NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY
THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES
ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.
THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE
SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD
PURSUANT TO RULE 144 OR RULE 144A UNDER
SAID ACT.
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
PRINCIPAL AMOUNT: US$77,750 ISSUE DATE: JULY 6, 2016
PURCHASE PRICE: US$77,750
CONVERTIBLE PROMISSORY NOTE
FOR VALUE RECEIVED, CLEAN ENERGY TECHNOLOGIES, INC., a Nevada
corporation (hereinafter called the "Borrower"), hereby promises
to pay to the order of
AUCTUS FUND, LLC, a Delaware limited liability company, or
registered assigns (the
"Holder") the sum of US$77,750 together with any interest as set
forth herein, on April 6, 2017
(the "Maturity Date"), and to pay interest on the unpaid principal balance
hereof at the rate of ten
percent (10%) (the "Interest Rate") per annum from the date hereof
(the "Issue Date") until the
same becomes due and payable, whether at maturity or upon acceleration
or by prepayment or
otherwise. This Note may not be prepaid in whole or in part except
as otherwise explicitly set
forth herein with the written consent of the Holder which may be
withheld for any reason or for
no reason. Any amount of principal or interest on this Note which is not paid
when due shall bear
interest at the rate of twenty-four percent (24%) per annum from the
due date thereof until the
same is paid (the "Default Interest"). Interest shall commence accruing on the
date that the Note
is fully paid and shall be computed on the basis of a 360-day year
and the actual number of days
elapsed. All payments due hereunder (to the extent not converted into common
stock, $0.001 par
value per share (the "Common Stock") in accordance with the terms
hereof) shall be made in
lawful money of the United States of America. All payments shall be
made at such address as
the Holder shall hereafter give to the Borrower by written notice
made in accordance with the
provisions of this Note. Whenever any amount expressed to be due by
the terms of this Note is
due on any day which is not a business day, the same shall instead be due on the
next succeeding
day which is a business day and, in the case of any interest payment date which
is not the date on
which this Note is paid in full, the extension of the due date
thereof shall not be taken into
account for purposes of determining the amount of interest due on
such date. As used in this
Note, the term "business day" shall mean any day other than a
Saturday, Sunday or a day on
which commercial banks in the city of New York, New York are
authorized or required by law
or executive order to remain closed. Each capitalized term used
herein, and not otherwise
defined, shall have the meaning ascribed thereto in that certain
Securities Purchase Agreement
dated the date hereof, pursuant to which this Note was
originally issued (the "Purchase
Agreement").
This Note is free from all taxes, liens, claims and encumbrances
with respect to the issue
thereof and shall not be subject to preemptive rights or other similar rights of
shareholders of the
Borrower and will not impose personal liability upon the holder thereof.
The following terms shall apply to this Note:
ARTICLE I. CONVERSION RIGHTS
1.1 Conversion Right. The Holder shall have the right from
time to time, and at
any time following one hundred eighty (180) days after the date of
this Note and ending on the
later of (i) the Maturity Date and (ii) the date of payment of the
Default Amount (as defined in
Article III) pursuant to Section 1.6(a) or Article III, each in
respect of the remaining outstanding
principal amount of this Note to convert all or any part of the
outstanding and unpaid principal
amount of this Note into fully paid and non-assessable shares of
Common Stock, as such
Common Stock exists on the Issue Date, or any shares of capital
stock or other securities of the
Borrower into which such Common Stock shall hereafter be changed or
reclassified at the
Conversion Price (as defined below) determined as provided herein (a
"Conversion"); provided,
however, that in no event shall the Holder be entitled to convert
any portion of this Note in
excess of that portion of this Note upon conversion of which the sum of (1) the
number of shares
of Common Stock beneficially owned by the Holder and its affiliates
(other than shares of
Common Stock which may be deemed beneficially owned through
the ownership of the
unconverted portion of the Notes or the unexercised or unconverted portion of
any other security
of the Borrower subject to a limitation on conversion or exercise
analogous to the limitations
contained herein) and (2) the number of shares of Common Stock
issuable upon the conversion
of the portion of this Note with respect to which the determination of this
proviso is being made,
would result in beneficial ownership by the Holder and its affiliates
of more than 4.99% of the
outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding
sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
Regulations 13D-G
thereunder, except as otherwise provided in clause (1) of such
proviso, provided, further,
however, that the limitations on conversion may be waived by the Holder upon, at
the election of
the Holder, not less than 61 days' prior notice to the Borrower, and
the provisions of the
conversion limitation shall continue to apply until such 61st
day (or such later date, as
determined by the Holder, as may be specified in such notice of
waiver). The number of shares
of Common Stock to be issued upon each conversion of this Note shall
be determined by
dividing the Conversion Amount (as defined below) by the applicable
Conversion Price then in
effect on the date specified in the notice of conversion, in the
form attached hereto as Exhibit A
(the "Notice of Conversion"), delivered to the Borrower by the Holder
in accordance with
Section 1.4 below; provided that the Notice of Conversion is submitted by
facsimile or e-mail (or
by other means resulting in, or reasonably expected to result in,
notice) to the Borrower before
6:00 p.m., New York, New York time on such conversion date (the
"Conversion Date"). The
2
term "Conversion Amount" means, with respect to any conversion of this
Note, the sum of (1)
the principal amount of this Note to be converted in such conversion
plus (2) at the Holder's
option, accrued and unpaid interest, if any, on such principal amount
at the interest rates
provided in this Note to the Conversion Date, provided however, that
the Borrower shall have
the right to pay any or all interest in cash plus (3) at the
Holder's option, Default Interest, if any,
on the amounts referred to in the immediately preceding clauses (1)
and/or (2) plus (4) at the
Holder's option, any amounts owed to the Holder pursuant to Sections 1.3 and
1.4(g) hereof.
1.2 Conversion Price.
(a) Calculation of Conversion Price. Subject to the
adjustments described
herein, and provided that no Event of Default (as defined in Article
III) has occurred, the
conversion price (the "Conversion Price") shall equal the lesser of
(i) 55% multiplied by the
lowest Trading Price (as defined below) (representing a discount rate
of 45%) during the
previous twenty (20) Trading Day period ending on the latest complete
Trading Day prior to the
date of this Note and (ii) the Variable Conversion Price (as defined
herein) (subject to equitable
adjustments for stock splits, stock dividends or rights offerings by
the Borrower relating to the
Borrower's securities or the securities of any subsidiary of
the Borrower, combinations,
recapitalization, reclassifications, extraordinary distributions and
similar events). The "Variable
Conversion Price" shall mean 55% multiplied by the Market
Price (as defined herein)
(representing a discount rate of 45%). "Market Price" means the
lowest Trading Price (as
defined below) for the Common Stock during the twenty (20) Trading
Day period ending on the
latest complete Trading Day prior to the Conversion Date. "Trading
Price" means, for any
security as of any date, the lesser of: (i) the lowest trade price
on the Over-the-Counter Bulletin
Board (the "OTCBB"), OTCQB or applicable trading market as reported by
a reliable reporting
service ("Reporting Service") designated by the Holder or, if the
OTCBB is not the principal
trading market for such security, the trading price of such security
on the principal securities
exchange or trading market where such security is listed or traded
or, if no trading price of such
security is available in any of the foregoing manners, the average of
the trading prices of any
market makers for such security that are listed in the "pink sheets"
by the OTC Markets Group,
Inc., or (ii) the closing bid price on the OTCBB, OTCQB or
applicable trading market as
reported by a Reporting Service designated by the Holder or, if the
OTCBB is not the principal
trading market for such security, the closing bid price of such
security on the principal securities
exchange or trading market where such security is listed or traded
or, if no closing bid price of
such security is available in any of the foregoing manners, the
average of the closing bid prices
of any market makers for such security that are listed in the "pink
sheets" by the OTC Markets
Group, Inc. To the extent the Conversion Price of the Borrower's
Common Stock closes below
the par value per share, the Borrower will take all steps necessary
to solicit the consent of the
stockholders to reduce the par value to the lowest value possible under law. The
Borrower agrees
to honor all conversions submitted pending this adjustment.
