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Exhibit 10.9
 
SECURED CONVERTIBLE PROMISSORY NOTE
 
Effective Date: March 5, 2015
U.S. $350,000.00

 
FOR VALUE RECEIVED, Hydrocarb Energy Corporation, a Nevada corporation
(“Borrower”), promises to pay to Typenex Co-Investment, LLC, a Utah limited
liability company, or its successors or assigns (“Lender”), $350,000.00 and any
interest, fees, charges, and late fees on the date that is ten (10) months after
the Purchase Price Date (as defined below) (the “Maturity Date”) in accordance
with the terms set forth herein and to pay interest on the Outstanding Balance
at the rate of ten percent (10%) per annum from the Purchase Price Date until
the same is paid in full. This Secured Convertible Promissory Note (this “Note”)
is issued and made effective as of March 5, 2015 (the “Effective Date”). This
Note is issued pursuant to that certain Securities Purchase Agreement dated
March 5, 2015, as the same may be amended from time to time (the “Purchase
Agreement”), by and between Borrower and Lender. All interest calculations
hereunder shall be computed on the basis of a 360-day year comprised of twelve
(12) thirty (30) day months, shall compound daily and shall be payable in
accordance with the terms of this Note. Certain capitalized terms used herein
are defined in Attachment 1 attached hereto and incorporated herein by this
reference.
 
This Note carries an OID of $45,000.00. In addition, Borrower agrees to pay
$5,000.00 to Lender to cover Lender’s legal fees, accounting costs, due
diligence, monitoring and other transaction costs incurred in connection with
the purchase and sale of this Note (the “Transaction Expense Amount”), all of
which amount is included in the initial principal balance of this Note. The
purchase price for this Note and the Warrant (as defined in the Purchase
Agreement) shall be $300,000.00 (the “Purchase Price”), computed as follows:
$350,000.00 original principal balance, less the OID, less the Transaction
Expense Amount. The Purchase Price shall be payable by Lender by wire transfer
of immediately available funds.
 
1.            Payment; Prepayment. Provided there is an Outstanding Balance, on
each Installment Date (as defined below), Borrower shall pay to Lender an amount
equal to the Installment Amount (as defined below) due on such Installment Date
in accordance with Section 8. All payments owing hereunder shall be in lawful
money of the United States of America or Conversion Shares (as defined below),
as provided for herein, and delivered to Lender at the address furnished to
Borrower for that purpose. All payments shall be applied first to (a) costs of
collection, if any, then to (b) fees and charges, if any, then to (c) accrued
and unpaid interest, and thereafter, to (d) principal. Notwithstanding the
foregoing, so long as Borrower has not received a Lender Conversion Notice (as
defined below) or an Installment Notice (as defined below) from Lender where the
applicable Conversion Shares have not yet been delivered and so long as no Event
of Default has occurred since the Effective Date (whether declared by Lender or
undeclared), then Borrower shall have the right, exercisable on not less than
five (5) Trading Days prior written notice to Lender to prepay the Outstanding
Balance of this Note, in full, in accordance with this Section 1. Any notice of
prepayment hereunder (an “Optional Prepayment Notice”) shall be delivered to
Lender at its registered address and shall state: (y) that Borrower is
exercising its right to prepay this Note, and (z) the date of prepayment, which
shall be not less than five (5) Trading Days from the date of the Optional
Prepayment Notice. On the date fixed for prepayment (the “Optional Prepayment
Date”), Borrower shall make payment of the Optional Prepayment Amount (as
defined below) to or upon the order of Lender as may be specified by Lender in
writing to Borrower. If Borrower exercises its right to prepay this Note,
Borrower shall make payment to Lender of an amount in cash (the “Optional
Prepayment Amount”) equal to 125% multiplied by the then Outstanding Balance of
this Note. In the event Borrower delivers the Optional Prepayment Amount to
Lender prior to the Optional Prepayment Date or without delivering an Optional
Prepayment Notice to Lender as set forth herein without Lender’s prior written
consent, the Optional Prepayment Amount shall not be deemed to have been paid to
Lender until the Optional Prepayment Date. Moreover, in such event the Optional
Prepayment Liquidated Damages Amount will automatically be added to the
Outstanding Balance of this Note on the day Borrower delivers the Optional
Prepayment Amount to Lender. In the event Borrower delivers the Optional
Prepayment Amount without an Optional Prepayment Notice, then the Optional
Prepayment Date will be deemed to be the date that is five (5) Trading Days from
the date that the Optional Prepayment Amount was delivered to Lender. In
addition, if Borrower delivers an Optional Prepayment Notice and fails to pay
the Optional Prepayment Amount due to Lender within two (2) Trading Days
following the Optional Prepayment Date, Borrower shall forever forfeit its right
to prepay this Note.
 

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2.            Security. This Note is secured by CW Navigation, Inc.’s pledge of
the Collateral Shares (as defined in the Purchase Agreement) as more
specifically set forth in the Pledge Agreement (as defined in the Purchase
Agreement), all the terms and conditions of which are hereby incorporated into
and made a part of this Note.
 
3.            Lender Optional Conversion.
 
3.1.            Lender Conversion Price. Subject to adjustment as set forth in
this Note, the conversion price for each Lender Conversion (as defined below)
shall be $2.25 (the “Lender Conversion Price”). However, in the event the Market
Capitalization falls below $20,000,000.00 at any time, then in such event (i)
the Lender Conversion Price for all Lender Conversions occurring after the first
date of such occurrence shall equal the lower of the Lender Conversion Price and
the Market Price as of any applicable date of Conversion, and (ii) the true-up
provisions of Section 11 below shall apply to all Lender Conversions that occur
after the first date the Market Capitalization falls below $20,000,000.00,
provided that all references to the “Installment Notice” in Section 11 shall be
replaced with references to a “Lender Conversion Notice” for purposes of this
Section 3.1, all references to “Installment Conversion Shares” in Section 11
shall be replaced with references to “Lender Conversion Shares” for purposes of
this Section 3.1, and all references to the “Installment Conversion Price” in
Section 11 shall be replaced with references to the “Lender Conversion Price”
for purposes of this Section 3.1.
 
3.2.            Lender Conversions. Lender has the right at any time after the
Purchase Price Date until the Outstanding Balance has been paid in full,
including without limitation (i) until any Optional Prepayment Date (even if
Lender has received an Optional Prepayment Notice) or at any time thereafter
with respect to any amount that is not prepaid, and (ii) during or after any
Fundamental Default Measuring Period, at its election, to convert (each instance
of conversion is referred to herein as a “Lender Conversion”) all or any part of
the Outstanding Balance into shares (“Lender Conversion Shares”) of fully paid
and non-assessable common stock, $0.001 par value per share (“Common Stock”), of
Borrower as per the following conversion formula: the number of Lender
Conversion Shares equals the amount being converted (the “Conversion Amount”)
divided by the Lender Conversion Price. Conversion notices in the form attached
hereto as Exhibit A (each, a “Lender Conversion Notice”) may be effectively
delivered to Borrower by any method of Lender’s choice (including but not
limited to facsimile, email, mail, overnight courier, or personal delivery), and
all Lender Conversions shall be cashless and not require further payment from
Lender. Borrower shall deliver the Lender Conversion Shares from any Lender
Conversion to Lender in accordance with Section 9 below.
 
3.3.            Application to Installments. Notwithstanding anything to the
contrary herein, including without limitation Section 8 hereof, Lender may, in
its sole discretion, apply all or any portion of any Lender Conversion toward
any Installment Conversion (as defined below), even if such Installment
Conversion is pending, as determined in Lender’s sole discretion, by delivering
written notice of such election (which notice may be included as part of the
applicable Lender Conversion Notice) to Borrower at any date on or prior to the
applicable Installment Date. In such event, Borrower may not elect to allocate
such portion of the Installment Amount being paid pursuant to this Section 3.3
in the manner prescribed in Section 8.3; rather, Borrower must reduce the
applicable Installment Amount by the Conversion Amount described in this Section
3.3.
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4.            Defaults and Remedies.
 
