Exhibit 10.02
 
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS 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 OR OTHER
LOAN SECURED BY SUCH SECURITIES.

PURSUANT TO THE TERMS OF THIS CONVERTIBLE NOTE, ALL OR A PORTION OF THIS
CONVERTIBLE NOTE MAY HAVE BEEN REDEEMED OR CONVERTED, AND THEREFORE THE ACTUAL
PRINCIPAL AMOUNT OUTSTANDING REPRESENTED BY THIS CONVERTIBLE NOTE MAY BE LESS
THAN THE AMOUNT SET FORTH ON THE FACE HEREOF.

Original Issue Date: January 9, 2015
Original Conversion Price (subject to adjustment herein): $________

$_______________

12% SENIOR SECURED CONVERTIBLE NOTE

THIS 12% SENIOR SECURED CONVERTIBLE NOTE is one of a series of duly authorized
and validly issued 12% Senior Secured Convertible Notes of Pegasi Energy
Resources Corp., a Nevada corporation (the “Company”), having its principal
place of business at 218 N. Broadway, Suite 204, Tyler, Texas 75702, designated
as its 12% Senior Secured Convertible Note (this Note, the “Note” and,
collectively with the other Notes of such series, the “Notes”).

FOR VALUE RECEIVED, the Company promises to pay to ________________________ or
its registered assigns (the “Holder”), or shall have paid pursuant to the terms
hereunder, the principal sum of $_______________ upon written demand of the
Required Holders at any time after 12 months from the Original Issue Date (the
“Maturity Date”) or such earlier date as this Note is required or permitted to
be repaid as provided hereunder, and to pay interest to the Holder on the
aggregate unconverted and then outstanding principal amount of this Note in
accordance with the provisions hereof.  This Note is senior in right of payment
to all of the Company's outstanding indebtedness.  This Note is subject to the
following additional provisions:
 
 
 

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

“Bankruptcy Event” means any of the following events: (a) the 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 the
Company or any Significant Subsidiary thereof, (b) there is commenced against
the Company or any Significant Subsidiary thereof any such case or proceeding
that is not dismissed within 60 days after commencement, (c) the 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)
the Company or any Significant Subsidiary thereof suffers any appointment of any
custodian or the like for it or any substantial part of its property that is not
discharged or stayed within 60 calendar days after such appointment, (e) the
Company or any Significant Subsidiary thereof makes a general assignment for the
benefit of creditors, (f) the Company or any Significant Subsidiary thereof
calls a meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts or (g) the 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.

“Beneficial Ownership Limitation” shall have the meaning set forth in Section
4(d).

“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 the 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 Notes and the Securities issued together with the Notes), (b) the Company
merges into or consolidates with any other Person, or any Person merges into or
consolidates with the Company and, after giving effect to such transaction, the
stockholders of the Company immediately prior to such transaction own less than
50% of the aggregate voting power of the Company or the successor entity of such
transaction, (c) the Company sells or transfers all or substantially all of its
assets to another Person and the stockholders of the 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 liquidation,
dissolution or winding up of the Company, (e) a replacement at one time or
within a three year period of more than one half of the members of the Company's
board of directors that is not approved by a majority of those individuals who
are members of the board of directors on the date hereof (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 (f)
the execution by the Company of an agreement to which the Company  is a party or
by which it is bound, providing for any of the events set forth in clauses (a)
through (e) above.
 
 
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“Conversion” shall have the meaning ascribed to such term in Section 4.

“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 I
attached hereto.

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

“Effective Date” means the date when a Registration Statement has been declared
effective by the SEC.

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

“Excluded Securities” means any issuance of Common Stock: (a) issued to
employees or consultants pursuant to employment and/or consulting agreements
approved by the Board; (b) issued pursuant to any equity compensation plan of
the Company approved by the Board, provided that the shares of Common Stock
issued pursuant to clauses (a) and (b) do not exceed, in the aggregate,
7,000,000 shares; (c) issued in connection with stock splits, stock combinations
and other similar transactions; and (d) upon conversion and/or exercise of any
convertible securities issued and outstanding as of the Original Issue Date,
provided that the conversion or exercise (as the case may be) of any such
convertible security is not lowered.

