Exhibit 10.01

 

SECOND AMENDMENT TO SECURITIES PURCHASE AGREEMENT

 

This Second Amendment to Securities Purchase Agreement (this “Amendment”) is
dated as of February 15, 2017, and is by and among DISCOVERY ENERGY CORP., a
Nevada corporation (the “Company”), DEC FUNDING LLC, a Texas limited liability
company (“Original Purchaser”) and TEXICAN ENERGY CORPORATION, a Texas
corporation (“New Purchaser”). The Company, Original Purchaser and New Purchaser
are hereinafter sometimes collectively referred to as the “Parties” and each
individually as a “Party”.

 

WHEREAS, the Company and Original Purchaser previously entered into that certain
Securities Purchase Agreement dated May 27, 2016, as amended by the First
Amendment to Securities Purchase Agreement dated August 16, 2016 (such First
Amendment, the “First Amendment”; the Securities Purchase Agreement, as amended
by the First Amendment, the “SPA”);

 

WHEREAS, each of Original Purchase and New Purchaser desires purchase additional
Debentures from time to time in accordance with the terms of this Amendment and
the SPA; and

 

WHEREAS, subject to the satisfaction of the conditions precedent set forth
herein, the Parties desire to amend the SPA and the First Amendment as set forth
herein to facilitate Original Purchaser’s and New Purchaser’s purchase of such
additional Debentures.

 

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Amendment, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Company, Original Purchaser and
New Purchaser agree as follows:

 

1.          Definitions. Capitalized terms used in this Amendment but not
otherwise defined herein have the meanings given such terms in the SPA. The SPA,
as amended by this Amendment, is hereinafter referred to as the “Agreement”.

 

2.          Amendments to SPA. Subject to the satisfaction of the conditions
precedent set forth in Section 4, each of the Company, Original Purchaser and
New Purchaser agree to amend the SPA as follows:

 

(a)          The definition of “Principal Amount” in Section 1.1 of the SPA is
hereby amended by replacing the reference therein to “$1,700,000” with
“$2,850,000”.

 

(b)          The definition of “Capital Raise” in Section 1.1 of the SPA is
hereby amended and restated in its entirety to read as follows: ““Capital Raise”
shall mean any proposed new Indebtedness or equity issuances of Company.”

 

(c)          The definitions “Exempt Capital Raise”, “Right of First Offer” and
“Right of First Offer Termination Date” in Section 1.1 of the SPA are hereby
deleted in its entirety.

 

(d)          The following are hereby added as new definitions in Section 1.1 of
the SPA, in the appropriate alphabetical order:

 

““2017 Option” shall have the meaning ascribed to such term in Section 2.1(c).

 

“Additional Option” shall have the meaning ascribed to such term in Section
2.1(d).

 

 

 

 

“Additional Option Termination Date” means the later of (a) that date which is
three (3) months after the date on which Original Purchaser first receives a
written certification from the Chief Executive Officer or the Chief Financial
Officer of Company that Company has drilled and completed, or otherwise
suspended operations with respect to, the fourth (4th) well located in the PEL
512 Area; or (b) March 31, 2018.”

 

(e)          Section 2.1(b) of the SPA is hereby amended by replacing the
reference therein to “$1,700,000” with “$2,850,000”.

 

(f)          Section 2.1(c) of the SPA is hereby deleted in its entirety.

 

(g)          The following are hereby added as new Sections 2.1(c) and 2.1(d) to
the Agreement:

 

“(c)          After the Closing Date through and including September 30, 2017,
Original Purchaser shall have the option to purchase (without the consent of the
then current Purchasers), upon three (3) Trading Days’ advance notice to
Company, up to an additional $10,000,000 in principal amount of the Debentures
(the “2017 Option”) in a single additional closing upon the same terms and
conditions as one or more of the Debentures previously issued to Original
Purchaser, with a conversion price of $0.20; provided, that if during the period
between January 31, 2017 and the exercise date of the 2017 Option, Company (i)
issued additional Debentures to another Purchaser (other than pursuant to
Section 6 of the Second Amendment to this Agreement) or (ii) consummated an
equity issuance (excluding the issuance of any Debentures) with another Person
preceding such exercise date and, in either case, the issuance price of such
Capital Raise was less than $0.20 per share, then the conversion price for the
2017 Option shall be such lesser price. Upon an exercise of the 2017 Option,
Original Purchaser shall deliver to Company or at Company’s written direction,
via wire transfer of immediately available funds, an amount up to $10,000,000,
and Company shall deliver to Original Purchaser the additional Debenture, and
Company and such Purchaser shall deliver the other items set forth in Section
2.2 deliverable at each Supplemental Closing.  Upon satisfaction of the
covenants and conditions set forth in Sections 2.2 and 2.3 with respect thereto,
each Supplemental Closing shall occur at the offices of Company Counsel or such
other location as the parties shall mutually agree.

 

(d)          Until the occurrence of the Additional Option Termination Date,
following an exercise of the 2017 Option, Original Purchaser shall have the
option to purchase (without the consent of the then current Purchasers), upon
three (3) Trading Days’ advance notice to Company, up to an additional
$10,000,000 in principal amount of the Debentures (the “Additional Option”) in a
single additional closing upon the same terms and conditions as one or more of
the Debentures previously issued to Original Purchaser, with a conversion price
of $0.20; provided, that if during the period between January 31, 2017 and the
exercise date of the Additional Option, Company (i) issued additional Debentures
to another Purchaser (other than pursuant to Section 6 of the Second Amendment
to this Agreement) or (ii) consummated an equity issuance (excluding the
issuance of any Debentures) with another Person preceding such exercise date
and, in either case, the issuance price of such Capital Raise was less than
$0.20 per share, then the conversion price for the Additional Option shall be
such lesser price. Upon an exercise of the Additional Option, Original Purchaser
shall deliver to Company or at Company’s written direction, via wire transfer of
immediately available funds, an amount up to $10,000,000, and Company shall
deliver to Original Purchaser the additional Debenture, and Company and such
Purchaser shall deliver the other items set forth in Section 2.2 deliverable at
each Supplemental Closing.  Upon satisfaction of the covenants and conditions
set forth in Sections 2.2 and 2.3 with respect thereto, each Supplemental
Closing shall occur at the offices of Company Counsel or such other location as
the parties shall mutually agree.”

 

 - 2 - 

 

 

(h)          Section 4.17 of the SPA is hereby amended by replacing the phrase
therein to “or equity pursuant to its Right of First Offer as set forth in
Section 2.1(c)” with the phrase “pursuant to the exercise of the 2017 Option and
the Additional Option”.

 

3.          Amendments to SPA. Subject to the satisfaction of the conditions
precedent set forth in Section 4, each of the Company, Original Purchaser and
New Purchaser agree to amend the First Amendment by replacing Exhibit C to the
First Amendment in its entirety with Exhibit C attached to this Amendment.

 

4.          Conditions Precedent. This Amendment and the agreements of the
Parties hereunder are subject to the satisfaction of the following conditions
precedent:

 

(a)          Each Party shall have delivered an executed counterpart of its
signature page to this Amendment to each other Party; and

 

(b)          The Company shall have received the unanimous written consent from
its Board of Directors, authorizing the Company’s entry into this Amendment.

 

5.          Purchase by Original Purchaser. On or prior to the expiration of ten
(10) Business Days’ following the date of this Amendment, the Company agrees to
sell, and Original Purchaser agrees to purchase, a principal amount of
$1,000,000 of Debentures, each in the form of Exhibit C to the First Amendment
(the “Subsequent DEC Purchase”). Within one (1) Business Day following the
Company’s receipt of the proceeds from the Subsequent DEC Purchase via wire
transfer, the Company shall deliver to Original Purchaser (i) a Debenture in a
principal amount of $1,000,000, upon the same terms and conditions as one or
more of the Debentures previously issued to Original Purchaser, with a
“Conversion Price” of $0.16 and (ii) a Warrant registered in the name of
Original Purchaser to purchase up to 3,750,000 shares of Common Stock, with an
exercise price equal to $0.20 per share of Common Stock, subject to adjustment
as set forth therein, and an expiration date three (3) years from the date of
issuance thereof.

