As filed with
the Securities and Exchange Commission on February 6, 2015
Registration No. 333-________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM S-1
______________________________
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
LABOR SMART,
INC.
(Exact name
of registrant as specified in its charter)
Nevada |
|
7363 |
|
45-2433287 |
(State or other jurisdiction
of incorporation or organization) |
|
(Primary Standard Industrial
Classification Code Number) |
|
(I.R.S. Employer
Identification Number) |
3270
Florence Road, Suite 200
Powder
Springs, GA
(770)
222-5888
(Address,
including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Ryan
Schadel
President
and Chief Executive Officer
3270
Florence Road, Suite 200
Powder
Springs, GA
(770)
222-5888
(Name,
address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Gregory
Sichenzia, Esq. |
David
B. Manno, Esq. |
Sichenzia
Ross Friedman Ference LLP |
61
Broadway, 32nd Floor |
New
York, New York 10006 |
Telephone:
(212) 930-9700 |
Facsimile:
(212) 930-9725 |
Approximate
date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared
effective.
If
any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following box. ☒
If
this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration statement number of the earlier effective registration statement
for the same offering. ☐
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
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 |
☐ |
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|
Accelerated filer |
☐ |
Non-accelerated filer |
☐ |
(Do not check if a smaller reporting company) |
|
Smaller reporting company |
☒ |
CALCULATION OF REGISTRATION FEE
| |
Proposed | |
|
| |
Maximum | |
Amount of |
| |
Aggregate | |
Registration |
Title of Each Class of Securities to be Registered | |
Offering Price(1) | |
Fee(2) |
Common Stock, $0.00001 par value per share(2)(3) | |
$ | 17,250,000.00 | | |
$ | 2,004.45 | |
Common Stock Purchase Warrants | |
$ | 17,250.00 | | |
$ | 2.00 | (4) |
Shares of Common Stock, $0.00001 par value per share, underlying Common Stock Purchase Warrants(2)(7) | |
$ | 10,781,250.00 | | |
$ | 1,252.78 | |
Representative’s Common Stock Purchase Warrant | |
| | | |
| | (5) | |
|
Shares of Common Stock underlying Representative’s Common Stock Purchase Warrant(2)(6) | |
$ | 937,500.00 | | |
$ | 108.94 | |
Total Registration Fee | |
$ | 28,986,000.00 | | |
$ | 3,368.17 | |
|
(1) |
Estimated solely for the purpose of calculating the amount of registration fee pursuant to Rule 457(o) under the Securities Act. |
|
(2) |
Pursuant to Rule 416, the securities being registered hereunder include such indeterminate number of additional shares of common stock as may be issued after the date hereof as a result of stock splits, stock dividends or similar transactions. |
|
(3) |
Includes shares the underwriters have the option to purchase to cover over-allotments, if any. |
|
(4) |
Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(i) under the Securities Act. |
|
(5) |
No registration fee required pursuant to Rule 457(g) under the Securities Act. |
|
(6) |
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act, based on an estimated proposed maximum aggregate offering price of $937,500, or 125% of $750,000 (5% of $15,000,000 ). |
|
(7) |
There will be issued warrants to purchase shares of common stock. The warrants are exercisable at a per share price equal to 125% of the public offering price. |
The Registrant hereby
amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to Section 8(a), may determine.
The information in this
prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is
not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
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PRELIMINARY PROSPECTUS |
SUBJECT TO COMPLETION |
DATED
FEBRUARY 6, 2015 |
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Shares
of Common Stock |
|
|
Warrants
to Purchase |
Shares of Common Stock |
Labor Smart, Inc. is offering shares
of common stock and warrants to purchase up to an aggregate
shares of our common stock pursuant to this prospectus to be sold in this offering. The warrants will have a per share exercise
price of $ [125% of public offering price of common stock and warrants]. The warrants are exercisable immediately and will expire
five years from the date of issuance. We expect to effect a 1-for- reverse stock split of our outstanding common stock just prior
to the date of this prospectus.
Our common stock is quoted on the OTC Pink under the symbol
“LTNC”. We intend to apply for listing of our common stock on The NASDAQ Capital Market under the symbol “LTNC”.
No assurance can be given that our application will be approved. On February 5, 2015, the last reported sale price for
our common stock on the OTC Pink was $0.0003 per share. There is no established trading market for the warrants.
We are an “emerging growth company” under applicable
Securities and Exchange Commission rules and are subject to reduced public company reporting requirements.
Investing in our securities involves a high degree of
risk. See “Risk Factors” beginning on page 8 of this prospectus for a discussion of information that should
be considered before investing in our securities.
Neither the Securities and Exchange Commission nor any
state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
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Per
Share |
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Per
Warrant |
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Total |
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Public offering price |
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$ |
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$ |
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$ |
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Underwriting discounts and commissions (1) |
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$ |
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$ |
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$ |
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Proceeds, before expenses, to us |
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$ |
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$ |
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$ |
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(1) |
Does not include a non-accountable expense allowance equal to 1% of the gross proceeds of this offering payable to , the representative of the underwriters. See “Underwriting” for a description of compensation payable to the underwriters. |
We have granted a 45-day option to the
representative of the underwriters to purchase up to additional shares of common stock
and warrants solely to cover over-allotments, if any.
The underwriters expect to deliver our shares and warrants
in the offering on or about , 2015.
TABLE OF
CONTENTS
You
should rely only on the information contained in this prospectus that we may specifically authorize to be delivered or made
available to you. We have not, and the underwriters have not, authorized anyone to provide you with any information other than
that contained in this prospectus we may authorize to be delivered or made available to you. We take no responsibility for,
and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus may
only be used where it is legal to offer and sell our securities. The information in this prospectus is accurate only as of the
date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our securities. Our business,
financial condition, results of operations and prospects may have changed since that date. We are not, and the underwriters
are not, making an offer of these securities in any jurisdiction where the offer is not permitted.
For
investors outside the United States: We have not and the underwriters have not done anything that would permit this offering
or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in
the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about,
and observe any restrictions relating to, the offering of the securities and the distribution of this prospectus outside the
United States
PROSPECTUS
SUMMARY
This summary highlights information
contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment
decision. Before investing in our securities, you should carefully read this entire prospectus, including our financial statements
and the related notes and the information set forth under the headings “Risk Factors” and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in each case included elsewhere in this prospectus.
Unless otherwise stated or the
context requires otherwise, references in this prospectus to the “Company”, “Labor Smart, Inc.”,
“we”, “us”, or “our” refer to Labor Smart, Inc.
LABOR SMART, INC.
Business Overview
Labor Smart, Inc. was incorporated
in the State of Nevada on May 31, 2011. We are an emerging provider of temporary employees to the construction, manufacturing,
hospitality, restoration and retail industries. We provide unskilled and semi-skilled temporary workers to our customers. We have
rapidly grown from two branch offices at November 2011 to thirty branch offices at January 13, 2015. The majority of our growth
in branch offices was achieved by opening our own locations. We acquired a total of four branch offices through our acquisition
of Qwik Staffing and Shirley’s Employment. Our annual revenues grew from approximately $7.1 million to $16.6 million from
2012 to 2013. This revenue growth has been generated both by opening new branch offices and by continuing to increase revenue at
existing branch offices.
Our mission is to be the
provider of choice to our growing community of customers, with a service-focused approach, that positions us as a resource and
partner for their business.
Seasonality
Generally, we expect our
revenues to be higher and gross margin percent to be higher during the second and third fiscal quarters as compared to the first
and fourth fiscal quarters each year. During the second and third quarters we receive the majority of our contracts to supply labor
to construction firms. Contracts for construction work tends to be both larger in dollar amount and to be more profitable than
our other contracts. However, the effects of seasonality is partially muted by our rapid revenue growth rate.
Growth Strategy
Historically, our growth
strategy has been heavily focused on new branch office openings, growth in revenue from existing offices, and closing one small
acquisition per year. On June 14, 2014, we secured a large deductible worker’s compensation insurance policy which resulted
in us becoming substantially self-insured. We have adjusted our growth strategy based on this significant change to the fundamentals
of our business.
At December 31, 2013, we
had 15 branches and at January 13, 2015, we had 30 branches. The increase in branches was due to fourteen branches added through
internal growth and one branch added through acquisition. We added two branches on September 29, 2014 as disclosed and we closed
one underperforming branch location.
Market Opportunity
In fiscal 2015, we will
seek opportunities to open new branches, though our new branch openings will be much less substantial than in prior years as we
shift our expansion strategy to be more acquisition centric. Selection of these locations will be more strategic than in prior
years. We will, when possible, open locations based on needs of already existing clients.
Emerging Growth Company
We qualify
as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As
an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable
generally to public companies. These provisions include:
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• |
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being permitted to present two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure; |
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• |
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reduced disclosure about our executive compensation arrangements; |
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• |
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exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements; and |
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• |
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exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting. |
We may
take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company.
We would cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year in
which we have total annual gross revenues of $1 billion or more; (ii) the last day of our fiscal year following the fifth
anniversary of the date of the completion of the first sale of our securities under an effective registration statement under the
Securities Act, which occurred in 2012; (iii) the date on which we have issued more than $1 billion in nonconvertible debt
during the previous three years; or (iv) the last day of the fiscal year in which we are deemed to be a large accelerated
filer under the rules of the Securities and Exchange Commission, or SEC, which means the market value of our common stock that
is held by non-affiliates exceeds $700 million as of the prior June 30th. We may choose to take advantage of some but not
all of these exemptions. Accordingly, the information contained herein may be different than the information you receive from other
public companies in which you hold stock.
Our Risks and Challenges
Our business
is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk Factors”
immediately following this prospectus summary. These risks include, but are not limited to, the following:
| · | We have a limited operating history,
have incurred losses, and can give no assurance of profitability. |
| · | Our business is significantly affected
by fluctuations in general economic conditions. |
| · | We may incur employment related and other claims that could materially
harm our business. |
| · | We operate in a highly competitive business. |
| · | We may be unable to attract and retain sufficient qualified temporary
workers. |
| · | Loss of Ryan Schadel, our president and Chief Executive Officer,
could impair our ability to operate. |
| · | Our common stock is illiquid and the
price of our common stock may be negatively impacted by factors which are not related to operations. |
| · | Our management will have broad discretion over the use of the
net proceeds from this offering and we may use the net proceeds in ways with which you disagree or which do not produce beneficial
results. |
| · | You will experience immediate and substantial dilution as a result
of this offering and may experience additional dilution in the future as we do further financings and transactions. |
Corporate Information
We were
incorporated in the State of Nevada on May 31, 2011. Our principal executive offices are located at 3270 Florence Road, Suite 200,
Powder Springs, Georgia 30127 and our telephone number is (770) 222-5888. Our website address is www.laborsmart.com. The information
on our website is not part of this prospectus. We have included our website address as a factual reference and do not
intend it to be an active link to our website.
The
Offering
|
|
|
Securities offered by us |
|
shares of common
stock ( shares if the underwriters exercise their over-allotment option
in full) and warrants to purchase up to an aggregate of shares of
common stock (warrants to purchase up to an aggregate of shares of
common stock if the underwriters exercise their over-allotment option in full). |
|
|
|
Common stock to be outstanding after this offering |
|
shares (
shares if the warrants are exercised in full). If the underwriters’ over-allotment option is exercised in full, the total
number of shares of common stock outstanding immediately after this offering would be
( shares if the warrants are exercised in full). |
|
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Description
of warrants |
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The warrants will have a per share exercise price equal to $ [125% of the public offering price of the common stock and warrants]. The warrants are exercisable immediately and expire five years from the date of issuance. |
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Use of proceeds |
|
We
expect to use the net proceeds received from this offering for acquisitions and working capital and general corporate purposes. While
we regularly seek and evaluate possible acquisition opportunities, we have no material definitive agreements, commitments,
understandings or arrangements with respect to any acquisitions. See “Use of Proceeds” on page 14. |
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Risk factors |
|
See
“Risk Factors” beginning on page 8 and the other information included in this prospectus for a discussion
of factors you should carefully consider before investing in our securities. |
|
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OTC Pink trading symbol |
|
LTNC |
|
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|
Proposed NASDAQ Capital Market listing symbol for our common stock |
|
We intend to apply for listing of our common stock on The NASDAQ Capital Market under the symbol “LTNC”. There can be no assurance that our application will be approved. |
Unless we indicate otherwise, all
information in this prospectus:
|
· |
reflects a 1-for- reverse stock split of our issued and outstanding shares of common stock, options and warrants to be effected just prior to the date of this prospectus and the corresponding adjustment of all common stock price per share and stock option and warrant exercise price per share; |
|
· |
is based on ____ shares of common stock issued and outstanding as of _________, 2015; |
|
· |
assumes no exercise by the underwriters of their option to purchase up to an additional shares of common stock and warrants to cover over-allotments, if any; |
|
· |
excludes ____ shares of our common stock issuable upon exercise of outstanding stock options under our 2012 Stock Incentive Plan at a weighted average exercise price of $____per share as of ______, 2015; |
|
· |
excludes ______ shares of our common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $____ per share as of ________, 2015; |
|
· |
excludes 51 shares of our common stock issuable upon conversion of our 51 shares of outstanding Series A Preferred Stock; |
|
· |
excludes __________________ shares of our common stock issuable upon conversion of outstanding convertible notes at a weighted average exercise price of $___ per share as of ________, 2015; |
|
· |
excludes shares of our common stock issuable upon conversion of outstanding convertible notes with variable conversion prices of ___________; and |
|
· |
excludes
shares of common stock underlying the warrants to be issued to the underwriters in connection with this offering.
|
Summary Consolidated Financial
Data
The following table sets
forth our summary statement of operations data for the years ended December 31, 2012 and 2013 derived from our audited financial
statements and related notes included elsewhere in this prospectus. The summary financial data for the nine months ended September
26, 2014 and September 30, 2013 and as of September 30, 2014, are derived from our unaudited financial statements appearing elsewhere
in this prospectus and are not indicative of results to be expected for the full year. Our financial statements are prepared and
presented in accordance with generally accepted accounting principles in the United States. The results indicated below are not
necessarily indicative of our future performance. You should read this information together with the sections entitled “Capitalization,”
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated
financial statements and related notes included elsewhere in this prospectus. As reported on our Current Report on Form
8-K which was filed with the Securities and Exchange Commission on May 20, 2014, on May 20, 2014, we changed our fiscal year end from
December 31 to a 52-53 week fiscal year ending on the Friday closest
to December 31. The change is intended to align our fiscal periods more closely with the seasonality
of our business and improve comparability with industry peers. This change was effective
with the end of our fiscal second quarter ended June 27, 2014. The change to a 52-53 week fiscal year is being retroactively applied
as if it was adopted as of January 1, 2014. Our last fiscal year ended on December 26, 2014.
| |
Nine Months Ended September 26, 2014 | |
Nine Months Ended September 30, 2013 | |
Year Ended December 31, 2013 | |
Year Ended December 31, 2012 | |
Summary of Operations Data: | |
| |
| |
|
| |
|
Revenues | |
$ | 18,078,661 | | |
$ | 11,886,084 | | |
$ | 16,651,885 | | |
$ | 7,175,846 | | |
Costs of Sales | |
| 13,890,193 | | |
| 10,015,513 | | |
| 13,953,122 | | |
| 5,955,679 | | |
Gross profit | |
| 4,188,468 | | |
| 1,870,571 | | |
| 2,698,763 | | |
| 1,220,167 | | |
Operating expenses | |
| | | |
| | | |
| | | |
| | | |
Professional fees | |
| 212,272 | | |
| 220,933 | | |
| 308,515 | | |
| 41,131 | | |
Stock-based compensation for services | |
| 119,257 | | |
| 539,721 | | |
| 801,915 | | |
| 210,600 | | |
Payroll | |
| 1,773,150 | | |
| 848,980 | | |
| 1,620,859 | | |
| 549,371 | | |
Bad debt | |
| 113,375 | | |
| 0 | | |
| 215,255 | | |
| 64,318 | | |
Loss on sale of receivables | |
| 0 | | |
| 125,602 | | |
| 90,826 | | |
| 126,321 | | |
General and administrative | |
| 2,484,116 | | |
| 1,275,344 | | |
| 1,398,877 | | |
| 527,957 | | |
Total operating expenses | |
| 4,702,170 | | |
| 3,010,580 | | |
| 4,436,247 | | |
| 1,519,698 | | |
Operating Loss | |
| (513,702 | ) | |
| (1,140,009 | ) | |
| (1,737,484 | ) | |
| (299,531 | ) | |
Other income (expenses) | |
| | | |
| | | |
| | | |
| | | |
Interest and finance expense | |
| (2,913,386 | ) | |
| (708,641 | ) | |
| (1,035,031 | ) | |
| (145,173 | ) | |
Interest income | |
| 0 | | |
| 73 | | |
| 73 | | |
| 0 | | |
Gain on change in fair value of derivative liability | |
| 357,842 | | |
| 15,912 | | |
| 45,222 | | |
| 0 | | |
Loss on sale of securities | |
| (15,437 | ) | |
| 2,916 | | |
| 4,240 | | |
| (4,761 | ) | |
Total other income (expenses) | |
| (2,570,981 | ) | |
| (689,740 | ) | |
| (985,496 | ) | |
| (149,934 | ) | |
Net loss | |
($ | 3,084,683 | ) | |
($ | 1,829,749 | ) | |
($ | 2,722,980 | ) | |
($ | 449,465 | ) | |
Other comprehensive income (loss): | |
| | | |
| | | |
| | | |
| | | |
Unrealized gain on marketable securities | |
| 73,435 | | |
| (3,372 | ) | |
| (6,938 | ) | |
| 6,252 | | |
Other comprehensive income (loss) | |
| 73,435 | | |
| (3,372 | ) | |
| (6,938 | ) | |
| 6,252 | | |
Comprehensive loss | |
($ | 3,011,248 | ) | |
($ | 1,833,121 | ) | |
($ | 2,729,918 | ) | |
($ | 443,213 | ) | |
Basis loss per common shares | |
($ | 0.13 | ) | |
($ | 0.10 | ) | |
($ | 0.14 | ) | |
($ | 0.03 | ) | |
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As at September 26, 2014 |
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|
As at September 26, 2014
Pro forma, as adjusted (1) |
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Balance Sheet Data: |
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Cash |
|
$ |
440,181 |
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Total assets |
|
$ |
5,353,566 |
|
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Total liabilities |
|
$ |
7,731,188 |
|
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Total stockholder's deficit |
|
($ |
2,377,622 |
) |
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(1) Pro forma, as adjusted amounts
give effect to the sale of the common stock and warrants in this offering at the assumed public offering price of $ per share
and $ per warrant, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us.
RISK FACTORS
Any investment in our securities involves
a high degree of risk. Investors should carefully consider the risks described below and all of the information contained in this
prospectus before deciding whether to purchase our common stock. Before you invest you should carefully consider the risks and
uncertainties described below and the other information in this prospectus. Our business, operating results and financial condition
could be harmed and the value of our common stock could go down due to any of these risks, and you could lose all or a part of
your investment.
Risks Related to our Business
We have a limited operating
history, have incurred losses, and can give no assurance of profitability.
We were formed
and commenced operations in May 2011. We incurred net losses of $3,084,683 and $1,829,749 for the nine months ended September
26, 2014 and September 30, 2013, respectively. We incurred net losses of $2,722,980 and $449,465 for the years ended December
31, 2013 and December 31, 2012, respectively. As of September 26, 2014, we have an accumulated deficit of $6,278,461. We
have a limited operating history on which investors can evaluate our potential for future success. Potential investors should
evaluate us in light of the expenses, delays, uncertainties, and complications typically encountered by early-stage businesses,
many of which will be beyond our control. These risks include, an unstable economy, competition, inexperienced management, lack
of sufficient capital, and lack of brand recognition. There is no assurance we will achieve or maintain profitability.
Our business is significantly affected
by fluctuations in general economic conditions.
The demand for our blue-collar staffing
services is highly dependent upon the state of the economy and upon the staffing needs of our customers. As economic activity slows,
companies tend to reduce their use of temporary employees before terminating their employees. Significant declines in demand and
corresponding revenues can result in expense de-leveraging, which would result in lower profit levels. Any variation in the economic
condition or unemployment levels of the United States or in the economic condition of any region or specific industry in which
we have a significant presence may severely reduce the demand for our services and thereby significantly decrease our revenues
and profits. Deterioration in economic conditions or the financial or credit markets could also have adverse impacts on our customers'
ability to pay us for services we have already provided.
We may incur employment related
and other claims that could materially harm our business.
We employ individuals on a temporary basis and
place them in our customers' workplaces. We have minimal control over our customers' workplace environments. As the employer of
record of our temporary workers, we incur a risk of liability for various workplace events, including claims for personal injury,
wage and hour violations, discrimination or harassment, and other actions or inactions of our temporary workers. In addition, some
or all of these claims may give rise to litigation including class action litigation. A material adverse impact on our financial
statements also could occur for the period in which the effect of an unfavorable final outcome becomes probable and can be reasonably
estimated.
We cannot be certain that our insurance will
be sufficient in amount or scope to cover all claims that may be asserted against us. Should the ultimate judgments or settlements
exceed our insurance coverage, they could have a material effect on our business. We cannot be certain we will be able to obtain
appropriate types or levels of insurance in the future, that adequate replacement policies will be available on acceptable terms
or that the companies from which we have obtained insurance will be able to pay claims we make under such policies.
Unexpected changes in claim trends on our worker's compensation
may negatively impact our financial condition.
We self-insure, or otherwise bear
financial responsibility for, a significant portion of expected losses under our workers' compensation program. Unexpected changes
in claim trends, including the severity and frequency of claims, actuarial estimates and medical cost inflation, could result in
costs that are significantly different than initially reported. There can be no assurance that we will be able to increase the
fees charged to our customers in a timely manner and in a sufficient amount to cover increased costs as a result of any changes
in claims-related liabilities.
We actively manage the safety of
our temporary workers with our safety programs and actively control costs with our network of service providers. These activities
have had a positive impact of reducing current and estimated future payouts as well as creating favorable adjustments to workers’
compensation liabilities recorded in prior periods. There can be no assurance that we will be able to continue to reduce accident
rates and control costs to produce these results in the future.
We operate in a highly competitive business.
The staffing services business is highly competitive
and the barriers to entry are low. There are new competitors entering the market which may increase pricing pressures. In addition,
long-term contracts form only a small portion of our revenue. Therefore, there can be no assurance that we will be able to retain
customers or market share in the future. Nor can there be any assurance that we will, in light of competitive pressures, be able
to become or remain profitable.
We may be unable to attract and retain sufficient qualified
temporary workers.
We compete with other temporary staffing companies
to meet our customer needs and we must continually attract qualified temporary workers to fill positions. Attracting and retaining
some skilled temporary employees depends on factors such as desirability of the assignment, location, and the associated wages
and other benefits. We have in the past experienced worker shortages and we may experience such shortages in the future. Further,
if there is a shortage of temporary workers, the cost to employ these individuals could increase. If we are unable to pass those
costs through to our customers, it could materially and adversely affect our business.
Acquisitions and new business ventures
may have an adverse effect on our business.
We expect to continue making acquisitions
and entering into new business initiatives as part of our business strategy. This strategy may be impeded, however, if we cannot
identify suitable acquisition candidates or new business initiatives, or if acquisition candidates are not available under terms
that are acceptable to us. Future acquisitions could result in our incurring debt and contingent liabilities, an increase in interest
expense, an increase in amortization expense, and/or significant charges related to integration costs. Acquisitions and new business
initiatives involve significant challenges and risks, including that they may not advance our business strategy, we may not realize
our anticipated return on our investment, we may experience difficulty in integrating operations, or management's attention may
be diverted from our other business. These events could cause material harm to our business, operating results, or financial condition.
Loss of Ryan Schadel, our President and Chief Executive
Officer, could impair our ability to operate.
If we lose our key employees, such as Ryan Schadel,
our President and Chief Executive Officer, our business could suffer. Our success is highly dependent on our ability to attract
and retain qualified management personnel. We are highly dependent on our management and the loss of Mr. Schadel’s services
could have a material adverse effect on our operations. If we were to lose Mr. Schadel’s services, we may experience difficulties
in competing effectively, developing our technology and implementing our business strategies.
If we are unable to continue as a going concern, investors
may face a complete loss of their investment.
Our independent registered public accounting
firm has expressed substantial doubt about our ability to continue as a going concern in the independent registered public accounting
firm’s report to the financial statements included in this prospectus. If our business fails, our investors may face a complete
loss of their investment.
We may not be able to attain profitability without additional
funding, which may be unavailable.
Unless we begin to generate sufficient revenues,
on a consistent basis, to sustain an ongoing business operation, we may experience liquidity and solvency problems. Such liquidity
and solvency problems may force us to cease operations if additional financing, under acceptable terms and conditions, is not available.
In the event our cash resources are insufficient to continue operations we intend to consider raising additional capital through
offerings and sales of equity or debt securities. In the event we are unable to raise sufficient funds, we will be forced to terminate
business operations. The possibility of such an outcome presents the risk of a complete loss of your investment in our securities.
The costs, expenses and complexity of SEC reporting and compliance
may inhibit or severely restrict our operations.
We are subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended. The costs of complying with these complex requirements are substantial
and require extensive consumption of our time as well as retention of expensive specialists in this area. In the event we are unable
to establish a base of operations that generates sufficient cash flows or cannot obtain additional equity or debt financing, the
costs of maintaining our status as a reporting entity may inhibit our ability to continue our operations.
Competitors with more resources may force us out of business.
The market for customers is intensely competitive
and such competition is expected to continue to increase. Generally, our actual and potential competitors are larger companies
with longer operating histories, greater financial and marketing resources, with superior name recognition and an entrenched client
base. Therefore, many of these competitors may be able to devote greater resources to attracting customers and be able to grant
preferred pricing. Competition by existing and future competitors could result in our inability to secure an adequate customer
base sufficient enough to support our endeavors. We cannot be assured that we will be able to compete successfully against present
or future competitors or that the competitive pressure we may face will not force us to cease operations.
Risks Related to our Common Stock and this Offering
Our common stock is illiquid and the price of our common
stock may be negatively impacted by factors which are not related to operations.
Our common stock
currently trades on a limited basis on the OTC Pink marketplace. Trading of our stock through OTC Pink marketplace is frequently
thin and highly volatile. There is no assurance that a sufficient market will develop in our common stock or warrants in which
case it could be difficult for shareholders to sell their common stock or warrants. Although we intend to apply for listing our
common stock on the NASDAQ Capital Market there can be no assurance that our application will be approved, or if approved, that
we will be able to sustain such a listing. The market price of our common stock and warrants could fluctuate substantially due
to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results
of our competitors, trading volume in our common stock or warrants, changes in general conditions in the economy and the financial
markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons
unrelated to their operating performance and could have the same effect on our common stock.
Investors may have difficulty liquidating their investment
because our stock is subject to penny stock regulation.
The SEC has adopted rules that regulate broker/dealer
practices in connection with transactions in penny stocks. Penny stocks generally are equity securities with a price of less than
$5.00 (other than securities listed on a national securities exchange). The rules, in part, require broker/dealers to provide penny
stock investors with increased risk disclosure documents and make a special written determination that a penny stock is a suitable
investment for the purchaser and receive the purchaser’s written agreement to the transaction. These heightened disclosure
requirements may have the effect of reducing the number of broker/dealers willing to make a market in our shares, thereby reducing
the level of trading activity in any secondary market that may develop for our shares. Consequently, shareholders in our securities
may find it difficult to sell their securities, if at all.
We do not currently intend to pay dividends on our common
stock so consequently your ability to achieve a return on your investment will depend on appreciation in the price our common stock.
Prospective investors should not anticipate
receiving any dividends from our common stock. We intend to retain future earnings, if any, to finance our growth and development
and do not plan to pay cash or stock dividends. The lack of dividend potential may discourage prospective investors from purchasing
our common stock.
The continued sale of our equity securities will dilute the
ownership percentage of our existing stockholders and may decrease the market price of our common stock.
Given our lack of financial resources and the
doubtful prospect that we will earn significant profits in the next several years, we will require additional financing which will
result in dilution to our existing stockholders. In short, our continued need to sell equity will result in reduced percentage
ownership interests for all of our investors, which may decrease the market price for our common stock.
Price adjustment provisions in the warrants
being sold in this offering may make it more difficult and expensive for us to raise additional capital in the future and may result
in further dilution to investors in this offering.
The warrants offered hereby provide that the
exercise price will adjust to the lowest price per share at which additional shares (with certain exceptions) are issued or deemed
to be issued (a “full-ratchet” adjustment). Because these price adjustment provisions will have the effect of lowering
the price at which shares of our common stock are issued upon exercise of the warrants, if we are unable to raise additional capital
at an effective price per share that is higher than the exercise price of these warrants, these provisions may make it more difficult
and more expensive to raise capital in the future. In addition, a reduction in the exercise price of our warrants may result in
additional dilution in the per share net tangible book value of the common stock you purchase in this offering to the extent that
the adjusted exercise price of the warrants is less than the public offering price per share of the common stock being offered
hereby.
There is no trading market for the warrants.
There is no trading market
for our warrants and we do not intend to apply to have the warrants listed or quoted on any market or exchange. The lack of an
active market may impair your ability to sell your warrants at the time you wish to sell them or at a price that you consider reasonable.
The lack of any market for the warrants may also reduce the fair market value of your warrants.
The warrants are
speculative in nature.
The warrants do not confer
any rights of common stock ownership on their holders, such as voting rights or the right to receive dividends, but rather
merely represent the right to acquire shares of common stock at a fixed price for a limited period of time. Specifically, commencing
on the date of issuance, holders of the warrants may exercise their right to acquire the common stock and pay an exercise price
of $ per share (125% of the public offering price of the common stock and warrants),
prior to five years from the date of issuance, after which date any unexercised warrants will expire and have no further value.
The requirements of the Sarbanes-Oxley Act of 2002 and other
U.S. securities laws impose substantial costs, and may drain our resources and distract our management.
We are subject to certain of the requirements
of the Sarbanes-Oxley Act of 2002 in the U.S., as well as the reporting requirements under the Exchange Act. The Exchange
Act requires, among other things, filing of annual reports on Form 10-K, quarterly reports on Form 10-Q and periodic
reports on Form 8-K following the happening of certain material events, with respect to our business and financial condition. The
Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls
over financial reporting. Our existing controls have some weaknesses, as described below. Meeting the requirements
of the Exchange Act and the Sarbanes-Oxley Act may strain our resources and may divert management's attention from other business
concerns, both of which may have a material adverse effect on our business.
Our management has identified internal control deficiencies,
which our management believes constitutes material weaknesses.
In connection with the preparation of our financial
statements for the year ended December 31, 2013, our management identified certain internal control deficiencies that, in
the aggregate, represent material weaknesses. We have begun taking appropriate and reasonable steps, and will continue and complete
such steps in due course, to make the necessary improvements to address these deficiencies, but the timing of such steps is uncertain
and the availability of funding and resources for such steps are also uncertain. Our ability to attract qualified individuals to
serve on our Board and to take on key management roles for us is also uncertain. Our failure to successfully complete the remedies
of the existing weaknesses could lead to heightened risk for financial reporting mistakes and irregularities, and/or lead to a
loss of public confidence in our internal controls that could have a negative effect on the market price of our common stock.
Our management will have broad discretion over the use of
the net proceeds from this offering and we may use the net proceeds in ways with which you disagree or which do not produce beneficial
results.
We currently intend to use the net proceeds
from this offering for acquisitions and working capital and general corporate purposes. We have not allocated specific amounts
of the net proceeds from this offering for any of the foregoing purposes. Accordingly, our management will have significant discretion
and flexibility in applying the net proceeds of this offering. You will be relying on the judgment of our management with regard
to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether
the proceeds are being used appropriately. It is possible that the net proceeds will be invested in a way that does not yield a
favorable, or any, return for us or our stockholders. The failure of our management to use such funds effectively could have a
material adverse effect on our business, prospects, financial condition, and results of operation.
You will experience immediate and substantial dilution as
a result of this offering and may experience additional dilution in the future as we do further financings and transactions.
You will incur immediate and substantial dilution
as a result of this offering. After giving effect to the sale by us of up to _______ shares offered in this offering at the assumed
public offering price of $_______ per share and $______ per warrant, and after deducting the underwriter’s discount and estimated
offering expenses payable by us, investors in this offering can expect an immediate dilution of $___ per share. In addition, in
the past, we issued options, warrants and convertible debentures to acquire shares of common stock and will issue warrants in this
offering. To the extent these options or warrants are ultimately exercised, or convertible debentures converted, you will sustain
further future dilution.
As a result of the continuously
adjustable conversion price feature of our convertible debentures, our obligation to issue shares of common stock upon conversion
of the debentures is limitless, which will cause dilution to our existing stockholders.
As of ___________,
2015, total indebtedness under our convertible debentures, including interest, is $________. The debentures are convertible at
a conversion price equal to ______. Our obligation to issue shares upon conversion of our convertible debentures is essentially
limitless. The number of shares of common stock issuable upon conversion of our convertible debentures will increase if the market
price of our stock declines, which will cause dilution to our existing stockholders.
The continuously adjustable
conversion price feature of our convertible debentures may encourage investors to make short sales in our common stock, which could
have a depressive effective on the price of our common stock, and make it more difficult for us to raise additional funds.
The downward
pressure on the price of the common stock as holders of our convertible debentures convert and sell material amounts of common
stock could encourage short sales by investors. Short sales by investors could place further downward pressure on the price of
the common stock. The holders of our convertible debentures could sell common stock into the market in anticipation of covering
the short sale by converting their securities, which could cause the further downward pressure on the stock price. In addition,
not only the sale of shares issued upon conversion of convertible debentures, but also the mere perception that these sales could
occur, may adversely affect the market price of the common stock. Downward pressure on the price of our common stock from consecutive
conversions could result in the investors receiving payment on the debentures at successively lower conversion rates, thereby causing
a successively greater dilution of our stockholders, and causing a downward spiraling effect on the price of our stock (a so-called
"death spiral"). A lower price of our stock would make it more difficult for us to raise additional funds.
We are an “emerging growth
company” and will be able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies,
which could make our common stock less attractive to investors.
We are an “emerging
growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting
requirements that are applicable to other public companies that are not “emerging growth companies” including not being
required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure
obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements
of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously
approved. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the
extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act,
for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain
accounting standards until those standards would otherwise apply to private companies. We cannot predict if investors will find
our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive
as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take
advantage of these reporting exemptions until we are no longer an emerging growth company. We are also currently able to take advantage
of certain of these exemptions as a smaller reporting company. We will remain an emerging growth company until the earliest of
(i) the last day of the fiscal year in which we have total annual gross revenue of $1.0 billion or more; (ii) the last
day of our fiscal year following the fifth anniversary of anniversary of the date of the completion of the first sale of our securities
under an effective registration statement under the Securities Act, which occurred in 2012; (iii) the date on which we have
issued more than $1.0 billion in nonconvertible debt during the previous three years; and (iv) the date on which we are deemed
to be a large accelerated filer under the rules of the SEC.
Our Chief Executive Officer
is able to assert substantial control over all matters submitted to our shareholders.
There are
51 shares of Series A Preferred Stock issued and outstanding, all of which are held by Ryan Schadel, our chief executive officer.
The holders of the Series A Preferred Stock vote as one class with the holders of the Common Stock and each share of Series
A Preferred Stock has voting rights equal to: (x) 0.019607 multiplied by the total issued and outstanding shares of common stock
eligible to vote at the time of the respective vote (the “Numerator”), divided by (y) 0.49, minus (z) the Numerator.
As a result, Mr. Schadel currently has the ability to exert substantial control over all matters submitted to shareholders, and
his interests may differ from those of other shareholders.
Risks Related to Our Reverse Split
Our planned reverse stock split may not increase our
stock price sufficiently to enable us to list our common stock on The NASDAQ Capital Market, in which case this offering will not
be completed.
We expect that the 1-for- reverse
stock split of our outstanding common stock will increase the market price of our common stock so that we will be able to meet
the minimum bid price requirement of the Listing Rules of The NASDAQ Capital Market. However, the effect of a reverse stock
split upon the market price of our common stock cannot be predicted with certainty, and the results of reverse stock splits by
companies in similar circumstances have been varied. It is possible that the market price of our common stock following the reverse
stock split will not increase sufficiently for us to be in compliance with the minimum bid price requirement. If we are unable
meet the minimum bid price requirement, we may be unable to list our shares on The NASDAQ Capital Market, in which case this offering
will not be completed.
Even if the reverse
stock split achieves the requisite increase in the market price of our common stock, we cannot assure you that we will be able
to continue to comply with the minimum bid price requirement of The NASDAQ Capital Market.
Even if the reverse stock split achieves
the requisite increase in the market price of our common stock to be in compliance with the minimum bid price of The NASDAQ Capital
Market, there can be no assurance that the market price of our common stock following the reverse stock split will remain at the
level required for continuing compliance with that requirement. It is not uncommon for the market price of a company’s common
stock to decline in the period following a reverse stock split. If the market price of our common stock declines following the
effectuation of a reverse stock split, the percentage decline may be greater than would occur in the absence of a reverse stock
split. In any event, other factors unrelated to the number of shares of our common stock outstanding, such as negative financial
or operational results, could adversely affect the market price of our common stock and jeopardize our ability to meet or maintain
The NASDAQ Capital Market’s minimum bid price requirement. In addition to specific listing and maintenance standards, The
NASDAQ Capital Market has broad discretionary authority over the initial and continued listing of securities, which it could exercise
with respect to the listing of our common stock.
Even if the reverse stock split increases the market
price of our common stock, there can be no assurance that we will be able to comply with other continued listing standards of The
NASDAQ Capital Market.
Even if the market price of our common
stock increases sufficiently so that we comply with the minimum bid price requirement, there can be no assurance that we will be
able to comply with the other standards that we are required to meet in order to maintain a listing of our common stock on The
NASDAQ Capital Market. Our failure to meet these requirements may result in our common stock being delisted from The NASDAQ Capital
Market, irrespective of our compliance with the minimum bid price requirement.
The reverse stock split may decrease the liquidity
of the shares of our common stock.
The liquidity of the shares of our common
stock may be affected adversely by the reverse stock split given the reduced number of shares that will be outstanding following
the reverse stock split, especially if the market price of our common stock does not increase following the reverse stock split.
In addition, the reverse stock split may increase the number of stockholders who own odd lots (less than 100 shares) of our common
stock, creating the potential for such stockholders to experience an increase in the cost of selling their shares and greater difficulty
effecting such sales.
Following the reverse stock split, the resulting market
price of our common stock may not attract new investors, including institutional investors, and may not satisfy the investing requirements
of those investors. Consequently, the trading liquidity of our common stock may not improve.
Although we believe that a higher market
price of our common stock may help generate greater or broader investor interest, there can be no assurance that the reverse stock
split will result in a share price that will attract new investors, including institutional investors. In addition, there can be
no assurance that the market price of our common stock will satisfy the investing requirements of those investors. As a result,
the trading liquidity of our common stock may not necessarily improve.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking
statements. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets
or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our
current expectations and projections about future events, and they are subject to risks and uncertainties (known and unknown) that
could cause actual results and developments to differ materially from those expressed or implied in such statements, including
the following:
|
· |
our ability to raise funds for general corporate purposes and operations; |
|
· |
uncertainties relating to general economic and business conditions; |
|
· |
industry trends and changes in demand for our services; |
|
· |
uncertainties relating to customer plans and commitments and the timing of placement orders from customers; |
|
· |
announcements or changes in our pricing policies or that of our competitors; |
|
· |
availability of management and other key personnel; and |
|
· |
the other factors discussed in the “Risk Factors” section and elsewhere in this prospectus. |
In some cases, you can identify forward-looking
statements by terminology, such as “expects,” “anticipates,” “intends,” “estimates,”
“plans,” “believes,” “seeks,” “may,” “should”, “could”
or the negative of such terms or other similar expressions. Accordingly, these statements involve estimates, assumptions and
uncertainties that could cause actual results to differ materially from those expressed in them. Any forward-looking statements
are qualified in their entirety by reference to the factors discussed throughout this prospectus.
You should read this prospectus and the
documents that we reference herein and therein and have filed as exhibits to the registration statement, of which this prospectus
is part, completely and with the understanding that our actual future results may be materially different from what we expect. You
should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus
only. Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed
in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. Further,
any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated
events, except as may be required under applicable law. New factors emerge from time to time, and it is not possible for us
to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent
to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking
statements. We qualify all of the information presented in this prospectus and any accompanying prospectus supplement, and
particularly our forward-looking statements, by these cautionary statements.
USE OF PROCEEDS
We estimate that the net proceeds from
the sale of the common stock and warrants offered pursuant to this prospectus will be approximately $ million,
or approximately $ million if the underwriters exercise in full
their option to purchase additional shares and warrants, after deducting the underwriting discount and the estimated
offering expenses that are payable by us.
We currently intend to use the net proceeds
from this offering for acquisitions and for working capital and general corporate purposes. While we regularly seek and evaluate
possible acquisition opportunities, we have no material definitive agreements, commitments, understandings or arrangements with
respect to any acquisitions.
We have not yet determined the amount
of net proceeds to be used specifically for any of the foregoing purposes. Accordingly, our management will have significant discretion
and flexibility in applying the net proceeds from this offering. Pending any use as described above, we intend to invest the net
proceeds in high-quality, short-term, interest-bearing securities.
PRICE RANGE
OF COMMON STOCK
Our common stock
is quoted on the OTC Pink marketplace. The table below sets forth the high and low prices for our common stock for the last
two recent fiscal years. Quotations reflect inter-dealer prices, without retail mark-up, mark-down commission, and may not represent
actual transactions.
|
|
High |
|
|
Low |
|
Year ending December 31, 2014 |
|
|
|
|
|
|
|
|
First Quarter |
|
|
.50 |
|
|
|
.17 |
|
Second Quarter |
|
|
.42 |
|
|
|
.20 |
|
Third Quarter |
|
|
.26 |
|
|
|
.10 |
|
Fourth Quarter |
|
|
.082 |
|
|
|
.0012 |
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2013 |
|
|
|
|
|
|
|
|
Fourth Quarter |
|
|
.33 |
|
|
|
.17 |
|
Third Quarter |
|
|
.38 |
|
|
|
.23 |
|
Second Quarter |
|
|
.56 |
|
|
|
.20 |
|
First Quarter |
|
|
.82 |
|
|
|
.10 |
|
As of February 6, 2015, we had 44
stockholders of record of our common stock.
DIVIDEND POLICY
We have never declared
or paid cash dividends on our capital stock. We currently intend to retain all future earnings, if any, to fund the ongoing development
and growth of our business. We do not currently anticipate paying any cash dividends in the foreseeable future.
DILUTION
If you invest in our securities, your interest
will be immediately and substantially diluted to the extent of the difference between the public offering price per share of our
common stock and the pro forma net tangible book value per share of our common stock after giving effect to this offering.
Our pro forma net tangible book value as
of September 26, 2014 was approximately $ million or $ per share of common stock, based upon shares outstanding after giving effect
to issuances of our common stock from September 26, 2014 through and immediately prior to the date of this offering. After giving
effect to the sale of the shares and warrants in this offering at the assumed public offering price of $ per share and after
deducting underwriting discounts and commissions and other estimated offering expenses payable by us, our pro forma as adjusted
net tangible book value at September 26, 2014 would have been approximately $ million or $ per share. This represents an immediate
increase in pro forma net tangible book value of approximately $ per share to our existing stockholders, and an immediate dilution
of $ per share to investors purchasing shares in the offering.
Dilution in pro forma net tangible book
value per share represents the difference between the amount per share paid by purchasers of our common stock in this offering
and the pro forma net tangible book value per share of our common stock immediately after this offering.
The following table illustrates the per
share dilution to investors purchasing shares in the offering:
|
|
|
|
|
Assumed public offering price per share |
|
|
|
|
|
$ |
|
|
Pro forma net tangible book value per share as of September 26, 2014 |
|
$ |
|
|
|
|
|
|
Increase in net tangible book value per share attributable to this offering |
|
$ |
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after this offering |
|
|
|
|
|
$ |
|
|
Amount of dilution in net tangible book value per share to new investors in this offering |
|
|
|
|
|
$ |
|
|
The information above
assumes that the underwriters do not exercise their over-allotment option. If the underwriters exercise their over-allotment option
in full, the pro forma as adjusted net tangible book value will increase to $ per share, representing an immediate increase to
existing stockholders of $ per share and an immediate dilution of $ per share to new investors. If any shares are issued upon exercise
of outstanding options, warrants, convertible debt, or convertible preferred stock, new investors will experience further dilution.
CAPITALIZATION
The following
table sets forth our capitalization, as of September 26, 2014:
|
· |
on a pro forma basis to give effect to the issuance of common stock, convertible debt and Series A Preferred Stock from September 26, 2014 through and immediately prior to the date of this prospectus; and; |
|
· |
on a pro forma, as adjusted basis to give effect to (i) the issuance of shares of common stock and Series A Preferred Stock from September 26, 2014 through and immediately prior to the date of this prospectus and (ii) the sale of the shares and warrants in this offering at the assumed public offering price of $ per share and $ per warrant, after deducting underwriting discounts and commissions and other estimated offering expenses payable by us.. |
You should consider
this table in conjunction with our financial statements and the notes to those financial statements included elsewhere in this
prospectus.
|
|
As of September 26, 2014 |
|
|
Actual |
|
Pro forma |
|
Pro forma, as adjusted |
|
|
|
|
|
|
|
Series A Preferred stock, $.001 par value, 51 |
|
|
|
|
|
|
shares authorized; none issued and outstanding actual and 51 shares |
|
|
|
|
|
|
issued and outstanding Pro forma and Pro forma as adjusted |
|
|
|
|
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Common stock; $0.00001 par value; 1,000,000,000 shares authorized, |
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28,557,173 shares issued and outstanding actual, _____ shares issued |
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outstanding Pro forma, _______ shares issued and outstanding |
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Pro forma, as adjusted |
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Additional paid-in capital |
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Accumulated deficit |
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Accumulated other comprehensive income (loss) |
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following
discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this
prospectus. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties.
See “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions
associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking
statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.
Overview
Labor Smart, Inc. was incorporated in the State
of Nevada on May 31, 2011. We are an emerging provider of temporary employees to the construction, manufacturing, hospitality,
restoration and retail industries. We provide unskilled and semi-skilled temporary workers to our customers. We have rapidly grown
from two branch offices at November 2011 to thirty branch offices at September 26, 2014. The majority of our growth in branch offices
was achieved by opening our own locations. We acquired a total of four branch offices through our acquisition of Qwik Staffing
and Shirley’s Employment. Our annual revenues grew from approximately $7.1 million to $16.6 million from 2012 to 2013. This
revenue growth has been generated both by opening new branch offices and by continuing to increase revenue at existing branch offices.
Our mission is to be the provider of choice
to our growing community of customers, with a service-focused approach, that positions us as a resource and partner for their business.
Seasonality
Generally, we expect our revenues to be higher
and gross margin percent to be higher during the second and third fiscal quarters as compared to the first and fourth fiscal quarters
each year. During the second and third quarters we receive the majority of our contracts to supply labor to construction firms.
Contracts for construction work tends to be both larger in dollar amount and to be more profitable than our other contracts. However,
the effects of seasonality is partially muted by our rapid revenue growth rate.
Growth Strategy
Historically, our growth strategy has been heavily
focused on new branch office openings, growth in revenue from existing offices, and closing one small acquisition per year. On
June 14, 2014, we secured a large deductible worker’s compensation insurance policy which resulted in us becoming substantially
self-insured. We have adjusted our growth strategy based on this significant change to the fundamentals of our business.
We are aggressively pursuing acquisitions that
fit well with our culture and will continue to seek more acquisition opportunities than in prior years. This major shift in focus
is directly related to our new large deductible worker’s compensation policy. Our industry is very fragmented. We have invested
heavily in our corporate infrastructure in the last two years. We believe we can execute acquisitions with an investment of one
to four times EBITDA of the seller and immediately recognize economies of scale and a reduced cost of sales for the acquired customer
lists as it is integrated into our operations. With our experienced management team, we believe we can successfully execute and
close acquisitions totaling $20-$40 million in revenue in 2015.
In fiscal 2015, we will seek opportunities to
open new branches, though our new branch openings will be much less substantial than in prior years as we shift our expansion strategy
to be more acquisition centric. Selection of these locations will be more strategic than in prior years. We will, when possible,
open locations based on needs of already existing clients.
At December 31, 2013, we had 15 branches and
at September 26, 2014, we had 30 branches. The increase in branches was due to fourteen branches added through internal growth
and one branch added through acquisition. Subsequent to the 3rd Quarter of 2014, we added two branches and we closed
one underperforming branch location.
Use of Non-GAAP Financial Information
In addition to GAAP results, this prospectus
also includes certain non-GAAP financial measures as defined by the Securities and Exchange Commission. We define EBITDA as net
income, plus interest and finance expense net of interest income, provision for income taxes, depreciation and amortization. We
define Adjusted EBITDA as these items plus non-recurring acquisition and expansion costs, pretax. EBITDA and Adjusted EBITDA
are measures used by management to evaluate ongoing operations and as a general indicator of our operating cash flow (in conjunction
with a cash flow statement that also includes, among other items, changes in working capital and the effect of non-cash charges).
Management believes these measurements are useful to investors because they are frequently used by securities analysts, investors
and other interested parties in the comparative evaluation of companies. Because not all companies use identical calculations,
our presentation of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. EBITDA
and Adjusted EBITDA are not recognized terms under GAAP, do not purport to be alternatives to, and should be considered in addition
to, and not as a substitute for or superior to, net income (loss) as a measure of operating performance or to cash flows from operating
activities or any other performance measures derived in accordance with GAAP as a measure of liquidity. Additionally, EBITDA
and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use as they do not reflect
certain cash requirements, such as interest payments, tax payments and debt service requirements.
Pursuant to the
requirements of Regulation G, a reconciliation of EBITDA and Adjusted EBITDA to GAAP net loss has been provided in the table below.
RECONCILIATION OF GAAP NET INCOME
(LOSS) TO EBITDA
(UNAUDITED)
|
|
Three Months Ended September 26, 2014 |
GAAP, net loss |
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$ |
(1,087,328 |
) |
Add: |
|
|
|
|
Provision for income taxes |
|
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— |
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Interest and finance expense, net |
|
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1,165,075 |
|
Depreciation and amortization |
|
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43,830 |
|
EBITDA |
|
|
121,577 |
|
Non-recurring acquisition and expansion costs |
|
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223,154 |
|
Adjusted EBITDA |
|
$ |
344,731 |
|
Results of Operations – Three Months
Ended September 26, 2014 as Compared to Three Months Ended September 30, 2013
Summary of Operations:
Revenue for the three months ended September
26, 2014 was $6,847,744 as compared to $5,345,172 for the three months ended September 30, 2013, an increase for the three months
ended September 26, 2014 of $1,502,572 or 28%. This increase was due to improved revenue from existing branches and the opening
of new branches in the first half of fiscal 2014 as well as our acquisition of Shirley’s Employment. Of the 15 branches that
were open at September 30, 2013, revenue for the three months ended September 26, 2014 was $6,013,592, representing a 12.5% increase
in same branch revenue in a year over year comparison.
Cost of Services:
Cost of services was 75% of revenue for
the three months ended September 26, 2014 and83% for the three months ended September 30, 2013. Cost of services mainly
consists of payroll and worker’s compensation expense for our laborers which was $4,998,853 or73% and $133,883 or2% of revenues,
respectively for the three months ended September 26, 2014 and $ 4,925,231 or72% and $207,505 or3% of revenues, respectively for
the three months ended September 30, 2013.
Selling, General and Administrative Expenses (SG&A):
General and administrative fees were 14% of
revenue for the three months ended September 26, 2014 and 10% for the three months ended September 30, 2013.
For the three months ended September 26, 2014,
of our total $1,816,435 in operating expenses, $83,130 is attributable to professional fees including legal, accounting, and consulting
services, $26,260 in stock based compensation related to vesting of stock options, $738,563 to staff payroll expenses, $17,329
to bad debts, and $951,153 to general and administrative fees.
For the three months ended September 30, 2013,
of our total $1,076,595 in operating expenses, $57,045 is attributable to professional fees including legal, accounting, and consulting
services, $69,483 in stock based compensation related to consulting fees, $388,385 to staff payroll expenses, $32,242 for loss
on sale of receivables and $529,440 to general and administrative expenses.
Other income (expenses)
Other income (expenses) mainly consists
of interest and finance expense of $1,165,075 and $272,437 for the three months ended September 26, 2014 and September 30, 2013,
respectively, and gain on changes in fair value in derivative liability of $191,192 and $15,912 for the three months ended September
26, 2014 and September 30, 2013, respectively. Interest and finances expense is largely due to amortization of debt discount
on our convertible notes. Gain on changes in fair value in derivative liability is due to the decrease in our share stock.
A fluctuation in our stock price is the most significant driver for changes in the fair value of our derivative instruments.
Results of Operations – Nine months Ended September 26,
2014 as Compared to Nine months Ended September 30, 2013
Summary of Operations:
Revenue for the nine months ended September
26, 2014 was $18,078,661 as compared to $11,886,084 for the nine months ended September 30, 2013. An increase for the nine months
ended September 26, 2014 of $6,192,577 or 52%.
Cost of Services:
Cost of services was 77% of revenue for the
nine months ended September 26, 2014 and 84% for the nine months ended September 30, 2013. Cost of services mainly consists of
payroll and worker’s compensation expense for our laborers which was $13,137,228 or 73% and $752,965 or 4% of revenues, respectively
for the nine months ended September 26, 2014 and $9,670,540 or 81% and $344,973 or 3% of revenues, respectively for the nine months
ended September 30, 2013.
Selling, General and Administrative Expenses (SG&A):
General and administrative fees were 14% of
revenue for the nine months ended September 26, 2014 and 11% for the nine months ended September 30, 2013.
For the nine months ended September 26, 2014,
of our total of $4,702,170 in operating expenses, $212,272 is attributable to professional fees including legal, accounting, and
consulting services, $119,257 in stock based compensation related to vesting of stock options, $1,773,150 to staff payroll expenses,
$113,375 to bad debts, and $2,484,116 to general and administrative fees.
For the nine months ended September 30, 2013,
of our total $3,010,580 in operating expenses, $220,933 is attributable to professional fees including legal, accounting, and consulting
services, $539,721 in stock based compensation related to consulting fees, $848,980 to staff payroll expenses, $125,602 for loss
on sale of receivables and $1,275,344 to general and administrative expenses.
Other income (expenses)
Other income (expenses) mainly consists of interest
and finance expense of $2,913,386 and $708,641 for the nine months ended September 26, 2014 and September 30, 2013, respectively,
and gain on changes in fair value in derivative liability of $357,842 and $15,912 for the three months ended September 26, 2014
and September 30, 2013, respectively. Interest and finances expense is largely due to amortization of debt discount on our
convertible notes. Gain on changes in fair value in derivative liability is due to the decrease in our share stock. A fluctuation
in our stock price is the most significant driver for changes in the fair value of our derivative instruments.
Year ended December 31, 2013 as compared to the year
ended December 31, 2012
Summary of Operations:
Revenue for the year
ended December 31, 2013 was $16,651,885 as compared to $7,175,846 for the year ended December 31, 2012, an increase for
the year ended December 31, 2013 of $9,476,039 or 132%.
Cost of Services:
Cost of services was
84% of revenue for the year ended December 31, 2013 and 83% for the year ended December 31, 2012. Cost of services mainly consists
of payroll related and worker’s compensation expense for our laborers which was $13,485,552 or 81% and $467,570 or 3% of
revenues, respectively for the year ended December 31, 2013 and $5,718,583 or 80% and $237,096 or 3% of revenues, respectively
for the year ended December 31, 2012.
Selling, General and Administrative
Expenses (SG&A):
General and administrative
fees were 8% of revenue for the year ended December 31, 2013 and 7% for the year ended December 31, 2012.
For the year ended
December 31, 2013, of our total $4,436,247 in operating expenses, $308,515 is attributable to professional fees including legal,
accounting, and consulting services, $801,915 in stock based compensation related to consulting fees, $1,620,859 to staff payroll
expenses, $90,826 for loss on sale of receivables, $215,255 for bad debt expense and $1,398,877 to general and administrative expenses.
For the year ended
December 31, 2012, of our total $1,519,698 in operating expenses, $41,131 is attributable to professional fees including legal,
accounting, and consulting services, $210,600 in stock based compensation related to consulting fees, $549,371 to staff payroll
expenses, bad debt expense to $64,318, $126,321 for loss on sale of receivables and $527,957 to general and administrative fees.
Liquidity and Capital Resources
We have funded our operations to date
primarily through the sale of equity, invoice factoring, convertible notes payable and shareholder loans. Based on our current
operating plan, we anticipate that we have sufficient cash and cash equivalents to fund our operations into the coming months.
We will require additional cash to fund our operating plan past that time. If the level of sales anticipated by our financial plan
are not achieved or our working capital requirements are higher than planned, we will need to raise additional cash sooner or take
actions to reduce operating expenses. We are implementing plans to reduce our costs of capital and improve our revenue. If we cannot
generate adequate cash by implementing these steps, we plan to obtain additional cash through the issuance of equity or debt securities.
There can be no assurance that additional cash will be available or that, if available, it will be available on terms acceptable
to us on a timely basis. If adequate funds are not available on a timely basis, we intend to limit our operations to extend our
funds as we pursue other financing opportunities and business relationships. This limitation of operations could include reducing
our planned investment in working capital to fund revenue growth and result in reductions in staff, operating costs, and capital
expenditures.
Net cash used in operations was $2,902,451
during the nine months ended September 26, 2014. Net cash flows used in operating activities for the nine months ended September
26, 2014 mainly consisted of a net loss of $3,084,683 adjusted for stock based compensation of $119,257, financing fees of $2,389,537,
by an increase of $1,760,776 in accounts receivable and an increase of $162,507 in payroll taxes payable.