“Fundamental Transaction” means any one of the following:  (i) the Company,
directly or indirectly, in one or more related transactions effects any merger
or consolidation of the Company with or into another Person, (ii) the 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 (excluding specifically the license or other
disposition of the Company’s intellectual property in the ordinary course of
business), (iii) any, direct or indirect, purchase offer, tender offer or
exchange offer (whether by the 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) the 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, or (v) the
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 or group of Persons whereby such other Person
or group 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).
 
 
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“New York Courts” shall have the meaning set forth in Section 9(d).

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

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

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

“Permitted Indebtedness” means (a) the indebtedness evidenced by the Notes, (b)
the indebtedness existing on the Original Issue Date as set forth on Schedule II
attached hereto, (c) trade payables and (d) indebtedness consisting of lease
obligations and purchase money indebtedness incurred in connection with the
acquisition of capital assets and lease obligations with respect to newly
acquired or leased assets, properties or leases, provided, however, that in each
case of clauses (b), (c) and (d), except as expressly set forth on Schedule II,
such obligations are not secured by liens on any assets of the Company or its
Subsidiaries existing as of the original date of this Note and may only be
secured by the assets so acquired or leased thereafter.

“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 the Company) have been
established in accordance with GAAP, (b) Liens imposed by law which were
incurred in the ordinary course of the Company’s business, such as carriers’,
warehousemen’s and mechanics’ Liens, statutory landlords’ Liens, and other
similar Liens arising in the ordinary course of the Company’s business, and
which (1) 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
(2) are being contested in good faith by appropriate proceedings for which
adequate reserves have been established in accordance with GAAP, 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 in connection with Permitted Indebtedness under clauses (a) and (b)
thereunder (in the case of clause (b), to the extent indicated in Items 1 and 2
of Schedule II), and (d) Liens incurred in connection with Permitted
Indebtedness under clause (d) thereunder, provided that such Liens are not
secured by assets of the Company or its Subsidiaries other than the assets so
acquired or leased, or cash collateral existing in a collateral account on the
date hereof and identified as restricted cash on the Company’s balance sheet.
 
 
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“Purchase Agreement” means the Securities Purchase Agreement, dated as of
January 9, 2015 among the 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 covering the resale of
all the Conversion Shares issuable upon conversion of the outstanding Notes.

“Required Holders” means Holders of at least a majority of principal amount of
the then outstanding Notes.

“SEC” means the United States Securities and Exchange Commission.

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

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

“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, the OTC Bulletin Board, the OTCQX,
the OTCQB or the OTCPK (or any successors to any of the foregoing).

“VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a
Trading Market, the daily volume weighted average price of the Common Stock for
the ten (10) trading days prior to such date (or the nearest preceding date) on
the Trading Market on which the Common Stock is then listed or quoted as
reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. New York City
time to 4:00 p.m. New York City time); (b)  if the OTCQB (or OTCPK) is not a
Trading Market, the volume weighted average price of the Common Stock for the
ten (10) trading days prior to such date (or the nearest preceding date) on the
OTCQB (or OTCPK); (c) if the Common Stock is not then listed or quoted on the
OTCQB (or OTCPK) and if prices for the Common Stock are then reported in the
“Pink Sheets” published by Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the average bid price per
share of the Common Stock so reported for the twenty (20) trading days prior to
such date; or (d) in all other cases, the fair market value of a share of Common
Stock as determined in good faith by the Company’s board of directors.
 