 

6.          Purchases by New Purchaser. The Company agrees to sell, and New
Purchaser agrees to purchase, Debentures each in the form of Exhibit C to the
Agreement in a principal amount equal to $150,000, payable monthly (beginning
with the month of February 2017) in an amount not less than $30,000, subject to
and in accordance with the covenants and conditions applicable to each
Supplemental Closing Date set forth in Section 2.1(b) of the Agreement; provided
that (i) for the purposes of Section 2.1(b) of the Agreement, New Purchaser
shall be deemed to have funded to the Company an amount equal to the Rincon
Charges paid by New Purchaser on and after the date of this Amendment, in full
satisfaction of New Purchaser’s obligation to transfer to the Company the
principal amount of the respective Debentures so purchased under this Section 6
and (ii) the aggregate sales and purchases under this Section 6 shall not exceed
$150,000. “Rincon Charges” means the $30,000 monthly amount owing from New
Purchaser to Rincon Energy, LLC from time to time pursuant to the Consulting
Agreement. “Consulting Agreement” means a Consulting Agreement among Rincon
Energy, LLC, New Purchaser, the Company and Discovery Energy SA Pty Ltd, as
amended from time to time.

 

 - 3 - 

 

 

7.          Representations and Warranties.

 

(a)          As of the date of the effectiveness of this Amendment, and after
giving effect to the amendments in Section 2, the Company hereby represents and
warrants to New Purchaser and Original Purchaser that the representations and
warranties of the Company and its Subsidiaries contained in the Agreement and in
each other Transaction Document are true and correct on and as of such date
(unless as of a specific date therein in which case they shall be accurate as of
such date).

 

(b)          As of the date of the effectiveness of this Amendment, New
Purchaser hereby represents and warrants to the Company that the representations
and warranties applicable to New Purchaser contained in the Agreement are true
and correct on and as of such date.

 

8.          Waiver of Australian Deposit Account Control Agreement. Each of the
Original Purchaser and New Purchaser hereby agree and confirm that,
notwithstanding anything set forth in Section 2.4(b) of the Agreement, until
such time as either (a) the average daily balance of the Australian Subsidiary’s
deposit accounts held in Australia exceeds $150,000 for thirty (30) consecutive
days or (b) an Event of Default has occurred and is continuing and any Purchaser
delivers written request therefor, no Deposit Account Control Agreements shall
be required for any such deposit accounts of the Australian Subsidiary.

 

9.          Miscellaneous.

 

(a)          Each of the Parties acknowledges and agrees that from and after the
date of the effectiveness of this Amendment, each reference in the SPA to “this
Agreement”, “herein”, “hereof”, “hereunder” or other words of like import shall
mean and be a reference to the Agreement.

 

(b)          This Amendment, the Agreement, the First Amendment (as amended
hereby) and the other Transaction Documents, together with the exhibits and
schedules thereto, contain the entire understanding of the Parties with respect
to the subject matter hereof and thereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.

 

(c)          Sections 5.6 (Headings), 5.9 (Governing Law), 5.11 (Execution),
5.15 (Remedies), 5.18 (Independent Nature, etc.), 5.21 (Construction) and 5.22
(Waiver of Jury Trial) of the SPA are hereby incorporated into this Amendment,
mutatis mutandis, as a part hereof for all purposes.

 

[Signature Page Follows]

 

 - 4 - 

 

 

COMPANY:       DISCOVERY ENERGY CORP.       By:       Keith D. Spickelmier,
Chairman         ORIGINAL PURCHASER:       DEC FUNDING LLC       By:      
Steven Webster, Manager  

 

NEW PURCHASER:

 

TEXICAN ENERGY CORPORATION

 

By:     Name:     Title:    

 

Address for Notice:

 

One Allen Center, Ste. 1150

500 Dallas St.

Houston, Texas 77002

 

Signature Page to Second Amendment to Securities Purchase Agreement

 

 

 

 

EXHIBIT C

 

Form of New Purchaser Debenture

 

(see attached)

 

 

 

 

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE
HAS 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 AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY.  THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A
REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN
“ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT OR
OTHER LOAN SECURED BY SUCH SECURITIES.

 

Original Issue Date: [        , 201_]  [$                   ]

 

SENIOR SECURED CONVERTIBLE DEBENTURE

DUE MAY 27, 2021

 

THIS SENIOR SECURED CONVERTIBLE DEBENTURE is one of a series of duly authorized
and validly issued Senior Secured Convertible Debentures of Discovery Energy
Corp., a Nevada corporation, (the “Company”), having its principal place of
business at One Riverway Drive, Suite 1700, Houston, Texas 77056, designated as
its Senior Secured Convertible Debentures due May 27, 2021 (this debenture, the
“Debenture” and, collectively with the other debentures of such series, the
“Debentures”).

 

FOR VALUE RECEIVED, Company promises to pay to [
                                      ] or its registered assigns (the “Holder”
and collectively with the holders of the other Debentures, the “Holders”), or
shall have paid pursuant to the terms hereunder, the principal sum of
[$                                           ]1 on May 27, 2021 (the “Maturity
Date”) or such earlier date as this Debenture is required or permitted to be
repaid as provided hereunder, and to pay interest to Holder on the aggregate
unconverted and then outstanding principal amount of this Debenture in
accordance with the provisions hereof.  This Debenture is subject to the
following additional provisions:

 

Section 1.          Definitions.  For the purposes hereof, in addition to the
terms defined elsewhere in this Debenture, (a) capitalized terms not otherwise
defined herein shall have the meanings set forth in the Purchase Agreement (as
defined below) and (b) the following terms shall have the following meanings:

 

“Alternate Consideration” shall have the meaning set forth in Section 5(d).

 

“Annual License Milestone Compliance Certificate” shall have the meaning set
forth in Section 8(a)(x). 

 

 

1 NTD: Prior to issuance, parties to complete all bracketed items, including the
Original Issue Date, Holder, principal sum (including the reference on Schedule
1) and Conversion Price (see 4(b)).

 - 7 - 

 

 

“Bankruptcy Event” means any of the following events: (a) Company or any
Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation
S-X) thereof commences a case or other proceeding under any bankruptcy,
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency or liquidation or similar law of any jurisdiction relating to Company
or any Significant Subsidiary thereof, (b) there is commenced against Company or
any Significant Subsidiary thereof any such case or proceeding that is not
dismissed within 20 days after commencement, (c) Company or any Significant
Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief
or other order approving any such case or proceeding is entered, (d) Company or
any Significant Subsidiary thereof seeks or suffers any appointment of any
administrator, receiver, custodian or the like for it or any substantial part of
its property that is not discharged or stayed within 20 calendar days after such
appointment, (e) Company or any Significant Subsidiary thereof makes a general
assignment for the benefit of creditors, (f) Company or any Significant
Subsidiary thereof calls a meeting of its creditors or makes application to a
court to call a meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts, (g) Company or any Significant
Subsidiary becomes insolvent or is unable to pay its debts or fails or admits in
writing its inability generally to pay its debts as they become due or (h)
Company or any Significant Subsidiary thereof, by any act or failure to act,
expressly indicates its consent to, approval of or acquiescence in any of the
foregoing or takes any corporate or other action for the purpose of effecting
any of the foregoing.

 

“Business Day” means any day except any Saturday, any Sunday, any day which is a
federal legal holiday in the United States or any day on which banking
institutions in the State of New York are authorized or required by law or other
governmental action to close.

 

“Buy-In” shall have the meaning set forth in Section 4(c)(v).

 

“Change of Control Transaction” means the occurrence after the date hereof of
any of (a) an acquisition after the date hereof by an individual or legal entity
or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act)
of effective control (whether through legal or beneficial ownership of capital
stock of Company, by contract or otherwise) of in excess of 50% of the voting
securities of the Company (other than by means of conversion or exercise of the
Debentures and the Securities issued together with the Debentures), (b) Company
merges into or consolidates with any other Person, or any Person merges into or
consolidates with Company and, after giving effect to such transaction, the
stockholders of Company immediately prior to such transaction own less than 50%
of the aggregate voting power of Company or the successor entity of such
transaction, (c) Company sells or transfers all or substantially all of its
assets to another Person and the stockholders of Company immediately prior to
such transaction own less than 50% of the aggregate voting power of the
acquiring entity immediately after the transaction, (d) a replacement at one
time or within a three year period of more than one-half of the members of the
Board of Directors which is not approved by a majority of those individuals who
are members of the Board of Directors on the Original Issue Date (or by those
individuals who are serving as members of the Board of Directors on any date
whose nomination to the Board of Directors was approved by a majority of the
members of the Board of Directors who are members on the date hereof) or (e) the
execution by Company of an agreement to which Company is a party or by which it
is bound, providing for any of the events set forth in clauses (a) through (d)
above.

 

“Conversion Date” shall have the meaning set forth in Section 4(a).

 

“Conversion Price” shall have the meaning set forth in Section 4(b).

