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Dated: April 4, 2008
NEITHER THIS NOTE NOR THE SECURITIES INTO WHICH THIS NOTE IS
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE “ SECURITIES ACT
”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES
LAWS.
TAO MINERALS, LTD.
Convertible Note
Due Date: as set forth herein
This Convertible Note (the
“ Note
”) is issued by Tao Minerals, Ltd.., a Nevada
corporation (the “ Obligor
”), to Outboard Investments Ltd. (the “
Holder
”), pursuant to that certain Securities Purchase
Agreement (the “ Securities
Purchase Agreement ”) dated April 4,
2008. Capitalized terms not otherwise defined
herein shall have the meaning ascribed thereto in the
Securities Purchase Agreement.
FOR VALUE
RECEIVED , the Obligor hereby promises to pay to the
Holder or its successors and assigns the principal sum of One
Hundred and Twenty Five Thousand ($125,000)
together with accrued but unpaid interest on April 4, 2011
(the “ Maturity
Date ”), in accordance with the following
terms:
Interest . Interest shall accrue on the
outstanding principal balance hereof at an annual rate equal to ten
percent (10%). Interest shall be calculated on the basis
of a 360-day year and the actual number of days elapsed, to the
extent permitted by applicable law. Interest hereunder
will be paid quarterly in arrears to the Holder or its assignee (as
defined in Section 5 ) in whose
name this Note is registered on the records of the Obligor
regarding registration and transfers of Notes (the “
Note
Register ”).
Right of Redemption . The Obligor at its option
shall have the right, with three (3) business days advance written
notice (the “ Redemption
Notice ”), to redeem a portion or all amounts
outstanding under this Note prior to the Maturity
Date. The Obligor shall deliver to the Holder the
Redemption Amount on the third (3 rd
) business day after the Redemption Notice.
Notwithstanding
the foregoing in the event that the Obligor has elected to
redeem a portion of the outstanding principal amount and
accrued interest under this Note the Holder shall be permitted
to convert all or any portion of this Note during such three
business day period.
This Note is subject to the
following additional provisions:
Section 1
. This
Note is exchangeable for an equal aggregate principal amount of
Notes of different authorized denominations, as requested by the
Holder surrendering the same. No service charge will be made for
such registration of transfer or exchange.
Section 2
.
Events of
Default .
(a) An
“ Event of
Default ”, wherever used herein, means any one of
the following events (whatever the reason and whether it shall
be voluntary or involuntary or effected by operation of law or
pursuant to any judgment, decree or order of any court, or any
order, rule or regulation of any administrative or
governmental body):
(i) Any
default in the payment of the principal of, interest on or
other charges in respect of this Note, free of any claim of
subordination, as and when the same shall become due and
payable (whether on a Conversion Date or the Maturity Date or
by acceleration or otherwise);
(ii) The
Obligor shall fail to observe or perform any other covenant,
agreement or warranty contained in, or otherwise commit any
breach or default of any provision of this Note (except as may
be covered by Section 2(a)(i)
hereof) or any Transaction Document (as defined in Section 5 ) which
is not cured with in the time prescribed, including without
limitation Obligor’s obligation to timely deliver shares
of Common Stock upon conversion of this Note and exercise of
the Warrant;
(iii) The
Obligor or any subsidiary of the Obligor shall commence, or
there shall be commenced against the Obligor or any subsidiary
of the Obligor under any applicable bankruptcy or insolvency
laws as now or hereafter in effect or any successor thereto,
or the Obligor or any subsidiary of the Obligor commences any
other proceeding under any reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency
or liquidation or similar law of any jurisdiction whether now
or hereafter in effect relating to the Obligor or any
subsidiary of the Obligor or there is commenced against the
Obligor or any subsidiary of the Obligor any such bankruptcy,
insolvency or other proceeding which remains undismissed for a
period of 61 days; or the Obligor or any subsidiary of the
Obligor is adjudicated insolvent or bankrupt; or any order of
relief or other order approving any such case or proceeding is
entered; or the Obligor or any subsidiary of the Obligor
suffers any appointment of any custodian, private or court
appointed receiver or the like for it or any substantial part
of its property which continues undischarged or unstayed for a
period of sixty one (61) days; or the Obligor or any
subsidiary of the Obligor makes a general assignment for the
benefit of creditors; or the Obligor or any subsidiary of the
Obligor shall fail to pay, or shall state that it is unable to
pay, or shall be unable to pay, its debts generally as they
become due; or the Obligor or any subsidiary of the Obligor
shall call a meeting of its creditors with a view to arranging
a composition, adjustment or restructuring of its debts; or
the Obligor or any subsidiary of the Obligor shall by any act
or failure to act expressly indicate its consent to, approval
of or acquiescence in any of the foregoing; or any corporate
or other action is taken by the Obligor or any subsidiary of
the Obligor for the purpose of effecting any of the
foregoing;
(iv) The
Obligor or any subsidiary of the Obligor shall default in any
of its obligations under any other Note or any mortgage,
