Document:

Unassociated Document

    THIS
      WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
      BEEN
      REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER
      THE SECURITIES LAWS OF APPLICABLE STATES. THESE SECURITIES ARE SUBJECT TO
      RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD
      EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS,
      PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE
      THAT
      THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
      INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION
      OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT
      ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE
      STATE SECURITIES LAWS.

     

    WARRANT
      TO PURCHASE COMMON STOCK

     

    OF

     

    ARIEL
      WAY, INC.

     

    Issued
      on
      September 26, 2005 (“Issue
      Date”)

    Void
      after September 25, 2015 (“Expiration
      Date”)

     

    This
      certifies that in consideration of the execution of that certain Promissory
      Note
      (the “Promissory
      Note”),
      dated
      as of September 26, 2005, as amended, by and between Ariel Way, Inc., a Florida
      corporation (the “Company”),
      with
      principal offices at 8000 Towers Crescent Drive, Suite 1220, Vienna, VA 22182,
      and Mrs. Eva Dunhem, an individual living at address 7901 Ariel Way, McLean,
      Virginia 22102 (“Mrs.
      Dunhem”)
      is
      entitled, subject to the terms and conditions of this Warrant, to purchase
      from
      the Company at any time during the Exercise Period (as defined below) and with
      vesting as defined below, up to Two Hundred Thousand (200,000) shares (the
      “Number
      of Warrant Shares”)
      of
      Warrant Stock (as defined below) at a price per share equal to the Warrant
      Price
      (as defined below), upon surrender of this Warrant at the principal offices
      of
      the Company, together with a duly executed subscription form in the form
      attached hereto as Exhibit 1
      and
      simultaneous payment of the full Warrant Price for the shares of Warrant Stock
      so purchased in lawful money of the United States. The Warrant Price and the
      number and character of shares of Warrant Stock purchasable under this Warrant
      are subject to adjustment as provided herein. The shares underlying the warrants
      shall entitle the Warrant Holder to one-time “piggyback” registration
      rights.

     

    1.  DEFINITIONS.
      The
      following definitions shall apply for purposes of this Warrant:

     

    1.1  “Company”
means
      the “Company”
as
      defined above and includes any corporation which shall succeed to or assume
      the
      obligations of the Company under this Warrant.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    1.2  “Exercise
      Period”
means
      the period (A) commencing on the Issue Date and (B) ending at 5:00 p.m. Eastern
      Standard Time on the Expiration Date (as defined on the first page of this
      Warrant, and as subject to adjustment as provided herein).

     

    1.3  “SEC”
means
      the U.S. Securities and Exchange Commission.

     

    1.4  “Warrant”
means
      this Warrant and any warrant(s) delivered in substitution or exchange therefor,
      as provided herein.

     

    1.5  “Warrant
      Holder”
means
      any person who shall at the time be the registered holder of this
      Warrant.

     

    1.6  “Warrant
      Price”
means
      $0.030 per share. The Warrant Price is subject to adjustment as provided
      herein.

     

    1.7  “Warrant
      Stock”
means
      the Common Stock of the Company, $0.001 par value per share. The number and
      character of shares of Warrant Stock are subject to adjustment as provided
      herein and the term “Warrant
      Stock”
shall
      include stock and other securities and property at any time receivable or
      issuable upon exercise of this Warrant in accordance with its
      terms.

     

    2.  EXERCISE.

     

    2.1  Method
      of Exercise.
      Subject
      to the terms and conditions of this Warrant, the Warrant Holder may exercise
      this Warrant in whole or in part, at any time or from time to time, on any
      business day during the Exercise Period, for up to that number of shares of
      Warrant Stock that has vested pursuant to Section 2.2
      below by
      surrendering this Warrant at the principal offices of the Company, with the
      subscription form attached hereto duly executed by the Warrant Holder, and
      payment
      of an amount equal to the product
      obtained by multiplying (i) the number of shares of Warrant Stock to be
      purchased by the Warrant Holder by (ii) the Warrant Price or adjusted
      Warrant Price therefor, if applicable, as determined in accordance with the
      terms hereof or cancellation of indebtedness of the Company to the Warrant
      Holder of the same equal amount at the option of the Warrant Holder.
The
      Warrant Holder shall also have a “cash-less” exercise option such that
      exercising certain number of shares of Warrant Stock and the sales proceeds
      from
      the sale of such shares shall provide for the payment to the Company of an
      amount equal to the total warrant purchase price as defined above.

     

    2.2  Vesting
      and Exercisability of Warrant.
      This
      Warrant for Two
      Hundred
      Thousand (200,000) Warrant Shares will vest immediately. 

     

    2.3  Form
      of Payment.
      Payment
      may be made by (i) a check payable to the Company’s order, (ii) wire
      transfer of funds to the Company, (iii) cancellation of indebtedness of the
      Company to the Warrant Holder, or (iv) any combination of the
      foregoing.

     

    2.4  Partial
      Exercise. Upon
      a
      partial exercise of this Warrant, this Warrant shall be surrendered by the
      Warrant Holder and replaced with a new Warrant of like tenor in which the Number
      of Shares shall be reduced by the number of shares of Warrant Stock purchased
      upon such exercise.

     

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    2.5  No
      Fractional Shares.
      No
      fractional shares may be issued upon any exercise of this Warrant, and any
      fractions shall be rounded down to the nearest whole number of shares. If upon
      any exercise of this Warrant a fraction of a share results, the Company will
      pay
      the cash value of any such fractional share, calculated on the basis of the
      Warrant Price.

     

    2.6  Restrictions
      on Exercise.
      This
      Warrant may not be exercised if the issuance of the Warrant Stock upon such
      exercise would constitute a violation of any applicable federal or state
      securities laws or other laws or regulations. As a condition to the exercise
      of
      this Warrant, the Warrant Holder shall execute the subscription form attached
      hereto as Exhibit 1,
      confirming and acknowledging that the representations and warranties of the
      Warrant Holder set forth in Section 5
      are true
      and correct as of the date of exercise.

     

    3.  ISSUANCE
      OF STOCK.
      This
      Warrant shall be deemed to have been exercised immediately prior to the close
      of
      business on the date of its surrender for exercise as provided above, and the
      person entitled to receive the shares of Warrant Stock issuable upon such
      exercise shall be treated for all purposes as the holder of record of such
      shares as of the close of business on such date. As soon as practicable on
      or
      after such date, the Company shall issue and deliver to the person or persons
      entitled to receive the same a certificate or certificates for the number of
      whole shares of Warrant Stock issuable upon such exercise.

     

    4.  ADJUSTMENT
      PROVISIONS.
      The
      number and character of shares of Warrant Stock issuable upon exercise of this
      Warrant (or any shares of stock or other securities or property at the time
      receivable or issuable upon exercise of this Warrant) and the Warrant Price
      therefor, are subject to adjustment upon the occurrence of the following events
      between the date this Warrant is issued and the date it is
      exercised:

     

    4.1  Adjustment
      for Stock Splits and Stock Dividends.
      The
      Warrant Price of this Warrant and the Number of Shares of Warrant Stock issuable
      upon exercise of this Warrant (or any shares of stock or other securities at
      the
      time issuable upon exercise of this Warrant) shall each be proportionally
      adjusted to reflect any stock dividend, stock split or reverse stock split,
      or
      other similar event affecting the number of outstanding shares of Warrant Stock
      (or such other stock or securities). 

     

    4.2  Adjustment
      for Other Dividends and Distributions.
      In case
      the Company shall make or issue, or shall fix a record date for the
      determination of eligible holders entitled to receive, a dividend or other
      distribution payable respect to the Warrant Stock that is payable in
      (a) securities of the Company (other than issuances with respect to which
      adjustment is made under Sections 4.1
      or
4.3)
      or
      (b) assets (other than cash dividends paid or payable solely out of
      retained earnings), then, and in each such case, the Warrant Holder, upon
      exercise of this Warrant at any time after the consummation, effective date
      or
      record date of such event, shall receive, in addition to the shares of Warrant
      Stock issuable upon such exercise prior to such date, the securities or such
      other assets of the Company to which the Warrant Holder would have been entitled
      upon such date if the Warrant Holder had exercised this Warrant immediately
      prior thereto (all subject to further adjustment as provided in this
      Warrant).

     

    
      
         

      

      
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    4.3  Adjustment
      for Reorganization, Consolidation, Merger.
      In case
      of any recapitalization or reorganization of the Company after the date of
      this
      Warrant, or in case, after such date, the Company shall consolidate with or
      merge into another corporation, then, and in each such case, the Warrant Holder,
      upon the exercise of this Warrant (as provided in Section 2),
      at any
      time after the consummation of such recapitalization, reorganization,
      consolidation or merger, shall be entitled to receive, in lieu of the stock
      or
      other securities and property receivable upon the exercise of this Warrant
      prior
      to such consummation, the stock or other securities or property to which the
      Warrant Holder would have been entitled upon the consummation of such
      recapitalization, reorganization, consolidation or merger if the Warrant Holder
      had exercised this Warrant immediately prior thereto, all subject to further
      adjustment as provided in this Warrant, and the successor or purchasing
      corporation in such reorganization, consolidation or merger (if other than
      the
      Company) shall duly execute and deliver to the Warrant Holder a supplement
      hereto acknowledging such corporation’s obligations under this Warrant; and in
      each such case, the terms of this Warrant shall be applicable to the shares
      of
      stock or other securities or property receivable upon the exercise of this
      Warrant after the consummation of such reorganization, consolidation or
      merger.

     

    4.4  Conversion
      of Stock.
      In case
      all the authorized Common Stock of the Company is converted, pursuant to the
      Company’s Certificate of Incorporation, into other securities or property, or
      the Common Stock otherwise ceases to exist, then, in such case, the Warrant
      Holder, upon exercise of this Warrant at any time after the date on which the
      Common Stock is so converted or ceases to exist (the “Termination
      Date”),
      shall
      receive, in lieu of the number of shares of Common Stock that would have been
      issuable upon such exercise immediately prior to the Termination Date (the
      “Former
      Number of Shares of Warrant Stock”),
      the
      stock and other securities and property which the Warrant Holder would have
      been
      entitled to receive upon the Termination Date if the Warrant Holder had
      exercised this Warrant with respect to the Former Number of Shares of Warrant
      Stock immediately prior to the Termination Date (all subject to further
      adjustment as provided in this Warrant).

     

    4.5  Notice
      of Adjustments.
      The
      Company shall promptly give written notice of each adjustment or readjustment
      of
      the Warrant Price or the number of shares of Warrant Stock or other securities
      issuable upon exercise of this Warrant. The notice shall describe the adjustment
      or readjustment and show in reasonable detail the facts on which the adjustment
      or readjustment is based.

     

    4.6  No
      Change Necessary.
      The
      form of this Warrant need not be changed because of any adjustment in the
      Warrant Price or in the number of shares of Warrant Stock issuable upon its
      exercise.

     

    4.7  Reservation
      of Stock.
      If at
      any time the number of shares of Warrant Stock or other securities issuable
      upon
      exercise of this Warrant shall not be sufficient to effect the exercise of
      this
      Warrant, the Company will take such corporate action as may, in the opinion
      of
      its counsel, be necessary to increase its authorized but unissued shares of
      Warrant Stock or other securities issuable upon exercise of this Warrant as
      shall be sufficient for such purpose.

     

    5.  REPRESENTATIONS
      AND WARRANTIES OF WARRANT HOLDER.
      Warrant
      Holder represents and warrants to the Company as follows:

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

    5.1  Purchase
      for Own Account for Investment.
      Warrant
      Holder is purchasing the Warrant Stock for Warrant Holder’s own account for
      investment purposes only and not with a view to, or for sale in connection
      with,
      a distribution of the Warrant Stock within the meaning of the Securities Act
      of
      1933, as amended (the “1933
      Act”).
      Warrant Holder has no present intention of selling or otherwise disposing of
      all
      or any portion of the Warrant Stock and no one other than Warrant Holder has
      any
      beneficial ownership of any of the Warrant Stock.

     

    5.2  Access
      to Information.
      Warrant
      Holder has had access to all information regarding the Company and its present
      and prospective business, assets, liabilities and financial condition that
      Warrant Holder reasonably considers important in making the decision to purchase
      the Warrant Stock, and Warrant Holder has had ample opportunity to ask questions
      of the Company’s representatives concerning such matters and this
      investment.

     

    5.3  Understanding
      of Risks.
      Warrant
      Holder is fully aware of: (a) the highly speculative nature of the
      investment in the Warrant Stock; (b) the financial hazards involved;
      (c) the lack of liquidity of the Warrant Stock and the restrictions on
      transferability of the Warrant Stock (e.g.,
      that
      Warrant Holder may not be able to sell or dispose of the Warrant Stock or use
      them as collateral for loans); (d) the qualifications and backgrounds of the
      management of the Company; and (e) the tax consequences of investment in the
      Warrant Stock.

     

    5.4  Warrant
      Holder’s Qualifications.
      Warrant
      Holder has a preexisting personal or business relationship with the Company
      and/or certain of its officers and/or directors of a nature and duration
      sufficient to make Warrant Holder aware of the character, business acumen and
      general business and financial circumstances of the Company and/or such officers
      and directors. By reason of Warrant Holder’s business or financial experience,
      Warrant Holder is capable of evaluating the merits and risks of this investment,
      has the ability to protect Warrant Holder’s own interests in this transaction
      and is financially capable of bearing a total loss of this
      investment.

     

    5.5  No
      General Solicitation.
      At no
      time was Warrant Holder presented with or solicited by any publicly issued
      or
      circulated newspaper, mail, radio, television or other form of general
      advertising or solicitation in connection with the offer, sale and purchase
      of
      the Warrant Stock.

     

    5.6  Compliance
      with Securities Laws.
      Warrant
      Holder understands and acknowledges that, in reliance upon the representations
      and warranties made by Warrant Holder herein, the Warrant Stock are not
      being registered with the SEC under the 1933 Act, but instead are being issued
      under an exemption or exemptions from the registration and qualification
      requirements of the 1933 Act which impose certain restrictions on Warrant
      Holder’s ability to transfer the Warrant Stock.

     

    5.7  Restrictions
      on Transfer.
      Warrant
      Holder understands that Warrant Holder may not transfer any Warrant Stock unless
      such Warrant Stock is registered under the 1933 Act or other applicable state
      securities laws or unless, in the opinion of counsel to the Company, exemptions
      from such registration and qualification requirements are available. Warrant
      Holder understands that only the Company may file a registration statement
      with
      the SEC. Warrant Holder has also been advised that exemptions from registration
      and qualification may not be available or may not permit Warrant Holder to
      transfer all or any of the Warrant Stock in the amounts or at the times proposed
      by Warrant Holder.

     

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    5.8  Legends.
      It is
      understood that the certificates evidencing the Warrant Stock and the Common
      Stock issuable upon exercise thereof, will bear the legend set forth
      below:

     

    THE
      SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
      ACT
      OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY OTHER
      JURISDICTIONS. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY
      AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
      ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
      EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO
      BEAR
      THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE
      ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND
      SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER
      OR
      RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES
      LAWS.

     

    6.  NO
      RIGHTS OR LIABILITIES AS STOCKHOLDER.
      This
      Warrant does not by itself entitle the Warrant Holder to any voting rights
      or
      other rights as a shareholder of the Company. In the absence of affirmative
      action by the Warrant Holder to purchase Warrant Stock by exercise of this
      Warrant, no provisions of this Warrant, and no enumeration herein of the rights
      or privileges of the Warrant Holder, shall cause the Warrant Holder to be a
      shareholder of the Company for any purpose.

     

    7.  NO
      IMPAIRMENT.
      The
      Company will not, by amendment of its Certificate of Incorporation or Bylaws,
      or
      through reorganization, consolidation, merger, dissolution, issue or sale of
      securities, sale of assets or any other voluntary action, willfully avoid or
      seek to avoid the observance or performance of any of the terms of this Warrant,
      but will at all times in good faith assist in the carrying out of all such
      terms
      and in the taking of all such action as may be necessary or appropriate in
      order
      to protect the rights of the holder against wrongful impairment. Without
      limiting the generality of the foregoing, the Company will take all such action
      as may be necessary or appropriate in order that the Company may duly and
      validly issue fully paid and nonassessable shares of Warrant Stock upon the
      exercise of this Warrant.

     

    8.  ATTORNEYS’
      FEES.
      In
      the
      event any party is required to engage the services of any attorneys for the
      purpose of enforcing this Warrant, or any provision thereof, the prevailing
      party shall be entitled to recover its reasonable expenses and costs in
      enforcing this Warrant, including attorneys’ fees.

     

    9.  TRANSFER.
      Neither
      this Warrant nor any rights hereunder may be assigned, conveyed or transferred,
      in whole or in part, without the Company’s prior written consent, which the
      Company may withhold in its sole discretion. The rights and obligations of
      the
      Company and the Warrant Holder under this Warrant shall be binding upon and
      benefit their respective permitted successors, assigns, heirs, administrators
      and transferees.

     

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

    10.  GOVERNING
      LAW.
      This
      Warrant shall be governed by and construed under the internal laws of the State
      of Florida as applied to agreements among Florida residents entered into and
      to
      be performed entirely within Florida, without reference to principles of
      conflict of laws or choice of laws.

     

    11.  HEADINGS.
      The
      headings and captions used in this Warrant are used only for convenience and
      are
      not to be considered in construing or interpreting this Warrant. All references
      in this Warrant to sections and exhibits shall, unless otherwise provided,
      refer
      to sections hereof and exhibits attached hereto, all of which exhibits are
      incorporated herein by this reference.

     

    12.  NOTICES.
      Unless
      otherwise provided, any notice required or permitted under this Agreement shall
      be given in writing and shall be deemed effectively given (i) at the time
      of personal delivery, if delivery is in person; (ii) one (1) business day
      after deposit with an express overnight courier for United States deliveries,
      or
      two (2) business days after such deposit for deliveries outside of the United
      States, with proof of delivery from the courier requested; or (iii) three
      (3) business days after deposit in the United States mail by certified mail
      (return receipt requested) for United States deliveries when addressed to the
      party to be notified at the address indicated for such party in the first
      paragraph of this Warrant or, in the case of the Company, at 8000 Towers
      Crescent Drive, Suite 1220, Vienna, VA 22182, or at such other address as any
      party or the Company may designate by giving ten (10) days’ advance written
      notice to all other parties.

     

    13.  AMENDMENT;
      WAIVER. Any
      term
      of this Warrant may be amended, and the observance of any term of this Warrant
      may be waived (either generally or in a particular instance and either
      retroactively or prospectively) only with the written consent of the Company
      and
      the Warrant Holder. Any amendment or waiver effected in accordance with this
      Section shall be binding upon the Warrant Holder, each future holder of such
      securities, and the Company.

     

    14.  SEVERABILITY.
      If one
      or more provisions of this Warrant are held to be unenforceable under applicable
      law, such provision(s) shall be excluded from this Warrant and the balance
      of
      the Warrant shall be interpreted as if such provision(s) were so excluded and
      shall be enforceable in accordance with its terms.

     

    15.  TERMS
      BINDING.
      By
      acceptance of this Warrant, the Warrant Holder accepts and agrees to be bound
      by
      all the terms and conditions of this Warrant.

     

    16.  COUNTERPARTS.
      This
      Warrant may be executed in any number of counterparts, each of which when so
      executed and delivered will be deemed an original, and all of which together
      shall constitute one and the same agreement.

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

    IN
      WITNESS WHEREOF, the
      parties hereto have executed this Warrant as of the date first above
      written.

     

     

     

     

     

     

    
      	
              THE
                COMPANY:

               

              ARIEL
                WAY, INC.

               

            	 
	
              By:

            	 	 
	
               

              Name:

            	
               

              Leif
                Carlsson

            	 
	
               

              Title:

            	
               

              Director
                of the Board

            	 
	
               

              AGREED
                AND ACKNOWLEDGED

               

            	 
	
               

              THE
                HOLDER:

               

               

              MRS.
                EVA DUNHEM

               

               

               

            	 

    

    

     

    

     

    
      
         

      

      
         

        
          

        

      

      
         

        
          

        

      

    

    EXHIBIT 1

     

    FORM
      OF SUBSCRIPTION

     

    (To
      be signed only upon exercise of Warrant)

     

    To:
      Ariel
      Way, Inc.

     

    (1)  The
      undersigned Warrant Holder hereby elects to purchase     
        
      shares
      of Common Stock of Ariel Way, Inc. (the “Warrant
      Stock”),
      pursuant to the terms of the attached Warrant, and tenders herewith payment
      of
      the purchase price for such shares in full or accepts cancellation of
      indebtedness of the Company to the Warrant Holder of the same equal
      amount.

     

    (2)  In
      exercising the Warrant, the undersigned Warrant Holder hereby confirms and
      acknowledges that the representations and warranties set forth in Section 5
      of the Warrant as they apply to the undersigned Warrant Holder continue to
      be
      true and correct as of this date. 

     

    (3)  Please
      issue a certificate or certificates representing such shares of Warrant Stock
      in
      the name specified below:

     

    
      	 	 
	 	
              (Name)

            
	 	 
	 	
              (Address)

            
	 	 
	 	
              (City,
                State, Zip Code)

            
	 	 
	 	
              (Federal
                Tax Identification Number)

            
	 	 
	 	
              (Date)Unassociated Document

    EXHIBIT
      10.27

     

    Dated:
      September 26, 2005

     

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

     

    $42,250.00

     

    ARIEL
      WAY, INC.

     

    Secured
      Convertible Debenture

     

     

    Due
      September 25, 2006

     

    This
      Secured Convertible Debenture (the “Debenture”)
      is
      issued by Ariel Way, Inc, a
      Florida
      corporation (the “Obligor”),
      to
      Mr. Arne Dunhem (the “Holder”),
      pursuant to that certain Securities Purchase Agreement (the “Securities
      Purchase Agreement”)
      of
      even date herewith. 

     

    FOR
      VALUE RECEIVED,
      the
      Obligor hereby promises to pay to the Holder or its successors and assigns
      the
      principal sum of $42,250.00, together with accrued but unpaid interest on the
      following terms:

     

    Payments.
      Interest on the outstanding principal balance hereof shall be due and payable
      monthly, in arrears, commencing on September 25, 2006 and shall continue on
      the
      first day of each calendar month thereafter that any amounts under this
      Debenture are due and payable (each, an “Interest
      Payment Date”).
      Principal shall be due and payable in 6 equal installments of $7,041.74 each.
      The installments of principal shall be due and payable commencing on October
      1,
      2006 and subsequent installments shall be due and payable on the first day
      of
      each calendar month thereafter (“Principal
      Payment Date”)
      until
      the outstanding principal balance is paid in full (the “Maturity
      Date”).
      All
      payments in respect of the indebtedness evidenced hereby shall be made in
      collected funds, and shall be applied to principal, accrued interest and charges
      and expenses owing under or in connection with this Debenture in such order
      as
      the Holder elects, except that payments shall be applied to accrued interest
      before principal. Notwithstanding the foregoing, this Debenture shall become
      due
      and immediately payable, including all accrued but unpaid interest, upon the
      closing of a Funding Event (as defined in Section
      4
      hereof)
      or pursuant to an Event of Default (as defined in Section
      2
      hereof).

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

    Interest.
      Interest shall accrue on the outstanding principal balance hereof at an annual
      rate equal to 5%. Interest shall be calculated on the basis of a 360-day year
      and the actual number of days elapsed, to the extent permitted by applicable
      law. Interest hereunder will be paid to the Holder or its assignee (as defined
      in Section
      4)
      in
      whose name this Debenture is registered on the records of the Obligor regarding
      registration and transfers of Debentures (the “Debenture
      Register”).
      

     

     

    Right
      of Redemption.
      The
      Company at its option shall have the right to redeem, with fifteen (15) days
      advance written notice (the “Redemption
      Notice”),
      a
      portion or all outstanding convertible debenture. The redemption price shall
      be
      one hundred ten percent (110%) of the amount redeemed plus accrued
      interest. 

     

     

     

    This
      Debenture is subject to the following additional provisions:

     

    Section
      1. This
      Debenture is exchangeable for an equal aggregate principal amount of Debentures
      of different authorized denominations, as requested by the Holder surrendering
      the same. No service charge will be made for such registration of transfer
      or
      exchange.

     

    Section
      2. Events
      of Default.

     

    (a) An
      “Event
      of Default”,
      wherever used herein, means any one of the following events (whatever the reason
      and whether it shall be voluntary or involuntary or effected by operation of
      law
      or pursuant to any judgment, decree or order of any court, or any order, rule
      or
      regulation of any administrative or governmental body):

     

    (i) Any
      default in the payment of the principal of, interest on or other charges in
      respect of this Debenture, free of any claim of subordination, as and when
      the
      same shall become due and payable (whether on an installment, a Principal
      Payment Date, an Interest Payment Date, a Conversion Date or the Maturity Date
      or by acceleration or otherwise);

     

    (ii) The
      Obligor shall fail to observe or perform any other covenant, agreement or
      warranty contained in, or otherwise commit any breach or default of any
      provision of this Debenture (except as may be covered by Section
      2(a)(i)
      hereof
      or any Transaction Document (as defined in Section
      4)
      which
      is not cured with in the time prescribed;

     

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

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    (iv) The
      Obligor or any subsidiary of the Obligor shall default in any of its obligations
      under any other Debenture or any mortgage, credit agreement or other facility,
      indenture agreement, factoring agreement or other instrument under which there
      may be issued, or by which there may be secured or evidenced any indebtedness
      for borrowed money or money due under any long term leasing or factoring
      arrangement of the Obligor or any subsidiary of the Obligor in an amount
      exceeding $100,000, whether such indebtedness now exists or shall hereafter
      be
      created and such default shall result in such indebtedness becoming or being
      declared due and payable prior to the date on which it would otherwise become
      due and payable;

     

    (v) The
      Common Stock shall cease to be quoted for trading or listed for trading on
      the
      Nasdaq OTC Bulletin Board (“OTC”),
      Nasdaq SmallCap Market, New York Stock Exchange, American Stock Exchange or
      the
      Nasdaq National Market (each, a “Subsequent
      Market”)
      and
      shall not again be quoted or listed for trading thereon within five (5) Trading
      Days of such delisting;

     

    (vi) The
      Obligor or any subsidiary of the Obligor shall be a party to any Change of
      Control Transaction (as defined in Section
      4);
      

     

    (vii) The
      Obligor shall fail to file the Underlying Shares Registration Statement (as
      defined in Section
      4)
      with
      the Commission (as defined in Section
      4),
      or the
      Underlying Shares Registration Statement shall not have been declared effective
      by the Commission, in each case within the time periods set forth in the
      Investor Registration Rights Agreement of even date herewith between the Obligor
      and the Holder;

     

    (viii) If
      the
      effectiveness of the Underlying Shares Registration Statement lapses for any
      reason or the Holder shall not be permitted to resell the shares of Common
      Stock
      underlying this Debenture under the Underlying Shares Registration Statement,
      in
      either case, for more than five (5) consecutive Trading Days or an aggregate
      of
      eight Trading Days (which need not be consecutive Trading Days);

     

    (ix) The
      Obligor shall fail for any reason to deliver Common Stock certificates to a
      Holder prior to the fifth (5th)
      Trading
      Day after a Conversion Date or the Obligor shall provide notice to the Holder,
      including by way of public announcement, at any time, of its intention not
      to
      comply with requests for conversions of this Debenture in accordance with the
      terms hereof; 

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    (x)  The
      Obligor shall fail for any reason to deliver the payment in cash pursuant to
      a
      Buy-In (as defined herein) within three (3) days after notice is claimed
      delivered hereunder; 

     

    (b) During
      the time that any portion of this Debenture is outstanding, if any Event of
      Default has occurred, the full principal amount of this Debenture, together
      with
      interest and other amounts owing in respect thereof, to the date of acceleration
      shall become at the Holder's election, immediately due and payable in cash,
      provided
      however,
      the
      Holder may request (but shall have no obligation to request) payment of such
      amounts in Common Stock of the Obligor. If an Event of Default occurs and
      remains uncured, the Conversion Price shall be reduced to Fifteen Cents ($0.15).
      In addition to any other remedies, the Holder shall have the right (but not
      the
      obligation) to convert this Debenture at any time after (x) an Event of Default
      or (y) the Maturity Date at the Conversion Price then in-effect. The Holder
      need
      not provide and the Obligor hereby waives any presentment, demand, protest
      or
      other notice of any kind, and the Holder may immediately and without expiration
      of any grace period enforce any and all of its rights and remedies hereunder
      and
      all other remedies available to it under applicable law. Such declaration may
      be
      rescinded and annulled by Holder at any time prior to payment hereunder. No
      such
      rescission or annulment shall affect any subsequent Event of Default or impair
      any right consequent thereon. Upon an Event of Default, notwithstanding any
      other provision of this Debenture or any Transaction Document, the Holder shall
      have no obligation to comply with or adhere to any limitations, if any, on
      the
      conversion of this Debenture or the sale of the Underlying Shares. 

     

    Section
      3. Conversion

     

    (a) (i) Conversion
      at Option of Holder.

     

    (A) This
      Debenture shall be convertible into shares of Common Stock at the option of
      the
      Holder, in whole or in part at any time and from time to time, after the
      Original Issue Date (as defined in Section 4) (subject to the limitations on
      conversion set forth in Section
      3(a)(ii)
      hereof).
      The number of shares of Common Stock issuable upon a conversion hereunder equals
      the sum of (i) the quotient obtained by dividing (x) the outstanding amount
      of
      this Debenture to be converted by (y) the Conversion Price (as defined in
Section
      3(c)(i)).
      The
      Obligor shall deliver Common Stock certificates to the Holder prior to the
      Fifth
      (5th)
      Trading
      Day after a Conversion Date.

     

    (B) Notwithstanding
      anything to the contrary contained herein, if on any Conversion Date: (1) the
      number of shares of Common Stock at the time authorized, unissued and unreserved
      for all purposes, or held as treasury stock, is insufficient to pay principal
      and interest hereunder in shares of Common Stock; (2) the Common Stock is not
      listed or quoted for trading on the OTC or on a Subsequent Market; (3) the
      Obligor has failed to timely satisfy its conversion; or (4) the issuance of
      such
      shares of Common Stock would result in a violation of Section
      3(a)(ii),
      then,
      at the option of the Holder, the Obligor, in lieu of delivering shares of Common
      Stock pursuant to Section
      3(a)(i)(A),
      shall
      deliver, within three (3) Trading Days of each applicable Conversion Date,
      an
      amount in cash equal to the product of the outstanding principal amount to
      be
      converted plus any interest due therein divided by the Conversion Price and
      multiplied by the highest closing price of the stock from date of the conversion
      notice till the date that such cash payment is made.

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    Further,
      if the Obligor shall not have delivered any cash due in respect of conversion
      of
      this Debenture or as payment of interest thereon by the fifth (5th)
      Trading
      Day after the Conversion Date, the Holder may, by notice to the Obligor, require
      the Obligor to issue shares of Common Stock pursuant to Section
      3(c),
      except
      that for such purpose the Conversion Price applicable thereto shall be the
      lesser of the Conversion Price on the Conversion Date and the Conversion Price
      on the date of such Holder demand. Any such shares will be subject to the
      provisions of this Section.

     

    (C) The
      Holder shall effect conversions by delivering to the Obligor a completed notice
      in the form attached hereto as Exhibit A (a “Conversion
      Notice”).
      The
      date on which a Conversion Notice is delivered is the “Conversion
      Date.”
Unless
      the Holder is converting the entire principal amount outstanding under this
      Debenture, the Holder is not required to physically surrender this Debenture
      to
      the Obligor in order to effect conversions. Conversions hereunder shall have
      the
      effect of lowering the outstanding principal amount of this Debenture plus
      all
      accrued and unpaid interest thereon in an amount equal to the applicable
      conversion. The Holder and the Obligor shall maintain records showing the
      principal amount converted and the date of such conversions. In the event of
      any
      dispute or discrepancy, the records of the Holder shall be controlling and
      determinative in the absence of manifest error.

     

    (ii) Certain
      Conversion Restrictions.

     

    (A) A
      Holder
      may not convert this Debenture or receive shares of Common Stock as payment
      of
      interest hereunder to the extent such conversion or receipt of such interest
      payment would result in the Holder, together with any affiliate thereof,
      beneficially owning (as determined in accordance with Section 13(d) of the
      Exchange Act and the rules promulgated thereunder) in excess of 4.9% of the
      then
      issued and outstanding shares of Common Stock, including shares issuable upon
      conversion of, and payment of interest on, this Debenture held by such Holder
      after application of this Section. Since the Holder will not be obligated to
      report to the Obligor the number of shares of Common Stock it may hold at the
      time of a conversion hereunder, unless the conversion at issue would result
      in
      the issuance of shares of Common Stock in excess of 4.9% of the then outstanding
      shares of Common Stock without regard to any other shares which may be
      beneficially owned by the Holder or an affiliate thereof, the Holder shall
      have
      the authority and obligation to determine whether the restriction contained
      in
      this Section will limit any particular 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 principal amount of this
      Debenture is convertible shall be the responsibility and obligation of the
      Holder. If the Holder has delivered a Conversion Notice for a principal amount
      of this Debenture that, without regard to any other shares that the Holder
      or
      its affiliates may beneficially own, would result in the issuance in excess
      of
      the permitted amount hereunder, the Obligor shall notify the Holder of this
      fact
      and shall honor the conversion for the maximum principal amount permitted to
      be
      converted on such Conversion Date in accordance with the periods described
      in
Section
      3(a)(i)(A)
      and, at
      the option of the Holder, either retain any principal amount tendered for
      conversion in excess of the permitted amount hereunder for future conversions
      or
      return such excess principal amount to the Holder. The provisions of this
      Section may be waived by a Holder (but only as to itself and not to any other
      Holder) upon not less than 65 days prior notice to the Obligor. Other Holders
      shall be unaffected by any such waiver.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    (b)          
      (i) Nothing
      herein shall limit a Holder's right to pursue actual damages or declare an
      Event
      of Default pursuant to Section
      2
      herein
      for the Obligor 's failure to deliver certificates representing shares of Common
      Stock upon conversion within the period specified herein and such Holder shall
      have the right to pursue all remedies available to it at law or in equity
      including, without limitation, a decree of specific performance and/or
      injunctive relief, in each case without the need to post a bond or provide
      other
      security. The exercise of any such rights shall not prohibit the Holder from
      seeking to enforce damages pursuant to any other Section hereof or under
      applicable law. 

     

    (ii) In
      addition to any other rights available to the Holder, if the Obligor fails
      to
      deliver to the Holder such certificate or certificates pursuant to Section
      3(a)(i)(A)
      by the
      fifth Trading Day after the Conversion Date, and if after such fifth
      (5th)
      Trading
      Day the Holder purchases (in an open market transaction or otherwise) Common
      Stock to deliver in satisfaction of a sale by such Holder of the Underlying
      Shares which the Holder anticipated receiving upon such conversion (a
“Buy-In”),
      then
      the Obligor shall (A) pay in cash to the Holder (in addition to any remedies
      available to or elected by the Holder) the amount by which (x) the Holder's
      total purchase price (including brokerage commissions, if any) for the Common
      Stock so purchased exceeds (y) the product of (1) the aggregate number of shares
      of Common Stock that such Holder anticipated receiving from the conversion
      at
      issue multiplied by (2) the market price of the Common Stock at the time of
      the
      sale giving rise to such purchase obligation and (B) at the option of the
      Holder, either reissue a Debenture in the principal amount equal to the
      principal amount of the attempted conversion or deliver to the Holder the number
      of shares of Common Stock that would have been issued had the Obligor timely
      complied with its delivery requirements under Section
      3(a)(i)(A).
      For
      example, if the Holder purchases Common Stock having a total purchase price
      of
      $11,000 to cover a Buy-In with respect to an attempted conversion of Debentures
      with respect to which the market price of the Underlying Shares on the date
      of
      conversion was a total of $10,000 under clause (A) of the immediately preceding
      sentence, the Obligor shall be required to pay the Holder $1,000. The Holder
      shall provide the Obligor written notice indicating the amounts payable to
      the
      Holder in respect of the Buy-In. 

     

    (c)         
       (i) The
      conversion price (the “Conversion
      Price”)
      in
      effect on any Conversion Date shall be equal to Thirty Cents ($0.30), which
      may
      be adjusted pursuant to the other terms of this Debenture.

     

    (ii) If
      the
      Obligor, at any time while this Debenture is outstanding, shall (a) pay a
      stock dividend or otherwise make a distribution or distributions on shares
      of
      its Common Stock or any other equity or equity equivalent securities payable
      in
      shares of Common Stock, (b) subdivide outstanding shares of Common Stock into
      a
      larger number of shares, (c) combine (including by way of reverse stock split)
      outstanding shares of Common Stock into a smaller number of shares, or (d)
      issue
      by reclassification of shares of the Common Stock any shares of capital stock
      of
      the Obligor, then the Conversion Price shall be multiplied by a fraction of
      which the numerator shall be the number of shares of Common Stock (excluding
      treasury shares, if any) outstanding before such event and of which the
      denominator shall be the number of shares of Common Stock outstanding 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.

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

    (iii) If
      the
      Obligor, at any time while this Debenture is outstanding, shall issue rights,
      options or warrants to all holders of Common Stock (and not to the Holder)
      entitling them to subscribe for or purchase shares of Common Stock at a price
      per share less than the Closing Bid Price at the record date mentioned below,
      then the Conversion Price shall be multiplied by a fraction, of which the
      denominator shall be the number of shares of the Common Stock (excluding
      treasury shares, if any) outstanding on the date of issuance of such rights
      or
      warrants (plus the number of additional shares of Common Stock offered for
      subscription or purchase), and of which the numerator shall be the number of
      shares of the Common Stock (excluding treasury shares, if any) outstanding
      on
      the date of issuance of such rights or warrants, plus the number of shares
      which
      the aggregate offering price of the total number of shares so offered would
      purchase at such Closing Bid Price. Such adjustment shall be made whenever
      such
      rights or warrants are issued, and shall become effective immediately after
      the
      record date for the determination of stockholders entitled to receive such
      rights, options or warrants. However, upon the expiration of any such right,
      option or warrant to purchase shares of the Common Stock the issuance of which
      resulted in an adjustment in the Conversion Price pursuant to this Section,
      if
      any such right, option or warrant shall expire and shall not have been
      exercised, the Conversion Price shall immediately upon such expiration be
      recomputed and effective immediately upon such expiration be increased to the
      price which it would have been (but reflecting any other adjustments in the
      Conversion Price made pursuant to the provisions of this Section after the
      issuance of such rights or warrants) had the adjustment of the Conversion Price
      made upon the issuance of such rights, options or warrants been made on the
      basis of offering for subscription or purchase only that number of shares of
      the
      Common Stock actually purchased upon the exercise of such rights, options or
      warrants actually exercised.

     

    (iv) If
      the
      Obligor or any subsidiary thereof, as applicable, with respect to Common Stock
      Equivalents (as defined below), at any time while this Debenture is outstanding,
      shall issue shares of Common Stock or rights, warrants, options or other
      securities or debt that are convertible into or exchangeable for shares of
      Common Stock (“Common
      Stock Equivalents”)
      entitling any Person to acquire shares of Common Stock, at a price per share
      less than the Conversion Price (if the holder of the Common Stock or Common
      Stock Equivalent so issued shall at any time, whether by operation of purchase
      price adjustments, reset provisions, floating conversion, exercise or exchange
      prices or otherwise, or due to warrants, options or rights per share which
      is
      issued in connection with such issuance, be entitled to receive shares of Common
      Stock at a price per share which is less than the Conversion Price, such
      issuance shall be deemed to have occurred for less than the Conversion Price),
      then, at the sole option of the Holder, the Conversion Price shall be adjusted
      to mirror the conversion, exchange or purchase price for such Common Stock
      or
      Common Stock Equivalents (including any reset provisions thereof) at issue.
      Such
      adjustment shall be made whenever such Common Stock or Common Stock Equivalents
      are issued. The Obligor shall notify the Holder in writing, no later than one
      (1) business day following the issuance of any Common Stock or Common Stock
      Equivalent subject to this Section, indicating therein the applicable issuance
      price, or of applicable reset price, exchange price, conversion price and other
      pricing terms. No adjustment under this Section shall be made as a result of
      issuances and exercises of options to purchase shares of Common Stock issued
      for
      compensatory purposes pursuant to any of the Obligor's stock option or stock
      purchase plans.

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

    (v) If
      the
      Obligor, at any time while this Debenture is outstanding, shall distribute
      to
      all holders of Common Stock (and not to the Holder) evidences of its
      indebtedness or assets or rights or warrants to subscribe for or purchase any
      security, then in each such case the Conversion Price at which this Debenture
      shall thereafter be convertible shall be determined by multiplying the
      Conversion Price in effect immediately prior to the record date fixed for
      determination of stockholders entitled to receive such distribution by a
      fraction of which the denominator shall be the Closing Bid Price determined
      as
      of the record date mentioned above, and of which the numerator shall be such
      Closing Bid Price on such record date less the then fair market value at such
      record date of the portion of such assets or evidence of indebtedness so
      distributed applicable to one outstanding share of the Common Stock as
      determined by the Board of Directors in good faith. In either case the
      adjustments shall be described in a statement provided to the Holder of the
      portion of assets or evidences of indebtedness so distributed or such
      subscription rights applicable to one share of Common Stock. Such adjustment
      shall be made whenever any such distribution is made and shall become effective
      immediately after the record date mentioned above.

     

    (vi) In
      case
      of any reclassification of the Common Stock or any compulsory share exchange
      pursuant to which the Common Stock is converted into other securities, cash
      or
      property, the Holder shall have the right thereafter to, at its option, (A)
      convert the then outstanding principal amount, together with all accrued but
      unpaid interest and any other amounts then owing hereunder in respect of this
      Debenture into the shares of stock and other securities, cash and property
      receivable upon or deemed to be held by holders of the Common Stock following
      such reclassification or share exchange, and the Holder of this Debenture shall
      be entitled upon such event to receive such amount of securities, cash or
      property as the shares of the Common Stock of the Obligor into which the then
      outstanding principal amount, together with all accrued but unpaid interest
      and
      any other amounts then owing hereunder in respect of this Debenture could have
      been converted immediately prior to such reclassification or share exchange
      would have been entitled, or (B) require the Obligor to prepay the outstanding
      principal amount of this Debenture, plus all interest and other amounts due
      and
      payable thereon. The entire prepayment price shall be paid in cash. This
      provision shall similarly apply to successive reclassifications or share
      exchanges.

     

    (vii) The
      Obligor shall maintain a share reserve of not less than 150% of the shares
      of
      Common Stock issuable upon conversion of this Debenture; and within three (3)
      Business Days following the receipt by the Obligor of a Holder's notice that
      such minimum number of Underlying Shares is not so reserved, the Obligor shall
      promptly reserve a sufficient number of shares of Common Stock to comply with
      such requirement.

     

    (viii) All
      calculations under this Section
      3
      shall be
      rounded up to the nearest $0.001 of a share.

     

    (ix) Whenever
      the Conversion is adjusted pursuant to Section
      3
      hereof,
      the Obligor shall promptly mail to the Holder a notice setting forth the
      Conversion Price after such adjustment and setting forth a brief statement
      of
      the facts requiring such adjustment.

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    (x) If
      (A)
      the Obligor shall declare a dividend (or any other distribution) on the Common
      Stock; (B) the Obligor shall declare a special nonrecurring cash dividend on
      or
      a redemption of the Common Stock; (C) the Obligor shall authorize the granting
      to all holders of the Common Stock rights or warrants to subscribe for or
      purchase any shares of capital stock of any class or of any rights; (D) the
      approval of any stockholders of the Obligor shall be required in connection
      with
      any reclassification of the Common Stock, any consolidation or merger to which
      the Obligor is a party, any sale or transfer of all or substantially all of
      the
      assets of the Obligor, of any compulsory share exchange whereby the Common
      Stock
      is converted into other securities, cash or property; or (E) the Obligor shall
      authorize the voluntary or involuntary dissolution, liquidation or winding
      up of
      the affairs of the Obligor; then, in each case, the Obligor shall cause to
      be
      filed at each office or agency maintained for the purpose of conversion of
      this
      Debenture, and shall cause to be mailed to the Holder at its last address as
      it
      shall appear upon the stock books of the Obligor, at least twenty (20) calendar
      days prior to the applicable record or effective date hereinafter specified,
      a
      notice stating (x) the date on which a record is to be taken for the purpose
      of
      such dividend, distribution, redemption, rights or warrants, or if a record
      is
      not to be taken, the date as of which the holders of the Common Stock of record
      to be entitled to such dividend, distributions, redemption, rights or warrants
      are to be determined or (y) the date on which such reclassification,
      consolidation, merger, sale, transfer or share exchange is expected to become
      effective or close, and the date as of which it is expected that holders of
      the
      Common Stock of record shall be entitled to exchange their shares of the Common
      Stock for securities, cash or other property deliverable upon such
      reclassification, consolidation, merger, sale, transfer or share exchange,
      provided, that the failure to mail such notice or any defect therein or in
      the
      mailing thereof shall not affect the validity of the corporate action required
      to be specified in such notice. The Holder is entitled to convert this Debenture
      during the 20-day calendar period commencing the date of such notice to the
      effective date of the event triggering such notice.

     

    (xi) In
      case
      of any (1) merger or consolidation of the Obligor or any subsidiary of the
      Obligor with or into another Person, or (2) sale by the Obligor or any
      subsidiary of the Obligor of more than one-half of the assets of the Obligor
      in
      one or a series of related transactions, a Holder shall have the right to (A)
      exercise any rights under Section
      2(b),
      (B)
      convert the aggregate amount of this Debenture then outstanding into the shares
      of stock and other securities, cash and property receivable upon or deemed
      to be
      held by holders of Common Stock following such merger, consolidation or sale,
      and such Holder shall be entitled upon such event or series of related events
      to
      receive such amount of securities, cash and property as the shares of Common
      Stock into which such aggregate principal amount of this Debenture could have
      been converted immediately prior to such merger, consolidation or sales would
      have been entitled, or (C) in the case of a merger or consolidation, require
      the
      surviving entity to issue to the Holder a convertible Debenture with a principal
      amount equal to the aggregate principal amount of this Debenture then held
      by
      such Holder, plus all accrued and unpaid interest and other amounts owing
      thereon, which such newly issued convertible Debenture shall have terms
      identical (including with respect to conversion) to the terms of this Debenture,
      and shall be entitled to all of the rights and privileges of the Holder of
      this
      Debenture set forth herein and the agreements pursuant to which this Debentures
      were issued. In the case of clause (C), the conversion price applicable for
      the
      newly issued shares of convertible preferred stock or convertible Debentures
      shall be based upon the amount of securities, cash and property that each share
      of Common Stock would receive in such transaction and the Conversion Price
      in
      effect immediately prior to the effectiveness or closing date for such
      transaction. The terms of any such merger, sale or consolidation shall include
      such terms so as to continue to give the Holder the right to receive the
      securities, cash and property set forth in this Section upon any conversion
      or
      redemption following such event. This provision shall similarly apply to
      successive such events.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    (d) The
      Obligor covenants that it will at all times reserve and keep available out
      of
      its authorized and unissued shares of Common Stock solely for the purpose of
      issuance upon conversion of this Debenture and payment of interest on this
      Debenture, each as herein provided, free from preemptive rights or any other
      actual contingent purchase rights of persons other than the Holder, not less
      than such number of shares of the Common Stock as shall (subject to any
      additional requirements of the Obligor as to reservation of such shares set
      forth in this Debenture) be issuable (taking into account the adjustments and
      restrictions of Sections
      2(b) and 3(c))
      upon
      the conversion of the outstanding principal amount of this Debenture and payment
      of interest hereunder. The Obligor covenants that all shares of Common Stock
      that shall be so issuable shall, upon issue, be duly and validly authorized,
      issued and fully paid, nonassessable and, if the Underlying Shares Registration
      Statement has been declared effective under the Securities Act, registered
      for
      public sale in accordance with such Underlying Shares Registration
      Statement.

     

    (e) Upon
      a
      conversion hereunder the Obligor shall not be required to issue stock
      certificates representing fractions of shares of the Common Stock, but may
      if
      otherwise permitted, make a cash payment in respect of any final fraction of
      a
      share based on the Closing Bid Price at such time. If the Obligor elects not,
      or
      is unable, to make such a cash payment, the Holder shall be entitled to receive,
      in lieu of the final fraction of a share, one whole share of Common
      Stock.

     

    (f) The
      issuance of certificates for shares of the Common Stock on conversion of this
      Debenture shall be made without charge to the Holder thereof for any documentary
      stamp or similar taxes that may be payable in respect of the issue or delivery
      of such certificate, provided that the Obligor shall not be required to pay
      any
      tax that may be payable in respect of any transfer involved in the issuance
      and
      delivery of any such certificate upon conversion in a name other than that
      of
      the Holder of such Debenture so converted and the Obligor shall not be required
      to issue or deliver such certificates unless or until the person or persons
      requesting the issuance thereof shall have paid to the Obligor the amount of
      such tax or shall have established to the satisfaction of the Obligor that
      such
      tax has been paid.

     

    (g) Any
      notices, consents, waivers or other communications required or permitted to
      be
      given under the terms hereof must be in writing and will be deemed to have
      been
      delivered: (i) upon receipt, when delivered personally; (ii) upon receipt,
      when
      sent by facsimile (provided confirmation of transmission is mechanically or
      electronically generated and kept on file by the sending party); or (iii) one
      (1) trading day after deposit with a nationally recognized overnight delivery
      service, in each case properly addressed to the party to receive the same.
      The
      addresses and facsimile numbers for such communications shall be:

    

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    

    
      	
              If
                to the Company, to:

            	
              Ariel
                Way, Inc.

            
	 	 
	 	
              8000
                Towers Crescent Drive, Suite 1220

            
	 	
              Vienna,
                VA 22182

            
	 	
              Attention: Chief
                Executive Officer

            
	 	
              Telephone: (703)
                918-2420

            
	 	
              Facsimile: (703)
                991-0841

            
	 	 
	
              If
                to the Holder:

            	
              Arne
                Dunhem

            
	 	
              7901
                Ariel Way

            
	 	
              McLean,
                VA 22102

            

    

    

    or
      at
      such other address and/or facsimile number and/or to the attention of such
      other
      person as the recipient party has specified by written notice given to each
      other party three (3) business days prior to the effectiveness of such change.
      Written confirmation of receipt (i) given by the recipient of such notice,
      consent, waiver or other communication, (ii) mechanically or electronically
      generated by the sender's facsimile machine containing the time, date, recipient
      facsimile number and an image of the first page of such transmission or (iii)
      provided by a nationally recognized overnight delivery service, shall be
      rebuttable evidence of personal service, receipt by facsimile or receipt from
      a
      nationally recognized overnight delivery service in accordance with clause
      (i),
      (ii) or (iii) above, respectively.

     

    Section
      4. Definitions.
      For the
      purposes hereof, the following terms shall have the following
      meanings:

     

    “Business
      Day”
means
      any day except Saturday, Sunday and any day which shall be a federal legal
      holiday in the United States or a day on which banking institutions are
      authorized or required by law or other government action to close.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    “Change
      of Control Transaction”
means
      the occurrence of (a) an acquisition after the date hereof by an individual
      or
      legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the
      Exchange Act) of effective control (whether through legal or beneficial
      ownership of capital stock of the Obligor, by contract or otherwise) of in
      excess of fifty percent (50%) of the voting securities of the Obligor (except
      that the acquisition of voting securities by the Holder shall not constitute
      a
      Change of Control Transaction for purposes hereof), (b) a replacement at one
      time or over time of more than one-half of the members of the board of directors
      of the Obligor which is not approved by a majority of those individuals who
      are
      members of the board of directors on the date hereof (or by those individuals
      who are serving as members of the board of directors on any date whose
      nomination to the board of directors was approved by a majority of the members
      of the board of directors who are members on the date hereof), (c) the merger,
      consolidation or sale of fifty percent (50%) or more of the assets of the
      Obligor or any subsidiary of the Obligor in one or a series of related
      transactions with or into another entity, or (d) the execution by the Obligor
      of
      an agreement to which the Obligor is a party or by which it is bound, providing
      for any of the events set forth above in (a), (b) or (c).

     

    “Commission”
means
      the Securities and Exchange Commission.

     

    “Common
      Stock”
means
      the common stock, par value $0.001, of the Obligor and stock of any other class
      into which such shares may hereafter be changed or reclassified.

     

    “Exchange
      Act”
means
      the Securities Exchange Act of 1934, as amended.

     

    “Funding
      Event”
means
      any transaction or series of transactions closed after the Original Issue Date
      in which the Obligor raise $4,000,000 or more through the sale of their equity
      securities or securities exercisable or convertible into equity
      securities.

     

    “Original
      Issue Date”
shall
      mean the date of the first issuance of this Debenture regardless of the number
      of transfers and regardless of the number of instruments, which may be issued
      to
      evidence such Debenture.

     

    “Closing
      Bid Price”
means
      the price per share in the last reported trade of the Common Stock on the OTC
      or
      on the exchange which the Common Stock is then listed as quoted by Bloomberg,
      LP.

     

    “Person”
means
      a
      corporation, an association, a partnership, organization, a business, an
      individual, a government or political subdivision thereof or a governmental
      agency.

     

    “Securities
      Act”
means
      the Securities Act of 1933, as amended, and the rules and regulations
      promulgated thereunder.

     

    “Trading
      Day”
means
      a
      day on which the shares of Common Stock are quoted on the OTC or quoted or
      traded on such Subsequent Market on which the shares of Common Stock are then
      quoted or listed; provided, that in the event that the shares of Common Stock
      are not listed or quoted, then Trading Day shall mean a Business
      Day.

     

    “Transaction
      Documents”
means
      the SECURITIES PURCHASE AGREEMENT or any other agreement delivered in connection
      with the SECURITIES PURCHASE AGREEMENT, including, without limitation, the
      Security Agreement, the Pledge and Escrow Agreement, or the Investor
      Registration Rights Agreement.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    “Underlying
      Shares”
means
      the shares of Common Stock issuable upon conversion of this Debenture or as
      payment of interest in accordance with the terms hereof.

     

    “Underlying
      Shares Registration Statement”
means
      a
      registration statement meeting the requirements set forth in the Registration
      Rights Agreement, covering among other things the resale of the Underlying
      Shares and naming the Holder as a “selling stockholder” thereunder.

     

    Section
      5. Except
      as
      expressly provided herein, no provision of this Debenture shall alter or impair
      the obligations of the Obligor, which are absolute and unconditional, to pay
      the
      principal of, interest and other charges (if any) on, this Debenture at the
      time, place, and rate, and in the coin or currency, herein prescribed. This
      Debenture is a direct obligation of the Obligor. This Debenture ranks pari
      passu
      with all other Debentures now or hereafter issued under the terms set forth
      herein. As long as this Debenture is outstanding, the Obligor shall not and
      shall cause their subsidiaries not to, without the consent of the Holder, (i)
      amend its certificate of incorporation, bylaws or other charter documents so
      as
      to adversely affect any rights of the Holder; (ii) repay, repurchase or offer
      to
      repay, repurchase or otherwise acquire shares of its Common Stock or other
      equity securities other than as to the Underlying Shares to the extent permitted
      or required under the Transaction Documents; or (iii) enter into any agreement
      with respect to any of the foregoing. 

     

    Section
      6. This
      Debenture shall not entitle the Holder to any of the rights of a stockholder
      of
      the Obligor, including without limitation, the right to vote, to receive
      dividends and other distributions, or to receive any notice of, or to attend,
      meetings of stockholders or any other proceedings of the Obligor, unless and
      to
      the extent converted into shares of Common Stock in accordance with the terms
      hereof.

     

    Section
      7. If
      this
      Debenture is mutilated, lost, stolen or destroyed, the Obligor shall execute
      and
      deliver, in exchange and substitution for and upon cancellation of the mutilated
      Debenture, or in lieu of or in substitution for a lost, stolen or destroyed
      Debenture, a new Debenture for the principal amount of this Debenture so
      mutilated, lost, stolen or destroyed but only upon receipt of evidence of such
      loss, theft or destruction of such Debenture, and of the ownership hereof,
      and
      indemnity, if requested, all reasonably satisfactory to the
      Obligor.

     

    Section
      8. No
      indebtedness of the Obligor is senior to this Debenture in right of payment,
      whether with respect to interest, damages or upon liquidation or dissolution
      or
      otherwise. Without the Holder’s consent, the Obligor will not and will not
      permit any of their subsidiaries to, directly or indirectly, enter into, create,
      incur, assume or suffer to exist any indebtedness 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 there from that is senior in any
      respect to the obligations of the Obligor under this Debenture.

     

    Section
      9. This
      Debenture shall be governed by and construed in accordance with the laws of
      the
      State of New Jersey, without giving effect to conflicts of laws thereof. Each
      of
      the parties consents to the jurisdiction of the Superior Courts of the State
      of
      New Jersey sitting in Hudson County, New Jersey and the U.S. District Court
      for the District of New Jersey sitting in Newark, New Jersey in connection
      with
      any dispute arising under this Debenture and hereby waives, to the maximum
      extent permitted by law, any objection, including any objection based on
forum non conveniens
      to the
      bringing of any such proceeding in such jurisdictions. 

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    Section
      10. If
      the
      Obligor fails to strictly comply with the terms of this Debenture, then the
      Obligor shall reimburse the Holder promptly for all fees, costs and expenses,
      including, without limitation, attorneys’ fees and expenses incurred by the
      Holder in any action in connection with this Debenture, including, without
      limitation, those incurred: (i) during any workout, attempted workout, and/or
      in
      connection with the rendering of legal advice as to the Holder’s rights,
      remedies and obligations, (ii) collecting any sums which become due to the
      Holder, (iii) defending or prosecuting any proceeding or any counterclaim to
      any
      proceeding or appeal; or (iv) the protection, preservation or enforcement of
      any
      rights or remedies of the Holder.

     

    Section
      11. Any
      waiver by the Holder of a breach of any provision of this Debenture shall not
      operate as or be construed to be a waiver of any other breach of such provision
      or of any breach of any other provision of this Debenture. The failure of the
      Holder to insist upon strict adherence to any term of this Debenture on one
      or
      more occasions shall not be considered a waiver or deprive that party of the
      right thereafter to insist upon strict adherence to that term or any other
      term
      of this Debenture. Any waiver must be in writing.

     

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

     

    Section
      13. Whenever
      any payment or other obligation hereunder shall be due on a day other than
      a
      Business Day, such payment shall be made on the next succeeding Business
      Day.

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

    Section
      14. THE
      PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT ANY
      OF
      THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON
      OR
      ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION
      DOCUMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL
      OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT
      FOR
      THE PARTIES’ ACCEPTANCE OF THIS AGREEMENT.

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    IN
      WITNESS WHEREOF,
      the
      Obligor has caused this Secured Convertible Debenture to be duly executed by
      a
      duly authorized officer as of the date set forth above.

     

    
      	 	
              ARIEL
                WAY, INC. 

            
	 	 
	
               By:

            	
                    

            
	 	
              Name: Leif
                T. Carlsson

            
	 	
              Title: Director

            

    

    

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

    

    

     

     

    EXHIBIT
      “A”

     

     

    NOTICE
      OF CONVERSION

     

     

    (To
      be executed by the Holder in order to Convert the
      Debenture)

     

    

    
      	
               

              TO:

               

            	 

    

    

    The
      undersigned hereby irrevocably elects to convert
      $__________________________  of
      the
      principal amount of the above Debenture into Shares of Common Stock of Ariel
      Way, Inc., according to the conditions stated therein, as of the Conversion
      Date
      written below.

     

    
      	
               

              Conversion
                Date:

            	 
	
               

              Applicable
                Conversion Price:

            	 
	
               

              Signature:

            	 
	
               

              Name:

            	 
	
               

              Address:

            	 
	
               

              Amount
                to be converted:

            	
               

              $          

            
	
               

              Amount
                of Debenture unconverted:

            	
               

              $          

            
	
               

              Conversion
                Price per share: 

            	
               

              $          

            
	
               

              Number
                of shares of Common Stock to be issued:

            	
            
	
               

              Please
                issue the shares of Common Stock in the following name and to the
                following address:

            	 
	
               

              Issue
                to:

            	 
	
               

              Authorized
                Signature:

            	 
	
               

              Name:

            	 
	
               

              Title:

            	 
	
               

              Phone
                Number:

            	 
	
               

              Broker
                DTC Participant Code:

            	 
	
               

              Account
                Number:

            	 

    

    

    

    

    
      
        
        

      

      
        17

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