Senior Secured Convertible Redeemable Debenture, dated as of January 4, 2010, by and among

Section 1.02 Optional Conversion.  The Holder is entitled, at its option, subject to the limitations set forth herein, to convert, and sell on the same day or at any subsequent time, at any time and from time to time, until payment in full of the remaining outstanding principal balance of this Debenture, plus any interest, all or any part of the principal amount of the Debenture, plus accrued interest, into shares (the “Conversion Shares”) of Common Stock at the price per share equal to two dollars ($2) per share (the “Conversion Price”).  No fraction of shares or scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded to the nearest whole share.  To convert this Debenture, the Holder hereof shall deliver written notice thereof, substantially in the form of Exhibit “A” to this Debenture, with appropriate insertions (the “Conversion Notice”), to the Company at its address as set forth herein.  The date upon which the conversion shall be effective (the “Conversion Date”) shall be deemed to be the date set forth in the Conversion Notice.  Conversions hereunder shall have the effect of lowering the outstanding principal amount of this Debenture in an amount equal to the applicable conversion and payment of the interest then due.  The Holder and the Company shall maintain records showing the principal amount converted and the date of such conversions. In no event shall the Holder be entitled to convert this Debenture for a number of shares of Common Stock in excess of that number of shares of Common Stock which, upon giving effect to such conversion, would cause the aggregate number of shares of Common Stock beneficially owned by the Holder and its affiliates to exceed 9.99% of the outstanding shares of the Common Stock following such conversion without the approval of the Company.

 

Section 1.03  Reservation of Common Stock.  The Company shall reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of this Debenture, such number of shares of Common Stock as shall from time to time be sufficient to effect such conversion, based upon the Conversion Price.  If at any time the Company does not have a sufficient number of Conversion Shares authorized and available, then the Company shall file a preliminary proxy statement with the Securities and Exchange Commission within ten (10) business day after such occurrence and shall call and hold a special meeting of its stockholders as soon as practicable after such occurrence for the sole purpose of increasing the number of authorized shares of Common Stock.

 

Section 1.04 Conversion Cap.  During any week in which the Company’s Common Stock trades at a price per share in excess of two US Dollars ($2.00.), the Holder shall be permitted to convert up to one hundred thousand dollars ($100,000) principal amount of this Debenture.

 

Section 1.05 Redemption.  At any time prior to the Maturity Date and after 12 months from the date of Closing, the Company will have the right to redeem all the Debentures then outstanding, by payment in full, and not in part, of the outstanding principal amount due plus a premium equal to 50% of the principal amount being paid, plus all accrued and unpaid interest due through the date of payment without premium.  A payment schedule is attached hereto as Exhibit B.

 

Section 1.06 Interest Payments.    Upon the occurrence of an Event of Default (as defined in Section 3.01 below) by the Company, the Holder has the option to elect that the interest due and payable hereunder be paid in cash (via wire transfer or certified funds) or in the form of Common Stock.  If paid in the form of Common Stock, that number of shares of Common Stock with a value equal to the amount of interest due shall be issued. The amount of stock to be issued will be calculated as follows: the value of the stock shall be eighty-five percent of the lower of:  (i) the VWAP as quoted by Bloomberg L.P. on the date the interest payment is due; or (ii) if the interest payment is not made when due, the VWAP as quoted by Bloomberg L.P. on the date the interest payment is made.  No fractional shares will be issued; therefore, in the event that the value of the Common Stock per share does not equal the total interest due, the Company will pay the balance in cash.

 

Section 1.07 Paying Agent and Registrar.  Initially, the Escrow Agent will act as paying agent and registrar.  The Company may change any paying agent, registrar, or Company-registrar by giving the Holder not less than ten (10) business days’ written notice of its election to do so, specifying the name, address, telephone number and facsimile number of the paying agent or registrar.

 

Section 1.08 Favor.  As long as there are shares of the Debentures are outstanding, the Company shall extend to the Holder any language in future transactions that is more preferable, as evaluated by the Holder, to these Debentures.

Secured Nature of Debenture.  This Debenture is secured by a pro rata portion of a majority position in the Company’s common stock owned by Mr. Shili Liu.

 

Section 1.09   [Reserved]

 

Section 4.02 Consent  of Holder to Sell Capital Stock, Incur Debt or Grant Security Interests.  Except for the second and third tranches of the current financing as contemplates and the Securities Purchase Agreement dated the date hereof between the Company and China Angel Assets Management Limited so long as any of the principal of or interest on this Debenture remains unpaid, the Company shall not, without the prior consent of a majority of the  Holders, after Closing (i) issue or sell shares of Common Stock or Preferred Stock without consideration or for a consideration per share less than the bid price of the Common Stock determined immediately prior to its issuance, (ii) issue or sell any warrant, option, right, contract, call, or other security instrument granting the holder thereof, the right to acquire Common Stock without consideration or for a consideration less than such Common Stock’s bid price value determined immediately prior to it’s issuance, (iii) enter into any security instrument granting the holder a security interest in any and all assets of the Company or any subsidiary of the Company (whether now owned or acquired in the future while the Debentures are outstanding) unless such security interest is junior to the security interest held by the Holder hereunder and under the Security Agreement and in no way or manner diminishes Holder’s rights hereunder or under the Security Agreement, (iv) permit any subsidiary of the Company (whether now owned or acquired in the future while the Debentures are outstanding) to enter into any security instrument granting the holder a security interest in any and all assets of such subsidiary (v) file any registration statement on Form S-8 or (vi) incur any additional secured debt or permit any subsidiary of the Company to incur any additional secured debt without the Holder’s prior written consent unless the security interest on such secured debt is junior to the security interest held by the Holder hereunder and under the Security Agreement.

 

Section 4.03 Registration with the State Administration of Foreign Exchange.  The Company will take all required action to register the transfer of the proceeds from this Debenture that are used in the Peoples’ Republic of China with the State Administration of Foreign Exchange as an external debt and pursuant to the “Interim Measures on Administration of External Debts” and reserve sufficient amounts of investment and registered capital to provide for repayment of the proceeds and interest due on the Debenture.  The Company will arrange a suitable opinion, indicating that the proceeds used in the Peoples’ Republic of China and the related interest may be paid outside of the Peoples’ Republic of China.  Additionally, the Company will provide a copy of the State Administration of Foreign Exchange registration of the external debt to the Holder at Closing.