THIS 12% SECURED SUBORDINATED CONVERTIBLE PROMISSORY NOTE (THE
“NOTE”) AND THE COMMON SHARES ISSUABLE UPON CONVERSION
OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE “ACT”). THIS NOTE AND
THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THIS NOTE OR THE COMMON SHARES ISSUABLE
UPON CONVERSION OF THIS NOTE UNDER SAID ACT, OR ANY OTHER VALID
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT OR AN
OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR
OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD PURSUANT TO RULE 144
UNDER SAID ACT.
PNG VENTURES, INC.
(a Nevada corporation)
12% SUBORDINATED SECURED CONVERTIBLE PROMISSORY NOTE
Issue Date:
June 3, 2008
Total
Principal Amount of Note: $626,250
FOR VALUE RECEIVED , PNG Ventures, Inc. a
Nevada corporation (hereinafter called the “ Borrower ”),
hereby promises to pay to the order of Black Forest International,
LLC., or its registered assigns (the “ Holder ”), the
sum of Six Hundred Twenty Six Thousand Two Hundred Fifty Dollars
($626,250) (the “ Principal Amount
”) on the maturity date set forth in Section 1.4
below (the “Maturity Date
”), and to pay interest on the unpaid principal balance
hereof at the rate of twelve percent (12%) per annum (the “
Initial Interest
Rate ”) from June 3, 2008 (the “ Issue Date ”)
until the same becomes due and payable at the Maturity Date,
whether at maturity or upon acceleration or by prepayment or
otherwise. Thereafter, such interest shall accrue at a default rate
of 18% (the “ Default Rate ”)
per annum until repaid as more fully set forth
below. All payments due hereunder shall be made in
lawful money of the United States of America. The
Principal Amount of this Note and any accrued interest is
convertible, at the sole and absolute discretion of the Holder,
into common stock (the “ Common Stock ”)
of the Borrower as provided in Article II
below. Repayment of this Note is unconditionally guaranteed by each
of Earth BioFuels, Inc. (“ Earth Biofuels
”), and by Earth LNG, Inc. (“ Earth LNG ”) and
each of its subsidiaries (the “ Earth LNG Subsidiaries
” and, collectively with Earth LNG, the “ Secured Parties
”), and shall be secured by all of the assets of the
Borrower, and Secured Parties, which security interest shall be
subordinate only to U.S. $36.5 Million of aggregate existing
indebtedness held by Fourth Third Capital, LLC as Agent for various
creditors and by Greenfield Commercial Credit, LLC (“
Existing
Creditors ”) and no other debt. All
payments shall be made at such address as the Holder shall
hereafter give to the Borrower by written notice made in accordance
with the provisions of this Note. Whenever any amount
expressed to be due by the terms of this Note is due on any day
which is not a business day, the same shall instead be due on the
next succeeding day which is a business day. As used in
this Note, the term “business day” shall mean any day
other than a Saturday, Sunday or a day on which commercial banks of
the United States of America are authorized or required by law or
executive order to remain closed. This Note shall be
secured pursuant to the terms of the certain Security Agreements by
and between the Borrower and the Holder and the Security Agreement
between the Secured Parties and Existing
Creditors. Notwithstanding the foregoing, in the event
that any of the Secured Parties have not executed the requisite
Guarantees or Security Agreement amendment or intercreditor
agreement amendments, or that the Existing Creditors do not execute
any of said agreements effectuating the intent of the parties
hereto, this Note is and shall be fully and unconditionally
enforceable as against the Borrower and each of the parties
executing guaranties or such documents.
The
following terms shall apply to this Note:
ARTICLE I. INTEREST AND AMORTIZATION AND
REPAYMENT
1.1
Interest Rate . Subject to Section 1.3
hereof, interest payable on this Note shall accrue at the Initial
Interest Rate a rate per annum of twelve percent
(12%). Interest on the Principal Amount shall be simple
interest, payable monthly, in arrears, commencing on June 3, 2008
and on the first day of each consecutive calendar month thereafter
(each, a “ Repayment Date ”)
and on the Maturity Date, whether by acceleration or
otherwise.