 
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Section 2.                      Interest.

a) Payment of Interest in Cash. The Company shall pay interest to the Holder on
the aggregate unconverted and then outstanding principal amount of this Note at
the rate of 12% per annum, compounded quarterly, subject to adjustment as set
forth herein, payable in cash on the Maturity Date or earlier date of payment.
 
b) Interest Calculations. Interest on the outstanding principal amount shall be
calculated on the basis of a 360-day year, consisting of twelve 30 calendar day
periods, and shall accrue daily commencing on the Original Issue Date until
payment or conversion 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 hereunder will be paid to the
Person in whose name this Note is registered on the records of the Company
regarding registration and transfers of this Note (the “Note Register”).

c) Late Fee.  All overdue accrued and unpaid interest to be paid hereunder shall
entail a late fee at an interest rate equal to 18% per annum, which shall accrue
daily from the date such interest is due hereunder through and including the
date of actual payment in full.

d) Prepayment.  The Company may, upon thirty (30) days prior written notice
thereof, after the later of (i) February 28, 2015, or (ii) the date the initial
Registration Statement covering the resale of the Registrable Securities is
declared effective under the Securities Act, as such capitalized terms are
defined under the Registration Rights Agreement dated as of January 9, 2015
entered into by the Company and the holders of the Notes and the related
warrants, prepay any portion of the principal amount of this Note without the
prior written consent of the Holder; provided, however, that if the Company
gives any such written notice of prepayment prior to the 11 month anniversary of
Original Issue Date, it shall be obligated to pay a premium equal to 10% of the
amount of principal of this Note being called for prepayment under such written
notice, regardless of whether such principal amount is then converted into
Conversion Shares prior to such prepayment.  The Company's election to prepay
any portion of the principal amount of this Note shall be applied ratably to all
holders of Notes based on their initial purchase of Notes pursuant to the
Purchase Agreement.
 
 
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Section 3.                      Registration of Transfers and Exchanges.
 
a) Different Denominations. This Note is exchangeable for an equal aggregate
principal amount of Notes of different authorized denominations, as requested by
the Holder surrendering the same.  No service charge will be payable for such
registration of transfer or exchange.
 
b) Investment Representations. This Note 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 Note Register. Prior to due presentment for transfer to the
Company of this Note, the Company and any agent of the Company may treat the
Person in whose name this Note is duly registered on the Note Register as the
owner hereof for the purpose of receiving payment as herein provided and for all
other purposes, whether or not this Note is overdue, and neither the Company nor
any such agent shall be affected by notice to the contrary.

Section 4.                      Conversion.
 
a) Voluntary Conversion. At any time after the Original Issue Date until this
Note is no longer outstanding, the Holder shall be entitled to convert any
portion of the outstanding and unpaid Conversion Amount (as defined below) into
validly issued, fully paid and non-assessable shares of Common Stock, at the
Conversion Rate (as defined below) (subject to the conversion limitations set
forth in Section 4(d)).  The Holder shall effect conversions by delivering to
the 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 Note to be converted and the date on which such conversion shall
be effected (such date, the “Conversion Date”).  The Conversion Date shall be no
earlier than the date that such Notice of Conversion is deemed delivered
hereunder.  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, the Holder shall not be
required to physically surrender this Note to the Company unless the entire
principal amount of this Note, plus all accrued and unpaid interest thereon, has
been so converted. Conversions hereunder shall have the effect of lowering the
accrued and then unpaid interest on this Note and thereafter lowering the
outstanding principal amount of this Note in an amount equal to the applicable
conversion.  Following delivery of the Notice of Conversion to the Company, the
Company shall promptly update the Conversion Schedule (showing the principal
amount(s) converted and the date of such conversion(s)) and deliver the same to
the Holder.  In the event of any dispute or discrepancy, the records of the
Holder shall be controlling and determinative in the absence of manifest error.
The Holder, and any assignee by acceptance of this Note, acknowledge and agree
that, by reason of the provisions of this paragraph, following conversion of a
portion of this Note, the unpaid and unconverted principal amount of this Note
and accrued interest therein may be less than the amount stated on the face
hereof.
 