 

“Conversion Schedule” means the Conversion Schedule in the form of Schedule 1
attached hereto.

 

“Conversion Shares” means, collectively, the shares of Common Stock issuable
upon conversion of this Debenture in accordance with the terms hereof.

 

 - 8 - 

 

 

“Debenture Register” shall have the meaning set forth in Section 2(b).

 

“Event of Default” shall have the meaning set forth in Section 8(a).

 

“Exempt Issuance” means the issuance of (a) shares of Common Stock or options to
employees, officers or directors of Company pursuant to any stock or option plan
duly adopted for such purpose, by a majority of the non-employee members of the
Board of Directors or a majority of the members of a committee of non-employee
directors established for such purpose, (b) securities upon the exercise or
exchange of or conversion of any Securities issued hereunder and/or other
securities exercisable or exchangeable for or convertible into shares of Common
Stock issued and outstanding on the date of this Agreement, provided that such
securities have not been amended since the date of this Agreement to increase
the number of such securities or to decrease the exercise price, exchange price
or conversion price of such securities and (c) securities issued pursuant to
acquisitions or strategic transactions approved by a majority of the
disinterested directors of Company, provided that any such issuance shall only
be to a Person (or to the equityholders of a Person) which is, itself or through
its subsidiaries, an operating company or an owner of an asset (including, but
not primarily, securities) in a business synergistic with the business of
Company and shall provide to Company additional benefits in addition to the
investment of funds, but shall not include a transaction in which Company is
issuing securities primarily for the purpose of raising capital or to an entity
whose primary business is investing in securities, provided that such agreements
have not been amended since the date of this Agreement to increase the number of
such securities or to decrease the exercise price, exchange price or conversion
price of such securities.

 

“Fundamental Transaction” shall have the meaning set forth in Section 5(d).

 

“Holder Optional Redemption” shall have the meaning set forth in Section 6(a).

 

“Holder Optional Redemption Date” shall have the meaning set forth in Section
6(a).

 

“Holder Optional Redemption Notice” shall have the meaning set forth in Section
6(a).

 

“Holder Optional Redemption Notice Date” shall have the meaning set forth in
Section 6(a).

 

“Interest Settlement Date” shall have the meaning set forth in Section 2(a)(i).

 

“Majority Holders” means, at any time, one or more Holders holding over fifty
percent (50%) in outstanding principal amount of the Debentures at such time.

 

“Mandatory Default Amount” means the sum of (a) 100% of the outstanding
principal amount of this Debenture, (b) 100% of the accrued and unpaid interest
hereon and (c) 100% of the interest on the outstanding principal amount of this
Debenture which would have been payable under Section 2(a) between the date of
the relevant Event of Default and the Maturity Date, plus all other amounts,
costs, expenses and liquidated damages due in respect of this Debenture.

 

“New York Courts” shall have the meaning set forth in Section 9(d).

 

“Notice of Conversion” shall have the meaning set forth in Section 4(a).

 

“Optional Redemption Amount” means the sum of (a) 120% of the then outstanding
principal amount of the Debenture and 100% of accrued and unpaid interest on the
outstanding principal amount of this Debenture, plus (b) all liquidated damages
and other amounts due hereunder in respect of the Debenture.

 

 - 9 - 

 

 

“Original Issue Date” means the date of the first issuance of the first
Debenture, regardless of any transfers of any Debenture and regardless of the
number of instruments which may be issued to evidence all such Debentures.

 

“Permitted Indebtedness” means (a) the indebtedness evidenced by the Debentures,
(b) indebtedness incurred in connection with any inventory financing transaction
and any refinancing or modification of the terms thereof; provided, that such
financing is secured only by inventory, (c) any indebtedness permitted pursuant
to the definition of Permitted Lien, (d) any indebtedness that has been
expressly subordinated in right of payment to the indebtedness under the
Debentures, provided that the terms of such subordination have been approved by
Majority Holders, (e) the Liberty Debt and Shareholder Debt and (f) Capital
Raises provided by Original Purchaser following the exercise of its Right of
First Offer (as defined in the Purchase Agreement).

 

“Permitted Lien” means the individual and collective reference to the following:
(a) Liens for taxes, assessments and other governmental charges or levies not
yet due or Liens for taxes, assessments and other governmental charges or levies
being contested in good faith and by appropriate proceedings for which adequate
reserves (in the good faith judgment of the management of Company) have been
established in accordance with GAAP, (b) Liens imposed by law which were
incurred in the ordinary course of Company’s business, such as carriers’,
warehousemen’s and mechanics’ Liens, statutory landlords’ Liens, and other
similar Liens arising in the ordinary course of Company’s business, and which
(x) do not individually or in the aggregate materially detract from the value of
such property or assets or materially impair the use thereof in the operation of
the business of the Company and its consolidated Subsidiaries or (y) are being
contested in good faith by appropriate proceedings, which proceedings have the
effect of preventing for the foreseeable future the forfeiture or sale of the
property or asset subject to such Lien, (c) Liens incurred by banks and other
financial institutions on deposit and securities accounts and other accounts
with such banks or financial institutions not to exceed $100,000 at any time,
(d) purchase money security interest in equipment (including capital leases),
(e) Liens securing judgments for the payment of money not constituting an Event
of Default and (f) Liens incurred in connection with indebtedness referred to in
clause (a) or (b) of Permitted Indebtedness.

 

“Petroleum Exploration License” means that certain Petroleum Exploration License
issued to Australian Subsidiary by the Energy Resource Division of the
Department for Manufacturing, Innovation, Trade, Resources and Energy on October
26, 2012, otherwise referred to as PEL 512.

 

“Purchase Agreement” means the Securities Purchase Agreement, dated as of May
27, 2016 among Company and the original Holders, as amended, modified or
supplemented from time to time in accordance with its terms.

 

“Purchase Right” shall have the meaning set forth in Section 5(c).

 

“Registration Rights Agreement” means the Registration Rights Agreement, dated
as of May 27, 2016 among Company and the original Holders, as amended, modified
or supplemented from time to time in accordance with its terms.

 

“Registration Statement” means a registration statement meeting the requirements
set forth in the Registration Rights Agreement and covering the resale of the
Underlying Shares by Holder as provided for in the Registration Rights
Agreement.

 

“Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.

 

 - 10 - 

 

 

“Share Delivery Date” shall have the meaning set forth in Section 4(c)(ii).

 

“Shareholder Debt” means that certain Indebtedness (a) payable to Keith D.
Spickelmier in the aggregate principal amount of $96,200.00, (b) payable to
William Begley in the aggregate principal amount of $33,153.00, and (c) payable
to EMTEECO Holdings Ltd. in the aggregate principal amount of $17,000.00, each
as of the Closing Date.

 

“Successor Entity” shall have the meaning set forth in Section 5(d).

 

“Trading Day” means a day on which the principal Trading Market is open for
trading.

 

“Trading Market” means any of the following markets or exchanges on which the
Common Stock is listed or quoted for trading on the date in question: the NYSE
MKT, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global
Select Market, the New York Stock Exchange or the OTC Bulletin Board or the
OTCQB over-the-counter bulletin board service maintained by OTC Markets Group
Inc. (or any successors to any of the foregoing).

 

Section 2.          Interest and Prepayment.

 

a)Interest.

 

i.            So long as no Event of Default has occurred and is continuing, the
aggregate unconverted and then outstanding principal amount of this Debenture
shall accrue interest from the Original Issue Date at the rate of eight percent
(8%) per annum, compounded quarterly, which accrued interest shall be added to
the outstanding principal balance of this Debenture on the last day of each
calendar quarter (each such date, an “Interest Settlement Date”) (or, if such
Interest Settlement Date is not a Business Day, on the immediately succeeding
Business Day) and shall thereafter itself, as part of the principal balance,
accrue interest at the rate set forth above, compounding quarterly on each
Interest Settlement Date. All such accrued interest added to the principal
balance of this Debenture pursuant to the immediately preceding sentence shall
be payable on the same terms and subject to the same conditions set forth
herein.

 

ii.           Notwithstanding the foregoing clause (i), Company may provide
Purchaser with written notice (each, a “Cash Pay Notice”) of its intent to pay
all or a portion of the interest which would otherwise accrue on the next
succeeding Interest Settlement Date in cash. Any Cash Pay Notice shall be
delivered at least ten (10) Business Days prior to the applicable Interest
Settlement Date and shall be irrevocable.

 

iii.         Upon the occurrence and during the continuance of an Event of
Default, the aggregate unconverted and then outstanding principal amount of this
Debenture shall accrue interest at the rate of twelve percent (12%) per annum
and otherwise shall accrue and/or be paid in cash consistent with clauses (i)
and (ii) above.