1.2
Minimum
Monthly Payments . Only all outstanding
interest shall be paid monthly.
1.3
Default
Interest Rate . Following the occurrence
and during the continuance of an Event of Default, and in
addition to any other remedies that Holder may have, the
annual interest rate on this Note shall automatically be
increased to the lesser of (i) eighteen percent (18%) or the
higher rate permissible by law (the “Default Interest
Rate ”), and all outstanding obligations under
this Note, including unpaid interest, shall continue to
accrue interest from the date of such Event of Default at
such interest rate applicable to such obligations until such
Event of Default is cured or waived (any such amount referred
to herein as “ Default Interest
”).
1.4
Repayment
. This Note shall be unconditionally and
immediately repaid on the business day first following
demand, in U.S. cash currency, by bank check payable to
Holder or its assigns, or bank wire transfer in accordance
with Holder’s written instructions (the “
Maturity
Date ”) for the full amount of the
demand. The Holder may make demand for repayment
at its sole discretion, in whole or in part and from time to
time until the entire balance of this Note is repaid or
converted, after the earliest to occur of (i) the closing of
a debt (secured or otherwise), equity or preferred stock or
derivative security financing or re-financing or debt/equity
line, of the Borrower or any Secured Party, with gross
proceeds or maximum credit limit of $1,000,000 or greater,
(ii) August 4, 2008, or (iii) upon any Event of
Default. This Note may not be prepaid
absent consent of the Holder.
ARTICLE II. CONVERSION RIGHTS
2.1
Conversion
Right . The Holder shall have the right at any
time, and from time to time, on or prior to the Maturity Date to
convert all or any part of the outstanding and unpaid principal
amount of this Note, into fully paid and non-assessable shares of
Common Stock (the “ Conversion Shares
”), of the Borrower as such Common Stock exists on the Issue
Date, or any shares of capital stock or other securities of the
Borrower into which such Common Stock shall hereafter be changed or
reclassified at the Conversion Price (as defined below) determined
as provided herein (a “ Conversion ”);
provided ,
however , that
in no event shall the Holder be entitled to convert any portion of
this Note in excess of that portion of this Note upon conversion of
which the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and its affiliates (other than
shares of Common Stock which may be deemed beneficially owned
through the ownership of the unconverted portion of this Note or
the unexercised or unconverted portion of any other security of the
Borrower subject to a limitation on conversion or exercise
analogous to the limitations contained herein) and (2) the number
of Conversion Shares issuable upon the conversion of the portion of
this Note with respect to which the determination of this proviso
is being made, would result in beneficial ownership by the Holder
and its affiliates of more than 4.9% of the outstanding shares of
Common Stock. For purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulations 13D-G thereunder,
except as otherwise provided in clause (1) of such
proviso. The Holder of this Note may waive the
limitations set forth herein at its sole and absolute discretion by
written notice of not less than sixty-one (61) days to the
Borrower. The number of Conversion Shares to be issued
upon each conversion of the convertible portion of this Note shall
be determined by dividing the Conversion Amount (as defined below)
by the applicable Conversion Price in effect on the date the notice
of conversion, in the form attached hereto as Exhibit
A (the “ Notice of Conversion
”), is delivered to the Borrower by the Holder in accordance
with Section 2.5
below (the “ Conversion Date
”). The term “ Conversion Amount
” means, with respect to any conversion of this Note, the sum
of (1) the principal amount of this Note to be converted in such
conversion plus (2)
accrued and unpaid interest, if any, on such principal amount at
the interest rates provided in this Note to the Conversion Date
plus (3)
default interest, if any, on the amounts referred to in the
immediately preceding clauses (1) and/or (2) plus (4) at
the Holder’s option, any other amounts owed to the Holder
pursuant to this Note.
2.2
Conversion
Price .
(a)
Calculation
of Conversion Price .
The
term “ Conversion Price
” as used herein shall be equal to: (i) $.09 per share for
the conversion of the initial $63,000 of the Principal Amount; and
(ii) $10.00 per share for the conversion of any remaining balance
of the Principal Amount and interest.