Net cash used in operations was $604,645
during the nine months ended September 30, 2013. Net cash flows used in operating activities for the nine months ended September
30, 2013 mainly consisted of a net loss of $1,829,749 adjusted for stock based compensation of $539,721, financing fees of $660,088,
an increase of our off-balance sheet receivables factoring of $570,771, by an increase of $1,477,838 in accounts receivable and
an increase of $847,642 in payroll taxes payable.
Cash used in investing activities totaled
$238,699 for the nine months ended September 26, 2014. Net cash flows used by investing activities consists of assets acquired
in asset purchase agreement of $120,797, the purchase of fixed assets of $75,754 and $99,339 in the purchase of marketable securities
offset by $57,191 in proceeds from the sale of marketable securities.
Cash used in investing activities totaled
$131,059 for the nine months ended September 30, 2013. Net cash flows used by investing activities consists of assets acquired
in asset purchase agreement of $150,000 and $966,696 in the purchase of marketable securities offset by $986,825 in proceeds from
the sale of marketable securities.
Net cash provided by financing activities
totaled $3,402,792 for the nine months ended September 26, 2014. Net cash flows from financing activities consisted of proceeds
from convertible notes payable of $3,844,823, offset by payments on a convertible note payable of $941,039, payments on related
party notes of $27,581, net amount received of $618,031 from factor and payments towards a contingent liability of $91,442.
Net cash provided by financing activities
totaled $848,552 for the nine months ended September 30, 2013. Net cash flows from financing activities consisted of proceeds from
the sale of common stock of $100,000, proceeds from convertible promissory notes payable of $1,033,200, offset by payments on a
convertible promissory note payable of $103,500, payments on related party notes of $129,962, payments towards a contingent liability
of $37,626 and payment for financed insurance premiums of $13,560.
Our continued capital needs will depend
on branch operating performance, our ability to control costs, and the continued impact from our expansion plans in 2014.
Net cash used in operations
was $1,524,975 during the year ended December 31, 2013. Net cash flows used in operating activities for the year ended December
31, 2013 mainly consisted of a net loss of $2,722,980 adjusted for stock based compensation of $801,915, interest and financing
fees of $698,585, a decrease of our off-balance sheet receivables factoring of $291,708, offset by an increase of $1,153,774 in
accounts receivable and an increase of $908,507 in payroll taxes payable.
Net cash used in operations
was $131,606 during the year ended December 31, 2012. Net cash flows used in operating activities for the year ended December 31,
2013 mainly consisted of a net loss of $449,465 adjusted for stock based compensation of $185,000, interest and financing fees
of $124,242, an increase of our off-balance sheet receivables factoring of $291,708, offset by an increase of $995,050 in accounts
receivable and an increase of $553,709 in payroll taxes payable.
Cash used in investing
activities totaled $130,433 for the year ended December 31, 2013. Net cash flows used by investing activities consists of $150,000
paid towards the asset purchase agreement, purchase of fixed assets of $1,188 and $1,833,129 in the purchase of marketable securities
offset by $1,853,884 in proceeds from the sale of marketable securities.
Cash used in investing
activities totaled $26,933 for the year ended December 31, 2012. Net cash flows used by investing activities consists of $28,469
in the purchase of marketable securities offset by $1,536 in proceeds from the sale of marketable securities.
Net cash provided by
financing activities totaled $1,709,059 for the year ended December 31, 2013. Net cash flows from financing activities consisted
of proceeds from convertible notes payable of $1,630,200, proceeds from the issuance of common stock of $100,000 offset by payments
on a convertible note payable of $607,500, payments on related party notes of $173,962, proceeds from loan payable to factor $865,321,
payments towards a contingent liability of $89,840, and payments on financed insurance premiums of $15,160.
Cash provided by financing
activities totaled $218,316 for the year ended December 31, 2012. The proceeds were generated from the issuance of convertible
notes of $120,000, shareholder loans of $210,000 offset by repayments of $110,000, and payments on financed insurance premiums
of $1,684.
Assets and Liabilities:
At September 26, 2014, we had total current
assets of approximately $4,431,647 and current liabilities of approximately $7,677,139. Included in current assets are trade accounts
receivable of approximately $3,702,213, prepaid expenses of $170,602, and deferred financing costs of $7,199. Accounts receivable
are recorded at the invoiced amounts. We regularly review our accounts receivable for collectability. We will typically refer overdue
balances to a collection agency at 120 days and the collection agent pursues collection for another 60 days. Most balances over
120 days past due are written off, as it is probable the receivable will not be collected. We wrote down $113,375 in bad debt included
in S,G,&A during the nine months ended September 26, 2014. As our business matures, we will continue to monitor and seek to
improve our historical collection ratio and aging experience with respect to trade accounts receivable. As we grow, our historical
collection ratio and aging experience with respect to trade accounts receivable will continue to be important factors affecting
our liquidity.
At December 31, 2013,
we had total current assets of approximately $2,239,784 and current liabilities of approximately $3,611,938. Included in current
assets are trade accounts receivable of approximately $1,941,437, prepaid expenses of $45,497, and deferred financing costs of
$57,748. Accounts receivable are recorded at the invoiced amounts. We regularly review our accounts receivable for collectability.
We will typically refer overdue balances to a collection agency at 120 days and the collection agent pursues collection for another
60 days. Most balances over 120 days past due are written off, as it is probable the receivable will not be collected. As our business
matures, we will continue to monitor and seek to improve our historical collection ratio and aging experience with respect to trade
accounts receivable. As we grow, our historical collection ratio and aging experience with respect to trade accounts receivable
will continue to be important factors affecting our liquidity.
Financing:
On July 24, 2013, we terminated a month-to-month
financing agreement with Riviera Finance LLC (“Riviera”) that included a non-recourse factoring arrangement that provides
notification factoring on substantially all our sales. Receivables were factored at a rate of 85% of the invoice face value on
accepted accounts.
Our total financing costs through our facility
with Riviera for the nine months ended September 26, 2014 and September 30, 2013 was $0 and $125,602, respectively, which is reflected
on our Statements of Operations as a loss on sale of receivables. As collateral for repayment of any and all obligations, we granted
Riviera a security interest in all our property, including, but not limited to, accounts receivable, intangible assets, contract
rights, investment property, deposit accounts, and other such assets.
On July
31, 2013, we entered into a Purchase and Sale Agreement with Transfac Capital, Inc. (“Transfac”). Under the terms
of the Purchase and Sale Agreement, Transfac shall have the right, but not the obligation, to purchase up to Two Million Dollars
($2,000,000) worth of accounts receivable (the “Maximum Advances”) of ours. For each account receivable purchased,
Transfac shall advance seventy percent (70%) of the face value of the account and the balance after receipt of full payment on
the account. As consideration, we shall pay Transfac two percent (2%) of the average monthly balance of the outstanding accounts
purchased, with a minimum of one half of one percent (0.5%) of the Maximum Advances per month, as long as the Purchase and Sale
Agreement remains in effect.
Our total financing costs through our facility
with Transfac for the nine months ended September 26, 2014 and 2013 was $218,946 and $29,664, respectively, which is reflected
on our Statements of Operations as interest and finance expense. As collateral for repayment of any and all obligations, we granted
Transfac a security interest in all our property, including, but not limited to, accounts receivable, intangible assets, contract
rights, investment property, deposit accounts, and other such assets.
Our total financing
costs through our facility with Transfac for the year ended December 31, 2013 and 2012 was $103,165 and $0, respectively, which
is reflected on our Statements of Operations in interest and finance expense. As collateral for repayment of any and all obligations,
we granted Transfac a security interest in all our property, including, but not limited to, accounts receivable, intangible assets,
contract rights, investment property, deposit accounts, and other such assets.
On February 27, 2014,
we entered into a First Amendment to Purchase and Sale Agreement (the “Amendment”) with Transfac. The Amendment amended
the original Purchase and Sale Agreement executed by and between us and Transfac on July 31, 2013 (the “Agreement”).
Under the terms of the Amendment, the definition of “Advance Rate” in the Agreement shall be amended to read: “Advance
Rate” means eighty five percent (85%), or such other percent as may be determined from time to time by Transfac in its sole
discretion. The definition of “Account Due Date” in the Agreement shall be amended to read: “Account Due Date”
means eighty (80) days from the date of the invoice evidencing the Account. The definition of “Contract Term” in the
Agreement shall be amended to read: “Contract Term” means an initial period of eighteen (18) months commencing on the
date of this signed First Amendment to Purchase and Sale Agreement and renewal periods of one (1) year thereafter. Finally, under
Section 5 of the Agreement, the following subparagraphs d) and e) were added to read: d) An invoice fee in the amount of five dollars
($5.00) for each invoice evidencing a Purchased Account or Serviced Account. e) The Administrative Fee, Supplemental Fee, Invoice
Fee and other fees and charges are for administration of the Accounts, collection of the Accounts, and administration of this Agreement
and are not intended to be and shall not be construed as interest. All other provisions of the Agreement shall remain in full force
and effect.
Off-Balance Sheet Arrangements
As of September 26, 2014, we do not have any
off-balance sheet arrangements except for our factored receivables under our agreements with Transfac
Capital, Inc. The cash received from our factored receivables finance our operating expenses and are a significant source
of liquidity for us. For more information about the factoring terms, see “Financing” discussion above.
Critical Accounting Policies
Our financial statements are based on the application
of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions,
judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue, and
expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including
information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions
adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates
under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial
statements.
Our significant accounting policies are summarized
in Note 2 of our financial statements. While all these significant accounting policies impact our financial condition and results
of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the
most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual
results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that
applying any other reasonable judgments or estimate methodologies would cause an effect on our results of operations, financial
position or liquidity for the periods presented in this report.
Recent Accounting Pronouncements
In February 2013, the FASB issued authoritative
guidance on the reporting of reclassifications out of accumulated other comprehensive income. The guidance requires an entity to
present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out
of accumulated other comprehensive income by the respective line items of net income if the amount is reclassified to net income
in its entirety in the same reporting period. The guidance is effective for fiscal years beginning after December 15, 2012, with
early adoption permitted. The adoption of this guidance did not have a material effect on our financial condition, results of operations
or cash flows.
From time to time, new accounting pronouncements
are issued by FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that
the impact of recently issued standards, which are not yet effective, will not have a material impact on our financial statements
upon adoption.
BUSINESS
About Labor Smart
Labor Smart, Inc. was incorporated in
the State of Nevada on May 31, 2011. Since inception, we have been engaged in organizational efforts, obtaining financing and deployment
of our business model. We provide temporary blue-collar staffing services. We supply general laborers on demand to the light industries,
including manufacturing, logistics, and warehousing, skilled trades’ people and general laborers to commercial construction
industries.
Industry Summary
The on-demand temporary staffing industry
developed out of the need for businesses to have flexible staffing options that would allow them to respond quickly to changing
business conditions. Cyclical business environments and competitive pressures have prompted businesses to focus on cost reduction,
sometimes replacing full-time employees when absent due to illness, vacation, or unplanned termination and utilizing temporary
staff during peak seasons.
The on-demand temporary staffing industry
is highly fragmented and the industry continues to develop specialized market segments that reflect the diverse needs of the businesses
it serves. Technical skills, work history, duration of assignment, and background check requirements vary among industries and
employers. We operate primarily within the short-term, skilled and unskilled segments of the on-demand temporary staffing industry.
We oversee the operation of multiple locations from a single corporate office. We are a business to business service provider.
The methods we use to sell and market our services to local and regional businesses vary depending on local economic factors, types
of business in the geographic area, and other competitive considerations. Our sales processes can take place at varying locations
including our branch offices, the customers’ worksite, or via e-commerce. Temporary employees are recruited by our branch
staff for placement with our customers based upon customer requirements.
Business Strategies
Our
objective is to aggressively grow our share of the on demand temporary staffing market. We plan to achieve this objective by:
-Growing
revenue in existing locations
-Growing
revenue through new branch openings
-Leveraging
customer relationships across vertical markets
Growing revenue
in existing locations: As a branch location matures, we seek to increase its revenues by expanding sales opportunities
with existing customers and aggressively increasing the number of customers served. By servicing our customers with a high level
of responsiveness and attention to detail, we believe additional market share and revenue growth is obtainable.
Growing revenue
through new branch openings: In 2013 we opened and acquired a total of 9 branches. We will continue to rapidly open new
locations based on the availability of talent in target markets and financial resources of the company. We believe that having
the right talent to oversee the day to day operations of a branch is key to the success of the branch and the company as a whole.
Leveraging customer
relationships across vertical markets: Due to the extensive fragmentation of our industry, we believe our expanding footprint
of branches provides a competitive edge when servicing customers with a regional presence. We intend to leverage local customer
relationships to seek out opportunities on a macro scale with new and existing customers.
Branch Expansion
We have grown rapidly from 6 branch locations
in 2012 to 15 branch locations at January 13, 2015. Our expansion has been achieved by opening company owned branch locations and
by acquisitions of branch locations that are managed day to day by Branch Managers.
We currently anticipate opening a total
of 30-40 branches in 2015 and 30-40 in 2016 while establishing a nationwide presence. We may pursue acquisitions in certain circumstances
and may slow or accelerate expansion based on future developments.
Operations
Branch Locations. Branch locations
are offices where temporary and prospective temporary employees report prior to being placed on an assignment. Branch locations
open between 5am and 6am daily depending on customer needs. Generally, the Branch Manager coordinates assignment of temporary employees
to customer work orders. Prior to dispatching the temporary employee, branch staff ensure that temporary employees have the necessary
Personal Protective Equipment (PPE) as needed for the assignment they are placed on. We provide PPE needed to the temporary employee
at no cost to the temporary employee. Temporary employees are matched to customer assignments primarily based on the customer specific
requirements such as skills, experience, and availability.
Most work orders from customers are scheduled
in advance. However, a significant portion of work orders are requested on short notice by the customer.
The temporary employees are provided
a work order by a branch staff member that is completed and signed by the customer. The work order shows the hours worked and allows
the customer to note a request for the same or different temporary employee at a future date.
Branch locations are generally staffed
with at least two full time employees including the Branch Manager and a Customer Service Representative or an Account Executive.
Each branch locations sets their own hours based on business volume for accepting applications from prospective temporary employees.
Customers. Our customers are primarily
businesses that require employees for manual labor such as hauling, cleaning, digging, loading, and assembly. Our customers are
generally engaged in construction, freight handling, landscaping, warehousing, janitorial, disaster response, light manufacturing,
retail or wholesale operations.
A new branch location initially targets
the construction and janitorial industries for potential customers. We have identified these industries as having a relatively
short sales cycle and ever changing workforce needs. As the branch matures, the customer base broadens and diversifies. We currently
derive our business from a large number of customers.
Sales and Marketing. Generally,
each branch location is responsible for its own sales and marketing efforts. The Branch Manager is primarily responsible for new
customer acquisition and customer service with all branch employees being involved in customer service, and to some degree, the
sales process. Our goal is for each branch to make contact with 125-200 potential customers weekly.
In the future, we plan to support branch
sales efforts from a national approach. We will continue to implement sales and marketing strategies that reflect our expanding
branch footprint and growing corporate infrastructure.
Management Employees and Training.
We seek to hire experienced branch and multi-unit managers as part of our expansion strategy. After a thorough interview process,
new staff members undergo two weeks of training at an existing branch. We are currently developing a structured training program
for all branch staff members that will emphasize
Company sales and service philosophies
and approaches. Additionally, we are identifying top performing Branch Managers to become Certified Training Branches, which will
be responsible for training new staff hires in the future.
Workers’ Compensation Program.
We maintain workers’ compensation insurance as required by state laws. In 2012, our workers’ compensation insurance
for all states was carried by Lumbermen’s Underwriting, except for Ohio and Washington, states that provide state administered
workers compensation pools. In January 2013, we began coverage with Zurich Insurance Group. Both of these policies are guaranteed
cost policies in which we pay a percentage of payroll as premium but assume no financial liability beyond the premiums. As we continue
to grow our branch footprint we intend to develop an internal safety department at our corporate office to manage claims filing,
a return to work program, and coding support for branch staff.
Safety Program. We have deployed
a general safety program that focuses on prevention. We believe that safety awareness and injury prevention will help control long
term worker’s compensation costs as rates are increased or reduced annually based on accident frequency, amount of claims,
and overall loss runs.
Competition. The on demand temporary
staffing industry is highly fragmented and competitive with limited barriers to entry. There is no one company dominant in the
on demand temporary staffing industry, however, there are several large competitors. We believe that the primary factors in obtaining
and retaining customers are the cost of services, the quality of employees provided, the responsiveness of service, and the number
of markets that can be serviced. We believe we may face pricing pressures until and unless we have the ability to service larger
customers on a national scale.
Where You Can Find Us
The address of our principal executive office is:
Labor Smart, Inc,
3270 Florence Road, Suite 200
Powder Springs, GA 30127
Our telephone number is (770) 222-5888. Our facsimile
number is (770) 222-5550. Our website can be viewed at www.laborsmart.com. Information found on our website is not
incorporated by reference into this prospectus.
Employees
As of December 26, 2014, we had 73 permanent
full-time employees and approximately 11,000 temporary employees. We believe our employee relations are satisfactory.
Legal Proceedings
We
know of no material, active or pending legal proceedings against our company, nor are we involved as a plaintiff in any material
proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered
or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
Properties
We lease
all of our branch locations. Branch location leases have, at minimum, a one year term and require additional payments for taxes,
insurance, maintenance and renewal options. In addition to branch locations, we oversee companywide operations at a leased corporate
office space located in an office building at 3270 Florence Road, Suite 200, Powder Springs, GA 30127, for which we pay monthly
rent of $6,250 under a 63 month lease entered into in August 2014.
DIRECTORS
AND EXECUTIVE OFFICERS
The following table
sets forth the names and ages of the members of our Board of Directors and our executive officers and the positions held by each:
Name |
|
Age |
|
Title |
Ryan Schadel |
|
36 |
|
Chief Executive Officer, Chief Financial Officer, Chairman |
Kimberly Thompson |
|
47 |
|
Chief Operating Officer |
James Robert Edmonds |
|
36 |
|
Director |
Matthew Rodgers |
|
51 |
|
Director |
Executive Biographies
Ryan Schadel, our
founder, Chief Executive Officer, Chief Financial Officer and Chairman, has nearly 13 years’ experience in the temporary
staffing industry. During these 12 years he has held numerous positions, starting as a sales rep in January 2000 with a nationwide
temporary staffing company. Of his nearly 13 years’ experience in our industry, 11 have been in a management or executive
capacity, and 8 of those years in a multi-unit management capacity. Mr. Schadel’s experience as our founder qualifies him
to serve on our board of directors.
Kimberly Thompson
has served as our Chief Operating Officer since November 2014. Ms. Thompson was previously an operations manager for Tip Top Roofers,
Inc., from August 2000 to November 2014. Mrs. Thompson is an energetic leader and excels in implementing processes that drive revenue
growth, financial performance, and operational excellence with a strong focus on customer satisfaction and brand loyalty. In her
most recent position, Mrs. Thompson lead the operations team for the largest commercial roofing company in the southeast US.
James Robert Edmonds has served as a member
of our board of directors since October 2014. Mr. Edmonds is a principal
product manager at ServiceNow, Inc. in Santa Clara, California. His tenure with ServiceNow began in 2009 as a consultant.
In 2011 he was promoted to Technical Architect, and in 2013 he was promoted to principal product manager. Prior to his tenure with
ServiceNow, Mr. Edmonds was a technical consultant with C3i Business Solutions where he served from 2007 until 2009. Prior
to his position at C3i, Mr. Edmonds served as the Mobile Solutions Engineer for Cox Communications, Virginia.
His tenure at Cox began in 2000 and he served until 2007.
Matthew
Rodgers has served as a member of our board of directors since October 2014. Mr. Rodgers is the President of iprospectcheck.com,
a privately held employment screening firm located in Folsom, California. His tenure with iprospectcheck.com began in 2009. Prior
to his tenure with iprospectcheck.com, Mr. Rodgers was the President and Chief Executive Officer of Interim Healthcare Staffing
where he served from 2003 until 2012. Prior to his position at Interim HealthCare Staffing, Mr. Rodgers served as Executive Vice
President and Chief Operating Officer of Labor Ready, Inc. His tenure at Labor Ready began in 1998 and he served until 2003.
Family Relationships
There are no family relationships among
our officers and directors.
Involvement in Certain Legal Proceedings
To our knowledge, during the past ten
years, none of our directors, executive officers, promoters, control persons, or nominees has been:
|
• |
the subject of 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; |
|
|
|
|
• |
convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
|
|
|
|
• |
subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or any Federal or State authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; |
|
|
|
|
• |
found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law; |
|
|
|
|
• |
the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (a) any Federal or State securities or commodities law or regulation; (b) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (c) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
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|
• |
the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Corporate Governance and Related Matters
The board of directors
has no nominating, auditing or compensation committees. We intend to establish nominating, audit and compensation committees and
adopt charters for such committees that comply with listing requirements of the Nasdaq Capital Market, prior to commencement of
this offering. We do not have a financial expert serving on the board of directors or employed as an officer based on management’s
belief that the cost of obtaining the services of a person who meets the criteria for a financial expert under Section 407 of the
Sarbanes-Oxley Act of 2002 and Item 407(d) of Regulation S-K is beyond our limited financial resources and the financial skills
of such an expert are simply not required or necessary for us to maintain effective internal controls and procedures for financial
reporting in light of the limited scope and simplicity of accounting issues raised in our financial statements at this stage of
our development. We intend to retain an audit committee financial expert prior to commencement of this offering.
Mr. Edmonds and Mr. Rodgers
qualify as “independent” as that term is defined under the Nasdaq Marketplace Rules
Board Leadership Structure
Our board is responsible for the selection
of the chairman of the board and the chief executive officer. Our board does not have a policy on whether or not the roles of chief
executive officer and chairman should be separate and, if they are to be separate, whether the chairman should be selected from
the non-employee directors or be an employee. Our board believes that Ryan Schadel, our founder and chief executive officer, is
best situated to act as chairman of the board because he is the director most familiar with our business and industry and is therefore
best able to identify the strategic priorities to be discussed by the board.
Our Board’s Role in Risk
Oversight
Our
board of directors is primarily responsible for overseeing our risk management processes. The board of directors receives
and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our company’s
assessment of risks. The board of directors focuses on the most significant risks facing our company and our company’s general
risk management strategy, and also ensures that risks undertaken by our company are consistent with the board’s appetite
for risk. While the board oversees our company, our company’s management is responsible for day-to-day risk management processes.
We believe this division of responsibilities is the most effective approach for addressing the risks facing our company and that
our Board leadership structure supports this approach.
Term of Office
Our directors are appointed
to hold office until removed from office or until his successor has been elected and qualified in accordance with our bylaws. Our
officers are appointed by our board of directors and hold office until removed by the board.
All officers and directors listed above will
remain in office until the next annual meeting of our stockholders, and until their successors have been duly elected and qualified.
There are no agreements with respect to the election of directors. Officers are appointed annually by our board of directors and
each executive officer serves at the discretion of our Board of Directors. We do not have any standing committees.
Code of Ethics
At
this time we have not established any code of conduct and ethics but intend to do so prior to commencement of this offering.
Executive Compensation
The
following table sets forth information concerning the annual and long-term compensation awarded to, earned by, or paid to the
named executive officer for all services rendered in all capacities to our company, or any of its subsidiaries, for the years
ended December 31, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
Name and |
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
Warrant |
|
|
Compen- |
|
|
Principal Position |
|
Year |
|
|
Salary |
|
|
Bonus |
|
|
Awards |
|
|
Awards |
|
|
sation |
|
|
Total |
Ryan Schadel |
|
2014 |
|
$ |
133,330 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
133,330 |
Chief Executive Officer |
|
2013 |
|
$ |
104,000 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
|
|
$ |
104,000 |
and Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following
table shows amounts earned by each director (excluding amounts earned by our executive officers included in the summary compensation
table above) in the fiscal year ended December 31, 2014.
| |
| |
| |
| |
| |
Change in | |
| |
|
| |
| |
| |
| |
| |
Pension | |
| |
|
| |
Fees | |
| |
| |
| |
Value and | |
| |
|
| |
Earned | |
| |
| |
Non-Equity | |
Nonqualified | |
| |
|
| |
or Paid | |
| |
| |
Incentive | |
Deferred | |
| |
|
| |
in | |
Stock | |
Warrant | |
Plan | |
Compensation | |
All Other | |
|
Director | |
Cash | |
Awards | |
Awards | |
Compensation | |
Earnings | |
Compensation | |
Total |
| |
| |
| |
| |
| |
| |
| |
|
Ryan Schadel | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | |
Matthew Rodgers | |
$ | — | | |
$ | 2,218 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 2,218 | |
James Edmonds | |
$ | — | | |
$ | 484 | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 484 | |
There were no outstanding
equity awards held by our named executive officers as of December 31, 2014.
Employment Agreements
We have no formal employment agreements with
our officers.
SECURITY
OWNERSHIP OF CERTAIN
BENEFICIAL
OWNERS AND MANAGEMENT
The following table presents information
regarding the beneficial ownership of our common stock as of January 13, 2015 by:
|
· |
each person, or group of affiliated persons, who is known by us to own beneficially 5% or more of any class of our equity securities; |
|
· |
each of our named executive officers, as defined in Item 402(a)(3) of Regulation S-K; and |
|
· |
our directors and executive officers as a group. |
Shares of common stock beneficially
owned and the respective percentages of beneficial ownership of common stock assumes the exercise of all options, warrants and
other securities convertible into common stock beneficially owned by such person or entity currently exercisable or exercisable
within 60 days of January 13, 2015. Shares issuable pursuant to the exercise of stock options and warrants exercisable within 60
days are deemed outstanding and held by the holder of such options or warrants for computing the percentage of outstanding common
stock beneficially owned by such person, but are not deemed outstanding for computing the percentage of outstanding common stock
beneficially owned by any other person.
Except as indicated
by the footnotes below, we believe, based on the information furnished to us, that the persons and the entities named in the table
have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable
community property laws.
Except as otherwise
noted, the address of the individuals in the following table below is c/o Labor Smart Inc., 3270 Florence Road, Suite 200, Powder
Springs, GA 30127.
| |
Number of | |
|
| |
Shares | |
|
| |
Beneficially | |
|
Name of Beneficial Owner | |
Owned | |
Percentage (1) |
Officers and Directors | |
| | |
| |
Ryan Schadel | |
35,054,792 | | (2) |
8.0 | % |
Kimberly Thompson | |
198,300 | | |
* | |
Matthew Rodgers | |
125,000 | | (3) |
* | |
James Edmonds | |
309,750 | | |
* | |
All officers and directors as a group (4 persons) | |
35,687,842 | | |
8.1 | % |
(1) | | Based on 439,586,521 shares of common stock issued and outstanding as of January 20,
2015. |
(2) | | Includes 51 shares issuable upon conversion of 51 shares of Series A Preferred Stock.
Excludes 50,000 shares owned by the Mr. Schadel’s wife and 210,000 shares issuable upon exercise of options held by Mr.
Schadel’s spouse. Each share of Series A Preferred Stock has voting rights equal to: (x) 0.019607 multiplied by the total
issued and outstanding shares of common stock eligible to vote at the time of the respective vote (the “Numerator”),
divided by (y) 0.49, minus (z) the Numerator. |
(3) | | Represents shares issuable upon exercise of options. |
CERTAIN RELATIONSHIPS
AND RELATED PARTY TRANSACTIONS
Since January
1, 2012, no director, executive officer, principal shareholder holding at least 5% of our common shares, or any family member thereof,
had any material interest, direct or indirect, in any transaction, or proposed transaction, in which the amount involved in the
transaction exceeded or exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for our last
two completed fiscal years.
On January 11, 2012,
we issued a promissory note to Ryan Schadel, our chief executive officer, in exchange for $50,000 in cash. The note is unsecured,
bears interest at 10% per annum if not paid before the maturity date, and had a maturity date of January 11, 2013.
On January 19, 2012,
we issued a promissory note to Ryan Schadel in exchange for $50,000 in cash. The note is unsecured, bears interest at 10% per year
if not paid before the maturity date, and had a maturity date of January 19, 2013.
On February 6, 2012,
we issued a promissory note to Ryan Schadel in exchange for $25,000 in cash. The note is unsecured, bears interest at 10% per year
if not paid before the maturity date, and had a maturity date of February 6, 2013.
On February 20,
2012, we issued a promissory note to Ryan Schadel in exchange for $15,000 in cash. The note is unsecured, bears interest at 10%
per year if not paid before the maturity date, and had a maturity date of February 20, 2013.
On March 5, 2012,
we issued a promissory note to Ryan Schadel in exchange for $15,000 in cash. The note is unsecured, bears interest at 10% per year
if not paid before the maturity date, and had a maturity date of March 5, 2013.
On March 8, 2012,
we issued a promissory note to Ryan Schadel in exchange for $45,000 in cash. The note is unsecured, bears interest at 10% per year
if not paid before the maturity date, and had a maturity date of March 8, 2013.
On March 12, 2012,
we issued a promissory note to Ryan Schadel in exchange for $10,000 in cash. The note is unsecured, bears interest at 10% per year
if not paid before the maturity date, and had a maturity date of March 12, 2013.
On April 25,
2013, we entered into a loan agreement with Ryan Schadel in the amount of $175,768. The loan is payable on demand, unsecured, and
does not bear interest. This loan consolidates all previous loans issued. As of September 26, 2014, $158,543 of this note has been
repaid and $17,225 of this note remains outstanding.
On October 20,
2014, we issued 51 shares of Series A Preferred Stock to Ryan Schadel for his service as our chief executive officer and director.
See “Description of Securities”.
Since January
2014 we have paid Henry Schadel, the father of Ryan Schadel, $7,000 per month for IT consulting services.
DESCRIPTION
OF SECURITIES
Authorized Capital Stock; Issued and Outstanding Capital
Stock
Our authorized capital stock consists
of 1,000,000,000 shares of common stock, $.00001 par value, per share and 5,000,000 shares of preferred stock $.001 par value per
share, of which 51 shares have been designated as Series A Preferred Stock all of which are issued and outstanding (see “Series
A Preferred Stock” below”).
Our board of directors, and Ryan Schadel
as our majority stockholder, have approved an amendment to our articles of incorporation to increase our authorized shares of common
stock from 1,000,000,000 to 20,000,000,000. We plan to file the amendment with the Secretary of State of Nevada effective 21 days
after the definitive information statement for the amendment is mailed to our stockholders, which we anticipate will be in February
2015.
Description of Common Stock
Holders of common stock are entitled
to one vote per share on each matter submitted to a vote at a meeting of our stockholders. Holders of common stock do not have
cumulative voting rights. Holders of common stock do not have preemptive rights or other similar rights to acquire additional shares
of our common stock or other securities. Holders of common stock are entitled to share in all dividends that the Board, in its
discretion, declares from legally available funds. In the event of our liquidation, dissolution or winding up, subject to preferences
that may be applicable to any then-outstanding preferred stock, each outstanding share of common stock entitles its holder to participate
ratably in all our remaining assets that are available for distribution to stockholders. Holders of common stock have no conversion,
preemptive or other subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock.
The rights of the holders of common stock are subject to any rights that may be fixed for holders of preferred stock, when and
if any preferred stock is authorized and issued.
Series A Preferred Stock
Our articles of incorporation authorize
the issuance of 5,000,000 shares of “blank check” preferred stock, par value $0.001 per share, in one or more series,
subject to any limitations prescribed by law, without further vote or action by the stockholders. Each such series of preferred
stock shall have such number of shares, designations, preferences, voting powers, qualifications, and special or relative rights
or privileges as shall be determined by our board of directors, which may include, among others, dividend rights, voting rights,
liquidation preferences, conversion rights and preemptive rights. 51 shares of preferred stock have been designed Series A Preferred
Stock, all of which are issued and outstanding and are owned by Ryan Schadel, our chief executive officer. Each share of
Series A Preferred Stock shall be convertible into one share of common stock and has voting rights equal to: (x) 0.019607 multiplied
by the total issued and outstanding shares of common stock eligible to vote at the time of the respective vote (the “Numerator”),
divided by (y) 0.49, minus (z) the Numerator.
Stock Options
As of __________, 2015, we had outstanding
stock options to purchase an aggregate of ____ shares of common stock, with a weighted average exercise price of $___ per share.
Warrants
As of __________, 2015, we had outstanding
warrants to purchase an aggregate of ______ shares of common stock, with a weighted average exercise price of $___ per share.
The following summary
of certain terms and provisions of the warrants offered hereby is not complete and is subject to, and qualified in its entirety
by the provisions of the form of the warrant, which is filed as an exhibit to the registration statement of which this prospectus
is a part of. Prospective investors should carefully review the terms and provisions set forth in the form of warrant.
Exercisability. The
warrants are exercisable immediately upon issuance and at any time up to the date that is five years from the date of issuance.
The warrants will be exercisable, at the option of each holder, in whole or in part by delivering to us a duly executed exercise
notice accompanied by payment in full for the number of shares of our common stock purchased upon such exercise (except in the
case of a cashless exercise as discussed below). Unless otherwise specified in the warrant, the holder will not have the right
to exercise any portion of the warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% (which
the holder may increase to 9.99% upon 61 days’ notice to us) of the number of shares of our common stock outstanding immediately
after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the warrants.
Cashless Exercise. The
holder may, in its sole discretion, exercise the warrant in whole or in part and, in lieu of making the cash payment otherwise
contemplated to be made to us upon such exercise in payment of the aggregate exercise price, elect instead to receive upon such
exercise the net number of shares of common stock determined according to the formula set forth in the warrant.
Exercise Price. The
initial exercise price per share of common stock purchasable upon exercise of the warrants is $ per share.
The exercise price and the number of shares issuable upon exercise are subject to appropriate adjustment in the event of certain
stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our common stock,
sales of our common stock at a price per share less than the exercise price then in effect (or securities convertible or exercisable
into common stock at a conversion or exercise price less than the exercise price then in effect) and also upon any distributions
of assets, including cash, stock or other property to our stockholders.
Transferability. Subject
to applicable laws, the warrants may be transferred at the option of the holders upon surrender of the warrants to us together
with the appropriate instruments of transfer.
Fundamental Transaction. Upon
the consummation of any Fundamental Transaction (as defined in the warrant), we will be required to purchase the warrants from
the holders for a purchase price of 200% of the Black Scholes Value (as defined in the warrant). A “Fundamental Transaction”
is defined under the warrants as (i) we or any of our subsidiaries shall (1) consolidate or merge with or into any other entity,
or (2) sell, lease, license, assign, transfer, convey or otherwise dispose of all or substantially all of its respective assets.
Representative's Warrants
Please see “Underwriting—Representative’s
Warrants” for a description of the warrants we have agreed to issue to the representative of the underwriters in this offering,
subject to the completion of the offering. We expect to enter into a warrant agreement in respect of the Representative's Warrants
prior to the closing of this offering.
Description of Convertible Notes
As of _________, 2015, we had a total
of convertible promissory notes that were outstanding as follows:
$_________ in principal amount with a
conversion price of $___________; and
$_________ in principal amount with a
conversion price of $___________;
Certain Anti-Takeover Provisions
The
provisions of Nevada law and our bylaws may have the effect of delaying, deferring or preventing another party from acquiring control
of us. These provisions, summarized below, may discourage and prevent coercive takeover practices and inadequate takeover bids.
Nevada Law
Nevada
law contains a provision governing “acquisition of controlling interest.” This law provides generally that any person
or entity that acquires 20% or more of the outstanding voting shares of a publicly-held Nevada corporation in the secondary
public or private market may be denied voting rights with respect to the acquired shares, unless a majority of the disinterested
shareholders of the corporation elects to restore such voting rights in whole or in part. The control share acquisition act provides
that a person or entity acquires “control shares” whenever it acquires shares that, but for the operation of the control
share acquisition act, would bring its voting power within any of the following three ranges: 20 to 33-1/3%; 33-1/3 to 50%; or
more than 50%.
A
“control share acquisition” is generally defined as the direct or indirect acquisition of either ownership or voting
power associated with issued and outstanding control shares. The shareholders or board of directors of a corporation may elect
to exempt the stock of the corporation from the provisions of the control share acquisition act through adoption of a provision
to that effect in the articles of incorporation or bylaws of the corporation. Our articles of incorporation and bylaws do not exempt
our common stock from the control share acquisition act.
The
control share acquisition act is applicable only to shares of “Issuing Corporations” as defined by the Nevada
law. An Issuing Corporation is a Nevada corporation which (i) has 200 or more shareholders, with at least 100 of such shareholders
being both shareholders of record and residents of Nevada, and (ii) does business in Nevada directly or through an affiliated
corporation.
At
this time, we do not have 100 shareholders of record resident of Nevada and we do not conduct business in Nevada directly.
Therefore, the provisions of the control share acquisition act do not apply to acquisitions of our shares and will not until such
time as these requirements have been met. At such time as they may apply, the provisions of the control share acquisition act may
discourage companies or persons interested in acquiring a significant interest in or control of us, regardless of whether such
acquisition may be in the interest of our shareholders.
The Nevada
“Combination with Interested Stockholders Statute” may also have an effect of delaying or making it more difficult
to effect a change in control of us. This statute prevents an “interested stockholder” and a resident domestic Nevada
corporation from entering into a “combination,” unless certain conditions are met. The statute defines “combination”
to include any merger or consolidation with an “interested stockholder,” or any sale, lease, exchange, mortgage, pledge,
transfer or other disposition, in one transaction or a series of transactions with an “interested stockholder” having
(i) an aggregate market value equal to 5% or more of the aggregate market value of the assets of the corporation, (ii) an aggregate
market value equal to 5% or more of the aggregate market value of all outstanding shares of the corporation, or (iii) representing
10% or more of the earning power or net income of the corporation.
An
“interested stockholder” means the beneficial owner of 10% or more of the voting shares of a resident domestic corporation,
or an affiliate or associate thereof. A corporation affected by the statute may not engage in a “combination” within
three years after the interested stockholder acquires its shares unless the combination or purchase is approved by the board of
directors before the interested stockholder acquired such shares. If approval is not obtained, then after the expiration of the
three-year period, the business combination may be consummated with the approval of the board of directors or a majority of the
voting power held by disinterested stockholders, or if the consideration to be paid by the interested stockholder is at least equal
to the highest of (i) the highest price per share paid by the interested stockholder within the three years immediately preceding
the date of the announcement of the combination or in the transaction in which he became an interested stockholder, whichever is
higher, (ii) the market value per common share on the date of announcement of the combination or the date the interested stockholder
acquired the shares, whichever is higher, or (iii) if higher for the holders of preferred stock, the highest liquidation value
of the preferred stock.
Articles of Incorporation and
Bylaws
Our articles of incorporation
are silent as to cumulative voting rights in the election of our directors. Nevada law requires the existence of cumulative voting
rights to be provided for by a corporation’s articles of incorporation. As such, the combination of the present ownership
by a few stockholders of a significant portion of our issued and outstanding voting stock (in particular, Ryan Schadel’s
ownership of the outstanding Series A Preferred Stock; see “Description of Securities”) and lack of cumulative voting
makes it more difficult for other stockholders to replace our board of directors or for a third party to obtain control of us by
replacing our board of directors. Our articles of incorporation and bylaws do not contain any explicit provisions that would have
an effect of delaying, deferring or preventing a change in control of us.
Transfer Agent and Registrar
Shares of common
stock are registered at the transfer agent and are transferable at such office by the registered holder (or duly authorized attorney)
upon surrender of the common stock certificate, properly endorsed. No transfer shall be registered unless we are satisfied that
such transfer will not result in a violation of any applicable federal or state securities laws. The transfer agent and registrar
for our common stock is West Coast Stock Transfer, Inc.
Listing
The shares of our common stock are currently
quoted on the OTC Pink. We intend to apply for the listing of our common stock on The NASDAQ Capital Market under the symbol “LTNC”.
The warrants will not be listed or quoted on any public market or exchange.
UNDERWRITING
is acting as the representative of the
underwriters of the offering, or the Representative. We have entered into an underwriting agreement dated , 2015 with the Representative.
Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to each underwriter named below and each
underwriter named below has severally agreed to purchase, at the public offering price less the underwriting discount set forth
on the cover page of this prospectus, the number of shares of common stock and the number of warrants listed next to its name in
the following table:
Name of Underwriter |
|
Number of
Shares |
|
|
Number of
Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
The underwriters are committed to purchase
all the shares of common stock and warrants offered by us other than those covered by the option to purchase additional shares
described below, if they purchase any shares. The obligations of the underwriters may be terminated upon the occurrence of certain
events specified in the underwriting agreement. Furthermore, pursuant to the underwriting agreement, the underwriters’ obligations
are subject to customary conditions, representations and warranties contained in the underwriting agreement, such as receipt by
the underwriters of officers’ certificates and legal opinions.
The underwriters propose to offer the
common stock and warrants directly to the public at the public offering price set forth on the cover page of this prospectus and
to certain dealers that are members of the Financial Industry Regulatory Authority, or FINRA, at that price less a concession not
in excess of $ per share. Any such dealers may resell shares to certain other brokers
or dealers at a discount of up to $ per share from the public offering price. After the public offering of the shares, the offering
price and other selling terms may be changed by the underwriters. We have agreed to indemnify the underwriters against specified
liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to
make in respect thereof.
Overallotment Option. We
have granted the underwriters an over-allotment option. This option, which is exercisable for up to 45 days after the date of this
prospectus, permits the underwriters to purchase a maximum of additional shares and warrants (15% of the securities sold
in this offering) from us to cover over-allotments, if any. If the underwriters exercise all or part of this option, they will
purchase shares and warrants covered by the option at the public offering price that appears on the cover page of this prospectus,
less the underwriting discount. If this option is exercised in full, the total price to the public will be $ and
the total net proceeds, before expenses, to us will be $ .
Discount. The following
table shows the public offering price, underwriting discount and proceeds, before expenses, to us. The information assumes either
no exercise or full exercise by the underwriters of their over-allotment option.
|
|
|
|
|
|
|
|
Total |
|
|
Total |
|
|
|
Per
Share |
|
|
Per
Warrant |
|
|
Without
Over-
Allotment |
|
|
With
Over-
Allotment |
|
Public offering price |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting discount (7%) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accountable expense allowance (1%) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds, before expenses, to us |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have paid an expense deposit of $15,000
to the representative, which will be applied against the accountable expenses that will be paid by us to the underwriters in connection
with this offering. The non-accountable expense reimbursement does not apply to the underwriter’s over-allotment option.
The underwriting agreement, however, provides that in the event the offering is terminated, the $15,000 expense deposit paid to
the representative will be returned to the extent offering expenses are not actually incurred. We estimate that the total expenses
of the offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding
the underwriting discount, will be approximately $ .
Discretionary Accounts. The underwriters
do not intend to confirm sales of the securities offered hereby to any accounts over which they have discretionary authority.
Lock-Up Agreements. We,
our directors and executive officers and certain of our stockholders expect to enter into lock up agreements with the representative
prior to the commencement of this offering pursuant to which each of these persons or entities, for a period of three months from
the effective date of the registration statement of which this prospectus is a part without the prior written consent of the Representative,
agree not to (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any
shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock owned
or acquired on or prior to the closing date of this offering (including any shares of common stock acquired after the closing date
of this offering upon the conversion, exercise or exchange of such securities); (2) file or caused to be filed any registration
statement relating to the offering of any shares of our capital stock; or (3) enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of ownership of the common stock, whether any such transaction
described in clause (1), (2) or (3) above is to be settled by delivery of common stock or such other securities, in cash or otherwise.
The lock-up period described in the preceding
paragraphs will be automatically extended if: (1) during the last 17 days of the restricted period, we issue an earnings release
or announce material news or a material event; or (2) prior to the expiration of the lock-up period, we announce that we will release
earnings results during the 16-day period beginning on the last day of the lock-up period, in which case the restrictions described
in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the date of the earnings
release.
Representative’s Warrants. We
have agreed to issue to the representative warrants, or the Representative’s Warrants, to purchase up to a total of shares
of common stock (5% of the shares of common stock sold in this offering). The Representative’s Warrants exclude the common
stock underlying the warrants offered to the public and the overallotment option. The warrants are exercisable at a per share price
equal to $ [125% of the public offering price per share in the offering], commencing on a date which is one year from the effective
date of the registration statement of which this prospectus is a part and expiring five years from the effective date of the offering.
The warrants have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to Rule 5110(g)(1)
of FINRA. The Representative (or permitted assignees under Rule 5110(g)(1)) will not sell, transfer, assign, pledge, or hypothecate
these warrants or the securities underlying these warrants, nor will they engage in any hedging, short sale, derivative, put, or
call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period
of 180 days from the date of this prospectus. In addition, the warrants provide for registration rights upon request, in certain
cases. The demand registration right provided will not be greater than five years from the effective date of the offering in compliance
with FINRA Rule 5110(f)(2)(H)(iv). The piggyback registration right provided will not be greater than seven years from the
effective date of the offering in compliance with FINRA Rule 5110(f)(2)(H)(v). We will bear all fees and expenses attendant
to registering the securities issuable on exercise of the warrants other than underwriting commissions incurred and payable by
the holders. The exercise price and number of shares issuable upon exercise of the warrants may be adjusted in certain circumstances
including in the event of a stock dividend, extraordinary cash dividend or our recapitalization, reorganization, merger or consolidation.
However, the warrant exercise price or underlying shares will not be adjusted for issuances of shares of common stock at a price
below the warrant exercise price. We expect to enter into a warrant agreement in respect of the Representative’s Warrants
prior to the closing of this offering.
Right of First Refusal. Until
twelve months after the closing date of the commencement of sales of the offering, the Representative shall have a right of first
refusal to act as sole book-running manager and exclusive underwriter or exclusive placement agent for any public or private equity
or public debt offerings in which we or any subsidiary or successor may engage during such twelve month period.
Electronic Offer, Sale and Distribution
of Shares . A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters
or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering
may distribute prospectuses electronically. The Representative may agree to allocate a number of shares and warrants to underwriters
and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters
and selling group members that will make internet distributions on the same basis as other allocations. Other than the prospectus
in electronic format, the information on these websites is not part of, nor incorporated by reference into, this prospectus or
the registration statement of which this prospectus forms a part, has not been approved or endorsed by us or any underwriter in
its capacity as underwriter, and should not be relied upon by investors.
Stabilization . In
connection with this offering, the underwriters may engage in stabilizing transactions, which involve making bids for, purchasing
and selling shares of common stock in the open market for the purpose of preventing or retarding a decline in the market price
of the common stock while this offering is in progress. These stabilizing transactions may include making short sales of the common
stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase
in this offering, and purchasing shares of common stock on the open market to cover positions created by short sales. Short sales
may be “covered” shorts or may be “naked” shorts. The underwriters may close out any covered short position
by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who
purchase in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the
open market to cover the position.
The underwriters have advised us that,
pursuant to Regulation M promulgated under the Securities Act, they may also engage in other activities that stabilize, maintain
or otherwise affect the price of the common stock, including the imposition of penalty bids. This means that if a representative
of an underwriter purchases common stock in the open market in stabilizing transactions or to cover short sales, the underwriter
can require the representative that sold those shares as part of this offering to repay the underwriting discount received by such
representative.
These activities may have the effect
of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the
common stock, and, as a result, the price of the common stock may be higher than the price that otherwise might exist in the open
market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters may carry out these
transactions in the over-the-counter market or otherwise.
In determining the public offering price,
we and the underwriters expect to consider a number of factors including:
|
· |
the information set forth in this prospectus and otherwise available to the underwriters; |
|
· |
our prospects and the history and prospects for the industry in which we compete; |
|
· |
an assessment of our management; |
|
· |
our prospects for future earnings; |
|
· |
the general condition of the securities markets at the time of this offering; |
|
· |
the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and |
|
· |
other factors deemed relevant by the underwriters and us. |
Neither we, nor the underwriters can
assure investors that an active trading market will develop for our common stock, or that the shares will trade in the public market
at or above the public offering price.
Persons into whose possession this prospectus
comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this
prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by
this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
Passive market making. In connection
with this offering, underwriters and selling group members may engage in passive market making transactions in our common stock
in accordance with Rule 103 of Regulation M under the Exchange Act, during a period before the commencement of offers or sales
of the shares and extending through the completion of the distribution. A passive market maker must display its bid at a price
not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market
maker’s bid, then that bid must then be lowered when specified purchase limits are exceeded.
Other Terms. During
the last 180 days, the underwriters and their affiliates have not provided any investment banking, commercial banking and other
financial services for us and our affiliates for which they have received, customary fees, except as disclosed in this prospectus
and we will not within the 90 days following commencement of sales of the offering have any arrangements with any of the underwriters
for any such services.
From time to time, the underwriters and
their affiliates may effect transactions for their own account or the account of customers, and hold on behalf of themselves or
their customers, long or short positions in our debt or equity securities or loans, and may do so in the future.
We have also agreed to pay the underwriters’
expenses relating to the offering, including (a) all fees, expenses and disbursements relating to background checks of our officers
and directors in an amount not to exceed $5,000 per individual, or an aggregate of $15,000; (b) all fees incurred in clearing
this offering with FINRA; (c) all fees, expenses and disbursements relating to the registration, qualification or exemption of
securities offered under the securities laws of foreign jurisdictions designated by the Representative; (d) ) all fees, expenses
and disbursements relating to the registration or qualification of the securities under the “blue sky” securities
laws of such states and other jurisdictions as the Represntative may reasonably designate (including, without limitation, all
filing and registration fees, and the reasonable fees and disbursements of “blue sky” counsel, it being agreed that
such fees and expenses will be limited to $1,000 per state (plus any state filing fees), (e) the fees and expenses of underwriters’
legal counsel not to exceed $50,000, and (f) upon successfully completing this offering, $25,000 for the underwriters’ use
of Ipreo’s book-building, prospectus tracking and compliance software for this offering. We paid an advance of $15,000
to the Representative, which will be applied against the accountable expense allowance (including an advance for the fees and
expenses of the underwriter’s counsel.) The total of any advanced payments will be refundable to the extent not actually
incurred in compliance with FINRA Rule 5110(f)(2)(C).
Offer Restrictions Outside the United
States
Other than in the United States, no action
has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any
jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly
or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of
any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance
with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised
to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This
prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus
in any jurisdiction in which such an offer or a solicitation is unlawful.
Australia
This prospectus is not a disclosure document
under Chapter 6D of the Australian Corporations Act, has not been lodged with the Australian Securities and Investments Commission
and does not purport to include the information required of a disclosure document under Chapter 6D of the Australian Corporations
Act. Accordingly, (i) the offer of the common stock and warrants under this prospectus is only made to persons to whom it is lawful
to offer the common stock and warrants without disclosure under Chapter 6D of the Australian Corporations Act under one or more
exemptions set out in section 708 of the Australian Corporations Act, (ii) this prospectus is made available in Australia only
to those persons as set forth in clause (i) above, and (iii) the offeree must be sent a notice stating in substance that by accepting
this offer, the offeree represents that the offeree is such a person as set forth in clause (i) above, and, unless permitted under
the Australian Corporations Act, agrees not to sell or offer for sale within Australia any of the common stock and warrants sold
to the offeree within 12 months after its transfer to the offeree under this prospectus.
Canada
This prospectus is not and under no circumstances
is to be construed as a prospectus, advertisement or a public offering of the common stock and warrants under Canadian securities
laws. The securities offered hereunder have not been and will not be qualified by a prospectus for the offer or sale to the public
in Canada under applicable Canadian securities laws. No securities commission or similar regulatory authority in Canada has reviewed
this prospectus or in any way passed upon the merits of the securities offered hereunder and any representation to the contrary
is an offence.
China
The information in this document does
not constitute a public offer of the common stock and warrants, whether by way of sale or subscription, in the People’s Republic
of China (excluding, for purposes of this paragraph, Hong Kong Special Administrative Region, Macau Special Administrative Region
and Taiwan). The common stock and warrants may not be offered or sold directly or indirectly in the PRC to legal or natural persons
other than directly to “qualified domestic institutional investors.”
European Economic Area — Belgium, Germany,
Luxembourg and Netherlands
The information in this document has
been prepared on the basis that all offers of securities will be made pursuant to an exemption under the Directive 2003/71/EC (“Prospectus
Directive”), as implemented in Member States of the European Economic Area (each, a “Relevant Member State”),
from the requirement to produce a prospectus for offers of securities.
An offer to the public of common stock
and warrants has not been made, and may not be made, in a Relevant Member State except pursuant to one of the following exemptions
under the Prospectus Directive as implemented in that Relevant Member State:
|
(a) |
to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; |
|
(b) |
to any legal entity that has two or more of (i) an average of at least 250 employees during its last fiscal year; (ii) a total balance sheet of more than €43,000,000 (as shown on its last annual unconsolidated or consolidated financial statements) and (iii) an annual net turnover of more than €50,000,000 (as shown on its last annual unconsolidated or consolidated financial statements); |
|
(c) |
to fewer than 100 natural or legal persons (other than qualified investors within the meaning of Article 2(1)I of the Prospectus Directive) subject to obtaining the prior consent of us or any underwriter for any such offer; or |
|
(d) |
in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of securities shall result in a requirement for the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive. |
France
This document is not being distributed
in the context of a public offering of financial securities (estr au public de titres financiers) in France within the meaning
of Article L.411-1 of the French Monetary and Financial Code (Code monétaire et financier) and Articles 211-1 et
seq . of the General Regulation of the French Autorité des estrai financiers (“AMF”). The common stock and
warrants have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France.
This document and any other offering
material relating to the common stock and warrants have not been, and will not be, submitted to the AMF for approval in France
and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in France.
Such offers, sales and distributions
have been and shall only be made in France to (i) qualified investors (investisseurs estraint) acting for their own account, as
defined in and in accordance with Articles L.411-2-II-2° and D.411-1 to D.411-3, D. 744-1, D.754-1 and D.764-1 of the French
Monetary and Financial Code and any implementing regulation and/or (ii) a restricted number of non-qualified investors (cercle
estraint d’investisseurs) acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and
D.411-4, D.744-1, D.754-1 and D.764-1 of the French Monetary and Financial Code and any implementing regulation.
Pursuant to Article 211-3 of the General
Regulation of the AMF, investors in France are informed that the common stock and warrants cannot be distributed (directly or indirectly)
to the public by the investors otherwise than in accordance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 to L.621-8-3 of
the French Monetary and Financial Code.
Ireland
The information in this document does
not constitute a prospectus under any Irish laws or regulations and this document has not been filed with or approved by any Irish
regulatory authority as the information has not been prepared in the context of a public offering of securities in Ireland within
the meaning of the Irish Prospectus (Directive 2003/71/EC) Regulations 2005 (the “Prospectus Regulations”). The common
stock and warrants have not been offered or sold, and will not be offered, sold or delivered directly or indirectly in Ireland
by way of a public offering, except to (i) qualified invest ors as defined in Regulation 2(l) of the Prospectus Regulations and
(ii) fewer than 100 natural or legal persons who are not qualified investors.
Israel
The common stock and warrants offered
by this prospectus have not been approved or disapproved by the Israeli Securities Authority (the ISA), or ISA, nor have such securities
been registered for sale in Israel. The securities may not be offered or sold, directly or indirectly, to the public in Israel,
absent the publication of a prospectus. The ISA has not issued permits, approvals or licenses in connection with the offering or
publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability or completeness, or
rendered an opinion as to the quality of the common stock and warrants being offered. Any resale in Israel, directly or indirectly,
to the public of the common stock and warrants offered by this prospectus is subject to restrictions on transferability and must
be effected only in compliance with the Israeli securities laws and regulations.
Italy
The offering of the common stock and
warrants in the Republic of Italy has not been authorized by the Italian Securities and Exchange Commission (Commissione Nazionale
per le Societàe la Borsa, “CONSOB” pursuant to the Italian securities legislation and, accordingly, no offering
material relating to the common stock and warrants may be distributed in Italy and such securities may not be offered or sold in
Italy in a public offer within the meaning of Article 1.1(t) of Legislative Decree No. 58 of 24 February 1998 (“Decree No.
58”), other than:
|
· |
to Italian qualified investors, as defined in Article 100 of Decree no.58 by reference to Article 34-ter of CONSOB Regulation no. 11971 of 14 May 1999 (“Regulation no. 1197l”) as amended (“Qualified Investors”); and |
|
· |
in other circumstances that are exempt from the rules on public offer pursuant to Article 100 of Decree No. 58 and Article 34-ter of Regulation No. 11971 as amended. |
Any offer, sale or delivery of the common stock and warrants
or distribution of any offer document relating to the common stock and warrants in Italy (excluding placements where a Qualified
Investor solicits an offer from the issuer) under the paragraphs above must be:
|
· |
made by investment firms, banks or financial intermediaries permitted to conduct such activities in Italy in accordance with Legislative Decree No. 385 of 1 September 1993 (as amended), Decree No. 58, CONSOB Regulation No. 16190 of 29 October 2007 and any other applicable laws; and |
|
· |
in compliance with all relevant Italian securities, tax and exchange controls and any other applicable laws. |
Any subsequent distribution of the common
stock and warrants in Italy must be made in compliance with the public offer and prospectus requirement rules provided under Decree
No. 58 and the Regulation No. 11971 as amended, unless an exception from those rules applies. Failure to comply with such rules
may result in the sale of such common stock being declared null and void and in the liability of the entity transferring the common
stock and warrants for any damages suffered by the investors.
Japan
The common stock and warrants have not
been and will not be registered under Article 4, paragraph 1 of the Financial Instruments and Exchange Law of Japan (Law No. 25
of 1948), as amended (the “FIEL”) pursuant to an exemption from the registration requirements applicable to a private
placement of securities to Qualified Institutional Investors (as defined in and in accordance with Article 2, paragraph 3 of the
FIEL and the regulations promulgated thereunder). Accordingly, the common stock and warrants may not be offered or sold, directly
or indirectly, in Japan or to, or for the benefit of, any resident of Japan other than Qualified Institutional Investors. Any Qualified
Institutional Investor who acquires common stock and warrants may not resell them to any person in Japan that is not a Qualified
Institutional Investor, and acquisition by any such person of common stock and warrants is conditioned upon the execution of an
agreement to that effect.
