This Exchange Agreement
(this “Agreement”), effective as of the 8th day of January, 2016 (the “Effective Date”),
is entered into by and between Arkados Group, Inc., a Delaware corporation (the “Company”), with headquarters
located at 211 Warren St., Suite 320, Newark, NJ 07103, and William Carson (“Mr. Carson”) and Susan Carson (“Mrs.
Carson,” and, collectively with Mr. Carson, the “Holders”), individuals having their address at 2703
Cottonwood Lane, Colleyville, TX 76034.
WHEREAS, Mr. Carson
and the Company entered into that certain Securities Purchase Agreement, dated September 10, 2014 (the “Individual SPA”),
pursuant to which Mr. Carson purchased, and the Company sold and issued to Mr. Carson its 6% Convertible Note No. 2014-3 dated
September 10, 2014 (“Note 2014-3”) in the original principal amount of $65,000;
WHEREAS, the Holders
and the Company entered into that certain Securities Purchase Agreement, dated August __, 2014 (the “Joint SPA,”
and, together with the Individual SPA, the “SPAs”), pursuant to which the Holders purchased, and the Company sold and
issued to the Holders its 6% Convertible Note No. 2014-4 dated September 10, 2014 (“Note 2014-4,” and, together
with Note 2014-3, the “Notes”) also in the original principal amount of $65,000;
WHEREAS, the Notes
matured on October 31, 2015, and the Company has requested the Holders to extend the Maturity Date (as defined in the Notes) to
December 31, 2016;
WHEREAS, the Holders
are willing to reduce the amount due under the Notes to $40,000 and to extend the Maturity Date in exchange for a cash payment
of $60,000 and the Company’s issuance to the Holders of 50,000 shares of its Common Stock, par value $0.001 per share (the
“Common Stock”) and certain changes to the terms and conditions of the Notes.
NOW THEREFORE, in consideration
of the sum of $10.00 paid in hand, the sufficiency and receipt of which is hereby acknowledged, the parties, intending to be legally
bound, hereby agree as follows:
upon the full execution of this Agreement, the Holders will tender the Notes for cancellation by the Company. In exchange the Company
will issue, sell and deliver to the Holders its 6% Convertible Note due December 31, 2016 in the original principal amount of $40,000,
such note to be in the form set forth as Exhibit “A” to this Agreement (“Note 2016-1”).
upon the full execution of this Agreement, the Company will pay the sum of $60,000 to the Holders by wire transfer of immediately
available fund to the following bank account of the Holders:
[insert bank name, routing number, bank
upon the full execution of this Agreement, the Company will immediately instruct its transfer agent to issue 50,000 shares of the
Common Stock (the Shares”). The Shares are “restricted securities” as defined in Rule 144 under the Securities
Act of 1933, as amended, and, accordingly, the certificate representing the Shares will bear a restrictive legend.
Holders hereby accept the Shares and the sum of $60,000 as payment in full for all interest accrued on the Notes (including interest,
Default Interest and all other penalty amounts due under the Notes) through the Effective Date and $70,000 aggregate principal
amount of the Notes. The Holders hereby release the Company from any and all claims that have accrued or may have accrued under
the SPAs or the Notes up to the Effective Date.
order to induce the Company to issue Note 2016-1 and the Shares, the Holders repeat and reconfirm their representations and warranties
contained in Sections 1d through 1i of the SPAs.
SPAs are hereby amended to the extent required to reflect the terms of this Agreement.
party to this Agreement shall use its, his or her commercially reasonable efforts at its own expense to take all actions and to
do all things necessary, proper or advisable in order to consummate and make effective the transactions contemplated by this Agreement.
Agreement shall supersede any and all prior amendments or agreements between the parties with respect to the subject matter. This
Agreement may not be amended except by a written instrument executed by all of the parties.
Agreement may be executed in counterparts and facsimile of same shall be deemed an original.
IN WITNESS WHEREOF,
the parties have hereafter set their signature as of the Effective Date.
||/s/ William Carson|
||Name: William Carson|
||/s/ Susan Carson|
||Name: Susan Carson|
||ARKADOS GROUP, INC.|
||/s/ Terrence DeFranco|
||Chief Executive Officer|
Form of Convertible Note
THIS NOTE AND THE
SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS
AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR ANY STATE SECURITIES LAWS OR THE PROVISIONS
OF THIS NOTE.
ARKADOS GROUP, INC.