Furthermore, the Conversion Price
may be adjusted downward if, within three (3) business days of the
transmittal of the Notice of
Conversion to the Borrower, the Common Stock has a closing bid which is 5% or
lower than that
set forth in the Notice of Conversion. If the shares of the
Borrower's Common Stock have not
been delivered within three (3) business days to the Borrower, the
Notice of Conversion may be
rescinded. At any time after the Closing Date, if in the case that
the Borrower's Common Stock
is not deliverable by DWAC (including if the Borrower's transfer agent
has a policy prohibiting
3
or limiting delivery of shares of the Borrower's Common Stock
specified in a Notice of
Conversion), an additional 10% discount will apply for all future conversions
under all Notes. If
in the case that the Borrower's Common Stock is "chilled" for deposit
into the DTC system and
only eligible for clearing deposit, an additional 15% discount
shall apply for all future
conversions under all Notes while the "chill" is in effect. If in
the case of both of the above, an
additional cumulative 25% discount shall apply. Additionally, if the
Company ceases to be a
reporting company pursuant to the 1934 Act or if the Note cannot be
converted into free trading
shares after one hundred eighty-one (181) days from the Issue Date,
an additional 15% discount
will be attributed to the Conversion Price. If the Trading Price
cannot be calculated for such
security on such date in the manner provided above, the Trading Price
shall be the fair market
value as mutually determined by the Borrower and the holders of a
majority in interest of the
Notes being converted for which the calculation of the Trading Price
is required in order to
determine the Conversion Price of such Notes. "Trading Day" shall
mean any day on which the
Common Stock is tradable for any period on the OTCBB, OTCQB or on
the principal securities
exchange or other securities market on which the Common Stock is then
being traded. The
Borrower shall be responsible for the fees of its transfer agent and
all DTC fees associated with
any such issuance.
(b) Conversion Price During Major Announcements.
Notwithstanding
anything contained in Section 1.2(a) to the contrary, in the event the Borrower
(i) makes a public
announcement that it intends to consolidate or merge with any other
corporation (other than a
merger in which the Borrower is the surviving or continuing
corporation and its capital stock is
unchanged) or sell or transfer all or substantially all of the assets
of the Borrower or (ii) any
person, group or entity (including the Borrower) publicly announces a
tender offer to purchase
50% or more of the Borrower's Common Stock (or any other takeover
scheme) (the date of the
announcement referred to in clause (i) or (ii) is hereinafter referred
to as the "Announcement
Date"), then the Conversion Price shall, effective upon the
Announcement Date and continuing
through the Adjusted Conversion Price Termination Date (as defined
below), be equal to the
lower of (x) the Conversion Price which would have been applicable
for a Conversion occurring
on the Announcement Date and (y) the Conversion Price that would otherwise be in
effect. From
and after the Adjusted Conversion Price Termination Date, the
Conversion Price shall be
determined as set forth in this Section 1.2(a). For purposes hereof,
"Adjusted Conversion Price
Termination Date" shall mean, with respect to any proposed transaction
or tender offer (or
takeover scheme) for which a public announcement as contemplated by
this Section 1.2(b) has
been made, the date upon which the Borrower (in the case of clause
(i) above) or the person,
group or entity (in the case of clause (ii) above) consummates or
publicly announces the
termination or abandonment of the proposed transaction or tender offer
(or takeover scheme)
which caused this Section 1.2(b) to become operative.
(c) Pro Rata Conversion; Disputes. In the event of a
dispute as to the
number of shares of Common Stock issuable to the Holder in connection with a
conversion of this
Note, the Borrower shall issue to the Holder the number of shares of
Common Stock not in
dispute and resolve such dispute in accordance with Section 4.13.
1.3 Authorized Shares. The Borrower covenants that
during the period the
conversion right exists, the Borrower will reserve from its authorized
and unissued Common
4
Stock a sufficient number of shares, free from preemptive rights, to
provide for the issuance of
Common Stock upon the full conversion of this Note issued pursuant to the
Purchase Agreement.
The Borrower is required at all times to have authorized and reserved
seven times the number of
shares that is actually issuable upon full conversion of the Note
(based on the Conversion Price
of the Notes in effect from time to time) (the "Reserved Amount").
The Reserved Amount shall
be increased from time to time in accordance with the Borrower's obligations
pursuant to Section
3(d) of the Purchase Agreement. The Borrower represents that upon
issuance, such shares will
be duly and validly issued, fully paid and non-assessable. In addition, if the
Borrower shall issue
any securities or make any change to its capital structure which
would change the number of
shares of Common Stock into which the Notes shall be
convertible at the then current
Conversion Price, the Borrower shall at the same time make proper
provision so that thereafter
there shall be a sufficient number of shares of Common Stock authorized and
reserved, free from
preemptive rights, for conversion of the outstanding Notes. The
Borrower (i) acknowledges that
it has irrevocably instructed its transfer agent to issue certificates for the
Common Stock issuable
upon conversion of this Note, and (ii) agrees that its issuance of
this Note shall constitute full
authority to its officers and agents who are charged with the duty
of executing stock certificates
to execute and issue the necessary certificates for shares of Common
Stock in accordance with
the terms and conditions of this Note. Notwithstanding the foregoing,
in no event shall the
Reserved Amount be lower than the initial Reserved Amount,
regardless of any prior
conversions.
If, at any time the Borrower does not maintain or replenish
the Reserved Amount
within three (3) business days of the request of the Holder, the principal
amount of the Note shall
increase by Five Thousand and No/100 United States Dollars ($5,000)
(under Holder's and
Borrower's expectation that any principal amount increase will tack
back to the Issue Date) per
occurrence.
1.4 Method of Conversion.
(a) Mechanics of Conversion. Subject to Section 1.1,
this Note may be
converted by the Holder in whole or in part at any time from time to time after
the Issue Date, by
(A) submitting to the Borrower a Notice of Conversion (by facsimile,
e-mail or other reasonable
means of communication dispatched on the Conversion Date prior to 5:00 p.m., New
York, New
York time) and (B) subject to Section 1.4(b), surrendering this Note
at the principal office of the
Borrower.
(b) Surrender of Note Upon Conversion. Notwithstanding
anything to the
contrary set forth herein, upon conversion of this Note in accordance
with the terms hereof, the
Holder shall not be required to physically surrender this Note to the
Borrower unless the entire
unpaid principal amount of this Note is so converted. The Holder
and the Borrower shall
maintain records showing the principal amount so converted and the dates of such
conversions or
shall use such other method, reasonably satisfactory to the Holder and the
Borrower, so as not to
require physical surrender of this Note upon each such conversion. In the event
of any dispute or
discrepancy, such records of the Borrower shall, prima facie, be controlling and
determinative in
the absence of manifest error. Notwithstanding the foregoing, if any
portion of this Note is
converted as aforesaid, the Holder may not transfer this Note unless
the Holder first physically
5
surrenders this Note to the Borrower, whereupon the Borrower will
forthwith issue and deliver
upon the order of the Holder a new Note of like tenor, registered as the Holder
(upon payment by
the Holder of any applicable transfer taxes) may request, representing
in the aggregate the
remaining unpaid principal amount of this Note. The Holder and any assignee,
by acceptance of
this Note, acknowledge and agree that, by reason of the provisions of
this paragraph, following
conversion of a portion of this Note, the unpaid and unconverted
principal amount of this Note
represented by this Note may be less than the amount stated on the face hereof.
(c) Payment of Taxes. The Borrower shall not be
required to pay any tax
which may be payable in respect of any transfer involved in the
issue and delivery of shares of
Common Stock or other securities or property on conversion of this
Note in a name other than
that of the Holder (or in street name), and the Borrower shall not
be required to issue or deliver
any such shares or other securities or property unless and until the
person or persons (other than
the Holder or the custodian in whose street name such shares are to
be held for the Holder's
account) requesting the issuance thereof shall have paid to the
Borrower the amount of any such
tax or shall have established to the satisfaction of the Borrower that such tax
has been paid.
(d) Delivery of Common Stock Upon Conversion. Upon
receipt by the
Borrower from the Holder of a facsimile transmission or e-mail (or
other reasonable means of
communication) of a Notice of Conversion meeting the requirements for
conversion as provided
in this Section 1.4, the Borrower shall issue and deliver or cause
to be issued and delivered to or
upon the order of the Holder certificates for the Common Stock
issuable upon such conversion
within three (3) business days after such receipt (the "Deadline")
(and, solely in the case of
conversion of the entire unpaid principal amount hereof, surrender of
this Note) in accordance
with the terms hereof and the Purchase Agreement.
(e) Obligation of Borrower to Deliver Common Stock.
