UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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): July 20, 2018

CLS HOLDINGS USA, INC.
(Exact name of registrant as specified in its charter)

Nevada
 
333-174705
 
45-1352286
 
(State or other jurisdiction of incorporation)
 
(Commission  File Number)
 
(I.R.S. Employer Identification No.)
 

11767 South Dixie Highway, Suite 115
 
 
 
Miami, Florida
 
 
33156
(Address of principal executive offices)
 
 
(Zip Code)

Registrant’s telephone number, including area code:  (888) 438-9132

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:
 
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Securities 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))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (Section 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (Section 240.12b-2 of this chapter).
 
Emerging growth company   ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Item 1.01            Entry into a Material Definitive Agreement.
On May 11, 2018, CLS Holdings USA, Inc. (“we,” “us,” “our,” “CLS,” or “Company”), entered into a Securities Purchase Agreement (the “Purchase Agreement”) with YA II PN, Ltd., a Cayman Island exempted limited partnership (the “Investor”), pursuant to which the Company agreed to sell to the Investor, in two closings, (i) convertible debentures (the “Debentures”) in the aggregate principal amount of $1,250,000, plus accrued interest, which may be converted into shares of our common stock (the “Conversion Shares”), par value $0.0001 per share (the “Common Stock”), at the discretion of either the Investor or the Company in accordance with the terms of the Debentures, and (ii) five-year warrants (the “Warrants”) to purchase an aggregate of 3,125,000 shares of our Common Stock at $0.60 per share of Common Stock.  At the first closing, which occurred on May 14, 2018, we issued a $750,000 Debenture (the “First Debenture” to the Investor and a Warrant to purchase 1,875,000 shares of our Common Stock (the “First Warrant”).  At the second closing, which occurred on July 20, 2018, we issued a $500,000 Debenture (the “Second Debenture) to the Investor and a Warrant to purchase 1,250,000 additional shares of our Common Stock (the “Second Warrant”).

  The Debentures bear interest at the rate of 8% per annum. If an event of default occurs and for so long as such event of default remains uncured, the interest rate on the Debentures shall immediately become 15% per annum and shall remain at such increased interest rate until the applicable event of default is cured.

Commencing on December 1, 2018 and on the first day of each month thereafter through July 1, 2019 (each an “Installment Date”), the Company shall pay to the Investor one-eighth of the principal amount of the Debentures, plus accrued and outstanding interest (the “Installment Amount”), plus 20% of the of the Installment Amount for Installment Amounts due within 180 days following the date of execution of the Purchase Agreement, and 25% of the Installment Amount for Installment Amounts due thereafter in cash or by converting such Installment Amount into shares of Common Stock of the Company, if the Company has met the applicable conditions for such a conversion and as long as the conversion does not exceed certain maximum amounts.
Pursuant to the terms of the Debentures, the Investor may elect to convert any portion of the principal and accrued interest under the Debentures into our Common Stock at a fixed conversion price of $0.40 per share.  The fixed conversion price may change if certain dilutive events or issuances occur. In addition, the Company may, at its sole discretion, make an Installment Payment using its Common Stock if certain conditions have been met.  In such case, the applicable conversion price would be equal to 75% of the VWAP of the Company’s Common Stock during the fifteen consecutive trading days immediately preceding such conversion.
In connection with our issuance of the Second Debenture and the Second Warrant, we also agreed to pay the Investor’s designee a commitment fee in an amount equal to 6% of the applicable purchase price.  The shares of our Common Stock underlying the Second Debenture and Second Warrant are also subject to the registration rights agreement in favor of the Investor that we executed in connection with the Purchase Agreement.
The descriptions of the Purchase Agreement, the First Debenture, the First Warrant, the registration rights agreement, the Second Debenture, and the Second Warrant are qualified in their entirety by reference to the full text of the  Purchase Agreement, the First Debenture, the First Warrant and the registration rights agreement, which have been filed as Exhibits 10.1, 10.2, 10.3, and 10.4, respectively, to the Company’s Current Report on Form 8-K filed on May 17, 2018, and the Second Debenture and the Second Warrant, which are attached as Exhibits 10.1 and 10.2, respectively, to this Current Report on Form 8-K and are incorporated by reference herein.
Item 2.03
Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
The disclosure in Item 1.01 of this Current Report on Form 8-K is incorporated by reference into this Item.
Item 3.02            Unregistered Sales of Equity Securities
The disclosure in Item 1.01 of this Current Report on Form 8-K is incorporated by reference into this Item.
The Investor is an accredited investor (as that term is defined in Regulation D of the Securities Act), and in issuing the above securities to the Investor, we relied on and intend to rely on the exemption from the registration requirements of the Securities Act provided by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D promulgated thereunder because the securities were issued in a private offering.
Item 9.01            Financial Statements and Exhibits
(d)            Exhibits.
Exhibit No.
 
Description of Exhibit
     
10.1
 
10.2
 


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.


 
 
CLS HOLDINGS USA, INC.
 
     
     
Date:  July 23, 2018
                                                              
By:   /s/ Jeffrey I. Binder           
   
        Jeffrey I. Binder
   
       Chairman and Chief Executive Officer
 


EXHIBIT INDEX

Exhibit No.
 
Description of Exhibit
 
 
 
 
 
10.1
   
       
10.2
   
 

Exhibit 10.1

NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE.  THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE BEEN SOLD IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) AND ACCORDINGLY, MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OR PURSUANT TO AVAILABLE EXEMPTION FROM THE REGISTATION REQUIREMENTS OF THE SECURITIES ACT, THE AVAILABILITY OF WHICH IS CONFIRMED BY AN OPINION OF COUNSEL IN GENERALLY ACCEPTABLE FORM, AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
CLS HOLDINGS USA, INC.
Convertible Debenture
Issuance Date: July 20, 2018
Original Principal Amount:            $500,000
No. CLSH-1-2
 

