UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] |
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended August 31, 2014 |
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[ ] |
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT |
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For the transition period from _________ to ________ |
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Commission file number: 333-177518 |
Aja Cannafacturing, Inc. |
(Exact name of registrant as specified in its charter) |
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Nevada |
45-2758994 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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31500 Grape Street
Suite 3-345
Lake Elsinore, CA |
92532 |
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number:(714)
733-1412 |
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Securities registered under Section 12(b) of
the Exchange Act:
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Title of each class |
Name of each exchange on which registered |
none |
not applicable |
Securities registered under Section 12(g) of
the Exchange Act: |
Title of class |
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Common stock, par value of $0.001 |
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Indicate by check mark if the registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by checkmark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer [ ] Accelerated
filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the aggregate market value of the voting
and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold,
or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed
second fiscal quarter. approximately $2,850,00 as of February 28, 2014.
Indicate the number of shares outstanding of
each of the registrant’s classes of common stock, as of the latest practicable date: 392,598,723 shares as of December
11, 2014
.
PART I
Item 1. Business
Company Overview
Our business focuses on the breeding, cultivation,
and processing of raw industrial cannabis materials for industry specific applications such as building materials (Hempcrete),
automotive (biofuels), plastics (healthcare) and textiles (fabrics). We are currently negotiating an exclusive production agreement
with Luna Agro & Earth Science, LLC (“LAES”), a Company partly owned by our CEO. The agreement would provide us
with exclusive rights to twenty (20) acres of land dedicated to cultivating our planned line of proprietary industrial cannabis
genetics. Under the production agreement, we would pay LAES a production fee of five percent (5%) of our total wholesale price
of all materials supplied.
Products
Our line of products is scheduled to be available
in the third quarter of our current fiscal year. At that time we will offer four products.Our lineup includes 1) Sterilized hemp
seed, 2) Hemp bark fiber, 3) Hemp hurds, and 4) Raw hemp essential oil.
Expansion and Development Plan
Our strategy includes providing consulting
opportunities, allowing new mergers and potential growth opportunities by educating commercial enterprises how thousands of additives
currently used across all industries can be substituted with a natural and more cost effective material. Our pending agreement
with LAES will allow for us to expand our agricultural foot print from 20 acres to 50 acres by the fourth quarter of our current
fiscal year, more than doubling our production/supply capacity. We feel that having such a large dedicated footprint will place
us in a position to become the leader and main supplier of all domestic raw industrial cannabis material.
Item 2. Properties
We currently have our administrative offices
in the city of Lake Elsinore, Ca.
Item 3. Legal
Proceedings
We are not a party to any pending legal proceeding.
We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more
of our voting securities are adverse to us or have a material interest adverse to us.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common
Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is quoted under the symbol
“AJAC” on the OTCBB operated by the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the OTCQB
operated by OTC Markets Group, Inc. Few market makers continue to participate in the OTCBB system because of high fees charged
by FINRA. Consequently, market makers that once quoted our shares on the OTCBB system may no longer be posting a quotation
for our shares. As of the date of this report, however, our shares are quoted by several market makers on the OTCQB. The criteria
for listing on either the OTCBB or OTCQB are similar and include that we remain current in our SEC reporting. Our reporting is
presently current and, since inception, we have filed our SEC reports on time.
A trading market for our securities did not
begin to develop until after the fiscal year ended August 31, 2012.
The following tables set forth the range of
high and low prices for our common stock for the each of the periods indicated as reported by the OTCQB. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Fiscal Year Ending August 31, 2014 |
Quarter Ended |
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High $ |
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Low $ |
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August 31, 2014 |
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0.0107 |
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0.0096 |
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May 31, 2014 |
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0.0110 |
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0.0103 |
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February 28, 2014 |
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0.0339 |
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0.0202 |
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November 30, 2013 |
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0.0170 |
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0.0170 |
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Fiscal Year Ending August 31, 2013 |
Quarter Ended |
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High $ |
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Low $ |
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August 31, 2013 |
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0.0970 |
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0.0311 |
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May 31, 2013 |
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0.1800 |
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0.0500 |
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February 28, 2013 |
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0.2500 |
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0.1208 |
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November 30, 2012 |
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0.2083 |
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0.0167 |
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As of December 12, 2014, the last trading price
of our common stock was $0.0006 per share.
Penny Stock
The SEC has adopted rules that regulate broker-dealer
practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of
less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided
that current price and volume information with respect to transactions in such securities is provided by the exchange or system.
The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure
document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in
both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and
of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities
laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and
the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary
actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains
such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.
The broker-dealer also must provide, prior
to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation
of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or
other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement
showing the market value of each penny stock held in the customer's account.
In addition, the penny stock rules require
that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment
of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and
dated copy of a written suitability statement.
These disclosure requirements may have the
effect of reducing the trading activity for our common stock. Therefore, stockholders may have difficulty selling our securities.
Holders of Our Common Stock
As of December 11, 2014, we had 392,598,723
shares of our common stock issued and outstanding, held by seventy-three (73) shareholders of record, with additional shareholders
holding their shares in street name.
Dividends
There are no restrictions in our articles of
incorporation or bylaws that prevent us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring
dividends where after giving effect to the distribution of the dividend:
1. |
we would not be able to pay our debts as they become due in the usual course of business, or; |
2. |
our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution. |
We have not declared any dividends and we do
not plan to declare any dividends in the foreseeable future.
Item 6. Selected Financial Data
A smaller reporting company is not required
to provide the information required by this Item.
Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements, other than purely historical
information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results,
and the assumptions upon which those statements are based, are “forward-looking statements.” These forward-looking
statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,”
“estimates,” “intends,” “strategy,” “plan,” “may,” “will,”
“would,” “will be,” “will continue,” “will likely result,” and similar expressions.
Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which
may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations
and future prospects on a consolidated basis include, but are not limited to: changes in economic conditions, legislative/regulatory
changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties
should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
Results of Operations for the Years Ended
August 31, 2014 and August 31, 2013.
Revenue
During the year ended August 31, 2014, revenue
was $22,932 compared to $37,074 for the year ended August 31, 2013. During the year Propel Management Group Inc., was launched
to raise revenues via providing services with existing core competencies within its existing staff. The revenue for the current
year was generated by our subsidiary Propel Management Group, Inc. There were no sales for the parent company in the current period
because we discontinued production of lead acid products.
Cost of Revenue
During the year ended August 31, 2014, cost
of revenue was $36,229 compared to $93,727 for the year ended August 31, 2013. In the current fiscal year the Company recognized
a loss for inventory impairment of $32,682.
Operating Expenses
Professional fees for the year ended August
31, 2014 were $91,941, as compared to $127,517 for the year ended August 31, 2013, a decrease of $35,576 or 28%. Professional
fees mainly consist of legal, auditor and other fees associated with the Company’s quarterly filings and year end audit.
The decrease in the current period is attributed to a decrease in legal fees that were incurred.
Stock based compensation was $207,153 for the
year ended August 31, 2014, as compared to $467,448 for the year ended August 31, 2013. This non-cash compensation expense
consists of stock issued for various consulting and marketing services as well as stock valued at $81,250 for shares issued to
the CEO.
Salaries and wage expense for the year ended
August 31, 2014 was $310,005 for the year ended August 31, 2014, as compared to $292,956 for the year ended August 31, 2013, an
increase of $17,049 or 5.8%.
Marketing and advertising expense for the year
ended August 31, 2014 was $47,710, as compared to $135,702 for the year ended August 31, 2013, a decrease of $87,992 or 65%. The
decrease can be attributed to the use of more common stock to compensate vendors for these services.
General and administrative expense for the
year ended August 31, 2014 was $261,551 for the year ended August 31, 2014, as compared to $130,444 for the year ended August 31,
2013, an increase of $131,107 or 101%.
Overall there was a $235,707 decrease in operating
expenses for the comparable period ended August 31.
Other income and expense
During the year ended August 31, 2014 we incurred
$410,598 of expense for amortization of debt discount, $581,179 of expense related to derivatives and had a gain on the change
in fair value of our derivative liability of $854,182. These gains and losses are a result of the derivative accounting required
for the issuance of convertible debt. We also had a $224,577 loss on debt conversion, interest expense of $98,272 and interest
income of $4,317, for a net total other expense of $456,127 compared to $122,271 for the year ended August 31, 2013, an increase
of $333,856.
Net Loss
Overall we recorded a net loss of $1,387,784
for the year ended August 31, 2014, as compared to a net loss of $1,332,991 for the year ended August 31, 2013.
Liquidity and Capital Resources
As of August 31, 2014, we had an accumulated
deficit of $2,799,397 and a working capital deficit of $1,116,379. For year ended August 31, 2014, net cash used in operating activities
was $456,672 and we received $498,705 from financing activities.
We have received short term loan financing
to fund operations under various promissory notes. Our promissory note obligations currently issued and outstanding are as follows:
We owe the principal sum of $100,000 to Steven
J. Caspi under the terms of a Forbearance Agreement issued March 10, 2014 which modified the terms of the original Convertible
Promissory Note and Security Agreement (the “Note”) issued November 19, 2012. The Forbearance Agreement bears interest
at an annual rate of five percent (5%), with all principal and interest being due on or before November 30, 2014. The Note is convertible
to shares of our common stock, in whole or in part at the option of Mr. Caspi, at a conversion price of $0.005 per share. As of
August 31, 2014, this note is still outstanding and has accrued interest of $9,166.
On May 31, 2013, the Company’s
former CEO, Bruce Knoblich and the Company executed a promissory note for $289,998, $2,150 of which has been repaid. The note
bears interest at 5% and was due November 30, 2013. On July 22, 2014, the principal and accrued interest were rolled into a
new convertible promissory note for $304,973. The new note bears interest at 8% per annum and is convertible at a 49%
discount of the average trading price during the ten days preceding the conversion date. The note is shown net of a debt
discount of $244,839 at August 31, 2014 and has accrued interest of $2,411.
Subsequent to the reporting period, on September
15, 2014, a portion of the Bruce Knoblich note in the amount $20,000 was assigned to Blackbridge Capital Partners, LLC. Concurrent
with this assignment, we entered into a replacement Convertible Promissory Note with Blackbridge Capital Partners, LLC. The replacement
note bears interest at 5% per annum, is due on or before March 17, 2015, and is convertible into shares of our common stock at
price equal to a fifty percent (50%) discount to our lowest trading price during the forty (40) trading days preceding the conversion.
Subsequent to the reporting period, on September
24, 2014, a portion of the Bruce Knoblich note in the amount $50,000 was assigned to WHC Capital, LLC. Concurrent with this assignment,
we entered into a replacement Convertible Promissory Note with WHC Capital, LLC. The replacement note bears interest at 12% per
annum, is due on or before September 25, 2015, and is convertible into shares of our common stock at price equal to a forty nine
percent (49%) discount to our lowest trading price during the three (3) trading days preceding the conversion.
Subsequent to the reporting period, on October
24, 2014, a portion of the Bruce Knoblich note in the amount $50,000 was assigned to Beaufort Capital Partners, LLC. Concurrent
with this assignment, we entered into a replacement Convertible Promissory Note with Beaufort Capital Partners, LLC. The replacement
note is non-interest bearing, due on demand, and is convertible into shares of our common stock at price equal to a fifty percent
(50%) discount to our lowest trading price during the twenty (20) trading days preceding the conversion.
On June 19, 2013, we entered into a $300,000
Promissory Note (the “Note”) with JMJ Financial (“JMJ”). The face amount of the Note includes an original
issue discount of $30,000. Funds are loaned to the Company under a series of advances made under the Note. Loans made under the
Note mature in one year from the date of the advance and, if repaid within ninety (90) days from the date of issue, the loans will
not bear interest. Upon ninety days after the date of issue, a onetime interest charge of twelve percent (12%) of the principal
amount will be applied. JMJ may convert all or part of the balance under the Note, at its discretion, into shares of our common
stock. The conversion price is sixty percent (60%) of the lowest trading price for our common stock in the twenty-five trading
days immediately preceding the conversion date.
Our outstanding loans with JMJ under the Note
as of August 31, 2014 are as follows:
Date |
Due Date |
Principal and Interest Amount |
September 30, 2013 |
September 30, 2014 |
$20,772 |
April 17, 2014 |
April 17, 2015 |
$49,777 |
June 24, 2014 |
June 24, 2015 |
$49,777 |
|
Total |
$120,326 |
We have received financing under a series of
Convertible Promissory Notes (the “Notes”) issued to Asher Enterprises, Inc. (“Asher”). The Notes bear
interest at an annual rate of 8%, with principal and interest coming due approximately nine months from the respective dates of
issue. The Notes may be converted in whole or in part, at the option of the holder, to shares of our common stock, par value $0.001,
at any time following 180 days after the issuance dates of the Notes. The conversion price under the Note is 51% of the Market
Price of our common stock on the conversion dates. For purposes of the Notes, “Market Price” is defined as the average
of the 3 lowest closing prices for our common stock on the 30 trading days immediately preceding the conversion dates. As of August
31, 2014, the total principal and interest due under these notes is $73,000 and $2,848, respectively.
On March 5, 2014, the Company executed a Convertible
Promissory Note (the “note”) with Black Mountain Equities, Inc. (“Black Mountain”). The nominal principal
sum of the Note is $250,000, with an original issue discount of ten percent (10%). The note matures one year from the effective
date of each payment, which is made at the sole discretion of Black Mountain. The Note is convertible into common stock in whole
or in part at a variable conversion price equal to the lessor of $0.025 or a 60% discount to the lowest trade price in the twenty
five trading days prior to conversion. The Company received its first payment towards the loan of $25,000. As of August 31, 2014,
the total principal and interest due under these notes is $27,500 and $2,750, respectively.
We have also received short term financing
from KBM Worldwide, Inc. (“KBM”) under a series of Securities Purchase Agreements (the “SPAs”) and a Convertible
Promissory Notes (the “Notes”). The Notes bear interest at an annual rate of 8%, with principal and interest coming
due approximately nine (9) months from issue. The Note may be converted in whole or in part, at the option of the holder, to shares
of our common stock, par value $0.001, at any time following 180 days after the issuance dates of the Notes. The conversion price
under the Notes is a 49% discount to the average of the 3 lowest closing prices for our common stock on the 30 trading days immediately
preceding the conversion dates.
Our outstanding loans with KBM are as follows:
Date |
Due Date |
Principal Amount |
March 19, 2014 |
December 26, 2014 |
$53,000 |
May 20, 2014 |
February 20, 2015 |
$53,000 |
August 18, 2014 |
May 20, 2015 |
$53,000 |
|
Total |
$159,000 |
On July 11, 2014, the Company executed a convertible
promissory note for $31,500 with LG Capital Funding, LLC. The note bears interest at 8% per annum and is due on or before July
11, 2015. The note is convertible at a 45% discount any time during the period beginning 180 days following the date of the note.
Accrued interest on the note as of August 31, 2014 is $359.
We will require significant additional financing
in order to move forward effectively with the development of our current business plan. We intend to fund the development of our
new business through debt and/or equity financing arrangements. We do not have any formal commitments or arrangements for the sales
of stock or the advancement or loan of funds at this time. There can be no assurance that such additional financing will be available
to us on acceptable terms, in amounts sufficient to fund our planned acquisitions and other activities, or at all.
Off Balance Sheet Arrangements
As of August 31, 2014, there were no off balance
sheet arrangements.
Going Concern
We have yet to achieve profitable operations,
have accumulated losses of $2,799,397 since our inception and expect to incur further losses in the development of our business,
all of which casts substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern
is dependent upon our ability to generate future profitable operations and/or to obtain the necessary financing from shareholders
or other sources to meet its obligations and repay its liabilities arising from normal business operations when they come due.
Management has no formal plan in place to address this concern but considers that we will be able to obtain additional funds by
equity and/or debt financing, however there is no assurance of additional funding being available or on acceptable terms, if at
all.
Critical Accounting Policies
In December 2001, the SEC requested that all
registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated
that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial
condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the
need to make estimates about the effect of matters that are inherently uncertain. At this time, management does not believe that
any of our accounting policies fit this definition.
Recently Issued Accounting Pronouncements
The Company has reviewed issued accounting
pronouncements and plans to adopt those that are applicable to it. The Company does not expect the adoption of any other pronouncements
to have an impact on its results of operations or financial position.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk
A smaller reporting company is not required
to provide the information required by this Item.
Item 8. Financial Statements and Supplementary Data
Index
to Financial Statements Required by Article 8 of Regulation S-X:
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of AJA Cannafacturing, Inc.
We
have audited the accompanying consolidated balance sheet of AJA
Cannafacturing, Inc. as of August 31, 2014 and the related consolidated statements of operations, stockholders’ equity (deficit),
and cash flows for the year then ended. AJA Cannafacturing, Inc.’s management is responsible for these consolidated financial
statements. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted
our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free
of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of AJA Cannafacturing, Inc. as of August 31, 2014, the results of their operations, and their cash flows, for the year ended August
31, 2014, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note (9) to the consolidated
financial statements, the Company has incurred losses from operations, has negative working capital and is in need of additional
capital to grow its operations. These factors raise substantial doubt about the Company’s ability to continue as a going
concern. Management's plans in regard to these matters are also described in Note (9). The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification
of liabilities that might result should the Company be unable to continue as a going concern.
|
/s/ KLJ & Associates, LLP
KLJ & Associates, LLP |
St. Louis Park, MN |
December 16, 2014 |
Silberstein Ungar, PLLC CPAs and Business Advisors
Phone (248) 203-0080
Fax (248) 281-0940
30600 Telegraph Road, Suite 2175
Bingham Farms, MI 48025-4586
Report of Independent Registered Public
Accounting Firm
To the Board of Directors of
Aja Cannafacturing, Inc. (formerly known as IDS Industries, Inc.)
Lake Elsinore, California
We have audited the accompanying consolidated
balance sheet of Aja Cannafacturing, Inc. (formerly known as IDS Industries, Inc.) as of August 31, 2013, and the related consolidated
statements of operations, stockholders’ equity (deficit), and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the consolidated financial position of IDS industries, Inc. as of August 31,
2013, and the results of its operations and its cash flows for the year ended August 31, 2013, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As discussed in Note 9 to the financial statements, the
Company has negative working capital, has not yet received revenue from sales of products or services, and has incurred losses
from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s
plans with regard to these matters are described in Note 9. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Silberstein Ungar, PLLC
Bingham Farms, Michigan
December 11, 2013
AJA
CANNAFACTURING, INC.
(FORMERLY
IDS INDUSTRIES, INC.)
CONSOLIDATED
BALANCE SHEETS
|
August 31, 2014 | |
August 31, 2013 |
ASSETS |
| | | |
| | |
Current Assets: |
| | | |
| | |
Cash |
$ | 43,993 | | |
$ | 1,960 | |
Accounts receivable, net of allowance of $8,753
and $4,950, respectively |
| 8,752 | | |
| 4,950 | |
Prepaid expenses and other current assets |
| 88,871 | | |
| 80,196 | |
Inventory |
| — | | |
| 32,682 | |
Other receivable, related party |
| — | | |
| 77,307 | |
Interest receivable, related
party |
| — | | |
| 2,612 | |
Total Current Assets |
| 141,616 | | |
| 199,707 | |
Total Assets |
$ | 141,616 | | |
$ | 199,707 | |
|
| | | |
| | |
LIABILITIES
AND STOCKHOLDERS’ DEFICIT |
| | | |
| | |
LIABILITIES: |
| | | |
| | |
Current Liabilities: |
| | | |
| | |
Cash overdraft |
$ | — | | |
$ | 12,413 | |
Accounts payable |
| 154,178 | | |
| 159,596 | |
Derivative liability |
| 558,194 | | |
| 148,870 | |
Accrued compensation |
| 52,686 | | |
| — | |
Accrued expenses |
| 43,483 | | |
| 10,159 | |
Accrued interest |
| 26,051 | | |
| 19,990 | |
Convertible
notes payable, net of discount of $174,125 and $93,858, respectively |
| 340,813 | | |
| 265,992 | |
Notes payable –
related party net of discount of $244,839 and $0, respectively |
| 30,135 | | |
| 290,098 | |
Other
notes payable |
| 52,455 | | |
| 30,000 | |
Total Current Liabilities |
| 1,257,995 | | |
| 937,118 | |
|
| | | |
| | |
Total Liabilities |
| 1,257,995 | | |
| 937,118 | |
|
| | | |
| | |
STOCKHOLDERS’ DEFICIT: |
| | | |
| | |
Preferred stock, par value $.001, 10,000,000
authorized, no shares issued and outstanding |
| — | | |
| — | |
Common stock, $.001 par value, 500,000,000
common shares authorized, 127,184,335 and 34,313,114 shares issued and outstanding, respectively |
| 127,184 | | |
| 34,313 | |
Additional paid in capital |
| 1,555,834 | | |
| 639,889 | |
Accumulated deficit |
| (2,799,397 | ) | |
| (1,411,613 | ) |
Total Stockholders’
Deficit |
| (1,116,379 | ) | |
| (737,411 | ) |
TOTAL LIABILITIES AND
STOCKHOLDERS’ DEFICIT |
$ | 141,616 | | |
$ | 199,707 | |
The
accompanying notes are an integral part of these consolidated financial statements.
AJA
CANNAFACTURING, INC.
(FORMERLY
IDS INDUSTRIES, INC.)
STATEMENTS
OF OPERATIONS
|
For the Years Ended
August 31, |
|
2014 | |
2013 |
|
| |
|
Revenue |
$ | 22,932 | | |
$ | 37,074 | |
Cost of revenue |
| 36,229 | | |
| 93,727 | |
Gross margin |
| (13,297 | ) | |
| (56,653 | ) |
|
| | | |
| | |
Operating expenses: |
| | | |
| | |
Professional fees |
| 91,941 | | |
| 127,517 | |
Stock based compensation |
| 207,153 | | |
| 467,448 | |
Salaries and wages |
| 310,005 | | |
| 292,956 | |
Marketing and advertising |
| 47,710 | | |
| 135,702 | |
General and administrative |
| 261,551 | | |
| 130,444 | |
Total operating expenses |
| 918,360 | | |
| 1,154,067 | |
Loss from operations |
| (931,657 | ) | |
| (1,210,720 | ) |
|
| | | |
| | |
Other income and (expense): |
| | | |
| | |
Amortization of debt
discount |
| (410,598 | ) | |
| (92,751 | ) |
Derivative expense |
| (581,179 | ) | |
| — | |
Gain (loss) on derivative
liability |
| 854,182 | | |
| (10,794 | ) |
Loss on debt conversion |
| (224,577 | ) | |
| — | |
Interest expense |
| (98,272 | ) | |
| (21,388 | ) |
Interest income |
| 4,317 | | |
| 2,662 | |
Total other expense |
| (456,127 | ) | |
| (122,271 | ) |
Loss before provision for income taxes |
| (1,387,784 | ) | |
| (1,332,991 | ) |
|
| | | |
| | |
Provision for income taxes |
| — | | |
| — | |
|
| | | |
| | |
Net Loss |
$ | (1,387,784 | ) | |
$ | (1,332,991 | ) |
|
| | | |
| | |
Loss per share: |
| | | |
| | |
Basic and diluted |
$ | (0.02 | ) | |
$ | (0.04 | ) |
|
| | | |
| | |
Weighted average shares outstanding:
basic and diluted |
| 73,614,030 | | |
| 38,356,630 | |
The
accompanying notes are an integral part of these consolidated financial statements.
AJA
CANNAFACTURING, INC.
(FORMERLY
IDS INDUSTRIES, INC.)
STATEMENT
OF STOCKHOLDERS’ EQUITY (DEFICIT)
AUGUST
31, 2014
|
Common
Stock | |
Additional |
|
Accumulated | |
Total
Stockholders’ |
|
Shares | |
Amount | |
Paid-in
Capital |
|
Deficit | |
Equity
(Deficit) |
Balance, August 31, 2012 |
| 144,000,000 | | |
$ | 144,000 | | |
$ | (109,000 | ) |
|
$ | (78,622 | ) | |
$ | (43,622 | ) |
Common stock issued for services |
| 3,157,750 | | |
| 3,158 | | |
| 464,290 | |
|
| — | | |
| 467,448 | |
Common stock returned |
| (113,000,004 | ) | |
| (113,000 | ) | |
| 113,000 | |
|
| — | | |
| — | |
Common stock issued for cash |
| 155,368 | | |
| 155 | | |
| 15,843 | |
|
| — | | |
| 15,998 | |
Conveyance of subsidiary |
| — | | |
| — | | |
| 57,147 | |
|
| — | | |
| 57,147 | |
Debt discount on convertible notes |
| — | | |
| — | | |
| 98,609 | |
|
| — | | |
| 98,609 | |
Net loss for the
year ended August 31, 2013 |
| — | | |
| — | | |
| — | |
|
| (1,332,991 | ) | |
| (1,332,991 | ) |
Balance, August 31, 2013 |
| 34,313,114 | | |
| 34,313 | | |
| 639,889 | |
|
| (1,411,613 | ) | |
| (737,411 | ) |
Common stock issued for services |
| 8,120,000 | | |
| 8,120 | | |
| 166,513 | |
|
| — | | |
| 174,633 | |
Common stock issued for cash |
| 1,333,333 | | |
| 1,333 | | |
| 18,667 | |
|
| — | | |
| 20,000 | |
Common stock issued for compensation |
| 6,500,000 | | |
| 6,500 | | |
| 74,750 | |
|
| — | | |
| 81,250 | |
Common stock issued for conversion of
debt |
| 76,917,888 | | |
| 76,918 | | |
| 551,538 | |
|
| — | | |
| 628,456 | |
Warrants issued for loan fee |
| — | | |
| — | | |
| 44,169 | |
|
| — | | |
| 44,169 | |
Debt discount on convertible notes |
| — | | |
| — | | |
| 60,308 | |
|
| — | | |
| 60,308 | |
Net loss for the
year ended August 31, 2014 |
| — | | |
| — | | |
| — | |
|
| (1,387,784 | ) | |
| (1,387,784 | ) |
Balance, August 31, 2014 |
| 127,184,335 | | |
$ | 127,184 | | |
$ | 1,555,834 | |
|
$ | (2,799,397 | ) | |
$ | (1,116,379 | ) |
The
accompanying notes are an integral part of these consolidated financial statements.
AJA
CANNAFACTURING, INC.
(FORMERLY
IDS INDUSTRIES, INC.)
STATEMENTS
OF CASH FLOWS
|
For the Years Ended
August 31, |
|
2014 | |
2013 |
Cash flows from operating activities: |
| | | |
| | |
Net loss for the year |
$ | (1,387,784 | ) | |
$ | (1,332,991 | ) |
Adjustments to reconcile net loss to net cash used in operations: |
| | | |
| | |
Stock based compensation and services |
| 207,153 | | |
| 467,448 | |
(Gain) loss on fair value of derivatives |
| (854,182 | ) | |
| 10,794 | |
Amortization of discounts |
| 410,598 | | |
| 93,989 | |
Loss on debt conversion |
| 224,577 | | |
| — | |
Bad debt expense |
| 42,972 | | |
| 4,950 | |
Inventory impairment |
| 32,682 | | |
| — | |
Excess of fair value of derivatives |
| — | | |
| 50,076 | |
Derivative expense |
| 581,179 | | |
| — | |
|
| | | |
| | |
Change in assets and liabilities: |
| | | |
| | |
Increase in accounts receivable |
| (3,802 | ) | |
| (9,900 | ) |
Purchase of inventory |
| — | | |
| (32,682 | ) |
(Increase)/decrease in prepaids and other current assets |
| 103,224 | | |
| (82,949 | ) |
(Increase)/decrease in note receivable – related
party |
| 39,764 | | |
| (77,307 | ) |
Increase in interest receivable – related
party |
| (2,817 | ) | |
| (2,612 | ) |
Increase/(decrease) in accounts payable |
| 7,419 | | |
| 172,009 | |
Increase/(decrease) in
accrued expenses |
| 142,345 | | |
| 30,149 | |
Net
cash used in operating activities |
| (456,672 | ) | |
| (709,026 | ) |
|
| | | |
| | |
Cash flows from investing activities: |
| — | | |
| — | |
|
| | | |
| | |
Cash flows from financing activities: |
| | | |
| | |
Proceeds from convertible debt |
| 476,500 | | |
| 359,850 | |
Payments on convertible debt |
| (17,500 | ) | |
| — | |
Increase / (decrease) in note payable –
related party |
| (2,150 | ) | |
| 289,998 | |
Increase in other notes payable |
| 21,855 | | |
| 30,000 | |
Proceeds
from the sale of common stock |
| 20,000 | | |
| 15,998 | |
Net
cash provided by financing activities |
| 498,705 | | |
| 695,846 | |
Net increase / (decrease) in cash |
| 42,033 | | |
| (13,180 | ) |
Cash at beginning of period |
| 1,960 | | |
| 15,140 | |
Cash at end of period |
$ | 43,993 | | |
$ | 1,960 | |
Supplemental Cash Flow Information: |
| | | |
| | |
Cash paid for interest |
$ | 2,617 | | |
$ | 55 | |
Cash paid for taxes |
$ | — | | |
$ | — | |
Supplemental disclosure of non-cash activities |
| | | |
| | |
Conveyance of subsidiary |
$ | — | | |
$ | 57,147 | |
Common stock issued for conversion of debt |
$ | 628,455 | | |
$ | — | |
Issuance of common stock warrants in connection with debt |
$ | 55,932 | | |
$ | — | |
Debt discount from fair value of embedded derivatives |
$ | 1,263,506 | | |
$ | — | |
The
accompanying notes are an integral part of these consolidated financial statements.
AJA
CANNAFACTURING, INC.
(FORMERLY
IDS INDUSTRIES, INC.)
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2014
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Business
Aja
Cannafacturing, Inc. (“Aja” or the “Company”) is focusing on the breeding, cultivation, and processing
of raw industrial Cannabis materials for industry specific applications such as building materials (Hempcrete), automotive
(biofuels), plastics (healthcare) and textiles (fabrics).
The
Company was formed as Step Out, Inc., a Nevada corporation on May 2, 2011. On July 18, 2011 Step Out issued 10,000,000 common
shares to acquire 100% membership interest in SOI Nevada, LLC, a Nevada limited liability corporation from the sole shareholder.
The membership interest was acquired at book value from the shareholder. SOI Nevada, LLC became a wholly-owned subsidiary of Step
Out, Inc.
On
September 19, 2012, the Company entered into an Agreement of Conveyance, Transfer and Assignment of Membership Interests and Assumption
of Obligations (the “Agreement”) with our sole officer and director, Sterling Hamilton. Pursuant to the Agreement,
the Company transferred all membership interests in our operating subsidiary, SOI Nevada, LLC, to Mr. Hamilton. In exchange for
this assignment of membership interests, Mr. Hamilton agreed to assume and cancel all liabilities relating to our former business
of developing a chain of flotation tank therapy spas. In addition, Mr. Hamilton agreed to release all liability under a promissory
note due and owing to him in the amount of $2,000.
As
a result of the Agreement, the Company is no longer pursuing its former business plan. Under the direction of our newly appointed
officers and directors, as set forth below, we intend to develop a business focused on the design, development, manufacturing
and distribution of renewable-energy based portable and mobile electrical generators and power stations under our own brand name,
IDS Solar TechnologiesÔ.
Effective
October 12, 2012, the Board of Directors approved a merger with our wholly-owned subsidiary, IDS Acquisition, Inc., pursuant to
NRS 92A.180. IDS Acquisition was incorporated in the state of Nevada on September 25, 2012. As part of the merger with our wholly-owned
subsidiary, our board authorized a change in the name of the company to “IDS Solar” Technologies, Inc.”
Effective
February 7, 2013, the board of directors approved a twelve for one forward split of the Company’s common stock. All shares
throughout these financial statement and Form 10-Q have been retroactively restated to reflect the forward split.
Effective
May 29, 2013, the board of directors authorized a change in the name of the company to “IDS Industries, Inc.”
On
February 6, 2014, the board of directors approved the launch of Propel Management Group, Inc. (PMG) a new wholly owned subsidiary.
The core competency of this consulting service includes developing and implementing Program Management in product development,
service industry, distribution and logistics. The addition of PMG has already proven to translate in-house core competencies in
to additional revenue stream opportunities for IDS Industries.
On
March 10, 2014, the board of directors approved the launch of Charge! Energy Storage, Inc. (Charge!) a new wholly owned subsidiary.
Effective
August 7, 2014, the board of directors authorized a change in the name of the company to “Aja Cannafacturing, Inc.”
The new name reflects the direction and focus of the Company more accurately.
Basis
of Presentation
The
accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America and the rules of the Securities and Exchange Commission ("SEC"). In the opinion of management, all
adjustments necessary in order for the financial statements to be not misleading have been reflected herein. The Company has adopted
an August 31 year end.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Aja Cannafacturing, Inc. and its wholly-owned subsidiary Propel Management
Group, Inc. and Charge! Energy Storage, Inc. All significant intercompany accounts and transactions have been eliminated.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. There were no
cash equivalents as of August 31, 2014 and 2013.
Basic
Loss per Share
Basic
income (loss) per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted
average number of common shares during the period. Diluted earnings per share is calculated by dividing the Company’s net
income available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted
weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt
or equity. Potentially dilutive shares were excluded from the computation as of August 31, 2014 and 2013 since they would
have been anti-dilutive.
Concentrations
of Credit Risk
The
Company maintains its cash in bank deposit accounts, the balances of which at times may exceed federally insured limits. The Company
continually monitors its banking relationships and consequently has not experienced any losses in such accounts. The Company believes
it is not exposed to any significant credit risk on cash.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using the first-in, first-out method; market value is based upon
estimated replacement costs.
Allowance
for Doubtful Accounts
We
maintain an allowance for doubtful accounts for estimated losses that result from the failure or inability of our customers to
make required payments. When determining the allowance, we consider the probability of recoverability of accounts receivable based
on past experience. Accounts receivable may also be fully reserved for when specific collection issues are known to exist. The
analysis of receivables is performed quarterly, and the allowances are adjusted accordingly.
Fair
Value of Financial Instruments
For
certain of the Company’s non-derivative financial instruments, including cash and cash equivalents, receivables, prepaids,
inventory, accounts payable, accrued liabilities, and notes payable, the carrying amount approximates fair value due to the short-term
maturities of these instruments. The estimated fair value of long-term debt is based primarily on borrowing rates currently available
to the Company for similar debt issues. The fair value approximates the carrying value of long-term debt.
ASC
Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments
held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying
amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are a
reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their
expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
| · | Level 1.
Observable inputs such as quoted prices in active markets; |
| · | Level 2.
Inputs, other than the quoted prices in active markets, that are observable either directly
or indirectly; |
| · | Level 3.
Unobservable inputs in which there is little or no market data, which require the reporting
entity to develop its own assumptions. |
The
following presents the gross value of assets and liabilities that were measured and recognized at fair value, as of August
31, 2014 and 2013.
|
Level
I |
|
Level
II |
|
Level
III |
|
Total |
Derivative liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
31, 2014 |
$ |
|
|
|
$ |
558,194 |
|
|
$ |
|
|
|
$ |
558,194 |
|
August 31, 2013 |
$ |
|
|
|
$ |
148,870 |
|
|
$ |
|
|
|
$ |
148,870 |
|
Stock-Based
Compensation
The Company accounts for equity based transactions
with non-employees under the provisions of ASC Topic No. 505-50, “Equity-Based Payments to Non-Employees” (“Topic
No. 505-50”). Topic No. 505-50 establishes that equity-based payment transactions with non-employees shall be measured at
the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
The fair value of common stock issued for payments to non-employees is measured at the market price on the date of grant. The fair
value of equity instruments, other than common stock, is estimated using the Black-Scholes option valuation model. In general,
the Company recognizes the fair value of the equity instruments issued as deferred stock compensation and amortizes the cost over
the term of the contract. During the year ended August 31, 2013, the Company issued 3,157,750 shares of common stock valued at
$467,448 to non-employees. During the year ended August 31, 2014, the Company issued 8,120,000 shares of common stock valued at
$174,633 to non-employees. As of August 31, 2014, $75,955 remains in deferred stock compensation expense.
The
Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718, Compensation
- Stock Compensation which requires all share-based payments to employees, including grants of employee stock options, to
be recognized in the financial statements based on their fair values. The fair value of the equity instrument is charged
directly to compensation expense and credited to additional paid-in capital over the period during which services are rendered.
During the year ended August 31, 2014, the Company issued 6,500,000 shares of common stock valued at $81,250 to its CEO.
Income
Taxes
Income
taxes are computed using the asset and liability method of accounting. Under the asset and liability method, a deferred tax asset
or liability is recognized for estimated future tax effects attributable to temporary differences and carry-forwards. The measurement
of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize future tax benefits only to the
extent, based on available evidence; it is more likely than not such benefits will be realized. The Company’s deferred tax
assets were fully reserved at August 31, 2014 and 2013.
The Company accounts for its income taxes using the Income Tax topic of
the FASB ASC 740, which requires the recognition of deferred tax liabilities and assets for expected future tax consequences of
events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected to reverse.
Revenue
Recognition
Sales of
products or services and related costs of products or services sold are recognized when (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred, (iii) the price is fixed or determinable, and (iv) collectability is reasonably assured. These
terms are typically met upon the prepayment or invoicing, and shipment of products.
Recent
Accounting Pronouncements
The
Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material
impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting
pronouncements that have been issued, that might have a material impact on its financial position or results of operations.
NOTE
2 – PREPAIDS AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets consisted of the following at:
|
August 31, 2014 | |
August 31, 2013 |
Prepaid consulting |
$ | 75,955 | | |
$ | 64,824 | |
Other assets |
| 5,319 | | |
| — | |
Unamortized original issue discount |
| 7,344 | | |
| 6,762 | |
Deferred financing costs |
| 253 | | |
| 8,610 | |
Total prepaid expenses
and other current assets |
$ | 88,871 | | |
$ | 80,196 | |
NOTE
3 – CONVERTIBLE NOTES PAYABLE
On
October 12, 2012, the Company executed a promissory note with Argent Offset, LLC for $20,000. The note bears interest at 18% and
was due on or before January 10, 2013. On February 27, 2013, a new convertible promissory note was executed for $33,850. The note
bears interest at 18% compounded monthly and is due August 26, 2013. The new note amends and replaces in its entirety the note
dated October 12, 2012. Pursuant to the terms of the note, it is convertible into shares of the Company’s common stock at
the option of the holder at any time in whole or in part at a conversion rate of $0.11. On the commitment date, management evaluated
the conversion feature with respect to the benefit of the holder and determined the value of the conversion feature to be $18,464.
This amount has been recorded as a discount against the outstanding balance of the note. The discount was amortized to interest
expense over the life of the debt using the effective interest method. Interest charged to operations relating to the amortization
of the debt discount for the year ended August 31, 2013 amounted to $18,464. In addition, the note included one warrant giving
the holder the right to purchase 50,000 shares of common stock at a price of $0.20 per share for a period of three years. As required
by ASC 470-20 the Company valued the warrant and recorded a debt discount to additional paid in capital in the amount of $3,690
based on the discount to market available at the time of issuance. The discount was to be amortized over the life of the loan
to interest expense. As of August 31, 2013, $3,690 has been amortized to interest expense. On November 26, 2013, an agreement
of temporary forbearance was executed in which for a $1,000 fee the lender agreed to waive any default until December 15, 2013.
On January 10, 2014, another agreement of temporary forbearance was executed in which for a $500 fee the lender agreed to waive
any default until March 20, 2014. On February 24, 2014, $2,500 was repaid on the note and on February 20, 2014, $20,000 of the
principal was converted into 2,857,143 shares of common stock at $.007 per share which resulted in a loss on conversion of debt
of $18,571. On March 10, 2014 the remaining principal and interest totaling $21,923 was converted into 3,131,792 shares of common
stock at $.0632 per share which resulted in a loss on conversion of debt of $176,006.
On
December 3, 2012, the Company executed a convertible promissory note with Steven J. Caspi (“Caspi”) for $125,000.
The note bears interest at 5% and was due on or before November 30, 2013. Pursuant to the terms of the note, it is convertible
into shares of the Company’s common stock at the option of the holder at any time in whole or in part at a conversion rate
of $1.25. On the commitment date, management evaluated the conversion feature with respect to the benefit of the holder and determined
the value of the conversion feature to be $60,000. This amount has been recorded as a discount against the outstanding balance
of the note. The discount is being amortized to interest expense over the life of the debt using the effective interest method.
The note also issued one warrant giving the holder the right to purchase 15,625 shares of common stock at a price of $2.00 per
share for a period of five years. As required by ASC 470-20 the Company recorded a debt discount to additional paid in capital
in the amount of $16,455 based on the discount to market available at the time of issuance. The discount has been fully amortized
to interest expense. On March 10, 2014, the Company executed a forbearance agreement with the lender modifying the terms of the
original agreement. Per the new agreement the conversion price was changed to $0.005 per share and the due date was extended to
November 30, 2014. As a result of the new conversion price the Company recorded an additional debt discount of $48,539. The additional
discount will be amortized over the remaining term of the note. On March 21, 2014, $25,000 of the note was converted into 5,000,000
shares of common stock. The note is shown net of a debt discount of $10,094 and the note has accrued interest of $9,166.
On
March 20, 2013, the Company executed a convertible promissory note for $32,500 with Asher Enterprises, Inc. The note bears interest
at 8% per annum and is due on or before December 26, 2013. The note is convertible at a 49% discount any time during the period
beginning 180 days following the date of the note. The Company recorded a debt discount in the amount of $32,500 in connection
with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the effective interest method
of accretion over the term of the note. Further, the Company recognized an initial derivative liability of $49,939 based on the
Black Scholes Merton pricing model. During the year ended August 31, 2014, the total principal of $32,500 and accrued interest
of $1,300 was converted into 6,143,590 shares of common stock. As a result of the conversion $8,125 of the remaining debt discount
was expensed and the company recognized a gain on derivative liability of $35,600.
On
April 4, 2013, the Company executed a convertible promissory note for $15,500 with Asher Enterprises, Inc. The note bears interest
at 8% per annum and is due on or before January 8, 2014. The note is convertible at a 49% discount any time during the period
beginning 180 days following the date of the note. The Company recorded a debt discount in the amount of $15,500 in connection
with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the interest method of accretion
over the term of the note. Further, the Company recognized an initial derivative liability of $21,610 based on the Black Scholes
Merton pricing model. During the year ended August 31, 2014, the total principal of $15,500 and accrued interest of $620 was converted
into 3,526,087 shares of common stock. As a result of the conversion $6,045 of the remaining debt discount was expensed and the
Company recognized a gain on derivative liability of $17,286.
On
June 3, 2013, the Company executed a convertible promissory note for $32,500 with Asher Enterprises, Inc. The note bears interest
at 8% per annum and is due on or before March 5, 2014. The note is convertible at a 49% discount any time during the period beginning
180 days following the date of the note. The Company recorded a debt discount in the amount of $32,500 in connection with the
initial valuation of the beneficial conversion feature of the note to be amortized utilizing the interest method of accretion
over the term of the note. Further, the Company recognized an initial derivative liability of $34,945 based on the Black Scholes
Merton pricing model. During the year ended August 31, 2014, the total principal of $32,500 and accrued interest of $1,300 was
converted into 7,347,826 shares of common stock. As a result of the conversion $2,865 of the remaining debt discount was expensed
and the Company recognized a gain on derivative liability of $78,028.
On
June 15, 2013, the Company executed a promissory note for $15,000 with a shareholder. The note bears interest at 10% and was due
within ninety days. On October 15, 2014, the original $15,000, accrued interest of $600 and an additional cash loan of $8,755
was rolled into a new convertible promissory note for $24,355. The new note bears interest at 10% per annum and is convertible
at a 49% discount of the VWAP occurring during the ten days preceding the conversion date. The Company recorded a debt discount
in the amount of $24,355 in connection with the initial valuation of the beneficial conversion feature of the note to be amortized
utilizing the effective interest method of accretion over the term of the note. Further, the Company recognized a derivative liability
of $35,664 based on the Black Scholes Merton pricing model using the following attributes: .68% risk free rate, 258% volatility
and a three year term to maturity. As of August 31, 2014, $7,117 of the debt discount has been amortized to interest expense.
In addition, the Company fair valued the derivative at $20,506 resulting in a gain on the change in fair value of the derivative.
The note is shown net of a debt discount of $17,238 at August 31, 2014 as accrued interest of $2,090.
On
June 19, 2013, the Company executed a Convertible Promissory Note (the “note”) with JMJ Financial (“JMJ”).
The nominal principal sum of the Note is $300,000, with an original issue discount of ten percent (10%). The note matures one
year from the effective date of each payment, which is made at the sole discretion of JMJ. The Note is convertible into common
stock in whole or in part at a variable conversion price equal to a 40% discount to the lowest trade price in the twenty five
trading days prior to conversion.
On
June 19, 2013, the Company received its first payment on the original JMJ financial convertible promissory note dated June 19,
2013 of $60,500, including a $5,500 original issue discount. The Company recorded a debt discount in the amount of $60,500 (payment
plus 10% original discount) in connection with the initial valuation of the beneficial conversion feature of the note to be amortized
utilizing the effective interest method of accretion over the term of the note. Further, the Company recognized a derivative liability
of $75,507 based on the Black Scholes Merton pricing model using the following attributes: .13% risk free rate, 134% volatility
and a one year term to maturity. During the six months ended February 28, 2014, principal of $11,351 and accrued interest of $7,944
was converted into 4,200,000 shares of common stock. As a result of the conversion $3,452 of the debt discount was accelerated
and expensed. On March 19, 2014, the remaining principal of $20,900 was converted into 3,800,000 shares of common stock. As a
result of the conversion the remaining $14,614 of debt discount was expensed to interest expense and the Company recognized a
gain on derivative liability of $241,878.
On
August 5, 2013, the Company executed a convertible promissory note for $32,500 with Asher Enterprises, Inc. The note bears interest
at 8% per annum and is due on or before May 7, 2014. The note is convertible at a 49% discount any time during the period beginning
180 days following the date of the note. During March 2014 the principal of $32,500 and $1,300 of accrued interest was converted
into 6,830,508 shares of common stock. As a result of the conversion the remaining $23,400 of debt discount was expensed to interest
expense and the Company recognized a gain on derivative liability of $138,269.
On
August 14, 2013, the Company received its second payment on the original JMJ financial convertible promissory note dated June
19, 2013 of $27,500, including a $2,500 original issue discount. The Company recorded a debt discount in the amount of $27,500
(payment plus 10% original discount) in connection with the initial valuation of the beneficial conversion feature of the note
to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the Company recognized
a derivative liability of $62,569 based on the Black Scholes Merton pricing model using the following attributes: .12% risk free
rate, 144% volatility and a one year term to maturity. During the year ended August 31, 2014 the principal of $27,500 and $3,611
of accrued interest was converted into 7,000,000 shares of common stock. As a result of the conversion the remaining $6,932 of
debt discount was expensed to interest expense and the Company recognized a gain on derivative liability of $126,070.
On
September 16, 2013, the Company executed a convertible promissory note for $10,000 with Robert Hendrickson. The note bears interest
at 10% per annum and is due on or before September 15, 2014. The Note is convertible into common stock in whole or in part at
a variable conversion price equal to a 49% discount to the VWAP price for the ten trading days prior to conversion. The Company
recorded a debt discount in the amount of $10,000 in connection with the initial valuation of the beneficial conversion feature
of the note to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the Company
recognized an initial derivative liability of $18,300 based on the Black Scholes Merton pricing model. On March 10, 2014, the
original note of $10,000 plus a $1,000 OID was purchased by GCEF Opportunity Fund, LLC.
On
September 30, 2013, the Company received its third payment on the original JMJ financial convertible promissory note dated June
19, 2013 of $27,500, including a $2,500 original issue discount. The Company recorded a debt discount in the amount of $27,500
(payment plus 10% original discount) in connection with the initial valuation of the beneficial conversion feature of the note
to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the Company recognized
a derivative liability of $70,390 based on the Black Scholes Merton pricing model using the following attributes: .10% risk free
rate, 261% volatility and a one year term to maturity. On June 5, 2014, $20,250 of principal was converted into 4,500,000 shares
of common stock. As of August 31, 2014; $25,316 of the debt discount has been amortized to interest expense. In addition, the
Company fair valued the derivative at $19,877 resulting in a gain on the change in fair value of the derivative. The note is shown
net of a debt discount of $2,184 at August 31, 2014.
On
January 22, 2014, we obtained short term financing from Finiks Capital, LLC under a Promissory Note in the amount of $100,000
(the “Note”). The Note features an original issue discount of ten percent (10%) and has a face amount of $100,000.
We will initially receive $20,000 from the Lender and will receive additional funds at the Lender’s sole discretion. The
Note accrues no interest if the principal sum due is repaid within ninety days. The Note incurs interest one time at a rate of
ten percent (10%) on the principal sum due, with all principal and interest due in full on the maturity date of one hundred eighty
days from the date of issue. At any time, the Note may be converted, in whole or in part at the option of the holder, at a price
per share of fifty-one percent (51%) of the average of the three lowest bid side prices in the ten trading days previous to the
conversion. The Company recorded a debt discount in the amount of $22,000 (payment plus 10% original discount) in connection with
the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the effective interest method
of accretion over the term of the note. Further, the Company recognized a derivative liability of $34,965 based on the Black Scholes
Merton pricing model using the following attributes: .13% risk free rate, 134% volatility and a six month term to maturity. On
July 18, 2014, the total principal of $22,000 and accrued interest of $2,200 was converted into 5,176,471 shares of common stock.
As a result of the conversion $6,112 of the remaining debt discount was expensed and the Company recognized a gain on derivative
liability of $40,583.
On
February 4, 2014, we obtained short term financing from GCEF Opportunity Fund, LLC under a Promissory Note in the amount of $33,000.
