UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 8-K

 

CURRENT REPORT PURSUANT

TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Date of report (Date of earliest event reported): October 18, 2011

 

Sunvalley Solar, Inc.

(Exact name of small business issuer as specified in its charter)

 

Nevada 20-8415633
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)

 

398 Lemon Creek Dr., Suite A, Walnut, CA 91789
(Address of principal executive offices)

 

(909) 598-0618
(Issuer’s telephone number)

 

 _____________________________________________
(Former name or former address, if changed since last report)

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 
 

SECTION 1 – Registrant’s Business and Operations

 

Item 1.01 Entry into a Material Definitive Agreement.

 

On October 18, 2011, our board of directors approved our entry into a Securities Purchase Agreement (the “SPA”) with Tonaquint, Inc., a Utah corporation (“Tonaquint”), and the issuance to Tonaquint of a Convertible Promissory Note (the “Note”) under the SPA in the amount of $200,000. The SPA and the Note are effective October 18, 2011. The Note bears interest at an annual rate of 8%, with principal and interest coming due nine (9) months from the date of issuance. The Note may be converted in whole or in part, at the option of the holder, to shares of our common stock, par value $0.001, at any time following 180 days after the issuance date of the Note. The conversion price under the Note is 61% of the Market Price of our common stock on the conversion date. For purposes of the Note, “Market Price” is defined as the average of the 3 lowest closing bid prices for our common stock on the 10 trading days immediately preceding the conversion date. The number of shares issuable upon conversion is limited so that the Holder’s total beneficial ownership of our common stock may not exceed 9.99% of the total issued and outstanding shares.

 

Upon conversion of the Note in whole or in part, we will be obligated to deliver the conversion stock to the holder within 3 business days of our receipt of notice of conversion. Failure to timely deliver conversion stock will cause us to be in default under the Note. Upon any default under the Note, interest will accrue at the default rate of 22% percent per year and significant additional penalties will be imposed. The conversion price of the Note will be subject to adjustment in the event of certain dilutive issuances of securities, distributions of stock or assets to shareholders, mergers, consolidations, and certain other events. Pre-payment of the Note will result in certain penalties depending on the time of pre-payment, and will not be allowed after 180 days.

 

Additional covenants, representations, and warranties between the parties are included in the Note and the SPA. The foregoing is a brief summary of the material terms of the Note and the SPA, which should be reviewed in their entirety for additional information.

 

SECTION 2 – Financial Information

 

Item 2.03 Creation of a Direct Financial Obligation of the Registrant

 

The information set forth in Item 1.01 of this Current Report on Form 8-K that relates to the creation of a direct financial obligation is incorporated by reference into this Item 2.03.

 

SECTION 3 – Securities and Trading Markets

 

Item 3.02 Unregistered Sales of Equity Securities

 

The information set forth in Item 1.01 of this Current Report on Form 8-K that relates to the issuance of unregistered securities to Tonaquint is incorporated by reference into this Item 3.02. Tonaquint is an accredited investor as defined in Rule 501(a) of Regulation D and the offer and sale of the Note to Tonaquint was exempt from registration under Rule 506 of Regulation D.

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SECTION 9 – Financial Statements And Exhibits

 

Item 9.01. Financial Statements and Exhibits

 

The exhibits listed in the following Exhibit Index are filed as part of this Current Report on Form 8-K.

 

Exhibit No. Description
10.1 Securities Purchase Agreement
10.2 Convertible Promissory Note

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

Sunvalley Solar, Inc.

 

/s/ Zhijian (James) Zhang

Zhijian (James) Zhang

Chief Executive Officer

 

Date: October 24, 2011

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SECURITIES PURCHASE AGREEMENT

 

THIS SECURITIES PURCHASE AGREEMENT , dated as of October 18, 2011 (this “ Agreement ”), is entered into by and between SUNVALLEY SOLAR, INC. , a Nevada corporation (the “ Company ”), and Tonaquint, Inc. , a Utah corporation, its successors or assigns (the “ Buyer ”).

 

W I T N E S S E T H :

 

WHEREAS , the Company and the Buyer are executing and delivering this Agreement in reliance upon the exemption from securities registration for offers and sales to accredited investors afforded, inter alia , under Regulation D (“ Regulation D ”) as promulgated by the United States Securities and Exchange Commission (the “ SEC ”) under the Securities Act of 1933, as amended (the “ 1933 Act ”), and/or Section 4(2) of the 1933 Act; and

 

WHEREAS , the Buyer wishes to acquire from the Company, and the Company desires to issue and sell to the Buyer and the Note (as defined below), which Note will be convertible into shares of common stock of the Company, par value $0.001 per share (the “ Common Stock ”), upon the terms and subject to the conditions of the Note, this Agreement and the other Transaction Documents (as defined below).

 

NOW THEREFORE , in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

 

1. CERTAIN DEFINITIONS. As used herein, each of the following terms has the meaning set forth below, unless the context otherwise requires:

 

Affiliate ” means, with respect to a specific Person referred to in the relevant provision, another Person who or which controls or is controlled by or is under common control with such specified Person.

 

Buyer’s Counsel ” means Carman Lehnhof Israelsen LLP.

 

Buyer Control Person ” means each manager, executive officer, promoter, and such other Persons as may be deemed in control of the Buyer pursuant to Rule 405 under the 1933 Act or Section 20 of the 1934 Act (as defined below).

 

Certificate of Incorporation ” means the certificate of incorporation, articles of incorporation or other charter document (howsoever denominated) of the Company, as amended to date.

 

Closing Date ” means the date of the closing of the purchase and sale of the Securities.

 

Company Control Person ” means each director, executive officer, promoter, and such other Persons as may be deemed in control of the Company pursuant to Rule 405 under the 1933 Act or Section 20 of the 1934 Act.

 

Company Counsel ” means Cane Clark LLP.

 

Company’s SEC Documents ” means the Company’s filings on the SEC’s EDGAR system.

 

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Conversion Date ” means the date a Holder submits a Notice of Conversion, as provided in the Note.

 

Conversion Shares ” means the shares of Common Stock issuable upon conversion of the Note and/or in payment of accrued interest, as contemplated in the Note.

 

Delivery Date ” has the meaning ascribed to it in the Note (with respect to Conversion Shares).

 

Holder ” means the Person holding the relevant Securities at the relevant time.

 

Last Audited Date ” means December 31, 2010.

 

Material Adverse Effect ” means an event or combination of events, which individually or in the aggregate, would reasonably be expected to (a) adversely affect the legality, validity or enforceability of the Note, or any of the Transaction Documents, (b) have or result in a material adverse effect on the results of operations, assets, or financial condition of the Company and its subsidiaries, taken as a whole, or (c) adversely impair the Company’s ability to perform fully on a timely basis its material obligations under any of the Transaction Documents or the transactions contemplated thereby.

 

Maturity Date ” has the meaning ascribed to it in the Note.

 

Person ” means any living person or any entity, such as, but not necessarily limited to, a corporation, partnership or trust.

 

Principal Trading Market ” means (a) NYSE Amex , (b) the New York Stock Exchange, (c) the Nasdaq Global Market, (d) the Nasdaq Capital Market, (e) the OTC Bulletin Board, (f) the OTCQX or OTCQB, or (g) such other market on which the Common Stock is principally traded at the relevant time, but shall not include the “pink sheets.”

 

Rule 144 ” means (a) Rule 144 promulgated under the 1933 Act or (b) any other similar rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration under the 1933 Act.

 

Securities ” means the Note and the Shares.

 

Shares ” means the shares of Common Stock representing any or all of the Conversion Shares.

 

State of Incorporation ” means Nevada.

 

Subsidiary ” means, as of the relevant date, any subsidiary of the Company (whether or not included in the Company’s SEC Documents) whether now existing or hereafter acquired or created.

 

Trading Day ” means any day during which the Principal Trading Market shall be open for business.

 

Transaction Documents ” means this Agreement, the Note, the Transfer Agent Letter (defined below), the Confession (defined below), and all other certificates, documents, agreements, resolutions and instruments delivered to any party under or in connection with this Agreement, as the same may be amended from time to time.

 

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Transfer Agent ” means, at any time, the transfer agent for the Common Stock.

 

Wire Instructions ” means the wire instructions for the Purchase Price (as defined below), as provided by the Company, set forth on Annex I .

 

2. AGREEMENT TO PURCHASE; PURCHASE PRICE.

 

a. Purchase.

 

(i) Subject to the terms and conditions of this Agreement and the other Transaction Documents, the undersigned Buyer hereby agrees to purchase from the Company a Convertible Promissory Note in the principal amount of $200,000.00 substantially in the form attached hereto as Annex II (the “ Note ”). In consideration thereof, the Buyer shall pay the amount set forth on the Buyer’s signature page to this Agreement designated as the “ Purchase Price ”. The Purchase Price shall be paid in accordance with the Wire Instructions.

 

(ii) In consideration for the Purchase Price, the Company shall also execute and deliver to the Buyer the Consent to Judgment by Confession substantially in the form attached hereto as Annex III (the “ Confession ”).

 

(iii) The Company shall also execute and deliver to the Transfer Agent, and the Transfer Agent shall execute to indicate its acceptance thereof, the irrevocable transfer agent instruction letter substantially in the form attached hereto as Annex IV (the “ Transfer Agent Letter ”).

 

(iv) At the Closing (as defined below), the Buyer shall deliver to the Company the Purchase Price.

 

(v) The tender of the Purchase Price and the issuance and sale of the Note to the Buyer are sometimes referred to herein and in the other Transaction Documents as the purchase and sale of the Securities.

 

b. Form of Payment; Delivery of Securities. The purchase and sale of the Securities shall take place at a closing (the “ Closing ”) to be held at the offices of the Buyer on the Closing Date. At the Closing, the Company will deliver the Transaction Documents to the Buyer against delivery by the Buyer to the Company of the Purchase Price.

 

3. BUYER REPRESENTATIONS AND WARRANTIES.

 

The Buyer represents and warrants to, and covenants and agrees with, the Company, as of the date hereof and as of the Closing Date, as follows:

 

a. Binding Obligation . The Transaction Documents to which the Buyer is a party, and the transactions contemplated hereby and thereby, have been duly and validly authorized by the Buyer. This Agreement has been executed and delivered by the Buyer, and this Agreement is, and each of the other Transaction Documents to which the Buyer is a party, when executed and delivered by the Buyer (if necessary), will be valid and binding obligations of the Buyer enforceable in accordance with their respective terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium and other similar laws affecting the enforcement of creditors’ rights generally.

 

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b. Accredited Investor Status . The Buyer is an “accredited investor” as that term is defined in Regulation D.

 

4. COMPANY REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to the Buyer as of the date hereof and as of the Closing Date that:

 

a. Rights of Others Affecting the Transactions. There are no preemptive rights of any stockholder of the Company, as such, to acquire the Securities. Other than the Asher Right of First Refusal (as defined herein), no other party has a currently exercisable right of first refusal which would be applicable to any or all of the transactions contemplated by the Transaction Documents.

 

b. Status. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Incorporation and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction where the nature of the business conducted or property owned by it makes such qualification necessary, other than those jurisdictions in which the failure to so qualify would not have or result in a Material Adverse Effect. The Company is obligated to file reports pursuant to Section 15(d) of the 1934 Act. The Company has not taken any action designed to terminate, or which to its knowledge is likely to have the effect of, terminating the registration of the Common Stock under the 1934 Act, nor has the Company received any notification that the SEC is contemplating terminating such registration. The Common Stock is quoted on the Principal Trading Market. The Company has received no notice, either oral or written, with respect to the continued eligibility of the Common Stock for quotation on the Principal Trading Market, and the Company has maintained all requirements on its part for the continuation of such quotation. The Company has not, in the twelve (12) months preceding the date hereof, received notice from the Principal Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Principal Trading Market. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.

 

c. Authorized Shares.

 

(i) The authorized capital stock of the Company consists of 1,500,000,000 shares of Common Stock, of which approximately 845,053,992 are outstanding. Of the outstanding shares of Common Stock, approximately 214,124,700 shares are beneficially owned by Affiliates of the Company.

 

(ii) Other than as set forth in the Company’s SEC Documents, there are no outstanding securities which are convertible into or exchangeable for shares of Common Stock, whether such conversion is currently exercisable or exercisable only upon some future date or the occurrence of some event in the future.

 

(iii) All issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and non-assessable. After considering all other commitments that may require the issuance of Common Stock, the Company has sufficient authorized and unissued shares of Common Stock as may be necessary to effect the issuance of the Shares on the Closing Date, were the Note issued and fully converted on that date.

