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 u