 

b)         Interest Calculations. Interest shall be calculated on the basis of a
365-day year, and shall accrue daily commencing on the Original Issue Date until
payment in full of the outstanding principal, together with all accrued and
unpaid interest, liquidated damages and other amounts which may become due
hereunder, has been made.  Interest shall cease to accrue with respect to any
principal amount converted, provided that Company actually delivers the
Conversion Shares within the time period required by Section 4(c)(ii)
herein.  Interest hereunder will be paid to the Person in whose name this
Debenture is registered in the records of Company regarding registration and
transfers of this Debenture (the “Debenture Register”).

 

 - 11 - 

 

 

c)         Prepayment.  Except as otherwise set forth in this Debenture, Company
may not prepay any portion of the principal amount of this Debenture without the
prior written consent of Holder.

 

Section 3.          Registration of Transfers and Exchanges.

 

a)         Different Denominations. This Debenture is exchangeable for an equal
aggregate principal amount of Debentures of different authorized denominations,
as requested by Holder surrendering the same.  No service charge will be payable
for such registration of transfer or exchange.

 

b)         Investment Representations. This Debenture has been issued subject to
certain investment representations of the original Holder set forth in the
Purchase Agreement and may be transferred or exchanged only in compliance with
the Purchase Agreement and applicable federal and state securities laws and
regulations.

 

c)         Reliance on Debenture Register. Prior to due presentment for transfer
to Company of this Debenture, Company and any agent of Company may treat the
Person in whose name this Debenture is duly registered on the Debenture Register
as the owner hereof for the purpose of receiving payment as herein provided and
for all other purposes, whether or not this Debenture is overdue, and neither
Company nor any such agent shall be affected by notice to the contrary.

 

Section 4.          Conversion.

 

a)         Voluntary Conversion. This Debenture shall be convertible, in whole
or in part, into shares of Common Stock at the option of Holder, at any time and
from time to time. Holder shall effect conversions by delivering to Company a
Notice of Conversion, the form of which is attached hereto as Annex A (each, a
“Notice of Conversion”), specifying therein the principal amount of this
Debenture to be converted and, if Holder determines in its sole discretion to
convert such accrued and unpaid interest (or a portion thereof), the amount of
accrued and unpaid interest thereon to be converted and the date on which such
conversion shall be effected; provided that Holder may only convert the portion
of the accrued interest that corresponds to the principal being converted (such
date, the “Conversion Date”).  If no Conversion Date is specified in a Notice of
Conversion, the Conversion Date shall be the date that such Notice of Conversion
is deemed delivered hereunder.  To effect conversions hereunder, Holder shall
not be required to physically surrender this Debenture to Company unless the
entire principal amount of this Debenture, plus all accrued and unpaid interest
thereon, has been so converted or otherwise been repaid to Holder. Conversions
hereunder shall have the effect of lowering the outstanding principal amount of
this Debenture in an amount equal to the principal amount converted in such
conversion.   Holder and Company shall maintain records showing the principal
amount(s) converted and the date of such conversion(s).   Company may deliver an
objection to any Notice of Conversion within two (2) Business Days of delivery
of such Notice of Conversion.  In the event of any dispute or discrepancy, the
records of Holder shall be controlling and determinative in the absence of
manifest error. Holder, and any assignee by acceptance of this Debenture,
acknowledge and agree that, by reason of the provisions of this paragraph,
following conversion of a portion of this Debenture, the unpaid and unconverted
principal amount of this Debenture may be less than the amount stated on the
face hereof.

 

b)         Conversion Price.  The Conversion Price in effect on any Conversion
Date shall be equal to [$0.__]2 and shall be subject to adjustment as provided
in Section 5 (the “Conversion Price”).

 

 

2 NTD: For Debentures with an Original Issue Date occurring during the period of
February, 2017 and June, 30, 2017, (i) up to $150,000 of such Debentures will
have a Conversion Price of $0.16 and (ii) for all principal amounts in excess of
$150,000, such respective Debentures will have a Conversion Price of $0.20. For
each Debenture with an Original Issue Date on or after June 30, 2017 the
Conversion Price will be $0.20.

 

 - 12 - 

 

 

c)        Mechanics of Conversion.

 

i.           Conversion Shares Issuable Upon Conversion of Debenture.  The
number of Conversion Shares issuable upon a conversion hereunder shall be
determined by the quotient obtained by dividing (x) the sum of (a) the
outstanding principal amount of this Debenture to be converted plus (b) any
accrued and unpaid interest on the principal amount of this Debenture to be
converted, by (y) the Conversion Price.

 

ii.         Delivery of Certificate Upon Conversion. Not later than three (3)
Trading Days after each Conversion Date (the “Share Delivery Date”), Company
shall deliver, or cause to be delivered, to Holder a certificate or certificates
representing the Conversion Shares which, on a Legend Removal Qualification
Event shall be free of restrictive legends and trading restrictions (other than
those which may then be required by the Purchase Agreement) representing the
number of Conversion Shares being acquired upon the conversion of this
Debenture. If (i) there is an effective registration statement permitting the
issuance of Conversion Shares to or resale of the Conversion Shares by Holder or
(ii) following the six month anniversary of the Original Issue Date, the
Conversion Shares are eligible for sale under Rule 144 without volume or
manner-of-sale restrictions and as of such date Company is in compliance with
the current public information required under Rule 144 as to such Conversion
Shares, Company shall deliver any certificate or certificates required to be
delivered by Company under this Section 4(c) by causing such certificates to be
transmitted by the Transfer Agent to the Holder by crediting the account of
Holder’s designated brokerage firm with The Depository Trust Company through its
Deposit or Withdrawal at Custodian (“DWAC”) system if Company is then a
participant in such system or another established clearing corporation
performing similar functions.

 

iii.         Failure to Deliver Certificates.  If, in the case of any Notice of
Conversion, such certificate or certificates are not credited to the account of
Holder’s broker with The Depository Trust Company through its DWAC system or
another established clearing corporation performing similar functions, if
Company is then a participant in any such system, or delivered to or as directed
by Holder by the Share Delivery Date, Holder shall be entitled to elect by
written notice to Company at any time on or before such crediting or its receipt
of such certificate or certificates, to rescind such Conversion, in which event
Company shall promptly return to Holder any original Debenture delivered to
Company and Holder shall promptly return to Company the Common Stock
certificates (or any shares of Common Stock received electronically) issued to
Holder pursuant to the rescinded Conversion Notice.

 

 - 13 - 

 

 

iv.         Obligation Absolute; Partial Liquidated Damages.  Company’s
obligations to issue and deliver the Conversion Shares upon conversion of this
Debenture in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by Holder to enforce the same, any waiver
or consent with respect to any provision hereof, the recovery of any judgment
against any Person or any action to enforce the same, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by Holder or any other Person of any obligation to Company (other than
Holder’s obligations hereunder with respect to the conversion, including the
delivery of a Notice of Conversion) or any violation or alleged violation of law
by Holder or any other Person, and irrespective of any other circumstance which
might otherwise limit such obligation of Company to Holder in connection with
the issuance of such Conversion Shares; provided, however, that such delivery
shall not operate as a waiver by Company of any such action Company may have
against Holder.  In the event Holder shall elect to convert any or all of the
outstanding principal amount hereof, Company may not refuse conversion based on
any claim by Company or any Affiliate thereof that Holder or anyone associated
or affiliated with Holder has been engaged in any violation of law, agreement or
for any other reason, unless an injunction from a court, on notice to Holder,
restraining and or enjoining conversion of all or part of this Debenture shall
have been sought and obtained, and the Company posts a surety bond for benefit
of the Holder in the amount of 150% of the outstanding principal amount of this
Debenture, which is subject to the injunction, which bond shall remain in effect
until the completion of arbitration/litigation of the underlying dispute and the
proceeds of which shall be payable to Holder to the extent it obtains
judgment.  In the absence of such injunction, Company shall issue Conversion
Shares or, if applicable, cash, upon a properly noticed conversion.  If Company
fails when required hereunder for any reason to deliver to Holder such
certificate or certificates pursuant to Section 4(c)(ii) by the third Trading
Day following the Share Delivery Date, the Company shall pay to Holder, in cash,
as liquidated damages and not as a penalty, for each $1,000 of principal amount
being converted, $5 per Trading Day (increasing to $10 per Trading Day on the
fifth (5th) Trading Day after such liquidated damages begin to accrue) for each
Trading Day commencing on the third Trading Day after such Share Delivery Date
until such certificates are delivered or Holder rescinds such conversion.
Nothing herein shall limit Holder’s right to pursue actual damages (provided
such damages may be reduced by the payments previously made hereunder) or
declare an Event of Default pursuant to Section 8 hereof for Company’s failure
to deliver Conversion Shares within the period specified herein and Holder shall
have the right to pursue all remedies available to it hereunder, at law or in
equity including, without limitation, a decree of specific performance and/or
injunctive relief.  The exercise of any such rights shall not prohibit Holder
from seeking to enforce damages pursuant to any other Section hereof or under
applicable law.

