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): January 24, 2020


GENERAL CANNABIS CORP

 (Exact Name of Registrant as Specified in Charter)


Colorado

000-54457

90-1072649

(State or other jurisdiction

of incorporation)

(Commission File Number)

(I.R.S. Employer Identification Number)


6565 E. Evans Avenue
Denver, Colorado

 

80224

(Address of principal executive offices)

 

(Zip Code)


Registrant’s telephone number, including area code: (303) 759-1300


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


Check the appropriate box below if the Form 8-K 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 Exchange Act (17 CFR 240.14a-12)

[_]

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

[_]

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


Securities registered pursuant to Section 12(b) of the Act:


Title of each class

Trading Symbol(s)

Name of each exchange
on which registered

N/A

N/A

N/A


Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§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.


Note and Warrants Offering


On February 21, 2020, General Cannabis Corp (the “Company”) issued and sold unsecured promissory notes (the “Unsecured Notes”) with an aggregate principal amount of $2,006,000 to certain investors in exchange for $500,000 of new funding and the cancellation of outstanding indebtedness of $1,506,000 represented by prior promissory notes issued by the Company in September 2019.  The Unsecured Notes have an annual interest rate of 15% and mature on January 31, 2021.  The Unsecured Notes provide that they shall be repaid in full out of the proceeds of any new debt or equity capital raise with net proceeds of more than $5,000,000.  In connection with the issuance of the Unsecured Notes, each holder of Unsecured Notes received three warrants (i.e., a 2020 A Warrant, a 2020 B Warrant and a 2020 C Warrant) to acquire shares of Common Stock of the Company at an exercise price equal to $0.45 per share, with the number of shares subject to each warrant equal to one share for each $1.00 of principal amount of Unsecured Note issued to the noteholder.  The 2020 A Warrants have an expiration date of December 31, 2020, the 2020 B Warrants have an expiration date of December 31, 2021, and the 2020 C Warrants have an expiration date of December 31, 2022 (collectively, the “Warrants”).  By way of example, if an investor was issued an Unsecured Note with a principal amount of $250,000, such noteholder would receive a 2020 A Warrant to purchase 250,000 shares of Common Stock, a 2020 B Warrant to purchase 250,000 shares of Common Stock and a 2020 C Warrant to purchase 250,000 shares of Common Stock.  Accordingly, the Company issued Warrants to purchase a total of 6,018,000 shares of Common Stock to the holders of Unsecured Notes.  The foregoing descriptions of the Unsecured Notes and the Convertible Notes are not complete and are qualified in their entirety by reference to the full text of the agreements, copies of which are attached hereto as Exhibits 10.1 and 10.2 and are incorporated herein by reference.


Convertible Note


The Company previously issued that certain Promissory Note, dated July 18, 2019, as amended (the “Original Note”), to SBI Investments LLC, 2014-1 (“SBI”), for the principal amount of $750,000.  On February 18, 2020, the Company and SBI entered into a promissory note exchange agreement (the “Exchange Agreement”) pursuant to which the Original Note was exchanged for a new convertible promissory note (the “Convertible Note”).  The Convertible Note has a principal amount of $934,000, an interest rate of 10% per annum and a maturity date of February 18, 2021.  The Convertible Note may be converted at the option of SBI into shares of Common Stock of the Company at a conversion price equal to 80% of the Market Price (as defined in the Convertible Note); provided that the conversion price shall in no event be less than $0.45 per share (unless adjusted as provided in the Convertible Note).  The foregoing descriptions of the Exchange Agreement and the Convertible Note are not complete and are qualified in their entirety by reference to the full text of the agreements, copies of which are attached hereto as Exhibits 10.3 and 10.4 and are incorporated herein by reference.


SevenFive Farm Acquisition


On January 24, 2020, the Company entered into an asset purchase agreement with Dalton Adventures, LLC (the “Seller”), pursuant to which the Company agreed to acquire the assets of the Seller constitute the business of SevenFive Farm, a cultivation facility in Boulder, Colorado.  The purchase price to be paid by the Company for the assets will be equal to 1.4 times the Seller’s gross revenue for the 12-month period prior to the closing; provided that the purchase price will not be lower than $3,000,000.  The Company will pay the purchase price by issuing to the Seller shares of common stock of the Company equal to the purchase price divided by the volume weighted average per share price of the Company’s shares for 30 consecutive trading days ending on the second trading day prior to the closing (the “VWAP”); provided that if the VWAP exceeds $0.85 per share, then the VWAP will equal $0.85 per share for purposes of the foregoing calculation.  The Company will make reasonable efforts to register the resale of the shares of common stock issued to the Seller.  For a period of six months following the closing, the Seller has agreed not to sell any of the shares of the Company received at the closing.  The Seller may require the Company to repurchase in cash 25% of the shares issued to the Seller at the closing at a repurchase price equal to the same VWAP used to determine the number of shares issued to the Seller at closing.  The Seller shall have the option to require such repurchase during the period from the date of the one-year anniversary of the closing until two business days following the one-year anniversary of the closing.  The closing is subject to approval of the transaction by the Colorado Marijuana Enforcement Division, as well as other customary closing conditions.




Item 3.02

 

Unregistered Sales of Equity Securities.


The information contained in Item 1.01 of this Current Report on Form 8-K is incorporated by reference into this Item 3.02. The Convertible Note, the Unsecured Notes and the Warrants were offered and sold in transactions exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(a)(2) thereof. Each of the investors represented that it was an accredited investor and is acquiring the shares for investment only and not with a view towards, or for resale in connection with, the public sale or distribution thereof.


Item 5.02

 

Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.


On February 18, 2020, the board of directors of the Company appointed Jessica Bast, the Company’s Vice President, Controller, as the Company’s principal financial officer and principal account officer. There is no arrangement or understanding between Ms. Bast and any other person pursuant to which she was selected as an officer of the Company, and there is no family relationship between Ms. Bast and any of the Company’s other directors or executive officers. Ms. Bast, age 41, has been the Company’s Vice President, Controller, since September 2017. Ms. Bast was Technical Accounting Research Manager at Pinnacle Agricultural Distribution from July 2016 to September 2017, she was Controller of Active Fashion Group from May 2016 to May 2016, and she was Audit Manager of Hein & Associates, LLP (now Moss Adams) from September 2004 to April 2015. Ms. Bast’s current annual base salary is $150,000.


Item 9.01.

 

Financial Statements and Exhibits.


(d)     Exhibits


Exhibit No.

 

Description

10.1

 

Form of Unsecured Promissory Note, dated February 21, 2020, issued by the Company to certain investors

10.2

 

Form of 2020 A Warrant, 2020 B Warrant and 2020 C Warrant, dated February 21, 2020, issued by the Company to certain investors

10.3

 

Exchange Agreement between the Company and SBI Investments LLC, 2014-1, dated as of February 18, 2020

10.4

 

Convertible Promissory Note, dated February 18, 2020, issued by the Company to SBI Investors LLC, 2014-1




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 thereunto duly authorized.


Dated: February 24, 2020


 

GENERAL CANNABIS CORP

 

 

 

 

 

 

 

By:

/s/ Steve Gutterman

 

Name:

Steve Gutterman

 

Title:

Chief Executive Officer





Exhibit 10.1


THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH STATE SECURITIES LAWS, OR AN EXEMPTION FROM REGISTRATION THEREUNDER, IN EACH CASE, TO THE EXTENT APPLICABLE HERETO.


SENIOR NOTE


$____________

February 21, 2020


FOR VALUE RECEIVED, GENERAL CANNABIS CORP, a Colorado corporation (“Borrower”), hereby promises to pay to _______________________________ or registered assigns (“Holder”) on the date set forth below, (i) the aggregate principal sum of _________________ DOLLARS ($____________) , (ii) accrued and unpaid interest on the unpaid principal balance hereof in the amount set forth herein and (iii) any other amounts payable hereunder (collectively, the “Obligations”). This Senior Note (“Note”) is issued by the Borrower pursuant to the terms of a Securities Purchase Agreement (“Securities Purchase Agreement”) dated the date hereof entered into between Holder and Borrower.  Capitalized terms used herein without further definition shall have the meanings ascribed to such terms in the Securities Purchase Agreement.


1.

Payment of Principal.  The principal amount of this Note, together with all unpaid interest accrued thereon and any other Obligations payable hereunder, shall be due and payable in full on January 31, 2021 (the “Maturity Date”).

2.

Accrual and Payment of Interest.  The unpaid principal balance due hereunder shall bear interest (“Interest”) at an annual rate of fifteen percent (15%) (the “Interest Rate”) and shall be calculated on the basis of a year of twelve 30-day months, and the actual number of days elapsed for any partial month.  The Principal shall bear interest from and including the first day of an Interest Period to and including the last day of such Interest Period at a rate equal to the Interest Rate. “Interest Period” means, initially, the period commencing the day after the Closing Date and ending on and including the final day of the calendar quarter of the Closing Date, and thereafter, each quarterly period, or a partial quarterly period during which the Principal is repaid in full.  Interest shall be due and payable on the fifth Business Day following the end of an Interest Period.  All principal and Interest shall be due and payable on the Maturity Date.

3.

Optional and Mandatory Prepayment.  At any time prior to the Maturity Date the Borrower shall have the right to make full or partial payments of the unpaid principal balance and the Interest payable under this Note (“Prepayment”); provided that in the event any principal balance is prepaid prior to the six-month anniversary of the Closing Date, the total amount of Interest that shall be paid with respect to the portion of the principal amount so prepaid (including any previous payments of Interest) shall be equal to six months of Interest.  The Borrower shall prepay the Note in full out of the proceeds of a new debt or equity capital raise with net proceeds of more than $5,000,000.

4.

Default.  

(a)

Event of Default” shall mean the occurrence of one or more of any of the following events:

(i)

failure to pay in full and when due any installment of principal or Interest on the Note, which failure is not cured within thirty (30) days following the Borrower’s actual knowledge of such failure, or other material default of the Borrower with respect to any other representation and warranty or covenant under the Securities Purchase Agreement which material default is not cured within thirty (30) days following the Borrower’s actual knowledge of such failure;

(ii)

the liquidation, termination or dissolution of Borrower, or its ceasing to carry on actively its present business or the appointment of a receiver for its property; or

(iii)

the institution by or against the Borrower of any proceedings under the Bankruptcy Code 11 USC §101 et seq. or any other law in which the Borrower is alleged to be insolvent or unable to pay its debts as they mature, which proceeding is not dismissed within ninety (90) days after institution, or the making by the Borrower of an assignment for the benefit of creditors or the granting by the Borrower of a trust mortgage for the benefit of creditors.

(b)

Acceleration.  If an Event of Default shall occur, then the Super Majority, by written notice to the Borrower, may (i) declare the Obligations due hereunder to be immediately due and payable, whereupon the sum of (x) the outstanding principal amount of this Note and (y) the Interest and other amounts outstanding hereunder shall become and shall be forthwith due and payable, without diligence, presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, and (ii) exercise any and all of its other rights under applicable law and/or hereunder.  Any payment pursuant to this Section 4 shall be applied first to the Interest owed under this Note, second, to any other Obligations (other than principal) owed hereunder and lastly to the principal balance of this Note.




Upon the occurrence of an Event of Default, without the approval of the Super Majority, the Holder shall have no right to undertake any of the types of actions described in clauses (i) or (ii) hereof or any other enforcement or collection action with respect to this Note. “Super Majority” shall mean the registered owners of more than 66.66% of the aggregate outstanding principal amount of the Notes.

5.

No Security; Agreement to Subordinate to Bank Debt. This Note is not secured and no mortgage, security or lien is or shall be granted by the Borrower upon its assets as collateral security for the obligations of the Borrower evidenced thereby. This Note represents a senior debt obligation of the Borrower and will be senior in right of repayment to all subordinated debt obligations of the Borrower. Notwithstanding the foregoing, the Borrower may incur indebtedness for monies borrowed from banks, trust companies, insurance companies, and other financial institutions, including commercial paper and accounts receivable sold or assigned by the Borrower to such institutions (“Bank Debt”), and any such Bank Debt may be senior in right of payment to this Note. The Holder agrees to execute any subordination agreement(s) the Borrower and the holders of Bank Debt may request to implement the aforesaid subordination of the Note to any Bank Debt incurred by the Borrower.  Except for Bank Debt, the Borrower may not incur any indebtedness senior in right of payment to the Note without the written consent of the Simple Majority.  “Simple Majority” shall mean the registered owners of more than 50.0% of the aggregate outstanding principal amount of the Notes.

6.

Costs and Expenses.  Each of Borrower and Holder will pay its own expenses in connection with the transactions contemplated under the Securities Purchase Agreement and the issuance of this Note.  Borrower will pay or reimburse Holder for its reasonable costs and expenses incurred or paid by the Holder in collecting or attempting to collect or enforcing or attempting to enforce payment of any Obligation.

7.

Representations and Warranties of Borrower.  Borrower represents and warrants to Holder as follows as of the date hereof: (a) Borrower has the power and authority to execute, deliver and perform all obligations in accordance herewith, (b) the execution, delivery and performance by Borrower of this Note is within Borrower's legal powers, and do not contravene any law or any contractual restriction binding on or affecting Borrower; (c) no authorization or approval or other action by, and no notice to or filing with any governmental authority or regulatory body is required for the due execution, delivery and performance by Borrower of this Note; (d) this Note constitutes the legal, valid and binding obligation of Borrower party thereto, enforceable against Borrower in accordance with its terms, except to the extent enforceability is limited by bankruptcy, insolvency, fraudulent conveyance, moratorium and other laws for the protection of creditors generally and by general equitable principles; and (e) there is no pending or, to Borrower's knowledge, threatened action or proceeding affecting Borrower before any governmental agency or arbitrator with respect to the transactions contemplated by this Note or which may materially adversely affect the property, assets or condition (financial or otherwise) of Borrower.

8.

Amendment. Except for the obligations to repay the outstanding principal on the Notes and to pay accrued Interest, the terms of the Notes (and this Note), including the Maturity Date and the Interest Rate, may be modified with the written consent of the Simple Majority and any such amendment shall be binding on all of the Holders.