4.1.            Defaults. The occurrence of any of the following events shall be
an event of default under this Note (each, an “Event of Default”); provided,
however, that the occurrence of an event described in Section 4.1(i) shall not
be considered an Event of Default if such event is cured within five (5) Trading
Days of its occurrence and the occurrence of any event described in Section
4.1(iii) – (xvii) shall not be considered an Event of Default if such event is
cured within fifteen (15) Trading Days of its occurrence: (i) Borrower shall
fail to pay any principal, interest, fees, charges, or any other amount when due
and payable hereunder; or (ii) Borrower shall fail to deliver any Lender
Conversion Shares in accordance with the terms hereof; or (iii) Borrower shall
fail to deliver any Installment Conversion Shares (as defined below) or True-Up
Shares (as defined below) in accordance with the terms hereof; or (iv) a
receiver, trustee or other similar official shall be appointed over Borrower or
a material part of its assets and such appointment shall remain uncontested for
twenty (20) days or shall not be dismissed or discharged within sixty (60) days;
or (v) Borrower shall become insolvent or generally fails to pay, or admits in
writing its inability to pay, its debts as they become due, subject to
applicable grace periods, if any; or (vi) Borrower shall make a general
assignment for the benefit of creditors; or (vii) Borrower shall file a petition
for relief under any bankruptcy, insolvency or similar law (domestic or
foreign); or (viii) an involuntary proceeding shall be commenced or filed
against Borrower; or (ix) Borrower shall default or otherwise fail to observe or
perform any covenant, obligation, condition or agreement of Borrower contained
herein or in any other Transaction Document, other than those specifically set
forth in this Section 4.1; or (x) Borrower shall become delinquent in its filing
requirements as a fully-reporting issuer registered with the SEC or shall fail
to timely file all required quarterly and annual reports and any other filings
that are necessary to enable Lender to sell Conversion Shares or True-Up Shares
pursuant to Rule 144; or (xi) any representation, warranty or other statement
made or furnished by or on behalf of Borrower to Lender herein, in any
Transaction Document, or otherwise in connection with the issuance of this Note
shall be false, incorrect, incomplete or misleading in any material respect when
made or furnished; or (xii) the occurrence of a Fundamental Transaction without
Lender’s prior written consent; or (xiii) Borrower shall fail to maintain the
Share Reserve as required under the Purchase Agreement; or (xiv) Borrower
effectuates a reverse split of its Common Stock without twenty (20) Trading Days
prior written notice to Lender; or (xv) any money judgment, writ or similar
process shall be entered or filed against Borrower or any subsidiary of Borrower
or any of its property or other assets for more than $500,000.00, and shall
remain unvacated, unbonded or unstayed for a period of twenty (20) calendar days
unless otherwise consented to by Lender; or (xvi) Borrower shall fail to deliver
to Lender original signature pages to all Transaction Documents within five (5)
Trading Days of the Purchase Price Date; or (xvii) Borrower shall fail to be
DWAC Eligible; or (xviii) the value (determined using the Market Price (for
purposes of this reference only, as defined in the Pledge Agreement)) of the
Collateral Shares is less than the Required Market Value (as defined in the
Pledge Agreement) on any Trading Day.
 
4.2.            Remedies. Upon the occurrence of any Event of Default, Borrower
shall within one (1) Trading Day deliver written notice thereof via facsimile,
email or reputable overnight courier (with next day delivery specified) (an
“Event of Default Notice”) to Lender. At any time and from time to time after
the earlier of Lender’s receipt of an Event of Default Notice and Lender
becoming aware of the occurrence of any Event of Default, Lender may accelerate
this Note by written notice to Borrower, with the Outstanding Balance becoming
immediately due and payable in cash at the Mandatory Default Amount (as defined
hereafter). Notwithstanding the foregoing, at any time following the occurrence
of any Event of Default, Lender may, at its option, elect to increase the
Outstanding Balance by applying the Default Effect (as defined below) (subject
to the limitation set forth below) via written notice to Borrower without
accelerating the Outstanding Balance, in which event the Outstanding Balance
shall be increased as of the date of the occurrence of the applicable Event of
Default pursuant to the Default Effect, but the Outstanding Balance shall not be
immediately due and payable unless so declared by Lender (for the avoidance of
doubt, if Lender elects to apply the Default Effect pursuant to this sentence,
it shall reserve the right to declare the Outstanding Balance immediately due
and payable at any time and no such election by Lender shall be deemed to be a
waiver of its right to declare the Outstanding Balance immediately due and
payable as set forth herein unless otherwise agreed to by Lender in writing).
Notwithstanding the foregoing, upon the occurrence of any Event of Default
described in clauses (iv), (v), (vi), (vii) or (viii) of Section 4.1, the
Outstanding Balance as of the date of acceleration shall become immediately and
automatically due and payable in cash at the Mandatory Default Amount, without
any written notice required by Lender. At any time following the occurrence of
any Event of Default, upon written notice given by Lender to Borrower, interest
shall accrue on the Outstanding Balance beginning on the date the applicable
Event of Default occurred at an interest rate equal to the lesser of 22% per
annum or the maximum rate permitted under applicable law (“Default Interest”);
provided, however, that no Default Interest shall accrue during the Fundamental
Default Measuring Period (as defined below). Additionally, following the
occurrence of any Event of Default, Borrower may, at its option, pay any Lender
Conversion in cash instead of Lender Conversion Shares by paying to Lender on or
before the applicable Delivery Date (as defined below) a cash amount equal to
the number of Lender Conversion Shares set forth in the applicable Lender
Conversion Notice multiplied by the highest intra-day trading price of the
Common Stock that occurs during the period beginning on the date the applicable
Event of Default occurred and ending on the date of the applicable Lender
Conversion Notice. In connection with acceleration described herein, Lender need
not provide, and Borrower hereby waives, any presentment, demand, protest or
other notice of any kind, and Lender may immediately and without expiration of
any grace period enforce any and all of its rights and remedies hereunder and
all other remedies available to it under applicable law. Such acceleration may
be rescinded and annulled by Lender at any time prior to payment hereunder and
Lender shall have all rights as a holder of the Note until such time, if any, as
Lender receives full payment pursuant to this Section 4.2. No such rescission or
annulment shall affect any subsequent Event of Default or impair any right
consequent thereon. Nothing herein shall limit Lender’s right to pursue any
other remedies available to it at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief with
respect to Borrower’s failure to timely deliver Conversion Shares upon
Conversion of the Notes as required pursuant to the terms hereof.
 
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4.3.            Fundamental Default Remedies. Notwithstanding anything to the
contrary herein, in addition to all other remedies set forth herein, the
Fundamental Liquidated Damages Amount shall be added to the Outstanding Balance
upon Lender’s delivery to Borrower of a notice (which notice Lender may deliver
to Borrower at any time following the occurrence of a Fundamental Default)
setting forth its election to declare a Fundamental Default and the Fundamental
Liquidated Damages Amount that will be added to the Outstanding Balance.
 
4.4.            Certain Additional Rights. Notwithstanding anything to the
contrary herein, in the event Borrower fails to make any payment or otherwise to
deliver any Conversion Shares as and when required under this Note, then (i) the
Lender Conversion Price for all Lender Conversions occurring after the date of
such failure to pay shall equal the lower of the Lender Conversion Price
applicable to any Lender Conversion and the Market Price as of any applicable
date of Conversion, and (ii) the true-up provisions of Section 11 below shall
apply to all Lender Conversions that occur after the date of such failure to
pay, provided that all references to the “Installment Notice” in Section 11
shall be replaced with references to a “Lender Conversion Notice” for purposes
of this Section 4.4, all references to “Installment Conversion Shares” in
Section 11 shall be replaced with references to “Lender Conversion Shares” for
purposes of this Section 4.4, and all references to the “Installment Conversion
Price” in Section 11 shall be replaced with references to the “Lender Conversion
Price” for purposes of this Section 4.4.
 