FOR VALUE RECEIVED, CLS HOLDINGS USA, INC., a Nevada corporation (the “ Company ”), hereby promises to pay to the order of YA II PN, LTD. or registered assigns (the “ Holder ”) the amount set out above as the Original Principal Amount (as reduced pursuant to the terms hereof pursuant to redemption, conversion or otherwise, the “ Principal ”) when due, whether upon the Maturity Date (as defined below), on any Installment Date with respect to the Installment Amount due on such Installment Date (each, as defined herein), acceleration, redemption or otherwise (in each case in accordance with the terms hereof) and to pay interest (“ Interest ”) on any outstanding Principal at the applicable Interest Rate from the date set out above as the Issuance Date (the “ Issuance Date ”) until the same becomes due and payable, whether upon any Installment Date or the Maturity Date or acceleration, conversion, redemption or otherwise (in each case in accordance with the terms hereof). This Convertible Debenture (including all Convertible Debentures issued in exchange, transfer or replacement hereof, this “ Debenture ”) is issued pursuant to the Securities Purchase Agreement.  Certain capitalized terms used herein are defined in Section 17.
(1)            GENERAL TERMS
(a)            Payment of Principal .  On each Installment Date, the Company shall pay to the Holder an amount equal to the Installment Amount due on such Installment Date in accordance with Section 3. On the Maturity Date, the Company shall pay to the Holder an amount in cash representing all outstanding Principal, accrued and unpaid Interest. The “ Maturity Date ” shall be November 14, 2019, as may be extended at the option of the Holder (i) in the event that, and for so long as, an Event of Default (as defined below) shall have occurred and be continuing on the Maturity Date (as may be extended pursuant to this Section 1) or (ii) in the event that any event shall have occurred and be continuing
on the Maturity Date (as may be extended pursuant to this Section 1) that with the passage of time and the failure to cure would result in an Event of Default. Other than as specifically permitted by this Debenture, the Company may not prepay or redeem any portion of the outstanding Principal without the prior written consent of the Holder.
(b)            Interest .  Interest shall accrue on the outstanding principal balance hereof at an annual rate equal to 8% (“ Interest Rate ”).  Interest shall be calculated on the basis of a 365-day year and the actual number of days elapsed, to the extent permitted by applicable law.  Interest hereunder shall be paid on each Installment Date and on the Maturity Date (or sooner as provided herein) to the Holder or its assignee in whose name this Debenture is registered on the records of the Company regarding registration and transfers of Debentures at the option of the Company in cash, or, provided that the Equity Conditions are then satisfied converted into Common Stock at the Market Conversion Price on the Trading Day immediately prior to the date paid.
(2)            EVENTS OF DEFAULT.
(a)            An “ Event of Default ”, wherever used herein, means any one of the following events which after notice to the Company remain uncured for a period of 3 business days after such notice if an Event of Default under 2(a)(i), 2(a)(vii) and 2(viii) herein and 5 business days after such notice for all other Events of Default under Section 2(a) (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):
(i)            the Company’s failure to pay to the Holder any amount of Principal, Interest, or other amounts when and as due under this Debenture (including, without limitation, the Company’s failure to pay any redemption payments or amounts hereunder) or any other Transaction Document;
(ii)            The Company or any subsidiary of the Company shall commence, or there shall be commenced against the Company or any subsidiary of the Company under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or the Company or any subsidiary of the Company commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or any subsidiary of the Company or there is commenced against the Company or any subsidiary of the Company any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of 61 days; or the Company or any subsidiary of the Company is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Company or any subsidiary of the Company suffers any appointment of any custodian, private or court appointed receiver or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of 61 days; or the Company or any subsidiary of the Company makes a general assignment for the benefit of creditors; or the Company or any subsidiary of the Company shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts in the aggregate grater that $100,00 generally as they become
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due unless disputed by the Company in god faith; or the Company or any subsidiary of the Company shall call a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or the Company or any subsidiary of the Company shall by any act or failure to act expressly indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Company or any subsidiary of the Company for the purpose of effecting any of the foregoing;
(iii)            The Company or any subsidiary of the Company shall default in any of its obligations under any other debenture or any mortgage, credit agreement or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement of the Company or any subsidiary of the Company in an amount exceeding $100,000, whether such indebtedness now exists or shall hereafter be created and such default shall result in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable unless the Company is contesting such obligations in good faith;
(iv)            The Common Stock ceases to be so quoted or listed for trading for trading on the OTCQB Venture Market operated by OTC Markets Group (the “ Primary Market ”) for a period of 5 consecutive Trading Days;
(v)            [RESERVED]
(vi)            The Company shall fail to file the Underlying Shares Registration Statement with the Commission no later July 20, 2018, or the Underlying Shares Registration Statement is not maintained effective as set forth in the Registration Rights Agreement (“ Registration Rights Agreement ”) dated the date hereof by and between the Company and the Holder, or, the effectiveness of the Underlying Shares Registration Statement lapses for any reason (including, without limitation, the issuance of a stop order) or is unavailable to the Holder for sale of all of the Holder’s Registrable Securities (as defined in the Investor Registration Rights Agreement) in accordance with the terms of the Investor Registration Rights Agreement, and such lapse or unavailability continues for a period of more than 30 consecutive Trading Days or for more than an aggregate of twenty 60 calendar days in any 365-day period (which need not be consecutive);
(vii)            the Company’s (A) failure to cure a Conversion Failure by delivery of the required number of shares of Common Stock within 3 Business Days after the applicable Conversion Failure or (B) notice, written or oral, to any holder of the Debenture, including by way of public announcement, at any time, of its intention not to comply with a request for conversion of the Debenture into shares of Common Stock that is tendered in accordance with the provisions of the Debentures, other than pursuant to Section 4(f);
(viii)            The Company shall fail for any reason to deliver the payment in cash pursuant to a Buy-In (as defined herein) within 3 Business Days after such payment is due;
(ix)            The Company shall fail to observe or perform any other covenant, agreement or warranty contained in, or otherwise commit any breach or default of any
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provision of this Debenture (except as may be covered by Section 2(a)(i) through 2(a)(vii) hereof) or any Transaction Documents (as defined in Section 17) which is not cured within the time prescribed.
(x)            any Event of Default occurs with respect to any Transaction Document.
(b)            During the time that any portion of this Debenture is outstanding, if any Event of Default has occurred, the full unpaid Principal amount of this Debenture, together with Interest and other amounts owing in respect thereof, to the date of acceleration shall become at the Holder’s election, immediately due and payable in cash. If an Event of Default occurs and for so long as such Event of Default remains uncured, the Interest Rate on this Debenture shall immediately become 15% per annum and shall remain at such increased interest rate until the applicable Event of Default is cured. Furthermore, in addition to any other remedies, the Holder shall have the right (but not the obligation) to convert this Debenture at any time after (x) an Event of Default at the Market Conversion Price or (y) the Maturity Date at the Fixed Conversion Price, in each case notwithstanding the Company Installment Conversion Payment Limitation.  Except as provided for herein, the Holder need not provide, and the Company hereby waives, any presentment, demand, protest or other notice of any kind, (other than required notice of conversion) and the Holder may if such Event of Default remains uncured after notice as may be provided for in the Transaction Documents immediately enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.
(3)            COMPANY INSTALLMENT IN CASH, CONVERSION OR REDEMPTION .
(a)            General .  On each applicable Installment Date, the Company shall pay to the Holder of this Debenture the Installment Amount plus the applicable Cash Payment Premium (collectively, a “ Company Cash Payment ”) in cash or by converting such Installment Amount into shares of Common Stock of the Company (a “ Company Conversion Payment ”), provided that there is not then an Equity Conditions Failure, nor is the Company Installment Conversion Payment Limitation exceeded, in accordance with this Section 3  or by any combination of a Company Cash Payment and a Company Conversion Payment so long as all of the outstanding applicable Installment Amount shall be paid (whether in cash or converted into shares of the Company’s Common Stock as provided for herein) on the applicable Installment Date, subject to the provisions of this Section 3.
(b)            On or prior to the date which is the 5th Trading Day prior to each Installment Date (each, an “Installment Notice Date”), the Company shall deliver written notice (each, a “Company Installment Notice”) to the Holder which Company Installment Notice shall (i) either (A) confirm that the applicable Installment Amount of the Holder’s Debenture shall be converted in whole pursuant to a Company Conversion Payment (such amount to be converted, the “Company Conversion Amount”), or (B) (1) specify the portion of the applicable Installment Amount (including Interest and the applicable Cash Payment Premium) which the Company elects to pay in cash, or is required to pay in cash in accordance with the provisions of this Debenture,
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pursuant to a Company Cash Payment (the “Company Cash Amount”) and (2) the portion of the applicable Installment Amount (including Interest) that the Company elects to convert pursuant to a Company Conversion Payment which amounts when added together, must equal the applicable Installment Amount and (ii) if the Installment Amount is to be paid, in whole or in part, pursuant to a Company Conversion Payment, certify that there is not then an Equity Conditions Failure as of the date of the Company Installment Notice.
Each Company Installment Notice shall be irrevocable.  If the Company does not timely deliver a Company Installment Notice in accordance with this Section 3, then the Company shall be deemed to have delivered an irrevocable Company Installment Notice confirming a Company Conversion Payment and shall be deemed to have certified that there is not then an Equity Conditions Failure in connection with any such conversion.  The Company Conversion Amount (whether set forth in the Company Installment Notice or by operation of this Section 3) shall be converted in accordance with Section 3(c) and the Company Cash Amount shall be paid in accordance with Section 3(d).
(c)            Mechanics of Company Conversion Payment .  Subject to Section 3(e), if the Company delivers a Company Installment Notice and elects, or is deemed to have elected, in whole or in part, a Company Conversion Payment in accordance with Section 3(b), then the applicable Company Conversion Amount, shall be converted as of the applicable Installment Date by converting on such Installment Date such Company Conversion Amount at the Market Conversion Price; provided that the Equity Conditions are then satisfied (or waived in writing by the Holder) and the Company Installment Conversion Payment Limitation is not exceeded on such Installment Date. Such shares of the Company’s Common Stock to be delivered in connection with such Company Conversion Payment shall be made in accordance with Section 4(e)(ii) herein.
If the Equity Conditions are not satisfied (or waived in writing by the Holder), then at the option of the Holder designated in writing to the Company, the Holder may require the Company to do any one or more of the following or if the Company Installment Conversion Payment Limitation is exceeded on such Installment Date, the Company at its option shall do one of the following: (i) redeem pursuant to the terms of the Debenture all or any part of the unconverted Company Conversion Amount designated by the Holder (such designated amount is referred to as the “ Unconverted Installment  Amount ”) and the Company shall pay to the Holder within 3 days of such Installment Date, by wire transfer of immediately available funds, an amount in cash equal to such Unconverted Installment Amount, and/or (ii) the Company Conversion Payment shall be null and void with respect to all or any part of the unconverted Company Conversion Amount designated by the Holder and the Holder shall be entitled to all the rights of a holder of this Debenture with respect to such designated amount of the Company Conversion Amount; provided, however, that the Market Conversion Price for such unconverted Company Installment Conversion Amount shall thereafter be adjusted to equal the lesser of (A) the Market Conversion Price as in effect on the date on which the Holder voided the Company Installment Conversion Payment and (B) the Market Conversion Price as in effect on the date on which the Holder delivers a Conversion Notice relating thereto.  If the Company fails to redeem any Unconverted Installment Amount by the 3 rd day following the applicable Installment Date, then the Holder shall have all rights under this Debenture (including, without limitation, such failure constituting an Event of Default).  Notwithstanding anything to the contrary in this Section 3(c), but subject to Section 4(f)(i), until the Company delivers Common Stock representing the Company Conversion Amount to the Holder, the Company Conversion Amount may be converted by the Holder into Common Stock
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pursuant to Section 4.  In the event that the Holder elects to convert the Company Conversion Amount prior to the applicable Installment Date as set forth in the immediately preceding sentence, the Company Conversion Amount so converted shall be deducted from the Installment Amount relating to the applicable Installment Date as set forth in the applicable Conversion Notice.
