Exhibit 10.4

 
DELAYED DRAW NOTE
 
THE PARTIES IN INTEREST HERETO HAVE AGREED THAT THIS NOTE SHALL BE TREATED AS A
CONTINGENT PAYMENT UNDER TREASURY REGULATION 1.1275-4(c)(4) PROMULGATED UNDER
THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.
 
THE INTEREST THAT ACCRUES ON THIS NOTE IS PAYABLE IN-KIND AND WILL EFFECTIVELY
INCREASE THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE.  ACCORDINGLY, THE
OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE AT ANY TIME MAY BE GREATER THAN THE
AMOUNT SHOWN ON THE FACE HEREOF.
 
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED, OR
OTHERWISE DISPOSED OF EXCEPT (1) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR (2) PURSUANT TO AN
APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH
LAWS, IN WHICH CASE THE ISSUER HAS RECEIVED, IF REQUESTED, AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO IT TO THE EFFECT THAT SUCH EXEMPTION IS APPLICABLE.
 

 
PARTICLE DRILLING TECHNOLOGIES, INC.
 
10% SENIOR SECURED PIK NOTES DUE 2010
 
$75,000                                  NEW YORK, NEW YORK
 
              March 3, 2009
 

PARTICLE DRILLING TECHNOLOGIES, INC. (the “Issuer”), a Nevada corporation,
hereby promises to pay in full to the order of LC CAPITAL MASTER FUND, LTD. (the
“Holder”) the principal sum of SEVENTY FIVE THOUSAND DOLLARS ($75,000) (which
amount shall be subject to adjustment as herein provided), together with
Interest (as defined below) thereon as herein provided, in lawful money of the
United States on the terms and subject to the conditions set forth in this
promissory note (this “Note”).
 
This Note is one of a duly authorized issue of notes of the Issuer designated as
its 10% Senior Secured PIK Notes Due 2010 (herein called  the “Notes” and each,
individually, a “Note”), issued in an aggregate principal amount limited to
$1,200,000 plus Interest thereon pursuant to that certain Purchase Agreement
(the “Purchase Agreement”), dated as of February 11, 2009, entered into by and
among the Issuer, Particle Drilling Technologies, Inc., a Delaware corporation
and a subsidiary of the Issuer, the Purchasers named therein and LC Capital
Master Fund, Ltd., as Agent of the holders of securities issued thereunder.
Capitalized terms used herein but not defined herein have the meanings ascribed
to them in the Purchase Agreement.
 
1. Payments of Principal.  Except as otherwise provided in Section 3, all unpaid
principal, fees and accrued and unpaid Interest on this Note shall be due and
payable in full in cash on the earlier of (a) March 3, 2010 or (b) the
termination or abandonment of that certain agreement, dated as of December 2,
2008 entered into by and between the Issuer and Shell Exploration & Production
Co. (such date, the “Maturity Date”).
 
2. Interest.
 
(a) The Issuer promises to pay interest (“Interest”) on the unpaid principal
amount of this Note to the Holder, in the manner hereinafter provided, computed
on the basis of a 365- or 366-day year, as appropriate in light of the actual
number of days in any applicable calendar year, at the rate of TEN PERCENT
(10.0%) per annum (as adjusted from time to time as provided in this Section
2(a), the “Interest Rate”).  Notwithstanding the foregoing, if the Interest Rate
payable under this Note is limited by applicable Law, then the Interest Rate
shall be the lesser of (i) the rate provided for in this Note and (ii) the
maximum rate permitted by applicable Law.  Interest shall be payable quarterly
in arrears on the Maturity Date, on any other date that all principal amounts of
the Notes shall be due and payable, and on the last Business Day of each March,
June, September and December of each year, commencing on  March 31, 2009 (each
date upon which interest shall be so payable, an “Interest Payment Date”).
Interest shall accrue from the most recent Interest Payment Date or, if no
Interest Payment Date has yet occurred, from the date on which this Note was
issued.
 