Portugal
This document is not being distributed
in the context of a public offer of financial securities (oferta pública de valores mobiliários ) in Portugal,
within the meaning of Article 109 of the Portuguese Securities Code (Código dos Valores Mobiliários ). The
common stock and warrants have not been offered or sold and will not be offered or sold, directly or indirectly, to the public
in Portugal. This document and any other offering material relating to the common stock and warrants have not been, and will not
be, submitted to the Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários)
for approval in Portugal and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public
in Portugal, other than under circumstances that are deemed not to qualify as a public offer under the Portuguese Securities Code.
Such offers, sales and distributions of common stock and warrants in Portugal are limited to persons who are “qualified investors”
(as defined in the Portuguese Securities Code). Only such investors may receive this document and they may not distribute it or
the information contained in it to any other person.
Sweden
This document has not been, and will
not be, registered with or approved by Finansinspektionen (the Swedish Financial Supervisory Authority). Accordingly, this document
may not be made available, nor may the common stock and warrants be offered for sale in Sweden, other than under circumstances
that are deemed not to require a prospectus under the Swedish Financial Instruments Trading Act (1991:980) (Sw. lag (1991:980)
om handel med finansiella instrument). Any offering of common stock and warrants in Sweden is limited to persons who are “qualified
investors” (as defined in the Financial Instruments Trading Act). Only such investors may receive this document and they
may not distribute it or the information contained in it to any other person.
Switzerland
The common stock and warrants may not
be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or on any other stock exchange
or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance
prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses
under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland.
Neither this document nor any other offering material relating to the common stock and warrants may be publicly distributed or
otherwise made publicly available in Switzerland.
Neither this document nor any other offering
material relating to the common stock and warrants have been or will be filed with or approved by any Swiss regulatory authority.
In particular, this document will not be filed with, and the offer of common stock and warrants will not be supervised by, the
Swiss Financial Market Supervisory Authority (FINMA).
This document is personal to the recipient
only and not for general circulation in Switzerland.
United Arab Emirates
Neither this document nor the common
stock and warrants have been approved, disapproved or passed on in any way by the Central Bank of the United Arab Emirates or any
other governmental authority in the United Arab Emirates, nor have we received authorization or licensing from the Central Bank
of the United Arab Emirates or any other governmental authority in the United Arab Emirates to market or sell the common stock
and warrants within the United Arab Emirates. This document does not constitute and may not be used for the purpose of an offer
or invitation. No services relating to the common stock and warrants, including the receipt of applications and/or the allotment
or redemption of such shares, may be rendered within the United Arab Emirates by us.
No offer or invitation to subscribe for
common stock and warrants is valid or permitted in the Dubai International Financial Centre.
United Kingdom
Neither the information in this document
nor any other document relating to the offer has been delivered for approval to the Financial Services Authority in the United
Kingdom and no prospectus (within the meaning of section 85 of the Financial Services and Markets Act 2000, as amended (“FSMA”)
has been published or is intended to be published in respect of the common stock and warrants. This document is issued on a confidential
basis to “qualified investors” (within the meaning of section 86(7) of FSMA) in the United Kingdom, and the common
stock and warrants may not be offered or sold in the United Kingdom by means of this document, any accompanying letter or any other
document, except in circumstances which do not require the publication of a prospectus pursuant to section 86(1) FSMA. This document
should not be distributed, published or reproduced, in whole or in part, nor may its contents be disclosed by recipients to any
other person in the United Kingdom.
Any invitation or inducement to engage
in investment activity (within the meaning of section 21 of FSMA) received in connection with the issue or sale of the common stock
and warrants has only been communicated or caused to be communicated and will only be communicated or caused to be communicated
in the United Kingdom in circumstances in which section 21(1) of FSMA does not apply to us.
In the United Kingdom, this document
is being distributed only to, and is directed at, persons (i) who have professional experience in matters relating to investments
falling within Article 19(5) (investment professionals) of the Financial Services and Markets Act 2000 (Financial Promotions) Order
2005 (“FPO”), (ii) who fall within the categories of persons referred to in Article 49(2)(a) to (d) (high net worth
companies, unincorporated associations, etc.) of the FPO or (iii) to whom it may otherwise be lawfully communicated (together “relevant
persons”). The investments to which this document relates are available only to, and any invitation, offer or agreement to
purchase will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this
document or any of its contents.
LEGAL MATTERS
The
validity of the securities being offered by this prospectus has been passed upon for us by Sichenzia Ross Friedman Ference
LLP, New York, New York. Certain legal matters related to the offering will be passed upon for the underwriters by .
EXPERTS
Our financial
statements included in this prospectus as of and for the fiscal years ended December 31, 2013 and 2012 have been so included in
reliance on the report of De Joya Griffith, LLC, an independent registered public accounting firm, appearing elsewhere herein,
given on the authority of said firm as experts in auditing and accounting.
WHERE YOU
CAN FIND MORE INFORMATION
We are a reporting company and file annual,
quarterly and special reports, and other information with the Securities and Exchange Commission. Copies of the reports and other
information may be read and copied at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549. You can
request copies of such documents by writing to the SEC and paying a fee for the copying cost. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site at http://www.sec.gov
that contains reports, proxy and information statements and other information regarding registrants that file electronically with
the SEC.
This prospectus is part of a registration
statement on Form S-1 that we filed with the SEC. Certain information in the registration statement has been omitted from this
prospectus in accordance with the rules and regulations of the SEC. We have also filed exhibits and schedules with the registration
statement that are excluded from this prospectus. For further information you may:
|
· |
read a copy of the registration statement, including the exhibits and schedules, without charge at the SEC’s Public Reference Room; or |
|
· |
obtain a copy from the SEC upon payment of the fees prescribed by the SEC. |
LABOR SMART, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page |
|
|
Consolidated Balance Sheets (Unaudited) as of September 26, 2014 and December 31, 2013 |
F-2 |
|
|
Statements of Operations and Comprehensive Loss (Unaudited) for the Three and Nine Months Ended September 26, 2014 and September 30, 2013 |
F-3 |
|
|
Statements of Cash Flows (Unaudited) for the Nine Months Ended September 26, 2014 and September 30, 2013 |
F-4 |
|
|
Notes to Financial Statements (Unaudited) |
F-5 |
|
|
Report of Independent Registered Public Accounting Firm |
F-25 |
|
|
Consolidated Balance Sheets as of December 31, 2013 and 2012 |
F-3 |
|
|
Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2013 and December 31, 2012 |
F-4 |
|
|
Statement of Stockholders' Equity (Deficit) for the Years Ended December 31, 2013 and December 31, 2012 |
F-5 |
|
|
Statements of Cash Flows for the Years Ended December 31, 2013 and December 31, 2012 |
F-6 |
|
|
Notes to Financial Statements |
F-8 |
LABOR SMART,
INC.
BALANCE SHEETS
(UNAUDITED)
| |
September 26, | |
December 31, |
| |
2014 | |
2013 |
Assets | |
| |
|
Current assets | |
| |
|
Cash | |
$ | 440,181 | | |
$ | 178,539 | |
Accounts receivable, net | |
| 3,702,213 | | |
| 1,941,437 | |
Prepaid expense | |
| 170,602 | | |
| 45,497 | |
Deferred financing costs | |
| 7,199 | | |
| 57,748 | |
Marketable securities | |
| 105,118 | | |
| 4,972 | |
Other assets | |
| 6,334 | | |
| 11,591 | |
Total current assets | |
| 4,431,647 | | |
| 2,239,784 | |
| |
| | | |
| | |
Deposits | |
| 77,783 | | |
| 20,014 | |
Fixed assets, net | |
| 65,779 | | |
| 7,894 | |
Customer relationships, net | |
| 435,140 | | |
| 228,028 | |
Workers' compensation insurance collateral | |
| 343,217 | | |
| — | |
Total long-term assets | |
| 921,919 | | |
| 255,936 | |
| |
| | | |
| | |
Total assets | |
$ | 5,353,566 | | |
$ | 2,495,720 | |
| |
| | | |
| | |
Liabilities and Stockholders' Deficit | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities | |
| | | |
| | |
Accounts payable and accrued liabilities | |
$ | 155,722 | | |
$ | 135,524 | |
Loan payable to factor | |
| 1,483,352 | | |
| 865,321 | |
Payroll taxes payable | |
| 1,650,414 | | |
| 1,487,907 | |
Notes payable, related party | |
| 17,225 | | |
| 44,806 | |
Contingent liability - current portion | |
| 122,129 | | |
| — | |
Convertible note payable, net of unamortized discount of $2,112,623 | |
| | | |
| | |
and $578,848, respectively | |
| 3,238,034 | | |
| 1,057,679 | |
Convertible note payable derivative liability | |
| 984,763 | | |
| 20,701 | |
Warrant derivative liability | |
| 25,500 | | |
| — | |
Total current liabilities | |
| 7,677,139 | | |
| 3,611,938 | |
| |
| | | |
| | |
Contingent liability | |
| 54,049 | | |
| 79,221 | |
Total liabilities | |
| 7,731,188 | | |
| 3,691,159 | |
| |
| | | |
| | |
Stockholders' deficit | |
| | | |
| | |
Preferred stock, ($.0001 par value, 5,000,000
| |
| | | |
| | |
shares authorized; none issued and outstanding) | |
| — | | |
| — | |
Series A Preferred stock, ($.0001 par value, 51
| |
| | | |
| | |
shares authorized; none issued and outstanding) | |
| — | | |
| — | |
Common stock; $0.001 par value; 1,000,000,000 shares authorized, | |
| | | |
| | |
28,557,173 and 20,982,740 issued and outstanding as of | |
| | | |
| | |
September 26, 2014 and December 31, 2013, respectively. | |
| 28,557 | | |
| 20,982 | |
Additional paid-in capital | |
| 3,799,533 | | |
| 1,978,043 | |
Accumulated deficit | |
| (6,278,461 | ) | |
| (3,193,778 | ) |
Accumulated other comprehensive income (loss) | |
| 72,749 | | |
| (686 | ) |
Total stockholder's deficit | |
| (2,377,622 | ) | |
| (1,195,439 | ) |
Total liabilities and stockholders' deficit | |
| | | |
| | |
| |
$ | 5,353,566 | | |
$ | 2,495,720 | |
See Accompany Notes to Financial Statements
LABOR SMART,
INC.
STATEMENT
OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| |
For the three months September 26, 2014 | |
For the three months September 30, 2013 | |
For the nine months September 26, 2014 | |
For the nine months September 30, 2013 |
| |
| |
| |
| |
|
Revenues | |
$ | 6,847,744 | | |
$ | 5,345,172 | | |
$ | 18,078,661 | | |
$ | 11,886,084 | |
| |
| | | |
| | | |
| | | |
| | |
Cost of sales | |
| 5,132,736 | | |
| 4,435,363 | | |
| 13,890,193 | | |
| 10,015,513 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 1,715,008 | | |
| 909,809 | | |
| 4,188,468 | | |
| 1,870,571 | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Professional fees | |
| 83,130 | | |
| 57,045 | | |
| 212,272 | | |
| 220,933 | |
Stock-based compensation for services | |
| 26,260 | | |
| 69,483 | | |
| 119,257 | | |
| 539,721 | |
Payroll | |
| 738,563 | | |
| 388,385 | | |
| 1,773,150 | | |
| 848,980 | |
Bad debt | |
| 17,329 | | |
| — | | |
| 113,375 | | |
| — | |
Loss on sale of receivables | |
| — | | |
| 32,242 | | |
| — | | |
| 125,602 | |
General and administrative | |
| 951,153 | | |
| 529,440 | | |
| 2,484,116 | | |
| 1,275,344 | |
| |
| | | |
| | | |
| | | |
| | |
Total operating expenses | |
| 1,816,435 | | |
| 1,076,595 | | |
| 4,702,170 | | |
| 3,010,580 | |
| |
| | | |
| | | |
| | | |
| | |
Operating loss | |
| (101,427 | ) | |
| (166,786 | ) | |
| (513,702 | ) | |
| (1,140,009 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expenses) | |
| | | |
| | | |
| | | |
| | |
Interest and finance expense | |
| (1,165,075 | ) | |
| (272,437 | ) | |
| (2,913,386 | ) | |
| (708,641 | ) |
Interest income | |
| — | | |
| — | | |
| — | | |
| 73 | |
Gain on change in fair value in derivative liability | |
| 191,192 | | |
| 15,912 | | |
| 357,842 | | |
| 15,912 | |
Loss on sale of securities | |
| (12,018 | ) | |
| 4,297 | | |
| (15,437 | ) | |
| 2,916 | |
| |
| | | |
| | | |
| | | |
| | |
Total other income (expenses) | |
| (985,901 | ) | |
| (252,228 | ) | |
| (2,570,981 | ) | |
| (689,740 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | (1,087,328 | ) | |
$ | (419,014 | ) | |
$ | (3,084,683 | ) | |
$ | (1,829,749 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other comprehensive income (loss): | |
| | | |
| | | |
| | | |
| | |
Unrealized gain on marketable securities | |
| 78,166 | | |
| 1,399 | | |
| 73,435 | | |
| (3,372 | ) |
Other comprehensive income (loss) | |
| 78,166 | | |
| 1,399 | | |
| 73,435 | | |
| (3,372 | ) |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive loss | |
$ | (1,009,162 | ) | |
$ | (417,615 | ) | |
$ | (3,011,248 | ) | |
$ | (1,833,121 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic loss per common share | |
$ | (0.04 | ) | |
$ | (0.02 | ) | |
$ | (0.13 | ) | |
$ | (0.10 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic weighted average common | |
| | | |
| | | |
| | | |
| | |
shares outstanding | |
| 26,764,068 | | |
| 19,436,806 | | |
| 23,711,572 | | |
| 18,951,574 | |
See Accompany Notes to Financial Statements
LABOR SMART,
INC.
STATEMENT
OF CASH FLOWS
(UNAUDITED)
| |
For the nine months September 26, 2014 | |
For the nine months September 30, 2013 |
Cash flows from operating activities: | |
| |
|
Net loss | |
$ | (3,084,683 | ) | |
$ | (1,829,749 | ) |
Adjustments to reconcile net loss to net | |
| | | |
| | |
cash used in operating activities: | |
| | | |
| | |
Stock-based compensation for services | |
| 119,257 | | |
| 539,721 | |
Interest and financing costs | |
| 2,389,537 | | |
| 660,088 | |
Bad debt | |
| — | | |
| — | |
Depreciation and amortization | |
| 114,748 | | |
| 43,336 | |
(Gain) loss on sale of securities | |
| 15,437 | | |
| (2,916 | ) |
Gain on change in fair value of derivative liability | |
| (357,842 | ) | |
| (15,912 | ) |
Changes in operating assets and liabilities: | |
| | | |
| | |
Increase in off-balance sheet receivable factoring | |
| — | | |
| 570,771 | |
Increase in accounts receivables | |
| (1,760,776 | ) | |
| (1,477,838 | ) |
Increase (decrease) in prepaid expense | |
| (125,104 | ) | |
| 495 | |
Increase in other assets | |
| (395,729 | ) | |
| 29,423 | |
Increase in accounts payable and accrued liabilities | |
| 20,197 | | |
| 30,294 | |
Increase in payroll taxes payable | |
| 162,507 | | |
| 847,642 | |
Net cash used by operating activities | |
| (2,902,451 | ) | |
| (604,645 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Assets acquired in asset purchase agreement | |
| (120,797 | ) | |
| (150,000 | ) |
Purchase of fixed assets | |
| (75,754 | ) | |
| (1,188 | ) |
Proceeds from sale of marketable securities | |
| 57,191 | | |
| 986,825 | |
Purchase of marketable securities | |
| (99,339 | ) | |
| (966,696 | ) |
Net cash used by investing activities | |
| (238,699 | ) | |
| (131,059 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from common stock | |
| — | | |
| 100,000 | |
Proceeds from convertible notes payable | |
| 3,844,823 | | |
| 1,033,200 | |
Proceeds from loan payable to factor | |
| 618,031 | | |
| — | |
Payment on convertible note payable | |
| (941,039 | ) | |
| (103,500 | ) |
Payment on notes payable - related party | |
| (27,581 | ) | |
| (129,962 | ) |
Payments on contingent liability | |
| (91,442 | ) | |
| (37,626 | ) |
Payment on financed insurance | |
| — | | |
| (13,560 | ) |
Net cash provided by financing activities | |
| 3,402,792 | | |
| 848,552 | |
| |
| | | |
| | |
Net change in cash | |
| 261,642 | | |
| 112,848 | |
| |
| | | |
| | |
Cash, beginning of period | |
| 178,539 | | |
| 124,888 | |
| |
| | | |
| | |
Cash, end of period | |
$ | 440,181 | | |
$ | 237,736 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Interest paid | |
$ | 381,399 | | |
$ | — | |
Taxes paid | |
$ | — | | |
$ | — | |
Non-cash interest and financing activities | |
| | | |
| | |
Warrants issued as part of deferred finance costs | |
$ | — | | |
$ | 57,359 | |
Shares issued for prepaid services | |
$ | — | | |
$ | 389,272 | |
Finance costs included in convertible note value | |
$ | — | | |
$ | 65,800 | |
Shares issued for convertible notes | |
$ | 822,681 | | |
$ | — | |
Contingent liability associated with asset purchase | |
$ | 183,194 | | |
$ | 158,490 | |
Convertible note payable derivative liability | |
$ | 1,300,883 | | |
$ | 65,922 | |
Warrant derivative liability | |
$ | 46,560 | | |
$ | — | |
See Accompany Notes to Financial
Statements
LABOR SMART, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 26, 2014
NOTE 1 – NATURE OF OPERATIONS
Nature of Business
Labor Smart, Inc. (the “Company”)
was incorporated in the State of Nevada on May 31, 2011. Labor Smart, Inc. provides temporary blue-collar staffing services. It
supplies general laborers on demand to the light industries, including manufacturing, logistics, and warehousing, skilled trades’
people, and general laborers to commercial construction industries.
NOTE 2 – GOING CONCERN
The accompanying financial statements have
been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. The Company requires capital for its contemplated operational and marketing activities. The Company’s
ability to raise additional capital through the future issuances of common stock is unknown. The Company had a net loss of $3,084,683
for the nine months ended September 26, 2014. Additionally, the operating activities of the Company used $2,902,451 net cash during
the same nine month period. The obtainment of additional financing and increasingly profitable operations are necessary for the
Company to continue operations. The ability to successfully resolve these factors raise substantial doubt about the Company’s
ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
These financial statements are presented in
United States dollars and have been prepared in accordance with generally accepted accounting principles in the United States of
America.
On May 20, 2014, the Board of Directors of
the Company determined it is in the best interests of the Company to change its fiscal year end from December 31 to a
52-53 week fiscal year ending on the Friday closest to December 31. The change is intended to align
the Company’s fiscal periods more closely with the seasonality of its business and improve comparability with industry
peers. This change is effective with the end of the registrant’s fiscal second quarter
ended September 26, 2014. The change to a 52-53 week fiscal year will be retroactively applied as if it was adopted as of January
1, 2014. The registrant’s current fiscal year will end on December 26, 2014. The three month and nine month periods ended
September 26, 2014 include 13 weeks and 26 weeks, respectively.
In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair statement of results in accordance with US GAAP have
been included and properly prepared within reasonable limits of materiality and within the framework of the significant accounting
policies summarized below:
Fair Value of Financial Instruments
As required by the Fair Value Measurements
and Disclosures Topic of the FASB ASC (“ASC 820-10”), fair value is measured based on a three-tier fair value hierarchy,
which prioritizes the inputs used in measuring fair value 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; and
(Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own
assumptions.
The three levels of the fair value hierarchy
are described below:
|
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
Level 2 |
|
Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; |
Level 3 |
|
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
Pursuant to ASC 825, the fair value of
cash and marketable securities is determined based on “Level 1” inputs, which consist of quoted prices in active markets
for identical assets. The Company believes that the recorded values of cash, accounts receivables, accounts payable and accrued
liabilities, and notes payable approximate their current fair values because of their nature and respective relatively short maturity
dates or durations.
Assets measured at fair value on a recurring
basis were presented on the Company’s balance sheets as of September 26, 2014 and December 31, 2013 as follows:
|
Fair Value Measurements as of September 26, 2014 Using: |
|
|
Total Carrying Value as of |
|
|
Quoted Market Prices in Active Markets |
|
|
Significant Other Observable Inputs |
|
|
Significant Unobservable Inputs |
|
|
09/26/14 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
$ |
56,977 |
|
$ |
56,977 |
|
$ |
0 |
|
$ |
0 |
Warrant |
|
48,141 |
|
|
0 |
|
|
48,141 |
|
|
0 |
Total |
$ |
105,118 |
|
$ |
56,977 |
|
$ |
48,141 |
|
$ |
0 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Convertible note payable derivative liability |
$ |
984,763 |
|
$ |
0 |
|
$ |
984,763 |
|
$ |
0 |
Warrant derivative liability |
|
25,500 |
|
|
0 |
|
|
25,500 |
|
|
0 |
Contingent consideration payable |
|
176,178 |
|
|
0 |
|
|
0 |
|
|
176,178 |
Total |
$ |
1,186,441 |
|
$ |
0 |
|
$ |
1,010,263 |
|
$ |
176,178 |
Equity securities comprise publicly traded
shares of common stock. Warrant give the Company, the right but not the obligation, to purchase 100,000 shares of Argon Beauty
Corp. (OTCBB:ABXX). The warrant is valued at the end of each accounting period using the Black Scholes option valuation model using
the following inputs at September 26, 2014: stock price $0.51, exercise price $0.50, expected life 2.98 years, volatility 220%,
dividends 0% and discount rate 1.08%.
|
Fair Value Measurements as of December 31, 2013 Using: |
|
|
Total Carrying Value as of |
|
|
Quoted Market Prices in Active Markets |
|
|
Significant Other Observable Inputs |
|
|
Significant Unobservable Inputs |
|
|
12/31/13 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
$ |
4,972 |
|
$ |
4,972 |
|
$ |
0 |
|
$ |
0 |
Total |
$ |
4,972 |
|
$ |
4,972 |
|
$ |
0 |
|
$ |
0 |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Convertible note payable derivative liability |
$ |
20,701 |
|
$ |
0 |
|
$ |
20,701 |
|
$ |
0 |
Contingent consideration payable |
|
79,221 |
|
|
0 |
|
|
0 |
|
|
79,221 |
Total |
$ |
99,922 |
|
$ |
0 |
|
$ |
20,701 |
|
$ |
79,221 |
Cash and Cash Equivalents
Cash
and cash equivalents consist of cash and short-term investments with original maturities of less
than 90 days. Cash equivalents are placed with high credit quality financial institutions and are primarily in money market funds.
The carrying value of those investments approximates fair value. The Company maintains its cash in bank deposit accounts which
may exceed federally insured limits. As of September 26, 2014, the Company’s accounts are insured for $250,000 by FDIC for
US bank deposits.
Revenue Recognition
The Company recognizes revenues and the related
costs when persuasive evidence of an arrangement exists, delivery and acceptance has occurred or service has been rendered, the
price is fixed or determinable, and collection of the resulting receivable is reasonably assured. Amounts invoiced or collected
in advance of product delivery or providing services are recorded as deferred revenue. The Company accrues for customer credits,
bad debts, and other allowances based on its historical experience. Staffing revenue is recognized as the services are performed.
Revenue also includes billable travel and other reimbursable costs and is recorded net of sales tax.
Deferred Financing Costs
Deferred financing costs consist of costs incurred
to obtain debt financing, including legal fees, origination fees and administration fees. Costs associated with the Convertible
Promissory Note are deferred and amortized in our accompanying statement of operations using the straight-line method, which
approximates the effective interest method, over the terms of the respective financing instrument.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent
assets and liabilities. These estimates and judgments are based on historical information, information that is currently available
to the Company, and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results
could differ from those estimates.
Factoring Agreement and Accounts Receivable
On July
31, 2013 the Company entered into a Purchase and Sale Agreement with Transfac Capital, Inc. (“Transfac”). Advances
to the Company from Transfac are with recourse and are secured by assets of the Company and are treated as a secured financing
arrangement. As of September 26, 2014 and December 31, 2013, factored accounts receivable total $1,483,352 and $865,321, respectively.
Allowance for Doubtful Accounts
The Company allows for an estimated amount
of receivables that may not be collected. The Company estimates its allowance for doubtful accounts based on historical experience
and customer relationships. As of September 26, 2014 and December 31, 2013, the Company has recorded an allowance of $55,605 and
$156,297, respectively.
Equipment
Property and equipment are stated at the lower
of cost or fair value. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, as follows:
Description |
Estimated Life |
Office equipment and furniture |
3 years |
The estimated useful lives are based on the
nature of the assets as well as current operating strategy and legal considerations such as contractual life. Future events, such
as property expansions, property developments, new competition, or new regulations, could result in a change in the manner in which
the Company uses certain assets requiring a change in the estimated useful lives of such assets.
| |
| September 26, 2014 | | |
| December 31, 2013 | |
Office equipment and furniture | |
$ | 87,595 | | |
$ | 11,841 | |
Less: accumulated depreciation | |
| (21,816 | ) | |
| (3,947 | ) |
| |
$ | 65,779 | | |
$ | 7,894 | |
Customer Relationships
Customer relationships comprise customer lists
acquired from Qwik Staffing Solutions, Inc. on April 29, 2013 with an estimated fair value of $293,920 from Shirley’s Employment
Service, Inc. on April 9, 2014 with an estimated fair value of $162,641 and from Kwik Jobs on September 26, 2014 with an estimated
fair value of $141,529. Customer lists are amortized on a straight-line basis over three years.
|
|
September 26, 2014 |
|
December 31, 2013 |
Customer lists |
|
$ 598,090 |
|
$ 294,100 |
Less: accumulated amortization |
|
(162,950) |
|
(66,072) |
|
|
$ 435,140 |
|
$ 228,028 |
Earnings Per Share
Basic earnings (loss) per common share is computed
by dividing net income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding
during the period. Diluted earnings per common share is computed by dividing income available to common shareholders by the weighted-average
number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock
that would have been outstanding if potentially dilutive securities had been issued.
Convertible Debentures
Beneficial Conversion Feature
If the conversion features of conventional
convertible debt provides for a rate of conversion that is below market
value, this feature is characterized as a beneficial
conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt
with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related
to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method.
Debt Discount
The Company determines if the convertible debenture
should be accounted for as liability or equity under ASC 480, Liabilities — Distinguishing Liabilities from Equity. ASC 480,
applies to certain contracts involving a company's own equity, and requires that issuers classify the following freestanding financial
instruments as liabilities. Mandatorily redeemable financial instruments, Obligations that require or may require repurchase of
the issuer's equity shares by transferring assets (e.g., written put options and forward purchase contracts), and Certain obligations
where at inception the monetary value of the obligation is based solely or predominantly on:
– A fixed monetary amount known at inception,
for example, a payable settleable with a variable number of the issuer's equity shares with an issuance date fair value equal to
a fixed dollar amount,
– Variations in something other than
the fair value of the issuer's equity shares, for example, a financial instrument indexed to the S&P 500 and settleable with
a variable number of the issuer's equity shares, or
– Variations inversely related to changes
in the fair value of the issuer's equity shares, for example, a written put that could be net share settled.
If the entity determined the instrument meets
the guidance under ASC 480 the instrument is accounted for as a liability with respective debt discount. The Company records debt
discounts in connection with raising funds through the issuance of convertible debt (see Note 10). These costs are amortized to
non-cash interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the
unamortized amounts is immediately expensed.
Derivative Financial Instruments
Derivative financial instruments, as defined
in ASC 815, “Accounting for Derivative Financial Instruments and Hedging Activities”, consist of financial instruments
or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable),
require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded
in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value
and recorded as liabilities or, in rare instances, assets.
The Company does not use derivative financial
instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has issued financial instruments
including senior convertible promissory notes payable and freestanding stock purchase warrants with features that are either (i)
not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash
settled by the counterparty. As required by ASC 815, in certain instances, these instruments are required to be carried as derivative
liabilities, at fair value, in our financial statements.
Stock-based compensation
The Company records stock based compensation
in accordance with the guidance in ASC Topic 505 and 718 which requires the Company to recognize expenses related to the fair value
of its employee stock option awards. This eliminates accounting for share-based compensation transactions using the intrinsic value
and requires instead that such transactions be accounted for using a fair-value-based method. The Company recognizes the cost of
all share-based awards on a graded vesting basis over the vesting period of the award.
The Company accounts for equity instruments
issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10 and the conclusions
reached by the FASB ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated
fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for
consideration other than employee services is determined on the earliest of a performance commitment or completion of performance
by the provider of goods or services as defined by FASB ASC 505-50.
Recent Accounting Pronouncements
The Company does not expect the adoption of
recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial
position, or cash flow.
NOTE 4 – ASSET PURCHASE AGREEMENTS
On April 9, 2014, the Company entered into
an Asset Purchase Agreement (“Agreement”) with Shirley’s Employment Service, Inc. (“Shirley’s”).
Under the terms of the Agreement, Shirley’s sold all of the operating assets (“Assets”) of Shirley’s,
excluding cash and accounts receivable. In consideration for the Assets, the Company agreed to pay $300,000 in cash minus
the open accounts receivable of Shirley’s. At closing, it was estimated by the Company that $170,797 will be paid for the
Assets after deducting accounts receivable. The first $70,797 was paid one day prior to the delivery and transfer of the Assets.
The remaining $100,000 is due in monthly installments by paying an amount equal to 5.0% of the monthly accounts receivable
collected at the Tulsa, Oklahoma location. In the event these aggregate monthly payments total less than $100,000, after
18 months, Shirley’s will issue the Company a credit memo for the difference.
The total purchase price for Shirley’s
was approximately $162,461. The purchase price consisted of approximately (i) $70,797 in cash, (ii) Estimated fair value
of consideration payable on collection 5.0% of the monthly accounts receivable collected by operating the Tulsa, Oklahoma location
over the next 18 months of $91,664. The Company expected to pay total consideration of $100,000 in equal installments over 18 months.
The fair value of the consideration was estimated by discounting the monthly installments by 12% per annum.
The determination of the estimated fair value
of the acquired assets and liabilities assumed required management to make significant estimates and assumptions. We determined
the fair value by applying established valuation techniques, based on information that management believed to be relevant to this
determination. The following table summarizes the purchase price allocation of the fair value of the assets acquired and liabilities
assumed at the date of purchase:
Customer relationships |
$ 164,641 |
Net assets acquired |
$ 164,641 |
|
|
Cash |
$ 70,797 |
Contingent consideration |
91,664 |
Consideration paid |
$ 164,641 |
On September 26, 2014, the Company entered
into an Asset Purchase Agreement (“Agreement”) with Kwik Jobs, Inc. (“Kwik’s”). Under the terms
of the Agreement, Kwik’s sold all of the operating assets (“Assets”) of Kwik’s. The first $50,000
was paid on closing. The remaining estimated $100,000 is due in monthly installments by paying an amount equal 5.0% of the
monthly accounts receivable collected at the Birmingham Alabama and Decatur Georgia locations.
The fair value of the total purchase price
for Kwik’s was approximately $141,529. The purchase price consisted of (i) $50,000 in cash, (ii) Estimated fair
value of consideration payable on collection 5.0% of the monthly accounts receivable collected at the Birmingham, Alabama and Decatur,
Georgia locations over the next 18 months of $91,529. The Company estimates that it will pay total consideration of $100,000 in
equal installments over 18 months. The fair value of the consideration was estimated by discounting the monthly installments by
12% per annum.
The determination of the estimated fair value
of the acquired assets and liabilities assumed required management to make significant estimates and assumptions. We determined
the fair value by applying established valuation techniques, based on information that management believed to be relevant to this
determination. The following table summarizes the purchase price allocation of the fair value of the assets acquired and liabilities
assumed at the date of purchase:
Customer relationships |
$ 141,529 |
Net assets acquired |
$ 141,529 |
|
|
Cash |
$ 50,000 |
Contingent
consideration |
91,529 |
Consideration paid |
$ 141,529 |
NOTE 5 – WORKERS COMPENSATION INSURANCE
COLLATERAL FUND
During the quarter ended September 26, 2014,
the Company entered into an insurance contract for workers compensation insurance for the policy period of June 14, 2014 to June
14, 2015. The policy coverage is for fifteen states. Coverage provided is $1,000,000 per occurrence with a deductible of $250,000
per occurrence. Upon binding of the contract, the Company paid a collateral deposit of $222,532 and 8% of the estimated annual
premium of $27,468. Thereafter, $450,000 of collateral is payable in weekly installments of $8,654 and estimated premium of $343,347
is payable in weekly installments of $6.603. The Workers Compensation Insurance Collateral Fund “Collateral Fund” is
a depleting loss fund whereby actual charges for losses per occurrence under $250,000 is directly charged to the fund. At the end
of each accounting period the Company estimates and records a liability for future changes against the Collateral Fund for occurrences
during the period. Premiums paid under the contract cover losses in excess of $250,000.
Other States are covered by State pools with
premiums expensed when due.
NOTE 6 – PREPAID EXPENSES
As of September 26, 2014 and December 31, 2013,
the Company had prepaid expenses of $170,602 and $45,497, respectively. Prepaid expenses at September 26, 2014 comprises prepaid
lease payments and other prepaid amounts.
NOTE 7 – RELATED PARTY
On April 25, 2013, the Company entered into
a loan agreement with the CEO of the Company in the amount of $175,768. This loan is payable on demand, unsecured, and bears 0%
interest per annum. This loan consolidates all previous loans issued. As of September 26, 2014, $158,543 of this note has been
repaid and $17,225 of this note remains outstanding.
NOTE 8 – PAYROLL TAXES PAYABLE
On March 17, 2014, the Internal Revenue Service
agreed not to take collection action against the Company for payroll tax liabilities as long as the Company remains current and
makes monthly installments against outstanding liabilities (“Installment Agreement”). The agreed monthly installments
are $5,000 which increases to $10,000 on July 28, 2014 which further increases to $15,000 on July 28, 2016. On the date of the
Installment Agreement, the total amount of our federal tax liability was $1,019,923, all of which is included in the Installment
Agreement. Interest under the Installment Agreement accrues at 3% plus the published Applicable Federal Short Term Rate (“AFR”)
per annum. The AFR as of August 4, 2014 is 0.36% per annum. At September 26, 2014 and August 4, 2014, we were in full compliance
of the terms of the Installment Agreement.
On June 23, 2014, the Company was refunded
$37,227 in penalties and interest which was originally paid and expensed in fiscal 2012. This amount has been applied to our outstanding
Federal payroll tax liability.
NOTE 9 – FACTORING AGREEMENT
On July
31, 2013 the Company entered into a Purchase and Sale Agreement with Transfac Capital, Inc. (“Transfac”). Under
the terms of the Purchase and Sale Agreement, Transfac shall have the right, but not the obligation, to purchase up to Two Million
Dollars ($2,000,000) worth of accounts receivable (the “Maximum Advances”) of the Company. For each account receivable
purchased, Transfac shall advance seventy percent (70%) of the face value of the account and the balance after receipt of full
payment on the account. As consideration, the Company shall pay Transfac two percent (2%) of the average monthly balance
of the outstanding accounts purchased, with a minimum of one half of one percent (0.5%) of the Maximum Advances per month, as long
as the Purchase and Sale Agreement remains in effect.
The factoring line of credit with Transfac
has been treated as a secured financing arrangement. As of September 26, 2014 and December 31, 2013 under the agreement with Transfac,
the Company had factored receivables in the amount of $1,850,824 and $1,281,122, respectively, and recorded a liability of $1,483,352
and $865,321,
respectively. Discounts and interest provided
during factoring of the accounts receivable have been expensed on the accompanying statements of operations as interest expense.
For the nine months ended September 26, 2014, interest expense related to the factoring arrangement was $218,946.
NOTE 10 – CONVERTIBLE PROMISSORY NOTES
On March 4, 2013, the Company issued a Convertible
Promissory Note (“Note”) to Vista Capital Investments, LLC (“Holder”), in the original principle amount
of $275,000 bearing a 12% annual interest rate and maturing one year for $250,000 of consideration paid in cash and a $25,000 original
issue discount. The Company may repay the Note any time and if repaid within 90 days of date of issue with an interest rate is
0%. This Note together with any unpaid accrued interest is convertible into shares of common stock at the Holder’s option
at a variable conversion price calculated as lessor of (a) $0.62 or (b) 60% of the lowest trade occurring during the 25 consecutive
trading days immediately preceding the conversion date.
| i) | The Company received cash proceeds of $25,000 on the first tranche
of the Note, which was net of original issue discount of $20,533. During the year ended December 31, 2013, the Holder converted
217,374 shares of common stock of the Company with a fair value of $61,667 for $25,000 and $5,800 in principal and interest, respectively.
On November 21, 2013, the first tranche of the Note was paid in full. |
| ii) | On October 30, 2013, the Company received
cash proceeds of $25,000 on the second tranche of the Note, which was net of original issue discount of $18,667. During the nine
months ended September 26, 2014, the Holder converted 239,246 shares of common stock of the Company with a fair value of $57,856
for $27,500 and $3,300 in principal and interest, respectively. On March 3, 2013, the second
tranche of the Note was paid in full. |
| iii) | On January 14, 2014, the Company received cash proceeds of $25,000
on the third tranche of the Note. |
| iv) | On March 19, 2014, the Company received cash proceeds of $25,000
on the fourth tranche of the Note. During the nine months ended September 26, 2014, the Holder converted 100,000 shares of common
stock of the Company with a fair value of $17,500 for $10,260 in principal and interest, respectively. |
| v) | On May 27, 2014, the Company received cash proceeds of $25,000 on
the fifth tranche of the Note. |
| vi) | On July 24, 2014, the Company received cash proceeds of $25,000 on
the sixth tranche of the Note. |
On March 6, 2013, the Company issued a Convertible
Promissory Note (“Note”) to JMJ Financial (“Holder”), in the original principle amount of $275,000 bearing
a 12% annual interest rate and maturing in one year for $250,000 of consideration paid in cash and a $25,000 original issue discount.
The Company may repay the Note any time and if repaid within 90 days of date of issue with an interest rate is 0%. This Note together
with any unpaid accrued interest is convertible into shares of common stock at the Holder’s option at a variable conversion
price calculated as lessor of (a) $0.62 or (b) 60% of the lowest trade occurring during the 25 consecutive trading days immediately
preceding the conversion date.
| i) | On March 6, 2013, the Company received cash of $46,000 in the first
tranche, which was net of original issue discount of $41,067. During the year ended December 31, 2013, the Holder converted 433,705
shares of common stock of the Company with a fair value of $115,758 for $55,000 and $6,600 in principal and interest, respectively.
On November 12, 2013, the first tranche was paid in full. |
| ii) | On June 27, 2013, the Company received the second tranche of $50,000
in cash, which was net of original issue discount of $43,750. During the nine months ended September 26, 2014, the Holder converted
603,943 shares of common stock of the Company with a fair value of $142,804 for $56,250 and $6,750 in principal and interest, respectively.
On March 3, 2014, the second tranche of the Note was paid in full. |
| iii) | On September 27, 2013, the Company received the third tranche of
$50,000 in cash, which was net of original issue discount of $42,000. During the nine months ended September 26, 2014, the Holder
converted 552,632 shares of common stock of the Company with a fair value of $243,158 for $56,250 and $6,750 in principal and interest,
respectively. On March 26, 2014, the third tranche of the Note was paid in full. |
| iv) | On December 9, 2013, the Company received the fourth tranche of $40,000
in cash, which was net of original issue discount of $36,497. During the nine months ended September 26, 2014, the Holder converted
432,629 shares of common stock of the Company with a fair value of $96,576 for $45,000 and $5,400 in principal and interest, respectively.
On July 22, 2014, the fourth tranche of the Note was paid in full. |
On July 11, 2013, the Company entered into
a Convertible Promissory Note (“Note”) with Asher Enterprises, Inc. (“Holder”) in the original principle
amount of $63,000 bearing an 8% annual interest rate and maturing April 15, 2014. This Note together with any unpaid accrued interest
is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price calculated
at 58% of the market price which means the average of the lowest three trading prices during the ten trading day period ending
on the latest complete trading day prior to the conversion date. The Company may repay the Note if repaid within 30 days of date
of issue at 112% of the original principal amount plus interest, between 31 days and 60 days at 119% of the original principal
amount plus interest, between 61 days and 90 days at 125% of the original principal amount plus interest, between 91 days and 120
days at 130% of the original principal amount plus interest and between 121 days and 180 days at 135% of the original principal
amount plus interest. Thereafter, the Company does not have the right of prepayment. The Company received cash proceeds of $60,000,
which was net of original issue discount of $48,400. On January 9, 2014, the Company elected to pay the Note in full for $87,466
in cash allocated to $63,000 and $24,466 in principal and interest, respectively.
On September 16, 2013, the Company entered
into a Convertible Promissory Note (“Note”) with Willow Creek Capital Group, LLC (“Holder”) in the original
principle amount of $130,000 bearing a 12% annual interest rate and maturing July 16, 2014. At the option of the Holder:
| i) | The Note together with any unpaid accrued interest is convertible
into shares of common stock of the Company at a variable conversion price calculated at 58% of the market price which means the
average of the lowest three trading prices during the ten trading day period ending on the latest complete trading day prior to
the conversion date, or |
| ii) | All principal, costs, charges and interest amounts outstanding may
be exchanged for shares of the Company’s common stock at the Conversion Price of $0.34 per share. The Conversion Price is
subject to an anti-dilution adjustment in the event the Company at any time, while the Notes are outstanding, issues equity securities
including common stock or any security convertible or exchangeable for shares of common stock for no consideration or for consideration
less than $0.34 a share. |
The Company may repay the Note at 135% of the
original principal amount plus interest. The Company received cash proceeds of $125,000, which was net of original issue discount
of $103,516 and convertible note payable derivative liability of $65,723. During the nine months ended September 26, 2014, the
Company elected to pay $79,099 in cash and the Holder converted 509,965 shares of common stock of the Company with a fair value
of $113,922 for $53,353 in principal and interest. At July 16, 2014, the Note was paid in full.
On October 31, 2013, the Company issued a Convertible
Promissory Note (“Note”) to Iconic Holding, LLC (“Holder”), in the original principle amount of $110,250
bearing a 0% annual interest rate and maturing October 31, 2014 for $105,000 of consideration paid in cash and a $5,250 original
issue discount. This unsecured Note is convertible into shares of common stock at the Holder’s option at a variable conversion
price calculated at 60% of the lowest trading price of any day during the 10 consecutive trading days prior to the dated on which
the Holder elects to convert all or part of the Note. The Company may repay the Note within 60 days of date of issue at 125% of
the original principal amount plus interest, between 60 days and 120 days at 130% of the original principal amount plus interest
plus 30,000 shares of common stock of the Company and between 120 days and 180 days at 135% of the original principal amount plus
interest plus 60,000 shares of common stock of the Company. Thereafter, the Note may only be repaid with the consent of the Holder.
The Company received cash proceeds of $105,000, which was net of unamortized discount of $73,500. At December 31, 2013, $12,284
of discount has been amortized. During the nine months ended September 26, 2014, the Holder converted 811,462 shares of common
stock of the Company with a fair value of $208,845 for $110,250 of principal and interest. On June 5, 2014, the Note was paid in
full.
On November 4, 2013, the Company entered into
a Convertible Promissory Note (“Note”) with Asher Enterprises, Inc. (“Holder”) in the original principle
amount of $128,500 bearing an 8% annual interest rate and maturing November 4, 2014. This Note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated at 58% of the market price which means the average of the lowest three trading prices during the ten trading day period
ending on the latest complete trading day prior to the conversion date. The Company may repay the Note if repaid within 30 days
of date of issue at 112% of the original principal amount plus interest, between 31 days and 60 days at 119% of the original principal
amount plus interest, between 61 days and 90 days at 125% of the original principal amount plus interest, between 91 days and 120
days at 130% of the original principal amount plus interest and between 121 days and 180 days at 135% of the original principal
amount plus interest. Thereafter, the Company does not have the right of prepayment. The Company received cash proceeds of $125,000,
which was net of original issue discount of $100,496. On May 21, 2014, the Company elected to pay the Note in full for $178,545
in cash allocated to $128,500 and $50,045 in principal and interest, respectively.
On December 9, 2013, the Company entered into
a Convertible Promissory Note (“Note”) with Group 10 Holdings, LLC (“Holder”) in the original principle
amount of $106,000 bearing a 12% annual interest rate and maturing December 9, 2014. This Note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated at 55% of the lowest trading price of any day during the 10 consecutive trading days prior to the dated on which the
Holder elects to convert all or part of the Note. The Company may repay the Note if repaid within 30 days of date of issue at 125%
of the original principal amount plus interest and between 31 days and 179 days at 135% of the original principal amount plus interest.
Thereafter, the Company subject to the approval of the Holder, may repay the Note at 135% of the original principal amount plus
interest. The Company received cash proceeds of $101,000 which was net of original issue discount of $97,135. During the nine months
ended September 26, 2014, the Holder converted 993,428 shares of common stock of the Company with a fair value of $214,959 for
$105,000 of principal and interest.
On December 12, 2013 the Company entered into
a Convertible Promissory Note (“Note”) with Tonaquint Inc. (“Holder”) in the original principle amount
of $115,000 bearing a 10% annual interest rate and maturing November 12, 2014. The Note is due is six equal monthly installments
plus interest (“Installment Amount”) commencing six months after the issue date. At the option of the Holder, the Installment
Amount is convertible into shares of common stock of the Company at a variable conversion price calculated at 60% of the market
price which means the average of the lowest two trading prices during the twenty trading day period ending on the latest complete
trading day prior to the conversion date. The Company may elect to prepay in cash all or any portion of the outstanding balance
of the Note if the Company pays the holder 125% of the outstanding balance. The Company received cash proceeds of $100,000, which
was net of original issue discount of $83,703. During the nine months ended September 26, 2014, the Company elected to pay $24,994
in cash and the Holder converted 713,167 shares of common stock of the Company with a fair market value of $138,205 for $90,126
in principal and interest. At July 17, 2014, the Note was paid in full.
On December 13, 2013 the Company entered into
a Convertible Promissory Note (“Note”) with Tailwind Partners, LLC (“Holder”) in the original principle
amount of $106,000 bearing a 12% annual interest rate and maturing November 12, 2014. This Note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated at 58% of the market price which means the average of the lowest three trading prices during the ten trading day period
ending on the latest complete trading day prior to the conversion date. The Company may repay the Note if repaid within 120 days
of date of issue at 125% of the original principal amount plus interest, between 121 days and 150 days at 130% of the original
principal amount plus interest and between 151 days and 180 days at 130% of the original principal amount plus interest. Thereafter,
the Company does not have the right of prepayment. The Company received cash proceeds of $101,000, which was net of original issue
discount of $83,673. During the nine months ended September 26, 2014, the Holder converted 650,409 shares of common stock of the
Company with a fair value of $77,528 for $57,452 of principal and interest.
On January 1, 2014, the Company entered into
an Original Issue Discount Secured Promissory Note dated December 27, 2014 with Beaufort Ventures PLC (“Holder”) for
a purchase price of $101,000 and a face amount of $136,350 and maturing June 27, 2014. After the maturity date, the Notes accrues
interest at 22% per annum and the Note together with any unpaid accrued interest is convertible into shares of common stock of
the Company at the Holder’s option at a variable conversion price calculated at 58% of the market price which means the lowest
trading price of the prior 15 trading days, determined on the then current trading market of the Company’s common stock,
for 10 trading days prior to conversion. The Company may repay the Note at any time for a net payment of $136,350. On June 27,
2014, the Company paid the Note in full for $136,350 in cash.
On January 2, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with Metolius Capital, LLC (“Holder”) in the original principal
amount of $106,000 bearing a 12% annual interest rate and maturing October 4, 2014. This Note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated at 58% of the market price which means the average of the lowest three trading prices during the ten trading day period
ending on the latest complete trading day prior to the conversion date. The Company may repay the Note if repaid within 120 days
of date of issue at 125% of the original principal amount plus interest, between 121 days and 150 days at 130% of the original
principal amount plus interest and between 151 days and 180 days at 135% of the original principal amount plus interest. Thereafter,
the Company does not have the right of prepayment. During the nine months ended September 26, 2014, the Holder converted 1,075,051
shares of common stock of the Company with a fair value of $225,761 for $106,000 of principal and interest. On July 25, 2014, the
Note was paid in full.
On January 8, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with Asher Enterprises, Inc. (“Holder”) in the original principal
amount of $63,000 bearing an 8% annual interest rate and maturing September 8, 2014. This Note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated at 58% of the market price which means the average of the lowest three trading prices during the ten trading day period
ending on the latest complete trading day prior to the conversion date. The Company may repay the Note if repaid within 30 days
of date of issue at 112% of the original principal amount plus interest, between 31 days and 60 days at 119% of the original principal
amount plus interest and between 61 days and 90 days at 125% of the original principal amount plus interest and between 91 days
and 120 days at 130% of the original principal amount plus interest and between 121 days and 180 days at 135% of the original principal
amount plus interest. Thereafter, the Company does not have the right of prepayment. On July 11, 2014, the Company elected to pay
the Note in full for $87,535 in cash allocated to $63,000 and $24,535 in principal and interest, respectively. On July 11, 2014,
the Note was paid in full.
On January 14, 2014, the Company entered into
a Convertible Debenture with Daniel James Management, Inc. (“Holder”) in the original principal amount of $101,000
bearing a 12% annual interest rate and maturing January 14, 2015. This Note together with any unpaid accrued interest is convertible
into shares of common stock of the Company at the Holder’s option at a variable conversion price calculated at 58% of the
market price which means the lowest closing bid price during the ten trading day period ending on the latest complete trading day
prior to the conversion date. The Company may repay any portion of the principal amount at 135% of such amount along with any accrued
interest of this Debenture at any time upon seven days written notice to the Holder. On July 11, 2014, the Company elected to pay
the Note in full for $144,780 in cash allocated to $101,000 and $43,780 in principal and interest, respectively. On July 11, 2014,
the Note was paid in full.
On January 22, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with WHC Capital, LLC (“Holder”) in the original principal amount
of $101,000 bearing a 12% annual interest rate and maturing January 22, 2015. This Note together with any unpaid accrued interest
is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price calculated
at 58% of the market price which means the lowest bid price during the fifteen trading day period ending on the latest complete
trading day prior to the conversion date. The Company may repay outstanding principal and interest due at 135% of such amount within
180 days of the execution of the Note. On July 25, 2014, the Company elected to pay the Note in full for $144,443 in cash allocated
to $101,000 and $43,443 in principal and interest, respectively.
On January 31, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with Tonaquint Inc. (“Holder”) in the original principal amount
of $115,000 less an original issuer’s discount of $10,000 and transaction costs of $5,000 bearing a 0% annual interest rate
and maturing December 31, 2014. The Note is due in six equal monthly installments plus interest (“Installment Amount”)
commencing nine months after the issue date. At the option of the Holder, the Installment Amount is convertible into shares of
common stock of the Company at a variable conversion price calculated at 60% of the market price which means the average of the
lowest two trading
prices during the twenty trading day period
ending on the latest complete trading day prior to the conversion date. The Company may elect to prepay in cash all or any portion
of the outstanding balance of the Note if the Company pays the holder 125% of the outstanding balance.
On February 13, 2014, the Company entered into
an Original Issue Discount Secured Promissory Note (“Note”) with Beaufort Ventures PLC (“Holder”) for a
purchase price of $101,000 and a face amount of $136,350 and maturing August 13, 2014. After the maturity date, the Notes accrues
interest at 22% per annum and the Note together with any unpaid accrued interest is convertible into shares of common stock of
the Company at the Holder’s option at a variable conversion price calculated at 58% of the market price which means the lowest
trading price of the prior 15 trading days, determined on the then current trading market of the Company’s common stock,
for 10 trading days prior to conversion. The Company may repay the (“, if repaid within 90 days of date of issue, for a net
payment of $136,350 plus 70,000 shares of common stock of the Company. On July 7, 2014, the Company paid the Note is full for $136,350
in cash.
On March 5, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with LG Capital Funding, LLC (“Holder”) in the original principal
amount of $101,000 bearing a 10% annual interest rate and maturing March 5, 2015. This Note together with any unpaid accrued interest
is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price calculated
at 58% of the market price which means the lowest bid price during the twelve trading day period ending on the latest complete
trading day prior to the conversion date. The Company may repay the Note if repaid within 90 days of date of issue at 125% of the
original principal amount plus interest, between 91 days and 150 days at 130% of the original principal amount plus interest and
between 151 days and 180 days at 135% of the original principal amount plus interest. Thereafter, the Company does not have the
right of prepayment.
On March 10, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with Adar Bays, LLC (“Holder”) in the original principal amount
of $101,000 bearing a 10% annual interest rate and maturing March 10, 2015. This Note together with any unpaid accrued interest
is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price calculated
at 58% of the market price which means the average of the lowest three trading prices during the ten trading day period ending
on the latest complete trading day prior to the conversion date. The Company may repay the Note if repaid within 90 days of date
of issue at 125% of the original principal amount plus interest, between 91 days and 150 days at 130% of the original principal
amount plus interest and between 151 days and 180 days at 135% of the original principal amount plus interest. Thereafter, the
Company does not have the right of prepayment. During the nine months ended September 26, 2014, the Holder converted 155,632 shares
of common stock of the Company with a fair value of $24,458 for $14,000 of principal and interest.
On March 12, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with Asher Enterprises, Inc. (“Holder”) in the original principal
amount of $103,500 bearing an 8% annual interest rate and maturing December 17, 2014. This Note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated at 58% of the market price which means the average of the lowest three trading prices during the ten trading day period
ending on the latest complete trading day prior to the conversion date. The Company may repay the Note if repaid within 30 days
of date of issue at 112% of the original principal amount plus interest, between 31 days and 60 days at 119% of the original principal
amount plus interest and between 61 days and 90 days at 125% of the original principal amount plus interest and between 91 days
and 120 days at 130% of the original principal amount plus interest and between 121 days and 180 days at 135% of the original principal
amount plus interest. Thereafter, the Company does not have the right of prepayment. During the nine months ended September 26,
2014, the Holder converted 216,920 shares of common stock of the Company with a fair value of $32,538 for $20,000 of principal
and interest.
On March 24, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with Carebourn Capital, L.P. (“Holder”) in the original principle
amount of $112,500 bearing an 8% annual interest rate and maturing November 24, 2014. This Note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated at 58% of the market price which means the average of the lowest three trading prices during the ten trading day period
ending on the latest complete trading day prior to the conversion date. The Company may repay the Note if repaid within 30 days
of date of issue at 110% of the original principal amount plus interest, between 31 days and 60 days at 115% of the original principal
amount plus interest, between 61 days and 90 days at 120% of the original principal amount plus interest, between 91 days and 120
days at 125% of the original principal amount plus interest, between 121 days and 150 days at 130% of the original principal amount
plus interest, and between 151 days and 180 days at 135% of the original principal amount plus interest. Thereafter, the Company
does not have the right of prepayment. During the nine months ended September 26, 2014, the Company elected to pay $78,289 in cash
and the Holder converted 209,353 shares of common stock of the Company with a fair value of $23,448 for $13,090 in principal and
interest. At September 25, 2014, the Note was paid in full.
On March 27, 2014, the Company entered into
a 10% Original Issue Discount Convertible Promissory Note (“Note”) with Gemini Master Fund, Ltd. (“Holder”)
in the original principal amount of $220,000 bearing a 10% annual interest rate and maturing January 1, 2015. At the option of
the Holder:
| i) | The Note together with any unpaid accrued interest is convertible
into shares of common stock of the Company at a variable conversion price calculated at 65% of the market price which means the
average of the lowest volume weighted average price during the twenty trading day period ending prior to the conversion date, or |
| ii) | All principal, costs, charges and interest amounts outstanding may
be exchanged for shares of the Company’s common stock at the Conversion Price of $0.25 per share. The Conversion Price is
subject to an anti-dilution adjustment. |
The Company may repay the Note at 130% of the
original principal amount plus interest.
On April 2, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with Coventry Enterprises, LLC (“Holder”) in the original principal
amount of $101,000 less transaction costs of $13,000 bearing a 10% annual interest rate and maturing April 5, 2015. This Note together
with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s option at a variable
conversion price calculated at 58% of the lowest bid price during the twelve trading days prior to the conversion date including
the day upon which a Notice of Conversion is received by the Company. The Company may repay the Note if repaid within 180 days
of date of issue at 135% of the original principal amount plus interest. Thereafter, the Company does not have the right of prepayment.
On April 14, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with Group 10 Holdings, LLC (“Holder”) in the original principal
amount of $113,000 less original issue discount of $12,000 bearing a 12% annual interest rate and maturing April 17, 2015. This
Note together with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s
option at a variable conversion price calculated at 55% of the lowest trading price of any day during the 20 consecutive trading
days prior to the date on which the Holder elects to convert all or part of the Note. The Company may repay the Note if repaid
within 30 days of date of issue at 125% of the original principal amount plus interest and between 31 days and 179 days at 135%
of the original principal amount plus interest and thereafter, the Company may repay the Note at 145% of the original principal
amount plus interest.
On April 16, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with Tonaquint Inc. (“Holder”) in the original principal amount
of $115,000 less an original issuer’s discount of $10,000 and transaction costs of $13,000 bearing a 10% annual interest
rate and maturing March 16, 2015. The Note is due in six equal monthly installments plus interest (“Installment Amount”)
commencing nine months after the issue date. At the option of the Holder, the Installment Amount is convertible into shares of
common stock of the Company at a variable conversion price calculated at 60% of the market price which means the average of the
lowest two trading prices during the twenty trading day period ending on the latest complete trading day prior to the conversion
date. The Company may elect to prepay in cash all or any portion of the outstanding balance of the Note if the Company pays the
holder 125% of the outstanding balance.