 
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b) Conversion Price.  The conversion price in effect on any Conversion Date
shall be equal to the lower of (i) $0.12 or (ii) the higher of (x) $0.05 or (y)
the VWAP on the Trading Day immediately preceding the Conversion Date, subject
to adjustment herein (the “Conversion Price”).

c)  Mechanics of Conversion.
 
i. Conversion Shares Issuable Upon Conversion of Principal Amount.  The number
of Conversion Shares issuable upon a conversion hereunder shall be determined by
the quotient obtained by dividing (x) the Conversion Amount by (y) the
Conversion Price.  “Conversion Amount” means the portion of the principal to be
converted plus all accrued and unpaid Interest with respect to such portion of
the principal amount.

ii. Delivery of Certificate Upon Conversion. Not later than three (3) Trading
Days after each Conversion Date (the “Share Delivery Date”), the Company shall
deliver, or cause to be delivered, to the Holder a certificate or certificates
representing the Conversion Shares which, on or after the earlier of (i) the
one-year anniversary of the Original Issue Date (if the Holder is not an
Affiliate of the Company and has not been an Affiliate during the preceding
three (3) months) or (ii) the Effective Date, 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 Note. On or after the earlier of (i) the
one year anniversary of the Original Issue Date or (ii) the Effective Date, the
Company shall use its best efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section 4(c) electronically
through the Depository Trust Company 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 delivered to or as directed
by the applicable Holder by the Share Delivery Date, the Holder shall be
entitled to elect by written notice to the Company at any time on or before its
receipt of such certificate or certificates, to rescind such Conversion, in
which event the Company shall promptly return to the Holder any original Note
delivered to the Company and the Holder shall promptly return to the Company the
Common Stock certificates issued to such Holder pursuant to the rescinded
Conversion Notice.
 
 
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iv. Obligation Absolute; Potential Liquidated Damages.  If the Company fails for
any reason to deliver to the Holder such certificate or certificates pursuant to
Section 4(c)(ii)  by the fifth Trading Day after the Conversion Date, the
Company shall pay to such Holder, in cash, as liquidated damages and not as a
penalty, for each $1,000 of principal amount being converted, $10 per Trading
Day (increasing to $20 per Trading Day after 10 Trading Days after such damages
begin to accrue) for each Trading Day after such fifth Trading Day until such
certificates are delivered.  The Company’s obligations to issue and deliver the
Conversion Shares upon conversion of this Note in accordance with the terms
hereof are absolute and unconditional, irrespective of any action or inaction by
the 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 the Holder or any other Person
of any obligation to the Company or any violation or alleged violation of law by
the Holder or any other Person, and irrespective of any other circumstance which
might otherwise limit such obligation of the Company to the Holder in connection
with the issuance of such Conversion Shares; provided, however, that such
delivery shall not operate as a waiver by the Company of any such action the
Company may have against the Holder.  In the event the Holder of this Note shall
elect to convert any or all of the outstanding principal amount hereof, the
Company may not refuse conversion based on any claim that the Holder or anyone
associated or affiliated with the 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
Note shall have been sought and obtained, and the Company posts a surety bond
for the benefit of the Holder in the amount of 150% of the outstanding principal
amount of this Note, 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 the Holder to the extent
it obtains judgment.  In the absence of such injunction, the Company shall issue
Conversion Shares or, if applicable, cash, upon a properly noticed
conversion.  The Holder shall have the right to pursue actual damages or declare
an Event of Default pursuant to Section 8 hereof for the Company’s failure to
deliver Conversion Shares within the period specified herein and the 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 the
Holder from seeking to enforce damages pursuant to any other Section hereof or
under applicable law.
 