9.

Persons Deemed Owners.  The person in whose name a Note is registered on the books and records of the Borrower shall be deemed to be the absolute owner thereof for all purposes, and payment of any principal or Interest on such Note shall be made only to the registered owner thereof or such owner’s legal representative.  All payments made to the registered owner or such owner’s legal representative shall be valid and effectual to discharge the liability of the Borrower upon this Note to the extent of the sum or sums so paid.

10.

Transfer. The Borrower will keep the registration and transfer books for this Note.  This Note may be transferred only on the books of the Borrower.  This Note may not be transferred unless the Holder delivers to the Borrower a written opinion of legal counsel or otherwise satisfies the Borrower with respect to the compliance of such transfer with applicable securities laws and the transferee enters into a written agreement in form and substance acceptable to the Borrower pursuant to which the transferee agrees to be bound by all of the provisions of the Note.  Upon surrender or transfer of this Note at the principal office of the Borrower, duly endorsed for transfer or accompanied by a proper assignment duly executed by the registered owner or such owner’s attorney duly authorized in writing, and accompanied by the agreement and other documentation described in the preceding sentence, the Borrower will issue and deliver to the transferee a new, fully registered Note in like principal amount.

11.

Miscellaneous.

(a)

Incorporation of Terms of Securities Purchase Agreement.  The terms of the Securities Purchase Agreement are incorporated into the terms of this Note to the same extent as if set forth herein.  Such terms include but are not limited to the notice provisions, confidentiality, survival of representations and warranties, successors and assigns, governing law, waiver of right to jury trial, and other provisions set forth in the Securities Purchase Agreement.  In the event of an inconsistency between the terms of this Note and the terms of the Securities Purchase Agreement, the terms of this Note shall govern.


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(g)

Severability.  Whenever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Note shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

(h)

Entire Agreement.  Except as otherwise expressly set forth herein, this Note and the Securities Purchase Agreement embody the complete agreement and understanding between the parties hereto with respect to the subject matter hereof and supersede and preempt any prior understandings, agreements or representations by or between the parties, written or oral, that may have related to the subject matter hereof in any way.

(i)

Counterparts.  This Note may be executed in separate counterparts each of which shall be an original and all of which taken together shall constitute one and the same agreement.

(j)

Governing Law.  THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES.  EACH PARTY AGREES THAT ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING IN ANY WAY TO THIS NOTE SHALL BE BROUGHT IN A U.S. FEDERAL OR STATE COURT OF COMPETENT JURISDICTION SITTING IN NEW YORK, NEW YORK. EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY CONSENTS TO THE JURISDICTION OF SUCH COURT AND HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY DEFENSE OF AN INCONVENIENT FORUM OR A LACK OF PERSONAL JURISDICTION TO THE MAINTENANCE OF ANY ACTION OR PROCEEDING AND ANY RIGHT OF JURISDICTION OR VENUE ON ACCOUNT OF THE PLACE OF RESIDENCE OR DOMICILE OF ANY PARTY HERETO.  EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.

(k)

No Third Party Beneficiaries.  This Note is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.  

(l)

Descriptive Headings.  The descriptive headings of this Note are inserted for convenience only and do not constitute a part of this Note.


[Signature Page Follows]


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[Signature Page to Senior Note]



IN WITNESS WHEREOF, this Note has been executed as of the date first written above.



 

GENERAL CANNABIS CORP

 

 

 

 

 

 

 

By:

 

 

 

Name: Steve Gutterman

 

 

Title: Chief Executive Officer





AGREED TO AND ACCEPTED:


HOLDER




By:

 

 

Name:

 

Title:






Exhibit 10.2


NEITHER THIS WARRANT NOR THE SECURITIES FOR WHICH THIS WARRANT IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.


GENERAL CANNABIS CORP

2020 A WARRANT

TO PURCHASE SHARES OF COMMON STOCK

No. GCCW-__

GENERAL CANNABIS CORP, a Colorado corporation (the “Company”), for value received, hereby certifies that _________________, or registered assigns (the “Holder”), is entitled to purchase from the Company, at the Purchase Price, ______________ (__) shares of the duly authorized, validly issued, fully paid and nonassessable shares the Company’s common stock with a par value of $0.001 (“Common Stock”), at any time or from time to time prior to 5:00 P.M., New York City time, on the Expiration Date, all subject to the terms, conditions and adjustments set forth below.  

This is the Warrant (the “Warrant”, such term to include any such warrants issued in substitution therefor) referred to in and issued pursuant to the terms of that certain Securities Purchase Agreement between the Company and the Holder (the “Agreement”).  This Warrant is entitled to the benefits of the Agreement and is also subject to the obligations imposed by the Agreement, including as relates to any restrictions on transfer of ownership of the Warrant.

Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned such terms in the Agreement.

1.

Definitions.  As used herein, unless the context otherwise requires, the following terms shall have the meanings indicated:

Acquisition” shall mean any sale or other disposition of all or substantially all of the assets of the Company, or any reorganization, consolidation, or merger of the Company where the holders of the Company’s securities before the transaction beneficially own less than one-third of the outstanding voting securities of the surviving entity after the transaction.

Business Day” shall mean any day other than a Saturday or a Sunday or a day on which commercial banking institutions in the City of New York are authorized by law to be closed.  Any reference to “days” (unless Business Days are specified) shall mean calendar days.  In any circumstance where a date of determination under this Warrant falls on a date that is not a Business Day, it shall be deemed to be the next Business Day.

Common Stock” shall have the meaning assigned to it in the introduction to this Warrant, such term to include any stock into which such Common Stock shall have been changed or any stock resulting from any reclassification of such Common Stock, and all other stock of any class or classes (however designated) of the Company the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference.

Company” shall have the meaning assigned to it in the introduction to this Warrant, such term to include any corporation or other entity which shall succeed to or assume the obligations of the Company hereunder in compliance with Section 4.




 

Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations thereunder, or any successor statute.

Expiration Date” shall mean December 31, [2020] [2021] [2022].

Person” shall mean any individual, firm, partnership, corporation, trust, joint venture, association, joint stock company, limited liability company, unincorporated organization or any other entity or organization, including a government or agency or political subdivision thereof, and shall include any successor (by merger or otherwise) of such entity.

Purchase Price” shall mean $0.45 per Warrant Share, subject to adjustment and readjustment from time to time as provided in Section 3, and, as so adjusted or readjusted, shall remain in effect until a further adjustment or readjustment thereof is required by Section 3.

Securities Act” shall mean the Securities Act of 1933, as amended from time to time, and the rules and regulations thereunder, or any successor statute.

Warrant Shares shall mean the number of shares of Common Stock that can be purchased upon exercise of this Warrant.

2.

Exercise of Warrant.

2.1.

Manner of Exercise; Payment of the Purchase Price.

(a)

This Warrant may be exercised by the Holder hereof, in whole or in part, at any time or from time to time prior to the Expiration Date, by surrendering to the Company at its principal office this Warrant, with the form of Election to Purchase Shares attached hereto as Exhibit ‘A’ (or a reasonable facsimile thereof) duly executed by the Holder and accompanied by payment of the Purchase Price for the number of shares of Common Stock specified in such form.

(b)

Payment of the Purchase Price shall be made in United States currency by cash or delivery of a check payable to the order of the Company or by wire transfer to the Company.

2.2.

When Exercise Effective.  Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the Business Day on which this Warrant shall have been surrendered to, and the Purchase Price shall have been received by, the Company and at such time the Person or Persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such exercise shall be deemed to have become the holder or holders of record thereof for all purposes.

2.3.

Delivery of Stock Certificates, Etc.; Charges, Taxes and Expenses.

(a)

As soon as practicable after each exercise of this Warrant, in whole or in part, the Company shall cause to be issued in such denominations as may be requested by the Holder in the Election to Purchase Shares, in the name of and delivered to the Holder or, subject to applicable securities laws, as the Holder may direct, the following:

(i)

a certificate or certificates for the number of Warrant Shares to which the Holder shall be entitled upon such exercise plus, if applicable, in lieu of issuance of any fractional share to which the Holder would otherwise be entitled, a Company check pursuant to Section 8.4, and

(ii)

in case such exercise is for less than all of the Warrant Shares a new Warrant or Warrants of like tenor, covering the balance of the Warrant Shares.

(b)

Issuance of Warrant Shares upon the exercise of this Warrant shall be made without charge to the Holder hereof for any issue tax or other incidental expense, in respect of the issuance of such certificates, all of which such taxes and expenses shall be paid by the Company; provided, however, the Holder shall pay any applicable transfer or similar tax resulting from the issuance of Warrant Shares to any Person other than the Holder.

2.4.

Beneficial Ownership Limitation.  The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise the Holder (together with the Holder’s affiliates, and any other person or entity acting as a group together with the Holder or any of the Holder’s affiliates),


2



 

would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the 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 such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock equivalents), subject to a limitation on conversion or exercise analogous to the limitation contained herein, beneficially owned by the Holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 2.4, beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2.4 applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a an Election to Purchase Shares (in the form attached hereto as Exhibit ‘A’) shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any affiliates) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. Upon the written or oral request of a Holder, the Company shall within two trading days confirm orally and in writing to the 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 conversion or exercise of securities of the Company, including this Warrant, by the Holder or its affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 9.9% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2.4 by an amount determined by the Holder in its sole discretion. Any such increase or decrease will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this Section 2.4 shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2.4 as may be necessary to correct any portion hereof which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this Section 2.4 shall apply to a successor holder of this Warrant.

3.

Stock Dividends, Splits.  In the event that the Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on the outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then, in each such event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Purchase Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Purchase Price then in effect.  The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 3.  The number of Warrant Shares that the Holder shall thereafter, be entitled to receive on the exercise hereof as provided in Section 2, shall be adjusted to a number determined by multiplying the number of Warrant Shares that would otherwise (but for the provisions of this Section 3) be issuable on such exercise by a fraction of which the numerator is the Purchase Price that would otherwise (but for the provisions of this Section 3) be in effect, and the denominator is the Purchase Price in effect on the date of such exercise.

4.

Warrants Callable by Company.  The Company shall have the right to redeem the Warrants at any time if (i) the closing price of the Common Stock is above $5.00 per share (subject to adjustment and readjustment from time to time as provided in Section 3) on ten (10) consecutive trading days following the Closing Date as reported for the primary exchange or quotation system on which the Common Stock is listed or quoted. If the Company has the right to call the Warrants and it elects to do so, it will deliver written notice to the Holder that the Company intends to redeem the Warrants at a price of $0.01 per Warrant (the “Call Price”) on the thirtieth (30th) day following the date of that notice (or, if that day is not a trading day for the Common Stock, then on the next following day that is a trading day for the Common Stock (the “Call Date”), and the Company shall then redeem all Warrants to the extent the Warrants have not been exercised in accordance with Section 2 by the trading day preceding the Call Date. The Company shall pay the redemption money to the Holders entitled to it upon surrenders by them of their Warrants for redemption. The Company shall cancel all Warrants surrendered for redemption.  All rights to exercise the Warrants shall terminate as of the end of the trading day preceding the Call Date.


3



 

5.

Acquisition of Company.  In the event of a proposed Acquisition of the Company, the Company shall provide the Holder with all information with respect to the Acquisition that is otherwise provided to shareholders of the Company at such time and from time to time during the pendency of the Acquisition, including (but not limited to) the proposed price to be paid in the proposed Acquisition.  The Holder shall have the right to exercise this Warrant on or prior to the closing date with respect to the proposed Acquisition; if the Warrant is not exercised on or prior to such closing date, the Warrant shall expire upon the occurrence of the closing of the Acquisition.

6.

Certificate as to Adjustments.  In each case of any adjustment or readjustment pursuant to Section 3, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms of this Warrant and prepare a certificate, signed by the Chief Financial Officer, or Corporate Secretary of the Company, setting forth such adjustment or readjustment (including but not limited to the Purchase Price and number of Warrant Shares purchasable hereunder after giving effect to such adjustment or readjustment) and showing in reasonable detail the method of calculation thereof.  Such certificate shall constitute an amendment to this Warrant and shall be delivered to the Holder in the manner provided in Section 9.  Upon request of the Holder, the Company shall issue a new Warrant that reflects the terms of any such adjustment or readjustment reflected in any such certificate issued hereunder.

Regardless of any adjustment or readjustment in the Purchase Price or the number of Warrant Shares or other securities actually purchasable under the Warrant (or the issuance of any certificate with respect thereto pursuant to this Section 6), any Warrant may continue to express the Purchase Price and the number of Warrant Shares purchasable under the Warrant as the price and number of shares were expressed on the Warrant when initially issued, subject to the Holder’s rights hereunder to exchange the Warrant for a new Warrant that reflects the terms of any such adjustment or readjustment.

7.

Reservation of Stock, Etc.  The Company shall at all times reserve and keep available, solely for issuance and delivery upon exercise of the Warrants, 100% of the number of Warrant Shares from time to time issuable upon exercise of all Warrants at the time outstanding.  All Warrant Shares issuable upon exercise of any Warrants shall be duly authorized and, when issued upon such exercise, shall be validly issued and, in the case of shares, fully paid and nonassessable with no liability on the part of the holders thereof, and, in the case of all securities, shall be free from all taxes, liens, security interests, encumbrances, preemptive rights and charges, except for the payment of applicable transfer or similar taxes by the Holder upon issuance to a Person other than the Holder.  Subsequent to the Expiration Date, no shares of stock need be reserved in respect of any unexercised portion of this Warrant.

8.

Registration and Transfer of Warrants, Etc.

8.1.

Warrant Register; Ownership of Warrants.  Each Warrant issued by the Company shall be numbered and shall be registered in a warrant register (the “Warrant Register”) as it is issued and transferred, which Warrant Register shall be maintained by the Company at its principal office or, at the Company’s election and expense, by a warrant agent or the Company’s Transfer Agent.  The Company shall be entitled to treat the registered Holder of any Warrant on the Warrant Register as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrant on the part of any other Person, and shall not be affected by any notice to the contrary, except that, if and when any Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer thereof as the owner of such Warrant for all purposes.  A Warrant, if properly assigned, may be exercised by a new holder without a new Warrant first having been issued.