The Note features an original issue discount of ten percent (10%) and we will therefore receive $30,000 in actual funding. The
Note is due within forty-five days, with an additional fifteen day grace period. As an additional loan fee, we have agreed to
issue the Lender 2,000,000 shares of our common stock. These shares were valued at $0.0188, the closing market price on the day
of issuance for total non-cash expense of $37,600. If the Note is not repaid by the maturity date, it shall be converted into
3,465,000 shares of our common stock, representing conversion of the principal, the original issue discount, and an interest at
the rate of fifteen percent (15%) into common stock at a price of $0.01 per share. On March 31, 2014, $15,000 was repaid on the
note. On June 3, 2014, the remaining principal of $18,000 and accrued interest of $1,650 was converted into 3,930,000 shares of
common stock.
On
February 26, 2014, The Company received an additional $20,000 from Finiks Capital. The Company recorded a debt discount in the
amount of $22,000 (payment plus 10% original discount) in connection with the initial valuation of the beneficial conversion feature
of the note to be amortized utilizing the effective interest method of accretion over the term of the note. Further, the Company
recognized a derivative liability of $47,295 based on the Black Scholes Merton pricing model using the following attributes: .08%
risk free rate, 212% volatility and a six month term to maturity. On July 22, 2014, the total principal of $22,000 and accrued
interest of $2,200 was converted into 5,176,471 shares of common stock. As a result of the conversion $10,512 of the remaining
debt discount was expensed and the Company recognized a gain on derivative liability of $33,247.
On
February 27, 2014, the Company executed a convertible promissory note for $73,000 with Asher Enterprises, Inc. The note bears
interest at 8% per annum and is due on or before December 3, 2014. The note is convertible at a 49% discount any time during
the period beginning 180 days following the date of the note. The Company recorded a debt discount in the amount of $73,000
in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the
interest method of accretion over the term of the note. Further, the Company recognized an initial derivative liability of
$118,582 based on the Black Scholes Merton pricing model. As of August 31, 2014, the Company fair valued the derivative at
$91,120 resulting in a gain on the change in fair value of the derivative. The note is shown net of a debt discount of
$70,080 at August 31, 2014 and has accrued interest of $2,848.
On
March 19, 2014, the Company executed a convertible promissory note for $53,000 with KBM Worldwide, Inc. The note bears interest
at 8% per annum and is due on or before December 26, 2014. The note is convertible at a 49% discount any time during the period
beginning 180 days following the date of the note. Accrued interest on the note as of August 31, 2014 is $1,870.
On
May 20, 2014, the Company executed a convertible promissory note for $53,000 with KBM Worldwide, Inc. The note bears interest
at 8% per annum and is due on or before February 23, 2015. The note is convertible at a 49% discount any time during the period
beginning 180 days following the date of the note. Accrued interest on the note as of August 31, 2014 is $1,429.
On
April 17, 2014, the Company received its fourth payment on the original JMJ financial convertible promissory note dated June 19,
2013 of $44,000, including a $4,000 original issue discount. The Company recorded a debt discount in the amount of $44,000 (payment
plus 10% original discount) in connection with the initial valuation of the beneficial conversion feature of the note to be amortized
utilizing the effective interest method of accretion over the term of the note. Further, the Company recognized a derivative liability
of $104,127 based on the Black Scholes Merton pricing model using the following attributes: .11% risk free rate, 214% volatility
and a one year term to maturity. As of August 31, 2014; $16,394 of the debt discount has been amortized to interest expense. In
addition, the Company fair valued the derivative at $60,776 resulting in a gain on the change in fair value of the derivative.
The note is shown net of a debt discount of $27,606 at August 31, 2014.
On
March 5, 2014, the Company executed a Convertible Promissory Note (the “note”) with Black Mountain Equities, Inc.
(“Black Mountain”). The nominal principal sum of the Note is $250,000, with an original issue discount of ten percent
(10%). The note matures one year from the effective date of each payment, which is made at the sole discretion of Black Mountain.
The Note is convertible into common stock in whole or in part at a variable conversion price equal to the lessor of $0.025 or
a 60% discount to the lowest trade price in the twenty five trading days prior to conversion. The Company received its first payment
towards the loan of $25,000. The Company recorded a debt discount in the amount of $27,500 (payment plus 10% original discount)
in connection with the initial valuation of the beneficial conversion feature of the note to be amortized utilizing the effective
interest method of accretion over the term of the note. Further, the Company recognized a derivative liability of $110,515 based
on the Black Scholes Merton pricing model using the following attributes: .13% risk free rate, 193% volatility and a one year
term to maturity. As of August 31, 2014, $13,487 of the debt discount has been amortized to interest expense. In addition, the
Company fair valued the derivative at $33,509 resulting in a gain on the change in fair value of the derivative. The note is shown
net of a debt discount of $14,013 at August 31, 2014.
On
August 18, 2014, the Company executed a convertible promissory note for $53,000 with KBM Worldwide, Inc. The note bears interest
at 8% per annum and is due on or before May 20, 2015. The note is convertible at a 49% discount any time during the period
beginning 180 days following the date of the note. Accrued interest on the note as of August 31, 2014 is $46.
On
July 11, 2014, the Company executed a convertible promissory note for $31,500 with LG Capital Funding, LLC. The note bears interest
at 8% per annum and is due on or before July 11, 2015. The note is convertible at a 45% discount any time during the period beginning
180 days following the date of the note. Accrued interest on the note as of August 31, 2014 is $359.
On
June 24, 2014, the Company received its fifth payment on the original JMJ financial convertible promissory note dated June 19,
2013 of $44,000, including a $4,000 original issue discount. The Company recorded a debt discount in the amount of $44,000 (payment
plus 10% original discount) in connection with the initial valuation of the beneficial conversion feature of the note to be amortized
utilizing the effective interest method of accretion over the term of the note. Further, the Company recognized a derivative liability
of $66,010 based on the Black Scholes Merton pricing model using the following attributes: .11% risk free rate, 214% volatility
and a one year term to maturity. As of August 31, 2014, $11,090 of the debt discount has been amortized to interest expense. In
addition, the Company fair valued the derivative at $63,221 resulting in a gain on the change in fair value of the derivative.
The note is shown net of a debt discount of $32,910 at August 31, 2014.
A
summary of the status of the Company’s debt discounts, derivative liabilities and original issue discounts, and changes
during the periods is presented below:
Debt Discount | |
August
31, 2013 | |
Additions | |
Amortization | |
August
31, 2014 |
Asher – 3/20/13 | |
$ | — | | |
$ | 32,500 | | |
| (32,500 | ) | |
$ | — | |
Asher – 4/4/13 | |
| — | | |
| 15,500 | | |
| (15,500 | ) | |
| — | |
Asher – 6/3/13 | |
| — | | |
| 32,500 | | |
| (32,500 | ) | |
| — | |
Asher – 8/5/13 | |
| — | | |
| 32,500 | | |
| (32,500 | ) | |
| — | |
Asher – 2/27/14 | |
| — | | |
| 73,000 | | |
| (2,920 | ) | |
| 70,080 | |
Black Mountain – 3/5/14 | |
| — | | |
| 27,500 | | |
| (13,487 | ) | |
| 14,013 | |
Caspi | |
| 19,480 | | |
| 48,545 | | |
| (57,931 | ) | |
| 10,094 | |
Finiks – 1/21/14 | |
| — | | |
| 22,000 | | |
| (22,000 | ) | |
| — | |
Finiks – 2/26/14 | |
| — | | |
| 22,000 | | |
| (22,000 | ) | |
| — | |
GCEF Opportunity | |
| — | | |
| 11,769 | | |
| (11,769 | ) | |
| — | |
Hendrickson – 9/16/13 | |
| — | | |
| 10,000 | | |
| (10,000 | ) | |
| — | |
JMJ – 6/19/13 | |
| 48,234 | | |
| — | | |
| (48,234 | ) | |
| — | |
JMJ – 8/14/13 | |
| 26,144 | | |
| — | | |
| (26,144 | ) | |
| — | |
JMJ – 9/30/13 | |
| — | | |
| 27,500 | | |
| (25,316 | ) | |
| 2,184 | |
JMJ – 4/17/14 | |
| — | | |
| 44,000 | | |
| (16,394 | ) | |
| 27,606 | |
JMJ – 6/24/14 | |
| — | | |
| 44,000 | | |
| (11,090 | ) | |
| 32,910 | |
Knoblich | |
| — | | |
| 274,973 | | |
| (30,134 | ) | |
| 244,839 | |
Neal | |
| — | | |
| 24,355 | | |
| (7,117 | ) | |
| 17,238 | |
| |
$ | 93,858 | | |
$ | 742,642 | | |
$ | (417,536 | ) | |
$ | 418,964 | |
Derivative Liabilities | |
August
31, 2013 | |
Initial
Valuation | |
Revaluation
on
8/31/14 | |
Change
in
fair value of
Derivative |
Asher – 3/20/13 | |
$ | — | | |
$ | 49,939 | | |
$ | — | | |
$ | (49,939 | ) |
Asher – 4/4/13 | |
| — | | |
| 21,610 | | |
| — | | |
| (21,610 | ) |
Asher – 6/3/13 | |
| — | | |
| 34,945 | | |
| — | | |
| (34,945 | ) |
Asher – 8/5/13 | |
| — | | |
| 155,554 | | |
| — | | |
| (155,554 | ) |
Asher – 2/27/14 | |
| | | |
| 118,852 | | |
| 91,120 | | |
| (27,732 | ) |
Black Mountain – 3/5/14 | |
| — | | |
| 110,515 | | |
| 33,509 | | |
| (77,006 | ) |
Finiks – 1/21/14 | |
| — | | |
| 34,965 | | |
| — | | |
| (34,965 | ) |
Finiks – 2/26/14 | |
| — | | |
| 47,295 | | |
| — | | |
| (47,295 | ) |
Hendrickson – 9/16/13 | |
| — | | |
| 18,300 | | |
| — | | |
| (18,300 | ) |
JMJ – 6/19/13 | |
| 102,245 | | |
| — | | |
| — | | |
| (102,245 | ) |
JMJ – 8/14/13 | |
| 46,625 | | |
| — | | |
| — | | |
| (46,625 | ) |
JMJ – 9/30/13 | |
| — | | |
| 70,390 | | |
| 19,877 | | |
| (50,513 | ) |
JMJ - 4/17/14 | |
| — | | |
| 104,127 | | |
| 60,776 | | |
| (43,351 | ) |
JMJ – 6/24/14 | |
| — | | |
| 66,010 | | |
| 63,221 | | |
| (2,789 | ) |
Knoblich | |
| — | | |
| 395,340 | | |
| 269,185 | | |
| (126,155 | ) |
Neal | |
| — | | |
| 35,665 | | |
| 20,506 | | |
| (15,158 | ) |
| |
$ | 148,870 | | |
$ | 1,263,506 | | |
$ | 558,194 | | |
$ | (854,182 | ) |
Original Issue
Discount | |
August
31, 2013 | |
Additions | |
Amortization | |
August
31, 2014 |
Black Mountain – 3/5/14 | |
$ | | | |
$ | 2,500 | | |
$ | (1,095 | ) | |
$ | 1,405 | |
Finiks – 1/21/14 | |
| — | | |
| 2,000 | | |
| (2,000 | ) | |
| — | |
Finiks – 2/26/14 | |
| — | | |
| 2,000 | | |
| (2,000 | ) | |
| — | |
GCEF Opportunity | |
| — | | |
| 3,000 | | |
| (3,000 | ) | |
| — | |
JMJ – 6/19/13 | |
| 4,385 | | |
| — | | |
| (4,385 | ) | |
| — | |
JMJ – 8/14/13 | |
| 2,377 | | |
| — | | |
| (2,377 | ) | |
| — | |
JMJ – 9/30/13 | |
| — | | |
| 2,500 | | |
| (2,315 | ) | |
| 185 | |
JMJ – 4/17/14 | |
| — | | |
| 4,000 | | |
| (1,501 | ) | |
| 2,499 | |
JMJ – 6/4/14 | |
| | | |
| 4,000 | | |
| (745 | ) | |
| 3,255 | |
| |
$ | 6,762 | | |
$ | 20,000 | | |
$ | (19,418 | ) | |
$ | 7,344 | |
NOTE
4 – NOTES PAYABLE
On
June 12, 2013, the Company executed a promissory note for $15,000. The loan was due August 12, 2013. The note does not bear interest
but its principal balance includes a loan fee of $5,000. This loan had been extended with no specific terms of repayment.
As
of August 31, 2014, the Company owed various shareholders $13,100 for advances made to cover certain operating costs. The loans
accrue interest at 8% per annum and are due on demand.
NOTE
5 – STOCK WARRANTS
Pursuant
to the terms and conditions of the convertible promissory note dated February 27, 2013, the Company issued a warrant to purchase
50,000 shares of the Company’s common stock. The aggregate fair value of the warrants totaled $2,044 based on the Black
Scholes Merton pricing model using the following estimates: exercise price of $0.20, 1.30% risk free rate, 64% volatility and
expected life of the warrants of 3 years.
Pursuant
to the terms and conditions of the convertible promissory note dated November 30, 2012, the Company issued a warrant to purchase
15,625 shares of the Company’s common stock. The aggregate fair value of the warrants totaled $16,455 based on the Black
Scholes Merton pricing model using the following estimates: exercise price of $2.00, .63% risk free rate, 85.9% volatility and
expected life of the warrants of 5 years.
Pursuant
to the terms and conditions of the convertible promissory note dated February 4, 2014, the Company issued a warrant to purchase
1,000,000 shares of the Company’s common stock. The aggregate fair value of the warrants totaled $11,769 based on the Black
Scholes Merton pricing model using the following estimates: exercise price of $0.02, 1.46% risk free rate, 197.6% volatility and
expected life of the warrants of 5 years.
Pursuant
to the terms and conditions of the Warrant agreement dated February 27, 2014, the Company issued a warrant to purchase 2,000,000
shares of the Company’s common stock. The aggregate fair value of the warrants totaled $44,169 based on the Black Scholes
Merton pricing model using the following estimates: exercise price of $0.01, 2.11% risk free rate, 246% volatility and expected
life of the warrants of 7 years.
A
summary of the status of the Company’s outstanding warrants and changes during the periods is presented below:
| |
Shares available
to purchase
with warrants | |
Weighted Average
Price | |
Weighted Average
Fair Value |
| | | |
| | | |
| | | |
| | |
| Outstanding,
August 31, 2013 | | |
| 65,625 | | |
$ | 0.06 | | |
$ | 0.03 | |
| | | |
| | | |
| | | |
| | |
| Issued | | |
| 3,000,000 | | |
| — | | |
| 0.03 | |
| Exercised | | |
| — | | |
| — | | |
| — | |
| Forfeited | | |
| — | | |
| — | | |
| — | |
| Expired | | |
| — | | |
| — | | |
| — | |
| Outstanding,
August 31, 2014 | | |
| 3,065,625 | | |
$ | 0.03 | | |
$ | 0.03 | |
| | | |
| | | |
| | | |
| | |
| Exercisable,
August 31, 2014 | | |
| 3,065,625 | | |
$ | 0.03 | | |
$ | 0.03 | |
| | | |
| | | |
| | | |
| | |
Range
of Exercise Prices |
Number
Outstanding at 8/31/14 |
Weighted
Average Remaining
Contractual Life |
|
Weighted
Average
Exercise Price |
$0.10
- $2.00 |
3,065,625 |
6.3
years |
$ |
0.03 |
NOTE
6 –COMMON STOCK TRANSACTIONS
On
September 19, 2012, Mr. Hamilton, the Company’s former CEO and Director, cancelled 113,000,004 of his shares and returned
them to treasury.
On
or about November 8, 2012, the Company issued 120,000 shares of common stock for services. The shares were valued using the closing
stock price on the day of issuance of $0.208, for a total non-cash expense of $25,000.
On
January 4, 2013, the Company issued 100,000 shares of common stock for consulting services. The shares were valued using the closing
stock price on the day of issuance of $1.45, for a total non-cash expense of $145,000.
Effective
February 7, 2013, the board of directors approved a one for twelve forward split of the Company’s common stock.
On
February 15, 2013, the Company issued 1,200,000 shares of common stock for advertising and investor relation services. The shares
were valued using the closing stock price on the day of issuance of $0.205, for a total non-cash expense of $246,000.
On
May 8, 2013, the Company issued 99,996 shares of common stock to its former CFO, for services. The shares were valued using the
closing stock price on the day of issuance of $0.093, for a total non-cash expense of $9,250.
On December
10, 2013, the company sold 1,333,333 shares of common stock to its CEO for total cash proceeds of $20,000.
During
the year ended August 31, 2014, the Company issued a total of 5,988,935 shares of common stock to Argent Offset, LLC in conversion
of total principal and interest of $41,923, (see Note 4). The conversions resulted in a total loss on conversion of debt of $194,577.
On
February 7, 2014, the Company issued 6,500,000 shares of common stock to its CEO, for services. The shares were valued using the
closing stock price on the day of issuance of $0.0125, for a total expense of $81,250.
On
March 18, 2014, the Company issued 2,298,000 shares of common stock to GCEF Opportunity Fund in conversion of total principal
and interest of $11,490.
On
March 21, 2014, the Company issued 5,000,000 shares of common stock to Steven Caspi in conversion of $25,000 of the $125,000 note
held by him.
On
June 3, 2014, the Company issued 3,930,000 shares of common stock to GCEF Opportunity Fund in conversion of total principal and
interest of $19,650.
In
July 2014, the Company issued 10,352,942 shares of common stock to Finiks Capital LLC in conversion of total principal and interest
of $48,400.
On
July 22, 2014, the Company issued 6,000,000 shares of common stock to the Company’s former CEO, Bruce Knoblich in conversion
of $30,000 of the amount due to him.
During
the year ended August 31, 2014, the Company issued a total of 23,848,014 shares of common stock to Asher Enterprises, Inc. in
conversion of total principal and interest of $117,520 (see Note 4).
During
the year ended August 31, 2014, the Company issued a total of 19,500,000 shares of common stock to JMJ Financial in conversion
of total principal and interest of $109,895 (see Note 4).
During
the year ended August 31, 2014, the Company issued a total of 8,120,000 shares of common stock for services. The shares were
valued using the closing stock price on the day of issuance, for a total non-cash expense of $174,635, $75,955 of which
remains in deferred stock compensation.
NOTE
7- RELATED PARTY TRANSACTIONS
On
May 8, 2013, the Company issued 99,996 shares of common stock to its former CFO, for services. The shares were valued using the
closing stock price on the day of issuance of $0.093, for a total expense of $9,250.
On August 15, 2013, the Company executed a
Note Receivable for $77,307 for funds that it had advanced to another company owned by the former CEO. The note bears interest
at 8% and was to mature in ninety days. During the year ended August 31, 2014, $39,764 and $1,500 was paid back on the principal
and interest, respectively on this loan. As of August 31, 2014, the Company from which the note was due ceased operations. As a
result management determined that the note and all accrued interest had become uncollectible. The Company has recognized a loss
on bad debt of $42,972.
On December
10, 2013, the Company sold 1,333,333 shares of common stock to its CEO for total cash proceeds of $20,000.
On
February 7, 2014, Company issued 6,500,000 shares of common stock to its CEO, for services. The shares were valued using the closing
stock price on the day of issuance of $0.0125, for a total expense of $81,250.
Notes
Payable
On
May 31, 2013, the Company’s former CEO, Bruce Knoblich and the Company executed a promissory note for $289,998, $2,150 of
which has been repaid. The note bears interest at 5% and was due November 30, 2013. On July 22, 2014, the principle and accrued
interest were rolled into a new convertible promissory note for $304,973. The new note bears interest at 8% per annum and is convertible
at a 49% discount of the average trading price during the ten days preceding the conversion date. The Company recorded a debt
discount in the amount of $274,973 in connection with the initial valuation of the beneficial conversion feature of the note to
be amortized utilizing the effective interest method of accretion over the term of the note. Further, the Company recognized a
derivative liability of $395,341 based on the Black Scholes Merton pricing model using the following attributes: .11% risk free
rate, 230% volatility and a one year term to maturity. As of August 31, 2014, $30,134 of the debt discount has been amortized
to interest expense. In addition, the Company fair valued the derivative at $269,185 resulting in a gain on the change in fair
value of the derivative. The note is shown net of a debt discount of $244,839 at August 31, 2014 plus accrued interest of $2,411.
NOTE
8 – INCOME TAXES
For
the year ended August 31, 2014, the Company has incurred a net loss of $1,381,377 and, therefore, has no tax liability. The net
deferred tax asset generated by the loss carry-forward has been fully reserved. The cumulative net operating loss carry-forward
is approximately $2,799,000 at August 31, 2014, and will expire beginning in the year 2032.
The
provision for Federal income tax consists of the following for the years ended August 31, 2014 and 2013:
|
2014 |
|
2013 |
Federal income
tax benefit attributable to: |
|
|
|
|
|
|
|
Current
operations |
$ |
471,847 |
|
|
$ |
453,217 |
|
Less:
valuation allowance |
|
(471,847 |
) |
|
|
(453,217 |
) |
Net
provision for Federal income taxes |
$ |
|
|
|
$ |
|
|
The
cumulative tax effect at the expected rate of 34% of significant items comprising our net deferred tax amount is as follows as
of August 31, 2014 and 2013:
|
2014 |
|
2013 |
Deferred tax asset
attributable to: |
|
|
|
|
|
|
|
Net
operating loss carryover |
$ |
951,794 |
|
|
$ |
479,948 |
|
Valuation
allowance |
|
(951,794 |
) |
|
|
(479,948 |
) |
Net
deferred tax asset |
$ |
|
|
|
$ |
|
|
Due
to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards of approximately $2,799,000
for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating
loss carry forwards may be limited as to use in future years.
ASC
Topic 740 provides guidance on the accounting for uncertainty in income taxes recognized in a company's financial statements.
Topic 740 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination
based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax
position to determine the amount to recognize in the financial statements.
The
Company includes interest and penalties arising from the underpayment of income taxes in the statements of operations in the provision
for income taxes. As of August 31, 2014, the Company had no accrued interest or penalties related to uncertain tax positions.
The
Company files income tax returns in the U.S. federal jurisdiction and in the state of Nevada.
NOTE
9- GOING CONCERN
As
of August 31, 2014, the Company has a working capital deficit of $1,192,334, limited revenue and an accumulated deficit of $2,799,397.
The financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which
contemplates the realization of assets and liquidation of liabilities in the normal course of business. Without realization of
additional capital, it would be unlikely for the Company to continue as a going concern. The Company’s management plans
on raising cash from public or private debt or equity financing, on an as needed basis and in the longer term, upon achieving
profitable operations through its business activities.
NOTE
10 - SUBSEQUENT EVENTS
Subsequent
to August 31, 2014, Black Mountain Equities, Inc. converted $23,800 of the amount due to them into 26,240,311 shares of common
stock.
Subsequent
to August 31, 2014, Asher Enterprises, Inc. converted $73,000 of the amount due to them into 42,830,672 shares of common stock.
Subsequent
to August 31, 2014, JMJ Financial converted $26,352 of the amount due to them into 29,483,336 shares of common stock.
Subsequent
to August 31, 2014, KBM Worldwide, Inc. converted $44,225 of the amount due to them into 41,833,761 shares of common stock.
On
September 15, 2014, a portion of the Bruce Knoblich note in the amount $20,000 was assigned to Blackbride Capital Partners, LLC.
Concurrent with this assignment, we entered into a replacement Convertible Promissory Note with Blackbridge Capital Partners,
LLC. The replacement note bears interest at 5% per annum, is due on or before March 17, 2015, and is convertible into shares of
our common stock at price equal to a fifty percent (50%) discount to our lowest trading price during the forty (40) trading days
preceding the conversion.
On
September 22, 2014, Blackbridge Capital, LLC converted $20,000 of the amount due to them into 12,121,212 shares of common stock.
On
September 24, 2014, a portion of the Bruce Knoblich note in the amount $50,000 was assigned to WHC Capital, LLC. Concurrent with
this assignment, we entered into a replacement Convertible Promissory Note with WHC Capital, LLC. The replacement note bears interest
at 12% per annum, is due on or before September 25, 2015, and is convertible into shares of our common stock at price equal to
a forty nine percent (49%) discount to our lowest trading price during the three (3) trading days preceding the conversion.
On
October 21, 2014, the Company’s Board of Directors approved a resolution to amend its Articles of Incorporation to increase
the aggregate number of common shares that it may issue to three billion (3,000,000,000) shares.
On
October 24, 2014, a portion of the Bruce Knoblich note in the amount $50,000 was assigned to Beaufort Capital Partners, LLC. Concurrent
with this assignment, we entered into a replacement Convertible Promissory Note with Beaufort Capital Partners, LLC. The replacement
note bears interest at 12% per annum, is due on or before October 9, 2015, and is convertible into shares of our common stock
at price equal to a fifty percent (50%) discount to our lowest trading price during the twenty (20) trading days preceding the
conversion.
On
October 17, 2014, our board of directors approved a Certificate of Designation for Class A Convertible Preferred Stock. This newly
designation class of preferred stock consists of one million (1,000,000) shares. Class A Convertible Preferred Stock votes together
with our common stock at a rate of three thousand (3,000) votes for each preferred share held. In addition, Class A Convertible
Preferred Stock is convertible to shares of our common stock, at the option of the holder, at a rate of one share of common stock
for each preferred share held. In any liquidation, holders of our Class A Convertible Preferred Stock will participate pro-rata
with the holders of our common stock. Shares of Class A Convertible Preferred Stock have no dividend rights.
On
October 17, 2014, our board of directors approved an Executive Employment Agreement (the “Agreement”) with Kendall
Smith under which Mr. Smith was retained to serve as our new President. Under the Agreement, Mr. Smith will serve as our President
and CEO for an initial term ending on August 31, 2015, with an automatic renewal for an additional year unless the Agreement is
terminated by advance notice. Mr. Smith’s base salary per year will be $100,000, subject to adjustments and performance
bonuses to be determined by the board of directors. As a signing bonus under the Agreement, Mr. Smith was issued 1,000,000 shares
of our newly-designated Class A Convertible Preferred Stock. As a result of the issuance 1,000,000 shares of Class A Convertible
Preferred Stock to Kendall Smith, as discussed above, Mr. Smith is deemed to have acquired control of the company on October 17,
2014.
On
November 4, 2014, Beaufort Capital Partners, LLC converted $4,900 of the amount due to them into 14,000,000 shares of common stock.
On
November 6, 2014, our Board of Directors approved a Severance and Release Agreement (the “Agreement”) with our departing
former CEO and board member, Scott Plantinga. The Agreement resolves all claims for compensation, benefits, or other consideration
due to Mr. Plantinga under his Executive Employment Agreement dated September 1, 2013.
On
November 20, 2014, our board of directors appointed Jesse Lopez to serve as a member of the board.
On
November 24, 2014, Beaufort Capital Partners, LLC converted $5,850 of the amount due to them into 16,714,286 shares of common
stock.
On December 11, 2014, WHC Capital, LLC converted
$5,778 of the amount due to them into 19,586,000 shares of common stock.
In
accordance with ASC 855-10, the Company has analyzed its operations subsequent to August 31, 2014 through the date these financial
statements were issued and has determined that it does not have any material subsequent events to disclose in these financial
statements other than the events described above.
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
Item 9A. Controls and Procedures
As required by Rule 13a-15 under the Securities
Exchange Act of 1934, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this annual report, being August 31, 2014. This evaluation was carried out under the supervision and
with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.
Disclosure controls and procedures are controls
and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under
the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities
and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to
ensure that information required to be disclosed in our company’s reports filed under the Securities Exchange Act of 1934
is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure.
Based upon that evaluation, including our Chief
Executive Officer and Chief Financial Officer, we have concluded that our disclosure controls and procedures were ineffective as
of the end of the period covered by this annual report.
Management’s Report on Internal Control
over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934). Management has assessed the effectiveness of our internal control over financial reporting as of August 31, 2014
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. As a result of this assessment, management concluded that, as of August 31, 2014, our internal control over
financial reporting was not effective. Our management identified the following material weaknesses in our internal control over
financial reporting, which are indicative of many small companies with small staff: (i) inadequate segregation of duties and effective
risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the
requirements and application of both US GAAP and SEC guidelines.
We plan to take steps to enhance and improve
the design of our internal control over financial reporting. During the period covered by this annual report on Form 10-K, we have
not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we hope to implement the following
changes during our fiscal year ending August 31, 2014: (i) appoint additional qualified personnel to address inadequate segregation
of duties and ineffective risk management; and (ii) adopt sufficient written policies and procedures for accounting and financial
reporting. The remediation efforts set out in (i) and (ii) are largely dependent upon our securing additional financing to cover
the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely
affected in a material manner.
This annual report does not include an attestation
report of our registered public accounting firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by our registered public accounting firm pursuant to an exemption for non-accelerated filers set
forth in Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Item 9B. Other Information
None
PART III
Item 10. Directors, Executive Officers and
Corporate Governance
Our sole executive officer and director is as follows:
Name |
|
Age |
|
Position(s) and Office(s) Held |
Kendall Smith |
|
|
33 |
|
|
President, Chief Executive Officer, Chief Financial Officer and Director |
Jesse Lopez |
|
|
31 |
|
|
Director |
Pamela J. McKeown |
|
|
52 |
|
|
Secretary and Treasurer |
Set forth below is a brief description of the background and business
experience of each of our current executive officers and directors.
Kendall Smith is our President, Chief
Executive Officer, and Chief Financial Officer, and a member of our Board of Directors. Mr. Smith is a business entrepreneur with
over thirteen years of experience consulting and providing services in multiple sectors ranging from the cultivation and harvesting
of cannabis and hemp to being a patient advocate and caregiver. Mr. Smith started his post academic career in 2001 operating a
graphic design company. After selling his interest in that business in 2003, Mr. Smith attended College of Southern Nevada, where
he focused his studies in the culinary arts and in food and beverage management. In 2005, Mr. Smith started Impressive Printing,
a custom apparel and merchandise printing company focusing on institutional markets including public schools, sporting leagues,
local bands and businesses. In January 2010, Mr. Smith founded two businesses, Juicy Freeze, a health juice bar that was located
internally to athletic gyms, and Presidential Catering, a business specializing in meal planning and preparation and catering special
events. In 2014, Mr. Smith founded Smith & Ramsay, LLC, a Nevada-based company that specializes in flavoring and aroma extraction
servicing the food, beverage and tobacco industries. Mr. Smith has been an active volunteer with the Nevada Children’s Center,
the Clark County School District, and 3Square Nevada, a statewide food bank. His drive for community activism and wellness education
prompted his research in cannabinoids and the industrial hemp industry, where he continues to make strides in breeding and cultivation.
Jesse Lopez is a member of our Board
of Directors. Mr. Lopez is currently a Vice President of NORML (National Organization of Reform of Marijuana Laws), and has been
an activist for the cannabis movement for the past seventeen years. He has also been recently elected Vice President of AZ4NORML,
which is a non-profit organization that is dedicated to reforming the current marijuana laws for the state of Arizona. Mr. Lopez
was also one of the driving force behind Arizona's Prop-203, the ballot measure to legalize the use of medical marijuana in Arizona.
He most recently wrote AZ-SB-2211, which allows for the growth of industrial hemp in the state as one of the largest agricultural
crops. Mr. Lopez has also been a board member of Safer Arizona since January of 2014. From May 2012 to August 2014, Mr. Lopez was
the owner of Dove Mountain Inflatables Inc. From December of 2010 to April of 2012, he was the General Manager and Executive Chef
of the Port of Long Beach Restaurant. From June to December of 2010, he was the Kitchen Manager of the Shoreline Yacht Club of
Long Beach. From January of 2008 to May of 2010, Mr. Lopez was Assistant General Manager of the Dove Mountain Ritz Carlton Property.
In addition, he also held the title of corporate trainer for that company and opened three Ritz Carlton locations. From November
of 2006 to January of 2010, Mr. Lopez was with Darden Restaurant Group, where was a Corporate Trainer and a Training Director,
which included him personally overseeing the opening of numerous different locations.
Pamela J. McKeown is our Secretary,
and Treasurer. For the past 12 years, Ms. McKeown has been the Controller for Installing Dealer Supply, Inc. She has been responsible
for developing and managing the finances and accounting of Installing Dealer Supply along with the company’s operations,
inclusive of sales, customer service, purchasing, inventory and credit management. Ms. McKeown has prior experience with large
corporations, including DLS Constructors, a noted provider of underground piping for highways to the State of California, and with
Air Control Management, Inc. (ACM), a supplier to the tract home industry.
Term of Office
Our Directors are appointed for a one year
term to hold office until the next annual general meeting of our shareholders or until removed from office in accordance with our
bylaws. Our officers are appointed by our board of directors and hold office until removed by the board.
Family Relationships
There are no family relationships between or
among the directors, executive officers or persons nominated or chosen by us to become directors or executive officers.
Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past
ten years, none of the following occurred with respect to a present or former director, executive officer, or employee: (1) any
bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at
the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject
to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment
or decree, not subsequently reversed, suspended, vacated, of any court of competent jurisdiction, permanently or temporarily enjoining,
barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and
(4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission
to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
Committees of the Board
We do not currently have a compensation committee, executive committee,
or stock plan committee.
Audit Committee
We do not have a separately-designated standing
audit committee. The entire Board of Directors performs the functions of an audit committee, but no written charter governs the
actions of the Board when performing the functions of what would generally be performed by an audit committee. The Board approves
the selection of our independent accountants and meets and interacts with the independent accountants to discuss issues related
to financial reporting. In addition, the Board reviews the scope and results of the audit with the independent accountants, reviews
with management and the independent accountants our annual operating results, considers the adequacy of our internal accounting
procedures and considers other auditing and accounting matters including fees to be paid to the independent auditor and the performance
of the independent auditor. Our Board of Directors, which performs the functions of an audit committee, does not have a member
who would qualify as an “audit committee financial expert” within the definition of Item 407(d)(5)(ii) of Regulation
S-K. We believe that, at our current size and stage of development, the addition of a special audit committee financial expert
to the Board is not necessary.
Nomination Committee
Our Board of Directors does not maintain a nominating committee.
As a result, no written charter governs the director nomination process. Our size and the size of our Board, at this time, do not
require a separate nominating committee.
When evaluating director nominees, our directors consider the following
factors:
- |
The appropriate size of our Board of Directors; |
- |
Our needs with respect to the particular talents and experience of our directors; |
- |
The knowledge, skills and experience of nominees, including experience in finance, administration or public service, in light of prevailing business conditions and the knowledge, skills and experience already possessed by other members of the Board; |
- |
Experience in political affairs; |
- |
Experience with accounting rules and practices; and |
- |
The desire to balance the benefit of continuity with the periodic injection of the fresh perspective provided by new Board members. |
Our goal is to assemble a Board that brings together a variety of
perspectives and skills derived from high quality business and professional experience. In doing so, the Board will also consider
candidates with appropriate non-business backgrounds.
Other than the foregoing, there are no stated
minimum criteria for director nominees, although the Board may also consider such other factors as it may deem are in our best
interests as well as our stockholders. In addition, the Board identifies nominees by first evaluating the current members of the
Board willing to continue in service. Current members of the Board with skills and experience that are relevant to our business
and who are willing to continue in service are considered for re-nomination. If any member of the Board does not wish to continue
in service or if the Board decides not to re-nominate a member for re-election, the Board then identifies the desired skills and
experience of a new nominee in light of the criteria above. Current members of the Board are polled for suggestions as to individuals
meeting the criteria described above. The Board may also engage in research to identify qualified individuals. To date, we have
not engaged third parties to identify or evaluate or assist in identifying potential nominees, although we reserve the right in
the future to retain a third party search firm, if necessary. The Board does not typically consider shareholder nominees because
it believes that its current nomination process is sufficient to identify directors who serve our best interests.
Code of Ethics
As of August 31, 2014, we had not adopted a
Code of Ethics for Financial Executives, which would include our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions.
Item 11. Executive Compensation
Compensation Discussion and Analysis
Our current President, CEO, and CFO, Kendall Smith, is employed
under an Executive Employment Agreement (the “Agreement”). Under the Agreement, Mr. Smith is serving as our President
and CEO for an initial term ending on August 31, 2015, with an automatic renewal for an additional year unless the Agreement is
terminated by advance notice. Mr. Smith’s base salary per year is $100,000, subject to adjustments and performance bonuses
to be determined by the board of directors. As a signing bonus under the Agreement, Mr. Smith was issued 1,000,000 shares of Class
A Convertible Preferred Stock. Class A Convertible Preferred Stock votes together with our common stock at a rate of three thousand
(3,000) votes for each preferred share held. In addition, Class A Convertible Preferred Stock is convertible to shares of our common
stock, at the option of the holder, at a rate of one share of common stock for each preferred share held. In any liquidation, holders
of our Class A Convertible Preferred Stock will participate pro-rata with the holders of our common stock. Shares of Class A Convertible
Preferred Stock have no dividend rights.
In addition, Mr. Smith is entitled under the
Agreement to the issuance of a new class of preferred stock to-be-designated. This additional preferred stock interest will be
granted in tranches upon the achievement of certain milestones as set forth in the Agreement and will, when fully issued, be convertible
to a total of 50.1% of our total issued and outstanding common stock on the date of the Agreement. The Agreement contains a covenant
not to compete with us in the fields of industrial hemp, medicinal marijuana, and related development, production, or sales for
a period of two years after the termination of the Agreement.
Summary Compensation Table
The table below summarizes all compensation
awarded to, earned by, or paid to our former or current executive officers for the fiscal years ended August 31, 2014 and 2013.
SUMMARY COMPENSATION TABLE |
Name and
principal position |
Year |
Salary
($) |
Bonus
($) |
Stock Awards
($) |
Option
Awards
($) |
Non-Equity
Incentive Plan
Compensation
($) |
Nonqualified
Deferred
Compensation
Earnings ($) |
All Other
Compensation
($) |
Total ($) |
Kendall Smith, President, CEO, and CFO |
2014
2013 |
$ n/a
$ n/a |
$ -
-
$ n/a |
$ -
$ n/a |
$ -
$ n/a |
$ -
$ n/a |
$ -
$ n/a |
$ -
$ n/a |
$ n/a
$ n/a |
Pamela J. McKeown, Secretary, and Treasurer |
2014
2013 |
$ 45,959
$ 50,861 |
$ -
$ n/a |
$9,250
$ 9,250 |
$ -
$ n/a |
$ -
$ n/a |
$ -
$ n/a |
$ -
$ n/a |
$ 45,959
$ 60,111 |
George Rodriguez, former
Vice President |
2014
2013 |
$ 45,865
$ 64,167 |
$ -
-
$ n/a |
$ -
$ n/a |
$ -
$ n/a |
$ -
$ n/a |
$ -
$ n/a |
$ -
$ n/a |
$ 45,964
$ 64,167 |
Scott Plantinga, former President and CEO |
2014
2013 |
$ 51,957
$ 11,697 |
$ -
-
$ n/a |
$ 81,250
$ n/a |
$ -
$ n/a |
$ -
$ n/a |
$ -
$ n/a |
$ -
$ n/a |
$ 133,204
$ 11,697 |
Narrative Disclosure to the Summary Compensation
Table
The table above reflects the compensation paid to each named executive
officer during the fiscal year ended August 31, 2014 and 2013. Our current President and CEO, Kendall Smith, did not
serve during our most recent fiscal year.
Outstanding Equity Awards at Fiscal Year-End
The table below summarizes all unexercised
options, stock that has not vested, and equity incentive plan awards for each named executive officer as of August 31, 2014.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END |
OPTION AWARDS |
STOCK AWARDS |
Name |
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable |
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable |
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#) |
Option
Exercise Price ($) |
Option
Expiration
Date |
Number
of
Shares
or Shares
of
Stock That
Have
Not
Vested
(#) |
Market
Value
of
Shares
or
Shares
of
Stock
That
Have
Not
Vested
($) |
Equity
Incentive Plan
Awards:
Number
of
Unearned
Shares,
Shares or
Other
Rights
That Have Not
Vested
(#) |
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Shares or
Other
Rights
That
Have Not Vested
(#) |
Kendall Smith |
- |
- |
- |
- |
- |
- |
- |
- |
- |
Pamela J. McKeown |
- |
- |
- |
- |
- |
- |
- |
- |
- |
George Rodriguez, former officer |
- |
- |
- |
- |
- |
- |
- |
- |
- |
Scott Plantinga, former officer |
- |
- |
- |
- |
- |
- |
- |
- |
- |
Director Compensation
The table below summarizes all compensation
of our directors for the year ended August 31, 2014.
DIRECTOR COMPENSATION |
Name |
Fees Earned or
Paid in
Cash |
Stock
Awards |
Option
Awards |
Non-Equity
Incentive
Plan
Compensation |
Non-Qualified
Deferred
Compensation
Earnings |
All
Other
Compensation |
Total |
Kendall Smith |
- |
- |
- |
- |
- |
- |
- |
Jesse Lopez |
- |
- |
- |
- |
- |
- |
- |
Scott Plantinga, former director |
- |
- |
- |
- |
- |
- |
- |
Bruce R. Knoblich, former director |
- |
- |
- |
- |
- |
- |
- |
|
|
|
|
|
|
|
|
Narrative Disclosure to the Director Compensation
Table
We do not compensate our directors for their service as directors
at this time.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The following table sets forth, as of December
11, 2014, the beneficial ownership of our common stock by each executive officer and director, by each person known by us to beneficially
own more than 5% of the our common stock and by the executive officers and directors as a group:
Title of class |
Name and address of beneficial owner (1) |
Amount of beneficial ownership |
Percent of class* |
Executive Officers & Directors: |
Common |
Kendall Smith
31500 Grape Street, Suite 3-345
Lake Elsinore, CA 92532 |
1,000,000(2) |
0.25% |
Common |
Jesse Lopez
31500 Grape Street, Suite 3-345
Lake Elsinore, CA 92532 |
0 |
0% |
Common |
Pamela J. McKeown
31500 Grape Street, Suite 3-345
Lake Elsinore, CA 92532 |
1,219,996 |
0.31% |
Common |
Total all executive officers and directors (3 persons) |
1,219,996 |
0.56% |
Common |
Other 5% Shareholders |
|
|
|
None |
|
|
Class A Convertible Preferred |
Kendall Smith
31500 Grape Street, Suite 3-345
Lake Elsinore, CA 92532 |
1,000,000(3) |
100% |
Class A Convertible Preferred |
Jesse Lopez
31500 Grape Street, Suite 3-345
Lake Elsinore, CA 92532 |
0 |
0% |
Class A Convertible Preferred |
Pamela J. McKeown
31500 Grape Street, Suite 3-345
Lake Elsinore, CA 92532 |
0 |
0% |
Class A Convertible Preferred |
Total all executive officers and directors (3 persons) |
1,000,000 |
100% |
|
|
|
|
|
(1) |
As used in this table, "beneficial ownership" means the sole or shared power to vote, or to direct the voting of, a security, or the sole or shared investment power with respect to a security (i.e., the power to dispose of, or to direct the disposition of, a security). In addition, for purposes of this table, a person is deemed, as of any date, to have "beneficial ownership" of any security that such person has the right to acquire within 60 days after such date. |
(2) |
Reflects 1,000,000 shares of Class A Convertible Preferred Stock which are convertible to 1,000,000 shares of common stock. |
(3) |
Each share of Class A Convertible Preferred Stock is entitled to 3,000 votes on matters submitted to a vote of the shareholders. Mr. Smith therefore controls 3,000,000,000 shares in voting power, or approximately 88.43% of the shareholder voting power as of December 11, 2014 |
Item 13. Certain Relationships and Related
Transactions, and Director Independence
Except as stated herein, none of our directors
or executive officers, nor any proposed nominee for election as a director, nor any person who beneficially owns, directly or indirectly,
shares carrying more than 5% of the voting rights attached to all of our outstanding shares, nor any members of the immediate family
(including spouse, parents, children, siblings, and in-laws) of any of the foregoing persons has any material interest, direct
or indirect, in any transaction over the last two years or in any presently proposed transaction which, in either case, has or
will materially affect us:
1.
On September 19, 2012, we entered into an Agreement of Conveyance, Transfer and Assignment of Membership Interests and Assumption
of Obligations (the “Agreement”) with our former sole officer and director, Sterling Hamilton. Pursuant to the Agreement,
we transferred all membership interests in our operating subsidiary, SOI Nevada, LLC, to Mr. Hamilton. In exchange for this assignment
of membership interests, Mr. Hamilton agreed to assume and cancel all liabilities relating to our former business of developing
a chain of flotation tank therapy spas. In addition, Mr. Hamilton agreed to release all liability under a promissory note due and
owing to him in the amount of $2,000.
2.
On May 31, 2013, the Company’s former CEO, Bruce Knoblich and the Company executed a promissory note for $289,998,
$2,150 of which has been repaid. The note bears interest at 5% and was due November 30, 2013. On July 22, 2014, the principle and
accrued interest were rolled into a new convertible promissory note for $304,973. The new note bears interest at 8% per annum and
is convertible at a 49% discount of the average trading price during the ten days preceding the conversion date. The note is shown
net of a debt discount of $244,839 at August 31, 2014 as accrued interest of $2,411. Subsequent to the reporting period, a total
of $120,000 of this obligation has been assigned to unrelated third parties.
3.
On November 6, 2014, our Board of Directors approved a Severance and Release Agreement (the “Agreement”) with
our departing former CEO and board member, Scott Plantinga. The Agreement resolves all claims for compensation, benefits, or other
consideration due to Mr. Plantinga under his Executive Employment Agreement dated September 1, 2013. The Agreement contains the
following key terms:
· |
Mr. Plantinga will be paid two cash installments totaling $45,000, with $25,000 due by November 10, 2014 and $20,000 due by February 10, 2014. |
· |
Mr. Plantinga will further be paid $133,000 within one year. |
· |
The cash payment obligations set forth above are further each documented by Convertible Promissory Notes which may be converted in whole or in part at a price equal to fifty percent (50%) of the market price of our common stock. |
· |
Mr. Plantinga will also be granted 1,500,000 shares of common stock. |
· |
Mr. Plantinga will be retained to advise the company under a Consulting Agreement which calls for compensation in the form of 58,500,000 shares of common stock. |
4.
Our current President, CEO, and CFO, Kendall Smith, is employed under an Executive Employment Agreement (the “Agreement”).
Under the Agreement, Mr. Smith is serving as our President and CEO for an initial term ending on August 31, 2015, with an automatic
renewal for an additional year unless the Agreement is terminated by advance notice. Mr. Smith’s base salary per year is
$100,000, subject to adjustments and performance bonuses to be determined by the board of directors. As a signing bonus under the
Agreement, Mr. Smith was issued 1,000,000 shares of Class A Convertible Preferred Stock. In addition, Mr. Smith is entitled under
the Agreement to the issuance of a new class of preferred stock to-be-designated. This additional preferred stock interest will
be granted in tranches upon the achievement of certain milestones as set forth in the Agreement and will, when fully issued, be
convertible to a total of 50.1% of our total issued and outstanding common stock on the date of the Agreement. The Agreement contains
a covenant not to compete with us in the fields of industrial hemp, medicinal marijuana, and related development, production, or
sales for a period of two years after the termination of the Agreement.
5.
We are currently negotiating an exclusive production agreement with Luna Agro & Earth Science, LLC (“LAES”),
a Company partly owned by our CEO. The agreement would provide us with exclusive rights to twenty (20) acres of land dedicated
to cultivating our planned line of proprietary industrial cannabis genetics. Under the production agreement, we would pay LAES
a production fee of five percent (5%) of our total wholesale price of all materials supplied.
Director Independence
We are not a “listed issuer” within
the meaning of Item 407 of Regulation S-K and there are no applicable listing standards for determining the independence of our
directors. Applying the definition of independence set forth in Rule 4200(a)(15) of The Nasdaq Stock Market, Inc., we believe that
Jesse Lopez is an independent director.
Item 14. Principal Accounting Fees and Services
Below is the table of Audit Fees (amounts in
US$) billed by our auditor in connection with the audit of the Company’s annual financial statements for the years ended:
Financial Statements for the Year Ended August 31 | |
Audit Services | |
Audit Related Fees | |
Tax Fees | |
Other Fees |
| 2014 | | |
$ | 21,400 | | |
$ | 11,000 | | |
$ | 0 | | |
$ | 0 | |
| 2013 | | |
$ | 16,000 | | |
$ | 6,300 | | |
$ | 0 | | |
$ | 0 | |
PART IV
Item 15. Exhibits, Financial Statements Schedules
(a) |
Financial Statements and Schedules |
The following financial statements and schedules
listed below are included in this Form 10-K.