(b) On each Interest Payment Date, the outstanding principal amount of this Note
shall be automatically increased by the amount of Interest to be paid on such
Interest Payment Date, which Interest shall be payable in arrears.  If the
payment of Interest by addition to the principal amount of this Note in the
manner set forth in the immediately preceding sentence shall for any reason be
prohibited by applicable Law on any Interest Payment Date, the Issuer shall
instead deliver to the Holder an additional promissory note (a “PIK Note”),
containing substantially the same terms and conditions as are set forth herein,
in an aggregate principal amount equal to the Interest due on this Note as of
such Interest Payment Date.
 
3. Redemption.  This Note is subject to prepayment at the option of the Issuer
at the times and on the terms specified in Section 4 of the Purchase Agreement,
but not otherwise.
 
4. Payment Terms.
 
(a) All payments of principal of, and cash Interest upon, this Note shall be
made by the Issuer to the Holder in immediately available lawful money of the
United States by wire transfer to the account or accounts designated by the
Holder from time to time.  All payments under this Note shall be made without
withholding, defense, set-off, counterclaim or other deduction.
 
(b) Payments, redemptions and prepayments made to the Holder by the Issuer
hereunder shall be applied first to expenses recoverable under Section 14.01 of
the Purchase Agreement, then to accrued Interest and then to principal.
 
5. Events of Default.  Upon the occurrence of any Event of Default specified in
Section 11.05 of the Purchase Agreement, the principal amount of this Note,
together with any Interest thereon, shall automatically become immediately due
and payable, without presentment, demand, notice, protest or other requirements
of any kind (all of which are hereby expressly waived by the Issuer).  Upon the
occurrence and during the continuance of any other Event of Default specified in
Section 11 of the Purchase Agreement, the Holder may, by written notice to the
Issuer, declare the principal amount of this Note together with any Interest
thereon to be due and payable, and the principal amount of this Note together
with any such Interest shall thereupon immediately become due and payable
without presentment, further notice, protest or other requirements of any kind
(all of which are hereby expressly waived by the Issuer).  Following any such
demand, the Issuer shall immediately pay to the Holder all amounts due and
payable with respect to this Note.
 
6. Security; Ranking; Relationship to Operative Agreements.
 
(a) This Note is a senior secured obligation of the Issuer, secured by a first
lien perfected security interest in all of the assets and property of the Issuer
as provided in the Security Documents.
 
(b) This Note shall in all respects rank pari passu with all other Notes issued
pursuant to the Purchase Agreement and all Notes issued upon transfer of or
exchange for this Note and such other Notes and shall rank senior in right of
payment to all other Indebtedness of the Issuer.
 
(c) This Note is entitled to the benefits provided by the Purchase Agreement and
the Security Documents.
 
7. Amendments; Waivers.  This Note may not be changed, modified or terminated
orally, but only by an agreement in writing signed by the Issuer and the Holder
or any subsequent holder hereof.              
 
8. Transfer; Registration of Transfer and Exchange; Transfer Notes.  The Holder
may sell, assign, transfer or otherwise dispose of this Note (or any portion
thereof), subject to compliance by the Holder of applicable law.
 
9. Governing Law.
 
(a) THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE
CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW
YORK.  ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS NOTE MAY BE BROUGHT
IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN
DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS NOTE, THE ISSUER
HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY
AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE ISSUER
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE ISSUER AT ITS ADDRESS SET
FORTH BELOW ITS SIGNATURE BELOW, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER
SUCH MAILING.  NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT UNDER THIS
AGREEMENT, THE HOLDER OF ANY NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED
BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY
OR ANY OF ITS SUBSIDIARIES IN ANY OTHER JURISDICTION.
 
(b) THE ISSUER HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR
PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS NOTE BROUGHT IN THE COURTS
REFERRED TO IN CLAUSE (a) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES
NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING
BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
 
(c) THE ISSUER HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS NOTE OR
THE TRANSACTIONS CONTEMPLATED HEREBY.
 
[Remainder of page intentionally left blank - Signature pages follow]
 

 
 
 

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IN WITNESS WHEREOF, the Issuer has caused this Note to be executed and delivered
by its duly authorized officers as of the date and year and at the place first
above written.
 

PARTICLE DRILLING TECHNOLOGIES, INC.

 
By:
/s/ Jim B. Terry__________________

 
Name:
Jim B. Terry

 
Title:
Chief Executive Officer

 
 
 

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