4.5.            Cross Default. An uncured breach or default by Borrower of any
covenant or other term or condition contained in any Other Agreements (as
defined below) shall, at the option of Lender, be considered an Event of Default
under this Note, in which event Lender shall be entitled (but in no event
required) to apply all rights and remedies of Lender under the terms of this
Note. For the avoidance of doubt, all existing and future loan transactions
between Borrower and Lender and their respective affiliates will be
cross-defaulted with each other loan transaction and with all other existing and
future debt of Borrower to Lender.
 
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5.            Unconditional Obligation; No Offset. Borrower acknowledges that
this Note is an unconditional, valid, binding and enforceable obligation of
Borrower not subject to offset, deduction or counterclaim of any kind. Borrower
hereby waives any rights of offset it now has or may have hereafter against
Lender, its successors and assigns, and agrees to make the payments or
conversions called for herein in accordance with the terms of this Note.
 
6.            Waiver. No waiver of any provision of this Note shall be effective
unless it is in the form of a writing signed by the party granting the waiver.
No waiver of any provision or consent to any prohibited action shall constitute
a waiver of any other provision or consent to any other prohibited action,
whether or not similar. No waiver or consent shall constitute a continuing
waiver or consent or commit a party to provide a waiver or consent in the future
except to the extent specifically set forth in writing.
 
7.            Rights Upon Issuance of Securities.
 
7.1.            Subsequent Equity Sales. Except with respect to Excluded
Securities, if Borrower or any subsidiary thereof, as applicable, at any time
this Note is outstanding, shall sell or issue any Common Stock to Lender or any
third party for a price that is less than the then effective Lender Conversion
Price, then such Lender Conversion Price shall be automatically reduced and only
reduced to equal such lower issuance price. Except with respect to Excluded
Securities, if Borrower or any subsidiary thereof, as applicable, at any time
this Note is outstanding, shall sell or grant any option to any party to
purchase, or sell or grant any right to reprice, or issue any Common Stock,
preferred shares convertible into Common Stock, or debt, warrants, options or
other instruments or securities to Lender or any third party which are
convertible into or exercisable for shares of Common Stock (together herein
referred to as “Equity Securities”), including without limitation any Deemed
Issuance, at an effective price per share less than the then effective Lender
Conversion Price (such issuance, together with any sale of Common Stock, is
referred to herein as a “Dilutive Issuance”), then, the Lender Conversion Price
shall be automatically reduced and only reduced to equal such lower effective
price per share. If the holder of any Equity Securities so issued shall at any
time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to
warrants, options, or rights per share which are issued in connection with such
Dilutive Issuance, be entitled to receive shares of Common Stock at an effective
price per share that is less than the Lender Conversion Price, such issuance
shall be deemed to have occurred for less than the Lender Conversion Price on
the date of such Dilutive Issuance, and the then effective Lender Conversion
Price shall be reduced and only reduced to equal such lower effective price per
share. Such adjustments described above to the Lender Conversion Price shall be
permanent (subject to additional adjustments under this section), and shall be
made whenever such Common Stock or Equity Securities are issued. Borrower shall
notify Lender, in writing, no later than the Trading Day following the issuance
of any Common Stock or Equity Securities subject to this Section 7.1, indicating
therein the applicable issuance price, or applicable reset price, exchange
price, conversion price, or other pricing terms (such notice, the
“Dilutive Issuance Notice”). For purposes of clarification, whether or not
Borrower provides a Dilutive Issuance Notice pursuant to this Section 7.1, upon
the occurrence of any Dilutive Issuance, on the date of such Dilutive Issuance
the Lender Conversion Price shall be lowered to equal the applicable effective
price per share regardless of whether Borrower or Lender accurately refers to
such lower effective price per share in any Installment Notice or Lender
Conversion Notice.
 
7.2.            Adjustment of Lender Conversion Price upon Subdivision or
Combination of Common Stock. Without limiting any provision hereof, if Borrower
at any time on or after the Effective Date subdivides (by any stock split, stock
dividend, recapitalization or otherwise) one or more classes of its outstanding
shares of Common Stock into a greater number of shares, the Lender Conversion
Price in effect immediately prior to such subdivision will be proportionately
reduced. Without limiting any provision hereof, if Borrower at any time on or
after the Effective Date combines (by combination, reverse stock split or
otherwise) one or more classes of its outstanding shares of Common Stock into a
smaller number of shares, the Lender Conversion Price in effect immediately
prior to such combination will be proportionately increased. Any adjustment
pursuant to this Section 7.2 shall become effective immediately after the
effective date of such subdivision or combination. If any event requiring an
adjustment under this Section 7.2 occurs during the period that a Lender
Conversion Price is calculated hereunder, then the calculation of such Lender
Conversion Price shall be adjusted appropriately to reflect such event.
 
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7.3.            Other Events. In the event that Borrower (or any subsidiary)
shall take any action to which the provisions hereof are not strictly
applicable, or, if applicable, would not operate to protect Lender from dilution
or if any event occurs of the type contemplated by the provisions of this
Section 7 but not expressly provided for by such provisions (including, without
limitation, the granting of stock appreciation rights, phantom stock rights or
other rights with equity features), then Borrower’s board of directors shall in
good faith determine and implement an appropriate adjustment in the Lender
Conversion Price so as to protect the rights of Lender, provided that no such
adjustment pursuant to this Section 7.3 will increase the Lender Conversion
Price as otherwise determined pursuant to this Section 7, provided further that
if Lender does not accept such adjustments as appropriately protecting its
interests hereunder against such dilution, then Borrower’s board of directors
and Lender shall agree, in good faith, upon an independent investment bank of
nationally recognized standing to make such appropriate adjustments, whose
determination shall be final and binding and whose fees and expenses shall be
borne by Borrower.
 
8.            Borrower Installments.
 
8.1.            Installment Conversion Price. Subject to the adjustments set
forth herein, the conversion price for each Installment Conversion (the
“Installment Conversion Price”) shall be the lesser of (i) the Lender Conversion
Price, and (ii) the Market Price.
 
8.2.            Installment Conversions. Beginning on the date that is six (6)
months after the Purchase Price Date and on the same day of each month
thereafter until the Maturity Date (each, an “Installment Date”), if paying in
cash, Borrower shall pay to Lender the applicable Installment Amount due on the
applicable Installment Date subject to the provisions of this Section 8, and if
paying in Installment Conversion Shares, Borrower shall deliver such Installment
Conversion Shares on or before the applicable Delivery Date. Payments of each
Installment Amount may be made (a) in cash, or (b) by converting such
Installment Amount into shares of Common Stock (“Installment Conversion Shares”,
and together with the Lender Conversion Shares, the “Conversion Shares”) in
accordance with this Section 8 (each, an “Installment Conversion”, and together
with Lender Conversions, a “Conversion”) per the following formula: the number
of Installment Conversion Shares equals the portion of the applicable
Installment Amount being converted divided by the Installment Conversion Price,
or (c) by any combination of the foregoing, so long as the cash is delivered to
Lender on the applicable Installment Date and the Installment Conversion Shares
are delivered to Lender on or before the applicable Delivery Date.
Notwithstanding the foregoing, Borrower will not be entitled to elect an
Installment Conversion with respect to any portion of any applicable Installment
Amount and shall be required to pay the entire amount of such Installment Amount
in cash if on the applicable Installment Notice Due Date (defined below) there
is an Equity Conditions Failure, and such failure is not waived in writing by
Lender. Moreover, in the event Borrower desires to pay all or any portion of any
Installment Amount in cash, it must notify Lender in writing of such election
and the portion of the applicable Installment Amount it elects to pay in cash
not more than twenty-five (25) or less than fifteen (15) Trading Days prior to
the applicable Installment Date. If Borrower fails to so notify Lender, it shall
not be permitted to elect to pay any portion of such Installment Amount in cash
unless otherwise agreed to by Lender in writing or proposed by Lender in an
Installment Notice delivered by Lender to Borrower. Notwithstanding that failure
to repay this Note in full by the Maturity Date is an Event of Default, the
Installment Dates shall continue after the Maturity Date pursuant to this
Section 8 until the Outstanding Balance is repaid in full, provided that Lender
shall, in Lender’s sole discretion, determine the Installment Amount for each
Installment Date after the Maturity Date.
 