Financial Statements (See Item 8)
Exhibit Number |
Description |
3.1 |
Articles of Incorporation(1) |
3.2 |
Certificate of Designation – Class A Convertible Preferred Stock(2) |
3.3 |
Bylaws(1) |
10.1 |
Promissory Note to JMJ Financial(3) |
10.2 |
Amendment to Promissory Note to JMJ Financial(3) |
10.3 |
Promissory Note issued to Bruce R. Knoblich dated May 31, 2013(4) |
10.4** |
Convertible Promissory Note issued to Blackbridge Capital, LLC dated September 17, 2014 |
10.5** |
Convertible Promissory Note issued to WHC Capital, LLC dated September 24, 2014 |
10.6** |
Securities Exchange and Settlement Agreement with Beaufort Capital Partners dated October 24, 2014 |
10.7 |
Convertible Promissory Note with Asher Enterprises, Inc. dated February 27, 2014(5) |
10.8 |
Securities Purchase Agreement with Asher Enterprises, Inc. dated February 27, 2014(5) |
10.9** |
Convertible Promissory Note with KBM Worldwide, Inc. dated March 19, 2014 |
10.10** |
Securities Purchase Agreement with KBM Worldwide, Inc. dated March 19, 2014 |
10.11 |
Convertible Note issued to Black Mountain Equities, Inc. dated March 5, 2014(6) |
10.12** |
Convertible Promissory Note with KBM Worldwide, Inc. dated May 20, 2014 |
10.13** |
Securities Purchase Agreement with KBM Worldwide, Inc. dated May 20, 2014 |
10.14** |
Convertible Promissory Note with KBM Worldwide, Inc. dated August 18, 2014 |
10.15** |
Securities Purchase Agreement with KBM Worldwide, Inc. dated August 18, 2014 |
10.16** |
8% Convertible Redeemable Note with LG Capital Funding, LLC dated July 14, 2014 |
10.17 |
Executive Employment Agreement with Kendall Smith(7) |
10.18 |
Severance and Release Agreement with Scott Plantinga(8) |
10.19 |
Convertible Promissory Note and Security Agreement with Steven J. Caspi(9) |
10.20** |
Forbearance Agreement with Steven J. Caspi dated March 10, 2014 |
31.1** |
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2** |
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1** |
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101** |
The following materials from the Company’s Annual Report on Form 10-K for the year ended August 31, 2014 formatted in Extensible Business Reporting Language (XBRL). |
(1) Incorporated
by reference to Registration Statement on Form S-1 filed October 26, 2011.
(2) Incorporated
by reference to Current Report on Form 8-K filed October 22, 2014.
(3) Incorporated
by reference to Current Report on Form 8-K filed June 21, 2013.
(4) Incorporated by reference to Quarterly Report on
Form 10-Q filed July 15, 2013.
(5) Incorporated by reference to Quarterly Report on
Form 10-Q filed April 21, 2014.
(6) Incorporated by reference to Quarterly Report on
Form 10-Q filed July 21, 2014.
(7) Incorporated by reference to Current Report on Form 8-K filed October 22, 2014.
(8) Incorporated by reference to Current Report on Form
8-K filed November 7, 2014.
(9) Incorporated by reference to Current Report on Form
8-K filed December 7, 2012.
**Provided herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AJA CANNAFACTURING, INC.
By: |
/s/ Kendall Smith |
|
Kendall Smith |
Title: |
Chief Executive Officer, Chief Financial Officer, President and Director |
Date: |
December 16, 2014 |
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: |
/s/ Kendall Smith |
|
Kendall Smith |
Title: |
Chief Executive Officer, Chief Financial Officer, President and Director |
Date: |
December 16, 2014 |
By: |
/s/ Jesse Lopez |
|
Jesse Lopez |
Title: |
Director |
Date: |
December 16, 2014 |
CERTIFICATIONS
I, Kendall Smith, certify that;
1. |
|
I
have reviewed this annual report on Form 10-K for the year ended August 31, 2014 of Aja Cannafacturing, Inc. (the “registrant”); |
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. |
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. |
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. |
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. |
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. |
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. |
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: December 16, 2014
/s/ Kendall Smith
By: Kendall Smith
Title: Chief Executive Officer
CERTIFICATIONS
I, Kendall Smith, certify that;
1. |
|
I
have reviewed this annual report on Form 10-K for the year ended August 31, 2014 of Aja Cannafacturing, Inc. (the
“registrant”); |
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
|
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. |
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. |
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. |
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. |
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
|
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. |
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. |
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: December 16, 2014
/s/ Kendall Smith
By: Kendall Smith
Title: Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND
CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the annual Report of Aja
Cannafacturing, Inc (the “Company”) on Form 10-K for the year ended August 31, 2014 filed with the Securities and
Exchange Commission (the “Report”), I, Kendall Smith, Chief Executive Officer and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of Section 13(a)
of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material
respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations
of the Company for the periods presented. |
By: |
/s/ Kendall Smith |
Name: |
Kendall Smith |
Title: |
Principal Executive Officer |
Date: |
December 16, 2014 |
This certification
has been furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
NEITHER THIS NOTE NOR THE SECURITIES INTO
WHICH THIS NOTE IS CONVERTIBLE HAVE BEEN REGISTER ED UNDER THE SECURITIES ACT OF I933, AS AMENDED (THE "ACT") OR ANY
STATE SECURITIES LAWS AND NEITHER THIS NOTE NOR ANY INTEREST THEREIN NOR THE SECURITIES INTO WHICH THIS NOTE IS CONVERTIBLE MAY
BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT AND SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS.
CONVERTIBLE PROMISSORY NOTE
Principal Amount: $20,000.00 |
Issue Date: September 17, 2014 |
|
Maturity Date: March 17, 2015 |
For good and valuable consideration, Aja
Cannafacturing, Inc., a Nevada corporation ("Maker"), hereby makes and delivers this Promissory Note
(this "Note") in favor of Blackbridge Capital, LLC, or its assigns ("Holder"), and hereby
agrees as follows:
ARTICLE I.
PRINCIPAL AND INTEREST
Section 1.1. For value received, Maker
promises to pay to Holder at such place as Holder or its assigns may designate in writing, in currently available funds of the
United States, the Principal A mount of Twenty Thousand Dollars ($20,000.00). Maker's obligation under this Note shall accrue
interest at the rate of Five percent (5.0%) per annum from the date hereof until paid in full. Interest shall be computed
on the basis of a 365-day year or 366-day year, as applicable, and actual days lapsed. Accrual of interest shall commence on the
first business day to occur after the Issue Date and continue until payment in full of the principal sum has been made or duly
provided for.
Section 1.2
a.
All payments shall be applied first to interest, then to principal and shall be credited to
the Maker’s account on the date that such payment is physically received by the Holder.
b.
All principal and accrued interest then outstanding shall be due and payable to the Maker’s
account on or before March 17, 2015 (the “Maturity Date.”)
c.
Maker shall have no right to repay all or any part of the principal under this Note.
d.
This Note is free from all taxes, liens, claims and encumbrances with respect to this issue
thereof and shall not be subject to preemptive rights or other similar rights of shareholders of the Maker and will not impose
personal liability upon the holder thereof.
Section 1.3 This Note is issued solely
for value received, paid by Holder to Maker by wire ("Consideration"). This Note is issued solely for value received,
paid by Holder to Maker by wire ("Consideration"). The Principal Amount due to Holder shall be prorated based on the
consideration actually paid by Holder to Maker, such that the Maker is only required to repay the amount of consideration and the
Maker is not required to repay any unfunded portion of this Note.
ARTICLE II.
CONVERSION RIGHTS; CONVERSION PRICE
Section 2.1. Conversion. The
Holder or its assigns shall have the right, from time to time, commencing on the Issuance Date of this Note, to convert any part
of the outstanding interest or Principal Amount of this Note into fully paid and non-assessable shares of Common Stock of the Maker
(the "Notice Shares") at the Conversion Price determined as provided herein. Promptly after delivery to Maker of a Notice
of Conversion of Convertible Note in the forms attached hereto as Exhibit 1, or any other form provided by the Holder, properly
completed and du l y executed by the Holder or its assigns (a "Conversion Notice"), the Maker shall issue and deliver
to or upon the order of the Holder that number of shares of Com mon Stock for the that port ion of this Note to be converted as
shall be determined in accordance herewith.
No fraction of a share or scrip representing
a fraction of a share will be issued on conversion, but the number of shares issuable shall be rounded to the nearest whole share.
The date on which Notice of Conversion is given (the "Conversion Date") shall be deemed to be the date on which the Holder
faxes or emails the Notice of Conversion duly executed to the Maker. Certificates representing Common Stock upon conversion will
be delivered to the Holder within two (2) trading days from the date the Notice of Conversion is delivered to the Maker. Delivery
of shares upon conversion shall be made to the address specified by the Holder or its assigns in the Notice of Conversion.
Section 2.2. Conversion Price. Upon
any conversion of this Note, the Conversion Price shall equal Fifty Percent (50%) of the lowest Trading Price (defined below) during
the Valuation Period (defined below), and the Conversion Amount shall be the amount of principal or interest electively converted
in the Conversion Notice. The total number of shares due under any conversion notice ("Notice Shares") will be equal
to the Conversion Amount divided by the Conversion Price.
On the date that a Conversion Notice is delivered
to Holder, the Company shall deliver an estimated number of shares ("Estimated Shares") to Holder's brokerage account
equal to the Conversion Amount divided by 50% of the Market Price. "Market Price" shall mean the lowest of the daily
Trading Price for the Common Stock during the forty (40) Trading Day period ending on the latest complete Trading Day prior to
the Conversion Date.
The "Valuation Period" shall mean
forty Trading Days, commencing on the first Trading Day following delivery and clearing of the Notice Shares in Holder's brokerage
account, as reported by Holder ("Valuation Start Date"). If at any time, one or multiple times, during the Valuation
Period the number of Estimated Shares delivered to Holder is less than the Notice Shares, the company must immediately deliver
enough shares equal to the difference. I f at the end of the Valuation Period the number of Estimated Shares delivered to Holder
is greater than the Notice Shares, the Holder shall return to the Company shares equal to the difference. A Conversion Amount will
not be considered fully converted until the end of the Valuation Period for that Conversion Amount.
"Trading Price" means, for any security
as of any date, any trading price on the OTC Bulletin Board, or other applicable trading market (the "OTCBB") as reported
by a reliable reporting service ("Reporting Service") mutually acceptable to Maker and Holder (i.e. Bloomberg) or, if
the OTCBB is not the principal trading market for such security, the volume weighted average price of such security on the principal
securities exchange or trading market where such security is listed or traded. "Trading Day" shall mean any day on which
the Common Stock is tradable for any period on the OTCBB, or on the principal securities exchange or other securities market on
which the Common Stock is then being traded.
Section 2.3. Reorganization, Reclassification,
Merger, Consolidation, or Disposition of Assets. In case the Maker shall reorganize its capital, reclassify its capital stock,
consolidate or merge with or into another corporation (where the Maker is not the surviving corporation or where there is a change
in or distribution with respect to the Common Stock of the Maker), or sell, transfer or otherwise dispose of all or substantially
all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification,
merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash,
shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase
rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property"), are to
be received by or distributed to the holders of Common Stock of the Maker, then Holder shall have the right thereafter to receive,
upon conversion of this Note, the number of shares of common stock of the successor or acquiring corporation or of the Maker, if
it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger,
consolidation or disposition of assets by a holder of the number of shares of Common Stock into which this Note is convertible
immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of
assets, the successor or acquiring corporation (if other than the Maker) shall expressly assume the due and punctual observance
and performance of each and every covenant and condition of this Note to be performed and observed by the Maker and all the obligations
and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution
of the Board of Directors of the Maker) in order to provide for adjustments of the number of shares of common stock into which
this Note is convertible which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 2.3(a).
For purposes of this Section 2.3(a), "common stock of the successor or acquiring corporation" shall include stock of
such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation
and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities
which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the
happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions
of this Section 2.3(a) shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition
of assets.
Section 2.4. Restrictions on Securities.
This Note has been issued by the Maker pursuant to the exemption from registration under the Securities Act of 1933, as amended
(the "Act"). None of this Note or the shares of Common Stock issuable upon conversion of this Note may be offered, sold
or otherwise transferred unless (i) they first shall have been registered under the Act and applicable state securities laws or
(ii) the Maker shall have been furnished with an opinion of legal counsel (in form, substance and scope reasonably acceptable to
Maker) to the effect that such sale or transfer is exempt from the registration requirements of the Act. Each certificate for shares
of Common Stock issuable upon conversion of this Note that have not been so registered and that have not been sold pursuant to
an exemption that permits removal of the applicable legend, shall bear a legend substantially in the following form, as appropriate:
THE SECURITIES REPRESENTED HEREBY HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF I933 (THE "ACT"). THE SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED UNLESS THEY ARE REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, OR SUCH OFFERS, SALES
AND TRANSFERS ARE MADE PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.
Upon the request of a holder of a certificate
representing any shares of Common Stock issuable upon conversion of this Note, the Maker shall remove the foregoing legend from
the certificate or issue to such Holder a new certificate free of any transfer legend, if (a) with such request, the Maker shall
have received an opinion of counsel, reasonably satisfactory to the Maker in form, substance and scope, to the effect that any
such legend may be removed from such certificate or (b) a registration statement under the Act covering such securities is in effect.
Section 2.5. Reservation of Common
Stock.
(a) The Maker covenants
that during the period the Note is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number
of shares to provide for the issuance of Common Stock of the Maker upon the Conversion of the Note. The Maker further covenants
that its issuance of this Note shall constitute full authority to its officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of Common Stock of the Maker issuable upon the conversion
of this Note. The Maker will take all such reasonable action as may be necessary to assure that such shares of Common Stock may
be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the OTC Bulletin
Board (or such other principal market upon which the Common Stock of the Maker may be listed or quoted).
(b) The Maker shall not
by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer
of assets, consolidation, merger, 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, but will at all times in good faith assist in the carrying out
of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against
impairment. Without limiting the generality of the foregoing, the Maker will (a) not increase the par value of any shares of Common
Stock issuable upon the conversion of this Note above the amount payable therefor upon such conversion immediately prior to such
increase in par value, (b) take all such action as may be necessary or appropriate in order that the Maker may validly and legally
issue fully paid and nonassessable shares of Common Stock upon the conversion of this Note, and (c) use its best efforts to obtain
all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary
to enable the Maker to perform its obligations under this Note.
(c) Upon the request of
Holder, the Maker will at any time during the period this Note is outstanding acknowledge in writing, in form reasonably satisfactory
to Holder, the continuing validity of this Note and the obligations of the Maker hereunder.
(d) Before taking any action
which would cause an adjustment reducing the current Conversion Price below the then par value, if any, of the shares of Common
Stock issuable upon conversion of the Notes, the Maker shall take any corporate action which may be necessary in order that the
Maker may validly and legally issue fully paid and non-assessable shares of such Common Stock at such adjusted Conversion Price.
(e) Before taking any action
which would result in an adjustment in the number of shares of Common Stock into which this Note is convertible or in the Conversion
Price, the Maker shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any
public regulatory body or bodies having jurisdiction thereof.
(f) lf at any time the
Maker does not have a sufficient number of authorized and available shares of Common Stock for issuance upon conversion of the
Note, then the Maker shall call and hold a special meeting of its stockholders within forty-five (45) days of that time for the
sole purpose of increasing the number of authorized shares of Common Stock.
Section 2.6. Maximum Conversion.
The Holder shall not be entitled to convert
on a Conversion Date that amount of the Notes in connection with that number of shares of Common Stock which would be in excess
of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its affiliates on Conversation Date,
and (ii) the number of shares of Common Stock issuable upon the conversion of the Notes with respect to which the determination
of this provision is being made on a Conversion Date, which would result in beneficial ownership by the Holder and its Affiliates
of more than 9.99% of the outstanding shares of Common Stock of the Company on such Conversion Date. For the purposes of the provision
to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation l3d-3 thereunder.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1. The Holder represents and
warrants to the Maker:
(a) The Holder of this
Note, by acceptance hereof, agrees that this Note is being acquired for investment and that such Holder will not offer, sell or
otherwise dispose of this Note or the Common Stock issuable upon conversion hereof except under circumstances that will not result
in a violation of the Act or any application state securities laws or similar laws relating to the sale of securities;
(b) That Holder understands
that none of this Note or the Common Stock issuable upon conversion hereof have been registered under the Securities Act of 1933,
as amended (the "Act"), in reliance upon the exemptions from the registration provisions of the Act and any continued
reliance on such exemption is predicated on the representations of the Holder set forth herein;
(c) Holder (i) has adequate
means of providing for his current needs and possible contingencies, (ii) has no need for liquidity in this investment, (iii) is
able to bear the substantial economic risks of an investment in this Note for an indefinite period, (iv) at the present time, can
afford a complete loss of such investment, and (v) does not have an overall commitment to investments which are not readily marketable
that is disproportionate to Holder's net worth, and Holder's investment in this Note will not cause such overall commitment to
become excessive;
(d) Holder is an "accredited
investor" (as defined in Regulation D promulgated under the Act) and the Holder's total investment in this Note does
not exceed l0% of the Holder's net worth; and
(e) Holder recognizes that
are investment in the Maker involves significant risks and only investors who can afford the loss of their entire investment should
consider investing in the Maker and this Note.
Section 3.2 The Maker represents and
warrants to Holder:
(a) Organization and
Qualification. The Maker and each of its Subsidiaries (as defined below), if any, is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction in which it is incorporated, with full power and authority (corporate
and other) to own, lease, use and operate its properties and to carry on its business as and where now owned, leased, used, operated
and conducted. The Maker and each of its Subsidiaries is duly qualified as a foreign corporation to do business and is in good
standing in every jurisdiction in which its ownership or use of property or the nature of the business conducted by it makes such
qualification necessary except where the failure to be so qualified or in good standing would not have a Material Adverse Effect.
"Material Adverse Effect" means any material adverse effect on the business, operations, assets, financial condition
or prospects of the Maker or its Subsidiaries, if any, taken as a whole, or on the transactions contemplated hereby or by the agreements
or instruments to be entered into in connection herewith. "Subsidiaries" means any corporation or other organization,
whether incorporated or unincorporated, in which the Maker owns, directly or indirectly, any equity or other ownership interest.
(b) Authorization: Enforcement.
(i) The Maker has all requisite corporate power and authority to enter into and perform this Note and to consummate the transactions
contemplated hereby and thereby and to issue the Common Stock, in accordance with the terms hereof, (ii) the execution and delivery
of this Note by the Maker and the consummation by it of the transactions contemplated hereby and thereby (including without limitation,
the issuance of the Note and the issuance and reservation for issuance of the Common Stock issuable upon conversion or exercise
hereof) have been duly authorized by the Maker's Board of Directors and no further consent or authorization of the Maker, its Board
of Directors, or its shareholders is required, (iii) this Note has been duly executed and delivered by the Maker by its authorized
representative, and such authorized representative is the true and official representative with authority to sign this Note and
the other documents executed in connection herewith and bind the Maker accordingly, and (iv) this Note constitutes, a legal, valid
and binding obligation of the Maker enforceable against the Maker in accordance with its terms.
(c) Issuance of Shares.
The Conversion Shares are duly authorized and reserved for issuance and, upon conversion of the Note in accordance with its respective
terms, will be validly issued, fully paid and non-assessable, and 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 Maker and will
not impose personal liability upon the holder thereof.
(d) Acknowledgment of
Dilution. The Maker understands and acknowledges the potentially dilutive effect to the Common Stock upon the issuance of the
Conversion Shares upon conversion of this Note. The Maker further acknowledges that its obligation to issue Conversion Shares upon
conversion of this Note is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership
interests of other shareholders of the Maker.
ARTICLE IV.
EVENTS OF DEFAULT
Section 4.1. Default. The following
events shall be defaults under this Note: ("Events of Default"):
(a) default in the due
and punctual payment of all or any part of any payment of interest or the Principal Amount as and when such amount or such part
thereof shall become due and payable hereunder; or
(b) failure on the part
of the Maker duly to observe or perform in all material respects any of the covenants or agreements on the part of the Maker contained
herein (other than those covered by clause (a) above) for a period of 5 business days after the date on which written notice specifying
such failure, stating that such notice is a 'Notice of Default" hereunder and demanding that the Maker remedy the same, shall
have been given by the Holder by registered or certified mail, return receipt requested, to the Maker; or
(c) any representation,
warranty or statement of fact made by the Maker herein when made or deemed to have been made, false or misleading in any material
respect; provided, however, that such failure shall not result in an Event of Default to the extent it is corrected
by the Maker within a period of 5 business days after the date on which written notice specifying such failure, stating that such
notice is a 'Notice of Default" hereunder and demanding that the Maker remedy same, shall have been given by the Holder by
registered or certified mail, return receipt requested; or
(d) any of the following
actions by the Maker pursuant to or within the meaning title 11, U.S. Code or any similar federal or state law for the relief of
debtors (collectively, the "Bankruptcy Law"): (A) commencement of a voluntary case or proceeding, (B) consent to the
entry of an order for relief against it in an involuntary case or proceeding, (C) consents to the appointment of a receiver, trustee,
assignee, liquidator or similar official under any Bankruptcy Law (each, a "Custodian"), of it or for all or substantially
all of its property, (D) a general assignment for the benefit of its creditors, or (E) admission in writing its inability to pay
its debts as the same become due; or
(e) entry by a court of
competent jurisdiction of an order or decree under any Bankruptcy Law that: (A) is for relief against the Maker in an involuntary
case, (B) appoints a Custodian of the Maker or for all or substantially all of the property of the Maker, or (C) orders the liquidation
of the Maker, and such order or decree remains unstayed and in effect for 60 days.
Section 4.2. Remedies Upon Default.
Upon the occurrence of an event of default by Maker under this Note or at any time before default when the Holder reasonably feels
insecure, then, in addition to all other rights and remedies at law or in equity, Holder may exercise any one or more of the following
rights and remedies:
a. Accelerate the time
for payment of all amounts payable under this Note by written notice thereof to Maker, whereupon all such amounts shall be immediately
due and payable.
b. Pursue any other rights
or remedies available to Holder at law or in equity.
Section 4.3. Payment of Costs.
The Maker shall reimburse the Holder, on demand, for any and all reasonable costs and expenses, including reasonable attorneys'
fees and disbursement and court costs, incurred by the Holder in collecting or otherwise enforcing this Note or in attempting to
collect or enforce this Note.
Section 4.4. Powers and Remedies
Cumulative: Delay or Omission Not Waiver of Default. No right or remedy herein conferred upon or reserved to the Holder is
intended to be exclusive of any other right or remedy available to Holder under applicable law, and every such right and remedy
shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or
hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise,
shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. No delay or omission of the
Holder to exercise any right or power accruing upon any Default occurring and continuing as aforesaid shall impair any such right
or power or shall be construed to be a waiver of any such Default or an acquiescence therein; and every power and remedy given
by this Note or by law may be exercised from time to time, and as often as shall be deemed expedient, by the Holder.
Section 4.5. Waiver of Past Defaults.
The Holder may waive any past default or Event of Default hereunder and its consequences but no such waiver shall extend to any
subsequent or other default or Event of Default or impair any right consequent thereon.
Section 4.6. Waiver of Presentment
etc. The Maker hereby waives presentment, demand, notice, protest and all other demands and notices in connection with the
delivery, acceptance, performance and enforcement of this Note, except as specifically provided herein.
AII.TICLE V.
MISCELLANEOUS
Section5.l. Notices. Any notice herein required
or permitted to be given shall be in writing and may be personally served or delivered by courier or sent by United States mail
and shall be deemed to have been given upon receipt if personally served (which shall include telephone line facsimile transmission)
or sent by courier or three (3) days after being deposited in the United States mail, certified, with postage pre-paid and properly
addressed, if sent by mail. For the purposes hereof, the address of the Holder shall be 450 7th Ave., Suite 601, New York. NY 10123;
and the address of the Maker shall be 5333 Birch Street, Lake Elsinore, CA 92530. Both the Holder or its assigns and the Maker
may change the address for service by delivery of written notice to the other as herein provided.
Section 5.2. Amendment. This
Note and any provision hereof may be amended only by an instrument in writing signed by the Maker and the Holder.
Section 5.3. Assignability. This
Note shall be binding upon the Maker and its successors and assigns and shall inure to be the benefit of the Holder and its successors
and assigns; provided, however, that so long as no Event of Default has occurred, this Note shall only be transferable in whole
subject to the restrictions contained in the restrictive legend on the first page of this Note.
Section 5.4. Governing Law. This
Note shall be governed by the internal laws of the State of Delaware, without regard to conflicts of laws principles.
Section 5.5. Replacement of Note.
The Maker covenants that upon receipt by the Maker of evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of this Note, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which
shall not include the posting of any bond), and upon surrender and cancellation of such Note, if mutilated, the Maker will make
and deliver a new Note of like tenor.
Section 5.6. This Note shall not entitle
the Holder to any of the rights of a stockholder of the Maker, including without limitation, the right to vote, to receive dividends
and other distributions, or to receive any notice of or to attend, meetings of stockholder or any other proceedings of the Maker,
unless and to the extent converted into shares of Common Stock in accordance with the terms hereof.
Section 5.7. Severability. In
case any provision of this Note is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable,
such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and
the validity and enforceability of the remaining provisions of this Note will not in any way be affected or impaired thereby.
Section 5.8. Headings. The headings
of the sections of this Note are inserted for convenience only and do not affect the meaning of such section.
Section 5.9. Counterparts. This
Note may be executed in multiple counterparts, each of which shall be an original, but all of which shall be deemed to constitute
one instrument.
IN WITNESS WHEREOF, with the intent to be legally
bound hereby, the Maker as executed this Note as of the date first written above.
Aja Cannafacturing, Inc.
/s/ Scott Plantinga
By: Scott Plantinga
Its: CEO
Acknowledged and Agreed:
Blackbridge Capital, LLC.
/s/ Alexander Dillon
By: Alexander Dillon
Its: Partner
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES
REPRESENTED BY THIS NOTE 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 CONNECTIO WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.
Principal Amount: $50,000
Date: September 24, 2014 (Tacking Back to
May 31, 2013)
CONVERTIBLE PROMISSORY NOTE
AJA Cannafacturing, Inc., F/K/A IDS Industries,
Inc., (hereinafter called the "Issuer" or "AJAC"), hereby promises to pay to the order of WHC Capital,
LLC, a Delaware Limited Liability Company, or its registered assigns (the "Holder") the sum of $5(),000, together
with any interest as set forth herein, on September 24, 2015 (the "Maturity Date"), and to pay interest on the unpaid
principal balance hereof at the rate of Twelve percent (12%) (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 shall serve in lieu of (and tack back to) $50.000 o( debt owing to Bruce Knoblich. pursuant to that certain Promissory
Note dated Mav 31. 2013 (attached hereto). exchanged (with no additional consideration paid to the Company) for that certain $304,972.72
Convertible Promissory Note dated .July 22.2014 and incorporate all interests and charges contemplated therein.
This Note may not be prepaid in whole or in
part except as otherwise explicitly set forth herein. Any amount of principal or interest on this Note which is not paid when due
shall bear interest at the rate of twenty two percent (22%) per annum from the due date thereof until the same is paid ("Default
Interest''). Interest shall commence accruing on the date that the Note is fully paid and shall be computed on the basis of a 365-day
year and the actual number of days elapsed. All payments due hereunder (to the extent not converted into common stock) 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 Issuer 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
the supporting documents of same date (attached hereto).
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 Issuer 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 and at any time during the period beginning on the date 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 Issuer into which such Common
Stock shall hereafter be changed or reclassified at the conversion price (the "Conversion Price") determined as provided
herein (a "Conversion"); provided, however, that in no event shall the Holder be entitled to convert any portion of this
Note in excess of that portion of this Note upon conversion of which the sum of (l) 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 Issuer 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°/o 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 l 3D-G thereunder,
except as otherwise provided in clause (I) 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 Issuer, and the provisions
of the conversion limitation shall continue to apply until such 6Ist 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, (the "Notice of Conversion"), delivered to the Issuer by the Holder in accordance
with the Sections 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 Issuer before 6:00 p.m., New York; New York time on such conversion date
(the "Conversion Date").
The term "Conversion Amount" means,
with respect to any conversion of this Note, the sum of (1) the principal amount of this Note to be converted in such conversion
plus (2) at the Issuer's option, accrued and unpaid interest, if any, on such principal amount at the interest rates provided in
this Note to the Conversion Date, plus (3) at the Issuer's option, Default 1nterest, 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.
1.2 Conversion Price.
(a)
Calculation of Conversion Price. Holder, at its discretion, shall have the right to
convert this Note in its entirety or in part(s) into common stock of the Company valued at a Forty Nine percent (49%) discount
off of the average of the Three (3) lowest intraday trading prices for the Company's common stock during the Ten (10) trading days
immediately preceding a conversion date.
If on the Clearing Date (as defined herein),
the Common Stock of the Company has depreciated by Seven and a half percent (7.5%) or more from the date of conversion, a corresponding
adjustment to the Conversion Amount stated in that specific Notice of Conversion shall be made, so as to adjust for such dilution.
The "Clearing Date" shall be defined as the date on which the Holder's broker shall provide confirmation to the Holder
that the shares of common stock issued pursuant to a Notice of Conversion are eligible for trading.
(b)
Conversion Price During Major Announcements. Notwithstanding anything contained in
the preceding section to the contrary, in the event the Issuer (i) makes a public announcement that it intends to consolidate or
merge with any other corporation (other than a merger in which the Issuer 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 Issuer or (ii) any person, group or entity
(including the Issuer) publicly announces a tender offer to purchase 50% or more of the Issuer'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. 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 has been made, the date upon which the Issuer (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.
1.3 Authorized Shares.
The Issuer covenants that during the period the conversion right exists, the Issuer will reserve from its authorized and unissued
Common Stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of Common Stock upon the full
conversion of this Note. The Issuer is required at all times to have authorized. and reserved five 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 Issuer's obligations.
The Issuer represents
that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. In addition, if the Issuer 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 Issuer 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 Issuer (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 th.at its issuance of this Note shall constitute full authority to its officers and agents who are
charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock
in accordance with the terms and conditions of this Note.
If, at any time the Issuer
does not maintain the Reserved Amount it will be considered an Event of Default as defined in this Note.
1.4 Method of Conversion.
(a)
Mechanics of Conversion. This Note may be converted by the Holder in whole or in part
at any time from time to time after the 1ssue Date, by (A) submitting to the Issue a Notice of Conversion (by facsimile, e-mail
or other reasonable means of communication dispatched on the Conversion Date prior to 6:00 p.m., New York, New York time).
(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 Issuer unless the entire unpaid principal amount of this Note is so converted. The Holder and the Issuer 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 Issuer, 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 Issuer shall, prima facie, be controlling and determinative in
the absence of manifest error.
(c)
Payment of Taxes. The Issuer 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 Issuer 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
Issuer the amount of any such tax or shall have established to the satisfaction of the Issuer that such tax has been paid.
(d)
Delivery of Common Stock Upon Conversion. Upon receipt by the Issuer 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, the Issuer 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 Issuer to Deliver Common Stock. Upon receipt by the Issuer 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 Issuer 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 Issuer'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 Issuer to
the bolder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the
Holder of any obligation to the Issuer, and irrespective of any other circumstance which might otherwise limit such obligation
of the Issuer 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 Issuer before 6:00 p.m., New York, New York time,
on such date.
(f)
Delivery of Common Stock by Electronic Transfer. In lieu of delivering physical certificates
representing the Common Stock issuable upon conversion, provided the Issuer 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 Issuer shall use its best efforts to cause its transfer agent to electronically transmit
the Common Stock issuable upon conversion to the Holder by crediting the account of Holder's Broker with DTC through its Deposit
Withdrawal Agent Commission ("DWAC") system.
(g)
Failure to Deliver Common Stock Prior to Deadline. Without in any way limiting the
Holder's right to pursue other remedies, including actual damages and/or equitable relief, the parties agree that if delivery of
the Common Stock issuable upon conversion of this Note is not delivered by the Deadline the Issuer shall pay to the Holder $2,000
per day in cash, for each day beyond the Deadline that the Issuer fails to deliver such Common Stock. Such cash amount shall be
paid to Holder by the fifth day of the month following the month in which it has accrued or, at the option of the Holder (by written
notice to the Issuer 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 Issuer 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 are justified. Any delay or failure of performance by the Issuer hereunder shall be excused if and to
the extent caused by Force Majeure. For purposes of this agreement, Force Majeure shall mean a cause or event that is not reasonably
foreseeable and/or caused by the Issuer, including acts of God, fires, floods, explosions, riots wars, hurricanes, etc.
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 Issuer 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 Issuer who agrees to
sell or otherwise transfer the shares only in accordance with this Section 1.5 and who is an Accredited Investor. Except as otherwise
provided herein (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 BAVE 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 (l) 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 (WJD.CH COUNSEL SHALL BE SELECTED BY IBE 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 CONNF.CTION 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 Issuer shall issue to the Holder a new certificate therefore free of any transfer legend if (i) the Issuer
or its transfer agent shall have received an opinion of counsel, in form, substance and scope customary for opinions of counsel
incomparable transactions, to the effect that a public sale or transfer of such Common Stock may be made without registration under
the Act, which opinion shall be accepted by the Company 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 144without any restriction as to the number of securities
as of a particular date that can then be immediately sold. In the event that the Company 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 J44 or
Regulation S, at the Deadline, it will be considered an Event of Default pursuant to this 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 Issuer, the effectuation by the Issuer of a transaction or series
of related transactions in which more than 50% of the voting power of the Issuer is disposed of, or the consolidation, merger or
other business combination of the Issuer with or into any other Person (as defined below) or Persons when the Issuer is not the
survivor shall either: (i) be deemed to be an Event of Default (as defined in Article III) pursuant to which the Issuer 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 Issuer shall be changed into the same
or a different number of shares of another class or classes of stock or securities of the Issuer or another entity, or in case
of any sale or conveyance of all or substantially all of the assets of the Issuer other than. in connection with a plan of complete
liquidation of the Issuer, 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 Issuer shall not affect any transaction
described in this Section 1.6(b) unless (a) it first gives, to the extent practicable, thirty (30) days prior written notice (but
in any event at least fifteen (15) days prior written notice) of the record date of the special meeting of shareholders to approve,
or if there is no such record date, the consummation of, such merger, consolidation, exchange of shares, recapitalization, reorganization
or other similar event or sale of assets (during which time the Holder shall be entitled to convert this Note) and (b) the resulting
successor or acquiring entity (if not the Issuer) assumes by written instrument the obligations of this Section l.6(b). The above
provisions shall similarly apply to successive consolidations, mergers, sales, transfers or share exchanges.
(c)
Adjustment Due to Distribution. If the Issuer 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 Issuer'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 Issuer issues or sells, or in accordance with this Section hereof is deemed to have issued or sold, 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 Issuer in such Dilutive Issuance.
The Issuer shall
be deemed to have issued or sold shares of Common Stock if the Issuer 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 Issuer as consideration
for the issuance or granting of all such Options, plus the minimum aggregate amount of additional consideration, if any,
payable to the Issuer 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 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 Issuer
shall be deemed to have issued or sold shares of Common Stock if the Issuer 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 Issuer 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 Issuer 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 Issuer
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 Issuer, at its expense, shall promptly compute such
adjustment or readjustment and prepare and furnish to the Holder of a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is based. The Issuer 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 (Hi) 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 Issuer issue upon conversion of or otherwise pursuant to this Note and the
other Notes issued pursuant to the Purchase Agreement more than the maximum number of shares of Common Stock that the Issuer 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 Issuer 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 Issuer or any of its securities on the Issuer'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 3.3 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 Issuer 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 Issuer)
the Holder shall regain the rights of a Holder of this Note with respect to such unconverted portions of this Note and the Issuer
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 Issuer's failure to convert this
Note.
1.9 Prepayment. Maker
may prepay this Note, in accordance with the following schedule: If within 180 calendar days of the execution of this Note. $135%
of a]I outstanding principal and interest due on each outstanding Note in one payment; After 180 calendar days of this Note being
executed, any prepayments must be approved by both parties in writing.
ARTICLE II. CERTAIN COVENANTS
2.1 Distributions on
Capital Stock. So long as the Issuer shall have any obligation under this Note, the Issuer 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 Issuer's disinterested
directors.
2.2 Restriction on
Stock Repurchases. So long as the Issuer shall have any obligation under this Note, the Issuer 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 Issuer or any warrants, rights or options
to purchase or acquire any such shares.
2.3 Borrowings.
So long as the Issuer shall have any obligation wider this Note, the Issuer 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
which the Issuer has informed Holder in writing prior to the date hereof, (b) indebtedness to trade creditors or financial institutions
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 Issuer shall have any obligation under this Note, the Issuer 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 Issuer shall have any obligation under this Note, the Issuer 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 Issuer, except loans, credits or advances (a) in existence or committed
on the date hereof and which the Issuer 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.
ARTICLE III. EVENTS OF DEFAULT
If any of the following events
of default (each, an "Event of Default") shall occur:
3.1 Failure to Pay
Principal or Interest. The Issuer 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 Issuer 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 Issuer 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 Issuer 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 Issuer to its transfer agent. If at the option of the Holder, the Holder advances
any funds to the Issuer's transfer agent in order to process a conversion, such advanced funds shall be paid by the Issuer to the
Holder within forty eight (48) hours of a demand from the Holder.
3.3 Breach of Covenants.
The Issuer 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 (I0) days after written notice
thereof to the Issuer from the Holder.
3.4 Breach of Representations
and Warranties. Any representation or warranty of the Issuer made herein or in any agreement, statement or certificate given
in writing pursuant hereto or in connection herewith (including, without limitation, the Purchase Agreement), shall be false or
misleading in any material respect when made and the breach of which has (or with the passage of time will have) a material adverse
effect on the rights of the Holder with respect to this Note or the Purchase Agreement.
3.5 Receiver or Trustee.
The Issuer or any subsidiary of the Issuer shall make an assignment for the benefit of creditors, or apply for or consent to the
appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee
shall otherwise be appointed.
3.6 Judgments.
Any money judgment, writ or similar process shall be entered or filed against the Issuer or any subsidiary of the Issuer 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.
3.7 Bankruptcy.
Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings, voluntary or involuntary, for relief under
any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Issuer or any subsidiary of the Issuer.
3.8 Delisting of Common
Stock. The Issuer shall fail to maintain the listing of the Common Stock on at least one of the OTCBB or an equivalent replacement
exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the American Stock Exchange.
3.9 Failure to Comply
with the Exchange Act. The Issuer shall fail to comply with the reporting requirements of the Exchange Act; and/or the Issuer
shall cease to be subject to the reporting requirements of the Exchange Act.
3.10 Liquidation.
Any dissolution, liquidation or winding up of Issuer or any substantial portion of its business.
3.11 Cessation of Operations.
Any cessation of operations by Issuer or Issuer admits it is otherwise generally unable to pay its debts as such debts become due,
provided, however, that any disclosure of the Issuer's ability to continue as a "going concern'' shall not be an admission
that the Issuer cannot pay its debts as they become due.
3.12 Maintenance of
Assets. The failure by Issuer to maintain any material intellectual property rights, personal, real property or other assets
which are necessary to conduct its business (whether now or in the future).
3.13 Financial Statement
Restatement. The restatement of any financial statements filed by the Issuer with the SEC for any date or period from two years
prior to the Issue Date of this Note and until this Note is no longer outstanding, if the result of such restatement would, by
comparison to the original financial statement, have constituted a material adverse effect on the rights of the Holder with respect
to this Note or supporting documents.
3.14 Reverse Splits.
The Issuer effectuates a reverse split of its Common Stock without at least twenty (20) days prior written notice to the Holder
3.15 Replacement of
Transfer Agent. In the event that the Issuer proposes to replace its transfer agent. the Issuer 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 Issuer and the Issuer.
3.16 Cross-Default.
Notwithstanding anything to the contrary contained in this Note or the other related or companion documents, a breach or default
by the Issuer 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 Issuer, 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: (l) the Issuer, and, or for the benefit of, (2) the Holder
and any affiliate of the Holder, including, without limitation, promissory notes; provided, however, the term "Other Agreements"
shall not include the related or companion documents to this Note. Each of the loan transactions will be cross-defaulted with each
other loan transaction and with all other existing and future debt of Issuer to the Holder.
Upon the occurrence and
during the continuation of any Event of Default specified in Section 3.1 (solely with respect to failure to pay the principal hereof
or interest thereon when due at the Maturity Date), the Note shall become immediately due and payable and the Issuer shall pay
to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Default Sum (as defined herein). UPON
THE OCCURRENCE AND DURING THE CONTINUATION OF ANY EVENT OF DEFAULT SPECIFIED IN SECTION 3.2, THE NOTE SHALL BECOME IMMEDIATELY
DUE AND PAYABLE AND THE ISSUER SHALL PAY TO THE HOLDER. IN FULL SATISFACTION OF ITS OBLIGATIONS HEREUNDER., AN AMOUNT EQUAL TO:
One Hundred and Thirty Five percent (135%) of all outstanding principal
and interest. Upon the occurrence and during the continuation of any Event of Default specified in Sections 3.1 (solely with respect
to failure to pay the principal hereof or interest thereon when due on this Note upon a Trading Market Prepayment Event pursuant
to Section l.7 or upon acceleration), 3.3, 3.4, 3.6, 3.8, 3.9, 3.11, 3.12, 3.13.3.14, and/or 3. 15 exercisable through the delivery
of written notice to the Issuer by such Holders (the "Default Notice"), and upon the occurrence of an Event of Default
specified the remaining sections of Articles Ill (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 Issuer shall pay to the Holder,
in full satisfaction of its obligations hereunder, an amount equal to the greater of (i) 135% times the sum of (w)
the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of
this Note to the date of payment (the "Mandatory Prepayment .Date") plus (y) Default Interest, if any, on the amounts
referred to in clauses (w) and/or (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof
(the then outstanding principal amount of this Note to the date of payment plus the amounts referred to in clauses (x),
(y) and (z) shall collectively be known as the "Default Sum") or (ii) the "parity value" of the Default Sum
to be prepaid, where parity value means (a) the highest number of shares of Common Stock issuable upon conversion of or otherwise
pursuant to such Default Sum in accordance with Article I, treating the Trading Day immediately preceding the Mandatory Prepayment
Date as the ••conversion Date" for purposes of determining the lowest applicable Conversion Price, unless the Default
Event arises as a result of a breach in .respect of a specific Conversion Date in which case such Conversion Date shall be the
Conversion Date), multiplied by (b) the highest Closing Price for the Common Stock during the period beginning on the date
of first occurrence of the Event of Default and ending one day prior to the Mandatory Prepayment Date (the "Default Amount")
and all other amounts payable hereunder shall immediately become due and payable, all without demand, presentment or notice, all
of which hereby are expressly waived, together with all costs, including, without limitation, legal fees and expenses, of collection,
and the Holder shall be entitled to exercise all other rights and remedies available at law or in equity.
If the Issuer 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 Issuer remains in defuult (and so long and to the extent that there are sufficient authorized
shares), to require the Issuer, upon written notice, to immediately issue, in lieu of the Default Amount, the number of shares
of Common Stock of the Issuer equal to the Default Amount divided by the Conversion Price then
in effect.
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 Issuer, to:
Attn: Facsimile:
If to the Holder:
WHC Capital, LLC.
200 Stonehinge Lane,
Suite 3
Carle Place, NY. 11514
Tel: 718.530.0182
4.3 Amendments.
This Note and any provision hereof may only be amended by an instrument in writing signed by the Issuer 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 Issuer and its successors and assigns, and shall inure to be the benefit of the Holder and
its successors and assigns. Each transferee of this Note must be an "accredited investor" (as defined in Rule 501(a)
of the 1933 Act). Notwithstanding anything in this Note to the contrary, this Note may be pledged as collateral in connection with
a bona fide margin account or other lending arrangement.
4.5 Cost of Collection.
If default is made in the payment of this Note, the Issuer shall pay the Holder hereof costs of collection, including reasonable
attorneys' fees.
4.6 Governing Law.
This Note shall be governed by and construed in accordance with the laws of the State of New York without regard to principles
of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Note
shall be brought only in the state courts of New York or in the federal courts located in the state and county of Nassau. 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 fornm non conveniens. The Issuer and Holder waive
trial by jury. 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 Issuer 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 Issuer 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 Issuer 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 Issuer 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 Issuer shall provide1heHolder with
prior notification of any meeting of the ·s shareholders (and copies of proxy .materials and other information sent to
shareholders). In the event of any taking by the Issuer of a record of its shareholders for the purpose of determining
shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase
or otherwise acquire (including by way of merger, consolidation, reclassification or recapitalization) any share of any class or
any other securities or property, or to receive any other right, or for the purpose of dettl1nining 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
Issuer or any proposed liquidation dissolution or winding up of the Issuer, the Issuer 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 lime. The Issuer shall make a public announcement of any event
requiring notification to the Holder hereunder substantially simultaneously with the notification to the Holder in accordance
with the terms of this Section 4.9.
4.10 Remedies. The
Issuer 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 Issuer acknowledges that the remedy at law
for a breach of its obligations under this Note will be inadequate and, in the event of a breach or threatened breach by the
Issuer 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 injections 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 hood or other security being required.
IN WITNESS WHEREOF, Issuer has caused
this Note to be signed in its name by its duly authorized officer.
AJA Cannfacturing, Inc.
By: /s/ Kendall Smith
Print: Kendall Smith
Title/Date: CEO 10/29/2014
SECURITIES EXCHANGE AND SETTLEMENT AGREEMENT
This Exchange and Settlement
Agreement, dated as of October 24, 2014 (this "Agreement"), between Aja Cannafacturing, Inc., a Nevada corporation
(inclusive of any Subsidiaries, "Issuer"), and Beaufort Capital Partners LLC ("Investor") (Issuer
and Investor may hereinafter be referred to individually as a "Party" or jointly as the "Parties").
WHEREAS, Issuer issued
a certain debt security in the form of a promissory note, dated November 27, 2012, in the face amount of $51,800, which promissory
note was amended on February 28, 201 3 to increase the face amount to $183,497.72, and further amended on May 31, 2013 to increase
the face amount to $289,997.72, to Investor a copy of which amended promissory note is annexed hereto as Exhibit A and made
a part hereof (the "Debt Securities Instrument");
WHEREAS, notwithstanding
that, in accordance with its stated terms, the Debt Securities Instrument has no rights of convertibility into shares of the common
stock of Issuer, $0.00 I par value per share (the "Issuer Common Stock"), and without regard to the Jack of such
an existing "conversion" provision in the Debt Securities Instrument, Investor desires to exchange the Debt Securities
Instrument from time to time hereinafter for equity securities in the form of unrestricted shares of Issuer Common Stock, and Issuer
desires to facilitate such exchange. in each case pursuant to their respective economic interests and in each case as more specifically
and fully set forth herein; and
WHEREAS, subject to certain
conditions, and pursuant to Section 3(aX9J of the Securities Act, one or more exchanges of the Debt Securities Instrument for shares
of Issuer Common Stock (each, a "3(a)(9) Exchange") while beneficially held by Investor is/are eligible to be
effected without registration as more specifically and fully provided herein;
NOW, THEREFORE, the Parties
hereby acknowledge, represent. warrant, covenant and agree, in each case as applicable, as follows for the benefit of each other
legal counsel and securities transfer agent professionals involved in any one or more J(aX9) Exchanges hereunder (such transactions
collectively, the "Transactions''):
1.
Recitals. The foregoing recitals arc hereby incorporated by reference into this Agreement
and made a part hereof.
2.
Definitions. For purposes of this Agreement, the following terms when appearing in
their capitalized forms as follow shall have the corresponding assigned meanings:
"3(a)(9) Exchange''-
shall have the meaning specified in the fifth paragraph of the recitals to this Agreement.
"Affiliate"
- with respect to any specified Person, any other Person who, directly or indirectly through one or more intermediaries, Controls,
is Controlled By, or is Under Common Control With, such specified Person.
"Agreement"
-shall have the meaning specified in the preamble above.
"Authorization'"
- any authorization, approval, consent, certificate license, permit or franchise of or from any Governmental Authority or pursuant
to any Law.
"Beneficial Owner"
- with respect to any shares means a Person who shall be deemed to be the beneficial owner of such shares (i) which such Person
or any of its Affiliates or associates (as such term is defined in Rule I 2 b-2 promulgated under the Exchange Act) beneficially
owns, directly or indirectly, (ii) which such Person or any of its Affiliates or associates has, directly or indirectly, (A) the
right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of consideration rights exchange rights. warrants or options, or otherwise, or
{B) the right to vote pursuant to any agreement, arrangement or understanding, (iii) which are beneficially owned, directly or
indirectly, by any other Persons with whom such Person or any of its Affiliates or associates or any Person with whom such Person
or any of its Affiliates or associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting
or disposing of any such shares, or (iv) pursuant to Section 13{d) of the Exchange Act and any rules or regulations promulgated
thereunder.
"Clearing Date"
the first date upon which both (i) the Exchange Shares under any Exchange Notice have been deposited into the Investors designated
brokerage account, and (ii) the Investor has thereafter received confirmation from its brokerage firm that it may execute trades
involving such Exchange Shares.
"Control"
(including "Controlled By" and "Under Common Control With'') - the possession, directly or indirectly
or as trustee or executor, of the power to direct or cause the direction of the management and policies of a Person, whether through
the ownership of voting securities, as trustee or executor, by contract or credit arrangement or otherwise.
"Current Form 10
Information" - for a given registrant/company, such infom1ation as is or may he required by the SEC to satisfy the financial
and other disclosure requirements of SEC Form I 0 within the meaning of Rule 144.
"Current Public Information"
- in an appropriate format the information concerning a given issuer specified in paragraphs (a)(5)(i) to (xiv) inclusive, and
paragraph (a)(5)(xvi), of Rule 15c2-l 1 of the Rules and Regulations promulgated under the Exchange Act.
"Debt Securities
Instrument" - shall have the meaning specified in the first paragraph of the recitals to this Agreement.
"DTC" -The
Depository Trust Company, a subsidiary of DTCC.
"DTCC" -
The Depository Trust & Clearing Corporation.
"DTC Eligibility"
/ "DTC Eligible" - in respect of a given security its eligibility to be traded electronically in book-entry form
through OTC.
"DWAC" -
DTC's Deposit Withdrawal Agent Commission system
"Exchange Act"
-the Securities and Exchange Act of I 934, as amended
"Exchange Amount"
- shall have the meaning specified in Section 2.1 of this Agreement.
"Exchange Cap"
- the maximum number of shares of Issuer Common Stock that Issuer may issue pursuant to this Agreement and the transactions contemplated
hereby without (i) breaching Issuer's obligations under the applicable rules of The Nasdaq Stock Market or any other Principal
Market on which the Issuer Common Stock may be listed or quoted, or (ii) obtaining stockholder approval under the applicable rules
of The Nasdaq Stock Market or any other Principal Market on which the Issuer Common Stock may be listed or quoted.