6% CONVERTIBLE NOTE
DUE DECEMBER 31, 2016
Original Issue Date: January 8, 2016
Registered Holder: William Carson and Susan Carson, jointly
Arkados Group, Inc.,
a Delaware corporation (the “Company”) with principal offices at 211 Warren Street, Suite 320, Newark, NJ 07103,
for value received, hereby promises to pay the registered holder hereof (the “Holder”) the principal sum set forth
above on December 31, 2016 (the “Maturity Date”), in such coin or currency of the United States of America as
at the time of payment shall be the legal tender for the payment of public and private debts, and to pay interest, less any amounts
required by law to be deducted or withheld, computed on the basis of a 365-day year, on the unpaid principal balance hereof from
the date hereof (the “Original Issue Date”), at the rate of 6% per year, compounded quarterly, until such principal
sum shall have become due and payable, or has been converted pursuant to Section 1.1, below. Interest shall be paid, on the Maturity
Date, or if the principal of the Note is earlier converted pursuant to Section 1.1 below, upon such exchange or conversion. All
references herein to dollar amounts refer to U.S. dollars and all references to Common Stock shall refer to voting stock.
This Note may not be
prepaid in whole or in part except as otherwise explicitly set forth herein. Any amount of principal or interest on this Note which
is not paid when due shall bear interest at the rate of twelve percent 12% per annum from the due date thereof until the same is
paid (“Default Interest”). Interest shall commence accruing on the date that the Note is made and shall be computed
on the basis of a 365-day year and the actual number of days elapsed. All payments due hereunder (to the extent not converted into
common stock, $0.001 par value per share (the “Common Stock”) in accordance with the terms hereof) shall be
made in lawful money of the United States of America. All payments shall be made at such address as the Holder shall hereafter
give to the Company by written notice made in accordance with the provisions of this Note. Whenever any amount expressed to be
due by the terms of this Note is due on any day which is not a business day, the same shall instead be due on the next succeeding
day which is a business day and, in the case of any interest payment date which is not the date on which this Note is paid in full,
the extension of the due date thereof shall not be taken into account for purposes of determining the amount of interest due on
such date. As used in this Note, the term “business day” shall mean any day other than a Saturday, Sunday or
a day on which commercial banks in the city of New York, New York are authorized or required by law or executive order to remain
closed. Each capitalized term used herein, and not otherwise defined, shall have the meaning ascribed thereto in that certain Securities
Purchase Agreement dated the date hereof, pursuant to which this Note was originally issued (the “Purchase Agreement”).
This Note is free from
all taxes, liens, claims and encumbrances with respect to the issue thereof and shall not be subject to preemptive rights or other
similar rights of shareholders of the Company and will not impose personal liability upon the holder thereof.
The following terms
shall apply to this Note:
ARTICLE I. CONVERSION RIGHTS
Right. The Holder shall have the right from time to time, and at any time during the period beginning on the effective date
of the Company’s Amendment to its Certificate of Incorporation increasing the Company’s authorized shares of Common
Stock discussed in Section 1.3 below, and ending on the later of: (i) the Maturity Date and (ii) the date of payment of the Default
Amount (as defined in Article III) — each in respect of the remaining outstanding principal amount of this Note —
to convert all or any part of the outstanding and unpaid principal amount of this Note and any outstanding accrued interest 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 Company into which such Common Stock shall hereafter be changed or reclassified, at the conversion
price (the “Conversion Price”) determined as provided herein (a “Conversion”). 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 Company by the Holder in accordance
with Section 1.4 below; provided that the Notice of Conversion is submitted by facsimile or e-mail to the Company 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 applicable, 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 this Note.
1.2 Conversion Price.
The conversion price (the “Conversion Price”) shall be equal to $1.20 (subject to equitable adjustments for
stock splits, stock dividends or rights offerings by the Company relating to the Company’s securities or the securities of
any subsidiary of the Company, combinations, recapitalization, reclassifications, extraordinary distributions and similar events).
1.3 Authorized Shares.
The Company covenants that during the period the conversion right exists, the Company will reserve from its authorized and unissued
Common Stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of Common Stock upon the full
conversion of this Note issued pursuant to the Purchase Agreement. The Company is required at all times to have authorized and
reserved a sufficient number of shares equal to at least the number issuable upon full conversion of the Note (based on the Conversion
Price of the Notes in effect from time to time)(the “Reserved Amount”). The Reserved Amount shall be increased
from time to time in accordance with the Company’s obligations pursuant to the Purchase Agreement. The Company represents
that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable. In addition, if the Company shall
issue any securities or make any change to its capital structure which would change the number of shares of Common Stock into which
the Notes shall be convertible at the then current Conversion Price, the Company shall at the same time make proper provision so
that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights,
for conversion of the outstanding Notes. The Company hereby acknowledges that the number of shares of its Common Stock authorized
and reserved for issuance is below the number of Conversion Shares issued and issuable upon conversion of or otherwise pursuant
to the Note (based on the Conversion Price) and any other shares of Common Stock issued or issuable pursuant to the terms of this
Note, the Company will promptly take all corporate action necessary to authorize and reserve a sufficient number of shares, including,
without limitation, calling a special meeting of stockholders, if necessary, to authorize additional shares to meet the Company’s
obligations under this Section 1.3, in the case of an insufficient number of authorized shares, and using its best efforts to obtain
stockholder approval of an increase in such authorized number of shares.