 
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v. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion. In addition to any other rights available to the Holder, if the
Company fails for any reason to deliver to the Holder such certificate or
certificates by the Share Delivery Date pursuant to Section 4(c)(ii), and if
after such Share Delivery Date the Holder is required by its brokerage firm to
purchase (in an open market transaction or otherwise), or the Holder’s brokerage
firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a
sale by the Holder of the Conversion Shares which the Holder was entitled to
receive upon the conversion relating to such Share Delivery Date (a “Buy-In”),
then the Company shall (A) pay in cash to the Holder (in addition to any other
remedies available to or elected by the Holder) the amount, if any, by which (x)
the 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 the 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 the Holder, either reissue (if
surrendered) this Note 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 the Holder the number of shares of Common Stock that
would have been issued if the Company had timely complied with its delivery
requirements under Section 4(c)(ii).  For example, if the 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 Note 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, the Company shall be required to pay the Holder
$1,000.  The Holder shall provide the Company written notice indicating the
amounts payable to the Holder in respect of the Buy-In and, upon request of the
Company, evidence of the amount of such loss.  Nothing herein shall limit a
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 the Company’s failure to timely deliver
certificates representing shares of Common Stock upon conversion of this Note as
required pursuant to the terms hereof.
 
vi. Reservation of Shares Issuable Upon Conversion. The 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 Note, free from preemptive rights or any other actual contingent
purchase rights of Persons other than the Holder (and the other holders of the
Notes), 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 Note.  The
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 the
rules and regulations of the SEC.
 
 
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vii. Fractional Shares. No fractional shares or scrip representing fractional
shares shall be issued upon the conversion of this Note.  As to any fraction of
a share which the Holder would otherwise be entitled to purchase upon such
conversion, the 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 Note shall be made without charge to the 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, the 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 Note so converted and the 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 the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
 
 
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d) Holder’s Conversion Limitations.  The Company shall not affect any conversion
of this Note, and a Holder shall not have the right to convert any portion of
this Note, to the extent that after giving effect to the conversion set forth on
the applicable Notice of Conversion, the Holder (together with the Holder’s
Affiliates, and any Persons acting as a group together with the Holder or any of
the Holder’s  or such Persons’ Affiliates) would beneficially own in excess of
the Beneficial Ownership Limitation (as defined below).  For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned by
the Holder and its Affiliates shall include the number of shares of Common Stock
issuable upon conversion of this Note with respect to which such determination
is being made, but shall exclude the number of shares of Common Stock which are
issuable upon (i) conversion of the remaining, unconverted principal amount of
this Note beneficially owned by the Holder or any of its Affiliates and (ii)
exercise or conversion of the unexercised or unconverted portion of any other
securities of the Company subject to a limitation on conversion or exercise
analogous to the limitation contained herein (including, without limitation, any
other Notes) beneficially owned by the Holder or any of its Affiliates.  Except
as set forth in the preceding sentence, for purposes of this Section 4(d),
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder.  To the
extent that the limitation contained in this Section 4(d) applies, the
determination of whether this Note is convertible (in relation to other
securities owned by the Holder together with any Affiliates and any Persons
deemed to act as a group together with the Holder and any of the Holder’s or
such Person’s Affiliates) and of which principal amount of this Note is
convertible shall be in the sole discretion of the Holder, and the submission of
a Notice of Conversion shall be deemed to be the Holder’s determination of
whether this Note may be converted (in relation to other securities owned by the
Holder together with any Affiliates) and which principal amount of this Note is
convertible, in each case subject to the Beneficial Ownership Limitation. To
ensure compliance with this restriction, the Holder will be deemed to represent
to the Company each time it delivers a Notice of Conversion that such Notice of
Conversion has not violated the restrictions set forth in this paragraph and the
Company shall have no obligation to verify or confirm the accuracy of such
determination.  In addition, a determination as to any group status as
contemplated above shall be determined in accordance with Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder.   For
purposes of this Section 4(d), in determining the number of outstanding shares
of Common Stock, the Holder may rely on the number of outstanding shares of
Common Stock as stated in the most recent of the following: (i) the Company’s
most recent periodic or annual report filed with the Commission, as the case may
be, (ii) a more recent public announcement by the Company, or (iii) a more
recent written notice by the Company or the Company’s transfer agent setting
forth the number of shares of Common Stock outstanding.  Upon the written or
oral request of a Holder, the Company shall within two Trading Days confirm
orally and in writing to the Holder the number of shares of Common Stock then
outstanding.  In any case, the number of outstanding shares of Common Stock
shall be determined after giving effect to the conversion or exercise of
securities of the Company, including this Note, by the Holder or its Affiliates
since the date as of which such number of outstanding shares of Common Stock was
reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of
shares of the Common Stock outstanding immediately after giving effect to the
issuance of shares of Common Stock issuable upon conversion of this Note held by
the Holder.  The Holder, upon not less than 61 days’ prior notice to the
Company, may increase or decrease the Beneficial Ownership Limitation provisions
of this Section 4(d), provided that the Beneficial Ownership Limitation in no
event exceeds 9.99% of the number of shares of the Common Stock outstanding
immediately after giving effect to the issuance of shares of Common Stock upon
conversion of this Note held by the Holder and the Beneficial Ownership
Limitation provisions of this Section 4(d) shall continue to apply.  Any such
increase or decrease will not be effective until the 61st day after such notice
is delivered to the Company.  The Beneficial Ownership Limitation provisions of
this paragraph shall be construed and implemented in a manner otherwise than in
strict conformity with the terms of this Section 4(d) to correct this paragraph
(or any portion hereof) which may be defective or inconsistent with the intended
Beneficial Ownership Limitation contained herein or to make changes or
supplements necessary or desirable to properly give effect to such limitation.
The limitations contained in this paragraph shall apply to a successor holder of
this Note.
 