"Exchange Notice"
- a written notice to the Investor executed by a duly authorized officer of the Issuer and including an Exchange Request, in each
case as the same may be deemed amended in accordance with Section 2.4.3.4.
"Exchange Notice
Date" - shall have the meaning specified in Section 2.4.1 of this Agreement.
"Exchange Notice
Date/Time Stamp" - shall have the meaning specified in Section 2.4.l of this Agreement.
"Exchange Request"
-·shall have the meaning specified in Section 2.1 of this Agreement.
"Exchange Shares"
- shall have the meaning specified in Section 2.1 of this Agreement
"Exchange Shares
Delivery Period" - in relation to any given Exchange Notice, the period commencing upon the date and time indicated in
the Exchange Notice Date/Time Stamp and continuing thereafter for twenty-eight (28) Trading Hours.
"FAST Program"
– DTC’s Fast Automated Securities Transfer program, participation in which is a required for OTC Eligibility.
"FINRA"
- shall mean the Financial Industry Regulatory Authority.
"Governmental Authority"
means any entity or body exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to
United States federal, state, local, or municipal government, foreign, international, multinational or other government, including
any department, commission. Board, agency, bureau, subdivision, instrumentality, official or other regulatory, administrative or
judicial authority thereof, and any non-governmental regulatory body to the extent that the rules and regulations or orders of
such body have the force of Law.
''Gypsy Swap"
- any series of transactions i n which, by arrangement or otherwise, the resale of an outstanding unrestricted security by the
then holder thereof results, directly or indirectly, and no matter the sequence of such transactions, in a capital infusion into
the issuing company.
"Investor"
- shall have the meaning specified in the preamble to this Agreement.
"Issuer'" -shall
have the meaning specified in the preamble to this Agreement.
"Issuer Common Stock"
- shall have the meaning specified in the fourth paragraph of the recitals to this Agreement.
''Issuer's Share Delivery
Obligation" - shall have the meaning specified in Section 2.4.3.3 of this Agreement
"Knowledge"
- of a given Person, and with respect to any fact or matter, the actual knowledge of the directors and executive officers of such
Person and each of its Subsidiaries, together with such knowledge that such directors, executive officers and other employees could
be expected to discover after due investigation concerning the existence of the fact or matter in question.
"Law" means
any statute, law (including common Law) constitution, treaty, ordinance, code, order, decree, judgment, rule, regulation and any
other binding requirement or determination of any Governmental Authority.
"Liens"
means any liens, claims, charges, security interests, mortgages, pledges easements, conditional sale or other title retention agreements,
defects, in title, covenants or other restrictions of any kind, including, any restrictions on the use, voting, transfer or other
attributes of ownership.
"Material Adverse
Effect" - with respect to any Person, any stale of facts, development, even circumstance, condition. occurrence or effect
that, individually or taken collectively with all other preceding facts, developments, events, circumstances, c-0nditions, occurrences
or effects (a) is materially adverse to the condition (financial or otherwise), business, operations or results of operations of
such Person, or (b) impairs the ability of such Person to perform its obligations under this Agreement.
"Officer's Certificate"
- shall have the meaning specified in Section 2.4.3.2 of this Agreement.
"Officer's Certificate
Deadline'" - shall have the n1eaning specified in Section 2.4.3.2 of Agreement
"Officer's Certificate
Delivery Obligation" - shall have the meaning specified in Section 2.4.3.2 of this Agreement.
"Order"
- any award, injunction, judgment, decree, stay, order, ruling, subpoena or verdict, or other decision entered, issued or rendered
by any Governmental Authority.
"OTC" --over-the-counter
"OTCPink - Current"
- the OTCMarkets tier for companies that are not SEC Reporting Companies but that regularly tile and make available Current Public
Information reports and that are current in such filings as of the date hereof.
"OTCOB"-
the base level OTCMarkets tier for SEC Reporting Companies. "Ownership Limitation" -at any given point in time, 4.99%.
"Parties"-
shall have the meaning specified in the preamble to this Agreement.
"Person"-
an individual, a corporation, a partnership, a limited liability company, a trust, an unincorporated association, Governmental
Authority, a person (including, without l imitation, a "person" as defined in Section I 3(dX3) of the Exchange Act),
or any political subdivision, agency or instrumentality of a Governmental Authority or any other entity or body.
"Pricing Period"
- in relation to any Exchange Shares, the twenty (20) Trading Days immediately preceding the date upon which Investor shall have
delivered to Issuer the corresponding Exchange Notice.
"Principal Market"
- as of any given date, whichever of the New York Stock Exchange, the Nasdaq Global Select Market, the Nasdaq Global Market, the
Nasdaq Capital Market, the American Stock Exchange, the OTCQB, or the OTCPink is at the time the principal trading exchange or
market for the Issuer Common Stock.
"Proceeding"
or "'Proceedings" - any actions, suits, claims, hearing arbitrations, mediations, Proceedings (public or private)
or governmental investigations that have been brought by any Governmental Authority or any other Person.
"Rule 144"-
Rule 144 promulgated under the Securities Act.
"Rule 405"
- Rule 405 of Regulation S-T.
"SEC" -shall
mean the U.S. Securities and Exchange Commission.
"SEC Reporting Company"
- any company with a class of common stock registered under Section 12 of the Exchange Act and that, as of the date hereof is,
and for at least the ninety (90) day period immediately preceding the date hereof has been, subject to the periodic and other reporting
requirements of either Section 13 or I 5(d) of the Exchange Act.
"Securities Act"
-the Securities Act of 1933, as amended.
"Shell Company"
- a company having no or nominal operations and either (a) no or nominal assets, (b) assets consisting solely of cash and cash
equivalents, or (c} assets consisting of any amount of cash and cash equivalents and nominal other assets.
"Stock Price"'
- on any given Trading Day, the intra-day lowest traded stock price (as reported by a direct feed service) of the Issuer Common
Stock on the Principal Market or if the Issuer Common Stock is not traded on a Principal Market, the highest reported bid price
for the Issuer Common Stock as provided by FINRA.
''Trading Day"
-any day during which the Principal Market shall be open for business.
''Trading Hours''
- for any given Trading Day, those hours between 9:30 am (U.S. Eastern Time and 4:30 pm (U.S.) Eastern Time.
"Transactions"
- shall have the meaning specified in the sixth paragraph of the recitals to this Agreement.
"Transfer Agent"
- as of any given date, the transfer agent firm engaged by Issuer to perform securities transfer agent and related services for
the Issuer and which, as of the date of this Agreement, is Globex Transfer, LLC, 780 Deltona Blvd., Suite 202, Deltona, FL 32725.
"Transfer Agent Instruction
Letter'' - shall have the meaning specified in Section 2.4.3.1 of this Agreement.
"Transfer Agent Instruction
Delivery Deadline" - shall have the meaning specified m Section 2.4.3.l of this Agreement.
"Transfer Agent Instruction
Delivery Requirement" - shall have the meaning specified in Section 2.4.3.1 of this Agreement.
"Transfer Agent Legal
Opinion Letter" - shall have the meaning specified in Section
2.4.3.2 of this Agreement.
2. The 3(aX9l Exchange(s).
2.1
Generally. Subject to the terms, conditions and limitations of this Agreement, for
so long as any amounts payable under the Debt Securities Instrument remain (i) unexchanged for shares of Issuer Common Stock hereunder,
or (ii) unpaid and outstanding (such period being deemed the "Investor Holding Period"), the Investor shall
have a continuing right in its sole and exclusive discretion, through the delivery by Investor to Issuer of an Exchange Notice,
to elect to exchange as part of a 3(a)(9) Exchange (in each instance, an "Exchange Request") all or any part of
the amount of any principal and/or accrued but unpaid interest thereon (as set forth within any such Exchange Notice. the "Exchange
Amount") for a number of fully-paid and non-assessable shares of Issuer Common Stock equal to (x) the Exchange Amount
divided by (y) fifty percent (50%) of t h e Stock Price during the Pricing Period (such result in each instance constituting the
"Exchange Shares"); provided, however, that any and all obligations under the Debt Securities shall
remain unaffected during such Investor Holding Period for all or any part thereof remaining unexchanged, including without limitation
any events or other terms of default. In connection with this provision, the Debt Securities Instrument shall be deemed to have
been incorporated by reference herein with all rights and obligations attendant thereto and arising thereunder to be continuing
unaffected hereby but only insofar as not in conflict at any given time with any superseding provisions of this Agreement.
2.2
Certain Acknowledgments and Covenants. Each of Issuer and Investor hereby (a) acknowledge
that they are aware and understand that, in order to be eligible for exemption from registration under the Securities Act, any
3(a)(9) Exchange(s) hereunder may not involve (i) any additional consideration beyond the Debt Securities Instrument being surrendered/exchanged
by the Investor, or (ii) any payment by the Issuer of any commission or other remuneration either directly or indirectly for the
solicitation of such exchange{s), and (b) covenant that any 3(a)(9) Exchange(s) hereunder shall not involve (i) any additional
consideration beyond the Debt Securities Instrument being surrendered/exchanged by the Investor, or (ii) any payment by the Issuer
of any commission or other remuneration either directly or indirectly for the solicitation of such exchru1ge(s).
2.3
Mechanics and Related Matters.
2.3.1 Delivery of
Exchange Notice. Any given Exchange Notice shall be deemed to have been delivered to the Issuer as of the date (the "Exchange
Notice Date") and time of dispatch by email to the Issuer as set forth on the email so dispatched, provided, however,
that no reasonably compelling basis upon which to challenge such date and time exists and has been provided to Investor (in each
case, the "Exchange Notice Date/time Stamp").
2.3.2 Certain Exchange
Notice Limitations. Anything in this Agreement to the contrary notwithstanding, in no event shall any Exchange Notice be deemed
valid (i) if and to the extent that fulfillment of the Exchange Request contained therein would cause the aggregate number of shares
of Issuer Common Stock beneficially owned by the Investor and its affiliates, including those in relation to which it/they have
a right to acquire within sixty (60) day>, lo exceed the Ownership Limitation, or (ii) if at such time the Issuer Common Stock
is listed or quoted on· The Nasdaq Stock Market or any other U.S. national securities exchange, and to the extent that that
fulfillment of the Exchange Request contained therein would cause the aggregate number of shares of Issuer Common Stock issued
pursuant to this Agreement, when combined with all shares of Issuer Common Stock issued pursuant to any transactions with which
they may be aggregated with other transactions for purposes of and under applicable rules of The Nasdaq Stock Market or any other
Principal Market on which the Common Stock may at such time be listed or quoted, would cause the aggregate number of shares of
Issuer Common Stock that would be deemed issued pursuant to this Agreement, to exceed the Exchange Cap. In the event that any Exchange
Notice shall have been delivered by Investor to Issuer but is invalid to any extent in accordance with the foregoing, such Exchange
Notice shall be void ab initio but only to the extent of such invalidity.
2.3.3 Delivery and
Settlement of Exchange Shares.
2.3.3.1 Transfer
Agent Instruction Requirement. Upon receipt of an Exchange Notice, Issuer shall immediately, but in no event more than seventy
two (72) hours (the "Transfer Agent Instruction Delivery Deadline"). deliver a letter to Transfer Agent, by email as
a .pdf attachment and with a cc (courtesy copy) email to Investor, such letter to be in the fom1 annexed hereto as Exhibit D and
incorporated by reference herein, inclusive of the unanimous written board consent annexed thereto (the "Transfer Agent
Instruction Letter"), in each case filled in as appropriate based on the information set forth in the corresponding Exchange
Notice, or deemed set forth in the corresponding Exchange Notice in accordance with Section 2.4.3.4 below (the ''Transfer Agent
Instruction Delivery Requirement''). Failure to meet the Transfer Agent Instruction Delivery Requirement shall result in an
adjustment to the Exchange A mount so that the Exchange Shares shall be a number of fully-paid and nonassessable shares of Issuer
Common Stock equal co ( x) the Exchange Amount divided by (y) the lessor of (A) $0.00001 and (B) twenty percent (20%) of the Stock
Price during the Pricing Period .
2.3.3.2 Officer's
Certificates. In connection with the delivery of any Exchange Shares, the cost of obtaining any formal written legal opinion
reasonably requested by Transfer Agent, including any one or more concluding that such Exchange Shares be delivered free of any
restrictive legend (each, a "Transfer Agent Legal Opinion Letter"), shall be borne by Investor, and it shall be
within the exclusive discretion of Investor as to what legal firm shall be engaged for this purpose. Promptly upon delivery via
email by Investor's designated counsel lo the President and chief executive officer of Issuer at the email address provided in
Section 5 of this Agreement (but in no event more than two [2] Trading Days) (the "Officer's Certificate Deadline")
of any officer's certificates identified in such email as being required by Investor's designated counsel for purposes of Investor's
designated counsel being able to deliver the Transfer Agent Legal Opinion Letter (each, an "Officer's Certificate"),
the CEO and chief executive. officer of Issuer shall duly execute and return to Investor's designated counsel, in .pdf format at
the email address from which the corresponding unexecuted Officer's Certificate(s) had been received, such duly executed Officer's
Certificate (the "Officer's Certificate Delivery Obligation").
2.3.3.3 Share Delivery
Obligation. Subject only to the limitations set forth in Section 2.4.2 above and any delays in delivery to Transfer Agent of
the Transfer Agent Legal Opinion Letter and within the applicable Exchange Share Delivery Period. Issuer shall be obligated to
and shall take any and all steps required to either (a) if Transfer Agent is not participating in the OTC FAST Program during the
applicable Exchange Share Delivery Period, and/or the Exchange Shares are not OTC Eligible, deliver for settlement to the window
of Investor's brokerage account (as designated in the Transfer Agent Instruction Letter) physical certificates representing the
Exchange Shares deliverable pursuant to the corresponding Exchange Request, or (b) if Transfer Agent is participating in the OTC
FAST Program during the applicable Exchange Share Delivery Period, and/or the Exchange Shares are OTC Eligible, cause such transfer
agent to effectuate delivery and settlement of such Exchange Shares electronically, in book-entry form, by appropriately crediting
the account of the Investor's prime broker (as designated in the Transfer Agent Instruction Letter) with OTC through its DWAC System
and providing proof satisfactory to the Investor thereof (in relation to any given Exchange Request, the "Issuer's Share Delivery
Obligation").
3.
Representations and Warranties of Issuer. Issuer hereby represents and warrants to
Investor, which representations and warranties, excepting (c) below, shall be deemed to be repeated by Issuer on each day on which
any amounts payable under the Debt Securities Instrument, including interest, remain (i) unexchanged for shares of Issuer Common
Stock hereunder, or (ii) unpaid and outstanding, that:
(a)
it is a corporation duly organized, validly existing, and in good standing under the Laws
of the State of Nevada:
(b)
it has taken all requisite corporate and other action to authorize, and it has full corporate
power and authority without any required further action, to (i) carry on its present business as current) conducted, (ii) own its
properties and assets, (iii) execute, deliver, and perform all of its obligations under this Agreement, (iv) have borrowed and
to repay with interest the indebtedness evidenced by the Debt Securities Instrument. and (v) issue and deliver to Investor or its
designee any and all Exchange Shares potentially deliverable pursuant to this Agreement;
(c)
its capitalization as of the date of this Agreement includes (i) ___________ (_________) shares
of Issuer Common Stock authorized, of which ________________ (_________) shares are issued and outstanding, and (ii) _____________
(_________) shares of Issuer preferred stock, par value $0.00001 per share authorized, of [Series A, B, C , D] are issued and outstanding,
and _______________________ ( ) notes/debentures in the combined amount of______________ dollars ($ __________) that, in accordance
with their terms, are "convertible" into capital stock of Issuer, issued and outstanding;
(d)
the Debt Securities Instrument constitutes a legal, valid and binding, and past due obligation
of Issuer, enforceable against Issuer i n accordance with the terms thereof, subject to applicable bankruptcy, reorganization,
insolvency, moratorium or similar Laws affecting creditors' rights generally and subject, as to enforceability, to equitable principles
of general application (regardless of whether enforcement is sought in a proceeding in equity or at law), there is no dispute relating
to the validity of such obligation, and any defenses to its validity have been waived in their entirety:
(e)
the execution, delivery and performance of this Agreement, the payment of all amounts due
under the Debt Securities Instrument by Issuer, and the consummation of the Transactions, do not and will not (i) violate any provision
of its articles of incorporation or bylaws, (ii) conflict with or result in the breach of any material provision of, or give rise
to a default under, any agreement with respect to indebtedness or of any other material agreement to which Issuer is a party or
by which it or any of its properties or assets are bound (iii) conflict with any Law, statute, rule or regulation or any Order
judgment or ruling of any court or other agency of government to which it is subject or any of its properties or assets may be
bound or affected. in each case except where such conflict would not have a Material Adverse Effect on Issuer or (iv) result in
the creation or imposition of any Lien, charge, mortgage, encumbrance or other security interest or any segregation of assets or
revenues or other preferential arrangement ( whether or not constituting a security interest) with respect to any present or future
assets, revenues or rights to the receipt of income of Issuer;
(f)
it is currently an SEC Reporting Company .
(g)
it is not a Shell Company, and, if it ever was a Shell Company, it (i) has ceased to be a
Shell Company, (ii) has filed all reports and other materials required to be filed by Section 13 or 15(d) of the Exchange Act,
as applicable, during the twelve (I 2) month period immediately preceding the date of this Agreement (or for such shorter period
as it has been required to file such reports and materials), other than current reports on Form 8-K, and (iii) has filed Current
Form I 0 Information with the SEC reflecting its status as an entity that is no longer a Shell Company, and at least one (1) year
has elapsed since such Current Form I 0 Information was filed:
(h)
the Issuer Common Stock currently trades publicly on the OTCQB market on under the symbol
''AJAC" and is not currently subject to any trading halts, suspensions, delistings or similar actions imposed by the SEC,
FINRA, or any other regulatory or similar authorities and no members of its management or board of directors is aware or has any
reason to be aware of any such threatened halts, suspensions, delistings or similar actions;
(i)
the Issuer Common Stock is currently DTC Eligible, Transfer Agent is participating in the
OTC FAST Program, and no OTC "chill" has been imposed upon the Issuer Common Stock:
(j)
its management understands what a Gypsy Swap is and that such arrangements are deemed to constitute
unlawful schemes to evade the registration requirements of the Securities Act, and has no knowledge of any such arrangements in
connection with the Transactions;
(k)
there are no legal actions, suits, arbitration proceedings, investigations or other Proceedings
pending or, to the reasonable knowledge of Issuer's officers or directors, threatened against Issuer which, if resolved unfavorably
would have a Material Adverse Effect on the financial condition of Issuer or the validity or enforceability of, or Issuer's ability
to perform its obligations under, the Debt Securities Instrument and/or this Agreement; and
(l)
all governmental and other consents, authorizations, approvals, licenses and orders that were
required to have been obtained by Issuer with respect to the Debt Securities Instrument and/or its issuance were duly obtained
and remain in full force and effect and all conditions of any such consents, Authorizations approvals, licenses and orders have
been complied with.
4.
Covenants of Issuer. In addition to the other obligations hereunder and under the Debt
Securities Instrument, and for so long as any amounts payable under the Debt Securities Instrument, including interest. remain
(i) unexchanged for shares of Issuer Common Stock hereunder, or (ii) unpaid and outstanding, Issuer hereby covenants to the Investor
as follows:
(a)
upon issuance, any Exchange Shares shall be duly authorized, fully paid and nonassessable;
(b)
it shall refrain from disclosing, and shall cause its officers, directors, employees and agents
to refrain from disclosing, any material non-public information to Investor without also disseminating such information to the
public in accordance with applicable Law, unless prior to disclosure of such information Issuer identifies such information as
being material non-public information and provides Investor with the opportunity to accept or refuse to accept such material non-public
information for review,
(c)
it shall timely file all reports required by it to be filed, in each case in full compliance
"ith the content requirements thereof, and shall meet all other of its obligations under the Exchange Act;
(d)
it shall take any and all steps as may be necessary to insure that the Issuer Common Stock
continues to trade publicly and does not become the subject of any trading halts, suspensions, delistings or similar actions imposed
by the SEC, FINRA, or any other regulatory or similar authorities:
(e)
it shall take any and all steps as may be necessary to insure that the Issuer Common Stock
continues to be DTC Eligible, that Transfer Agent continue to participate in the OTC FAST Program, and that no DTC "chill"
is imposed upon the Issuer Common Stock;
(f)
it shall take any and all steps as may be necessary to insure that it avoid becoming or otherwise
being deemed by the SEC a Shell Company;
(g)
it shall not issue any shares of Issuer Common Stock under this Agreement which, when aggregated
with all other shares of Issuer Common Stock then beneficially owned by Investor and its affiliates, including those in relation
to which it/they have a right to acquire within sixty (60) days, would result in the beneficial ownership by Investor and its affiliates
to exceed the Ownership Limitation, and, upon the written or telephonic request of Investor from time to time, Issuer shall confirm
to Investor within one (I) Trading Day of such request the number of shares of Issuer Common Stock then outstanding;
(h)
it shall not initiate or otherwise execute any share buybacks of the Issuer Common Stock that
would have the effect of increasing Investor's percentage beneficial ownership together with its affiliates, including those in
relation to which it/they have a right to acquire within sixty (60) days, to exceed the ownership Limitation;
(i)
if the Common Stock is listed or quoted on The Nasdaq Stock Market or any other U.S. national
securities exchange during the Investor Holding Period, it shall not issue any shares of Issuer Common Stock pursuant to this Agreement
to the extent that after giving effect thereto, the aggregate number of all shares of Issuer Common Stock that would be issued
pursuant to this Agreement together with all shares of Issuer Common Stock issued pursuant to any transactions that may be aggregated
with the transactions contemplated by this Agreement under applicable rules of The Nasdaq Stock Market or any other Principal Market
on which the Issuer Common Stock may be listed or quoted, would exceed the Exchange Cap, unless and until Issuer elects to solicit
stockholder approval of the transactions contemplated by this Agreement and the stockholders of Issuer have in fact so approved
the transactions contemplated by this Agreement in accordance with the applicable rules and regulations of The Nasdaq Stock Market,
any other Principal Market on which the Issuer Common Stock may be listed or quoted, and the Issuer's articles of incorporation
and bylaws; and
(j)
it shall not knowingly be a participant in any Gypsy Swap in connection with the Transactions
or otherwise.
5.
Notices. Except as otherwise expressly set forth herein, any notice, demand or request
relating to any matter set forth herein shall be made in writing and shall be deemed effective when hand delivered or when mailed,
postage pre-paid by registered or certified mail return receipt requested, when picked-up by or delivered to a recognized overnight
courier service, or when sent by email to either Issuer at its address below, or to Investor at its address below, or such other
address as either Party shall have notified the other in writing as provided herein from and after the date hereof.
If to Issuer:
Aja Cannafacturing, Inc.
5333 Birch Street
Lake Elsinore, CA 92530
Att: Kendall Smith
If to Investor:
Beaufort Capital Partners LLC
660 White Plains Road, Suite 455
Tarrytown, NY I 0591
Att: Robert Marino
6.
Governing Law. This Agreement and the Exhibits hereto shall be governed by and interpreted
and enforced in accordance with the Laws of the State of New York, without giving effect to any choice of Law or conflict of Laws
rules or provisions (whether of the State of New York or any other jurisdiction) that would cause the application of the Laws of
any jurisdiction other than the State of New York.
7.
Headings. The descriptive headings contained in this Agreement are included for convenience
of reference only and shall not affect in any way the meaning or interpretation of this Agreement.
8.
Counterparts. This Agreement may be executed and delivered (including by facsimile
or email .pdf file format attachment transmission) in one or more counterparts, and by the different Parties hereto in separate
counterparts, each of which when executed and delivered shall be deemed to be an original but all of which taken together shall
constitute one and the same agreement.
9.
Integration; Modification. This Agreement including the Exhibits hereto. constitutes
the entirety of the rights and obligations of each of the Investor and Issuer with respect to the subject matter hereof. No provision
of this Agreement may be modified except by an instrument in writing signed by the Party against whom the enforcement of any such
modification is or may be sought.
[SIGNATURES APPEAR ON THE FOLLOWING PAGE]
IN WITNESS WHEREOF, the Parties have caused
Ibis Agreement to be executed by 1he respective office thereunto duly authorized, in each case as of the date first written above.
"ISSUER"
AJA CANNAFACTURING, INC.
By: /s/ Kendall Smith'
Name: Kendall Smith
Title: CEO
BEAUFORT CAPITAL PARTNERS LLC
By: /s/ Leib Schaeffer
Name: Laib Schaeffer
Title: Managing Member
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 SECURIlTIES A OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITlES LAWS. THE SECURITIES MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFRED 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 SO PURSUANT TO RULE 144 OR RULE l44A UNDER SAID
ACT NOTWlTIISTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
Principal Amount: $53,000.00 |
Issue Date: March 19, 2014 |
Purchase Price: $53,000,000 |
|
COVERTIBILE PROMISSORY NOTE
FOR
VALUE RECEIVED IDS INDUSTRIES, INC., a Nevada corporation (hereinafter called the Borrower) hereby promises to pay to the order
or KBM WORLDWIDE, INC., a New York corporation, or registered assigns (the "Holder") the sum or $53.000.00 together with any interest as set forth herein on December 26, 2014 (the ''Maturity Date.) and to pay interest on the unpaid principal balance hereof at the rate of eight percent (8%) (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 expicitly set forth in herein. Any amount of principal or interest on
this Note which is not paid when due shall bear interest at the rate of twenty two percent (22%) per annum from the due date thereof
until the same is paid ("Default Interest"). Interest shall commence accruing on the date that the Note is fully paid
and shall be computed on the basis of a 365-day year and the actual number of days lapsed. 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 in 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 th e ri ght from time to time, and at any time during the period beginning on the date which is
one hundred eighty (180) days following 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 i n 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
th is Note into fully paid and non-asscssable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares
of capital stock or other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified at
the conversion price (the "Conversion Price'') determind 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 conversin
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 unexcrcised
r 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. purposes of the provision to the immediately preceding
sentence, beneficial ownership shall be determined in accordance wit h Section l3(d) of the Securities Exchange Act or 1934, as
amended (the '"Exchange Act"') and Regulations 13D-G thereunder except as otherwise provided in clause (1) of such provision
provided, further, however, that the limitations on conversion may be waived by the Holder upon, at the election
of the Holder, not less than 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 conversion, in the
form attached hereto as Exhibit A (the "Notice of Conversion'") delivered the Borrower by the Holder in accordance with
Section 1.4 below; provided that the Notice 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 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
a, on such principal amount at the interest rates provided in this Note to the Conversion Date plus (3) at the Holder's
option. Default Interest if any, on the amounts referred to in the immediatly 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 l .4(g) hereof.
(a)
Calculation of Conversion Price. The conversion price (the Conversion Price")
shall equal 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 or any subsidiary of the Borrower combinations.
recapitialization, reclassifications. extraordinary distributions and similar event). The "Variable Conversion Price"
shall mean 51% multiplied by the Market Price (as defined herein) (representing a discount rate of 49%). "Market Price"
means the average of the lowest three (3) Trading Prices (as defined below) for the Common Stock during the thirty (30) 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 closing bid price on the Over-the-Counter Bulletin Hoard or applicable trading market (the ''OTCBB")
as reported by a reliable reporting service ("Reporting Service") designated by the Holder (i.e. Bloomberg) 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 National Quotation Bureau. Inc. 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 s 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, or on the principal securities exchange or other securities market on which the Common Stock is
then being traded.
(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 or the assers or the Borrower or (ii) any person, group or entity
(including the Borrower) publicly announces a lender after 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 here inafter 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 l.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) as 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 after (or takeover scheme) which caused this Section 1.2(b)
to become operative.
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 Stock a sufficient number or 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 five 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 hereunder, 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 its capital structure which would change the number or shares of Common Stock into which 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 or share 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.
If at any
time the Borrower does not maintain the Reserved Amount it will be considered an Event of Default under Section 3.2 of the Note.
1.4 Method
of Conversion.
(a)
Mechanics of Conversion. Subject to Section 1.1, this Note may be converted
by the Holder in whole or in part at any time from time to time after the Issue Date. By (A) submitting to the Borrower a Notice
of Conversion (by facsimile, e-mail or other reason means of co munication dispatched on the Conversion Date prior to 6:00
p.m., New York, New York time) and (8) subject to Section 1.4(b), surrendering this Note at the principal office of he Borrower.
(b) Surrender
of Note Upon Conversion. Notwithstanding anything to the contrary set forth herein, upon conversion or this Note in
accordance with the terms hereof, he Holder shall not be required to physically surrender this Note to the Borrower unless
the en ire 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 conversion, or shall use such other method, reasonably satisfactory
to the Holder and the Borrower, so as no to require physical surrender of this Note upon each such conversion. In the event
of any dispuet or discrepancy, such records of the Borrower shall, prima facie, be controlling and detenninativ in the
absence of manifest error. Notwithstanding the foregoing, if any port ion of this Note is converted as aforesaid, the Holder
may no transfer this Note unless the Holder first physically surrenders this Note to the Borrower, whereupon the Borrower
will forthwith issue and deliver upon the order of the Holder a new Note of like tenor, registered as the Holder
(upon payment by the Holder of any applicable transfer taxes) may request, representing in the aggregate the remaining unpaid
principal amount of this Note. The Holder and any assignee. by acceptance of this Note, acknowledge and agree that, by reason
of the provisions of this paragraph , following conversion of a portion of this Note, the unpaid and unconverted principal
amount or 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 share 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 Holders 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 he 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 f con version or the entire unpaid principal amount hereto
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 recevied the Common Stock or other securities, cash
or other asset, as herein provided on such conversion. If the Holder shall have given a Notice or 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 or 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 longs the Notice of Conversion is received by the Borrower before 6:00
p.m. New York, New York time, on such date.
(f)
Delivery of Common Stock by Electronic Transfer. In lieu of delivering
physical certificates representing the Common Stock issuable upon conversion provided the Borrower is participating in the Depository
Trust Company ("DTC') Fast Automated Securities Transfer ("FAST") program upon request of the Holder and its compliance
with the provisions contained in Section 1.1 and in this Section 1.4 the Borrower shall use its best efforts to cause its transfer
agent to electronically transmit the Common Stcok issuable upon conversion to the Holder by crediting the account of Holder’s
"Prime Broker" with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system.
(g)
Failure to Deliver Common Stock Prior to Deadline. Without in any way
limiting the Holder's right to pursue other remedies. including actual damages an or equitable relief the parties agree that if
delivery of the Common Stock issuable upon conversion or this Note is not delivered by the Deadline (other than a failure due to
the circumstanes 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 10 deliver such Common Stock. Such cash
amount shall be paid to Holder by the fifth day of the month following the month in which it has accrued or at the option of the
Holder (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 interests shall accrue thereon in accordance with the terms or·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 result g from a failure attempt to frustrate.
interference with such conversion right are difficult if ot im possible to qualify. Accordingly the parties acknowledge that
the liquidated damages provision contained in this Section l.4(g) are justified.
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 an effective registration statement under the Act or (ii) the Borrower or its transfer agents 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 ( a successor rule) ("'Rule
l44") or (iv) such shares arc transferred to an "affiliate" (as defined in Rule l44) 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 immediatly sold each certificate for shares of Common Stock issuable upon conversion of this Note that as 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 b ar 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 WllICH 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 PLEDGE 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 or opinions
of counsel in com parable transactions. to the effect that a pubI ic sale or transfer of such Common Stock may be made without
registration under the Act, which opinion shall be accepted by the Company so that the sale or transfer is effected or (ii) in
the case of the Common Stock issuable upon conversion of th is 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 the be immediately sold. In the event that the Company does not accept
the opinion of cour el provided by the Holder 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 Even 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,
he 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 i n which more than 50% or the voting power of the Borrower is disposed of, or
the consolidation. merger or o er 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 Even of Default (as defined in Article III) pursuant
to which the Borrower shall be required to pay to he Holder upon the consummation of and as a condition to such transaction an
amount equal to he 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 simliar event. as a result of which shares or Common Stock of the Borrower
shall be changed into he same or a different number of shares of another class or classes of stock or securities of he Borrower
or another entity, or in case of' any sale or conveyance of all or substantially all or he assets or 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 he 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
lo the rights and interests of the Holder or 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) or the record date or
the special meeting of shareholders to approve, or if there is no such record date, the consummation of such merger consolidation
exchange of share recapitalization 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 or a subsidiary (i.e., a spin-off)) (a '"Distribution) then the Holdcr of this
Note shall be entitled, upon any conversion or this Note after the date of record for determinig shareholders entitled to such
Distribution, to receive the amount or such assets which would have been payable to the Holder with respect to the shares or Common
Stock issuable upon such conversion had such Holder been the holder or 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, any shares of Common Stock for no consideration or or a consideration per share (before deduction of reasonable expenses
or commissions or underwriting discount or allowances in connection therewith) less than the Conversion Price in effect on the
date or 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 or 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 considerat ion 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 or 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 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 or such Options or upon the conversion or exchange or 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 or 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 Borrowers 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 Converitble Securities first become convertible or exchangeable by (ii) the maximum total number of shares or 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. It: at any time when any Notes are issued and outstanding the Borrower issues any convertible securities or
rights to purchase stock, warrant, 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 l 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 holder 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 readjustment
of the Conversion Price as a result of the events described in this Section 1.6, Borrower at its expense, shall promptly compute
such adjustment or readjustment and pre and furnish to the Holder a certificate setting setting 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 or 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 is Note
and the other Notes issued pursuant to the Purchase Agreement more than the maximum 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 split stock dividends, combinations, capital reorganizations and similar
events relating to the Common Stock occurring after the date hereof. Once the Maximum Share Amount as 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 or the Maximum Share Amount in lieu of any furthter right to convert this Note this will
be considered an Event or Default under Section 3.3 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) e 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 so as practicable, return such unconverted Note to the Holder or, if the Note has not be
surrendered, adjust its records to reflect that such portion of this Note has not been converted all cases. the Holder shall retain
all of its rights and remedies (including, without limitation, the right to receive Conversion Default Payments pursuant to Section
1.3 to the extent require thereby for such Conversion Default and any subsequent Conversion Default and (ii) the right 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 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, in accordance with this Section 1.9. 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 Optional Prepayment Amount (as defined below) 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 exercises its right to prepay
the Note, the Borrower shall make payment to the Holder of an amount in cash (the “Optional Prepayment Amount") 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 to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts
referred to in clauses (w) and (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the Borrower
delivers an Optional Prepayment Notice and fails to pay the Optional Prepayment Amount due lo 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.
Notwithstanding
anything to the contrary contained in this Note, at any time during the period beginning on the date which is ninety-one (91) days
following the Issue Date and ending on the date which is one hundred twenty (120) 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, in accordance with this Section 1.9. Any 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 Optional Prepayment Date, the Borrower shall make payment of the Second Optional Prepayment
Amount (as defined below) 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 exercises its right to prepay the Note, the Borrower shall make payment to the Holder
of an amount in cash (the “Second Optional Prepayment Amount”) equal to 145%, 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
to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referred to in clauses (w) and (x) plus
(z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the Borrower delivers an Optional Prepayment
Notice and fails to pay the Second Optional 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.
Notwithstanding
anything to the contrary contained in this Note, at any time during the period beginning on the date which is one hundred twenty-one
(121) 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, in accordance with this Section 1.9. Any 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 Optional Prepayment Date, the Borrower shall make payment of the Third Optional Prepayment
Amount (as defined below) 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 exercises its right to prepay the Note, the Borrower shall
make payment to the Holder of an amount in cash (the “Third Optional Prepayment Amount") equal to 150%, 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 to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referred to in clauses
(w) and (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the Borrower delivers
an Optional Prepayment Notice and fails to pay the Third Optional 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.
After the
expiration of one hundred eighty (180) following the date or the Note, the Borrower shall have no right of prepayment.
ARTICLE II.
CERTAIN COVENANTS
2.
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 securiries) on shares of capital
stock other than dividends on shares of Common Stock solely in the form or additional shares or 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
which the Borrower has informed Holder in writing prior to the date hereof, (b) indebtedness to trade creditors or financial institutions
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.
ARTICLE III. EVENTS OF DEFAULT
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) hour s of a demand from the Holder.
3.3 Breach of Covenants.
The Borrower breaches any material covenant or other material term or condition contained in this Note and any collateral documents
including but not limited to the Purchase Agreement and such breach continues for a period of ten (I0) days after written notice
thereof to the Borrower from the Holder.
3.4 Breach of Representations
and Warranties. Any representation or warranty of the Borrower made herein or in any agreement, statement or certificate given
in writing pursuant hereto or in connection herewith (including, without limitation, the Purchase Agreement), shall be false or
misleading in any material respect when made and the breach of which has (or with the passage of time will have) a material adverse
effect on the rights of the Holder with respect to this Note or the Purchase Agreement.
3.5 Receiver or Trustee.
The Borrower or any subsidiary of the Borrower shall make an assignment for the benefit of creditors, or apply for or consent to
the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee
shall otherwise be appointed.
3.6 Judgments. Any
money judgment, writ or similar process shall be entered or filed against the Borrower or any subsidiary of the Borrower or any
of its property or other assets for more than $50,000, and shall remain unvacated, unbonded or unstayed for a period of twenty
(20) days unless otherwise consented to by the Holder, which consent will not be unreasonably withheld.
3.7 Bankruptcy.
Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings, voluntary or involuntary, for relief under
any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any subsidiary of the
Borrower.
3.8 Delisting of Common
Stock. The Borrower shall fail to maintain the listing of the Common Stock on at least one of the OTCBB or an equivalent replacement
exchange, the Nasdaq National Market, the Nasdaq Small Cap Market, the New York Stock Exchange, or the American Stock Exchange.
3.9 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 requirement s of the Exchange Act.
3.10 Liquidation.
Any dissolution, liquidation, or winding up of Borrower or any substantial portion of its business.
3.11 Cessation of Operations.
Any cessation of operations by Borrower or Borrower admits it is otherwise generally unable to pay its debts as such debts become
due, provided, however, that any disclosure of the Borrower's ability to continue as a "going concern" shall not be an
admission that the Borrower cannot pay its debts as they become due.
3.12 Maintenance of
Assets. The failure by Borrower to maintain any material intellectual property rights, personal, real property or other assets
which are necessary to conduct its business (whether now or in the future).
3.13 Financial Statement
Restatement. The restatement of any financial statements filed by the Borrower with the SEC for any date or period from two
years prior to the Issue Date of this Note and until this Note is no longer outstanding, if the result of such restatement would,
by comparison to the unrestated financial statement, have constituted a material adverse effect on the rights of the Holder with
respect to this Note or the Purchase Agreement.
3.14 Reverse Splits.
The Borrower effectuates a reverse split of its Common Stock without twenty (20) days prior written notice to the Holder.
3.15 Replacement of
Transfer Agent. In the event that the Borrower propose s to replace its transfer agent, the Borrower fails to provide, prior
to the effective date of such replacement, a fully executed Irrevocable Transfer Agent Instructions in a form as initially delivered
pursuant to the Purchase Agreement (including but not limited to the provision to irrevocably reserve shares of Common Stock in
the Reserved Amount) signed by the successor transfer agent to Borrower and the Borrower.
3.16 Cross-Default.
Notwithstanding anything to the contrary contained in this Note or the other related or companion documents , a breach or default
by the Borrower of any covenant or other term or condition contained in any of the Other Agreement s, after the passage of all
applicable notice and cure or grace periods, shall, at the option of the Holder, be considered a default under this Note and the
Other Agreements, in which event the Holder shall be entitled (but in no event required) to apply all rights and remedies of the
Holder under the terms of this Note and the Other Agreements by reason of a default under said Other Agreement or hereunder. "Other
Agreements" means, collectively, all agreements and instruments between , among or by: (1) the Borrower, and, or for the
benefit of, (2) the Holder and any affiliate of the Holder, including, without limitation , promissory notes; provided, however,
the term "Other Agreements" shall not include the related or companion documents to this Note. Each of the loan transactions
will be cross-defaulted with each other loan transaction and with all other existing and future debt of Borrower to the Holder.
Upon the occurrence and
during the continuation of any Event of Default specified in Section 3.1 (solely with respect to failure to pay the principal hereof
or interest thereon when due at the Maturity Date), the Note shall become immediately due and payable and the Borrower shall pay
to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Default Sum (as defined herein). UPON
THE OCCURRENCE AND DURING THE CONTINUATION OF ANY EVENT OF DEFAULT SPECIFIED TN SECTION 3.2, THE NOTE SHALL BECOME IMMEDIATELY
DUE AND PAYABLE AND THE BORROWER SHALL PAY TO THE HOLDER , IN FULL SATISFACTION OF ITS OBLIGATIONS HEREUNDER, AN AMOUNT EQUAL TO:
(Y) THE DEFAULT SUM (AS DEFINED HEREIN); MULTIPLIED BY (Z) TWO (2). Upon the occurrence and during the continuation of any Event
of Default specified in Sections 3.1 (solely with respect to failure to pay the principal hereof or interest thereon when due on
this Note upon a Trading Market Prepayment Event pursuant to Section 1.7 or upon acceleration) , 3.3, 3.4, 3.6, 3.8, 3.9, 3.11,
3.12, 3.13, 3.14, and/or 3. 15 exercisable through the delivery of written notice to the Borrower by such Holders (the "Default
Notice"), and upon the occurrence of an Event of Default specified the remaining sections of Articles III (other than failure
to pay the principal hereof or interest thereon at the Maturity Date specified in Section 3,1 hereof), the Note shall become immediately
due and payable and the Borrower shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to
the greater of (i) 150% times the sum of (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest
on the unpaid principal amount of this Note to the date of payment (the "Mandatory Prepayment Date") plus (y) Default
Interest, if any, on the amounts referred to in clauses (w) and/or (x) plus (z) any amounts owed to the Holder pursuant to Sections
1 .3 and 1.4(g) hereof (the then outstanding principal amount of this Note to the date of payment plus the amounts referred to
in clauses (x), (y) and (z) shall collectively be known as the "Default Sum") or (ii) the "parity value" of
the Default Sum to be prepaid, where parity value means (a) the highest number of shares of Common Stock issuable upon conversion
of or otherwise pursuant to such Default Sum in accordance with Article I, treating the Trading Day immediately preceding the Mandatory
Prepayment Date as the "Conversion Date" for purposes of determining the lowest applicable Conversion Price, unless the
Default Event arises as a result of a breach in respect of a specific Conversion Date in which case such Conversion Date shall
be the Conversion Date), multiplied by (b) the highest Closing Price for the Common Stock during the period beginning on the date
of first occurrence of the Event of Default and ending one day prior to the Mandatory Prepayment Date (the "Default Amount")
and all other amounts payable hereunder shall immediately become due and payable, all without demand, presentment or notice , all
of which hereby are expressly waived, together with all costs, including , without limitation, legal fees and expenses, of collection,
and the Holder shall be entitled to exercise all other rights and remedies available at law or in equity.
If the Borrower fails to
pay the Default Amount within five (5) business days of written notice that such amount is due and payable, then the Holder shall
have the right at any time, so long as the Borrower remains in default (and so long and to the extent that there are sufficient
authorized shares), to require the Borrower, upon written notice , to immediately issue, in lieu of the Default Amount , the number
of shares of Common Stock of the Borrower equal to the Default Amount divided by the Conversion Price then in effect.
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: |
|
IDS INDUSTRIES, INC. (f/k/a/ IDS Solar Technologies, Inc.) |
533 Birch Street |
Lake Elsinore, CA 92530 |
Attn:
SCOTT PLANTINGA, Chief Executive Officer |
facsimile: |
|
With a copy by fax only to (which copy shall not constitute notice): |
|
[enter name of law firm] |
Attn:
[attorney name] |
[enter
address line 1] |
[enter city,
state, zip] |
facsimile: [enter fax number] |
|
If to the Holder: |
|
KBM WORLDWIDE, INC. |
80 Cuttermill Road
- Suite 207 Great Neck, NY. 11021 |
Attn:Seth Kramer , President |
email: info@kbmworkdwide.com |
|
With a copy by fax only to (which copy shall not constitute notice): |
|
Naidich
Wurman Birbaum & Maday, LLP |
Att: Bernard S. Feldman, Esq. |
facsimile: 516-466-3555 |
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 am ended or supplemented.
4.4 Assignability.
This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to be the benefit of the Holder and
its successors and assigns. Each transferee of this Note must be an "accredited investor" (as defined in Rule 501 (a)
of the 1933 Act). Notwithstanding anything in this Note to the contrary, this Note may be pledged as collateral in connection with
a bona fide margin account or other lending arrangement.
4.5 Cost of Collection.
If default is made in the payment of this Note, the Borrower shall pay the Holder hereof costs of collection, including reasonable
attorneys' fees.
4.6 Governing Law.
This Note shall be governed by and construed in accordance with the laws of the State of New York without regard to principles
of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Note
shall be brought only in the state courts of New York or in the federal courts located in the state and county of Nassau. 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 and Holder waive
trial by jury. 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 disproportion ate 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 shareholder s). In the
event of any taking by the Borrower of a record of its shareholder s for the purpose of determining shareholders who are entitled
to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including
by way of merger, consolidation, reclassification or recapitalization) any share of any class or any other securities or property,
or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed
sale, lease or conveyance of all or substantially all of the assets of the Borrower or any proposed liquidation, dissolution or
winding up of the Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20) days prior to the record date
specified therein (or thirty (30) days prior to the consummation of the transaction or event, whichever is earlier), of the date
on which any such record is to be taken for the purpose of such dividend, distribution , right or other event, and a brief statement
regarding the amount and character of such dividend , distribution, right or other event to the extent known at such time. The
Borrower shall make a public announcement of any event requiring notification to the Holder hereunder substantially simultaneously
with the notification to the Holder in accordance with the terms of this Section 4.9.
4.10 Remedies. The
Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating
the intent and purpose of the transaction contemplated hereby. Accordingly, the Borrower acknowledges that the remedy at law for
a breach of its obligations under this Note will be inadequate and agrees, in the event of a breach or threatened breach by the
Borrower of the provisions of this Note, that the Holder shall be entitled , in addition to all other available remedies at law
or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing
any breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity of showing economic
loss and without any bond or other security being required.
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in
its name by its duly authorized officer this March 19, 2014.
IDS INDUSTRIES, INC. |
(f/k/a/ IDS Solar Technologies) |
By: /s/
Scott Plantinga |
Scott Plantinga |
Chief Executive Officer |
EXHIBIT A
NOTICE OF CONVERSION
The undersigned hereby elects to
convert $ principal amount of the Note (defined below) 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 IDS INDUSTRIES, INC. (f/k/a/ IDS
Solar Technologies, Inc.), a Nevada corporation (the "Borrower") according to the conditions of the convertible
note of the Borrower dated as of March 19, 2014 (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 Agent Commission 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:
KMB WORLDWIDE, INC.
80 Cuttermill Road - Suite 410
Great Neck, NY. 11021
Attention: Certificate Delivery (516) 498-9890
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:
KMB WORLDWIDE, INC.
By:
Name: Seth Kramer
Title: President Date:
80 Cuttermill Road - Suite 410 Great Neck, NY. 11021
SECURITIES
PURCHASE AGREEMENT
This SECURITIES
PURCHASE AGREEMENT (the "Agreement"), dated as
of March 19, 2014, by and
between IDS INDUSTRIES, INC., a
Nevada corporation, with
headquarters located at 533 Birch Street, Lake
Elsinore, CA
92530 (the "Company"), and KBM
WORLDWIDE, INC., a
New York corporation , with
its address at 80 Cuttermill Road, 410, Great
Neck, NY
11021 (the "Buyer").
WHEREAS:
A.
The Company and
the Buyer are executing and delivering
this Agreement reliance upon the
exemption from securities
registration afforded by
the rules and
regulation promulgated by the United States Securities and Exchange Commission (the "SEC")
und Securities Act of 1933,
as amended (the "1933
Act");
B.
Buyer desires to purchase and the Company desires to issue and sell, up terms and conditions set forth in this Agreement an 8%
convertible note of the Company, form attached hereto as Exhibit A, in the aggregate principal amount of $53,000.00 (to with any
note(s) issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms
thereof, the "Note"), convertible into shares of common stock, $0.001 par value per share, of the Company (the "Common
Stock"), upon the term and subject to the limitations and conditions set forth in such Note.
C.
The Buyer wishes to purchase, upon the terms and conditions stated in this Agreement , such principal amount of Note as is set
forth immediately below its name the signature pages hereto; and
NOW
THEREFORE, the Company and the Buyer severally (and not jointly) agree as follows:
1.
Purchase and Sale of Note.
a.
Purchase of Note. On the Closing Date (as defined below Company
shall issue and sell to the Buyer and the Buyer agrees to purchase from the Company such principal amount of Note as is set forth
immediately below the Buyer's name signature pages hereto.
b.
Form of Payment. On the Closing Date (as defined below),
( the Buyer shall pay the purchase price for the Note to be issued and sold to it at the Closing (as defined below) (the "Purchase
Price") by wire transfer of immediately available funds to the Company, in accordance with the Company's written wiring instructions
, against delivery of the Note in the principal amount equal to the Purchase Price as is set forth immediately below the Buyer's
name on the signature pages hereto, and (ii) the Company shall deliver such duly executed Note on behalf of the Company, to the
Buyer, against delivery of such Purchase Price.
c. Closing
Date. Subject to the satisfaction (or written waiver) of the conditions thereto set forth in Section 6 and Section 7
below, the date and time of the issuance and sale of the Note pursuant to this Agreement (the "Closing Date") shall
be 12:00 noon, Eastern Standard Time on or about March 26, 2014, or such other mutually agreed upon time The closing of the
transactions contemplated by this Agreement (the "Closing") shall occur the Closing Date at such location as may be
agreed to by the parties.