1.4 Method of Conversion.
of Conversion. Subject to Section 1.1, this Note may be converted by the Holder in whole or in part at any time from time to
time after the Issue Date, by (A) submitting to the Company a Notice of Conversion (by facsimile, e-mail or other reasonable
means of communication dispatched on the Conversion Date prior to 6:00 p.m., New York, New York time) and (B) subject to Section
1.4(b), surrendering this Note at the principal office of the Company.
of Note Upon Conversion. Notwithstanding anything to the contrary set forth herein, upon conversion of this Note in
accordance with the terms hereof, the Holder shall not be required to physically surrender this Note to the Company unless
the entire unpaid principal amount of this Note is so converted. The Holder and the Company 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 Company, 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 Company 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 Company, whereupon the Company 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
of Taxes. The Company 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 Company 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 Company the amount of any such
tax, or shall have established to the satisfaction of the Company that such tax has been paid.
Delivery of Common Stock Upon Conversion. Upon receipt by the Company
from the Holder of a facsimile transmission or e-mail (or other reasonable means of communication) of a Notice of Conversion
meeting the requirements for conversion as provided in this Section 1.4, the Company shall issue and deliver or cause to be
issued and delivered to or upon the order of the Holder certificates for the Common Stock issuable upon such conversion
within three (3) business days after such receipt (the “Deadline”) (and, solely in the case of conversion
of the entire unpaid principal amount hereof, surrender of this Note) in accordance with the terms hereof and the Purchase
of Company to Deliver Common Stock. Upon receipt by the Company 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 Company 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 Company’s obligation to issue
and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any action
by the Holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment
against any person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the
Company 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 Company, and irrespective of any other circumstance which might otherwise limit
such obligation of the Company 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 Company before 6:00 p.m.,
New York, New York time, on such date.
of Common Stock by Electronic Transfer. In lieu of delivering physical certificates representing the Common Stock issuable
upon conversion, provided the Company is participating in the Depository Trust Company (“DTC”) Fast Automated
Securities Transfer (“FAST”) program, upon request of the Holder and its compliance with the provisions contained
in Section 1.1 and in this Section 1.4, the Company 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.
to Deliver Common Stock Prior to Deadline. Without in any way limiting the Holder’s right to pursue other remedies, including
actual damages and/or equitable relief, the parties agree that if delivery of the Common Stock issuable upon conversion of this
Note is not delivered by the Deadline (other than a failure due to the circumstances described in Section 1.3 above, which failure
shall be governed by such Section) a reasonable equivalent approximation of the damages would be $100 per day, for each day beyond
the Deadline that the Company fails to deliver such Common Stock through willful or deliberate acts on the part of the Company.
Such cash amount shall be paid to Holder by the fifth day of the month following the month in which it has accrued or, at the option
of the Holder (by written notice to the Company by the first day of the month following the month in which it has accrued), shall
be added to the principal amount of this Note, in which event interest shall accrue thereon in accordance with the terms of this
Note and such additional principal amount shall be convertible into Common Stock in accordance with the terms of this Note. The
Company agrees that the right to convert is a valuable right to the Holder. The damages resulting from a failure, attempt to frustrate,
and interference with such conversion right are difficult if not impossible to qualify. Accordingly the parties acknowledge that
the liquidated damages provision contained in this Section 1.4(g) are justified.