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8.3.            Allocation of Installment Amounts. Subject to Section 8.2
regarding an Equity Conditions Failure, for each Installment Date (each, an
“Installment Notice Due Date”), Borrower may elect to allocate the amount of the
applicable Installment Amount between cash and via an Installment Conversion, by
email or fax delivery of a notice to Lender substantially in the form attached
hereto as Exhibit B (each, an “Installment Notice”), provided, that to be
effective, each applicable Installment Notice must be received by Lender not
more than twenty-five (25) or less than fifteen (15) Trading Days prior to the
applicable Installment Notice Due Date. If Lender has not received an
Installment Notice within such time period, then Lender may prepare the
Installment Notice and deliver the same to Borrower by fax or email. Following
its receipt of such Installment Notice, Borrower may either ratify Lender’s
proposed allocation in the applicable Installment Notice or elect to change the
allocation by written notice to Lender by email or fax on or before 12:00 p.m.
New York time on the applicable Installment Date, so long as the sum of the cash
payments and the amount of Installment Conversions equal the applicable
Installment Amount, provided that Lender must approve any increase to the
portion of the Installment Amount payable in cash. If Borrower fails to notify
Lender of its election to change the allocation prior to the deadline set forth
in the previous sentence (and seek approval to increase the amount payable in
cash), it shall be deemed to have ratified and accepted the allocation set forth
in the applicable Installment Notice prepared by Lender. If neither Borrower nor
Lender prepare and deliver to the other party an Installment Notice as outlined
above, then Borrower shall be deemed to have elected that the entire Installment
Amount be converted via an Installment Conversion. Borrower acknowledges and
agrees that regardless of which party prepares the applicable Installment
Notice, the amounts and calculations set forth thereon are subject to correction
or adjustment because of error, mistake, or any adjustment resulting from an
Event of Default or other adjustment permitted under the Transaction Documents
(an “Adjustment”). Furthermore, no error or mistake in the preparation of such
notices, or failure to apply any Adjustment that could have been applied prior
to the preparation of an Installment Notice may be deemed a waiver of Lender’s
right to enforce the terms of any Note, even if such error, mistake, or failure
to include an Adjustment arises from Lender’s own calculation. Borrower shall
deliver the Installment Conversion Shares from any Installment Conversion to
Lender in accordance with Section 9 below on or before each applicable
Installment Date.
 
9.            Method of Conversion Share Delivery. On or before the close of
business on the third (3rd) Trading Day following the Installment Date or the
third (3rd) Trading Day following the date of delivery of a Lender Conversion
Notice, as applicable (the “Delivery Date”), Borrower shall, provided it is DWAC
Eligible at such time, deliver or cause its transfer agent to deliver the
applicable Conversion Shares electronically via DWAC to the account designated
by Lender in the applicable Lender Conversion Notice or Installment Notice. If
Borrower is not DWAC Eligible, it shall deliver to Lender or its broker (as
designated in the Lender Conversion Notice or Installment Notice, as
applicable), via reputable overnight courier, a certificate representing the
number of shares of Common Stock equal to the number of Conversion Shares to
which Lender shall be entitled, registered in the name of Lender or its
designee. For the avoidance of doubt, Borrower has not met its obligation to
deliver Conversion Shares by the Delivery Date unless Lender or its broker, as
applicable, has actually received the certificate representing the applicable
Conversion Shares no later than the close of business on the relevant Delivery
Date pursuant to the terms set forth above.
 
10.            Conversion Delays. If Borrower fails to deliver Conversion Shares
or True-Up Shares in accordance with the timeframes stated in Sections 9 or 11,
as applicable, Lender, at any time prior to selling all of those Conversion
Shares or True-Up Shares, as applicable, may rescind in whole or in part that
particular Conversion attributable to the unsold Conversion Shares or True-Up
Shares, with a corresponding increase to the Outstanding Balance (any returned
Conversion Amount will tack back to the Purchase Price Date for purposes of
determining the holding period under Rule 144). In addition, for each Lender
Conversion, in the event that Lender Conversion Shares are not delivered by the
fourth Trading Day (inclusive of the day of the Lender Conversion), a late fee
equal to the greater of (a) $500.00 per day and (b) 2% of the applicable Lender
Conversion Share Value rounded to the nearest multiple of $100.00 (but in any
event the cumulative amount of such late fees for each Lender Conversion shall
not exceed 200% of the applicable Lender Conversion Share Value) will be
assessed for each day after the third Trading Day (inclusive of the day of the
Lender Conversion) until Lender Conversion Share delivery is made; and such late
fee will be added to the Outstanding Balance (such fees, the “Conversion Delay
Late Fees”). For illustration purposes only, if Lender delivers a Lender
Conversion Notice to Borrower pursuant to which Borrower is required to deliver
100,000 Lender Conversion Shares to Lender and on the Delivery Date such Lender
Conversion Shares have a Lender Conversion Share Value of $20,000.00 (assuming a
Closing Trade Price on the Delivery Date of $0.20 per share of Common Stock),
then in such event a Conversion Delay Late Fee in the amount of $500.00 per day
(the greater of $500.00 per day and $20,000.00 multiplied by 2%, which is
$400.00) would be added to the Outstanding Balance of the Note until such Lender
Conversion Shares are delivered to Lender. For purposes of this example, if the
Lender Conversion Shares are delivered to Lender twenty (20) days after the
applicable Delivery Date, the total Conversion Delay Late Fees that would be
added to the Outstanding Balance would be $10,000.00 (20 days multiplied by
$500.00 per day). If the Lender Conversion Shares are delivered to Lender one
hundred (100) days after the applicable Delivery Date, the total Conversion
Delay Late Fees that would be added to the Outstanding Balance would be
$40,000.00 (100 days multiplied by $500.00 per day, but capped at 200% of the
Lender Conversion Share Value).
 
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11.         True-Up. On the date that is twenty (20) Trading Days (a “True-Up
Date”) from each date that Installment Conversion Shares by Borrower to Lender
become Free Trading, there shall be a true-up where Borrower shall deliver to
Lender additional Installment Conversion Shares (“True-Up Shares”) if the
Installment Conversion Price as of the True-Up Date is less than the Installment
Conversion Price used in the applicable Installment Notice. In such event,
Borrower shall deliver to Lender within three (3) Trading Days of the True-Up
Date (the “True-Up Share Delivery Date”) a number of True-Up Shares equal to the
difference between the number of Installment Conversion Shares that would have
been delivered to Lender on the True-Up Date based on the Installment Conversion
Price as of the True-Up Date and the number of Installment Conversion Shares
originally delivered to Lender pursuant to the applicable Installment Notice.
For the avoidance of doubt, if the Installment Conversion Price as of the
True-Up Date is higher than the Installment Conversion Price set forth in the
applicable Installment Notice, then Borrower shall have no obligation to deliver
True-Up Shares to Lender, nor shall Lender have any obligation to return any
excess Installment Conversion Shares to Borrower under any circumstance. For the
convenience of Borrower only, Lender may, in its sole discretion, deliver to
Borrower a notice (pursuant to a form of notice substantially in the form
attached hereto as Exhibit C) informing Borrower of the number of True-Up Shares
it is obligated to deliver to Lender as of any given True-Up Date, provided that
if Lender does not deliver any such notice Borrower shall not be relieved of its
obligation to deliver True-Up Shares pursuant to this Section 11.
Notwithstanding the foregoing, if Borrower fails to deliver any required True-Up
Shares on or before any applicable True-Up Share Delivery Date, then in such
event the Outstanding Balance of this Note will automatically increase (under
Lender’s and Borrower’s expectations that any such increase will tack back to
the Purchase Price Date for purposes of determining the holding period under
Rule 144) by a sum equal to the number of True-Up Shares deliverable as of the
applicable True-Up Date multiplied by the Market Price for the Common Stock as
of the applicable True-Up Date.
 