 

(iv) The Shares have been duly authorized by all necessary corporate action on the part of the Company, and, when issued (1) on conversion of, or in payment of interest on the Note in accordance with the terms thereof, or (2) at the Closing in accordance with the terms of this Agreement, as applicable, will have been duly and validly issued, fully paid and non-assessable, free from all taxes, liens, claims, pledges, mortgages, restrictions, obligations, security interests and encumbrances of any kind, nature and description, and will not subject the Holder thereof to personal liability by reason of being a Holder.

 

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(v) The Conversion Shares are enforceable against the Company and the Company presently has no claims or defenses of any nature whatsoever with respect to the Conversion Shares.

 

d. Transaction Documents and Stock. This Agreement and each of the other Transaction Documents, and the transactions contemplated hereby and thereby, have been duly and validly authorized by the Company. This Agreement has been duly executed and delivered by the Company and this Agreement is, and the Note, and each of the other Transaction Documents, when executed and delivered by the Company (if necessary), will be, valid and binding obligations of the Company enforceable in accordance with their respective terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium, and other similar laws affecting the enforcement of creditors’ rights generally.

 

e. Non-contravention. The execution and delivery of this Agreement and each of the other Transaction Documents by the Company, the issuance of the Securities in accordance with the terms hereof and thereof, and the consummation by the Company of the other transactions contemplated by this Agreement, the Note, and the other Transaction Documents do not and will not conflict with or result in a breach by the Company of any of the terms or provisions of, or constitute a default under (i) the Certificate of Incorporation or bylaws of the Company, each as currently in effect, (ii) any indenture, mortgage, deed of trust, or other material agreement or instrument to which the Company is a party or by which it or any of its properties or assets are bound, including any listing agreement for the Common Stock except as herein set forth, or (iii) to its knowledge, any existing applicable law, rule, or regulation or any applicable decree, judgment, or order of any court, United States federal or state regulatory body, administrative agency, or other governmental body having jurisdiction over the Company or any of its properties or assets, except such conflict, breach or default which would not have or result in a Material Adverse Effect.

 

f. Approvals. No authorization, approval or consent of any court, governmental body, regulatory agency, self-regulatory organization, or stock exchange or market or the stockholders of the Company is required to be obtained by the Company for the issuance and sale of the Securities to the Buyer as contemplated by this Agreement, except such authorizations, approvals and consents that have been obtained.

 

g. Filings; Financial Statements. None of the Company’s SEC Documents contained, at the time they were filed, any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. The Company has filed all reports, schedules, forms, statements and other documents required to be filed by the Company with the SEC under the 1934 Act on a timely basis or has received a valid extension of such time of filing and has filed any such report, schedule, form, statement or other document prior to the expiration of any such extension. As of their respective dates, the financial statements of the Company included in the Company’s SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other information provided by or on behalf of the Company to the Buyer which is not included in the Company’s SEC Documents, including, without limitation, information referred to in this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstance under which they are or were made, not misleading.

 

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h. Absence of Certain Changes. Since the Last Audited Date, there has been no Material Adverse Effect, except as disclosed in the Company’s SEC Documents. Since the Last Audited Date, except as provided in the Company’s SEC Documents, the Company has not (i) incurred or become subject to any material liabilities (absolute or contingent) except liabilities incurred in the ordinary course of business consistent with past practices; (ii) discharged or satisfied any material lien or encumbrance or paid any material obligation or liability (absolute or contingent), other than current liabilities paid in the ordinary course of business consistent with past practices; (iii) declared or made any payment or distribution of cash or other property to stockholders with respect to its capital stock, or purchased or redeemed, or made any agreements to purchase or redeem, any shares of its capital stock; (iv) sold, assigned or transferred any other material tangible assets, or canceled any material debts owed to the Company by any third party or material claims of the Company against any third party, except in the ordinary course of business consistent with past practices; (v) waived any rights of material value, whether or not in the ordinary course of business, or suffered the loss of any material amount of existing business; (vi) made any increases in employee compensation, except in the ordinary course of business consistent with past practices; or (vii) experienced any material problems with labor or management in connection with the terms and conditions of their employment.

 

i. Full Disclosure. There is no fact known to the Company or that the Company should know after having made all reasonable inquiries (other than conditions known to the public generally or as disclosed in the Company’s SEC Documents) that has not been disclosed in writing to the Buyer that would reasonably be expected to have or result in a Material Adverse Effect.

 

j. Absence of Litigation. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body pending or, to the knowledge of the Company, threatened against or affecting the Company before or by any governmental authority or non-governmental department, commission, board, bureau, agency or instrumentality or any other person, wherein an unfavorable decision, ruling or finding would have a Material Adverse Effect or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, any of the Transaction Documents. The Company is not aware of any valid basis for any such claim that (either individually or in the aggregate with all other such events and circumstances) could reasonably be expected to have a Material Adverse Effect. There are no outstanding or unsatisfied judgments, orders, decrees, writs, injunctions or stipulations to which the Company is a party or by which it or any of its properties is bound, that involve the transactions contemplated herein or that, alone or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

 

k. Absence of Events of Default. Neither the Company nor any of its Subsidiaries is in violation of or in default with respect to (i) its C ertificate of Incorporation or bylaws or other organizational documents, each as currently in effect, or any material judgment, order, writ, decree, statute, rule or regulation applicable to such entity; or (ii) any material mortgage, indenture, agreement, instrument or contract to which such entity is a party or by which it or any of its properties or assets are bound (nor is there any waiver in effect which, if not in effect, would result in such a violation or default), except such breach or default which would not have or result in a Material Adverse Effect.

 

l. Absence of Certain Company Control Person Actions or Events. Other than as set forth in the Company’s SEC Documents, none of the following has occurred during the past five (5) years with respect to a Company Control Person:

 

(i) A petition under the federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such Company Control Person, or any partnership in which he or she was a general partner at or within two (2) years before the time of such filing, or any corporation or business association of which he or she was an executive officer at or within two (2) years before the time of such filing;

 

(ii) Such Company Control Person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);

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(iii) Such Company Control Person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him or her from, or otherwise limiting, the following activities:

 

A. acting, as an investment advisor, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, any other Person regulated by the Commodity Futures Trading Commission (“ CFTC ”) or engaging in or continuing any conduct or practice in connection with such activity;

 

B. engaging in any type of business practice; or

 

C. engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws;

 

(iv) Such Company Control Person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any federal or state authority barring, suspending or otherwise limiting for more than sixty (60) days the right of such Company Control Person to engage in any activity described in subsection (iii) immediately above, or to be associated with Persons engaged in any such activity; or

 

(v) Such Company Control Person was found by a court of competent jurisdiction in a civil action or by the CFTC or SEC to have violated any federal or state securities law, and the judgment in such civil action or finding by the CFTC or SEC has not been subsequently reversed, suspended, or vacated.

 

m. No Undisclosed Liabilities or Events. The Company has no liabilities or obligations other than those disclosed in the Transaction Documents or the Company’s SEC Documents or those incurred in the ordinary course of the Company’s business since the Last Audited Date, or which individually or in the aggregate, do not or would not have a Material Adverse Effect. No event or circumstance has occurred or exists with respect to the Company or its properties, business, operations, condition (financial or otherwise), or results of operations, which, under applicable laws, rules or regulations, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. There are no proposals currently under consideration or currently anticipated to be under consideration by the Board of Directors or the executive officers of the Company which proposal would (i) change the Certificate of Incorporation or bylaws of the Company, each as currently in effect, with or without stockholder approval, which change would reduce or otherwise adversely affect the rights and powers of the stockholders of the Common Stock or (ii) materially or substantially change the business, assets or capital of the Company, including its interests in Subsidiaries.

 

n. No Integrated Offering. Neither the Company nor any of its Affiliates nor any Person acting on its or their behalf has, directly or indirectly, made any offer or sale of any security of the Company or solicited any offer to buy any such security under circumstances that would eliminate the availability of the exemption from registration under Regulation D in connection with the offer and sale of the Securities as contemplated hereby.

 

o. Dilution. Each of the Company and its executive officers and directors is aware that the number of shares of Common Stock issuable upon the execution of this Agreement, the conversion of the Note, or pursuant to the other terms of the Transaction Documents may have a dilutive effect on the ownership interests of the other stockholders (and Persons having the right to become stockholders) of the Company. The Company specifically acknowledges that its obligation to issue the Conversion Shares upon conversion of the Note is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other stockholders of the Company, and the Company will honor such obligations, including honoring every Notice of Conversion (or “ Conversion Notice ” as contemplated by the Note), unless the Company is subject to an injunction (which injunction was not sought by the Company or any of its directors or executive officers) prohibiting the Company from doing so.

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p. Fees to Brokers, Placement Agents and Others. The Company has taken no action which would give rise to any claim by any Person for a brokerage commission, placement agent or finder’s fees or similar payments by the Buyer relating to this Agreement or the transactions contemplated hereby. Except for such fees arising as a result of any agreement or arrangement entered into by the Buyer without the knowledge of the Company (a “ Buyer’s Fee ”), the Buyer shall have no obligation with respect to such fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this subsection that may be due in connection with the transactions contemplated hereby. The Company shall indemnify and hold harmless each of the Buyer, its employees, officers, directors, stockholders, managers, agents, and partners, and their respective Affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorneys’ fees) and expenses suffered in respect of any such claimed or existing fees (other than a Buyer’s Fee, if any).

 

q. Disclosure. All information relating to or concerning the Company set forth in the Transaction Documents or in the Company’s SEC Documents or other public filings provided by or on behalf of the Company to the Buyer is true and correct in all material respects and the Company has not omitted to state any material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. No event or circumstance has occurred or exists with respect to the Company or its business, properties, prospects, operations or financial conditions, which under applicable laws, rules or regulations, requires public disclosure or announcement by the Company.

 

r. Confirmation. The Company agrees that, if, to the knowledge of the Company, any events occur or circumstances exist prior to the payment of the Purchase Price by the Buyer to the Company which would make any of the Company’s representations or warranties set forth herein materially untrue or materially inaccurate as of such date, the Company shall immediately notify the Buyer in writing prior to such date of such events or circumstances, specifying which representations or warranties are affected and the reasons therefor.

 

s. Title. The Company and the Subsidiaries, if applicable, own and have good and marketable title in fee simple absolute to, or a valid leasehold interest in, all their respective real properties and good title to their other respective assets and properties, subject to no liens, claims or encumbrances except as have been disclosed to the Buyer.

 

t. Intellectual Property.

 

(i) Ownership . The Company owns or possesses or can obtain on commercially reasonable terms sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses (software or otherwise), information, know-how, inventions, discoveries, published and unpublished works of authorship, processes and any and all other proprietary rights (“ Intellectual Property ”) necessary to the business of the Company as presently conducted, the lack of which could reasonably be expected to have a Material Adverse Effect. Except for agreements with its own employees or consultants, standard end-user license agreements, support/maintenance agreements and agreements entered in the ordinary course of the Company’s business, all of which have been made available for review by the Buyer, there are no outstanding options, licenses or agreements relating to the Intellectual Property of the Company, and the Company is not bound by or a party to any options, licenses or agreements with respect to the Intellectual Property of any other person or entity. The Company has not received any written communication alleging that the Company has violated or, by conducting its business as currently conducted, would violate any of the Intellectual Property of any other person or entity, nor is the Company aware of any basis therefor. The Company is not obligated to make any payments by way of royalties, fees or otherwise to any owner or licensor of or claimant to any Intellectual Property with respect to the use thereof in connection with the present conduct of its business other than in the ordinary course of its business. There are no agreements, understandings, instruments, contracts, judgments, orders or decrees to which the Company is a party or by which it is bound which involve indemnification by the Company with respect to infringements of Intellectual Property, other than in the ordinary course of its business.

 

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(ii) No Breach by Employees . The Company is not aware that any of its employees is obligated under any contract or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would materially interfere with the use of his or her efforts to promote the interests of the Company or that would conflict with the Company’s business as presently conducted. Neither the execution nor delivery of this Agreement, nor the carrying on of the Company’s business by the employees of the Company, nor the conduct of the Company’s business as presently conducted, will, to the Company’s knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any such employee is now obligated. The Company does not believe it is or will be necessary to use any inventions of any of its employees made prior to their employment by the Company of which it is aware.

 

u. Opinion. Counsel to the Company has delivered to the Buyer an opinion letter attached hereto as Annex V (the “ Opinion Letter ”) stating that (i) the Company is not a “ Shell Company ” as such term is defined in Rule 144, (ii) the Company has not been a Shell Company for the preceding twelve (12) months, (iii) the Company is in compliance with all filing requirements under Rule 144 as of the date hereof, and (iv) the Shares may be sold by the Buyer without any restrictions pursuant to Rule 144, so long as the applicable holding period specified by Rule 144 is satisfied .

 

v. Environmental Matters .