2.
Buyer's Representations and Warranties. The Buyer represent and warrants to the Company that:
a.
Investment Purpose. As of the date hereof, the Bu purchasing
the Note and the shares of Common Stock issuable upon conversion of or otherwise pursuant to the Note (including, without limitation,
such additional shares of Common St k, if any, as are issuable (i) on account of interest on the Note, (ii) as a result of the
events described in Sections 1.3 and 1.4(g) of the Note or (iii) in payment of the Standard Liquidated Damages Amount (as defined
in Section 2(f) below) pursuant to this Agreement, such shares of Co on Stock being collectively referred to herein as the "Conversion
Shares" and, collectively with the Note, the "Securities") for its own account and not with a present view towards
the public sale or distribution thereof, except pursuant to sales registered or exempted from registration un r the 1933 Act;
provided, however, that by making the representations herein, the Buyer does not agree to hold any of the Securities for any minimum
or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the 1933 Act.
b.
Accredited Investor Status. The Buyer is an "accredited
investor" as that term is defined in Rule 501(a) of Regulation D (an "Accredited Investor").
c.
Reliance on Exemptions. The Buyer understands that the Securities
are being offered and sold to it in reliance upon specific exemptions the registration requirements of United States federal and
state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer's compliance with, the representations,
warranties, agreements, acknowledgments and understandings of the Buyer set forth he order to determine the availability of such
exemptions and the eligibility of the Buyer to the Securities, securities laws or to comply with the terms and conditions of any
exemption thereunder (in case). Notwithstanding the foregoing or anything else contained herein to the contrary, the Securities
may be pledged as collateral in connection with a bona fide margin account or lending arrangement.
g. Legends.
The Buyer understands that the Note and, until sue time as the Conversion Shares have been registered under the 1933 Act may be
sold pursuant to Rule 144 or Regulation S without any restriction as to the number of securities as of a particular date that
can then be immediately sold, the Conversion Shares may bear a restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of the certificates for such Securities):
"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 Company shall issue a certificate without such legend to the holder of any Security
upon which it is stamped, if, unless otherwise required by applicable state securities laws, (a) such Security is registered for
sale un effective registration statement filed under the 1933 Act or otherwise may be sold pursuant to Rule 144 or Regulation
S without any restriction as to the number of securities as of a particular date that can then be immediately sold, or (b) such
holder provides the Company with 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 Security may be made without registration under the 1933 Act,
which opinion shall be accepted by the Company so that t sale or transfer is effected. The Buyer agrees to sell all Securities,
including those represented by a certificate(s) from which the legend has been removed, in compliance with applicable prospectus
d.
Information. The Buyer and its advisors, if any, have been,
a for so long as the Note remain outstanding will continue to be, furnished with all materials relating to the business, finances
and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by the
Buyer or its advisors. The Buyer and its advisors, if any, have been, and for so long as the Note remain outstanding will continue
be, afforded the opportunity to ask questions of the Company. Notwithstanding the foregoing, the Company has not disclosed to
the Buyer any material nonpublic information and will not disclose such information unless such information is disclosed to the
public prior to or pro following such disclosure to the Buyer. Neither such inquiries nor any other due diligence investigation
conducted by Buyer or any of its advisors or representatives shall modify, am affect Buyer's right to rely on the Company's representations
and warranties contained in Section 3 below. The Buyer understands that its investment in the Securities involves a significant
degree of risk. The Buyer is not aware of any facts that may constitute a breach any of the Company's representations and warranties
made herein.
e.
Governmental Review. The Buyer understands that no United
States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement
of the Securities.
f.
Transfer or Re-sale. The Buyer understands that (i) the sale
or re-sale of the Securities has not been and is not being registered under the 1933 Act or any applicable state securities laws,
and the Securities may not be transferred unless (a) the Sec are sold pursuant to an effective registration statement under the
1933 Act, (b) the Buyer have delivered to the Company, at the cost of the Buyer, an opinion of counsel that shall form, substance
and scope customary for opinions of counsel in comparable transactions effect that the Securities to be sold or transferred may
be sold or transferred pursuant exemption from such registration , which opinion shall be accepted by the Company,) the Securities
are sold or transferred to an "affiliate" (as defined in Rule 144 promulgated und r the 1933 Act (or a successor rule)
("Rule 144")) of the Buyer who agrees to sell or otherwise transfer the Securities only in accordance with this Section
2(f) and who is an Accredited Investor, (d) the Securities are sold pursuant to Rule 144, or (e) the Securities are sold pursuant
to Regulation S under the 1933 Act (or a successor rule) ("Regulation S"), and the Buyer shall have delivered to the
Company, at the cost of the Buyer, an opinion of counsel that shall be in form, substance and scope customary for opinions of
counsel in corporate transactions, which opinion shall be accepted by the Company; (ii) any sale of such Securities made in reliance
on Rule 144 may be made only in accordance with the terms of said Rule and further, if said not applicable, any re-sale of such
Securities under circumstances in which the seller ( person through whom the sale is made) may be deemed to be an underwriter
(as that term defined in the 1933 Act) may require compliance with some other exemption under the 19 or the rules and regulations
of the SEC thereunder; and (iii) neither the Company nor any other person is under any obligation to register such Securities
under the 1933 Act or an state delivery requirements, if any. In the event that the Company 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 consider an Event of Default pursuant to Section 3.2 of the Note.
g.
Authorization; Enforcement. This Agreement has been duly
and validly authorized. This Agreement has been duly executed and delivered on behalf the Buyer, and this Agreement constitutes
a valid and binding agreement of the Buyer enforceable accordance with its terms.
h.
Residency. The Buyer is a resident of the jurisdiction set
immediately below the Buyer's name on the signature pages hereto.
3.
Representations and Warranties of the Company. The Company represents and warrants to the
Buyer that:
a.
Organization and Qualification. The Company and each Subsidiaries
(as defined below), if any, is a corporation duly organized, validly existing good standing under the laws of the jurisdiction
in which it is incorporated, with full pow authority (corporate and other) to own, lease, use and operate its properties and to
carry on its business as and where now owned, leased, used, operated and conducted. Schedule 3 (a sets forth a list of all of
the Subsidiaries of the Company and the jurisdiction in which each is incorporated. The Company and each of its Subsidiaries is
duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its owners use of
property or the nature of the business conducted by it makes such qualification nee except where the failure to be so qualified
or in good standing would not have a Material Adverse Effect. "Material Adverse Effect" means any material adverse effect
on the business, operations, assets, financial condition or prospects of the Company or its Subsidiaries, if any, taken as a whole,
or on the transactions contemplated hereby or by the agreements or instruments to be entered into in connection herewith. "Subsidiaries"
means any corporation or other organization, whether incorporated or unincorporated, in which the Company owns, directly or indirectly,
any equity or other ownership interest.
b.
Authorization; Enforcement. (i) The Company has all requisite
corporate power and authority to enter into and perform this Agreement, the Note consummate the transactions contemplated hereby
and thereby and to issue the Securities accordance with the terms hereof and thereof, (ii) the execution and delivery of this
Agreement, the Note by the Company and the consummation by it of the transactions contemplated and thereby (including without
limitation, the issuance of the Note and the issuance reservation for issuance of the Conversion Shares issuable upon conversion
or exercise thereof) have been duly authorized by the Company's Board of Directors and no further consent or authorization of
the Company, its Board of Directors, or its shareholders is required, (ii ) this Agreement has been duly executed and delivered
by the Company by its authorize representative, and such authorized representative is the true and official representative with
authority to sign this Agreement and the other documents executed in connection herewith bind the Company accordingly, and (iv)
this Agreement constitutes, and upon execution delivery by the Company of the Note, each of such instruments will constitute,
a legal, valid binding obligation of the Company enforceable against the Company in accordance with its terms.
c.
Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of: (i) 490,000,000 shares of Common Stock, $0.001 par value per share, of which 76,352,885 shares
are issued and outstanding; and (ii) 10,000,000 authorized shares of Preferred Stock, $0.001 par value per share, of which no
shares are issued and outstanding; no shares are reserved for issuance pursuant to the Company's stock option no shares are reserved
for issuance pursuant to securities (other than the Note) exercisable for, or convertible
into or exchangeable for shares of Common Stock and 42,500,000 shares are reserved for issuance upon conversion of the Note. All
of such outstanding shares of capital stock are, or upon issuance will be, duly authorized, validly issued, fully paid and nonassessable.
No shares of capital stock of the Company are subject to preemptive rights any other similar rights of the shareholders of the
Company or any liens or encumbrances imposed through the actions or failure to act of the Company. As of the effective date of
this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal,
agreements, understandings, claims or other commitments or rights of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for any shares of capital stock of the Company or any of its Subsidiaries, or arrangements by
which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company
or any of its Subsidiaries, (ii) there are no agreements or arrangements under the Company or any of its Subsidiaries is obligated
to register the sale of any of its o their securities under the 1933 Act and (iii) there are no anti-dilution or price adjustment
provisions contained in any security issued by the Company (or in any agreement providing rights to security holders) that will
be triggered by the issuance of the Note or the Conversion Shares. The Company has furnished to the Buyer true and correct copies
of the Company's Certificate of Incorporation as in effect on the date hereof ("Certificate of Incorporation "), the
Company s By laws, as in effect on the date hereof (the "By-laws"), and the terms of all securities convertible into
or exercisable for Common Stock of the Company and the material rights of the holders thereof in respect thereto. The Company
shall provide the Buyer with a written update of this representation signed by the Company's Chief Executive on behalf of the
Company as of the Closing Date.
d.
Issuance of Shares. The Conversion Shares are duly authorized
and reserved for issuance and, upon conversion of the Note in accordance with its respective terms, will be validly issued, fully
paid and non-assessable, and 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 Company and will not impose personal liability
upon the holder thereof.
e.
Acknowledgment of Dilution. The Company understand and acknowledges
the potentially dilutive effect to the Common Stock upon the issuance the Conversion Shares upon conversion of the Note. The Company
further acknowledges that its obligation to issue Conversion Shares upon conversion of the Note in accordance with this Agreement,
the Note is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests
of other shareholders of the Company.
f.
No Conflicts. The execution, delivery and performance of
this Agreement, the Note by the Company and the consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the issuance and reservation for issuance of the Conversion Shares) will not (i) conflict with
or result in a violation of any provision of the Certificate of Incorporation or By-laws, or (ii) violate or conflict with, or
result in a breach of any provision of, or constitute a default (or an event which with notice or lapse of time or both could
become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement,
indenture, patent, patent license or instrument to which the Company or any of its Subsidiaries is a party, or (iii) result in
a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations
and regulations of any self-regulatory organizations to which the Company or its securities are subject) applicable to the Company
or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected (except
for such conflicts, defaults, terminations, amendments, accelerations, cancellation violations as would not, individually or in
the aggregate, have a Material Adverse Effect). Neither the Company nor any of its Subsidiaries is in violation of its Certificate
of Incorporation By-laws or other organizational documents and neither the Company nor any of its Subsidiaries is in default (and
no event has occurred which with notice or lapse of time or both could Company or any of its Subsidiaries in default) under, and
neither the Company nor any Subsidiaries has taken any action or failed to take any action that would give to others any of termination,
amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its Subsidiaries
is a party or by which any property or assets of the Company or any of its Subsidiaries is bound or affected, except for possible
defaults as would not, individually or in the aggregate, have a Material Adverse Effect. The businesses of the Company and its
Subsidiaries, if any, are not being conducted, and shall not be conducted so long as the Buyer owns any of the Securities, in
violation of any law, ordinance or regulation of any governmental entity. Except as specifically contemplated by this Agreement
and as required under the 1933 Act and any applicable state securities laws, the Company is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court, governmental agency, regulatory agency, self regulatory
organization or stock market or any third party in order for it to execute, deliver or perform any of its obligations under this
Agreement , the Note in accordance with the terms hereof or thereof or to issue and sell the Note in accordance with the terms
hereof and to issue the Conversion Shares upon conversion Note. All consents, authorizations, orders, filings and registrations
which the Company required to obtain pursuant to the preceding sentence have been obtained or effected on or to the date hereof.
The Company is not in violation of the listing requirements of the Over Counter Bulletin Board (the "OTCBB") and does
not reasonably anticipate that the Common Stock will be delisted by the OTCBB in the foreseeable future. The Company a Subsidiaries
are unaware of any facts or circumstances which might give rise to any foregoing.
g.
SEC Documents; Financial Statements. The Company has timely
filed all reports, schedules, forms, statements and other documents required to be filed by I the SEC pursuant to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act") (all of the foregoing filed prior to
the date hereof and all exhibits included therein and financial statements and schedules thereto and documents (other than exhibits
to such documents) incorporated by reference therein, being hereinafter referred to herein as the "SEC Documents ").
Upon written request the Company will deliver to the Buyer true and complete copies of the SEC Documents, except for such exhibits
and incorporated documents. As of their respective dates, the SEC Documents complied in all material re with the requirements
of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the
SEC Documents, at the time were filed with the SEC, contained any untrue statement of a material fact or omitted to ate a material
fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which
they were made, not misleading. None of the state made in any such SEC Documents is, or has been, required to be amended or updated
applicable law (except for such statements as have been amended or updated in subs filings prior the date hereof) As of their
respective dates, the financial statements Company included in the SEC Documents complied as to form in all material respect applicable
accounting requirements and the published rules and regulations of the SEC respect thereto. Such financial statements have been
prepared in accordance with United generally accepted accounting principles, consistently applied, during the periods involve
fairly present in all material respects the consolidated financial position of the Company consolidated Subsidiaries as of the
dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case
of unaudited statements, to year-end audit adjustments). Except as set forth in the financial statements of the Co included in
the SEC Documents, the Company has no liabilities, contingent or otherwise other than (i) liabilities incurred in the ordinary
course of business subsequent to February 28, 2014, and (ii) obligations under contracts and commitments incurred in the ordinary
course of b and not required under generally accepted accounting principles to be reflected in such fi statements, which, individually
or in the aggregate, are not material to the financial condition operating results of the Company. The Company is subject to the
reporting requirements 1934 Act.
h.
Absence of Certain Changes. Since February 28, 2014, there
has been no material adverse change and no material adverse development in the assets, liabilities, business, properties, operations,
financial condition, results of operations, prospects or 193 Act reporting status of the Company or any of its Subsidiaries.
i.
Absence of Litigation. There is no action, suit, claim, proceeding,
inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending
or, to the knowledge of the Company or any of its Subsidiaries, threatened against or affecting the Company or any of its Subsidiaries,
or their offices or directors in their capacity as such, that could have a Material Adverse Effect. Schedule 3(i) contains a complete
list and summary description of any pending or, to the knowledge the Company, threatened proceeding against or affecting the Company
or any of its Subsidiaries, without regard to whether it would have a Material Adverse Effect. The Company a d its Subsidiaries
are unaware of any facts or circumstances which might give rise to any the foregoing.
j.
Patents, Copyrights, etc. The Company and each its Subsidiaries
owns or possesses the requisite licenses or rights to use all patents, applications, patent rights, inventions, know-how, trade
secrets, trademarks, trade applications, service marks, service names, trade names and copyrights ("Intellectual Property")
necessary to enable it to conduct its business as now operated (and, as presently contemplated to be operated in the future);
there is no claim or action by any person pe1iaining to, or proceeding pending, or to the Company's knowledge threatened, which
challenges the right of the Company or of a Subsidiary with respect to any Intellectual Property necessary to enable it to conduct
its business as now operated (and, as presently contemplated to be operated in the future); to the best of the Company's knowledge,
the Company's or its Subsidiaries' current and intended products, services and processes do not infringe on any Intellectual Property
or other right held by any person; and the Company is unaware of any facts or circumstances which might give rise to any of the
foregoing. The Company and each of its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality
and value of their Intellectual Property.
k.
No Materially Adverse Contracts, Etc. Neither the Comp nor
any of its Subsidiaries is subject to any charter, corporate or other legal restriction, judgment, decree, order, rule or regulation
which in the judgment of the Company's office or is expected in the future to have a Material Adverse Effect. Neither the Company
nor its Subsidiaries is a party to any contract or agreement which in the judgment of the Com officers has or is expected to have
a Material Adverse Effect.
l.
Tax Status. The Company and each of its Subsidiaries has
made or filed all federal, state and foreign income and all other tax returns, reports and declarations required by any jurisdiction
to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books
provisions reasonably adequate payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments
and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those
being contested in good faith and has set aside on its books provisions reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount
claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.
The Company has not executed a with respect to the statute of limitations relating to the assessment or collection of any foreign
federal, state or local tax. None of the Company's tax returns is presently being audited by taxing authority.
m.
Certain Transactions. Except for arm's length transactions
pursuant to which the Company or any of its Subsidiaries makes payments in the ordinary of business upon terms no less favorable
than the Company or any of its Subsidiaries obtain from third parties and other than the grant of stock options disclosed on Schedule
none of the officers, directors, or employees of the Company is presently a party t transaction with the Company or any of its
Subsidiaries (other than for services as employees officers and directors), including any contract, agreement or other arrangement
providing furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, the knowledge of the Company, any corporation, partnership, trust
or other entity in which officer, director, or any such employee has a substantial interest or is an officer, director, or partner.
n.
Disclosure. All information relating to or concerning the
Company or any of its Subsidiaries set forth in this Agreement and provided to the Buyer pursuant to Section 2(d) hereof and otherwise
in connection with the transactions contemplated her by is true and correct in all material respects and the Company has not omitted
to state any material fact necessary in order to make the statements made herein or therein, in light of the circumstances under
which they were made, not misleading. No event or circumstance occurred or exists with respect to the Company or any of its Subsidiaries
or its or their business, properties , prospects, operations or financial conditions, which, under applicable law, r le or regulation,
requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed (assuming
for this purpose that the Company's report filed under the 1934 Act are being incorporated into an effective registration statement
filed by the Company under the 1933 Act).
o.
Acknowledgment Regarding Buyer' Purchase of Securities. The
Company acknowledges and agrees that the Buyer is acting solely in the capacity of arm's length purchasers with respect to this
Agreement and the transactions contemplated hereby. The Company further acknowledges that the Buyer is not acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated
hereby and any statement made by the Buyer or any of its respective representatives or agents in connection with this Agreement
and the transactions contemplated hereby is not advice or a recommendation and is merely incidental to the Buyer' purchase the
Securities. The Company further represents to the Buyer that the Company's decision to into this Agreement has been based solely
on the independent evaluation of the Company representatives.
p.
No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales in any security
or solicited any offers to buy any security under circumstances that would require registration under the 1933 Act of the issuance
of the Securities to the Buyer. The issuance of the Securities to the Buyer will not be integrated with any other issuance the
Company's securities (past, current or future) for purposes of any shareholder approval provisions applicable to the Company or
its securities.
q.
No Brokers. The Company has taken no action which would rise
to any claim by any person for brokerage commissions, transaction fees or similar payments relating to this Agreement or the transactions
contemplated hereby.
r.
Permits; Compliance. The Company and each of its Subsidiaries
is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates,
approvals and orders necessary to own, lease and operate its properties and to carry on its business as it is now being conducted
(collectively, the "Company Permits"), and there is no action pending or, to the knowledge of the Company, threatened
regarding suspension or cancellation of any of the Company Permits. Neither the Company nor any of its Subsidiaries is in conflict
with, or in default or violation of, any of the Co Permits, except for any such conflicts, defaults or violations which, individually
or aggregate, would not reasonably be expected to have a Material Adverse Effect. Since Fe 28, 2014, neither the Company nor any
of its Subsidiaries has received any notification respect to possible conflicts, defaults or violations of applicable laws, except
for notices relating to possible conflicts, defaults or violations, which conflicts, defaults or violations would not have a Material
Adverse Effect.
s.
Environmental Matters.
(i)
There are, to the Company's knowledge, with respect
to the Company or any of its Subsidiaries or any predecessor of the Company, no past or violations of Environmental Laws (as defined
below), releases of any material in environment, actions, activities, circumstances, conditions, events, incidents, or contractual
obligations which may give rise to any common law environmental liability or any liability under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 or similar federal, state, local or foreign laws and neither the Company nor
any of its Subsidiaries has received any notice with respect to any of the foregoing, nor is any action pending or, to the Company's
knowledge, threatened in connection with any of the foregoing. The term "Environmental Laws" means all federal, state,
local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient
air, surface water, groundwater, land surface or subsurface strata), including, without limitation laws relating to emissions,
discharges, releases or threatened releases of chemicals, pollutants contaminants, or toxic or hazardous substances or wastes
(collectively, "Hazardous Materials") into the environment, or otherwise relating to the manufacture, processing, distribution
use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees,
demands or demand letters, injunctions, judgments, lie notices or notice letters, orders, permits, plans or regulations issued,
entered, promulgated approved thereunder.
(ii)
Other than those that are or were stored, used or
disposed of in compliance with applicable law, no Hazardous Materials are contained on or about an real property currently owned,
leased or used by the Company or any of its Subsidiaries, a d no Hazardous Materials were released on or about any real property
previously owned, leased or used by the Company or any of its Subsidiaries during the period the property was owned, or used by
the Company or any of its Subsidiaries, except in the normal course of the Company's or any of its Subsidiaries' business.
(iii)
There are no underground storage tanks on or und
real property owned, leased or used by the Company or any of its Subsidiaries that are not in compliance with applicable law.
t.
Title to Property. The Company and its Subsidiaries have
good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them
which is material to the business of the Company d its Subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such s are described in Schedule 3(t) or such as would not have a Material Adverse Effect. Any real property and
facilities held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as would not have a Material Adverse Effect.
u.
Insurance. The Company and each of its Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company
believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged. Neither the Company
nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost
that would not have a Material Adverse Effect. Upon written request the Company will provide to the Buyer true and correct copies
of all policies relating to directors' and officers' liability coverage, errors and omissions coverage and commercial general
liability coverage.
v.
Internal Accounting Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient, in the judgment Company's board of directors, to provide
reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii)
transaction are recorded as necessary to permit preparation of financial statements in conformity with gen rally accepted accounting
principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general
or specific authorization and (I the recorded accountability for assets is compared with the existing assets at reasonable interval
and appropriate action is taken with respect to any differences.
w.
Foreign Corrupt Practices. Neither the Company, nor any of
its Subsidiaries, nor any director, officer, agent, employee or other person acting on behalf of the Company or any Subsidiary
has, in the course of his actions for, or on behalf of, the Co any, used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment t any foreign
or domestic government official or employee from corporate funds; violated or is in violation of any provision of the U.S. Foreign
Corrupt Practices Act of 1977, as amended, or made any bribe, rebate, payoff, influence payment , kickback or other unlawful payment
t any foreign or domestic government official or employee.
x.
Solvency. The Company (after giving effect to the transactions
contemplated by this Agreement) is solvent (i.e., its assets have a fair market value in excess of the amount required to pay
its probable liabilities on its existing debts as they become absolute and matured) and currently the Company has no information
that would lead it to reasonably conclude that the Company would not, after giving effect to the transaction contemplated this
Agreement, have the ability to, nor does it intend to take any action that would impair its ability to, pay its debts from time
to time incurred in connection therewith as such debts mature The Company did not receive a qualified opinion from its auditors
with respect to its most recent fiscal year end and, after giving effect to the transactions contemplated by this Agreement does
not anticipate or know of any basis upon which its auditors might issue a qualified opinion in respect of its current fiscal year.
y.
No Investment Company. The Company is not, and up the issuance
and sale of the Securities as contemplated by this Agreement will not be an "investment company" required to be registered
under the Investment Company Act of 1940 (an "Investment Company"). The Company is not controlled by an Investment Company.
z. Breach
of Representations and Warranties by the Company. If the Company breaches any of the representations or warranties set
forth in this Section 3, and in addition to any other remedies available to the Buyer pursuant to this Agreement , it will be
considered an Event of default under Section 3.4 of the Note.
4.
COVENANTS.
a.
Best Efforts. The parties shall use their best efforts to
satisfy timely each of the conditions described in Section 6 and 7 of this Agreement.
b.
Form D; Blue Sky Laws. The Company agrees to file a Form
D with respect to the Securities as required under Regulation D and to provide a copy thereof Buyer promptly after such filing.
The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary to qualify
the Securities for sale to the Buyer at the applicable closing pursuant to this Agreement under applicable securities or "blue
sky" laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence
of any such action so taken to the Buyer on or prior the Closing Date.
c.
Use of Proceeds. The Company shall use the proceeds for general
working capital purposes.
d.
Right of First Refusal. Unless it shall have first delivered
the Buyer, at least seventy two (72) hours prior to the closing of such Future Offering (as defined herein), written notice describing
the proposed Future Offering ("ROFR Notice"), including the terms and conditions thereof, identity of the proposed purchaser
and proposed definitive documentation to be entered into in connection therewith, and providing the Buyer an option during the
seventy two (72) hour period following delivery of such notice to purchase the securities being offered in the Future Offering
on the same terms as contemplated by such Offering (the limitations referred to in this sentence and the preceding sentence are
collectively referred to as the "Right of First Refusal") (and subject to the exceptions described below Company will
not conduct any equity (or debt with an equity component) financing in an a less than $100,000 ("Future Offering(s) ")
during the period beginning on the Closing Da ending six (6) months following the Closing Date. Notwithstanding anything contained
he in to the contrary, the Company shall not consummate any Future Offering with an investor, or an affiliate of such investor
(collectively "Prospective Investor"), identified on an ROFR Notice whereby the Buyer exercised its Right of First Refusal
for a period of forty (45) days following such exercise; and any subsequent offer by a Prospective Investor is subject to this
Section 4(d) and the Right of First Refusal. In the event the terms and conditions of a proposed future Offering are amended in
any respect after delivery of the notice to the Buyer concerning the proposed Future Offering, the Company shall deliver a new
notice to the Buyer describing the amended terms and conditions of the proposed Future Offering and the Buyer thereafter shall
have an option during the seventy two (72) hour period following delivery of such new no ice to purchase its pro rata share of
the securities being offered on the same terms as contemplated by such proposed Future Offering, as amended. The foregoing sentence
shall apply to such amendments to the terms and conditions of any proposed Future Offering. The Right of First Refusal shall not
apply to any transaction involving (i) issuances of securities in a commitment underwritten public offering (excluding a continuous
offering pursuant to Rule under the 1933 Act) or (ii) issuances of securities as consideration for a merger, consolidate purchase
of assets, or in connection with any strategic partnership or joint venture (the primary purpose of which is not to raise equity
capital), or in connection with the disposition acquisition of a business, product or license by the Company. The Right of First
Refuse shall not apply to the issuance of securities upon exercise or conversion of the Company’s options, warrants or other
convertible securities outstanding as of the date hereof or to the of additional options or warrants, or the issuance of additional
securities, under any Company stock option or restricted stock plan approved by the shareholders of the Company.
e.
Expenses. At the Closing, the Company shall reimburse Bu
r for expenses incurred by them in connection with the negotiation, preparation , execution, delivery and performance of this
Agreement and the other agreements to be executed in connection herewith ("Documents "), including, without limitation,
reasonable attorneys' and consultants' fees and expenses, transfer agent fees, fees for stock quotation services, fees relating
to any amendments or modifications of the Documents or any consents or waivers of provisions in the Documents, fees for the preparation
of opinions of counsel, escrow fees, and co restructuring the transactions contemplated by the Documents. When possible, the Company
must pay these fees directly, otherwise the Company must make immediate payment for reimbursement to the Buyer for all fees and
expenses immediately upon written notice y the Buyer or the submission of an invoice by the Buyer. The Company's obligation with
respect to this transaction is to reimburse Buyer' expenses shall be $3,000.
f.
Financial Information. Upon written request the Company to
send or make available the following reports to the Buyer until the Buyer transfers, assigns, or sells all of the Securities:
(i) within ten (10) days after the filing with the SEC, a copy of its Annual Report on Form 10-K its Quarterly Reports on Form
10-Q and any Current Rep s on Form 8-K; (ii) within one (1) day after release, copies of all press releases issued the Company
or any of its Subsidiaries; and (iii) contemporaneously with the making avail le or giving to the shareholders of the Company,
copies of any notices or other information the Company makes available or gives to such shareholders.
g.
[INTENTIONALLY DELETED]
h.
Listing. The Company shall promptly secure the listing Conversion
Shares upon each national securities exchange or automated quotation system, upon which shares of Common Stock are then listed
(subject to official notice of issuance so long as the Buyer owns any of the Securities, shall maintain, so long as any other
shares Common Stock shall be so listed, such listing of all Conversion Shares from time to time issuable upon conversion of the
Note. The Company will obtain and, so long as the Buyer owns any of the Securities, maintain the listing and trading of its Common
Stock on the OTC or any equivalent replacement exchange, the Nasdaq National Market ("Nasdaq"), the Nasdaq SmallCap
Market ("Nasdaq SmallCap"), the New York Stock Exchange ("NYSE"), the American Stock Exchange ("AMEX")
and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the Financial
Industry Regulatory Authority ("FINRA") and such exchanges, as applicable. The Company shall promptly provide to the
Buyer copies of any notices it receives from the OTCBB and any other exchanges or quotation systems on which the Common Stock
is then listed regarding the continued eligibility of the Common Stock for listing on such exchanges and quotation systems.
i.
Corporate Existence. So long as the Buyer beneficially o
Note, the Company shall maintain its corporate existence and shall not sell all or substantia of the Company's assets, except
in the event of a merger or consolidation or sale of substantially all of the Company's assets, where the surviving or successor
entity in such transaction (i) assumes the Company's obligations hereunder and under the agreement and instruments entered into
in connection herewith and (ii) is a publicly traded corporation whose Common Stock is listed for trading on the OTCBB, Nasdaq,
Nasdaq SmallCap, NY E or AMEX.
j.
No Integration. The Company shall not make any offers or
sales of any security (other than the Securities) under circumstances that would require registration of the Securities being
offered or sold hereunder under the 1933 Act or cause the offering of the Securities to be integrated with any other offering
of securities by the Company for the purpose of any stockholder approval provision applicable to the Company or its securities.
k.
Breach of Covenants. If the Company breaches any the covenants
set forth in this Section 4, and in addition to any other remedies available to the pursuant to this Agreement, it will be considered
an event of default under Section 3.4 Note.
l.
Failure to Comply with the 1934 Act. So long as the Buyer
beneficially owns the Note, the Company shall comply with the reporting requirements of the 1934 Act; and the Company shall continue
to be subject to the reporting requirements of the 1934 Act.
m.
Trading Activities. Neither the Buyer nor its affiliates
has an open short position in the common stock of the Company and the Buyer agree that it shall not, that it will cause its affiliates
not to, engage in any short sales of or hedging transactions with respect to the common stock of the Company.
5.
Transfer Agent Instructions. The Company shall issue irrevocable instructions to its transfer
agent to issue certificates, registered in the name of the Buyer or its nominee, for the Conversion Shares in such amounts as
specified from time to time by the Buyer to the Company upon conversion of the Note in accordance with the terms thereof (the
"Irrevocable Transfer Agent Instructions"). In the event that the Borrower proposes to replace its transfer agent, the
Borrower shall 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. Prior
to registration of the Conversion Shares under the 1933 Act or the date on which the Conversion Shares 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, all
such certificates shall bear the restrictive legend specified in Section 2(g) of this Agreement. The Company warrants that: (i)
no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5, and stop transfer instructions
to give effect to Section 2(f) hereof (in the case of the Conversion Shares, prior to registration of the Conversion Shares under
the 1933 Act or the date on which the Conversion Shares 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), will be given by the Company to its transfer agent and
that the Securities shall otherwise be freely transferable on the books and records of the Company as and to the extent provided
this Agreement and the Note; (ii) it will not direct its transfer agent not to transfer or impair, and/or hinder its transfer
agent in transferring (or issuing)(electronically or in certificated form) any certificate for Conversion Shares to be issued
to the Buyer upon conversion otherwise pursuant to the Note as and when required by the Note and this Agreement; and will not
fail to remove (or directs its transfer agent not to remove or impairs, delays, hinders its transfer agent from removing) any
restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate for any Conversion Shares
issued to the Buyer upon conversion of or otherwise pursuant to the Note as and when required by the Note a this Agreement. Nothing
in this Section shall affect in any way the Buyer's obligation and agreement set forth in Section 2(g) hereof to comply with all
applicable prospectus delivery requirements, if any, upon re-sale of the Securities. If the Buyer provides the Company, t the
cost of the Buyer, with (i) an opinion of counsel in form, substance and scope customary for opinions in comparable transactions
, to the effect that a public sale or transfer of such Securities may be made without registration under the 1933 Act and such
sale or transfer is effected r (ii) the Buyer provides reasonable assurances that the Securities can be sold pursuant to Rule
144, the Company shall permit the transfer, and, in the case of the Conversion Shares, promptly instruct its transfer agent to
issue one or more certificates, free from restrictive legend, in such name and in such denominations as specified by the Buyer.
The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Buyer, by vitiating
the intent and purpose of the transactions contemplated hereby. Accordingly, the Co acknowledges that the remedy at law for a
breach of its obligations under this Section 5 inadequate and agrees, in the event of a breach or threatened breach by the Company
provisions of this Section, that the Buyer shall be entitled, in addition to all other available remedies, to an injunction restraining
any breach and requiring immediate transfer, without the necessity of showing economic loss and without any bond or other security
being required.
6.
Conditions to the Company's Obligation to Sell. The obligation the Company hereunder to issue
and sell the Note to the Buyer at the Closing is subject to the satisfaction, at or before the Closing Date of each of the following
conditions thereto, provided that these conditions are for the Company's sole benefit and may be waived by the Comp y at any time
in its sole discretion: same to the Company.
a.
The Buyer shall have executed this Agreement and delivered the same to the Company.
b.
The Buyer shall have delivered the Purchase Price in accordance with Section 1(b) above.
c.
The representations and warranties of the Buyer shall be true and correct in all material respects as of the date when made and
as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date
, and the Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed , satisfied or complied with by the Buyer at or prior to the Closing Date.
d.
No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated
or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having
authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this
Agreement.
7.
Conditions to The Buyer's Obligation to Purchase.
The obligation of the Buyer hereunder to purchase the Note at the Closing is subject to the satisfaction, at or before the Closing
Date of each of the following conditions, provided that these conditions are for the Buyer's sole benefit and may be waived by
the Buyer at any time in its sole discretion:
a.
The Company shall have this Agreement and delivered the same to the Buyer.
b.
The Company shall have delivered to the Buyer the duly executed
Note (in such denominations as the Buyer shall request) in accordance with Section l (b) above.
c.
The Irrevocable Transfer Agent Instructions, in form and substance satisfactory to a majority-in-interest of the Buyer, shall
have been delivered to and acknowledged in writing by the Company's Transfer Agent.
d.
The representations and warranties of the Company shall be true and correct in all material respects as of the date when made
and as of the Closing Date as though made at such time (except for representations and warranties that speak as of a specific
date) and the Company shall have performed , satisfied and complied in all material respect with the covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date.
The Buyer shall have received a certificate or certificates, executed by the chief executive officer of the Company, dated as
of the Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by the Buyer including,
but not limited to ce1iificates with respect to the Com Certificate of Incorporation, By-laws and Board of Directors’ resolutions
relating to transactions contemplated hereby.
e.
No litigation, statute, rule, regulation , executive order, decree, ruling or injunction shall have been enacted, entered, promulgated
or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having
authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this
Agreement.
f.
No event shall have occurred which could reasonably be ex to have a Material Adverse Effect on the Company including but not limited
to a change 1934 Act reporting status of the Company or the failure of the Company to be timely in it Act reporting obligations.
g.
The Conversion Shares shall have been authorized for quotation on the OTCBB and trading in the Common Stock on the OTCBB shall
not have been suspended by the SEC or the OTCBB.
h.
The Buyer shall have received an officer's certificate described in Section 3(c) above, dated as of the Closing Date.
8.
Governing Law; Miscellaneous.
a.
Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without
regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated
by this Agreement shall be brought only in the state courts of New York or in the federal courts located in the state and county
of Nassau. The parties this Agreement 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 have based upon forum non conveniens.
The Company and Buyer waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable
attorney's fees and cost. In the event that any provision of this Agreement 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 prove invalid or unenforceable under any law shall not affect the validity or enforceability other provision of any agreement.
Each party hereby irrevocably waives personal service process and consents to process being served in any suit, action or proceeding
in connection 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.
b.
Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but
all of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party.
c.
Headings. The headings of this Agreement are for convenience of reference only and shall not form part of, or affect the
interpretation of, this Agreement.
d.
Severability. In the event that any provision of this Agree invalid or unenforceable under any applicable statute or rule
of law, then such provisions deemed inoperative to the extent that it may conflict therewith and shall be deemed modified conform
with such statute or rule of law. Any provision hereof which may proves invalid unenforceable under any law shall not affect the
validity or enforceability of any other pro hereof.
e.
Entire Agreement; Amendments. This Agreement and the instruments referenced herein contain the entire understanding of
the parties with respect matters covered herein and therein and, except as specifically set forth herein or therein, either the
Company nor the Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended other than by an instrument in writing signed by the majority in interest of the Buyer.
f.
Notices. All notices, demands, requests, consents, approval , 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 s 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 bel w (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
ring 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 address s for such communications shall be:
If
to the Company, to:
IDS
INDUSTRIES, INC.
533
Birch Street
Lake
Elsinore, CA 92530
Attn:
SCOTT PLANTINGA, Chief Executive Officer
facsimile:
[enter fax number]
With
a copy by fax only to (which copy shall not constitute notice):
[enter
name of law firm]
Attn:
[attorney name]
[enter
address line 1]
[enter
city, state, zip]
facsimile:
[enter fax number]
If
to the Buyer:
KBM
WORLDWIDE, INC.
80
Cuttermill Road –
Suite
410 Great Neck, NY 11021
Attn:
Seth Kramer, President
e-mail:
info@kwbmlaw.com
With
a copy by fax only to (which copy shall not constitute notice):
Naidich
Wurman Birnbaum & Maday LLP
Attn:
Bernard S. Feldman, Esq.
acsimile:
516-466-3555
e-mail:
dyork@nwbmlaw.com
Each
party shall provide notice to the other party of any change in address.
g.
Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors
and assigns. Neither the Company nor the Buyer shall assign this Agreement or any rights or obligations hereunder without the
prior written consent of the other. Notwithstanding the foregoing, subject to Section 2(f), the may assign its rights hereunder
to any person that purchases Securities in a private transaction from the Buyer or to any of its "affiliates," as that
term is defined under the 1934 Act, without the consent of the Company.
h.
Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted
successors and assigns, and is t for the benefit of, nor may any provision hereof be enforced by, any other person.
i.
Survival. The representations and warranties of the Company and the agreements and covenants set forth in this Agreement
shall survive the closing here notwithstanding any due diligence investigation conducted by or on behalf of the Buyer. Company
agrees to indemnify and hold harmless the Buyer and all their officers, directors, employees and agents for loss or damage arising
as a result of or related to any breach or alleged breach by the Company of any of its representations, warranties and covenants
set forth this Agreement or any of its covenants and obligations under this Agreement, including advancement of expenses as they
are incurred.
j.
Publicity. The Company, and the Buyer shall have the right to review a reasonable period of time before issuance of any
press releases, SEC, OTCBB or FINRA filings, or any other public statements with respect to the transactions contemplated hereby;
provided, however , that the Company shall be entitled, without the prior approval of the Buyer, to make any press
release or SEC, OTCBB (or other applicable trading market) or FINRA filings with respect to such transactions as is required by
applicable law and regulations (although the Buyer shall be consulted by the Company in connection with any such press release
prior to its release and shall be provided with a copy thereof and be given an opportunity to comment thereon).
k.
Further Assurances. Each party shall do and perform, or case to be done and performed, all such further acts and things,
and shall execute and deliver al such other agreements, certificates, instruments and documents, as the other party may reasonably
request in order to carry out the intent and accomplish the purposes of this Agreement d the consummation of the transactions
contemplated hereby.
l.
No Strict Construction. The language used in this Agreement be deemed to be the language chosen by the parties to express
their mutual intent, and no les of strict construction will be applied against any party.
m.
Remedies. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the
Buyer by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Agreement will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Agreement, that the Buyer 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 Agreement and to enforce specifically terms and provisions hereof, without the necessity
of showing economic loss and without bond or other security being required.
IN
WITNESS WHEREOF, the undersigned Buyer and the Company have cause this Agreement to be duly executed as of the date first above
written.
IDS
INDUSTRIES, INC. |
|
By:
/s/ Scott Plantinga |
Scott
Plantinga |
Chief
Executive Officer |
|
KBM
WORLDWIDE, INC. |
|
By:
/s/ Seth Kramer |
Seth
Kramer |
President |
80
Cuttermill Road – Suite 410 |
Great
Neck, NY 11021 |
AGGREGATE
SUBSCRIPTION AMOUNT:
|
|
Aggregate
Principal Amount of Note: |
$53,000.00 |
Aggregate
Purchase Price: |
$53,000.00 |
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 SECURIlTIES A OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITlES LAWS. THE SECURITIES MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFRED 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 SO PURSUANT TO RULE 144 OR RULE l44A UNDER SAID
ACT NOTWlTIISTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN FINANCING ARRANGEMENT SECURED BY THE SECURITIES.
Principal Amount: $53,000.00 |
Issue
Date: May 20, 2014 |
Purchase Price: $53,000,000 |
|
COVERTIBILE PROMISSORY NOTE
FOR
VALUE RECEIVED IDS INDUSTRIES, INC., a Nevada corporation (hereinafter called the Borrower) hereby promises to pay to the
order or KBM WORLDWIDE, INC., a New York corporation, or registered assigns (the "Holder") the sum or
$53.000.00 together with any interest as set forth herein on February 23, 2015 (the ''Maturity Date.) and to pay interest on
the unpaid principal balance hereof at the rate of eight percent (8%) (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 expicitly set forth in herein. Any amount of
principal or interest on this Note which is not paid when due shall bear interest at the rate of twenty two percent (22%) per
annum from the due date thereof until the same is paid ("Default Interest"). Interest shall commence accruing on
the date that the Note is fully paid and shall be computed on the basis of a 365-day year and the actual number of days
lapsed. 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 in 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 th e ri ght from time to time, and at any time during the period beginning on the date which is
one hundred eighty (180) days following 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 i n 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
th is Note into fully paid and non-asscssable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares
of capital stock or other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified at
the conversion price (the "Conversion Price'') determind 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 conversin
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 unexcrcised
r 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. purposes of the provision to the immediately preceding
sentence, beneficial ownership shall be determined in accordance wit h Section l3(d) of the Securities Exchange Act or 1934, as
amended (the '"Exchange Act"') and Regulations 13D-G thereunder except as otherwise provided in clause (1) of such provision
provided, further, however, that the limitations on conversion may be waived by the Holder upon, at the election
of the Holder, not less than 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 conversion, in the
form attached hereto as Exhibit A (the "Notice of Conversion'") delivered the Borrower by the Holder in accordance with
Section 1.4 below; provided that the Notice 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 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
a, on such principal amount at the interest rates provided in this Note to the Conversion Date plus (3) at the Holder's
option. Default Interest if any, on the amounts referred to in the immediatly 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 l .4(g) hereof.
(a)
Calculation of Conversion Price. The conversion price (the Conversion Price")
shall equal 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 or any subsidiary of the Borrower combinations.
recapitialization, reclassifications. extraordinary distributions and similar event). The "Variable Conversion Price"
shall mean 51% multiplied by the Market Price (as defined herein) (representing a discount rate of 49%). "Market Price"
means the average of the lowest three (3) Trading Prices (as defined below) for the Common Stock during the thirty (30) 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 closing bid price on the Over-the-Counter Bulletin Hoard or applicable trading market (the ''OTCBB")
as reported by a reliable reporting service ("Reporting Service") designated by the Holder (i.e. Bloomberg) 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 National Quotation Bureau. Inc. 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 s 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, or on the principal securities exchange or other securities market on which the Common Stock is
then being traded.
(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 or the assers or the Borrower or (ii) any person, group or entity
(including the Borrower) publicly announces a lender after 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 here inafter 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 l.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) as 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 after (or takeover scheme) which caused this Section 1.2(b)
to become operative.
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 Stock a sufficient number or 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 five 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 hereunder, 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 its capital structure which would change the number or shares of Common Stock into which 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 or share 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.
If at any
time the Borrower does not maintain the Reserved Amount it will be considered an Event of Default under Section 3.2 of the Note.
1.4 Method
of Conversion.
(a)
Mechanics of Conversion. Subject to Section 1.1, this Note may be converted
by the Holder in whole or in part at any time from time to time after the Issue Date. By (A) submitting to the Borrower a Notice
of Conversion (by facsimile, e-mail or other reason means of co munication dispatched on the Conversion Date prior to 6:00
p.m., New York, New York time) and (8) subject to Section 1.4(b), surrendering this Note at the principal office of he Borrower.
(b) Surrender
of Note Upon Conversion. Notwithstanding anything to the contrary set forth herein, upon conversion or this Note in
accordance with the terms hereof, he Holder shall not be required to physically surrender this Note to the Borrower unless
the en ire 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 conversion, or shall use such other method, reasonably satisfactory
to the Holder and the Borrower, so as no to require physical surrender of this Note upon each such conversion. In the event
of any dispuet or discrepancy, such records of the Borrower shall, prima facie, be controlling and detenninativ in the
absence of manifest error. Notwithstanding the foregoing, if any port ion of this Note is converted as aforesaid, the Holder
may no transfer this Note unless the Holder first physically surrenders this Note to the Borrower, whereupon the Borrower
will forthwith issue and deliver upon the order of the Holder a new Note of like tenor, registered as the Holder
(upon payment by the Holder of any applicable transfer taxes) may request, representing in the aggregate the remaining unpaid
principal amount of this Note. The Holder and any assignee. by acceptance of this Note, acknowledge and agree that, by reason
of the provisions of this paragraph , following conversion of a portion of this Note, the unpaid and unconverted principal
amount or 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 share 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 Holders 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 he 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 f con version or the entire unpaid principal amount hereto
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 recevied the Common Stock or other securities, cash
or other asset, as herein provided on such conversion. If the Holder shall have given a Notice or 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 or 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 longs the Notice of Conversion is received by the Borrower before 6:00
p.m. New York, New York time, on such date.
(f)
Delivery of Common Stock by Electronic Transfer. In lieu of delivering
physical certificates representing the Common Stock issuable upon conversion provided the Borrower is participating in the Depository
Trust Company ("DTC') Fast Automated Securities Transfer ("FAST") program upon request of the Holder and its compliance
with the provisions contained in Section 1.1 and in this Section 1.4 the Borrower shall use its best efforts to cause its transfer
agent to electronically transmit the Common Stcok issuable upon conversion to the Holder by crediting the account of Holder’s
"Prime Broker" with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system.
(g)
Failure to Deliver Common Stock Prior to Deadline. Without in any way
limiting the Holder's right to pursue other remedies. including actual damages an or equitable relief the parties agree that if
delivery of the Common Stock issuable upon conversion or this Note is not delivered by the Deadline (other than a failure due to
the circumstanes 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 10 deliver such Common Stock. Such cash
amount shall be paid to Holder by the fifth day of the month following the month in which it has accrued or at the option of the
Holder (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 interests shall accrue thereon in accordance with the terms or·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 result g from a failure attempt to frustrate.
interference with such conversion right are difficult if ot im possible to qualify. Accordingly the parties acknowledge that
the liquidated damages provision contained in this Section l.4(g) are justified.
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 an effective registration statement under the Act or (ii) the Borrower or its transfer agents 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 ( a successor rule) ("'Rule
l44") or (iv) such shares arc transferred to an "affiliate" (as defined in Rule l44) 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 immediatly sold each certificate for shares of Common Stock issuable upon conversion of this Note that as 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 b ar 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 WllICH 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 PLEDGE 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 or opinions
of counsel in com parable transactions. to the effect that a pubI ic sale or transfer of such Common Stock may be made without
registration under the Act, which opinion shall be accepted by the Company so that the sale or transfer is effected or (ii) in
the case of the Common Stock issuable upon conversion of th is 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 the be immediately sold. In the event that the Company does not accept
the opinion of cour el provided by the Holder 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 Even 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,
he 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 i n which more than 50% or the voting power of the Borrower is disposed of, or
the consolidation. merger or o er 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 Even of Default (as defined in Article III) pursuant
to which the Borrower shall be required to pay to he Holder upon the consummation of and as a condition to such transaction an
amount equal to he 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 simliar event. as a result of which shares or Common Stock of the Borrower
shall be changed into he same or a different number of shares of another class or classes of stock or securities of he Borrower
or another entity, or in case of' any sale or conveyance of all or substantially all or he assets or 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 he 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
lo the rights and interests of the Holder or 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) or the record date or
the special meeting of shareholders to approve, or if there is no such record date, the consummation of such merger consolidation
exchange of share recapitalization 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 or a subsidiary (i.e., a spin-off)) (a '"Distribution) then the Holdcr of this
Note shall be entitled, upon any conversion or this Note after the date of record for determinig shareholders entitled to such
Distribution, to receive the amount or such assets which would have been payable to the Holder with respect to the shares or Common
Stock issuable upon such conversion had such Holder been the holder or 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, any shares of Common Stock for no consideration or or a consideration per share (before deduction of reasonable expenses
or commissions or underwriting discount or allowances in connection therewith) less than the Conversion Price in effect on the
date or 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 or 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 considerat ion 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 or 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 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 or such Options or upon the conversion or exchange or 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 or 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 Borrowers 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 Converitble Securities first become convertible or exchangeable by (ii) the maximum total number of shares or 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. It: at any time when any Notes are issued and outstanding the Borrower issues any convertible securities or
rights to purchase stock, warrant, 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 l 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 holder 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 readjustment
of the Conversion Price as a result of the events described in this Section 1.6, Borrower at its expense, shall promptly compute
such adjustment or readjustment and pre and furnish to the Holder a certificate setting setting 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 or 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 is Note
and the other Notes issued pursuant to the Purchase Agreement more than the maximum 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 split stock dividends, combinations, capital reorganizations and similar
events relating to the Common Stock occurring after the date hereof. Once the Maximum Share Amount as 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 or the Maximum Share Amount in lieu of any furthter right to convert this Note this will
be considered an Event or Default under Section 3.3 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) e 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 so as practicable, return such unconverted Note to the Holder or, if the Note has not be
surrendered, adjust its records to reflect that such portion of this Note has not been converted all cases. the Holder shall retain
all of its rights and remedies (including, without limitation, the right to receive Conversion Default Payments pursuant to Section
1.3 to the extent require thereby for such Conversion Default and any subsequent Conversion Default and (ii) the right 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 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, in accordance with this Section 1.9. 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 Optional Prepayment Amount (as defined below) 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 exercises its right to prepay
the Note, the Borrower shall make payment to the Holder of an amount in cash (the “Optional Prepayment Amount") 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 to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts
referred to in clauses (w) and (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the Borrower
delivers an Optional Prepayment Notice and fails to pay the Optional Prepayment Amount due lo 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.