On April 21, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with Tailwind Partners 3, LLC (“Holder”) in the original principal
amount of $106,000 less transaction costs of $5,000 bearing a 12% annual interest rate and maturing January 21, 2015. This Note
together with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s option
at a variable conversion price calculated at 58% of the market price which means the average of the lowest three trading prices
during the ten trading day period ending on the latest complete trading day prior to the conversion date. The Company may repay
the Note if repaid within 120 days of date of issue at 125% of the original principal amount plus interest, between 121 days and
150 days at 130% of the original principal amount plus interest and between 151 days and 180 days at 135% of the original principal
amount plus interest. Thereafter, the Company does not have the right of prepayment. During the nine months ended September 26,
2014, the Holder converted 459,281 shares of common stock of the Company with a fair value of $103,600 for $71,000 of principal
and interest.
On May 14, 2014, the Company entered into a
Convertible Promissory Note (“Note”) with KBM Worldwide, Inc. (“Holder”) in the original principal amount
of $103,500 less transaction costs $3,500 bearing an 8% annual interest rate and maturing February 16, 2015. This Note together
with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s option at a variable
conversion price calculated at 58% of the market price which means the average of the lowest three trading prices during the ten
trading day period ending on the latest complete trading day prior to the conversion date. The Company may repay the Note if repaid
within 60 days of date of issue at 119% of the original principal amount plus interest, between 61 days and 90 days at 125% of
the original principal amount plus interest, between 91 days and 120 days at 130% of the original principal amount plus interest
and 121 days and 180 days at 135% of the original principal amount plus interest. Thereafter, the Company does not have the right
of prepayment.
On May 27, 2014, the Company issued a Convertible
Promissory Note (“Note”) to JMJ Financial (“Holder”), in the original principle amount of $330,000 bearing
a 12% annual interest rate and maturing in one year for $300,000 of consideration paid in cash and a $30,000 original issue discount.
The Company may repay the Note any time and if repaid within 90 days of date of issue with an interest rate is 0%. This Note together
with any unpaid accrued interest is convertible into shares of common stock at the Holder’s option at a variable conversion
price calculated as lessor of (a) $0.30 or (b) 60% of the lowest trade occurring during the 25 consecutive trading days immediately
preceding the conversion date. On May 27, 2014, the Company received cash of $100,000 in the first tranche, which was net of original
issue discount of $10,000. On August 19, 2014, the Company received cash of $50,000 in the second tranche, which was net of original
issue discount of $5,000 bearing a 8% annual interest and maturing in one year.
On June 6, 2014, the Company entered into a
Convertible Promissory Note (“Note”) with Firehole River Capital, LLC (“Holder”) in the original principal
amount of $106,000 less transaction costs of $5,000 bearing a 12% annual interest rate and maturing March 6, 2015. This Note together
with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s option at a variable
conversion price calculated at 58% of the market price which means the average of the lowest three trading prices during the ten
trading day period ending on the latest complete trading day prior to the conversion date. The Company may repay the Note if repaid
within 120 days of date of issue at 125% of the original principal amount plus interest, between 121 days and 150 days at 130%
of the original principal amount plus interest and between 151 days and 180 days at 135% of the original principal amount plus
interest. Thereafter, the Company does not have the right of prepayment.
On June 9, 2014, the Company entered into a
Convertible Promissory Note (“Note”) with Group 10 Holdings, LLC (“Holder”) in the original principal amount
of $113,000 less an original issue discount of $12,000 bearing a 12% annual interest rate and maturing June 9, 2015. This Note
together with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s option
at a variable conversion price calculated at 55% of the lowest trading price of any day during the 20 consecutive trading days
prior to the date on which the Holder elects to convert all or part of the Note. The Company may repay the Note if repaid within
30 days of date of issue at 125% of the original principal amount plus interest and between 31 days and 179 days at 135% of the
original principal amount plus interest and thereafter, the Company may repay the Note at 145% of the original principal amount
plus interest.
On July 2, 2014, the Company entered into a
Convertible Promissory Note (“Note”) with KBM Worldwide, Inc. (“Holder”) in the original principal amount
of $78,500 less transaction costs $3,500 bearing an 8% annual interest rate and maturing April 7, 2015. This Note together with
any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s option at a variable
conversion price calculated at 58% of the market price which means the average of the lowest three trading prices during the ten
trading day period ending on the
latest complete trading day prior to the conversion
date. The Company may repay the Note if repaid within 30 days of date of issue at 112% of the original principal amount plus interest,
between 31 days and 60 days at 119% of the original principal amount plus interest, between 61 days and 90 days at 125% of the
original principal amount plus interest, between 91 days and 120 days at 130% of the original principal amount plus interest and
121 days and 180 days at 135% of the original principal amount plus interest. Thereafter, the Company does not have the right of
prepayment.
On July 3, 2014, the Company received cash
proceed of a Convertible Promissory Note (“Note”) dated September 26, 2014 with JSJ Investment Inc. (“Holder”)
in the original principal amount of $101,000 bearing a 10% annual interest rate and maturing December 27, 2014. This Note together
with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s option at a variable
conversion price calculated at 58% of the market price which means the average of the lowest three trading prices during the ten
trading day period ending on the latest complete trading day prior to the conversion date. Upon the maturity date, this note has
a cash redemption value of 135%. This provision only may be exercise if the consent of the Note holder is obtained.
On July 8, 2014, the Company entered into a
Convertible Promissory Note (“Note”) with Tailwind Partners, LLC (“Holder”) in the original principal amount
of $106,000 less transaction costs of $5,000 bearing a 12% annual interest rate and maturing April 8, 2015. This Note together
with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s option at a variable
conversion price calculated at 58% of the market price which means the average of the lowest three trading prices during the ten
trading day period ending on the latest complete trading day prior to the conversion date. The Company may repay the Note if repaid
within 120 days of date of issue at 125% of the original principal amount plus interest, between 121 days and 150 days at 130%
of the original principal amount plus interest and between 151 days and 180 days at 130% of the original principal amount plus
interest. Thereafter, the Company does not have the right of prepayment.
On July 11, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with Tonaquint Inc. (“Holder”) in the original principal amount
of $225,000 less an original issuer’s discount of $20,000 and transaction costs of $16,000 bearing a 10% annual interest
rate and maturing June 11, 2015. The Note is due in six equal monthly installments plus interest (“Installment Amount”)
commencing nine months after the issue date. At the option of the Holder, the Installment Amount is convertible into shares of
common stock of the Company at a variable conversion price calculated at 60% of the market price which means the average of the
lowest two trading prices during the twenty trading day period ending on the latest complete trading day prior to the conversion
date. The Company may elect to prepay in cash all or any portion of the outstanding balance of the Note if the Company pays the
holder 125% of the outstanding balance.
On July 11, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with Macallan Partners, LLC (“Holder”) in the original principal
amount of $115,000 less an original issue discount of $14,000 and transaction costs of $8,080 bearing a 0% annual interest rate
and maturing January 7, 2015. This Note together with any unpaid accrued interest is convertible into shares of common stock of
the Company at the Holder’s option at a variable conversion price calculated at 58% of the lowest trading price of any day
during the 15 consecutive trading days prior to the date on which the Holder elects to convert all or part of the Note. The Company
may repay the Note if repaid within 60 days of date of issue at 125% of the original principal amount plus interest, and between
61 days and 120 days at 130% of the original principal amount plus interest and between 121 days and 180 days at 135% of the original
principal amount plus interest. Thereafter, the Company does not have the right of prepayment.
On July 15, 2014, the Company issued a Convertible
Promissory Note (“Note”) to Iconic Holding, LLC (“Holder”), in the original principle amount of $110,250
less an original issue discount of $5,250 and transaction costs of $8,340 bearing a 0% annual interest rate and maturing July 15,
2015. This unsecured Note is convertible into shares of common stock at the Holder’s option at a variable conversion price
calculated at 60% of the lowest trading price of any day during the 10 consecutive trading days prior to the dated on which the
Holder elects to convert all or part of the Note. The Company may repay the Note within 60 days of date of issue at 125% of the
original principal amount plus interest, between 60 days and 120 days at 130% of the original principal amount plus interest plus
30,000 shares of common stock of the Company and between 120 days and 180 days at 135% of the original principal amount plus interest
plus 60,000 shares of common stock of the Company. Thereafter, the Note may only be repaid with the consent of the Holder.
On July 22, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with Firehole River Capital, LLC (“Holder”) in the original principal
amount of $106,000 less transaction costs of $8,080 bearing a 12% annual interest rate and maturing April 22, 2015. This Note together
with any unpaid accrued interest is convertible into
shares of common stock of the Company at the
Holder’s option at a variable conversion price calculated at 58% of the market price which means the average of the lowest
three trading prices during the ten trading day period ending on the latest complete trading day prior to the conversion date.
The Company may repay the Note if repaid within 120 days of date of issue at 125% of the original principal amount plus interest,
between 121 days and 150 days at 130% of the original principal amount plus interest and between 151 days and 180 days at 135%
of the original principal amount plus interest. Thereafter, the Company does not have the right of prepayment.
On July 23, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with WHC Capital, LLC (“Holder”) in the original principal amount
of $101,000 less transaction costs of $5,000 bearing a 12% annual interest rate and maturing July 23, 2015. This Note together
with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s option at a variable
conversion price calculated at 58% of the market price which means the average of the lowest three trading prices during the fifteen
trading day period ending on the latest complete trading day prior to the conversion date. The Company may repay the Note if repaid
within 120 days of date of issue at 125% of the original principal amount plus interest, between 121 days and 150 days at 130%
of the original principal amount plus interest and between 151 days and 180 days at 135% of the original principal amount plus
interest. Thereafter, the Company does not have the right of prepayment.
On August 6, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with LG Capital Funding, LLC (“Holder”) in the original principal
amount of $106,000 less transaction costs of $5,000 bearing a 10% annual interest rate and maturing August 6, 2015. This Note together
with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s option at a variable
conversion price calculated at 58% of the market price which means the lowest bid price during the twelve trading day period ending
on the latest complete trading day prior to the conversion date. The Company may repay the Note if repaid within 90 days of date
of issue at 125% of the original principal amount plus interest, between 91 days and 150 days at 130% of the original principal
amount plus interest and between 151 days and 180 days at 135% of the original principal amount plus interest. Thereafter, the
Company does not have the right of prepayment.
On August 8, 2014, the Company entered into
a Convertible Debenture (“Note”) with Daniel James Management, Inc. (“Holder”) in the original principal
amount of $101,000 bearing a 12% annual interest rate and maturing August 8, 2015. This Note together with any unpaid accrued interest
is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price calculated
at 58% of the market price which means the lowest closing bid price during the ten trading day period ending on the latest complete
trading day prior to the conversion date. The Company may repay any portion of the principal amount at 135% of such amount along
with any accrued interest of this Debenture at any time upon seven days written notice to the Holder.
On August 18, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with Redwood Fund III, LLC (“Holder”) in the original principle
amount of $262,500 less original issue discount of $12,500 and transaction costs of $22,000 bearing a 11% annual interest rate
and maturing August 18, 2015. This Note together with any unpaid accrued interest is convertible into shares of common stock of
the Company at the Holder’s option at a variable conversion price calculated as 60% of the lowest trading price, determined
on the then current trading market for the Company’s common stock, for 20 trading days prior to conversion. The Company may
repay any portion of the principal amount at 130% of such amount along with any accrued interest of this Debenture at any time
upon five days written notice to the Holder.
On August 18, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with Redwood Management, LLC (“Holder”) in the original principle
amount of $105,000 less original issue discount $5,000 bearing a 11% annual interest rate and maturing August 18, 2015. This Note
together with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s option
at a variable conversion price calculated as 60% of the lowest trading price, determined on the then current trading market for
the Company’s common stock, for 20 trading days prior to conversion. The Company may repay any portion of the principal amount
at 130% of such amount along with any accrued interest of this Debenture at any time upon five days written notice to the Holder.
On September 19, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with Eastmore Capital, LLC (“Holder”) in the original principal
amount of $110,000 less transaction costs of $5,000 bearing a 12% annual interest rate and maturing September 18, 2015. This Note
together with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s option
at a variable conversion price calculated at 60% of the market price which means the average of the lowest trading price during
the fifteen trading day period ending on the latest complete trading day prior to the conversion date. For six months, the Company
may repay any portion
of the principal amount at 130% of such amount
along with any accrued interest of this Debenture at any time upon five days written notice to the Holder. Thereafter, the Company
does not have the right of prepayment.
On September 19, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with RDW Capital, LLC (“Holder”) in the original principle
amount of $131,250 less original issue discount of $6,250 bearing a 11% annual interest rate and maturing September 19, 2015. This
Note together with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s
option at a variable conversion price calculated as 60% of the lowest trading price, determined on the then current trading market
for the Company’s common stock, for 20 trading days prior to conversion. The Company may repay any portion of the principal
amount at 130% of such amount along with any accrued interest of this Debenture at any time upon five days written notice to the
Holder.
On September 24, 2014, the Company entered
into a Convertible Promissory Note (“Note”) with Carebourn Capital, L.P. (“Holder”) in the original principal
amount of $125,289 less transaction costs $6,300 bearing an 12% annual interest rate and maturing June 24, 2015. This Note together
with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s option at a variable
conversion price calculated at 60% of the market price which means the average of the lowest three trading prices during the ten
trading day period ending on the latest complete trading day prior to the conversion date. The Company may repay the Note if repaid
within 30 days of date of issue at 110% of the original principal amount plus interest, between 31 days and 60 days at 115% of
the original principal amount plus interest, between 61 days and 90 days at 120% of the original principal amount plus interest,
between 91 days and 120 days at 125% of the original principal amount plus interest and 121 days and 150 days at 130% and between
151 days and 180 days at 135% of the original principal amount plus interest of the original principal amount plus interest. Thereafter,
the Company does not have the right of prepayment.
NOTE 11 – CONVERTIBLE NOTE PAYABLE
DERIVATIVE LIABILITY
The Convertible Promissory Notes (see Note
10) with Gemini Master Fund Ltd. an issue date of March 27, 2014, JMJ Financial Tranche 1 with an issue date of May 27, 2014, Tonaquint,
Inc. with an issue date of April 16, 2014, Tonaquint, Inc. with an issue date of July 11, 2014, Redwood Fund III, Ltd. with an
issue date of August 18, 2014, Redwood Management LLC with an issue date of August 18, 2014, JMJ Financial Tranche 2 with an issue
date of August 19, 2014 and RDW Capital, LLC with an issue date of September 19, 2014 have an initial conversion price that is
subject to anti-dilution adjustments that allow for the reduction in the Conversion Price in the event the Company subsequently
issues equity securities including common stock or any security convertible or exchangeable for shares of common stock for no consideration
or for consideration less than original conversion price. Additionally, the Convertible Promissory Notes with JSJ Investments Inc.
an issue date of July 3, 2014, KBM Worldwide, Inc an issue date of July 2, 2014, Tailwind Partners, LLC and issued date of July
8, 2014, Macallan Partnes, LLC and issue date of July 11, 2014, Iconic Holdings, LLC an issued date of July 15, 2014, Firehole
River Capital, LLC an issued date of July 22, 2014, WHC Capital, LLC an issue date of July 23, 2014, Vista Capital an issue date
of July 24, 2014, LG Capital Funding, LLC an issue date of August 6, 2014, Daniel James Manangment, Inc an issue date of August
8, 2014, Eastmore Capital, LLC an issued date of September 19, 2014 and Carebourn Captial LP an issued date of September 24, 2014
all were deemed to not meet the scope exception under ASC 815. The Company accounted for the conversion option in accordance
with ASC Topic 815. Accordingly, the Conversion Option is not considered to be solely indexed to the Company’s own stock
and, as such, recorded as a liability.
The Company’s convertible promissory
note derivative liabilities has been measured at fair value at September 26, 2014 and December 31, 2013 using a binomial model.
Since the Conversion Price contains an anti-dilution adjustment, the probability that the Conversion Price of the Notes would decrease
as the share price decreased was incorporated into the valuation calculation.
The inputs into the binomial models are as
follows:
Conversion price |
$0.25 - $0.50 |
Risk free rate |
0.05% - 0.11% |
Expected volatility |
101% - 136% |
Dividend yield |
0% |
Expected life |
0.25 years – 0.98 years |
The fair value of the convertible note payable
derivative liability is $984,763 at September 26, 2014. The net change in fair value of the convertible note payable derivative
liability of $170,132 and $357,842 is recorded as a gain in the statement of operations for the three and nine months ended
September 26, 2014, respectively.
NOTE 12 – WARRANT DERIVATIVE LIABILITY
On July 11, 2014, in conjunction with the issuance
of the Convertible Promissory Note issued to Tonaquint, Inc. on July 11, 2014 (see Note 10), the Company issued a warrant to purchase
271,084 shares of common stock with an exercise price of $0.45 per share and a life of five years.
The warrant, is subject to anti-dilution
adjustments that allow for the reduction in the conversion price in the event the Company subsequently issues equity securities
including common stock or any security convertible or exchangeable for shares of common stock for no consideration or for consideration
less than $0.45 a share. The Company accounted for the conversion option in accordance with ASC Topic 815. Accordingly, the
Conversion Option is not considered to be solely indexed to the Company’s own stock and, as such, recorded as a liability.
The warrant derivative liability has been measured
at fair value at July 11, 2014 and September 26, 2014 using a binomial model. Since the Conversion Price contains an anti-dilution
adjustment, the probability that the exercise price of the Notes would decrease as the share price decreased was incorporated into
the valuation calculation.
The inputs into the binomial model are as follows:
Risk free rate |
1.65% - 1.80% |
Expected volatility |
136% - 149% |
Dividend yield |
0% |
Expected life |
4.75 – 5.00 years |
The fair value of the warrant derivative liability
is $25,500 at September 26, 2014. The decrease in the fair value of the warrant derivative liability of $21,060 is recorded as
a gain in the statement of operations for the three and nine months ended September 26, 2014.
NOTE 13 – CONTINGENT CONSIDERATION
PAYABLE
The Company incurred a contingent liability
related to Asset Acquisition Agreement with Qwik Staffing Solutions, Inc. on April 29, 2013. The obligation is due in monthly installments
by paying an amount equal to 6.5% of the monthly accounts receivable collected by operating the Orlando, Jacksonville and Tampa,
Florida locations. The total payments are not to exceed $170,000. The fair value of the obligation is determined by estimating
discounted monthly installments at an interest rate of 12% per annum. The obligation to Qwik was paid in full during May 2014.
The Company incurred a contingent liability
related to Asset Acquisition Agreement with Shirley’s Employment Service, Inc. on April 13, 2014. The obligation is due in
monthly installments by paying an amount equal to 5.0% of the monthly accounts receivable collected by operating the Tulsa, Oklahoma
location. The total payments are not to exceed $100,000. The fair value of the obligation is determined by estimating discounted
monthly installments at an interest rate of 12% per annum.
The Company incurred a contingent liability
related to Asset Acquisition Agreement with Kwik Jobs, Inc. on September 26, 2014. The obligation is due in monthly installments
by paying an amount equal to 5.0% of the monthly accounts receivable collected by operating the Birmingham, Alabama and Decatur,
Georgia locations. The total payments are not expected to exceed $100,000. The fair value of the obligation is determined by estimating
discounted monthly installments at an interest rate of 12% per annum.
| Opening
balance at December 31, 2013 | | |
$ | 79,221 | |
| Purchase of Shirley’s customer list – April 13, 2014 | | |
| 91,664 | |
| Purchase of Kwik customer list – September 26, 2014 | | |
| 141,529 | |
| Payments | | |
| (141,441 | ) |
| Interest | | |
| 5,205 | |
| Closing balance at September 26, 2014 | | |
$ | 176,178 | |
NOTE 14 – STOCKHOLDERS’ EQUITY
On October 6, 2014 the Company filed a Certificate
of Designation with the Nevada Secretary of State to amend its Articles of Incorporation to create and designate the rights and
preferences of a new series of preferred stock designated the Series A Preferred Stock. The number of shares authorized as Series
A Preferred Stock shall be fifty one (51) shares. Each share of Series A Preferred Stock shall be convertible into one (1) share
of common stock of the Company at the election of the holder and shall have voting rights equal to: (x) 0.019607 multiplied by
the total issued and outstanding shares of Common Stock eligible to vote at the time of the respective vote (the “Numerator”),
divided by (y) 0.49, minus (z) the Numerator.
On October 22, 2014, the Board of Directors
adopted and approved and the majority shareholder, Ryan Schadel, ratified a Company proposed an amendment to the Articles of Incorporation
to increase the number of authorized shares of the Company’s common stock from 150,000,000 to 1,000,000,000. The amendment
is effective November 25, 2014.
Preferred Stock – The Company
has 5,000,000 shares of “blank check” preferred stock authorized. As of September 26, 2014 and December 31, 2013, the
Company had no preferred shares issued and outstanding, respectively.
Common Stock - The Company has 150,000,000
shares of $0.001 par value common stock authorized. As of September 26, 2014 and December 31, 2013, the Company had 28,557,173
and 20,982,740 shares issued and outstanding, respectively.
During the nine months ended September 26,
2014, the holders of Convertible Promissory Notes (see Note 10) converted 7,374,433 shares of common stock of the Company with
a fair value of $1,709,808 to settle $822,681 of principal and interest.
On February 11, 2014, the Company issued 100,000
shares of common stock for professional services valued at $21,000 ($0.21 per share).
On July 11, 2014, the Company issued 100,000
shares common stock in satisfaction of stock payable for $23,000 in stock-based compensation for professional fees
The following is a summary of the common stock
options granted, forfeited or expired and exercised:
| |
Number of Options | |
Weighted Average Exercise Price Per Share |
Outstanding - January 1, 2014 | |
| 3,883,455 | | |
$ | 0.18 | |
Granted | |
| — | | |
| — | |
Forfeited or expired | |
| (325,580 | ) | |
$ | 0.05 | |
Exercised | |
| — | | |
| — | |
Outstanding– September 26, 2014 | |
| 3,557,875 | | |
$ | 0.19 | |
Exercisable – September 26, 2014 | |
| 1,835,000 | | |
$ | 0.33 | |
The following table summarizes information
on stock options exercisable as of September 26, 2014:
| Exercise Price | | |
| Number Outstanding at September 26, 2014 | | |
| Average Remaining Life (Years) | | |
| Aggregate Intrinsic Value | |
$ | 0.25 | | |
| 25,000 | | |
| 4.25 | | |
| — | |
$ | 0.295 | | |
| 50,000 | | |
| 4.00 | | |
| — | |
$ | 0.30 | | |
| 1,500,000 | | |
| 0.59 | | |
| — | |
$ | 0.41 | | |
| 30,000 | | |
| 3.56 | | |
| — | |
$ | 0.50 | | |
| 130,000 | | |
| 4.25 | | |
| — | |
$ | 0.56 | | |
| 50,000 | | |
| 3.41 | | |
| — | |
$ | 0.62 | | |
| 50,000 | | |
| 3.47 | | |
| — | |
The following table summarizes information
on stock options outstanding as of September 26, 2014:
| Exercise Price | | |
| Number Outstanding at September 26, 2014 | | |
| Average Remaining Life (Years) | | |
| Aggregate Intrinsic Value | |
$ | 0.05 | | |
| 1,722,875 | | |
| 9.04 | | |
| 106,818 | |
$ | 0.25 | | |
| 25,000 | | |
| 4.25 | | |
| — | |
$ | 0.295 | | |
| 50,000 | | |
| 4.00 | | |
| — | |
$ | 0.30 | | |
| 1,500,000 | | |
| 0.59 | | |
| — | |
$ | 0.41 | | |
| 30,000 | | |
| 3.56 | | |
| — | |
$ | 0.50 | | |
| 130,000 | | |
| 4.25 | | |
| — | |
$ | 0.56 | | |
| 50,000 | | |
| 3.41 | | |
| — | |
$ | 0.62 | | |
| 50,000 | | |
| 3.47 | | |
| — | |
The following is a summary of warrants activity
during September 26, 2014:
|
Number of Shares |
Weighted Average Exercise Price |
Balance, January 1, 2014 |
502,000 |
0.40 |
Warrants granted
and assumed
Warrants canceled |
271,084
- |
0.45
- |
Warrants expired |
- |
- |
Balance, September 26, 2014 |
773,084 |
0.42 |
All warrants
outstanding as of September 26, 2014 are exercisable.
NOTE 15 – COMMITMENTS
On January 15, 2014, the Company entered into
a 39 month lease agreement with Joe’s Creek Industrial Park, Ltd., commencing February 1, 2014, to rent office space at 4632
28th Street North, St. Petersburg, Florida. Monthly minimum lease payments are $1,500 for the first year of occupancy, $1,545 for
the second year of occupancy, $1,591 for the third year of occupancy and $1,691 for the last three months of occupancy.
On January 15, 2014, the Company entered into
a 38 month lease agreement with Joseph Vinh Properties., commencing April 1, 2014, to rent office space at 5833 Clinton Highway,
Knoxville, TN. Rent is abated for two months of the lease. Monthly minimum lease payments are $1,690 for the first and second year
of occupancy.
On March 12, 2014, the Company entered into
a 63 month lease agreement with AZG Summit Square LLC., commencing April 1, 2014, to rent office space at 8114 North Federal Blvd.,
Westminster, CO. The fixed minimum rent for the first nine months is $0 per month. Monthly minimum lease payments are $1,964 for
the next nine months of occupancy. Monthly minimum lease payments increase by approximately 3% per annum thereafter.
On March 5, 2014, the Company entered into
a 60 month lease agreement HB Jacinto Investors, LLC, commencing April 1, 2014, to rent office space at 11420 East Freeway (I-10).
Suite 310, Jacinto City, Texas. Monthly minimum lease payments are $1,728 for the term of the lease.
On March 18, 2014, the Company entered into
a 39 month lease agreement with Amusement Sales & Service, Inc., commencing March 18, 2014, to rent office space at 5500 White
Bluff Road, Suite B, Savannah, GA. Rent is abated for three months of the lease. Monthly minimum lease payments are $1,500 for
the first year of occupancy. Monthly minimum lease payments increase by approximately 3% per annum thereafter.
On April 16, 2014, the Company entered into
a 36 month lease agreement with Korbet’s Restaurant, Inc., commencing August 1, 2014, to rent office space at 2029-E. Airport
Blvd, Mobile, AL. Monthly minimum lease payments are $850 for the term of the lease.
On April 16, 2014, the Company entered into
a 39 month lease agreement with JW Mariner Corporation, commencing May 1, 2014, to rent office space at 621 U.S. Highway 231. Panama
City, FL. Rent is abated for three months of the lease. Monthly minimum lease payments are $1,050 for the first year of occupancy.
Monthly minimum lease payments increase by approximately 3% per annum thereafter.
On April 21, 2014, the Company entered into
a 36 month 10 day lease agreement with William D. Sconyers and Suzanne L. Sconyers, commencing April 21, 2014, to rent office space
at 344 Meadow Ridge Dr., Tallahassee, FL. Rent is abated for three months of the lease. Monthly minimum lease payments are $1,400
for the first year of occupancy. Monthly minimum lease payments increase by approximately 3% per annum thereafter.
On April 21, 2014, the Company entered into
a 60 month lease agreement with L’Wood Associates, Inc., commencing May 1, 2014, to rent office space at 4365 Dorchester
Rd. Suite 108, North Charleston, SC. Monthly minimum lease payments are $1,452 for the first year of occupancy. Monthly minimum
lease payments increase by approximately 3% per annum thereafter.
On April 23, 2014, the Company entered into
a 36 month lease agreement with Gale York, commencing May 1, 2014, to rent office space at 1103 Broad Avenue Suite A, Gulfport,
MS. Monthly minimum lease payments are $1,250 for the term of the lease.
On April 24, 2014, the Company entered into
a 36 month lease agreement with Monterrery Plaza, LLC, commencing May 1, 2014, to rent office space at 9250 Florida Blvd, Baton
Rouge, LA. Monthly minimum lease payments are $1,450 for the term of the lease.
On April 28, 2014, the Company entered into
a 36 month lease agreement with John Cockfield, commencing April 28, 2014, to rent office space at 4621 Jefferson Hwy, Jefferson,
LA. Monthly minimum lease payments are $1,200 for the term of the lease.
On May 1, 2014, the Company entered into a
60 month lease agreement with SP Forest Oaks, LLC, commencing May 1, 2014, to rent office space at 5007 N. Davis Highway Unit 15,
Pensacola, FL. Rent is abated for three months of the lease. Monthly minimum lease payments are $1,115.25 for the first year of
occupancy. Monthly minimum lease payments increase by approximately 3% per annum thereafter.
On May 22, 2014, the Company entered into a
38 month lease agreement with Vaughn Plaza, LLC, commencing June 1, 2014, to rent office space at 5034 and 5036 Vaughn Road, Montgomery,
AL. Monthly minimum lease payments are $1,305 for the term of the lease. Rent is abated for first two months of the lease.
On August 11, 2014, the Company entered into
a 63 month lease agreement with First Citizens Bank and Trust Company, Inc, commencing October 1, 2014, to rent office space at
3270A Florence Road, Powder Springs, GA. Monthly minimum lease payments are $6,250 for the first year of occupancy. Monthly minimum
lease payments increase by approximately 3% per annum thereafter. Rent is abated for first two months of the lease.
|
2014 |
$ 136,622 |
Year ended December 31, |
2015 |
483,201 |
Year ended December 31, |
2016 |
382,161 |
Year ended December 31, |
2017 |
260,679 |
Year ended December 31, |
2018 |
185,301 |
Year ended December 31, |
2019 |
105,566 |
|
|
$ 1,553,530 |
NOTE 16 – SUBSEQUENT EVENTS
From October 1, 2014 to November 4, 2014,
the holders of Convertible Promissory Notes (see Note 10) converted 26,936,235 shares of common stock of the Company with
a fair value of $1,202,533 to settle $497,573 of principal and interest.
On September 30, 2014, the Company elected
to pay in full Carebourn Capital LLP $112,000 in cash for the Convertible Promissory Note dated March 23, 2014.
On October 6, 2014 the Company filed a Certificate
of Designation with the Nevada Secretary of State to amend its Articles of Incorporation to create and designate the rights and
preferences of a new series of preferred stock designated the Series A Preferred Stock. The number of shares authorized as Series
A Preferred Stock shall be fifty one (51) shares. Each share of Series A Preferred Stock shall be convertible into one (1) share
of common stock of the Company at the election of the holder and shall have voting rights equal to: (x) 0.019607 multiplied by
the total issued and outstanding shares of Common Stock eligible to vote at the time of the respective vote (the “Numerator”),
divided by (y) 0.49, minus (z) the Numerator.
On October 20, 2014, the Company issued fifty-one
(51) shares of Series A Preferred Stock to Ryan Schadel for his service as the Chief Executive Officer and director of the Company.
On October 22, 2014, the Board of Directors
adopted and approved and the majority shareholder, Ryan Schadel, ratified a Company proposed an amendment to the Articles of Incorporation
to increase the number of authorized shares of the Company’s common stock from 150,000,000 to 1,000,000,000. The amendment
is effective November 25, 2014.
On October 21, 2014, the Company entered into
a Convertible Promissory Note (“Note”) with Tailwind Partners 3, LLC (“Holder”) in the original principal
amount of $106,000 less transaction costs of $5,000 bearing a 12% annual interest rate and maturing July 31, 2015. This Note together
with any unpaid accrued interest is convertible into shares of common stock of the Company at the Holder’s option at a variable
conversion price calculated at 58% of the market price which means the average of the lowest three trading prices during the ten
trading day period ending on the latest complete trading day prior to the conversion date. The Company may repay the Note if repaid
within 120 days of date of issue at 125% of the original principal amount plus interest, between 121 days and 150 days at 130%
of the original principal amount plus interest and between 151 days and 180 days at 135% of the original principal amount plus
interest. Thereafter, the Company does not have the right of prepayment
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Labor Smart, Inc.
We have audited the accompanying balance sheets
of Labor Smart, Inc. (the “Company”) as of December 31, 2013 and 2012 and the related statements of operations and
comprehensive loss, stockholders’ deficit and cash flows for the years then ended. Labor Smart, Inc.’s management is
responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 audits
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 financial position of Labor Smart, Inc. as of December 31, 2013 and 2012
and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have
been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company
has suffered losses from operations, which raise substantial doubt about its ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ De Joya Griffith, LLC
Henderson, Nevada
April 11, 2014
LABOR
SMART, INC.
BALANCE
SHEETS
December
31, 2013 and 2012
(Audited)
ASSETS |
| |
| December 31, | |
| |
| 2013 | | |
| 2012 | |
Current assets | |
| | | |
| | |
Cash | |
$ | 178,539 | | |
$ | 124,888 | |
Accounts receivable, net | |
| 1,941,437 | | |
| 711,210 | |
Prepaid expense | |
| 45,497 | | |
| 43,336 | |
Deferred financing costs | |
| 57,748 | | |
| 83,634 | |
Marketable securities | |
| 4,972 | | |
| 28,424 | |
Other assets | |
| 11,591 | | |
| 26,897 | |
Total current assets | |
| 2,239,784 | | |
| 1,018,389 | |
| |
| | | |
| | |
Deposits | |
| 20,014 | | |
| 7,655 | |
Equipment, net | |
| 7,894 | | |
| — | |
Customer relationships, net | |
| 228,028 | | |
| — | |
Total long-term assets | |
| 255,936 | | |
| 7,655 | |
| |
| | | |
| | |
Total assets | |
$ | 2,495,720 | | |
$ | 1,026,044 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' DEFICIT | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities | |
| | | |
| | |
Accounts payable and accrued liabilities | |
$ | 135,524 | | |
$ | 126,705 | |
Loan payable to factor | |
| 865,321 | | |
| — | |
Payroll taxes payable | |
| 1,487,907 | | |
| 579,400 | |
Notes payable, related party | |
| 44,806 | | |
| 219,375 | |
Note payable | |
| — | | |
| 15,160 | |
Convertible notes payable, net of unamortized discount of $578,848 | |
| 1,057,679 | | |
| 184,355 | |
Convertible note payable, derivative liability | |
| 20,701 | | |
| — | |
Total current liabilities | |
| 3,611,938 | | |
| 1,124,995 | |
| |
| | | |
| | |
Contingent liability | |
| 79,221 | | |
| — | |
| |
| | | |
| | |
Total liabilities | |
| 3,691,159 | | |
| 1,124,995 | |
| |
| | | |
| | |
Stockholders' deficit | |
| | | |
| | |
Common stock; $0.001 par value; 75,000,000 shares authorized, | |
| | | |
| | |
20,982,740 and 16,757,000 issued and outstanding as of | |
| | | |
| | |
December 31, 2013 and 2012, respectively. | |
| 20,982 | | |
| 16,757 | |
Additional paid-in capital | |
| 1,978,043 | | |
| 348,838 | |
Accumulated deficit | |
| (3,193,778 | ) | |
| (470,798 | ) |
Accumulated other comprehensive income(loss) | |
| (686 | ) | |
| 6,252 | |
Total stockholder's deficit | |
| (1,195,439 | ) | |
| (98,951 | ) |
| |
| | | |
| | |
Total liabilities and stockholders' deficit | |
$ | 2,495,720 | | |
$ | 1,026,044 | |
See
the accompanying notes to the financial statements
LABOR
SMART, INC.
STATEMENTS
OF OPERATIONS AND COMPREHENSIVE LOSS
For
years ended December 31, 2013 and 2012
(Audited)
| |
For the year ended December 31, 2013 | |
For the year ended December 31, 2012 |
| |
| | | |
| | |
Revenues | |
$ | 16,651,885 | | |
$ | 7,175,846 | |
| |
| | | |
| | |
Cost of sales | |
| 13,953,122 | | |
| 5,955,679 | |
| |
| | | |
| | |
Gross profit | |
| 2,698,763 | | |
| 1,220,167 | |
| |
| | | |
| | |
Operating expenses | |
| | | |
| | |
Professional fees | |
| 308,515 | | |
| 41,131 | |
Stock-based compensation | |
| 801,915 | | |
| 210,600 | |
Payroll expenses | |
| 1,620,859 | | |
| 549,371 | |
Bad debt expense | |
| 215,255 | | |
| 64,318 | |
Loss on sale of receivables | |
| 90,826 | | |
| 126,321 | |
General and administrative expense | |
| 1,398,877 | | |
| 527,957 | |
| |
| | | |
| | |
Total operating expenses | |
| 4,436,247 | | |
| 1,519,698 | |
| |
| | | |
| | |
Operating loss | |
| (1,737,484 | ) | |
| (299,531 | ) |
| |
| | | |
| | |
Other income (expenses) | |
| | | |
| | |
Interest and finance expense | |
| (1,035,031 | ) | |
| (145,173 | ) |
Interest income | |
| 73 | | |
| — | |
Gain on change in fair value in derivative liability | |
| 45,222 | | |
| — | |
Gain (loss) on sale of securities | |
| 4,240 | | |
| (4,761 | ) |
| |
| | | |
| | |
Total other income (expenses) | |
| (985,496 | ) | |
| (149,934 | ) |
| |
| | | |
| | |
Net loss | |
$ | (2,722,980 | ) | |
$ | (449,465 | ) |
| |
| | | |
| | |
Other comprehensive income (loss): | |
| | | |
| | |
Unrealized gain (loss) on marketable securities | |
| (6,938 | ) | |
| 6,252 | |
Other comprehensive income (loss) | |
| (6,938 | ) | |
| 6,252 | |
| |
| | | |
| | |
Comprehensive loss | |
$ | (2,729,918 | ) | |
$ | (443,213 | ) |
| |
| | | |
| | |
Basic loss per common share | |
$ | (0.14 | ) | |
$ | (0.03 | ) |
| |
| | | |
| | |
Basic weighted average common | |
| | | |
| | |
shares outstanding | |
| 19,337,142 | | |
| 16,293,667 | |
See the accompanying notes to the financial
statements
LABOR
SMART, INC.
STATEMENT
OF STOCKHOLDERS’ DEFICIT
For
years ended December 31, 2013 and 2012
(Audited)
| |
| |
| |
| |
| |
| |
|
| |
Common Stock | |
Additional paid-in | |
Accumulated | |
Accumulated other comprehensive | |
Total Stockholders' Equity |
| |
Shares | |
Amount | |
capital | |
Deficit | |
income | |
(deficit) |
| |
| |
| |
| |
| |
| |
|
Balance, December 31, 2011 | |
| 16,045,000 | | |
$ | 16,045 | | |
$ | 16,355 | | |
$ | (21,333 | ) | |
$ | — | | |
$ | 11,067 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Shares issued for services | |
| 625,000 | | |
| 625 | | |
| 124,375 | | |
| — | | |
| — | | |
| 125,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Warrants issued for services | |
| — | | |
| — | | |
| 17,020 | | |
| — | | |
| — | | |
| 17,020 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Warrants issued for finance costs | |
| — | | |
| — | | |
| 133,521 | | |
| — | | |
| — | | |
| 133,521 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Shares issued for employee compensation | |
| 87,000 | | |
| 87 | | |
| 43,113 | | |
| — | | |
| — | | |
| 43,200 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Options issued for employee compensation | |
| — | | |
| — | | |
| 14,454 | | |
| — | | |
| — | | |
| 14,454 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net change in unrealized gain on marketable securities | |
| — | | |
| — | | |
| — | | |
| — | | |
| 6,252 | | |
| 6,252 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| — | | |
| — | | |
| — | | |
| (449,465 | ) | |
| — | | |
| (449,465 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, December 31, 2012 | |
| 16,757,000 | | |
| 16,757 | | |
| 348,838 | | |
| (470,798 | ) | |
| 6,252 | | |
| (98,951 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Shares issued for services | |
| 1,833,500 | | |
| 1,834 | | |
| 442,561 | | |
| — | | |
| — | | |
| 444,395 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Shares issued for cash | |
| 200,000 | | |
| 200 | | |
| 99,800 | | |
| — | | |
| — | | |
| 100,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Conversion of convertible notes | |
| 2,152,240 | | |
| 2,151 | | |
| 675,879 | | |
| — | | |
| — | | |
| 678,030 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commitment fees | |
| 40,000 | | |
| 40 | | |
| 10,760 | | |
| — | | |
| — | | |
| 10,800 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Warrants issued for finance costs | |
| — | | |
| — | | |
| 57,359 | | |
| — | | |
| — | | |
| 57,359 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Options issued for employee compensation | |
| — | | |
| — | | |
| 342,846 | | |
| — | | |
| — | | |
| 342,846 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net change in unrealized gain on marketable securities | |
| — | | |
| — | | |
| — | | |
| — | | |
| (6,938 | ) | |
| (6,938 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| — | | |
| — | | |
| — | | |
| (2,722,980 | ) | |
| — | | |
| (2,722,980 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, December 31, 2013 | |
| 20,982,740 | | |
$ | 20,982 | | |
$ | 1,978,043 | | |
$ | (3,193,778 | ) | |
$ | (686 | ) | |
$ | (1,195,439 | ) |
See the accompanying notes to the financial
statements
LABOR
SMART, INC.
STATEMENTS
OF CASH FLOWS
For
years ended December 31, 2013 and 2012
(Audited)
| |
For the year ended December 31, 2013 | |
For the year ended December 31, 2012 |
| |
| |
|
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (2,722,980 | ) | |
$ | (449,465 | ) |
Adjustments to reconcile net loss to net | |
| | | |
| | |
cash used in operating activities: | |
| | | |
| | |
Stock-based compensation | |
| 801,915 | | |
| 185,000 | |
Interest and financing costs | |
| 698,585 | | |
| 124,242 | |
Depreciation and amortization | |
| 70,020 | | |
| — | |
Bad debt expense | |
| 215,255 | | |
| 64,318 | |
(Gain) loss on sale of securities | |
| (4,240 | ) | |
| 4,761 | |
(Gain) on change in fair value of derivative liability | |
| (45,222 | ) | |
| — | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Increase (decrease) in off-balance sheet receivable factoring | |
| (291,708 | ) | |
| 291,708 | |
Increase in accounts receivables | |
| (1,153,774 | ) | |
| (995,050 | ) |
Increase in prepaid expense and deposits | |
| (25,458 | ) | |
| (8,699 | ) |
Increase in other assets | |
| 15,306 | | |
| (32,168 | ) |
Increase in accounts payable and accrued liabilities | |
| 8,819 | | |
| 117,848 | |
Increase in accrued liabilities, related party | |
| — | | |
| 19,375 | |
Increase in payroll taxes payable | |
| 908,507 | | |
| 553,709 | |
(Decrease) in other liabilities | |
| — | | |
| (7,185 | ) |
Net cash used by operating activities | |
| (1,524,975 | ) | |
| (131,606 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Assets acquired in asset purchase agreement | |
| (150,000 | ) | |
| — | |
Purchase of fixed assets | |
| (1,188 | ) | |
| — | |
Proceeds from sale of marketable securities | |
| 1,853,884 | | |
| 1,536 | |
Purchase of marketable securities | |
| (1,833,129 | ) | |
| (28,469 | ) |
Net cash used by investing activities | |
| (130,433 | ) | |
| (26,933 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from common stock | |
| 100,000 | | |
| — | |
Proceeds from convertible notes payable | |
| 1,630,200 | | |
| 120,000 | |
Payment on convertible notes payable | |
| (607,500 | ) | |
| — | |
Proceeds from notes payable- related party | |
| — | | |
| 210,000 | |
Payment on notes payable - related party | |
| (173,962 | ) | |
| (110,000 | ) |
Proceeds from loan payable to factor | |
| 865,321 | | |
| — | |
Payments on contingent liability | |
| (89,840 | ) | |
| — | |
Payment on financed insurance | |
| (15,160 | ) | |
| (1,684 | ) |
Net cash provided by financing activities | |
| 1,709,059 | | |
| 218,316 | |
| |
| | | |
| | |
Net change in cash | |
| 53,651 | | |
| 59,777 | |
| |
| | | |
| | |
Cash, beginning of period | |
| 124,888 | | |
| 65,111 | |
| |
| | | |
| | |
Cash, end of period | |
$ | 178,539 | | |
$ | 124,888 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Interest paid | |
$ | 227,854 | | |
$ | — | |
Taxes paid | |
$ | — | | |
$ | — | |
Non-cash investing and financing activities | |
| | | |
| | |
Warrants issued as part of deferred finance costs | |
$ | 57,359 | | |
$ | 83,634 | |
Shares issued for prepaid services | |
$ | — | | |
$ | 14,674 | |
Finance costs included in convertible note value | |
$ | 104,550 | | |
$ | 16,844 | |
Commitment fees | |
$ | 10,800 | | |
$ | — | |
Shares issued for convertible notes | |
$ | 678,030 | | |
$ | — | |
Contingent liability associated with asset purchase | |
$ | 158,490 | | |
$ | — | |
See the accompanying notes to the financial
statements
LABOR
SMART, INC.
NOTES
TO THE FINANCIAL STATEMENTS
December 31, 2013 and 2012
(Audited)
NOTE 1 – NATURE OF OPERATIONS
Nature of Business
Labor Smart, Inc. (the “Company”)
was incorporated in the State of Nevada on May 31, 2011. Labor Smart, Inc. provides temporary blue-collar staffing services. It
supplies general laborers on demand to the light industries, including manufacturing, logistics, and warehousing, skilled trades’
people, and general laborers to commercial construction industries.
NOTE 2 – GOING CONCERN
The accompanying financial statements
have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company requires capital for its contemplated operational and marketing activities. The Company’s
ability to raise additional capital through the future issuances of common stock is unknown. Accordingly, the Company had a net
loss of $2,722,980 for the year ended December 31, 2013. Additionally, the operating activities of the Company used $1,524,975
net cash during the same one year period. The obtainment of additional financing and increasingly profitable operations are necessary
for the Company to continue operations. The ability to successfully resolve these factors raise substantial doubt about the Company’s
ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
These financial statements are presented
in United States dollars and have been prepared in accordance with generally accepted accounting principles in the United States
of America. The Company has adopted a December 31 fiscal year end.
Fair Value of Financial Instruments
As required by the Fair Value Measurements
and Disclosures Topic of the FASB ASC (“ASC 820-10”), fair value is measured based on a three-tier fair value hierarchy,
which prioritizes the inputs used in measuring fair value 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; and
(Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own
assumptions.
The three levels of the fair value hierarchy are described below:
|
Level 1 |
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
|
Level 2 |
Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; |
|
Level 3 |
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
Pursuant to ASC 825, the fair value
of cash and marketable securities is determined based on “Level 1” inputs, which consist of quoted prices in active
markets for identical assets. The Company believes that the recorded values of cash, accounts receivables, marketable securities,
accounts payable and accrued liabilities, and notes payable approximate their current fair values because of their nature and respective
relatively short maturity dates or durations.
Assets measured at fair value on a recurring
basis were presented on the Company’s balance sheet as of December 31, 2013 and 2012 as follows:
| |
Fair Value Measurements as of December 31,
2013 Using: |
| |
Total Carrying Value as of | |
Quoted Market Prices in Active Markets | |
Significant Other Observable Inputs | |
Significant Unobservable Inputs |
| |
12/31/13 | |
(Level 1) | |
(Level 2) | |
(Level 3) |
Assets: | |
| | | |
| | | |
| | | |
| | |
Equity securities | |
$ | 4,972 | | |
$ | 4,972 | | |
$ | 0 | | |
$ | 0 | |
Total | |
$ | 4,972 | | |
$ | 4,972 | | |
$ | 0 | | |
$ | 0 | |
Liabilities: | |
| | | |
| | | |
| | | |
| | |
Derivative liability | |
$ | 20,701 | | |
$ | 0 | | |
$ | 20,701 | | |
$ | 0 | |
Contingent liability | |
| 79,221 | | |
| 0 | | |
| 0 | | |
| 79,221 | |
Total | |
$ | 99,922 | | |
$ | 0 | | |
$ | 20,701 | | |
$ | 79,221 | |
| |
Fair Value Measurements as of December 31,
2012 Using: |
| |
Total Carrying Value as of | |
Quoted Market Prices in Active Markets | |
Significant Other Observable Inputs | |
Significant Unobservable Inputs |
| |
12/31/12 | |
(Level 1) | |
(Level 2) | |
(Level 3) |
Assets: | |
| | | |
| | | |
| | | |
| | |
Equity securities | |
$ | 28,424 | | |
$ | 28,424 | | |
$ | 0 | | |
$ | 0 | |
Total | |
$ | 28,424 | | |
$ | 28,424 | | |
$ | 0 | | |
$ | 0 | |
Liabilities: | |
| | | |
| | | |
| | | |
| | |
Derivative liability | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | |
Contingent liability | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | |
Total | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | |
Cash and Cash Equivalents
Cash and cash equivalents consist of
cash and short-term investments with original maturities of less than 90 days. Cash equivalents are placed with high credit quality
financial institutions and are primarily in money market funds. The carrying value of those investments approximates fair value.
Income Taxes
The Company follows the liability method
of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax balances. Deferred tax assets and liabilities are measured using enacted or substantially enacted tax rates expected to apply
to the taxable income in the years in which those differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive
enactment. Deferred income taxes are reported for timing differences between items of income or expense reported in the financial
statements and those reported for income tax purposes in accordance with FASB ASC 740-10, “Income Taxes,” which requires
the use of the asset/liability method of accounting for income taxes.
The Company provides for deferred taxes
for the estimated future tax effects attributable to temporary differences and carry-forwards when realization is more likely than
not.
Revenue Recognition
The
Company recognizes revenues and the related costs when persuasive evidence of an arrangement exists, delivery and acceptance has
occurred or service has been rendered, the price is fixed or determinable, and collection of the resulting receivable is reasonably
assured. Amounts invoiced or collected in advance of product delivery or providing services are recorded as deferred revenue. The
Company accrues for customer credits, bad debts, and other allowances based on its historical experience. Staffing revenue is recognized
as the services are performed. Revenue also includes billable travel and other
reimbursable costs and is record net of sales tax.
Deferred Financing Costs
Deferred financing costs consist of
costs incurred to obtain debt financing, including legal fees, origination fees and administration fees. Costs associated with
the Convertible Promissory Note are deferred and amortized in our accompanying statement of operations using the straight-line
method, which approximates the effective interest method, over the terms of the respective financing instrument.
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent
assets and liabilities. These estimates and judgments are based on historical information, information that is currently available
to the Company, and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results
could differ from those estimates.
Factoring Agreements and Accounts
Receivable
The Company had a month-to-month financing
agreements with Riviera Finance LLC (“Riveria”) which was terminated on July 24, 2013. On
July 31, 2013 the Company entered into a Purchase and Sale Agreement with Transfac Capital, Inc. (“Transfac”). The
agreement with Riveria includes a non-recourse factoring arrangement that provides notification factoring on substantially all
of the Company’s sales. Riviera, based on credit approved orders, assumes the accounts receivable risk of the Company’s
customers in the event of insolvency or non-payment. All other receivable risks for customer deductions that reduce the customer
receivable balances are retained by the Company, including, but not limited to, allowable customer markdowns, disputes, and discounts.
The Company assumes the risk on accounts receivable not factored to Riviera, which is shown as accounts receivable on the accompanying
balance sheets, net of factored accounts receivable. Advance to the Company from Transfac are with recourse and are secured by
assets of the Company and are treated as a secured financing arrangement. As of December 31, 2013 and 2012, factored accounts receivable
total $865,321 and $772,676, respectively.
Allowance for Doubtful Accounts
The Company allows for an estimated amount
of receivables that may not be collected. The Company estimates its allowance for doubtful accounts based on historical experience
and customer relationships. As of December 31, 2013 and 2012, the Company has recorded an allowance of $215,255 and $64,318, respectively.
Equipment
Property and equipment are stated at the lower
of cost or fair value. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, as follows:
Description |
Estimated Life |
Office equipment and furniture |
3 years |
The estimated useful lives are based
on the nature of the assets as well as current operating strategy and legal considerations such as contractual life. Future events,
such as property expansions, property developments, new competition, or new regulations, could result in a change in the manner
in which the Company uses certain assets requiring a change in the estimated useful lives of such assets.
| |
December 31, 2013 | |
December 31, 2012 |
Office equipment and furniture | |
$ | 11,842 | | |
$ | — | |
Less: accumulated depreciation | |
| (3,948 | ) | |
| — | |
| |
$ | 7,894 | | |
$ | — | |
Customer Relationships
Customer relationships comprise customer
lists acquired from Qwik Staffing Solutions, Inc. on April 29, 2013. Customer lists are amortized on a straight-line basis over
three years.
| |
December 31, 2013 | |
December 31, 2012 |
Customer lists | |
$ | 294,100 | | |
$ | — | |
Less: accumulated amortization | |
| (66,072 | ) | |
| — | |
| |
$ | 228,028 | | |
$ | — | |
Earnings (loss) per share
Basic earnings (loss) per common share
is computed by dividing net income (loss) available to common shareholders by the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings per common share is computed by dividing income available to common shareholders
by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional
shares of common stock that would have been outstanding if potentially dilutive securities had been issued.
Convertible Debentures
Beneficial Conversion Feature
If the conversion features of conventional
convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion
feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt
with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related
to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method.
Debt Discount
The Company determines if the convertible
debenture should be accounted for as liability or equity under ASC 480, Liabilities — Distinguishing Liabilities from Equity.
ASC 480, applies to certain contracts involving a company's own equity, and requires that issuers classify the following freestanding
financial instruments as liabilities. Mandatorily redeemable financial instruments, Obligations that require or may require repurchase
of the issuer's equity shares by transferring assets (e.g., written put options and forward purchase contracts), and Certain obligations
where at inception the monetary value of the obligation is based solely or predominantly on:
– A fixed monetary amount known
at inception, for example, a payable settleable with a variable number of the issuer's equity shares with an issuance date fair
value equal to a fixed dollar amount,
– Variations in something other
than the fair value of the issuer's equity shares, for example, a financial instrument indexed to the S&P 500 and settleable
with a variable number of the issuer's equity shares, or
– Variations inversely related
to changes in the fair value of the issuer's equity shares, for example, a written put that could be net share settled.
If the entity determined the instrument
meets the guidance under ASC 480 the instrument is accounted for as a liability with respective debt discount. The Company records
debt discounts in connection with raising funds through the issuance of convertible debt (see Note 8). These costs are amortized
to non-cash interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of
the unamortized amounts is immediately expensed.
Derivative Financial Instruments
Derivative financial instruments, as
defined in ASC 815, “Accounting for Derivative Financial Instruments and Hedging Activities”, consist of financial
instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or
other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing
or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured
at fair value and recorded as liabilities or, in rare instances, assets.
The Company does not use derivative
financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has issued financial
instruments including senior convertible notes payable and freestanding stock purchase warrants with features that are either (i)
not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash
settled by the counterparty. As required by ASC 815, in certain instances, these instruments are required to be carried as derivative
liabilities, at fair value, in our financial statements.
Stock-based compensation
The Company records stock based
compensation in accordance with the guidance in ASC Topic 505 and 718 which requires the Company to recognize expenses related
to the fair value of its employee stock option awards. This eliminates accounting for share-based compensation transactions using
the intrinsic value and requires instead that such transactions be accounted for using a fair-value-based method. The Company recognizes
the cost of all share-based awards on a graded vesting basis over the vesting period of the award.
The Company accounts for equity instruments
issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10 and the conclusions
reached by the FASB ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated
fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for
consideration other than employee services is determined on the earliest of a performance commitment or completion of performance
by the provider of goods or services as defined by FASB ASC 505-50.
Recent Accounting Pronouncements
The Company does not expect the adoption
of recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial
position, or cash flow.
NOTE 4 – PREPAID
As of December 31, 2013 and 2012, the
Company had prepaid expenses of $45,497 and $43,336, respectively. Prepaid expenses at December 31, 2013 comprises primarily of
prepaid lease payments.
NOTE 5 – CUSTOMER RELATIONSHIP,
NET
On April 29, 2013 the Company entered
into an Asset Purchase Agreement (“Agreement”) with Qwik Staffing Solutions, Inc. (“Qwik”). Under
the terms of the Agreement, Qwik sold all of the operating assets (“Assets”) of Qwik, excluding cash and accounts receivable.
In consideration for the Assets, the Company agreed to pay $320,000 in cash. The first $150,000 is due one day prior
to the delivery and transfer of the Assets. The remaining $170,000 is due in monthly installments by paying an amount equal
to 6.5% of the monthly accounts receivable collected by operating the Orlando, Jacksonville and Tampa, Florida locations. In
the event these aggregate monthly payments total less than $170,000, after 14 months, Qwik will issue the Company a credit memo
for the difference.
The total purchase price for Qwik was
approximately $308,490. The purchase price consisted of approximately (i) $150,000 in cash, (ii) Estimated fair value
of consideration payable on collection 6.5% of the monthly accounts receivable collected by operating the Orlando, Jacksonville
and Tampa, Florida locations over the next fourteen months of $158,490. The Company expected to pay total consideration of $170,000
in equal installments over 14 months. The fair value of the consideration was estimated by discounting the monthly installments
by 12% per annum.
Equipment | |
$ | 10,654 | |
Prepaid supplies | |
| 3,736 | |
Customer relationships | |
| 294,100 | |
Net assets acquired | |
$ | 308,490 | |
| |
| | |
Cash | |
$ | 150,000 | |
Contingent consideration | |
| 158,490 | |
Consideration paid | |
$ | 308,490 | |
As of December 31, 2013 and 2012, the
customer list is valued at $228,028 and $0, respectively. Amortization expense was $66,072 and $0 for the year ended December 31,
2013 and 2012, respectively.