 

(i)                    No Violation . There are, to the Company’s knowledge, with respect to the

Company or any of its Subsidiaries or any predecessor of the Company, no past or present violations of Environmental Laws (as defined below), releases of any material into the environment, actions, activities, circumstances, conditions, events, incidents, or contractual obligations which may give rise to any common law environmental liability or any liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or similar federal, state, local or foreign laws and neither the Company nor any of its Subsidiaries has received any notice with respect to any of the foregoing, nor is any action pending or, to the Company’s knowledge, threatened in connection with any of the foregoing. The term “ Environmental Laws ” means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants contaminants, or toxic or hazardous substances or wastes (collectively, “ Hazardous Materials ”) into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder.

 

(ii)                  No Hazardous Materials . Other than those that are or were stored, used or

disposed of in compliance with applicable law, no Hazardous Materials are contained on or about any real property currently owned, leased or used by the Company or any of its Subsidiaries, and no Hazardous Materials were released on or about any real property previously owned, leased or used by the Company or any of its Subsidiaries during the period the property was owned, leased or used by the Company or any of its Subsidiaries, except in the normal course of the Company’s or any of its Subsidiaries’ business.

 

(iii)                 No Storage Tanks . There are no underground storage tanks on or under any real

property owned, leased or used by the Company or any of its Subsidiaries that are not in compliance with applicable law.

 

9
 

5. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.

 

a. Covenants and Acknowledgements of the Buyer.

 

(i) Transfer Restrictions . The Buyer acknowledges that (1) the Securities have not been and are not being registered under the provisions of the 1933 Act and, except as included in an effective registration statement, the Shares have not been and are not being registered under the 1933 Act, and may not be transferred unless (A) subsequently registered thereunder, or (B) the Buyer shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration; (2) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of such Rule and further, if such Rule is not applicable, any resale of such Securities under circumstances in which the seller, or the Person through whom the sale is made, may be deemed to be an underwriter, as that term is used in the 1933 Act, may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (3) neither the Company nor any other Person is under any obligation to register the Securities under the 1933 Act or to comply with the terms and conditions of any exemption thereunder.

 

(ii) Restrictive Legend . The Buyer acknowledges and agrees that, until such time as the relevant Securities have been registered under the 1933 Act, and may be sold in accordance with an effective registration statement, or until such Securities can otherwise be sold without restriction, whichever is earlier, the certificates and other instruments representing any of the Securities shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of any such Securities):

 

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

 

(iii) Confession of Judgment . The Buyer agrees it will not file the Confession unless and until an Event of Default (as defined in the Note) under the Note has occurred; provided, however , that upon such an Event of Default, the Buyer shall be entitled to immediately file such the Confession in an ex parte fashion.

 

b. Covenants, Acknowledgements and Agreements of the Company. As a condition to the Buyer’s obligation to purchase the Securities contemplated by this Agreement, and as a material inducement for the Buyer to enter into this Agreement and the other Transaction Documents, until all of the Company’s obligations hereunder and the Note are paid and performed in full, or within the timeframes otherwise specifically set forth below, the Company shall comply with the following covenants:

 

(i) Filings . From the date hereof until the date that is six (6) months after all the Conversion Shares either have been sold by the Buyer, or may permanently be sold by the Buyer without any restrictions pursuant to Rule 144 (the “ Registration Period ”), the Company shall timely make all filings required to be made by it under the 1933 Act, the 1934 Act, Rule 144 or any United States state securities laws and regulations thereof applicable to the Company or by the rules and regulations of the Principal Trading Market, and such filings shall conform to the requirements of applicable laws, regulations and government agencies, and, unless such filings are publicly available on the SEC’s EDGAR system (via the SEC’s web site at no additional charge), the Company shall provide a copy thereof to the Buyer promptly after such filings. Without limiting the foregoing, the Company agrees to file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof to the Buyer promptly after such filing. Additionally, w ithin four (4) business days following the date of this Agreement, the Company shall file a current report on Form 8-K describing the terms of the transactions contemplated by the Transaction Documents in the form required by the 1934 Act and approved by the Buyer and attaching the material Transaction Documents as exhibits to such filing. The Company shall further redact all confidential information from such Form 8-K. Additionally, the Company shall furnish to the Buyer, so long as the Buyer owns any Securities, promptly upon request, (1) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (2) a copy of the most recent annual or quarterly report of the Company, and (3) such other information as may be reasonably requested to permit the Buyer to sell such Securities pursuant to Rule 144 without registration.

10
 

(ii) Reporting Status . So long as the Buyer beneficially owns Securities and for at least twenty (20) Trading Days thereafter, the Company shall file all reports required to be filed with the SEC pursuant to Sections 13 or 15(d) of the 1934 Act, and shall take all reasonable action under its control to ensure that adequate current public information with respect to the Company, as required in accordance with Rule 144, is publicly available, and shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would permit such termination.

 

(iii) Listing . The Common Stock shall be listed or quoted for trading on any of (1) NYSE Amex, (2) the New York Stock Exchange, (3) the Nasdaq Global Market, (4) the Nasdaq Capital Market, (5) the OTC Bulletin Board, or (6) the OTCQX or OTCQB . The Company shall promptly secure the listing of all of the Conversion Shares upon each national securities exchange and automated quotation system, if any, upon which the Common Stock is then listed (subject to official notice of issuance) and shall maintain such listing of all securities from time to time issuable under the terms of the Transaction Documents. The Company shall comply in all material respects with the Company’s reporting, filing and other obligations under the bylaws or rules of the Principal Trading Market and/or the Financial Industry Regulatory Authority, Inc. (“ FINRA ”) or any successor thereto, as the case may be, applicable to it at least through the date which is sixty (60) days after the date on which the Note has been converted or paid in full.

 

(iv) Use of Proceeds . The Company shall use the net proceeds received hereunder for working capital and general corporate purposes only; provided, however , the Company will not use such proceeds to pay fees payable (1) to any broker or finder relating to the offer and sale of the Note, or (2) to any other party relating to any financing transaction effected prior to the Closing Date.

 

(v) Publicity, Filings, Releases, Etc . Neither party shall disseminate any information relating to the Transaction Documents or the transactions contemplated thereby, including issuing any press releases, holding any press conferences or other forums, or filing any reports (collectively, “ Publicity ”), without giving the other party reasonable advance notice and an opportunity to comment on the contents thereof. Neither party will include in any such Publicity any statement or statements or other material to which the other party reasonably objects, unless in the reasonable opinion of counsel to the party proposing such statement, such statement is legally required to be included. In furtherance of the foregoing, the Company shall provide to the Buyer’s Counsel a draft of the first current report on Form 8-K or a quarterly or annual report on Form 10-Q or 10-K, as the case may be, intended to be made with the SEC which refers to the Transaction Documents or the transactions contemplated thereby as soon as practicable (but at least two (2) Trading Days before such filing will be made) and shall not include in such filing (or any other filing filed before then) any statement or statements or other material to which the other party reasonably objects, unless in the reasonable opinion of counsel to the party proposing such statement, such statement is legally required to be included. Notwithstanding the foregoing, each of the parties hereby consents to the inclusion of the text of the Transaction Documents in filings made with the SEC (but any descriptive text accompanying or part of such filing shall be subject to the other provisions of this subsection).

 

(vi) FINRA Rule 5110 . In the event that the Corporate Financing Rule 5110 of FINRA is or becomes applicable to the transactions contemplated by the Transaction Documents or to the sale by a Holder of any of the Securities, then the Company shall, to the extent required by such rule, timely make any filings and cooperate with any broker or selling stockholder in respect of any consents, authorizations or approvals that may be necessary for FINRA to timely and expeditiously permit the Holder to sell the Securities.

 

(vii) Keeping of Records and Books of Account . The Company shall keep and cause each Subsidiary to keep adequate records and books of account, in which complete entries shall be made in accordance with GAAP consistently applied, reflecting all financial transactions of the Company and such Subsidiaries, and in which, for each fiscal year, all proper reserves for depreciation, depletion, obsolescence, amortization, taxes, bad debts and other purposes in connection with its business shall be made.

 

(viii) Corporate Existence . The Company shall (1) do all things necessary to preserve and keep in full force and effect its corporate existence, including, without limitation, preserving and keeping in full force and effect all licenses or similar qualifications required by it to engage in its business in all jurisdictions in which it is at the time so engaged; (2) continue to engage in business of the same general type as conducted as of the date hereof; and (3) continue to conduct its business substantially as now conducted or as otherwise permitted hereunder.

11
 

(ix) Taxes . The Company shall pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property before the same shall become delinquent or in default, which, if unpaid, might reasonably be expected to give rise to liens or charges upon such properties or any part thereof, unless, in each case, the validity or amount thereof is being contested in good faith by appropriate proceedings and the Company has maintained adequate reserves with respect thereto in accordance with GAAP.

 

(x) Compliance . The Company shall comply in all material respects with all federal, state and local laws and regulations, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations and requirements (collectively, “ Requirements ”) of all governmental bodies, insurers, departments, commissions, boards, courts, authorities, officials or officers which are applicable to the Company, its business, operations, or any of its properties, except where the failure to so comply would not have a Material Adverse Effect on the Company or any of its properties; provided, however , that nothing provided herein shall prevent the Company from contesting in good faith the validity or the application of any Requirements.

 

(xi) 3(a)(10) Shares . In the event the Company, in violation of the covenants contained herein, ever ceases to be a reporting company for purposes of the 1934 Act for any period of time, then the Company, for so long as Rule 144 is not available to the Buyer as an exemption from registration, shall cause any of its stockholders who at such time are in possession of Common Stock tradable under Section 3(a)(10) of the Securities Act (“ 3(a)(10) Shares ”) to cease to sell such 3(a)(10) Shares.

 

(xii) Litigation . From and after the date hereof and until all of the Company’s obligations hereunder and the Note is paid and performed in full, the Company shall notify the Buyer in writing, promptly upon learning thereof, of any litigation or administrative proceeding commenced or threatened against the Company involving a claim in excess of $100,000.00.

 

(xiii) Performance of Obligations . The Company shall promptly and in a timely fashion perform and honor all demands, notices, requests and obligations that exist or may arise under the Transaction Documents.

 

(xiv) Failure to Make Timely Filings . The Company agrees that, if the Company fails to timely file on the SEC’s EDGAR system any information required to be filed by it, whether on a Form 10-K, Form 10-Q, Form 8-K, Proxy Statement or otherwise so as to be deemed a “reporting issuer” with current public information under the 1934 Act, the Company shall be liable to pay to the Holder an amount based on the following schedule (where “ No. Business Days Late ” refers to each Trading Day after the latest due date for the relevant filing):

12
 

 

No. Business Days Late

Late Filing Payment For

Each $10,000.00 of

Outstanding Principal of the Note

1 $100.00
2 $200.00
3 $300.00
4 $400.00
5 $500.00
6 $600.00
7 $700.00
8 $800.00
9 $900.00
10 $1,000.00
>10

$1,000.00 + $200.00 for each Trading

Day Late beyond 10 days

 

The Company shall pay any payments incurred under this subsection in immediately available funds upon demand by the Holder; provided, however , that the Holder making the demand may specify that the payment shall be made in shares of Common Stock at the Conversion Price (as defined in the Note) applicable to the date of such demand. If the payment is to be made in shares of Common Stock, such shares shall be considered Conversion Shares under the Note, with the “ Delivery Date ” for such shares being determined from the date of such demand. The demand for payment of such amount in shares of Common Stock shall be considered a “ Conversion Notice ” (but the delivery of such shares shall be in payment of the amount contemplated by this subsection and not in payment of any principal or interest on the Note).

(xv) Authorized Shares . The Company shall take all action necessary to at all times have authorized, and reserved for the purpose of issuance, such number of shares of Common Stock as shall be necessary to effect the full conversion of the Note multiplied by two (2) (the “ Share Reserve ”). If at any time the Share Reserve is insufficient to effect the full conversion of the Note, the Company shall immediately increase the Share Reserve accordingly. If the Company does not have sufficient authorized and unissued shares of Common Stock available to increase the Share Reserve, the Company shall call and hold a special meeting of the stockholders within thirty (30) days of such occurrence, for the sole purpose of increasing the number of authorized shares of Common Stock. The Company’s management shall recommend to the Company’s stockholders to vote in favor of increasing the number of authorized shares of Common Stock. Management shall also vote all of its shares in favor of increasing the number of authorized shares of Common Stock. The Company shall use its best efforts to cause such additional shares of Common Stock to be authorized so as to comply with the requirements of this Section.

 

(xvi) DWAC Eligibility . For so long as any portion of the Note remains outstanding, the Company shall use its best efforts to maintain DWAC eligibility. In the event the Company is not DWAC eligible or does not otherwise deliver Shares to the Buyer pursuant to a conversion of all or any portion of the Note, the outstanding principal balance of the Note shall increase by an amount equal to the decline in value of the Shares, if any, between the time the applicable Conversion Notice (a “ Notice of Exercise ”) was delivered to the Company and the time such Shares are freely tradeable in the Buyer’s brokerage account.