(d)            Mechanics of Company Cash Payment .  If the Company elects a Company Cash Payment in accordance with Section 3(b), then the Company Cash Amount, if any, which is to be paid to the Holder on the applicable Installment Date shall be paid by the Company on such Installment Date, to the Holder by wire transfer of immediately available funds, in an amount in cash equal to the Installment Amount being repaid in cash, plus the Cash Payment Premium of the Principal portion of such Installment Amount, plus accrued and unpaid Interest. If the Company fails to deliver to the Holder via wire transfer the Company Cash Amount on the applicable Installment Date then at the option of the Holder designated in writing to the Company (any such designation, “Conversion Notice” for purposes of this Debenture), the Holder may require the Company to convert all or any part of the Company Cash Amount into shares of Common Stock of the Company at the Market Conversion Price.  Conversions required by this Section 3(d) shall be made in accordance with the provisions of Section 4(d).  Notwithstanding anything to the contrary in this Section 3(d), but subject to Section 4(f)(i), until the Company Cash Amount is paid in full, the Company Cash Amount may be converted, in whole or in part, by the Holder into Common Stock pursuant to Section 4.  In the event the Holder elects to convert all or any portion of the unpaid Company Cash Amount prior to the applicable Installment Date as set forth in the immediately preceding sentence, the Company Cash Amount so converted shall be deducted from the Installment Amount relating to the applicable Installment Date as set forth in the applicable Conversion Notice.
(e)            Deferred Installment Amount .  Notwithstanding any provision of this Section 3 to the contrary, the Holder may, at its option and in its sole discretion, deliver a written notice to the Company at least 2 calendar days prior to any Installment Notice Date electing to have the payment of all or any portion of an Installment Amount payable on the next Installment Date deferred to the Maturity Date.  Any amount deferred to the Maturity Date pursuant to this Section 3(e) shall continue to accrue Interest through the Maturity Date.
(f)            Cancellation of Installment Amount .  Notwithstanding any provision of this Section 3 to the contrary, in the event that the VWAP of the Common Stock equals or exceeds $0.40 per share, as quoted by Bloomberg, LP, for each of the 10 consecutive Trading Days immediately preceding the Installment Notice Date and no Event of Default has occurred then the Installment Amount payable on such Installment Date shall be deferred to the Maturity Date .  Any amount deferred to the Maturity Date pursuant to this Section 3(f) shall continue to accrue Interest through the Maturity Date.
(g)            Company’s Cash Redemption .  The Company at its option shall have the right to redeem (a “ Redemption ”), in part or in whole, outstanding Principal and Interest under this Debenture in addition to any Installment Amount payments prior to the Maturity Date provided that as of the date of the Holder’s receipt of a Redemption Notice (as defined herein) (i) the VWAP of the Company’s Common Stock is less than the Fixed Conversion Price and (ii) there is no Equity Conditions Failure.  The Company shall pay an amount equal to the principal amount being redeemed plus a redemption premium (“ Redemption Premium ”) equal to 1) if such
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Redemption occurs within 180 calendar days from the date of the Securities Purchase Agreement an amount equal to 20% of the outstanding Principal Amount being redeemed plus outstanding and accrued Interest and 2) if such Optional Redemption occurs after 180 calendar days from the date of the Securities Purchase Agreement an amount equal to 25% of the outstanding Principal Amount plus outstanding and accrued Interest. In order to make a Redemption pursuant to this Section, the Company shall first provide 7 business days advanced written notice to the Holder of its intention to make a redemption (the “ Redemption Notice ”) setting forth the amount of Principal and Interest it desires to redeem plus the applicable Redemption Premium (the “ Redemption Amount ”). After receipt of the Redemption Notice the Holder shall have 7 Business Days to elect to convert all or any portion of this Debenture, subject to the limitations set forth in Section 4(f).  On the 8 th Business Day after the Redemption Notice, the Company shall deliver to the Holder via wire transfer of immediately available funds the Redemption Amount with respect to the Principal Amount and Interest redeemed after giving effect to conversions by the Holder effected during the 7 Business Day period.
(4)            CONVERSION OF DEBENTURE .            This Debenture shall be convertible into shares of the Company’s Common Stock, on the terms and conditions set forth in this Section 4.
(a)            Conversion Right .  Subject to the provisions of Section 4(f), at any time or times on or after the Issuance Date and notwithstanding any pending Company Cash Payment, Company Conversion Payment or Redemption, the Holder shall be entitled to convert any portion of the outstanding and unpaid Conversion Amount (as defined below) into fully paid and nonassessable shares of Common Stock in accordance with Section 4(e)(i), at the Fixed Conversion Price except as provided for in Section 2(b).  The number of shares of Common Stock issuable upon conversion of any Conversion Amount pursuant to this Section 4(a) shall be determined by dividing (x) such Conversion Amount by (y) the Fixed Conversion Price (the “ Conversion Rate ”).  The Company shall not issue any fraction of a share of Common Stock upon any conversion.  If the issuance would result in the issuance of a fraction of a share of Common Stock, the Company shall round such fraction of a share of Common Stock up to the nearest whole share.  The Company shall pay any and all transfer, stamp and similar taxes that may be payable with respect to the issuance and delivery of Common Stock upon conversion of any Conversion Amount.
(b)             “ Conversion Amount ” means the portion of the Principal and accrued Interest to be converted, redeemed or otherwise with respect to which this determination is being made.
(c)            “Fixed Conversion Price ” means, as of any Conversion Date (as defined below) or other date of determination, $0.40 , subject to adjustment as provided herein.  All such determinations to be appropriately adjusted for any stock split, stock dividend, stock combination or other similar transaction.
(d)            “ Market Conversion Price ” means, as of any Conversion Date (as defined below) or other date of determination, 75% of the lowest VWAP of the Company’s Common Stock during the 15 Trading Days immediately preceding the Conversion Date. All such
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prices used in such determinations to be appropriately adjusted for any stock split, stock dividend, stock combination or other similar transaction.
(e)            Mechanics of Conversion .
(i)            Optional Conversion .  To convert any Conversion Amount into shares of Common Stock on any date (a “ Conversion Date ”), the Holder shall (A) transmit by electronic mail (or otherwise deliver), for receipt on or prior to 5:00 p.m., New York Time, on such date, a copy of an executed notice of conversion in the form attached hereto as Exhibit I (the “ Conversion Notice ”) to the Company and (B) if required by Section 4(e)(iv), surrender this Debenture to a nationally recognized overnight delivery service for delivery to the Company (or an indemnification undertaking reasonably satisfactory to the Company with respect to this Debenture in the case of its loss, theft or destruction).  On or before the 3rd Business Day following (i) the date of receipt of a Conversion Notice or (ii) an Installment Date if the Company has delivered a Company Installment Notice pursuant to which a Company Conversion Payment will be made (the “ Share Delivery Date ”), the Company shall (X) if legends are not required to be placed on certificates of Common Stock pursuant to the Securities Purchase Agreement and provided that the Transfer Agent is participating in the Depository Trust Company’s (“ DTC ”) Fast Automated Securities Transfer Program, credit such aggregate number of shares of Common Stock to which the Holder shall be entitled to the Holder’s or its designee’s balance account with DTC through its Deposit Withdrawal Agent Commission system or (Y) if the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program, issue and deliver to the address as specified in the Conversion Notice, a certificate, registered in the name of the Holder or its designee, for the number of shares of Common Stock to which the Holder shall be entitled which certificates shall not bear any restrictive legends unless required pursuant to Section 2(g) of the Securities Purchase Agreement.  If this Debenture is physically surrendered for conversion and the outstanding Principal of this Debenture is greater than the Principal portion of the Conversion Amount being converted, then the Company shall as soon as practicable and in no event later than 3 Business Days after receipt of this Debenture and at its own expense, issue and deliver to the holder a new Debenture representing the outstanding Principal not converted.  The Person or Persons entitled to receive the shares of Common Stock issuable upon a conversion of this Debenture shall be treated for all purposes as the record holder or holders of such shares of Common Stock upon the transmission pursuant to the notice delivery provisions in Section 7 herein of a Conversion Notice procedures set forth in this Section 4(e)(i).
(ii)            Company’s Failure to Timely Convert .  If within 3 Trading Days after the Company’s receipt by electronic mail of a copy of a Conversion Notice or an Installment Date if the Company has delivered a Company Installment Notice pursuant to which a Company Installment Conversion Payment will be made the Company shall fail to issue and deliver a certificate to the Holder or credit the Holder’s balance account with DTC for the number of shares of Common Stock to which the Holder is entitled upon such conversion of any Conversion Amount, unless such delivery failure results from a failure of the Company’s transfer agent to issue such shares as a result of an act of terrorism, war, natural disaster, act of god or other force majure event,  (a “ Conversion Failure ”), and if on or after such Trading Day the Holder purchases (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by the Holder of Common Stock issuable upon such conversion that the Holder anticipated receiving from the Company (a “ Buy-In ”), then the Company shall, within 3 Business Days after
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the Holder’s request and in the Holder’s discretion, either (i) pay cash to the Holder in an amount equal to the Holder’s total purchase price (including brokerage commissions and other out of pocket expenses, if any) for the shares of Common Stock so purchased (the “ Buy-In Price ” ), at which point the Company’s obligation to deliver such certificate (and to issue such Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver to the Holder a certificate or certificates representing such Common Stock and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock, times (B) the Closing Bid Price on the Conversion Date.
(iii)            Automatic Conversion .  Subject to Section 4(f)(i) herein this Debenture will automatically convert if the Company’s Common Stock has traded at 300% or more above the Fixed Conversion Price for a period of 20 consecutive Trading Days, as quoted by Bloomberg, LP, provided that the Holder is entitled to sell all such Conversion Shares pursuant to an effective registration statement or Rule 144 and the Company’s Common Stock has an average daily traded volume of $350,000 per day during the same period of 20 consecutive Trading Days, as quoted by Bloomberg, LP.
(iv)            Book-Entry . Notwithstanding anything to the contrary set forth herein, upon conversion of any portion of this Debenture in accordance with the terms hereof, the Holder shall not be required to physically surrender this Debenture to the Company unless (A) the full Conversion Amount represented by this Debenture is being converted or (B) the Holder has provided the Company with prior written notice (which notice may be included in a Conversion Notice) requesting reissuance of this Debenture upon physical surrender of this Debenture.  The Holder and the Company shall maintain records showing the Principal and Interest converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Company, so as not to require physical surrender of this Debenture upon conversion.
(f)            Limitations on Conversions .
(i)            Beneficial Ownership .  The Company shall not effect any conversions of this Debenture and the Holder shall not have the right to convert any portion of this Debenture or receive shares of Common Stock as payment of interest hereunder to the extent that after giving effect to such conversion or receipt of such interest payment, the Holder, together with any affiliate thereof, would beneficially own (as determined in accordance with Section 13(d) of the Exchange Act and the rules promulgated thereunder) in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion or receipt of shares as payment of interest.    Since the Holder will not be obligated to report to the Company the number of shares of Common Stock it may hold at the time of a conversion hereunder, unless the conversion at issue would result in the issuance of shares of Common Stock in excess of 4.99% of the then outstanding shares of Common Stock without regard to any other shares which may be beneficially owned by the Holder or an affiliate thereof, the Holder shall have the authority and obligation to determine whether the restriction contained in this Section will limit any particular conversion hereunder and to the extent that the Holder determines that the limitation contained in this Section applies, the determination of which portion of the principal amount of this Debenture is convertible shall be the responsibility and obligation of the Holder.  If the Holder has delivered a Conversion Notice for a principal amount of this Debenture that, without regard to any other shares that the Holder or its affiliates may beneficially own, would result in the issuance in excess
9
of the permitted amount hereunder, the Company shall notify the Holder of this fact and shall honor the conversion for the maximum principal amount permitted to be converted on such Conversion Date in accordance with Section 4(a) and, any principal amount tendered for conversion in excess of the permitted amount hereunder shall remain outstanding under this Debenture. The provisions of this Section may be waived by a Holder (but only as to itself and not to any other Holder) upon not less than 65 days prior notice to the Company. Other Holders shall be unaffected by any such waiver.
(g)            Other Provisions .