Upon receipt by
the Borrower of a Notice of Conversion, the Holder shall be deemed to be the
holder of record of
the Common Stock issuable upon such conversion, the outstanding
principal amount and the
amount of accrued and unpaid interest on this Note shall be reduced
to reflect such conversion,
and, unless the Borrower defaults on its obligations under this
Article I, all rights with respect to
the portion of this Note being so converted shall forthwith terminate
except the right to receive
the Common Stock or other securities, cash or other assets,
as herein provided, on such
conversion. If the Holder shall have given a Notice of Conversion
as provided herein, the
Borrower's obligation to issue and deliver the certificates for Common
Stock shall be absolute
and unconditional, irrespective of the absence of any action by the
Holder to enforce the same,
any waiver or consent with respect to any provision thereof, the
recovery of any judgment
against any person or any action to enforce the same, any failure or
delay in the enforcement of
any other obligation of the Borrower to the holder of record, or any
setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach
by the Holder of any
obligation to the Borrower, and irrespective of any other circumstance
which might otherwise
limit such obligation of the Borrower to the Holder in connection
with such conversion. The
Conversion Date specified in the Notice of Conversion shall be the
Conversion Date so long as
the Notice of Conversion is received by the Borrower before 5:00
p.m., New York, New York
time, on such date.
6
(f) Delivery of Common Stock by Electronic
Transfer. In lieu of
delivering physical certificates representing the Common Stock
issuable upon conversion,
provided the Borrower is participating in the Depository Trust
Company ("DTC") Fast
Automated Securities Transfer ("FAST") program, upon request of
the Holder and its
compliance with the provisions contained in Section 1.1 and in this
Section 1.4, the Borrower
shall use its commercially reasonable best efforts to cause its
transfer agent to electronically
transmit the Common Stock issuable upon conversion to the Holder by
crediting the account of
Holder's Prime Broker with DTC through its Deposit Withdrawal At
Custodian ("DWAC")
system.
(g) DTC Eligibility & Sub-Penny. If the Borrower fails
to maintain its
status as "DTC Eligible" for any reason, or, if the Conversion Price
is less than $0.01, the
principal amount of the Note shall increase by Fifteen Thousand and
No/100 United States
Dollars ($15,000) (under Holder's and Borrower's expectation that
any principal amount
increase will tack back to the Issue Date). In addition, the
Variable Conversion Price shall be
redefined to mean forty percent (40%) multiplied by the Market Price,
subject to adjustment as
provided in this Note.
(h) Failure to Deliver Common Stock Prior to
Delivery Deadline.
Without in any way limiting the Holder's right to pursue other
remedies, including actual
damages and/or equitable relief, the parties agree that if delivery of
the Common Stock issuable
upon conversion of this Note is not delivered by the Deadline (other
than a failure due to the
circumstances described in Section 1.3 above, which failure shall be
governed by such Section)
the Borrower shall pay to the Holder $2,000 per day in cash, for
each day beyond the Deadline
that the Borrower fails to deliver such Common Stock until the
Borrower issues and delivers a
certificate to the Holder or credit the Holder's balance account with
OTC for the number of
shares of Common Stock to which the Holder is entitled upon such
Holder's conversion of any
Conversion Amount (under Holder's and Borrower's expectation that any damages
will tack back
to the Issue Date).. Such cash amount shall be paid to Holder by
the fifth day of the month
following the month in which it has accrued or, at the option of
the Holder (by written notice to
the Borrower by the first day of the month following the month in which it has
accrued), shall be
added to the principal amount of this Note, in which event interest
shall accrue thereon in
accordance with the terms of this Note and such additional principal
amount shall be convertible
into Common Stock in accordance with the terms of this Note. The
Borrower agrees that the
right to convert is a valuable right to the Holder. The damages
resulting from a failure, attempt
to frustrate, interference with such conversion right are difficult if
not impossible to qualify.
Accordingly the parties acknowledge that the liquidated damages
provision contained in this
Section 1.4(h) are justified.
(i) Rescindment of a Notice of Conversion. If (i)
the Borrower fails
to respond to Holder within one (1) business day from the Conversion
Date confirming the
details of Notice of Conversion, (ii) the Borrower fails to provide
any of the shares of the
Borrower's Common Stock requested in the Notice of Conversion within three (3)
business days
from the date of receipt of the Note of Conversion, (iii) the Holder
is unable to procure a legal
opinion required to have the shares of the Borrower's Common Stock
issued unrestricted and/or
deposited to sell for any reason related to the Borrower's standing,
(iv) the Holder is unable to
7
deposit the shares of the Borrower's Common Stock requested in the
Notice of Conversion for
any reason related to the Borrower's standing, (v) at any time after
a missed Deadline, at the
Holder's sole discretion, or (vi) if OTC Markets changes the
Borrower's designation to `Limited
Information' (Yield), `No Information' (Stop Sign), `Caveat Emptor'
(Skull & Crossbones),
`OTC', `Other OTC' or `Grey Market' (Exclamation Mark Sign) or other
trading restriction on
the day of or any day after the Conversion Date, the Holder
maintains the option and sole
discretion to rescind the Notice of Conversion ("Rescindment") with a "Notice of
Rescindment."
1.5 Concerning the Shares. The shares of Common
Stock issuable upon
conversion of this Note may not be sold or transferred unless (i) such shares
are sold pursuant to
an effective registration statement under the Act or (ii) the Borrower
or its transfer agent shall
have been furnished with an opinion of counsel (which opinion shall
be in form, substance and
scope customary for opinions of counsel in comparable transactions) to
the effect that the shares
to be sold or transferred may be sold or transferred pursuant to an
exemption from such
registration or (iii) such shares are sold or transferred pursuant to
Rule 144 under the Act (or a
successor rule) ("Rule 144") or (iv) such shares are transferred to
an "affiliate" (as defined in
Rule 144) of the Borrower who agrees to sell or otherwise transfer the
shares only in accordance
with this Section 1.5 and who is an Accredited Investor (as defined
in the Purchase Agreement).
Except as otherwise provided in the Purchase Agreement (and subject to
the removal provisions
set forth below), until such time as the shares of Common Stock issuable upon
conversion of this
Note have been registered under the Act or otherwise may be sold
pursuant to Rule 144 without
any restriction as to the number of securities as of a particular
date that can then be immediately
sold, each certificate for shares of Common Stock issuable upon conversion of
this Note that has
not been so included in an effective registration statement or that
has not been sold pursuant to
an effective registration statement or an exemption that permits removal of the
legend, shall bear
a legend substantially in the following form, as appropriate:
"NEITHER THE ISSUANCE AND SALE OF THE
SECURITIES
REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO
WHICH THESE SECURITIES ARE EXERCISABLE HAVE
BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE
OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN
THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B)
AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY
THE HOLDER), IN A GENERALLY ACCEPTABLE FORM,
THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II)
UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES."
The legend set forth above shall be removed and the
Borrower shall issue to the
Holder a new certificate therefore free of any transfer legend if (i)
the Borrower or its transfer
agent shall have received an opinion of counsel, in form, substance
and scope customary for
opinions of counsel in comparable transactions, to the effect that a public sale
or transfer of such
8
Common Stock may be made without registration under the Act,
which opinion shall be
reasonably accepted by the Borrower so that the sale or transfer is
effected or (ii) in the case of
the Common Stock issuable upon conversion of this Note, such security
is registered for sale by
the Holder under an effective registration statement filed under the Act or
otherwise may be sold
pursuant to Rule 144 without any restriction as to the number of
securities as of a particular date
that can then be immediately sold. In the event that the Borrower
does not accept the opinion of
counsel provided by the Buyer with respect to the transfer of Securities
pursuant to an exemption
from registration, such as Rule 144 or Regulation S, at the Deadline,
it will be considered an
Event of Default pursuant to Section 3.2 of the Note.
1.6 Effect of Certain Events.
(a) Effect of Merger, Consolidation, Etc. At the
option of the Holder, the
sale, conveyance or disposition of all or substantially all of the
assets of the Borrower, the
effectuation by the Borrower of a transaction or series of related transactions
in which more than
50% of the voting power of the Borrower is disposed of, or the
consolidation, merger or other
business combination of the Borrower with or into any other Person
(as defined below) or
Persons when the Borrower is not the survivor shall either: (i) be
deemed to be an Event of
Default (as defined in Article III) pursuant to which the Borrower
shall be required to pay to the
Holder upon the consummation of and as a condition to such
transaction an amount equal to the
Default Amount (as defined in Article III) or (ii) be treated
pursuant to Section 1.6(b) hereof.
"Person" shall mean any individual, corporation, limited liability
company, partnership,
association, trust or other entity or organization.