 

(xvii) Anti-Dilution Certification . For so long as any portion of the Note remains outstanding, the Company shall deliver to the Buyer on or before the 10 th day of each month a certification in the form attached hereto as Annex VI whereby the Company shall notify the Buyer of any events that occurred during the previous month that trigger anti-dilution protection or other adjustments to the applicable Conversion Price (as defined in the Note) (“ Adjustment Events ”) under the Note or, if no Adjustment Events occurred, certifying to the Buyer that no Adjustment Events occurred during the previous month .

13
 

 

(xviii) Future Financing Arrangement . Unless it shall have first delivered to the Buyer, at least seventy two (72) hours prior to the closing of such Future Offering (as defined herein), written notice describing the proposed Future Offering, including the terms and conditions thereof and proposed definitive documentation to be entered into in connection therewith, and providing the Buyer an option during the seventy two (72) hour period following delivery of such notice to purchase the securities being offered in the Future Offering on the same terms as contemplated by such Future Offering (the limitations referred to in this sentence and the preceding sentence are collectively referred to as the “ Right of First Refusal ”) (and subject to the exceptions described below), the Company will not conduct any equity financing (including debt with an equity component) (“ Future Offerings ”) during the period beginning on the Closing Date and ending at such time as the debt herein is fully satisfied. In the event the terms and conditions of a proposed Future Offering are amended in any respect after delivery of the notice to the Buyer concerning the proposed Future Offering, the Company shall deliver a new notice to the Buyer describing the amended terms and conditions of the proposed Future Offering and the Buyer thereafter shall have an option during the seventy two (72) hour period following delivery of such new notice to purchase the securities being offered on the same terms as contemplated by such proposed Future Offering, as amended. The foregoing sentence shall apply to successive amendments to the terms and conditions of any proposed Future Offering. The Right of First Refusal shall not apply to any transaction involving (i) issuances of securities in a firm commitment underwritten public offering (excluding a continuous offering pursuant to Rule 415 under the 1933 Act) or (ii) issuances of securities as consideration for a merger, consolidation or purchase of assets, or in connection with any strategic partnership or joint venture (the primary purpose of which is not to raise equity capital), or in connection with the disposition or acquisition of a business, product or license by the Company. The Right of First Refusal also shall not apply to the issuance of securities upon exercise or conversion of the Company’s options, warrants or other convertible securities outstanding as of the date hereof or to the grant of additional options or warrants, or the issuance of additional securities, under any Company stock option or restricted stock plan approved by the stockholders of the Company. Buyer’s right to exercise the Right of First Refusal shall be subordinate to exercise of a right of first refusal (“ Asher Right of First Refusal ”) by Asher Enterprises, Inc., a Delaware corporation (“ Asher ”) set forth in that certain Securities Purchase Agreement dated July 12, 2011, by and between the Company and Asher; provided , however , that such subordination shall only be effective for so long as the Asher Right of First Refusal is effective and valid. Consequently, the Right of First Refusal granted to the Buyer under this section only applies to those Future Offerings that are declined by Asher while the Asher Right of First Refusal is effective and valid.

(xix) Certain Negative Covenants of the Company . From and after the date hereof and until all of the Company’s obligations hereunder and the Note are paid and performed in full , the Company shall not:

A. Incur any new indebtedness for borrowed money that includes an equity conversion component without complying with the Right of First Refusal set forth in Section 5(b)(xvii) hereof; provided, however , that if the Company is in breach of any of its obligations under this Agreement, then Buyer shall also have the right, in its sole and absolute discretion, to disallow any new indebtedness for borrowed money without the prior written consent of Buyer, notwithstanding the Right of First Refusal.

 

B. Grant or permit any security interest (or other lien or other encumbrance) in or on any of its assets; provided, however , that such restriction shall not restrict the Company’s right to factor receivables or engage in similar types of limited secured financing arrangements;

 

14
 

C. Enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate of the Company, or amend or modify any agreement related to any of the foregoing, except on terms that are no less favorable, in any material respect, than those obtainable from any person or entity who is not an Affiliate of the Company; or

 

D. Enter into any debt or equity financing transaction without giving the Buyer at least ten (10) Trading Days notice of such prospective financing transaction (the “ Transaction Notice ”) and the pre-emptive right to provide such financing on substantially similar terms within five (5) Trading Days of receiving the Transaction Notice. The Buyer may also elect, in its sole discretion, to convert then then-outstanding balance of the Note (including all default interest, penalties and fee) into securities issued in any such subsequent financing transactions on the same terms and conditions as the other investors in such financing transaction. The Buyer shall make such election by giving the Company written notice of its election within five (5) Trading Days of receiving the Transaction Notice.

 

6. TRANSFER AGENT INSTRUCTIONS.

 

a. The Company warrants that, with respect to the Securities, other than the stop transfer instructions to give effect to Section 5(a)(i) hereof, it will give the Transfer Agent no instructions inconsistent with instructions to issue Common Stock upon conversion of the Note, as may be applicable from time to time, in such amounts as specified from time to time by the Company to the Transfer Agent, bearing the restrictive legend specified in Section 5(a)(ii) of this Agreement prior to registration of the Shares under the 1933 Act, registered in the name of the Holder or its designee and in such denominations to be specified by the Holder in connection therewith. Except as so provided, the Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement and the other Transaction Documents. Nothing in this Section shall affect in any way the Buyer’s obligations and agreement to comply with all applicable securities laws upon resale of the Securities. If the Buyer provides the Company with an opinion of counsel reasonably satisfactory to the Company that registration of a resale by the Buyer of any of the Securities in accordance with clause (1)(B) of Section 5(a)(i) of this Agreement is not required under the 1933 Act or upon request from a Holder while an applicable registration statement is effective, the Company shall (except as provided in clause (2) of Section 5(a)(i) of this Agreement) permit the transfer of the Securities and, in the case of the Conversion Shares, use its best efforts to cause the Transfer Agent to promptly electronically transmit to the Holder via DWAC such Conversion Shares. The Company specifically covenants that, as of the Closing Date, the Transfer Agent shall be (a) participating in the DWAC program, and (b) DWAC eligible. Moreover, the Company shall notify the Buyer in writing if the Company at any time while the Holder holds Securities becomes aware of any plans of the Transfer Agent to terminate such DWAC participation or eligibility. While any Holder holds Securities, the Company shall at all times after the Closing Date maintain a transfer agent which participates in the DWAC program and is DWAC eligible, and the Company shall not appoint any transfer agent which does not both participate in the DWAC program and maintain DWAC eligibility. Nevertheless, if at any time that the Company receives a Conversion Notice the Transfer Agent is not participating in the DWAC program or the Conversion Shares are not otherwise transferable via the DWAC program, then the Company shall instruct the Transfer Agent to issue one or more certificates for Common Stock without legend in such name and in such denominations as specified by the Holder. In the event the Transfer Agent is not DWAC eligible on any Conversion Date, and consequently the Company issues Conversion Shares pursuant to a Notice of Conversion or Notice of Exercise in certificated rather than electronic form, then in such event the amount set forth in Section 5(b)(xvi) shall be added to the principal balance of the Note.

 

b. (i) The Company understands that a delay in the delivery of Conversion Shares, whether on conversion of all or any portion of the Note and/or in payment of accrued interest, beyond the relevant Delivery Date (as defined in the Note) could result in economic loss to the Holder. As compensation to the Holder for such loss, in addition to any other available remedies in the Transactions Documents or at law or equity, the Company shall pay late payments to the Holder for late delivery of the Shares in accordance with the following schedule (where “ No. Business Days Late ” is defined as the number of Trading Days beyond three (3) Trading Days after the Delivery Date):

15
 

 

No. Business Days Late

Late Payment For Each $10,000.00

of Principal or Interest Being Converted

1 $100.00
2 $200.00
3 $300.00
4 $400.00
5 $500.00
6 $600.00
7 $700.00
8 $800.00
9 $900.00
10 $1,000.00
>10

$1,000.00 + $200.00 for each

Business Day Late beyond 10 days

 

As elected by the Holder, the amount of any payments incurred under this Section 6(b)(i) shall either be automatically added to the principal balance of the Note or otherwise paid by the Company in immediately available funds upon demand. Nothing herein shall limit the Holder’s right to pursue additional damages for the Company’s failure to issue and deliver the Shares to the Holder within a reasonable time. Furthermore, in addition to any other remedies which may be available to a Holder, in the event that the Company fails for any reason to effect delivery of such Shares within three (3) Trading Days after the Delivery Date, the Holder will be entitled to revoke the relevant Notice of Conversion or Notice of Exercise by delivering a notice to such effect to the Company prior to such Holder’s receipt of the relevant Shares, whereupon the Company and the Holder shall each be restored to their respective positions immediately prior to delivery of such Notice of Conversion or Notice of Exercise, as the case may be; provided, however , that any payments contemplated by this Section 6(b)(i) which have accrued through the date of such revocation notice shall remain due and owing to the Holder notwithstanding such revocation.

 

(ii) If, by the fifth Trading Day after the relevant Delivery Date, the Company fails for any reason to deliver the Shares, but at any time after the Delivery Date, the Holder purchases, in an arm’s-length open market transaction or otherwise, shares of Common Stock (the “ Covering Shares ”) in order to make delivery in satisfaction of a sale of Common Stock by the Holder (the “ Sold Shares ”), which delivery such Holder anticipated to make using the shares of Common Stock to be issued upon such conversion or exercise (a “ Buy-In ”), the Holder shall have the right to require the Company to pay to the Holder, in addition to and not in lieu of the amounts contemplated in other provisions of the Transaction Documents, including, but not limited to, the provisions of the immediately preceding Section 6(b)(i), the Buy-In Adjustment Amount (as defined below). The “ Buy-In Adjustment Amount ” is the amount equal to the number of Sold Shares multiplied by the excess, if any, of (1) the Holder’s total purchase price per share (including brokerage commissions, if any) for the Covering Shares over (2) the net proceeds per share (after brokerage commissions, if any) received by the Holder from the sale of the Sold Shares. The Company shall pay the Buy-In Adjustment Amount to the Holder in immediately available funds immediately upon demand by the Holder. By way of illustration and not in limitation of the foregoing, if the Holder purchases shares of Common Stock having a total purchase price (including brokerage commissions) of $11,000.00 to cover a Buy-In with respect to shares of Common Stock the Holder sold for net proceeds of $10,000.00, the Buy-In Adjustment Amount which Company will be required to pay to the Holder will be $1,000.00.

16
 

 

c. The Company shall assume any fees or charges of the Transfer Agent or Company Counsel regarding (i) the removal of a legend or stop transfer instructions with respect to the Securities, and (ii) the issuance of certificates or DWAC registration to or in the name of the Holder or the Holder’s designee or to a transferee as contemplated by an effective registration statement. Notwithstanding the foregoing, it shall be the Holder’s responsibility to obtain all needed formal requirements (specifically: medallion guarantee and prospectus delivery compliance) in connection with any electronic issuance of shares of Common Stock.

 

d. The Holder of the Note shall be entitled to exercise its conversion privilege with respect to such Note, notwithstanding the commencement of any case under 11 U.S.C. §101 et seq. (the “ Bankruptcy Code ”). In the event the Company is a debtor under the Bankruptcy Code, the Company hereby waives, to the fullest extent permitted, any rights to relief it may have under 11 U.S.C. §362 in respect of such Holder’s exercise privilege. The Company hereby waives, to the fullest extent permitted, any rights to relief it may have under 11 U.S.C. §362 in respect of the conversion of such Note. The Company agrees, without cost or expense to such Holder, to take or to consent to any and all action necessary to effectuate relief under 11 U.S.C. §362.

 

7. CLOSING DATE.

 

a. The Closing Date shall occur on the date which is the first Trading Day after each of the conditions contemplated by Sections 8 and 9 hereof shall have either been satisfied or been waived by the party in whose favor such conditions run.

 

b. Closing of the purchase and sale of the Securities, which the parties anticipate shall occur concurrently with the execution of this Agreement, shall occur at the offices of the Buyer and shall take place no later than 3:00 P.M., Eastern Time, or on such day or such other time as is mutually agreed upon by the Company and the Buyer.

 

8. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL. The Company’s obligation to sell the Securities to the Buyer pursuant to this Agreement on the Closing Date is conditioned upon and subject to the fulfillment, on or prior to the Closing Date, of all of the following conditions, any of which may be waived in whole or in part by the Company:

 

a. The execution and delivery of this Agreement, and, as applicable, the other Transaction Documents by the Buyer;

 

b. Delivery by the Buyer of good funds as payment in full of an amount equal to the Purchase Price in accordance with this Agreement;

 

c. The accuracy on the Closing Date of the representations and warranties of the Buyer contained in this Agreement, each as if made on such date, and the performance by the Buyer on or before such date of all covenants and agreements of the Buyer required to be performed on or before such date; and

 

d. There shall not be in effect any law, rule or regulation prohibiting or restricting the transactions contemplated hereby, or requiring any consent or approval which shall not have been obtained.