credit agreement or other facility, indenture agreement,
factoring agreement or other instrument under which there may
be issued, or by which there may be secured or evidenced any
indebtedness for borrowed money or money due under any long
term leasing or factoring arrangement of the Obligor or any
subsidiary of the Obligor in an amount exceeding $100,000,
whether such indebtedness now exists or shall hereafter be
created and such default shall result in such indebtedness
becoming or being declared due and payable prior to the date
on which it would otherwise become due and
payable;
(v) The
Obligor or any subsidiary of the Obligor shall be a party to
any Change of Control Transaction (as defined in Section 5
);
(vi) The
Obligor shall fail for any reason to deliver Common Stock
certificates to a Holder prior to the fifth (5 th
) Trading Day after a Conversion Date or the Obligor shall
provide notice to the Holder, including by way of public
announcement, at any time, of its intention not to comply with
requests for conversions of this Note in accordance with the
terms hereof; and
(b) During
the time that any portion of this Note is outstanding, if any
Event of Default has occurred and shall continue for a period
of ten (10) days after a notice of such default has been
delivered by the Holder to the Obligor (the “
Notice
Period ”), the full principal amount of this
Note, together with interest and other amounts owing in
respect thereof, to the date of acceleration shall become at
the Holder's election, immediately due and payable in cash,
provided
however , the Holder may request (but shall have no
obligation to request) payment of such amounts in Common Stock
of the Obligor. In addition to any other remedies,
the Holder shall have the right (but not the obligation) to
convert this Note at any time after (x) an Event of Default or
(y) the Maturity Date at the Conversion Price then
in-effect. The Holder need not provide and the
Obligor hereby waives any presentment, demand, protest or
other notice of any kind, and the Holder may immediately and
without expiration of any grace period (other than the Notice
Period) enforce any and all of its rights and remedies
hereunder and all other remedies available to it under
applicable law. Such declaration may be rescinded and annulled
by Holder at any time prior to payment hereunder. No such
rescission or annulment shall affect any subsequent Event of
Default or impair any right consequent thereon
Section 3
.
Conversion
.
(a)
Conversion at
Option of Holder .
(i) This
Note shall be convertible into shares of Common Stock at the
option of the Holder, in whole or in part at any time and from
time to time, after the Original Issue Date (as defined in
Section
5 ) (subject to the limitations on conversion set forth
in Section
3(b) hereof). The number of shares of Common Stock
issuable upon a conversion hereunder equals the quotient
obtained by dividing (x) the outstanding amount of this Note
to be converted by (y) the Conversion Price (as defined in
Section
3(b)(i) ). The Obligor shall deliver Common
Stock certificates to the Holder prior to the Fifth (5
th
) Trading Day after a Conversion Date.
(ii) Notwithstanding
anything to the contrary contained herein, if on any
Conversion Date: (1) the number of shares of Common
Stock at the time authorized, unissued and unreserved for all
purposes, or held as treasury stock, is insufficient to pay
principal and interest hereunder in shares of Common Stock;
(2) the Common Stock is not listed or quoted for trading on
the OTC or on a Subsequent Market; or (3) the Obligor has
failed to timely satisfy its conversion, and the Obligor is
unable to remedy any of the foregoing within 20 business
days, then, at the option of the Holder, the
Obligor, in lieu of delivering shares of Common Stock pursuant
to Section
3(a)(i) , shall deliver, within three (3) Trading Days
of each applicable Conversion Date, an amount in cash equal to
the product of the outstanding principal amount to be
converted plus any interest due therein divided by the
Conversion Price, chosen by the Holder, and multiplied by
the average closing price of the stock from date of
the conversion notice till the date that such cash payment is
made.
Further,
if the Obligor shall not have delivered any cash due in
respect of conversion of this Note or as payment of interest
thereon by the fifth (5 th
) Trading Day after the Conversion Date, the Holder may, by
notice to the Obligor, require the Obligor to issue shares of
Common Stock pursuant to Section 3(c) ,
except that for such purpose the Conversion Price applicable
thereto shall be the lesser of the Conversion Price on the
Conversion Date and the Conversion Price on the date of such
Holder demand. Any such shares will be subject to the
provisions of this Section.
(iii) The
Holder shall effect conversions by delivering to the Obligor a
completed notice in the form attached hereto as Exhibit A (a
“ Conversion
Notice ”). The date on which a
Conversion Notice is delivered is the “ Conversion
Date .” Unless the Holder is converting the
entire principal amount outstanding under this Note, the
Holder is not required to physically surrender this Note to
the Obligor in order to effect
conversions. Conversions hereunder shall have the
effect of lowering the outstanding principal amount of this
Note plus all accrued and unpaid interest thereon in an amount
equal to the applicable conversion. The Holder and the Obligor
shall maintain records showing the principal amount converted
and the date of such conversions. In the event of any dispute
or discrepancy, the records of the Holder shall be controlling
and determinative in the absence of manifest
error.