8.2.

Transfer of Warrants and Compliance with Securities Laws.

(a)

Neither this Warrant nor any interest therein may be transferred or assigned in whole or in part without compliance with all applicable federal and state securities laws by the Holder and the transferee or assignee thereof.  Subject to such compliance, this Warrant and all rights hereunder are transferable in whole or in part, without charge to the Holder hereof, upon surrender of this Warrant with a properly executed Form of Assignment, attached hereto as Exhibit B, at the principal office of the Company.  Upon any partial transfer, the Company shall at its expense issue and deliver to the Holder a new Warrant of like tenor, in the name of the Holder, which shall be exercisable for such number of shares of Common Stock with respect to which rights under this Warrant were not so transferred and to the transferee a new Warrant of like tenor, in the name of the transferee, which shall be exercisable for such number of shares of Common Stock with respect to which rights under this Warrant were so transferred.


4



 

(b)

The Holder, by acceptance of this Warrant, acknowledges that neither this Warrant nor the Warrant Shares have been registered under the Securities Act and represents and warrants to the Company that this Warrant is being acquired for investment and not for distribution or resale, solely for Holder’s own account and not as a nominee for any other person, and that Holder will not offer, sell, pledge or otherwise transfer this Warrant or any Warrant Shares except (i) in compliance with the requirements for an available exemption from the Securities Act and any applicable state securities laws, or (ii) pursuant to an effective registration statement or qualification under the Securities Act and any applicable state securities laws.

8.3.

Replacement of Warrants.  On receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender of such Warrant to the Company at its principal office and cancellation thereof, the Company at its expense shall execute and deliver, in lieu thereof, a new Warrant of like tenor.

8.4.

Fractional Shares.  Notwithstanding any adjustment pursuant to Section 3, if the Common Stock shall be listed on a national securities exchange, the Company then shall not be required to issue fractions of shares upon exercise of this Warrant or to distribute certificates which evidence fractional shares.  In lieu of fractional shares, the Company then shall make payment to the Holder of an amount in cash equal to such fraction multiplied by the closing bid price on the principal trading market of a share of Common Stock on the date of exercise of this Warrant.

7.5

No  Impairment.  The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, 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 be necessary or appropriate in order to protect the rights of the holders of this Warrant against impairment.

9.

Notices.  Any notices, consents, waivers or other communications required or permitted to be given hereunder must be in writing and will be deemed to have been given (i) upon receipt, when delivered personally; (ii) three days after being sent by U.S. certified mail, return receipt requested; or (iii) one day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same.  The addresses for such communications shall be:

If to the Company:

General Cannabis Corp
6565 E. Evans Avenue
Denver, CO 80224
Attn:  Steve Gutterman


If to the Holder:

_____________
_____________
_____________
Attention:  _____________

Each party shall provide five days’ prior written notice to the other party of any change in address.  Notwithstanding the foregoing, the exercise of this Warrant shall be effective in the manner provided in Section 2.

10.

Amendments.  This Warrant and any term hereof may not be amended, modified, supplemented or terminated, and waivers or consents to departures from the provisions hereof may not be given, except by written instrument duly executed by the party against which enforcement of such amendment, modification, supplement, termination or consent to departure is sought.  


5




11.

Descriptive Headings, Etc. The headings in this Warrant are for convenience of reference only and shall not limit or otherwise affect the meaning of terms contained herein.  Unless the context of this Warrant otherwise requires:  (a) words of any gender shall be deemed to include each other gender; (b) words using the singular or plural number shall also include the plural or singular number, respectively; (c) the words “hereof”, “herein” and “hereunder” and words of similar import when used in this Warrant shall refer to this Warrant as a whole and not to any particular provision of this Warrant, and Section and paragraph references are to the Sections and paragraphs of this Warrant unless otherwise specified; (d) the word “including” and words of similar import when used in this Warrant shall mean “including, without limitation,” unless otherwise specified; (e) ”or” is not exclusive; and (f) provisions apply to successive events and transactions.

12.

Governing Law.  This Warrant shall be governed by, and construed in accordance with, the laws of the State of New York (without giving effect to the conflict of laws principles thereof).

13.

Judicial Proceedings.  Any legal action, suit or proceeding brought against the Company with respect to this Warrant may be brought in any court located in Denver County, State of Colorado, and by execution and delivery of this Warrant, the Company hereby irrevocably and unconditionally waives any claim (by way of motion, as a defense or otherwise) of improper venue, that it is not subject personally to the jurisdiction of such court, that such courts are an inconvenient forum or that this Warrant or its subject matter may not be enforced in or by such court.


[Signature Page Follows]



6




IN WITNESS WHEREOF, the Company has caused this Warrant to be issued as of the ___ day of_______, 2020.



 

GENERAL CANNABIS CORP

 

 

 

 

 

 

 

By:

 

 

Name:

Steve Gutterman

 

Title:

Chief Executive Officer





7





EXHIBIT A to
2020 A Warrant


GENERAL CANNABIS CORP

ELECTION TO PURCHASE SHARES

The undersigned hereby irrevocably elects to purchase __ shares of no par value Common Stock (“Common Stock”), of GENERAL CANNABIS CORP (the “Company”) by exercising the warrant (the “Warrant”) dated _______ __, 20__ and issued to the undersigned, and hereby makes payment of $___________ therefor.  The undersigned hereby requests that the certificate(s) for such shares and payment for fractional shares be issued and made as follows:

ISSUE/PAY TO*: _____________________________________________________________

(NAME)

____________________________________________________________________________

(ADDRESS, INCLUDING ZIP CODE)

____________________________________________________________________________

(SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER)

DELIVER TO: ________________________________________________________________

(NAME)

____________________________________________________________________________

(ADDRESS, INCLUDING ZIP CODE)


If the number of shares of Common Stock purchased hereby is less than the number of shares of Common Stock covered by the Warrant, the undersigned requests that a new Warrant representing the number of shares of Common Stock not so purchased be issued and delivered as follows:

ISSUE TO*: __________________________________________________________________

(NAME OF HOLDER)

____________________________________________________________________________

(ADDRESS, INCLUDING ZIP CODE)


DELIVER TO: ________________________________________________________________

(NAME)

____________________________________________________________________________

(ADDRESS, INCLUDING ZIP CODE)


In order to induce the Company to give instructions to its transfer agent to issue the shares of Common Stock being purchased upon exercise of the Warrant, the undersigned hereby represents and warrants that the undersigned is an “accredited investor” as that term is defined in Regulation D under the Securities Act of 1933, as amended.


[Signature page follows]


                                         

 

*   If other than the Holder specified on the Warrant delivered with this Election to Purchase Shares, the transfer is subject to compliance with applicable securities laws and the payment by the Holder of any applicable transfer or similar taxes.


A-1






[Signature Page to Election to Purchase Shares]


Individual(s):

 

 

 

 

 

 

 

 

 

 

 

Signature (exactly as name appears on stock certificate(s) tendered)

 

Signature of spouse, joint tenant, tenant in common, or other required signature

 

 

 

 

 

 

Print or type name

 

Print or type name

 

 

 

 

 

 

Entity:

 

 

 

 

 

 

 

 

 

 

 

Print or type name of entity (exactly as name appears on stock certificate(s) tendered)

 

 

 

 

 

 

 

 

By:

 

 

 

Name:

Title:

 

 


(Unless waived by the Company, all signatures must be guaranteed by an eligible guarantor institution that is a member of a recognized medallion signature guarantee program.)


A-2





EXHIBIT B to
2020 A Warrant

ASSIGNMENT

FOR VALUE RECEIVED, and subject to compliance with applicable securities laws and payment of any applicable transfer taxes, the undersigned hereby sells, assigns, and transfers unto the Assignee named below all of the rights of the undersigned to purchase no par value Common Stock of GENERAL CANNABIS CORP (the “Company”) represented by the Warrant dated ______________, with respect to the number of shares of Common Stock set forth below:


Name of Assignee

 

Address

 

No. of
Warrant Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


and does hereby irrevocably constitute and appoint any officer of the Company to make such transfer on the books of the Company maintained for that purpose, with full power of substitution in the premises.



Date: ____________________
















(Unless waived by the Company, all signatures must be guaranteed by an eligible guarantor institution that is a member of a recognized medallion signature guaranty program.)


B-1


Exhibit 10.3


NEITHER THE ISSUANCE NOR SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES FILED PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.


Principal Amount: $934,000.00

Issue Date: February 18, 2020


CONVERTIBLE PROMISSORY NOTE

FOR VALUE RECEIVED, GENERAL CANNABIS CORP, a Colorado corporation (hereinafter called the “Borrower”), hereby promises to pay to the order of SBI INVESTMENTS LLC, 2014-1, a statutory series of a Delaware limited liability company, or its registered assigns (the “Holder”) the principal sum of $934,000.00 (the “Principal Amount”), together with interest at the rate of ten percent (10%) per annum on the aggregate unconverted and then outstanding Principal Amount of this Note, at maturity or upon acceleration or otherwise, as set forth herein (this “Note”) (with the understanding that the initial six months of such interest shall be guaranteed).  This Note is being issued pursuant to that certain Promissory Note Exchange Agreement (the “Exchange Agreement”) entered into on February 18, 2020 (the “Issue Date”). The maturity date of this Note shall be on that day that is twelve (12) months after the Issue Date (the “Maturity Date”), and is the date upon which the Principal Amount, as well as all accrued and unpaid interest and other fees, shall be due and payable.  This Note may not be repaid in whole or in part except as otherwise explicitly set forth herein.  Any amount of principal or interest on this Note, which is not paid by the Maturity Date, shall bear interest at the rate of the lesser of (i) twenty-four percent (24%) per annum or (ii) the maximum amount allowed by law, from the due date thereof until the same is paid (“Default Interest”).  Interest shall commence accruing on the date that this Note is issued and shall be computed on the basis of a 365-day year and the actual number of days elapsed.  All payments due hereunder (to the extent not converted into the Borrower’s common stock (the “Common Stock”) in accordance with the terms hereof) shall be made in lawful money of the United States of America.  All payments shall be made at such address as the Holder shall hereafter give to the Borrower by written notice made in accordance with the provisions of this Note.  Whenever any amount expressed to be due by the terms of this Note is due on any day which is not a business day, the same shall instead be due on the next succeeding day which is a business day and, in the case of any interest payment date which is not the date on which this Note is paid in full, the extension of the due date thereof shall not be taken into account for purposes of determining the amount of interest due on such date.  As used in this Note, the term “business day” shall mean any day other than a Saturday, Sunday or a day on which commercial banks in the city of New York, New York are authorized or required by law or executive order to remain closed.

This Note is free from all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of shareholders of the Borrower and will not impose personal liability upon the Holder thereof.

The following additional terms shall also apply to this Note:

ARTICLE I. CONVERSION RIGHTS

1.1

Conversion Right.  The Holder shall have the right at any time on or after the Issue Date, to convert all or any part of the outstanding and unpaid Principal Amount and accrued and unpaid interest of this Note into fully paid and non-assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares of capital stock or other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified at the Conversion Price determined as provided herein (a “Conversion”); provided, however, that in no event shall the Holder be entitled to convert any portion of this Note in excess of that portion of this Note upon conversion of which the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of this Note or the unexercised or unconverted portion of any other security of the Borrower subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (2) the number of shares of Common Stock issuable upon the conversion of the portion of this Note with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock (the “Maximum Share Amount”).  The Holder, upon not less than 61 days’ prior written notice to the Borrower, may increase the Maximum Share Amount, provided that the Maximum Share Amount shall never exceed 9.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of this Note held by the Holder and the provisions of this Section 1.1 shall continue to apply.  Any such increase will not be effective until the 61st day after


1



such notice is delivered to the Borrower.  The Maximum Share Amount provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 1.1 to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Maximum Share Amount provisions contained herein or to make changes or supplements necessary or desirable to properly give effect to such limitation.  The limitations contained in this paragraph shall apply to a successor holder of this Note.  For purposes of this Section 1.1, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Regulations 13D-G thereunder.  The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing the Conversion Amount (as defined below) by the applicable Conversion Price then in effect on the date specified in the notice of conversion, in the form attached hereto as Exhibit A (the “Notice of Conversion”), delivered to the Borrower by the Holder in accordance with Section 1.3 below; provided that the Notice of Conversion is submitted by facsimile or e-mail (or by other means resulting in, or reasonably expected to result in, notice) to the Borrower before 6:00 p.m., New York, New York time on such conversion date (the “Conversion Date”).  The term “Conversion Amount” means, with respect to any conversion of this Note, the sum of (1) the Principal Amount of this Note to be converted in such conversion plus (2) at the Holder’s option, accrued and unpaid interest, if any, on such Principal Amount at the interest rates provided in this Note to the Conversion Date, plus (3) at the Holder’s option, Default Interest, if any, on the amounts referred to in the immediately preceding clauses (1) and/or (2) plus (4) at the Holder’s option, any amounts owed to the Holder pursuant to Sections 1.2, 1.3(g), 4.11, 4.12 and/or 4.13 and/or Article III hereof.

1.2

Conversion Price.

(a)

Calculation of Conversion Price.  The “Conversion Price” per share shall be the Variable Conversion Price (as defined herein) (subject to adjustment as further described herein).  The “Variable Conversion Price” shall mean 80% multiplied by the Market Price (as defined herein) (representing a discount rate of 20%); provided, however, that for purposes of this Section 1.2(a), in no event shall the Variable Conversion Price be less than $0.45 per share of Common Stock (as adjusted for stock splits, stock dividends, reclassifications and the like) except as may be required pursuant to Section 1.2(c) below.