NOTE 6 – FACTORING AGREEMENT
On July 24, 2013, the Company terminated
a month-to-month financing agreement with Riviera Finance LLC (“Riviera”) that included a non-recourse factoring arrangement
that provides notification factoring on substantially all of the Company’s sales. Receivables were factored at a rate of
eight-five (85) percent of the invoice face value on accepted accounts up to $500,000. A reserve of eight (8) percent of the invoice
face value is held by Riviera in case of customer disputes.
Fees charged by Riviera are two (2)
percent of the unpaid invoice face value for the first twenty-five (25) days after the factored date and 0.8% of the invoice face
value for every ten (10) days thereafter up to a total of seven (7) percent, including the initial two (2) percent. Administrative
charges based on various rates are charged on the gross face amount of all accounts with minimum fees as defined in the agreement.
The following table details the amounts of the factoring agreement with Riviera as of December 31, 2013 and 2012.
|
| |
Receivables Factored | |
Reserve Deposit | |
Fees | |
Administrative Charges |
|
December 31, 2013 | |
$ | 0 | | |
$ | 0 | | |
$ | 90,826 | | |
$0 |
|
December 31, 2012 | |
$ | 291,708 | | |
$ | 25,597 | | |
$ | 126,321 | | |
$0 |
The reserve deposit is included in other
current assets within the balance sheets and receivables factored are netted against accounts receivable. Fees or charges billed
by Riviera Finance as of December 31, 2013 and 2012 are $90,826 and $126,321, respectively.
On
July 31, 2013 the Company entered into a Purchase and Sale Agreement with Transfac Capital, Inc. (“Transfac”). Under
the terms of the Purchase and Sale Agreement, Transfac shall have the right, but not the obligation, to purchase up to Two Million
Dollars ($2,000,000) worth of accounts receivable (the “Maximum Advances”) of the Company. For each account receivable
purchased, Transfac shall advance seventy percent (70%) of the face value of the account and the balance after receipt of full
payment on the account. As consideration, the Company shall pay Transfac two percent (2%) of the average monthly balance
of the outstanding accounts purchased, with a minimum of one half of one percent (0.5%) of the Maximum Advances per month, as long
as the Purchase and Sale Agreement remains in effect.
The factoring line of credit with Transfac
has been treated as a secured financing arrangement. As of December 31, 2013 under the agreement with Transfac, the Company had
factored receivables in the amount of $1,281,122 and recorded a liability of $865,321. Discounts and interest provided during factoring
of the accounts receivable have been expensed on the accompanying combined statements of operations as interest expense. For the
year ended December 31, 2013, interest expense related to the factoring arrangement was $103,165.
NOTE 7 – RELATED PARTY
On January 11, 2012, the Company issued
a promissory note to the Company’s President in exchange for $50,000 in cash. The note is unsecured, bears interest at 10%
per annum if not paid before the maturity date, and matures on January 11, 2013. As of April 23, 2013, $43,000 of this note has
been repaid. The unpaid portion of this note of $7,000 was consolidated into the loan agreement dated April 25, 2013.
On January 19, 2012, the Company issued
a promissory note to the Company’s President in exchange for $50,000 in cash. The note is unsecured, bears interest at 10%
per annum if not paid before the maturity date, and matures on January 19, 2013. This note was consolidated into the loan agreement
dated April 25, 2013.
On February 6, 2012, the Company issued
a promissory note to the Company’s President in exchange for $25,000 in cash. The note is unsecured, bears interest at 10%
per annum if not paid before the maturity date, and matures on February 6, 2013. This note was consolidated into the loan agreement
dated April 25, 2013.
On February 20, 2012, the Company issued
a promissory note to the Company’s President in exchange for $15,000 in cash. The note is unsecured, bears interest at 10%
per annum if not paid before the maturity date, and matures on February 20, 2013. This note was consolidated into the loan agreement
dated April 25, 2013.
On March 5, 2012, the Company issued
a promissory note to the Company’s President in exchange for $15,000 in cash. The note is unsecured, bears interest at 10%
per annum if not paid before the maturity date, and matures on March 5, 2013. This note was consolidated into the loan agreement
dated April 25, 2013.
On March 8, 2012, the Company issued
a promissory note to the Company’s President in exchange for $45,000 in cash. The note is unsecured, bears interest at 10%
per annum if not paid before the maturity date, and matures on March 8, 2013. This note was consolidated into the loan agreement
dated April 25, 2013.
On March 12, 2012, the Company issued
a promissory note to the Company’s President in exchange for $10,000 in cash. The note is unsecured, bears interest at 10%
per annum if not paid before the maturity date, and matures on March 12, 2013. This note was consolidated into the loan agreement
dated April 25, 2013.
On April 25, 2013, the Company entered
into a loan agreement with the CEO of the Company in the amount of $175,768. This loan is payable on demand, unsecured, and bears
0% interest per annum. This loan consolidates all previous loans issued. As of December 31, 2013, $130,962 of this note has been
repaid and $44,806 of this note remains outstanding.
NOTE 8 – CONVERTIBLE PROMISSORY
NOTES
On September 20, 2012, the Company entered
into a Convertible Promissory Note with Evolution Capital, LLC, (the ‘Holder’) in the original principle amount of
$130,000 bearing a 12% annual interest rate and maturing June 20, 2013. This convertible note together with any unpaid accrued
interest is convertible into shares of common stock at the holder’s option at a variable conversion price calculated as 50%
of the market price which means the average of the lowest three trading prices during the ten trading day period ending on the
latest complete trading day prior to the conversion date. On March 28, 2013, Evolution Capital, LLC elected to convert $130,000
of principal amount for 604,651 shares of common stock of the Company valued at $268,088 ($0.44 per share) in accordance with the
terms of the Note. After conversion the Convertible Promissory Note was paid in full.
On January 17, 2013, the Company entered
into a Convertible Promissory Note with Asher Enterprises, Inc. (“Holder”) in the original principle amount of $103,500
bearing an 8% annual interest rate and maturing October 21, 2013. This convertible promissory note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated at 51% of the market price which means the average of the lowest three trading prices during the ten trading day period
ending on the latest complete trading day prior to the conversion date. The Company may repay the convertible promissory note if
repaid within 60 days of date of issue at 130% of the original principal amount plus interest, between 60 days and 120 days at
140% of the original principal amount plus interest and between 120 days and 180 days at 150% of the original principal amount
plus interest. Thereafter, the Company does not have the right of prepayment. The Company received cash proceeds of $100,000, which
was net of original issue discount of $105,478. On April 16, 2013, Company elected to prepay the Convertible Promissory Note dated
January 17, 2013 with Asher Enterprises, Inc. for $146,647 in cash. The payment includes prepayment of $103,500 in original principal,
a prepayment penalty and outstanding accrued interest of $43,147.
On February 25, 2013, the Company entered
into a Convertible Promissory Note with Evolution Capital Fund I, L.P. (“Holder”) in the original principle amount
of $106,000 bearing a 12% annual interest rate and maturing November 25, 2013. This convertible note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated as 52% of the market price which means the average of the lowest three trading prices during the ten trading day period
ending on the latest complete trading day prior to the conversion date. The Company may repay the convertible promissory note if
repaid within 120 days of date of issue at 140% of the original principal amount plus interest, between 121 days and 150 days at
145% of the original principal amount plus interest and between 151 days and 180 days at 150% of the original principal amount
plus interest. Thereafter, the Company does not have the right of prepayment. The Company received cash proceeds of $101,000, which
was net of original issue discount of $106,628. On September 28, 2013, the Holder converted 221,108 shares of common stock of the
Company with a fair market value of $61,910 for $27,529 and $2,471 in principal and interest, respectively. On October 29, 2013,
the Holder converted 227,342 shares of common stock of the Company with a fair market value of $65,929 for $23,859 and $2,141 in
principal and interest, respectively. On November 26, 2013, the Holder converted 418,060 shares of common stock of the Company
with a fair market value of $96,154 for $45,882 and $4,118 in principal and interest, respectively. On November 26, 2013, the Holder
waived $9,514 of interest and the Convertible Promissory Note was paid in full.
On March 4, 2013, the Company issued
a Convertible Note to Vista Capital Investments, LLC (“Holder”), in the original principle amount of $275,000 bearing
a 12% annual interest rate and maturing one year for $250,000 of consideration paid in cash and a $25,000 original issue discount.
The Company may repay the convertible note any time and if repaid within 90 days of date of issue with an interest rate is 0%.
This convertible note together with any unpaid accrued interest is convertible into shares of common stock at the Holder’s
option at a variable conversion price calculated as lessor of (a) $0.62 or (b) 60% of the lowest trade occurring during the 25
consecutive trading days immediately preceding the conversion date.
| i) | The Company received cash proceeds of $25,000 on the first tranche
of the Convertible Note, which was net of original issue discount of $20,533. On September 5, 2013, the Holder converted 50,000
shares of common stock of the Company with a fair market value of $17,500 for $7,071 and $849 in principal and interest, respectively.
On October 8, 2013, the Holder converted 50,000 shares of common stock of the Company with a fair market value of $14,250 for $6,696
and $804 in principal and interest, respectively. On October 24, 2013, the Holder converted 60,000 shares of common stock of the
Company with a fair market value of $15,000 for $7,007 and $841 in principal and interest, respectively. On November 21, 2013,
the Holder converted 57,374 shares of common stock of the Company with a fair market value of $14,917 for $6,725 and $807 in principal
and interest, respectively. On November 21, 2013, the first tranche of the Convertible Note was paid in full. |
| ii) | On October 30, 2013, the Company received cash proceeds of $25,000
on the second tranche of the Convertible Note, which was net of original issue discount of $18,667. At December 31, 2013, $3,680
of discount has been amortized on the second tranche. |
On March 6, 2013, the Company issued
a Convertible Note to JMJ Financial (“Holder”), in the original principle amount of $275,000 bearing a 12% annual interest
rate and maturing in one year for $250,000 of consideration paid in cash and a $25,000 original issue discount. The Company may
repay the convertible note any time and if repaid within 90 days of date of issue with an interest rate is 0%. This convertible
note together with any unpaid accrued interest is convertible into shares of common stock at the Holder’s option at a variable
conversion price calculated as lessor of (a) $0.62 or (b) 60% of the lowest trade occurring during the 25 consecutive trading days
immediately preceding the conversion date.
| i) | On March 6, 2013, the Company received cash of $46,000 in the first
tranche, which was net of original issue discount of $41,067. On September 9, 2013, the Holder converted 60,000 shares of common
stock of the Company with a fair market value of $21,000 for $8,486 and $1,018 in principal and interest, respectively. On September
19, 2013, the Holder converted 80,000 shares of common stock of the Company with a fair market value of $20,800 for $10,834 and
$1,300 in principal and interest, respectively. On October 7, 2013, the Holder converted 75,000 shares of common stock of the Company
with a fair market value of $19,875 for $10,045 and $1,205 in principal and interest, respectively. On October 21, 2013, the Holder
converted 100,000 shares of common stock of the Company with a fair market value of $25,000 for $11,721 and $1,407 in principal
and interest, respectively. On November 12, 2013, the Holder converted 118,705 shares of common stock of the Company with a fair
market value of $29,083 for $13,914 and $1,670 in principal and interest, respectively. On November 12, 2013, the first tranche
was paid in full. |
| ii) | On June 27, 2013, the Company received the second tranche of $50,000
in cash, which was net of original issue discount of $42,000. At December 31, 2013, $24,976 of discount has been amortized on the
second tranche. |
| iii) | On September 27, 2013, the Company received the third tranche of
$50,000 in cash, which was net of original issue discount of $42,000. At December 31, 2013, $12,688 of discount has been amortized
on the third tranche. |
| iv) | On December 9, 2013, the Company received the fourth tranche of $40,000
in cash, which was net of original issue discount of $36,497. At December 31, 2013, $2,526 of discount has been amortized on the
fourth tranche. |
On April 10, 2013, the Company issued
a Convertible Promissory Note to Iconic Holding, LLC (“Holder”), in the original principle amount of $115,500 bearing
a 5% annual interest rate and maturing April 10, 2014 for $101,200 of consideration paid in cash, $8,800 in issuer expenses and
a $5,500 original issue discount. This unsecured convertible promissory note is convertible into shares of common stock at the
Holder’s option at a variable conversion price calculated at 65% of the lowest trading price of any day during the 10 consecutive
trading days prior to the dated on which the Holder elects to convert all or part of the Note. The Company may repay the convertible
promissory note within 60 days of date of issue at 110% of the original principal amount plus interest, between 60 days and 120
days at 120% of the original principal amount plus interest and between 120 days and 180 days at 130% of the original principal
amount plus interest and 30,000 shares of common stock of the Company with a fair market value of $8,550. Thereafter, the Note
may only be repaid with the consent of the Holder. The Company received cash proceeds of $101,200, which was net of unamortized
discount of $62,192. On October 7, 2013, Company elected to prepay the Convertible Promissory Note for $149,500 in cash. The payment
includes prepayment of $115,500 in original principal a prepayment penalty and outstanding accrued interest of $34,000.
On April 29, 2013, the Company entered
into a Convertible Promissory Note with Asher Enterprises, Inc. (“Holder”) in the original principle amount of $128,500
bearing an 8% annual interest rate and maturing January 31, 2014. This convertible promissory note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated at 58% of the market price which means the average of the lowest three trading prices during the ten trading day period
ending on the latest complete trading day prior to the conversion date. The Company may repay the convertible promissory note if
repaid within 30 days of date of issue at 112% of the original principal amount plus interest, between 31 days and 60 days at 119%
of the original principal amount plus interest, between 61 days and 90 days at 125% of the original principal amount plus interest,
between 91 days and 120 days at 130% of the original principal amount plus interest and between 121 days and 180 days at 135% of
the original principal amount plus interest. Thereafter, the Company does not have the right of prepayment. The Company received
cash proceeds of $125,000, which was net of original issue discount of $93,052. On October 24, 2013, Company elected to prepay
the Convertible Promissory Note for $176,291 in cash. The payment includes prepayment of $128,500 in original principal a prepayment
penalty and outstanding accrued interest of $47,791.
On May 17, 2013, the Company entered
into a Convertible Promissory Note with Redwood Fund II, LLC (“Holder”) in the original principle amount of $101,000
bearing a 10% annual interest rate and maturing November 17, 2013. This convertible note together with any unpaid accrued interest
is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price calculated
as 58% of the lowest trading price, determined on the then current trading market for the Company’s common stock, for 20
trading days prior to conversion. The Company received cash proceeds of $101,000, which was net of original issue discount of $76,825.
At December 31, 2013, $60,547 of discount has been amortized. On November 19, 2013, Company elected to prepay the Convertible Promissory
Note for $138,875 in cash. The payment includes prepayment of $101,000 in original principal a prepayment penalty and outstanding
accrued interest of $37,875.
On May 20, 2013, the Company entered
into a Convertible Promissory Note with Asher Enterprises, Inc. (“Holder”) in the original principle amount of $53,000
bearing an 8% annual interest rate and maturing February 20, 2014. This convertible promissory note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated at 58% of the market price which means the average of the lowest three trading prices during the ten trading day period
ending on the latest complete trading day prior to the conversion date. The Company may repay the convertible promissory note if
repaid within 30 days of date of issue at 112% of the original principal amount plus interest, between 31 days and 60 days at 119%
of the original principal amount plus interest, between 61 days and 90 days at 125% of the original principal amount plus interest,
between 91 days and 120 days at 130% of the original principal amount plus interest and between 121 days and 180 days at 135% of
the original principal amount plus interest. Thereafter, the Company does not have the right of prepayment. The Company received
cash proceeds of $50,000, which was net of original issue discount of $40,701. On November 20, 2013, Company elected to prepay
the Convertible Promissory Note for $73,641 in cash. The payment includes prepayment of $53,000 in original principal a prepayment
penalty and outstanding accrued interest of $20,641.
On June 4, 2013, the Company entered
into a Convertible Promissory Note with Evolution Capital Fund I, L.P. (“Holder”) in the original principle amount
of $106,000 bearing a 12% annual interest rate and maturing March 4, 2014. This convertible note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated as 58% of the market price which means the average of the lowest three trading prices during the ten trading day period
ending on the latest complete trading day prior to the conversion date. The Company may repay the convertible promissory note if
repaid within 120 days of date of issue at 140% of the original principal amount plus interest, between 121 days and 150 days at
145% of the original principal amount plus interest and between 151 days and 180 days at 150% of the original principal amount
plus interest. Thereafter, the Company does not have the right of prepayment. The Company received cash proceeds of $101,000, which
was net of original issue discount of $81,648. On December 31, 2013, Company elected to prepay the Convertible Promissory Note
for $148,400 in cash. The payment includes prepayment of $106,000 in original principal a prepayment penalty and outstanding accrued
interest of $42,400.
On July 11, 2013, the Company entered
into a Convertible Promissory Note with Asher Enterprises, Inc. (“Holder”) in the original principle amount of $63,000
bearing an 8% annual interest rate and maturing April 15, 2014. This convertible promissory note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated at 58% of the market price which means the average of the lowest three trading prices during the ten trading day period
ending on the latest complete trading day prior to the conversion date. The Company may repay the convertible promissory note if
repaid within 30 days of date of issue at 112% of the original principal amount plus interest, between 31 days and 60 days at 119%
of the original principal amount plus interest, between 61 days and 90 days at 125% of the original principal amount plus interest,
between 91 days and 120 days at 130% of the original principal amount plus interest and between 121 days and 180 days at 135% of
the original principal amount plus interest. Thereafter, the Company does not have the right of prepayment. The Company received
cash proceeds of $60,000, which was net of original issue discount of $48,400. At December 31, 2013, $32,508 of discount has been
amortized.
On September 16, 2013, the Company entered
into a Convertible Promissory Note (“Note”) with Willow Creek Capital Group, LLC (“Holder”) in the original
principle amount of $130,000 bearing a 12% annual interest rate and maturing July 16, 2014. At the option of the Holder:
| i) | The Note together with any unpaid accrued interest is convertible
into shares of common stock of the Company at a variable conversion price calculated at 58% of the market price which means the
average of the lowest three trading prices during the ten trading day period ending on the latest complete trading day prior to
the conversion date, or |
| ii) | All principal, costs, charges and interest amounts outstanding may
be exchanged for shares of the Company’s common stock at the Conversion Price of $0.34 per share. The Conversion Price is
subject to an anti-dilution adjustment in the event the Company at any time, while the Notes are outstanding, issues equity securities
including common stock or any security convertible or exchangeable for shares of common stock for no consideration or for consideration
less than $0.34 a share. |
The Company may repay the convertible
promissory note at 135% of the original principal amount plus interest. The Company received cash proceeds of $125,000, which was
net of original issue discount of $103,516 and convertible note payable derivative liability of $65,723. At December 31, 2013,
$40,744 of discount has been amortized.
On October 31, 2013, the Company issued
a Convertible Promissory Note to Iconic Holding, LLC (“Holder”), in the original principle amount of $110,250 bearing
a 0% annual interest rate and maturing October 31, 2014 for $105,000 of consideration paid in cash and a $5,250 original issue
discount. This unsecured convertible promissory note is convertible into shares of common stock at the Holder’s option at
a variable conversion price calculated at 60% of the lowest trading price of any day during the 10 consecutive trading days prior
to the dated on which the Holder elects to convert all or part of the Note. The Company may repay the convertible promissory note
within 60 days of date of issue at 125% of the original principal amount plus interest, between 60 days and 120 days at 130% of
the original principal amount plus interest plus 30,000 shares of common stock of the Company and between 120 days and 180 days
at 135% of the original principal amount plus interest plus 60,000 shares of common stock of the Company. Thereafter, the Note
may only be repaid with the consent of the Holder. The Company received cash proceeds of $105,000, which was net of unamortized
discount of $73,500. At December 31, 2013, $12,284 of discount has been amortized.
On November 4, 2013, the Company entered
into a Convertible Promissory Note with Asher Enterprises, Inc. (“Holder”) in the original principle amount of $128,500
bearing an 8% annual interest rate and maturing November 4, 2014. This convertible promissory note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated at 58% of the market price which means the average of the lowest three trading prices during the ten trading day period
ending on the latest complete trading day prior to the conversion date. The Company may repay the convertible promissory note if
repaid within 30 days of date of issue at 112% of the original principal amount plus interest, between 31 days and 60 days at 119%
of the original principal amount plus interest, between 61 days and 90 days at 125% of the original principal amount plus interest,
between 91 days and 120 days at 130% of the original principal amount plus interest and between 121 days and 180 days at 135% of
the original principal amount plus interest. Thereafter, the Company does not have the right of prepayment. The Company received
cash proceeds of $125,000, which was net of original issue discount of $100,496. At December 31, 2013, $17,300 of discount has
been amortized.
On December 9, 2013, the Company entered
into a Convertible Promissory Note with Group 10 Holdings, LLC (“Holder”) in the original principle amount of $106,000
bearing a 12% annual interest rate and maturing December 9, 2014. This convertible promissory note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated at 55% of the lowest trading price of any day during the 10 consecutive trading days prior to the dated on which the
Holder elects to convert all or part of the Note. The Company may repay the convertible promissory note if repaid within 30 days
of date of issue at 125% of the original principal amount plus interest and between 31 days and 179 days at 135% of the original
principal amount plus interest. Thereafter, the Company subject to the approval of the Holder, may repay the convertible promissory
note at 135% of the original principal amount plus interest. The Company received cash proceeds of $101,000 which was net of original
issue discount of $97,135. At December 31, 2013, $6,622 of discount has been amortized.
On December 12, 2013 the Company entered
into a Convertible Promissory Note with Tonaquint Inc. (“Holder”) in the original principle amount of $115,000 bearing
a 10% annual interest rate and maturing November 12, 2014. The Convertible Promissory Note is due is six equal monthly installments
plus interest (“Installment Amount”) commencing six months after the issue date. At the option of the Holder, the Installment
Amount is convertible into shares of common stock of the Company at a variable conversion price calculated at 60% of the market
price which means the average of the lowest two trading prices during the twenty trading day period ending on the latest complete
trading day prior to the conversion date. The Company may elect to prepay in cash all or any portion of the outstanding balance
of the convertible promissory note if the Company pays the holder 125% of the outstanding balance. The Company received cash proceeds
of $100,000, which was net of original issue discount of $83,703. At December 31, 2013, $5,346 of discount has been amortized.
On December 13, 2013 the Company entered
into a Convertible Promissory Note with Tailwind Partners, LLC (“Holder”) in the original principle amount of $106,000
bearing a 12% annual interest rate and maturing November 12, 2014. This convertible promissory note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated at 58% of the market price which means the average of the lowest three trading prices during the ten trading day period
ending on the latest complete trading day prior to the conversion date. The Company may repay the convertible promissory note if
repaid within 120 days of date of issue at 125% of the original principal amount plus interest, between 121 days and 150 days at
130% of the original principal amount plus interest and between 151 days and 180 days at 130% of the original principal amount
plus interest. Thereafter, the Company does not have the right of prepayment. The Company received cash proceeds of $101,000, which
was net of original issue discount of $83,673. At December 31, 2013, $6,124 of discount has been amortized.
NOTE 9 – CONVERTIBLE NOTE PAYABLE
DERIVATIVE LIABILITY
The Convertible Promissory Note with
Willow Creek Capital Group, LLC are subject to anti-dilution adjustments that allow for the reduction in the Conversion Price in
the event the Company subsequently issues equity securities including common stock or any security convertible or exchangeable
for shares of common stock for no consideration or for consideration less than $0.34 a share. The Company accounted for the
conversion option in accordance with ASC Topic 815. Accordingly, the Conversion Option is not considered to be solely indexed to
the Company’s own stock and, as such, recorded as a liability.
The Company’s convertible promissory
note derivative liability has been measured at fair value at September 16, 2013 and December 31, 2013 using a binomial model. Since
the Conversion Price contains an anti-dilution adjustment, the probability that the Conversion Price of the Notes would decrease
as the share price decreased was incorporated into the valuation calculation.
The inputs into the binomial model are
as follows:
| |
September 16, 2013 | |
December 31, 2013 |
Closing share price | |
$ | 0.34 | | |
$ | 0.248 | |
Conversion price | |
$ | 0.34 | | |
$ | 0.34 | |
Risk free rate | |
| 0.10 | % | |
| 0.10 | % |
Expected volatility | |
| 150 | % | |
| 99 | % |
Dividend yield | |
| 0 | % | |
| 0 | % |
Expected life | |
| 10 months | | |
| 7 months | |
The fair value of the convertible note
payable derivative liability is $20,701 at December 31, 2013. The decrease in the fair value of the convertible note payable derivative
liability of $45,222 is recorded as a gain in the consolidated condensed statement of operations for the year ended December 31,
2013.
NOTE 10 – CONTINGENT LIABILITY
The Company has a contingent liability
related to Asset Acquisition Agreement with Qwik Staffing Solutions, Inc. on April 29, 2013. The obligation is due in monthly installments
by paying an amount equal to 6.5% of the monthly accounts receivable collected by operating the Orlando, Jacksonville and Tampa,
Florida locations. The total payments are not to exceed $170,000. The fair value of the obligation is determined by estimating
discounted monthly installments at an interest rate of 12% per annum.
Opening balance at April 29, 2013 |
$ 158,490 |
Payments |
(89,940) |
Interest |
10,571 |
Closing balance at December 31, 2013 |
$ 79,121 |
NOTE 11 – STOCKHOLDERS’
EQUITY
The Company has 75,000,000 shares of
$0.001 par value common stock authorized. As of December 31, 2013 and 2012, the Company had 20,982,740 and 16,757,000 shares issued
and outstanding, respectively.
In July 2012, the Company issued 25,000
shares in conjunction with the Form S-8 Registration Statement as filed on July 13, 2012 with a fair market value of $0.20 per
share.
On July 12, 2012, the Company entered
into an agreement with Infinity Global Consulting Group Inc. (“Infinity”) whereas the Company grants Infinity the option
to purchase all or part of an aggregate total of 100,000 shares of the Company’s common stock at the strike price of $0.50
per share. The aforementioned options expire on July 12, 2017. The options were measured at their fair value on July
12, 2012 using the following Black-Scholes Model Assumptions: risk free interest (0.83%); expected volatility (148%); expected
life (5 years); no dividends. These warrants were valued at $17,020 and expensed as stock based compensation.
In August 2012, the Company issued 100,000
restricted shares with a fair value of $0.20 per share for services and 500,000 shares with a fair value of $0.20 per share in
conjunction with the Form S-8 Registration Statement as filed on July 13, 2012.
On September 20, 2012, the Company issued
warrants to purchase 300,000 shares of common stock of the Company with an exercise price of $0.40 per share and no specific term.
These warrants were issued in conjunction to the Convertible Promissory Note the Company entered into on September 20, 2012.
The warrants were measured at their fair value on September 20, 2012 using the following Black-Scholes Model Assumptions: risk
free interest (2.53%); expected volatility (157%); expected life (10 years); no dividends. These warrants were valued at $133,521
and are deferred and amortized in our accompanying statement of operations using the straight-line method, which approximates the
effective interest method, over the term of the associated Convertible Promissory Note.
On October 1, 2012, the Company issued
57,000 shares of common stock for employee compensation with a fair value of $0.50 per share in conjunction with the Form S-8 Registration
Statement as filed on July 13, 2012.
In October 2012, the Company
issued 30,000 shares for employee compensation in conjunction with the Form S-8 Registration Statement as filed on October 17,
2012 with a fair value of $0.49 per share.
In October, 2012 the Company
issued 30,000 stock options with an exercise price of $0.50 per share, expiring on October 12, 2022 in conjunction with the Form
S-8 Registration Statement as filed on July 13, 2012. The options were measured at their fair value on October 17, 2012 using the
following Black-Scholes Model Assumptions: risk free interest (1.83%); expected volatility (149%); expected life (10 years); no
dividends. These options were immediately vested and exercisable, valued at $14,454 and expensed in our accompanying statement
of operations.
On January 28, 2013, the Company entered
into a Consultant Agreement for a term of six months for general corporate and due diligence services. As compensation, the Company
agreed to issue to the consultant 300,000 shares of unrestricted common stock valued at $72,000 ($0.24 per share) in conjunction
with the Form S-8 Registration Statement as filed on July 13, 2012.
On January 28, 2013, the Company entered
into a Consultant Agreement for a term of six months for general corporate and due diligence services. As compensation, the Company
agreed to issue to the consultant 700,000 shares of unrestricted common stock valued at $168,000 ($0.24 per share) in conjunction
with the Form S-8 Registration Statement as filed on July 13, 2012.
On January 28, 2013, the Company entered
into a Consultant Agreement for a term of six months. As compensation, the Company agreed to issue to the consultant 500,000 shares
of common stock valued at $120,000 ($0.24 per share) of the Company.
On January 28, 2013, the Company entered
into a Consultant Agreement for services. As compensation, the Company agreed to issue to the consultant 300,000 shares of unrestricted
common stock valued at $72,000 ($0.24 per share) in conjunction with the Form S-8 Registration Statement as filed on July 13, 2012.
In February 21, 2013, the Company issued
50,000 stock options to a director of the Company with an exercise price of $0.56 per share, expiring on February 21, 2018 in conjunction
with the Form S-8 Registration Statement as filed on July 13, 2012. The options were measured at their fair value on February 21,
2013 using the following Black-Scholes Model Assumptions: risk free interest (0.86%); expected volatility (166%); expected life
(5 years); no dividends. These options were immediately vested and exercisable, valued at $26,244 and expensed in our accompanying
statement of operations.
On February 25, 2013, the Company issued
warrants to purchase 202,000 shares of common stock of the Company with an exercise price of $0.40 per share and no specific term.
These warrants were issued in conjunction to the Convertible Promissory Note the Company entered into on February 25, 2013.
The warrants were measured at their fair value on February 25, 2013 using the following Black-Scholes Model Assumptions: risk free
interest (1.93%); expected volatility (166%); expected life (10 years); no dividends. These warrants were valued at their relative
fair value of $57,359, recorded as a discount to convertible note payable and are deferred and amortized in our accompanying statement
of operations using the straight-line method, which approximates the effective interest method, over the term of the associated
Convertible Promissory Note.
In March 14, 2013, the Company issued
50,000 stock options to a director of the Company with an exercise price of $0.62 per share, expiring on March 14, 2018 in conjunction
with the Form S-8 Registration Statement as filed on July 13, 2012. The options were measured at their fair value on March 14,
2013 using the following Black-Scholes Model Assumptions: risk free interest (0.88%); expected volatility (166%); expected life
(5 years); no dividends. These options were immediately vested and exercisable, valued at $29,057 and expensed in our accompanying
statement of operations.
On March 20, 2013, the Company agreed
to issue 100,000 shares of its common stock for cash. The shares were issued at $0.50 per share for an aggregate of $50,000.
On March 28, 2013, the Holder (Evolution
Capital, LLC) of the Convertible Promissory Note originally issued on September 20, 2012, elected to convert $130,000 of principal
amount for 604,651 shares of common stock of the Company valued at $268,088 ($0.44 per share) in accordance with the terms of the
Note. The amount of principal balance due after the conversion is $0.
On April 5, 2013, the Company agreed
to issue 100,000 shares of its common stock for cash. The shares were issued at $0.50 per share for an aggregate of $50,000.
In April 19, 2013, the Company issued
30,000 stock options for employee compensation with an exercise price of $0.41 per share, expiring on April 19, 2018 in conjunction
with the Form S-8 Registration Statement as filed on July 13, 2012. The options were measured at their fair value on April 19,
2013 using the following Black-Scholes Model
Assumptions: risk free interest (0.72%);
expected volatility (167%); expected life (5 years); no dividends. These options were immediately vested and exercisable, valued
at $11,559 and expensed in our accompanying statement of operations.
On May 24, 2013, the Company issued
33,500 of shares of common stock to employees for services rendered by them for an aggregate fair value of $12,395 ($0.37 per share)
based on the quoted market price of the shares at time of issuance in conjunction with the Form S-8 Registration Statement as filed
on July 13, 2012.
On September 5, 2013, Vista Capital
Investments, LLC elected to convert 50,000 shares of common stock with an aggregate fair value of $17,500 ($0.35 per share) based
on the quoted market price of the shares at time of issuance for $7,920 for principal and interest and $9,580 for debt discount.
On September 9, 2013, JMJ Financial
elected to convert 60,000 shares of common stock with an aggregate fair value of $21,000 ($0.35 per share) based on the quoted
market price of the shares at time of issuance for $9,504 for principal and interest and $11,496 for debt discount.
On September 19, 2013, JMJ Financial
elected to convert 80,000 shares of common stock with an aggregate fair value of $20,800 ($0.26 per share) based on the quoted
market price of the shares at time of issuance for $12,134 for principal and interest and $8,666 for debt discount.
In October 28, 2013, the Company issued
1,500,000 stock options for employee compensation with an exercise price of $0.30 per share, expiring on April 28, 2015 in conjunction
with the Form S-8 Registration Statement as filed on July 13, 2012. The options were measured at their fair value on October 28,
2013 using the following Black-Scholes Model Assumptions: risk free interest (0.215%); expected volatility (148%); expected life
(1.5 years); no dividends. These options were immediately vested and exercisable, valued at $226,882 and expensed in our accompanying
statement of operations.
On September 28, 2013, Evolution Capital
LLC elected to convert 221,108 shares of common stock with an aggregate fair value of $61,910 ($0.28 per share) based on the quoted
market price of the shares at time of issuance for $30,000 for principal and interest and $31,910 for debt discount.
On October 7, 2013, JMJ Financial elected
to convert 75,000 shares of common stock with an aggregate fair value of $19,875 ($0.265 per share) based on the quoted market
price of the shares at time of issuance for $11,250 for principal and interest and $8,625 for debt discount.
On October 8, 2013, the Company issued
30,000 shares of its common stock with an aggregate fair value of $8,550 ($0.285 per share) based on the quoted market price of
the shares at time of issue to Iconic Holding, LLC for finance costs upon the election of the Company to prepay the Convertible
Promissory Note dated April 10, 2013.
On October 8, 2013, Vista Capital Investments,
LLC elected to convert 50,000 shares of common stock with an aggregate fair value of $14,250 ($0.285 per share) based on the quoted
market price of the shares at time of issuance for $7,500 for principal and interest and $6,750 for debt discount.
On October 9, 2013, the Company agreed
to issue options to purchase 2,405,037 shares of common stock to nineteen (19) employees of the Company with an exercise price
of $0.05 per share of common stock and a contractual life of ten years in conjunction with the Form S-8 Registration Statement
as filed on July 13, 2012. The stock options as vest follows: 25% on October 9, 2016, 35% on October 9, 2017 and the remaining
40% on October 9, 2018. The options were measured at their fair value on October 9, 2013 using the following Black-Scholes Model
Assumptions: risk free interest (1.73%); expected volatility (147%); expected life (ten years); no dividends. Share-based compensation
related to these common stock option grants for the years ended December 31, 2013 and 2012 amounted to $29,783 and $0, respectively,
and is reported as stock-based compensation in the statement of operations and additional paid-in capital in the statement of stockholders’
equity.
On October 21, 2013, JMJ Financial elected
to convert 100,000 shares of common stock with an aggregate fair value of $25,000 ($0.25 per share) based on the quoted market
price of the shares at time of issuance for $13,128 for principal and interest and $11,872 for debt discount.
On October 24, 2013, Vista Capital Investments,
LLC elected to convert 60,000 shares of common stock with an aggregate fair value of $15,000 ($0.25 per share) based on the quoted
market price of the shares at time of issuance for $7,848 for principal and interest and $7,152 for debt discount.
In October 28, 2013, the Company issued
50,000 stock options for employee compensation with an exercise price of $0.295 per share, expiring on September 24, 2018 in conjunction
with the Form S-8 Registration Statement as filed on July 13, 2012. The options were measured at their fair value on October 28,
2013 using the following Black-Scholes Model Assumptions: risk free interest (0.72%); expected volatility (164%); expected life
(5 years); no dividends. These options were immediately vested and exercisable, valued at $13,792 and expensed in our accompanying
statement of operations.
On October 29, 2013, Evolution Capital
LLC elected to convert 227,342 shares of common stock with an aggregate fair value of $65,929 ($0.29 per share) based on the quoted
market price of the shares at time of issuance for $26,000 for principal and interest and $39,929 for debt discount.
On November 12, 2013, JMJ Financial
elected to convert 118,705 shares of common stock with an aggregate fair value of $29,083 ($0.245 per share) based on the quoted
market price of the shares at time of issuance for $15,584 for principal and interest and $13,499 for debt discount.
On November 21, 2013, Vista Capital
Investments, LLC elected to convert 57,374 shares of common stock with an aggregate fair value of $14,917 ($0.26 per share) based
on the quoted market price of the shares at time of issuance for $7,532 for principal and interest and $7,385 for debt discount.
On November 26, 2013, Evolution Capital
Fund I, LLC elected to convert 418,060 shares of common stock with an aggregate fair value of $96,154 ($0.23 per share) based on
the quoted market price of the shares at time of issuance for $50,000 for principal and interest and $46,154 for debt discount.
On December 12, 2013, the Company issued
to Group 10 Holdings, LLC in conjunction with the Convertible Promissory Note issued to Group 10 Holdings, LLC on December 9, 2013
40,000 shares of common stock with an aggregate fair value of $10,800 ($0.27 per share) based on the quoted market price of the
for a commitment fee. The commitment fee is included in deferred finance costs and amortized on a straight line, which approximates
the effective interest method, over the life the Convertible Promissory Note.
In December 24, 2013, the Company issued
25,000 stock options for employee compensation with an exercise price of $0.25 per share, expiring on December 24, 2018 in conjunction
with the Form S-8 Registration Statement as filed on July 13, 2012. The options were measured at their fair value on December 24,
2013 using the following Black-Scholes Model Assumptions: risk free interest (1.73%); expected volatility (147%); expected life
(5 years); no dividends. These options were immediately vested and exercisable, valued at $5,529 and expensed in our accompanying
statement of operations.
The following is a summary of the common
stock options granted, forfeited or expired and exercised:
|
Number of Options |
|
Weighted Average Exercise
Price Per Share |
Outstanding – January 1, 2012 |
- |
|
$ - |
Granted |
130,000 |
|
0.50 |
Forfeited or expired |
- |
|
- |
Exercised |
- |
|
- |
Outstanding - December 31, 2012 |
130,000 |
|
0.50 |
Granted |
4,110,037 |
|
0.16 |
Forfeited or expired |
(356,582) |
|
0.05 |
Exercised |
- |
|
- |
Outstanding– December 31, 2013 |
3,883,455 |
|
$ 0.18 |
Exercisable – December 31, 2013 |
1,835,000 |
|
$ 0.33 |
The following table summarizes information
on stock options exercisable as of December 31, 2013:
Exercise Price |
Number Outstanding at December 31, 2013 |
Average Remaining Life (Years) |
Aggregate Intrinsic Value |
$0.295 |
75,000 |
4.99 |
- |
$0.30 |
1,500,000 |
1.32 |
- |
$0.41 |
30,000 |
4.55 |
- |
$0.50 |
130,000 |
5.00 |
- |
$0.56 |
50,000 |
4.40 |
- |
$0.62 |
50,000 |
4.45 |
- |
The following table summarizes information
on stock options outstanding as of December 31, 2013:
Exercise Price |
Number Outstanding at December 31, 2013 |
Average Remaining Life (Years) |
Aggregate Intrinsic Value |
$0.05 |
2,048,455 |
9.78 |
$405,594 |
$0.295 |
75,000 |
4.99 |
- |
$0.30 |
1,500,000 |
1.32 |
- |
$0.41 |
30,000 |
4.55 |
- |
$0.50 |
130,000 |
5.00 |
- |
$0.56 |
50,000 |
4.40 |
- |
$0.62 |
50,000 |
4.45 |
- |
The following is a summary of warrants
activity during December 31, 2013:
|
Number of Shares |
Weighted Average Exercise Price |
Balance, December 31, 2012 |
300,000 |
0.40 |
|
|
|
Warrants granted and assumed
Warrants
canceled |
202,000
- |
0.40
0.00 |
Warrants expired |
- |
0.00 |
Balance, December 31, 2013 |
502,000 |
0.40 |
All
warrants outstanding as of December 31, 2013 are exercisable.
NOTE 12 – INCOME
TAXES
As of December 31, 2013, the Company
had net operating loss carry forwards of $1,236,187 that may be available to reduce future years’ taxable income through
2031 and 2032. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements,
as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the
deferred tax asset relating to these tax loss carryforwards.
Components of net deferred tax assets,
including a valuation allowance, are as follows at December 31, 2013 and 2012:
| |
2013 | |
2012 |
| |
| | | |
| | |
Net loss before taxes | |
$ | (2,722,980 | ) | |
$ | (449,465 | ) |
| |
| | | |
| | |
Permanent adjustments: | |
| | | |
| | |
Stock based compensation | |
| 801,915 | | |
| 185,000 | |
Penalties | |
| — | | |
| 41,459 | |
Meals and Entertainment | |
| 12,926 | | |
| 3,637 | |
Amortized debt discount | |
| 682,603 | | |
| 52,195 | |
Temporary adjustments: | |
| | | |
| | |
Bad debt expense | |
| 113,538 | | |
| 64,318 | |
NOL loss carryforward | |
$ | (1,111,998 | ) | |
$ | (102,856 | ) |
| |
| | | |
| | |
Tax rate | |
| 35 | % | |
| 35 | % |
Recovery) Provision for income taxes | |
$ | (389,000 | ) | |
$ | (36,000 | ) |
Less: Valuation allowance | |
$ | 389,000 | | |
$ | 36,000 | |
Net deferred tax asset | |
$ | — | | |
$ | — | |
The valuation allowance for deferred
tax assets as of December 31, 2013 was $432,000. In assessing the recovery of the deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences
become deductible. Management considers the scheduled reversals of future deferred tax assets, projected future taxable income,
and tax planning strategies in making this assessment. As a result, management determined it was more likely than not the deferred
tax assets would not be realized as of December 31, 2013 and 2012.
Reconciliation between the statutory
rate and the effective tax rate is as follows at December 31, 2013 and 2012:
|
2013 |
2012 |
Federal statutory tax rate |
(35.0)% |
(35.0)% |
Valuation allowance |
35.0% |
35.0% |
|
- % |
- % |
Below is a chart showing the estimated
corporate federal net operating loss (NOL) and the year in which it will expire.
Year |
Amount |
Expiration |
2013 |
$ 1,238,462 |
2033 |
2012 |
$ 102,856 |
2032 |
2011 |
$ 21,333 |
2031 |
NOTE 13 – COMMITMENTS
On November 12, 2011, the Company entered
into a three year lease agreement with VFC Properties 8, LLC to rent office space at 1166 Franklin Road, Suite 5 for the Company’s
Marietta, GA operations. Minimum monthly lease payments equal $1,083.
On November 12, 2011, the Company entered
into a single year lease agreement with Brothers Investments, Inc. to rent office space at 427 Lafayette Street for the Company’s
Nashville, TN operations. Minimum monthly lease payments equal $2,250. As of December 31, 2012, the lease
term is month to month.
On December 9, 2011, Labor Smart, Inc.
entered into a two year lease agreement with Cleanstar National, Inc. to rent office space at 44 Darby’s Crossing Drive,
Suite 116 for the Company’s corporate operations. Minimum monthly lease payments total $650.
On January 26, 2012, the Company entered
into a three year lease agreement with Hull 2000 WS2, LLC, commencing February 1, 2012, to rent office space at the Windsor Square
Two Shopping Center, Augusta for the Company’s GA operations. Monthly lease payments, including CTI, are $1,244. The
Company has the option to extend the lease for an additional three years at an increased monthly lease payment of $1,530.
On March 1, 2012, the Company entered
into a lease agreement with Nancy Elaine Cagle, with an initial lease term commencing March 1, 2012 and expiring on February 28,
2015, to rent office space in Chattanooga, Tennessee. Monthly lease payments are $935 plus common area maintenance. The Company
has the option to extend the lease for three additional three year terms with the rental amount for each extension to be determined
30 days prior to commencement.
On March 29, 2012, the Company entered
into a three year lease agreement with Phillips Holding, LP, commencing April 1, 2012, to rent office space at Wade Hampton Square
for the Company’s SC operations. Minimum monthly lease payments total $1,600. The Company has the option
to extend the lease for an additional three years.
On April 25, 2012, the Company entered
into a three year lease agreement with Molay, Inc. commencing May 1, 2012, to rent office space at 430 Greensprings Highway for
the Company’s AL operations. Minimum monthly lease payments total $1,132. The Company has the option
to extend the lease for an additional three years at an increased monthly lease payment of $1,232.
On February 14, 2013, the Company entered
into a two year lease agreement with L. Gerald Crews Trust, commencing March 1, 2013, to rent office space at 5604 Wendy Bagwell
Pkwy., Hiram, Georgia. The Company is not required to pay rent in the first month of the lease. Thereafter, monthly lease payments,
including common area maintenance, are $900 and $936 in Year 1 and Year 2, respectively. The Company has the option to extend the
lease for an additional two years at increased monthly lease payments of $964 and $993 in Year 1 and Year 2, respectively, during
the renewal period.
On February 27, 2013, the Company entered
into a 37 month lease agreement with Ross Properties, LLC, commencing March 1, 2013, to rent office space at 4424 Taggart Creek
Road, Charlotte, North Carolina. The Company is not required to pay rent in the first month of the lease. Thereafter, monthly lease
payments, including initial estimated monthly operating expense payments, are $1,408 with an annual rent escalation of 3% per annum.
On March 15, 2013, the Company entered
into a 37 month lease agreement with DV Partnership, commencing April 1, 2013, to rent office space at 2300 Decker Blvd., Columbia,
South Carolina. The Company is not required to pay rent in the first month of the lease. Thereafter, monthly minimum lease payments
are $1,034, $1,065 and $1,097 in Year 1, Year 2 and Year 3, respectively. In additional, initial monthly estimated operating expense
payments are $366.
On March 21, 2013, the Company entered
into a 37 month lease agreement with Rosie III, LLC, d/b/a Elis Enterprises L.P., commencing April 1, 2013, to rent office space
at 6612 B&C Blue Ridge Blvd., Raytown, Missouri. The Company is not required to pay rent in the first month of the lease. Thereafter,
monthly minimum lease payments which includes common area expenses are $1,350, $1,400 and $1,450 in Year 1, Year 2 and Year 3,
respectively.
On May 1, 2013, the Company entered
into a 12 month lease agreement with Steven C. Cheeseman to rent office space at 14601 North Nebraska Ave., Tampa, Florida. Monthly
minimum lease payments are $1,200.
On May 1, 2013, the Company entered
into a 12 month lease agreement with Progressive Properties LLC to rent office space at 4818 Preston Street, Louisville, Kentucky.
Monthly minimum lease payments are $1,500 along with a security deposit of $1,500. The Company has the option to renew this lease
for 12 additional months for monthly minimum lease payments are $1,545.
On May 3, 2013, the Company entered
into a 24 month lease agreement with Alterman Properties, Inc., commencing May 6, 2013, to rent office space at 6365 Philips Highway,
Jacksonville, Florida. Monthly minimum lease payments are $1,600 and $1,700 in Year 1 and Year 2, respectively along with a security
deposit of $1,600. The Company has the option to renew this lease for 24 additional months for monthly minimum lease payments are
$1,775 and $1,850 in Year 1 and Year 2, respectively during the renewal period.
On May 7, 2013, the Company entered
into a 36 month lease agreement with Noujaim and Warren, Inc. to rent office space at 1517 North Orange Blossom Trail, Orlando,
Florida. Monthly minimum lease payments are $1,500, $1,700 and $1,700 in Year 1, Year 2 and Year 3, respectively plus 6.5% sales
tax.
On May 29, 2013, the Company entered
into a 36 month lease agreement with Terry Clyne, commencing June 1, 2013, to rent office space at 571 Murfreesboro Road, Nashville,
Tennessee. Monthly minimum lease payments are $0 June 1, 2013 through August 31, 2013, $950 for September 2013 and $1,900 from
October 1, 2013 through May 31, 2016.
On April 15, 2013, the Company entered
into a 60 month lease agreement with Gary T. Anderberg & Sharon D. Anderberg Family Trust Dated March 30th 1999,
commencing July 1, 2013, to rent office space at 3945 N High School Road, Indianapolis, Indiana. Monthly minimum lease payments
are $425 for July 2013, $850 for August 1, 2013 through June 30, 2015, $876 for July 1, 2015 through June 30, 2016, $902 for July
1, 2016 through June 30, 2017 and $929 for July 1, 2017 through June 30, 2018.
On September 5, 2013, the Company entered
into a 37 month lease agreement with Sarah T. Knott & Macon T. Newby, commencing September 6, 2013, to rent office space at
207 Oberlin Road, Raleigh, North Carolina. Monthly minimum lease payments are $2,650 for September 6, 2013 through September 30,
2014, $2,730 for October 1, 2014 through September 30, 2015, $2,811 and for October 1, 2015 through September 30, 2016.
On October 1, 2013, the Company entered
into a 60 month lease agreement with NG BIM Colony Plaza, LLC, commencing October 1, 2013, to rent office space at 2115 Windsor
Spring Road, Augusta Georgia. Monthly minimum lease payments are $1,200 for October 1, 2013 through December 31, 2014, $1,250 for
January 1, 2015 through December 31, 2015, $1,300 for January 1, 2016 through December 31, 2016, $1,350 for January 1, 2017 through
December 31, 2017 and $1,400 for January 1, 2018 through September 30, 2018,
The following table is a schedule
of future minimum lease commitments for the Company:
Period ending December 31 |
2014 |
$ 269,925 |
|
2015 |
177,760 |
|
2016 |
78,225 |
|
2017 |
27,185 |
|
2018 |
19,075 |
|
|
$ 572,170 |
NOTE 14 – SUBSEQUENT
EVENTS
On January 6, 2014, JMJ Financial elected
to convert 110,000 shares of common stock to convert $11,352 principal amount of a Convertible Promissory Note.
On January 14, 2014, the Company received
cash proceeds of $25,000 on the third tranche of the Convertible Note dated March 4, 2013 with Vista Capital Investments, LLC.
On January 16, 2014, JMJ Financial elected
to convert 120,000 shares of common stock to convert $12,684 principal amount of a Convertible Promissory Note.
On January 31, 2014, JMJ Financial elected
to convert 130,000 shares of common stock to convert $13,650 principal amount of a Convertible Promissory Note.
On January 31, 2014, the Company entered
into a Convertible Promissory Note with Tonaquint Inc. (“Holder”) in the original principal amount of $115,000 bearing
a 10% annual interest rate and maturing December 31, 2014. The Convertible Promissory Note is due in six equal monthly installments
plus interest (“Installment Amount”) commencing six months after the issue date. At the option of the Holder, the Installment
Amount is convertible into shares of common stock of the Company at a variable conversion price calculated at 60% of the market
price which means the average of the lowest two trading prices during the twenty trading day period ending on the latest complete
trading day prior to the conversion date. The Company may elect to prepay in cash all or any portion of the outstanding balance
of the convertible promissory note if the Company pays the holder 125% of the outstanding balance.
On February 11, 2014, the Company issued
100,000 shares of common stock to satisfy obligations under share subscription agreement for $29,000 in professional fees included
in share subscriptions payable.
On February 12, 2014, JMJ Financial
elected to convert 120,000 shares of common stock to convert $12,600 principal amount of a Convertible Promissory Note.
On February 13, 2014, the Company entered
into an Original Issue Discount Secured Promissory Note with Beaufort Ventures PLC (“Holder”) for a purchase price
of $101,000 and a face amount of $136,350 and maturing August 13, 2014. After the maturity date, the Notes accrues interest at
22% per annum and the Note together with any unpaid accrued interest is convertible into shares of common stock of the Company
at the Holder’s option at a variable conversion price calculated at 58% of the market price which means the lowest trading
price of the prior 15 trading days, determined on the then current trading market of the Company’s common stock, for 10 trading
days prior to conversion. The Company may repay the convertible promissory note, if repaid within 90 days of date of issue, for
a net payment of $136,350 plus 70,000 shares of common stock of the Company.
On March 3, 2014, JMJ Financial elected
to convert 123,943 shares of common stock to convert $13,014 principal amount of a Convertible Promissory Note.
On March 24, 2014, the Company entered
into a Convertible Promissory Note with Carebourn Capital, L.P. (“Holder”) in the original principle amount of $112,500
bearing a 8% annual interest rate and maturing November 24, 2014. This convertible promissory note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated at 58% of the market price which means the average of the lowest three trading prices during the ten trading day period
ending on the latest complete trading day prior to the conversion date. The Company may repay the convertible promissory note if
repaid within 30 days of date of issue at 110% of the original principal amount plus interest, between 31 days and 60 days at 115%
of the original principal amount plus interest, between 61 days and 90 days at 120% of the original principal amount plus interest,
between 91 days and 120 days at 125% of the original principal amount plus interest, between 121 days and 150 days at 130% of the
original principal amount plus interest, and between 151 days and 180 days at 135% of the original principal amount plus interest.
Thereafter, the Company does not have the right of prepayment.
On March 26, 2014, JMJ Financial elected
to convert 552,632 shares of common stock to convert $63,000 principal amount of a Convertible Promissory Note.
On March 27, 2014, the Company entered
into a 10% Original Issue Discount Convertible Promissory Note (“Note”) with Gemini Master Fund, Ltd. (“Holder”)
in the original principle amount of $220,000 bearing a 10% annual interest rate and maturing January 1, 2015. At the option of
the Holder:
| i) | The Note together with any unpaid accrued interest is convertible
into shares of common stock of the Company at a variable conversion price calculated at 65% of the market price which means the
average of the lowest volume weighted average price during the twenty trading day period ending prior to the conversion date, or |
| ii) | All principal, costs, charges and interest amounts outstanding may
be exchanged for shares of the Company’s common stock at the Conversion Price of $0.25 per share. The Conversion Price is
subject to an anti-dilution adjustment. |
The Company may repay the convertible promissory
note at 130% of the original principal amount plus interest.
On April 2, 2014, the Company entered
into a Convertible Promissory Note with Coventry Enterprises, LLC (“Holder”) in the original principle amount of $101,000
bearing a 10% annual interest rate and maturing April 5, 2015. This convertible promissory note together with any unpaid accrued
interest is convertible into shares of common stock of the Company at the Holder’s option at a variable conversion price
calculated at 58% of the lowest bid price during the twelve trading days prior to the conversion date including the day upon which
a Notice of Conversion is received by the Company. The Company may repay the convertible promissory note if repaid within 180 days
of date of issue at 135% of the original principal amount plus interest. Thereafter, the Company does not have the right of prepayment.
On April 9, 2014, the Company entered
into an Asset Purchase Agreement (“Agreement”) with Shirley’s Employment Service, Inc. (“Shirley’s”).
Under the terms of the Agreement, Shirley’s sold all of the operating assets (“Assets”) of Shirley’s,
excluding cash and accounts receivable. In consideration for the Assets, the Company agreed to pay $300,000 in cash minus
the open accounts receivable of Shirley’s. The consideration to be paid will be determined on closing. It is currently estimated
by the Company that $180,000 will be paid for the Assets after deducting accounts receivable. The first $80,000 is due one
day prior to the delivery and transfer of the Assets. The remaining $100,000 is due in monthly installments by paying an
amount equal 5.0% of the monthly accounts receivable collected by operating the Tulsa, Oklahoma location. In the event these
aggregate monthly payments total less than $100,000, after 18 months, Shirley’s will issue the Company a credit memo for
the difference.
Shares
of Common Stock |
|
|
Warrants
to Purchase |
Shares of Common Stock |
PROSPECTUS
Through and including ,
2015 (the 25th day after the date of this offering), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation
to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of
Issuance and Distribution
The following
table provides information regarding the various actual and anticipated expenses (other than underwriting discounts) payable by
us in connection with the issuance and distribution of the securities being registered hereby. All amounts shown are
estimates except the Securities and Exchange Commission registration fee, the FINRA filing fee and the NASDAQ initial listing fee.
Nature of Expense |
|
Amount |
|
SEC registration fee |
|
$ |
3,368 |
|
FINRA filing fee |
|
|
|
|
NASDAQ initial listing fee |
|
|
|
* |
Accounting fees and expenses |
|
|
|
* |
Legal fees and expenses |
|
|
|
* |
Transfer agent’s fees and expenses |
|
|
|
* |
Printing and related fees |
|
|
|
* |
Miscellaneous |
|
|
|
* |
Total |
|
$ |
|
|
* To be completed by amendment
Item 14. Indemnification of
Directors and Officers.
Neither our
Articles of Incorporation nor Bylaws prevent us from indemnifying our officers, directors and agents to the extent permitted under
the Nevada Revised Statute (“NRS”). NRS Section 78.7502 provides that a corporation shall indemnify any director, officer,
employee or agent of a corporation against expenses, including attorneys' fees, actually and reasonably incurred by him in connection
with any the defense to the extent that a director, officer, employee or agent of a corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to Section 78.7502(1) or 78.7502(2), or in defense of any claim,
issue or matter therein.
NRS 78.7502(1)
provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by
or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action, suit or proceeding if he: (a) is not liable pursuant to
NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests
of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was
unlawful.
NRS Section
78.7502(2) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason
of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise
against expenses, including amounts paid in settlement and attorneys' fees actually and reasonably incurred by him in connection
with the defense or settlement of the action or suit if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith
and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification
may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals there from, to be liable to the corporation or for amounts paid in settlement to the corporation,
unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines
upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for
such expenses as the court deems proper.
NRS Section
78.747 provides that except as otherwise provided by specific statute, no director or officer of a corporation is individually
liable for a debt or liability of the corporation, unless the director or officer acts as the alter ego of the corporation. The
court as a matter of law must determine the question of whether a director or officer acts as the alter ego of a corporation.
Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection
with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy
as expressed hereby in the Securities Act and we will be governed by the final adjudication of such issue.