(i)            The Company shall at all times reserve and keep available out of its authorized Common Stock the full number of shares of Common Stock issuable upon conversion of all outstanding amounts under this Debenture; and within 3 Business Days following the receipt by the Company of a Holder’s notice that such minimum number of Underlying Shares is not so reserved, the Company shall promptly reserve a sufficient number of shares of Common Stock to comply with such requirement.
(ii)            All calculations under this Section 4 shall be rounded to the nearest $0.0001 or whole share.
(iii)            The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock solely for the purpose of issuance upon conversion of this Debenture and payment of interest on this Debenture, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder, not less than such number of shares of the Common Stock as shall (subject to any additional requirements of the Company as to reservation of such shares set forth in this Debenture or in the Transaction Documents) be issuable (taking into account the adjustments and restrictions set forth herein) upon the conversion of the outstanding principal amount of this Debenture and payment of interest hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and, if the Underlying Shares Registration Statement has been declared and remains effective under the Securities Act, registered for public sale in accordance with such Underlying Shares Registration Statement.
(iv)            Nothing herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 2 herein for a Conversion Failure and such Holder shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief, in each case without the need to post a bond or provide other security. The exercise of any such rights shall not prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable law.
(5)            Adjustments to the Fixed Conversion Price.
(a)            Adjustment of Conversion Price upon Issuance of Common Stock .  If the Company, at any time while this Debenture is outstanding, issues or sells, or in accordance with this Section 5(a) is deemed to have issued or sold, any shares of Common Stock, excluding
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shares of Common Stock deemed to have been issued or sold by the Company in connection with any Excluded Securities, for a consideration per share (the “ New Issuance Price ”) less than a price equal to the Fixed Conversion Price in effect immediately prior to such issue or sale (such price the “ Applicable Price ”) (the foregoing a “ Dilutive Issuance ”), then immediately after such Dilutive Issuance the Fixed Conversion Price then in effect shall be reduced to an amount equal to the New Issuance Price.  For purposes of determining the adjusted Fixed Conversion Price under this Section 5(a), the following shall be applicable:
(i)            Issuance of Options .  If the Company in any manner grants or sells any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange or exercise of any Convertible Securities issuable upon exercise of such Option together with the price paid for such Option is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share.  For purposes of this Section, the “lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange or exercise of any Convertible Securities issuable upon exercise of such Option” shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon granting or sale of the Option, upon exercise of the Option and upon conversion or exchange or exercise of any Convertible Security issuable upon exercise of such Option.  No further adjustment of the Conversion Price shall be made upon the actual issuance of such share of Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion or exchange or exercise of such Convertible Securities.
(ii)            Issuance of Convertible Securities .  If the Company in any manner issues or sells any Convertible Securities and the lowest price per share for which one share of Common Stock is issuable upon such conversion or exchange or exercise thereof is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance or sale of such Convertible Securities for such price per share.  For the purposes of this Section, the “lowest price per share for which one share of Common Stock is issuable upon such conversion or exchange or exercise” shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the issuance or sale of the Convertible Security and upon the conversion or exchange or exercise of such Convertible Security.  No further adjustment of the Fixed Conversion Price shall be made upon the actual issuance of such share of Common Stock upon conversion or exchange or exercise of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Fixed Conversion Price had been or are to be made pursuant to other provisions of this Section, no further adjustment of the Fixed Conversion Price shall be made by reason of such issue or sale.
(iii)            Change in Option Price or Rate of Conversion .  If the purchase price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock changes at any time, the Fixed Conversion Price in effect at the time of such change shall be
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adjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold.  For purposes of this Section, if the terms of any Option or Convertible Security that was outstanding as of the Issuance Date are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change.  No adjustment shall be made if such adjustment would result in an increase of the Conversion Price then in effect.
(iv)            Calculation of Consideration Received .  In case any Option (other than an Excluded Security) is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, the Options will be deemed to have been issued for the difference of (x) the aggregate fair market value of such Options and other securities issued or sold in such integrated transaction, less (y) the fair market value of the securities other than such Option, issued or sold in such transaction and the other securities issued or sold in such integrated transaction will be deemed to have been issued or sold for the balance of the consideration received by the Company.  If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the gross amount raised by the Company; provided that any deductions made from the gross amount are commercially reasonable commissions and expenses in connection with such capital raise.  If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the fair market value of such securities as mutually determined by the Company and the Holder of such securities on the date of receipt.  If any Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be.  The fair value of any consideration other than cash or securities will be determined jointly by the Company and the Holder.  If such parties are unable to reach agreement within ten 10 days after the occurrence of an event requiring valuation (the “ Valuation Event ”), the fair value of such consideration will be determined within 5 Business Days after the 10 th day following the Valuation Event by an independent, reputable appraiser jointly selected by the Company and the Holder.  The determination of such appraiser shall be deemed binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the Company.
(v)            Record Date .  If the Company takes a record of the holders of Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (B) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.
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(b)            Adjustment of the Fixed Conversion Price upon Subdivision or Combination of Common Stock .  If the Company, at any time while this Debenture is outstanding, shall (a) pay a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock, (b) subdivide outstanding shares of Common Stock into a larger number of shares, (c) combine (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (d) issue by reclassification of shares of the Common Stock any shares of capital stock of the Company, then the Fixed Conversion Price, as applicable, shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
(c)            Purchase Rights .  If at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the “ Purchase Rights ”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Debenture (without taking into account any limitations or restrictions on the convertibility of this Debenture) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.
(d)            Other Events .  If any event occurs of the type contemplated by the provisions of this Section 5 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company’s Board of Directors will make an appropriate adjustment in the Fixed Conversion Price so as to protect the rights of the Holder under this Debenture; provided that no such adjustment will increase the Fixed Conversion Price as otherwise determined pursuant to this Section 5.
(e)            Other Corporate Events .  In addition to and not in substitution for any other rights hereunder, prior to the consummation of any Change of Control Transaction pursuant to which holders of shares of Common Stock are entitled to receive securities or other assets with respect to or in exchange for shares of Common Stock (a “ Corporate Event ”), the Company shall make appropriate provision to insure that the Holder will thereafter have the right to receive upon a conversion of this Debenture, at the Holder’s option, (i) in addition to the shares of Common Stock receivable upon such conversion, such securities or other assets to which the Holder would have been entitled with respect to such shares of Common Stock had such shares of Common Stock been held by the Holder upon the consummation of such Corporate Event (without taking into account any limitations or restrictions on the convertibility of this Debenture) or (ii) in lieu of the shares of Common Stock otherwise receivable upon such conversion, such securities or other assets received by the holders of shares of Common Stock in connection with the
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consummation of such Corporate Event in such amounts as the Holder would have been entitled to receive had this Debenture initially been issued with conversion rights for the form of such consideration (as opposed to shares of Common Stock) at a conversion rate for such consideration commensurate with the Conversion Rate.  The provisions of this Section shall apply similarly and equally to successive Corporate Events and shall be applied without regard to any limitations on the conversion or redemption of this Debenture.
(f)            Whenever the Fixed Conversion Price is adjusted pursuant to Section 5 hereof, the Company shall promptly mail to the Holder a notice setting forth the Fixed Conversion Price, as applicable, after such adjustment and setting forth a brief statement of the facts requiring such adjustment.
(g)            Neither the Company, nor any subsidiary of the Company, shall be a party to any Change of Control Transaction unless, at least ten (10) days prior to the consummation of such Change of Control Transaction, but not prior to the public announcement of such Change of Control Transaction, the Company shall deliver written notice thereof to the Holder (a “ Change of Control Notice ”).  At any time during the period beginning after the Holder’s receipt of a Change of Control Notice and ending twenty (20) Trading Days after the date of the consummation of such Change of Control Transaction, the Holder may require the Company to redeem all or any portion of this Debenture by delivering written notice thereof (“ Change of Control Redemption Notice ”) to the Company, which Change of Control Redemption Notice shall indicate the Principal amount the Holder is electing to redeem. The portion of this Debenture subject to redemption pursuant to this Section 5(h) shall be redeemed by the Company in cash at a price equal to the Principal amount being redeemed, plus applicable Cash Payment Premium, plus the amount of any accrued but unpaid Interest on this Debenture.
(6)            REISSUANCE OF THIS DEBENTURE .
(a)            Transfer .  If this Debenture is to be transferred, the Holder shall surrender this Debenture to the Company, whereupon the Company will, subject to the satisfaction of the transfer provisions of the Securities Purchase Agreement, forthwith issue and deliver upon the order of the Holder a new Debenture (in accordance with Section 6(d)), registered in the name of the registered transferee or assignee, representing the outstanding Principal being transferred by the Holder and, if less then the entire outstanding Principal is being transferred, a new Debenture (in accordance with Section 6(d)) to the Holder representing the outstanding Principal not being transferred.  The Holder and any assignee, by acceptance of this Debenture, acknowledge and agree that, by reason of the provisions of Section 4(b)(iii) following conversion or redemption of any portion of this Debenture, the outstanding Principal represented by this Debenture may be less than the Principal stated on the face of this Debenture.
(b)            Lost, Stolen or Mutilated Debenture .  Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Debenture, and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of this Debenture, the Company shall execute and deliver to the Holder a new Debenture (in accordance with Section 6(d)) representing the outstanding Principal.
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(c)            Debenture Exchangeable for Different Denominations .  This Debenture is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company, for a new Debenture or Debentures (in accordance with Section 6(d)) representing in the aggregate the outstanding Principal of this Debenture, and each such new Debenture will represent such portion of such outstanding Principal as is designated by the Holder at the time of such surrender.
(d)            Issuance of New Debentures .  Whenever the Company is required to issue a new Debenture pursuant to the terms of this Debenture, such new Debenture (i) shall be of like tenor with this Debenture, (ii) shall represent, as indicated on the face of such new Debenture, the Principal remaining outstanding (or in the case of a new Debenture being issued pursuant to Section 6(a) or Section 6(c), the Principal designated by the Holder which, when added to the principal represented by the other new Debentures issued in connection with such issuance, does not exceed the Principal remaining outstanding under this Debenture immediately prior to such issuance of new Debentures), (iii) shall have an issuance date, as indicated on the face of such new Debenture, which is the same as the Issuance Date of this Debenture, (iv) shall have the same rights and conditions as this Debenture, and (v) shall represent accrued and unpaid Interest from the Issuance Date to the date the Debenture is reissued.
(7)            NOTICES .            Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered upon:  (i) receipt, when delivered personally, (ii) 1 Business Day after deposit with an overnight courier service with next day delivery specified, in each case, properly addressed to the party to receive the same, or  (iii) receipt, which shall mean the next Business day if such notice is sent after 5:00pm EST, when sent by electronic mail (provided that the electronic mail transmission is not returned in error or the sender is not otherwise notified of any error in transmission. The addresses and e-mail addresses for such communications shall be:
If to the Company, to:
CLS Holdings USA, Inc.
 