The
calculation of Conversion Price set forth in the previous
paragraph shall be subject, as set forth in Section
2.7 , to equitable adjustments upon the occurrence of
certain events including, but not limited to, stock splits,
reverse stock splits, stock dividends or rights offerings by
the Borrower relating to the Borrower’s securities or
the securities of any subsidiary of the Borrower or of Secured
Parties (before or after the contemplated acquisition by
Borrower of Earth LNG), combinations, recapitalization,
reclassifications, extraordinary distributions and similar
events until converted in full.
(b)
Deficiency Upon Conversion . Upon
Conversion, in the event of any deficiency of any amounts due
Holder hereunder, Borrower agrees to pay Holder, at Holder’s
option any such deficiency in either cash or additional shares of
Common Stock. If the Holder elects, in its sole and
absolute discretion to be paid such deficiency in Common Stock,
such Common Stock shall be valued at the Conversion Price, then in
effect. Nothing herein shall be deemed to limit the ability of
Holder to collect any of the Principal Amount of this Note in cash
or otherwise enforce any of its rights herein, as against the
Borrower or any of the guarantors and Secured Parties or obligate
the Holder to accept such shares in lieu of such
deficiency.
2.3
Application
of Conversion Amounts . Any amounts
converted by the Holder pursuant to Section
2.1 or paid by the Borrower shall be deemed to
constitute payments of and applied, (i) first, any amounts
owed other than accrued and unpaid interest (ii) second,
against accrued and unpaid interest on the Principal Amount,
and (iii) third, against the Principal Amount.
2.4
Authorized
Shares . For so long as the conversion right
exists, the Borrower will reserve (and, from time to time, amend
its Certificate of Incorporation so as to maintain reserved) from
its authorized and unissued Common Stock a sufficient number of
shares, free from preemptive rights, to provide for the issuance of
Common Stock upon the full conversion of this Note and all other
convertible securities of the Borrower, options or
warrants. As of the date of issuance of this Note, the
Borrower has a sufficient number of authorized and unissued shares
of Common Stock that have been duly reserved for
issuance upon conversion of this Note and such other
securities (the “ Reserved Amount
”). The Reserved Amount shall be increased from
time to time in accordance with the Borrower’s obligations
pursuant to this Note and other agreements to which the Borrower
may be obligated to issue shares (subject to the anti dilution
provisions and other restrictions on such issuances
herein). The Borrower represents that upon issuance,
such shares will be duly and validly issued, fully paid and
non-assessable. In addition, the if Borrower shall issue
any securities or make any change to its capital structure which
would change the number of shares of Common Stock into which this
Note shall be convertible at their then current conversion price,
the Borrower shall at the same time make proper provision so that
thereafter there shall be a sufficient number of shares of Common
Stock authorized and reserved, free from preemptive rights, for
conversion of this Note. The Borrower agrees that the
issuance of this Note by Borrower and execution hereof by Borrower
shall constitute full authority to its officers and agents who are
charged with the duty of executing stock certificates to execute
and issue the necessary certificates for shares of Common Stock in
accordance with the terms and conditions of this Note. Concurrently
with this Note, the Borrower, the Holder and the Holder’s
transfer agent (the “ Transfer Agent ”)
have entered into an escrow agreement and irrevocable transfer
agent instruction letter (collectively the “ Escrow Documents
”) whereby the Borrower has deposited 700,000 shares of
Common Stock with the Transfer Agent to be held in
escrow for the conversion of the initial $63,000 of the Principal
Amount (as described above in Section 2.2(a)) pursuant to the terms
of the Escrow Documents.