(b)

Market Price” means the lowest Trading Price (as defined below) for the Common Stock during the seven (7) Trading Day period ending on the last complete Trading Day prior to the Conversion Date.  “Trading Price” or “Trading Prices” means, for any security as of any date, the lowest volume weighted average price (VWAP) on the Over-the-Counter Pink Marketplace, OTCQB, or applicable trading market (the “Trading Market”) as reported by a reliable reporting service designated by the Holder (i.e. www.Nasdaq.com) or, if the Trading Market is not the principal trading market for such security, on the principal securities exchange or trading market where such security is listed or traded or, if the lowest intraday trading price of such security is not available in any of the foregoing manners, the lowest intraday price of any market makers for such security that are quoted on the OTC Markets.  If the Conversion Price on the date in which the Holder actually receives the Conversion Shares (as defined in the Exchange Agreement) (each a “Share Delivery Date”) is less than the Conversion Price in the respective Notice of Conversion, then the Conversion Price in the respective Notice of Conversion shall be retroactively adjusted downward to equal the Conversion Price on the Share Delivery Date.  If the Trading Price cannot be calculated for such security on such date in the manner provided above, the Trading Price shall be the fair market value as mutually determined by the Borrower and the Holder in order to determine the Conversion Price of this Note.  “Trading Day” shall mean any day on which the Common Stock is tradable for any period on the Trading Market, or on the principal securities exchange or other securities market on which the Common Stock is then being traded.  So long as this Note is outstanding, if any security of the Borrower contains any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to the Holder in this Note, then the Borrower shall notify the Holder in writing of such additional or more favorable term and such term, at Holder’s option, shall become a part of the transaction documents with the Holder pursuant to the amendment thereof at the Holder’s direction.

(c)

Dilutive Issuance.  If, at any time when this Note is issued and outstanding, the Borrower issues or sells, or is deemed to have issued or sold (in the sole determination of the Holder), any shares of Common Stock, for a consideration per share less than the Conversion Price in effect on the date of such issuance (or deemed issuance) of such shares of Common Stock (a “Dilutive Issuance”), then the Holder shall have the right, in Holder’s sole discretion on each conversion after such Dilutive Issuance, to utilize the price per share of the Dilutive Issuance as the Conversion Price for such conversion.  Notwithstanding the foregoing, a Dilutive Issuance shall not include any Exempt Issuance.  An “Exempt Issuance” shall be the issuance of any of the following by the Company: (a) shares of Common Stock or options to employees, consultants, officers or directors of the Company pursuant to any stock or option plan duly adopted for such purpose, by the Board of Directors or a committee of the Board of Directors; (b) securities upon the exercise or exchange of or conversion of any securities issued hereunder and/or any securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the Issue Date, provided that such securities have not been amended since the Issue Date to increase the number of such securities or to decrease the exercise price or conversion price of such securities (other than in connection with stock splits or combinations) or to extend the term of such securities; and (c) securities issued pursuant to acquisitions or strategic transactions approved by the Board of Directors, provided that any such issuance shall only be to a person or entity which is, itself or through its subsidiaries, an operating company or an owner of an asset in a business synergistic with the business of the Company (and shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to any entity whose primary business is investing in securities). For the avoidance of any doubt, the issuance by the Borrower of any securities, that are not Exempt Securities, having conversion prices or exercise prices less than the Conversion Price in effect on the date of any such issuance shall qualify as Dilutive Issuances.


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(d)

Authorized Shares.  The Borrower covenants that during the period the conversion right exists, the Borrower will reserve from its authorized and unissued Common Stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of this Note.  The Borrower is required at all times to have authorized and reserved two times (200%) the number of shares issuable upon full conversion of the face Principal Amount of this Note (based on the Conversion Price of this Note in effect from time to time) (the “Reserved Amount”).  The Reserved Amount shall be increased from time to time in accordance with the Borrower’s obligations hereunder.  The Borrower represents that upon issuance, such shares of Common Stock will be duly and validly issued, fully paid and non-assessable.  In addition, if the Borrower shall issue any securities or make any change to its capital structure which would change the number of shares of Common Stock into which this Note shall be convertible at the then current Conversion Price, the Borrower shall at the same time make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Note.  The Borrower acknowledges that it has irrevocably instructed its transfer agent to issue certificates for the Common Stock issuable upon conversion of this Note, and agrees that its issuance of this Note shall constitute full authority to its officers and agents who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock in accordance with the terms and conditions of this Note.

If, at any time the Borrower does not maintain the Reserved Amount it will be considered an Event of Default under Section 3.2 of this Note.

1.3

Method of Conversion.

(a)

Mechanics of Conversion.  Subject to Section 1.1, this Note may be converted by the Holder in whole or in part at any time on or after the Issue Date, (A) by submitting to the Borrower a Notice of Conversion (by facsimile, e-mail or other reasonable means of communication dispatched on the Conversion Date prior to 6:00 p.m., New York, New York time) and (B) subject to Section 1.3(b), surrendering this Note at the principal office of the Borrower.

(b)

Surrender of Note Upon Conversion.  The Holder and the Borrower shall maintain records showing the updated current unpaid and unconverted Principal Amount of the Note. Notwithstanding anything to the contrary set forth herein, upon conversion of this Note in accordance with the terms hereof, the Holder shall not be required to physically surrender this Note to the Borrower unless the entire unpaid Principal Amount of this Note is so converted.  The Holder and the Borrower shall maintain records showing the Principal Amount so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holder and the Borrower, so as not to require physical surrender of this Note upon each such conversion.  In the event of any dispute or discrepancy, such records of the Borrower shall, prima facie, be controlling and determinative in the absence of manifest error.  Notwithstanding the foregoing, if any portion of this Note is converted as aforesaid, the Holder may not transfer this Note unless the Holder first physically surrenders this Note to the Borrower, whereupon the Borrower will forthwith issue and deliver upon the order of the Holder a new Note of like tenor, registered as the Holder (upon payment by the Holder of any applicable transfer taxes) may request, representing in the aggregate the remaining unpaid Principal Amount of this Note.  The Holder and any assignee, by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted Principal Amount of this Note represented by this Note may be less than the amount stated on the face hereof.

(c)

Payment of Taxes.  The Borrower shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock or other securities or property on conversion of this Note in a name other than that of the Holder (or in street name), and the Borrower shall not be required to issue or deliver any such shares or other securities or property unless and until the person or persons (other than the Holder or the custodian in whose street name such shares are to be held for the Holder’s account) requesting the issuance thereof shall have paid to the Borrower the amount of any such tax or shall have established to the satisfaction of the Borrower that such tax has been paid.

(d)

Delivery of Common Stock Upon Conversion.  Upon receipt by the Borrower from the Holder of a facsimile transmission or e-mail (or other reasonable means of communication) of a Notice of Conversion meeting the requirements for conversion as provided in this Section 1.3, the Borrower shall issue and deliver or cause to be issued and delivered to or upon the order of the Holder certificates for the Common Stock issuable upon such conversion within one (1) business day after such receipt (the “Deadline”) (and, solely in the case of conversion of the entire unpaid Principal Amount hereof, surrender of this Note) in accordance with the terms hereof.

(e)

Obligation of Borrower to Deliver Common Stock.  Upon receipt by the Borrower of a Notice of Conversion, the Holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, the outstanding Principal Amount and the amount of accrued and unpaid interest on this Note shall be reduced to reflect such conversion, and, unless the Borrower defaults on its obligations under this Article I, all rights with respect to the portion of this Note being so converted shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided, on such conversion.  If the Holder shall have given a Notice of Conversion as provided herein, the Borrower’s obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any action by


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the Holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Borrower to the holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder of any obligation to the Borrower, and irrespective of any other circumstance which might otherwise limit such obligation of the Borrower to the Holder in connection with such conversion.  The Conversion Date specified in the Notice of Conversion shall be the Conversion Date so long as the Notice of Conversion is received by the Borrower before 6:00 p.m., New York, New York time, on such date.

(f)

Delivery of Common Stock by Electronic Transfer.  In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Borrower is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer (“FAST”) program, upon request of the Holder and its compliance with the provisions contained in Sections 1.1 and 1.2 and in this Section 1.3, the Borrower shall use its best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the Holder by crediting the account of Holder’s Prime Broker with DTC through its Deposit Withdrawal Agent Commission (“DWAC”) system.

(g)

Failure to Deliver Common Stock Prior to Deadline.  Without in any way limiting the Holder’s right to pursue other remedies, including actual damages and/or equitable relief, the parties agree that if delivery of the Common Stock issuable upon conversion of this Note is not delivered by the Deadline the Borrower shall pay to the Holder $3,000 per day in cash, for each day beyond the Deadline that the Borrower fails to deliver such Common Stock (unless such failure results from war, acts of terrorism, an epidemic, or natural disaster) (“Conversion Default Payments”).  Such cash amount shall be paid to Holder in cash by the fifth day of the month following the month in which it has accrued or, at the option of the Holder (by written notice to the Borrower by the first day of the month following the month in which it has accrued), shall be added to the Principal Amount of this Note on the fifth day of the month following the month in which it has accrued, in which event interest shall accrue thereon in accordance with the terms of this Note and such additional Principal Amount shall be convertible into Common Stock in accordance with the terms of this Note.  The Borrower agrees that the right to convert is a valuable right to the Holder.  The damages resulting from a failure of, attempt to frustrate or interference with such conversion right are difficult if not impossible to qualify.  Accordingly the parties acknowledge that the liquidated damages provision contained in this Section 1.3(g) are justified.

1.4

Concerning the Shares.  The shares of Common Stock issuable upon conversion of this Note may not be sold or transferred unless (i) such shares are sold pursuant to an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), or (ii) the Borrower or its transfer agent shall have been furnished with an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the shares to be sold or transferred may be sold or transferred pursuant to an exemption from such registration or (iii) such shares are sold or transferred pursuant to Rule 144 under the Securities Act (or a successor rule) (“Rule 144”) or (iv) such shares are transferred to an “affiliate” (as defined in Rule 144) of the Borrower who agrees to sell or otherwise transfer the shares only in accordance with this Section 1.4 and who is an “accredited investor” (as defined in Rule 501(a) of the Securities Act).  Except as otherwise provided (and subject to the removal provisions set forth below), until such time as the shares of Common Stock issuable upon conversion of this Note have been registered under the Securities Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, each certificate for shares of Common Stock issuable upon conversion of this Note that has not been so included in an effective registration statement or that has not been sold pursuant to an effective registration statement or an exemption that permits removal of the legend, shall bear a legend substantially in the following form, as appropriate:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, UNLESS SOLD PURSUANT TO: (1) RULE 144 UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (2) AN OPINION OF COUNSEL IN A CUSTOMARY FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS.”

The legend set forth above shall be removed and the Borrower shall issue to the Holder a new certificate therefore free of any transfer legend if (i) the Borrower or its transfer agent shall have received an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Common Stock may be made without registration under the Securities Act, which opinion shall be accepted by the Borrower so that the sale or transfer is effected or (ii) in the case of the Common Stock issuable upon conversion of this Note, such security is registered for sale by the Holder under an effective registration statement filed under the Securities Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold.  In the event that the Borrower unreasonably fails to accept the opinion of counsel provided by the Holder with respect to the transfer of securities pursuant to an exemption from registration, such as Rule 144 or Regulation S, at the Deadline, it will be considered an Event of Default pursuant to Section 3.2 of this Note.



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1.5

Status as Shareholder.  Upon submission of a Notice of Conversion by a Holder, (i) the shares covered thereby (other than the shares, if any, which cannot be issued because their issuance would exceed such Holder’s allocated portion of the Reserved Amount or non-waived Maximum Share Amount) shall be deemed converted into shares of Common Stock and (ii) the Holder’s rights as a Holder of such converted portion of this Note shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such Holder because of a failure by the Borrower to comply with the terms of this Note.  Notwithstanding the foregoing, if a Holder has not received certificates or transmission of such shares pursuant to Section 1.3(f) for all shares of Common Stock prior to the tenth (10th) business day after the expiration of the Deadline with respect to a conversion of any portion of this Note for any reason, then (unless the Holder otherwise elects to retain its status as a holder of Common Stock by so notifying the Borrower) the Holder shall regain the rights of a Holder of this Note with respect to such unconverted portions of this Note and the Borrower shall, as soon as practicable, return such unconverted Note to the Holder or, if this Note has not been surrendered, adjust its records to reflect that such portion of this Note has not been converted.  In all cases, the Holder shall retain all of its rights and remedies (including, without limitation, (i) the right to receive Conversion Default Payments pursuant to Section 1.3(g) to the extent required thereby for such conversion default and any subsequent conversion default and (ii) the right to have the Conversion Price with respect to subsequent conversions determined in accordance with Section 1.2) for the Borrower’s failure to convert this Note.

ARTICLE II. CERTAIN COVENANTS

2.1

Distributions on Capital Stock.  So long as the Borrower shall have any obligation under this Note, the Borrower shall not without the Holder’s written consent (a) pay, declare or set apart for such payment, any dividend or other distribution (whether in cash, property or other securities) on shares of capital stock other than dividends on shares of Common Stock solely in the form of additional shares of Common Stock or (b) directly or indirectly or through any subsidiary make any other payment or distribution in respect of its capital stock except for distributions pursuant to any shareholders’ rights plan which is approved by a majority of the Borrower’s disinterested directors.

2.2

Restriction on Stock Repurchases.  So long as the Borrower shall have any obligation under this Note, the Borrower shall not without the Holder’s written consent redeem, repurchase or otherwise acquire (whether for cash or in exchange for property or other securities or otherwise) in any one transaction or series of related transactions any shares of capital stock of the Borrower or any warrants, rights or options to purchase or acquire any such shares.

2.3

Restriction on Fundamental Transactions.  So long as the Borrower shall have any obligation under this Note, the Borrower shall not directly or indirectly, in one or more related transactions (i) effect any merger or consolidation of the Borrower with or into another entity, (ii) effect any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) effect any purchase offer, tender offer or exchange offer (whether by the Borrower or another entity) pursuant to which holders of capital stock are permitted to sell, tender or exchange their shares for other securities, cash or property, (iv) consummate a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another person or entity or group of persons or entities whereby such other person or entity or group acquires more than 50% of the voting power of the outstanding shares of any class of capital stock (not including any shares of capital stock held by the other person or entity or other group thereof making or party to, or associated or affiliated with the other persons or entities making or party to, such stock or share purchase agreement or other business combination) or (v) effect any acquisition of all or substantially all of the assets or capital stock of another entity (each a “Fundamental Transaction”).