11767 South Dixie Highway – Suite 115
 
Miami, FL 33156
 
Attention:    Jeffrey I. Binder
Telephone:  (305) 992-2500
 
Email:    jeff@clslabs.com
              jeff@jbinder.net
   
With a copy to:
Broad and Cassel LLP
 
One North Clematis Street – Suite 500
 
West Palm Beach, FL 33401
 
Attention:     Kathleen L. Deutsch, Esq.
 
Telephone:   (561)832-3300
 
Email:    kdeutsch@broadandcassel.com
              kathydash@aol.com
       
If to the Holder:
YA II PN, Ltd.
c/o Yorkville Advisors Global, LP
 
1012 Springfield Avenue
 
15
 
Mountainside, NJ 07092
 
Attention:      Mark Angelo
Telephone:   (201) 536-5114
 
Email:      mangelo@yorkvilleadvisors.com
   
With a copy to:
David Gonzalez, Esq.
 
1012 Springfield Avenue
 
Mountainside, NJ 07092
 
Telephone:      (201) 536-5109
 
Email:      Legal@yorkvilleadvisors.com
   
or at such other address and/or electronic email address and/or to the attention of such other person as the recipient party has specified by written notice given to each other party 3 Business Days prior to the effectiveness of such change.  Written confirmation of receipt (i) given by the recipient of such notice, consent, waiver or other communication, (ii) mechanically or electronically generated by the sender’s computer containing the time, date, recipient’s electronic mail address and the text of such electronic mail or (iii) provided by a nationally recognized overnight delivery service, shall be rebuttable evidence of personal service, receipt by electronic mail or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively.
(8)            Except as expressly provided herein, no provision of this Debenture shall alter or impair the obligations of the Company, which are absolute and unconditional, to pay the principal of, interest and other charges (if any) on, this Debenture at the time, place, and rate, and in the coin or currency, herein prescribed.  This Debenture is a direct obligation of the Company. As long as this Debenture is outstanding, the Company shall not and shall cause their subsidiaries not to, without the consent of the Holder, (i) amend its certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of the Holder (which shall include combining (by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares); (ii) repay, repurchase or offer to repay, repurchase or otherwise acquire shares of its Common Stock or other equity securities other than as to the Underlying Shares to the extent permitted or required under the Transaction Documents or as may be required pursuant to the Company’s convertible loans outstanding as of the date hereof, or as long as there is not in existence any uncured Event of Default, as may be permitted pursuant to the Company’s convertible loans; or (iii) enter into any agreement with respect to any of the foregoing.
(9)            This Debenture shall not entitle the Holder to any of the rights of a stockholder of the Company, including without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of stockholders or any
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other proceedings of the Company, unless and to the extent converted into shares of Common Stock in accordance with the terms hereof.
(10)            Except as set forth in the SEC Documents and Schedule 10, no indebtedness of the Company is senior to this Debenture in right of payment, whether with respect to interest, damages or upon liquidation or dissolution or otherwise.
(11)            This Debenture shall be governed by and construed in accordance with the laws of the State of New Jersey, without giving effect to conflicts of laws thereof.  Each of the parties consents to the jurisdiction of the Superior Courts of the State of New Jersey sitting in Union County, New Jersey and the U.S. District Court for the District of New Jersey sitting in Newark, New Jersey in connection with any dispute arising under this Debenture and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens to the bringing of any such proceeding in such jurisdictions.
(12)            If the Company fails to strictly comply with the terms of this Debenture, then the Company shall reimburse the Holder promptly for all fees, costs and expenses, including, without limitation, attorneys’ fees and expenses incurred by the Holder in any action in connection with this Debenture, including, without limitation, those incurred: (i) during any workout, attempted workout, and/or in connection with the rendering of legal advice as to the Holder’s rights, remedies and obligations, (ii) collecting any sums which become due to the Holder, (iii) defending or prosecuting any proceeding or any counterclaim to any proceeding or appeal; or (iv) the protection, preservation or enforcement of any rights or remedies of the Holder.
(13)            Any waiver by the Holder of a breach of any provision of this Debenture shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Debenture. The failure of the Holder to insist upon strict adherence to any term of this Debenture on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Debenture. Any waiver must be in writing.
(14)            If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder shall violate applicable laws governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum permitted rate of interest. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on this Debenture as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this indenture, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impeded the
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execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted.
(15)            Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.
(16)            THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION DOCUMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY.  THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES’ ACCEPTANCE OF THIS AGREEMENT.
(17)            CERTAIN DEFINITIONS            For purposes of this Debenture, the following terms shall have the following meanings:
(a)            “ Approved Stock Plan ” means a stock plan, award or arrangement pursuant to which the Company’s securities may be issued to any employee, officer, or director or third party service providers in the normal course of business, for services provided to the Company or to a new hire in connection with future employment by the Company, provided that (i) such plan, award or arrangement and any issuance made pursuant thereto has been approved by the Board of Directors of the Company, and (ii) the issuance of any such shares are not subject to any registration statement or contain any registration rights.
(b)            “ Bloomberg ” means Bloomberg Financial Markets.
(c)            “ Business Day ” means any day except Saturday, Sunday and any day which shall be a federal legal holiday in the United States or a day on which banking institutions are authorized or required by law or other government action to close.
(d)            “ Cash Payment Premium ” means with regard to any Installment Amount being paid in cash an amount equal to an amount equal to 20% of the of the Installment Amount for Installment Amounts due within 180 days following the date of execution of the Securities Purchase Agreement, and 25% of the Installment Amount for Installment Amounts due thereafter.
(e)            “ Change of Control Transaction ” means the occurrence of (a) an acquisition after the date hereof by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of in excess of fifty percent (50%) of the voting securities of the Company (except that the acquisition of voting securities by the Holder or any other current holder of convertible securities of the Company shall not constitute a Change of Control Transaction for purposes hereof), (b) a replacement at one time or over time of more than one-half of the members of the board of directors of the Company which is not approved by a majority of those individuals who are members of the board of directors on the date hereof (or by those individuals who are serving as members of the board of directors on
18
any date whose nomination to the board of directors was approved by a majority of the members of the board of directors who are members on the date hereof), (c) the merger, consolidation or sale of fifty percent (50%) or more of the assets of the Company or any subsidiary of the Company in one or a series of related transactions with or into another entity, or (d) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in (a), (b) or (c).  Notwithstanding the foregoing, neither the consummation the Oasis Acquisition, nor the consummation of the financing transaction undertaken by a Canadian agent as described in the Company’s Form 8-K dated May 8, 2018, shall constitute a Change of Control Transaction.
(f)            “ Closing Bid Price ” means the price per share in the last reported trade of the Common Stock on a Primary Market or on the exchange which the Common Stock is then listed as quoted by Bloomberg.
(g)            “ Convertible Securities ” means any stock or securities (other than Options) directly or indirectly convertible into or exercisable or exchangeable for Common Stock.
(h)            “ Commission ” means the Securities and Exchange Commission.
(i)            “ Common Stock ” means the common stock, par value $0.0001, of the Company and stock of any other class into which such shares may hereafter be changed or reclassified.
(j)            “ Company Installment Conversion Payment Limitation ” means 300% of the average daily dollar trading volume, as quoted by Bloomberg, LP of the Company’s Common Stock over the 10 consecutive Trading Day period immediately preceding an Installment Notice.
(k)            “ Effective Date ” has the meaning ascribed to such term in the Registration Rights Agreement.
(l)            “ Equity Conditions ” means that each of the following conditions is satisfied:  (i) on each day during the period beginning 2 weeks prior to the applicable date of determination and ending on and including the applicable date of determination (the “ Equity Conditions Measuring Period ”), either (x) the Underlying Shares Registration Statement filed pursuant to the Registration Rights Agreement shall be effective and available for the resale of all applicable shares of Common Stock to be issued in connection with the event requiring determination or (y) all applicable shares of Common Stock to be issued in connection with the event requiring determination shall be eligible for sale without restriction and without the need for registration under any applicable federal or state securities laws; (ii) on each day during the Equity Conditions Measuring Period, the Common Stock is designated for quotation on the Primary Market and shall not have been suspended from trading on such exchange or market nor shall delisting or suspension by such exchange or market been threatened or pending either (A) in writing by such exchange or Primary Market or (B) by falling below the then effective minimum listing maintenance requirements of such exchange or Primary Market; (iii) during the Equity Conditions Measuring Period, the Company shall have delivered Conversion Shares with respect to any prior conversions of the Debenture, if any, to the Holder on a timely basis as set forth in
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Section 4(e)(ii) hereof; (iv) any applicable shares of Common Stock to be issued in connection with the event requiring determination may be issued in full without violating Section 4(f) hereof and the rules or regulations of the Primary Market; (v) during the Equity Conditions Measuring Period, there shall not have occurred either (A) an Event of Default or (B) an event that with the passage of time or giving of notice would constitute an Event of Default; and (vii) the Company shall have no knowledge of any fact that would cause (x) the Registration Statements required pursuant to the Registration Rights Agreement not to be effective and available for the resale of all applicable shares of Common Stock to be issued in connection with the event requiring determination or (y) any applicable shares of Common Stock to be issued in connection with the event requiring determination not to be eligible for sale without restriction and without the need for registration under any applicable federal or state securities laws.
(m)             “ Equity Conditions Failure ” means that on any applicable date the Equity Conditions have not been satisfied (or waived in writing by the Holder).
(n)            “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.
(o)            “ Excluded Securities ” means any Common Stock issued or issuable: (i) in connection with any Approved Stock Plan, (ii) upon conversion of the Debenture or any other Convertible Debentures issued pursuant to the Securities Purchase Agreement, or exercise of the Warrants, or (iii) upon conversion or exercise of any Options or Convertible Securities which are outstanding on the day immediately preceding the date of the Securities Purchase Agreement, provided that the conversion or exercise price of such Options or Convertible Securities is not amended, modified or changed on or after the Subscription Date.
(p)            “ Installment Amount ” means with respect to any Installment Date, $62,500 of Principal amount of this Debenture, plus accrued and outstanding Interest.  In the event the Holder shall sell or otherwise transfer any portion of this Debenture, the transferee shall be allocated a pro rata portion of each unpaid Installment Amount hereunder.  In the event that the Holder is the holder of more than one Debenture of this series of Convertible Debentures issued pursuant to the Securities Purchase Agreement, then the Holder shall have the right to allocate the total Installment Amount due to it among the Debentures as it sees fit and shall notify the Company of such allocation.
(q)            “ Installment Date ”  means each of the following dates: (i) December 1, 2018, (ii) January 1, 2019, (iii) February 1, 2019, (iv) March 1, 2019, (v) April 1, 2019, (vi) May 1, 2019, (vii) June 1, 2019, (viii) July 1, 2019.
(r)            “ Oasis Acquisition ” shall have the meaning set forth in the Securities Purchase Agreement.
(s)            “ Options ” means any rights, warrants or options to subscribe for or purchase shares of Common Stock or Convertible Securities.
(t)            “ Original Issue Date ” means the date of the first issuance of this Debenture regardless of the number of transfers and regardless of the number of instruments, which may be issued to evidence such Debenture.
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(u)            “ Person ” means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency.
(v)            “ Securities Act ” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
(w)            “ Securities Purchase Agreement ” means the Securities Purchase Agreement dated May 11, 2018 by and among the Company and the Investor.
(x)             “ Trading Day ” means a day on which the shares of Common Stock are quoted on the Primary Market on which the shares of Common Stock are then quoted or listed; provided, that in the event that the shares of Common Stock are not listed or quoted, then Trading Day shall mean a Business Day.
(y)            “ Transaction Documents ” means the Securities Purchase Agreement or any other agreement delivered in connection with the Securities Purchase Agreement, including, without limitation, the Irrevocable Transfer Agent Instructions, the Warrants and the Registration Rights Agreement.
(z)            “ Underlying Shares ” means the shares of Common Stock issuable upon conversion of this Debenture or as payment of interest in accordance with the terms hereof.
(aa)            “ Underlying Shares Registration Statement ” means a registration statement meeting the requirements set forth in the Registration Rights Agreement, covering among other things the resale of the Underlying Shares and naming the Holder as a “selling stockholder” thereunder.
(bb)            “ VWAP ” means, for any security as of any date, the daily dollar volume-weighted average price for such security as reported by Bloomberg, LP through its “Historical Price Table Screen (HP)” with Market: Weighted Ave function selected, or, if no dollar volume-weighted average price is reported for such security by Bloomberg, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the “pink sheets” by Pink Sheets LLC.
(cc)            “ Warrants ” has the meaning ascribed to such term in the Securities Purchase Agreement, and shall include all warrants issued in exchange therefor or replacement thereof.
[Signature Page Follows]

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

 
COMPANY:
 
CLS HOLDINGS USA, INC.
 