(b)
Certain
Conversion Restrictions .
(i) The
Holder may not convert this Note or receive shares of Common
Stock as payment of interest hereunder to the extent such
conversion or receipt of such interest payment would result in
the Holder, together with any affiliate thereof, beneficially
owning (as determined in accordance with Section 13(d) of the
Exchange Act and the rules promulgated thereunder) in excess
of 4.9% of the then issued and outstanding shares of Common
Stock, including shares issuable upon conversion of, and
payment of interest on, this Debenture held by such Holder
after application of this Section. Since the Holder
will not be obligated to report to the Obligor the number of
shares of Common Stock it may hold at the time of a conversion
hereunder, unless the conversion at issue would result in the
issuance of shares of Common Stock in excess of 4.9% of the
then outstanding shares of Common Stock without regard to any
other shares which may be beneficially owned by the Holder or
an affiliate thereof, the Holder shall have the authority and
obligation to determine whether the restriction contained in
this Section will limit any particular conversion hereunder
and to the extent that the Holder determines that the
limitation contained in this Section applies, the
determination of which portion of the principal amount of this
Debenture is convertible shall be the responsibility and
obligation of the Holder. If the Holder has
delivered a Conversion Notice for a principal amount of this
Debenture that, without regard to any other shares that the
Holder or its affiliates may beneficially own, would result in
the issuance in excess of the permitted amount hereunder, the
Obligor shall notify the Holder of this fact and shall honor
the conversion for the maximum principal amount permitted to
be converted on such Conversion Date in accordance with the
periods described in Section 3(a)(i)
and, at the option of the Holder, either retain any principal
amount tendered for conversion in excess of the permitted
amount hereunder for future conversions or return such excess
principal amount to the Holder by issuing to the Holder a new
debenture representing such excess principal
amount. The provisions of this Section may be
waived by a Holder (but only as to itself and not to any other
Holder) upon not less than 65 days prior notice to the
Obligor. Other Holders shall be unaffected by any such
waiver.
(c)
Conversion Price
and Adjustments to Conversion Price .
(i) The
Holder shall be entitled to convert, at its sole option, at
any time a portion or all amounts of principal and interest
due and outstanding under this Note into shares of the
Obligor’s Common Stock at a price equal to fifty (50%)
percent of the of the average of the volume weighted average
price of the shares of the Obligor’s common Stock during
the five trading days immediately preceding the Conversion
Date as quoted by Bloomberg, LP (the “ Conversion
Price”) . The Conversion Price may be
adjusted pursuant to the other terms of this
Note.
(ii) If
the Obligor, at any time while this Note is outstanding, shall
(a) pay a stock dividend or otherwise make a distribution
or distributions on shares of its Common Stock or any other
equity or equity equivalent securities payable in shares of
Common Stock, (b) subdivide outstanding shares of Common Stock
into a larger number of shares, (c) combine (including by way
of reverse stock split) outstanding shares of Common Stock
into a smaller number of shares, or (d) issue by
reclassification of shares of the Common Stock any shares of
capital stock of the Obligor, then the Conversion Price shall
be multiplied by a fraction of which the numerator shall be
the number of shares of Common Stock (excluding treasury
shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of Common Stock
outstanding after such event. Any adjustment made pursuant to
this Section shall become effective immediately after the
record date for the determination of stockholders entitled to
receive such dividend or distribution and shall become
effective immediately after the effective date in the case of
a subdivision, combination or re-classification.
(iii) If
the Obligor, at any time while this Note is outstanding, shall
issue rights, options or warrants to all holders of Common
Stock (and not to the Holder) entitling them to subscribe for
or purchase shares of Common Stock at a price per share less
than the Conversion Price, then the Conversion Price shall be
multiplied by a fraction, of which the denominator shall be
the number of shares of the Common Stock (excluding treasury
shares, if any) outstanding on the date of issuance of such
rights or warrants (plus the number of additional shares of
Common Stock offered for subscription or purchase), and of
which the numerator shall be the number of shares of the
Common Stock (excluding treasury shares, if any) outstanding
on the date of issuance of such rights or warrants, plus the
number of shares which the aggregate offering price of the
total number of shares so offered would purchase at the
Conversion Price. Such adjustment shall be made whenever such
rights or warrants are issued, and shall become effective
immediately after the record date for the determination of
stockholders entitled to receive such rights, options or
warrants. However, upon the expiration of any such right,
option or warrant to purchase shares of the Common Stock the
issuance of which resulted in an adjustment in the Conversion
Price pursuant to this Section, if any such right, option or
warrant shall expire and shall not have been exercised, the
Conversion Price shall immediately upon such e
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