Notwithstanding
anything to the contrary contained in this Note, at any time during the period beginning on the date which is ninety-one (91) days
following the Issue Date and ending on the date which is one hundred twenty (120) 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, in accordance with this Section 1.9. Any 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 Optional Prepayment Date, the Borrower shall make payment of the Second Optional Prepayment
Amount (as defined below) 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 exercises its right to prepay the Note, the Borrower shall make payment to the Holder
of an amount in cash (the “Second Optional Prepayment Amount”) equal to 145%, 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
to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referred to in clauses (w) and (x) plus
(z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the Borrower delivers an Optional Prepayment
Notice and fails to pay the Second Optional 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.
Notwithstanding
anything to the contrary contained in this Note, at any time during the period beginning on the date which is one hundred twenty-one
(121) 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, in accordance with this Section 1.9. Any 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 Optional Prepayment Date, the Borrower shall make payment of the Third Optional Prepayment
Amount (as defined below) 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 exercises its right to prepay the Note, the Borrower shall
make payment to the Holder of an amount in cash (the “Third Optional Prepayment Amount") equal to 150%, 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 to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referred to in clauses
(w) and (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the Borrower delivers
an Optional Prepayment Notice and fails to pay the Third Optional 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.
After the
expiration of one hundred eighty (180) following the date or the Note, the Borrower shall have no right of prepayment.
ARTICLE II.
CERTAIN COVENANTS
2.
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 securiries) on shares of capital
stock other than dividends on shares of Common Stock solely in the form or additional shares or 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
which the Borrower has informed Holder in writing prior to the date hereof, (b) indebtedness to trade creditors or financial institutions
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.
ARTICLE III. EVENTS OF DEFAULT
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) hour s of a demand from the Holder.
3.3 Breach of Covenants.
The Borrower breaches any material covenant or other material term or condition contained in this Note and any collateral documents
including but not limited to the Purchase Agreement and such breach continues for a period of ten (I0) days after written notice
thereof to the Borrower from the Holder.
3.4 Breach of Representations
and Warranties. Any representation or warranty of the Borrower made herein or in any agreement, statement or certificate given
in writing pursuant hereto or in connection herewith (including, without limitation, the Purchase Agreement), shall be false or
misleading in any material respect when made and the breach of which has (or with the passage of time will have) a material adverse
effect on the rights of the Holder with respect to this Note or the Purchase Agreement.
3.5 Receiver or Trustee.
The Borrower or any subsidiary of the Borrower shall make an assignment for the benefit of creditors, or apply for or consent to
the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee
shall otherwise be appointed.
3.6 Judgments. Any
money judgment, writ or similar process shall be entered or filed against the Borrower or any subsidiary of the Borrower or any
of its property or other assets for more than $50,000, and shall remain unvacated, unbonded or unstayed for a period of twenty
(20) days unless otherwise consented to by the Holder, which consent will not be unreasonably withheld.
3.7 Bankruptcy.
Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings, voluntary or involuntary, for relief under
any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any subsidiary of the
Borrower.
3.8 Delisting of Common
Stock. The Borrower shall fail to maintain the listing of the Common Stock on at least one of the OTCBB or an equivalent replacement
exchange, the Nasdaq National Market, the Nasdaq Small Cap Market, the New York Stock Exchange, or the American Stock Exchange.
3.9 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 requirement s of the Exchange Act.
3.10 Liquidation.
Any dissolution, liquidation, or winding up of Borrower or any substantial portion of its business.
3.11 Cessation of Operations.
Any cessation of operations by Borrower or Borrower admits it is otherwise generally unable to pay its debts as such debts become
due, provided, however, that any disclosure of the Borrower's ability to continue as a "going concern" shall not be an
admission that the Borrower cannot pay its debts as they become due.
3.12 Maintenance of
Assets. The failure by Borrower to maintain any material intellectual property rights, personal, real property or other assets
which are necessary to conduct its business (whether now or in the future).
3.13 Financial Statement
Restatement. The restatement of any financial statements filed by the Borrower with the SEC for any date or period from two
years prior to the Issue Date of this Note and until this Note is no longer outstanding, if the result of such restatement would,
by comparison to the unrestated financial statement, have constituted a material adverse effect on the rights of the Holder with
respect to this Note or the Purchase Agreement.
3.14 Reverse Splits.
The Borrower effectuates a reverse split of its Common Stock without twenty (20) days prior written notice to the Holder.
3.15 Replacement of
Transfer Agent. In the event that the Borrower propose s to replace its transfer agent, the Borrower fails to provide, prior
to the effective date of such replacement, a fully executed Irrevocable Transfer Agent Instructions in a form as initially delivered
pursuant to the Purchase Agreement (including but not limited to the provision to irrevocably reserve shares of Common Stock in
the Reserved Amount) signed by the successor transfer agent to Borrower and the Borrower.
3.16 Cross-Default.
Notwithstanding anything to the contrary contained in this Note or the other related or companion documents , a breach or default
by the Borrower of any covenant or other term or condition contained in any of the Other Agreement s, after the passage of all
applicable notice and cure or grace periods, shall, at the option of the Holder, be considered a default under this Note and the
Other Agreements, in which event the Holder shall be entitled (but in no event required) to apply all rights and remedies of the
Holder under the terms of this Note and the Other Agreements by reason of a default under said Other Agreement or hereunder. "Other
Agreements" means, collectively, all agreements and instruments between , among or by: (1) the Borrower, and, or for the
benefit of, (2) the Holder and any affiliate of the Holder, including, without limitation , promissory notes; provided, however,
the term "Other Agreements" shall not include the related or companion documents to this Note. Each of the loan transactions
will be cross-defaulted with each other loan transaction and with all other existing and future debt of Borrower to the Holder.
Upon the occurrence and
during the continuation of any Event of Default specified in Section 3.1 (solely with respect to failure to pay the principal hereof
or interest thereon when due at the Maturity Date), the Note shall become immediately due and payable and the Borrower shall pay
to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Default Sum (as defined herein). UPON
THE OCCURRENCE AND DURING THE CONTINUATION OF ANY EVENT OF DEFAULT SPECIFIED TN SECTION 3.2, THE NOTE SHALL BECOME IMMEDIATELY
DUE AND PAYABLE AND THE BORROWER SHALL PAY TO THE HOLDER , IN FULL SATISFACTION OF ITS OBLIGATIONS HEREUNDER, AN AMOUNT EQUAL TO:
(Y) THE DEFAULT SUM (AS DEFINED HEREIN); MULTIPLIED BY (Z) TWO (2). Upon the occurrence and during the continuation of any Event
of Default specified in Sections 3.1 (solely with respect to failure to pay the principal hereof or interest thereon when due on
this Note upon a Trading Market Prepayment Event pursuant to Section 1.7 or upon acceleration) , 3.3, 3.4, 3.6, 3.8, 3.9, 3.11,
3.12, 3.13, 3.14, and/or 3. 15 exercisable through the delivery of written notice to the Borrower by such Holders (the "Default
Notice"), and upon the occurrence of an Event of Default specified the remaining sections of Articles III (other than failure
to pay the principal hereof or interest thereon at the Maturity Date specified in Section 3,1 hereof), the Note shall become immediately
due and payable and the Borrower shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to
the greater of (i) 150% times the sum of (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest
on the unpaid principal amount of this Note to the date of payment (the "Mandatory Prepayment Date") plus (y) Default
Interest, if any, on the amounts referred to in clauses (w) and/or (x) plus (z) any amounts owed to the Holder pursuant to Sections
1 .3 and 1.4(g) hereof (the then outstanding principal amount of this Note to the date of payment plus the amounts referred to
in clauses (x), (y) and (z) shall collectively be known as the "Default Sum") or (ii) the "parity value" of
the Default Sum to be prepaid, where parity value means (a) the highest number of shares of Common Stock issuable upon conversion
of or otherwise pursuant to such Default Sum in accordance with Article I, treating the Trading Day immediately preceding the Mandatory
Prepayment Date as the "Conversion Date" for purposes of determining the lowest applicable Conversion Price, unless the
Default Event arises as a result of a breach in respect of a specific Conversion Date in which case such Conversion Date shall
be the Conversion Date), multiplied by (b) the highest Closing Price for the Common Stock during the period beginning on the date
of first occurrence of the Event of Default and ending one day prior to the Mandatory Prepayment Date (the "Default Amount")
and all other amounts payable hereunder shall immediately become due and payable, all without demand, presentment or notice , all
of which hereby are expressly waived, together with all costs, including , without limitation, legal fees and expenses, of collection,
and the Holder shall be entitled to exercise all other rights and remedies available at law or in equity.
If the Borrower fails to
pay the Default Amount within five (5) business days of written notice that such amount is due and payable, then the Holder shall
have the right at any time, so long as the Borrower remains in default (and so long and to the extent that there are sufficient
authorized shares), to require the Borrower, upon written notice , to immediately issue, in lieu of the Default Amount , the number
of shares of Common Stock of the Borrower equal to the Default Amount divided by the Conversion Price then in effect.
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: |
|
IDS INDUSTRIES, INC. (f/k/a/ IDS Solar Technologies, Inc.) |
533 Birch Street |
Lake Elsinore, CA 92530 |
Attn:
SCOTT PLANTINGA, Chief Executive Officer |
facsimile: |
|
With a copy by fax only to (which copy shall not constitute notice): |
|
[enter name of law firm] |
Attn:
[attorney name] |
[enter
address line 1] |
[enter city,
state, zip] |
facsimile: [enter fax number] |
|
If to the Holder: |
|
KBM WORLDWIDE, INC. |
80 Cuttermill Road
- Suite 207 Great Neck, NY. 11021 |
Attn:Seth Kramer , President |
email: info@kbmworkdwide.com |
|
With a copy by fax only to (which copy shall not constitute notice): |
|
Naidich
Wurman Birbaum & Maday, LLP |
Att: Bernard S. Feldman, Esq. |
facsimile: 516-466-3555 |
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 am ended or supplemented.
4.4 Assignability.
This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to be the benefit of the Holder and
its successors and assigns. Each transferee of this Note must be an "accredited investor" (as defined in Rule 501 (a)
of the 1933 Act). Notwithstanding anything in this Note to the contrary, this Note may be pledged as collateral in connection with
a bona fide margin account or other lending arrangement.
4.5 Cost of Collection.
If default is made in the payment of this Note, the Borrower shall pay the Holder hereof costs of collection, including reasonable
attorneys' fees.
4.6 Governing Law.
This Note shall be governed by and construed in accordance with the laws of the State of New York without regard to principles
of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Note
shall be brought only in the state courts of New York or in the federal courts located in the state and county of Nassau. 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 and Holder waive
trial by jury. 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 disproportion ate 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 shareholder s). In the
event of any taking by the Borrower of a record of its shareholder s for the purpose of determining shareholders who are entitled
to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including
by way of merger, consolidation, reclassification or recapitalization) any share of any class or any other securities or property,
or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed
sale, lease or conveyance of all or substantially all of the assets of the Borrower or any proposed liquidation, dissolution or
winding up of the Borrower, the Borrower shall mail a notice to the Holder, at least twenty (20) days prior to the record date
specified therein (or thirty (30) days prior to the consummation of the transaction or event, whichever is earlier), of the date
on which any such record is to be taken for the purpose of such dividend, distribution , right or other event, and a brief statement
regarding the amount and character of such dividend , distribution, right or other event to the extent known at such time. The
Borrower shall make a public announcement of any event requiring notification to the Holder hereunder substantially simultaneously
with the notification to the Holder in accordance with the terms of this Section 4.9.
4.10 Remedies. The
Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating
the intent and purpose of the transaction contemplated hereby. Accordingly, the Borrower acknowledges that the remedy at law for
a breach of its obligations under this Note will be inadequate and agrees, in the event of a breach or threatened breach by the
Borrower of the provisions of this Note, that the Holder shall be entitled , in addition to all other available remedies at law
or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing
any breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity of showing economic
loss and without any bond or other security being required.
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in
its name by its duly authorized officer this May 20, 2014.
IDS INDUSTRIES, INC. |
(f/k/a/ IDS Solar Technologies) |
By: /s/
Scott Plantinga |
Scott Plantinga |
Chief Executive Officer |
EXHIBIT A
NOTICE OF CONVERSION
The undersigned hereby elects to
convert $__________ principal amount of the Note (defined below) 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 IDS INDUSTRIES, INC. (f/k/a/ IDS
Solar Technologies, Inc.), a Nevada corporation (the "Borrower") according to the conditions of the convertible
note of the Borrower dated as of May 20, 2014 (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 Agent Commission 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:
KMB WORLDWIDE, INC.
80 Cuttermill Road - Suite 410
Great Neck, NY. 11021
Attention: Certificate Delivery (516) 498-9890
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:
KMB WORLDWIDE, INC.
By:
Name: Seth Kramer
Title: President Date:
80 Cuttermill Road - Suite 410 Great Neck, NY. 11021
SECURITIES
PURCHASE AGREEMENT
This SECURITIES
PURCHASE AGREEMENT (the "Agreement"), dated as
of May 20, 2014, by and
between IDS INDUSTRIES, INC., a
Nevada corporation, with
headquarters located at 533 Birch Street, Lake
Elsinore, CA
92530 (the "Company"), and KBM
WORLDWIDE, INC., a
New York corporation , with
its address at 80 Cuttermill Road, 410, Great
Neck, NY
11021 (the "Buyer").
WHEREAS:
A.
The Company and
the Buyer are executing and delivering
this Agreement reliance upon the
exemption from securities
registration afforded by
the rules and
regulation promulgated by the United States Securities and Exchange Commission (the "SEC")
und Securities Act of 1933,
as amended (the "1933
Act");
B.
Buyer desires to purchase and the Company desires to issue and sell, up terms and conditions set forth in this Agreement an 8%
convertible note of the Company, form attached hereto as Exhibit A, in the aggregate principal amount of $53,000.00 (to with any
note(s) issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms
thereof, the "Note"), convertible into shares of common stock, $0.001 par value per share, of the Company (the "Common
Stock"), upon the term and subject to the limitations and conditions set forth in such Note.
C.
The Buyer wishes to purchase, upon the terms and conditions stated in this Agreement , such principal amount of Note as is set
forth immediately below its name the signature pages hereto; and
NOW
THEREFORE, the Company and the Buyer severally (and not jointly) agree as follows:
1.
Purchase and Sale of Note.
a.
Purchase of Note. On the Closing Date (as defined below Company
shall issue and sell to the Buyer and the Buyer agrees to purchase from the Company such principal amount of Note as is set forth
immediately below the Buyer's name signature pages hereto.
b.
Form of Payment. On the Closing Date (as defined below),
( the Buyer shall pay the purchase price for the Note to be issued and sold to it at the Closing (as defined below) (the "Purchase
Price") by wire transfer of immediately available funds to the Company, in accordance with the Company's written wiring instructions
, against delivery of the Note in the principal amount equal to the Purchase Price as is set forth immediately below the Buyer's
name on the signature pages hereto, and (ii) the Company shall deliver such duly executed Note on behalf of the Company, to the
Buyer, against delivery of such Purchase Price.
c.
Closing Date. Subject to the satisfaction (or written waiver)
of the conditions thereto set forth in Section 6 and Section 7 below, the date and time of the issuance and sale of the Note pursuant
to this Agreement (the "Closing Date") shall be 12:00 noon, Eastern Standard Time on or about May 23, 2014, or such
other mutually agreed upon time The closing of the transactions contemplated by this Agreement (the "Closing") shall
occur the Closing Date at such location as may be agreed to by the parties.
2.
Buyer's Representations and Warranties. The Buyer represent and warrants to the Company that:
a.
Investment Purpose. As of the date hereof, the Bu purchasing
the Note and the shares of Common Stock issuable upon conversion of or otherwise pursuant to the Note (including, without limitation,
such additional shares of Common St k, if any, as are issuable (i) on account of interest on the Note, (ii) as a result of the
events described in Sections 1.3 and 1.4(g) of the Note or (iii) in payment of the Standard Liquidated Damages Amount (as defined
in Section 2(f) below) pursuant to this Agreement, such shares of Co on Stock being collectively referred to herein as the "Conversion
Shares" and, collectively with the Note, the "Securities") for its own account and not with a present view towards
the public sale or distribution thereof, except pursuant to sales registered or exempted from registration un r the 1933 Act;
provided, however, that by making the representations herein, the Buyer does not agree to hold any of the Securities for any minimum
or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the 1933 Act.
b.
Accredited Investor Status. The Buyer is an "accredited
investor" as that term is defined in Rule 501(a) of Regulation D (an "Accredited Investor").
c.
Reliance on Exemptions. The Buyer understands that the Securities
are being offered and sold to it in reliance upon specific exemptions the registration requirements of United States federal and
state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer's compliance with, the representations,
warranties, agreements, acknowledgments and understandings of the Buyer set forth he order to determine the availability of such
exemptions and the eligibility of the Buyer to the Securities, securities laws or to comply with the terms and conditions of any
exemption thereunder (in case). Notwithstanding the foregoing or anything else contained herein to the contrary, the Securities
may be pledged as collateral in connection with a bona fide margin account or lending arrangement.
g. Legends.
The Buyer understands that the Note and, until sue time as the Conversion Shares have been registered under the 1933 Act may be
sold pursuant to Rule 144 or Regulation S without any restriction as to the number of securities as of a particular date that
can then be immediately sold, the Conversion Shares may bear a restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of the certificates for such Securities):
"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 Company shall issue a certificate without such legend to the holder of any Security
upon which it is stamped, if, unless otherwise required by applicable state securities laws, (a) such Security is registered for
sale un effective registration statement filed under the 1933 Act or otherwise may be sold pursuant to Rule 144 or Regulation
S without any restriction as to the number of securities as of a particular date that can then be immediately sold, or (b) such
holder provides the Company with 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 Security may be made without registration under the 1933 Act,
which opinion shall be accepted by the Company so that t sale or transfer is effected. The Buyer agrees to sell all Securities,
including those represented by a certificate(s) from which the legend has been removed, in compliance with applicable prospectus
d.
Information. The Buyer and its advisors, if any, have been,
a for so long as the Note remain outstanding will continue to be, furnished with all materials relating to the business, finances
and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by the
Buyer or its advisors. The Buyer and its advisors, if any, have been, and for so long as the Note remain outstanding will continue
be, afforded the opportunity to ask questions of the Company. Notwithstanding the foregoing, the Company has not disclosed to
the Buyer any material nonpublic information and will not disclose such information unless such information is disclosed to the
public prior to or pro following such disclosure to the Buyer. Neither such inquiries nor any other due diligence investigation
conducted by Buyer or any of its advisors or representatives shall modify, am affect Buyer's right to rely on the Company's representations
and warranties contained in Section 3 below. The Buyer understands that its investment in the Securities involves a significant
degree of risk. The Buyer is not aware of any facts that may constitute a breach any of the Company's representations and warranties
made herein.
e.
Governmental Review. The Buyer understands that no United
States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement
of the Securities.
f.
Transfer or Re-sale. The Buyer understands that (i) the sale
or re-sale of the Securities has not been and is not being registered under the 1933 Act or any applicable state securities laws,
and the Securities may not be transferred unless (a) the Sec are sold pursuant to an effective registration statement under the
1933 Act, (b) the Buyer have delivered to the Company, at the cost of the Buyer, an opinion of counsel that shall form, substance
and scope customary for opinions of counsel in comparable transactions effect that the Securities to be sold or transferred may
be sold or transferred pursuant exemption from such registration , which opinion shall be accepted by the Company,) the Securities
are sold or transferred to an "affiliate" (as defined in Rule 144 promulgated und r the 1933 Act (or a successor rule)
("Rule 144")) of the Buyer who agrees to sell or otherwise transfer the Securities only in accordance with this Section
2(f) and who is an Accredited Investor, (d) the Securities are sold pursuant to Rule 144, or (e) the Securities are sold pursuant
to Regulation S under the 1933 Act (or a successor rule) ("Regulation S"), and the Buyer shall have delivered to the
Company, at the cost of the Buyer, an opinion of counsel that shall be in form, substance and scope customary for opinions of
counsel in corporate transactions, which opinion shall be accepted by the Company; (ii) any sale of such Securities made in reliance
on Rule 144 may be made only in accordance with the terms of said Rule and further, if said not applicable, any re-sale of such
Securities under circumstances in which the seller ( person through whom the sale is made) may be deemed to be an underwriter
(as that term defined in the 1933 Act) may require compliance with some other exemption under the 19 or the rules and regulations
of the SEC thereunder; and (iii) neither the Company nor any other person is under any obligation to register such Securities
under the 1933 Act or an state delivery requirements, if any. In the event that the Company 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 consider an Event of Default pursuant to Section 3.2 of the Note.
g.
Authorization; Enforcement. This Agreement has been duly
and validly authorized. This Agreement has been duly executed and delivered on behalf the Buyer, and this Agreement constitutes
a valid and binding agreement of the Buyer enforceable accordance with its terms.
h.
Residency. The Buyer is a resident of the jurisdiction set
immediately below the Buyer's name on the signature pages hereto.
3.
Representations and Warranties of the Company. The Company represents and warrants to the
Buyer that:
a.
Organization and Qualification. The Company and each Subsidiaries
(as defined below), if any, is a corporation duly organized, validly existing good standing under the laws of the jurisdiction
in which it is incorporated, with full pow authority (corporate and other) to own, lease, use and operate its properties and to
carry on its business as and where now owned, leased, used, operated and conducted. Schedule 3 (a sets forth a list of all of
the Subsidiaries of the Company and the jurisdiction in which each is incorporated. The Company and each of its Subsidiaries is
duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its owners use of
property or the nature of the business conducted by it makes such qualification nee except where the failure to be so qualified
or in good standing would not have a Material Adverse Effect. "Material Adverse Effect" means any material adverse effect
on the business, operations, assets, financial condition or prospects of the Company or its Subsidiaries, if any, taken as a whole,
or on the transactions contemplated hereby or by the agreements or instruments to be entered into in connection herewith. "Subsidiaries"
means any corporation or other organization, whether incorporated or unincorporated, in which the Company owns, directly or indirectly,
any equity or other ownership interest.
b.
Authorization; Enforcement. (i) The Company has all requisite
corporate power and authority to enter into and perform this Agreement, the Note consummate the transactions contemplated hereby
and thereby and to issue the Securities accordance with the terms hereof and thereof, (ii) the execution and delivery of this
Agreement, the Note by the Company and the consummation by it of the transactions contemplated and thereby (including without
limitation, the issuance of the Note and the issuance reservation for issuance of the Conversion Shares issuable upon conversion
or exercise thereof) have been duly authorized by the Company's Board of Directors and no further consent or authorization of
the Company, its Board of Directors, or its shareholders is required, (ii ) this Agreement has been duly executed and delivered
by the Company by its authorize representative, and such authorized representative is the true and official representative with
authority to sign this Agreement and the other documents executed in connection herewith bind the Company accordingly, and (iv)
this Agreement constitutes, and upon execution delivery by the Company of the Note, each of such instruments will constitute,
a legal, valid binding obligation of the Company enforceable against the Company in accordance with its terms.
c.
Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of: (i) 490,000,000 shares of Common Stock, $0.001 par value per share, of which 95,051,393 shares
are issued and outstanding; and (ii) 10,000,000 authorized shares of Preferred Stock, $0.001 par value per share, of which no
shares are issued and outstanding; no shares are reserved for issuance pursuant to the Company's stock option no shares are reserved
for issuance pursuant to securities (other than the Note and a nor convertible promissory note in favor of the Buyer dated March
19, 2014 in the amount of $53,000.00 for which 42,500,000 shares of Common Stock are presently reserved) exercisable for, or convertible
into or exchangeable for shares of Common Stock and 52,500,000 shares are reserved for issuance upon conversion of the Note. All
of such outstanding shares of capital stock are, or upon issuance will be, duly authorized, validly issued, fully paid and nonassessable.
No shares of capital stock of the Company are subject to preemptive rights any other similar rights of the shareholders of the
Company or any liens or encumbrances imposed through the actions or failure to act of the Company. As of the effective date of
this Agreement, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal,
agreements, understandings, claims or other commitments or rights of any character whatsoever relating to, or securities or rights
convertible into or exchangeable for any shares of capital stock of the Company or any of its Subsidiaries, or arrangements by
which the Company or any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the Company
or any of its Subsidiaries, (ii) there are no agreements or arrangements under the Company or any of its Subsidiaries is obligated
to register the sale of any of its o their securities under the 1933 Act and (iii) there are no anti-dilution or price adjustment
provisions contained in any security issued by the Company (or in any agreement providing rights to security holders) that will
be triggered by the issuance of the Note or the Conversion Shares. The Company has furnished to the Buyer true and correct copies
of the Company's Certificate of Incorporation as in effect on the date hereof ("Certificate of Incorporation "), the
Company s By laws, as in effect on the date hereof (the "By-laws"), and the terms of all securities convertible into
or exercisable for Common Stock of the Company and the material rights of the holders thereof in respect thereto. The Company
shall provide the Buyer with a written update of this representation signed by the Company's Chief Executive on behalf of the
Company as of the Closing Date.
d.
Issuance of Shares. The Conversion Shares are duly authorized
and reserved for issuance and, upon conversion of the Note in accordance with its respective terms, will be validly issued, fully
paid and non-assessable, and 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 Company and will not impose personal liability
upon the holder thereof.
e.
Acknowledgment of Dilution. The Company understand and acknowledges
the potentially dilutive effect to the Common Stock upon the issuance the Conversion Shares upon conversion of the Note. The Company
further acknowledges that its obligation to issue Conversion Shares upon conversion of the Note in accordance with this Agreement,
the Note is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests
of other shareholders of the Company.
f.
No Conflicts. The execution, delivery and performance of
this Agreement, the Note by the Company and the consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the issuance and reservation for issuance of the Conversion Shares) will not (i) conflict with
or result in a violation of any provision of the Certificate of Incorporation or By-laws, or (ii) violate or conflict with, or
result in a breach of any provision of, or constitute a default (or an event which with notice or lapse of time or both could
become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement,
indenture, patent, patent license or instrument to which the Company or any of its Subsidiaries is a party, or (iii) result in
a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations
and regulations of any self-regulatory organizations to which the Company or its securities are subject) applicable to the Company
or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected (except
for such conflicts, defaults, terminations, amendments, accelerations, cancellation violations as would not, individually or in
the aggregate, have a Material Adverse Effect). Neither the Company nor any of its Subsidiaries is in violation of its Certificate
of Incorporation By-laws or other organizational documents and neither the Company nor any of its Subsidiaries is in default (and
no event has occurred which with notice or lapse of time or both could Company or any of its Subsidiaries in default) under, and
neither the Company nor any Subsidiaries has taken any action or failed to take any action that would give to others any of termination,
amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its Subsidiaries
is a party or by which any property or assets of the Company or any of its Subsidiaries is bound or affected, except for possible
defaults as would not, individually or in the aggregate, have a Material Adverse Effect. The businesses of the Company and its
Subsidiaries, if any, are not being conducted, and shall not be conducted so long as the Buyer owns any of the Securities, in
violation of any law, ordinance or regulation of any governmental entity. Except as specifically contemplated by this Agreement
and as required under the 1933 Act and any applicable state securities laws, the Company is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court, governmental agency, regulatory agency, self regulatory
organization or stock market or any third party in order for it to execute, deliver or perform any of its obligations under this
Agreement , the Note in accordance with the terms hereof or thereof or to issue and sell the Note in accordance with the terms
hereof and to issue the Conversion Shares upon conversion Note. All consents, authorizations, orders, filings and registrations
which the Company required to obtain pursuant to the preceding sentence have been obtained or effected on or to the date hereof.
The Company is not in violation of the listing requirements of the Over Counter Bulletin Board (the "OTCBB") and does
not reasonably anticipate that the Common Stock will be delisted by the OTCBB in the foreseeable future. The Company a Subsidiaries
are unaware of any facts or circumstances which might give rise to any foregoing.
g.
SEC Documents; Financial Statements. The Company has timely
filed all reports, schedules, forms, statements and other documents required to be filed by I the SEC pursuant to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act") (all of the foregoing filed prior to
the date hereof and all exhibits included therein and financial statements and schedules thereto and documents (other than exhibits
to such documents) incorporated by reference therein, being hereinafter referred to herein as the "SEC Documents ").
Upon written request the Company will deliver to the Buyer true and complete copies of the SEC Documents, except for such exhibits
and incorporated documents. As of their respective dates, the SEC Documents complied in all material re with the requirements
of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the
SEC Documents, at the time were filed with the SEC, contained any untrue statement of a material fact or omitted to ate a material
fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which
they were made, not misleading. None of the state made in any such SEC Documents is, or has been, required to be amended or updated
applicable law (except for such statements as have been amended or updated in subs filings prior the date hereof) As of their
respective dates, the financial statements Company included in the SEC Documents complied as to form in all material respect applicable
accounting requirements and the published rules and regulations of the SEC respect thereto. Such financial statements have been
prepared in accordance with United generally accepted accounting principles, consistently applied, during the periods involve
fairly present in all material respects the consolidated financial position of the Company consolidated Subsidiaries as of the
dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case
of unaudited statements, to year-end audit adjustments). Except as set forth in the financial statements of the Co included in
the SEC Documents, the Company has no liabilities, contingent or otherwise other than (i) liabilities incurred in the ordinary
course of business subsequent to February 28, 2014, and (ii) obligations under contracts and commitments incurred in the ordinary
course of b and not required under generally accepted accounting principles to be reflected in such fi statements, which, individually
or in the aggregate, are not material to the financial condition operating results of the Company. The Company is subject to the
reporting requirements 1934 Act.
h.
Absence of Certain Changes. Since February 28, 2014, there
has been no material adverse change and no material adverse development in the assets, liabilities, business, properties, operations,
financial condition, results of operations, prospects or 193 Act reporting status of the Company or any of its Subsidiaries.
i.
Absence of Litigation. There is no action, suit, claim, proceeding,
inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending
or, to the knowledge of the Company or any of its Subsidiaries, threatened against or affecting the Company or any of its Subsidiaries,
or their offices or directors in their capacity as such, that could have a Material Adverse Effect. Schedule 3(i) contains a complete
list and summary description of any pending or, to the knowledge the Company, threatened proceeding against or affecting the Company
or any of its Subsidiaries, without regard to whether it would have a Material Adverse Effect. The Company a d its Subsidiaries
are unaware of any facts or circumstances which might give rise to any the foregoing.
j.
Patents, Copyrights, etc. The Company and each its Subsidiaries
owns or possesses the requisite licenses or rights to use all patents, applications, patent rights, inventions, know-how, trade
secrets, trademarks, trade applications, service marks, service names, trade names and copyrights ("Intellectual Property")
necessary to enable it to conduct its business as now operated (and, as presently contemplated to be operated in the future);
there is no claim or action by any person pe1iaining to, or proceeding pending, or to the Company's knowledge threatened, which
challenges the right of the Company or of a Subsidiary with respect to any Intellectual Property necessary to enable it to conduct
its business as now operated (and, as presently contemplated to be operated in the future); to the best of the Company's knowledge,
the Company's or its Subsidiaries' current and intended products, services and processes do not infringe on any Intellectual Property
or other right held by any person; and the Company is unaware of any facts or circumstances which might give rise to any of the
foregoing. The Company and each of its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality
and value of their Intellectual Property.
k.
No Materially Adverse Contracts, Etc. Neither the Comp nor
any of its Subsidiaries is subject to any charter, corporate or other legal restriction, judgment, decree, order, rule or regulation
which in the judgment of the Company's office or is expected in the future to have a Material Adverse Effect. Neither the Company
nor its Subsidiaries is a party to any contract or agreement which in the judgment of the Com officers has or is expected to have
a Material Adverse Effect.
l.
Tax Status. The Company and each of its Subsidiaries has
made or filed all federal, state and foreign income and all other tax returns, reports and declarations required by any jurisdiction
to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books
provisions reasonably adequate payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments
and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those
being contested in good faith and has set aside on its books provisions reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount
claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.
The Company has not executed a with respect to the statute of limitations relating to the assessment or collection of any foreign
federal, state or local tax. None of the Company's tax returns is presently being audited by taxing authority.
m.
Certain Transactions. Except for arm's length transactions
pursuant to which the Company or any of its Subsidiaries makes payments in the ordinary of business upon terms no less favorable
than the Company or any of its Subsidiaries obtain from third parties and other than the grant of stock options disclosed on Schedule
none of the officers, directors, or employees of the Company is presently a party t transaction with the Company or any of its
Subsidiaries (other than for services as employees officers and directors), including any contract, agreement or other arrangement
providing furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, the knowledge of the Company, any corporation, partnership, trust
or other entity in which officer, director, or any such employee has a substantial interest or is an officer, director, or partner.
n.
Disclosure. All information relating to or concerning the
Company or any of its Subsidiaries set forth in this Agreement and provided to the Buyer pursuant to Section 2(d) hereof and otherwise
in connection with the transactions contemplated her by is true and correct in all material respects and the Company has not omitted
to state any material fact necessary in order to make the statements made herein or therein, in light of the circumstances under
which they were made, not misleading. No event or circumstance occurred or exists with respect to the Company or any of its Subsidiaries
or its or their business, properties , prospects, operations or financial conditions, which, under applicable law, r le or regulation,
requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed (assuming
for this purpose that the Company's report filed under the 1934 Act are being incorporated into an effective registration statement
filed by the Company under the 1933 Act).
o.
Acknowledgment Regarding Buyer' Purchase of Securities. The
Company acknowledges and agrees that the Buyer is acting solely in the capacity of arm's length purchasers with respect to this
Agreement and the transactions contemplated hereby. The Company further acknowledges that the Buyer is not acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated
hereby and any statement made by the Buyer or any of its respective representatives or agents in connection with this Agreement
and the transactions contemplated hereby is not advice or a recommendation and is merely incidental to the Buyer' purchase the
Securities. The Company further represents to the Buyer that the Company's decision to into this Agreement has been based solely
on the independent evaluation of the Company representatives.
p.
No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales in any security
or solicited any offers to buy any security under circumstances that would require registration under the 1933 Act of the issuance
of the Securities to the Buyer. The issuance of the Securities to the Buyer will not be integrated with any other issuance the
Company's securities (past, current or future) for purposes of any shareholder approval provisions applicable to the Company or
its securities.
q.
No Brokers. The Company has taken no action which would rise
to any claim by any person for brokerage commissions, transaction fees or similar payments relating to this Agreement or the transactions
contemplated hereby.
r.
Permits; Compliance. The Company and each of its Subsidiaries
is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates,
approvals and orders necessary to own, lease and operate its properties and to carry on its business as it is now being conducted
(collectively, the "Company Permits"), and there is no action pending or, to the knowledge of the Company, threatened
regarding suspension or cancellation of any of the Company Permits. Neither the Company nor any of its Subsidiaries is in conflict
with, or in default or violation of, any of the Co Permits, except for any such conflicts, defaults or violations which, individually
or aggregate, would not reasonably be expected to have a Material Adverse Effect. Since Fe 28, 2014, neither the Company nor any
of its Subsidiaries has received any notification respect to possible conflicts, defaults or violations of applicable laws, except
for notices relating to possible conflicts, defaults or violations, which conflicts, defaults or violations would not have a Material
Adverse Effect.
s.
Environmental Matters.
(i)
There are, to the Company's knowledge, with respect
to the Company or any of its Subsidiaries or any predecessor of the Company, no past or violations of Environmental Laws (as defined
below), releases of any material in environment, actions, activities, circumstances, conditions, events, incidents, or contractual
obligations which may give rise to any common law environmental liability or any liability under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 or similar federal, state, local or foreign laws and neither the Company nor
any of its Subsidiaries has received any notice with respect to any of the foregoing, nor is any action pending or, to the Company's
knowledge, threatened in connection with any of the foregoing. The term "Environmental Laws" means all federal, state,
local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient
air, surface water, groundwater, land surface or subsurface strata), including, without limitation laws relating to emissions,
discharges, releases or threatened releases of chemicals, pollutants contaminants, or toxic or hazardous substances or wastes
(collectively, "Hazardous Materials") into the environment, or otherwise relating to the manufacture, processing, distribution
use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees,
demands or demand letters, injunctions, judgments, lie notices or notice letters, orders, permits, plans or regulations issued,
entered, promulgated approved thereunder.
(ii)
Other than those that are or were stored, used or
disposed of in compliance with applicable law, no Hazardous Materials are contained on or about an real property currently owned,
leased or used by the Company or any of its Subsidiaries, a d no Hazardous Materials were released on or about any real property
previously owned, leased or used by the Company or any of its Subsidiaries during the period the property was owned, or used by
the Company or any of its Subsidiaries, except in the normal course of the Company's or any of its Subsidiaries' business.
(iii)
There are no underground storage tanks on or und
real property owned, leased or used by the Company or any of its Subsidiaries that are not in compliance with applicable law.
t.
Title to Property. The Company and its Subsidiaries have
good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them
which is material to the business of the Company d its Subsidiaries, in each case free and clear of all liens, encumbrances and
defects except such s are described in Schedule 3(t) or such as would not have a Material Adverse Effect. Any real property and
facilities held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as would not have a Material Adverse Effect.
u.
Insurance. The Company and each of its Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company
believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged. Neither the Company
nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost
that would not have a Material Adverse Effect. Upon written request the Company will provide to the Buyer true and correct copies
of all policies relating to directors' and officers' liability coverage, errors and omissions coverage and commercial general
liability coverage.
v.
Internal Accounting Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient, in the judgment Company's board of directors, to provide
reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii)
transaction are recorded as necessary to permit preparation of financial statements in conformity with gen rally accepted accounting
principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general
or specific authorization and (I the recorded accountability for assets is compared with the existing assets at reasonable interval
and appropriate action is taken with respect to any differences.
w.
Foreign Corrupt Practices. Neither the Company, nor any of
its Subsidiaries, nor any director, officer, agent, employee or other person acting on behalf of the Company or any Subsidiary
has, in the course of his actions for, or on behalf of, the Co any, used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment t any foreign
or domestic government official or employee from corporate funds; violated or is in violation of any provision of the U.S. Foreign
Corrupt Practices Act of 1977, as amended, or made any bribe, rebate, payoff, influence payment , kickback or other unlawful payment
t any foreign or domestic government official or employee.
x.
Solvency. The Company (after giving effect to the transactions
contemplated by this Agreement) is solvent (i.e., its assets have a fair market value in excess of the amount required to pay
its probable liabilities on its existing debts as they become absolute and matured) and currently the Company has no information
that would lead it to reasonably conclude that the Company would not, after giving effect to the transaction contemplated this
Agreement, have the ability to, nor does it intend to take any action that would impair its ability to, pay its debts from time
to time incurred in connection therewith as such debts mature The Company did not receive a qualified opinion from its auditors
with respect to its most recent fiscal year end and, after giving effect to the transactions contemplated by this Agreement does
not anticipate or know of any basis upon which its auditors might issue a qualified opinion in respect of its current fiscal year.
y.
No Investment Company. The Company is not, and up the issuance
and sale of the Securities as contemplated by this Agreement will not be an "investment company" required to be registered
under the Investment Company Act of 1940 (an "Investment Company"). The Company is not controlled by an Investment Company.
z. Breach
of Representations and Warranties by the Company. If the Company breaches any of the representations or warranties set
forth in this Section 3, and in addition to any other remedies available to the Buyer pursuant to this Agreement , it will be
considered an Event of default under Section 3.4 of the Note.
4.
COVENANTS.
a.
Best Efforts. The parties shall use their best efforts to
satisfy timely each of the conditions described in Section 6 and 7 of this Agreement.
b.
Form D; Blue Sky Laws. The Company agrees to file a Form
D with respect to the Securities as required under Regulation D and to provide a copy thereof Buyer promptly after such filing.
The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary to qualify
the Securities for sale to the Buyer at the applicable closing pursuant to this Agreement under applicable securities or "blue
sky" laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence
of any such action so taken to the Buyer on or prior the Closing Date.
c.
Use of Proceeds. The Company shall use the proceeds for general
working capital purposes.
d.
Right of First Refusal. Unless it shall have first delivered
the Buyer, at least seventy two (72) hours prior to the closing of such Future Offering (as defined herein), written notice describing
the proposed Future Offering ("ROFR Notice"), including the terms and conditions thereof, identity of the proposed purchaser
and proposed definitive documentation to be entered into in connection therewith, and providing the Buyer an option during the
seventy two (72) hour period following delivery of such notice to purchase the securities being offered in the Future Offering
on the same terms as contemplated by such Offering (the limitations referred to in this sentence and the preceding sentence are
collectively referred to as the "Right of First Refusal") (and subject to the exceptions described below Company will
not conduct any equity (or debt with an equity component) financing in an a less than $100,000 ("Future Offering(s) ")
during the period beginning on the Closing Da ending six (6) months following the Closing Date. Notwithstanding anything contained
he in to the contrary, the Company shall not consummate any Future Offering with an investor, or an affiliate of such investor
(collectively "Prospective Investor"), identified on an ROFR Notice whereby the Buyer exercised its Right of First Refusal
for a period of forty (45) days following such exercise; and any subsequent offer by a Prospective Investor is subject to this
Section 4(d) and the Right of First Refusal. In the event the terms and conditions of a proposed future Offering are amended in
any respect after delivery of the notice to the Buyer concerning the proposed Future Offering, the Company shall deliver a new
notice to the Buyer describing the amended terms and conditions of the proposed Future Offering and the Buyer thereafter shall
have an option during the seventy two (72) hour period following delivery of such new no ice to purchase its pro rata share of
the securities being offered on the same terms as contemplated by such proposed Future Offering, as amended. The foregoing sentence
shall apply to such amendments to the terms and conditions of any proposed Future Offering. The Right of First Refusal shall not
apply to any transaction involving (i) issuances of securities in a commitment underwritten public offering (excluding a continuous
offering pursuant to Rule under the 1933 Act) or (ii) issuances of securities as consideration for a merger, consolidate purchase
of assets, or in connection with any strategic partnership or joint venture (the primary purpose of which is not to raise equity
capital), or in connection with the disposition acquisition of a business, product or license by the Company. The Right of First
Refuse shall not apply to the issuance of securities upon exercise or conversion of the Company’s options, warrants or other
convertible securities outstanding as of the date hereof or to the of additional options or warrants, or the issuance of additional
securities, under any Company stock option or restricted stock plan approved by the shareholders of the Company.
e.
Expenses. At the Closing, the Company shall reimburse Bu
r for expenses incurred by them in connection with the negotiation, preparation , execution, delivery and performance of this
Agreement and the other agreements to be executed in connection herewith ("Documents "), including, without limitation,
reasonable attorneys' and consultants' fees and expenses, transfer agent fees, fees for stock quotation services, fees relating
to any amendments or modifications of the Documents or any consents or waivers of provisions in the Documents, fees for the preparation
of opinions of counsel, escrow fees, and co restructuring the transactions contemplated by the Documents. When possible, the Company
must pay these fees directly, otherwise the Company must make immediate payment for reimbursement to the Buyer for all fees and
expenses immediately upon written notice y the Buyer or the submission of an invoice by the Buyer. The Company's obligation with
respect to this transaction is to reimburse Buyer' expenses shall be $3,000.
f.
Financial Information. Upon written request the Company to
send or make available the following reports to the Buyer until the Buyer transfers, assigns, or sells all of the Securities:
(i) within ten (10) days after the filing with the SEC, a copy of its Annual Report on Form 10-K its Quarterly Reports on Form
10-Q and any Current Rep s on Form 8-K; (ii) within one (1) day after release, copies of all press releases issued the Company
or any of its Subsidiaries; and (iii) contemporaneously with the making avail le or giving to the shareholders of the Company,
copies of any notices or other information the Company makes available or gives to such shareholders.
g.
[INTENTIONALLY DELETED]
h.
Listing. The Company shall promptly secure the listing Conversion
Shares upon each national securities exchange or automated quotation system, upon which shares of Common Stock are then listed
(subject to official notice of issuance so long as the Buyer owns any of the Securities, shall maintain, so long as any other
shares Common Stock shall be so listed, such listing of all Conversion Shares from time to time issuable upon conversion of the
Note. The Company will obtain and, so long as the Buyer owns any of the Securities, maintain the listing and trading of its Common
Stock on the OTC or any equivalent replacement exchange, the Nasdaq National Market ("Nasdaq"), the Nasdaq SmallCap
Market ("Nasdaq SmallCap"), the New York Stock Exchange ("NYSE"), the American Stock Exchange ("AMEX")
and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the Financial
Industry Regulatory Authority ("FINRA") and such exchanges, as applicable. The Company shall promptly provide to the
Buyer copies of any notices it receives from the OTCBB and any other exchanges or quotation systems on which the Common Stock
is then listed regarding the continued eligibility of the Common Stock for listing on such exchanges and quotation systems.
i.
Corporate Existence. So long as the Buyer beneficially o
Note, the Company shall maintain its corporate existence and shall not sell all or substantia of the Company's assets, except
in the event of a merger or consolidation or sale of substantially all of the Company's assets, where the surviving or successor
entity in such transaction (i) assumes the Company's obligations hereunder and under the agreement and instruments entered into
in connection herewith and (ii) is a publicly traded corporation whose Common Stock is listed for trading on the OTCBB, Nasdaq,
Nasdaq SmallCap, NY E or AMEX.
j.
No Integration. The Company shall not make any offers or
sales of any security (other than the Securities) under circumstances that would require registration of the Securities being
offered or sold hereunder under the 1933 Act or cause the offering of the Securities to be integrated with any other offering
of securities by the Company for the purpose of any stockholder approval provision applicable to the Company or its securities.
k.
Breach of Covenants. If the Company breaches any the covenants
set forth in this Section 4, and in addition to any other remedies available to the pursuant to this Agreement, it will be considered
an event of default under Section 3.4 Note.
l.
Failure to Comply with the 1934 Act. So long as the Buyer
beneficially owns the Note, the Company shall comply with the reporting requirements of the 1934 Act; and the Company shall continue
to be subject to the reporting requirements of the 1934 Act.
m.
Trading Activities. Neither the Buyer nor its affiliates
has an open short position in the common stock of the Company and the Buyer agree that it shall not, that it will cause its affiliates
not to, engage in any short sales of or hedging transactions with respect to the common stock of the Company.
5.
Transfer Agent Instructions. The Company shall issue irrevocable instructions to its transfer
agent to issue certificates, registered in the name of the Buyer or its nominee, for the Conversion Shares in such amounts as
specified from time to time by the Buyer to the Company upon conversion of the Note in accordance with the terms thereof (the
"Irrevocable Transfer Agent Instructions"). In the event that the Borrower proposes to replace its transfer agent, the
Borrower shall 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. Prior
to registration of the Conversion Shares under the 1933 Act or the date on which the Conversion Shares 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, all
such certificates shall bear the restrictive legend specified in Section 2(g) of this Agreement. The Company warrants that: (i)
no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 5, and stop transfer instructions
to give effect to Section 2(f) hereof (in the case of the Conversion Shares, prior to registration of the Conversion Shares under
the 1933 Act or the date on which the Conversion Shares 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), will be given by the Company to its transfer agent and
that the Securities shall otherwise be freely transferable on the books and records of the Company as and to the extent provided
this Agreement and the Note; (ii) it will not direct its transfer agent not to transfer or impair, and/or hinder its transfer
agent in transferring (or issuing)(electronically or in certificated form) any certificate for Conversion Shares to be issued
to the Buyer upon conversion otherwise pursuant to the Note as and when required by the Note and this Agreement; and will not
fail to remove (or directs its transfer agent not to remove or impairs, delays, hinders its transfer agent from removing) any
restrictive legend (or to withdraw any stop transfer instructions in respect thereof) on any certificate for any Conversion Shares
issued to the Buyer upon conversion of or otherwise pursuant to the Note as and when required by the Note a this Agreement. Nothing
in this Section shall affect in any way the Buyer's obligation and agreement set forth in Section 2(g) hereof to comply with all
applicable prospectus delivery requirements, if any, upon re-sale of the Securities. If the Buyer provides the Company, t the
cost of the Buyer, with (i) an opinion of counsel in form, substance and scope customary for opinions in comparable transactions
, to the effect that a public sale or transfer of such Securities may be made without registration under the 1933 Act and such
sale or transfer is effected r (ii) the Buyer provides reasonable assurances that the Securities can be sold pursuant to Rule
144, the Company shall permit the transfer, and, in the case of the Conversion Shares, promptly instruct its transfer agent to
issue one or more certificates, free from restrictive legend, in such name and in such denominations as specified by the Buyer.