ARTICLE III. EVENTS OF DEFAULT

The occurrence of any of the following events of default shall each be an “Event of Default”, with no right to notice or right to cure except as specifically stated:

3.1

Failure to Pay Principal or Interest.  The Borrower fails to pay the Principal Amount hereof or interest thereon when due on this Note, whether at the Maturity Date, upon acceleration, or otherwise, and such failure continues for a period of five (5) days after written notice thereof to the Borrower from the Holder.

3.2

Conversion and the Shares.  The Borrower fails to reserve a sufficient amount of shares of Common Stock as required under the terms of this Note (including without limitation, Sections 1.2 and 1.3 of this Note), fails to issue shares of Common Stock to the Holder (or announces or threatens in writing that it will not honor its obligation to do so) upon exercise by the Holder of the conversion rights of the Holder in accordance with the terms of this Note, fails to transfer or cause its transfer agent to transfer (issue) (electronically or in certificated form) shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note, the Borrower directs its transfer agent not to transfer or delays, impairs, and/or hinders its transfer agent in transferring (or issuing) (electronically or in certificated form) shares of Common Stock to be issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note, or fails to remove (or directs its transfer agent not to remove or impairs, delays, and/or hinders its transfer agent from removing) any restrictive legend (or to withdraw any


5



stop transfer instructions in respect thereof) on any shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this Note (or makes any written announcement, statement or threat that it does not intend to honor the obligations described in this paragraph) and any such failure shall continue uncured (or any written announcement, statement or threat not to honor its obligations shall not be rescinded in writing) for five (5) business days after the Holder shall have delivered a Notice of Conversion.  It is an obligation of the Borrower to remain current in its obligations to its transfer agent.  It shall be an Event of Default of this Note, if a conversion of this Note is delayed, hindered or frustrated due to a balance owed by the Borrower to its transfer agent.  If at the option of the Holder, the Holder advances any funds to the Borrower’s transfer agent in order to process a conversion, such advanced funds shall be paid by the Borrower to the Holder within five (5) business days, either in cash or as an addition to the balance of this Note, and such choice of payment method is at the discretion of the Borrower.

3.3

Breach of Covenants.  The Borrower breaches any covenant or other term or condition contained in this Note or in any other document entered into between the Holder and Borrower, and such breach continues for a period of five (5) days after written notice thereof to the Borrower from the Holder or after ten  (10) days after the Borrower should have been aware of the breach.

3.4

Breach of Representations and Warranties.  Any representation or warranty of the Borrower made herein or in any agreement, statement or certificate given in writing pursuant hereto or in connection herewith, shall be false or misleading in any material respect when made and the breach of which has (or with the passage of time will have) a material adverse effect on the rights of the Holder with respect to this Note, provided that Holder shall provide Borrower with five (5) days advance notice that Holder intends to declare that such representation or warranty was breached by the Company.

3.5

Receiver or Trustee.  The Borrower or any subsidiary of the Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business, or such a receiver or trustee shall otherwise be appointed.

3.6

Judgments.  Any money judgment, writ or similar process shall be entered or filed against the Borrower or any subsidiary of the Borrower or any of its property or other assets for more than $100,000, and shall remain unvacated, unbonded or unstayed for a period of ten (10) days unless otherwise consented to by the Holder, which consent will not be unreasonably withheld.

3.7

Bankruptcy.  Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings, voluntary or involuntary, for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower or any subsidiary of the Borrower.

3.8

Delisting of Common Stock.  The Borrower shall fail to maintain the listing or quotation of the Common Stock on the Trading Market or an equivalent replacement exchange, the Nasdaq Global Market, the Nasdaq Capital Market, the New York Stock Exchange, or the NYSE American.

3.9

Failure to Comply with the Exchange Act.  The Borrower shall fail to comply in any material respect with the reporting requirements of the Exchange Act (including but not limited to becoming delinquent in its filings), and/or the Borrower shall cease to be subject to the reporting requirements of the Exchange Act.

3.10

Liquidation.  The Borrower commences any dissolution, liquidation or winding up of Borrower or any substantial portion of its business.

3.11

Cessation of Operations.  The Borrower ceases operations or Borrower admits it is otherwise generally unable to pay its debts as such debts become due, provided, however, that any disclosure of the Borrower’s ability to continue as a “going concern” shall not be an admission that the Borrower cannot pay its debts as they become due.

3.12

Financial Statement Restatement.  The Borrower restates any financial statements filed by the Borrower with the SEC for any date or period from two years prior to the Issue Date of this Note and until this Note is no longer outstanding, if the result of such restatement would, by comparison to the unrestated financial statements, have constituted a material adverse effect on the Borrower or the rights of the Holder with respect to this Note.

3.13

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

3.14

Replacement of Transfer Agent.  In the event that the Borrower replaces its transfer agent, and the Borrower fails to provide prior to the effective date of such replacement, a fully executed Irrevocable Transfer Agent Instructions (including but not limited to the provision to irrevocably reserve shares of Common Stock in the Reserved Amount) signed by the successor transfer agent to Borrower and the Borrower that reserves the greater of the (i) total amount of shares previously held in reserve for this Note with the Borrower’s immediately preceding transfer agent and (ii) Reserved Amount.


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3.15

Cross-Default.  Notwithstanding anything to the contrary contained in this Note or the other related or companion documents, a breach or default by the Borrower of any covenant or other term or condition contained in any of the other agreements or financial instruments, including but not limited to all convertible promissory notes, currently issued, or hereafter issued, by the Borrower, to the Holder or any third party (the “Other Agreements”), shall, at the option of the Holder, be considered a default under this Note, in which event the Holder shall be entitled to apply all rights and remedies of the Holder under the terms of this Note by reason of a default under said Other Agreement or hereunder.

3.16

Inside Information.  Any attempt by the Borrower or its officers, directors, and/or affiliates to transmit, convey or disclose, or any actual transmittal, conveyance or disclosure by the Borrower or its officers, directors, and/or affiliates of, material non-public information concerning the Borrower, to the Holder or its successors and assigns, which is not immediately cured by Borrower’s filing of a Form 8-K pursuant to Regulation FD on that same date.

3.17

No bid.  At any time while this Note is outstanding, the lowest Trading Price on the Trading Market or other applicable principal trading market for the Common Stock is equal to or less than $0.01.

3.18   Prohibition on Debt and Variable Securities.  So long as this Note is outstanding, the Borrower shall not, without written consent of the Holder (which consent shall not be unreasonably withheld), issue any Variable Security (as defined herein) to any party, unless (i) the Borrower is permitted to pay off this Note in cash at the time of the issuance of the respective Variable Security and (ii) the Borrower pays off this Note, pursuant to the terms of this Note, in cash at the time of the issuance of the respective Variable Security.  A “Variable Security” shall mean any security issued by the Borrower that (a) has or may have conversion rights of any kind, contingent, conditional or otherwise in which the number of shares that may be issued pursuant to such conversion right varies with the market price of the Common Stock; (b) is or may become convertible into Common Stock (including without limitation convertible debt, warrants or convertible preferred stock), with a conversion or exercise price that varies with the market price of the Common Stock, even if such security only becomes convertible or exercisable following an Event of Default, the passage of time, or another trigger event or condition; or (c) was issued or may be issued in the future in exchange for or in connection with any contract, security, or instrument, whether convertible or not, where the number of shares of Common Stock issued or to be issued is based upon or related in any way to the market price of the Common Stock, including, but not limited to, Common Stock issued in connection with a 3(a)(9) Transaction, a 3(a)(10) Transaction, or any other similar settlement or exchange.

Upon the occurrence of any Event of Default specified in Sections 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 3.8, 3.9, 3.10, 3.11, 3.12, 3.13, 3.14, 3.15, 3.16, 3.17, and/or this 3.18, this Note shall become immediately due and payable and the Borrower shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to 120% multiplied by the then outstanding entire balance of this Note (including principal and accrued and unpaid interest) plus Default Interest, if any, plus any amounts owed to the Holder pursuant to Sections 1.3(g) hereof (collectively, in the aggregate of all of the above, the “Default Amount”), and all other amounts payable hereunder shall immediately become due and payable, all without demand, presentment or notice, all of which hereby are expressly waived, together with all costs, including, without limitation, legal fees and expenses, of collection, and the Holder shall be entitled to exercise all other rights and remedies available at law or in equity.

ARTICLE IV. MISCELLANEOUS

4.1

Failure or Indulgence Not Waiver.  No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privileges.  All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available.

4.2

Notices.  All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, facsimile, or electronic mail addressed as set forth below or to such other address as such party shall have specified most recently by written notice.  Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery, upon electronic mail delivery or upon delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.  The addresses for such communications shall be:


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If to the Borrower, to:

General Cannabis Corp

6565 E. Evans Avenue
Denver, CO 80224
Attention:

E-mail:


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

Morrison & Foerster LLP

425 Market Street

San Francisco, CA 94105

Attention:  John M. Rafferty

Email: jrafferty@mofo.com


If to the Holder, to:

SBI Investments LLC, 2014-1

107 Grand Street, 7th Floor

New York, NY 10013

Attention: Jonathan Juchno, Principal

Email: jjuchno@seaotterglobal.com


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

K&L Gates LLP

200 S. Biscayne Blvd., Suite 3900

Miami, FL 33131

Attention: John D. Owens, III, Esq.

E-mail: john.owens@klgates.com


4.3

Amendments.  This Note and any provision hereof may only be amended by an instrument in writing signed by the Borrower and the Holder.  The term “Note” and all reference thereto, as used throughout this instrument, shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented.

4.4

Assignability.  This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to the benefit of the Holder and its successors and assigns.  Notwithstanding anything to the contrary herein, the rights, interests or obligations of the Borrower hereunder may not be assigned, by operation of law or otherwise, in whole or in part, by the Borrower without the prior signed written consent of the Holder, which consent may be withheld at the sole discretion of the Holder (any such assignment or transfer shall be null and void if the Borrower does not obtain the prior signed written consent of the Holder).  This Note or any of the severable rights and obligations inuring to the benefit of or to be performed by Holder hereunder may be assigned by Holder to a third party, in whole or in part, without the need to obtain the Borrower’s consent thereto.  Each transferee of this Note must be an “accredited investor” (as defined in Rule 501(a) of the Securities Act).  Notwithstanding anything in this Note to the contrary, this Note may be pledged as collateral in connection with a bona fide margin account or other lending arrangement.

4.5

Cost of Collection.  If default is made in the payment of this Note, the Borrower shall pay the Holder hereof costs of collection, including reasonable attorneys’ fees.

4.6

Governing Law.  All questions concerning the construction, validity, enforcement and interpretation of this Note shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflict of laws thereof.


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4.7

Exclusive Jurisdiction. Each party agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by this Note (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall only be commenced in the state and federal courts sitting in New York, New York (the “New York Courts”).  Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of the Note), 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 such New York Courts, or such New York Courts are improper or inconvenient venue for such proceeding.  Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Note or the transactions contemplated hereby.

4.8

JURY TRIAL WAIVER.  THE BORROWER AND THE HOLDER HEREBY WAIVE A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER IN RESPECT OF ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS NOTE.

4.9

Certain Amounts.  Whenever pursuant to this Note the Borrower is required to pay an amount in excess of the outstanding Principal Amount (or the portion thereof required to be paid at that time) plus accrued and unpaid interest plus Default Interest on such interest, the Borrower and the Holder agree that the actual damages to the Holder from the receipt of cash payment on this Note may be difficult to determine and the amount to be so paid by the Borrower represents stipulated damages and not a penalty and is intended to compensate the Holder in part for loss of the opportunity to convert this Note and to earn a return from the sale of shares of Common Stock acquired upon conversion of this Note at a price in excess of the price paid for such shares pursuant to this Note.  The Borrower and the Holder hereby agree that such amount of stipulated damages is not plainly disproportionate to the possible loss to the Holder from the receipt of a cash payment without the opportunity to convert this Note into shares of Common Stock.

4.10

Remedies.  The Borrower acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating the intent and purpose of the transaction contemplated hereby.  Accordingly, the Borrower acknowledges that the remedy at law for a breach of its obligations under this Note will be inadequate and agrees, in the event of a breach or threatened breach by the Borrower of the provisions of this Note, that the Holder shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required.

4.11

Section 3(a)(10) Transactions.  If at any time while this Note is outstanding, the Borrower enters into a transaction structured in accordance with, based upon, or related or pursuant to, in whole or in part, Section 3(a)(10) of the Securities Act (a “3(a)(10) Transaction”), then a liquidated damages charge of 100% of the outstanding principal balance of this Note at that time, will be assessed and will become immediately due and payable to the Holder, either in the form of cash payment, an addition to the balance of this Note, or a combination of both forms of payment, as determined by the Holder.  The liquidated damages charge in this Section 4.11 shall be in addition to, and not in substitution of, any of the other rights of the Holder under this Note.

4.12

Removed.

4.13

Terms of Future Financings.  So long as this Note is outstanding, upon any issuance by the Borrower or any of its subsidiaries of any security with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to the Holder in this Note, then the Borrower shall notify the Holder in writing of such additional or more favorable term and such term, at Holder’s option, shall become a part of the transaction documents with the Holder.  The types of terms contained in another security that may be more favorable to the holder of such security include, but are not limited to, terms addressing conversion discounts, prepayment rate, conversion look back/holding periods, interest rates, original issue discounts, stock sale price, private placement price per share, and warrant coverage.

4.14

Usury.  If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law.  The Borrower 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 Borrower from paying all or any portion of the principal of or interest on this Note as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Note, and the Borrower (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 impede the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted.


9




4.15

Repayment.  Notwithstanding anything to the contrary contained in this Note, the Borrower may repay all amounts outstanding under this Note, after the Issue Date, provided that such payment shall include at least six months of interest on the Note (even if such repayment occurs prior to the six-month anniversary of the Issue Date).  Subject to the limitations set forth in this Section 4.15, the Borrower shall provide notice to the Holder seven (7) business days prior to such respective repayment date, and the Holder must receive such repayment within nine (9) business days of the Holder’s receipt of the respective repayment notice, but not sooner than seven (7) business days from the date of notice (the “Repayment Period”).  The Holder may convert the Note in whole or in part at any time during the Repayment Period, subject to the terms and conditions of this Note.