 

9. CONDITIONS TO THE BUYER’S OBLIGATION TO PURCHASE. The Buyer’s obligation to purchase the Securities from the Company pursuant to this Agreement on the Closing Date is conditioned upon and subject to the fulfillment, on or prior to the Closing Date, of all of the following conditions, any of which may be waived in whole or in part by the Buyer:

17
 

a. The execution and delivery of this Agreement, the Confession, the Transfer Agent Letter, and, as applicable, the other Transaction Documents by the Company;

 

b. The delivery by the Company to the Buyer of the Note in original form, duly executed by the Company, in accordance with this Agreement;

 

c. The delivery by the Company to the Buyer of the Opinion Letter, which Opinion Letter is in a form reasonably satisfactory to the Buyer;

 

d. On the Closing Date, each of the Transaction Documents executed by the Company on or before such date shall be in full force and effect and the Company shall not be in default thereunder;

 

e. The Share Reserve shall be sufficient to effect the full conversion of the Note as of the Closing Date;

 

f. The accuracy in all material respects on the Closing Date of the representations and warranties of the Company contained in this Agreement and the other Transaction Documents, each as if made on such date, and the performance by the Company on or before such date of all covenants and agreements of the Company required to be performed on or before such date;

 

g. There shall not be in effect any law, rule or regulation prohibiting or restricting the transactions contemplated hereby, or requiring any consent or approval which shall not have been obtained;

 

h. From and after the date hereof up to and including the Closing Date, each of the following conditions will remain in effect: (i) the trading of the Common Stock shall not have been suspended by the SEC or on the Principal Trading Market; (ii) trading in securities generally on the Principal Trading Market shall not have been suspended or limited; (iii) no minimum prices shall been established for securities traded on the Principal Trading Market; (iv) there shall not have been any material adverse change in any financial market; and (v) there shall not have occurred any Material Adverse Effect;

 

i. Except for any notices required or permitted to be filed after the Closing Date with certain federal and state securities commissions, the Company shall have obtained (i) all governmental approvals required in connection with the lawful sale and issuance of the Securities, and (ii) all third party approvals required to be obtained by the Company in connection with the execution and delivery of the Transaction Documents by the Company or the performance of the Company’s obligations thereunder;

 

j. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the Buyer;

 

k. A written consent and waiver (“ Waiver ”) executed by Asher Enterprises, Inc. (“ Asher ”) regarding the Transaction Documents, as required by Section 2.3 (borrowings) of that certain Convertible Promissory Note dated July 12, 2011, issued by the Company in favor of Asher; and as required by Section 4(d) (right of first refusal) of that certain Securities Purchase Agreement dated July 12, 2011, between the Company and Asher. The form of the Waiver must be acceptable to Buyer in Buyer’s sole discretion; and.

 

l. A fully executed written consent of directors or secretary’s certificate, in form acceptable to Buyer in its sole discretion, evidencing the Company’s approval of the Transaction Documents.

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10. INDEMNIFICATION.

 

a. The Company agrees to defend, indemnify and forever hold harmless the Buyer and its stockholders, directors, officers, managers, members, partners, Affiliates, employees, and agents, and each Buyer Control Person (collectively, the “ Buyer Parties ”) from and against any losses, claims, damages, liabilities or expenses incurred (collectively, “ Damages ”), joint or several, and any action in respect thereof to which the Buyer or any of the other Buyer Parties becomes subject, resulting from, arising out of or relating to any misrepresentation, breach of warranty or nonfulfillment of or failure to perform any covenant or agreement on the part of the Company contained in this Agreement or any of the other Transaction Documents, as such Damages are incurred. The Buyer Parties with the right to be indemnified under this Section (the “ Indemnified Parties ”) shall have the right to defend any such action or proceeding with attorneys of their own selection, and the Company shall be solely responsible for all costs and expenses related thereto. If the Indemnified Parties opt not to retain their own counsel, the Company shall defend any such action or proceeding with attorneys of its choosing at its sole cost and expense, provided that such attorneys have been pre-approved by the Indemnified Parties, which approval shall not be unreasonably withheld, and provided further that the Company may not settle any such action or proceeding without first obtaining the written consent of the Indemnified Parties.

 

b. The indemnity contained in this Agreement shall be in addition to (i) any cause of action or similar rights of the Buyer Parties against the Company or others, and (ii) any other liabilities the Company may be subject to.

 

11. SPECIFIC PERFORMANCE. The Company and the Buyer acknowledge and agree that irreparable damage would occur in the event that any provision of this Agreement or any of the other Transaction Documents were not performed in accordance with its specific terms or were otherwise breached. It is accordingly agreed that the parties (including any Holder) shall be entitled to an injunction or injunctions, without the necessity to post a bond (except as specified below), to prevent or cure breaches of the provisions of this Agreement or any of the other Transaction Documents and to enforce specifically the terms and provisions hereof or thereof, this being in addition to any other remedy to which any of them may be entitled by law or equity; provided, however , that the Company, upon receipt of a Notice of Conversion or a Notice of Exercise, may not fail or refuse to deliver certificates representing shares of Common Stock and the related legal opinions, if any, or if there is a claim for a breach by the Company of any other provision of this Agreement or any of the other Transaction Documents, the Company shall not raise as a legal defense any claim that the Holder or anyone associated or affiliated with the Holder has violated any provision hereof or any of the other Transaction Documents or has engaged in any violation of law or any other claim or defense, unless the Company has first posted a bond for one hundred fifty percent (150%) of the principal amount and, if relevant, then obtained a court order specifically directing it not to deliver such certificates to the Holder. The proceeds of such bond shall be payable to the Holder to the extent that the Holder obtains judgment or its defense is recognized. Such bond shall remain in effect until the completion of the relevant proceeding and, if the Holder appeals therefrom, until all such appeals are exhausted. This provision is deemed incorporated by reference into each of the Transaction Documents as if set forth therein in full.

 

12. OWNERSHIP LIMITATION. If at any time after the Closing, the Buyer shall or would receive shares of Common Stock in payment of interest or principal under the Note or upon conversion of the Note, so that the Buyer would, together with other shares of Common Stock held by it or its Affiliates, hold by virtue of such action or receipt of additional shares of Common Stock a number of shares exceeding 9.99% of the number of shares of Common Stock outstanding on such date (the “ 9.99% Cap ”), the Company shall not be obligated and shall not issue to the Buyer shares of Common Stock which would exceed the 9.99% Cap, but only until such time as the 9.99% Cap would no longer be exceeded by any such receipt of shares of Common Stock by the Buyer. The foregoing limitations are enforceable, unconditional and non-waivable and shall apply to all Affiliates and assigns of the Buyer.

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13. MISCELLANEOUS.

 

a. Governing Law and Venue . This Agreement shall be governed by and interpreted in accordance with the laws of the State of Utah for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the exclusive personal jurisdiction of the federal courts whose districts encompass any part of Salt Lake County or the state courts of the State of Utah sitting in Salt Lake County in connection with any dispute arising under this Agreement, and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens , to the bringing of any such proceeding in such jurisdictions or to any claim that such venue of the suit, action or proceeding is improper. Nothing in this subsection shall affect or limit any right to serve process in any other manner permitted by law.

 

b. No Waiver . Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.

 

c. Successors and Assigns . This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties hereto.

 

d. Pronouns . All pronouns and any variations thereof in this Agreement refer to the masculine, feminine or neuter, singular or plural, as the context may permit or require.

 

e. Counterparts . This Agreement may be signed in one or more counterparts, each of which shall be deemed an original, but all of which together shall be deemed to constitute one instrument. Facsimile and email copies of signed signature pages will be deemed binding originals.

 

f. Headings . The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement.

 

g. Severability . Whenever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such provision shall be modified to achieve the objective of the parties to the fullest extent permitted and such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement or the validity or enforceability of this Agreement in any other jurisdiction.

 

h. Amendment . This Agreement may be amended only by an instrument in writing signed by the Company and the Buyer.

 

i. Entire Agreement . This Agreement together with the other Transaction Documents constitutes and contains the entire agreement between the Company and the Buyer and supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof.

 

j. Currency . All dollar amounts referred to or contemplated by this Agreement or any other Transaction Documents shall be deemed to refer to US Dollars, unless otherwise explicitly stated to the contrary.

 

k. Buyer’s Expenses . In the event the Company or the Buyer elects not to effect the Closing for any reason, the Company shall pay $10,000 in cash to the Buyer for the Buyer’s legal, administrative and due diligence expenses. Except as provided in the immediately preceding sentence, and except for $5,000 which has been previously paid to the Buyer for the Buyer’s legal, administrative and due diligence expenses, the Company and the Buyer shall be responsible for paying such party’s own fees and expenses (including legal expenses) incurred in connection with the preparation and negotiation of this Agreement and the other Transaction Documents and the closing of the transactions contemplated hereby and thereby.

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l. Assignment by the Company . Notwithstanding anything to the contrary herein, the rights, interests or obligations of the Company hereunder may not be assigned, by operation of law or otherwise, in whole or in part, by the Company without the prior written consent of the Buyer, which consent may be withheld at the sole discretion of the Buyer; provided, however , that in the case of a merger, sale of substantially all of the Company’s assets or other corporate reorganization, the Buyer shall not unreasonably withhold, condition or delay such consent.

 

m. Advice of Counsel. In connection with the preparation of this Agreement and all other Transaction Documents, each of the Company, its stockholders, officers, agents, and representatives acknowledges and agrees that the attorney that prepared this Agreement and all of the other Transaction Documents acted as legal counsel to the Buyer only. Each of the Company, its stockholders, officers, agents, and representatives (i) hereby acknowledges that he/she/it has been, and hereby is, advised to seek legal counsel and to review this Agreement and all of the other Transaction Documents with legal counsel of his/her/its choice, and (ii) either has sought such legal counsel or hereby waives the right to do so.

 

n. No Strict Construction. The language used in this Agreement is the language chosen mutually by the parties hereto and no doctrine of construction shall be applied for or against any party.

 

o. Attorney’s Fees. In the event of any action at law or in equity to enforce or interpret the terms of this Agreement or any of the other Transaction Documents, the Prevailing Party (as defined hereafter) shall be entitled to reasonable attorneys’ fees, court costs and collection costs in addition to any other relief to which such party may be entitled. “ Prevailing Party ” shall mean the party in any litigation or enforcement action that prevails in the highest number of final rulings, counts or judgments adjudicated by a court of competent jurisdiction.

 

p. Replacement of the Note. Subject to any restrictions on or conditions to transfer set forth in the Note, the Holder of the Note, at its option, may in person or by duly authorized attorney surrender the same for exchange at the Company’s principal corporate office, and promptly thereafter and at the Company’s expense, except as provided below, receive in exchange therefor one or more new convertible promissory note(s), each in the principal amount requested by such Holder, dated the date to which interest shall have been paid on the Note so surrendered or, if no interest shall have yet been so paid, dated the date of the Note so surrendered and registered in the name of such person or persons as shall have been designated in writing by such Holder or its attorney for the same principal amount as the then unpaid principal amount of the Note so surrendered. As applicable, upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of the Note and (i) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it; or (ii) in the case of mutilation, upon surrender thereof, the Company, at its expense, will execute and deliver in lieu thereof a new convertible promissory note executed in the same manner as the Note being replaced, in the same principal amount as the unpaid principal amount of such Note and dated the date to which interest shall have been paid on the Note or, if no interest shall have yet been so paid, dated the date of the Note.

 

q. Notices. Any notice required or permitted hereunder shall be given in writing (unless otherwise specified herein) and shall be deemed effectively given on the earliest of

 

(i) the date delivered, if delivered by personal delivery as against written receipt therefor or by confirmed facsimile or electronic mail transmission,

 

(ii) the fifth Trading Day after deposit, postage prepaid, in the United States Postal Service by registered or certified mail, or

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(iii) the third Trading Day after mailing by domestic or international express courier, with delivery costs and fees prepaid,

 

in each case, addressed to each of the other parties thereunto entitled at the following addresses (or at such other addresses as such party may designate by ten (10) days’ advance written notice similarly given to each of the other parties hereto):

 

If to the Company:

 

Sunvalley Solar, Inc.

Attn: _________________

398 Lemon Creek Dr., Suite A

Walnut, CA 91789

 

with a copy to (which shall not constitute notice):

 

Cane Clark LLP

Attn: Joe Laxague

3273 E. Warm Springs Rd.

Las Vegas, Nevada 89120

Telephone: (702) 312-6255

 

If to the Buyer:

 

Tonaquint, Inc.