 

v.          Compensation for Buy-In on Failure to Timely Deliver Certificates
Upon Conversion. In addition to any other rights available to Holder, if Company
fails for any reason to deliver to Holder such certificate or certificates by
the Share Delivery Date pursuant to Section 4(c)(ii), and if after such Share
Delivery Date Holder is required by its brokerage firm to purchase (in an open
market transaction or otherwise), or Holder’s brokerage firm otherwise
purchases, shares of Common Stock to deliver in satisfaction of a sale by Holder
of the Conversion Shares which Holder was entitled to receive upon the
conversion relating to such Share Delivery Date (a “Buy-In”), then Company shall
(A) pay in cash to Holder (in addition to any other remedies available to or
elected by Holder) the amount, if any, by which (x) Holder’s total purchase
price (including any brokerage commissions) for the Common Stock so purchased
exceeds (y) the product of (1) the aggregate number of shares of Common Stock
that Holder was entitled to receive from the conversion at issue multiplied by
(2) the actual sale price at which the sell order giving rise to such purchase
obligation was executed (including any brokerage commissions) and (B) at the
option of Holder, either reissue (if surrendered) this Debenture in a principal
amount equal to the principal amount of the attempted conversion (in which case
such conversion shall be deemed rescinded) or deliver to Holder the number of
shares of Common Stock that would have been issued if Company had timely
complied with its delivery requirements under Section 4(c)(ii). For example, if
Holder purchases Common Stock having a total purchase price of $11,000 to cover
a Buy-In with respect to an attempted conversion of this Debenture with respect
to which the actual sale price of the Conversion Shares (including any brokerage
commissions) giving rise to such purchase obligation was a total of $10,000
under clause (A) of the immediately preceding sentence, Company shall be
required to pay Holder $1,000. Holder shall provide Company written notice
indicating the amounts payable to Holder in respect of the Buy-In and, upon
request of Company, evidence of the amount of such loss. Nothing herein shall
limit Holder’s right to pursue any other remedies available to it hereunder, at
law or in equity including, without limitation, a decree of specific performance
and/or injunctive relief with respect to Company’s failure to timely deliver
certificates representing shares of Common Stock upon conversion of this
Debenture as required pursuant to the terms hereof.

 

 - 14 - 

 

 

vi.         Reservation of Shares Issuable Upon Conversion. Company covenants
that it will at all times reserve and keep available out of its authorized and
unissued shares of Common Stock for the sole purpose of issuance upon conversion
of this Debenture and payment of interest on this Debenture, each as herein
provided, free from preemptive rights or any other actual contingent purchase
rights of Persons other than Holder (and any other holder of the Debentures),
not less than such aggregate number of shares of the Common Stock as shall
(subject to the terms and conditions set forth in the Purchase Agreement) be
issuable (taking into account the adjustments and restrictions of Section 5)
upon the conversion of the then outstanding principal amount of this Debenture
and payment of interest hereunder. Company covenants that all shares of Common
Stock that shall be so issuable shall, upon issue, be duly authorized, validly
issued, fully paid and nonassessable and, if the Registration Statement is then
effective under the Securities Act, shall be registered for public resale in
accordance with such Registration Statement (subject to Holder’s compliance with
its obligations under the Registration Rights Agreement).

 

vii.        Fractional Shares. No fractional shares or scrip representing
fractional shares shall be issued upon the conversion of this Debenture.  As to
any fraction of a share which Holder would otherwise be entitled to purchase
upon such conversion, Company shall at its election, either pay a cash
adjustment in respect of such final fraction in an amount equal to such fraction
multiplied by the Conversion Price or round up to the next whole share.

 

viii.       Transfer Taxes.  The issuance of certificates for shares of the
Common Stock on conversion of this Debenture shall be made without charge to
Holder hereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificates, provided that, Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of this Debenture so
converted and Company shall not be required to issue or deliver such
certificates unless or until the Person or Persons requesting the issuance
thereof shall have paid to Company the amount of such tax or shall have
established to the satisfaction of Company that such tax has been paid.

 

Section 5.          Certain Adjustments.

 

a)         Stock Dividends and Stock Splits.  If Company, at any time while this
Debenture is outstanding: (i) pays a stock dividend or otherwise makes a
distribution or distributions payable in shares of Common Stock on shares of
Common Stock or any Common Stock Equivalents (which, for avoidance of doubt,
shall not include any shares of Common Stock issued by Company upon conversion
of, or payment of interest on, the Debentures), (ii) subdivides outstanding
shares of Common Stock into a larger number of shares, (iii) combines (including
by way of a reverse stock split) outstanding shares of Common Stock into a
smaller number of shares or (iv) issues, in the event of a reclassification of
shares of the Common Stock, any shares of capital stock of Company, then the
Conversion Price shall be multiplied by a fraction of which the numerator shall
be the number of shares of Common Stock (excluding any treasury shares of
Company) outstanding immediately before such event, and of which the denominator
shall be the number of shares of Common Stock outstanding immediately 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.

 

 - 15 - 

 

 

b)         Subsequent Equity Sales. If, at any time while this Debenture is
outstanding, Company or any Subsidiary, as applicable, sells or grants any
option to purchase or reprices or reduce the conversion or exercise price of any
outstanding Securities, grants any right to reprice, or otherwise disposes of or
issues, any Common Stock or Common Stock Equivalents entitling any Person to
acquire shares of Common Stock at an effective price per share that is lower
than the then Conversion Price, other than in connection with any Common Stock
Equivalents outstanding on the Original Issue Date (such lower price, the “Base
Conversion Price” and such issuances, collectively, a “Dilutive Issuance”) (if
the holder of the Common Stock or Common Stock Equivalents 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
issuance, be entitled to receive shares of Common Stock at an effective price
per share that is lower than the Conversion Price, such issuance shall be deemed
to have occurred for less than the Conversion Price on such date of the Dilutive
Issuance), then the Conversion Price shall be reduced to equal the Base
Conversion Price. Such adjustment shall be made whenever such Common Stock or
Common Stock Equivalents are issued. Notwithstanding the foregoing, no
adjustment will be made under this Section 5(b) in respect of an Exempt
Issuance. If Company enters into a Variable Rate Transaction, despite the
prohibition set forth in the Purchase Agreement, Company shall be deemed to have
issued Common Stock or Common Stock Equivalents at the lowest possible
conversion price at which such securities may be converted or exercised. Company
shall notify Holder in writing, no later than the Trading Day following the
issuance of any Common Stock or Common Stock Equivalents subject to this Section
5(b), indicating therein the applicable issuance price, or applicable reset
price, exchange price, conversion price and other pricing terms (such notice,
the “Dilutive Issuance Notice”). For purposes of clarification, whether or not
Company provides a Dilutive Issuance Notice pursuant to this Section 5(b), upon
the occurrence of any Dilutive Issuance, Holder is entitled to receive a number
of Conversion Shares based upon the Base Conversion Price on or after the date
of such Dilutive Issuance, regardless of whether Holder accurately refers to the
Base Conversion Price in the Notice of Conversion.

 

c)         Subsequent Rights Offerings.  If Company, at any time while this
Debenture is outstanding, shall issue rights, options or warrants to all holders
of Common Stock (and not to Holder) entitling them to subscribe for or purchase
shares of Common Stock (the “Purchase Rights”), then, upon any conversion of
this Debenture, Holder will be entitled to acquire, upon the terms applicable to
such Purchase Rights, the aggregate Purchase Rights that Holder could have
acquired if Holder had held the number of Conversion Shares issued upon such
conversion of this Debenture immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of shares of Common
Stock are to be determined for the grant, issue or sale of such Purchase Rights.

 

d)         Pro Rata Distributions. If Company, at any time while this Debenture
is outstanding, shall distribute to all holders of Common Stock (and not to
Holder) evidences of its indebtedness or assets (including cash and cash
dividends) or rights or warrants to subscribe for or purchase any security other
than the Common Stock (a “Distribution”), then, upon any conversion of this
Debenture, Holder shall be entitled to participate in such Distribution to the
same extent that Holder would have participated therein if Holder had held the
number of Conversion Shares issued upon such conversion of this Debenture
immediately before the date on which a record is taken for such Distribution,
or, if no such record is taken, the date as of which the record holders of
shares of Common Stock are to be determined for the participation in such
Distribution.

