shares of
Common Stock issuable upon the conversion of the Note with respect to which the
determination of this provision is being made, which would result in beneficial
ownership by the Holder and its affiliates of more than 4.99% of the outstanding
shares of Common Stock of the Borrower on such Conversion Date.  For
the purposes of the provision 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, and Regulation 13d-3
thereunder.  Subject to the foregoing, the Holder shall not be limited
to aggregate conversions of only 4.99% and aggregate conversion by the Holder
may exceed 4.99%.  The Holder shall have the authority and obligation
to determine whether the restriction contained in this Section 3.2 will limit
any conversion hereunder and to the extent that the Holder determines that the
limitation contained in this Section applies, the determination of which portion
of the Notes are convertible shall be the responsibility and obligation of the
Holder.  The Holder may waive the conversion limitation described in
this Section 3.2, in whole or in part, upon and effective after 61 days prior
written notice to the Borrower to increase such percentage to up to
9.99%.

    

    3.3.            
Mechanics of Holder’s
Conversion.

    

    (a)         In
the event that the Holder elects to convert any amounts outstanding under this
Note into Common Stock, the Holder shall give notice of such election by
delivering an executed and completed notice of conversion (a “Notice of
Conversion”) to the Borrower, which Notice of Conversion shall provide a
breakdown in reasonable detail of the Principal Amount, accrued interest and
amounts being converted.  The original Note is not required to be
surrendered to the Borrower until all sums due under the Note have been
paid.  On each Conversion Date (as hereinafter defined) and in
accordance with its Notice of Conversion, the Holder shall make the appropriate
reduction to the Principal Amount, accrued interest and fees as entered in its
records.  Each date on which a Notice of Conversion is delivered or
telecopied to the Borrower in accordance with the provisions hereof shall be
deemed a “Conversion Date.”  A form of Notice of Conversion to be
employed by the Holder is annexed hereto as Exhibit A.

     

    (b)         Pursuant
to the terms of a Notice of Conversion, the Borrower will issue instructions to
the transfer agent accompanied by an opinion of counsel (if so required by the
Borrower’s transfer agent), and, except as otherwise provided below, shall cause
the transfer agent to transmit the certificates representing the Conversion
Shares to the Holder by crediting the account of the Holder’s designated broker
with the Depository Trust Corporation (“DTC”) through its Deposit Withdrawal
Agent Commission (“DWAC”) system within three (3) business days after receipt by
the Borrower of the Notice of Conversion (the “Delivery Date”).  In
the case of the exercise of the conversion rights set forth herein, the
conversion privilege shall be deemed to have been exercised and the Conversion
Shares issuable upon such conversion shall be deemed to have been issued upon
the date of receipt by the Borrower of the Notice of Conversion. The Holder
shall be treated for all purposes as the beneficial holder of such shares of
Common Stock, or, in the case that Borrower delivers physical certificates as
set forth below, the record holder of such shares of Common Stock, unless the
Holder provides the Borrower written instructions to the contrary. Notwithstanding the foregoing to the contrary, the
Borrower or its transfer agent shall only be obligated to issue and deliver the
shares to the DTC on the Holder’s behalf via DWAC (or certificates free of
restrictive legends) if the registration statement providing for the resale of
the shares of Common Stock issuable upon the conversion of this Note is
effective and the Holder has complied with all applicable securities laws in
connection with the sale of the Common Stock, including, without limitation, the
prospectus delivery requirements and has provided representations
accordingly.  In the event that Conversion Shares cannot be delivered
to the Holder via DWAC, the Borrower shall deliver physical certificates
representing the Conversion Shares by the Delivery Date to an address designated
by Holder in the U.S.

     

     

    
      
        
        

      

      
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    3.4.              Conversion
Mechanics.

    

    (a)         The
number of shares of Common Stock to be issued upon each conversion of this Note
pursuant to this Article III shall be determined by dividing that portion of the
Principal Amount and interest and fees to be converted, if any, by the then
applicable Fixed Conversion Price.