Attn: John M. Fife

303 East Wacker Drive, Suite 1200

Chicago, Illinois 60601

 

with a copy to (which shall not constitute notice):

 

Carman Lehnhof Israelsen LLP

Attn: Jonathan K. Hansen

4626 North 300 West, Suite 160

Provo, Utah 84604

Telephone: (801) 209-5558

 

r. Further Assurance. Each party to this Agreement agrees to perform any further acts and execute and deliver any documents that may be reasonably necessary to carry out the provisions of this Agreement and the other Transaction Documents.

 

14. SURVIVAL OF COVENANTS, REPRESENTATIONS AND WARRANTIES . The Company’s and the Buyer’s covenants, agreements, representations and warranties contained herein shall survive the execution and delivery of this Agreement and the other Transaction Documents and the Closing hereunder, and shall inure to the benefit of the Buyer and the Company and their respective successors and permitted assigns.

 

[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF , each of the undersigned represents that the foregoing statements made by it above are true and correct and that it has caused this Agreement to be duly executed on its behalf (if an entity, by one of its officers thereunto duly authorized) as of the date first above written.

 

PURCHASE PRICE: $200,000.00
 
THE BUYER:
 
TONAQUINT, INC.
 
By: /s/ John M. Fife
John M. Fife, President
 
THE COMPANY:
 
SUNVALLEY SOLAR, INC.
 
By: /s/ Zhijian Zhang

Name: Zhijian Zhang
Title: CEO
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ANNEX I WIRE INSTRUCTIONS
 
ANNEX II NOTE
 
ANNEX III CONSENT TO CONFESSION
 
ANNEX IV TRANSFER AGENT INSTRUCTION LETTER
 
ANNEX V OPINION LETTER
 
ANNEX VI FORM OF ANTI-DILUTION CERTIFICATE

 

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COMPANY NOTE

 

$200,000.00 October 18, 2011

 

SUNVALLEY SOLAR, INC.
Convertible Promissory Note

For value received , Sunvalley Solar, Inc., a Nevada corporation (the “ Borrower ”), hereby promises to pay to the order of Tonaquint, Inc., a Utah corporation, or its successors or assigns (the “ Lender ” or “ Holder ”, and together with the Borrower, the “ Parties ”), the principal sum of $200,000.00 together with all accrued and unpaid interest thereon, fees incurred or other amounts owing hereunder, all as set forth below in this Convertible Promissory Note (this “ Note ”). This Note is issued pursuant to that certain Securities Purchase Agreement dated October 18, 2011, entered into by and between the Borrower and the Lender, as the same may be amended from time to time, (the “ Purchase Agreement ”). Defined terms used herein but not otherwise defined shall have the meanings ascribed thereto in the Purchase Agreement.

1.                  Principal and Interest Payments . Interest on the unpaid principal balance of this Note and any unpaid fees shall accrue at the rate of 8.0% per annum, compounded daily. Notwithstanding any provision to the contrary herein, in no event shall the applicable interest rate at any time exceed the maximum interest rate allowed under applicable law, as provided in Section 17 hereof. Upon the occurrence of an Event of Default (as defined below), the Outstanding Balance (as defined below) of this Note shall accrue interest at the rate of 22.00% per annum, compounded daily, from and after the date of the occurrence of the Event of Default, whether before or after judgment. Interest shall accrue on the basis of a 360 day year for the actual number of days elapsed. The Borrower shall pay to the Lender all outstanding amounts due hereunder in a payment due on or before the date that is nine (9) months from the date hereof (the “ Maturity Date ”). All payments owing hereunder shall be in lawful money of the United States of America delivered to the Lender at the address furnished to the Borrower for that purpose. All payments shall be applied first to (a) costs of collection, if any, then to (b) fees and penalties, if any, then to (c) accrued and unpaid interest, and thereafter (d) to principal. For purposes hereof, the term “ Outstanding Balance ” means the sum of the outstanding principal balance of this Note and any accrued but unpaid interest, collection and enforcement costs, and any other fees, penalties, adjustments, including without limitation, the Default Effects, incurred under this Note, including, without limitation, any increases in connection with a prepayment of this Note as provided for in Section 3 hereof.

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2.                  Conversion .

(a)                Optional Conversion . At any time or from time to time after the date that is one hundred eighty (180) days from the date hereof and prior to payment in full of the entire Outstanding Balance, the Lender shall have the right, at the Lender’s option, to convert the Outstanding Balance, in whole or in part (the “ Conversion Amount ”), into shares of common stock, par value $0.001 per share (the “ Common Stock ”) of the Borrower. The number of shares of Common Stock to be issued upon a conversion hereunder shall be determined by dividing (1) the Conversion Amount by (2) the Conversion Price (as defined below). For purposes hereof, the “ Conversion Price ” is calculated on the applicable date as follows: (i) 61% (the “ Conversion Factor ”) multiplied by (ii) the average of the three lowest closing bid prices (the “ Trade Price ”) during the ten (10) Trading Days immediately preceding the Conversion Date (as defined below). The Trade Price will be determined above by using the closing bid price on the Over-the-Counter Bulletin Board, or applicable trading market (the “ OTCBB ”) as reported by Bloomberg, LP (“ Bloomberg ”), or if such information is not then being reported by Bloomberg, then as reported by such other data information source as may be selected by the Lender; or, if the OTCBB is not the principal trading market for such security, the closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded; or, if no closing bid price of such security is available in any of the foregoing manners, the average of the closing bid prices of any market makers for such security that are listed in the “ pink sheets ” by the National Quotation Bureau, Inc. If the Trading Price cannot be calculated for such security on each applicable date in the manner provided above, the Trade Price shall be the fair market value as mutually determined by the Borrower and the holders of a majority in interest of the Note(s) being converted for which the calculation of the Trade Price is required in order to determine the Conversion Price of such Note(s). “ Trading Day ” shall mean any day on which the Common Stock is tradable for any period on the OTCBB, or on the principal securities exchange or other securities market on which the Common Stock is then being traded.

(b)               Conversion Price During Major Announcements . Notwithstanding anything contained in Section 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 business entity (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 Section 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 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 2(b) to become operative.

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(c)                Conversion Mechanics . In order to convert this Note into Common Stock, the Lender shall give written notice to the Borrower at its principal corporate office or the notice address provided in the Purchase Agreement (which notice, notwithstanding anything herein to the contrary, may be given via facsimile, email, or other means in the discretion of the Lender) pursuant to the forms attached hereto as Exhibit A (the “ Conversion Notice ”) and Exhibit A-1 (the “ Conversion Worksheet ”) of the election to convert the same pursuant to this Section 2 (the date on which a Conversion Notice is given, a “ Conversion Date ”). Such Conversion Notice shall state the Conversion Amount, the number of shares of Common Stock to which the Lender is entitled pursuant to the Conversion Notice (the “ Conversion Shares ”), and the account into which the shares of Common Stock are to be deposited (the “ Lender Account ”). The Borrower shall immediately, but in no event later than three (3) Trading Days after receipt of a Conversion Notice (the “ Delivery Date ”), deliver the Conversion Shares to the Lender Account. Notwithstanding anything to the contrary herein, all such deliveries of Conversion Shares shall be electronic, via DWAC. In the event the Borrower fails to deliver the Conversion Shares on or before the Delivery Date, in addition to all other remedies available to the Lender hereunder or under any other Transaction Documents and at law or in equity, a penalty equal to 1.83% of the Conversion Amount shall be added to the balance of this Note per day until such Conversion Shares are delivered. The conversion shall be deemed to have been made immediately prior to the close of business on the date of the Conversion Notice, and the person or entity entitled to receive the shares of Common Stock upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date.

(d)               No Fractional Shares . Conversion calculations pursuant to this Section 2 shall be rounded up to the nearest whole share, and no fractional shares shall be issuable by the Borrower upon conversion of this Note or any portion thereof. All shares issuable upon conversion of this Note or any portion thereof shall be aggregated for purposes of determining whether such conversion would result in the issuance of a fractional share.

(e)                No Impairment . The Borrower will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Borrower, but will at all times in good faith assist in the carrying out of all the provisions of this Section 2 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the Lender against impairment.

3.                  Prepayment by the Borrower . Prior to the date that is one hundred and eighty (180) days from the date hereof, so long as no Event of Default shall have occurred and the Borrower shall have a sufficient number of shares of Common Stock authorized to accommodate conversion of the Outstanding Balance, the Borrower may, in its sole and absolute discretion and upon giving the Lender not less than five (5) Trading Days written notice (a “ Prepayment Notice ”), pay in cash all or any portion of the Outstanding Balance at any time prior to the Maturity Date, provided that in the event the Borrower elects to prepay all or any portion of the Outstanding Balance, it shall pay to the Lender (a) 130% of the portion of the Outstanding Balance the Borrower elects to prepay if the prepayment occurs prior to the date that is sixty (60) days from the date hereof, (b) 140% of the portion of the Outstanding Balance the Borrower elects to prepay if the prepayment occurs on a date that is between sixty-one (61) days and one hundred twenty (120) days from the date hereof, and (c) 150% of the portion of the Outstanding Balance the Borrower elects to prepay if the prepayment occurs on a date that is between one hundred twenty-one (121) days and one hundred eighty (180) days from the date hereof. If the Borrower delivers a Prepayment Notice and fails to pay the specified prepayment amount due to the Lender within two (2) Trading Days following the date of prepayment set forth in the Prepayment Notice, the Borrower shall forever forfeit its right to repay this Note pursuant to this Section.

3
 

4.                  Certain Adjustments . The number and class of securities into which this Note may be converted under Section 2 shall be subject to adjustment in accordance with the following provisions:

(a)                Computation of Adjusted Conversion Price . Except as hereinafter provided, in case the Borrower shall at any time after the date hereof issue or sell any (i) shares of Common Stock or preferred shares convertible into Common Stock, or (ii) debt, warrants, options or other instruments or securities convertible into or exercisable for shares of Common Stock (together herein referred to as “ Equity Securities ”), in each case for consideration (or with a conversion price or exercise price) per share of Common Stock less than the Conversion Price in effect immediately prior to the issuance or sale of such securities or instruments, or without consideration, other than for Excepted Issuances (as defined below), then forthwith upon such issuance or sale, the Conversion Price shall (until another such issuance or sale) be reduced to the price equal to the price (or conversion price or exercise price) of any such securities or instruments; provided, however , that in no event shall the Conversion Price be adjusted pursuant to this computation to an amount in excess of the Conversion Price in effect immediately prior to such computation. For the purposes of this Section 4, the term Conversion Price shall mean the Conversion Price per share set forth in Section 2(a) hereof, as adjusted from time to time pursuant to the provisions of this Section.

Excepted Issuances ” shall mean, collectively, (i) the Borrower’s issuance of securities in connection with strategic license agreements and other partnering arrangements so long as such issuances are not for the purpose of raising capital and in which holders of such securities or debt are not at any time granted registration rights, and (ii) the Borrower’s issuance of Common Stock or the issuance or grant of options to purchase Common Stock to employees, directors, and consultants, pursuant to plans or agreements which are constituted or in effect on the date of this Note.

For purposes of any computation to be made in accordance with this Section 4, the following provisions shall be applicable:

(i)                    In case of the issuance or sale of any Equity Securities for consideration part or all of which shall be cash, the amount of the cash consideration shall be deemed to be the amount of cash received by the Borrower for such Equity Securities (or, if Equity Securities are offered by the Borrower for subscription, the subscription price, or, if such securities shall be sold to underwriters or dealers for public offering without a subscription price, the public offering price, before deducting therefrom any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or other persons or entities performing similar services), or any expenses incurred in connection therewith and less any amounts payable to security holders or any affiliate thereof, including, without limitation, any employment agreement, royalty, consulting agreement, covenant not to compete, earnout or contingent payment right or similar arrangement, agreement or understanding, whether oral or written; all such amounts shall be valued at the aggregate amount payable thereunder whether such payments are absolute or contingent and irrespective of the period or uncertainty of payment, the rate of interest, if any, or the contingent nature thereof.

4
 

(ii)                  In case of the issuance or sale (otherwise than as a dividend or other distribution on any capital stock of the Borrower) of Equity Securities for consideration part or all of which shall be other than cash, the amount of the consideration other than cash shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors of the Borrower.

(iii)                 Equity Securities issuable by way of dividend or other distribution on any capital stock of the Borrower shall be deemed to have been issued immediately after the opening of business on the day following the record date for the determination of stockholders entitled to receive such dividend or other distribution and shall be deemed to have been issued without consideration.

(iv)                The reclassification of securities of the Borrower other than Equity Securities into securities including Equity Securities shall be deemed to involve the issuance of such Equity Securities for consideration other than cash immediately prior to the close of business on the date fixed for the determination of security holders entitled to receive such securities, and the value of the consideration allocable to such securities shall be determined as provided in this Section 4.