If,
at any time a Holder of this Note submits a Notice of
Conversion, and the Borrower does not have sufficient
authorized but unissued shares of Common Stock available to
effect such conversion in accordance with the provisions of
this Article
II (a “ Conversion Default
”), the Borrower shall issue to the Holder all of the
shares of Common Stock which are then available to effect such
conversion. The portion of this Note which the
Holder included in its Conversion Notice and which exceeds the
amount which is then convertible into available shares of
Common Stock (the “ Excess Amount
”) shall, notwithstanding anything to the contrary
contained herein, not be convertible into Common Stock in
accordance with the terms hereof until (and at the
Holder’s option at any time after) the date additional
shares of Common Stock are authorized by the Borrower to
permit such conversion. The Borrower shall use its
best efforts to authorize a sufficient number of shares of
Common Stock as soon as practicable following the earlier of
(i) such time that the Holder notifies the Borrower or that
the Borrower otherwise becomes aware that there are or likely
will be insufficient authorized and unissued shares to allow
full conversion thereof and (ii) a Conversion
Default. The Borrower shall send notice to the
Holder of the authorization of additional shares of Common
Stock, and the Authorization Date.
Nothing
herein shall limit the Holder’s right to pursue actual
damages against Borrower or any guarantor or Secured Party for
the Borrowers failure to maintain a sufficient number of
authorized shares of Common Stock or to repay this Note
pursuant to the guarantees, and each Holder shall have the
right to pursue all remedies available at law or in equity
(including degree of specific performance and/or injunctive
relief or under this Note.
2.5
Method
of Conversion .
(a)
Mechanics
of Conversion .
Subject
to Section 2.1 ,
the Principal Amount and interest of this Note may be converted by
the Holder in whole or in part at any time from time to time after
the Issue Date, by (A) submitting to the Borrower a Notice of
Conversion (by facsimile or other reasonable means of communication
dispatched on the Conversion Date prior to 5:00 p.m., Pacific
Standard Time) and (B) subject to Section 2.5(b)
, surrendering this Note at the principal office of the
Borrower.
(b)
Surrender
of Note Upon Conversion .
Notwithstanding anything to the contrary set forth herein, upon
conversion of this Note in accordance with the terms hereof, the
Holder shall not be required to physically surrender this Note to
the Borrower unless the entire unpaid principal amount of this Note
is so converted. The Borrower shall maintain records
showing the principal amount so converted and the dates of such
conversions or shall use such other method, reasonably satisfactory
to the Holder and the Borrower, so as not to require physical
surrender of this Note upon each such
conversion. Notwithstanding the foregoing, if any
portion of this Note is converted as aforesaid, the Holder may not
transfer this Note unless the Holder first physically surrenders
this Note to the Borrower, whereupon the Borrower will forthwith
issue and deliver upon the order of the Holder a new Note of like
tenor, registered as the Holder (upon payment by the Holder of any
applicable transfer taxes) may request, representing in the
aggregate the remaining unpaid principal amount of this
Note.
THE HOLDER AND ANY ASSIGNEE, BY ACCEPTANCE OF THIS NOTE,
ACKNOWLEDGE AND AGREE THAT, BY REASON OF THE PROVISIONS OF THIS
PARAGRAPH, FOLLOWING CONVERSION OF A PORTION OF THIS NOTE, THE
UNPAID AND UNCONVERTED PRINCIPAL AMOUNT OF THIS NOTE REPRESENTED BY
THIS NOTE MAY BE LESS THAN THE AMOUNT STATED ON THE FACE
HEREOF.
(c)
Payment
of Taxes .
The
Borrower shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of
shares of Common Stock or other securities or property on
conversion of this Note in a name other than that of the Holder (or
in street name), and the Borrower or the Transfer Agent, as the
case may be, shall not be required to issue or deliver any such
shares or other securities or property unless and until the person
or persons (other than the Holder or the custodian in whose street
name such shares are to be held for the Holder’s account)
requesting the issuance thereof shall have paid to the Borrower or
the Transfer Agent, as the case may be, the amount of any such tax
or shall have established to the satisfaction of the Transfer
Agent, that such tax has been paid.