     

    (b)         The
Fixed Conversion Price and number and kind of shares or other securities to be
issued upon conversion shall be subject to adjustment from time to time upon the
happening of certain events while this conversion right remains outstanding, as
follows:

    

    A.           Merger, Sale of Assets,
etc.  If (A) the Company effects any merger
or  consolidation of the Company with or into another entity, (B) the
Company effects any sale of all or substantially all of its assets in one or a
series of related transactions,  (C) any tender offer or exchange
offer (whether by the Company or another entity) is completed pursuant to which
holders of Common Stock are permitted to tender or exchange their shares for
other securities, cash or property, (D) the Company consummates a stock purchase
agreement or other business combination (including, without limitation, a
reorganization, recapitalization, spin-off or scheme of arrangement) with one or
more persons or entities whereby such other persons or entities acquire more
than the 50% of the outstanding shares of Common Stock (not including any shares
of Common Stock held by such other persons or entities making or party to, or
associated or affiliated with the other persons or entities making or party to,
such stock purchase agreement or other business combination), (E) any "person"
or "group" (as these terms are used for purposes of Sections 13(d) and 14(d) of
the 1934 Act) is or shall become the "beneficial owner" (as defined in Rule
13d-3 under the 1934 Act), directly or indirectly, of 50% of the aggregate
Common Stock of the Company, or (F) the Company effects any reclassification of
the Common Stock or any compulsory share exchange pursuant to which the Common
Stock is effectively converted into or exchanged for other securities, cash or
property (in any such case, a "Fundamental  Transaction"), this Note,
as to the unpaid principal portion thereof and accrued interest thereon, shall
thereafter be deemed to evidence the right to convert into such number and kind
of shares or other securities and property as would have been issuable or
distributable on account of such Fundamental Transaction, upon or with respect
to the securities subject to the conversion right immediately prior to such
Fundamental Transaction.  The foregoing provision shall similarly
apply to successive Fundamental Transactions of a similar nature by any such
successor or purchaser.  Without limiting the generality of the
foregoing, the anti-dilution provisions of this Section shall apply to such
securities of such successor or purchaser after any such Fundamental
Transaction.

    

    B.           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, this Note, as to the unpaid principal
portion hereof and accrued interest hereon, shall thereafter be deemed to
evidence the right to convert into 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.

    

    C.           Stock Splits, Combinations
and Dividends.  If the shares of Common Stock 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 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.

     

     D.           Share
Issuance.   The Holder has been granted certain rights in
the Convertible Loan Agreement in connection with issuances and proposed
issuances of Common Stock by the Company at a price lower than the Conversion
Price, until such time as this Note is Converted to Common Stock or Paid in
Full.

     

     

    
      
        
        

      

      
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    (c)         Whenever
the Conversion Price is adjusted pursuant to Section 3.4(b) above, the Borrower
shall promptly mail to the Holder a notice setting forth the Conversion Price
after such adjustment and setting forth a statement of the facts requiring such
adjustment.

    

    3.5.              Reservation.   During
the period the conversion right exists, Borrower will reserve from its
authorized and unissued Common Stock not less than  hundred percent (100%) of the number of shares to provide for the
issuance of Common Stock upon the full conversion of this Note.
Borrower represents that upon issuance, such shares will be duly and validly
issued, fully paid and non-assessable.  Borrower agrees that its
issuance of this Note shall constitute full authority to its officers, agents,
and transfer agents who are charged with the duty of executing and issuing stock
certificates to execute and issue the necessary certificates for shares of
Common Stock upon the conversion of this Note.