12.         Ownership Limitation. Notwithstanding anything to the contrary
contained in this Note or the other Transaction Documents, if at any time Lender
shall or would be issued shares of Common Stock under any of the Transaction
Documents, but such issuance would cause Lender (together with its affiliates)
to beneficially own (including without limitation as a result of any foreclosure
on the Collateral Shares under the Pledge Agreement) a number of shares
exceeding 4.99% of the number of shares of Common Stock outstanding on such date
(including for such purpose the shares of Common Stock issuable upon such
issuance) (the “Maximum Percentage”), then Borrower must not issue to Lender
shares of the Common Stock which would exceed the Maximum Percentage. For
purposes of this section, beneficial ownership of Common Stock will be
determined pursuant to Section 13(d) of the 1934 Act. The shares of Common Stock
issuable to Lender that would cause the Maximum Percentage to be exceeded are
referred to herein as the “Ownership Limitation Shares”. Borrower will reserve
the Ownership Limitation Shares for the exclusive benefit of Lender. From time
to time, Lender may notify Borrower in writing of the number of the Ownership
Limitation Shares that may be issued to Lender without causing Lender to exceed
the Maximum Percentage. Upon receipt of such notice, Borrower shall be
unconditionally obligated to immediately issue such designated shares to Lender,
with a corresponding reduction in the number of the Ownership Limitation Shares.
Notwithstanding the forgoing, the term “4.99%” above shall be replaced with
“9.99%” at such time as the Market Capitalization is less than $10,000,000.00.
Notwithstanding any other provision contained herein, if the term “4.99%” is
replaced with “9.99%” pursuant to the preceding sentence, such increase to
“9.99%” shall remain at 9.99% until increased, decreased or waived by Lender as
set forth below. By written notice to Borrower, Lender may increase, decrease or
waive the Maximum Percentage as to itself but any such waiver will not be
effective until the 61st day after delivery thereof. The foregoing 61-day notice
requirement is enforceable, unconditional and non-waivable and shall apply to
all affiliates and assigns of Lender.
 
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13.         Payment of Collection Costs. If this Note is placed in the hands of
an attorney for collection or enforcement prior to commencing arbitration or
legal proceedings, or is collected or enforced through any arbitration or legal
proceeding, or Lender otherwise takes action to collect amounts due under this
Note or to enforce the provisions of this Note, then Borrower shall pay the
costs incurred by Lender for such collection, enforcement or action including,
without limitation, attorneys’ fees and disbursements. Borrower also agrees to
pay for any costs, fees or charges of its transfer agent that are charged to
Lender pursuant to any Conversion or issuance of shares pursuant to this Note.
 
14.        Opinion of Counsel. In the event that an opinion of counsel is needed
for any matter related to this Note, Lender has the right to have any such
opinion provided by its counsel. Lender also has the right to have any such
opinion provided by Borrower’s counsel.
 
15.        Governing Law. This Note shall be construed and enforced in
accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Note shall be governed by, the internal
laws of the State of Utah, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of Utah or any other
jurisdictions) that would cause the application of the laws of any jurisdictions
other than the State of Utah. The provisions set forth in the Purchase Agreement
to determine the proper venue for any disputes are incorporated herein by this
reference.
 
16.         Resolution of Disputes.
 
16.1.         Arbitration of Disputes. By its acceptance of this Note, each
party agrees to be bound by the Arbitration Provisions (as defined in the
Purchase Agreement) set forth as an exhibit to the Purchase Agreement.
 
16.2.        Calculation Disputes. Notwithstanding the Arbitration Provisions,
in the case of a dispute as to any Calculations (as defined in the Purchase
Agreement), such dispute will be resolved in the manner set forth in the
Purchase Agreement.
 
17.         Cancellation. After repayment or conversion of the entire
Outstanding Balance (including without limitation delivery of True-Up Shares
pursuant to the payment of the final Installment Amount, if applicable), this
Note shall be deemed paid in full, shall automatically be deemed canceled, and
shall not be reissued.
 
18.         Amendments. The prior written consent of both parties hereto shall
be required for any change or amendment to this Note.
 
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19.         Assignments. Borrower may not assign this Note without the prior
written consent of Lender. This Note and any shares of Common Stock issued upon
conversion of this Note may be offered, sold, assigned or transferred by Lender
without the consent of Borrower.
 
20.         Time of the Essence. Time is expressly made of the essence with
respect to each and every provision of this Note and the documents and
instruments entered into in connection herewith.
 
21.         Notices. Whenever notice is required to be given under this Note,
unless otherwise provided herein, such notice shall be given in accordance with
the subsection of the Purchase Agreement titled “Notices.”
 
22.         Liquidated Damages. Lender and Borrower agree that in the event
Borrower fails to comply with any of the terms or provisions of this Note,
Lender’s damages would be uncertain and difficult (if not impossible) to
accurately estimate because of the parties’ inability to predict future interest
rates, future share prices, future trading volumes and other relevant factors.
Accordingly, Lender and Borrower agree that any fees, balance adjustments,
default interest or other charges assessed under this Note are not penalties but
instead are intended by the parties to be, and shall be deemed, liquidated
damages (under Lender’s and Borrower’s expectations that any such liquidated
damages will tack back to the Purchase Price Date for purposes of determining
the holding period under Rule 144).
 
[Remainder of page intentionally left blank; signature page follows]
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IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed as of the
Effective Date.
 

 
BORROWER:
 
Hydrocarb Energy Corporation
   
By:
/s/ Kent P. Watts
Name:
Kent P. Watts
Title:
CEO

 
ACKNOWLEDGED, ACCEPTED AND AGREED:
 
LENDER:
 
Typenex Co-Investment, LLC
     
By:
Red Cliffs Investments, Inc., its Manager
       
By:
/s/ John M. Fife    
John M. Fife, President

 
 
[Signature Page to Convertible Promissory Note]

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ATTACHMENT 1
DEFINITIONS

For purposes of this Note, the following terms shall have the following
meanings:
 
A1.            “Adjusted Outstanding Balance” means the Outstanding Balance of
this Note as of the date the applicable Fundamental Default occurred less any
Conversion Delay Late Fees included in such Outstanding Balance.
 
A2.            “Approved Stock Plan” means any stock option plan which has been
approved by the board of directors of Borrower, pursuant to which Borrower’s
securities may be issued to any employee, officer or director for services
provided to Borrower.
 
A3.            “Closing Bid Price” and “Closing Trade Price” means the last
closing bid price and last closing trade price, respectively, for the Common
Stock on its principal market, as reported by Bloomberg, or, if its principal
market begins to operate on an extended hours basis and does not designate the
closing bid price or the closing trade price (as the case may be) then the last
bid price or last trade price, respectively, of the Common Stock prior to
4:00:00 p.m., New York time, as reported by Bloomberg, or, if its principal
market is not the principal securities exchange or trading market for the Common
Stock, the last closing bid price or last trade price, respectively, of the
Common Stock on the principal securities exchange or trading market where the
Common Stock is listed or traded as reported by Bloomberg, or if the foregoing
do not apply, the last closing bid price or last trade price, respectively, of
the Common Stock in the over-the-counter market on the electronic bulletin board
for the Common Stock as reported by Bloomberg, or, if no closing bid price or
last trade price, respectively, is reported for the Common Stock by Bloomberg,
the average of the bid prices, or the ask prices, respectively, of any market
makers for the Common Stock as reported by OTC Markets Group, Inc., and any
successor thereto. If the Closing Bid Price or the Closing Trade Price cannot be
calculated for the Common Stock on a particular date on any of the foregoing
bases, the Closing Bid Price or the Closing Trade Price (as the case may be) of
the Common Stock on such date shall be the fair market value as mutually
determined by Lender and Borrower. If Lender and Borrower are unable to agree
upon the fair market value of the Common Stock, then such dispute shall be
resolved in accordance with the procedures in Section 16.2. All such
determinations shall be appropriately adjusted for any stock dividend, stock
split, stock combination or other similar transaction during such period.
 