   
 
By:   /s/ Jeffrey I. Binder           
 
Name:            Jeffrey I. Binder
 
Title:            Chairman and CEO
   



EXHIBIT I
CONVERSION NOTICE
(To be executed by the Holder in order to Convert the Debenture)

TO:

The undersigned hereby irrevocably elects to convert $                                                                     of the principal amount of Debenture No. CLSH-1-2 into Shares of Common Stock of CLS HOLDINGS USA, INC. , according to the conditions stated therein, as of the Conversion Date written below.
Conversion Date:
     
Conversion Amount to be converted:
 
$
   
Applicable Conversion Price:
 
$
   
Number of shares of Common Stock to be issued:
       
Principal Amount of Debenture Unconverted:
 
$
   
         
         
Please issue the shares of Common Stock in the following name and to the following address:
 
Issue to:
       
         
Authorized Signature:
       
Name:
       
Title:
       
Broker DTC Participant Code:
       
Account Number:
       

Exhibit 10.2
 
 

WARRANT
NEITHER THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE INTO HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE.  THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE BEEN SOLD IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) AND ACCORDINGLY, MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OR PURSUANT TO AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, THE AVAILABILITY OF WHICH IS CONFIRMED BY AN OPINION OF COUNSEL IN GENERALLY ACCEPTABLE FORM AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS..
CLS HOLDINGS USA, INC.
Warrant To Purchase Common Stock
Warrant No.: CLSH-1-2
Number of Shares:          1,250,000
Warrant Exercise Price:            $0.60
 
Expiration Date:            May 14, 2023

 
Date of Issuance: July 20, 2018

CLS Holdings USA, Inc., a Nevada corporation (the “ Company ”), hereby certifies that, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, YA II PN, Ltd. (the “ Holder ”), the registered holder hereof or its permitted assigns, is entitled, subject to the terms set forth below, to purchase from the Company upon surrender of this Warrant, at any time or times on or after the date hereof, but not after 11:59 P.M. Eastern Time on the Expiration Date (as defined herein) up to 1,250,000 fully paid and nonassessable shares of Common Stock (as defined herein) of the Company (the “ Warrant Shares ”) at the exercise price per share provided in Section 1(b) below or as subsequently adjusted; provided, however, that in no event shall the holder be entitled to exercise this Warrant for a number of Warrant Shares in excess of that number of Warrant Shares which, upon giving effect to such exercise, would cause the aggregate number of shares of Common Stock beneficially owned by the holder and its affiliates to exceed 4.99% of the outstanding shares of the Common Stock following such exercise, except within 60 days of the Expiration Date (however, such restriction may be waived by Holder (but only as to itself and not to any other holder) upon not less than 65 days prior notice to the Company).  For purposes of the foregoing proviso, the aggregate number of shares of Common Stock beneficially owned by the holder and its affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such proviso is being made, but shall exclude shares of Common Stock which would be issuable upon (i) exercise of the remaining, unexercised Warrants beneficially owned by the holder and its affiliates and
(ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company beneficially owned by the holder and its affiliates (including, without limitation, any convertible notes or preferred stock) subject to a limitation on conversion or exercise analogous to the limitation contained herein.  Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended.  For purposes of this Warrant, in determining the number of outstanding shares of Common Stock a holder may rely on the number of outstanding shares of Common Stock as reflected in (1) the Company’s most recent Form 10-Q or Form 10-K, as the case may be, (2) a more recent public announcement by the Company or (3) any other notice by the Company or its transfer agent setting forth the number of shares of Common Stock outstanding.  Upon the written request of any holder, the Company shall promptly, but in no event later than 1 Business Day following the receipt of such notice, confirm in writing to any such holder the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the exercise of Warrants (as defined below) by such holder and its affiliates since the date as of which such number of outstanding shares of Common Stock was reported.
Section 1.           
(a)            This Warrant is issued pursuant to the Securities Purchase Agreement (“ Securities Purchase Agreement ”) dated May 11, 2018 between the Company and the Holder or issued in exchange or substitution thereafter or replacement thereof.  Each Capitalized term used, and not otherwise defined herein, shall have the meaning ascribed thereto in the Securities Purchase Agreement.
(b)            Definitions .  The following words and terms as used in this Warrant shall have the following meanings:
(i)            “ Approved Stock Plan ” means a stock plan, award or arrangement pursuant to which the Company’s securities may be issued to any employee, officer, or director or third party service providers in the normal course of business, for services provided to the Company or to a new hire in connection with future employment by the Company, provided that (i) such plan, award or arrangement and any issuance made pursuant thereto has been approved by the Board of Directors of the Company, and (ii) the issuance of any such shares are not subject to any registration statement or contain any registration rights.
(ii)             “ Business Day ” means any day other than Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law to remain closed.
(iii)            “ Convertible Debentures ” means the convertible debentures issued pursuant to the Securities Purchase Agreement.
(iv)            “ Convertible Securities ” means any stock or securities (other than Options) directly or indirectly convertible into or exercisable or exchangeable for Common Stock.
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(v)            “ Closing Bid Price ” means the closing bid price (or closing trade if there is no closing bid price) of Common Stock as quoted on the Principal Market (as reported by Bloomberg, LP (“ Bloomberg ”) through its “Volume at Price” function).
(vi)            “ Common Stock ” means (i) the Company’s common stock, par value $0.0001 per share, and (ii) any capital stock into which such Common Stock shall have been changed or any capital stock resulting from a reclassification of such Common Stock.
(vii)            “ Event of Default ” means an event of default under the Securities Purchase Agreement or the Convertible Debentures issued in connection therewith.
(viii)            “ Excluded Securities ” means any Common Stock issued or issuable: (i) in connection with any Approved Stock Plan, (ii) upon conversion of any of the Convertible Debentures issued pursuant to the Securities Purchase Agreement, or exercise of any of the Warrants, or (iii) upon conversion or exercise of any Options or Convertible Securities which are outstanding on the day immediately preceding the date of the Securities Purchase Agreement, provided that the conversion or exercise price of such Options or Convertible Securities is not amended, modified or changed on or after the date of the Securities Purchase Agreement.
(ix)            “ Expiration Date ” means the date set forth on the first page of this Warrant.
(x)            “ Issuance Date ” means the date hereof.
(xi)            “ Options ” means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.
(xii)             “ Person ” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.
(xiii)            “ Primary Market ” means the OTC Markets Group’s OTCQB Venture Market.
(xiv)            “ Securities Act ” means the Securities Act of 1933, as amended.
(xv)            “ Warrant ” means this Warrant and all Warrants issued in exchange, transfer or replacement thereof.
(xvi)            “ Warrant Exercise Price ” shall be $0.60 or as subsequently adjusted as provided in Section 8 hereof.
(c)            Other Definitional Provisions.
(i)            Except as otherwise specified herein, all references herein (A) to the Company shall be deemed to include the Company’s successors and (B) to any applicable law defined or referred to herein shall be deemed references to such applicable law as the same may have been or may be amended or supplemented from time to time.
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(ii)            When used in this Warrant, the words “ herein ”, “ hereof ”, and “ hereunder ” and words of similar import, shall refer to this Warrant as a whole and not to any provision of this Warrant, and the words “ Section ”, “ Schedule ”, and “ Exhibit ” shall refer to Sections of, and Schedules and Exhibits to, this Warrant unless otherwise specified.
(iii)            Whenever the context so requires, the neuter gender includes the masculine or feminine, and the singular number includes the plural, and vice versa.
Section 2.                       Exercise of Warrant .
(a)            Subject to the terms and conditions hereof, this Warrant may be exercised by the holder hereof then registered on the books of the Company, pro rata as hereinafter provided, at any time on any Business Day on or after the opening of business on such Business Day, commencing with the first day after the date hereof, and prior to 5:00 P.M. Eastern Time on the Expiration Date (i) by delivery of a written notice, in the form of the subscription notice attached as Exhibit A hereto (the “ Exercise Notice ”), of such holder’s election to exercise this Warrant, which notice shall specify the number of Warrant Shares to be purchased, payment to the Company of an amount equal to the Warrant Exercise Price(s) applicable to the Warrant Shares being purchased, multiplied by the number of Warrant Shares (at the applicable Warrant Exercise Price) as to which this Warrant is being exercised (plus any applicable issue or transfer taxes) (the “ Aggregate Exercise Price ”) in cash or wire transfer of immediately available funds and the surrender of this Warrant (or an indemnification undertaking with respect to this Warrant in the case of its loss, theft or destruction) to a common carrier for overnight delivery to the Company or (ii) if at the time of exercise, the Warrant Shares are not subject to an effective registration statement or if an Event of Default has occurred and is continuing, by delivering an Exercise Notice and in lieu of making payment of the Aggregate Exercise Price in cash or wire transfer, elect instead to receive upon such exercise the “Net Number” of shares of Common Stock determined according to the following formula (the “ Cashless Exercise ”):
Net Number = (A x B) – (A x C)
                                      B

For purposes of the foregoing formula:

A = the total number of Warrant Shares with respect to which this Warrant is then being exercised.

B = the Closing Bid Price of the Common Stock on the date of exercise of the Warrant.

C = the Warrant Exercise Price then in effect for the applicable Warrant Shares at the time of such exercise.