4.16

Short-Sales.  The Borrower will not execute any Short Sales at any time prior to the Maturity Date. “Short Sales” shall mean all “short sales” as defined in Rule 200 of Regulation SHO under the Exchange Act.

** signature page to follow **



10




IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its duly authorized officer on the Issue Date.


General Cannabis Corp



By:    /s/ Steve Gutterman              

Name: Steve Gutterman

Title: Chief Executive Officer




SIGNATURE PAGE TO CONVERTIBLE PROMISSORY NOTE




EXHIBIT A - NOTICE OF CONVERSION


The undersigned hereby elects to convert $                                        principal amount of the Note (defined below) into that number of shares of Common Stock to be issued pursuant to the conversion of the Note (“Common Stock”) as set forth below, of General Cannabis Corp, a Colorado corporation (the “Borrower”), according to the conditions of the convertible promissory note of the Borrower dated as of February 18, 2020 (the “Note”), as of the date written below. No fee will be charged to the Holder for any conversion, except for transfer taxes, if any.

Box Checked as to applicable instructions:

[  ]

The Borrower shall electronically transmit the Common Stock issuable pursuant to this Notice of Conversion to the account of the undersigned or its nominee with DTC through its Deposit Withdrawal Agent Commission system (“DWAC Transfer”).


Name of DTC Prime

Broker: Account Number:


[  ]

The undersigned hereby requests that the Borrower issue a certificate or certificates for the number of shares of Common Stock set forth below (which numbers are based on the Holder’s calculation attached hereto) in the name(s) specified immediately below or, if additional space is necessary, on an attachment hereto:


SBI Investments LLC, 2014-1

107 Grand Street, 7th Floor

New York, NY 10013

Email: jjuchno@seaotterglobal.com

Phone: 646.401.4216

Attention: Jonathan Juchno, Principal


Date of Conversion: 

                  

Applicable Conversion Price: 

 $                

Number of Shares of Common Stock to be 
Issued Pursuant to Conversion of this Note: 

 

                  

Amount of Principal Balance Due remaining 
Under this Note after this conversion: 

 

                  


SBI INVESTMENTS LLC, 2014-1


By:                                           

 

Name:                                      

 

Title:                                        

 

Date:                                        



12


Exhibit 10.4


PROMISSORY NOTE EXCHANGE AGREEMENT

THIS PROMISSORY NOTE EXCHANGE AGREEMENT (this “Agreement”) is entered into as of February 18, 2020 (the “Execution Date”), by and between General Cannabis Corp, a Colorado corporation (the “Company”), and SBI Investments LLC, 2014-1, a statutory series of a Delaware limited liability company (the “Investor”).

RECITALS

WHEREAS, pursuant to that certain Promissory Note Purchase Agreement, dated as of July 18, 2019, by and between the Company and the Investor, the Company issued a Promissory Note in the aggregate principal face value amount of US$855,000.00 to the Investor (the “2019 Note”);

WHEREAS, pursuant to that certain Letter Agreement, dated as of October 18, 2019, the Company and the Investor agreed to extend the maturity date of the 2019 Note from October 18, 2019 to November 1, 2019;  

WHEREAS, pursuant to that certain Letter Agreement, dated as of November 15, 2019, the Company and the Investor agreed to extend the maturity date of the 2019 Note to November 29, 2019 in exchange for an increase in the principal amount of the 2019 Note to US$905,000.00;

WHEREAS, pursuant to that certain Letter Agreement, dated as of November 20, 2019, the Company and the Investor agreed to extend the maturity date of the 2019 Note to January 31, 2020 in exchange for a partial repayment of the 2019 Note in the amount of US$195,910.96 resulting in a decrease in the principal amount of the 2019 Note from US$905,000.00 to US$750,000.00;

WHEREAS, the Company has duly authorized the issuance to the Investor of a new note, which the parties desire to exchange for the 2019 Note, in the form attached hereto as Exhibit A, in the aggregate principal face value amount of US$934,000.00 (together with any note(s) issued in replacement thereof or as a dividend thereon or otherwise with respect thereto in accordance with the terms thereof, the “Exchanged Note”), convertible into shares (the “Conversion Shares”) of Common Stock upon the terms and subject to the limitations and conditions set forth in the Exchanged Note;

WHEREAS, each of the Company and the Investor desire to effectuate such exchange and amendment on the basis and subject to the terms and conditions set forth in this Agreement and the Exchanged Note; and

WHEREAS, the exchange of the 2019 Note for the Exchanged Note is being made in reliance upon the exemption from registration provided by Section 3(a)(9) of the Securities Act.

NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Investor hereby agree as follows:

ARTICLE I
CERTAIN DEFINITIONS

Section 1.1

RECITALS.  The parties acknowledge and agree that the recitals set forth above are true and correct and are hereby incorporated in and made a part of this Agreement.

Section 1.2

DEFINED TERMS.  As used in this Agreement, the following terms shall have the following meanings specified or indicated (such meanings to be equally applicable to both the singular and plural forms of the terms defined):

2019 Note” shall have the meaning set forth in the Recitals.

Agreement” shall have the meaning specified in the preamble hereof.

Closing” shall have the meaning specified in Section 2.2.

Closing Date” shall have the meaning specified in Section 2.2

Common Stock” shall mean the Company’s common stock, $0.001 par value per share, and any shares of any other class of common stock whether now or hereafter authorized, having the right to participate in the distribution of dividends (as and when declared) and assets (upon liquidation of the Company).

Company” shall have the meaning specified in the preamble to this Agreement.


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Company Securities” shall mean the Exchanged Note and the Conversion Shares.

Confidential Information” means any information disclosed by either party to this Agreement to the other party to this Agreement, either directly or indirectly, in writing, orally or by inspection of tangible objects (including, without limitation, documents, formulae, business information, trade secrets, technology, strategies, prototypes, samples, plant and equipment), which is designated as “Confidential,” “Proprietary” or some similar designation.  Confidential Information may also include information disclosed by third parties.  Confidential Information shall not, however, include any information which (i) was publicly known and made generally available in the public domain prior to the time of disclosure by the disclosing party; (ii) becomes publicly known and made generally available after disclosure by the disclosing party to the receiving party through no action or inaction of the receiving party; (iii) is already in the possession of the receiving party at the time of disclosure by the disclosing party as shown by the receiving party’s files and records immediately prior to the time of disclosure; (iv) is obtained by the receiving party from a third party without a breach of such third party’s obligations of confidentiality; (v) is independently developed by the receiving party without use of or reference to the disclosing party’s Confidential Information, as shown by documents and other competent evidence in the receiving party’s possession; or (vi) is required by law to be disclosed by the receiving party, provided that the receiving party gives the disclosing party prompt written notice of such requirement prior to such disclosure and reasonable assistance in obtaining an order protecting the information from public disclosure.

Current Report” shall have the meaning set forth in Section 5.2.

Damages” shall mean any loss, claim, damage, liability, cost and expense (including, without limitation, reasonable attorneys’ fees and disbursements and costs and expenses of expert witnesses and investigation).

 “Disqualification Event” shall have the meaning specified in Section 4.23.

Environmental Laws” shall have the meaning set forth in Section 4.12.

Exchange” shall have the meaning specified in Section 2.1.

Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

Exchanged Note” shall have the meaning set forth in the Recitals.

Execution Date” shall have the meaning set forth in the preamble to this Agreement.

FINRA” shall mean the Financial Industry Regulatory Authority, Inc.

Indemnified Party” shall have the meaning specified in Section 7.2.

Indemnifying Party” shall have the meaning specified in Section 7.2.

Investor” shall have the meaning specified in the preamble to this Agreement.

Issuer Covered Person” shall have the meaning specified in Section 4.23.

 “Lien” means a lien, charge, pledge, security interest, encumbrance, right of first refusal, preemptive right or any other restriction.

Material Adverse Effect” shall mean any effect on the business, operations, properties, or financial condition of the Company and/or the Subsidiaries that is material and adverse to the Company and/or the Subsidiaries and/or any condition, circumstance, or situation that prohibit or otherwise materially interfere with the ability of the Company and/or the Subsidiaries to enter into and/or perform its obligations under any Transaction Document.

 “Person” shall mean an individual, a corporation, a partnership, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

Principal Market” shall mean any of the U.S. national exchanges (i.e. NYSE, NYSE AMEX, NASDAQ), or principal quotation systems (i.e. OTCQX, OTCQB, OTC Pink, the OTC Bulletin Board), or other principal exchange or recognized quotation system which is at the time the principal trading platform or market for the Common Stock.

Rule 144” shall mean Rule 144 promulgated under the Securities Act or any similar provision then in force under the Securities Act.

 “SEC” shall mean the United States Securities and Exchange Commission.


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SEC Documents” shall have the meaning specified in Section 4.4.

Securities Act” shall mean the Securities Act of 1933, as amended.

Subsidiary” or “Subsidiaries” means any Person the Company wholly-owns or controls, or in which the Company, directly or indirectly, owns a majority of the voting stock or similar voting interest, in each case that would be disclosable pursuant to Item 601(b)(21) of Regulation S-K promulgated under the Securities Act.

Trading Day” shall mean a day on which the Principal Market shall be open for business.

Transaction Documents” shall mean this Agreement, the Exchanged Note, the ITAI and all schedules and exhibits hereto and thereto.

Variable Security Holder” means any holder, other than Cavalry Fund I LP, of any securities of the Company in an amount in excess of US$50,000.00 that (A) have or may have conversion rights of any kind, contingent, conditional or otherwise, in which the number of shares that may be issued pursuant to such conversion right varies with the market price of the Common Stock, or (B) are or may become convertible into Common Stock (including without limitation convertible debt, warrants or convertible preferred stock), with a conversion price that varies with the market price of the Common Stock, even if such security only becomes convertible following an event of default, the passage of time, or another trigger event or condition.

ARTICLE II
EXCHANGE OF NOTE

Section 2.1

Exchange of 2019 Note.  On the Closing Date, pursuant to Section 3(a)(9) of the Securities Act, the Investor hereby agrees to convey, assign and transfer the 2019 Note to the Company in exchange for the Company’s agreement to issue the Exchanged Note to the Investor as follows (such transactions in this Section 2.1, the “Exchange”):  

(a)

In exchange for the 2019 Note, on the Closing Date the Company shall deliver or cause to be delivered to the Investor (or its designee) the Exchanged Note at the address of Investor set forth in Section 7.1.  

(b)

The Investor shall deliver or cause to be delivered to the Company (or its designee) the 2019 Note as soon as commercially practicable following the Closing Date.  Immediately following the delivery of the Exchanged Note to the Investor (or its designee), the 2019 Note shall be cancelled.  The Company shall deliver to its transfer agent irrevocable instructions in the form attached hereto as Exhibit B (the “ITAI”).

(c)

The Company and the Investor shall execute and/or deliver such other documents and agreements as are customary and reasonably necessary to effectuate the Exchange.

Section 2.2

Closing Date.  Subject to the satisfaction (or written waiver) of the conditions thereto set forth in Article VI below, the “Closing Date” shall be 5:00 P.M., Eastern Standard Time on or about the Execution Date, or such other mutually agreed upon time.  The closing of the transactions contemplated by this Agreement (the “Closing”) shall occur on the Closing Date at such location as may be agreed to by the parties.

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR

The Investor represents and warrants to the Company that:

Section 3.1

PURCHASE FOR OWN ACCOUNT.  The Investor is acquiring the Exchanged Note solely for the Investor’s own account and beneficial interest for investment and not for sale or with a view to distribution of the Exchanged Note or the Conversion Shares or any part thereof, has no present intention of selling (in connection with a distribution or otherwise), granting any participation in, or otherwise distributing the same, and does not presently have reason to anticipate a change in such intention.

Section 3.2

INFORMATION AND SOPHISTICATION.  Without lessening or obviating the representations and warranties of the Company set forth herein, the Investor hereby: (A) acknowledges that the Investor has received all the information the Investor has requested from the Company and the Investor considers necessary or appropriate for deciding whether to acquire the Exchanged Note, (B) represents that the Investor has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Exchanged Note and to obtain any additional information necessary to verify the accuracy of the information given the Investor and (C) further represents that the Investor has such knowledge and experience in financial and business matters that the Investor is capable of evaluating the merits and risk of this investment.


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Section 3.3

ABILITY TO BEAR ECONOMIC RISK.  The Investor acknowledges that investment in the Exchanged Note involves a high degree of risk, and represents that the Investor is able, without materially impairing the Investor’s financial condition, to hold the Exchanged Note and/or Company Securities for an indefinite period of time and to suffer a complete loss of the Investor’s investment.

Section 3.4

ACCREDITED INVESTOR STATUS.  The Investor is an “accredited investor” as such term is defined in Rule 501 under the Securities Act of 1933, as amended.

Section 3.5

NO “BAD ACTOR” DISQUALIFICATION.  The Investor represents and warrants that neither (A) the Investor nor (B) any entity that controls the Investor or is under the control of, or under common control with, the Investor, is subject to any Disqualification Event, except for Disqualification Events covered by Rule 506(d)(2)(ii) or (iii) or (d)(3) under the Securities Act of 1933, as amended, and disclosed in writing in reasonable detail to the Company.  The Investor represents that the Investor has exercised reasonable care to determine the accuracy of the representation made by the Investor in this paragraph, and agrees to notify the Company if the Investor becomes aware of any fact that makes the representation given by the Investor hereunder inaccurate.

Section 3.6

NO LEGAL ADVICE FROM THE COMPANY. The Investor acknowledges that it has had the opportunity to review this Agreement and the transactions contemplated by this Agreement with its own legal counsel and investment and tax advisors.  Except with respect to the representations, warranties and covenants contained in this Agreement, the Investor is relying solely on such counsel and advisors and not on any statements or representations of the Company or any of its representatives or agents for legal, tax or investment advice with respect to this investment, the transactions contemplated by this Agreement or the securities laws of any jurisdiction.