(b) Adjustment Due to Merger, Consolidation, Etc. If,
at any time when
this Note is issued and outstanding and prior to conversion of all
of the Notes, there shall be any
merger, consolidation, exchange of shares, recapitalization,
reorganization, or other similar
event, as a result of which shares of Common Stock of the Borrower
shall be changed into the
same or a different number of shares of another class or classes of
stock or securities of the
Borrower or another entity, or in case of any sale or conveyance of
all or substantially all of the
assets of the Borrower other than in connection with a plan of
complete liquidation of the
Borrower, then the Holder of this Note shall thereafter have the
right to receive upon conversion
of this Note, upon the basis and upon the terms and conditions specified herein
and in lieu of the
shares of Common Stock immediately theretofore issuable upon
conversion, such stock,
securities or assets which the Holder would have been entitled to
receive in such transaction had
this Note been converted in full immediately prior to such transaction
(without regard to any
limitations on conversion set forth herein), and in any such case
appropriate provisions shall be
made with respect to the rights and interests of the Holder of this
Note to the end that the
provisions hereof (including, without limitation, provisions for
adjustment of the Conversion
Price and of the number of shares issuable upon conversion of the
Note) shall thereafter be
applicable, as nearly as may be practicable in relation to any
securities or assets thereafter
deliverable upon the conversion hereof. The Borrower shall not affect
any transaction described
in this Section 1.6(b) unless (a) it first gives, to the extent
practicable, thirty (30) days prior
written notice (but in any event at least fifteen (15) days prior
written notice) of the record date
of the special meeting of shareholders to approve, or if there is no
such record date, the
consummation of, such merger, consolidation, exchange of
shares, recapitalization,
9
reorganization or other similar event or sale of assets (during which
time the Holder shall be
entitled to convert this Note) and (b) the resulting successor or
acquiring entity (if not the
Borrower) assumes by written instrument the obligations of this Section
1.6(b). The above
provisions shall similarly apply to successive consolidations, mergers,
sales, transfers or share
exchanges.
(c) Adjustment Due to Distribution. If the Borrower shall
declare or make
any distribution of its assets (or rights to acquire its assets) to
holders of Common Stock as a
dividend, stock repurchase, by way of return of capital or otherwise
(including any dividend or
distribution to the Borrower's shareholders in cash or shares (or
rights to acquire shares) of
capital stock of a subsidiary (i.e., a spin-off)) (a "Distribution"),
then the Holder of this Note
shall be entitled, upon any conversion of this Note after the date
of record for determining
shareholders entitled to such Distribution, to receive the amount of such assets
which would have
been payable to the Holder with respect to the shares of Common
Stock issuable upon such
conversion had such Holder been the holder of such shares of Common
Stock on the record date
for the determination of shareholders entitled to such Distribution.
(d) Adjustment Due to Dilutive Issuance. If, at any
time when any Notes
are issued and outstanding, the Borrower issues or sells, or in accordance with
this Section 1.6(d)
hereof is deemed to have issued or sold, except for shares of Common
Stock issued directly to
vendors or suppliers of the Borrower in satisfaction of amounts owed
to such vendors or
suppliers (provided, however, that such vendors or suppliers shall not
have an arrangement to
transfer, sell or assign such shares of Common Stock prior to the
issuance of such shares), any
shares of Common Stock for no consideration or for a consideration
per share (before deduction
of reasonable expenses or commissions or underwriting discounts or
allowances in connection
therewith) less than the Conversion Price in effect on the date of
such issuance (or deemed
issuance) of such shares of Common Stock (a "Dilutive Issuance"), then
immediately upon the
Dilutive Issuance, the Conversion Price will be reduced to the amount
of the consideration per
share received by the Borrower in such Dilutive Issuance.
The Borrower shall be deemed to have issued or sold
shares of Common
Stock if the Borrower in any manner issues or grants any warrants,
rights or options (not
including employee stock option plans), whether or not immediately exercisable,
to subscribe for
or to purchase Common Stock or other securities convertible into or
exchangeable for Common
Stock ("Convertible Securities") (such warrants, rights and options to
purchase Common Stock
or Convertible Securities are hereinafter referred to as "Options") and
the price per share for
which Common Stock is issuable upon the exercise of such Options is
less than the Conversion
Price then in effect, then the Conversion Price shall be equal to
such price per share. For
purposes of the preceding sentence, the "price per share for which
Common Stock is issuable
upon the exercise of such Options" is determined by dividing (i) the
total amount, if any,
received or receivable by the Borrower as consideration for the
issuance or granting of all such
Options, plus the minimum aggregate amount of additional consideration,
if any, payable to the
Borrower upon the exercise of all such Options, plus, in the case of
Convertible Securities
issuable upon the exercise of such Options, the minimum
aggregate amount of additional
consideration payable upon the conversion or exchange thereof at the
time such Convertible
Securities first become convertible or exchangeable, by (ii) the
maximum total number of shares
10
of Common Stock issuable upon the exercise of all such Options
(assuming full conversion of
Convertible Securities, if applicable). No further adjustment to the
Conversion Price will be
made upon the actual issuance of such Common Stock upon the exercise of such
Options or upon
the conversion or exchange of Convertible Securities issuable upon exercise of
such Options.
Additionally, the Borrower shall be deemed to have
issued or sold shares
of Common Stock if the Borrower in any manner issues or sells any
Convertible Securities,
whether or not immediately convertible (other than where the same are
issuable upon the
exercise of Options), and the price per share for which Common Stock
is issuable upon such
conversion or exchange is less than the Conversion Price then in
effect, then the Conversion
Price shall be equal to such price per share. For the purposes of
the preceding sentence, the
"price per share for which Common Stock is issuable upon such
conversion or exchange" is
determined by dividing (i) the total amount, if any, received or
receivable by the Borrower as
consideration for the issuance or sale of all such Convertible
Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to
the Borrower upon the
conversion or exchange thereof at the time such Convertible Securities
first become convertible
or exchangeable, by (ii) the maximum total number of shares of Common
Stock issuable upon
the conversion or exchange of all such Convertible Securities. No
further adjustment to the
Conversion Price will be made upon the actual issuance of such Common Stock upon
conversion
or exchange of such Convertible Securities.
(e) Purchase Rights. If, at any time when any Notes
are issued and
outstanding, the Borrower issues any convertible securities or rights
to purchase stock, warrants,
securities or other property (the "Purchase Rights") pro rata to the
record holders of any class of
Common Stock, then the Holder of this Note will be entitled
to acquire, upon the terms
applicable to such Purchase Rights, the aggregate Purchase Rights which such
Holder could have
acquired if such Holder had held the number of shares of Common
Stock acquirable upon
complete conversion of this Note (without regard to any limitations on
conversion contained
herein) immediately before the date on which a record is taken for
the grant, issuance or sale of
such Purchase Rights or, if no such record is taken, the date as of
which the record holders of
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights.
(f) Notice of Adjustments. Upon the occurrence of
each adjustment or
readjustment of the Conversion Price as a result of the events
described in this Section 1.6, the
Borrower, at its expense, shall promptly compute such adjustment or
readjustment and prepare
and furnish to the Holder a certificate setting forth such adjustment or
readjustment and showing
in detail the facts upon which such adjustment or readjustment is
based. The Borrower shall,
upon the written request at any time of the Holder, furnish to such
Holder a like certificate
setting forth (i) such adjustment or readjustment, (ii) the Conversion
Price at the time in effect
and (iii) the number of shares of Common Stock and the amount, if
any, of other securities or
property which at the time would be received upon conversion of the Note.
1.7 Trading Market Limitations. Unless permitted by the
applicable rules and
regulations of the principal securities market on which the Common
Stock is then listed or
traded, in no event shall the Borrower issue upon conversion of or
otherwise pursuant to this
Note and the other Notes issued pursuant to the Purchase Agreement
more than the maximum
11
number of shares of Common Stock that the Borrower can issue pursuant
to any rule of the
principal United States securities market on which the Common Stock is
then traded (the
"Maximum Share Amount"), which shall be 4.99% of the total shares outstanding on
the Closing
Date (as defined in the Purchase Agreement), subject to equitable
adjustment from time to time
for stock splits, stock dividends, combinations, capital reorganizations and
similar events relating
to the Common Stock occurring after the date hereof. Once the
Maximum Share Amount has
been issued, if the Borrower fails to eliminate any prohibitions under
applicable law or the rules
or regulations of any stock exchange, interdealer quotation system or
other self-regulatory
organization with jurisdiction over the Borrower or any of its securities on the
Borrower's ability
to issue shares of Common Stock in excess of the Maximum Share
Amount, in lieu of any
further right to convert this Note, this will be considered an Event
of Default under Section 3.2
of the Note.
1.8 Status as Shareholder. Upon submission of a Notice of
Conversion by a
Holder, (i) the shares covered thereby (other than the shares, if
any, which cannot be issued
because their issuance would exceed such Holder's allocated portion of
the Reserved Amount or
Maximum Share Amount) shall be deemed converted into shares of Common
Stock and (ii) the
Holder's rights as a Holder of such converted portion of this Note
shall cease and terminate,
excepting only the right to receive certificates for such shares of
Common Stock and to any
remedies provided herein or otherwise available at law or in equity
to such Holder because of a
failure by the Borrower to comply with the terms of this Note.