The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Buyer, by vitiating
the intent and purpose of the transactions contemplated hereby. Accordingly, the Co acknowledges that the remedy at law for a
breach of its obligations under this Section 5 inadequate and agrees, in the event of a breach or threatened breach by the Company
provisions of this Section, that the Buyer shall be entitled, in addition to all other available remedies, to an injunction restraining
any breach and requiring immediate transfer, without the necessity of showing economic loss and without any bond or other security
being required.
6.
Conditions to the Company's Obligation to Sell. The obligation the Company hereunder to issue
and sell the Note to the Buyer at the Closing is subject to the satisfaction, at or before the Closing Date of each of the following
conditions thereto, provided that these conditions are for the Company's sole benefit and may be waived by the Comp y at any time
in its sole discretion: same to the Company.
a.
The Buyer shall have executed this Agreement and delivered the same to the Company.
b.
The Buyer shall have delivered the Purchase Price in accordance with Section 1(b) above.
c.
The representations and warranties of the Buyer shall be true and correct in all material respects as of the date when made and
as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date
, and the Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed , satisfied or complied with by the Buyer at or prior to the Closing Date.
d.
No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated
or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having
authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this
Agreement.
7.
Conditions to The Buyer's Obligation to Purchase.
The obligation of the Buyer hereunder to purchase the Note at the Closing is subject to the satisfaction, at or before the Closing
Date of each of the following conditions, provided that these conditions are for the Buyer's sole benefit and may be waived by
the Buyer at any time in its sole discretion:
a.
The Company shall have this Agreement and delivered the same to the Buyer.
b.
The Company shall have delivered to the Buyer the duly executed
Note (in such denominations as the Buyer shall request) in accordance with Section l (b) above.
c.
The Irrevocable Transfer Agent Instructions, in form and substance satisfactory to a majority-in-interest of the Buyer, shall
have been delivered to and acknowledged in writing by the Company's Transfer Agent.
d.
The representations and warranties of the Company shall be true and correct in all material respects as of the date when made
and as of the Closing Date as though made at such time (except for representations and warranties that speak as of a specific
date) and the Company shall have performed , satisfied and complied in all material respect with the covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date.
The Buyer shall have received a certificate or certificates, executed by the chief executive officer of the Company, dated as
of the Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by the Buyer including,
but not limited to ce1iificates with respect to the Com Certificate of Incorporation, By-laws and Board of Directors’ resolutions
relating to transactions contemplated hereby.
e.
No litigation, statute, rule, regulation , executive order, decree, ruling or injunction shall have been enacted, entered, promulgated
or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having
authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this
Agreement.
f.
No event shall have occurred which could reasonably be ex to have a Material Adverse Effect on the Company including but not limited
to a change 1934 Act reporting status of the Company or the failure of the Company to be timely in it Act reporting obligations.
g.
The Conversion Shares shall have been authorized for quotation on the OTCBB and trading in the Common Stock on the OTCBB shall
not have been suspended by the SEC or the OTCBB.
h.
The Buyer shall have received an officer's certificate described in Section 3(c) above, dated as of the Closing Date.
8.
Governing Law; Miscellaneous.
a.
Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without
regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated
by this Agreement shall be brought only in the state courts of New York or in the federal courts located in the state and county
of Nassau. The parties this Agreement 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 have based upon forum non conveniens.
The Company and Buyer waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable
attorney's fees and cost. In the event that any provision of this Agreement 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 prove invalid or unenforceable under any law shall not affect the validity or enforceability other provision of any agreement.
Each party hereby irrevocably waives personal service process and consents to process being served in any suit, action or proceeding
in connection 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.
b.
Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but
all of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party.
c.
Headings. The headings of this Agreement are for convenience of reference only and shall not form part of, or affect the
interpretation of, this Agreement.
d.
Severability. In the event that any provision of this Agree invalid or unenforceable under any applicable statute or rule
of law, then such provisions deemed inoperative to the extent that it may conflict therewith and shall be deemed modified conform
with such statute or rule of law. Any provision hereof which may proves invalid unenforceable under any law shall not affect the
validity or enforceability of any other pro hereof.
e.
Entire Agreement; Amendments. This Agreement and the instruments referenced herein contain the entire understanding of
the parties with respect matters covered herein and therein and, except as specifically set forth herein or therein, either the
Company nor the Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended other than by an instrument in writing signed by the majority in interest of the Buyer.
f.
Notices. All notices, demands, requests, consents, approval , 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 s 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 bel w (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
ring 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 address s for such communications shall be:
If
to the Company, to:
IDS
INDUSTRIES, INC.
533
Birch Street
Lake
Elsinore, CA 92530
Attn:
SCOTT PLANTINGA, Chief Executive Officer
facsimile:
[enter fax number]
With
a copy by fax only to (which copy shall not constitute notice):
[enter
name of law firm]
Attn:
[attorney name]
[enter
address line 1]
[enter
city, state, zip]
facsimile:
[enter fax number]
If
to the Buyer:
KBM
WORLDWIDE, INC.
80
Cuttermill Road –
Suite
410 Great Neck, NY 11021
Attn:
Seth Kramer, President
e-mail:
info@kwbmlaw.com
With
a copy by fax only to (which copy shall not constitute notice):
Naidich
Wurman Birnbaum & Maday LLP
Attn:
Bernard S. Feldman, Esq.
acsimile:
516-466-3555
e-mail:
dyork@nwbmlaw.com
Each
party shall provide notice to the other party of any change in address.
g.
Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors
and assigns. Neither the Company nor the Buyer shall assign this Agreement or any rights or obligations hereunder without the
prior written consent of the other. Notwithstanding the foregoing, subject to Section 2(f), the may assign its rights hereunder
to any person that purchases Securities in a private transaction from the Buyer or to any of its "affiliates," as that
term is defined under the 1934 Act, without the consent of the Company.
h.
Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted
successors and assigns, and is t for the benefit of, nor may any provision hereof be enforced by, any other person.
i.
Survival. The representations and warranties of the Company and the agreements and covenants set forth in this Agreement
shall survive the closing here notwithstanding any due diligence investigation conducted by or on behalf of the Buyer. Company
agrees to indemnify and hold harmless the Buyer and all their officers, directors, employees and agents for loss or damage arising
as a result of or related to any breach or alleged breach by the Company of any of its representations, warranties and covenants
set forth this Agreement or any of its covenants and obligations under this Agreement, including advancement of expenses as they
are incurred.
j.
Publicity. The Company, and the Buyer shall have the right to review a reasonable period of time before issuance of any
press releases, SEC, OTCBB or FINRA filings, or any other public statements with respect to the transactions contemplated hereby;
provided, however , that the Company shall be entitled, without the prior approval of the Buyer, to make any press
release or SEC, OTCBB (or other applicable trading market) or FINRA filings with respect to such transactions as is required by
applicable law and regulations (although the Buyer shall be consulted by the Company in connection with any such press release
prior to its release and shall be provided with a copy thereof and be given an opportunity to comment thereon).
k.
Further Assurances. Each party shall do and perform, or case to be done and performed, all such further acts and things,
and shall execute and deliver al such other agreements, certificates, instruments and documents, as the other party may reasonably
request in order to carry out the intent and accomplish the purposes of this Agreement d the consummation of the transactions
contemplated hereby.
l.
No Strict Construction. The language used in this Agreement be deemed to be the language chosen by the parties to express
their mutual intent, and no les of strict construction will be applied against any party.
m.
Remedies. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the
Buyer by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Agreement will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Agreement, that the Buyer 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 Agreement and to enforce specifically terms and provisions hereof, without the necessity
of showing economic loss and without bond or other security being required.
IN
WITNESS WHEREOF, the undersigned Buyer and the Company have cause this Agreement to be duly executed as of the date first above
written.
IDS
INDUSTRIES, INC. |
|
By:
/s/ Scott Plantinga |
Scott
Plantinga |
Chief
Executive Officer |
|
KBM
WORLDWIDE, INC. |
|
By:
/s/ Seth Kramer |
Seth
Kramer |
President |
80
Cuttermill Road – Suite 410 |
Great
Neck, NY 11021 |
AGGREGATE
SUBSCRIPTION AMOUNT:
|
|
Aggregate
Principal Amount of Note: |
$53,000.00 |
Aggregate
Purchase Price: |
$53,000.00 |
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: $53,000.00 |
Issue
Date: August 18, 2014 |
Purchase
Price: $53,000.00 |
|
CONVERTIBLE
PROMISSORY NOTE
FOR VALUE RECEIVED, AJA CANNAFACTURING, INC. f/k/a IDS
INDUSTRIES, INC., a Nevada corporation (hereinafter called the “Borrower”), hereby promises to pay to the order
of KBM WORLDWIDE, INC., a New York corporation, or registered assigns (the “Holder”) the sum of $53,000.00
together with any interest as set forth herein, on May 20, 2015 (the “Maturity Date”), and to pay interest on the
unpaid principal balance hereof at the rate of eight percent (8%) (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. Any amount of
principal or interest on this Note which is not paid when due shall bear interest at the rate of twenty two percent (22%) per
annum from the due date thereof until the same is paid (“Default Interest”). Interest shall commence accruing on the
date that the Note is fully paid and shall be computed on the basis of a 365-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 during the period beginning on the
date which is one hundred eighty (180) days following 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 (the “Conversion Price”) determined as provided herein (a “Conversion”);
provided, however, that in no event shall the Holder be entitled to convert any portion of this Note in excess of
that portion of this Note upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by the
Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the Notes or the unexercised or unconverted portion of any other security of the Borrower subject to a
limitation on conversion or exercise analogous to the limitations contained herein) and (2) the number of shares of Common Stock
issuable upon the conversion of the portion of this Note with respect to which the determination of this proviso is being made,
would result in beneficial ownership by the Holder and its affiliates of more than 4.99% 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 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, 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.
(a)
Calculation of Conversion Price. The conversion price (the “Conversion Price”) shall equal 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 51% multiplied
by the Market Price (as defined herein) (representing a discount rate of 49%). “Market Price” means the average of
the lowest three (3) Trading Prices (as defined below) for the Common Stock during the thirty (30) 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 closing bid price on the Over-the-Counter Bulletin Board, or applicable trading market (the “OTCBB”) as reported
by a reliable reporting service (“Reporting Service”) designated by the Holder (i.e. Bloomberg) 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 National Quotation Bureau, Inc. 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, or on the principal securities exchange or other securities market on which the Common Stock is then
being traded.
(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.
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 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 five 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 hereunder. 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.
If,
at any time the Borrower does not maintain the Reserved Amount it will be considered an Event of Default under Section 3.2 of
the Note.
(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 6:00 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 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 6:00 p.m., New York, New York time,
on such date.
(f)
Delivery of Common Stock by Electronic Transfer. In lieu of delivering physical certificates representing the Common Stock
issuable upon conversion, provided the Borrower is participating in the Depository Trust Company (“DTC”) Fast Automated
Securities Transfer (“FAST”) program, upon request of the Holder and its compliance with the provisions contained
in Section 1.1 and in this Section 1.4, the Borrower shall use its best efforts to cause its transfer agent to electronically
transmit the Common Stock issuable upon conversion to the Holder by crediting the account of Holder’s Prime Broker with
DTC through its Deposit Withdrawal Agent Commission (“DWAC”) system.
(g)
Failure to Deliver Common Stock Prior to Deadline. Without in any way limiting the Holder’s right to pursue other
remedies, including actual damages and/or equitable relief, the parties agree that if delivery of the Common Stock issuable upon
conversion of this Note is not delivered by the Deadline (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. 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(g) are justified.
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 Common Stock may be made
without registration under the Act, which opinion shall be accepted by the Company 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 Company does not
accept the opinion of counsel provided by the Holder 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, 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, 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 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 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 3.3 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, 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, in accordance with
this Section 1.9. 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 Optional
Prepayment Amount (as defined below) 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 exercises its right to prepay the Note, the
Borrower shall make payment to the Holder of an amount in cash (the “Optional Prepayment Amount”) 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 to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referred
to in clauses (w) and (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the Borrower
delivers an Optional Prepayment Notice and fails to pay the Optional 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.
Notwithstanding
anything to the contrary contained in this Note, at any time during the period beginning on the date which is ninety-one (91)
days following the Issue Date and ending on the date which is one hundred twenty (120) 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, in accordance with this Section 1.9. Any 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 Optional Prepayment Date, the Borrower shall make payment of the Second Optional Prepayment
Amount
(as defined below) 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 exercises its right to prepay the Note, the Borrower shall make payment
to the Holder of an amount in cash (the “Second Optional Prepayment Amount”) equal to 145%, 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 to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referred to in clauses
(w) and (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the Borrower delivers
an Optional Prepayment Notice and fails to pay the Second Optional 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.
Notwithstanding
anything to the contrary contained in this Note, at any time during the period beginning on the date which is one hundred twenty-one
(121) 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, in accordance with this Section 1.9. Any 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 Optional Prepayment Date, the Borrower shall make payment of the Third Optional Prepayment
Amount (as defined below) 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 exercises its right to prepay the Note, the Borrower shall
make payment to the Holder of an amount in cash (the “Third Optional Prepayment Amount”) equal to 150%, 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 to the Optional Prepayment Date plus (y) Default Interest, if any, on the amounts referred
to in clauses (w) and (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof. If the Borrower
delivers an Optional Prepayment Notice and fails to pay the Third Optional 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.
After
the expiration of one hundred eighty (180) following the date of the Note, the Borrower shall have no right of prepayment.
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 which the Borrower has informed Holder in writing prior to the date hereof, (b) indebtedness to trade
creditors or financial institutions 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.
ARTICLE
III. EVENTS OF DEFAULT
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
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.
3.4
Breach of Representations and Warranties. Any representation or warranty of the Borrower made herein or in any agreement,
statement or certificate given in writing pursuant hereto or in connection herewith (including, without limitation, the Purchase
Agreement), shall be false or misleading in any material respect when made and the breach of which has (or with the passage of
time will have) a material adverse effect on the rights of the Holder with respect to this Note or the Purchase Agreement.
3.5
Receiver or Trustee. The Borrower or any subsidiary of the Borrower shall make an assignment for the benefit of creditors,
or apply for or consent to the appointment of a
receiver
or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed.
3.6
Judgments. Any money judgment, writ or similar process shall be entered or filed against the Borrower or any subsidiary
of the Borrower or any of its property or other assets for more than $50,000, and shall remain unvacated, unbonded or unstayed
for a period of twenty
(20)
days unless otherwise consented to by the Holder, which consent will not be unreasonably withheld.
3.7
Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings, voluntary or involuntary,
for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any
subsidiary of the Borrower.
3.8
Delisting of Common Stock. The Borrower shall fail to maintain the listing of the Common Stock on at least one of the OTCBB
or an equivalent replacement exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or
the American Stock Exchange.
3.9
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.
3.10
Liquidation. Any dissolution, liquidation, or winding up of Borrower or any substantial portion of its business.
3.11
Cessation of Operations. Any cessation of operations by Borrower or Borrower admits it is otherwise generally unable to
pay its debts as such debts become due, provided, however, that any disclosure of the Borrower’s ability to continue as
a “going concern” shall not be an admission that the Borrower cannot pay its debts as they become due.
3.12
Maintenance of Assets. The failure by Borrower to maintain any material intellectual property rights, personal, real
property or other assets which are necessary to conduct its business (whether now or in the future).
3.13
Financial Statement Restatement. The restatement of any financial statements filed by the Borrower with the SEC for any
date or period from two years prior to the Issue Date of this Note and until this Note is no longer outstanding, if the result
of such restatement would, by comparison to the unrestated financial statement, have constituted a material adverse effect on
the rights of the Holder with respect to this Note or the Purchase Agreement.
3.14
Reverse Splits. The Borrower effectuates a reverse split of its Common Stock without twenty (20) days prior written
notice to the Holder.
3.15
Replacement of Transfer Agent. In the event that the Borrower proposes to replace its transfer agent, the Borrower fails
to provide, prior to the effective date of such replacement, a fully executed Irrevocable Transfer Agent Instructions in a form
as initially delivered pursuant to the Purchase Agreement (including but not limited to the provision to irrevocably reserve shares
of Common Stock in the Reserved Amount) signed by the successor transfer agent to Borrower and the Borrower.
3.16
Cross-Default. Notwithstanding anything to the contrary contained in this Note or the other related or companion documents,
a breach or default by the Borrower of any covenant or other term or condition contained in any of the Other Agreements, after
the passage of all applicable notice and cure or grace periods, shall, at the option of the Holder, be considered a default under
this Note and the Other Agreements, in which event the Holder shall be entitled (but in no event required) to apply all rights
and remedies of the Holder under the terms of this Note and the Other Agreements by reason of a default under said Other Agreement
or hereunder. “Other Agreements” means, collectively, all agreements and instruments between, among or by: (1) the
Borrower, and, or for the benefit of, (2) the Holder and any affiliate of the Holder, including, without limitation, promissory
notes; provided, however, the term “Other Agreements” shall not include the related or companion documents to this
Note. Each of the loan transactions will be cross-defaulted with each other loan transaction and with all other existing and future
debt of Borrower to the Holder.
Upon
the occurrence and during the continuation of any Event of Default specified in Section 3.1 (solely with respect to failure
to pay the principal hereof or interest thereon when due at the Maturity Date), the Note shall become immediately due and
payable and the Borrower shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the
Default Sum (as defined herein). UPON THE OCCURRENCE AND DURING THE CONTINUATION OF ANY EVENT OF DEFAULT SPECIFIED IN SECTION
3.2, THE NOTE SHALL BECOME IMMEDIATELY DUE AND PAYABLE AND THE BORROWER SHALL PAY TO THE HOLDER, IN FULL SATISFACTION OF ITS
OBLIGATIONS HEREUNDER, AN AMOUNT EQUAL TO: (Y) THE DEFAULT SUM (AS DEFINED HEREIN);
MULTIPLIED BY (Z) TWO (2). Upon the occurrence and during the continuation of any Event of Default specified in Sections 3.1
(solely with respect to failure to pay the principal hereof or interest thereon when due on this Note upon a Trading Market
Prepayment Event pursuant to Section 1.7 or upon acceleration), 3.3, 3.4, 3.6, 3.8, 3.9, 3.11, 3.12, 3.13, 3.14, and/or 3. 15
exercisable through the delivery of written notice to the Borrower by such Holders (the “Default Notice”), and
upon the occurrence of an Event of Default specified the remaining sections of Articles III (other than failure to pay the
principal hereof or interest thereon at the
Maturity
Date specified in Section 3,1 hereof), the Note shall become immediately due and payable and the Borrower shall pay to the Holder,
in full satisfaction of its obligations hereunder, an amount equal to the greater of (i) 150% times the sum of (w)
the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount
of this Note to the date of payment (the “Mandatory Prepayment Date”) plus (y) Default Interest, if any, on
the amounts referred to in clauses (w) and/or (x) plus (z) any amounts owed to the Holder pursuant to Sections 1.3 and
1.4(g) hereof (the then outstanding principal amount of this Note to the date of payment plus the amounts referred to in
clauses (x), (y) and (z) shall collectively be known as the “Default Sum”) or (ii) the “parity value”
of the Default Sum to be prepaid, where parity value means (a) the highest number of shares of Common Stock issuable upon conversion
of or otherwise pursuant to such Default Sum in accordance with Article I, treating the Trading Day immediately preceding the
Mandatory Prepayment Date as the “Conversion Date” for purposes of determining the lowest applicable Conversion Price,
unless the Default Event arises as a result of a breach in respect of a specific Conversion Date in which case such Conversion
Date shall be the Conversion Date), multiplied by (b) the highest Closing Price for the Common Stock during the period
beginning on the date of first occurrence of the Event of Default and ending one day prior to the Mandatory Prepayment Date (the
“Default Amount”) and all other amounts payable hereunder shall immediately become due and payable, all without demand,
presentment or notice, all of which hereby are expressly waived, together with all costs, including, without limitation, legal
fees and expenses, of collection, and the Holder shall be entitled to exercise all other rights and remedies available at law
or in equity.
If
the Borrower fails to pay the Default Amount within five (5) business days of written notice that such amount is due and payable,
then the Holder shall have the right at any time, so long as the Borrower remains in default (and so long and to the extent that
there are sufficient authorized shares), to require the Borrower, upon written notice, to immediately issue, in lieu of the Default
Amount, the number of shares of Common Stock of the Borrower equal to the Default Amount divided by the Conversion Price then
in effect.
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:
AJA
CANNAFACTURING, INC. f/k/a IDS INDUSTRIES, INC.
5333
Birch Street
Lake
Elsinore, CA 92530
Attn:
SCOTT PLANTINGA, Chief Executive Officer facsimile:
With
a copy by fax only to (which copy shall not constitute notice): [enter name of law firm]
Attn:
[attorney name] [enter address line 1] [enter city, state, zip]
facsimile:
[enter fax number] If to the Holder:
KBM
WORLDWIDE, INC.
80
Cuttermill Road – Suite 410 Great Neck, NY 11021
Attn:
Seth Kramer, President
e-mail:
info@kbmworldwide.com
With
a copy by fax only to (which copy shall not constitute notice):
Naidich
Wurman Birnbaum & Maday, LLP Attn: Bernard S. Feldman, Esq.
facsimile:
516-466-3555
e-mail:
dyork@nwbmlaw.com
4.3
Amendments. This Note and any provision hereof may only be amended by an instrument in writing signed by the Borrower and
the Holder. The term “Note” and all reference thereto, as used throughout this instrument, shall mean this instrument
(and the other Notes issued pursuant to the Purchase Agreement) as originally executed, or if later amended or supplemented, then
as so amended or supplemented.
4.4
Assignability. This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to be the benefit
of the Holder and its successors and assigns. Each transferee of this Note must be an “accredited investor” (as defined
in Rule 501(a) of the 1933 Act). Notwithstanding anything in this Note to the contrary, this Note may be pledged as collateral
in connection with a bona fide margin account or other lending arrangement.
4.5
Cost of Collection. If default is made in the payment of this Note, the Borrower shall pay the Holder hereof costs of collection,
including reasonable attorneys’ fees.
4.6
Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of New York without
regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated
by this Note shall be brought only in the state courts of New York or in the federal courts located in the state and county of
Nassau. 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
and Holder waive trial by jury. 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 acquire (including by way of merger, consolidation, reclassification or recapitalization) any share of any class or
any other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled
to vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of the Borrower or
any proposed liquidation, dissolution or winding up of the Borrower, the Borrower shall mail a notice to the Holder, at least
twenty (20) days prior to the record date specified therein (or thirty (30) days prior to the consummation of the transaction
or event, whichever is earlier), of the date on which any such record is to be taken for the purpose of such dividend, distribution,
right or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other
event to the extent known at such time. The Borrower shall make a public announcement of any event requiring notification to the
Holder hereunder substantially simultaneously with the notification to the Holder in accordance with the terms of this Section
4.9.
4.10
Remedies. The Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the
Holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Borrower acknowledges that
the remedy at law for a breach of its obligations under this Note will be inadequate and agrees, in the event of a breach or threatened
breach by the Borrower of the provisions of this Note, that the Holder shall be entitled, in addition to all other available remedies
at law or in equity, and in
addition
to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Note
and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond
or other security being required.
IN
WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its duly authorized officer this August 18, 2014.
AJA
CANNAFACTURING, INC. f/k/a IDS INDUSTRIES, INC.
By:
/s/ Scott Plantinga
SCOTT
PLANTINGA
Chief
Executive Officer
EXHIBIT
A -- NOTICE OF CONVERSION
The
undersigned hereby elects to convert $ principal amount of the Note (defined below) 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 AJA CANNAFACTURING,
INC. f/k/a IDS INDUSTRIES, INC., a Nevada corporation (the “Borrower”) according to the conditions of the convertible
note of the Borrower dated as of August 18, 2014 (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 Agent Commission 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:
KBM
WORLDWIDE, INC.
80
Cuttermill Road – Suite 410 Great Neck, NY 11021 Attention: Certificate Delivery
e-mail:
info@kbmworldwide.com
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: ___________
KBM
WORLDWIDE, INC.
By:
Name: Seth Kramer
Title:
President Date:
SECURITIES
PURCHASE AGREEMENT
This
SECURITIES PURCHASE
AGREEMENT (the
“Agreement”), dated
as of
August 18,
2014, by
and between
AJA CANNAFACTURING,
INC. f/k/a
IDS INDUSTRIES,
INC.,
a Nevada
corporation, with
headquarters located
at 5333
Birch Street,
Lake Elsinore,
CA 92530 (the “Company”),
and KBM WORLDWIDE,
INC., a New
York corporation, with its address
at 80 Cuttermill Road,
Suite 410, Great Neck,
NY 11021 (the “Buyer”).
WHEREAS:
A.
The
Company and
the Buyer
are executing
and delivering
this Agreement
in reliance
upon the exemption
from securities
registration afforded
by the
rules and
regulations as
promulgated by
the United States Securities
and Exchange
Commission (the “SEC”) under
the Securities Act of
1933, as amended (the
“1933 Act”);
B.
Buyer
desires
to purchase
and the
Company desires
to issue and
sell, upon
the terms
and conditions
set forth
in this Agreement
an 8%
convertible note
of the
Company, in
the form
attached hereto
as Exhibit
A, in
the aggregate
principal amount
of $53,000.00 (together
with any note(s) issued in
replacement thereof or as
a dividend thereon or otherwise
with respect thereto
in accordance
with the
terms thereof,
the “Note”),
convertible into
shares of
common stock, $0.001 par
value per share,
of the Company (the “Common Stock”),
upon the terms and subject
to the limitations and conditions
set forth in such
Note.
C.
The
Buyer
wishes
to purchase,
upon the terms
and conditions
stated in
this Agreement,
such principal
amount of
Note as
is set
forth immediately
below its name
on the signature
pages hereto; and
NOW
THEREFORE,
the Company and
the Buyer
severally (and not
jointly) hereby
agree as
follows:
1.
Purchase and Sale
of Note.
a.
Purchase
of Note.
On the
Closing Date
(as defined
below), the
Company shall
issue and
sell to
the Buyer
and the
Buyer agrees
to purchase from
the Company such
principal amount
of Note as
is set
forth immediately
below the Buyer’s
name on the signature
pages hereto.
b.
Form
of Payment.
On the
Closing Date
(as defined
below), (i)
the Buyer
shall pay
the purchase
price for the
Note to
be issued
and sold
to it at
the Closing (as
defined below) (the
“Purchase Price”) by wire
transfer of immediately available funds
to the Company, in
accordance with
the Company’s
written wiring
instructions, against
delivery of the Note in the principal
amount equal to the Purchase
Price as is set
forth immediately below the Buyer’s
name on the signature pages
hereto, and (ii) the Company shall
deliver such duly executed
Note on behalf of
the Company, to the Buyer,
against delivery of such
Purchase Price.
c.
Closing Date.
Subject to
the satisfaction
(or written
waiver) of
the conditions
thereto set
forth in
Section 6
and Section
7 below,
the date
and time
of the issuance
and sale
of the Note
pursuant to this
Agreement (the
“Closing Date”) shall
be 12:00 noon,
Eastern Standard
Time on
or about
August 20,
2014, or such
other mutually
agreed upon
time. The closing
of the transactions contemplated
by this Agreement (the
“Closing”) shall occur on
the Closing Date at
such location as
may be agreed to by the parties.
2.
Buyer’s
Representations and
Warranties. The
Buyer
represents and
warrants to the Company
that:
a.
Investment
Purpose.
As of
the date hereof,
the Buyer
is purchasing
the Note
and the
shares of
Common Stock
issuable upon
conversion of
or otherwise
pursuant to
the Note
(including, without
limitation, such
additional shares
of Common Stock,
if any,
as are
issuable (i)
on account
of interest
on the Note,
(ii) as a
result of
the events
described in
Sections 1.3
and 1.4(g)
of the Note or (iii) in
payment of the Standard
Liquidated Damages
Amount (as
defined in
Section 2(f)
below) pursuant to
this Agreement,
such shares
of Common Stock being
collectively referred to herein
as the “Conversion
Shares” and, collectively with
the Note, the “Securities”)
for its own account and
not with a present view towards
the public sale or distribution thereof,
except pursuant
to sales registered or exempted
from registration under the 1933 Act;
provided, however, that
by making the representations herein, the Buyer
does not agree
to hold any of the Securities for any
minimum or other specific term
and reserves the right
to dispose of the Securities at any time
in accordance with or pursuant to a registration
statement or an exemption under
the 1933 Act.
b.
Accredited
Investor
Status.
The Buyer
is an
“accredited investor”
as that term
is defined in Rule
501(a) of Regulation D (an “Accredited
Investor”).
c.
Reliance on Exemptions.
The Buyer
understands that
the Securities
are being offered
and sold
to it in
reliance upon
specific exemptions
from the
registration requirements
of United
States federal
and state
securities laws
and that
the Company is
relying upon
the truth
and accuracy
of, and
the Buyer’s
compliance with,
the representations, warranties,
agreements, acknowledgments and
understandings of the Buyer set
forth herein in order
to determine
the availability of such
exemptions and
the eligibility
of the Buyer
to acquire the
Securities.
d.
Information.
The
Buyer
and its
advisors, if
any, have
been, and
for so
long as
the Note remain
outstanding will
continue to
be, furnished
with all
materials relating
to the business,
finances and
operations of
the Company and
materials relating
to the offer
and sale
of the Securities
which have been
requested by
the Buyer
or its advisors.
The Buyer
and its advisors,
if any,
have been, and
for so
long as the Note
remain outstanding
will continue to
be, afforded
the opportunity to ask
questions of the
Company. Notwithstanding
the foregoing, the Company has
not disclosed to
the Buyer
any material
nonpublic information
and will
not disclose such information
unless such information
is disclosed to the public prior to or
promptly following such disclosure to
the Buyer. Neither such inquiries
nor any other due diligence investigation
conducted by
Buyer or any of
its advisors or representatives shall
modify, amend
or affect Buyer’s
right to rely on
the Company’s representations
and warranties
contained in
Section 3 below.
The Buyer
understands that its investment
in the Securities involves a
significant degree of
risk. The
Buyer is not aware
of any facts
that may constitute
a breach of any of
the Company's representations
and warranties
made herein.
e.
Governmental
Review.
The
Buyer
understands that no United
States federal
or state
agency or any
other government
or governmental
agency has
passed upon or
made any recommendation
or endorsement of
the Securities.
f.
Transfer
or Re-sale.
The Buyer
understands that
(i) the
sale or
re- sale
of the Securities
has not been
and is
not being
registered under
the 1933 Act
or any
applicable state securities laws,
and the
Securities may not be
transferred unless (a) the
Securities are sold pursuant
to an effective
registration statement
under the 1933 Act, (b)
the Buyer shall have delivered
to the Company, at the cost
of the Buyer, an opinion of counsel that
shall be in form, substance
and scope customary for opinions of counsel
in comparable transactions to the effect
that the Securities to be sold or transferred
may be sold or transferred pursuant to an
exemption from such registration,
which opinion shall be accepted
by the Company, (c)
the Securities are sold or
transferred to an
“affiliate” (as
defined in Rule 144
promulgated under the 1933 Act
(or a successor rule)
(“Rule 144”)) of the Buyer
who agrees to sell
or otherwise transfer
the Securities
only in accordance
with this Section
2(f) and
who is
an Accredited
Investor, (d) the Securities
are sold pursuant to Rule 144, or (e)
the Securities are sold pursuant
to Regulation S under the 1933
Act (or a successor rule)
(“Regulation S”), and the
Buyer shall have
delivered to the Company, at
the cost of the Buyer, an
opinion of counsel that shall be in form,
substance and scope customary
for opinions of counsel in corporate
transactions, which opinion shall
be accepted by
the Company; (ii) any
sale of such Securities made in
reliance on Rule 144
may be
made only in
accordance with
the terms
of said Rule
and further,
if said Rule
is not applicable, any re-sale
of such Securities under circumstances
in which the seller (or
the person through whom
the sale is made) may be
deemed to be an
underwriter (as that term is defined
in the 1933 Act)
may require compliance
with some
other exemption under
the 1933 Act or
the rules and
regulations of
the SEC thereunder;
and (iii)
neither the Company
nor any other person
is under
any obligation to
register such
Securities under
the 1933 Act
or any state securities laws
or to comply with
the terms and conditions of any exemption thereunder
(in each
case). Notwithstanding the foregoing
or anything else contained
herein to the contrary, the Securities
may be pledged as
collateral in connection with a bona
fide margin account
or other lending
arrangement.
g.
Legends.
The
Buyer understands that
the Note
and, until such time as
the Conversion
Shares have
been registered
under the 1933
Act may
be sold
pursuant to
Rule 144
or Regulation
S without
any restriction
as to
the number
of securities
as of
a particular
date that
can then
be immediately sold, the
Conversion Shares
may bear a restrictive
legend in substantially the following
form (and
a stop-transfer order may be placed
against transfer
of the certificates for
such Securities):
“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 Company shall
issue a certificate
without such
legend to
the holder
of any
Security upon
which it
is stamped,
if, unless
otherwise required
by applicable
state securities
laws, (a) such
Security is registered
for sale under an effective
registration statement filed
under the 1933 Act or otherwise may be
sold pursuant to Rule 144
or Regulation S without
any restriction
as to
the number of securities as
of a particular date
that can
then be
immediately sold, or
(b) such holder
provides the
Company with 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
Security may be made
without registration
under the
1933 Act,
which opinion
shall be
accepted by the
Company so that the
sale or transfer is effected.
The Buyer agrees
to sell all Securities, including
those represented by a certificate(s)
from which the
legend has
been removed,
in compliance
with applicable
prospectus delivery requirements,
if any. In
the event that the Company 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.
h.
Authorization;
Enforcement.
This
Agreement
has been
duly and
validly authorized.
This Agreement
has been
duly executed
and delivered
on behalf
of the Buyer,
and this
Agreement constitutes
a valid
and binding agreement
of the Buyer
enforceable in
accordance with its terms.
i.
Residency.
The Buyer
is a resident
of the
jurisdiction set
forth immediately
below the Buyer’s
name on the
signature pages hereto.
3.
Representations and
Warranties of the Company.
The Company represents and
warrants to the
Buyer that:
a.
Organization
and
Qualification.
The Company
and each
of its
Subsidiaries (as
defined below),
if any,
is a corporation
duly organized, validly
existing and
in good
standing under the laws
of the jurisdiction in
which it
is incorporated,
with full
power and authority (corporate
and other)
to own,
lease, use and
operate its
properties and to
carry on its business
as and where
now owned, leased, used,
operated and conducted.
Schedule 3(a) sets
forth a list of all of the Subsidiaries
of the Company and the jurisdiction in
which each
is incorporated. The
Company and
each of
its Subsidiaries
is duly qualified
as a foreign
corporation to do business and is in
good standing in every jurisdiction in which
its ownership or use of property or the nature of the business
conducted by
it makes
such qualification
necessary except where the failure
to be so qualified
or in good
standing would
not have a Material Adverse
Effect. “Material Adverse
Effect” means
any material
adverse effect
on the
business, operations, assets,
financial condition or prospects of the
Company or its Subsidiaries, if any,
taken as a
whole, or
on the transactions contemplated
hereby or by the agreements
or instruments to be
entered into in connection herewith.
“Subsidiaries” means
any corporation or
other organization,
whether incorporated
or unincorporated,
in which
the Company owns,
directly or indirectly, any
equity or other ownership interest.
b.
Authorization;
Enforcement.
(i)
The
Company has
all requisite
corporate power
and authority
to enter
into and perform
this Agreement,
the Note
and to
consummate the
transactions contemplated
hereby and
thereby and
to issue the
Securities, in
accordance with the terms hereof
and thereof, (ii) the execution
and delivery of this Agreement,
the Note by the Company and the consummation
by it of the transactions contemplated
hereby and thereby (including without
limitation, the issuance of the Note
and the issuance and reservation
for issuance of the Conversion
Shares issuable upon conversion
or exercise thereof) have
been duly authorized
by the Company’s
Board of Directors
and no further
consent or authorization of the
Company, its Board of Directors,
or its shareholders is required, (iii)
this Agreement has been duly
executed and delivered
by the Company by
its authorized representative,
and such
authorized representative is the
true and official
representative with
authority to sign this Agreement and
the other documents executed in connection
herewith and
bind the Company
accordingly, and
(iv) this
Agreement constitutes,
and upon execution
and delivery by the Company
of the Note, each of such instruments
will constitute, a legal,
valid and binding obligation
of the Company
enforceable against
the Company in
accordance with
its terms.
c.
Capitalization.
As of
the date
hereof, the
authorized capital
stock of
the Company consists
of: (i)
500,000,000 shares
of Common
Stock, $0.001
par value
per share,
of which
121,184,334 shares
are issued
and outstanding;
and (ii)10,000,000
authorized shares
of Preferred
Stock, $0.001 par
value per share,
of which
no shares
are issued
and outstanding;
no shares
are reserved for
issuance pursuant to
the Company’s
stock option
plans, no shares are reserved
for issuance pursuant to securities
(other than the Note
and two (2)
prior convertible promissory notes in
favor of the
Buyer
(a)
Prior
convertible
promissory note
in favor of
the Buyer
dated March
19, 2014 in
the amount of
$53,000.00 ;
(b)
Prior convertible
promissory note
in favor of
the Buyer
dated May
20, 2014 in
the amount
of $53,000.00; an
aggregate total
of for
which 115,000,000
shares of
Common Stock are presently reserved
for both prior notes referenced
above; and exercisable for,
or convertible into or exchangeable
for shares of Common Stock
and 60,000,000 shares
are reserved
for issuance
upon conversion
of the Note.
All of such
outstanding shares of
capital stock
are, or
upon issuance
will be,
duly authorized, validly issued,
fully paid and
non-assessable. No shares
of capital stock of
the Company are
subject to preemptive rights
or any other
similar rights
of the shareholders of the Company
or any liens
or encumbrances imposed through
the actions or failure
to act of the Company.
As of the effective
date of this Agreement,
(i) there
are no outstanding
options, warrants,
scrip, rights
to subscribe for,
puts, calls,
rights of first refusal,
agreements, understandings, claims
or other
commitments or rights of any
character whatsoever relating
to, or securities or rights convertible
into or exchangeable for any shares
of capital stock of the Company or any
of its Subsidiaries, or arrangements
by which the Company or
any of its Subsidiaries is or may
become bound to issue additional shares
of capital stock of the Company or
any of its Subsidiaries, (ii)
there are no agreements
or arrangements under which
the Company or any
of its Subsidiaries is obligated
to register the sale of any
of its or their securities under
the 1933 Act and (iii)
there are no anti-
dilution or price
adjustment provisions
contained in
any security issued
by the Company
(or in any agreement
providing rights
to security
holders) that will
be triggered by
the issuance of the Note
or the Conversion
Shares. The
Company has furnished to the Buyer
true and correct
copies of the Company’s
Certificate of Incorporation
as in
effect on
the date hereof (“Certificate
of Incorporation”), the Company’s
By-laws, as in effect
on the date hereof (the “By-laws”),
and the terms of all
securities convertible into or exercisable
for Common Stock of the Company and
the material rights
of the holders thereof
in respect
thereto. The
Company shall provide the Buyer
with a written
update of this representation
signed by the Company’s
Chief Executive on
behalf of the
Company as of the
Closing Date.
d.
Issuance
of Shares.
The Conversion
Shares are
duly authorized
and reserved
for issuance
and, upon
conversion of
the Note
in accordance
with its
respective terms,
will be
validly issued, fully
paid and
non-assessable, and
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 Company and will
not impose personal
liability upon the holder thereof.
e.
Acknowledgment
of
Dilution.
The Company
understands and
acknowledges the
potentially dilutive effect
to the Common
Stock upon
the issuance
of the Conversion
Shares upon
conversion of
the Note. The Company further
acknowledges that
its obligation to issue Conversion
Shares upon conversion of
the Note in accordance
with this Agreement,
the Note is absolute and
unconditional regardless of
the dilutive effect that such
issuance may have
on the ownership interests of
other shareholders of the
Company.
f.
No
Conflicts.
The
execution,
delivery
and performance
of this Agreement,
the Note by
the Company and
the consummation by
the Company of
the transactions
contemplated hereby
and thereby
(including, without
limitation, the issuance
and reservation
for issuance of the Conversion
Shares) will
not (i)
conflict with
or result
in a violation
of any provision of the Certificate
of Incorporation or By-laws,
or (ii) violate or conflict
with, or result
in a breach
of any provision of,
or constitute a default (or
an event
which with
notice or lapse of time or both could
become a default) under,
or give to others
any rights
of termination, amendment, acceleration
or cancellation of, any
agreement, indenture, patent, patent
license or instrument
to which
the Company or any
of its Subsidiaries
is a party, or
(iii) result
in a violation of any
law, rule, regulation, order,
judgment or decree (including
federal and state
securities laws
and regulations
and regulations
of any self-regulatory
organizations to
which the Company or
its securities are subject) applicable
to the Company or any of
its Subsidiaries or by which
any property or asset of the Company or
any of its Subsidiaries is bound or affected
(except for such conflicts,
defaults, terminations, amendments,
accelerations, cancellations and
violations as would
not, individually or in the aggregate,
have a Material Adverse Effect).
Neither the
Company nor any
of its Subsidiaries
is in violation
of its Certificate
of Incorporation, By-laws or other
organizational documents
and neither the Company nor any
of its Subsidiaries is
in default
(and no
event has
occurred which
with notice
or lapse of time or both could
put the Company or any of its Subsidiaries
in default) under, and
neither the Company nor any of its Subsidiaries
has taken
any action or failed to take any
action that would
give to others
any rights of termination,
amendment, acceleration or cancellation
of, any agreement,
indenture or instrument
to which
the Company or any
of its Subsidiaries
is a party or by
which any
property or assets of the Company or any
of its Subsidiaries is bound or affected, except
for possible defaults as
would not,
individually or in the aggregate,
have a Material Adverse Effect.
The businesses of the Company
and its Subsidiaries, if any,
are not being conducted, and
shall not be conducted
so long as
the Buyer owns any
of the Securities, in
violation of any
law, ordinance or regulation
of any governmental entity.
Except as specifically
contemplated by this Agreement
and as
required under the 1933
Act and
any applicable
state securities
laws, the Company is not required
to obtain
any consent, authorization
or order of, or make
any filing or registration
with, any court,
governmental agency,
regulatory agency,
self regulatory organization or stock
market or any third party in order
for it to execute, deliver
or perform any of its obligations under
this
Agreement,
the Note in
accordance with
the terms hereof
or thereof
or to
issue and
sell the Note
in accordance
with the
terms hereof
and to
issue the Conversion
Shares upon
conversion of
the Note.
All consents, authorizations,
orders, filings and
registrations which the Company is required
to obtain pursuant to the preceding
sentence have been obtained or effected
on or prior to the date
hereof. The Company
is not in violation of the listing requirements
of the Over-the- Counter
Bulletin Board (the
“OTCBB”) and does not reasonably
anticipate that the Common
Stock will
be delisted by
the OTCBB
in the foreseeable
future. The Company and
its Subsidiaries are unaware of
any facts or circumstances
which might give
rise to any of
the foregoing.
g.
SEC
Documents;
Financial
Statements.
The Company
has timely filed
all reports,
schedules, forms,
statements and
other documents
required to
be filed
by it with
the SEC
pursuant to
the reporting
requirements of
the Securities
Exchange Act
of 1934, as
amended (the “1934 Act”)
(all of the foregoing filed prior to
the date hereof and
all exhibits included therein
and financial statements
and schedules
thereto and documents (other
than exhibits to such documents)
incorporated by reference therein,
being hereinafter referred to herein
as the “SEC Documents”).
Upon written request
the Company will deliver to the Buyer true
and complete
copies of the
SEC Documents,
except for
such exhibits
and incorporated
documents. As
of their respective dates,
the SEC Documents
complied in all
material respects
with the requirements of the 1934 Act
and the rules and regulations
of the SEC promulgated thereunder
applicable to the SEC Documents,
and none of the SEC Documents,
at the time they were
filed with the SEC,
contained any untrue
statement of a material fact or omitted
to state a material fact
required to
be stated therein
or necessary in order
to make the statements
therein, in light
of the circumstances under which
they were made,
not misleading. None
of the statements made in any
such SEC Documents
is, or has been, required to be amended
or updated under applicable
law (except
for such
statements as
have been amended
or updated
in subsequent filings
prior the date hereof). As
of their respective dates,
the financial statements
of the Company included in the SEC
Documents complied as
to form in all
material respects with
applicable accounting requirements
and the published
rules and
regulations of the SEC
with respect
thereto. Such
financial statements
have been prepared
in accordance with
United States
generally accepted accounting principles,
consistently applied, during the
periods involved and
fairly present in
all material
respects the consolidated
financial position
of the Company and its
consolidated Subsidiaries as
of the dates thereof
and the consolidated results of
their operations and
cash flows for
the periods then ended
(subject, in the case
of unaudited
statements, to normal year-end
audit adjustments). Except
as set forth
in the financial statements of the Company
included in
the SEC
Documents, the
Company has no
liabilities, contingent
or otherwise,
other than (i)
liabilities incurred in the ordinary
course of business subsequent to May
31, 2014, and (ii) obligations
under contracts
and commitments
incurred in
the ordinary course of business
and not required
under generally
accepted accounting
principles to
be reflected in
such financial
statements, which, individually
or in the aggregate, are not material
to the financial condition or operating
results of the Company. The Company is
subject to the reporting requirements
of the 1934 Act.
h.
Absence
of
Certain
Changes.
Since
May 31,
2014, there
has been no
material adverse
change and
no material
adverse development
in the assets,
liabilities, business,
properties, operations,
financial condition,
results of
operations, prospects
or 1934 Act
reporting status
of the Company
or any of
its Subsidiaries.
i.
Absence
of Litigation.
There is
no action,
suit, claim,
proceeding, inquiry or
investigation before
or by any
court, public board,
government agency,
self-regulatory organization
or body pending
or, to
the knowledge
of the Company
or any of
its Subsidiaries, threatened
against or affecting the Company or any of its Subsidiaries,
or their officers or directors
in their capacity as such, that
could have a Material Adverse
Effect. Schedule 3(i) contains a complete
list and summary description
of any pending or, to the knowledge
of the Company, threatened proceeding
against or affecting the Company or
any of its Subsidiaries,
without regard to whether
it would have a Material
Adverse Effect. The Company and
its Subsidiaries are unaware of any
facts or circumstances which
might give rise
to any of the foregoing.
j.
Patents,
Copyrights,
etc. The
Company and each
of its Subsidiaries
owns or
possesses the
requisite licenses
or rights
to use
all patents,
patent applications,
patent rights,
inventions, know-how,
trade secrets,
trademarks, trademark
applications, service
marks, service
names, trade names
and copyrights
(“Intellectual Property”)
necessary to enable it to conduct its business
as now operated (and,
as presently contemplated to be
operated in
the future); there
is no claim
or action by any person
pertaining to, or proceeding
pending, or to the Company’s
knowledge threatened, which challenges
the right of the Company or of a Subsidiary with
respect to any Intellectual
Property necessary
to enable it to conduct its business
as now operated
(and, as
presently contemplated to
be operated in
the future); to the best
of the Company’s knowledge, the
Company’s or its Subsidiaries’
current and intended
products, services
and processes
do not infringe
on any Intellectual
Property or other rights
held by any person; and the Company is unaware
of any facts or circumstances
which might give
rise to any of the foregoing. The Company
and each of its Subsidiaries
have taken reasonable security measures
to protect the secrecy, confidentiality
and value of
their Intellectual Property.
k.
No
Materially Adverse
Contracts, Etc.
Neither the
Company nor any
of its Subsidiaries
is subject
to any
charter, corporate
or other legal
restriction, or
any judgment,
decree, order,
rule or regulation
which in the judgment
of the Company’s officers
has or is expected in
the future to have a Material
Adverse Effect.
Neither the Company nor any of
its Subsidiaries
is a party to any
contract or agreement which
in the judgment of the Company’s
officers has or is expected to have
a Material Adverse Effect.
l.
Tax
Status.
The Company and each
of its Subsidiaries
has made
or filed
all federal,
state and
foreign income
and all
other tax
returns, reports
and declarations
required by
any jurisdiction to which
it is subject (unless and only
to the extent that
the Company and
each of
its Subsidiaries
has set
aside on
its books provisions
reasonably adequate for
the payment of
all unpaid
and unreported
taxes) and has
paid all
taxes and
other governmental
assessments
and charges
that are
material in
amount, shown
or determined
to be due
on such
returns, reports
and declarations,
except those
being contested
in good
faith and
has set
aside on
its books provisions
reasonably adequate
for the
payment of
all taxes
for periods
subsequent to the
periods to which such returns,
reports or declarations apply.
There are no unpaid
taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers
of the Company know of no basis for any
such claim. The Company has
not executed a waiver with
respect to
the statute
of limitations
relating to
the assessment
or collection
of any foreign,
federal, state
or local tax. None
of the Company’s
tax returns
is presently being
audited by any taxing authority.
m.
Certain
Transactions.
Except
for
arm’s
length
transactions
pursuant
to which
the Company or
any of
its Subsidiaries
makes payments
in the ordinary
course of business
upon terms
no less
favorable than
the Company or
any of
its Subsidiaries
could obtain
from third parties
and other than
the grant of stock options disclosed
on Schedule 3(c), none of
the officers, directors,
or employees
of the Company is
presently a party to
any transaction
with the Company or any
of its Subsidiaries (other
than for services as
employees, officers and
directors), including any
contract, agreement or other
arrangement providing for
the furnishing of services to or by,
providing for rental of real
or personal property to or from, or otherwise
requiring payments
to or from any officer,
director or
such employee
or, to the knowledge of the Company,
any corporation, partnership,
trust or other entity
in which any officer,
director, or any
such employee has a substantial interest
or is an officer, director,
trustee or partner.
n.