Item 15. Recent Sales of Unregistered Securities
During the period commencing January
22, 2015 through January 28, 2015, we issued an aggregate of 234,711,656 shares of common stock as follows: on January 22, 2015,
we issued 30,241,379 shares of common stock to reduce an outstanding convertible note payable by $10,524. On January 23, 2015,
we issued 30,091,967 shares of common stock to reduce an outstanding convertible note payable by $6,981.34. On January 27, 2015,
we issued 30,172,414 shares of common stock to reduce an outstanding convertible note payable by $7,000. On January 27, 2015, we
issued 67,444,451 shares of common stock to reduce an outstanding convertible note payable by $12,140. On January 28, 2015, we
issued 43,713,145 shares of common stock to reduce an outstanding convertible note payable by $24,042.23. On January 28, 2015,
we issued 33,048,300 shares of common stock to reduce an outstanding convertible note payable by $5,750.40.
During the period commencing January
9, 2015 through January 13, 2015, we issued an aggregate of 127,331,602 shares of common stock as follows: on January 9, 2015,
we issued 9,419,355 shares of common stock to reduce an outstanding convertible note payable by $5,840. On January 9, 2015, we
issued 15,600,000 shares of common stock to reduce an outstanding convertible note payable by $8,580. On January 9, 2015, we issued
17,500,000 shares of common stock to reduce an outstanding convertible note payable by $10,597.50. On January 9, 2015, we issued
15,740,741 shares of common stock to reduce an outstanding convertible note payable by $8,500. On January 9, 2015, we issued 9,358,685
shares of common stock to reduce an outstanding convertible note payable by $4,885.23. On January 12, 2015, we issued 5,566,667
shares of common stock to reduce an outstanding convertible note payable by $3,340. On January 12, 2015, we issued 16,346,154 shares
of common stock to reduce an outstanding convertible note payable by $8,500. On January 13, 2015, we issued 18,950,000 shares of
common stock to reduce an outstanding convertible note payable by $10,233. On January 13, 2015, we issued 18,850,000 shares of
common stock to reduce an outstanding convertible note payable by $10,367.50.
During the period commencing December
31, 2014 through January 8, 2015, we issued an aggregate of 121,261,354 shares of common stock as follows: on December 31, 2014,
we issued 3,537,975 shares of common stock to reduce an outstanding convertible note payable by $2,795. On December 31, 2014, we
issued 8,015,809 shares of common stock to reduce an outstanding convertible note payable by $5,049.96. On January 2, 2015, we
issued 7,000,000 shares of common stock to reduce an outstanding convertible note payable by $5,390. On January 2, 2015, we issued
9,526,667 shares of common stock to reduce an outstanding convertible note payable by $7,145. On January 5, 2015, we issued 10,100,000
shares of common stock to reduce an outstanding convertible note payable by $6,060. On January 5, 2015, we issued 9,500,000 shares
of common stock to reduce an outstanding convertible note payable by $5,747. On January 5, 2015, we issued 9,528,571 shares of
common stock to reduce an outstanding convertible note payable by $6,670. On January 6, 2015, we issued 9,482,759 shares of common
stock to reduce an outstanding convertible note payable by $5,500. On January 6, 2015, we issued 9,523,438 shares of common stock
to reduce an outstanding convertible note payable by $6,095. On January 7, 2015, we issued 7,200,000 shares of common stock to
reduce an outstanding convertible note payable by $4,176. On January 7, 2015, we issued 9,523,438 shares of common stock to reduce
an outstanding convertible note payable by $6,095. On January 8, we issued 9,540,000 shares of common stock to reduce an outstanding
convertible note payable by $5,247. On January 8, 2015, we issued 9,259,259 shares of common stock to reduce a convertible note
payable note by $5,000. On January 8, 2015, we issued 9,523,438 shares of common stock to reduce a convertible note payable by
$6,095.
During the period
commencing December 22, 2014 through December 29, 2014, we issued an aggregate of 46,647,814 shares of common stock as follows:
on December 22, 2014, we issued 10,400,000 shares of common stock to reduce an outstanding convertible note payable by $10,587.20.
On December 23, 2014, we issued 5,000,000 shares of common stock to reduce an outstanding convertible note payable by $4,400. On
December 23, 2014, we issued 7,200,000 shares of common stock to reduce an outstanding convertible note payable by $5,616. On December
23, 2014, we issued 5,434,782 shares of common stock to reduce an outstanding convertible note payable by $5,000. On December 23,
2014, we issued 3,541,237 shares of common stock to reduce an outstanding convertible note payable by $3,435. On December 29, 2014,
we issued 3,538,462 shares of common stock to reduce an outstanding convertible note payable by $3,220. On December 29, 2014, we
issued 7,000,000 shares of common stock to reduce an outstanding convertible note payable by $5,390. On December 29, 2014, we issued
4,533,333 shares of common stock to reduce an outstanding convertible note payable by $2,856.
During the period
commencing December 15, 2014 through December 19, 2014, we issued an aggregate of 39,866,648 shares of common stock as follows:
on December 15, 2014, we issued 3,541,667 shares of common stock to reduce an outstanding convertible note payable by $4,250. On
December 15, 2014, we issued 3,800,000 shares of common stock to reduce an outstanding convertible note payable by $3,553. On December
15, 2014, we issued 5,200,000 shares of common stock to reduce an outstanding convertible note payable by $4,056. On December 16,
2014, we issued 5,102,040 shares of its common stock to reduce an outstanding convertible note payable by $5,000. On December 16,
2014, we issued 3,540,909 shares of common stock to reduce an outstanding convertible note payable by $3,895. On December 17, 2014,
we issued 3,540,000 shares of common stock to reduce an outstanding convertible note payable by $3,540. On December 18, 2014, we
issued 3,540,404 shares of common stock in exchange to reduce an outstanding convertible note payable by $3,505. On December 18,
2014, we issued 5,000,000 shares of common stock to reduce an outstanding convertible note payable by $4,675. On December 19, 2014,
we issued 3,061,224 shares of common stock to reduce an outstanding convertible note payable by $3,000. On December 19, 2014, we
issued 3,540,404 shares of common stock to reduce an outstanding convertible note payable by $3,505.
During the period
commencing December 4, 2014 through December 12, 2014, we issued an aggregate of 30,383,717 shares of common stock as follows:
on December 4, 2014, we issued 2,272,727 shares of common stock to reduce an outstanding convertible note payable by $7,500. On
December 8, 2014, we issued 2,700,000 shares of common stock to reduce an outstanding convertible note payable by $5,346. On December
8, 2014, we issued 3,400,000 shares of common stock to reduce an outstanding convertible note payable by $6,528. On December 8,
2014, we issued 3,543,478 shares of common stock to reduce an outstanding convertible note payable by $8,150. On December 8, 2014,
we issued 3,700,000 shares of common stock to reduce an outstanding convertible note payable by $7,104. On December 9, 2014, we
issued 2,978,409 shares of common stock to reduce an outstanding convertible note payable by $19,493.69. On December 10, 2014,
we issued 3,800,000 shares of common stock to reduce an outstanding convertible note payable by $4,389. On December 10, 2014, we
issued 330,000 shares of common stock as compensation valued at $1,650. On December 11, 2014, we issued 60,000 shares of common
stock as compensation valued at $210. On December 11, 2014, we issued 3,542,308 shares of common stock to reduce an outstanding
convertible note payable by $4,605. On December 12, 2014, we issued 4,056,795 shares of common stock to reduce an outstanding convertible
note payable by $4,000.
On October 20,
2014, we issued 5 shares of Series A Preferred Stock to Ryan Schadel for his service as the Chief Executive Officer and director
of the Company.
During the three
months ended September 26, 2014, we issued 3,746,326 shares of common stock upon conversion of $372,455 of principal and interest
in convertible notes.
On
August 18, 2014, we entered into a securities purchase agreement (the “Purchase Agreement”) with accredited investors
(the “Investors”) pursuant to which we agreed to sell, and the Investors agreed to purchase, original issue discount
convertible debentures (the “Debentures”) in the aggregate principal amount of $1,155,000 (corresponding to an aggregate
purchase price of $1,100,000), in seven tranches, in the principal amount of $367,500 (with respect to the first tranche) and $131,250
(with respect to subsequent tranches). The initial closing under the Purchase Agreement, for Debentures in the aggregate principal
amount of $367,500, occurred on August 18, 2014.
On May 5, 2014,
Vista Capital Investments, LLC elected to convert 51,867 shares of common stock for $7,500 principal and interest.
On May 5, 2014,
Iconic Holdings, LLC elected to convert 276,625 shares of common stock for $40,000 principal and interest.
On May 19, 2014,
Iconic Holdings, LLC elected to convert 305,670 shares of common stock for $40,000 principal and interest.
On May 21, 2014,
Willow Creek Capital Group, LLC elected to convert 201,746 shares of common stock for $26,530 principal and interest.
On June 5, 2014,
Iconic Holdings, LLC elected to convert 229,167 shares of common stock for $30,250 principal and interest.
On June 9 2014,
Vista Capital Investments, LLC elected to convert 75,000 shares of common stock for $9,815 principal and interest.
On June 10,
2014, Group 10 Holdings, LLC elected to convert 249,521 shares of common stock for $30,000 principal and interest.
On June 13,
2014, JMJ Financial elected to convert 130,000 shares of common stock for $17,012 principal and interest.
On June 16,
2014, Tailwind Partners 3, LLC elected to convert 274,295 shares of common stock for $35,000 principal and interest.
On June 18,
2014, Tonaquint, Inc. elected to convert 184,436 shares of common stock for $25,297 principal and interest.
On June 25,
2014, Tailwind Partners 3, LLC elected to convert 184,986 shares of common stock for $36,000 principal and interest.
On June 25,
2014, Willow Creek Capital Group, LLC elected to convert 308,219 shares of common stock for $26,823 principal and interest.
On January 6,
2014, JMJ Financial elected to convert 110,000 shares of common stock to convert $11,352 principal amount of a Convertible Promissory
Note.
On January 16,
2014, JMJ Financial elected to convert 120,000 shares of common stock to convert $12,684 principal amount of a Convertible Promissory
Note.
On January 31,
2014, JMJ Financial elected to convert 130,000 shares of common stock to convert $13,650 principal amount of a Convertible Promissory
Note.
On February
11, 2014, we issued 100,000 shares of common stock for professional services valued at $21,000 ($0.21 per share).
On February
12, 2014, JMJ Financial elected to convert 120,000 shares of common stock to convert $12,600 principal amount of a Convertible
Promissory Note.
On March 3,
2014, JMJ Financial elected to convert 123,943 shares of common stock to convert $13,014 principal amount of a Convertible Promissory
Note.
On March 26,
2014, JMJ Financial elected to convert 552,632 shares of common stock to convert $63,000 principal amount of a Convertible Promissory
Note.
On October 7, 2013, JMJ
Financial elected to convert 75,000 shares of common stock for $11,250 for principal and interest and $8,625 for debt discount.
On October 8, 2013, we
issued 30,000 shares of common stock to Iconic Holding, LLC for finance costs upon the election of the Company to prepay
the Convertible Promissory Note dated April 10, 2013.
On October 8, 2013, Vista
Capital Investments, LLC elected to convert 50,000 shares of common stock for $7,500 for principal and interest and $6,750 for
debt discount.
On October 21, 2013, JMJ
Financial elected to convert 100,000 shares of common stock for $13,128 for principal and interest and $11,872 for debt discount.
On October 24, 2013, Vista
Capital Investments, LLC elected to convert 60,000 shares of common stock for $7,848 for principal and interest and $7,152 for
debt discount.
On October 29, 2013, Evolution
Capital LLC elected to convert 227,342 shares of common stock for $26,000 for principal and interest and $39,929 for debt discount.
On November 12, 2013, JMJ
Financial elected to convert 118,705 shares of common stock for $15,584 for principal and interest and $13,499 for debt discount.
On November 21, 2013, Vista
Capital Investments, LLC elected to convert 57,374 shares of common for $7,532 for principal and interest and $7,385 for debt discount.
On November 26, 2013, Evolution
Capital Fund I, LLC elected to convert 418,060 shares of common stock for $50,000 for principal and interest and $46,154 for debt
discount.
On December 12, 2013, the
Company issued to Group 10 Holdings, LLC in conjunction with the Convertible Promissory Note issued to Group 10 Holdings, LLC on
December 9, 2013 40,000 shares of common stock for a commitment fee.
On September
5, 2013, Vista Capital Investments, LLC elected to convert 50,000 shares of common stock for $7,920 for principal and interest
and $9,580 for debt discount.
On September
9, 2013, JMJ Financial elected to convert 60,000 shares of common stock for $9,504 for principal and interest and $11,496 for debt
discount.
On September
19, 2013, JMJ Financial elected to convert 80,000 shares of common stock for $12,134 for principal and interest and $8,666 for
debt discount.
On September
28, 2013, Evolution Capital LLC elected to convert 221,108 shares of common stock for $36,000 for principal and interest and $25,910
for debt discount.
On April 5, 2013, we issued 100,000
shares of common stock at $0.50 per share for an aggregate of $50,000.
On August 20,
2012, we issued 100,000 shares of common stock for services.
On March 20,
2013, the Company issued 100,000 shares of its common stock at $0.50 per share for an aggregate of $50,000.
On March 26,
2013, the holder of the Convertible Promissory Note, Evolution Capital, LLC, elected to convert $130,000 (conversion price of $0.215
per share) of principal amount for 604,651 shares of common stock of the Company in accordance with the conditions of the Note.
On April 5,
2013, we issued 100,000 shares of its common stock at $0.50 per share for an aggregate of $50,000.
On August 20,
2012, we issued 100,000 shares of the Company’s common stock to our legal counsel for services.
On July 8, 2014,
we issued a convertible promissory note to an accredited investor in the principal amount of $106,000, convertible into common
stock at a variable conversion price equal to 58% of average of the three lowest trading prices for the 10 prior trading days.
On July 23,
2014, we issued a convertible promissory note to an accredited investor in the principal amount of $101,000, convertible into common
stock at a variable conversion price equal to 58% of the lowest trading price for the 15 prior trading days.
On July 22,
2014, we issued a convertible promissory note to an accredited investor in the principal amount of $106,000, convertible into common
stock at a variable conversion price equal to 58% of average of the three lowest trading prices for the 10 prior trading days.
On August 8,
2014, we issued a convertible debenture to an accredited investor in the principal amount of $101,000, convertible into common
stock at a variable conversion price equal to 58% the lowest trading price for the 10 prior trading days.
On March 27,
2014, we issued a convertible promissory note to an accredited investor in the principal amount of $220,000, convertible into common
stock at a variable conversion price equal to the lesser of $0.25 and 65% of the lowest volume weighted average price for the 20
prior trading days.
On April 21,
2014, we issued a convertible promissory note to an accredited investor in the principal amount of $106,000, convertible into common
stock at a variable conversion price equal to58% of the average of the three lowest trading prices for the 10 prior trading days.
On September
24, 2014, we issued a convertible promissory note to an accredited investor in the principal amount of $125,289, convertible into
common stock at a variable conversion price equal to 60% of the average of the three lowest trading prices for the 10 prior trading
days.
On November
14, 2014, we issued a convertible promissory note to an accredited investor in the principal amount of $106,000, convertible into
common stock at a variable conversion price equal to 60% of the lowest closing bid price for the 12 prior trading days.
On September
19, 2014, we issued a convertible promissory note to an accredited investor in the principal amount of $110,000, convertible into
common stock at a variable conversion price equal to the lower of the closing sale price in the prior trading day or 60% of the
lowest sale for the 15 prior trading days.
On November
14, 2014, we issued a convertible promissory note to an accredited investor in the principal amount of $106,000, convertible into
common stock at a variable conversion price equal to 60% of the lowest closing bid price for the 12 prior trading days.
On August 6,
2014, we issued a convertible promissory note to an accredited investor in the principal amount of $106,000, convertible into common
stock at a variable conversion price equal to 58% of the lowest closing bid price for the 12 prior trading days.
On September 20, 2012, we entered into
a convertible promissory note with Evolution Capital, LLC in the original principal amount of $130,000. This convertible note together
with any unpaid accrued interest is convertible into shares of common stock at the holder’s option at a variable conversion
price calculated as 50% of the market price which means the average of the lowest three trading prices during the ten trading day
period ending on the latest complete trading day prior to the conversion date.
On January 17, 2013, we entered into
a convertible promissory note with Asher Enterprises, Inc. in the original principal amount of $103,500 bearing an 8% annual interest
rate and maturing October 21, 2013. This convertible promissory note together with any unpaid accrued interest is convertible into
shares of our common stock at the holder’s option at a variable conversion price calculated at 51% of the market price which
means the average of the lowest three trading prices during the ten trading day period ending on the latest complete trading day
prior to the conversion date.
On February 25, 2013, we entered into
a convertible promissory note with Evolution Capital Fund I, L.P. in the original principal amount of $106,000. This convertible
note together with any unpaid accrued interest is convertible into shares of our common stock at the holder’s option at a
variable conversion price calculated as 52% of the market price which means the average of the lowest three trading prices during
the ten trading day period ending on the latest complete trading day prior to the conversion date.
On March 4, 2013, we issued a convertible
note to Vista Capital Investments, LLC in the original principal amount of $275,000. This convertible note together with any unpaid
accrued interest is convertible into shares of common stock at the holder’s option at a variable conversion price calculated
as lessor of (a) $0.62 or (b) 60% of the lowest trade occurring during the 25 consecutive trading days immediately preceding the
conversion date.
On March 6, 2013, we issued a convertible
note to JMJ Financial, in the original principal amount of $275,000. This convertible note together with any unpaid accrued interest
is convertible into shares of common stock at the holder’s option at a variable conversion price calculated as lessor of
(a) $0.62 or (b) 60% of the lowest trade occurring during the 25 consecutive trading days immediately preceding the conversion
date.
On April 10, 2013, we issued a convertible
promissory note to Iconic Holding, LLC in the original principal amount of $115,500. This unsecured convertible promissory note
is convertible into shares of common stock at the holder’s option at a variable conversion price calculated at 65% of the
lowest trading price of any day during the 10 consecutive trading days prior to the dated on which the holder elects to convert
all or part of the note.
On April 29, 2013, we entered into a
convertible promissory note with Asher Enterprises, Inc. in the original principal amount of $128,500. This convertible promissory
note together with any unpaid accrued interest is convertible into shares of our common stock at the holder’s option at a
variable conversion price calculated at 58% of the market price which means the average of the lowest three trading prices during
the ten trading day period ending on the latest complete trading day prior to the conversion date.
On May 17, 2013, we entered into a convertible
promissory note with Redwood Fund II, LLC in the original principal amount of $101,000. This convertible note together with any
unpaid accrued interest is convertible into shares of our common stock at the holder’s option at a variable conversion price
calculated as 58% of the lowest trading price, determined on the then current trading market for our common stock, for 20 trading
days prior to conversion.
On May 20, 2013, we entered into a convertible
promissory note with Asher Enterprises, Inc. in the original principal amount of $53,000. This convertible promissory note together
with any unpaid accrued interest is convertible into shares of our common stock at the holder’s option at a variable conversion
price calculated at 58% of the market price which means the average of the lowest three trading prices during the ten trading day
period ending on the latest complete trading day prior to the conversion date.
On June 4, 2013, we entered into a convertible
promissory note with Evolution Capital Fund I, L.P. in the original principal amount of $106,000. This convertible note together
with any unpaid accrued interest is convertible into shares of our common stock at the holder’s option at a variable conversion
price calculated as 58% of the market price which means the average of the lowest three trading prices during the ten trading day
period ending on the latest complete trading day prior to the conversion date.
On July 11, 2013, we entered into a convertible
promissory note with Asher Enterprises, Inc. in the original principal amount of $63,000. This convertible promissory note together
with any unpaid accrued interest is convertible into shares of our common stock at the holder’s option at a variable conversion
price calculated at 58% of the market price which means the average of the lowest three trading prices during the ten trading day
period ending on the latest complete trading day prior to the conversion date.
On September 16, 2013, we entered into
a convertible promissory note with Willow Creek Capital Group, LLC in the original principal amount of $130,000 bearing a 12% annual
interest rate and maturing July 16, 2014. At the option of the holder:
|
i) |
The note together with any unpaid accrued interest is convertible into shares of our common stock at a variable conversion price calculated at 58% of the market price which means the average of the lowest three trading prices during the ten trading day period ending on the latest complete trading day prior to the conversion date, or |
|
ii) |
All principal, costs, charges and interest amounts outstanding may be exchanged for shares of our common stock at the conversion price of $0.34 per share, subject to adjustment. |
On October 31, 2013, we issued a convertible
promissory note to Iconic Holding, LLC in the original principal amount of $110,250. This unsecured convertible promissory note
is convertible into shares of common stock at the holder’s option at a variable conversion price calculated at 60% of the
lowest trading price of any day during the 10 consecutive trading days prior to the dated on which the holder elects to convert
all or part of the note.
On November 4, 2013, we entered into
a convertible promissory note with Asher Enterprises, Inc. in the original principal amount of $128,500. This convertible promissory
note together with any unpaid accrued interest is convertible into shares of our common stock at the holder’s option at a
variable conversion price calculated at 58% of the market price which means the average of the lowest three trading prices during
the ten trading day period ending on the latest complete trading day prior to the conversion date.
On December 9, 2013, we entered into
a convertible promissory note with Group 10 Holdings, LLC in the original principal amount of $106,000. This convertible promissory
note together with any unpaid accrued interest is convertible into shares of our common stock at the holder’s option at a
variable conversion price calculated at 55% of the lowest trading price of any day during the 10 consecutive trading days prior
to the dated on which the holder elects to convert all or part of the note.
On December 12, 2013 we entered into
a convertible promissory note with Tonaquint Inc. in the original principal amount of $115,000. The convertible promissory note
is due is six equal monthly installments plus interest (“Installment Amount”) commencing six months after the issue
date. At the option of the holder, the Installment Amount is convertible into shares of our common stock at a variable conversion
price calculated at 60% of the market price which means the average of the lowest two trading prices during the twenty trading
day period ending on the latest complete trading day prior to the conversion date.
On December 13, 2013 we entered into
a convertible promissory note with Tailwind Partners, LLC in the original principal amount of $106,000. This convertible promissory
note together with any unpaid accrued interest is convertible into shares of our common stock at the holder’s option at a
variable conversion price calculated at 58% of the market price which means the average of the lowest three trading prices during
the ten trading day period ending on the latest complete trading day prior to the conversion date.
In connection with the foregoing, we
relied upon the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended, for transactions
not involving a public offering.
Item 16. Exhibits and Financial Statement Schedules
Exhibit
Number |
|
Description |
1.1 |
|
Form of Underwriting Agreement (1) |
3.1 |
|
Articles of Incorporation (2) |
3.2 |
|
Certificate of Designation of Series A Preferred Stock (3) |
3.3 |
|
Bylaws (4) |
5.1 |
|
Opinion of Sichenzia Ross Friedman Ference LLP (1) |
10.1 |
|
Shareholder Loan Agreement, dated April 25, 2013, between Labor Smart, Inc. and Ryan Schadel (5) |
10.2 |
|
Asset Purchase Agreement, dated April 29, 2013, between Labor Smart, Inc. and Qwik Staffing Solutions, Inc. (6) |
10.3 |
|
Purchase and Sale Agreement, dated July 31, 2013, between Labor Smart, Inc. and Transfac Capital, Inc. (7) |
10.4 |
|
First Amendment to Purchase and Sale Agreement, dated February 27, 2014, between Labor Smart, Inc. and Transfac Capital, Inc. (8) |
10.5 |
|
Asset Purchase Agreement, dated April 9, 2014, between Labor Smart, Inc. and Shirley’s Employment Service, Inc. (9) |
10.6 |
|
Asset Purchase Agreement, dated September 26, 2014 between Labor Smart, Inc. and Kwik Jobs, Inc. (10) |
10.7 |
|
Securities Purchase Agreement, dated August 18, 2014, between Labor Smart, Inc. and the Purchasers named therein (11) |
10.8 |
|
Form of Convertible Debenture (11) |
10.9 |
|
Second Amendment to Purchase and Sale Agreement, dated January 13, 2015, between Labor Smart, Inc. and Transfac Capital, Inc. (12) |
10.10 |
|
Convertible Promissory Note, dated July 8, 2014 (2) |
10.11 |
|
Convertible Promissory Note, dated July 23, 2014 (2) |
10.12 |
|
Convertible Promissory Note, dated July 22, 2014 (2) |
10.13 |
|
Convertible Promissory Note, dated August 8, 2014 (2) |
10.14 |
|
Convertible Note dated March 27, 2014(2) |
10.15 |
|
Convertible Promissory Note, dated April 21, 2014 (2) |
10.16 |
|
Convertible Promissory Note, dated September 24, 2014 (2) |
10.17 |
|
Collateralized Secured Promissory Note, dated November 12, 2014 (2) |
10.18 |
|
Convertible Redeemable Note, Back End Note, dated November 14, 2014 (2) |
10.19 |
|
12% Convertible Note, dated September 19, 2014 (2) |
10.20 |
|
Convertible Redeemable Note, dated November 14, 2014 (2) |
10.21 |
|
Collateralized Secured Promissory Note, dated August 6, 2014 (2) |
10.22 |
|
Convertible Redeemable Note, dated August 6, 2014 (2) |
10.23 |
|
Convertible Redeemable Note, Back End Note, dated August 6, 2014 (2) |
10.24 |
|
Convertible Promissory Note, dated September 24, 2014 (2) |
10.25 |
|
2012 Stock Option Plan (12) |
23.1 |
|
Consent of De Joya Griffith, LLC |
23.2 |
|
Consent of Sichenzia Ross Friedman Ference LLP (1) |
24 |
|
Power of Attorney (included on the Signature page to this Registration Statement) |
|
|
|
101(1) |
|
The following materials, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text |
|
|
|
(1) | | To be filed by amendment. |
(3) | | Incorporated by reference to the Current Report on Form 8-K filed on October 21, 2014. |
(4) | | Incorporated by reference to the Registration Statement on Form S-1 (Registration
No. 333-177200) filed on October 6, 2011. |
(5) | | Incorporated by reference to the Current Report on Form 8-K filed on April 29, 2013. |
(6) | | Incorporated by reference to the Current Report on Form 8-K filed on May 6, 2013. |
(7) | | Incorporated by reference to the Current Report on Form 8-K filed on August 5, 2013. |
(8) | | Incorporated by reference to the Current Report on Form 8-K filed on March 4, 2014. |
(9) | | Incorporated by reference to the Current Report on Form 8-K filed on April 14, 2014. |
(10) | | Incorporated by reference to the Current Report on Form 8-K filed on September 30,
2014. |
(11) | | Incorporated by reference to the Current Report on Form 8-K filed on August 22, 2014. |
(12) | | Incorporated by reference to the Current Report on Form 8-K filed on January 14, 2015. |
(13) | | Incorporated by reference to the Registration Statement on Form S-8 (Registration
No. 333-182661) filed on July 13, 2012. |
Item 17. Undertakings.
(a) |
The undersigned registrant hereby undertakes: |
|
(1) |
To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
|
(i) |
To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; |
|
(ii) |
To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent posteffective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) of this chapter) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and |
|
(iii) |
To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
|
(2) |
That, for the purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof. |
|
(3) |
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
|
(5) (ii) |
That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. |
|
(6) |
For the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: |
|
(i) |
Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; |
|
(ii) |
Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; |
|
(iii) |
The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and |
|
(iv) |
Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
(h) |
Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Act”) may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities, other than the payment by the registrant of expenses incurred and paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding, is asserted by such director, officer or controlling person in connection with the securities being registered hereby, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. |
(i) |
The undersigned Registrant hereby undertakes that it will: |
|
(1) |
for determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant under Rule 424(b)(1), or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective. |
|
(2) |
for determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. |
SIGNATURES
Pursuant to
the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Powder Springs, State of Georgia, on February 6, 2015.
|
LABOR SMART, INC. |
|
|
|
|
By: |
/s/
Ryan Schadel |
|
|
Ryan Schadel |
|
|
Chief Executive Officer (Principal Executive
Officer and Principal Financial and Accounting
Officer) and Chairperson |
KNOW ALL MEN BY THESE PRESENTS,
that each person whose signature appears below constitutes and appoints Ryan Schadel as his true and lawful attorneys-in-fact and
agent, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities,
to sign any and all amendments (including post-effective amendments) to this Registration Statement, and any subsequent registration
statements pursuant to Rule 462 of the Securities Act of 193 and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact
or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements
of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Ryan Schadel |
|
Chief Executive Officer, Chief Financial Officer, and Chairman (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
|
February
6, 2015 |
Ryan Schadel |
|
|
|
|
|
|
|
|
|
/s/ Matthew Rodgers |
|
Director |
|
February
6, 2015 |
Matthew Rodgers |
|
|
|
|
|
|
|
|
|
/s/ James Robert Edmonds |
|
Director |
|
February
6, 2015 |
James Robert Edmonds |
|
|
|
|
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 19339
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 19339 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: $106,000.00 |
Issue Date: July 8, 2014 |
CONVERTIBLE PROMISSORY NOTE
FOR VALUE
RECEIVED, a Labor Smart, Inc., a Nevada corporation (hereinafter called the "Borrower"), hereby promises to pay to the
order of Tailwind Partners, LLC a Utah limited liability company, or registered assigns (the "Holder") the sum of $106,000.00
together with any interest as set forth herein, on April 8, 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 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 four percent (24%) 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 61 st 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 Borrower'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 Borrower's option, Default Interest, if any, on the amounts referred
to in the immediately preceding clauses (1) and/or (2) plus (4) at the Holder's option, any amounts owed to the Holder pursuant
to Sections 1.3 and 1.4(g) hereof.
1.2 Conversion Price.
(a) Calculation
of Conversion Price. The conversion price (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 58%
multiplied by the Market Price (as defined herein). "Market Price" means the average of the lowest three (3)
Trading Prices (as defined below) for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading
Day prior to the Conversion Date. "Trading Price" means any intraday trading price, designated by the Holder, of any
shares of Common Stock as reporting on the OTC Markets website, or applicable trading market (the "OTCQB") as reported
by a reliable reporting service ("Reporting Service") designated by the Holder (i.e. www.otcmarkets.com,
Bloomberg, etc.) or, if the OTCQB is not the principal trading market for such security, the lowest intraday price of such security
on the principal securities exchange or trading market where such security is listed or traded or, if no
intraday
price of such security is available in any of the foregoing manners, the closing price of the Common stock. 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 OTCQB, 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 pursuant to Section 4(g) of the Purchase Agreement. The Borrower
represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. In addition, if the
Borrower shall issue any securities or make any change to its capital structure which would change the number of shares of Common
Stock into which the Notes shall be convertible at the then current Conversion Price, the Borrower shall at the same time make
proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free
from preemptive rights, for conversion of the outstanding Notes. The Borrower (i) acknowledges that it has irrevocably instructed
its transfer agent to issue certificates for the Common Stock issuable upon conversion of this Note, and (ii) agrees that its issuance
of this Note shall constitute full authority to its officers and agents who are charged with the duty of executing stock certificates
to execute and issue the necessary certificates for shares of Common Stock in accordance with the terms and conditions of this
Note.
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 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. Notvithstanding 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 I folder (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 1, 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 he 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 19339 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 Buyer with respect to the transfer of Securities pursuant to an exemption from registration, such as Rule 144 or
Regulation S, at the Deadline, it will be considered an Event of Default pursuant to Section 3.2 of the Note.
1.6 Effect of Certain Events.
(a)
Effect of Merger, Consolidation. Etc. At the option of the Holder, the sale, conveyance or disposition of
all or substantially all of the assets of the Borrower, the effectuation by the Borrower of a transaction or series of related
transactions in which more than 50% of the voting power of the Borrower is disposed of, or the consolidation, merger or
other business combination of the Borrower with or into any other Person (as defined below) or Persons when the Borrower is not
the survivor shall either: (i) be deemed to be an Event of Default (as defined in Article 111) 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 (1 5) 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 (1) 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 ally, 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 Holders allocated portion of the Reserved Amount or Maximum
Share Amount) shall be deemed converted into shares of Common Stock and (ii) the 1-loider'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 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 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 (tile "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 (I) 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 125%, multiplied by
the sum of: (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid
interest on the unpaid principal amount of this Note to the Optional Prepayment Date pj (y) Default Interest, if ally, on the amounts
referred to in clauses (w) and (x) pj (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 one hundred twenty-one
(121) days following the issue date and ending on the date which is one hundred fifty (150)
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 130%, 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, 011
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 fifty-one
(151) 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 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 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 without the prior written
consent of the Holder.
ARTICLE 11. 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 OTCQB or an equivalent
replacement exchange, the Nasdaq National Market, the Nasdaq SmaliCap 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.
3.15 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 o1 (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
SI-IALL 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 accrued and unpaid
interest on the unpaid principal amount of this Note to the date of payment (the "Mandatory Prepayment Date") plus 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 &us 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 live (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:
Labor Smart, Inc.
5604 Wendy Bagwell Parkway
Suite 223
Hiram, GA 30141
If to the Holder:
Tailwind Partners, LLC 1384 Michigan Ave.
Salt Lake City, UT 84105
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 50 1(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 Utah 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 Utah
or in the federal courts located in the state of Utah. 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 July 8, 2014
Labor Smart, Inc.
By: /s/ Ryan Schadel, CEO
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 19339
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: $101,000
Date: July
23, 2014
CONVERTIBLE PROMISSORY NOTE
Labor Smart, Inc., (hereinafter
called the "Borrower" or "LTNC"), 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 $101,000, together with any interest as
set forth herein, on July 23, 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 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 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 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 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 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 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 1 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 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,
(the "Notice of Conversion"), delivered to the Borrower 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 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 Borrower'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 Borrower'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.
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 Two Percent (42%) discount off the lowest intra-day trading price
for the Company's common stock during the Fifteen (15) trading days immediately preceding a conversion date, as reported by Quotestream.
(b) Conversion
Price During Major Announcements. Notwithstanding anything contained inthe preceding section to the contrary, in the event
the Borrower (1) 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 (1) 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 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. 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.
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 shalt 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 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 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).
(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, 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 Ilolder 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 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 are justified. Any delay or failure of performance by the Borrower 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
Borrower, 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 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. 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 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 19331, 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 Buyer with respect to the transfer of Securities pursuant
to an exemption from registration, such as Rule 144 or Regulation 5, 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 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 capita] 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 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 (1) 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 of 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.
Maker may prepay this Note, in accordance with the following schedule: If within 180 calendar days of the execution of this Note,
$ 135% of all 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 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 T-Iolder in writing prior to the
date hereof, (b) made in the ordinary course of business or (c) not in excess of $100,000.
ARTICLE 111. EVENTS OF DEFAULT
3.1 Failure to Pay Principal or Interest. The
Borrower fails to pay the
principal hereof or interest
thereon when due on this Note, whether at maturity, upon acceleration or otherwise.
3.2 Conversion and the Shares. The
Borrower fails to issue shares of
Common Stock to the Holder (or announces
or threatens in writing that it will not honor its obligation to do so) 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 Cessationof
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 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 Borrower 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 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 Borrower, 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 TI-IE 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 (1) 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 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 1-lolder 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 (1) 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:
5604 Wendy Bagwell Pkwy
Suite 223
Hiram, GA 30141
Attn: Ryan Schadel
Facsimile: 770-222-5550
If to the Holder:
WHC Capital,
LLC.
200 Stonehinge
Lane,
Suite 3
Carle Place, NY
11514
Facsimile: 212.574.3326
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 Linder 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 older 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 [east
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:
Labor Smart, Inc.
By: /s/ Ryan Schadel
Print: Ryan Schadel
Title/Date: CEO
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 19339 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 19339 AS
AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE UOLDER), 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: $106,000.00 |
Issue Date: July
22, 2014 |
CONVERTIBLE PROMISSORY NOTE
FOR VALUE RECEIVED, a Labor
Smart, Inc., a Nevada corporation (hereinafter called the "Borrower"), hereby promises to pay to the order of Firehole
River Capital, LLC a Utah limited liability company, or registered assigns (the "Holder") the sum of $106,000.00 together
with any interest as set forth herein, on April 22, 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 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 four percent (24%) 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 he 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 (1 80) 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 Ill) pursuant to Section 1.6(a) or Article Ill, 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 3(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and Regulations 13D-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 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 Borrower's
option, accrued and unpaid interest, if any, on such principal amount at the interest rates provided in this Note to the Conversion
Date, ptus (3) at the Borrower's option, Default Interest, if any, on the amounts referred to in the immediately preceding clauses
(1) and/or (2) plus (4) at the Holder's option, any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof.
1.2 Conversion
Price.
(a) Calculation
of Conversion Price. The conversion price (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 58% multiplied by the Market
Price (as defined herein). "Market Price" means the average of the lowest three (3) Trading Prices (as defined below)
for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date.
"Trading Price" means any intraday trading price, designated by the Holder, of any shares of Common Stock as reporting
on the OTC Markets website, or applicable trading market (the "OTCQB") as reported by a reliable reporting service ("Reporting
Service") designated by the Holder (i.e. www.otcmarkets.com, Bloomberg, etc.) or, if the OTCQB is not the principal trading
market for such security, the lowest intraday price of such security on the principal securities exchange or trading market where
such security is listed or traded or, if nointraday price of such security is available in any of the foregoing manners, the closing
price of the Common stock. 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 OTCQB, 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 (1) 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 pursuant to Section 4(g) of the Purchase Agreement. The Borrower
represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. In addition, if the
Borrower shall issue any securities or make any change to its capital structure which would change the number of shares of Common
Stock into which the Notes shall be convertible at the then current Conversion Price, the Borrower shall at the same time make
proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free
from preemptive rights, for conversion of the outstanding Notes. The Borrower (i) acknowledges that it has irrevocably instructed
its transfer agent to issue certificates for the Common Stock issuable upon conversion of this Note, and (ii) agrees that its issuance
of this Note shall constitute full authority to its officers and agents who are charged with the duty of executing stock certificates
to execute and issue the necessary certificates for shares of Common Stock in accordance with the terms and conditions of this
Note.
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 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 USC 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 fade, 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 I lolder 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 19339 AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (1) 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 Buyer with respect to the transfer of Securities
pursuant to an exemption from registration, such as Rule 144 or Regulation S, at the Deadline, it will be considered an Event of
Default pursuant to Section 3.2 of 'the Note.
1.6 Effect
of Certain Events.
(a) Effect
of Merger Consolidation. Etc. At the option of the Holder, the sale, conveyance or disposition of all or substantially all
of the assets of the Borrower, the effectuation by the Borrower of a transaction or series of related transactions in which more
than 50% of the voting power of the Borrower is disposed of, or the consolidation, merger or other business combination of the
Borrower with or into any other Person (as defined below) or Persons when the Borrower is not the survivor shall either: (I) be
deemed to be an Event of Default (as defined in Article Ill) 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 Oil 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 ally, 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 a11 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 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 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 125%, multiplied by the sum of: (w) tile then outstanding principal amount of this Note plus (x) accrued
and unpaid interest oil the unpaid principal amount of this Note to the Optional Prepayment Date pj (y) Default Interest, if any.
Oil the amounts referred to in clauses (w) and (x) pi (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 one hundred twenty-one
(121) days following the issue date and ending on the date which is one hundred fifty (I 50) days following the issue date, the
Borrower shall have the right, exercisable Oil 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 130%,
multiplied by the sum of: (w) the
then outstanding principal amount of this Note pj (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) pj (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 fifty-one
(15 1) 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
(I) 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 135%, multiplied by
the sum of: (w) the then outstanding principal amount of this Note pi (x) accrued and unpaid interest on the unpaid principal amount
of this Note to the Optional Prepayment Date plus Default Interest, if any, on the amounts referred to in clauses (w) and (x) pi
(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 without the prior written
consent of the Holder.
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 Loan. 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 OTCQB 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. arid/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 Notes)q (x) accrued and unpaid interest
on the unpaid principal amount of this Note to the date of payment (the "Mandatory Prepayment Date") pj (y) Default Interest.
if any. oil the amounts referred to in clauses (w) arid/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:
Labor Smart, Inc.
5604 Wendy Bagwell Parkway Suite 223
Hiram, GA 30141
If to the Holder:
Firehole River Capital, LLC
175 S. Main Street
15th Floor
Salt Lake City, UT 84111
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. 'fhe
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 he 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 Utah 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 Utah or in the federal courts located in the state of Utah. 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 sLich 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 I lolder 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 July 22, 2014
Labor Smart, Inc.
/s/ Ryan Schadel
Ryan Schadel, Chief Executive Officer
NEITHER
THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION 014 THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
OF 1933. AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSAC1'ION NOT SUBJECT TO,
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE ('OMPANY. THESE
SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OF THESE SECURITIES MM BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OK OTHER LOAN SECURED BY SUCH SECURITIES.
Date of Issuance: August 8, 2014
$101,000
12% CONVERTIBLE DEBENTURE
DUE: August 7, 2015
THIS DEBENTURE
is a duly authorized and issued 12% Convertible Debentures of Labor Smart, Inc., a Nevada corporation having a principal place
of business at 5604 Wendy Bagwell Parkway, Suite 223, Hiram, GA 30141 (the "Company), due August 7, 2015 (the 'Debenture")
FOR VALUE RECEIVED,
the Company promises to pay to DANIEL JAMES MANAGEMENT, INC., or its registered assigns (the "Holder"), the principal
sum of $101,000 on August 7, 2015 or such earlier date as the Debentures are required or permitted to be repaid as provided hereunder
(the "Maturity Date"), and to pay interest to the Holder on the aggregate unconverted and then outstanding principal
amount of this Debenture at the rate of 12% per annum, compounded daily, payable on the Maturity Date, unless the Debenture is
converted to shares of common stock in accordance with the terms and conditions herein.
THE COMPANY MAY PREPAY ANY PORTION
OF THE PRINCIPAL AMOUNT AT 135% OF SUCH AMOUNT ALONG WITH ANY ACCRUED INTEREST OF THIS DEBENTURE AT ANY TIME UPON SEVEN DAYS WRITTEN
NOTICE TO THE HOLDER
This Debenture is subject to the following additional
provisions:
Section 1.
This Debenture is exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same. No service charge will be made for such registration of transfer or exchange.
Section 2.
This Debenture may be transferred or exchanged only in compliance with applicable federal and state securities laws and regulations.
Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company
may
treat the Person in whose name this Debenture is duly registered on the Debenture Register as the owner hereof for the purpose
of receiving payment as herein provided and for all other purposes, whether or not this Debenture is overdue, and neither the Company
nor any such agent shall be affected by notice to the contrary.
Section 3. Events of Default.
a) "Event
of Default", wherever used herein, means any one of the following events (whatever the reason and whether it shall be voluntary
or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or
regulation of any administrative or governmental body):
i)
any default in the payment of the principal of, interest (including Late Fees) on, or liquidated damages in respect
to this Debenture, free of any claim of subordination, as and when the same shall become due and payable (whether on a Conversion
Date or the Maturity Date or by acceleration or otherwise) which default is not cured, if possible to cure, within 3 days of notice
of such default sent by the Holder;
ii)
the Company or any of its subsidiaries shall commence, or there shall be commenced against the Company or any such
subsidiary a case under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or
the Company commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or any
subsidiary thereof or there is commenced against the Company or any subsidiary thereof any such bankruptcy, insolvency or other
proceeding which remains undismissed for a period of 60 days; or the Company or any subsidiary thereof is adjudicated insolvent
or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Company or any subsidiary
thereof suffers any appointment of any custodian or the like for it or any substantial part of its property which continues undischarged
or unstayed for a period of 60 days; or the Company or any subsidiary thereof makes a general assignment for the benefit of creditors;
or the Company shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they
become due; or the Company or any subsidiary thereof shall call a meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or the Company or any subsidiary thereof shall by any act or failure to act expressly
indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the
Company or any subsidiary thereof for the purpose of effecting any of the foregoing; or
(iii) the Company shall fail to timely file
all reports required to be filed
by it with the SEC pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise required by the Exchange Act.
(iv) a
conversion of the Debenture into shares as detailed in Section 4
is delayed due to a balance owed
by the Company to its transfer agent. While it is an obligation of the Company to stay current in its obligations to its transfer
agent, if, at its option, the Holder makes payment to the Company's transfer agent to cause issuance of shares in accordance with
a conversion, the Company shall repay such payment amount to the Holder within 48 hours of demand by the Holder.
b) If
any Event of Default occurs and is continuing, the full principal amount of this Debenture, together with interest and other amounts
owing in respect thereof, to the date of acceleration, such sum multiplied by 2, shall become at the Holder's election, immediately
due and payable in cash. The Holder need not provide and the Company hereby waives any presentment, demand, protest or other notice
of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies
hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder
at any time prior to payment hereunder and the Holder shall have all rights as a Debenture holder until such time, if any, as the
full payment under this Section shall have been received by it. No such rescission or annulment shall affect any subsequent Event
of Default or impair any right consequent thereon.
Section 4. Conversion.
(a) i) Holder's Conversion Right. At any time
after the Original Issue Date
until this Debenture is no longer
outstanding, this Debenture, including interest and principal, shall be convertible into shares of Common Stock at a price of fifty-eight
percent (58%) (the "Conversion Rate") of the lowest daily trading price, determined on the then current trading
market for the Company's common stock, for 10 trading days prior to conversion (the "Set Price") at the option of the
Holder, in whole at any time and from time to time. All Common Stock issued under this Debenture shall be issued to Daniel James
Management, Inc. The Holder shall effect conversions by delivering to the Company the form of Notice of Conversion attached hereto
as Annex A (a "Notice of Conversion"), specifying the date on which such conversion is to be effected (a "Conversion
Date"). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice
of Conversion is provided hereunder. To effect conversions hereunder, the Holder shall not be required to physically surrender
Debentures to the Company. The Company shall deliver any objection to any Notice of Conversion within 2 Business Days of receipt
of such notice. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in
the absence of manifest error. If the Company does not request the issuance of the shares underlying this Debenture after receipt
of a Notice of Conversion within 4 Business days following the period allowed for any objection, the Company shall be responsible
for any differential in the value of the converted shares underlying this Debenture between the value of the closing price on the
date the shares should have been delivered and the date the shares are delivered. Furthermore, if the Holder or its assigned designee
do not receive delivery of the converted shares within 14 days after the Conversion Date, the Conversion Rate for all future conversions
shall be forty percent (40%), and if the Holder
or
its assigned designee do not receive delivery of the converted shares within 30 days after the Conversion Date, the Conversion
Rate for all future conversions shall be thirty percent (30%). The Holder and any assignee, by acceptance of this Debenture, acknowledge
and agree that, by reason of the provisions of this paragraph, following conversion of a portion
of this Debenture, the unpaid and unconverted principal amount of this Debenture may be less than the amount stated on the face
hereof.
ii)
If the Company, at any time while this Debenture is outstanding: (A) shall pay a stock dividend or otherwise make
a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares
of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company pursuant to
this Debenture, including as interest thereon), (B) subdivide outstanding shares of Common Stock into a larger number of shares,
(C) combine (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (D)
issue by reclassification of shares of the Common Stock any shares of capital stock of the Company, then the Set Price shall be
multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any)
outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such
event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination
of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date
in the case of a subdivision, combination or re-classification.
iii)
Whenever the Set Price is adjusted pursuant to any of Section 4, the Company shall promptly mail to each Holder a
notice setting forth the Set Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.
iv)
If (A) the Company shall declare a dividend (or any other distribution) on the Common Stock;
(B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock; (C) the Company shall
authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital
stock of any class or of any rights; (D) the approval of any stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all
or substantially all of the assets of the Company, of any compulsory share exchange whereby the Common Stock is converted into
other securities, cash or property; (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding
up of the affairs of the Company; then, in each case, the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of the Debentures, and shall cause to be mailed to the Holders at their last addresses as they shall
appear upon the stock books of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter
specified, a notice stating the date on which a record is to be taken for the purpose of such dividend, distribution, redemption,
rights or warrants, or if a record is not to be taken, the date as of
which
the holders of the Common Stock of record to be entitled to such dividend. distributions, redemption, rights or warrants
are to be determined or the date on which such reclassification, consolidation, merger, sale, transfer or share exchange
is expected to become effective or close, and the date as of which it
is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange;
provided, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of
the corporate action required to be specified in such notice. Holders are entitled to convert Debentures during the 20-day period
commencing the date of such notice to the effective date of the event triggering such notice.
v) If, at any
time while this Debenture is outstanding, (A) the Company effects any merger or consolidation of the Company with or into another
Person, (B) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions.
(C) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common
Stock are permitted to tender or exchange their shares for other securities, cash or property, or (D) the Company effects any reclassification
of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged
for other securities, cash or property (in any such case, a "Fundamental Transaction"), then upon any subsequent conversion
of this Debenture, the Holder shall have the right to receive, for each Underlying Share that would have been issuable upon such
conversion absent such Fundamental Transaction, the same kind and amount of securities, cash or property as it would have been
entitled to receive upon the occurrence of such Fundamental Transaction if it had been. immediately prior to such Fundamental Transaction,
the holder of one share of Common Stock (the "Alternate Consideration"). For purposes of any such conversion, the determination
of the Set Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Set Price
among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate
Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of
this Debenture following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor
to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new debenture consistent with the
foregoing provisions and evidencing the Holder's right to convert such debenture into Alternate Consideration. The terms of any
agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving
entity to comply with the provisions of this paragraph and insuring that this Debenture (or any such replacement security) will
be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. If any Fundamental Transaction constitutes
or results in a Change of Control Transaction, then at the request of the Holder delivered before the 90th
day
after such Fundamental Transaction. the Company (or any such
successor or surviving entity) will purchase the Debenture from the Holder for a purchase price, payable in cash within
five Trading Days after such request (or, if later, on the effective date of the Fundamental Transaction), equal to the
100% of the remaining unconverted principal amount of this Debenture on the date of such request, plus all accrued and unpaid
interest thereon, plus all other accrued and unpaid amounts due hereunder.
(b)
In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, the Company shall
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 the Depository Trust Company ("DTC") through its Deposit Withdrawal Agent Commission ("DWAC")
system.
(c)
The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares
of Common Stock solely for the purpose of issuance upon conversion of the Debenture, such number of shares of Common Stock as shall
then be issuable upon conversion of this Debenture. Furthermore, the Company is required to at all time, regardless of issuances
of shares to the Holder, to maintain an "evergreen" reserve of THREE MILLION (3,000,000) authorized common stock shares
available for issuance to the Holder pursuant to a conversion.
(d)
Any and all notices or other communications or deliveries to be provided by the Holders hereunder, including, without
limitation, any Notice of Conversion, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service, addressed to the Company, at the address set forth or such other address or facsimile number as the
Company may specify for such purposes by notice to the Holders delivered in accordance with this Section. Any and all notices or
other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile,
sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile telephone number or address
of such Holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal
place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective
on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone
number specified in this Section prior to 5:30 p.m. PST, (ii) the date after the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:30
p.m.PST on any date and earlier than 11:59 p.m. PST
on such date, (iii) the second Business Day following the date of mailing, if sent by nationally recognized-overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required to be given.
Section 5.
Definitions. For the purposes hereof, in addition to the terms defined elsewhere in this Debenture and in the Purchase Agreement
(the "Transaction Documents"), the following terms shall have the following meanings:
"Business
Day" means any day except Saturday, Sunday and any day which shall be a federal legal holiday in the United States or a day
on which banking institutions in the State of California
are authorized or required by law or other government action to
close.
"Common Stock" means the
common stock of the Company and stock of any other class into which such shares may hereafter have been reclassified or changed.
"Person"
means a corporation, an association, a partnership, organization, a business, an individual,
a government or political subdivision thereof or a governmental agency.
"Securities Act" means
the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
"Set Price" shall have the meaning set
forth in Section 4.
Section 6.
Except as expressly provided herein, no provision of this Debenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of, interest and liquidated damages (if any) on, this Debenture at the time,
place, and rate, and in the coin or currency, herein prescribed. This Debenture is a direct debt obligation of the Company. This
Debenture ranks pari passu with all other Debentures now or hereafter issued under the terms set forth herein. As long as this
Debenture is outstanding, the Company shall not and shall cause it subsidiaries not to, without the consent of the Holder, amend
its certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of the Holder.
Section 7. If
this Debenture shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or destroyed Debenture,
a new Debenture for the principal amount of this Debenture so mutilated, lost, stolen or destroyed but only upon receipt of evidence
of such loss, theft or destruction of such Debenture, and of the ownership hereof, and indemnity, if requested, all reasonably
satisfactory to the Company.
Section 8.
So long as any portion of this Debenture is outstanding, the Company will not and will not permit any of its subsidiaries to, directly
or indirectly, enter into, create, incur, assume or suffer to exist any indebtedness of any kind, on or with respect to any of
its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom that is senior
in any respect to the Company's obligations under the Debentures without the prior consent of the Holder, which consent shall not
be unreasonably withheld.
Section 9.
In the event an Event of Default shall occur, and in the event that thereafter this Debenture is placed in the hands of an attorney
for collection, or in the event this Debenture is collected in whole or in part through legal proceedings of any
nature, then and in any such case the Company
promises to pay all costs of collection, including, but not limited to. reasonable attorneys' fees and court costs incurred by
the holder hereof on account of such collection, whether or not suit is filed.
Section 10.
Any waiver by the Company or the Holder of a breach of any provision of this Debenture shall not operate as or be construed to
be a waiver of any other breach of such provision or of any breach of any other provision of this Debenture. The failure of the
Company or the Holder to insist upon strict adherence to any term of this Debenture on one or more occasions shall not be considered
a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Debenture.
Any waiver must be in writing.
Section 11.
If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect,
and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons
and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates applicable laws
governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum permitted rate
of interest. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead,
or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would
prohibit or forgive the Company from paying all or any portion of the principal of or interest on the Debentures as contemplated
herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this indenture,
and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants
that it will not, by resort to any such law, hinder, delay or impeded the execution of any power herein granted to the Holder,
but will suffer and permit the execution of every such as though no such law has been enacted.
Section 12.
Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made
on the next succeeding Business Day.
Section
13. All questions concerning the construction, validity, enforcement and interpretation of this Debenture shall be governed by
and construed and enforced in accordance with the internal laws of the State of California, without regard to the principles of
conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense
of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective
affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting
in the City of Orange, (the "California Courts"). Each party hereto hereby irrevocably submits to the exclusive jurisdiction
of the California Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably
waives,
and
agrees not to assert in any suit, action or proceeding, any claim that it is not personally
subject to the jurisdiction of any such court, or such California Courts are improper or inconvenient venue for such proceeding.
Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit,
action or proceeding 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 Debenture 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 manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Debenture or the
transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this Debenture,
then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorneys fees and other
costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.
IN WITNESS WHEREOF, the Company
has caused this Convertible Debenture to be duly executed by a duly authorized officer as of the date first above indicated.
FOR: LABORSMART, INC.
By: /s/ Ryan Schadel
Name & Title: Ryan Schadel, CEO
Date: 8/8/14
ANNEX
A
NOTICE OF CONVERSION
The undersigned hereby elects to
convert principal under the 12% Convertible Debenture of Labor Smart, Inc. (the "Company"), due on August 7, 2015, (12
months) into
shares of common stock,
$.001 par value per share (the "Common Stock"), of the Company according to the conditions hereof, 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 taxes
payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in
accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any.
By the delivery of this Notice of Conversion
the undersigned represents and warrants to the Company that its ownership of the Company's Common Stock does not exceed the amounts
determined in accordance with Section 13(d) of the Exchange Act, specified under Section 4 of this Debenture.
Conversion calculations:
Date to Effect Conversion:
58% of the lowest daily trading price for 10 trading days
prior to conversion:
Principal Amount of
Debentures to be Converted: Interest Amount of Debentures to be Converted: Number of shares of Common Stock to be issued: Signature:
Name & Title:
THIS NOTE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE,
AND HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE
OR DISPOSITION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAWS.
THIS NOTE DOES NOT REQUIRE PHYSICAL
SURRENDER OF THIS NOTE IN THE EVENT OF A PARTIAL REDEMPTION OR CONVERSION. AS A RESULT, FOLLOWING ANY REDEMPTION OR CONVERSION
OF ANY PORTION OF THIS NOTE, THE OUTSTANDING PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE MAY BE LESS THAN THE PRINCIPAL AMOUNT AND
ACCRUED INTEREST SET FORTH BELOW.
Original Issue Date: March 27, 2014 |
$220,000.00 |
LABOR SMART, INC.
10% OID CONVERTIBLE NOTE DUE JANUARY
1, 2015
This 10% OID
Convertible Note of Labor Smart, Inc., a Nevada corporation (the "Company"), having its principal place of business at
5604 Wendy Bagwell Parkway, Suite 223, Hiram, GA 30141 (this "Note"), is duly authorized and validly issued.
FOR VALUE RECEIVED,
the Company promises to pay to the order of GEMINI MASTER FUND, LTD., a Cayman Islands company, or its registered assigns (the
"Holder"), or shall have paid pursuant to the terms hereunder, on or before January 1, 2015 (the "Maturity or such
earlier date as this Note is required or permitted to be repaid as provided hereunder, the principal sum of $220,000.00.
This Note is subject to the following
additional provisions:
Section
1. Definitions. For the purposes hereof, in addition to the terms defined elsewhere in this Note (a) capitalized
terms not otherwise defined herein shall have the meanings set forth in the Purchase Agreement and (b) the following terms shall
have the following meanings:
"Bankruptcy
Event" means any of the following events: (a) the Company or any Subsidiary thereof commences a case or other proceeding
under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation
or similar law of any jurisdiction relating to the Company or any Subsidiary thereof; (b) there is commenced against the Company
or any Subsidiary thereof any such case or proceeding that is not dismissed within 60 days after commencement; (c) the Company
or any Subsidiary thereof is adjudicated insolvent or
March 2014 01D 10% LTNC Note | 1 | |
bankrupt or any order of relief
or other order approving any such case or proceeding is entered; (d) the Company or any Subsidiary thereof suffers any appointment
of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 calendar
days after such appointment; (e) the Company or any Subsidiary thereof makes a general assignment for the benefit of creditors;
(f) the Company or any Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (g) the Company or any Subsidiary thereof, by any act or failure to act, expressly indicates its
consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting
any of the foregoing.