1.5 Concerning the
Shares. The shares of Common Stock issuable upon conversion
of this Note may not be sold or transferred unless (i) such shares are sold pursuant to an effective registration statement under
the Act or (ii) the Company or its transfer agent shall have been furnished with an opinion of counsel (which opinion shall be
in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the shares to be
sold or transferred may be sold or transferred pursuant to an exemption from such registration or (iii) such shares are sold
or transferred pursuant to Rule 144 under the Act (or a successor rule) (“Rule 144”) or (iv) such shares are
transferred to an “affiliate” (as defined in Rule 144) of the Company who agrees to sell or otherwise transfer
the shares only in accordance with this Section 1.5 and who is an Accredited Investor (as defined in the Purchase Agreement). Except
as otherwise provided in the Purchase Agreement (and subject to the removal provisions set forth below), until such time as the
shares of Common Stock issuable upon conversion of this Note have been registered under the Act or otherwise may be sold pursuant
to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, each
certificate for shares of Common Stock issuable upon conversion of this Note that has not been so included in an effective registration
statement or that has not been sold pursuant to an effective registration statement or an exemption that permits removal of the
legend, shall bear a legend substantially in the following form, as appropriate:
“NEITHER THE ISSUANCE
AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED
FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.”
The legend set forth
above shall be removed and the Company shall issue to the Holder a new certificate therefore free of any transfer legend if (i)
the Company or its transfer agent shall have received an opinion of counsel, in form, substance and scope customary for opinions
of counsel in comparable transactions, to the effect that a public sale or transfer of such Common Stock may be made without registration
under the Act, which opinion shall be reasonably acceptable by the Company so that the sale or transfer is effected or (ii) in
the case of the Common Stock issuable upon conversion of this Note, such security is registered for sale by the Holder under an
effective registration statement filed under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to
the number of securities as of a particular date that can then be immediately sold. In the event that the Company does not reasonably
accept the opinion of counsel provided by the Buyer with respect to the transfer of Securities pursuant to an exemption from registration,
such as Rule 144 or Regulation S, at the Deadline, it will be considered an Event of Default pursuant to Section 3.2 of the Note.
1.6 Effect of Certain Events.
(a) Effect of Merger,
Consolidation, Etc. At the option of the Holder, the sale, conveyance or disposition of all or substantially all of the assets
of the Company, the effectuation by the Company of a transaction or series of related transactions in which more than 50% of the
voting power of the Company is disposed of, or the consolidation, merger or other business combination of the Company with or into
any other Person (as defined below) or Persons when the Company is not the survivor shall either: (i) be deemed to be an Event
of Default (as defined in Article III) pursuant to which the Company shall be required to pay to the Holder upon the consummation
of and as a condition to such transaction an amount equal to the Default Amount (as defined in Article III) or (ii) be treated
pursuant to Section 1.6(b) hereof. “Person” shall mean any individual, corporation, limited liability company,
partnership, association, trust or other entity or organization.
(b) Adjustment Due
to Merger, Consolidation, Etc. If, at any time when this Note is issued and outstanding and prior to conversion of all of the
Notes, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization,
or other similar event, as a result of which shares of Common Stock of the Company shall be changed into the same or a different
number of shares of another class or classes of stock or securities of the Company or another entity, or in case of any sale or
conveyance of all or substantially all of the assets of the Company other than in connection with a plan of complete liquidation
of the Company, then the Holder of this Note shall thereafter have the right to receive upon conversion of this Note, upon the
basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable
upon conversion, such stock, securities or assets which the Holder would have been entitled to receive in such transaction had
this Note been converted in full immediately prior to such transaction (without regard to any limitations on conversion set forth
herein), and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder of this
Note to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and
of the number of shares issuable upon conversion of the Note) shall thereafter be applicable, as nearly as may be practicable in
relation to any securities or assets thereafter deliverable upon the conversion hereof. The Company shall not affect any transaction
described in this Section 1.6(b) unless (a) it first gives, to the extent practicable, thirty (30) days prior written notice (but
in any event at least fifteen (15) days prior written notice) of the record date of the special meeting of shareholders to approve,
or if there is no such record date, the consummation of, such merger, consolidation, exchange of shares, recapitalization, reorganization
or other similar event or sale of assets (during which time the Holder shall be entitled to convert this Note), and (b) the Holder
hereof has an opportunity to participate in the transaction as if such Holder was a holder of common stock immediately prior to
the closing of such transaction and receive the consideration paid to the other holders of Common Stock of the Company, or have
this Note assumed by the acquirer giving effect to the identical conversion price, at the election of the Holder hereof. The above
provisions shall similarly apply to successive consolidations, mergers, sales, transfers or share exchanges.
(c) Adjustment Due
to Distribution. If the Company shall declare or make any distribution of its assets (or rights to acquire its assets) to holders
of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution
to the Company’s shareholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a spin-off))
(a “Distribution”), then the Holder of this Note shall be entitled, upon any conversion of this Note after the
date of record for determining shareholders entitled to such Distribution, to receive the amount of such assets which would have
been payable to the Holder with respect to the shares of Common Stock issuable upon such conversion had such Holder been the holder
of such shares of Common Stock on the record date for the determination of shareholders entitled to such Distribution.