Section 3.7

AUTHORITY.  The Investor has the requisite power and authority to enter into and perform its obligations under this Agreement and to consummate the transactions contemplated hereby.  The execution and delivery of this Agreement and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary action and no further consent or authorization of the Investor is required.  This Agreement constitutes the valid and binding obligation of the Investor enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by other equitable principles of general application.

Section 3.8

ORGANIZATION AND STANDING.  The Investor is a statutory series of a Delaware limited liability company duly formed, validly existing and in good standing under the laws of the jurisdiction of its formation with full right and authority to enter into and to consummate the transactions contemplated by this Agreement and the Exchanged Note.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to the Investor that as of the Execution Date and at the Closing Date:

Section 4.1

ORGANIZATION OF THE COMPANY.  The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the state of Colorado, with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted.  Each of the Subsidiaries is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted.  Each of the Company and the Subsidiaries is not in violation or default of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents.  Each of the Company and the Subsidiaries is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not have or reasonably be expected to result in a Material Adverse Effect and no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification.

Section 4.2

AUTHORITY/ISSUANCE.  The Company has the requisite corporate power and authority to enter into and perform its obligations under the Transaction Documents.  The execution and delivery of this Agreement and the Exchanged Note by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action and no further consent or authorization of the Company or its Board of Directors or stockholders is required.  Each of this Agreement and the Exchanged Note has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by other equitable principles of general application. The Conversion Shares are duly authorized and fully reserved for issuance and, upon conversion of the Exchanged Note in accordance with its terms, will be validly issued, fully paid and non-assessable, and free from all taxes, liens, claims and encumbrances with respect to the issue thereof, with the Investor being entitled to all rights accorded to a holder of Common Stock.


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Section 4.3

LISTING AND MAINTENANCE REQUIREMENTS.  The Common Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act, nor has the Company received any notification that the SEC is contemplating terminating such registration.  The Company has not, in the twelve (12) months preceding the Execution Date, received notice from the Principal Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Principal Market.  The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.

Section 4.4

SEC DOCUMENTS; DISCLOSURE.  Except as set forth on Schedule 4.4, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by the Company under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the one (1) year preceding the Execution Date (or such shorter period as the Company was required by law or regulation to file such material) (the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, being collectively referred to herein as the “SEC Documents”) on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Documents prior to the expiration of any such extension.  As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act and the Exchange Act, as applicable, and other federal laws, rules and regulations applicable to such SEC Documents, and none of the SEC Documents when filed contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.  The financial statements of the Company included in the SEC Documents comply as to form and substance in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto.  Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except (a) as may be otherwise indicated in such financial statements or the notes thereto or (b) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments).  The Company maintains a system of internal accounting controls appropriate for its size. There is no transaction, arrangement, or other relationship between the Company and an unconsolidated or other off balance sheet entity that is not disclosed by the Company in its financial statements or otherwise that would be reasonably likely to have a Material Adverse Effect.  Except with respect to the material terms and conditions of the transactions contemplated by the Transaction Documents, the Company confirms that neither it nor any other Person acting on its behalf has provided the Investor or its agents or counsel with any information that it believes constitutes or might constitute material, non-public information.  The Company understands and confirms that the Investor will rely on the foregoing representation in effecting transactions in securities of the Company.

Section 4.5

NO CONFLICTS. The execution, delivery and performance of this Agreement, the Exchanged Note, and the ITAI by the Company, and the consummation by the Company of the transactions contemplated hereby and thereby, do not and will not: (a) result in a violation of the Company’s or any Subsidiary’s certificate or articles of incorporation, by-laws or other organizational or charter documents, (b) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture, instrument or any “lock-up” or similar provision of any agreement to which the Company or any Subsidiary is a party, or (c) result in a violation of any federal, state or local law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or any Subsidiary or by which any property or asset of the Company or any Subsidiary is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect), nor is the Company otherwise in violation of, conflict with or in default under any of the foregoing.  The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental entity.  The Company is not required under federal, state or local law, rule or regulation to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement or the Exchanged Note (other than any SEC, FINRA or state securities filings that may be required to be made by the Company subsequent to any Closing or any registration statement that may be filed pursuant hereto).

Section 4.6

NO MATERIAL ADVERSE CHANGE.  No event has occurred that would have a Material Adverse Effect on the Company or any Subsidiary that has not been disclosed in subsequent SEC Documents.


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Section 4.7

LITIGATION AND OTHER PROCEEDINGS.  Except as set forth on Schedule 4.7, (i) there are no actions, suits, investigations, inquiries or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of their respective properties, (ii) nor has the Company received any written or oral notice of any such action, suit, proceeding, inquiry or investigation, which would have a Material Adverse Effect or would require disclosure under the Securities Act or the Exchange Act.  No judgment, order, writ, injunction or decree or award has been issued by or, to the knowledge of the Company, requested of any court, arbitrator or governmental agency which would have a Material Adverse Effect.  Except as set forth on Schedule 4.7, there has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the SEC involving the Company, any Subsidiary or any current or former director or officer of the Company or any Subsidiary.

Section 4.8

REGISTRATION RIGHTS.  Except as disclosed in SEC Documents filed as of the Execution Date, no Person has any right to cause the Company to effect the registration under the Securities Act of any securities of the Company or any Subsidiary.

Section 4.9

INVESTOR’S STATUS.  The Company acknowledges and agrees that the Investor is acting solely in the capacity of arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated hereby and thereby.  The Company further acknowledges that the Investor is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated hereby and thereby and any advice given by the Investor or any of its representatives or agents in connection with the Transaction Documents and the transactions contemplated hereby and thereby is merely incidental to the Investor’s exchange of the 2019 Note for the Exchanged Note.  The Company further represents to the Investor that the Company’s decision to enter into the Transaction Documents has been based solely on the independent evaluation by the Company and its representatives and advisors.

Section 4.10

NO GENERAL SOLICITATION; NO INTEGRATED OFFERING.  Neither the Company, any Subsidiary, nor any of their respective affiliates, nor any Person acting on their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or issuance of the Exchanged Note.  Neither the Company, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales in any security or solicited any offers to buy any security under circumstances that would require registration under the Securities Act of the issuance of the Company Securities to the Investor. The issuance of the Company Securities to the Investor will not be integrated with any other issuance of the Company’s securities (past, current or future) for purposes of any shareholder approval provisions applicable to the Company or its securities.

Section 4.11

INTELLECTUAL PROPERTY RIGHTS.  The Company and the Subsidiaries own or possess adequate rights or licenses to use all material trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted.  None of the Company’s, nor any Subsidiary’s material trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, government authorizations, trade secrets or other intellectual property rights have expired or terminated, or, by the terms and conditions thereof, could expire or terminate within two years from the date of this Agreement.  The Company does not have any knowledge of any infringement by the Company and/or any Subsidiary of any material trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, or of any such development of similar or identical trade secrets or technical information by others, and there is no claim, action or proceeding being made or brought against, or to the Company’s knowledge, being threatened against, the Company and/or any Subsidiary regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement, which could reasonably be expected to have a Material Adverse Effect.

Section 4.12

ENVIRONMENTAL LAWS.  To the Company’s knowledge, the Company and each Subsidiary (i) is in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (“Environmental Laws”), (ii) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its respective businesses and (iii) is in compliance with all terms and conditions of any such permit, license or approval, except where, in each of the three foregoing clauses, the failure to so comply could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.


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Section 4.13

TITLE.  The Company and each Subsidiary has good and marketable title in fee simple to all real property owned by it and good and marketable title in all personal property owned by it that is material to the business of the Company and each Subsidiary, in each case free and clear of all Liens and, except for Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company or any Subsidiary and Liens for the payment of federal, state or other taxes, the payment of which is neither delinquent nor subject to penalties.  Any real property and facilities held under lease by the Company or any Subsidiary is held under valid, subsisting and enforceable leases with which the Company is in compliance with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company or any Subsidiary.

Section 4.14

INSURANCE.  The Company and each Subsidiary is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company reasonably believes to be prudent and customary in the businesses in which the Company and each Subsidiary is engaged.  Neither the Company, nor any Subsidiary has been refused any insurance coverage sought or applied for, and the Company has no reason to believe that it or any Subsidiary will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company, taken as a whole.

Section 4.15

REGULATORY PERMITS.  The Company and each Subsidiary possesses all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct its businesses, and neither the Company, nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit.

Section 4.16

TAX STATUS.  The Company and each Subsidiary has made or filed all federal and state income and all other material tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply.  There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.

Section 4.17

TRANSACTIONS WITH AFFILIATES.  Except as set forth in the SEC Documents, none of the officers or directors of the Company or any Subsidiary, and to the knowledge of the Company, none of the employees of the Company or any Subsidiary is presently a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of the lesser of (i) US$120,000.00 or (ii) one percent of the average of the Company’s total assets at year end for the last two completed fiscal years, other than for (i) payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company or any Subsidiary and (iii) other employee benefits, including stock option agreements under any stock option plan of the Company.

Section 4.18

FOREIGN CORRUPT PRACTICES.  None of the Company, any Subsidiary, or to the knowledge of the Company, any agent or other Person acting on behalf of the Company or any Subsidiary, has (i) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company of any Subsidiary (or made by any Person acting on its behalf of which the Company is aware) which is in violation of law, or (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended.

Section 4.19

SARBANES-OXLEY.  The Company is in compliance with all provisions of the Sarbanes-Oxley Act of 2002, as amended, which are applicable to it.


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Section 4.20

CERTAIN FEES.  No brokerage or finder’s fees or commissions are or will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by the Transaction Documents.  The Investor shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section 4.20 that may be due in connection with the transactions contemplated by the Transaction Documents.

Section 4.21

INVESTMENT COMPANY.  The Company is not an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

Section 4.22

ACCOUNTANTS.  The Company’s accountants are set forth in the SEC Documents and, to the knowledge of the Company, such accountants are an independent registered public accounting firm as required by the Securities Act.

Section 4.23

NO DISQUALIFICATION EVENTS.  None of the Company, any Subsidiary, any of their predecessors, any affiliated issuer, any director, executive officer, other officer of the Company or any Subsidiary, any beneficial owner of 20% or more of the Company’s outstanding voting equity securities, calculated on the basis of voting power, nor any promoter (as that term is defined in Rule 405 under the Securities Act) connected with the Company in any capacity at the time of sale (each, an “Issuer Covered Person”) is subject to any of the “Bad Actor” disqualifications described in Rule 506(d)(1)(i) to (viii) under the Securities Act (a “Disqualification Event”), except for a Disqualification Event covered by Rule 506(d)(2) or (d)(3) under the Securities Act.  The Company has exercised reasonable care to determine whether any Issuer Covered Person is subject to a Disqualification Event.

Section 4.24

MONEY LAUNDERING.  The Company and each Subsidiary is in compliance with, and has not previously violated, the USA PATRIOT ACT of 2001 and all other applicable U.S. and non-U.S. anti-money laundering laws and regulations, including, but not limited to, the laws, regulations and Executive Orders and sanctions programs administered by the U.S. Office of Foreign Assets Control, including, but not limited, to (i) Executive Order 13224 of September 23, 2001 entitled, “Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism” (66 Fed. Reg. 49079 (2001)); and (ii) any regulations contained in 31 CFR, Subtitle B, Chapter V.

Section 4.25

ILLEGAL OR UNAUTHORIZED PAYMENTS; POLITICAL CONTRIBUTIONS.  Neither the Company, nor any Subsidiary has, nor, to the best of the Company’s knowledge (after reasonable inquiry of its officers and directors), any of the officers, directors, employees, agents or other representatives of the Company, any Subsidiary or any other business entity or enterprise with which the Company is or has been affiliated or associated, has, directly or indirectly, made or authorized any payment, contribution or gift of money, property, or services, whether or not in contravention of applicable law, (i) as a kickback or bribe to any Person or (ii) to any political organization, or the holder of or any aspirant to any elective or appointive public office except for personal political contributions not involving the direct or indirect use of funds of the Company.

Section 4.26

SHELL COMPANY STATUS.  The Company is not currently an issuer identified in Rule 144(i)(1)(i) under the Securities Act, is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, has filed all reports and other materials required to be filed by Section 13 or 15(d) of the Exchange Act as applicable during the preceding 12 months, and, as of a date at least one year prior to the Execution Date, has filed current “Form 10 information” with the SEC (as defined in Rule 144(i)(3) of the Securities Act) reflecting its status as an entity that is no longer an issuer described in Rule 144(i)(1)(i) of the Securities Act.

Section 4.27

ACKNOWLEDGMENT OF DILUTION. The Company understands and acknowledges the potentially dilutive effect to the Common Stock upon the issuance of the Conversion Shares upon conversion of the Exchanged Note. The Company further acknowledges that its obligation to issue Conversion Shares upon conversion of the Exchanged Note in accordance with this Agreement, and the Exchanged Note, is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other shareholders of the Company.

Section 4.28

ABSENCE OF SCHEDULES.  In the event that, at the Closing, the Company does not deliver any disclosure schedule contemplated by this Agreement, the Company hereby acknowledges and agrees that (i) each such undelivered disclosure schedule shall be deemed to read as follows: “Nothing to Disclose”, and (ii) the Investor has not otherwise waived delivery of such disclosure schedule.  


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ARTICLE V
COVENANTS OF THE COMPANY

Section 5.1

EQUITY LINES AND CONVERTIBLE NOTES.  The Company covenants and agrees that it will not, while the Exchanged Note remains outstanding, without the prior written consent of the Investor (which consent shall not be unreasonably withheld), enter into any equity line of credit agreement with any other party or have any Variable Security Holders, excluding the Investor, without the Investor’s prior written consent, which consent may be granted or withheld in the Investor’s sole and absolute discretion; provided that such arrangements evidenced by written agreements that exist as of the Execution Date shall not be subject to the provisions of this Section 5.1.