 

 - 16 - 

 

 

e)         Fundamental Transaction. If, at any time while this Debenture is
outstanding, (i) Company, directly or indirectly, in one or more related
transactions effects any merger or consolidation of Company with or into another
Person, (ii) Company, directly or indirectly, effects any sale, lease, license,
assignment, transfer, conveyance or other disposition of all or substantially
all of its assets in one or a series of related transactions, (iii) any, direct
or indirect, purchase offer, tender offer or exchange offer (whether by Company
or another Person) is completed pursuant to which holders of Common Stock are
permitted to sell, tender or exchange their shares for other securities, cash or
property and has been accepted by the holders of 50% or more of the outstanding
Common Stock, (iv) Company, directly or indirectly, in one or more related
transactions effects any reclassification, reorganization or recapitalization of
the Common Stock or any compulsory share exchange pursuant to which the Common
Stock is effectively converted into or exchanged for other securities, cash or
property, (v) Company, directly or indirectly, in one or more related
transactions consummates a stock or share purchase agreement or other business
combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with another Person whereby such other Person
acquires more than 50% of the outstanding shares of Common Stock (not including
any shares of Common Stock held by the other Person or other Persons making or
party to, or associated or affiliated with the other Persons making or party to,
such stock or share purchase agreement or other business combination) (each a
“Fundamental Transaction”), then, upon any subsequent conversion of this
Debenture, Holder shall have the right to receive, for each Conversion Share
that would have been issuable upon such conversion immediately prior to the
occurrence of such Fundamental Transaction, the number of shares of Common Stock
of the successor or acquiring corporation or of the Company, if it is the
surviving corporation, and any additional consideration (the “Alternate
Consideration”) receivable as a result of such Fundamental Transaction by a
holder of the number of shares of Common Stock for which this Debenture is
convertible immediately prior to such Fundamental Transaction.  For purposes of
any such conversion, the determination of the Conversion Price shall be
appropriately adjusted to apply to such Alternate Consideration based on the
amount of Alternate Consideration issuable in respect of one (1) share of Common
Stock in such Fundamental Transaction, and Company shall apportion the
Conversion Price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the Alternate
Consideration.  If holders of Common Stock are given any choice as to the
securities, cash or property to be received in a Fundamental Transaction, then
Holder shall be given the same choice as to the Alternate Consideration it
receives upon any conversion of this Debenture following such Fundamental
Transaction.  Company shall cause any successor entity in a Fundamental
Transaction in which Company is not the survivor (the “Successor Entity”) to
assume in writing all of the obligations of Company under this Debenture and the
other Transaction Documents (as defined in the Purchase Agreement) in accordance
with the provisions of this Section 5(d) pursuant to written agreements in form
and substance reasonably satisfactory to Holder and approved by Holder (without
unreasonable delay) prior to such Fundamental Transaction and shall, at the
option of the holder of this Debenture, deliver to Holder in exchange for this
Debenture a security of the Successor Entity evidenced by a written instrument
substantially similar in form and substance to this Debenture which is
convertible for a corresponding number of shares of capital stock of such
Successor Entity (or its parent entity) equivalent to the shares of Common Stock
acquirable and receivable upon conversion of this Debenture (without regard to
any limitations on the conversion of this Debenture) prior to such Fundamental
Transaction, and with a conversion price which applies the conversion price
hereunder to such shares of capital stock (but taking into account the relative
value of the shares of Common Stock pursuant to such Fundamental Transaction and
the value of such shares of capital stock, such number of shares of capital
stock and such conversion price being for the purpose of protecting the economic
value of this Debenture immediately prior to the consummation of such
Fundamental Transaction), and which is reasonably satisfactory in form and
substance to Holder. Upon the occurrence of any such Fundamental Transaction,
the Successor Entity shall succeed to, and be substituted for (so that from and
after the date of such Fundamental Transaction, the provisions of this Debenture
and the other Transaction Documents referring to “Company” shall refer instead
to the Successor Entity), and may exercise every right and power of Company and
shall assume all of the obligations of Company under this Debenture and the
other Transaction Documents with the same effect as if such Successor Entity had
been named as Company herein.

 

 - 17 - 

 

 

e)         Calculations.  All calculations under this Section 5 shall be made to
the nearest cent or the nearest 1/100th of a share, as the case may be.  For
purposes of this Section 5, the number of shares of Common Stock deemed to be
issued and outstanding as of a given date shall be the sum of the number of
shares of Common Stock (excluding any treasury shares of Company) issued and
outstanding.

 

f)         Notice to Holder.

 

i.           Adjustment to Conversion Price.  Whenever the Conversion Price is
adjusted pursuant to any provision of this Section 5, Company shall within 10
calendar days of such adjustment deliver to Holder a notice setting forth the
Conversion Price after such adjustment and setting forth a brief statement of
the facts requiring such adjustment.

 

ii.         Notice to Allow Conversion by Holder.  If (A) Company shall declare
a dividend (or any other distribution in whatever form) on the Common Stock, (B)
Company shall declare a special nonrecurring cash dividend on or a redemption of
the Common Stock, (C) Company shall authorize the granting to all holders of the
Common Stock of rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights, (D) the approval of any
stockholders of Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which
Company is a party, any sale or transfer of all or substantially all of the
assets of Company, or any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property or (E) Company shall authorize
the voluntary or involuntary dissolution, liquidation or winding up of the
affairs of Company, then, in each case, Company shall cause to be filed at each
office or agency maintained for the purpose of conversion of this Debenture, and
shall cause to be delivered to Holder at its last address as it shall appear
upon the Debenture Register, at least twenty (20) calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of the Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange, provided that the
failure to deliver such notice or any defect therein or in the delivery thereof
shall not affect the validity of the corporate action required to be specified
in such notice.  To the extent that any notice provided hereunder constitutes,
or contains, material, non-public information regarding Company or any of its
Subsidiaries, Company shall simultaneously file such notice with the Commission
pursuant to a Current Report on Form 8-K.   Holder shall remain entitled to
convert this Debenture during the 20-day period commencing on the date of such
notice through the effective date of the event triggering such notice except as
may otherwise be expressly set forth herein.

 

Section 6.           Redemption.

 

a)         Optional Redemption at Election of Holder. Subject to the provisions
of this Section 6, at any time after either (i) the date Company announces a
Change of Control Transaction or (ii) the date Company or any Subsidiary enters
into an agreement providing for the sale of a material portion of their
respective assets, Holder may deliver a notice to Company (a “Holder Optional
Redemption Notice” and the date such notice is deemed delivered hereunder, the
“Holder Optional Redemption Notice Date”) of its irrevocable election to cause
Company redeem some or all of the then outstanding principal amount of this
Debenture for cash in an amount equal to the Optional Redemption Amount on the
later of (i) the 5th Trading Day following the Holder Optional Redemption Notice
Date or (ii) the date such applicable transaction triggering such redemption
right is consummated (such date, the “Holder Optional Redemption Date” and such
redemption, the “Holder Optional Redemption”). The Optional Redemption Amount is
payable in full on the Holder Optional Redemption Date. Any Holder Optional
Redemption shall be applied ratably to all Holders that submit a Holder Optional
Redemption based on their (or their predecessor’s) initial purchases of
Debentures pursuant to the Purchase Agreement. Company hereby agrees to publicly
disclose any Change of Control Transaction or entry into an asset sale agreement
which would trigger a redemption right hereunder within one Trading Day from the
date such agreement or transaction is entered into.

 

 - 18 - 

 

 

b)         Redemption Procedure.  The payment of cash pursuant to a Holder
Optional Redemption shall be payable on the applicable Holder Optional
Redemption Date.  If any portion of the payment pursuant to a Holder Optional
Redemption shall not be paid by Company by the Holder Optional Redemption Date,
interest shall accrue on the aggregate amount payable by Company at the Default
Rate until such amount is paid in full.