     

    3.6              Issuance of Replacement
Note.  Upon any partial conversion of this Note, a replacement
Note containing the same date and provisions of this Note shall, at the written
request of the Holder, be issued by the Borrower to the Holder for the
outstanding Principal Amount of this Note and accrued interest which shall not
have been converted or paid, provided Holder has surrendered an original Note to
the Borrower. In the event that the Holder elects not to surrender a Note for
reissuance upon partial payment or conversion, the Holder hereby indemnifies the
Borrower against any and all loss or damage attributable to a third-party claim
in an amount in excess of the actual amount then due under the Note, and the
Borrower is hereby expressly authorized to offset any such amounts mutually
agreed upon by Borrower and Holder or pursuant to a judgment in Borrower’s favor
against amounts then due under the Note.

    

    ARTICLE
IV

     

    EVENTS
OF DEFAULT

    

    The
occurrence of any of the following events of default (“Event of Default”) shall,
at the option of the Holder hereof, make all sums of principal and interest then
remaining unpaid hereon and all other amounts payable hereunder immediately due
and payable, upon demand, without presentment, or grace period, all of which
hereby are expressly waived, except as set forth below:

    

    4.1              Failure to Pay Principal or
Interest.  The Borrower fails to pay any installment of
Principal Amount, interest or other sum due under this Note or the Convertible
Loan Agreement when due and such failure continues for a period of five (5)
business days after the due date.

    

    4.2              Breach of
Covenant.  The Borrower breaches any material covenant or other
term or condition of the Convertible Loan Agreement or this Note in any material
respect and such breach, if subject to cure, continues for a period of ten (10)
business days after written notice to the Borrower from the Holder.

    

    4.3              Breach of Representations
and Warranties.  Any material representation or warranty of the
Borrower made herein, in the Convertible Loan Agreement or in any agreement,
statement or certificate given in writing pursuant hereto or in connection
herewith or therewith shall be false or misleading in any material respect as of
the date made and the Closing Date.

    

    4.4              Receiver or
Trustee.  The Borrower or any Subsidiary of Borrower shall make
an assignment for the benefit of creditors, or apply for or consent to the
appointment of a receiver or trustee for them or for a substantial part of their
property or business; or such a receiver or trustee shall otherwise be
appointed.

     

     

    
      
        
        

      

      
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    4.5              Judgments.  Any
money judgment, writ or similar final process shall be entered or filed against
Borrower or any subsidiary of Borrower or any of their property or other assets
for more than $100,000, and shall remain unvacated, unbonded, unappealed,
unsatisfied, or unstayed for a period of forty-five (45) days.

    

    4.6              Non-Payment.   A
default by the Borrower under any one or more obligations in an aggregate
monetary amount in excess of $100,000 for more than twenty (20) days after the
due date, unless the Borrower is contesting the validity of such obligation in
good faith and has segregated cash funds equal to not less than one-half of the
contested amount.

    

    4.7              Bankruptcy.  Bankruptcy,
insolvency, reorganization, or liquidation proceedings or other proceedings or
relief under any bankruptcy law or any law, or the issuance of any notice in
relation to such event, for the relief of debtors shall be instituted by or
against the Borrower or any Subsidiary of Borrower and if instituted against
them are not dismissed within forty-five (45) days of initiation.

    

    4.8              Stop
Trade.  An SEC or judicial stop trade order with respect to
Borrower’s Common Stock that lasts for five or more consecutive trading
days.

    

    4.10              Failure to Deliver Common
Stock or Replacement Note.  Borrower’s failure to timely
deliver Common Stock to the Holder pursuant to and in the form required by this
Note or the Subscription Agreement, or if required, a replacement Note.

    

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

    

    4.12              Cross
Default.  A default by the Borrower of a material term,
covenant, warranty or undertaking of any Transaction Document or other agreement
to which the Borrower and Holder are parties, or the occurrence of a material
event of default under any such other agreement which is not cured after any
required notice and/or cure period.

    

    4.13              Reservation
Default.   Failure by the Borrower to have reserved for
issuance upon conversion of the Note the amount of Common Stock as set forth in
this Note and the Subscription Agreement.

    

    4.14              Financial Statement
Restatement.   The restatement of any financial statements
filed by the Borrower 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 statements,
have constituted a Material Adverse Effect.