(d) Adjustment Due
to Dilutive Issuance. If, at any time when any Notes are issued and outstanding, the Company issues or sells, or in accordance
with this Section 1.6(d) hereof is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration
per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith)
less than the Conversion Price in effect on the date of such issuance (or deemed issuance) of such shares of Common Stock (a “Dilutive
Issuance”), then immediately upon the Dilutive Issuance, the Conversion Price will be reduced to the amount of the consideration
per share received by the Company in such Dilutive Issuance.
The Company shall be
deemed to have issued or sold shares of Common Stock if the Company in any manner issues or grants any warrants, rights or options
(not including employee stock option plans), whether or not immediately exercisable, to subscribe for or to purchase Common Stock
or other securities convertible into or exchangeable for Common Stock (“Convertible Securities”) (such warrants,
rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as “Options”)
and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Conversion Price
then in effect, then the Conversion Price shall be equal to such price per share. For purposes of the preceding sentence, the “price
per share for which Common Stock is issuable upon the exercise of such Options” is determined by dividing (i) the total amount,
if any, received or receivable by the Company as consideration for the issuance or granting of all such Options, plus the minimum
aggregate amount of additional consideration, if any, payable to the Company upon the exercise of all such Options, plus, in the
case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration
payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable,
by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion
of Convertible Securities, if applicable). No further adjustment to the Conversion Price will be made upon the actual issuance
of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable upon
exercise of such Options.
Additionally, the Company
shall be deemed to have issued or sold shares of Common Stock if the Company in any manner issues or sells any Convertible Securities,
whether or not immediately convertible (other than where the same are issuable upon the exercise of Options), and the price per
share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price then in effect, then
the Conversion Price shall be equal to such price per share. For the purposes of the preceding sentence, the “price per share
for which Common Stock is issuable upon such conversion or exchange” is determined by dividing (i) the total amount, if any,
received or receivable by the Company as consideration for the issuance or sale of all such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof at the time
such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment to the Conversion Price will
be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities.
(e) Purchase Rights.
If, at any time when any Notes are issued and outstanding, the Company issues any convertible securities or rights to purchase
stock, warrants, securities or other property (the “Purchase Rights”) pro rata to the record holders of any
class of Common Stock, then the Holder of this Note will be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock
acquirable upon complete conversion of this Note (without regard to any limitations on conversion contained herein) immediately
before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights or, if no such record is taken,
the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.
(f) Notice of Adjustments.
Upon the occurrence of each adjustment or readjustment of the Conversion Price as a result of the events described in this Section
1.6, the Company, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to the Holder
a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment
is based. The Company shall, upon the written request at any time of the Holder, furnish to such Holder a like certificate setting
forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common
Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of the Note.
1.7 Status as Shareholder.
Upon submission of a Notice of Conversion by a Holder, (i) the shares covered thereby (other than the shares, if any, which cannot
be issued because their issuance would exceed such Holder’s allocated portion of the Reserved Amount or Maximum Share Amount)
all 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 Company
to comply with the terms of this Note. In all cases, the Holder shall retain all of its rights and remedies (including, without
limitation, (i) the right to receive Conversion Default Payments pursuant to Section 1.3 to the extent required thereby for such
Conversion Default and any subsequent Conversion Default and (ii) the right to have the Conversion Price with respect to subsequent
conversions determined in accordance with Section 1.3) for the Company’s failure to convert this Note.
The Company shall have no right of prepayment or redemption of this Note.
1.9 Qualifying Financing.
Upon the closing of a financing transaction in which the Company raises cash proceeds net of the costs of the transaction of not
less than $1,000,000 in one transaction or in a series of related transactions in which the Company issues equity securities or
securities convertible into or exchangeable for, equity securities, or options or rights to purchase equity securities to one or
more investors, this Note shall immediately become due and payable.
ARTICLE II. CERTAIN COVENANTS
on Capital Stock. So long as the Company shall have any obligation under this Note, the Company 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 Company’s
on Stock Repurchases. So long as the Company shall have any obligation under this Note, the Company 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 Company or any warrants, rights or
options to purchase or acquire any such shares.
2.3 Sale of Assets.
So long as the Company shall have any obligation under this Note, the Company shall not, without the Holder’s written consent,
sell, lease or otherwise dispose of any significant portion of its assets outside the ordinary course of business. Any consent
to the disposition of any assets may be conditioned on a specified use of the proceeds of disposition.
