China Intelligence (PINK:IICN)

Page 20 of 2010 third quarter 10Q

As previously disclosed in the Company's Form 10-Q filed on August 14, 2008 and the Current Report Form 8-K filed on October 10, 2008, we received event of default redemption notices dated July 25, 2008 and dated October 6, 2008 respectively from an accredited investor with respect to the amended and restated terms of the Securities Purchase Agreement and related transaction documents dated December 21, 2007.  Both the July Default Notice and the October Default Notice stated that we were in default for failure to:

(1) cause the Initial Registration Statement to be declared effective by the SEC on or prior to June 18, 2008 and

(2) make the required Registration Delay Payments to the Investor on or prior to the applicable Payment Date.  We agreed to enter into the Amended Agreement (as defined below) and all related documents as a direct response to resolve the Default Notices and as an inducement for the Investor to issue us a formal withdrawal of the Default Notices.  Upon closing of the above Amended Agreement, the Investor agreed to withdraw the Default Notices and we will no longer be in default under the Financing Transaction and Amended Agreement.

On December 8, 2008, we entered into an Amendment and Exchange Agreement with the Investor in the Financing Transaction.  The Financing Transaction is disclosed in more detail in the Form 8-K filed on December 26, 2007.  In connection with the Amended Agreement, we agreed to exchange the note and warrants issued in the Financing Transaction for

(i) an amended and restated senior secured convertible note in the principal amount of $5,000,000 (the "2008 Note"), which is convertible into Common Stock,

(ii) an amended and restated Series A Warrant in the form, which is exercisable into 23,062,731 shares of Common Stock (the "Exchanged Series A Warrant "),

(iii) an amended and restated Series B Warrant which is exercisable into 16,143,911 shares of Common Stock (the "Exchanged Series B Warrant"),

(iv) an amended and restated Series C Warrant, which, subject to certain conditions, shall be exercisable to 16,489,852 shares of Common Stock (the "Exchanged Series C Warrant")

(v) a new Series D Warrant which is exercisable into 7,500,000 shares of Common Stock (the "Exchanged Series D Warrant,” and together with the Exchanged Series A Warrant, Exchanged Series B Warrant and Exchanged Series C Warrant, the “2008 Warrants”).

Pursuant to the Amended Agreement, we agreed to adjust the Conversion Price (as defined in the Exchanged Note) and the exercise prices of the Exchanges Series A Warrant, the Exchanged Series B Warrant and the Exchanged Series C Warrant to $0.2168. Accordingly, the Exchanged Series A Warrant is exercisable into 23,062,731 shares of Common Stock of the Company, the Exchanged Series B Warrant is exercisable into 16,143,911 shares of Common Stock of the Company, and the Exchanged Series C Warrant, subject to certain conditions, shall be exercisable into 16,489,852 shares of Common Stock of the Company.  Further, we amended the Expiration Date of the Series A Warrant and Series B Warrant to June 8, 2014, which is 78 months after the date of Amendment Date (as defined in the Exchanged Series A Warrant and the Exchanged Series B Warrant), and restated the expiration date of the Exchanged Series C Warrant to 78 months after the first time the Company elects a Company Optional Redemption (as defined in the Exchanged Note).

We also issued a new Series D Warrant, which can be exercised into 7,500,000 shares of the Common Stock of the Company with an exercise price of $0.2168 per share and expires on June 8, 2014.  There is also a cashless exercise feature that permits the Investor to exercise the warrant on a cashless basis if a registration statement covering the shares underlying the Series D Warrant is not in effect.  The Amended Agreement does not grant the Investor any additional registration rights so there is no requirement for us to register the shares underlying the Series D Warrant.

As disclosed in Form 10-K filed on March 31, 2009, we received an Investor Redemption Notice (the “Notice”) from the Investor on December 21, 2008, stating that they selected to redeem one third of the principal ($5,000,000) after one year of the investment since December 21, 2007 according to the Amendment Agreement. The Company received the Notice and was under discussion with the Investor to seek a consummate solution for the Company was not available to render the required amount before December 31, 2008, the deadline for the redemption. The issue would incur default for the Company and it was uncertain if we can get a resolution finally. 

As disclosed in From 8-K filed on June 30, 2009, we received an Event of Default Redemption Notice (the " Default Notice") from the Investor with respect to the certain Amended and Restated Senior Secured Convertible Note issued by the Company to the Investor on or about December 21, 2007, as amended December 8, 2008 (the “Financing Transaction”) on June 22, 2009. The Default Notice stated that we are in default for failure to (1) pay the Redemption Amount of $1,703,025.33 by no later than December 30, 2008;  (2) make timely payment of the interest covering the Calendar Quarter ended March 31, 2009; and (3) make required share conversion within two business days after getting the Conversion Notice; The total amount of the Default Redemption was calculated as $66,703,289. The Company did not believe that any of the events specified in the Notice constituted a default under the Note. 

As the Company previously reported in the January 11, 2010 Form 8-K (with regard to the Securities Redemption and Pay-off Agreement, the “Settlement Agreement”), the Investor agreed to accept $3,000,000 from the Company in exchange for the redemption of the 2008 Note and the 2008 Warrants, but only upon the terms and conditions expressly set forth in the Settlement Agreement (the “Conditions”). 

As previously disclosed in the Company’s Form 8-K filed on August 13, 2010, in April and July 29, 2010, the Company and the Investor entered into two Amended and Restated Securities Redemption and Pay-Off Agreements, pursuant to which the Company and the Investor agreed to extend the termination date in consideration for a payment by the Company to the Investor of an aggregate of $850,000.

The Company paid the $2,150,000 balance due under the Settlement Agreement, as amended, on August 16, 2010 in exchange for the redemption of the 2008 Note and the 2008 Warrants. The Investor and the Company released each other from all claims related to the Securities Purchase Agreement, as amended, the 2008 Note and the 2008 Warrants. In addition, pursuant to the Settlement Agreement, as amended, since January 5, 2010, the Company delivered to the Investor an aggregate of 1,100,000 shares of Common Stock pursuant the terms of the 2008 Note.  Under the Settlement Agreement, as amended, the Investor also returned the shares of common stock that were pledged in 2007.

On June 22, 2009, we received an Event of Default Redemption Notice from Castlerigg Master Investments Ltd. with respect to the certain Amended and Restated Senior Secured Convertible Note issued by the Registrant to Castlerigg on or about December 21,2007, as amended December 8, 2008 (the “Financing Transaction”). The Financing Transaction is disclosed in more detail in the Form 8-k filed on December 26, 2007 and December 10, 2008, and all transaction documents are attached to that Form 8-ks and are herein incorporated by reference.

Source: SEC Form 8K (June 30, 2009)