     

    ARTICLE
V

     

    MISCELLANEOUS

     

    5.1             
Failure or Indulgence
Not Waiver.  No failure or delay on the part of Holder hereof
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 privilege.  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.  All
notices, demands, requests, consents, approvals, and other communications
required or permitted hereunder shall be in writing and, unless otherwise
specified herein, shall be (i) personally served, (ii) deposited in the mail,
registered or certified, return receipt requested, postage prepaid, (iii)
delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by hand delivery, telegram, or facsimile, addressed as set forth
below or to such other address as such party shall have specified most recently
by written notice.  Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur.  The
addresses for such communications shall be: (i) if to the Borrower to: Neonode
Inc., 651 Byrdee Way, Lafayette, California, 94549, Attn: David Brunton, with a
copy by telecopier only to: SRK Law Offices, Hamada 12. Rehovot, Israel, Attn:
Steve Kronengold, telecopier: +972-8-936-6000, and (ii) if to the Holder, to the
name, address and telecopy number set forth on the front page of this
Note.

     

    5.3           Amendment
Provision.  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.

     

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

     

    5.6           Governing
Law.  This Note shall be governed by and construed in
accordance with the laws of the State of New York , including, but not limited to, New
York statutes of limitations.  Any action brought by either
party against the other concerning the transactions contemplated by this
Agreement shall be brought only in the courts 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 Law 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.

     

     

    
      
        
        

      

      
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    5.7            
 Maximum
Payments.  Nothing contained herein shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum permitted by applicable law.  In the event that
the rate of interest required to be paid or other charges hereunder exceed the
maximum permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Borrower to the Holder and thus refunded to
the Borrower.

     

    5.8.            
Construction.   Each
party acknowledges that its legal counsel participated in the preparation of
this Note and, therefore, stipulates that the rule of construction that
ambiguities are to be resolved against the drafting party shall not be applied
in the interpretation of this Note to favor any party against
the other.

     

    5.9             
Redemption.  This
Note may not be redeemed or called without the consent of the Holder except as
described in this Note or the Convertible Loan Agreement.

     

    5.10            Shareholder
Status.  The Holder shall not have rights as a shareholder of
the Borrower with respect to unconverted portions of this
Note.  However, the Holder will have the rights of a shareholder of
the Borrower with respect to the Shares of Common Stock to be received after
delivery by the Holder of a Conversion Notice to the Borrower.

     

    5.11         
   Non-Business
Days.   Whenever any payment or any action to be made
shall be due on a Saturday, Sunday or a public holiday under the laws of the
State of New York, such payment may be due or action shall be required on the
next succeeding business day and, for such payment, such next succeeding day
shall be included in the calculation of the amount of accrued interest payable
on such date.

     

     

     

    
      
        
        

      

      
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    IN WITNESS WHEREOF, Borrower
has caused this Note to be signed in its name by an authorized officer as of the
____ day of _____________.

    

    

    NEONODE
INC.

    

    

    

    

    By:________________________________

               Name:

               Title:

    

    WITNESS:

    

    

    

    ______________________________________

                                                            

     

     

     

    
      
        
        

      

      
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    EXHIBIT
A

    NOTICE OF
CONVERSION

    

    (To be
executed by the Registered Holder in order to convert the Note)

    

    

    The
undersigned hereby elects to convert $_________ of the principal and $_________
of the interest due on the Note issued by Neonode Inc. on _________________ into
Shares of Common Stock of Neonode Inc. (the “Borrower”) according to the
conditions set forth in such Note, as of the date written below.

    

    

    

    Date of
Conversion:____________________________________________________________________

    

    

    Conversion
Price:______________________________________________________________________

    

    

    Shares To
Be
Delivered:_________________________________________________________________

    

    

    Signature:____________________________________________________________________________

    

    

    Print
Name:__________________________________________________________________________

    

    

    Address:_____________________________________________________________________________

    

       ____________________________________________________________________________

    

    
 

     

     

     

     10

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