2.4 Advances and
Loans. So long as the Company shall have any obligation under this Note, the Company shall not, without the Holder’s
written consent, lend money, give credit or make advances to any person, firm, joint venture or corporation, including, without
limitation, officers, directors, employees, subsidiaries and affiliates of the Company, except loans, credits or advances (a) in
existence or committed on the date, (b) made in the ordinary course of business or (c) not in excess of $500,000.
2.5 Stockholder Approval.
The Company will promptly take all corporate action necessary to authorize and reserve a sufficient number of shares, including,
without limitation, calling a special meeting of stockholders to authorize additional shares to meet the Company’s obligations
under this Section 2.5, in the case of an insufficient number of authorized shares, and using its best efforts to obtain stockholder
approval of an increase in such authorized number of shares.
2.6 Reporting Requirements.
The Company will within 60 days from the date of this Note to take all necessary actions to bring the Company current with
its reporting requirements of the Exchange Act.
ARTICLE III. EVENTS OF
If any of the following
events of default (each, an “Event of Default”) shall occur:
3.1 Failure to Pay
Principal or Interest. The Company fails to pay the principal hereof or interest thereon when due on this Note, whether at
maturity, upon acceleration or otherwise.
3.2 Conversion and
the Shares. The Company fails to issue shares of Common Stock to the Holder (or announces or threatens in writing that it will
not honor its obligation to do so) upon exercise by the Holder of the conversion rights of the Holder in accordance with the terms
of this Note, fails to transfer or cause its transfer agent to transfer (issue) (electronically or in certificated form) any certificate
for shares of Common Stock issued to the Holder upon conversion of or otherwise pursuant to this Note as and when required by this
Note, the Company directs its transfer agent not to transfer or delays, impairs, and/or hinders its transfer agent in transferring
(or issuing) (electronically or in certificated form) any certificate for shares of Common Stock to be issued to the Holder upon
conversion of or otherwise pursuant to this Note as and when required by this Note, or fails to remove (or directs its transfer
agent not to remove or impairs, delays, and/or hinders its transfer agent from removing) any restrictive legend (or to withdraw
any stop transfer instructions in respect thereof) on any certificate for any shares of Common Stock issued to the Holder upon
conversion of or otherwise pursuant to this Note as and when required by this Note (or makes any written announcement, statement
or threat that it does not intend to honor the obligations described in this paragraph) and any such failure shall continue uncured
(or any written announcement, statement or threat not to honor its obligations shall not be rescinded in writing) for five (5)
business days after the Holder shall have delivered a Notice of Conversion. It is an obligation of the Company 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 Company to its transfer agent. If at the option of the Holder, the Holder advances
any funds to the Company’s transfer agent in order to process a conversion; such advanced funds shall be paid by the Company
to the Holder within forty eight (48) hours of a demand from the Holder.
3.3 Breach of Covenants.
The Company breaches any covenant or other term or condition contained in this Note and any collateral documents including but
not limited to the Purchase Agreement and such breach continues for a period of ten (10) days after written notice thereof to the
Company from the Holder.
3.4 Breach of Representations
and Warranties. Any representation or warranty of the Company made herein or in any agreement, statement or certificate given
in writing pursuant hereto or in connection herewith (including, without limitation, the Purchase Agreement), shall be false or
misleading in any material respect when made and the breach of which has (or with the passage of time will have) a material adverse
effect on the rights of the Holder with respect to this Note or the Purchase Agreement.
3.5 Receiver or
Trustee. The Company or any subsidiary of the Company 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.
Any money judgment, writ or similar process shall be entered or filed against the Company or any subsidiary of the Company or any
of its property or other assets for more than $100,000, and shall remain unvacated, unbonded or unstayed for a period of twenty
(20) days unless otherwise consented to by the Holder, which consent will not be unreasonably withheld.
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 Company or any subsidiary of the
3.8 Failure to Comply
with the Exchange Act. The Company shall fail to comply with the reporting requirements of the Exchange Act; and/or the Company
shall cease to be subject to the reporting requirements of the Exchange Act.
Any dissolution, liquidation, or winding up of Company or any substantial portion of its business.
3.10 Cessation of
Operations. Any cessation of operations by Company or Company admits
it is otherwise generally unable to pay its debts as such debts become due, provided, however, that any disclosure of the Company’s
ability to continue as a “going concern” shall not be an admission that the Company cannot pay its debts as they become
of Assets. The failure by Company to maintain any material intellectual property rights, personal, real property
or other assets which are necessary to conduct its business (whether now or in the future).
3.12 Financial Statement
Restatement. The restatement of any financial statements filed by the Company with the SEC for any date or period from two
years prior to the Issue Date of this Note and until this Note is no longer outstanding, if the result of such restatement would,
by comparison to the unrestated financial statement, have constituted a material adverse effect on the rights of the Holder with
respect to this Note or the Purchase Agreement.
3.13 Reverse Splits. The
Company effectuates a reverse split of its Common Stock without twenty (20) days prior written notice to the Holder.
Notwithstanding anything to the contrary contained in this Note or the other related or companion documents, a breach or default
by the Company of any covenant or other term or condition contained in any of the Other Agreements, after the passage of all applicable
notice and cure or grace periods, shall, at the option of the Holder, be considered a default under this Note and the Other Agreements,
in which event the Holder shall be entitled (but in no event required) to apply all rights and remedies of the Holder under the
terms of this Note and the Other Agreements by reason of a default under said Other Agreement or hereunder.
“Other Agreements” means, collectively, all agreements and instruments between, among or by: (1) the
Company, and, or for the benefit of, (2) the Holder and any affiliate of the Holder, including, without limitation, promissory
notes; provided, however, the term “Other Agreements” shall not include the related or companion documents to this
Note. Each of the loan transactions will be cross-defaulted with each other loan transaction and with all other existing and future
debt of Company to the Holder.
Upon the occurrence and during the continuation
of any Event of Default specified in Section 3.1 (solely with respect to failure to pay the principal hereof or interest thereon
when due at the Maturity Date), the Note shall become immediately due and payable and the Company shall pay to the Holder, in full
satisfaction of its obligations hereunder, an amount equal to the Default Sum (as defined herein). UPON THE OCCURRENCE AND
DURING THE CONTINUATION OF ANY EVENT OF DEFAULT SPECIFIED IN SECTION 3.2, THE NOTE SHALL BECOME IMMEDIATELY DUE AND PAYABLE AND
THE COMPANY SHALL PAY TO THE HOLDER, IN FULL SATISFACTION OF ITS OBLIGATIONS HEREUNDER, AN AMOUNT EQUAL TO: (Y) THE DEFAULT SUM
(AS DEFINED HEREIN); MULTIPLIED BY (Z) TWO (2). Upon the occurrence and during the continuation of any Event of Default specified
in Sections 3.1, 3.3, 3.4, 3.6, 3.8, 3.9, 3.11, 3.12, 3.13, , and/or 3.15 exercisable through the delivery of written notice to
the Company by such Holders (the “Default Notice”), and upon the occurrence of an Event of Default specified
the remaining sections of Articles III (other than failure to pay the principal hereof or interest thereon at the Maturity Date
specified in Section 3.1 hereof), the Note shall become immediately due and payable and the Company shall pay to the Holder, in
full satisfaction of its obligations hereunder, an amount equal to the greater of (i) 150% times the sum of (w) the
then outstanding principal amount of this Note plus (x) accrued and unpaid interest on the unpaid principal amount of this
Note to the date of payment (the “Mandatory Prepayment Date”) plus (y) Default Interest, if any, on the
amounts referred to in clauses (w) and/or (x) plus (z) any amounts owed to the Holder pursuant to Section 1.4(g) hereof
(the then outstanding principal amount of this Note to the date of payment plus the amounts referred to in clauses (x),
(y) and (z) shall collectively be known as the “Default Sum”) and all other amounts payable hereunder shall
immediately become due and payable, all without demand, presentment or notice, all of which hereby are expressly waived, together
with all costs, including, without limitation, legal fees and expenses, of collection, and the Holder shall be entitled to exercise
all other rights and remedies available at law or in equity.
If the Company fails
to pay the Default Amount within twenty (20) business days of written notice that such amount is due and payable, then the Holder
shall have the right at any time, so long as the Company remains in default (and so long and to the extent that there are sufficient
authorized shares), to require the Company, upon written notice, to immediately issue, in lieu of the Default Amount, the number
of shares of Common Stock of the Company equal to the Default Amount divided by the Conversion Price then in effect.
ARTICLE IV. MISCELLANEOUS
4.1 Failure or Indulgence
Not Waiver. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall
operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privileges. All rights and remedies existing hereunder are cumulative to, and
not exclusive of, any rights or remedies otherwise available.
All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return
receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted
by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine,
at the address or number designated below (if delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service,
fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to the
If to the
William Carson and Susan Carson
This Note and any provision hereof may only be amended by an instrument in writing signed by the Company and the Holder. The term
“Note” and all reference thereto, as used throughout this instrument, shall mean this instrument (and the other
Notes issued pursuant to the Purchase Agreement) as originally executed, or if later amended or supplemented, then as so amended
This Note shall be binding upon the Company and its successors and assigns, and shall inure to be the benefit of the Holder and
its successors and assigns. Each transferee of this Note must be an “accredited investor” (as defined in Rule 501(a)
of the 1933 Act). Notwithstanding anything in this Note to the contrary, this Note may be pledged as collateral in connection with
a bona fide margin account or other lending arrangement.