Notwithstanding the foregoing,
if a Holder has not received certificates for all shares of Common
Stock prior to the tenth (10th)
business day after the expiration of the Deadline with respect to a
conversion of any portion of
this Note for any reason, then (unless the Holder otherwise elects to
retain its status as a holder
of Common Stock by so notifying the Borrower) the Holder shall regain the rights
of a Holder of
this Note with respect to such unconverted portions of this Note and
the Borrower shall, as soon
as practicable, return such unconverted Note to the Holder or,
if the Note has not been
surrendered, adjust its records to reflect that such portion of this Note has
not been converted. In
all cases, the Holder shall retain all of its rights and remedies
(including, without limitation, (i)
the right to receive Conversion Default Payments pursuant to Section
1.3 to the extent required
thereby for such Conversion Default and any subsequent Conversion
Default and (ii) the right to
have the Conversion Price with respect to subsequent conversions determined in
accordance with
Section 1.3) for the Borrower's failure to convert this Note.
1.9 Prepayment. Notwithstanding anything to the contrary contained
in this Note,
the Borrower may prepay the amounts outstanding hereunder pursuant to
the following terms
and conditions:
(a) At any time during the period beginning on the
Issue Date and ending
on the date which is ninety (90) days following the Issue Date, the Borrower
shall have the right,
exercisable on not less than three (3) Trading Days prior written notice to the
Holder of the Note
to prepay the outstanding Note (principal and accrued interest), in
full by making a payment to
the Holder of an amount in cash equal to 125%, multiplied by the
sum of: (w) the then
outstanding principal amount of this Note plus (x) accrued and unpaid
interest on the unpaid
principal amount of this Note plus (y) Default Interest, if any.
12
(b) At any time during the period beginning the day
which is ninety one
(91) days following the Issue Date and ending on the date which is
one hundred eighty (180)
days following the Issue Date, the Borrower shall have the right,
exercisable on not less than
three (3) Trading Days prior written notice to the Holder of the
Note to prepay the outstanding
Note (principal and accrued interest), in full by making a payment to
the Holder of an amount in
cash equal to 135%, multiplied by the sum of: (w) the then
outstanding principal amount of this
Note plus (x) accrued and unpaid interest on the unpaid principal
amount of this Note plus (y)
Default Interest, if any.
(c) After the expiration of one hundred eighty (180)
days following the
date of the Note, the Borrower shall have no right of prepayment.
Any notice of prepayment hereunder (an "Optional Prepayment Notice") shall be
delivered to the
Holder of the Note at its registered addresses and shall state: (1)
that the Borrower is exercising
its right to prepay the Note, and (2) the date of prepayment which
shall be not more than three
(3) Trading Days from the date of the Optional Prepayment Notice.
On the date fixed for
prepayment (the "Optional Prepayment Date"), the Borrower shall
make payment of the
applicable prepayment amount to or upon the order of the Holder as
specified by the Holder in
writing to the Borrower at least one (1) business day prior to the
Optional Prepayment Date. If
the Borrower delivers an Optional Prepayment Notice and fails to pay the
applicable prepayment
amount due to the Holder of the Note within two (2) business days
following the Optional
Prepayment Date, the Borrower shall forever forfeit its right to
prepay the Note pursuant to this
Section 1.9.
ARTICLE II. CERTAIN COVENANTS
2.1 Distributions on Capital Stock. So long as the Borrower
shall have any
obligation under this Note, the Borrower shall not without the
Holder's written consent (a) pay,
declare or set apart for such payment, any dividend or other
distribution (whether in cash,
property or other securities) on shares of capital stock other than dividends on
shares of Common
Stock solely in the form of additional shares of Common Stock or (b)
directly or indirectly or
through any subsidiary make any other payment or distribution in
respect of its capital stock
except for distributions pursuant to any shareholders' rights plan which is
approved by a majority
of the Borrower's disinterested directors.
2.2 Restriction on Stock Repurchases. So long as the
Borrower shall have any
obligation under this Note, the Borrower shall not without the
Holder's written consent redeem,
repurchase or otherwise acquire (whether for cash or in exchange for
property or other securities
or otherwise) in any one transaction or series of related transactions any
shares of capital stock of
the Borrower or any warrants, rights or options to purchase or acquire any such
shares.
2.3 Borrowings. So long as the Borrower shall have any
obligation under this
Note, the Borrower shall not, without the Holder's written
consent, create, incur, assume
guarantee, endorse, contingently agree to purchase or otherwise
become liable upon the
obligation of any person, firm, partnership, joint venture or
corporation, except by the
endorsement of negotiable instruments for deposit or collection, or suffer to
exist any liability for
borrowed money, except (a) borrowings in existence or committed on the
date hereof and of
13
which the Borrower has informed Holder in writing prior to the date
hereof, (b) indebtedness to
trade creditors financial institutions or other lenders incurred in the
ordinary course of business
or (c) borrowings, the proceeds of which shall be used to repay this Note.
2.4 Sale of Assets. So long as the Borrower shall have any
obligation under this
Note, the Borrower shall not, without the Holder's written consent,
sell, lease or otherwise
dispose of any significant portion of its assets outside the ordinary
course of business. Any
consent to the disposition of any assets may be conditioned on a
specified use of the proceeds of
disposition.
2.5 Advances and Loans. So long as the Borrower shall have
any obligation
under this Note, the Borrower shall not, without the Holder's written
consent, lend money, give
credit or make advances to any person, firm, joint venture or
corporation, including, without
limitation, officers, directors, employees, subsidiaries and affiliates
of the Borrower, except
loans, credits or advances (a) in existence or committed on the date
hereof and which the
Borrower has informed Holder in writing prior to the date hereof, (b)
made in the ordinary
course of business or (c) not in excess of $100,000.
2.6 Section 3(a)(9) or 3(a)(10) Transaction. So long as this
Note is outstanding,
the Borrower shall not enter into any transaction or arrangement
structured in accordance with,
based upon, or related or pursuant to, in whole or in part, either
Section 3(a)(9) of the Securities
Act (a "3(a)(9) Transaction") or Section 3(a)(l0) of the Securities
Act (a "3(a)(l0) Transaction").
In the event that the Borrower does enter into, or makes any
issuance of Common Stock related
to a 3(a)(9) Transaction or a 3(a)(l0) Transaction while this note is
outstanding, a liquidated
damages charge of 25% of the outstanding principal balance of this
Note, but not less than
Fifteen Thousand Dollars $15,000, will be assessed and will become
immediately due and
payable to the Holder at its election in the form of cash payment or addition to
the balance of this
Note.
2.7 Preservation of Existence, etc. The Borrower shall
maintain and preserve, and
cause each of its Subsidiaries to maintain and preserve, its
existence, rights and privileges, and
become or remain, and cause each of its Subsidiaries (other than
dormant Subsidiaries that have
no or minimum assets) to become or remain, duly qualified and in
good standing in each
jurisdiction in which the character of the properties owned or leased
by it or in which the
transaction of its business makes such qualification necessary.
2.8 Non-circumvention. The Borrower hereby covenants and
agrees that the
Borrower will not, by amendment of its Certificate or Articles of
Incorporation or Bylaws, or
through any reorganization, transfer of assets, consolidation, merger,
scheme of arrangement,
dissolution, issue or sale of securities, or any other voluntary
action, avoid or seek to avoid the
observance or performance of any of the terms of this Note, and will
at all times in good faith
carry out all the provisions of this Note and take all action as
may be required to protect the
rights of the Holder.
ARTICLE III. EVENTS OF DEFAULT
14
If any of the following events of default (each, an "Event of
Default") shall occur:
3.1 Failure to Pay Principal or Interest. The Borrower fails
to pay the principal
hereof or interest thereon when due on this Note, whether at
maturity, upon acceleration or
otherwise.