A4.            “Conversion Factor” means 80%, subject to the following
adjustments. If at any time the average of the five (5) lowest Closing Bid
Prices in the twenty (20) Trading Days immediately preceding any date of
measurement is below $0.75, then in such event the then-current Conversion
Factor shall be reduced by 5% for all future Conversions (subject to other
reductions set forth in this section). Additionally, if at any time after the
Effective Date, Borrower is not DWAC Eligible, then the then-current Conversion
Factor will automatically be reduced by 5% for all future Conversions. If at any
time after the Effective Date, the Conversion Shares are not DTC Eligible, then
the then-current Conversion Factor will automatically be reduced by an
additional 5% for all future Conversions. Finally, in addition to the Default
Effect, if any Major Default occurs after the Effective Date, the Conversion
Factor shall automatically be reduced for all future Conversions by an
additional 5% for each of the first three (3) Major Defaults that occur after
the Effective Date (for the avoidance of doubt, each occurrence of any Major
Default shall be deemed to be a separate occurrence for purposes of the
foregoing reductions in Conversion Factor, even if the same Major Default occurs
three (3) separate times). For example, the first time Borrower is not DWAC
Eligible, the Conversion Factor for future Conversions thereafter will be
reduced from 80% to 75% for purposes of this example. Following such event, the
first time the Conversion Shares are no longer DTC Eligible, the Conversion
Factor for future Conversions thereafter will be reduced from 75% to 70% for
purposes of this example. If, thereafter, there are three (3) separate
occurrences of a Major Default pursuant to Section 4.1(iii), then for purposes
of this example the Conversion Factor would be reduced by 5% for the first such
occurrence, and so on for each of the second and third occurrences of such Major
Default.
 
A5.            “Deemed Issuance” means an issuance of Common Stock that shall be
deemed to have occurred on the latest possible permitted date pursuant to the
terms hereof or any applicable Warrant in the event Borrower fails to deliver
Conversion Shares as and when required pursuant to Sections 3 or 8 of the Note
or Warrant Shares (as defined in the Purchase Agreement) as and when required
pursuant to the Warrant. For the avoidance of doubt, if Borrower has elected or
is deemed under Section 8.3 to have elected to pay an Installment Amount in
Installment Conversion Shares and fails to deliver such Installment Conversion
Shares, such failure shall be considered a Deemed Issuance hereunder even if an
Equity Conditions Failure exists at that time or other relevant date of
determination.
 
Attachment 1 to Convertible Promissory Note, Page 1

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A6.            “Default Effect” means an amount calculated by multiplying the
Outstanding Balance as of the date the applicable Event of Default occurred by
(i) 15% for each occurrence of any Major Default, or (ii) 5% for each occurrence
of any Minor Default, and then adding the resulting product to the Outstanding
Balance as of the date the applicable Event of Default occurred, with the sum of
the foregoing then becoming the Outstanding Balance under this Note as of the
date the applicable Event of Default occurred; provided that the Default Effect
may only be applied three (3) times hereunder with respect to Major Defaults and
three (3) times hereunder with respect to Minor Defaults; and provided further
that the Default Effect shall not apply to any Event of Default pursuant to
Section 4.1(ii) hereof.
 
A7.            “DTC” means the Depository Trust Company.
 
A8.            “DTC Eligible” means, with respect to the Common Stock, that such
Common Stock is eligible to be deposited in certificate form at the DTC, cleared
and converted into electronic shares by the DTC and held in the name of the
clearing firm servicing Lender’s brokerage firm for the benefit of Lender.
 
A9.            “DTC/FAST Program” means the DTC’s Fast Automated Securities
Transfer program.
 
A10.          “DWAC” means the DTC’s Deposit/Withdrawal at Custodian system.
 
A11.          “DWAC Eligible” means that (i) Borrower’s Common Stock is eligible
at DTC for full services pursuant to DTC’s operational arrangements, including
without limitation transfer through DTC’s DWAC system, (ii) Borrower has been
approved (without revocation) by the DTC’s underwriting department, (iii)
Borrower’s transfer agent is approved as an agent in the DTC/FAST Program, (iv)
the Conversion Shares are otherwise eligible for delivery via DWAC; (v) Borrower
has previously delivered all Conversion Shares to Lender via DWAC; and (vi)
Borrower’s transfer agent does not have a policy prohibiting or limiting
delivery of the Conversion Shares via DWAC.
 
A12.          “Equity Conditions Failure” means that any of the following
conditions has not been satisfied during any applicable Equity Conditions
Measuring Period (as defined below): (i) with respect to the applicable date of
determination all of the Conversion Shares are freely tradable under Rule 144 or
without the need for registration under any applicable federal or state
securities laws (in each case, disregarding any limitation on conversion of this
Note); (ii) on each day during the period beginning one month prior to the
applicable date of determination and ending on and including the applicable date
of determination (the “Equity Conditions Measuring Period”), the Common Stock is
listed or designated for quotation (as applicable) on any of NYSE, NASDAQ,
OTCQX, or OTCQB (each, an “Eligible Market”) and shall not have been suspended
from trading on any such Eligible Market (other than suspensions of not more
than two (2) Trading Days and occurring prior to the applicable date of
determination due to business announcements by Borrower); (iii) on each day
during the Equity Conditions Measuring Period, Borrower shall have delivered all
shares of Common Stock issuable upon conversion of this Note on a timely basis
as set forth in Section 9 hereof and all other shares of capital stock required
to be delivered by Borrower on a timely basis as set forth in the other
Transaction Documents; (iv) any shares of Common Stock to be issued in
connection with the event requiring determination may be issued in full without
violating Section 12 hereof (Lender acknowledges that Borrower shall be entitled
to assume that this condition has been met for all purposes hereunder absent
written notice from Lender); (v) any shares of Common Stock to be issued in
connection with the event requiring determination may be issued in full without
violating the rules or regulations of the Eligible Market on which the Common
Stock is then listed or designated for quotation (as applicable); (vi) on each
day during the Equity Conditions Measuring Period, no public announcement of a
pending, proposed or intended Fundamental Transaction shall have occurred which
has not been abandoned, terminated or consummated; (vii) Borrower shall have no
knowledge of any fact that would reasonably be expected to cause any of the
Conversion Shares to not be freely tradable without the need for registration
under any applicable state securities laws (in each case, disregarding any
limitation on conversion of this Note); (viii) on each day during the Equity
Conditions Measuring Period, Borrower otherwise shall have been in material
compliance with each, and shall not have breached any, term, provision,
covenant, representation or warranty of any Transaction Document; (ix) without
limiting clause (viii) above, on each day during the Equity Conditions Measuring
Period, there shall not have occurred an Event of Default or an event that with
the passage of time or giving of notice would constitute an Event of Default;
(x) on each Installment Notice Due Date and each Installment Date, the average
and median daily dollar volume of the Common Stock on its principal market for
the previous twenty (20) Trading Days shall be greater than $20,000.00; (xi) the
ten (10) day average VWAP of the Common Stock is greater than $0.20, and (xii)
the Common Stock shall be DWAC Eligible as of each applicable Installment Notice
Due Date, Installment Date or other date of determination.
 
Attachment 1 to Convertible Promissory Note, Page 2

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A13.            “Excluded Securities” means any shares of Common Stock, options,
or convertible securities issued or issuable in connection with any Approved
Stock Plan; provided that the option term, exercise price or similar provisions
of any issuances pursuant to such Approved Stock Plan are not amended, modified
or changed on or after the Purchase Price Date.
 