(d)
Delivery
of Common Stock Upon Conversion . Upon
receipt by the Borrower from the Holder of a facsimile
transmission, Adobe Acrobat electronic reproduction (or other
reasonable means of reproduction of a signature) of a Notice of
Conversion meeting the requirements for conversion as provided in
this Section 2.5 ,
the Borrower shall issue and deliver or cause to be issued and
delivered to or upon the order of the Holder certificates for the
Common Stock issuable upon such conversion within three (3) full
business days (the “ Deadline ”) after
such receipt (and, solely in the case of conversion of the entire
unpaid principal amount hereof, surrender of this Note) in
accordance with the terms hereof. The Borrower shall pay liquidated
damages, in addition to other damages or lost profits resulting in
the decline in price of the shares after the Deadline date
(regardless of whether such shares could have been sold), of 1% of
the number of shares not delivered for each 3 business day after
the Deadline (i.e. 1% after six business days after the deadline,
an aggregate of 2% after nine days, 3% after 12 days etc.),
.
(e)
Obligation
of Borrower to Deliver Common Stock . Upon
receipt by the Borrower of a Notice of Conversion, the Holder shall
be deemed to be the Holder of record of the Common Stock issuable
upon such conversion (the “ Conversion Shares
”), the outstanding principal amount and the amount of
accrued and unpaid interest (and any other unpaid amounts) on this
Note shall be reduced to reflect such conversion, and, unless the
Borrower defaults on its obligations under this Article II ,
all rights with respect to the portion of this Note being so
converted shall forthwith terminate except the right to receive the
Common Stock or other securities, cash or other assets, as herein
provided, on such conversion. If the Holder shall have
given a Notice of Conversion as provided herein, the
Borrower’s obligation to issue and deliver the certificates
for Common Stock shall be absolute and unconditional, irrespective
of the absence of any action by the Holder to enforce the same, any
waiver or consent with respect to any provision thereof, the
recovery of any judgment against any person or any action to
enforce the same, any failure or delay in the enforcement of any
other obligation of the Borrower to the holder of record, or any
setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder of any obligation to the
Borrower, and irrespective of any other circumstance which might
otherwise limit such obligation of the Borrower to the Holder in
connection with such conversion. The Conversion Date
with respect to a Notice of Conversion shall be the date on which
the Notice of Conversion is given so long as the Notice of
Conversion is received by the Escrow Agent before 5:00 p.m.,
Pacific Standard Time, on such date; or if received after 5:00 p.m.
Pacific Standard Time, the Conversion Date shall be the following
date. Upon failure of the Borrower to timely deliver the
shares of Common Stock issuable upon any such conversion, the
Holder shall be entitled, as liquidated damages and not as a
penalty, to a cash payment equal to 1.5% of the dollar amount of
any such conversion for each 30-day period (or pro-rata for any
portion thereof) following the Conversion Date until delivery of
the Conversion Shares.
2.6
Concerning
the Shares . The shares of Common Stock issuable
upon conversion of this Note may not be sold or transferred
unless (i) such shares are sold pursuant to an effective
registration statement under the Act or (ii) the Borrower or its
Transfer Agent shall have been furnished with an opinion of counsel
(which opinion shall be in form, substance and scope customary for
opinions of counsel in comparable transactions) to the effect that
the shares to be sold or transferred may be sold or transferred
pursuant to an exemption from such registration or (iii) such
shares are sold or transferred pursuant to Rule 144 under the Act
(or a successor rule) (“ Rule 144 ”) or
(iv) such shares are issued or transferred pursuant to a valid
court order or other exemption from the registration requirements
of the Act, or (v) such shares are transferred to an
“affiliate” (as defined in Rule 144) of the Borrower
who agrees to sell or otherwise transfer the shares only in
accordance with this Section 2.6
and who is an Accredited Investor (as defined in the
Act). Except as otherwise provided in the Agreement (and
subject to the removal provisions set forth below), until such time
as the shares of Common Stock issuable upon conversion of this Note
have been registered under the Act as contemplated by Article IV
hereof or otherwise may be sold pursuant to Rule 144 or any other
exemption, each certificate for shares of Common Stock issuable
upon conversion of this Note that has not been so included in an
effective registration statement or that has not been sold pursuant
to an effective registration statement or issued pursuant to a
valid exemption from the registration requirements of the Act, an
exemption that permits removal of the legend, shall bear a legend
substantially in the following form, as appropriate:
“THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THE SECURITIES MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR
AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE CUSTOMARY
FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT UNLESS SOLD
P
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