Form of Convertible Promissory Note

EX-10.1 2 ex_10-1.htm FORM OF PROMISSORY NOTE AGREEMENT ex_10-1.htm

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. IT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITY UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.

JAYHAWK ENERGY, INC.

CONVERTIBLE PROMISSORY NOTE

$800,000.00 Post Falls, Idaho

Dated as of July 30, 2008

Jayhawk Energy, Inc., a Colorado corporation (the “Company”), for value received, hereby promises to pay to __________, or its registered assigns (“Holder”), the sum of Eight Hundred Thousand Dollars ($800,000.00) on the terms and conditions set forth hereinafter. Payment for all amounts due hereunder shall be made by mail to the registered address of Holder.

The following is a statement of the rights of Holder of this Note and the conditions to which this Note is subject, and to which Holder hereof, by the acceptance of this Note, agrees:

1. Maturity; Partial Prepayment. The principal hereof and any unpaid accrued interest hereon, as set forth below, shall be due and payable on the earlier to occur of: (i) July 30, 2009 (“Maturity Date”); and (ii) when declared due and payable by Holder upon the occurrence of an Event of Default (as defined below).

2. Interest. The Company shall pay interest at the rate of the lower of (i) 12 percent per annum; or (ii) the maximum allowable rate under applicable laws (such rate, the “Interest Rate”) on the principal of this Note outstanding during the period beginning on the date of this Note and ending on the date that the principal amount of this Note is repaid in full. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. Interest accruing on this Note shall be due and payable at the Maturity Date or upon the occurrence of an Event of Default. The Company shall pay the interest due on this Note by delivering to Holder cash equal to the outstanding principal amount of the Note plus any due and unpaid interest. If there occurs an acceleration or prepayment of the Note prior to the Maturity Date in accordance with the terms hereof, all interest due and payable at such time on the principal amount due shall be paid in full. All payments hereunder are to be applied first to reasonable costs and fees referred to herein, second to the payment of accrued interest, and the remaining balance to the payment of principal.

3. Events of Default. If any of the events specified in this Section 3 shall occur (herein individually referred to as an “Event of Default”), Holder may, so long as such condition exists, declare the entire principal and unpaid accrued interest hereon immediately due and payable, by notice in writing to the Company:

(a) Default in the payment of the principal or unpaid accrued interest of this Note when due and payable; or

(b) The institution by the Company of proceedings to be adjudicated as bankrupt or insolvent, or the consent by it to institution of bankruptcy or insolvency proceedings against it or the filing by it of a petition or answer or consent seeking reorganization or release under the Federal Bankruptcy Act, or any other applicable Federal or state law, or the consent by it to the filing of any such petition or the appointment of a receiver, liquidator, assignee, trustee or other similar official of the Company, or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the taking of corporate action by the Company in furtherance of any such action; or

(c) If, within 60 calendar days after the commencement of an action against the Company, without the consent or acquiescence of the Company (and service of process in connection therewith on the Company) seeking any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such action shall not have been resolved in favor of the Company or all orders or proceedings thereunder affecting the operations or the business of the Company stayed, or if the stay of any such order or proceeding shall thereafter be set aside, or if, within 60 calendar days after the appointment without the consent or acquiescence of the Company of any trustee, receiver or liquidator of the Company or of all or any substantial part of the properties of the Company, such appointment shall not have been vacated.

4. Holder’s Rights Upon Event of Default. Upon the occurrence and continuance of any Event of Default, Holder in its sole and absolute discretion shall have the right to:

(i) convert all of the principal amount and unpaid accrued interest attributable to this Note into shares of preferred stock of the Company that are convertible into Common Stock at a conversion price of $1.75 per share; or

(ii) declare all unpaid interest and principal immediately due and payable and exercise all other legal rights in connection therewith.

5. Conversion; Optional Reinvestment.

(a) Optional Conversion. Holder may elect at its sole discretion to convert the outstanding principal balance and unpaid accrued interest on this Note into shares of Common Stock at any time. The number of shares of Common Stock to be issued upon such conversion shall be equal to the quotient obtained by dividing (a) the outstanding principal and unpaid accrued interest due on this Note on the date of conversion, by (b) the conversion price of $1.75 per share (“Conversion Price”). The Common Stock received by Holder pursuant to the conversion of the Note shall be referred to as the “Conversion Shares.”

(b) Identical Terms. The Common Stock, as the case may be, received by Holder pursuant to the conversion of the Note hereunder shall have identical rights, preferences and privileges as those shares received by investors currently holding or subscribing for Common Stock, as applicable.

(c) Conversion Procedure. If this Note is to be converted, written notice shall be delivered by Holder to the Company, at its address set forth on the signature page hereto, notifying the Company of the conversion to be effected, specifying the principal amount of the Note to be converted, the amount of accrued interest to be converted, and a statement of commitment to surrender to the Company, in the manner and at the place designated, the Note. Holder will surrender this Note within 10 business days after receiving the Conversion Shares hereunder. Promptly upon receipt of this Note, the Company will issue a new note on the same terms as provided herein for any amount of this Note not being converted.

(d) Delivery of Stock Certificates. As promptly as practicable after the conversion of this Note but in no event later than 15 calendar days after the date of delivery of the notice to the Company under Section 5(c), the Company at its expense will issue and deliver to Holder a certificate or certificates for the number of full shares of the Common Stock issuable upon such conversion. Upon conversion of the Note, the Company shall take all such actions as are necessary in order to insure that the Conversion Shares issuable with respect to such conversion shall be validly issued, fully paid and nonassessable.

(e) Mechanics and Effect of Conversion. No fractional shares of Common Stock shall be issued upon conversion of this Note. In lieu of the Company issuing any fractional shares to Holder upon the conversion of this Note, the Company shall pay to Holder the amount of outstanding principal and interest that is not so converted, such payment to be in the form as provided below. Upon conversion of this Note, the Company shall be forever released from all of its obligations and liabilities under this Note (to the extent of the amounts converted), except that the Company shall be obligated to pay Holder, within 10 business days after the date of such conversion, any interest accrued and unpaid or unconverted to and including the date of such conversion, and no more.

(f) Notices of Record Date, etc. In the event of:

(i) any taking by the Company of a record of holders of any class of securities of the Company for the purpose of determining holders thereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus at the same rate as that of the last such cash dividend theretofore paid) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right; or

(ii) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all of the assets of the Company to any other person or any consolidation or merger involving the Company; or

(iii) any voluntary or involuntary dissolution, liquidation or winding-up of the Company;

the Company will mail to Holder at least 20 calendar days prior to the earliest date specified therein, a notice specifying:

(A) The date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right; and

(B) The date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding-up is expected to become effective and the record date for determining stockholders entitled to vote thereon.

(g) Reservation of Stock Issuable Upon Conversion. The Company shall, before the conversion of this Note into Common Stock pursuant to the terms set forth herein, increase the number of authorized but unissued shares of Common Stock as necessary, and at all times reserve and keep available out of such duly authorized but unissued shares of Common Stock, such number of its duly authorized Common Stock as shall be sufficient to effect the conversion of the Note pursuant to the terms set forth herein. If at any relevant time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of the entire outstanding principal amount of this Note, in addition to such other remedies as shall be available to Holder, the Company will use its best efforts to forthwith take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes.

6. Prepayment. Upon 5 calendar days’ prior written notice to Holder, the Company may at any time prepay in whole or in part, the principal sum, plus accrued interest to date of such prepayment, of this Note; provided that, after the date of such notice and prior to the proposed prepayment date, Holder may elect to convert such amounts to the issued securities of the Company at the Conversion Price in accordance with the terms of Section 5.

7. Subscription Rights. So long as this Note is outstanding, Holder shall have the right to participate in any offering of the Company’s securities on the same terms and conditions as the other subscribers to such offering.

8. Representations and Warranties. The Company hereby represents and warrants:

(a) Due Organization and Qualification. The Company 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 (as applicable), with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Company is in no violation or default of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. The Company 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 (i) a material adverse effect on the legality, validity or enforceability of this Convertible Promissory Note or the Warrant (“The Transaction Documents”), (ii) a material adverse effect on the results of operations, assets, business, prospects or condition (financial or otherwise) of the Company, or (iii) a material adverse effect on the Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse Effect”) and to the Company’s knowledge 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.

(b) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company, its board of directors or its shareholders in connection therewith. Each Transaction Document has been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof and thereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies.

(c) No Conflicts. The execution, delivery and performance of the Transaction Documents by the Company, the issuance and sale of the securities and the consummation by the Company of the other transactions contemplated hereby and thereby do not and will not (i) conflict with or violate any provision of the Company’s certificate or articles of incorporation, bylaws or other organizational or charter documents, or (ii) conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company is bound or affected.

(d) Litigation. There is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an “Action”) which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the securities or (ii) could, if there were an unfavorable decision, have or reasonably be expected to result in a Material Adverse Effect. Neither the Company, nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty.

9. Successors and Assigns; Assignment. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. Nothing in this Note, express or implied, is intended to confer upon any party, other than the parties hereto and their successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Note, except as expressly provided herein. The Company may not assign this Note or any of the rights or obligations referenced herein without the prior written consent of Holder.

10. Waiver and Amendment. Any provision of this Note may be amended, waived or modified upon the written consent of the Company and Holder.

11. Waiver of Notice. The Company hereby waives notice, presentment, demand, protest and notice of dishonor.

12. Treatment of Note. To the extent permitted by generally accepted accounting principles, the Company will treat, account and report the Note as debt and not equity for accounting purposes and with respect to any returns filed with Federal, state or local tax authorities.

13. Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if sent by nationally recognized courier service or mailed by registered or certified mail, postage prepaid, to the respective addresses of the parties as set forth on the signature page hereof or if sent by facsimile to the respective facsimile numbers of the parties set forth on the signature page hereof. Any party hereto may by notice so given change its address for future notice hereunder. Notice shall conclusively be deemed to have been given and received when personally delivered or 3 business days after deposited in the mail or one business day after sent by courier or upon confirmation of facsimile delivery in the manner set forth above.

14. No Stockholder Rights. Nothing contained in this Note shall be construed as conferring upon Holder or any other person the right to vote or to consent or to receive notice as a stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matters or any rights whatsoever as a stockholder of the Company; and no dividends or interest shall be payable or accrued in respect of this Note or the interest represented hereby or the securities into which this Note is convertible hereunder until, and only to the extent that, this Note shall have been converted.

15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado, excluding that body of law relating to conflict of laws.

16. Heading; References. All headings used herein are used for convenience only and shall not be used to construe or interpret this Note. Except as otherwise indicated, all references herein to Sections refer to Sections hereof.

IN WITNESS WHEREOF, the Company has caused this Note to be issued as of the date first written above.

Jayhawk Energy, Inc.,

a Colorado corporation

By: Lindsay Gorrill

Its: President

Name of Holder: ____________

Address: ____________

____________

Telephone:

Facsimile: ____________

NOTICE OF CONVERSION

(To be Signed Only Upon Conversion of Note)

To Jayhawk Energy, Inc.:

The undersigned, holder of the $____________ Convertible Note of Jayhawk Energy, Inc., due _______________ (the “Note”), hereby agrees to surrender the Note for conversion into ________________shares of Common Stock of Jayhawk Energy, Inc., to the extent of ________________________ dollars ($____________) unpaid principal amount of the Note, and________________________ dollars ($____________) unpaid accrued interest under the Note and requests that the certificates for such shares be issued in the name of, and delivered to, _________________________________________________, whose address is _________________________________________________________. Conversion should be effected as of ___________________.

Dated:

(signature must conform in all respects to name

of holder as specified on the face of the Note)

Address:

EXHIBIT 1

Historical Financial Statements

EXHIBIT 2

Capitalization Table