 

Section 7.          Negative Covenants. As long as any portion of this Debenture
remains outstanding, unless Holder shall have otherwise given prior written
consent, Company shall not, and shall not permit any of the Subsidiaries to,
directly or indirectly:

 

a)         other than for the Permitted Indebtedness, enter into, create, incur,
assume, guarantee or suffer to exist any Indebtedness;

 

b)         other than for Permitted Liens, enter into, create, incur, assume or
suffer to exist any Liens of any kind, on or with respect to any of its property
or assets now owned or hereafter acquired or any interest therein or any income
or profits therefrom;

 

c)         amend its charter documents, including, without limitation, its
certificate of incorporation and bylaws, in any manner that materially and
adversely affects any rights of Holder;

 

d)         repay, repurchase or offer to repay, repurchase or otherwise acquire
more than a de minimis number of shares of its Common Stock or Common Stock
Equivalents other than as to the Conversion Shares or Warrant Shares as
permitted or required under the Transaction Documents;

 

e)         repay, repurchase or offer to repay, repurchase or otherwise acquire
any Indebtedness using the proceeds of the Debentures issued on the Closing
Date;

 

f)         pay cash dividends or distributions on any equity securities of
Company;

 

g)         enter into any transaction with any Affiliate of Company which would
be required to be disclosed in any public filing with the Commission, unless
such transaction is made on an arm’s-length basis and expressly approved by a
majority of the disinterested directors of Company (even if less than a quorum
otherwise required for board approval);

 

h)         issue any additional Common Stock or securities of Company or any of
its Subsidiaries other than (i) pursuant to an Exempt Capital Raise; (ii) up to
1,400,000 shares of Common Stock to employees and other service providers of
Company as compensation for services provided to Company provided that the issue
price for such Common Stock exceeds the then effective Conversion Price; (iii)
up to 1,150,895 shares of Common Stock to Liberty in partial payment of the
Liberty Debt pursuant to the terms of the Liberty Loan Documents or (iv)
issuance of stock options (or shares of Common Stock in exchange for such stock
options) pursuant to Company’s stock option plan in effect on the Closing Date;

 

 - 19 - 

 

 

i)         make any investments other than (i) investments in cash and/or cash
equivalents and (ii) investments by Company in the Australian Subsidiary;

 

j)         dissolve, liquidate, merge, consolidate or otherwise alter or modify
Company’s or any Subsidiaries’ corporate name, mailing address, principal place
of business, structure, status or existence or enter into or engage in any
operation or activity materially different from that presently conducted by
Company or such Subsidiary; make any substantial change in its executive
management, or form any Subsidiary;

 

k)         sell, lease, transfer or otherwise dispose of its properties, assets,
rights, licenses and franchises to any Person, except sales of production or
inventory in the ordinary course of its business or turn over the management of,
or enter a management contract with respect to, such properties, assets, rights,
licenses and franchises or enter into any arrangement, directly or indirectly,
with any Person whereby it shall sell or transfer any property, real, personal
or mixed, used or useful in its business, whether now owned or hereafter
acquired, and thereafter rent or lease such property; or

 

l)         enter into any agreement with respect to any of the foregoing.

 

Section 8.          Events of Default.

 

a)         “Event of Default” means, wherever used herein, any of the following
events (whatever the reason for such event and whether such event 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 (A) the principal amount of any
Debenture or (B) interest, liquidated damages and other amounts owing to any
Holder of a Debenture, as and when the same shall become due and payable
(whether on an Interest Settlement Date, a Conversion Date or the Maturity Date
or by acceleration or otherwise), and solely with respect to payment of interest
in cash after delivery of a Cash Pay Notice such failure continues for three (3)
Trading Days after an Interest Settlement Date;

 

ii.         Company shall fail to observe or perform any other covenant or
agreement contained in a Transaction Document (other than (x) a breach by
Company of its obligations to deliver shares of Common Stock to Holder upon
conversion or a breach by Company of its obligations to deliver shares of Common
Stock to the holder of a Warrant upon exercise thereof which breaches are
addressed in clause (vii) below or (y) any failure by Company to observe or
perform any covenant or agreement contained in the Registration Rights
Agreement, except as set forth in clause (x) below) which failure, unless a cure
period is specifically provided with respect to such failure to observe or
perform, is not cured, if possible to cure, within the earlier to occur of (A) 4
Trading Days after notice of such failure sent by Holder or by any other Holder
to Company and (B) 7 Trading Days after Company has become or should have become
aware of such failure;

 

iii.         any representation or warranty made in this Debenture or any other
Transaction Documents, any written statement pursuant hereto or thereto or any
other report, financial statement or certificate made or delivered to Holder
shall be untrue or incorrect in any material respect as of the date when made or
deemed made;

 

iv.         a Bankruptcy Event shall occur;

 

 - 20 - 

 

 

v.          Company or any Subsidiary shall default on any of its obligations
under (A) the Liberty Debt or (B) 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 that, in the case of this clause (B): (1) involves an
obligation greater than $75,000, whether such indebtedness now exists or shall
hereafter be created, and (2) results in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise become
due and payable;

 

vi.         Company shall be a party to any Change of Control Transaction or a
Fundamental Transaction or shall agree to sell or dispose of all or in excess of
50% of its assets in one transaction or a series of related transactions
(whether or not such sale would constitute a Change of Control Transaction);

 

vii.         Company shall fail for any reason to deliver certificates to Holder
prior to the third Trading Day after the Share Delivery Date pursuant to Section
4(c) or fail to deliver certificates to a holder of Warrants prior to the third
Trading Day after the Warrant Share Delivery Date (as defined in the Warrants)
or Company shall provide at any time notice to Holder, including by way of
public announcement, of Company’s intention to not honor requests for
conversions of any Debentures in accordance with the terms hereof or exercise of
the Warrants in accordance with the terms thereof;

 

viii.       any monetary judgment, writ or similar final process shall be
entered against Company, any Subsidiary or any of their respective property or
other assets for more than $75,000, and such judgment, writ or similar final
process shall remain unvacated, unbonded or unstayed for a period of 45 calendar
days;

 

ix.         Company fails to meet the current public information requirements
under Rule 144 in respect of the Underlying Shares for more than 10 consecutive
Trading Days;

 

x.          Company shall fail to pay when due any liquidated damages under the
Registration Rights Agreement as and when the same shall become due and payable
and such failure continues for 30 calendar days;

 

xi.         Company shall fail to deliver a certificate of a responsible officer
of Company (each such certificate, an “Annual License Milestone Certificate”) to
Purchaser at least 90 days prior to the required completion date for each
“minimum work requirement” to be completed under the Petroleum Exploration
License certifying (A) that Company has adequate funds to fulfill the applicable
annual minimum work requirement in accordance with the terms of the Petroleum
Exploration License; (B) that Company expects to be able to fulfill the
applicable annual minimum work requirement in accordance with the terms of the
Petroleum Exploration License and (C) as to other matters relating to the
Petroleum Exploration License as requested by Purchaser;

 

xii.        termination of the Petroleum Exploration License; or

 

xiii.       either (A) Company delivers an Annual License Milestone Certificate
which indicates a prospective non-compliance with the certifications required by
subclauses (A) and/or (B) in clause (xi) above or (B) Company fails to meet any
of the annual minimum work requirements set forth in the Petroleum Exploration
License.

 

 - 21 - 

 

 

b)         Remedies Upon Event of Default. If any Event of Default has occurred
and is continuing, the outstanding principal amount of this Debenture, plus
accrued but unpaid interest, liquidated damages and other amounts owing in
respect thereof through the date of acceleration, shall become, at the Majority
Holders’ election, immediately due and payable in cash at the Mandatory Default
Amount.  Commencing 5 calendar days after the occurrence of any Event of Default
that results in the eventual acceleration of this Debenture, interest on the
Mandatory Default Amount shall accrue at the Default Rate.  Upon the payment in
full of the Mandatory Default Amount, Holder shall promptly surrender this
Debenture to or as directed by Company.  In connection with such acceleration
described herein, Holder need not provide, and Company hereby waives, any
presentment, demand, protest or other notice of any kind, and the Holder 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 Holder at
any time prior to payment hereunder and Holder shall have all rights as a holder
of the Debenture until such time, if any, as Holder receives full payment
pursuant to this Section 8(b).  No such rescission or annulment shall affect any
subsequent Event of Default or impair any right consequent thereon.

 

Section 9.          Miscellaneous.