Section 5.2

FILING OF CURRENT REPORT.  The Company agrees that, if required under applicable laws and regulations, it shall file a Current Report on Form 8-K, including the Transaction Documents as exhibits thereto, with the SEC within the time required by the Exchange Act, relating to the transactions contemplated by, and describing the material terms and conditions of, the Transaction Documents (the “Current Report”).  The Company shall permit the Investor to review and comment upon the final pre-filing draft version of the Current Report at least two (2) Trading Days prior to its filing with the SEC, and the Company shall give reasonable consideration to all such comments.  The Investor shall use its reasonable best efforts to comment upon the final pre-filing draft version of the Current Report within one (1) Trading Day from the date the Investor receives it from the Company. At all times while the Investor holds the Exchanged Note and/or any Conversion Shares, the Company shall file all reports, schedules, registrations, forms, statements, information and other documents required to be filed by a publicly reporting company with the SEC pursuant to the reporting requirements of the Exchange Act, within the applicable time periods prescribed for such filings under the Exchange Act, and take all other Company actions necessary for the Investor to be able utilize Rule 144.

Section 5.3

DUE DILIGENCE; CONFIDENTIALITY; NON-PUBLIC INFORMATION.  The Investor shall have the right, from time to time as the Investor may reasonably deem appropriate, to perform reasonable due diligence on the Company during normal business hours.  The Company, each Subsidiary and their respective officers and employees shall provide information and reasonably cooperate with the Investor in connection with any reasonable request by the Investor related to the Investor’s due diligence of the Company.  The Company agrees not to disclose any Confidential Information of the Investor to any third party, except for attorneys, accountants, advisors who have a need to know such Confidential Information and are bound by confidentiality, and shall not use any Confidential Information for any purpose other than in connection with, or in furtherance of, the transactions contemplated hereby.  The Company acknowledges that the Confidential Information of the Investor shall remain the property of the Investor and agrees that it shall take all reasonable measures to protect the secrecy of any Confidential Information disclosed by the Investor.  The Company confirms that neither it nor any other Person acting on its behalf shall provide the Investor or its agents or counsel with any information that constitutes or might constitute material, non-public information, unless a simultaneous public announcement thereof is made by the Company in the manner contemplated by Regulation FD. In the event of a breach of the foregoing covenant by the Company or any Person acting on its behalf (as determined in the reasonable good faith judgment of the Investor), in addition to any other remedy provided herein or in the Exchanged Note, the Investor shall have the right to make a public disclosure, in the form of a press release, public advertisement or otherwise, of such material, non-public information without the prior approval by the Company; provided the Investor shall have first provided notice to the Company that it believes it has received information that constitutes material, non-public information, the Company shall have at least twenty-four (24) hours to publicly disclose such material, non-public information prior to any such disclosure by the Investor, and the Company shall have failed to publicly disclose such material, non-public information within such time period.  The Investor shall not have any liability to the Company, any Subsidiary, or any of their respective directors, officers, employees, stockholders, affiliates or agents, for any such disclosure.  The Company understands and confirms that the Investor shall be relying on the foregoing covenants in effecting transactions in securities of the Company.

Section 5.4

TAXES.  The Company shall pay any and all transfer, stamp or similar taxes that may be payable with respect to the issuance and delivery of the Exchanged Note.

Section 5.5

USE OF PROCEEDS.  The Company shall use the proceeds underlying the Exchanged Note for working capital and other general corporate purposes and shall not, directly or indirectly, use such proceeds for any loan or advances to, or investment in, or the repayment of any debts to, any of its officers, directors or affiliates or any other corporation, partnership, enterprise or other Person.

Section 5.6

RESTRICTION ON FUNDAMENTAL TRANSACTION.  The Company covenants and agrees that it will not, without the prior written consent of the Investor, enter into any agreement to engage in or otherwise consummate, directly or indirectly, any Fundamental Transaction (as defined in the Exchanged Note), without the Investor’s prior written consent, which consent may be granted or withheld in the Investor’s sole and absolute discretion.


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ARTICLE VI
CONDITIONS TO CLOSING

Section 6.1

CONDITIONS PRECEDENT TO THE OBLIGATION OF COMPANY TO EXCHANGE THE NOTE.  The obligation of the Company hereunder to exchange the 2019 Note for the Exchanged Note is subject to the satisfaction of each of the following conditions:

(a)

ACCURACY OF INVESTOR’S REPRESENTATIONS AND WARRANTIES.  The representations and warranties of the Investor shall be true and correct in all material respects as of the Execution Date and as of the date of the Closing as though made at each such time.

(b)

PERFORMANCE BY INVESTOR.  The Investor shall have performed, satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Investor at or prior to the Closing.

Section 6.2

CONDITIONS PRECEDENT TO THE OBLIGATION OF INVESTOR TO EXCHANGE THE NOTE.  The obligation of the Investor hereunder to exchange the 2019 Note for the Exchanged Note is subject to the satisfaction of each of the following conditions:

(a)

ACCURACY OF THE COMPANY’S REPRESENTATIONS AND WARRANTIES.  The representations and warranties of the Company in this Agreement shall be true and correct in all material respects as of the Execution Date and as of the Closing Date.

(b)

PERFORMANCE BY THE COMPANY.  The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company including the delivery of executed copies of all Transaction Documents.

(c)

NO INJUNCTION.  No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or adopted by any court or governmental authority of competent jurisdiction that prohibits or directly and materially adversely affects any of the transactions contemplated by the Transaction Documents, and no proceeding shall have been commenced that may have the effect of prohibiting or materially adversely affecting any of the transactions contemplated by the Transaction Documents.

(d)

ADVERSE CHANGES.  Since the date of filing of the Company’s most recent SEC Document, no event that had or is reasonably likely to have a Material Adverse Effect has occurred.

(e)

NO SUSPENSION OF TRADING IN OR DELISTING OF COMMON STOCK.  The trading of the Common Stock shall not have been suspended by the SEC, the Principal Market or FINRA, or otherwise halted for any reason, and the Common Stock shall have been approved for listing or quotation on and shall not have been delisted from the Principal Market.

(f)

SEC DOCUMENTS.  All reports, schedules, registrations, forms, statements, information and other documents required to have been filed by the Company with the SEC pursuant to the reporting requirements of the Exchange Act (other than Forms 8-K) shall have been filed with the SEC within the applicable time periods prescribed for such filings under the Exchange Act.

(g)

NO VIOLATION.  No statute, regulation, order, guidance, decree, writ, ruling or injunction shall have been enacted, entered, promulgated, threatened or endorsed by any federal, state, local or foreign court or governmental authority of competent jurisdiction, including, without limitation, the SEC, which prohibits the consummation of or which would materially modify or delay any of the transactions contemplated by the Transaction Documents.

(h)

GOOD STANDING.  The Company shall have delivered a certificate of good standing issued by the State of Colorado, dated within 5 days prior to the Closing Date.

(i)

BOARD APPROVAL.  The Company shall deliver executed copies of its board consent authorizing this transaction.


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ARTICLE VII
NOTICES; INDEMNIFICATION

Section 7.1

NOTICES.  All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (a) personally served, (b) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (c) delivered by reputable air courier service with charges prepaid, or (d) transmitted by hand delivery, facsimile, or e-mail as a PDF, addressed as set forth below or to such other address as such party shall have specified most recently by written notice given in accordance herewith. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (i) upon hand delivery or delivery by e-mail at the address designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (ii) on the second business day following the date of mailing by express courier service or on the fifth business day after deposited in the mail, in each case, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.

The addresses for such communications shall be:

If to the Company:

General Cannabis Corp

6565 E. Evans Avenue
Denver, CO 80224
Attention:

E-mail:

Phone:


with a copy to (that shall not constitute notice)

Morrison & Foerster LLP

425 Market Street

San Francisco, CA 94105

Attention: John M. Rafferty

Email: jrafferty@mofo.com

Phone: 415.268.6897


If to the Investor:

SBI Investments LLC, 2014-1

107 Grand Street, 7th Floor

New York, NY 10013

Attention: Jonathan Juchno, Principal

Email: jjuchno@seaotterglobal.com

Phone: 646.401.4216


with a copy to (that shall not constitute notice)

K&L Gates LLP

200 S. Biscayne Blvd., Suite 3900

Miami, FL 33131

Attention: John D. Owens, III, Esq.

E-mail: john.owens@klgates.com

Phone:  305.539.3328


Either party hereto may from time to time change its address or e-mail for notices under this Section 7.1 by giving at least ten (10) days’ prior written notice of such changed address to the other party hereto.

Section 7.2

INDEMNIFICATION.  Each party hereto (an “Indemnifying Party”) agrees to indemnify and hold harmless the other party along with its officers, directors, employees, and authorized agents, and each Person or entity, if any, who controls such party within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act or the rules and regulations thereunder (an “Indemnified Party”) from and against any Damages, joint or several, and any action in respect thereof to which the Indemnified Party becomes subject to, resulting from, arising out of or relating to any misrepresentation, breach of warranty or nonfulfillment of or failure to perform any covenant or agreement on the part of the Indemnifying Party contained in this Agreement.


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ARTICLE VIII
MISCELLANEOUS

Section 8.1

GOVERNING LAW.  All questions concerning the construction, validity, enforcement and interpretation of the Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to any principles of conflicts of law.

Section 8.2

JURISDICTION.  Each party agrees that all legal actions, suits, proceedings and claims concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York, New York.  Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such action or proceeding is improper or is an inconvenient venue for such proceeding.  Each party hereby irrevocably waives personal service of process and consents to process being served in any such action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law.  If any party shall commence an action or proceeding to enforce any provisions of the Transaction Documents, then, in addition to the obligations of the Company elsewhere in this Agreement, the prevailing party in such action or proceeding shall be reimbursed by the non-prevailing party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.

Section 8.3

JURY TRIAL WAIVER.  THE COMPANY AND THE INVESTOR HEREBY IRREVOCABLY WAIVE A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER IN RESPECT OF ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THE TRANSACTION DOCUMENTS.

Section 8.4

ASSIGNMENT.  This Agreement shall be binding upon and inure to the benefit of the Company and the Investor and their respective successors and assigns.  Neither this Agreement nor any rights of the Company hereunder may be assigned to any other Person.  The Investor may assign its rights under this Agreement.

Section 8.5

NO THIRD PARTY BENEFICIARIES.  This Agreement is intended for the benefit of the Company and the Investor and their respective successors, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.

Section 8.6

ENTIRE AGREEMENT.  The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the Company and the Investor with respect to the matters covered herein and therein and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.

Section 8.7

FEES AND EXPENSES.  Except as expressly set forth in the Transaction Documents, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement except that, the principal balance of the Exchange Note shall be increased by $9,000.00 to reimburse the Investor for its transactional expenses.  The Company shall pay all stamp taxes and other taxes and duties levied in connection with the delivery of the Exchanged Note to the Investor.

Section 8.8

COUNTERPARTS.  This Agreement may be executed in multiple counterparts, each of which may be executed by less than all of the parties and shall be deemed to be an original instrument which shall be enforceable against the parties actually executing such counterparts and all of which together shall constitute one and the same instrument.  This Agreement may be delivered to the other parties hereto by e-mail of a copy of this Agreement bearing the signature of the parties so delivering this Agreement.


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Section 8.9

SEVERABILITY.  In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that such severability shall be ineffective if it materially changes the economic benefit of this Agreement to any party.

Section 8.10

FURTHER ASSURANCES.  Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

Section 8.11

NO STRICT CONSTRUCTION.  The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

Section 8.12

EQUITABLE RELIEF.  The Company recognizes that in the event that it fails to perform, observe, or discharge any or all of its obligations under this Agreement, any remedy at law may prove to be inadequate relief to the Investor.  The Company therefore agrees that the Investor shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.

Section 8.13

TITLE AND SUBTITLES.  The titles and subtitles used in this Agreement are used for the convenience of reference and are not to be considered in construing or interpreting this Agreement.

Section 8.14

AMENDMENTS; WAIVERS.  No provision of this Agreement may be amended other than by a written instrument signed by both parties hereto, and no provision of this Agreement may be waived other than in a written instrument signed by the party against whom enforcement of such waiver is sought.  No failure or delay in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.

Section 8.15

SHORT SALES AND CONFIDENTIALITY. The Investor will not execute any Short Sales during the period from the Execution Date until the first anniversary thereof. “Short Sales” shall mean all “short sales” as defined in Rule 200 of Regulation SHO under the Exchange Act.

Section 8.16

PUBLICITY.  The Company and the Investor shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and no party shall issue any such press release or otherwise make any such public statement, other than as required by law, without the prior written consent of the other parties, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is required by law, in which such case the disclosing party shall provide the other party with prior notice of such public statement.  Notwithstanding the foregoing, the Company shall not publicly disclose the name of the Investor without the prior written consent of the Investor, except to the extent required by law.

Section 8.17

LEAK OUT.  For a period of one (1) year from the Execution Date, the Investor agrees not to sell a number of Conversion Shares that exceeds the greater of (i) 20% of the total daily trading volume of the Common Stock on the date of such sale, as reported on the Principal Market; and (ii) such number of Conversion Shares that equals $10,000.00 divided by the closing price of the Common Stock one Trading Day prior to the date of such sale, as reported on the Principal Market.

Section 8.18

TERMINATION.  Notwithstanding anything contained in this Agreement to the contrary, if the Closing Date has not occurred and the Company does not deliver the Exchanged Note to the Investor in accordance with Section 2.1, then, at the election of the Investor delivered in writing to the Company at any time after the fifth (5th) business day immediately following the Execution Date, this Agreement shall be terminated and be null and void ab initio and the 2019 Note shall not be terminated hereunder and shall remain outstanding as if this Agreement never existed.

** Signature Page Follows **


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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the Execution Date.



 

GENERAL CANNABIS CORP

 

 

 

 

 

 

 

By:

/s/ Steve Gutterman

 

Name:

Steve Gutterman

 

Title:

Chief Executive Officer



 

SBI INVESTMENTS LLC, 2014-1

 

 

 

 

 

 

 

By:

/s/ Jonathan Juchno

 

Name:

Jonathan Juchno

 

Title:

Principal






** Signature Page to Promissory Note Exchange Agreement **