3.2 Conversion and the Shares. The Borrower fails to issue
shares of Common
Stock to the Holder (or announces or threatens in writing that it
will not honor its obligation to
do so) upon exercise by the Holder of the conversion rights of the
Holder in accordance with the
terms of this Note, fails to transfer or cause its transfer agent to
transfer (issue) (electronically or
in certificated form) any certificate for shares of Common Stock
issued to the Holder upon
conversion of or otherwise pursuant to this Note as and when required
by this Note, the
Borrower directs its transfer agent not to transfer or delays,
impairs, and/or hinders its transfer
agent in transferring (or issuing) (electronically or in certificated
form) any certificate for shares
of Common Stock to be issued to the Holder upon conversion of or
otherwise pursuant to this
Note as and when required by this Note, or fails to remove (or
directs its transfer agent not to
remove or impairs, delays, and/or hinders its transfer agent from
removing) any restrictive
legend (or to withdraw any stop transfer instructions in respect thereof) on any
certificate for any
shares of Common Stock issued to the Holder upon conversion of or
otherwise pursuant to this
Note as and when required by this Note (or makes any written announcement,
statement or threat
that it does not intend to honor the obligations described in this
paragraph) and any such failure
shall continue uncured (or any written announcement, statement or
threat not to honor its
obligations shall not be rescinded in writing) for three (3) business
days after the Holder shall
have delivered a Notice of Conversion. It is an obligation of the
Borrower to remain current in
its obligations to its transfer agent. It shall be an event of
default of this Note, if a conversion of
this Note is delayed, hindered or frustrated due to a balance owed
by the Borrower to its transfer
agent. If at the option of the Holder, the Holder advances any funds
to the Borrower's transfer
agent in order to process a conversion, such advanced funds shall be paid by the
Borrower to the
Holder within forty eight (48) hours of a demand from the Holder.
3.3 Failure to Deliver Transaction Expense Amount. The
Borrower fails to
deliver the Transaction Expense Amount (as defined in the Purchase
Agreement) to the Holder
within three (3) business days of the date such amount is due.
3.4 Breach of Covenants. The Borrower breaches any material
covenant or other
material term or condition contained in this Note and any collateral
documents including but not
limited to the Purchase Agreement and such breach continues for a
period of ten (10) days after
written notice thereof to the Borrower from the Holder.
3.5 Breach of Representations and Warranties. Any
representation or warranty of
the Borrower made herein or in any agreement, statement or certificate given in
writing pursuant
hereto or in connection herewith (including, without limitation, the
Purchase Agreement), shall
be false or misleading in any material respect when made and the
breach of which has (or with
the passage of time will have) a material adverse effect on the rights of the
Holder with respect to
this Note or the Purchase Agreement.
15
3.6 Receiver or Trustee. The Borrower or any subsidiary of
the Borrower shall
make an assignment for the benefit of creditors or commence
proceedings for its dissolution, or
apply for or consent to the appointment of a receiver or trustee for
it or for a substantial part of
its property or business, or such a receiver or trustee shall
otherwise be appointed for the
Borrower or for a substantial part of its property or business
without its consent and shall not be
discharged within sixty (60) days after such appointment.
3.7 Judgments. Any money judgment, writ or similar process
shall be entered or
filed against the Borrower or any subsidiary of the Borrower or any of its
property or other assets
for more than $50,000, and shall remain unvacated, unbonded or unstayed for a
period of twenty
(20) days unless otherwise consented to by the Holder, which consent
will not be unreasonably
withheld.
3.8 Bankruptcy. Bankruptcy, insolvency, reorganization or
liquidation
proceedings or other proceedings, voluntary or involuntary, for relief
under any bankruptcy law
or any law for the relief of debtors shall be instituted by or
against the Borrower or any
subsidiary of the Borrower, or the Borrower admits in writing its
inability to pay its debts
generally as they mature, or have filed against it an involuntary petition for
bankruptcy relief, all
under federal or state laws as applicable or the Borrower admits in
writing its inability to pay its
debts generally as they mature, or have filed against it an
involuntary petition for bankruptcy
relief, all under international, federal or state laws as applicable.
3.9 Delisting of Common Stock. The Borrower shall fail to maintain
the listing of
the Common Stock on at least one of the OTCBB, a tier of the OTC
Markets Group Inc. or an
equivalent replacement exchange, the Nasdaq National Market, the Nasdaq
Small Cap Market,
the New York Stock Exchange, or the NYSE MKT.
3.10 Failure to Comply with the Exchange Act. The
Borrower shall fail to
comply with the reporting requirements of the Exchange Act; and/or the
Borrower shall cease to
be subject to the reporting requirements of the Exchange Act.
3.11 Liquidation. Any dissolution, liquidation, or
winding up of Borrower or
any substantial portion of its business.
3.12 Cessation of Operations. Any cessation of operations
by Borrower or
Borrower admits it is otherwise generally unable to pay its debts as
such debts become due,
provided, however, that any disclosure of the Borrower's ability to continue as
a "going concern"
shall not be an admission that the Borrower cannot pay its debts as they become
due.
3.13 Maintenance of Assets. The failure by Borrower to
maintain any material
intellectual property rights, personal, real property or other assets which are
necessary to conduct
its business (whether now or in the future).
3.14 Financial Statement Restatement.The restatement of any
financial
statements filed by the Borrower with the SEC for any date or period from two
years prior to the
Issue Date of this Note and until this Note is no longer
outstanding, if the result of such
16
restatement would, by comparison to the unrestated financial statement,
have constituted a
material adverse effect on the rights of the Holder with respect to
this Note or the Purchase
Agreement.
3.15 Reverse Splits. The Borrower effectuates a reverse
split of its Common
Stock without twenty (20) days prior written notice to the Holder.
3.16 Replacement of Transfer Agent. In the event that the
Borrower proposes to
replace its transfer agent, the Borrower fails to provide, prior to
the effective date of such
replacement, a fully executed Irrevocable Transfer Agent Instructions in
a form as initially
delivered pursuant to the Purchase Agreement (including but not limited
to the provision to
irrevocably reserve shares of Common Stock in the Reserved Amount)
signed by the successor
transfer agent to Borrower and the Borrower.
3.17 Cessation of Trading. Any cessation of trading of
the Common Stock on
at least one of the OTCBB, a tier of the OTC Markets Group Inc. or
an equivalent replacement
exchange, the Nasdaq National Market, the Nasdaq Small Cap Market, the
New York Stock
Exchange, or the NYSE MKT, and such cessation of trading shall
continue for a period of five
consecutive (5) Trading Days.
3.18 Cross-Default. Notwithstanding anything to the
contrary contained in this
Note or the other related or companion documents, a breach or default
by the Borrower of any
covenant or other term or condition contained in any of the Other
Agreements, after the passage
of all applicable notice and cure or grace periods, shall, at the option of the
Holder, be considered
a default under this Note and the Other Agreements, in which event
the Holder shall be entitled
(but in no event required) to apply all rights and remedies of the
Holder under the terms of this
Note and the Other Agreements by reason of a default under
said Other Agreement or
hereunder. "Other Agreements" means, collectively, all agreements and
instruments between,
among or by: (1) the Borrower, and, or for the benefit of, (2) the
Holder and any affiliate of the
Holder, including, without limitation, promissory notes; provided,
however, the term "Other
Agreements" shall not include the agreements and instruments defined as
the Documents. Each
of the loan transactions will be cross-defaulted with each other loan
transaction and with all other
existing and future debt of Borrower to the Holder.
3.19 Bid Price. The Borrower shall lose the "bid" price
for its Common Stock
($0.0001 on the "Ask" with zero market makers on the "Bid" per Level
2) and/or a market
(including the OTCBB, any tier of the OTC Markets Group Inc. or an
equivalent replacement
exchange).
3.20 OTC Markets Designation. OTC Markets changes
the Borrower's
designation to `No Information' (Stop Sign), `Limited Information'
(Yield Sign), `Caveat
Emptor' (Skull and Crossbones), or `OTC', `Other OTC' or `Grey Market'
(Exclamation Mark
Sign).
Upon the occurrence and during the continuation of any Event of Default
specified in Section 3.1
(solely with respect to failure to pay the principal hereof or
interest thereon when due at the
Maturity Date), the Note shall become immediately due and payable and
the Borrower shall pay
17
to the Holder, in full satisfaction of its obligations hereunder, an
amount equal to the Default
Sum (as defined herein). UPON THE OCCURRENCE AND DURING THE CONTINUATION
OF ANY EVENT OF DEFAULT SPECIFIED IN SECTION 3.2, THE NOTE
SHALL
BECOME IMMEDIATELY DUE AND PAYABLE AND THE BORROWER SHALL PAY TO
THE HOLDER, IN FULL SATISFACTION OF ITS OBLIGATIONS HEREUNDER,
AN
AMOUNT EQUAL TO: (Y) THE DEFAULT SUM (AS DEFINED HEREIN); MULTIPLIED
BY (Z) TWO (2). Upon the occurrence and during the continuation of
any Event of Default
specified in Sections 3.1 (solely with respect to failure to pay the
principal hereof or interest
thereon when due on this Note upon acceleration), 3.3, 3.4, 3.6, 3.8,
3.9, 3.11, 3.12, 3.13, 3.14,
3.15, 3.16. 3.17, 3.18, 3.19 and/or 3.20 exercisable through the
delivery of written notice to the
Borrower by such Holders (the "Default Notice"), and upon the
occurrence of an Event of
Default specified the remaining sections of Article III (other than
failure to pay the principal
hereof or interest thereon at the Maturity Date specified in Section
3,1 hereof), the Note shall
become immediately due and payable and the Borrower shall pay
to the Holder, in full
satisfaction of its obligations hereunder, an amount equal to (i) 130%
times the sum of (w) the
then outstanding principal amount of this Note plus (x) accrued and unpaid
interest on the unpaid
principal amount of this Note to the date of payment (the "Mandatory
Prepayment Date") plus
(y) Default Interest, if any, on the amounts referred to in clauses
(w) and/or (x) plus (z) any
amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof
(the then outstanding
principal amount of this Note to the date of payment plus the
amounts referred to in clauses (x),
(y) and (z) shall collectively be known as the "Default Sum") or
(ii) at the option of the Holder,
the "parity value" of the Default Sum to be prepaid, where parity
value means (a) the highest
number of shares of Common Stock issuable upon conversion of or
otherwise pursuant to such
Default Sum in accordance with Article I, treating the Trading Day
immediately preceding the
Mandatory Prepayment Date as the "Conversion Date" for purposes of
determining the lowest
applicable Conversion Price, unless the Default Event arises as a result of a
breach in respect of a
specific Conversion Date in which case such Conversion Date shall be
the Conversion Date),
multiplied by (b) the highest Trading Price for the Common Stock
during the period beginning
on the date of first occurrence of the Event of Default and ending one day prior
to the Mandatory
Prepayment Date (the "Default Amount") and all other amounts
payable hereunder shall
immediately become due and payable, all without demand, presentment or
notice, all of which
hereby are expressly waived, together with all costs, including,
without limitation, legal fees and
expenses, of collection, and the Holder shall be entitled to exercise
all other rights and remedies
available at law or in equity. Further, if a breach of Sections
3.9, 3.10 and/or 3.19 occurs or is
continuing after the six (6) month anniversary of this Note, then the principal
amount of the Note
shall increase by Fifteen Thousand and No/100 United States Dollars
($15,000) (under Holder's
and Borrower's expectation that any principal amount increase will tack
back to the Issue Date)
and the Holder shall be entitled to use the lowest Trading Price
during the delinquency period as
a base price for the conversion with the Variable Conversion Price
shall be redefined to mean
forty percent (40%) multiplied by the Market Price, subject to
adjustment as provided in this
Note. For example, if the lowest Trading Price during the delinquency
period is $0.01 per share
and the conversion discount is 50%, then the Holder may elect to
convert future conversions at
$0.005 per share. If this Note is not paid at Maturity Date, then
the outstanding principal due
under this Note shall increase by Fifteen Thousand and No/100 United States
Dollars ($15,000).
18
If the Borrower fails to pay the Default Amount within five (5)
business days of written notice
that such amount is due and payable, then the Holder shall have the
right at any time, so long as
the Borrower remains in default (and so long and to the extent that there are
sufficient authorized
shares), to require the Borrower, upon written notice, to immediately issue, in
lieu of the Default
Amount, the number of shares of Common Stock of the Borrower equal
to the Default Amount
divided by the Conversion Price then in effect. This
requirement by the Borrower shall
automatically apply upon the occurrence of an Event of Default without the need
for any party to
give any notice or take any other action.
If the Holder shall commence an action or proceeding to enforce any
provisions of this Note,
including, without limitation, engaging an attorney, then if the Holder prevails
in such action, the
Holder shall be reimbursed by the Borrower for its attorneys' fees
and other costs and expenses
incurred in the investigation, preparation and prosecution of such action or
proceeding.
ARTICLE IV. MISCELLANEOUS
4.1 Failure or Indulgence Not Waiver. No failure or delay
on the part of the
Holder in the exercise of any power, right or privilege hereunder
shall operate as a waiver
thereof, nor shall any single or partial exercise of any such power,
right or privilege preclude
other or further exercise thereof or of any other right, power or
privileges. All rights and
remedies existing hereunder are cumulative to, and not exclusive of,
any rights or remedies
otherwise available.
4.2 Notices. All notices, demands, requests, consents,
approvals, and other
communications required or permitted hereunder shall be in
writing and, unless otherwise
specified herein, shall be (i) personally served, (ii) deposited in
the mail, registered or certified,
return receipt requested, postage prepaid, (iii) delivered by reputable
air courier service with
charges prepaid, or (iv) transmitted by hand delivery, telegram, or
facsimile, addressed as set
forth below or to such other address as such party shall have
specified most recently by written
notice. Any notice or other communication required or permitted to be
given hereunder shall be
deemed effective (a) upon hand delivery or delivery by facsimile, with
accurate confirmation
generated by the transmitting facsimile machine, at the address or
number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or
the first business day following such delivery (if delivered other
than on a business day during
normal business hours where such notice is to be received) or (b) on
the second business day
following the date of mailing by express courier service, fully
prepaid, addressed to such
address, or upon actual receipt of such mailing, whichever shall first
occur. The addresses for
such communications shall be:
If to the Borrower, to:
Clean Energy Technologies, Inc.
2990 Redhill Avenue
Costa Mesa, CA 92626
Attn: John Bennett, CFO
E-mail: jbennett@cetyinc.com
19
With a copy to (which copy shall not constitute notice):
Law Office of Andrew Coldicutt
1220 Rosecrans Street, PMB 258
San Diego, CA 92106
Attn: Andrew Coldicutt, Esq.
E-mail: andrew@coldicuttlaw.com
If to the Holder:
Auctus Fund, LLC
101 Arch Street, 20th Floor
Boston, MA 02110
Attn: Lou Posner
Facsimile: (617) 532-6420
With a copy to (which copy shall not constitute notice):
Lucosky Brookman LLP
101 Wood Avenue South, 5th Floor
Woodbridge, NJ 08830
Attn: Joseph M. Lucosky, Esq.
Facsimile: (732) 395-4401
4.3 Amendments. This Note and any provision hereof may only
be amended by
an instrument in writing signed by the Borrower and the Holder. The
term "Note" and all
reference thereto, as used throughout this instrument, shall mean this
instrument (and the other
Notes issued pursuant to the Purchase Agreement) as originally
executed, or if later amended or
supplemented, then as so amended or supplemented.
4.4 Assignability. This Note shall be binding upon
the Borrower and its
successors and assigns, and shall inure to be the benefit of the
Holder and its successors and
assigns. Each transferee of this Note must be an "accredited investor" (as
defined in Rule 501(a)
of the 1933 Act). Notwithstanding anything in this Note to the
contrary, this Note may be
pledged as collateral in connection with a bona fide margin
account or other lending
arrangement. The Holder and any assignee, by acceptance of this Note,
acknowledge and agree
that following conversion of a portion of this Note, the unpaid and unconverted
principal amount
of this Note represented by this Note may be less than the amount stated on the
face hereof.
4.5 Cost of Collection. If default is made in the payment
of this Note, the
Borrower shall pay the Holder hereof reasonable costs of
collection, including reasonable
attorneys' fees.
4.6 Governing Law. This Note shall be governed by and
construed in accordance
with the laws of the State of Nevada without regard to principles of conflicts
of laws. Any action
20
brought by either party against the other concerning the transactions
contemplated by this Note
shall be brought only in the state courts of Massachusetts or in the
federal courts located in the
Commonwealth of Massachusetts. The parties to this Note hereby
irrevocably waive any
objection to jurisdiction and venue of any action instituted hereunder
and shall not assert any
defense based on lack of jurisdiction or venue or based upon forum
non conveniens. THE
BORROWER HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO,
AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF
ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF
THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY. The prevailing
party shall be entitled to recover from the other party its
reasonable attorney's fees and costs. In
the event that any provision of this Note or any other agreement delivered in
connection herewith
is invalid or unenforceable under any applicable statute or rule of
law, then such provision shall
be deemed inoperative to the extent that it may conflict therewith
and shall be deemed modified
to conform with such statute or rule of law. Any such provision
which may prove invalid or
unenforceable under any law shall not affect the validity or
enforceability of any other provision
of any agreement. Each party hereby irrevocably waives personal
service of process and
consents to process being served in any suit, action or proceeding in
connection with this
Agreement or any other Transaction Document by mailing a copy thereof
via registered or
certified mail or overnight delivery (with evidence of delivery) to
such party at the address in
effect for notices to it under this Agreement and agrees that such
service shall constitute good
and sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to
limit in any way any right to serve process in any other manner permitted by
law.
4.7 Certain Amounts. Whenever pursuant to this Note the Borrower is
required to
pay an amount in excess of the outstanding principal amount (or the
portion thereof required to
be paid at that time) plus accrued and unpaid interest plus Default
Interest on such interest, the
Borrower and the Holder agree that the actual damages to the Holder
from the receipt of cash
payment on this Note may be difficult to determine and the amount to
be so paid by the
Borrower represents stipulated damages and not a penalty and is
intended to compensate the
Holder in part for loss of the opportunity to convert this Note and
to earn a return from the sale
of shares of Common Stock acquired upon conversion of this Note at a
price in excess of the
price paid for such shares pursuant to this Note. The Borrower and
the Holder hereby agree that
such amount of stipulated damages is not plainly disproportionate to
the possible loss to the
Holder from the receipt of a cash payment without the opportunity to
convert this Note into
shares of Common Stock.
4.8 Purchase Agreement. By its acceptance of this Note, each
party agrees to be
bound by the applicable terms of the Purchase Agreement.
4.9 Notice of Corporate Events. Except as otherwise provided
below, the Holder
of this Note shall have no rights as a Holder of Common Stock unless and only to
the extent that
it converts this Note into Common Stock. The Borrower shall provide
the Holder with prior
notification of any meeting of the Borrower's shareholders (and copies
of proxy materials and
other information sent to shareholders). In the event of any taking
by the Borrower of a record
of its shareholders for the purpose of determining shareholders who
are entitled to receive
payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise
21
acquire (including by way of merger, consolidation, reclassification or
recapitalization) any share
of any class or any other securities or property, or to receive any other right,
or for the purpose of
determining shareholders who are entitled to vote in connection with
any proposed sale, lease or
conveyance of all or substantially all of the assets of the Borrower
or any proposed liquidation,
dissolution or winding up of the Borrower, the Borrower shall mail a
notice to the Holder, at
least twenty (20) days prior to the record date specified therein (or
thirty (30) days prior to the
consummation of the transaction or event, whichever is earlier), of
the date on which any such
record is to be taken for the purpose of such dividend, distribution,
right or other event, and a
brief statement regarding the amount and character of such dividend,
distribution, right or other
event to the extent known at such time. The Borrower shall make a public
announcement of any
event requiring notification to the Holder hereunder substantially
simultaneously with the
notification to the Holder in accordance with the terms of this
Section 4.9 including, but not
limited to, name changes, recapitalizations, etc. as soon as possible under law.
4.10 Usury. If it shall be found that any interest or
other amount deemed
interest due hereunder violates the applicable law governing usury, the
applicable provision shall
automatically be revised to equal the maximum rate of interest or
other amount deemed interest
permitted under applicable law. The Borrower covenants (to the extent
that it may lawfully do
so) that it will not seek to claim or take advantage of any law
that would prohibit or forgive the
Borrower from paying all or a portion of the principal or interest on this Note.
4.11 Remedies. The Borrower acknowledges that a
breach by it of its
obligations hereunder will cause irreparable harm to the Holder, by
vitiating the intent and
purpose of the transaction contemplated hereby. Accordingly, the
Borrower acknowledges that
the remedy at law for a breach of its obligations under this Note will be
inadequate and agrees, in
the event of a breach or threatened breach by the Borrower of the provisions of
this Note, that the
Holder shall be entitled, in addition to all other available remedies
at law or in equity, and in
addition to the penalties assessable herein, to an injunction or
injunctions restraining, preventing
or curing any breach of this Note and to enforce specifically the
terms and provisions thereof,
without the necessity of showing economic loss and without any bond
or other security being
required. No provision of this Note shall alter or impair the obligation of
the Borrower, which is
absolute and unconditional, to pay the principal of, and interest on,
this Note at the time, place,
and rate, and in the form, herein prescribed.
4.12 Severability. 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 provision hereof which may prove invalid
or unenforceable
under any law shall not affect the validity or enforceability of any other
provision hereof.
4.13 Dispute Resolution. In the case of a dispute as to
the determination of the
Conversion Price, Conversion Amount, any prepayment amount or Default
Amount, Default
Sum, Closing or Maturity Date, the closing bid price, or fair market value (as
the case may be) or
the arithmetic calculation of the Conversion Price or the applicable prepayment
amount(s) (as the
case may be), the Borrower or the Holder shall submit the disputed
determinations or arithmetic
calculations via facsimile (i) within two (2) Business Days after
receipt of the applicable notice
22
giving rise to such dispute to the Borrower or the Holder or (ii)
if no notice gave rise to such
dispute, at any time after the Holder learned of the circumstances
giving rise to such dispute. If
the Holder and the Borrower are unable to agree upon such
determination or calculation within
two (2) Business Days of such disputed determination or arithmetic
calculation (as the case may
be) being submitted to the Borrower or the Holder, then the Borrower
shall, within two (2)
Business Days, submit via facsimile (a) the disputed determination of
the Conversion Price, the
closing bid price, the or fair market value (as the case may be) to
an independent, reputable
investment bank selected by the Borrower and approved by the Holder
or (b) the disputed
arithmetic calculation of the Conversion Price, Conversion Amount, any
prepayment amount or
Default Amount, Default Sum to an independent, outside accountant
selected by the Holder that
is reasonably acceptable to the Borrower. The Borrower shall cause at its
expense the investment
bank or the accountant to perform the determinations or calculations and notify
the Borrower and
the Holder of the results no later than ten (10) Business Days from
the time it receives such
disputed determinations or calculations. Such investment bank's or
accountant's determination
or calculation shall be binding upon all parties absent demonstrable error.
4.14 Terms of Future Financings. So long as this Note is
outstanding, upon any
issuance by the Borrower or any of its subsidiaries of any security
with any term more favorable
to the holder of such security or with a term in favor of the
holder of such security that was not
similarly provided to the Holder in this Note, then the Borrower
shall notify the Holder of such
additional or more favorable term and such term, at Holder's option,
shall become a part of the
transaction documents with the Holder. The types of terms contained
in another security that
may be more favorable to the holder of such security include, but
are not limited to, terms
addressing conversion discounts, prepayment rate, conversion lookback
periods, interest rates,
original issue discounts, stock sale price, private placement
price per share, and warrant
coverage.
4.15 Piggyback Registration Rights. The Borrower shall
include on the next
registration statement the Borrower files with SEC (or on the subsequent
registration statement if
such registration statement is withdrawn) all shares issuable upon
conversion of this Note.
Failure to do so will result in liquidated damages of 25% of the
outstanding principal balance of
this Note, but not less than Fifteen Thousand and No/100 United
States Dollars ($15,000), being
immediately due and payable to the Holder at its election in the form of cash
payment or addition
to the balance of this Note.
[signature page follows]
23
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name
by its
duly authorized officer as of the date first above written.
CLEAN ENERGY TECHNOLOGIES,
INC.
By:
Name: Meddy Sahebi
Title: Executive Chairman
24
EXHIBIT A
NOTICE OF CONVERSION
The undersigned hereby elects to convert
$_________________principal amount
of the Note (defined below) together with $________________ of accrued
and unpaid interest
thereto, totaling $_____________ into that number of shares of Common
Stock to be issued
pursuant to the conversion of the Note ("Common Stock") as set forth
below, of Clean Energy
Technologies, Inc., a Nevada corporation (the "Borrower"), according to
the conditions of the
convertible note of the Borrower dated as of July 6, 2016 (the
"Note"), as of the date written
below. No fee will be charged to the Holder for any conversion, except for
transfer taxes, if any.
Box Checked as to applicable instructions:
[ ] The Borrower shall electronically transmit the Common Stock
issuable pursuant
to this Notice of Conversion to the account of the undersigned or its
nominee with
DTC through its Deposit Withdrawal At Custodian system ("DWAC
Transfer").
Name of DTC Prime Broker:
Account Number:
[ ] The undersigned hereby requests that the Borrower issue
a certificate or
certificates for the number of shares of Common Stock set
forth below (which
numbers are based on the Holder's calculation attached
hereto) in the name(s)
specified immediately below or, if additional space is necessary, on
an attachment
hereto:
Name: [NAME]
Address: [ADDRESS]
Date of Conversion: _____________
Applicable Conversion Price: $____________
Number of Shares of Common Stock to be Issued
Pursuant to Conversion of the Notes: ______________
Amount of Principal Balance Due remaining
Under the Note after this conversion: ______________
Accrued and unpaid interest remaining: ______________
[HOLDER]
By:_____________________________
Name: [NAME]
Title: [TITLE]
Date: [DATE]
4818-3048-2483, v. 1-2690-2064, v. 1-0454, v. 1