4.5 Cost of Collection.
If default is made in the payment of this Note, the Company shall pay the Holder hereof costs of collection, including reasonable
4.6 Governing Law.
This Note shall be governed by and construed in accordance with the laws of the State of New Jersey except with respect to the
Default Interest Rate, which will be governed by the law of the State of New York without regard to principles of conflicts of
laws. Any action brought by either party against the other concerning the transactions contemplated by this Note shall be brought
only in the state courts of New Jersey or in the federal courts located in the state and county of Santa Clara. The parties to
this Note hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert
any defense based on lack of jurisdiction or venue or based upon forum non conveniens. The Company and Holder waive trial
by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the
event that any provision of this Note or any other agreement delivered in connection herewith is invalid or unenforceable under
any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith
and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable
under any law shall not affect the validity or enforceability of any other provision of any agreement. Each party hereby irrevocably
waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this
Agreement or any other Transaction Document by mailing a copy thereof via registered or certified mail or overnight delivery (with
evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in
any way any right to serve process in any other manner permitted by law.
4.7 Certain Amounts.
Whenever pursuant to this Note the Company 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 Company
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 Company 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 Company and the
Holder hereby agree that such amount of stipulated damages is not plainly disproportionate to the possible loss to the Holder from
the receipt of a cash payment without the opportunity to convert this Note into shares of Common Stock.
4.8 Purchase Agreement.
By its acceptance of this Note, each party agrees to be bound by the applicable terms of the Purchase Agreement.
4.9 Notice of Corporate
Events. Except as otherwise provided below, the Holder of this Note shall have no rights as a Holder of Common Stock unless
and only to the extent that it converts this Note into Common Stock. The Company shall provide the Holder with prior notification
of any meeting of the Company’s shareholders (and copies of proxy materials and other information sent to shareholders).
In the event of any taking by the Company of a record of its shareholders for the purpose of determining shareholders who are entitled
to receive payment of any dividend or other distribution, any right to subscribe for, purchase or otherwise acquire (including
by way of merger, consolidation, reclassification or recapitalization) any share of any class or any other securities or property,
or to receive any other right, or for the purpose of determining shareholders who are entitled to vote in connection with any proposed
sale, lease or conveyance of all or substantially all of the assets of the Company or any proposed liquidation, dissolution or
winding up of the Company, the Company shall mail a notice to the Holder, at least twenty (20) days prior to the record date specified
therein (or thirty (30) days prior to the consummation of the transaction or event, whichever is earlier), of the date on which
any such record is to be taken for the purpose of such dividend, distribution, right or other event, and a brief statement regarding
the amount and character of such dividend, distribution, right or other event to the extent known at such time. The Company shall
make a public announcement of any event requiring notification to the Holder hereunder substantially simultaneously with the notification
to the Holder in accordance with the terms of this Section 4.9.
The Company 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 Company 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
Company of the provisions of this Note, that the Holder shall be entitled, in addition to all other available remedies at law or
in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing
any breach of this Note and to enforce specifically the terms and provisions thereof, without the necessity of showing economic
loss and without any bond or other security being required.
IN WITNESS WHEREOF,
Company has caused this Note to be signed in its name by its duly authorized officer as of the issuance date.
||ARKADOS GROUP, INC.|
||/s/ Terrence DeFranco|
||President and Chief Executive Officer|
The undersigned hereby
elects to convert US$_______________ principal amount plus interest in the amount of US$______________ per day accruing
through the Date of Conversion 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
ARKADOS GROUP, INC., a Delaware corporation (the “Company”) according to the conditions of the convertible note of
the Company dated as of January 8, 2016 (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
||The Company 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 Company 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:|
|Date of Conversion:
|Total obligation converted:
|Applicable Conversion Price:
||US$1.20 per US$1.00 of Principal and interest converted|
|Number of Shares of Common Stock to be Issued
|Pursuant to Conversion of the Notes:
|Amount of Principal Balance Due remaining
|Under the Note after this conversion:
|U.S. Social Security Number/Taxpayer
|Identification Number/Employer Identification Number
PLEASE NOTE: If non-US individual
or company, you will be required to complete a W-8-BEN (individual) or W-8-BEN-E (entity) prior to acceptance of the conversion.