"Business
Day" means any day except any Saturday, any Sunday, any day which shall be a federal legal holiday in the United States
or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action
to close.
"Change
of Control Transaction" means the occurrence after the date hereof of any of (i) an acquisition after the date hereof
by an individual or legal entity or "group" (as described in Rule 13d-5(b)(1) promulgated under the Securities Exchange
Act of 1934, as amended) of effective control (whether through legal or beneficial ownership of capital stock of the Company, by
contract or otherwise) of in excess of 33% of the voting securities of the Company, or (ii) the Company merges into or consolidates
with any other entity, or any entity merges into or consolidates with the Company and, after giving effect to such transaction,
the stockholders of the Company immediately prior to such transaction own less than 66% of the aggregate voting power of the Company
or the successor entity of such transaction, or (iii) the Company sells or transfers all or substantially all of its assets to
a third party and the stockholders of the Company immediately prior to such transaction own less than 66% of the aggregate voting
power of the acquiring entity immediately after the transaction, or (iv) a replacement at one time or within a three year period
of more than one-half of the members of the Company's board of directors which is not approved by a majority of those individuals
who are members of the board of directors on the date hereof (or by those individuals who are serving as members of the board of
directors on any date whose nomination to the board of directors was approved by a majority of the members of the board of directors
who are members on the date hereof), or (v) the execution by the Company of an agreement to which the Company is a party or by
which it is bound, providing for any of the events set forth in clauses (1) through (iv) above.
"Event of Default"
shall have the meaning set forth in Section 5.
"Fundamental Transaction"
means any Change of Control Transaction.
"Mandatory Default
Amount" is equal to the greater of (i) one hundred twenty percent (120%) of the outstanding Principal (plus all accrued
and unpaid Interest, if any) and (ii) the product of (A) the highest closing price for the five (5) days on which the principal
Primary Market is open for business (a "Trading Day") immediately preceding
March 2014 01D 10% LTNC Note | 2 | |
the Holder's acceleration
and (B) a fraction, of which the numerator is the entire outstanding Principal, and of which the denominator is the Conversion
Price as of the date such ratio is being determined.
"New
York Courts" shall have the meaning set forth in Section 7(d).
"Original
Issue Date" means the date of the issuance of this Note, regardless of any transfers of any Note and regardless of the
number of instruments which may be issued to evidence this Note.
"Purchase
Agreement" means that certain Securities Purchase Agreement, dated on or about the date hereof, among the Company and
the Holder, as amended, modified or supplemented from time to time in accordance with its terms.
"Subsidiary"
means any direct or indirect subsidiary of the Company currently existing or formed or acquired after the date hereof.
Section 2. Interest Rate; Default
Interest.
a) Interest Rate. Interest
shall accrue on the principal amount hereunder at a rate of 10% per annum and be payable in cash on the Maturity Date or in shares
of common stock upon a conversion.
b) Default Interest Rate.
Upon an Event of Default hereunder, interest shall accrue daily on the outstanding principal amount of this Note at a rate per
annum equal to 18%.
Section 3. Conversion of Note.
This Note shall be convertible into shares of Common Stock, on the terms and conditions set forth in this Section 3.
(a) Conversion Right.
Subject to the provisions of Section 3(c), at any time or times on or after the date set out above as the Original Issue Date (the
"Original Issue Date"), the Holder shall be entitled to convert any portion of the outstanding and unpaid
Conversion Amount (as defined below) into fully paid and nonassessable shares of Common Stock in accordance with Section 3(b),
at the Conversion Price (as defined below) subject to the Conversion Minimum (as defined below). The number of shares of Common
Stock issuable upon conversion of any Conversion Amount pursuant to this Section 3(a) shall be equal to the quotient of
dividing the Conversion Amount by the Conversion Price ("Conversion Shares"). The Company shall not issue any
fraction of a share of Common Stock upon any conversion. If the issuance would result in the issuance of a fraction of a share
of Common Stock, the Company shall round such fraction of a share of Common Stock up to the nearest whole share. The Company shall
pay any and all transfer agent fees, legal fees, costs and any other fees or costs that may be incurred or charged in connection
with the issuance of shares of Common Stock to the Holder arising out of or relating to the conversion of this Note.
March 2014 01D 10% LTNC Note | 3 | |
(i) "Conversion
Amount" means the portion of the Principal and Interest to be converted, plus any penalties, redeemed or otherwise
with respect to which this determination is being made.
(ii) "Conversion
Price" shall equal the lesser of (A) $0.25 and (B) sixty-five percent (65%) of the lowest VWAP occurring during the
twenty (20) consecutive Trading Days immediately preceding the applicable Conversion Date on which the Holder elects to convert
all or part of this Note, subject to adjustment as provided in this Note.
(iii) "Conversion
Minimum" shall, unless otherwise approved in writing by the Company, constitute any individual conversion of at least
an amount equal to $10,000 of the Principal.
(iv) "VWAP"
means, for any date, the price determined by the first of the following clauses that applies: (a) the volume weighted average price
of the Common Stock for such date (or the nearest preceding date) on the Primary Market; (b) if the Common Stock is not then quoted
for trading on the Primary Market and if prices for the Common Stock are then reported in the "Pink Sheets" published
by Pink Sheets, LLC (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid
price per share of the Common Stock so reported; or (c) in all other cases, the fair market value of a share of Common Stock as
determined by an independent appraiser selected in good faith by the Holder and reasonably acceptable to the Company.
(b) Mechanics
of Conversion.
(i) Optional
Conversion. To convert any Conversion Amount into shares of Common Stock on any date (a "Conversion Date"),
the Holder shall transmit by email, facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., New York, NY Time,
on such date, a copy of an executed notice of conversion in the form attached hereto as Exhibit A (the "Conversion Notice")
to the Company. On or before the third (3rd) Business Day following the date of receipt of a Conversion Notice, the Company shall
(A) if legends are not required to be placed on certificates of Common Stock pursuant to the then existing provisions of Rule 144
of the Securities Act of 1933 ("Rule 144") and provided that the Company's transfer agent is participating
in the Depository Trust Company's ("DTC") Fast Automated Securities Transfer Program, credit such aggregate
number of shares of Common Stock to which the Holder shall be entitled to the Holder's or its designee's balance account with DTC,
or (B) if the Company's transfer agent is not participating in the DTC Fast Automated Securities Transfer Program, issue and deliver
to the address as specified in the Conversion Notice, a certificate, registered in the name of the Holder or its designee, for
the number of shares of Common Stock to which the Holder shall be entitled which certificates shall not bear any restrictive legends
unless required pursuant the Rule 144. If this Note is physically surrendered for conversion and the outstanding Principal is greater
than the Principal portion of the Conversion Amount being converted, then the Company shall, upon request of the Holder, as soon
as practicable and in no event later than three (3) Business
March 2014 01D 10% LTNC Note | 4 | |
Days after receipt of this Note
and at its own expense, issue and deliver to the holder a new Note representing the outstanding Principal not converted. The individual,
corporation, partnership, limited liability company, limited liability partnership, trust, association, organization or other entity
(each a "Person") entitled to receive the shares of Common Stock issuable upon a conversion of this Note
shall be treated for all purposes as the record holder or holders of such shares of Common Stock upon the transmission of a Conversion
Notice. For the purposes hereof, the term "Business Day" means any day except any Saturday, any Sunday,
any day which shall be a federal legal holiday in the United States or any day on which banking institutions in the State of California
are authorized or required by law or other governmental action to close.
(ii) Company's
Failure to Timely Convert. If within three (3) Business Days after the Company's receipt of the facsimile or email copy of
a Conversion Notice, the Company shall fail to issue and deliver to Holder the number of shares of Common Stock to which the Holder
is entitled upon such Holder's conversion of any Conversion Amount (a "Conversion Failure"), the Principal
shall increase by $3,000 per day until the Company issues and delivers a certificate to the Holder for the number of shares of
Common Stock to which the Holder is entitled upon such Holder's conversion of any Conversion Amount. If the Company fails to deliver
shares in accordance with the timeframe stated in this Section, resulting in a Conversion Failure, the Holder, at any time prior
to selling all of those shares, may rescind any portion, in whole or in part, of that particular conversion attributable to the
unsold shares and have the rescinded Conversion Amount returned to the Principal with the rescinded Conversion Shares returned
to the Company.
(iii) DTC
Eligibility. If the Company loses its status as "DTC Eligible" for any reason, the Conversion Price shall thereafter
be redefined to mean the lesser of (A) $0.10 and (B) fifty percent (50%) of the lowest trade occurring during the twenty (20) consecutive
Trading Days immediately preceding the applicable Conversion Date on which the Holder elects to convert all or part of this Note,
subject to adjustment as provided in this Note.
(iv) Book-Entry.
Notwithstanding anything to the contrary set forth herein, upon conversion of any portion of this Note in accordance with the terms
hereof, the Holder shall not be required to physically surrender this Note to the Company unless (A) the full Conversion Amount
represented by this Note is being converted or (B) the Holder has provided the Company with prior written notice (which notice
may be included in a Conversion Notice) requesting reissuance of this Note upon physical surrender of this Note. The Holder and
the Company shall maintain records showing the Principal and Interest converted and the dates of such conversions or shall use
such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of this Note
upon conversion.
(c) Limitations
on Conversions. The Company shall not effect any conversions of this Note and the Holder shall not have the right to convert
any portion of this Note or receive shares of Common Stock as payment of interest hereunder to the
March 2014 01D 10% LTNC Note | 5 | |
extent that after giving effect
to such conversion or receipt of such Interest payment, the Holder, together with any affiliate thereof, would beneficially own
(as determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules promulgated thereunder) in excess of 9.99% of the number of shares of Common Stock outstanding immediately after
giving effect to such conversion or receipt of shares as payment of Interest. Since the Holder will not be obligated to report
to the Company the number of shares of Common Stock it may hold at the time of a conversion hereunder, unless the conversion at
issue would result in the issuance of shares of Common Stock in excess of 9.99% of the then outstanding shares of Common Stock
without regard to any other shares which may be beneficially owned by the Holder or an affiliate thereof, the Holder shall have
the authority and obligation to determine whether the restriction contained in this Section will limit any particular conversion
hereunder and to the extent that the Holder determines that the limitation contained in this Section applies, the determination
of which portion of the principal amount of this Note is convertible shall be the responsibility and obligation of the Holder.
If the Holder has delivered a Conversion Notice for a principal amount of this Note that, without regard to any other shares that
the Holder or its affiliates may beneficially own, would result in the issuance in excess of the permitted amount hereunder, the
Company shall notify the Holder of this fact and shall honor the conversion for the maximum principal amount permitted to be converted
on such Conversion Date in accordance with Section 3(a) and, any principal amount tendered for conversion in excess of the permitted
amount hereunder shall remain outstanding under this Note. The provisions of this Section may be waived by a Holder (but only as
to itself and not to any other Holder) upon not less than sixty-five (65) days' prior notice to the Company. Other Holders shall
be unaffected by any such waiver.
(d) Other
Provisions.
(i) Share Reservation. The
Company shall at all times reserve and keep available out of its authorized Common Stock the full number of shares of Common Stock
issuable upon conversion of all outstanding amounts under this Note; and within five (5) Business Days following the receipt by
the Company of a Holder's notice that such minimum number of underlying shares of Common Stock is not so reserved, the Company
shall promptly reserve a sufficient number of shares of Common Stock to comply with such requirement. The Company will at all times
reserve at least 2,000,000 shares of Common Stock for conversion.
(ii) Prepayment.
At any time the Company shall have the option, upon ten (10) Business Days' notice to Holder, to pre-pay the entire remaining outstanding
principal amount of this Note in cash, provided that (A) the Company shall pay the Holder one hundred thirty percent (130%) of
the Principal plus Interest outstanding in repayment hereof, (B) such amount must be paid in cash on the next Business Day following
such ten (10) Business Day notice period, and (C) the Holder may still convert this Note pursuant to the terms hereof at all times
until such prepayment amount has been received in full. Except as set forth in this Section the Company may not prepay this Note
in whole or in part.
March 2014 01D 10% LTNC Note | 6 | |
(iii) All calculations
under this Section 3 shall be rounded up to the nearest $0.00001 or whole share.
(iv) Nothing
herein shall limit a Holder's right to pursue actual damages or declare an Event of Default herein for the Company's failure to
deliver certificates representing shares of Common Stock upon conversion within the period specified herein and such Holder shall
have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance
and/or injunctive relief, in each case without the need to post a bond or provide other security. The exercise of any such rights
shall not prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable law.
Section 4. Adjustments
to Conversion Price; Fundamental Transactions. The Conversion Price and the number and kind of securities issuable upon
conversion of this Note shall be subject to adjustment from time to time as set forth in this Section 4.
(a) Stock
Dividends and Splits. If at any time while this Note is outstanding the Company (i) declares or pays a stock dividend on its
Common Stock or otherwise makes a distribution on any class of capital stock (or securities convertible into or exercisable or
exchangeable for capital stock) that is payable in shares of Common Stock, (ii) subdivides outstanding shares of Common Stock into
a larger number of shares, (iii) combines (including, without limitation, by way of reverse stock split) outstanding shares of
Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital
stock of the Company (including, without limitation, in connection with any merger or consolidation), then in each such case the
Conversion Price then in effect shall be adjusted by multiplying such Conversion Price by a fraction of which (A) the numerator
shall be the number of shares of Common Stock outstanding immediately before such event, and (B) the denominator shall be the number
of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to clause (i) of this paragraph
shall become effective immediately after the record date for such dividend or distribution, and any adjustment made pursuant to
clauses (ii), (iii) or (iv) of this paragraph shall become effective immediately after the effective date of such subdivision,
combination or reclassification.
(b) Pro
Rata Distributions. Subject to Section 4(c) below, if at any time while this Note is outstanding the Company declares
or pays any dividend or otherwise distributes any of its assets (including, without limitation, cash, properties, evidences of
indebtedness, securities (including any options or other convertible securities but excluding a distribution of Common Stock covered
by Section 4(a) above or Purchase Rights covered by Section 4(c) below) or options or rights to acquire any such
assets) (in each case, "Distributed Property") to all holders of Common Stock pro raw (and not to all Holders
in their capacity as holders of Notes), whether by way of dividend, return of capital, spin-off, reclassification, corporate rearrangement,
scheme of arrangement or other similar transaction, then in each such case the Conversion Price in effect
March 2014 01D 10% LTNC Note | 7 | |
immediately prior to the close of
business on the record date for such dividend or distribution shall be reduced, effective as of the close of business on such record
date, to a price determined by multiplying such Conversion Price by a fraction of which (i) the denominator shall be the closing
price of Common Stock on the Primary Market on such record date (the "Market Price"), and (ii) the numerator
shall be such Market Price minus the value of the Distributed Property on such date applicable to one outstanding share of Common
Stock, as determined by the Company's independent certified public accounting firm that regularly examines the financial statements
of the Company.
(c) Rights
Offerings Below Market. Notwithstanding Section 4(b) above, if at any time while this Note is outstanding the Company grants,
issues or sells pro raw to all holders of its outstanding shares of Common Stock, any options, convertible securities or other
rights (the "Purchase Rights") entitling them to directly or indirectly subscribe for or purchase shares
of Common Stock at an effective price per share less than the Market Price on the record date of such grant, issuance or sale,
then in each such case the Conversion Price in effect immediately prior to the close of business on such record date shall be reduced,
effective as of the close of business on such record date, to a price determined by multiplying such Conversion Price by a fraction
of which (i) the numerator shall be the number of shares of Common Stock outstanding as of the close of business on such record
date plus the number of shares of Common Stock which the aggregate offering price of the total number of shares so offered for
subscription or purchase (including and assuming receipt by the Company in full of all consideration payable upon both issuance
and exercise of such Purchase Rights) would purchase at such Market Price, and (ii) the denominator shall be the number of shares
of Common Stock outstanding as of the close of business on such record date plus the total number of additional shares of Common
Stock so offered for subscription or purchase; provided, that in lieu of receiving such adjustment to the Conversion Price, the
Holder shall have the option, upon written notice to the Company within thirty (30) days following its receipt of the notice of
such adjustment, to elect to acquire, upon any conversion of this Note and in accordance with the terms applicable to the issuance
of such Purchase Rights, the aggregate Purchase Rights which the Holder would have acquired if the Holder had converted such portion
of this Note being converted (without regard to any limitations on ownership or conversion and regardless of whether this Note
was then convertible) immediately prior to such record date. To the extent that shares of Common Stock have not been delivered
pursuant to such Purchase Rights specified in this Section upon the expiration or termination of such Purchase Rights, the Conversion
Price shall be readjusted to the Conversion Price which would then be in effect had the adjustment made upon the issuance of such
Purchase Rights been made on the basis of delivery of only the number of shares of Common Stock actually delivered. In determining
whether any Purchase Rights entitle the holder thereof to subscribe for or purchase shares of Common Stock at less than such Market
Price, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration
received for such Purchase Rights, the value of such consideration (if other than cash) to be determined in good faith by the Company's
Board of Directors.
(d) Fundamental
Transactions. If at any time while this Note is
March 2014 01D 10% LTNC Note | 8 | |
outstanding, (i) the Company effects
any merger or consolidation of the Company with or into another Person, (ii) the Company effects any sale of all or substantially
all of its assets in one or a series of related transactions, (iii) any tender offer or exchange offer (whether by the Company
or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for
other securities, cash or property, or (iv) the Company effects any reclassification of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (each,
a "Fundamental Transaction"), then the Holder shall have the right thereafter to receive, upon any conversion
of this Note, for each Conversion Share that would have been issuable upon such conversion immediately prior to the occurrence
of such Fundamental Transaction, the same amount and kind of securities, cash and property as the Holder would have been entitled
to receive upon the occurrence of such Fundamental Transaction if the Holder had been the record holder of one Conversion Share
immediately prior to such Fundamental Transaction (without regard to any limitations or restrictions on conversion or acquisition
of Conversion Shares and whether or not this Note was then convertible) (the "Alternate Consideration"), and the
Conversion Price shall be appropriately and equitably adjusted to apply to such Alternate Consideration based on the amount of
Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction relative to the then Conversion
Price. The Company shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the
relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to
the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as
to the Alternate Consideration it receives upon any conversion of this Note following such Fundamental Transaction. In case of
any such Fundamental Transaction, any successor to the Company, acquirer or surviving entity (if other than the Company) shall
expressly assume the due and punctual observance and performance of each and every covenant, obligation, liability and condition
under this Note to be performed and observed by the Company, subject to such modifications as may be reasonably deemed appropriate
(as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of the
number and kind of Conversion Shares for which this Note is convertible which shall be as nearly equivalent as practicable to the
adjustments provided for in this Section. Such assumption shall be pursuant to a written agreement in form and substance reasonably
satisfactory to the Holder. At the Holder's request, any successor to the Company, acquirer or surviving entity in such Fundamental
Transaction shall issue to the Holder a new Note from such entity substantially similar in form and substance to this Note and
consistent with the foregoing provisions, which new Note shall be reasonably satisfactory to the Holder and include, without limitation,
(A) the outstanding Principal and Interest owed to the Holder under this Note, (B) an interest rate equal to the Interest Rate,
(C) similar ranking to this Note, and (D) the Holder's right to convert the new Note into Alternate Consideration. The terms of
any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor, acquirer
or surviving entity to comply with the provisions of this Section and ensuring that this Note (or any such replacement security)
will be similarly adjusted upon any subsequent
March 2014 01D 10% LTNC Note | 9 | |
transaction analogous to a Fundamental
Transaction. Notwithstanding anything to the contrary contained herein, if a Fundamental Transaction (X) is an all cash transaction,
(Y) constitutes or results in a "Rule 13e-3 transaction" as defined in Rule 13e-3 under the Exchange Act (going private
transaction), or (Z) otherwise results in the successor, surviving or acquiring entity not being traded on a national securities
exchange, the Nasdaq Global Select Market, the Nasdaq Global Market or the Nasdaq Capital Market, then upon the written request
of the Holder, delivered before the sixtieth (60th) day after such Fundamental Transaction, the Company (or any such successor,
acquirer or surviving entity) shall redeem this Note from the Holder for a redemption price, payable in cash within five (5) Business
Days after such request (or, if later, on the effective date of such Fundamental Transaction), equal to the value of this Note
as determined using the Black-Scholes Option Pricing Model via Bloomberg. The provisions of this Section shall similarly apply
to successive Fundamental Transactions and shall be applied without regard to any limitations of this Note.
Section 5. Intentionally
Deleted.
Section 6. Events of
Default.
a) "Event
of Default" means, wherever used herein, any of the following events (whatever the reason for such event and whether such
event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court,
or any order, rule or regulation of any administrative or governmental body):
i. any
default in the payment of (A) the principal amount under this Note, or (B) interest, liquidated damages and other amounts owing
under this Note as and when the same shall become due and payable (whether on the Maturity Date or by acceleration or otherwise)
which default is not cured within 3 business days;
ii. the
Company shall fail to observe or perform any other covenant or agreement contained in this Note which failure is not cured, if
possible to cure, within 5 days after notice of such failure is delivered by the Holder or after the Company has become or should
have become aware of such failure, whichever is earlier;
iii. a
default or event of default (subject to any grace or cure period provided in the applicable agreement, document or instrument)
shall occur under (A) the Purchase Agreement or (B) any other convertible debenture
iv. the
Company or any Subsidiary shall be subject to a Bankruptcy Event;
v. the
Company or any Subsidiary shall default on any of its obligations under any mortgage or indenture agreement that (a) involves an
March 2014 01D 10% LTNC Note | 10 | |
obligation greater
than $100,000, whether such indebtedness now exists or shall hereafter be created, and (b) results in such indebtedness becoming
or being declared due and payable prior to the date on which it would otherwise become due and payable;
vi. the
Company shall be a party to any Change of Control Transaction or shall agree to sell or dispose of all or in excess of 33% of its
assets in one transaction or a series of related transactions (whether or not such sale would constitute a Change of Control Transaction);
vii. The
common stock of the Company ("Common Stock") is suspended or delisted for trading on the Over the Counter Bulletin Board
market (the "Primary Market") and the OTCQB;
viii. A
Conversion Failure as defined in Section 3(b)(ii) hereof;
ix. The
Company loses its status as "DTC Eligible"; or
x. The
Company shall become late or delinquent in its filing requirements as a fully-reporting issuer registered with the Securities &
Exchange Commission. For the avoidance of doubt, the Company will not be considered late or delinquent in its filings requirements
as a fully-reporting issuer registered with the Securities & Exchange Commission if it timely files Form 12b-25 (Notification
of Late Filing) and subsequently timely files the required filing documents to maintain compliance.
b) Remedies Upon Event of
Default. If any Event of Default occurs, the outstanding principal amount of this Note, plus accrued but unpaid interest, liquidated
damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the Holder's election, immediately
due and payable in cash at the Mandatory Default Amount. After the occurrence and during the continuance of any Event of Default,
the interest rate on this Note shall accrue at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted
under applicable law. In connection with such acceleration described herein, the Holder need not provide, and the Company hereby
waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of
any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable
law.
Section 7. Miscellaneous.
a) Notices. Any and
all notices or other communications or deliveries to be provided by the Holder hereunder, shall be in writing and delivered personally,
by facsimile, by email or sent by a nationally recognized overnight courier service, addressed to the Company, at the address set
forth above, or such other facsimile number, email or address as the Company may specify for such purpose by notice to the
March 2014 01D 10% LTNC Note | 11 | |
Holder delivered in accordance with
this Section. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing
and delivered personally, by facsimile, by email or sent by a nationally recognized overnight courier service addressed to each
Holder at the facsimile number or address of the Holder appearing on the books of the Company, or if no such facsimile number,
email or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder
shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered
via facsimile or email at the facsimile number or email address specified to such party prior to 8:30 p.m. (New York City time),
(ii) the date immediately following the date of transmission, if such notice or communication is delivered via facsimile or email
at the facsimile number or email address specified to such party between 8:30 p.m. (New York City time) and 11:59 p.m. (New York
City time) on any date, (iii) the second Business Day following the date of mailing, if sent by U.S. nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices
and communications shall be as set forth in the Purchase Agreement.
b) Absolute
Obligation. Except as expressly provided herein, no provision of this Note shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of, liquidated damages and accrued interest, as applicable, on this Note
at the time, place, and rate, and in the coin or currency, herein prescribed. This Note is a direct debt obligation of the Company.
c) Lost or
Mutilated Note. If this Note shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange
and substitution for and upon cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed
Note, a new Note for the principal amount of this Note so mutilated, lost, stolen or destroyed, but only upon receipt of evidence
of such loss, theft or destruction of such Note, and of the ownership hereof, reasonably satisfactory to the Company, as well as
an affidavit and indemnification agreement in form and substance reasonably acceptable to the Company.
d) Governing
Law. All questions concerning the construction, validity, enforcement and interpretation of this Note shall be governed by and
construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflict
of laws thereof. Each party agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions
contemplated by this Note or the Purchase Agreement (whether brought against a party hereto or its respective affiliates, directors,
officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York,
Borough of Manhattan (the "New York Courts"). Each party hereto hereby irrevocably submits to the exclusive jurisdiction
of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein (including with respect to the enforcement of this Note or the Purchase Agreement), and hereby irrevocably
waives, and agrees not to assert in any suit,
March 2014 01D 10% LTNC Note | 12 | |
action or proceeding, any claim
that it is not personally subject to the jurisdiction of such New York Courts, or such New York Courts are improper or inconvenient
venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served
in any such suit, action or proceeding 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 Note 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 applicable law. Each party hereto hereby irrevocably waives, to the fullest extent
permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Note
or the transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this
Note, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorney's fees and
other costs and expenses reasonably incurred in the investigation, preparation and prosecution of such action or proceeding.
e) Waiver;
Amendments. Any waiver by the Company or the Holder of a breach of any provision of this Note shall not operate as or be construed
to be a waiver of any other breach of such provision or of any breach of any other provision of this Note. The failure of the Company
or the Holder to insist upon strict adherence to any term of this Note on one or more occasions shall not be considered a waiver
or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Note. Any
waiver by the Company or the Holder must be in writing. This Note shall not be directly or indirectly effectively modified or amended
without the prior written consent of the Holder.
f) Successors
and Assigns. This Note may be assigned by the Holder with the prior written consent of the Company. This Note may not be assigned
by the Company, except to a successor in the event of a Fundamental Transaction. This Note shall be binding on and inure to the
benefit of the parties thereto and their respective successors and assigns.
g) Severability.
If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any
provision is inapplicable to any person or entity or circumstance, it shall nevertheless remain applicable to all other persons,
entities and circumstances.
h) Next Business
Day. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be
made on the next succeeding Business Day.
i) Headings.
The headings contained herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit
or affect any of the provisions hereof.
March 2014 01D 10% LTNC Note | 13 | |
j) Assumption.
Any successor to the Company or any surviving entity in a Fundamental Transaction shall (i) assume, prior to such Fundamental Transaction,
all of the obligations of the Company under this Note and the Purchase Agreement pursuant to written agreements in form and substance
satisfactory to the Holder (such approval not to be unreasonably withheld or delayed) and (ii) issue to the Holder a new Note of
such successor entity evidenced by a written instrument substantially similar in form and substance to this Note, including, without
limitation, having a principal amount and interest rate equal to the principal amount and the interest rate of this Note and having
similar ranking to this Note, which shall be satisfactory to the Holder (any such approval not to be unreasonably withheld or delayed).
The provisions of this Section shall apply similarly and equally to successive Fundamental Transactions and shall be applied without
regard to any limitations of this Note.
k) No Usury.
To the fullest extent permitted by law, the Company agrees not to insist upon or plead or in any manner whatsoever claim, and shall
resist any and all efforts to be compelled to take the benefit or advantage of, usury laws wherever enacted, in force at the time
of execution of this Note or hereafter, in connection with any action that may be brought by the Holder in order to enforce any
right or remedy under this Note or other Transaction Documents. Notwithstanding any provision to the contrary contained herein,
it is expressly agreed and provided that the total liability of the Company under this Note for payments in the nature of interest
shall not exceed the maximum lawful interest rate authorized under applicable law. If the effective interest rate otherwise applicable
under this Note exceeds such maximum lawful interest rate, then such applicable interest rate shall be reduced so as not to exceed
such maximum lawful interest rate.
** * *** ** * *** * * *
March 2014 01D 10% LTNC Note | 14 | |
IN WITNESS WHEREOF,
the Company has caused this Note to be duly executed by a duly authorized officer as of the date first above indicated.
LABOR SMART, INC.
By: /s/ Ryan Schadel
Name: Ryan Schadel
Title: CEO
March 2014 01D 10% LTNC Note | 15 | |
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 19339 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: $106,000.00 Issue
Date: April 21, 2014
CONVERTIBLE
PROMISSORY NOTE
FOR
VALUE RECEIVED, a Labor Smart, Inc., a Nevada corporation (hereinafter called the "Borrower"), hereby
promises to pay to the order of Tailwind Partners 3, LLC a Utah limited liability company,
or registered assigns (the "Holder") the sum of $106,000.00 together with any interest as set forth
herein, on January 21, 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 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 four percent
(24%) 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 Ill) pursuant to Section 1.6(a) or Article Ill, 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(l) the principal amount of this Note to be converted in such
conversion pi (2) at the Borrower'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 Borrower's option, Default Interest,
if any, on the amounts referred to in the immediately preceding clauses (1) and/or (2)
pi (4) at the Holder's option, any amounts owed to
the Holder pursuant to Sections 1.3 and 1.4(g) hereof.
1.2 Conversion Price.
(a)
Calculation of Conversion Price. The conversion price (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 58% multiplied
by the Market Price (as defined herein). "Market Price" means the average of the lowest three (3)
Trading Prices (as defined below) for the Common Stock during the ten (10) Trading Day period ending on the latest complete Trading
Day prior to the Conversion Date. "Trading Price" means any intraday trading
price, designated by the Holder, of any shares of Common Stock as reporting on the OTC Markets
website, or applicable trading market (the 'OTCQB") as reported by a reliable reporting service ("Reporting
Service") designated by the Holder (i.e. www.otcmarkets.com, Bloomberg, etc.) or,
if the OTCQB is not the principal trading market for such security, the lowest intraday price of such security on the
principal securities exchange or trading market where such security is listed or traded or, if no
intraday
price of such security is available in any of the foregoing manners, the closing price of the Common stock. 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 OTCQB, 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 pursuant to Section 4(g) of the Purchase Agreement. The Borrower
represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. In addition, if the
Borrower shall issue any securities or make any change to its capital structure which would change the number of shares of Common
Stock into which the Notes shall be convertible at the then current Conversion Price, the Borrower shall at the same time make
proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free
from preemptive rights, for conversion of the outstanding Notes. The Borrower (I) acknowledges that it has irrevocably instructed
its transfer agent to issue certificates for the Common Stock issuable upon conversion of this Note, and (ii) agrees that its
issuance of this Note shall constitute full authority to its officers and agents who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for shares of Common Stock in accordance with the terms and conditions
of this Note.
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 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, prinla fade, 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 1, 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 .I 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
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 Maximurn 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, (1) 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, (1) 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 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 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 125%, multiplied
by the sum of: (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid
interest on the unpaid principal amount of this Note to the Optional Prepayment Date pj
(y) Default Interest, if any, on the amounts referred to in clauses (xv) 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 one hundred
twenty-one (121) days following the issue date and ending on the date which is one hundred
fifty (150) 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 130%, multiplied by the
sum of: (w) the then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the amounts referred
to in clause (w) and (x) plus (z) any amounts owed to the Holder pursuant to Section 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 fifty-one (151) 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 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 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
without the prior written consent of the Holder.
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 OTCQB 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.
3.15 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 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:
Labor Smart, Inc.
5604 Wendy
Bagwell Parkway Suite 223
Hiram, GA 30141
If to the Holder:
Tailwind
Partners 3, LLC 1384 Michigan Ave.
Salt Lake City, UT 84105
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 50 1(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 Utah 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 Utah or in the federal courts located in the state of Utah. 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 April 21, 2014
LaborSmart,
Inc.
/s/ Ryan Schadel, 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 Labor Smart, Inc., a Nevada corporation (the "Borrower") according to
the conditions of the convertible note of the Borrower dated as of April 21, 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:
Tailwind
Partners 3, LLC 1384 Michigan Ave.
Salt Lake City, UT 84105
Date of Conversion:
Applicable Conversion
Price: $
Number
of Shares of Common Stock to be Issued Pursuant to Conversion of the Note:
Amount
of Principal Balance Due remaining Under the Note after this conversion:
Tailwind Partners 3, LLC
Name:
Title:
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION
IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING,
THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.
Principal Amount: $125,288.69 |
Issue Date: September 24, 2014 |
Purchase Price: $125,288.69 |
|
CONVERTIBLE PROMISSORY NOTE
FOR
VALUE RECEIVED, LABOR SMART, INC., a Nevada corporation (hereinafter called the "Borrower"),
hereby promises to pay to the order of CAREBOURN CAPITAL, L.P., a
Delaware limited partnership, or registered assigns (the "Holder") the sum of $125,288.69 together with any interest
as set forth herein, on June 24, 2014 (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 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 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 1 3D-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.
1.2 Conversion
Price.
(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 60% multiplied by the Market Price (as defined herein) (representing a discount rate of 40%). "Market
Price" means the average of the lowest three (3) Trading Prices (as defined below) for the Common Stock during the ten (10)
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 OTC Markets OTCQB Marketplace, or applicable trading market (the "OTCQB")
as reported by a reliable reporting service ("Reporting Service") designated by the Holder (i.e. Bloomberg) or, if the
OTCQB 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 OTCQB, 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.
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 three times the number of shares that is actually
issuable upon full conversion of the Note (based on the Conversion Price of the Notes in effect from time to time)(the 'Reserved
Amount"). The Reserved Amount shall be increased from time to time in accordance with the Borrower's obligations pursuant
to Section 4(g) of the Purchase Agreement. The Borrower represents that upon issuance, such shares will be duly and validly issued,
fully paid and non-assessable. In addition, if the Borrower shall issue any securities or make any change to its capital structure
which would change the number of shares of Common Stock into which the Notes shall be convertible at the then current Conversion
Price, the Borrower shall at the same time make proper provision so that thereafter there shall be a sufficient number of shares
of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Notes. The Borrower (i)
acknowledges that it has irrevocably instructed its transfer agent to issue certificates for the Common Stock issuable upon conversion
of this Note, and (ii) agrees that its issuance of this Note shall constitute full authority to its officers and agents who are
charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock
in accordance with the terms and conditions of this Note.
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 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 fade,
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 $1,000 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 19339
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 19339 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 Buyer with respect to the transfer of Securities pursuant to an exemption from registration, such as Rule 144 or
Regulation S, at the Deadline, it will be considered an Event of Default pursuant to Section 3.2 of the Note.
1.6 Effect of Certain Events.
(a)
Effect of Merger, Consolidation, Etc. At the option of the Holder, the sale, conveyance
or disposition of all or substantially all of the assets of the Borrower, the effectuation by the Borrower of a transaction or
series of related transactions in which more than 50% of the voting power of
the Borrower is disposed of, or the consolidation, merger or other business combination of the Borrower with or into any other
Person (as defined below) or Persons when the Borrower is not the survivor shall either: (i) be deemed to be an Event of Default
(as defined in Article III) pursuant to which the Borrower shall be required to pay to the Holder upon the consummation of and
as a condition to such transaction an amount equal to the Default Amount (as defined in Article III) or (ii) be treated pursuant
to Section 1.6(b) hereof. "Person" shall mean any individual, corporation, limited liability company, partnership, association,
trust or other entity or organization.
(b)
Adjustment Due to Merger, Consolidation, Etc. if, at any time when this Note is issued
and outstanding and prior to conversion of all of the Notes, there shall be any merger, consolidation, exchange of shares, recapitalization,
reorganization, or other similar event, as a result of which shares of Common Stock of the Borrower shall be changed into the same
or a different number of shares of another class or classes of stock or securities of the Borrower or another entity, or in case
of any sale or conveyance of all or substantially all of the assets of the Borrower other than in connection with a plan of complete
liquidation of the Borrower, then the Holder of this Note shall thereafter have the right to receive upon conversion of this Note,
upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore
issuable upon conversion, such stock, securities or assets which the Holder would have been entitled to receive in such transaction
had this Note been converted in full immediately prior to such transaction (without regard to any limitations on conversion set
forth herein), and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder
of this Note to the end that the provisions hereof (including, without
limitation,
provisions for adjustment of the Conversion Price and of the number of shares issuable upon conversion of the Note) shall thereafter
be applicable, as nearly as may be practicable in relation
to any securities or assets thereafter deliverable upon the conversion hereof. The Borrower shall not affect any transaction described
in this Section 1.6(b) unless (a) it first gives, to the extent practicable, thirty (30)
days prior written notice (but in any event at least fifteen (15) days
prior written notice) of the record date of the special meeting of shareholders to approve,
or if there is no such record date, the consummation of, such merger, consolidation, exchange of shares, recapitalization,
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 of 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, (1) 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. Prepayment is permitted
by the Company at any time by
paying an amount equal to the
outstanding principal amount of the Note together with accrued and unpaid interest thereon (the "Outstanding
Amount") multiplied by the following percentage (the "Multiplier"), which such Multiplier shall be
determined depending on the date of such prepayment: (i) beginning on the date of the Note and ending on the date which is
thirty (30) days following the date of the Note, 110%; (ii) beginning on the date which is thirty one (3 1) days from the
date of the Note and ending on the date which is sixty (60) days following the date of the Note, 115%; (iii) beginning
on the date which is sixty one (61) days from the date of the Note and ending on the date which is ninety (90) days following
the date of this Note, 120%; (iv) beginning on the date which is ninety one (9 1) days from the date of the Note and ending
on the one hundred twenty (120) days following the date of this Note, 125%; (v) beginning on the date which is one
hundred twenty one (121) days from the date of the Note and ending on the one hundred fifty (150) days following the
date of this Note, 130%; (vi) beginning on the date which is one hundred fifty one (15 1) days from the date of the
Note and ending on the one hundred eightieth (180) days following the date of this Note, 135%. After the expiration of one
hundred eighty (180) days following the
date
of the Note, the company 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 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.
2.4 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, following a five (5) day cure period.
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 OTCQB or an equivalent replacement exchange, the
Nasdaq
National Market, the Nasdaq SmaliCap 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:
LABOR SMART, INC.
5604
Wendy Bagwell, Suite 223
Hiram, GA 30141
Attn: Ryan Schadel, Chief
Executive Officer Facsimile: (PLEASE INSERT)
If to the Holder:
CAREBOURN CAPITAL, L.P. 8700 Black Oaks Lane
N
Maple Grove, Minnesota 55311 Attn: Chip Rice, Managing
Member facsimile: (763) 416- 1450
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.
45 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 Illinois 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 Illinois or in the federal courts located
in the state of Illinois. 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.
[SIGNATURE PAGE FOLLOWS]
IN
WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its duly authorized officer this September 24th, 2014.
Labor Smart, Inc.
Name: /s/ Ryan Schadel
Title: Chief Executive Officer
THIS
NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE
AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE
STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. LENDERS SHOULD
BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT
FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
LG CAPITAL FUNDING, LLC
COLLATERALIZED SECURED PROMISSORY NOTE
BACK END NOTE
$106,000.00 |
Brooklyn,
NY |
|
November 12, 2014 |
1.
Principal and Interest
FOR
VALUE RECEIVED. LG Capital Funding, LLC, a New York Limited Liability Company (the "Company") hereby absolutely
and unconditionally promises to pay to Labor Smart, Inc. (the Lender"). or order. the
principal amount of One Hundred Six Thousand Dollars ($106,000.00) no later than July
12. 2015. unless the Lender does not meet the "current information requirements" required under Rule 144 of the Securities
Act of 1933, as amended, in which case the Company may declare the offsetting note issued by the Lender on the same date
herewith to be in Default (as defined in that note) and cross cancel its payment obligations
under this Note as well as the Lenders payment obligations under the offsetting note.
This Full Recourse Note shall bear simple interest at the rate of 10%.
2.
Repayments
and Prepayments: Security.
a.
All principal under this Note shall be due
and payable no later than July 12,
2015, unless the Lender does not meet the "current information requirements"
required under Rule 144 of the Securities
Act of 1933, as amended, in which case the Company may declare the offsetting
note issued by the Lender on the same date herewith to be in Default (as defined in that note)
and cross cancel its payment obligations under this Note as well as the Lenders payment obligations
under the offsetting note.
b.
The Company may pay this Note at any time.
This note may not be assigned
by the Lender, except by operation of law.
c. This
Note shall initially be secured by the pledge of the $106,000.00 10% convertible
promissory note issued to the Company by the Lender on even date herewith (the
"Lender
Note"). The Company may
exchange this collateral for other collateral with an appraised
value of at least $1 06,000.00, by providing 3 days prior written notice to the Lender. If
the Lender does not object to the substitution of collateral in that 3 day period, such substitution
of collateral shall be deemed to have been accepted by the Lender. All
collateral shall be retained by New Venture Attorneys, P.C., which
shall act as the escrow agent for the collateral for the benefit of
the Lender. The Company may not effect any conversions under the Lender Note until it has
made full cash payment for the portion of the Lender Note being converted.
Lender Initials to Acceptance of bolded section above.
3.
Events
of Default Acceleration.
a.
The principal amount of this Note is subject to prepayment in whole or in part upon the
occurrence and during the continuance of any of the following events (each, an "Event of Default"):
the initiation of any bankruptcy, insolvency, moratorium, receivership or reorganization by or against the Company, or a general
assignment of assets by the Company for the benefit of creditors. Upon the occurrence
of any Event of Default, the entire unpaid principal balance of this Note and all of
the unpaid interest accrued thereon shall be immediately due and payable. The Company
may offset amounts due to the Lender under this Note by similar amounts that may be due to the Company by the Lender resulting
from breaches under the Lender Note.
b.
No remedy herein conferred upon the Lender is intended to be exclusive of
any other remedy and each and every remedy shall be cumulative and in addition to
every other remedy hereunder, now or hereafter existing at law or in equity or otherwise. The Company accepts and agrees
that this Note is a full recourse note and that the holder may exercise any and all remedies available to it under law.
4.
Notices.
a.
All notices, reports and other communications required or permitted hereunder shall be
in writing and may be delivered in person, by telecopy with written confirmation, overnight delivery
service or U.S. mail, in which event it may be mailed by first-class, certified or registered, postage
prepaid, addressed (i) if to a Lender, at such Lender's address as the Lender shall have furnished
the Company in writing and (ii) if to the Company at such address as the Company shall have furnished the Lender(s) in writing.
b.
Each such notice, report or other communication shall for all purposes under
this Note be treated as effective or having been given when delivered if delivered personally
or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle
for the deposit of the United States mail, addressed and mailed as aforesaid, or, if
sent by electronic communication with confirmation, upon the delivery of electronic communication.
5.
Miscellaneous.
a.
Neither this Note nor any provisions hereof may be changed, waived, discharged or terminated orally, but only by
a signed statement in writing.
b.
No failure or delay by the Lender to exercise any right hereunder shall operate as a waiver
thereof. nor shall any single or partial exercise of any right, power or privilege preclude any other
right, power or privilege. The provisions of this Note are severable and if any one provision hereof
shall be held invalid or unenforceable in whole or in part in any jurisdiction, such invalidity or
unenforceability shall affect only such provision in such jurisdiction. This Note expresses the entire
understanding of the parties with respect to the transactions contemplated hereby. The Company
and every endorser and guarantor of this Note regardless of the time, order or place of signing hereby waives presentment,
demand, protest and notice of every kind, and assents to any extension or postponement of
the time for payment or any other indulgence, to any substitution, exchange or release of collateral, and to the addition or release
of any other party or person primarily or secondarily liable.
c.
If
Lender retains an attorney for collection of this Note, or if any suit or proceeding is
brought for the recovery of all, or any part
of, or for protection of the indebtedness respected by this Note, then the Company agrees
to pay all costs and expenses of the suit or proceeding, or any appeal thereof, incurred by the Lender, including without
limitation, reasonable attorneys' fees.
d.
This Note shall for all purposes be governed by, and construed in accordance with the laws of the State of New York
(without reference to conflict of laws).
e.
This Note shall be binding upon the Company's successors and assigns,
and shall inure to the benefit of the Lender's successors and assigns.
IN
WITNESS WHEREOF, the Company has caused this Note to be executed by its duly authorized
officer to take effect as of the date first hereinabove written.
LG CAPITAL
FUNDING, LLC
Title:
APPROVED:
LABOR SMART, INC.
By: /s/ Ryan Schadel, CEO
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 UNDER THE SECURITIES ACT OF 19339
AS AMENDED, AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER (THE 11933
ACT")
US $106,000.00
LABOR SMART, INC.
10% CONVERTIBLE REDEEMABLE NOTE
DUE NOVEMBER 12, 2015
BACK END NOTE
FOR VALUE RECEIVED,
Labor Smart, Inc. (the "Company") promises to pay to the order of LG CAPITAL FUNDING, LLC and its authorized successors
and permitted assigns ("Holder), the aggregate principal face amount of One Hundred Six Thousand Dollars exactly (U.S. $106,000.00)
on November 12, 2015 ("Maturity Date") and to pay interest on the principal amount outstanding hereunder at the rate
of 10% per annum commencing on November 12, 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 cheek or wire transfer shall constitute a payment of outstanding principal hereunder and shall satisfy and
discharge the liability for principal on this Note to the extent of the sum represented by such check 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 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 Holder 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 for all other purposes, whether or not this Note be overdue,
and neither the Company nor any such agent shall be affected or bound by notice to the
contrary. Any Holder of this Note electing 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) of 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, and after full cash payment for the shares convertible hereunder, 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 60% of the lowest
closing bid 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 twelve
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 50% instead of 60% while that "Chill" is in effect. In the event
the Company is not "Current" in its SEC filings at the time this note is cash funded, the discount shall be decreased
to 40%. In no event shall the Holder be allowed to effect a conversion if such conversion, along with all other shares of Company
Common Stock beneficially owned by the Holder and its affiliates would exceed 9.9% of the outstanding shares of the Common Stock
of the Company.
(b)
Interest on any unpaid principal balance of this Note shall be paid at the
rate of 10% per annum. Interest shall be paid by the Company in Common Stock ("Interest Shares"). The Holder may, at
any time, send in a Notice of Conversion to the Company for Interest Shares based on the formula
provided in Section 4(a) above. The dollar amount converted into Interest Shares shall be all or a portion of the accrued interest
calculated on the unpaid principal balance of this Note to the date of such notice.
(c)
This Note may not be prepaid, except that if the $106,000 Rule 144 con-
vertible redeemable note issued by the Company of even date herewith is redeemed by the Company within 6 months of the issuance
date of such Note, all obligations of the Company under this Note and all obligations of the Holder under the Holder issued Back
End Note will be automatically be deemed satisfied and this Note and the Holder issued Back End Note will be automatically be deemed
cancelled and of no further force or effect.
(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
Holder, redeem this Note in cash for 150% 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 of
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 have the right thereafter, by converting this Note, to purchase or convert this
Note into the kind and number of shares of stock or other securities or property (including cash) receivable upon such reclassification,
capital reorganization or other change, consolidation or merger by a holder of the number of shares of Common Stock that could
have been purchased upon exercise of the Note and at the same Conversion Price, as defined in this Note, immediately prior to such
Sale 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 determined 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 pay-
ment, 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 shall be false or misleading in 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 and not cure such breach within 10 days; 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)
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 five (5) days
prior to the date of any proposed sale thereunder; or the Company shall have its Common Stock delisted
from a market (including the OTCQB marketplace) or, if the Common Stock trades on an exchange, then trading in the Common
Stock shall be suspended for more than 10 consecutive days;
(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 such default within the appropriate grace period; or
(i)
Intentionally Deleted;
(j)
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
(1) The Company shall not replenish the reserve set
forth in Section 12, with-
in 5 business days of the request of the Holder ; or
(m)
The Company's Common Stock has a closing bid price of less than $0.005 per share for at least 5 consecutive trading
days; or
(n)
The aggregate dollar trading volume of the Company's Common Stock is less than fifty thousand dollars ($50,000.00)
in any 5 consecutive trading days; or
(o)
The Company shall cease to be "current" in its filings with the Securities and Exchange Commission; or.
(p)
The Company shall lose the "bid" price for its stock and a market (including the OTCBB marketplace or other
exchange)
Then, or at any time thereafter,
unless cured (except for 8(m) and 8(n) which are incurable defaults, the sole remedy of which is to allow the Holder to cancel
both this Note and the Holder Issued Note, 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 to 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 be accrue at a default interest rate of 24% per annum or,
if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law. Further, if the
Note becomes due and payable, the Holder may use the outstanding principal and interest due under the Note to offset any payment
obligations it may have to the Company. In the event of a breach of 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 the 10th day. Once cash funded,
the penalty for a breach of Section 8(p) shall be an increase of the outstanding principal amounts by 20%. Once cash funded, in
the event of a breach of Section 8(1), the outstanding
principal
due under this Note shall increase by 50%. If this Note is not paid at maturity,
the outstanding principal 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.
Make-Whole for Failure to Deliver
Loss. At the Holder's election, if the Company fails for any reason to deliver to the Holder the conversion shares by the by the
3rd business day following the delivery of a Notice of Conversion to the Company and if the Holder incurs a Failure to Deliver
Loss, then at any time the Holder may provide the Company written notice indicating the amounts payable to the Holder in respect
of the Failure to Deliver Loss and the Company must make the Holder whole as follows:
Failure to Deliver Loss = [(High trade price at any
time on or after the day of exercise) x (Number of conversion shares)]
9.
In case any provision of this Note is held by a court of competent jurisdiction 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.
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 to allow for salability of the conversion shares or (ii) accept
such opinion from Holder's counsel.
12. Prior
to cash funding of this Note, The Company will issue irrevocable transfer agent instructions reserving 4x the number of
shares of Common Stock necessary to allow the holder to convert this note based on the discounted conversion price set forth
in Section 4(a) herewith. The reserve shall he replenished as needed to allow for conversions of this Note. Upon full
conversion of this Note, the reserve representing this Note shall be cancelled. The Company will pay all transfer agent 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 he 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: 11/14/14
LABOR SMART INC.
By: /s/ Ryan Schadel,
CEO
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 19339 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: $110,000.00 |
Issue Date: September 19th. 2014 |
|
|
12% CONVERTIBLE NOTE
FOR
VALUE RECEIVED, LABOR SMART, INC., a Nevada corporation ("Borrower" or "Company"), hereby promises to pay
to the order of Eastmore Capital, LLC, a Delaware limited liability company, or its registered assigns (the "Holder"),
on September 18th, 2015 (subject to extension as set forth below, the "Maturity Date"), the sum of $110,000.00 as set
forth herein, and to pay interest on the unpaid principal balance hereof at the rate of twelve percent (12%) per annum (the "Interest
Rate") from the date of issuance hereof until this Note plus any and all accrued interest is paid in full. Interest shall
be computed on the basis of a 365-day year and the actual number of days elapsed. Any amount of principal or interest on this Note
which is not paid when due shall bear interest at the rate of twenty-four (24%) per annum from the due date thereof until the same
is paid ("Default Interest"). All payments due hereunder shall be made in lawful money of the United States of America.
All payments shall be made at such address as the Holder shall hereafter give to the Borrower by written notice made in accordance
with the provisions of this Note. Whenever any amount expressed to be due by the terms of this Note is due on any day which is
not a business day, the same shall instead be due on the next succeeding day which is a business day and, in the case of any interest
payment date which is not the date on which this Note is paid in full, the extension of the due date thereof shall not be taken
into account for purposes of determining the amount of interest due on such date. As used it!
this Note, the term "business day" shall mean any day other than a Saturday, Sunday
or a day on which commercial banks in the city of New York, New York are authorized or required by law or
executive order to remain closed. Each capitalized term used herein, and not otherwise defined,
shall have the meaning ascribed thereto in that certain Securities Purchase Agreement entered into by and between the Company and
Holder dated on or about the date hereof, pursuant to which this Note was originally issued (the "Purchase Agreement").
The Holder may, by written notice to the Borrower at least five (5)
days before the Maturity Date (as may have been previously extended), extend the Maturity
Date to up to one (1) year following the date of the original Maturity Date hereunder.
This
Note is free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive
rights or other similar rights of shareholders of the Borrower and will not impose personal liability upon the holder thereof.
The following terms shall apply to this Note:
ARTICLE I. CONVERSION RIGHTS
1. 1 Conversion Right. The Holder shall have
the right, in its sole and absolute
discretion,
at any time and from time to time to convert all or any part of the outstanding amount due under this Note into fully paid
and non-assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares of capital stock or
other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified at the conversion
price (the "Conversion Price") determined as provided herein (a "Conversion"); provided, however, that in
no event shall the Holder be entitled to convert any portion of this Note in excess of that portion of this Note upon
conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates
(other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of
the Notes or the unexercised or unconverted portion of any other security of the Borrower subject to a limitation on
conversion or exercise analogous to the limitations contained herein) and (2) the number of shares of Common Stock issuable
upon the conversion of the portion of this Note with respect to which the determination of this proviso is being made, would
result in beneficial ownership by the Holder and its affiliates of more than 4.9% of the outstanding shares of Common Stock.
For purposes of the proviso to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and Regulation 13D-G thereunder, except as otherwise
provided in clause (1) of such proviso, provided, further, however, that the limitations on conversion may be waived by the
Holder upon, at the election of the Holder, not less than 61 days' prior notice to the Borrower, and the provisions of the
conversion limitation shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be
specified in such notice of waiver). The number of shares of Common Stock to be issued upon each conversion of this Note
shall be determined by dividing the Conversion Amount (as defined below) by the applicable Conversion Price then in effect on
the date specified in the
notice of conversion, in the form attached hereto as Exhibit A (the "Notice of Conversion"), delivered to the
Borrower by the Holder in accordance with Section 1.4 below; provided that the Notice of Conversion is submitted by facsimile
or e-mail (or by other means resulting in, or reasonably expected to result in, notice) to the Borrower before 11:59 p.m.,
New York, New York time on such conversion date (the "Conversion Date"). The term "Conversion Amount"
means, with respect to any conversion of this Note, the sum of (1) the principal amount of this Note to be converted in such
conversion, pjjj (2)
accrued and unpaid interest, if any, on such principal amount being converted at the interest rates provided in this Note to
the Conversion Date, jjj (3) at
the Holder's option, Default Interest, if any, on the amounts referred to in the immediately preceding clauses (1)
and/or (2) plus (4) at the Holder's option, any amounts owed to the Holder pursuant to Sections 1.3 and 1.4(g) hereof.
1.2. Conversion Price.
a) Calculation of Conversion Price. The conversion
price hereunder (the
"Conversion Price") shall equal
the lower of either (i) the closing sale price of the Common Stock
on
the Principal Market on the Trading Day immediately preceding the Closing Date, and (ii) 60% of the lowest sale price for
the Common Stock on the Principal Market during the fifteen (15) consecutive Trading Days immediately preceding the Conversion
Date. However, if Company's share price at any time loses the bid (ex: 0.0001 on the ask with zero market makers on the bid on
level 2), then the Conversion Price may, in the Holder's sole and absolute discretion, be reduced to a fixed conversion price of
0.00001 (if lower than the conversion price otherwise). If such Common Stock is not traded on the
OTCBB, OTCQB, Nasdaq or NYSE, then such sale price shall be the sale price of such security on the principal securities
exchange or trading market where such security is listed or traded or, if no sale price of such security is available in any of
the foregoing manners, the average of the closing bid prices of any market makers for such security that are listed in the "pink
sheets" by the National Quotation Bureau, Inc. If such sale price cannot be calculated for such security on such date in the
manner provided above, such price shall be the fair market value as mutually determined by the Borrower and the Holder. if the
Borrower's Common stock is chilled for deposit at DTC, becomes chilled at any point while this Note remains outstanding or deposit
or other additional fees are payable due to a Yield Sign, Stop Sign or other trading restrictions, or if the closing sale price
at any time falls below 0.01, then such 60% figure specified in clause 1 .2(a)(ii) above shall be reduced to 45%. Additionally,
the Borrower acknowledges that it will take all reasonable steps necessary or appropriate, including providing a board of directors
resolution authorizing the issuance of common stock and an opinion of counsel confirming the rights of Holder to sell shares of
Common Stock issuable or issued to Holder on conversion of this Note pursuant to Rule 144 as promulgated by the SEC ("Rule
144"), as such Rule may be in effect from time to time. If the Borrower does not promptly provide a board of directors' resolution
and an opinion from Company counsel, and so long as the requested sale may be made pursuant to Rule 144, the Company agrees to
accept an opinion of counsel to the Holder which opinion will be issued at the Company's expense and the conversion dollar amount
will be reduced by $750.00 to cover the cost of such legal opinion. "Trading Day" shall mean any day on which
the Common Stock is tradable for any period on the OTCQB, or on the principal securities exchange or other securities market on
which the Common Stock is then being traded. Additionally, if the Company ceases to be a reporting company pursuant to the 1934
Act or if the Note cannot be converted into free trading shares after 181 days from the issuance date, an additional 15% discount
will be attributed to the Conversion Price.
b) Without in any way limiting the Holder's
right to pursue other
remedies, including actual
damages and/or equitable relief, the parties agree that if delivery of the Common Stock issuable upon conversion of this Note is
not delivered by the Deadline (as defined below) the Borrower shall pay to the Holder $1,000.00 per day in cash, for each day beyond
the Deadline that the Borrower fails to deliver such Common Stock. Such cash amount shall be paid to Holder by the fifth day of
the month following the month in which it has accrued or, at the option of the Holder, shall be added to the principal amount of
this Note, in which event interest shall accrue thereon in accordance with the terms of this Note and such additional principal
amount shall be convertible into Common Stock in accordance with the terms of this Note. The Borrower agrees that the right to
convert this Note is a valuable right to the Holder. The damages resulting from a failure, attempt to frustrate, or interference
with such conversion right are difficult if not impossible to quantify. Accordingly the parties acknowledge that the liquidated
damages provision contained in this Section are justified.