 

a)         Notices.  Any and all notices or other communications or deliveries
to be provided by Holder hereunder, including, without limitation, any Notice of
Conversion, shall be in writing and delivered personally, by facsimile or email,
or sent by an internationally recognized overnight courier service, addressed to
Company, set forth in the Purchase Agreement, or such other facsimile number,
email address or address as Company may specify for such purposes by notice to
Holder delivered in accordance with this Section 9(a).  Any and all notices or
other communications or deliveries to be provided by Company hereunder shall be
in writing and delivered, by facsimile or email, or sent by an internationally
recognized overnight courier service addressed to each Holder at the facsimile
number, email address or address of Holder appearing on the books of Company, or
if no such facsimile number, email address or address appears on the books of
Company, at the principal place of business of Holder, as set forth in the
Purchase Agreement.  Any notice or other communication or deliveries hereunder
shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile or
email at the facsimile number or email address set forth on the signature pages
attached hereto prior to 5:30 p.m. (New York City time) on any date, (ii) the
next Trading Day after the date of transmission, if such notice or communication
is delivered via facsimile or email at the facsimile number or email address set
forth on the signature pages attached hereto on a day that is not a Trading Day
or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the
second Trading Day following the date of mailing, if sent by U.S. recognized
overnight courier service or (iv) upon actual receipt by the party to whom such
notice is required to be given. If an email address is provided for a party on
the signature pages attached hereto, notice to such party given by other means
hereunder shall also be given by email, provided, that failure to deliver a
duplicate notice by email shall not constitute a failure to deliver the
applicable notice.

 

b)         Absolute Obligation. Except as expressly provided herein, no
provision of this Debenture shall alter or impair the obligation of Company,
which is absolute and unconditional, to pay the principal of, liquidated damages
and accrued interest, as applicable, on this Debenture at the time, place, and
rate, and in the coin or currency, herein prescribed.  This Debenture is a
direct debt obligation of Company. This Debenture ranks pari passu with all
other Debentures now or hereafter issued under the terms set forth herein.

 

c)         Lost or Mutilated Debenture.  If this Debenture shall be mutilated,
lost, stolen or destroyed, Company shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated Debenture, or in lieu of
or in substitution for a lost, stolen or destroyed Debenture, a new Debenture
for the principal amount of this Debenture so mutilated, lost, stolen or
destroyed, but only upon receipt of evidence of such loss, theft or destruction
of such Debenture, and of the ownership hereof and a lost Debenture affidavit,
reasonably satisfactory to Company.

 

 - 22 - 

 

 

d)         Governing Law.  All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflict of laws thereof. Each party
agrees that all legal proceedings concerning the interpretation, enforcement and
defense of the transactions contemplated by any of the Transaction Documents
(whether brought against a party hereto or its respective Affiliates, directors,
officers, shareholders, employees or agents) shall be commenced in the state and
federal courts sitting in the City of New York, County of New York (the “New
York Courts”) unless otherwise specified therein. Each party hereto hereby
irrevocably submits to the exclusive jurisdiction of the New York Courts for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein (including with respect to
the enforcement of any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of such New York Courts,
or such New York Courts are improper or inconvenient venue for such proceeding.
Each party hereby irrevocably waives personal service of process and consents to
process being served in any such suit, action or proceeding by mailing a copy
thereof via registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under this
Debenture and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any other manner permitted by
applicable law. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY
LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS DEBENTURE OR THE
TRANSACTIONS CONTEMPLATED HEREBY. IF ANY PARTY SHALL COMMENCE AN ACTION OR
PROCEEDING TO ENFORCE ANY PROVISIONS OF THIS DEBENTURE, THEN THE PREVAILING
PARTY IN SUCH ACTION OR PROCEEDING SHALL BE REIMBURSED BY THE OTHER PARTY FOR
ITS ATTORNEYS FEES AND OTHER COSTS AND EXPENSES INCURRED IN THE INVESTIGATION,
PREPARATION AND PROSECUTION OF SUCH ACTION OR PROCEEDING.

 

e)         Waiver.  Any waiver by Company or Holder of a breach of any provision
of this Debenture shall not operate as or be construed to be a waiver of any
other breach of such provision or of any breach of any other provision of this
Debenture.  The failure of Company or Holder to insist upon strict adherence to
any term of this Debenture on one or more occasions shall not be considered a
waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Debenture on any other
occasion.  Any waiver by Company or Holder must be in writing.

 

f)         Severability.  If any provision of this Debenture is invalid, illegal
or unenforceable, the balance of this Debenture shall remain in effect, and if
any provision is inapplicable to any Person or circumstance, it shall
nevertheless remain applicable to all other Persons and circumstances.  If it
shall be found that any interest or other amount deemed interest due hereunder
violates the applicable law governing usury, the applicable rate of interest due
hereunder shall automatically be lowered to equal the maximum rate of interest
permitted under applicable law. Company covenants (to the extent that it may
lawfully do so) that it shall not at any time insist upon, plead, or in any
manner whatsoever claim or take the benefit or advantage of, any stay, extension
or usury law or other law which would prohibit or forgive Company from paying
all or any portion of the principal of or interest on this Debenture as
contemplated herein, wherever enacted, now or at any time hereafter in force, or
which may affect the covenants or the performance of this Debenture, and Company
(to the extent it may lawfully do so) hereby expressly waives all benefits or
advantage of any such law, and covenants that it will not, by resort to any such
law, hinder, delay or impede the execution of any power herein granted to
Holder, but will suffer and permit the execution of every such as though no such
law has been enacted.

 

 - 23 - 

 

 

g)         Next Business Day.  Whenever any payment or other obligation
hereunder shall be due on a day other than a Business Day, such payment shall be
made on the next succeeding Business Day.

 

h)         Headings.  The headings contained herein are for convenience only, do
not constitute a part of this Debenture and shall not be deemed to limit or
affect any of the provisions hereof.

 

i)         Secured Obligation.  The obligations of Company under this Debenture
are secured by all assets of Company and each Subsidiary (other than the
Petroleum Exploration License) pursuant to the Security Agreement and the
Australian Security Agreement, each dated as of May 27, 2016 among Company, the
relevant Subsidiaries of Company and Agent.

 

j)         Amendments.  This Debenture and each of the other Debentures issued
under the Purchase Agreement may be amended upon the written consent of Company
and the Majority Holders.

 

(Signature Pages Follow)

 

 - 24 - 

 

 

IN WITNESS WHEREOF, Company has caused this Debenture to be duly executed by a
duly authorized officer as of the date first above indicated.

 

  DISCOVERY ENERGY CORP.         By:       Keith D. Spickelmier, Chairman      
 

Facsimile No. for delivery of Notices:

(713) 622-1937

Email address for delivery of Notices:

kspickelmier1@comcast.net

kjm@discoveryenergy.com

 

Signature Page to Senior Secured Convertible Debenture (Texican)

 

 

 

 

ANNEX A

 

NOTICE OF CONVERSION

 

The undersigned hereby elects to convert principal under the Senior Secured
Convertible Debenture due May 27, 2021 of Discovery Energy Corp., a Nevada
corporation (the “Company”), into shares of common stock (the “Common Stock”),
of Company according to the conditions hereof, as of the date written below.  If
shares of Common Stock are to be issued in the name of a person other than the
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by Company in accordance therewith.  No fee will be charged to the
holder for any conversion, except for such transfer taxes, if any.

 

By the delivery of this Notice of Conversion, the undersigned represents and
warrants to the Company that the undersigned’s representations and warranties
contained in Section 3.2 of the Purchase Agreement (as defined in the
Debenture), including that the undersigned is either (i) an “accredited
investor” as defined in Rule 501(a) under the Securities Act or (ii) a
“qualified institutional buyer” as defined in Rule 144A(a) under the Securities
Act as of the giving of this Notice of Conversion, are true and correct as of
the giving of this Notice of Conversion.

 

The undersigned agrees to comply with the prospectus delivery requirements under
the applicable securities laws in connection with any transfer of the aforesaid
shares of Common Stock.

 

Conversion calculations:

 

Date to Effect Conversion:

 

Principal Amount of Debenture to be Converted:

 

Accrued and Unpaid Interest on Amount of Debenture to be Converted:

 

Number of shares of Common Stock to be issued:

 

  Signature:       Name:       Address for Delivery of Common Stock
Certificates:

 

Or

 

DWAC Instructions:

 

Broker No:_________________________

Account No:_______________________

 

 

 

 

Schedule 1

 

CONVERSION SCHEDULE

 

The Senior Secured Convertible Debentures due on May 27, 2021 in the aggregate
principal amount of [$         ] issued by Discovery Energy Corp., a Nevada
corporation.  This Conversion Schedule reflects conversions made under Section 4
of the above referenced Debenture.

 

Dated:

 

Date of Conversion

(or for first entry, Original
Issue Date)

  Amount of Conversion   Aggregate Principal
Amount Remaining
Subsequent to
Conversion
(or original Principal
Amount)   Company Attest                            

 

Exhibit C to Second Amendment to Securities Purchase Agreement