(v)                  The number of Equity Securities at any one time outstanding shall include the aggregate number of shares of Common Stock issued or issuable (subject to readjustment upon the actual issuance thereof) upon the exercise of then outstanding options, rights, warrants, and convertible and exchangeable securities.

(b)               Adjustment for Reorganization or Recapitalization . If, while this Note remains outstanding and unconverted, there shall be a reorganization or recapitalization of the Borrower (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), all necessary or appropriate lawful provisions shall be made so that the Lender shall thereafter be entitled to receive upon conversion of this Note, the greatest number of shares of stock or other securities or property that a holder of the class of securities deliverable upon conversion of this Note would have been entitled to receive in such reorganization or recapitalization if this Note had been converted immediately prior to such reorganization or recapitalization, all subject to further adjustment as provided in this Section 4. If the per share consideration payable to the Lender for such class of securities in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be determined in good faith by the Board of Directors of the Borrower. The foregoing provisions of this subsection shall similarly apply to successive reorganizations or recapitalizations and to the stock or securities of any other corporation that are at the time receivable upon the conversion of this Note. In all events, appropriate adjustment shall be made in the application of the provisions of this Note (including adjustment of the Conversion Price and number of shares of Common Stock into which this Note is then convertible pursuant to the terms and conditions of this Note) with respect to the rights and interests of the Lender after the transaction, to the end that the provisions of this Note shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable or issuable after such reorganization or recapitalization upon conversion of this Note.

5
 

(c)                Adjustments for Split, Subdivision or Combination of Shares. If the Borrower at any time while this Note remains outstanding and unconverted, shall split or subdivide any class of securities into which this Note may be converted into a different number of securities of the same class, the number of shares of such class issuable upon conversion of this Note immediately prior to such split or subdivision shall be proportionately increased and the Conversion Price and any other applicable prices for such class of securities shall be proportionately decreased. If the Borrower at any time while this Note, or any portion hereof, remains outstanding and unconverted shall combine any class of securities into which this Note may be converted, into a different number of securities of the same class, the number of shares of such class issuable upon conversion of this Note immediately prior to such combination shall be proportionately decreased and the Conversion Price and any other applicable prices for such class of securities shall be proportionately increased.

(d)               Adjustments for Dividends in Stock or Other Securities or Property . If, while this Note remains outstanding and unconverted, the holders of any class of securities as to which conversion rights under this Note exist at the time shall have received, or, on or after the record date fixed for the determination of eligible stockholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash) of the Borrower by way of dividend, then and in each case, this Note shall represent the right to acquire, in addition to the number of shares of such class of security receivable upon conversion of this Note, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property (other than cash) of the Borrower that such holder would hold on the date of such conversion had such holder been the holder of record of the class of security receivable upon conversion of this Note on the date hereof and had thereafter, during the period from the date hereof to and including the date of such conversion, retained such shares and/or all other additional stock available to such holder as aforesaid during said period, giving effect to all adjustments called for during such period by the provisions of this Section 4.

(e)                Adjustments for Spin Offs . If, at any time while any portion of this Note remains outstanding and unconverted, the Borrower spins off or otherwise divests itself of a part of its business or operations or disposes of all or of a part of its assets in a transaction (the “ Spin Off ”) in which the Borrower, in addition to or in lieu of any other compensation received and retained by the Borrower for such business, operations or assets, causes securities of another entity (the “ Spin Off Securities ”) to be issued to security holders of the Borrower, the Borrower shall cause (i) to be reserved Spin Off Securities equal to the number thereof which would have been issued to the Lender had the entire balance of this Note outstanding on the record date (the “ Record Date ”) for determining the amount and number of Spin Off Securities to be issued to security holders of the Borrower been converted as of the close of business on the Trading Day immediately before the Record Date (the “ Reserved Spin Off Shares ”), and (ii) to be issued to the Lender on the conversion of all or any portion of this Note, such amount of the Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares multiplied by (y) a fraction, of which (I) the numerator is the principal amount of the portion of the Outstanding Balance then being converted, and (II) the denominator is the entire Outstanding Balance of this Note. In the event of any Spin Off, (i) the Lender shall have the right to convert the Outstanding Balance by delivering a Conversion Notice to the Borrower within ten (10) days of receipt of notice of such Spin Off from the Borrower, or (ii) immediately upon the consummation of a Spin Off, all amounts owed under this Note shall accelerate and be immediately due and payable in the sole discretion of the Lender.

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(f)                No Change Necessary . The form of this Note need not be changed because of any adjustment in the number and class of securities issuable upon its conversion.

5.                  Further Adjustments . In case at any time or, from time to time, the Borrower shall take any action that affects the class of securities into which this Note may be converted under Section 2, other than an action described herein, then, unless such action will not have a material adverse effect upon the rights of the Lender, the number and class of securities into which this Note is convertible shall be adjusted in such a manner and at such time as shall be equitable under the circumstances.

6.                  Certificate as to Adjustments . Upon the occurrence of each adjustment or readjustment pursuant to Section 4 or Section 5, the Borrower at its sole expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Lender 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 Lender, furnish or cause to be furnished to the Lender a like certificate setting forth (i) such adjustments and readjustments, and (ii) the number and class of securities and the amount, if any, of other property which at the time would be received upon the conversion of this Note under Section 2.

7.                  Change of Control . In the event of (i) any transaction or series of related transactions (including any reorganization, merger or consolidation) that results in the transfer of 50% or more of the outstanding voting power of the Borrower, or (ii) a sale of all or substantially all of the assets of the Borrower to another person or entity, this Note shall be automatically due and payable in cash. The Borrower will give the Lender not less than ten (10) Trading Days prior written notice of the occurrence of any events referred to in this Section 7.

8.                  Representations and Warranties of the Borrower . In addition to the representations and warranties set forth in the Purchase Agreement, which are incorporated herein, the Borrower hereby represents and warrants to the Lender that:

(a)                The Borrower understands and acknowledges that the number of Conversion Shares issuable upon conversion of this Note will increase in certain circumstances. The Borrower further acknowledges that its obligation to issue Conversion Shares upon conversion of this Note in accordance with its terms is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Borrower;

(b)               The Borrower is not and for at least the last 12 months prior to the date hereof has not been a “shell company,” as defined in paragraph (i)(1)(i) of Rule 144 or Rule 12(b)(2) of the Exchange Act;

(c)                The Borrower is subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act and has filed all required reports under Section 13 or Section 15(d) of the Exchange Act during the 12 months prior to the date hereof (or for such shorter period that the Borrower was required to file such reports); and

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(d)               The issuance of this Note has been duly authorized by the Borrower. Upon conversion in accordance with the terms of this Note, the Conversion Shares, when issued, will be validly issued, fully paid and non-assessable, free from all taxes, liens, claims, pledges, mortgages, restrictions, obligations, security interests and encumbrances of any kind, nature and description. The Borrower has reserved from its duly authorized capital stock the appropriate number of shares of Common Stock for issuance upon conversion of this Note as required by the terms of this Note.

9.                  Affirmative and Negative Covenants . In addition to the covenants set forth in the Purchase Agreement, the Borrower covenants and agrees, while any portion of this Note remains outstanding and unconverted, as follows:

(a)                The Borrower shall do all things necessary to preserve and keep in full force and effect its corporate existence including, without limitation, maintain all licenses or similar qualifications required by it to engage in its business in all jurisdictions in which it is at the time so engaged; and continue to engage in business of the same general type as conducted as of the date hereof; and continue to conduct its business substantially as now conducted or as otherwise permitted hereunder;

(b)               The Borrower shall pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property before the same shall become delinquent or in default, which, if unpaid, might reasonably be expected to give rise to liens or charges upon such properties or any part thereof, unless, in each case, the validity or amount thereof is being contested in good faith by appropriate proceedings and the Borrower has maintained adequate reserves with respect thereto in accordance with GAAP;

(c)                The Borrower shall comply in all material respects with all federal, state and local laws and regulations, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations and requirements (collectively, “ Requirements ”) of all governmental bodies, departments, commissions, boards, insurers, courts, authorities, officials or officers which are applicable to the Borrower or any of its properties, except where the failure to so comply would not have a Material Adverse Effect on the Borrower or any of its properties; provided , however , that nothing provided herein shall prevent the Borrower from contesting the validity or the application of any Requirements;

(d)               The Borrower shall keep proper records and books of account with respect to its business activities, in which proper entries, reflecting all of their financial transactions, are made in accordance with GAAP;

(e)                From the date hereof until the date that is six (6) months after the date that all the Conversion Shares either have been sold by the Lender, or may permanently be sold by the Lender without any restrictions pursuant to Rule 144 (the “ Registration Period ”), the Borrower shall file with the Securities and Exchange Commission (the “ SEC ”) in a timely manner all required reports under Sections 13 or 15(d) of the Exchange Act and such reports shall conform to the requirement of the Exchange Act and the SEC for filing thereunder;

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(f)                The Borrower shall furnish to the Lender, so long as the Lender owns any Common Stock, promptly upon request, (i) a written statement by the Borrower that it has complied with the reporting requirements of Rule 144, (ii) a copy of the most recent annual or quarterly report of the Borrower and such other reports and documents so filed by the Borrower, and (iii) such other information as may be reasonably requested to permit the Lender to sell such securities pursuant to Rule 144 without registration;

(g)               During the Registration Period, the Borrower shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations thereunder would otherwise permit such termination;

(h)               On the date hereof and at all times prior to the repayment in full of this Note, the Borrower shall reserve the number of shares required by the Share Reserve for the purpose of, among other things, the conversion of this Note. The Borrower represents that it has sufficient authorized and unissued shares of Common Stock available to create the Share Reserve after considering all other commitments that may require the issuance of Common Stock. The Borrower shall take all action reasonably necessary to at all times have authorized, and reserved for the purpose of issuance, such number of shares of Common Stock as shall be necessary to effect the full conversion of the Note multiplied by five (5) (the “ Share Reserve ”). If at any time the Share Reserve is insufficient to effect the full conversion of the Note, the Borrower shall increase the Share Reserve accordingly. If the Borrower does not have sufficient authorized and unissued shares of Common Stock available to increase the Share Reserve, the Borrower shall call and hold a special meeting of the stockholders within thirty (30) days of such occurrence, for the sole purpose of increasing the number of authorized shares. The Borrower’s management shall recommend to the stockholders to vote in favor of increasing the number of shares of Common Stock authorized. Management shall also vote all of its shares in favor of increasing the number of authorized shares of Common Stock. The Borrower shall use its best efforts to cause such additional shares of Common Stock to be authorized so as to comply with the requirements of this Section 9(h);

(i)                 The Common Stock shall be listed or quoted for trading on any of (i) NYSE Amex, (ii) the New York Stock Exchange, (iii) the Nasdaq Global Market, (iv) the Nasdaq Capital Market, (v) the OTC Bulletin Board, or (f) the OTCQX or OTCQB (each, a “ Primary Market ”). The Borrower shall promptly secure the listing of all of its securities issuable under the terms of the Transaction Documents upon each national securities exchange and automated quotation system, if any, upon which the Common Stock is then listed (subject to official notice of issuance) and shall maintain such listing of all securities from time to time issuable under the terms of the Transaction Documents;

(j)                 The Borrower shall notify the Lender in writing, promptly upon learning thereof, of any litigation or administrative proceeding commenced or threatened against the Borrower involving a claim in excess of $100,000.00;

(k)               The Borrower shall use the proceeds from this Note for working capital and general corporate purposes only; and

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(l)                 The Borrower shall notify the Lender in writing, promptly upon the occurrence of any Event of Default.

10.              Default . Upon each occurrence of any of the following events (each, an “ Event of Default ”), (i) with respect to an Event of Default occurring under all subsections other than subsection (c) of this Section 10, the Outstanding Balance shall immediately increase to the higher of (A) 150% of the Outstanding Balance immediately prior to the occurrence of the Event of Default, and (B) 150% of the value of the Conversion Shares if the entire Outstanding Balance were converted pursuant to Section 2 above and sold at the highest closing price for the Common Stock during the period the Event of Default was continuing for any such Event of Default, (ii) with respect to an Event of Default occurring under subsection (c) hereof, the Outstanding Balance shall immediately increase to the higher of (A) 200% of the Outstanding Balance immediately prior to the occurrence of the Event of Default, and (B) 200% of the value of the Conversion Shares if the entire Outstanding Balance were converted pursuant to Section 2 above and sold at the highest closing price for the Common Stock during the period the Event of Default was continuing for such Event of Default, and (iii) this Note shall accrue interest at the rate of 1.83% per month (or 22% per annum), compounding daily, whether before or after judgment (the “ Default Effects ”); provided, however , that (1) in no event shall the Default Effects be applied more than two times, and (2) notwithstanding any provision to the contrary herein, in no event shall the applicable interest rate at any time exceed the maximum interest rate allowed under applicable law. Additionally, upon the occurrence of an Event of Default, the Lender may by written notice to the Borrower declare the entire Outstanding Balance immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding; provided , however , that upon the occurrence or existence of any Event of Default described in Section 10(f), (g) or (h), immediately and without notice, all outstanding obligations payable by the Borrower hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding:

(a)                Failure to Pay . The Borrower shall fail to make any payment when due and payable under the terms of this Note including, without limitation, any payment of costs, fees, interest, principal or other amount due hereunder.