A14.            “Free Trading” means that (a) the shares or certificate(s)
representing the applicable shares of Common Stock have been cleared and
approved for public resale by the compliance departments of Lender’s brokerage
firm and the clearing firm servicing such brokerage, and (b) such shares are
held in the name of the clearing firm servicing Lender’s brokerage firm and have
been deposited into such clearing firm’s account for the benefit of Lender.
 
A15.            “Fundamental Default” means that Borrower either fails to pay
the entire Outstanding Balance to Lender on or before the Maturity Date or fails
to pay the Mandatory Default Amount within three (3) Trading Days of the date
Lender delivers any notice of acceleration to Borrower pursuant to Section 4.2
of this Note.
 
A16.            “Fundamental Default Conversion Value” means the Adjusted
Outstanding Balance multiplied by the highest Fundamental Default Ratio that
occurs during the Fundamental Default Measuring Period.
 
A17.            “Fundamental Default Measuring Period” means a number of months
equal to the Outstanding Balance as of the date the Fundamental Default occurred
divided by the Installment Amount, with such number being rounded up to the next
whole month; provided, however, that if Borrower repays the entire Outstanding
Balance prior to the conclusion of the Fundamental Default Measuring Period, the
Fundamental Default Measuring Period shall end on the date of repayment. For
illustration purposes only, if the Outstanding Balance were equal to $125,000 as
of the date a Fundamental Default occurred and if the Installment Amount were
$28,500, then the Fundamental Default Measuring Period would equal five (5)
months calculated as follows: $125,000/$28,500 equals 4.386, rounded up to five
(5).
 
A18.            “Fundamental Default Ratio” means a ratio that will be
calculated on each Trading Day during the Fundamental Default Measuring Period
by dividing the Closing Trade Price for the Common Stock on a given Trading Day
by the Lender Conversion Price (as adjusted pursuant to the terms hereof) in
effect for such Trading Day.
 
A19.            “Fundamental Liquidated Damages Amount” means the greater of (i)
(a) the quotient of the Outstanding Balance on the date the Fundamental Default
occurred divided by the then-current Conversion Factor, minus (b) the
Outstanding Balance on the date the Fundamental Default occurred, or (ii) the
Fundamental Default Conversion Value.
 
A20.            “Fundamental Transaction” means that (i) (a) Borrower or any of
its subsidiaries shall, directly or indirectly, in one or more related
transactions, consolidate or merge with or into (whether or not Borrower or any
of its subsidiaries is the surviving corporation) any other person or entity, or
(b) Borrower or any of its subsidiaries shall, directly or indirectly, in one or
more related transactions, sell, lease, license, assign, transfer, convey or
otherwise dispose of all or substantially all of its respective properties or
assets to any other person or entity, or (c) Borrower or any of its subsidiaries
shall, directly or indirectly, in one or more related transactions, allow any
other person or entity to make a purchase, tender or exchange offer that is
accepted by the holders of more than 50% of the outstanding shares of voting
stock of Borrower (not including any shares of voting stock of Borrower held by
the person or persons making or party to, or associated or affiliated with the
persons or entities making or party to, such purchase, tender or exchange
offer), or (d) Borrower or any of its subsidiaries shall, directly or
indirectly, in one or more related transactions, consummate a stock or share
purchase agreement or other business combination (including, without limitation,
a reorganization, recapitalization, spin-off or scheme of arrangement) with any
other person or entity whereby such other person or entity acquires more than
50% of the outstanding shares of voting stock of Borrower (not including any
shares of voting stock of Borrower held by the other persons or entities making
or party to, or associated or affiliated with the other persons or entities
making or party to, such stock or share purchase agreement or other business
combination), or (e) Borrower or any of its subsidiaries shall, directly or
indirectly, in one or more related transactions, reorganize, recapitalize or
reclassify the Common Stock, other than an increase in the number of authorized
shares of Borrower’s Common Stock, or (ii) any “person” or “group” (as these
terms are used for purposes of Sections 13(d) and 14(d) of the 1934 Act and the
rules and regulations promulgated thereunder) is or shall become the “beneficial
owner” (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of
50% of the aggregate ordinary voting power represented by issued and outstanding
voting stock of Borrower.
 
A21.            “Installment Amount” means the greater of (i) $70,000.00
($350,000.00 ÷ 5), plus the sum of any accrued and unpaid interest as of the
applicable Installment Date and accrued, and unpaid late charges, if any, under
this Note as of the applicable Installment Date, and any other amounts accruing
or owing to Lender under this Note as of such Installment Date, and (ii) the
then Outstanding Balance divided by the number of Installment Dates remaining
prior to the Maturity Date.
 
Attachment 1 to Convertible Promissory Note, Page 3

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A22.            “Lender Conversion Share Value” means the product of the number
of Lender Conversion Shares deliverable pursuant to any Lender Conversion
multiplied by the Closing Trade Price of the Common Stock on the Delivery Date
for such Lender Conversion.
 
A23.            “Major Default” means any Event of Default occurring under
Sections 4.1(i), (iii), (x), or (xiii) of this Note.
 
A24.             “Mandatory Default Amount” means the greater of (i) the
Outstanding Balance divided by the Installment Conversion Price (as defined
below) on the date the Mandatory Default Amount is demanded, multiplied by the
VWAP on the date the Mandatory Default Amount is demanded, or (ii) the Default
Effect.
 
A25.            “Market Capitalization” shall mean the product equal to (a) the
average VWAP of the Common Stock for the immediately preceding fifteen (15)
Trading Days, multiplied by (b) the aggregate number of outstanding shares of
Common Stock as reported on Borrower’s most recently filed Form 10-Q or Form
10-K.
 
A26.            “Market Price” means the Conversion Factor multiplied by the
average of the five (5) lowest Closing Bid Prices in the twenty (20) Trading
Days immediately preceding the applicable Conversion.
 
A27.            “Minor Default” means any Event of Default that is not a Major
Default or a Fundamental Default.
 
A28.            “Purchase Price Date” means the date the Purchase Price is
delivered by Lender to Borrower.
 
A29.            “OID” means an original issue discount.
 
A30.            “Optional Prepayment Liquidated Damages Amount” means an amount
equal to the difference between (a) the product of (i) the number of shares of
Common Stock obtained by dividing (1) the applicable Optional Prepayment Amount
by (2) the Lender Conversion Price as of the date Borrower delivered the
applicable Optional Prepayment Amount to Lender, multiplied by (ii) the Closing
Trade Price on the date Borrower delivered the applicable Optional Prepayment
Amount to Lender, and (b) the applicable Optional Prepayment Amount paid by
Borrower to Lender. For illustration purposes only, if the applicable Optional
Prepayment Amount were $50,000.00, the Lender Conversion Price as of the date
the Optional Prepayment Amount was paid to Lender was equal to $0.75 per share
of Common Stock, and the Closing Trade Price of a share of Common Stock as of
such date was equal to $1.00, then the Optional Prepayment Liquidated Damages
Amount would equal $16,666.67 computed as follows: (a) $66,666.67 (calculated as
(i) (1) $50,000.00 divided by (2) $0.75 multiplied by (ii) $1.00) minus (b)
$50,000.00.
 
A31.            “Other Agreements” means, collectively, (a) all existing and
future agreements and instruments between, among or by Borrower (or an
affiliate), on the one hand, and Lender (or an affiliate), on the other hand,
and (b) any financing agreement or a material agreement that affects Borrower’s
ongoing business operations.
 
A32.             “Outstanding Balance” means, as of any date of determination,
the Purchase Price, as reduced or increased, as the case may be, pursuant to the
terms hereof for payment, conversion, offset, or otherwise, plus any OID, the
Transaction Expense Amount, accrued but unpaid interest, collection and
enforcements costs (including attorneys’ fees) incurred by Lender, transfer,
stamp, issuance and similar taxes and fees related to Conversions (as defined
below), and any other fees or charges (including without limitation late
charges) incurred under this Note.
 
A33.            “Trading Day” shall mean any day on which the Common Stock is
traded or tradable for any period on the Common Stock’s principal market, or on
the principal securities exchange or other securities market on which the Common
Stock is then being traded.
 