In the event of any exercise of the rights represented by this Warrant in compliance with this Section 2, the Company shall on or before the 3 rd   Business Day following the date of receipt of the Exercise Notice, the Aggregate Exercise Price and this Warrant (or an indemnification undertaking with respect to this Warrant in the case of its loss, theft or destruction) and the receipt
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of the representations of the holder specified in Section 6 hereof, if requested by the Company (the “ Exercise Delivery Documents ”), and if the Warrant Shares are subject to an effective and current Registration Statement and the Common Stock is DTC eligible, credit such aggregate number of shares of Common Stock to which the holder shall be entitled to the holder’s or its designee’s balance account with The Depository Trust Company; provided, however, if the holder who submitted the Exercise Notice requested physical delivery of any or all of the Warrant Shares, or, if the Warrant Shares are not subject to an effective and current Registration Statement and the Common Stock is not DTC eligible  then the Company shall, on or before the 3 rd   Business Day following receipt of the Exercise Delivery Documents, issue and surrender to a common carrier for overnight delivery to the address specified in the Exercise Notice, a certificate, registered in the name of the holder, for the number of shares of Common Stock to which the holder shall be entitled pursuant to such request.  The Warrant Shares shall be issued with a legend unless they are subject to an effective and current Registration Statement or they are being transferred pursuant to an exemption from such registration requirements, the availability of which is confirmed in an opinion of counsel acceptable to the Company’s Transfer Agent. Upon delivery of the Exercise Notice pursuant to the notice delivery provisions in Section 11 herein and Aggregate Exercise Price referred to in clause (i) or (ii) above the holder of this Warrant shall be deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has been exercised.  In the case of a dispute as to the determination of the Warrant Exercise Price, the Closing Bid Price or the arithmetic calculation of the Warrant Shares, the Company shall promptly issue to the holder the number of Warrant Shares that is not disputed and shall submit the disputed determinations or arithmetic calculations to the holder via facsimile within 1 Business Day of receipt of the holder’s Exercise Notice.
(b)            If the holder and the Company are unable to agree upon the determination of the Warrant Exercise Price or arithmetic calculation of the Warrant Shares within 1 day of such disputed determination or arithmetic calculation being submitted to the holder, then the Company shall immediately submit via electronic mail (i) the disputed determination of the Warrant Exercise Price or the Closing Bid Price to an independent, reputable investment banking firm or (ii) the disputed arithmetic calculation of the Warrant Shares to its independent, outside accountant.  The Company shall cause the investment banking firm or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the holder of the results no later than 72 hours from the time it receives the disputed determinations or calculations.  Such investment banking firm’s or accountant’s determination or calculation, as the case may be, shall be deemed conclusive absent manifest error.
(c)            Unless the rights represented by this Warrant shall have expired or shall have been fully exercised, the Company shall, as soon as practicable and in no event later than 5 Business Days after any exercise and at its own expense, issue a new Warrant identical in all respects to this Warrant exercised except it shall represent rights to purchase the number of Warrant Shares purchasable immediately prior to such exercise under this Warrant exercised, less the number of Warrant Shares with respect to which such Warrant is exercised.
(d)            No fractional Warrant Shares are to be issued upon any pro rata exercise of this Warrant, but rather the number of Warrant Shares issued upon such exercise of this Warrant shall be rounded up or down to the nearest whole number.
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(e)            If the Company or its Transfer Agent shall fail for any reason or for no reason to issue to the holder within 5 days of receipt of the Exercise Delivery Documents, a certificate for the number of Warrant Shares to which the holder is entitled or to credit the holder’s balance account with The Depository Trust Company for such number of Warrant Shares to which the holder is entitled upon the holder’s exercise of this Warrant, unless such failure results from a failure of the Company’s Transfer Agent to issue such shares as a result of an act of terrorism, war, natural disaster, act of god or other force majure event, the Company shall, in addition to any other remedies under this Warrant or otherwise available to such holder, pay as additional damages in cash to such holder on each day the issuance of such certificate for Warrant Shares is not timely effected an amount equal to 0.025% of the product of (A) the sum of the number of Warrant Shares not issued to the holder on a timely basis and to which the holder is entitled, and (B) the Closing Bid Price of the Common Stock for the trading day immediately preceding the last possible date which the Company could have issued such Common Stock to the holder without violating this Section 2.
(f)            If within 5 days after the Company’s receipt of the Exercise Delivery Documents and the written request of the Holder that a new Warrant be issued, the Company fails to deliver a new Warrant to the holder for the number of Warrant Shares to which such holder is entitled pursuant to Section 2 hereof, then, in addition to any other available remedies under this Warrant, or otherwise available to such holder, the holder shall be entitled to exercise or transfer its rights under such new warrant as if it had received such new Warrant and the Company shall be obligated to honor such exercises or transfers as if the holder had submitted the new Warrant without violating this Section 2.
Section 3.                       Covenants as to Common Stock .  The Company hereby covenants and agrees as follows:
(a)            This Warrant is, and any Warrants issued in substitution for or replacement of this Warrant will upon issuance be, duly authorized and validly issued.
(b)            All Warrant Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof.
(c)            During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved at least 100% of the number of shares of Common Stock needed to provide for the exercise of the rights then represented by this Warrant and the par value of said shares will at all times be less than or equal to the applicable Warrant Exercise Price.  If at any time the Company does not have a sufficient number of shares of Common Stock authorized and available, then the Company shall call and hold a special meeting of its stockholders within 60 days of that time for the sole purpose of increasing the number of authorized shares of Common Stock.
(d)            If at any time after the date hereof the Company shall file a Registration Statement, the Company shall include the Warrant Shares issuable to the holder, pursuant to the terms of this Warrant and shall maintain, so long as any other shares of Common Stock shall be so listed, such listing of all Warrant Shares from time to time issuable upon the exercise of this
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Warrant on the Primary Market or such national securities exchange or automated quotation system on which the Common Stock of the Company is listed; and the Company shall so list on the Primary Market or such national securities exchange or automated quotation system on which the Common Stock of the Company is listed, as the case may be, and shall maintain such listing of, any other shares of capital stock of the Company issuable upon the exercise of this Warrant Shares if and so long as any shares of the same class shall be listed on the Primary Market or such national securities exchange or automated quotation system on which the Common Stock of the Company is listed.
(e)            The Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the holder of this Warrant in order to protect the exercise privilege of the holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant.  The Company will not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Warrant Exercise Price then in effect, and (ii) will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant.
(f)            This Warrant will be binding upon any entity succeeding to the Company by merger, consolidation or acquisition of all or substantially all of the Company’s assets.
Section 4.                       Taxes .  The Company shall pay any and all taxes, except any applicable withholding, which may be payable with respect to the issuance and delivery of Warrant Shares upon exercise of this Warrant.
Section 5.                       Warrant Holder Not Deemed a Stockholder .  Except as otherwise specifically provided herein, no holder, as such, of this Warrant shall be entitled to vote or receive dividends or be deemed the holder of shares of capital stock of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the holder of this Warrant of the Warrant Shares which he or she is then entitled to receive upon the due exercise of this Warrant.  In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on such holder to purchase any securities (upon exercise of this Warrant or otherwise) or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company.  Notwithstanding this Section 5, the Company will provide the holder of this Warrant with copies of the same notices and other information given to the stockholders of the Company generally, contemporaneously with the giving thereof to the stockholders.
Section 6.                       Representations of Holder .  The holder of this Warrant, by the acceptance hereof, represents that it is acquiring this Warrant and the Warrant Shares for its own account for
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investment only and not with a view towards, or for resale in connection with, the public sale or distribution of this Warrant or the Warrant Shares, except pursuant to sales registered or exempted under the Securities Act; provided, however, that by making the representations herein, the holder does not agree to hold this Warrant or any of the Warrant Shares for any minimum or other specific term and reserves the right to dispose of this Warrant and the Warrant Shares at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act.  The holder of this Warrant further represents, by acceptance hereof, that, as of this date, such holder is an “accredited investor” as such term is defined in Rule 501(a)(1) of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act (an “ Accredited Investor ”).  Upon exercise of this Warrant  the holder shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the Warrant Shares so purchased are being acquired solely for the holder’s own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale and that such holder is an Accredited Investor.  If such holder cannot make such representations because they would be factually incorrect, it shall be a condition to such holder’s exercise of this Warrant that the Company receive such other representations as the Company considers reasonably necessary to assure the Company that the issuance of its securities upon exercise of this Warrant shall not violate any United States or state securities laws.
Section 7.                       Ownership and Transfer .
(a)            The Company shall maintain at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee.  The Company may treat the person in whose name any Warrant is registered on the register as the owner and holder thereof for all purposes, notwithstanding any notice to the contrary, but in all events recognizing any transfers made in accordance with the terms of this Warrant.
Section 8.                       Adjustment of Warrant Exercise Price .  The Warrant Exercise Price of this Warrant shall be adjusted from time to time as follows:
(a)            Adjustment of Warrant Exercise Price .  If and whenever on or after the Issuance Date of this Warrant, the Company issues or sells, or is deemed to have issued or sold, any shares of Common Stock (other than Excluded Securities) for a consideration per share (the “ New Issuance Price ”) less than the Fixed Conversion Price of the Convertible Debentures in effect immediately prior to such issuance or sale (the “ Applicable Price ”), then immediately after such issue or sale the Warrant Exercise Price then in effect shall be reduced to an amount equal to such New Issuance Price.
(b)            Effect on Warrant Exercise Price of Certain Events .  For purposes of determining the adjusted Warrant Exercise Price under Section 8(a) above, the following shall be applicable:
(i)            Issuance of Options .  If after the date hereof, the Company in any manner grants any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange of any
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Convertible Securities issuable upon exercise of any such Option is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share.  For purposes of this Section 8(b)(i), the lowest price per share for which one share of Common Stock is issuable upon exercise of such Options or upon conversion or exchange of such Convertible Securities shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the granting or sale of the Option, upon exercise of the Option or upon conversion or exchange of any convertible security issuable upon exercise of such Option.  No further adjustment of the Warrant Exercise Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities.
(ii)            Issuance of Convertible Securities .  If the Company in any manner issues or sells any Convertible Securities and the lowest price per share for which 1 share of Common Stock is issuable upon the conversion or exchange thereof is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance or sale of such Convertible Securities for such price per share.  For the purposes of this Section 8(b)(ii), the lowest price per share for which one share of Common Stock is issuable upon such conversion or exchange shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to one share of Common Stock upon the issuance or sale of the convertible security and upon conversion or exchange of such convertible security.  No further adjustment of the Warrant Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Warrant Exercise Price had been or are to be made pursuant to other provisions of this Section 8(b), no further adjustment of the Warrant Exercise Price shall be made by reason of such issue or sale.
(iii)            Change in Option Price or Rate of Conversion.   If the purchase price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion or exchange of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock changes at any time, the Warrant Exercise Price in effect at the time of such change shall be adjusted to the Warrant Exercise Price which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold.  For purposes of this Section 8(b)(iii), if the terms of any Option or convertible security that was outstanding as of the Issuance Date of this Warrant are changed in the manner described in the immediately preceding sentence, then such Option or convertible security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change.  No adjustment pursuant to this Section 8(b) shall be made if such adjustment would result in an increase of the Warrant Exercise Price then in effect.
(iv)            Calculation of Consideration Received .  If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefore will be deemed to be the gross amount received by the
9
Company therefore; provided that any deductions made from the gross amount are commercially reasonable commissions and expenses in connection with such capital raise.  If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of such consideration received by the Company will be the fair value of such consideration, except where such consideration consists of marketable securities, in which case the amount of consideration received by the Company will be the market price of such securities on the date of receipt of such securities.  If any Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity, the amount of consideration therefore will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be.  The fair value of any consideration other than cash or securities will be determined jointly by the Company and the holders of Warrants representing at least two-thirds (b) of the Warrant Shares issuable upon exercise of the Warrants then outstanding.  If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the “ Valuation Event ”), the fair value of such consideration will be determined within five (5) Business Days after the tenth (10 th ) day following the Valuation Event by an independent, reputable appraiser jointly selected by the Company and the holders of Warrants representing at least two-thirds (b) of the Warrant Shares issuable upon exercise of the Warrants then outstanding.  The determination of such appraiser shall be final and binding upon all parties and the fees and expenses of such appraiser shall be borne jointly by the Company and the holders of Warrants.
(v)            Integrated Transactions .  In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, the Options will be deemed to have been issued for a consideration of $.01.
(vi)            Treasury Shares .  The number of shares of Common Stock outstanding at any given time does not include shares owned or held by or for the account of the Company, and the disposition of any shares so owned or held will be considered an issue or sale of Common Stock.
(vii)            Record Date .  If the Company takes a record of the holders of Common Stock for the purpose of entitling them (1) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (2) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.
(c)            Adjustment of Warrant Exercise Price upon Subdivision or Combination of Common Stock .  If the Company at any time after the date of issuance of this Warrant subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, any Warrant Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately increased.  If the Company at any time after the date of issuance of this Warrant combines (by
10
combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, any Warrant Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of Warrant Shares issuable upon exercise of this Warrant will be proportionately decreased.  Any adjustment under this Section 8(c) shall become effective at the close of business on the date the subdivision or combination becomes effective.
(d)            Distribution of Assets .  If the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement or other similar transaction) (a “ Distribution ”), at any time after the issuance of this Warrant, then, in each such case:
(i)            any Warrant Exercise Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of Common Stock entitled   to receive the Distribution shall be reduced, effective as of the close of business on such record date, to a price determined by multiplying such Warrant Exercise Price by a fraction of which (A) the numerator shall be the Closing Sale Price of the Common Stock on the trading day immediately preceding such record date minus the value of the Distribution (as determined in good faith by the Company’s Board of Directors) applicable to one share of Common Stock, and (B) the denominator shall be the Closing Sale Price of the Common Stock on the trading day immediately preceding such record date; and
(ii)            either (A) the number of Warrant Shares obtainable upon exercise of this Warrant shall be increased to a number of shares equal to the number of shares of Common Stock obtainable immediately prior to the close of business on the record date fixed for the determination of holders of Common Stock entitled to receive the Distribution multiplied by the reciprocal of the fraction set forth in the immediately preceding clause (i), or (B) in the event that the Distribution is of common stock of a company whose common stock is traded on a national securities exchange or a national automated quotation system, then the holder of this Warrant shall receive an additional warrant to purchase Common Stock, the terms of which shall be identical to those of this Warrant, except that such warrant shall be exercisable into the amount of the assets that would have been payable to the holder of this Warrant pursuant to the Distribution had the holder exercised this Warrant immediately prior to such record date and with an exercise price equal to the amount by which the exercise price of this Warrant was decreased with respect to the Distribution pursuant to the terms of the immediately preceding clause (i).
(e)            Certain Events .  If any event occurs of the type contemplated by the provisions of this Section 8 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Company’s Board of Directors will make an appropriate adjustment in the Warrant Exercise Price and the number of shares of Common Stock obtainable upon exercise of this Warrant so as to protect the rights of the holders of the Warrants; provided, except as set forth in section 8(c),that no such adjustment pursuant to this Section 8(e) will increase the Warrant Exercise Price or decrease the number of shares of Common Stock obtainable as otherwise determined pursuant to this Section 8.
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(f)            Voluntary Adjustments By Company .  The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company.
(g)            Notices .
(i)            Immediately upon any adjustment of the Warrant Exercise Price, the Company will give written notice thereof to the holder of this Warrant, setting forth in reasonable detail, and certifying, the calculation of such adjustment.
(ii)            The Company will give written notice to the holder of this Warrant at least ten (10) days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Organic Change (as defined below), dissolution or liquidation, provided that such information shall be made known to the public prior to or in conjunction with such notice being provided to such holder.
(iii)            The Company will also give written notice to the holder of this Warrant at least 10 days prior to the date on which any Organic Change, dissolution or liquidation will take place, provided that such information shall be made known to the public prior to or in conjunction with such notice being provided to such holder.
Section 9.                       Purchase Rights; Reorganization, Reclassification, Consolidation, Merger or Sale .
(a)            In addition to any adjustments pursuant to Section 8 above, if at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the “ Purchase Rights ”), then the holder of this Warrant will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.
(b)            Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company’s assets to another Person or other transaction in each case which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as an “ Organic Change .”  Prior to the consummation of any (i) sale of all or substantially all of the Company’s assets to an acquiring Person or (ii) other Organic Change following which the Company is not a surviving entity, the Company will secure from the Person purchasing such assets or the successor resulting from such Organic Change (in each case, the “ Acquiring Entity ”) a written agreement to deliver to each holder of Warrants in exchange for such Warrants, a security of the Acquiring Entity evidenced
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by a written instrument substantially similar in form and substance to this Warrant (including an adjusted warrant exercise price equal to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and exercisable for a corresponding number of shares of Common Stock acquirable and receivable upon exercise of the Warrants without regard to any limitations on exercise, if the value so reflected is less than any Applicable Warrant Exercise Price immediately prior to such consolidation, merger or sale).  Prior to the consummation of any other Organic Change, the Company shall make appropriate provision to insure that each of the holders of the Warrants will thereafter have the right to acquire and receive in lieu of or in addition to (as the case may be) the Warrant Shares immediately theretofore issuable and receivable upon the exercise of such holder’s Warrants (without regard to any limitations on exercise), such shares of stock, securities or assets that would have been issued or payable in such Organic Change with respect to or in exchange for the number of Warrant Shares which would have been issuable and receivable upon the exercise of such holder’s Warrant as of the date of such Organic Change (without taking into account any limitations or restrictions on the exercisability of this Warrant).
Section 10.                       Lost, Stolen, Mutilated or Destroyed Warrant .  If this Warrant is lost, stolen, mutilated or destroyed, the Company shall promptly, on receipt of an indemnification undertaking (or, in the case of a mutilated Warrant, the Warrant), issue a new Warrant of like denomination and tenor as this Warrant so lost, stolen, mutilated or destroyed.
Section 11.                       Notice .  Any  notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered upon:  (i) receipt, when delivered personally, (ii) 1 Business Day after deposit with an overnight courier service with next day delivery specified, in each case, properly addressed to the party to receive the same, or  (iii) receipt, when sent by electronic mail (provided that the electronic mail transmission is not returned in error or the sender is not otherwise notified of any error in transmission. The addresses and e-mail addresses for such communications shall be:

If to Holder:
YA II PN, Ltd.
c/o Yorkville Advisors Global, LP
 
1012 Springfield Avenue
 
Mountainside, NJ 07092
 
Attention:     Mark A. Angelo
 
Telephone:    (201) 536-5114
 
Email:      mangelo@yorkvilleadvisors.com
   
With Copy to:
David Gonzalez, Esq.
 
1012 Springfield Avenue
 
Mountainside, NJ 07092
 
Telephone:    (201) 536-5109
 
Email:      dgonzalez@yorkvilleadvisors.com and
               Legal@yorkvilleadvisors.com
   
 
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If to the Company, to:
CLS Holdings USA, Inc.
 
11767 South Dixie Highway – Suite 115
 
Miami, FL 33156
 
Attention:   Jeffrey I. Binder
Telephone: (305) 992-2500
Email:    jeff@clslabs.com
              jeff@jbinder.net
   
   
   
With a copy to:
Broad and Cassel LLP
One North Clematis Street – Suite 500
West Palm Beach, FL 33401
Attention:   Kathleen L. Deutsch, Esq.
Telephone:  (561)832-3300
Email:    kdeutsch@broadandcassel.com
              kathydash@aol.com
   
or at such other address and/or electronic email address and/or to the attention of such other person as the recipient party has specified by written notice given to each other party 3 Business Days prior to the effectiveness of such change.  Written confirmation of receipt (i) given by the recipient of such notice, consent, waiver or other communication, (ii) mechanically or electronically generated by the sender’s computer containing the time, date, recipient’s electronic mail address and the text of such electronic mail or (iii) provided by a nationally recognized overnight delivery service, shall be rebuttable evidence of personal service, receipt by electronic mail or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively.
Section 12.                       Date .  The date of this Warrant is set forth on page 1 hereof.  This Warrant, in all events, shall be wholly void and of no effect after the close of business on the Expiration Date, except that notwithstanding any other provisions hereof, the provisions of Section 3(d) shall continue in full force and effect after such date as to any Warrant Shares or other securities issued upon the exercise of this Warrant.
Section 13.                       Amendment and Waiver .  Except as otherwise provided herein, the provisions of the Warrant may be amended and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the holders of Warrants representing at least 2/3rds of the Warrant Shares issuable upon exercise of the Warrants then outstanding; provided that, except for Section 8(c), no such action may increase the Warrant Exercise Price or decrease the number of shares or class of stock obtainable upon exercise of any Warrant without the written consent of the holder of such Warrant.
Section 14.                     Assignment .   This Warrant may be assigned by the Holder only if such assignment is made in compliance with all applicable laws, including federal and state securities laws.  In connection with any permitted transfer, the transferee shall make such representation and warranties to the Company, consistent with Section 6 hereof, s the Company may reasonably request.
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Section 15.                    Descriptive Headings; Governing Law .  The descriptive headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant.  The corporate laws of the State of New Jersey shall govern all issues concerning the relative rights of the Company and its stockholders.  All other questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New Jersey, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New Jersey or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New Jersey.  Each party hereby irrevocably submits to the exclusive jurisdiction of the Superior Court of the state courts sitting in Union County New Jersey and the Federal District Court for the District of New Jersey sitting in Newark, New Jersey, for the adjudication of any dispute hereunder or in connection herewith or therewith, or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper.  Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.
Section 16.                       Remedies, Other Obligations, Breaches and Injunctive Relief .   The remedies provided in this Warrant shall be cumulative and in addition to all other remedies available under this Warrant, in any other agreement between the Company and the Holder, at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the right of the Holder to pursue actual damages for any failure by the Company to comply with the terms of this Warrant.  The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate.  The Company therefore agrees that, in the event of any such breach or threatened breach, the holder of this Warrant shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required.

Section 17.                       Waiver of Jury Trial .  AS A MATERIAL INDUCEMENT FOR EACH PARTY HERETO TO ENTER INTO THIS WARRANT, THE PARTIES HERETO HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATED IN ANY WAY TO THIS WARRANT AND/OR ANY AND ALL OF THE TRANSACTION  DOCUMENTS ASSOCIATED WITH THIS TRANSACTION.

REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
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IN WITNESS WHEREOF , the Company has caused this Warrant to be signed as of the date first set forth above.
 
CLS HOLDINGS USA, INC.
 
   
 
By:   /s/ Jeffrey I. Binder           
 
Name:            Jeffrey I. Binder
 
Title:            Chairman and CEO
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EXHIBIT A TO WARRANT
EXERCISE NOTICE
TO BE EXECUTED
BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
CLS HOLDINGS USA, INC.
The undersigned holder hereby exercises the right to purchase ______________ of the shares of Common Stock (“ Warrant Shares ”) of CLS Holdings USA, Inc. (the “ Company ”), evidenced by the attached Warrant (the “ Warrant ”).  Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Warrant.
Specify Method of exercise by check mark:
1.  ___            Cash Exercise
(a) Payment of Warrant Exercise Price . The holder shall pay the Aggregate Exercise Price of $______________ to the Company in accordance with the terms of the Warrant.
(b) Delivery of Warrant Shares .  The Company shall deliver to the holder _________ Warrant Shares in accordance with the terms of the Warrant.

2.  ___            Cashless Exercise
(a) Payment of Warrant Exercise Price .  In lieu of making payment of the Aggregate Exercise Price, if permitted by the terms of the Warrant, the holder elects to receive upon such exercise the Net Number of shares of Common Stock determined in accordance with the terms of the Warrant.
(b) Delivery of Warrant Shares .  The Company shall deliver to the holder _________ Warrant Shares in accordance with the terms of the Warrant.

Date: _______________ __, ______

Name of Registered Holder

By:                                                               
Name:                                                                 
Title:                                                                     

Address:
Taxpayer ID No.:

EXHIBIT B TO WARRANT
FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to ________________, Federal Identification No. __________, a warrant to purchase ____________ shares of the capital stock of CLS Holdings USA, Inc. represented by warrant certificate no. _____, standing in the name of the undersigned on the books of said corporation.  The undersigned does hereby irrevocably constitute and appoint ______________, attorney to transfer the warrant of said corporation, with full power of substitution in the premises.
Dated:                                                                                                        
   
     
 
By:           
 
 
Name:           
 
 
Title: