MASTER CONVERTIBLE ORIGINAL ISSUE DISCOUNT NOTE WITH REVENUE PARTICIPATION INTEREST

Issue Date: October 21, 2013

 

RECITALS

WHEREAS, STW, through its 100% owned subsidiary, STW Pipeline Maintenance and Construction, LLC (“STW Pipeline”), provides pipeline construction for customers in the midstream vertical of the oil and gas industry. STW Pipeline performs maintenance on pipelines in the oil and gas industry.

STW Pipeline’s revenues have begun their cycle and from its share of the net cash flow, STW can dedicate to repaying Participant for its capital investment and interest.

STW requires approximately $180,000 in funding for payment to services providers to bring STW current in all filings through the 2013 10k.These funds will be escrowed and released ONLY to the providers identified on Exhibit “A”. All monies will be released in accordance with the completion of work as outlined by the agreements from the service providers and the escrow agreement, Exhibit “B”..

Participant, individually or in combination with other Participants has loaned STW an amount of Two Hundred Seven Thousand Dollars ($207,000), with an original issue discount of Twenty Seven Thousand Dollars ($27,000) and net proceeds to STW  of One Hundred Eighty Thousand Dollars ($180,000). STW has executed within this Note, a Corporate Convertible Loan Note with Covenants (the "Note") and other documents relating thereto (the Note and all other documents related thereto are referred to collectively as the "Loan Documents"); and

                  NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties agree as follows:

 

1.2. Corporate Promissory Note. Participant agrees to loan the amount indicated on Participant’s Subscription to STW, which represents all or a percentage of the $207,000.00 principal amount (“Investment Amount”).  STW promises to pay Participant that amount indicated on Participant’s Subscription Agreement, including any accrued but unpaid interest, on or before March 5, 2014, with the Note carrying a stated percentage interest rate of 6% per annum, with the further provision that any and all payments on the Note shall come solely from Participant’s share of the Revenue Participation Fees, as set forth in following Section 1.5.

 1.3. Security Interest. To secure payment of STW's obligations under this Note, STW pledges and grants to Participant a continuing security interest in its net revenues and the proceeds thereof, until such time as STW’s obligations to pay Participant on the Note ceases.

 1.4. Deemed Interest. Participant’s investment hereunder shall be considered a 100% AT RISK INVESTMENT, not subject to any general guarantees other than the performance of STW Pipeline and the revenues derived from such operations funded in whole or in part by Participant’s investment. It is not intended by the parties hereto that the Revenue Sharing payments due under this Agreement be deemed to constitute "interest" on the Note or other Loan Documents.   However, in the event a Court of competent jurisdiction determines that the Revenue Participation Fees due and payable hereunder are deemed to be "interest" arising with respect to the obligations evidenced by the Note and other Loan Documents, and as a direct result thereof such payments under this Note results in Borrower having paid interest in excess of that permitted by applicable law, then all excess amounts theretofore collected by Participant shall be credited on the principal balance owing under the Note and remaining Loan Documents (or, if all sums owing thereunder have been paid in full, refunded to STW ), and the amounts thereafter collectible under this Note shall immediately be deemed reduced, without the necessity of the execution of any new document so as to comply with applicable law and permit the recovery of the fullest amount otherwise called for hereunder.

1.5. Revenue Participation Fees.  In order to provide payment on the Note, STW will pay the following Revenue Participation Fees:

A.           During the term hereof STW agrees to pay to Participant Revenue Participation Fees from its share of Net Operating Revenues of STW Pipeline, (per the schedule listed below) to all Participants generally (with each Participant’s percentage of the $207,000.00 investment being paid on a pro-rata basis) until such time as each Participant’s share of the $207,000.00 Note, including accrued but unpaid interest, has been paid in full. Thereafter, all further Revenue Fees shall cease and this Note shall be terminated in all respects.

·	Payments to be made monthly in arrears;

·	Interest plus principal repayment of $11,000 (with each Participant’s percentage of the $207,000 investment being paid on a pro-rata basis), commencing 30 days from close; and

·	All outstanding principal and accrued, but unpaid, interest to be repaid in full on maturity.

B.           The Participants’ share(s) of Net Operating Revenues, as defined above, shall be paid quarterly on or before the fifteenth of the month following the end of the ninety day period, during the term hereof.  In the event payment of the Revenue Participation Fees are not received by Participant within thirty (30) days after the date due, interest shall then begin to accrue on the late payment at the rate of eighteen percent (18%) per annum until the Revenue Participation Fees due and accrued interest are paid in full.

C.  N/A

D.  N/A

E.  Stock Warrants.  As additional consideration, STW will issue two-year stock warrants to purchase shares of STW’s common stock at $0.20 per share, with up to 414,000 stock warrants to be issued.  Each Participant will be issued warrants to purchase two shares of STW common stock for every one dollar of face value based upon their dollar amount participation interest in the $207,000 investment amount.

 1.6. Term and Termination. The term of this Note shall commence immediately and shall terminate upon the later of payment in full of sums due under this Note, per Section 1.5B or six (6) months from the date hereof, whichever is shorter. This Note may not be terminated prior to the expiration of its term without the written agreement of the parties. The conversion rights set forth in Article II shall remain in full force and effect immediately from the date hereof and until the Note is paid in full regardless of the occurrence of an Event of Default.  The Note shall be payable in full on or prior to the Maturity Date, except to the extent previously converted into Common Stock of the Company (the “Common Stock”) in accordance with Article II hereof.

The Holder shall have the right to convert the Principal and accrued and unpaid Interest due under this Note into shares of the Company’s Common Stock, as set forth below.

2.1           Conversion into the Company’s Common Stock.

(a)           The Holder shall have the right from and after the date of the issuance of this Note and then at any time until this Note is fully paid, to convert any outstanding and unpaid Principal portion of this Note, and accrued Interest on such portion, at the election of the Holder (the date of such conversion being a “Conversion Date”) into fully paid and non-assessable shares of Common Stock, as such stock exists on the date of this Note (such shares, the “Conversion Shares”), or any shares of capital stock of the Company into which such Common Stock shall hereafter be changed or reclassified, at the conversion price as defined in Section 2.1(b) hereof (the “Conversion Price”), determined as provided herein. Upon delivery to the Company of a completed Notice of Conversion, a form of which is annexed hereto, Company shall issue and deliver to the Holder within three (3) business days from the Conversion Date (such third day being the “Delivery Date”) that number of Conversion Shares for the portion of the Principal, along with accrued but unpaid Interest, converted in accordance with the foregoing.  The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing that portion of the Principal of the Note and accrued Interest to be converted, by the Conversion Price. No fractional shares shall be issued for any payment of Interest due under this Note.  As to any fraction of a share which Holder would otherwise be entitled to upon such payment of Interest, the Company shall round up to the next whole share.  Each conversion hereof shall constitute the re-affirmation by the Holder that the representations and warranties contained in the Subscription Agreement are true and correct in all material respects with respect to the Holder as of the time of such conversion. Upon partial conversion of this Note, a new Note containing the same date and provisions of this Note shall, at the request of the Holder, be issued by the Company to the Holder for the remaining Principal balance of this Note and Interest which shall not have been paid. Notwithstanding anything to the contrary stated above, Holder may not convert that portion of this Note that if converted would increase Investor’s beneficial ownership of Company’s common shares above 9.99% of the outstanding common shares.

(b)           Subject to adjustment as provided in Section 2.1(c) hereof, the Conversion Price per share shall be equal to $0.12.

(c)           The Conversion Price and number and kind of shares of Common Stock or other securities to be issued upon conversion as determined pursuant to Section 2.1(a), shall be subject to adjustment from time to time upon the happening of certain events while this Note remains outstanding, as follows:

(i)           Reorganization, Consolidation, Merger, etc.; Reclassification.  In case at any time or from time to time, the Company shall effect any merger, reorganization, restructuring, reverse stock split, consolidation, sale of all or substantially all of the Company’s assets or any similar transaction or related transactions (each such transaction, a “Fundamental Change”), then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder of this Note, on the conversion hereof, at any time after the consummation of such Fundamental Change, shall receive, in lieu of the Conversion Shares issuable on such conversion prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation of a Fundamental Change if such Holder had so converted this Note, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 2.1(c)(iv).

 

If the Company at any time shall, by reclassification or otherwise, change the Common Stock into the same or a different number of securities of any class or classes that may be issued or outstanding, this Note, as to the unpaid principal portion thereof and accrued interest thereon, shall thereafter be deemed to evidence the right to purchase an adjusted number of such securities and kind of securities as would have been issuable as the result of such change with respect to the Common Stock immediately prior to such reclassification or other change.

 

2.3           Fractional Shares.  No fractional shares shall be issued upon the conversion of this Note.  As to any fraction of a share which Holder would otherwise be entitled to upon such conversion, the Company shall round up to the next whole share.

 3.1. Default and Remedies Upon Default. In the event STW is in default of any of the terms of this Note, Participant shall have all the remedies provided in this Note.

3.2. Notices. Any notice to be given hereunder by either party to the other shall be in writing and personally delivered, sent by certified mail, return receipt requested or by reliable overnight delivery service, to the respective address above or to any other address required by the respective party, or by facsimile transmission with confirmation of receipt, and notice shall be deemed given on the earlier of: a) three (3) business days after notice is mailed as set forth above; or, b) upon actual receipt.

3.3.  Compliance with Securities Laws. Participant, as the holder of this Note, by acceptance hereof, acknowledges that this Note and the Revenue Participation Interests are being acquired solely for the Participant’s own account and not as a nominee for any other party, and for investment, and that the Participant will not offer, sell or otherwise dispose this Note and/or Revenue Participation Interest except pursuant to an effective registration statement, or an exemption from registration, under the Securities Act and any applicable state securities laws.

3.4. Jurisdiction. The terms and provisions of this agreement shall be governed by Texas law without giving effect to any choice or conflict of law provision or rule (whether of Texas or any other jurisdiction) that would cause the application of the laws of any other jurisdiction other than Texas to apply.   Each of the parties submits to the exclusive jurisdiction of the state district courts sitting in Dallas County, Texas.  Each party also agrees not to bring any such action or proceeding arising out of or relating to this Note in such court.  Each of the parties waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought.

 

         IN WITNESS WHEREOF, the parties have executed this Note upon the date set forth above.

STW RESOURCES HOLDING CORP.

By:  ________________________

Stanley T. Weiner, its CEO

PARTICIPANTS

[Agreements indicated by their signatures on the Subscription Agreements]