1..3. Authorized Shares. The Borrower
covenants that the Borrower will at all times while this Note is outstanding reserve from its authorized and unissued Common
Stock a
3
Convertible
Note - LTNC, TI, 09-19-2014
sufficient
number of shares, free from
preemptive rights, to provide for the
issuance of Common Stock upon the full conversion
of this Note. The Borrower is required at all times to have authorized and reserved three (3) times the number of shares that is
actually issuable upon full conversion of this Note (based on the Conversion Price of the Notes in effect from time to time)(the
"Reserved Amount"). Initially, the Company will instruct the Transfer Agent to reserve three million five hundred thousand
(3,500,000) shares of common stock in the name of the Holder for issuance upon conversion hereof. The Borrower represents that
upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. In addition, if the Borrower shall issue
any securities or make any change to its capital structure which would change the number of shares of Common Stock into which this
Note shall be convertible at the then current Conversion Price, the Borrower shall at the same time make proper provision so that
thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for
conversion of this Note in full. The Borrower (I) acknowledges that it has irrevocably instructed its transfer agent to issue certificates
for the Common Stock issuable upon conversion of this Note, and (ii) agrees that its issuance of this Note shall constitute full
authority to its officers and agents who are charged with the duty of executing stock certificates to execute and issue the necessary
certificates for shares of Common Stock in accordance with the terms and conditions of this Note.
If, at
any time the Borrower does not maintain the Reserved Amount it will be considered an Event of Default under Section 3.2 of the
Note.
1.4. Method of Conversion.
a)
Mechanics of Conversion. Subject to Section 1.1, this Note may be converted
by the Holder in whole or in part at any time and from time to time after the Issue Date, by submitting to the Borrower a Notice
of Conversion (by facsimile, e-mail or other reasonable means of communication dispatched on the Conversion Date prior to 11:59
p.m., New York, New York time).
b)
Book Entry upon Conversion. Notwithstanding anything to the contrary set forth herein, upon conversion of this Note
in accordance with the terms hereof, the Holder shall not be required to physically surrender this Note to the Borrower unless
the entire unpaid principal amount of this Note is so converted. The Holder and the Borrower shall maintain records showing the
principal amount so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the
Holder and the Borrower, so as not to require physical surrender of this Note upon each such conversion. In the event of any dispute
or discrepancy, such records of the Borrower shall, prima fade, 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.
4
Convertible Note - LTNC, TI 09-19-2014
c)
Payment of Taxes. The Borrower shall not be required to pay any tax
which may be payable in respect of any transfer
involved in the issue and delivery of shares of Common Stock or other securities or property on conversion of this Note in a name
other than that of the Holder (or in street name), and the Borrower shall not be required to issue or deliver any such shares or
other securities or property unless and until the person or persons (other than the Holder or the custodian in whose street name
such shares are to be held for the Holder's account) requesting the issuance thereof shall have paid to the Borrower the amount
of any such tax or shall have established to the satisfaction of the Borrower that such tax has been paid.
d)
Delivery of Common Stock upon Conversion. Upon receipt by the Borrower from the Holder of a facsimile transmission or e-mail
(or other reasonable means of communication) of a Notice of Conversion meeting the requirements for conversion as provided in this
Section 1.4, the Borrower shall issue and deliver or cause to be issued and delivered to or upon the order of the Holder certificates
for the Common Stock issuable upon such conversion within three (3) business days after such receipt (the "Deadline")
(and, solely in the case of conversion of the entire unpaid
principal amount hereof, surrender of this Note) in accordance with the terms hereof and the Purchase Agreement.
e)
Obligation of Borrower to Deliver Common Stock. Upon receipt by the Borrower of a duly and properly executed Notice of Conversion,
the Holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, the outstanding principal
amount and the amount of accrued and unpaid interest on this Note shall be reduced to reflect such conversion, and, unless the
Borrower defaults on its obligations under this Article I, all rights with respect to the portion of this Note being so converted
shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided,
on such conversion. If the Holder shall have given a Notice of Conversion as provided herein, the Borrower's obligation to issue
and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any action by
the Holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against
any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Borrower to
the holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the
Holder of any obligation to the Borrower, and irrespective of any other circumstance which might otherwise limit such obligation
of the Borrower to the Holder in connection with such conversion. The Conversion Date specified in the Notice of Conversion shall
be the Conversion Date so long as the Notice of Conversion is received by the Borrower before 11:59
p.m., New York, New York time, on such date.
f)
Delivery of Common
Stock by Electronic Transfer. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion,
provided the Borrower is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer ("FAST")
program, upon request of the Holder and its compliance with the provisions contained in Section 1.1 and in this Section 1.4, the
Borrower shall use its best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion
to the Holder by crediting the account of Holder's Prime Broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC")
system.
g)
Failure to Deliver Common Stock Prior to Deadline.
Without in any
way limiting the Holder's right to pursue
other remedies, including actual damages and/or equitable
relief, the parties agree that if delivery
of the Common Stock issuable upon conversion of this Note is not delivered by the Deadline, the Borrower shall
pay to the Holder $1,000.00 per day in cash, for each
day beyond the Deadline that the Borrower fails to deliver such Common Stock to the Holder. Such cash amount shall be paid to Holder
by the fifth day of the month following the month in which it has accrued or, at the option of the Holder, shall be added to the
principal amount of this Note, in which event interest shall accrue thereon in accordance with the terms of this Note and such
additional principal amount shall be convertible into Common Stock in accordance with the terms of this Note. The Borrower agrees
that the right to convert is a valuable right to the Holder. The damages resulting from a failure, attempt to frustrate, or interference
with such conversion right are difficult if not impossible to qualify. Accordingly the parties acknowledge that the liquidated
damages provision contained in this Section 1.4(g) are justified.
h) The Borrower acknowledges that it will take
all reasonable steps
necessary or appropriate, including providing
an opinion of counsel confirming the rights of Holder to sell shares of Common Stock issued to Holder on conversion of the Note
pursuant to Rule 144 as promulgated by the SEC ("Rule 144"), as such Rule may be in effect from time to time. If the
Borrower does not promptly provide an opinion from Borrower counsel, and so long as the requested sale may be made pursuant to
Rule 144, the Borrower agrees to accept an opinion of counsel to the Holder which opinion will be issued at the Borrower's expense.
1.5. Restricted
Securities. The shares of Common Stock issuable upon conversion
of this Note may not be sold or transferred
unless (i) such shares are sold pursuant to an effective registration statement under the Act or (ii) the Borrower or its transfer
agent shall have been furnished with an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions
of counsel in comparable transactions) to the effect that the shares to be sold or transferred may be sold or transferred pursuant
to an exemption from such registration or (iii) such shares are sold or transferred pursuant to Rule 144 under the Act (or a successor
rule) ("Rule 144") or (iv) such shares are transferred to an "affiliate" (as defined in Rule 144) of the Borrower
who agrees to sell or otherwise transfer the shares only in accordance with this Section 1.5 and who is an Accredited Investor
(as defined in the Purchase Agreement). Any legend set forth on any stock certificate evidencing any Conversion Shares shall be
removed and the Borrower shall issue to the Holder a new certificate therefore free of any transfer legend if the Borrower or its
transfer agent shall have received an opinion of counsel form, substance and scope customary for opinions of counsel in comparable
transactions, to the effect that a public sale or transfer of such Common Stock may be made without registration under the Act,
which opinion shall be reasonably acceptable to the Company, or (ii) in the case of the Common Stock issued or issuable upon conversion
of this Note, such security is registered for sale by the Holder under an effective registration statement filed under the Act
or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that
can then be immediately sold.
1.6. Effect of Certain Events.
a) Effect of Merger, Consolidation, Etc.
At the option of the Holder, the
sale, conveyance or disposition of all or
substantially all of the assets of the Borrower, the effectuation by the Borrower of a transaction or series of related transactions
in which more than 50% of the voting power of the Borrower
is disposed of, or the consolidation, merger or other business combination of the Borrower with or into any other Person (as defined
below) or Persons
Convertible Note - LTNC, Ti3O9-19-2014
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) Adiustment Due to Merger.
Consolidation, Etc. If, at any time when
this Note is issued and
outstanding and prior to conversion of all of the Notes, there shall be any merger, consolidation, exchange of shares, recapitalization,
reorganization, or other similar event, as a result of which shares of Common Stock of the Borrower shall be changed into the same
or a different number of shares of another class or classes of stock or securities of the Borrower or another entity, or in case
of any sale or conveyance of all or substantially all of the assets of the Borrower other than in connection with a plan of complete
liquidation of the Borrower, then the Holder of this Note shall thereafter have the right to receive upon conversion of this Note,
upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore
issuable upon conversion, such stock, securities or assets which the Holder would have been entitled to receive in such transaction
had this Note been converted in full immediately prior to such transaction (without regard to any limitations on conversion set
forth herein), and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder
of this Note to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion
Price and of the number of shares issuable upon conversion of the Note) shall thereafter be applicable, as nearly as may be practicable
in relation to any securities or assets thereafter deliverable upon the conversion hereof. The Borrower shall not affect any transaction
described in this Section 1.6(b) unless (a) it first gives, to the extent practicable, thirty (30) days prior written notice (but
in any event at least fifteen (15) days prior written
notice) of the record date of the special meeting of shareholders to approve, or if there is no such record date, the consummation
of, such merger, consolidation, exchange of shares, recapitalization, reorganization or other similar event or sale of assets (during
which time, for clarification, the Holder shall be entitled to convert this Note) and (b) the resulting successor or acquiring
entity assumes by written instrument the obligations of this Section 1.6(b). The above provisions shall similarly apply to successive
consolidations, mergers, sales, transfers or share exchanges.
C) Adjustment
Due to Distribution. If the Borrower shall declare or make
any distribution of its
assets (or rights to acquire its assets) to holders of Common Stock as a dividend, stock repurchase, by way of return of capital
or otherwise (including any dividend or distribution to the Borrower's shareholders in cash or shares (or rights to acquire shares)
of capital stock of a subsidiary (i.e., a spin-off)) (a "Distribution"), then the Holder of this Note shall be entitled,
upon any conversion of this Note after the date of record for determining shareholders entitled to such Distribution, to receive
the amount of such assets which would have been payable to the Holder with respect to the shares of Common Stock issuable upon
such conversion had such Holder been the holder of such shares of Common Stock on the record date for the determination of shareholders
entitled to such Distribution. Such assets shall be held in escrow by the Company pending any such conversion
d) Purchase Rights. If, at any time when
any Notes are issued and
outstanding, the Borrower issues any
convertible securities or rights to purchase stock, warrants,
7
Convertible Note - L'FNC TI, 09-19-2014
securities
or other property (the "Purchase Rights") pro rata to the record holders of any class of Common Stock, then the Holder
of this Note will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which
such Holder could have acquired if such Holder had held the number of shares of Common Stock acquirable upon complete conversion
of this Note (without regard to any limitations on conversion contained herein) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights or, if no such record is taken, the date as of which the record holders
of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.
e)
Stock Dividends and Stock Splits. If the Company, at any time while
this Note is outstanding: (A) pays a stock dividend or otherwise makes a distribution or distributions payable in shares of Common
Stock on shares of Common Stock or any securities convertible into or exercisable for Common Stock; (B) subdivides outstanding
shares of Common Stock into a larger number of shares; (C) combines (including by way of a reverse stock split) outstanding shares
of Common Stock into a smaller number of shares; or (D) issues, in the event of a reclassification of shares of the Common Stock,
any shares of capital stock of the Company, then the Conversion Price (and each sale or bid price used in determining the Conversion
Price) shall be multiplied by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately
before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such
event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination
of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date
in the case of a subdivision, combination or re-classification.
f)
Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price as a result of the events described in this Section 1 .6, the Borrower, at its expense, shall
promptly compute such adjustment or readjustment and prepare and furnish to the Holder a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Borrower shall, upon the
written request at any time of the Holder, furnish to such Holder a like certificate setting forth (i) such adjustment or readjustment,
(ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other
securities or property which at the time would be received upon conversion of the Note.
1.7. Revocation. If any Conversion Shares
are not received by the Deadline, the
Holder may revoke the applicable
Conversion pursuant to which such Conversion Shares were issuable. This Note shall remain convertible after the Maturity Date hereof
until this Note is repaid or converted in full.
1.8. Prepayment. Notwithstanding anything to
the contrary contained in this Note,
subject
to the terms of this Section, at any time during the period beginning on the Issue Date and ending on the date which is six (6)
months following the Issue Date ("Prepayment Termination Date"), Borrower shall have the right, exercisable on not less
than five (5) Trading
Days prior written notice to the Holder of this Note, to prepay the outstanding balance on this Note (principal and accrued interest),
in full, in accordance with this Section. 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: (I) that the Borrower is exercising its right
to prepay the Note, and (2) the date of prepayment which shall be not more than ten (tO) 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 130%, 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 pj (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. After the Prepayment
Termination Date, the Borrower shall have no right to prepay this Note.
ARTICLE II. CERTAIN COVENANTS
2.1. Distributions on Capital Stock. So
long as the Borrower shall have any
obligation under this Note, the Borrower
shall not without the Holder's written consent (a) pay, declare or set apart for such payment, any dividend or other distribution
(whether in cash, property or other securities) on shares of capital stock other than dividends on shares of Common Stock solely
in the form of additional shares of Common Stock or (b) directly or indirectly or through any subsidiary make any other payment
or distribution in respect of its capital stock except for distributions pursuant to any shareholders' rights plan which is approved
by a majority of the Borrower's disinterested directors.
2.2. Restriction on Stock Repurchases. So
long as the Borrower shall have any
obligation under this Note, the Borrower
shall not without the Holder's written consent redeem, repurchase or otherwise acquire (whether for cash or in exchange for property
or other securities or otherwise) in any one transaction or series of related transactions any shares of capital stock of the Borrower
or any warrants, rights or options to purchase or acquire any such shares.
2.3. Borrowings; Liens. Notwithstanding
section 4(m) of the Purchase
Agreement, so long as the Borrower shall
have any obligation under this Note, the Borrower shall not, without promptly providing an Event Disclosure Notice to the Holder,
as set forth in section 4(m) of the Purchase Agreement, (i) create, incur, assume guarantee, endorse, contingently agree to purchase
or otherwise become liable upon the obligation of any person, firm, partnership, joint venture or corporation, except by the endorsement
of negotiable instruments for deposit or collection, or suffer to exist any liability for borrowed money, except (a) borrowings
in existence or committed on the date hereof and of which the Borrower has informed Holder in writing prior to the date hereof,
or (b) indebtedness to trade creditors or financial institutions incurred in the ordinary course of business, or (ii) enter into,
create or incur any liens, claims or encumbrances of any kind, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits therefrom. securing any indebtedness occurring after the date
hereof.
2.4. Sale of Assets. So long as the Borrower
shall have any obligation under this
Note, the Borrower shall not, without the
Holder's written consent, sell, lease or otherwise dispose
9
Convertible
Note - LTNC, Ti, 09-19-2014
of any significant portion
of its assets outside the ordinary course of business. Any consent to the disposition
of any assets may be conditioned on a specified use of the proceeds of disposition.
2.5. Advances
and Loans. So long as the Borrower shall have any obligation
under
this Note, the Borrower shall not, without the Holder's written consent, lend money, give credit or make advances to any person,
firm, joint venture or corporation, including, without limitation, officers, directors, employees, subsidiaries and affiliates
of the Borrower, except loans, credits or advances
in existence or committed on the date hereof and which the Borrower has informed Holder in writing prior to the date hereof.
2.6. Charter. So long as the Borrower
shall have any obligations under this Note,
the Borrower shall not amend its
charter documents, including without limitation its certificate of incorporation and bylaws, in any manner that materially and
adversely affects any rights of the Holder.
ARTICLE III. EVENTS OF DEFAULT
Any one or more of the following
events which shall occur and/or be continuing shall constitute an event of default (each, an "Event of Default"):
3.1. Failure to Pay Principal or
Interest. The Borrower fails to pay the principal
hereof or interest thereon when due on this Note, whether
at maturity, upon acceleration or otherwise.
3.2. Conversion and the Shares.
The Borrower fails to issue shares of Common
Stock
to the Holder (or announces or threatens in writing that it will not honor its obligation to do so at any time following the execution
hereof or) upon exercise by the Holder of the conversion rights of the Holder in accordance with the terms of this Note, fails
to transfer or cause its transfer agent to transfer (issue) (electronically or in certificated form) any certificate for shares
of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note, the
Borrower directs its transfer agent not to transfer or delays, impairs, and/or hinders its transfer agent in transferring (or issuing)
(electronically or in certificated form) any certificate for shares of Common Stock to be issued to the Holder upon conversion
of or otherwise pursuant to this Note as and when required by this Note, or fails to remove (or directs its transfer agent not
to remove or impairs, delays, and/or hinders its transfer agent from removing) any restrictive legend (or to withdraw any stop
transfer instructions in respect thereof) on any certificate for any shares of Common Stock issued to the Holder upon conversion
of or otherwise pursuant to this Note as and when required by this Note (or makes any written announcement, statement or threat
that it does not intend to honor the obligations described in this paragraph) and any such failure shall continue uncured (or any
written announcement, statement or threat not to honor its obligations shall not be rescinded in writing) for five (5)
business days after the Holder shall have delivered a Notice of Conversion. It is an
obligation of the Borrower to remain current in its obligations to its transfer agent. It shall be an event of default of this
Note, if a conversion of this Note is delayed, hindered or frustrated due to a balance owed by the Borrower to its transfer agent.
If at the option of the Holder, the Holder advances any funds to the Borrower's transfer agent in order to process a conversion,
such advanced funds shall be paid by the Borrower to the Holder within forty eight (48) hours of a demand from the Holder.
10
Convertible Note —LTNC, Ti, 09-19-2014
3.3. Breach of Covenants. The Borrower
breaches any material covenant or other
material term or condition
contained in this Note and any collateral documents including but not limited to the Purchase Agreement and such breach continues
for a period of seven (7) days after written notice thereof to the Borrower from the Holder.
3.4. Breach of Representations and Warranties.
Any representation or warranty of
the Borrower made herein
or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith (including, without limitation,
the Purchase Agreement), shall be false or misleading in any material respect when made and the breach of which has (or with the
passage of time will have) a material adverse effect on the rights of the Holder with respect
to this Note or the Purchase Agreement.
3.5. Receiver
or Trustee. The Borrower or any subsidiary of the Borrower shall
make an assignment for
the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part
of its property or business, or such a receiver or trustee shall otherwise be appointed.
3.6. Judgments. Any money judgment,
writ or similar process shall be entered or
filed against the Borrower
or any subsidiary of the Borrower or any of its property or other assets for more than $50,000.00, and shall remain unvacated,
unbonded or unstayed for a period of twenty (20) days unless otherwise consented to by the Holder, which consent will not be unreasonably
withheld.
3.7. Bankruptcy, Bankruptcy, insolvency,
reorganization or liquidation
proceedings or other proceedings,
voluntary or involuntary, for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against
the Borrower or any subsidiary of the Borrower.
3.8. Delisting of Common Stock. The
Borrower shall fail to maintain the listing of
the Common Stock on at least one of the OTCQB
or an equivalent replacement exchange, Nasdaq, the NYSE or AMEX.
3.9. Failure to Comply with the Exchange
Act, The Borrower shall fail to comply
in any material respect with the reporting
requirements of the Exchange Act; and/or the Borrower shall cease to be subject to the reporting requirements of the Exchange Act.
3.10. Liquidation. Any dissolution,
liquidation, or winding up of Borrower or any
substantial portion of its business.
3.11. Cessation of Operations. Any
cessation of operations by Borrower or
Borrower admits it is otherwise
generally unable to pay its debts as such debts become due, provided, however, that any disclosure of the Borrower's ability to
continue as a "going concern" shall not be an admission that the Borrower cannot pay its debts as they become due.
3.12.
Maintenance of Assets. The failure by Borrower, during the term of this Note, to maintain any material intellectual property rights,
personal, real property or other assets which are necessary to conduct its business (whether now or in the future).
3.13. Financial Statement Restatement.
The restatement of any financial
statements filed by the
Borrower with the SEC for any date or period from two years prior to the Issue Date of this Note and until this Note is no longer
outstanding, if the result of such restatement would, by comparison to the unrestated financial statement, have constituted a material
adverse effect on the rights of the Holder with respect to this Note or the Purchase Agreement.
11
Convertible Note - LTNC, TI, 09-19-2014
3.14. Reverse Splits. The Borrower effectuates
a reverse split of its Common Stock
without twenty (20) days prior written notice to the Holder.
3.15.
Replacement of Transfer Agent. In the event
that the Borrower proposes to
replace its transfer agent, the Borrower fails to provide,
prior to the effective date of such replacement, a fully executed Irrevocable Transfer Agent Instructions in a form as initially
delivered pursuant to the Purchase Agreement (including but not limited to the provision to irrevocably reserve shares of Common
Stock in the Reserved Amount) signed by the successor transfer agent to Borrower and the Borrower.
3.16. Cross-Default. Notwithstanding
anything to the contrary contained in this
Note or the other related or companion
documents, a breach or default by the Borrower of any covenant or other term or condition contained in any of the Other Agreements,
after the passage of all applicable notice and cure or grace periods, shall, at the option of the Holder, be considered a default
under this Note and the Other Agreements, in which event the Holder shall be entitled (but in no event required) to apply all rights
and remedies of the Holder under the terms of this Note and the Other Agreements by reason of a default under said Other Agreement
or hereunder. "Other Agreements" means, collectively, all agreements and instruments between, among or by: (1) the Borrower,
and, or for the benefit of, (2) the Holder and any affiliate of the Holder, including, without limitation, promissory notes; provided,
however, the term "Other Agreements" shall not include the related or companion documents to this Note. Each of the loan
transactions will be cross-defaulted with each other loan transaction and with all other existing and future debt of Borrower to
the Holder.
Upon the occurrence and during
the continuation of any Event of Default specified in Section 3.1 (solely with respect to failure to pay the principal hereof or
interest thereon when due at the Maturity Date), the Note shall become immediately due and payable and the Borrower shall pay to
the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Default Sum (as defined herein). UPON THE
OCCURRENCE AND DURING THE CONTINUATION OF ANY EVENT OF DEFAULT SPECIFIED IN SECTION 3.2, THE NOTE SHALL BECOME IMMEDIATELY DUE
AND PAYABLE AND THE BORROWER SHALL PAY TO THE HOLDER, IN FULL SATISFACTION OF ITS OBLIGATIONS HEREUNDER, AN AMOUNT EQUAL TO: (Y)
THE DEFAULT SUM (AS DEFINED HEREIN); MULTIPLIED BY (Z) TWO (2). Upon the occurrence and during the continuation of any Event of
Default specified in Sections 3.1 (solely with respect to failure to pay the principal hereof or interest thereon when due on this
Note upon a Trading Market Prepayment Event pursuant to Section 1.7 or upon acceleration), 3.3, 3.4, 3.6, 3.8, 3.9, 3.11, 3.12,
3.13, 3.14, and/or 3. 15 exercisable through the delivery of written notice to the Borrower by such Holders (the "Default
Notice"), and upon the occurrence of an Event of Default specified in the remaining sections of Articles 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 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 paymentjj 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
12
Convertible Note - LTNC, TI, 09-19-2014
conversion
of or otherwise pursuant to such Default Sum in accordance with Article 1, treating the Trading Day immediately preceding
the Mandatory Prepayment Date as the "Conversion Date" for purposes of determining the lowest applicable Conversion Price,
unless the Default Event arises as a result of a breach in respect of a specific Conversion Date in which case such Conversion
Date shall be the Conversion Date), multiplied by (b) the highest Closing Price for the Common Stock during the period beginning
on the date of first occurrence of the Event of Default and ending one day prior to the Mandatory Prepayment Date (the 'Default
Amount") and all other amounts payable hereunder shall immediately become due and payable. all without demand, presentment
or notice, all of which hereby are expressly waived, together with all costs, including, without limitation, legal fees and expenses,
of collection, and the Holder shall be entitled to exercise all other rights and remedies available at law or in equity.
If the Borrower fails
to pay the Default Amount within five (5) business days
of written notice that such amount is due and payable, then the Holder shall have the right at any time, so long as the Borrower
remains in default (and so long and to the extent that there are sufficient authorized shares), to require the Borrower, upon written
notice, to immediately issue, in lieu of the Default Amount, the number of shares of Common Stock of the Borrower equal to the
Default Amount divided by the Conversion Price then in effect. The Holder may still convert any amounts due hereunder, including
without limitation the Default Sum, until such time as this Note has been repaid in full.
ARTICLE IV. MISCELLANEOUS
4.1. Failure or Indulgence Not Waiver.
No failure or delay on the part of the
Holder in the exercise
of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such
power, right or privilege preclude other or further exercise thereof or of any other right, power or privileges. All rights and
remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.
4.2. Notices. All notices, demands,
requests, consents, approvals, and other
communications required
or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (I) personally served, (ii) deposited
in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service
with charges prepaid, or (iv) transmitted by hand delivery, telegram, email or facsimile, addressed as set forth below or to such
other address as such party shall have specified most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile or email, with accurate
confirmation generated by the transmitting facsimile machine or computer, at the address, email or number designated in the Purchase
Agreement (if delivered on a business day during normal business hours where such notice is to be received), or the first business
day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be
received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed
to such address, or upon actual receipt of such mailing, whichever shall first occur.
4.3. Amendments. This Note and any
provision hereof may only be amended by
an instrument in writing
signed by the Borrower and the Holder. The term "Note" and all reference thereto, as used throughout this instrument,
shall mean this instrument (and the other Notes issued pursuant to the Purchase Agreement) as originally executed, or if later
amended or supplemented, then as so amended or supplemented.
13
Convertible Note - LTNC, TI, 09-19-2014
4.4. Assignability.
This Note shall be binding upon the Borrower and its
successors and assigns, and shall inure to
be the benefit of the Holder and its successors and assigns. Each transferee of this Note must be an "accredited investor"
(as defined in Rule 501(a) of the 1933 Act). Notwithstanding anything in this Note to the contrary, this Note may be pledged
as collateral in connection with a bona fide margin account or
other lending arrangement.
4.5. Cost of Collection. If default
is made in the payment of this Note, the
Borrower shall pay the Holder hereof costs of collection, including
reasonable attorneys' fees.
4.6. Governing Law. This Note shall be governed
by and construed in accordance
with the laws of the State of New York without
regard to conflicts of laws principles that would result in the application of the substantive laws of another jurisdiction. Any
action brought by either party against the other concerning the transactions contemplated by this Agreement must be brought only
in the civil or state courts of New York or in the federal courts located in the State and county of New York. Both parties and
the individual signing this Agreement on behalf of the Borrower agree to submit to the jurisdiction of such courts. The prevailing
party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision
of this Note is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative
to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such
provision which may prove invalid or unenforceable under any law shall not affect the validity or unenforceability of any other
provision of this Note. Nothing contained herein shall be deemed or operate to preclude the Holder from bringing suit or taking
other legal action against the Borrower in any other jurisdiction to collect on the Borrower's obligations to Holder, to realize
on any collateral or any other security for such obligations, or to enforce a judgment or other decision in favor of the Holder.
This Note shall be deemed an unconditional obligation of Borrower for the payment of money and,
without limitation to any other remedies of Holder, may be enforced against Borrower by summary proceeding pursuant to New York
Civil Procedure Law and Rules Section 3213 or any similar rule or statute in the jurisdiction
where enforcement is sought. For purposes of such rule or statute, any other document or agreement to which Holder and Borrower
are parties or which Borrower delivered to Holder, which may be convenient or necessary to determine Holder's rights hereunder
or Borrower's obligations to Holder are deemed a part of this Note, whether or not such other document or agreement was delivered
together herewith or was executed apart from this Note.
4.7. Certain Amounts. Whenever pursuant
to this Note the Borrower is required to
pay an amount in excess of the outstanding
principal amount (or the portion thereof required to be paid at that time) plus accrued and unpaid interest plus Default Interest
on such interest, the Borrower and the Holder agree that the actual damages to the Holder from the receipt of cash payment on this
Note may be difficult to determine and the amount to be so paid by the Borrower represents stipulated damages and not a penalty
and is intended to compensate the Holder in part for loss of the opportunity to convert this Note and to earn a return from the
sale of shares of Common Stock acquired upon conversion of this Note at a price in excess of the price paid for such shares pursuant
to this Note. The Borrower and the Holder hereby agree that such amount of stipulated damages is not plainly disproportionate to
the possible loss to the Holder from the receipt of a cash payment without the opportunity to convert this Note into shares of
Common Stock.
'4
Convertible
Note— LTNC, TI, 09.19-2014
4.8. Disclosure. Upon receipt or delivery
by the Company of any notice in
accordance
with the terms of this Note, unless the Company has in good faith determined that the matters relating to such notice do not constitute
material, non-public information relating to the Company or any of its Subsidiaries, the Company shall within one (1) Trading Day
after any such receipt or delivery, publicly disclose such material,
non-public information on a Current Report on Form 8-K or otherwise. In the event that the Company believes that a notice contains
material, nonpublic information relating to the Company or any of its Subsidiaries, the Company so shall indicate to such Holder
contemporaneously with delivery of such notice, and in the absence of any such indication, the Holder shall be allowed to presume
that all matters relating to such notice do not constitute material, non-public information relating to the Company or its Subsidiaries.
4.9. Notice of Corporate Events. Except
as otherwise provided below, the Holder
of this Note shall have no rights
as a Holder of Common Stock unless and only to the extent that it converts this Note into Common Stock. The Borrower shall provide
the Holder with prior notification of any meeting of the Borrower's shareholders (and copies of proxy materials and other information
sent to shareholders). In the event of any taking by the Borrower of a record of its shareholders for the purpose of determining
shareholders who are entitled to receive payment of any dividend or other distribution, any right to subscribe for, purchase or
otherwise acquire (including by way of merger, consolidation, reclassification or recapitalization) any share of any class or any
other securities or property, or to receive any other right, or for the purpose of determining shareholders who are entitled to
vote in connection with any proposed sale, lease or conveyance of all or substantially all of the assets of the Borrower or any
proposed liquidation, dissolution or winding up of the Borrower, the Borrower shall mail a notice to the Holder, at least twenty
(20) days prior to the record date specified therein (or thirty (30) days prior to the consummation of the transaction or event,
whichever is earlier), of the date on which any such record is to be taken for the purpose of such dividend, distribution, right
or other event, and a brief statement regarding the amount and character of such dividend, distribution, right or other event to
the extent known at such time. The Borrower shall make a public announcement of any event requiring notification to the Holder
hereunder substantially simultaneously with the notification to the Holder in accordance with the terms of this Section 4.9.
4.10; Remedies.
The Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating
the intent and purpose of the transaction contemplated hereby. Accordingly, the Borrower acknowledges that the remedy at law for
a breach of its obligations under this Note will he inadequate and agrees, in the event of a breach or threatened breach by the
Borrower of the provisions of this Note, that the Holder shall be entitled, in addition to all other available remedies at law
or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing
any breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity of showing economic
loss and without any bond or other security being required.
4.11. Usury. This Note shall be subject
to the anti-usury limitations contained in
the Purchase Agreement.
(Remainder of Page intentionally
left blank)
15
Convertible Note - LTNC, TI, 09-19-2014
IN WITNESS WHEREOF,
Borrower has caused this Note to be signed in its name by its duly authorized officer as of the Issue Date first
set forth above.
LABOR SMART, INC.
By: /s/ Ryan Schadel,
CEO
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 UNDER THE SECURITIES ACT OF 19339
AS AMENDED, AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER (THE 11933
ACT")
US $106,000.00
LABOR SMART, INC.
10% CONVERTIBLE REDEEMABLE NOTE
DUE NOVEMBER 12, 2015
BACK END NOTE
FOR VALUE RECEIVED,
Labor Smart, Inc. (the "Company") promises to pay to the order of LG CAPITAL FUNDING, LLC and its authorized successors
and permitted assigns ("Holder), the aggregate principal face amount of One Hundred Six Thousand Dollars exactly (U.S. $106,000.00)
on November 12, 2015 ("Maturity Date") and to pay interest on the principal amount outstanding hereunder at the rate
of 10% per annum commencing on November 12, 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 cheek or wire transfer shall constitute a payment of outstanding principal hereunder and shall satisfy and
discharge the liability for principal on this Note to the extent of the sum represented by such check 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
of different authorized denominations,
as requested by the Holder surrendering the same.
Initials
No service charge will be made for such registration or transfer
or exchange, except that Holder 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 for all other purposes, whether
or not this Note be overdue, and neither the Company nor any such agent shall be
affected or bound by notice to the contrary. Any Holder
of this Note electing 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) of 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, and after full cash payment for the shares convertible hereunder, 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 60% of the lowest
closing bid 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 twelve
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 50% instead of 60% while that "Chill" is in effect. In the event
the Company is not "Current" in its SEC filings at the time this note is cash funded, the discount shall be decreased
to 40%. In no event shall the Holder be allowed to effect a conversion if such conversion, along with all other shares of Company
Common Stock beneficially owned by the Holder and its affiliates would exceed 9.9% of the outstanding shares of the Common Stock
of the Company.
2
initials
(b)
Interest on any unpaid principal balance of this Note shall be paid at the
rate of 10% per annum. Interest shall be paid by the Company in Common Stock ("Interest Shares"). The Holder may, at
any time, send in a Notice of Conversion to the Company for Interest Shares based on the formula
provided in Section 4(a) above. The dollar amount converted into Interest Shares shall be all or a portion of the accrued interest
calculated on the unpaid principal balance of this Note to the date of such notice.
(c)
This Note may not be prepaid, except that if the $106,000 Rule 144 con-
vertible redeemable note issued by the Company of even date herewith is redeemed by the Company within 6 months of the issuance
date of such Note, all obligations of the Company under this Note and all obligations of the Holder under the Holder issued Back
End Note will be automatically be deemed satisfied and this Note and the Holder issued Back End Note will be automatically be deemed
cancelled and of no further force or effect.
(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
Holder, redeem this Note in cash for 150% 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 of
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 have the right thereafter, by converting this Note, to purchase or convert this
Note into the kind and number of shares of stock or other securities or property (including cash) receivable upon such reclassification,
capital reorganization or other change, consolidation or merger by a holder of the number of shares of Common Stock that could
have been purchased upon exercise of the Note and at the same Conversion Price, as defined in this Note, immediately prior to such
Sale 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 determined 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 pay-
Initials
ment, 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 shall be false or misleading in 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 and not cure such breach within 10 days; 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
(0 Any
governmental agency or any court of competent jurisdiction at the in-
stance 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)
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 five (5) days
prior to the date of any proposed sale thereunder; or
| (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 such de-4 |
Initials
fault
within the appropriate grace period; or
(i)
The Company shall have its Common Stock delisted from
a market (including the OTCQB marketplace) 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)
Intentionally Deleted;
(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
(1) The Company shall not replenish the reserve set
forth in Section 12, with-
in 5 business days of the request of the Holder ; or
(m)
The Company's Common Stock has a closing bid price of less than $0.005 per share for at least 5 consecutive trading
days; or
(n)
The aggregate dollar trading volume of the Company's Common Stock is less than fifty thousand dollars ($50,000.00)
in any 5 consecutive trading days; or
(o)
The Company shall cease to be "current" in its filings with the Securities and Exchange Commission; or.
(p)
The Company shall lose the "bid" price for its stock and a market (including the OTCBB marketplace or other
exchange)
Then, or at any time thereafter,
unless cured (except for 8(m) and 8(n) which are incurable defaults, the sole remedy of which is to allow the Holder to cancel
both this Note and the Holder Issued Note, 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 to 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 be accrue at a default interest rate of 24% per annum or,
if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law. Further, if the
Note becomes due and payable, the Holder may use the outstanding principal and interest due under the Note to offset any payment
obligations it may have to the Company. In the event of a breach of 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 the 10th day. Once cash funded,
the penalty for a breach of Section 8(p) shall be an increase of the outstanding principal amounts by 20%. Once cash funded, in
the event of a breach of Section 8(1), the outstanding
5
principal
due under this Note shall increase by 50%. If
this Note is not paid at maturity, the outstanding
principal 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.
Make-Whole for Failure to Deliver
Loss. At the Holder's election, if the Company fails for any reason to deliver to the Holder the conversion shares by the by the
3rd business day following the delivery of a Notice of Conversion to the Company and if the Holder incurs a Failure to Deliver
Loss, then at any time the Holder may provide the Company written notice indicating the amounts payable to the Holder in respect
of the Failure to Deliver Loss and the Company must make the Holder whole as follows:
Failure to Deliver Loss = [(High trade price at any
time on or after the day of exercise) x (Number of conversion shares)]
9.
In case any provision of this Note is held by a court of competent jurisdic-
tion 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.
10.
Neither this Note nor any term hereof may be amended, waived, dis-
charged 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 to allow for salability of the conversion shares or (ii) accept
such opinion from Holder's counsel.
12.
Prior to cash funding of this Note, The Company will issue irrevocable
transfer agent instructions reserving 4x the number of shares of Common Stock necessary to allow the holder to convert this note
based on the discounted conversion price set forth in Section 4(a) herewith. The reserve shall he replenished as needed to allow
for conversions of this Note. Upon full conversion of this Note, the reserve representing this Note shall be cancelled. The Company
will pay all transfer agent 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 he 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 6 |
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:
11/12/14
Labor
Smart, Inc.
By:
/s/ Ryan Schadel, CEO
THIS
NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE
AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE
STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. LENDERS SHOULD
BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT
FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
LG CAPITAL FUNDING, LLC
COLLATERALIZED SECURED PROMISSORY NOTE
BACK END NOTE
$106,000.00 |
Brooklyn,
NY |
|
August 6, 2014 |
1.
Principal and Interest
FOR
VALUE RECEIVED, LG Capital Funding, LLC, a New York Limited Liability Company
(the "Company") hereby absolutely and unconditionally promises to pay to Labor Smart, Inc.
(the "Lender"), or order, the principal amount of One Hundred Six Thousand Dollars ($106,000.00)
no later than April 6, 2015, unless
the Lender does not meet the "current information requirements"
required under Rule 144 of the Securities Act of 1933, as amended, in which case the Company
may declare the offsetting note issued by the Lender on the same date herewith to be in Default
(as defined in that note) and cross cancel its payment obligations under this Note as well as the
Lenders payment obligations under the offsetting note. This Full Recourse Note shall bear simple interest
at the rate of 10%.
2.
Repayments and Prepayments: Security.
a.
All principal under this Note shall be due and payable no later
than April 6,
2015, unless the Lender does not meet the "current information requirements"
required under Rule 144 of the Securities Act of 1933, as amended,
in which case the Company may declare the offsetting note issued
by the Lender on the same date herewith to be in Default (as defined in that note) and cross cancel
its payment obligations under this Note as well as the Lenders payment obligations under the offsetting
note.
b.
The Company may pay this Note at any time.
This note may not be assigned
by the Lender, except by operation of law.
c. This
Note shall initially be secured by the pledge of the $106,000.00 10% convertible
promissory note issued to the Company by the Lender on even date herewith (the “Lender
Note"). The Company may
exchange this collateral for other collateral with an appraised
value of at least $1 06,000.00, by providing 3 days prior written notice to the Lender. If
the Lender does not object to the substitution of collateral in that 3 day period, such substitution
of collateral shall be deemed to have been accepted by the Lender. All
collateral shall be retained by New Venture Attorneys, P.C., which
shall act as the escrow agent for the collateral for the benefit of
the Lender. The Company may not effect any conversions under the Lender Note until it has
made full cash payment for the portion of the Lender Note being converted.
Lender Initials to Acceptance of bolded section above.
3.
Events of Default Acceleration.
a.
The principal amount of this Note is subject to prepayment in whole or in part upon the
occurrence and during the continuance of any of the following events (each, an "Event of Default"):
the initiation of any bankruptcy, insolvency, moratorium, receivership or reorganization by or against the Company, or a general
assignment of assets by the Company for the benefit of creditors. Upon the occurrence
of any Event of Default, the entire unpaid principal balance of this Note and all of
the unpaid interest accrued thereon shall be immediately due and payable. The Company
may offset amounts due to the Lender under this Note by similar amounts that may be due to the Company by the Lender resulting
from breaches under the Lender Note.
b.
No remedy herein conferred upon the Lender is intended to be exclusive of
any other remedy and each and every remedy shall be cumulative and in addition to
every other remedy hereunder, now or hereafter existing at law or in equity or otherwise. The Company accepts and agrees
that this Note is a full recourse note and that the holder may exercise any and all remedies available to it under law.
4.
Notices.
a.
All notices, reports and other communications required or permitted hereunder shall be
in writing and may be delivered in person, by telecopy with written confirmation, overnight delivery
service or U.S. mail, in which event it may be mailed by first-class, certified or registered, postage
prepaid, addressed (i) if to a Lender, at such Lender's address as the Lender shall have furnished
the Company in writing and (ii) if to the Company at such address as the Company shall have furnished the Lender(s) in writing.
b.
Each such notice, report or other communication shall for all purposes under
this Note be treated as effective or having been given when delivered if delivered personally
or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle
for the deposit of the United States mail, addressed and mailed as aforesaid, or, if
sent by electronic communication with confirmation, upon the delivery of electronic communication.
5.
Miscellaneous.
a.
Neither this Note nor any provisions hereof may be changed, waived, discharged or terminated orally, but only by
a signed statement in writing.
b.
No failure or delay by the Lender to exercise any right hereunder shall operate as a waiver
thereof. nor shall any single or partial exercise of any right, power or privilege preclude any other
right, power or privilege. The provisions of this Note are severable and if any one provision hereof
shall be held invalid or unenforceable in whole or in part in any jurisdiction, such invalidity or
unenforceability shall affect only such provision in such jurisdiction. This Note expresses the entire
understanding of the parties with respect to the transactions contemplated hereby. The Company
and every endorser and guarantor of this Note regardless of the time, order or place of signing hereby waives presentment,
demand, protest and notice of every kind, and assents to any extension or postponement of
the time for payment or any other indulgence, to any substitution, exchange or release of collateral, and to the addition or release
of any other party or person primarily or secondarily liable.
c.
If
Lender retains an attorney for collection of this Note, or if any suit or proceeding is
brought for the recovery of all, or any part
of, or for protection of the indebtedness respected by this Note, then the Company agrees
to pay all costs and expenses of the suit or proceeding, or any appeal thereof, incurred by the Lender, including without
limitation, reasonable attorneys' fees.
d.
This Note shall for all purposes be governed by, and construed in accordance with the laws of the State of New York
(without reference to conflict of laws).
e.
This Note shall be binding upon the Company's successors and assigns,
and shall inure to the benefit of the Lender's successors and assigns.
IN
WITNESS WHEREOF, the Company has caused this Note to be executed by its duly authorized
officer to take effect as of the date first hereinabove written.
LG CAPITAL
FUNDING, LLC
By:
Title:
APPROVED:
LABOR SMART, INC.
By: /s/ Ryan Schadel
Title: CEO
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 $106,000.00
LABOR SMART, INC.
10% CONVERTIBLE REDEEMABLE NOTE
DUE AUGUST 6, 2015
FOR VALUE RECEIVED,
Labor Smart, Inc. (the "Company") promises to pay to the order of LG CAPITAL FUNDING, LLC and its authorized successors
and permitted assigns ("Holder"), the aggregate principal face amount of One Hundred Six Thousand Dollars exactly
(U.S. $106,000.00) on August 6, 2015 ("Maturity Date") and to pay interest on the principal amount outstanding
hereunder at the rate of 10% per annum commencing on August 6, 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 or wire transfer shall constitute a payment of outstanding principal hereunder and
shall satisfy and discharge the liability for principal on this Note to the extent of the sum represented by such check 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 Notes
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 Holder shall pay any or other governmental charges payable in connection therewith.
Initials
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 for all other purposes,
whether or not this Note be overdue, and neither the Company nor any such agent shall be affected or bound by notice to the contrary.
Any Holder of this Note electing 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) of 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 58% of the lowest daily
closing bid 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
twelve 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 48% instead of 58 % while that "Chill"
is in effect.
(b) Interest on any unpaid principal balance of this
Note shall be paid at the rate
of 10% per annum. Interest shall be
paid by the Company in Common Stock ("Interest Shares"). The Holder may, at any time, send in a Notice of Conversion
to the Company for Interest Shares based on the formula provided in Section 4(a) above. The dollar amount converted into Interest
Shares shall be all or a portion of the accrued interest calculated on the unpaid principal balance of this Note to the date of
such notice.
(c)
During the first six months
this Note is in effect, the Company may redeem this Note by paying to the Holder an amount as follows: (i) if the redemption is
within the first 90 days this Note is in effect, then for an amount equal to 125%
of the unpaid principal amount of this Note along with any interest that has accrued during that period, (ii) if the
redemption is after the 91st day this Note is in effect, but less than the 151"
day this Note is in effect, then for an amount equal to 130% of the unpaid principal amount of this Note along with any accrued
interest and (iv) if the redemption is after the 151st day this Note is in effect, but less than the 181St day this Note is in
effect, then for an amount equal to 135% of the unpaid
principal amount of this Note along with any accrued interest This Note may not be redeemed after 180 days. 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 Holder, 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 of 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 have the right thereafter, by converting this Note, to purchase or convert this Note into the kind and number of
shares of stock or other securities or property (including cash) receivable upon such reclassification, capital reorganization
or other change, consolidation or merger by a holder of the number of shares of Common Stock that could have been purchased upon
exercise of the Note and at the same Conversion Price, as defined in this Note, immediately prior to such Sale 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 determined 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 in 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 five (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 such default 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
(1) 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 to 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 default 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 the 10th
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 under this Note shall increase by 50%. If this Note is not paid at maturity,
the outstanding principal 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 jurisdic-
tion to be excessive
in scope or otherwise invalid or unenforceable, such provision shall be ad-
justed 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.
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.
II. 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 to 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
3,482,000 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. Upon full 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: 8/6/14
LABOR SMART, IN By: /s Ryan Schadel, CEO
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 UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER (THE "1933 ACT”)
US $106,000.00
LABOR SMART, INC.
10% CONVERTIBLE REDEEMABLE NOTE
DUE AUGUST 6, 2015
BACK END NOTE
FOR
VALUE RECEIVED, Labor Smart, Inc. (the “Company”) promises to pay to the order of LG CAPITAL FUNDING, LLC and its authorized
successors and permitted assigns ("Holder"), the aggregate principal face amount of One Hundred Six Thousand Dollars
exactly (U.S. $106,000.00) on August 6, 2015 ("Maturity Date") and to pay interest on the principal amount outstanding
hereunder at the rate of 10% per annum commencing on August 6, 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 or wire transfer shall constitute a payment
of outstanding principal hereunder and shall satisfy and discharge the liability for principal on this Note to the extent of the
sum represented by such check 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 Notes 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 Holder 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 for all other purposes, whether or not this Note be overdue, and neither the Company nor any such agent
shall be affected or bound by notice to the contrary. Any Holder of this Note electing 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) of such Notice of Conversion
shall be the Conversion Date.
4. (a) The Holder of this Note is entitled, at its
option, after the expiration of the requisite Rule 144 holding period and after full cash payment for the promissory note issued
by the Holder to the Company simultaneously with the issuance by the Company of this Note (the “Holder Issued Note”)),
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 58% of the lowest daily closing bid 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 twelve 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 48% instead of 58% while that “Chill” is in effect.
(b) Interest on any unpaid principal
balance of this Note shall be paid at the rate of 10% per annum. Interest shall be paid by the Company in Common Stock ("Interest
Shares"). The Holder may, at any time, send in a Notice of Conversion to the Company for Interest Shares based on the formula
provided in Section 4(a) above. The dollar amount converted into Interest
Shares shall be all or a portion of the
accrued interest calculated on the unpaid principal balance of this Note to the date of such notice.
(c) This
Note may not be prepaid, except that if the $106,000 Rule 144 convertible redeemable note issued by the Company of even date herewith
is redeemed by the Company within 6 months of the issuance date of such Note, all obligations of the Company under this Note and
all obligations of the Holder under the Holder Issued Note will each be automatically be deemed satisfied and this Note and the
Holder Issued Note will be automatically be deemed cancelled and of no further force or effect.
(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 Holder, redeem this Note in cash for 150%
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 of 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 have the right thereafter, by converting this Note, to purchase or convert this Note into the kind and number
of shares of stock or other securities or property (including cash) receivable upon such reclassification, capital reorganization
or other change, consolidation or merger by a holder of the number of shares of Common Stock that could have been purchased upon
exercise of the Note and at the same Conversion Price, as defined in this Note, immediately prior to such Sale 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 determined 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 shall
be false or misleading in 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 and not cure such breach within 10 days; 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 five (5) days prior to the date of any proposed sale thereunder;
or
(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 such default 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) Intentionally
Deleted;
(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 5 business days of the request of the Holder ;
or
(m)
The Company’s Common Stock has a closing bid price of less than $0.10 per share for at least 5 consecutive trading days;
or
(n)
The aggregate dollar trading volume of the Company’s Common Stock is less than Fifty thousand dollars ($50,000.00) in
any 5 consecutive trading days; or
(o)
The Company shall cease to be “current” in its filings with the Securities and Exchange Commission; or
(p)
The Company shall lose the “bid” price for its stock in a market (including the OTCBB marketplace or other exchange)
Then, or at any time thereafter, unless
cured (except for 8(m) and 8(n) which are incurable defaults, the sole remedy of which is to allow the Holder to cancel
both this Note and the Holder Issued Note, 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 to 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 be accrue at a default 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. Further, if the
Note becomes due and payable, the Holder may use the outstanding principal and interest due under the Note to offset any payment
obligations it may have to the Company. In the event of a breach of 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 the 10th day. Once cash funded, the penalty for a breach of Section 8(p) shall be an increase of
the outstanding principal amounts by 20%. Once cash funded, in the event of a breach of Section 8(i), the outstanding principal
due under this Note shall increase by 50%. If this Note is not paid at maturity, the outstanding principal 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 any 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 to allow for salability
of the conversion shares or (ii) accept such opinion from Holder’s counsel.
12. Prior to cash funding of this
Note, The Company will issue irrevocable transfer agent instructions reserving 4x the number of shares of Common Stock necessary
to allow the holder to convert this note based on the discounted conversion price set forth in Section 4(a) herewith. The reserve
shall be replenished as needed to allow for conversions of this Note. Upon full conversion of this Note, the reserve representing
this Note shall be cancelled. The Company will pay all transfer agent 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:
LABOR SMART, INC.
By: __________________________________
Title: _________________________________
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 Labor Smart, 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.
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Shares are to be sent or delivered to the following account: |
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NEITHER THE ISSUANCE AND SALE OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION
IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING,
THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.
Principal Amount: $125,288.69 |
Issue Date: September 24, 2014 |
Purchase Price: $125,288.69 |
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CONVERTIBLE PROMISSORY NOTE
FOR
VALUE RECEIVED, LABOR SMART, INC., a Nevada corporation (hereinafter called the "Borrower"),
hereby promises to pay to the order of CAREBOURN CAPITAL, L.P., a
Delaware limited partnership, or registered assigns (the "Holder") the sum of $125,288.69 together with any interest
as set forth herein, on June 24, 2014 (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 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 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 1 3D-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.
1.2 Conversion
Price.
(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 60% multiplied by the Market Price (as defined herein) (representing a discount rate of 40%). "Market
Price" means the average of the lowest three (3) Trading Prices (as defined below) for the Common Stock during the ten (10)
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 OTC Markets OTCQB Marketplace, or applicable trading market (the "OTCQB")
as reported by a reliable reporting service ("Reporting Service") designated by the Holder (i.e. Bloomberg) or, if the
OTCQB 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 OTCQB, 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.
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 three times the number of shares that is actually
issuable upon full conversion of the Note (based on the Conversion Price of the Notes in effect from time to time)(the 'Reserved
Amount"). The Reserved Amount shall be increased from time to time in accordance with the Borrower's obligations pursuant
to Section 4(g) of the Purchase Agreement. The Borrower represents that upon issuance, such shares will be duly and validly issued,
fully paid and non-assessable. In addition, if the Borrower shall issue any securities or make any change to its capital structure
which would change the number of shares of Common Stock into which the Notes shall be convertible at the then current Conversion
Price, the Borrower shall at the same time make proper provision so that thereafter there shall be a sufficient number of shares
of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Notes. The Borrower (i)
acknowledges that it has irrevocably instructed its transfer agent to issue certificates for the Common Stock issuable upon conversion
of this Note, and (ii) agrees that its issuance of this Note shall constitute full authority to its officers and agents who are
charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock
in accordance with the terms and conditions of this Note.
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 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 fade,
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 $1,000 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 19339
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 19339 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 Buyer with respect to the transfer of Securities pursuant to an exemption from registration, such as Rule 144 or
Regulation S, at the Deadline, it will be considered an Event of Default pursuant to Section 3.2 of the Note.
1.6 Effect of Certain Events.
(a)
Effect of Merger, Consolidation, Etc. At the option of the Holder, the sale, conveyance
or disposition of all or substantially all of the assets of the Borrower, the effectuation by the Borrower of a transaction or
series of related transactions in which more than 50% of the voting power of
the Borrower is disposed of, or the consolidation, merger or other business combination of the Borrower with or into any other
Person (as defined below) or Persons when the Borrower is not the survivor shall either: (i) be deemed to be an Event of Default
(as defined in Article III) pursuant to which the Borrower shall be required to pay to the Holder upon the consummation of and
as a condition to such transaction an amount equal to the Default Amount (as defined in Article III) or (ii) be treated pursuant
to Section 1.6(b) hereof. "Person" shall mean any individual, corporation, limited liability company, partnership, association,
trust or other entity or organization.
(b)
Adjustment Due to Merger, Consolidation, Etc. if, at any time when this Note is issued
and outstanding and prior to conversion of all of the Notes, there shall be any merger, consolidation, exchange of shares, recapitalization,
reorganization, or other similar event, as a result of which shares of Common Stock of the Borrower shall be changed into the same
or a different number of shares of another class or classes of stock or securities of the Borrower or another entity, or in case
of any sale or conveyance of all or substantially all of the assets of the Borrower other than in connection with a plan of complete
liquidation of the Borrower, then the Holder of this Note shall thereafter have the right to receive upon conversion of this Note,
upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore
issuable upon conversion, such stock, securities or assets which the Holder would have been entitled to receive in such transaction
had this Note been converted in full immediately prior to such transaction (without regard to any limitations on conversion set
forth herein), and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder
of this Note to the end that the provisions hereof (including, without
limitation,
provisions for adjustment of the Conversion Price and of the number of shares issuable upon conversion of the Note) shall thereafter
be applicable, as nearly as may be practicable in relation
to any securities or assets thereafter deliverable upon the conversion hereof. The Borrower shall not affect any transaction described
in this Section 1.6(b) unless (a) it first gives, to the extent practicable, thirty (30)
days prior written notice (but in any event at least fifteen (15) days
prior written notice) of the record date of the special meeting of shareholders to approve,
or if there is no such record date, the consummation of, such merger, consolidation, exchange of shares, recapitalization,
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 of 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, (1) 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. Prepayment is permitted
by the Company at any time by
paying an amount equal to the
outstanding principal amount of the Note together with accrued and unpaid interest thereon (the "Outstanding
Amount") multiplied by the following percentage (the "Multiplier"), which such Multiplier shall be
determined depending on the date of such prepayment: (i) beginning on the date of the Note and ending on the date which is
thirty (30) days following the date of the Note, 110%; (ii) beginning on the date which is thirty one (3 1) days from the
date of the Note and ending on the date which is sixty (60) days following the date of the Note, 115%; (iii) beginning
on the date which is sixty one (61) days from the date of the Note and ending on the date which is ninety (90) days following
the date of this Note, 120%; (iv) beginning on the date which is ninety one (9 1) days from the date of the Note and ending
on the one hundred twenty (120) days following the date of this Note, 125%; (v) beginning on the date which is one
hundred twenty one (121) days from the date of the Note and ending on the one hundred fifty (150) days following the
date of this Note, 130%; (vi) beginning on the date which is one hundred fifty one (15 1) days from the date of the
Note and ending on the one hundred eightieth (180) days following the date of this Note, 135%. After the expiration of one
hundred eighty (180) days following the
date
of the Note, the company 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 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.
2.4 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, following a five (5) day cure period.
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 OTCQB 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:
LABOR SMART, INC.
5604
Wendy Bagwell, Suite 223
Hiram, GA 30141
Attn: Ryan Schadel, Chief
Executive Officer Facsimile: (PLEASE INSERT)
If to the Holder:
CAREBOURN CAPITAL, L.P. 8700 Black Oaks Lane
N
Maple Grove, Minnesota 55311 Attn: Chip Rice, Managing
Member facsimile: (763) 416- 1450
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.
45 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 Illinois 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 Illinois or in the federal courts located
in the state of Illinois. 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.
[SIGNATURE PAGE FOLLOWS]
IN
WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its duly authorized officer this September 24th, 2014.
Labor Smart, Inc.
By: /s/ Ryan Schadel
Title: Chief Executive Officer
CONSENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
We consent to the use in this Registration Statement on Form S-1 of Labor
Smart, Inc. of our report dated April 11, 2014, relating to our audit of the financial statements, appearing in the Prospectus,
which is part of this Registration Statement.
We
also consent to the reference to our firm under the caption "Experts" in such Prospectus.
/s/
De Joya Griffith, LLC
Henderson, NV
February 6, 2015
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