(b)               Judgment . Any money judgment, writ or similar process shall be entered or filed against the Borrower or any of its property or other assets for more than $200,000.

(c)                Failure to Deliver Shares . The Borrower (or its transfer agent) fails to issue the Conversion Shares (or announces or threatens in writing that it will not honor its obligation to do so) upon exercise by the Lender of the conversion rights of the Lender in accordance with Section 2(c) of this Note, fails to transfer or cause its transfer agent to transfer (issue) (electronically or in certificated form) any certificate for Conversion Shares issued to the Lender 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 Conversion Shares to be issued to the Lender 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 Conversion Shares as and when required by this Note (or makes any written announcement, statement or threat that it does not intend to honor any such obligations) 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 Lender shall have delivered a Notice of Conversion.

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(d)               Breach of Covenants . The Borrower or its subsidiaries, if any, shall fail to observe or perform any other covenant, obligation, condition or agreement contained in this Note or any of the other Transaction Documents, including without limitation all reporting covenants and covenants to timely file all required quarterly and annual reports and any other filings required pursuant to Rule 144.

(e)                Breach of Representations and Warranties . Any representation, warranty, certificate, or other statement (financial or otherwise) made or furnished by or on behalf of the Borrower to the Lender in writing included in this Note or in connection with any of the Transaction Documents, or as an inducement to the Lender to enter into this Note or any of the other Transaction Documents, shall be false, incorrect, incomplete or misleading in any material respect when made or furnished or become false thereafter.

(f)                Receiver or Trustee . The Borrower shall make an assignment for the benefit of creditors, or apply for, or consent to, or otherwise be subject to, the appointment of a receiver, trustee, liquidator, assignee, custodian, sequestrator, or other similar official for a substantial part of its property or business.

(g)               Failure to Pay Debts . If any of the Borrower’s assets are assigned to its creditors or if the Borrower fails to pay its debts generally as they become due.

(h)               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.

(i)                 Delisting of Common Stock . The Borrower shall fail to maintain the listing or the quotation 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.

(j)                 Liquidation . Any dissolution, liquidation, or winding up of Borrower or any substantial portion of its business.

(k)               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.

(l)                 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).

(m)             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 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 Lender with respect to this Note or the Purchase Agreement.

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(n)               Reverse Split . The Borrower effectuates a reverse split of its Common Stock without twenty (20) days prior written notice to the Lender.

(o)               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 Transfer Agent Letter (as defined by the Purchase Agreement) 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.

(p)               Governmental Action . If any governmental or regulatory authority takes or institutes any action that will materially affect the Borrower’s financial condition, operations or ability to pay or perform the Borrower’s obligations under this Note.

(q)               Share Reserve . The Borrower’s failure to maintain the Share Reserve pursuant to the Purchase Agreement.

(r)                 Cross Default . Notwithstanding anything to the contrary contained in this Note or the other Transaction Documents, a breach or default by the Borrower of any covenant or other term or condition contained in (i) the Note, (ii) any of the other Transaction Documents, or (iii) any Other Agreements (defined below); shall, at the option of the Lender, be considered a default under this Note, in which event the Lender shall be entitled (but in no event required) to apply all rights and remedies of the Lender under the terms of this Note. “ Other Agreements ” means, collectively, all existing and future agreements and instruments between, among or by: (1) the Borrower (or a subsidiary), and, or for the benefit of, (2) the Lender and any affiliate of the Lender, including, without limitation, promissory notes, purchase agreements, contracts or other agreements or undertakings; provided, however , the term “Other Agreements” shall not include the Transaction Documents. The intent of this provision is that all existing and future loan transactions will be cross-defaulted with each other loan transaction and with all other existing and future debt of Borrower to the Lender.

11.              Ownership Limitation . Notwithstanding the provisions of this Note, if at any time after the date hereof, the Lender shall or would receive shares of Common Stock in payment of interest or principal under this Note or upon conversion of this Note, so that the Lender would, together with other shares of Common Stock held by it or its Affiliates, own or beneficially own by virtue of such action or receipt of additional shares of Common Stock a number of shares exceeding 9.99% of the number of shares of Common Stock outstanding on such date (the “ 9.99% Cap ”), the Borrower shall not be obligated and shall not issue to the Lender shares of Common Stock which would exceed the 9.99% Cap, but only until such time as the 9.99% Cap would no longer be exceeded by any such receipt of shares of Common Stock by the Borrower. The foregoing limitations are enforceable, unconditional and non-waivable and shall apply to all Affiliates and assigns of the Lender.

12.              No Rights or Liabilities as Stockholder . This Note does not by itself entitle the Lender to any voting rights or other rights as a stockholder of the Borrower. In the absence of conversion of this Note, no provisions of this Note, and no enumeration herein of the rights or privileges of the Lender, shall cause the Lender to be a stockholder of the Borrower for any purpose.

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13.              Unconditional Obligation . No provision of this Note shall alter or impair the obligation of the Borrower, which is absolute and unconditional, to pay the principal of, and interest on, this Note at the time, place, and rate, and in the currency or where contemplated herein in shares of Common Stock, as applicable, as herein prescribed. This Note is a direct obligation of the Borrower and not subject to offsets, counterclaims, credits or deductions.

14.              Confession of Judgment . Upon the occurrence of an Event of Default, in addition to any other rights or remedies the Lender may have under the Transaction Documents or applicable law, the Lender shall have the right, but not the obligation, to cause the Judgment by Confession attached to the Purchase Agreement to be entered into a court of competent jurisdiction.

15.              Binding Effect . This Note shall be binding on the Parties and their respective heirs, successors, and assigns; provided, however , that the Borrower shall not assign its rights hereunder in whole or in part without the express written consent of the Lender.

16.              Governing Law; Venue . The terms of this Note shall be construed in accordance with the laws of the State of Utah as applied to contracts entered into by Utah residents within the State of Utah which contracts are to be performed entirely within the State of Utah. With respect to any disputes arising out of or related to this Note, the Parties consent to the exclusive personal jurisdiction of, and venue in, the state courts located in Salt Lake County, State of Utah (or in the event of federal jurisdiction, any United States District Court for the District of Utah), and hereby waive, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens , to the bringing of any such proceeding in such jurisdiction or to any claim that such venue of the suit, action or proceeding is improper.

17.              Lawful Interest . It being the intention of the Lender and the Borrower to comply with all applicable laws with regard to the interest charged hereunder, it is agreed that, notwithstanding any provision to the contrary in this Note or any other Transaction Document, no such provision, including without limitation any provision of this Note providing for the payment of interest or other charges, shall require the payment or permit the collection of any amount in excess of the maximum amount of interest permitted by law to be charged for the use or detention, or the forbearance in the collection, of all or any portion of the indebtedness evidenced by this Note or by any extension or renewal hereof (“ Excess Interest ”). If any Excess Interest is provided for, or is adjudicated to be provided for, in this Note or any other Transaction Document, then in such event:

(a)                the provisions of this Section shall govern and control;

(b)               the Borrower shall not be obligated to pay any Excess Interest;

(c)                any Excess Interest that the Lender may have received hereunder shall, at the option of the Lender, be (i) applied as a credit against the principal balance due under this Note or the accrued and unpaid interest thereon not to exceed the maximum amount permitted by law, or both, (ii) refunded to the Borrower, or (iii) any combination of the foregoing;

(d)               the applicable interest rate or rates shall be automatically subject to the reduction to the maximum lawful rate allowed to be contracted for in writing under the applicable governing usury laws, and this Note and the Transaction Documents shall be deemed to have been, and shall be, reformed and modified to reflect such reduction in such interest rate or rates; and

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(e)                the Borrower shall not have any action or remedy against the Lender for any damages whatsoever or any defense to enforcement or this Note or arising out of the payment or collection of any Excess Interest.

18.              Pronouns . Regardless of their form, all words used in this Note shall be deemed singular or plural and shall have the gender as required by the text.

19.              Headings . The various headings used in this Note as headings for sections or otherwise are for convenience and reference only and shall not be used in interpreting the text of the section in which they appear and shall not limit or otherwise affect the meanings thereof.

20.              Severability . If any part of this Note is construed to be in violation of any law, such part shall be modified to achieve the objective of the Parties to the fullest extent permitted by law and the balance of this Note shall remain in full force and effect.

21.              Attorneys’ Fees . If any action at law or in equity is necessary to enforce this Note or to collect payment under this Note, the Lender shall be entitled to recover reasonable attorneys’ fees directly related to such enforcement or collection actions.

22.              Amendments and Waivers; Remedies . No failure or delay on the part of a Party hereto in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to a Party hereto at law, in equity or otherwise. Any amendment, supplement or modification of or to any provision of this Note, any waiver of any provision of this Note, and any consent to any departure by either Party from the terms of any provision of this Note, shall be effective (i) only if it is made or given in writing and signed by the Borrower and the Lender and (ii) only in the specific instance and for the specific purpose for which made or given.

23.              Notices . All notices, requests, demands, claims and other communications hereunder shall be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly given if it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient, as set forth in the Purchase Agreement. Any Party may send any notice, request, demand, claim or other communication hereunder to the intended recipient at the address set forth in the Purchase Agreement using any other means (including personal delivery, expedited courier, messenger service, facsimile, ordinary mail, or electronic mail), but no such notice, request, demand, claim or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient or receipt is confirmed electronically or by return mail. Any Party may change the address to which notices, requests, demands, claims and other communications hereunder are to be delivered by giving the other Party notice in any manner herein set forth.

24.              Entire Agreement . This Note, together with the other Transaction Documents, contains the complete understanding and agreement of the Borrower and the Lender and supersedes all prior representations, warranties, agreements, arrangements, understandings, and negotiations with respect to the subject matter thereof. THIS NOTE, TOGETHER WITH THE OTHER TRANSACTION DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY ALLEGED PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[Remainder of page intentionally left blank]

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IN WITNESS WHEREOF , the Borrower has executed this Note as of the date set forth above.

 

Exhibits

 

Exhibit A – Conversion Notice

Exhibit A-1 – Conversion Worksheet

 

THE BORROWER:
 
SUNVALLEY SOLAR, INC.
 
By: /s/ Zhijian Zhang
Name: Zhijian Zhang
Title: CEO

 

ACKNOWLEDGED, ACCEPTED AND AGREED:

TONAQUINT, INC.

 

By: /s/ John M. Fife

John M. Fife, President

15
 

EXHIBIT A

 

Tonaquint, Inc.

303 EAST WACKER DRIVE, SUITE 1200

CHICAGO, ILLINOIS 60601

 

Date:

 

Sunvalley Solar, Inc.

398 Lemon Creek Dr., Suite A

Walnut, CA 91789

Attn: _________

 

VIA FAX:

 

CONVERSION NOTICE

 

The above-captioned Lender hereby gives notice to Sunvalley Solar, Inc., a Nevada corporation (the “ Company ”), pursuant to that certain Convertible Promissory Note made by the Company in favor of the Lender on October 18, 2011, as the same may be amended from time to time, (the “ Note ”), that the Lender elects to convert the portion of the Note balance set forth below into fully paid and non-assessable shares of Common Stock of the Company as of the date of conversion specified below. Such conversion shall be based on the Conversion Price set forth below. In the event of a conflict between this Conversion Notice and the Note, the Note shall govern, or, in the alternative, at the election of the Lender in its sole discretion, the Lender may provide a new form of Conversion Notice to conform to the Note.

 

  1. Date of conversion: ____________
  2. Conversion #: ____________
  3. Conversion Amount: ____________
  4. Average trade price ___ (of lowest (3) Trading Days of the last 10 Trading Days per Exhibit A-1)
  5. Conversion Factor: 61%
  6. Conversion Price: _______________ (D multiplied by E)
  7. Conversion Shares: _______________ (C divided by F)
  8. Remaining Note Balance: ____________

 

Please transfer the Conversion Shares electronically (via DWAC) to the following account:

 

Broker: Address:
DTC#:
Account #:
Account Name:

 

Sincerely,

 

Tonaquint, Inc.

 

By: _______________________

John M. Fife, President

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EXHIBIT A-1

 

CONVERSION WORKSHEET

 

Trading Day Closing Bid Price Lowest (Yes or No)
 
 
  
  
 
 
 
 
 
   

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