A34.            “VWAP” means the volume weighted average price of the Common
Stock.
 

Attachment 1 to Convertible Promissory Note, Page 4

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EXHIBIT A
 
Typenex Co-Investment, LLC
303 East Wacker Drive, Suite 1040
Chicago, Illinois 60601

Hydrocarb Energy Corporation
 
Date:
 
Attn: Kent Watts, CEO
     
800 Gessner, Suite 375
     
Houston, Texas 77024
     

LENDER CONVERSION NOTICE

The above-captioned Lender hereby gives notice to Hydrocarb Energy Corporation,
a Nevada corporation (the “Borrower”), pursuant to that certain Secured
Convertible Promissory Note made by Borrower in favor of Lender on March 5, 2015
(the “Note”), that Lender elects to convert the portion of the Note balance set
forth below into fully paid and non-assessable shares of Common Stock of
Borrower as of the date of conversion specified below. Said conversion shall be
based on the Lender Conversion Price set forth below. In the event of a conflict
between this Lender Conversion Notice and the Note, the Note shall govern, or,
in the alternative, at the election of Lender in its sole discretion, Lender may
provide a new form of Lender Conversion Notice to conform to the Note.
Capitalized terms used in this notice without definition shall have the meanings
given to them in the Note.

A.
Date of Conversion:   ________________
 
B.
Lender Conversion #:  _______________
 
C.
Conversion Amount:   _______________
 
D.
Lender Conversion Price:  _______________
 
E.
Lender Conversion Shares:  _______________ (C divided by D)
 
F.
Remaining Outstanding Balance of Note:  ____________*
 

 
* Subject to adjustments for corrections, defaults, interest and other
adjustments permitted by the Transaction Documents (as defined in the Purchase
Agreement), the terms of which shall control in the event of any dispute between
the terms of this Lender Conversion Notice and such Transaction Documents.

$_________________ of the Conversion Amount converted hereunder shall be
deducted from the Installment Amount(s) relating to the following Installment
Date(s): __________________________________________.

Please transfer the Lender Conversion Shares electronically (via DWAC) to the
following account:
Broker:
  Address:  
DTC#:
       
Account #:
       
Account Name:
       

To the extent the Lender Conversion Shares are not able to be delivered to
Lender electronically via the DWAC system, deliver all such certificated shares
to Lender via reputable overnight courier after receipt of this Lender
Conversion Notice (by facsimile transmission or otherwise) to:
 

 
 
 
 
 
 
   

 
Exhibit A to Convertible Promissory Note, Page 1

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Sincerely,

Lender:

Typenex Co-Investment, LLC
     
By:
Red Cliffs Investments, Inc., its Manager
       
By:
     
John M. Fife, President

 
Exhibit A to Convertible Promissory Note, Page 2

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EXHIBIT B
 
Hydrocarb Energy Corporation
Attn: Kent Watts, CEO
800 Gessner, Suite 375
Houston, Texas 77024
 
Typenex Co-Investment, LLC
 
Date:
 
Attn: John Fife
     
303 East Wacker Drive, Suite 1040
     
Chicago, Illinois 60601
     

 
INSTALLMENT NOTICE
 
The above-captioned Borrower hereby gives notice to Typenex Co-Investment, LLC,
a Utah limited liability company (the “Lender”), pursuant to that certain
Secured Convertible Promissory Note made by Borrower in favor of Lender on March
5, 2015 (the “Note”), of certain Borrower elections and certifications related
to payment of the Installment Amount of $_________________ due on ___________,
201_ (the “Installment Date”). In the event of a conflict between this
Installment Notice and the Note, the Note shall govern, or, in the alternative,
at the election of Lender in its sole discretion, Lender may provide a new form
of Installment Notice to conform to the Note. Capitalized terms used in this
notice without definition shall have the meanings given to them in the Note.
 
INSTALLMENT CONVERSION AND CERTIFICATIONS
AS OF THE INSTALLMENT DATE

A. INSTALLMENT CONVERSION

 

A. Installment Date: ____________, 201_

B. Installment Amount: ____________

C. Portion of Installment Amount Borrower elected to pay in cash: ____________

D. Portion of Installment Amount to be converted into Common Stock: ____________
(B minus C)

E. Installment Conversion Price:  _______________ (lower of (i) Lender
Conversion Price in effect and (ii) Market Price as of Installment Date)

F. Installment Conversion Shares:  _______________ (D divided by E)

G. Remaining Outstanding Balance of Note:  ____________ *

 
* Subject to adjustments for corrections, defaults, interest and other
adjustments permitted by the Transaction Documents (as defined in the Purchase
Agreement), the terms of which shall control in the event of any dispute between
the terms of this Installment Notice and such Transaction Documents.

B. EQUITY CONDITIONS CERTIFICATION

 

1. Market Capitalization:________________

 
(Check One)
 

2. _________ Borrower herby certifies that no Equity Conditions Failure exists
as of the Installment Date.

 

3. _________ Borrower hereby gives notice that an Equity Conditions Failure has
occurred and requests a waiver from Lender with respect thereto. The Equity
Conditions Failure is as follows:

 
Exhibit B to Convertible Promissory Note, Page 1

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Sincerely,
 
Borrower:
 
Hydrocarb Energy Corporation
   
By:
 
Name:
 
Title:
 

Exhibit B to Convertible Promissory Note, Page 2

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EXHIBIT C

Typenex Co-Investment, LLC
303 East Wacker Drive, Suite 1040
Chicago, Illinois 60601
 
Hydrocarb Energy Corporation
 
Date:
 
Attn: Kent Watts, CEO
     
800 Gessner, Suite 375
     
Houston, Texas 77024
     

 
TRUE-UP NOTICE
 
The above-captioned Lender hereby gives notice to Hydrocarb Energy Corporation,
a Nevada corporation (the “Borrower”), pursuant to that certain Secured
Convertible Promissory Note made by Borrower in favor of Lender on March 5, 2015
(the “Note”), of True-Up Conversion Shares related to _____________, 201_ (the
“Installment Date”). In the event of a conflict between this True-Up Notice and
the Note, the Note shall govern, or, in the alternative, at the election of
Lender in its sole discretion, Lender may provide a new form of True-Up Notice
to conform to the Note. Capitalized terms used in this notice without definition
shall have the meanings given to them in the Note.
 
TRUE-UP CONVERSION SHARES AND CERTIFICATIONS
AS OF THE TRUE-UP DATE

1. TRUE-UP CONVERSION SHARES

 

A. Installment Date: ____________, 201_

 

B. True-Up Date: ____________, 201_

 

C. Portion of Installment Amount converted into Common Stock: _____________

 

D. True-Up Conversion Price:  _______________ (lower of (i) Lender Conversion
Price in effect and (ii) Market Price as of True-Up Date)

 

E. True-Up Conversion Shares:  _______________ (C divided by D)

 

F. Installment Conversion Shares delivered: ________________

 

G. True-Up Conversion Shares to be delivered: ________________ (only applicable
if E minus F is greater than zero)

 

2. EQUITY CONDITIONS CERTIFICATION (Section to be completed by Borrower)

 

A. Market Capitalization:________________

 
(Check One)
 

B. _________ Borrower herby certifies that no Equity Conditions Failure exists
as of the applicable True-Up Date.

 

C. _________ Borrower hereby gives notice that an Equity Conditions Failure has
occurred and requests a waiver from Lender with respect thereto. The Equity
Conditions Failure is as follows:

 
Exhibit C to Convertible Promissory Note, Page 1

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Sincerely,

Lender:       
 
Typenex Co-Investment, LLC
     
By:
Red Cliffs Investments, Inc., its Manager
       
By:
     
John M. Fife, President

ACKNOWLEDGED AND CERTIFIED BY:
 
Borrower:
 
Hydrocarb Energy Corporation
   
By:
 
Name:
 
Title:
 

 
 
Exhibit C to Convertible Promissory Note, Page 2

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