Disclosure. All
information relating
to or concerning
the Company or
any of its
Subsidiaries set
forth in
this Agreement
and provided
to the
Buyer pursuant
to Section
2(d) hereof
and otherwise
in connection with
the transactions contemplated
hereby is true
and correct in all
material respects and
the Company has not omitted to state
any material fact necessary in order
to make the statements made
herein or therein,
in light of the circumstances under
which they were made,
not misleading. No
event or circumstance has
occurred or exists with respect
to the Company or any of its Subsidiaries
or its or their business,
properties, prospects,
operations or financial
conditions, which,
under applicable
law, rule
or regulation, requires
public disclosure or announcement by
the Company but which has not been so
publicly announced or disclosed
(assuming for this purpose that
the Company’s reports filed
under the 1934
Act are being
incorporated into
an effective
registration statement
filed by
the Company under the 1933 Act).
o.
Acknowledgment
Regarding Buyer’
Purchase of
Securities.
The Company
acknowledges and
agrees that
the Buyer
is acting solely
in the capacity
of arm’s
length purchasers
with respect
to this Agreement
and the
transactions contemplated
hereby. The
Company further acknowledges
that the Buyer is not acting
as a financial advisor
or fiduciary of the Company (or
in any similar
capacity) with
respect to this Agreement and
the transactions contemplated hereby
and any statement made by the Buyer
or any of its respective representatives
or agents in connection with this Agreement
and the transactions contemplated
hereby
is not advice
or a
recommendation and
is merely incidental
to the Buyer’
purchase of
the Securities.
The Company
further represents
to the Buyer
that the
Company’s decision
to enter
into this Agreement has
been based
solely on the independent
evaluation of
the Company and its representatives.
p.
No
Integrated
Offering.
Neither
the Company,
nor any of
its affiliates,
nor any
person acting
on its or
their behalf,
has directly
or indirectly
made any
offers or sales in any
security or solicited any
offers to buy any
security under circumstances that would
require registration under
the 1933 Act of the issuance
of the Securities to the Buyer. The issuance
of the Securities to the Buyer will
not be integrated with any other
issuance of the Company’s securities
(past, current or future)
for purposes of any
shareholder approval provisions
applicable to the Company or
its securities.
q.
No
Brokers.
The Company
has taken
no action
which would
give rise
to any
claim by
any person
for brokerage
commissions, transaction
fees or
similar payments
relating to this Agreement
or the transactions contemplated
hereby.
r.
Permits; Compliance.
The Company and
each of its Subsidiaries
is in possession
of all
franchises, grants,
authorizations, licenses,
permits, easements,
variances, exemptions,
consents, certificates,
approvals and
orders necessary
to own,
lease and
operate its
properties and
to carry on its
business as
it is now being
conducted (collectively,
the “Company Permits”), and
there is no action pending or, to the
knowledge of the Company, threatened
regarding suspension
or cancellation of any of the Company
Permits. Neither the Company
nor any of its Subsidiaries is
in conflict with,
or in default
or violation
of, any of
the Company Permits, except
for any such
conflicts, defaults
or violations which,
individually or in the aggregate,
would not
reasonably be expected
to have a Material
Adverse Effect. Since
May 31, 2014, neither the Company
nor any of its Subsidiaries has
received any
notification with respect
to possible conflicts, defaults or violations
of applicable laws, except
for notices relating to possible conflicts,
defaults or violations, which
conflicts, defaults or violations would
not have a Material Adverse
Effect.
s.
Environmental Matters.
(i)
There
are,
to the Company’s
knowledge, with
respect to
the Company or
any of
its Subsidiaries
or any predecessor
of the Company,
no past
or present
violations of
Environmental Laws
(as defined
below), releases
of any
material into
the environment, actions, activities,
circumstances, conditions,
events, incidents, or contractual
obligations which may
give rise to any common
law environmental liability or any
liability under the Comprehensive Environmental
Response, Compensation and
Liability Act of 1980 or similar
federal, state, local
or foreign laws and neither the Company
nor any of its Subsidiaries has
received any
notice with
respect to
any of the foregoing,
nor is any action
pending or,
to the Company’s knowledge,
threatened in connection with
any of the foregoing. The
term “Environmental Laws”
means all federal,
state, local or foreign
laws relating to pollution or
protection
of human health
or the environment
(including, without
limitation, ambient
air,
surface water,
groundwater, land
surface or
subsurface strata),
including, without
limitation, laws
relating to
emissions, discharges,
releases or
threatened releases
of chemicals,
pollutants contaminants,
or toxic or hazardous substances
or wastes
(collectively, “Hazardous
Materials”) into the environment,
or otherwise relating to the manufacture,
processing, distribution, use,
treatment, storage, disposal, transport
or handling of Hazardous Materials, as
well as all
authorizations, codes, decrees,
demands or demand letters, injunctions,
judgments, licenses, notices
or notice letters, orders,
permits, plans or regulations
issued, entered, promulgated
or approved thereunder.
(ii)
Other
than
those that
are or
were stored,
used or
disposed of in
compliance with
applicable law,
no Hazardous
Materials are
contained on
or about
any real
property currently owned,
leased or
used by
the Company or
any of
its Subsidiaries,
and no Hazardous
Materials were
released on
or about any real
property previously owned, leased
or used by
the Company or any of
its Subsidiaries
during the period
the property was owned,
leased or used by
the Company or any
of its Subsidiaries,
except in the normal course
of the Company’s or
any of its Subsidiaries’
business.
(iii)
There are
no underground
storage tanks
on or under
any real
property owned,
leased or
used by
the Company or
any of
its Subsidiaries
that are
not in compliance
with applicable law.
t.
Title
to Property.
The Company and
its Subsidiaries
have good
and marketable
title in fee
simple to all
real property
and good
and marketable
title to all
personal property owned by them
which is material to the business
of the Company and its Subsidiaries,
in each case free and
clear of all liens, encumbrances
and defects except
such as are described
in Schedule 3(t) or such as
would not have a Material
Adverse Effect. Any real
property and facilities held under
lease by the Company and its Subsidiaries
are held by them under
valid, subsisting and enforceable leases
with such exceptions as
would not have a Material
Adverse Effect.
u.
Insurance.
The Company
and each
of its Subsidiaries
are insured by
insurers of
recognized financial
responsibility against
such losses
and risks
and in
such amounts
as management
of the Company believes
to be prudent
and customary
in the businesses in which the Company
and its Subsidiaries are
engaged. Neither the Company nor any
such Subsidiary has any reason to believe
that it will not be able
to renew its existing insurance
coverage as and when
such coverage expires or to obtain
similar coverage from similar
insurers as
may be necessary
to continue its business at
a cost that would
not have a Material Adverse Effect.
Upon written
request the Company will provide
to the Buyer
true and correct
copies of all policies
relating to directors’
and officers’
liability coverage, errors
and omissions coverage,
and commercial general
liability coverage.
v.
Internal
Accounting
Controls.
The Company
and each
of its
Subsidiaries maintain
a system
of internal
accounting controls
sufficient, in
the judgment
of the Company’s
board of
directors, to
provide reasonable
assurance that
(i) transactions
are executed
in accordance
with management’s
general or
specific authorizations,
(ii) transactions are
recorded as
necessary to permit
preparation of
financial statements
in conformity with
generally accepted accounting principles
and to maintain asset
accountability, (iii) access to assets
is permitted only in accordance
with management’s
general or specific
authorization and (iv) the recorded
accountability for assets is compared
with the existing
assets at reasonable
intervals and appropriate
action is taken with respect
to any differences.
w.
Foreign
Corrupt
Practices.
Neither
the Company,
nor any
of its Subsidiaries,
nor any
director, officer,
agent, employee
or other
person acting
on behalf of
the Company or
any Subsidiary
has, in the course of his actions for,
or on behalf of, the Company, used
any corporate
funds for
any unlawful
contribution, gift,
entertainment or
other unlawful expenses
relating to political activity; made
any direct or indirect unlawful
payment to any foreign
or domestic government official
or employee from corporate
funds; violated or is in violation
of any provision of the U.S.
Foreign Corrupt
Practices Act
of 1977, as
amended, or made
any bribe,
rebate, payoff,
influence payment,
kickback or other
unlawful payment to
any foreign or
domestic government official
or employee.
x.
Solvency.
The Company
(after giving
effect to
the transactions
contemplated by
this Agreement)
is solvent
(i.e., its
assets have
a fair market
value in
excess of the amount
required to pay its probable liabilities
on its existing debts as
they become absolute and
matured) and currently the Company has
no information that would
lead it to reasonably conclude
that the Company
would not,
after giving effect
to the transaction
contemplated by
this Agreement, have the ability to, nor does it intend
to take any action
that would impair its ability to, pay
its debts from time
to time incurred in connection therewith
as such debts
mature. The
Company did not receive a qualified opinion
from its auditors with
respect to its most recent
fiscal year
end and,
after giving
effect to
the transactions
contemplated by
this Agreement,
does not anticipate or know of
any basis upon which its auditors might
issue a qualified opinion in respect
of its current fiscal
year.
y.
No Investment
Company.
The Company
is not, and
upon the issuance
and sale
of the Securities
as contemplated
by this Agreement
will not
be an
“investment company”
required to
be registered
under the Investment
Company Act
of 1940 (an
“Investment Company”).
The Company is not controlled by
an Investment Company.
z.
Breach
of Representations
and Warranties
by the
Company.
If the
Company breaches
any of
the representations
or warranties
set forth
in this
Section 3,
and in
addition to any other remedies
available to the Buyer pursuant to this
Agreement, it will be considered
an Event of
default under Section 3.4 of the
Note.
4.
COVENANTS.
a.
Best
Efforts.
The parties
shall use
their best
efforts to
satisfy timely each
of the conditions
described in Section
6 and 7 of this Agreement.
b.
Form
D;
Blue
Sky
Laws.
The
Company agrees
to file
a Form
D with
respect to
the Securities
as required
under Regulation
D and
to provide a
copy thereof
to the Buyer
promptly after
such filing.
The Company shall,
on or before
the Closing Date, take such action
as the Company shall reasonably determine
is necessary to qualify the Securities
for sale to the Buyer at
the applicable closing pursuant to
this Agreement under applicable
securities or “blue sky”
laws of the states of the United
States (or to obtain
an exemption from
such qualification),
and shall provide
evidence of any such
action so taken
to the Buyer on or prior to the
Closing Date.
c.
Use
of Proceeds.
The Company shall
use the proceeds
for general
working capital purposes.
d.
Right
of First
Refusal.
Unless it
shall have
first delivered
to the Buyer,
at least
seventy two (72)
hours prior
to the closing
of such
Future Offering
(as defined
herein), written
notice describing the proposed
Future Offering
(“ROFR Notice”),
including the terms
and conditions
thereof, identity
of the proposed purchaser
and proposed
definitive documentation to be
entered into in connection therewith,
and providing the Buyer
an option during the seventy two
(72) hour period following delivery of such
notice to purchase the securities
being offered in the Future
Offering on the same
terms as contemplated
by such Future
Offering (the
limitations referred
to in this sentence
and the preceding
sentence are collectively referred
to as the “Right
of First Refusal”) (and
subject to the exceptions
described below),
the Company will not conduct any
equity (or debt with an
equity component) financing in an amount
less than
$100,000 (“Future Offering(s)”)
during the period
beginning on the Closing
Date and ending six (6)
months following the Closing Date.
Notwithstanding anything contained
herein to the contrary, the Company
shall not consummate any Future
Offering with an investor,
or an affiliate of such
investor (collectively “Prospective
Investor”), identified on an
ROFR Notice whereby the Buyer
exercised its
Right of
First Refusal
for a
period of
forty (45) days
following such exercise;
and any
subsequent offer by a Prospective
Investor is subject to this Section 4(d)
and the Right of First
Refusal. In the event the terms
and conditions of a proposed
Future Offering are amended in any respect
after delivery of
the notice to the Buyer concerning
the proposed Future
Offering, the
Company shall deliver
a new
notice to
the Buyer describing
the amended terms and conditions
of the proposed Future Offering
and the Buyer thereafter
shall have an
option during the seventy two (72)
hour period following delivery of such
new notice to purchase
its pro
rata share
of the securities
being offered
on the same
terms as
contemplated by
such proposed
Future Offering,
as amended.
The foregoing
sentence shall
apply to successive
amendments to
the terms and
conditions of any
proposed Future
Offering. The Right
of First Refusal
shall not
apply to any transaction
involving (i) issuances
of securities
in a firm
commitment underwritten public offering
(excluding a continuous offering pursuant
to Rule 415 under the 1933 Act) or (ii)
issuances of securities as
consideration for a merger,
consolidation or purchase of assets,
or in
connection with
any strategic partnership
or joint venture (the primary
purpose of which is not to raise
equity capital), or in connection
with the disposition or acquisition of
a business,
product or
license by
the Company. The
Right of
First Refusal
also shall not apply to the issuance
of securities upon exercise or conversion
of the Company’s options, warrants
or other convertible securities
outstanding as of the
date hereof
or to the grant of additional
options or warrants,
or the issuance
of additional
securities, under
any Company stock
option or restricted stock plan
approved by the shareholders of
the Company.
e.
Expenses.
At the
Closing, the
Company shall
reimburse Buyer
for expenses
incurred by
them in connection
with the
negotiation, preparation,
execution, delivery
and performance
of this Agreement
and the
other agreements
to be executed
in connection herewith
(“Documents”), including,
without limitation, reasonable
attorneys’ and consultants’
fees and expenses,
transfer agent fees, fees
for stock quotation services,
fees relating to any amendments
or modifications of the Documents
or any consents or waivers
of provisions in
the Documents, fees for
the preparation of opinions of counsel,
escrow fees, and
costs of restructuring the transactions
contemplated by the Documents.
When possible, the Company must pay these
fees directly,
otherwise the Company must make
immediate payment
for reimbursement to the Buyer
for all fees and
expenses immediately upon written notice
by the Buyer or the submission of an
invoice by the Buyer. The
Company’s obligation with
respect to this transaction is to reimburse
Buyer’ expenses shall be
$3,000.
f.
Financial
Information.
Upon
written
request
the Company agrees
to send
or make
available the
following reports
to the Buyer
until the Buyer
transfers, assigns,
or sells
all of the Securities:
(i) within ten
(10) days after
the filing with
the SEC, a copy of its Annual
Report on
Form 10-K
its Quarterly Reports
on Form
10-Q and
any Current
Reports on Form
8-K; (ii)
within one (1)
day after release,
copies of
all press
releases issued
by the Company or any
of its Subsidiaries; and (iii)
contemporaneously with the making
available or giving to the shareholders
of the Company, copies of any notices or other
information the Company makes
available or gives to such
shareholders.
g.
[INTENTIONALLY
DELETED]
h.
Listing.
The Company
shall promptly
secure the listing
of the Conversion
Shares upon each
national securities exchange
or automated quotation system,
if any, upon
which shares
of Common Stock
are then
listed (subject
to official
notice of
issuance) and,
so long as
the Buyer
owns any of the
Securities, shall maintain,
so long as
any other shares
of Common Stock shall be so listed,
such listing of all
Conversion Shares from
time to time issuable upon conversion
of the Note. The Company will
obtain and, so long as
the Buyer owns
any of the Securities, maintain
the listing and trading of
its Common Stock on the OTCBB or any
equivalent replacement exchange, the
Nasdaq National Market
(“Nasdaq”), the Nasdaq SmallCap
Market (“Nasdaq
SmallCap”), the
New York
Stock Exchange
(“NYSE”), or
the American Stock Exchange
(“AMEX”) and will
comply in all respects
with the Company’s reporting,
filing and other
obligations under the bylaws
or rules of the Financial
Industry
Regulatory
Authority (“FINRA”)
and such
exchanges, as
applicable. The
Company shall promptly
provide to the
Buyer copies
of any notices
it receives
from the
OTCBB and
any other
exchanges or
quotation systems
on which
the Common Stock
is then
listed regarding
the continued eligibility
of the
Common Stock for listing on such
exchanges and quotation systems.
i.
Corporate
Existence.
So long as
the Buyer
beneficially owns any
Note, the
Company shall
maintain its
corporate existence
and shall
not sell all
or substantially all
of the Company’s assets, except
in the event of a merger or consolidation
or sale of all or substantially all
of the Company’s
assets, where
the surviving
or successor
entity in such transaction
(i) assumes the Company’s
obligations hereunder and
under the agreements and instruments
entered into in connection herewith
and (ii) is a publicly traded corporation
whose Common Stock is
listed for trading on the OTCBB,
Nasdaq, Nasdaq
SmallCap, NYSE or AMEX.
j.
No
Integration.
The
Company shall
not make
any offers
or sales
of any
security (other than
the Securities)
under circumstances
that would
require registration
of the Securities
being offered
or sold hereunder
under the 1933
Act or
cause the offering
of the Securities to be integrated
with any
other offering of
securities by the
Company for the
purpose of any stockholder
approval provision applicable
to the Company or
its securities.
k.
Breach
of Covenants.
If the
Company breaches
any of
the covenants
set forth
in this Section
4, and
in addition
to any other
remedies available
to the Buyer
pursuant to
this Agreement,
it will
be considered an
event of default
under Section
3.4 of
the Note.
l.
Failure
to Comply
with the
1934 Act.
So long as
the Buyer
beneficially owns
the Note, the
Company shall comply
with the
reporting requirements
of the 1934
Act; and the Company shall
continue to
be subject to
the reporting requirements
of the 1934 Act.
m.
Trading
Activities.
Neither
the Buyer
nor its affiliates
has an
open short
position in the common stock of
the Company and
the Buyer agree that it shall
not, and that
it will
cause its
affiliates not
to, engage
in any
short sales
of or hedging
transactions with
respect to the
common stock of the
Company.
5.
Transfer
Agent
Instructions.
The
Company shall
issue irrevocable
instructions to
its transfer
agent to
issue certificates,
registered in
the name of
the Buyer
or its nominee,
for the
Conversion Shares
in such
amounts as
specified from
time to
time by
the Buyer to the Company upon conversion
of the Note in accordance with
the terms thereof (the
“Irrevocable Transfer Agent
Instructions”). In the
event that
the Borrower
proposes to
replace its transfer agent,
the Borrower shall 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. Prior
to registration
of the Conversion
Shares under
the 1933 Act
or the date
on which
the Conversion
Shares 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,
all such
certificates shall bear
the restrictive legend specified in Section
2(g) of this Agreement.
The Company warrants that:
(i) no instruction
other than
the Irrevocable
Transfer Agent
Instructions referred to in this
Section 5, and stop transfer
instructions to give effect
to Section 2(f) hereof
(in the case
of the Conversion Shares,
prior to registration
of the Conversion Shares
under the 1933 Act
or the date on which
the Conversion Shares
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), will
be given by
the Company to its transfer
agent and
that the Securities shall
otherwise be freely transferable
on the books and records
of the Company as and
to the extent provided in this
Agreement and the Note;
(ii) it will not direct
its transfer agent not to transfer or
delay, impair, and/or
hinder its transfer agent
in transferring (or issuing)(electronically
or in certificated form) any
certificate for
Conversion Shares to be issued
to the Buyer upon conversion of or otherwise
pursuant to the Note as
and when required
by the Note and
this Agreement; and (iii)
it will not fail 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
Conversion Shares
issued to
the Buyer upon conversion
of or otherwise pursuant to
the Note as
and when
required by the Note and
this Agreement. Nothing in
this Section shall
affect in
any way the Buyer’s
obligations and
agreement set forth
in Section 2(g) hereof to comply with
all applicable prospectus
delivery requirements, if any, upon re-sale
of the Securities. If the Buyer
provides the Company, at the cost
of the Buyer, with (i)
an opinion of counsel in form, substance
and scope customary for opinions
in comparable transactions,
to the effect that
a public sale or transfer of such
Securities may be made
without registration
under the 1933 Act and
such sale or
transfer is effected
or (ii) the Buyer
provides reasonable assurances that
the Securities can be sold pursuant
to Rule 144, the Company shall
permit the transfer,
and, in the
case of
the Conversion Shares,
promptly instruct its transfer
agent to issue one or more certificates,
free from restrictive legend,
in such name
and in such denominations as specified
by the Buyer. The
Company acknowledges that
a breach by it of its obligations
hereunder will cause
irreparable harm to the
Buyer, by vitiating the intent
and purpose of
the transactions contemplated hereby.
Accordingly, the Company acknowledges
that the remedy at
law for
a breach
of its obligations under
this Section 5 may be inadequate
and agrees, in the event
of a breach or threatened
breach by the Company of the provisions
of this Section,
that the
Buyer shall
be entitled,
in addition to
all other
available remedies, to an
injunction restraining any
breach and requiring
immediate transfer, without
the necessity of showing economic loss
and without any bond or
other security being required.
6.
Conditions to
the Company’s
Obligation to
Sell.
The obligation
of the Company
hereunder to issue
and sell
the Note to
the Buyer
at the
Closing is subject
to the satisfaction,
at or
before the
Closing Date of each
of the following
conditions thereto,
provided that these conditions
are for the Company’s sole benefit
and may be waived by the Company at
any time in its sole discretion:
a.
The Buyer
shall
have
executed
this Agreement
and delivered
the same to the Company.
b.
The
Buyer
shall have
delivered the Purchase
Price in accordance
with Section 1(b)
above.
c.
The
representations
and warranties
of the Buyer
shall be
true and
correct in
all material
respects as
of the date
when made
and as
of the Closing
Date as
though made
at that
time (except for
representations and
warranties that
speak as
of a specific
date), and the Buyer
shall have performed,
satisfied and complied
in all material respects
with the covenants,
agreements and
conditions required
by this Agreement
to be performed,
satisfied or complied
with by the Buyer at
or prior to the
Closing Date.
d.
No litigation,
statute,
rule,
regulation,
executive
order,
decree,
ruling or
injunction shall
have been
enacted, entered,
promulgated or
endorsed by
or in any
court or
governmental authority
of competent
jurisdiction or
any self-regulatory
organization having
authority over the matters contemplated
hereby which prohibits the consummation
of any of the transactions contemplated
by this Agreement.
7.
Conditions to
The Buyer’s
Obligation to
Purchase.
The obligation
of the Buyer
hereunder to purchase
the Note
at the
Closing is subject
to the satisfaction,
at or
before the
Closing Date
of each
of the
following conditions,
provided that
these conditions
are for
the Buyer’s sole
benefit and may be
waived by the Buyer
at any time
in its sole discretion:
a.
The Company
shall have
executed this
Agreement and
delivered
b.
The Company
shall have
delivered to
the Buyer
the duly executed
Note (in such denominations as
the Buyer shall request) in accordance
with Section 1(b) above.
c.
The Irrevocable
Transfer
Agent
Instructions, in
form and substance satisfactory
to a majority-in-interest of the
Buyer, shall
have been delivered
to and acknowledged
in writing by
the Company’s Transfer Agent.
d.
The representations
and
warranties
of the Company
shall be
true and
correct in
all material
respects as
of the date
when made
and as
of the
Closing Date
as though
made at
such time (except
for representations
and warranties
that speak
as of
a specific
date)
and the
Company shall have
performed, satisfied
and complied
in all
material respects
with the
covenants, agreements
and conditions
required by
this Agreement
to be performed,
satisfied or
complied with
by the
Company at
or prior
to the Closing Date.
The
Buyer shall
have received
a certificate
or certificates, executed
by the chief
executive officer
of the Company, dated
as of the Closing Date, to the foregoing
effect and as
to such other matters
as may be reasonably requested by
the Buyer including, but not limited
to certificates with respect
to the Company’s Certificate of
Incorporation, By-laws and
Board of Directors’ resolutions
relating to the transactions contemplated
hereby.
e.
No litigation,
statute,
rule,
regulation,
executive
order,
decree,
ruling or
injunction shall
have been
enacted, entered,
promulgated or
endorsed by
or in any
court or
governmental authority
of competent
jurisdiction or
any self-regulatory
organization having
authority over the matters contemplated
hereby which prohibits the consummation
of any of the transactions contemplated
by this Agreement.
f.
No event
shall
have
occurred
which
could
reasonably be
expected to
have a
Material Adverse
Effect on
the Company including
but not limited
to a change
in the 1934
Act reporting
status of
the Company or
the failure
of the Company
to be timely
in its 1934
Act reporting obligations.
g.
The Conversion
Shares
shall have
been authorized for
quotation on
the OTCBB
and trading
in the Common
Stock on
the OTCBB
shall not
have been
suspended by
the SEC or the
OTCBB.
h.
The Buyer
shall have
received an
officer’s certificate
described in
Section 3(c) above, dated
as of the
Closing Date.
8.
Governing Law;
Miscellaneous.
a.
Governing
Law.
This
Agreement
shall
be governed
by and
construed in
accordance with
the laws
of the
State of New
York without
regard to
principles of
conflicts of laws.
Any action brought by
either party against the other concerning
the transactions contemplated by
this Agreement
shall be brought
only in the state
courts of New York
or in the federal courts located in the
state and county of Nassau. The
parties to this Agreement 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 Company and Buyer
waive trial by
jury. 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 Agreement
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.
b.
Counterparts.
This
Agreement
may be
executed in one
or more
counterparts, each
of which shall
be deemed
an original
but all
of which
shall constitute
one and
the same
agreement and
shall become
effective when
counterparts have
been signed
by each
party and delivered to the
other party.
c.
Headings.
The headings
of this Agreement
are for
convenience of
reference only
and shall
not form part of,
or affect
the interpretation of, this
Agreement.
d.
Severability.
In the
event that
any provision
of this Agreement
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.
e.
Entire
Agreement;
Amendments.
This
Agreement
and the
instruments referenced
herein contain
the entire understanding
of the parties
with respect
to the matters
covered herein
and therein
and, except
as specifically
set forth
herein or
therein, neither the Company nor
the Buyer makes any representation, warranty,
covenant or undertaking with respect
to such
matters. No
provision of this Agreement
may be waived
or amended
other than by an
instrument in writing signed by the
majority in interest of the
Buyer.
f.
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 Company, to:
AJA CANNAFACTURING,
INC f/k/a
IDS INDUSTRIES,
INC.
5333 Birch
Street
Lake
Elsinore, CA 92530
Attn:
SCOTT PLANTINGA, Chief Executive Officer
facsimile:
[enter fax number]
With a copy
by fax
only to (which
copy shall not constitute
notice):
[enter name
of law firm]
Attn:
[attorney name]
[enter
address line 1]
[enter
city, state, zip]
facsimile:
[enter fax number]
If
to the Buyer:
KBM
WORLDWIDE, INC.
80 Cuttermill
Road – Suite 410
Great
Neck, NY 11021
Attn:
Seth Kramer, President
e-mail:
info@kwbmlaw.com
With a copy
by fax
only to (which
copy shall not constitute
notice):
Naidich
Wurman Birnbaum & Maday
LLP
Attn:
Bernard S. Feldman, Esq.
facsimile:
516-466-3555
e-mail:
dyork@nwbmlaw.com
Each
party shall provide
notice to the other party
of any
change in address.
g.
Successors
and
Assigns.
This
Agreement
shall
be binding
upon and
inure to
the benefit
of the parties
and their
successors and
assigns. Neither
the Company nor the
Buyer shall
assign this
Agreement or
any rights
or obligations
hereunder without
the prior written
consent of the other. Notwithstanding
the foregoing, subject to Section 2(f),
the Buyer
may
assign its
rights hereunder
to any
person that purchases
Securities in
a private
transaction from
the Buyer
or to
any of
its “affiliates,”
as that
term is
defined under
the 1934 Act,
without the
consent of the Company.
h.
Third
Party Beneficiaries.
This Agreement
is intended for
the benefit
of the parties
hereto and
their respective
permitted successors
and assigns,
and is
not for
the benefit of, nor
may any
provision hereof be
enforced by, any
other person.
i.
Survival.
The
representations
and warranties
of the Company
and the
agreements and
covenants set
forth in
this Agreement
shall survive
the closing hereunder
notwithstanding any
due diligence investigation
conducted by or on
behalf of the Buyer. The Company
agrees to indemnify and hold harmless
the Buyer and all
their officers, directors,
employees and agents for loss or damage
arising as a result of or related
to any breach or alleged breach
by the Company of any
of its representations, warranties and
covenants set forth
in this Agreement or any of
its covenants and obligations
under this Agreement,
including advancement of expenses as
they are incurred.
j.
Publicity.
The Company,
and the
Buyer shall
have the
right to
review a
reasonable period
of time before
issuance of
any press
releases, SEC,
OTCBB or
FINRA filings,
or any
other public statements
with respect
to the transactions
contemplated hereby; provided,
however, that the Company shall be entitled,
without the prior approval
of the Buyer, to make any
press release or SEC, OTCBB
(or other applicable trading
market) or FINRA filings
with respect to such
transactions as is required by
applicable law and
regulations (although
the Buyer
shall be consulted
by the Company in
connection with
any such press release
prior to its release and
shall be provided with
a copy thereof and be given
an opportunity to comment thereon).
k.
Further
Assurances.
Each party
shall do and
perform, or cause
to be done
and performed,
all such
further acts
and things,
and shall
execute and
deliver all
such other
agreements, certificates,
instruments and
documents, as
the other
party may reasonably request in
order to carry out the intent and
accomplish the purposes of this Agreement
and the consummation of
the transactions contemplated
hereby.
l.
No
Strict
Construction.
The
language
used
in this Agreement
will be
deemed to
be the language
chosen by
the parties
to express
their mutual
intent, and
no rules
of strict construction
will be applied against
any party.
m.
Remedies.
The Company
acknowledges that
a breach
by it
of its obligations
hereunder will
cause irreparable harm to the
Buyer by vitiating
the intent and purpose
of the transaction
contemplated hereby. Accordingly,
the Company acknowledges
that the remedy at
law for
a breach of
its obligations
under this
Agreement will
be inadequate
and agrees,
in the event of a breach or threatened
breach by the Company of the provisions
of this Agreement, that the Buyer
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
Agreement and
to enforce
specifically the terms
and provisions
hereof, without
the necessity
of showing economic
loss and
without any
bond or other security being required.
IN
WITNESS WHEREOF,
the undersigned
Buyer and
the Company have
caused this
Agreement to be duly
executed as of
the date first
above written.
AJA CANNAFACTURING,
INC. f/k/a
IDS INDUSTRIES, INC.
By: /s/
Scott Plantinga
SCOTT PLANTINGA
Chief Executive
Officer
KBM
WORLDWIDE, INC.
By:
/s/ Seth Kramer
Name:
Seth Kramer
Title:
President
80 Cuttermill
Road – Suite 410
Great
Neck, NY. 11021
AGGREGATE SUBSCRIPTION AMOUNT: |
|
Aggregate Principal Amount of Note: |
$53,000.00 |
Aggregate Purchase Price: |
$53,000.00 |
Tranche
#3 K-1266 (AJAC)
August 18,
2014 |
|
THIS NOTE AND THE COMMON STOCK ISSUABLE
UPON CONVERSION OF THIS NOTE HAVE NOT BEEN AND WILL NOT BE REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION
OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER (THE "1933 ACT")
US $31,500.00
IDS INDUSTRIES, INC.
8% CONVERTIBLE REDEEMABLE NOTE
DUE JULY 11, 2015
FOR VALUE RECEIV ED, IDS
Industries, Inc. (the "Company") promises to pay to the order of LG CAPITAL FUNDING, LLC and its authorized successors
and permitted a signs ("Holder"), the aggregate principal face amount of Thirty One Thousand Five Hundred dollars
exactly (U.S. $31,500.00) on July 11, 2015 ("Maturity Date") and to pay interest on the principal amount outstanding
hereunder at the rate of 8% per annum commencing on July 11, 2014. The interest will be paid to the Holder in whose name this Note
is registered on the records of the Company regarding registration and transfers of this Note. The principal of, and interest on,
this Note are payable at 1218 Union Street, Suite #2, Brooklyn, NY 11225 initially, and if changed, last appearing on the records
of the Company as designated in writing by the Holder hereof from time to time. The Company will pay each interest payment and
the outstanding principal due upon this Note before or on the Maturity Date, less any amounts required by law to be deducted or
withheld, to the Holder of this Note by check or wire transfer addressed to such Holder at the last address appearing on the records
of the Company. The forwarding of such check o transfer shall constitute a payment of outstanding principal hereunder and shall
satisfy a charge the liability for principal on this Note to the extent of the sum represented by such or wire transfer. Interest
shall be payable in Common Stock (as defined below) pursuant to paragraph 4(b) herein.
This Note is subject to the
following additional provisions:
1.
This Note is exchangeable for an equal aggregate principal amount of Note of different authorized
denominations, as requested by the Holder surrendering the same.
No service charge will be made for such registration
or transfer or exchange, except that shall pay any tax or other governmental charges payable in connection therewith.
2.
The Company shall be entitled to withhold from all payments any amounts required to be withheld
under applicable laws.
3.
This Note may be transferred or exchanged only in compliance with the Securities Act of 1933,
as amended ("Act") and applicable state securities laws. Any attempted transfer to a non-qualifying party shall
be treated by the Company as void. Prior to due presentment for transfer of this Note, the Company and any agent of the Company
may treat the person in whose name this Note is duly registered on the Company's records as the owner hereof or all other purposes,
whether or not this Note be overdue, and neither the Company nor an such agent shall be affected or bound by notice to the contrary.
Any Holder of this Note elect ng to exercise the right of conversion set forth in Section 4(a) hereof, in addition to the requirements
set forth in Section 4(a), and any prospective transferee of this Note, also is required to give the Company written confirmation
that this Note is being converted ("Notice of Conversion") in the form annexed hereto as Exhibit A. The
date of receipt (including receipt by telecopy) o such Notice of Conversion shall be the Conversion Date.
4.
(a) The Holder of this Note is entitled, at its option, at any time after 180 days, to convert
all or any amount of the principal face amount of this Note then outstanding into shares of the Company's common stock (the "Common
Stock") without restrictive legend of any nature, at a price ("Conversion Price") for each share of Common
Stock equal to 55% of the lowest trading price of the Common Stock as reported on the National Quotations Bureau OTCQB exchange
which the Company's shares are traded or any exchange upon which the Common Stock may be traded in the future ("Exchange"),
for the ten prior trading days including the day upon which a Notice of Conversion is received by the Company (provided
such Notice of Conversion is delivered by fax or other electronic method of communication to the Company after 4 P.M. Eastern Standard
or Daylight Savings Time if the Holder wishes to include the same day closing price). If the shares have not been delivered within
3 business days, the Notice of Conversion may be rescinded. Such conversion shall be effectuated by the Company delivering the
shares of Common Stock to the Holder within 3 business days of receipt by the Company of the Notice of Conversion. Once the Holder
has received such shares of Common Stock, the Holder shall surrender this Note to the Company, executed by the Holder evidencing
such Holder's intention to convert this Note or a specified portion hereof, and accompanied by proper assignment hereof in blank.
Accrued, but unpaid interest shall be subject to conversion. No fractional shares or scrip representing fractions of shares will
be issued on conversion, but the number of shares issuable shall be rounded to the nearest whole share. In the event the Company
experiences a DTC "Chill" on its shares, the conversion price shall be decreased to 45% instead of 55% while that "Chill"
is in effect.
(b) Interest on any unpaid
principal balance of this Note shall be paid at the rate of 8% per annum. Interest shall be paid by the Company in cash only.
(c) During the first six
months this Note is in effect, the Company may deem this Note by paying to the Holder an amount as follows, 140% of the face amount
plus any accrued interest. This Note may not be prepaid after the 180111 day. The redemption must be closed and paid for within
3 business days of the Company sending the redemption demand or the redemption will be invalid and the Company may not redeem this
Note.
(d) Upon (i) a transfer
of all or substantially all of the assets of the Company to any person in a single transaction or series of related transactions,
(ii) a reclassification, capital reorganization or other change or exchange of outstanding shares of the Common Stock, other than
a forward or reverse stock split or stock dividend, or (iii) any consolidation or merger of the Company with or into another person
or entity in which the Company is not the surviving entity (other than a merger which is effected solely to change the jurisdiction
of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock
solely into shares of Common Stock) (each of items (i), (ii) and (iii) being referred to as a "Sale Event"), then, in
each case, the Company shall, upon request of the redeem this Note in cash for 140% of the principal amount, plus accrued but unpaid
interest through the date of redemption, or at the election of the Holder, such Holder may convert the unpaid principal amount
of this Note (together with the amount of accrued but unpaid interest) into shares of Common Stock immediately prior to such Sale
Event at the Conversion Price.
(e) In case of any Sale
Event (not to include a sale of all or substantially all the Company's assets) in connection with which this Note is not redeemed
or converted, the Company shall cause effective provision to be made so that the Holder of this Note shall the right thereafter,
by converting this Note, to purchase or convert this Note into the kind number of shares of stock or other securities or property
(including cash) receivable upon reclassification, capital reorganization or other change, consolidation or merger by a holder
the number of shares of Common Stock that could have been purchased upon exercise Note and at the same Conversion Price, as defined
in this Note, immediately prior to sue Event. The foregoing provisions shall similarly apply to successive Sale Events. If the
consideration received by the holders of Common Stock is other than cash, the value shall be as mined by the Board of Directors
of the Company or successor person or entity acting in good faith.
5.
No provision of this Note shall alter or impair the obligation of the Company, 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.
6.
The Company hereby expressly waives demand and presentment for payment, notice of non-payment
, protest , notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, and diligence in taking any
action to collect amounts called for hereunder and shall be directly and primarily liable for the payment of all sums owing and
to be owing hereto.
7.
The Company agrees to pay all costs and expenses, including reasonable attorneys' fees and
expenses, which may be incurred by the Holder in collecting any amount due under this Note.
8.
If one or more of the following described "Events of Default" shall occur:
(a)
The Company shall default in the payment of principal or interest on this Note or any other
note issued to the Holder by the Company; or
(b)
Any of the representations or warranties made by the Company herein or in any certificate
or financial or other written statements heretofore or hereafter furnished by or on behalf of the Company in connection with the
execution and delivery of this Note, or the Securities Purchase Agreement under which this note was issued shall be false or misleading
any respect; or
(c)
The Company shall fail to perform or observe, in any respect, any covenant, term, provision,
condition, agreement or obligation of the Company under this Note or any other note issued to the Holder; or
(d)
The Company shall (1) become insolvent; (2) admit in writing its inability to pay its debts
generally as they mature; (3) make an assignment for the benefit of creditors or commence proceedings for its dissolution; (4)
apply for or consent to the appointment of a trustee, liquidator or receiver for its or for a substantial part of its property
or business; (5) file a petition for bankruptcy relief, consent to the filing of such petition or have filed against it an involuntary
petition for bankruptcy relief, all under federal or state laws as applicable; or
(e)
A trustee, liquidator or receiver shall be appointed for the Company 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;
or
(f)
Any governmental agency or any court of competent jurisdiction at the instance of any governmental
agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company; or
(g)
Unless previously disclosed in the Company's filings with the Securities and Exchange Commission
, one or more money judgments , writs or warrants of attachment, or similar process, in excess of fifty thousand dollars ($50,000)
in the aggregate, shall be entered or filed against the Company or any of its properties or other assets and shall remain unpaid
, unvacated, unbonded or unstayed for a period of fifteen (15) days or in any event later than e (5) days prior to the date of
any proposed sale thereunder.
(h)
The Company shall have defaulted on or breached any term of any other note of similar debt
instrument into which the Company has entered and failed to cure s fault within the appropriate grace period; or
(i)
The Company shall have its Common Stock delisted from an exchange (including the OTCBB exchange)
or, if the Common Stock trades on an exchange, then trading in the Common Stock shall be suspended for more than 10 consecutive
days;
(j)
If a majority of the members of the Board of Directors of the Company on the date hereof are
no longer serving as members of the Board;
(k)
The Company shall not deliver to the Holder the Common Stock pursuant to paragraph 4 herein
without restrictive legend within 3 business days of its receipt of a Notice of Conversion; or
(l)
The Company shall not replenish the reserve set forth in Section 12,within 3 business days
of the request of the Holder; or
(m)
The Company shall not be "current" in its filings with the Securities and Exchange
Commission; or
(n)
The Company shall lose the "bid" price for its stock in a market (including the
OTCQB marketplace or other exchange).
Then, or at any time thereafter , unless cured,
and in each and every such case, unless such Event of Default shall have been waived in writing by the Holder (which waiver shall
not be deemed be a waiver of any subsequent default) at the option of the Holder and in the Holder's sole discretion, the Holder
may consider this Note immediately due and payable, without presentment, demand, protest or (further) notice of any kind (other
than notice of acceleration), all of which are hereby expressly waived, anything herein or in any note or other instruments contained
to the contrary notwithstanding, and the Holder may immediately, and without expiration of any period of grace, enforce any and
all of the Holder's rights and remedies provided herein or any other rights or remedies afforded by law. Upon an Event of Default,
interest shall accrue at a fault interest rate of 16% per annum or, if such rate is usurious or not permitted by current law, then
at the highest rate of interest permitted by law. In the event of a breach of Section 8(k) the penalty shall be $250 per day the
shares are not issued beginning on the 4th day after the conversion notice was delivered to the Company. This penalty shall increase
to $500 per day beginning on the101 day. The penalty for a breach of Section 8(n) shall be an increase of the outstanding principal
amounts by 20%. In case of a breach of Section 8(i), the outstanding principal due und r this Note shall increase by 50%. If this
Note is not paid at maturity, the outstanding principa1 due under this Note shall increase by 10%.
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 Company for its attorneys' fees and other costs and expenses incurred in the investigation,
preparation and prosecution of such action or proceeding.
9.
In case any provision of this Note is held by a court of competent jurisdiction to be excessive
in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is
enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Note will not
in a way be affected or impaired thereby.
10.
Neither this Note nor any term hereof may be amended, waived, discharged or terminated other
than by a written instrument signed by the Company and the Holder.
11.
The Company represents that it is not a "shell" issuer and has never been a "shell"
issuer or that if it previously has been a "shell" issuer that at least 12 months have passed since the Company has reported
form 10 type information indicating it is no longer a "shell issuer. Further. The Company will instruct its counsel to either
(i) write a 144- 3(a) (9) opinion allow for salability of the conversion shares or (ii) accept such opinion from Holder's counsel.
12.
The Company shall issue irrevocable transfer agent instructions reserving 12,500,000 shares
of its Common Stock for conversions under this Note (the "Share Reserve"). The reserve shall be replenished as needed
to allow for conversions of this Note. Up conversion of this Note, any shares remaining in the Share Reserve shall be cancelled.
The Company shall pay all costs associated with issuing and delivering the shares.
13.
The Company will give the Holder direct notice of any corporate actions including but not
limited to name changes, stock splits, recapitalizations etc. This notice shall be given to the Holder as soon as possible under
law.
14.
This Note shall be governed by and construed in accordance with the laws of New York applicable
to contracts made and wholly to be performed within the State of New York and shall be binding upon the successors and assigns
of each party hereto. The Holder and the Company hereby mutually waive trial by jury and consent to exclusive jurisdiction and
venue in the courts of the State of New York. This Agreement may be executed in counterparts, and the facsimile transmission of
an executed counterpart to this Agreement shall be effective as an original.
IN WITNESS WHEREOF, the
Company has caused this Note to be duly executed by an officer thereunto duly authorized.
Dated: 7/14/2012
IDS INDUSTRIES, INC.
By: /s/ Scott Plantinga
Title CEO
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in
order to Convert the Note)
The undersigned hereby
irrevocably elects to convert $_____________ of the above Note into _____________Shares of Common Stock of IDS Industries, Inc.
("Shares") according to the conditions set forth in such Note, as of the date written below.
If Shares are to be issued
in the name of a person other than the undersigned, the undersigned will pay all transfer and other taxes and charges payable with
respect thereto.
Date of Conversion:
Applicable Conversion Price:
Signature:
[Print Name of Holder and Title of Signer]
Address:
SSN or EIN:
Shares are to be registered in the following
name:
Name:
Address:
Tel:
Fax:
SSN or EIN:
Shares are to be sent or delivered to the following
account:
Account Name:
Address:
FORBEARANCE AGREEMENT
BETWEEN
STEVEN J. CASPI AND IDS INDUSTRIES, INC.
THIS
FORBEARANCE AGREEMENT (this "AGREEMENT"), dated as of March 26, 2014, between IDS Industries Inc., a Nevada corporation
(the “Company”) and Steven J. Caspi, an individual investor, a resident of New York, (the “Holder”). Capitalized
terms not otherwise defined herein shall have the meanings specified in the Note (as defined below).
WHEREAS,
on November 30, 2012, the Company issued a $125,000.00 Convertible Promissory Note due November 30, 2013 (the “Note”)
to the Holder.
WHEREAS,
the Company has requested to amend the conversion price to reflect where recent conversions have taken place (from $2.00 per share
to $0.005 cents per share), and the holder has agreed to accept this consideration as a fee
(the “Forbearance Fee”). Further, the Company is willing to remove the requirement the Holder not exceed 4.99% of the
fully diluted, total issued and outstanding shares of Maker found in the Original Note (page 1, section 3 Conversion), but the
Holder may stay fast to that at his option. In return, the Company asks that once the conversion of an amount equal to the original
investment ($125,000) plus a Thirty (30%) Percent profit ($37,500) has been achieved, (the effective repayment in full plus a 30%
fee, a total of $162,500, while Holder still has a sizeable position left in Company), that all Security Positions (collateral
specified) in the original note be released back to the Company by Holder.
WHEREAS,
the Company has requested, and the Holder has agreed, subject to the terms and conditions set forth in this Agreement, for the
period commencing on November 30. 2013 and ending on the earlier of November 30, 2014 (the "PAYMENT DATE") or the occurrence
of a Termination Event (as defined in Section 3) (the "WAIVER PERIOD"), (i) to waive any Default or Event of Default
existing solely as a result of the failure of the Company to pay to Holder all amounts due commencing November 30.2013 and continuing
through and including November 30, 2014 with payments to be made to the Holder on the Payment Date), and (ii) the it shall refrain
from exercising its rights and remedies against the Company in connection with the Company’s failure to pay Holder prior
to the Payment Date including the increase in the interest rate to Eighteen (18%) Percent;
NOW,
THEREFORE, in consideration of the premises and the mutual covenants and agreement of the parties hereinafter set forth, the
parties hereto hereby agree as follows:
1.
WAIVER OF DEFAULT. The Holder hereby waives, until the expiration of the Waiver Period, any Default or Event of
Default existing solely as a result of the Company’s failure to pay to Holder the Forbearance Fee prior to the Payment Date.
The Company acknowledges that interest shall accrue at the rate of 5.0% per annum from the date each payment is due pursuant to
the Note until all amounts are paid in full in cash.
2.
STANDSTILL. Holder hereby agrees that during the Waiver Period it will not exercise any remedy under the Note, at
law or in equity, which it hereafter may have in respect of any Default or Event of Default resulting solely from the failure of
the Company to pay to Holder the Forbearance Fee prior to the Payment Date.
3.
TERMINATION. This Agreement shall terminate upon the earlier of (i) the payment in full to Holder of the Forbearance
Fee, plus all amounts owing thereon pursuant to the Note and Section 1 hereof, (ii) the occurrence of an Event of Default (other
than in connection with the Forbearance Fee) and (iii) any repurchase of the Note pursuant to Section 2 of the Note: provided,
that this Agreement shall only terminate with respect to the Note actually repurchased from the Holder pursuant to the terms of
the Note (a “TERMINATION EVENT”).
4.
ABSENCE OF WAIVER. The parties hereto agree that, except to the extent expressly set forth herein, nothing
contained herein shall be deemed to:
| (a) | be a consent to, or waiver of, any Default or Event of Default; or |
(b)
prejudice any right or remedy which the Holder may now have or may in the future have under the Note or otherwise, including,
without limitation, any right or remedy resulting from any Default or Event of Default.
| 5. | REPRESENTATIONS. Each party hereto hereby represents and warrants to the other parties that: |
(a)
the Company is a corporation and the Holder is a qualified individual investor, in good standing under the laws of the state
of its incorporation or formation or accreditation, as applicable,
(b)
the execution, delivery and performance of this Agreement by such party if within its corporate or trust powers, as applicable,
has duly authorized by all necessary corporate or trust action, as applicable, has received all necessary consents and approvals
(if any shall be required), and does not and will not contravene or conflict with any provisions of law or of the charter or by-laws,
or trust agreement, as applicable, of such party or of any material agreement binding upon such party or its property: and
(c)
this Agreement will be legal, valid and binding obligation of each party, enforceable against it in accordance with its
terms.
In
addition, the Company represents and warrants that to the best of its knowledge, except as set forth herein no Default or Event
of Default under the Note has occurred and is continuing.
6.
CONTINUING EFFECT, ETC. Except as expressly provided herein, the Company hereby agrees that the Note shall continue
unchanged and in full force and effect, and all rights, powers and remedies of the Holder thereunder and under applicable law are
hereby expressly reserved.
7.
MISCELLANEOUS.
(a)
Section headings used in this Agreement are for convenience of reference only and shall not affect the construction of this
Agreement.
(b)
This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts and each
such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same agreement.
(c)
This Agreement shall be a contract made under and governed by the laws of the State of Nevada.
(d)
All obligations of the Company and rights of the Holder expressed herein shall be in addition to and not in limitation of
those provided by applicable law.
(e)
This Agreement shall be binding upon the Company, the Holder and their respective successors and assigns, and shall inure
to the benefit of the Company, the Holder ad their respective successors and assigns.
(f)
All amendments or modifications of this Agreement and all consents, waivers and notices delivered hereunder or in connection
herewith shall be in writing.
8.
WAIVER OF JURY TRIAL. THE COMPANY AND THE HOLDER HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as
of the first date written above.
“Company”:
IDS Industries, Inc.
/s/
Stephen Scott Plantinga
Stephen
Scott Plantinga, CEO
Investor |
“Holder”:
Steven J. Caspi
/s/
Steven J. Caspi
Steven
J. Caspi, Individual |