 
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Section 5.                      Certain Adjustments.
 
a) Stock Dividends and Stock Splits.  If the Company, at any time while this
Note 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 the Company upon conversion of, or payment
of interest on, the Notes), (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 the 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 the 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.  Simultaneously with any adjustment to the Conversion Price pursuant to
this Section 5(a), the number of Conversion Shares which may be issued upon
conversion of this Note or as payment interest hereon shall be increased or
decreased proportionately, so that after such adjustment, the aggregate amount
of the adjusted Conversion Price multiplied by the aggregate adjusted amount of
Conversion Shares shall equal the aggregate amount of the unadjusted Conversion
Price multiplied by the aggregate unadjusted amount of Conversion Shares.  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.

b) Pro Rata Distributions. If the Company, at any time while this Note  is
outstanding, shall distribute to all holders (and not to Holders on a pro-rata
basis) of Common Stock, evidences of its indebtedness or assets (including cash
or cash dividends) or rights or warrants to subscribe for or purchase any
security, then in each such case the Conversion Price shall be adjusted by
multiplying such Conversion Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such distribution by
a fraction of which the denominator shall be the Closing Price determined as of
the record date mentioned above, and of which the numerator shall be such
Closing Price on such record date less the then the per share fair market value
at such record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of the Common Stock (determined
by dividing the amount distributed by the then issued and outstanding shares of
Common Stock), as the case may be, as determined by the Board of Directors in
good faith. In either case the adjustments shall be described in a statement
provided to the Holder of the portion of assets or evidences of indebtedness so
distributed or such subscription rights applicable to one share of Common Stock.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.
 
 
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c) 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 the Company) issued and
outstanding.

d) Notice to the Holder.

i. Adjustment to Conversion Price.  Whenever the Conversion Price is adjusted
pursuant to any provision of this Section 5, the Company shall promptly deliver
to each 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 or Prepayment by the Company.  If (A)
the Company shall declare a dividend (or any other distribution in whatever
form) on the Common Stock, (B) the Company shall declare a special nonrecurring
cash dividend on or a redemption of the Common Stock, (C) the 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 the Company shall be required in
connection with any Fundamental Transaction or (E) the Company shall authorize
the voluntary or involuntary dissolution, liquidation or winding up of the
affairs of the Company, then, in each case, the Company shall cause to be
delivered to the Holder at its last address as it shall appear upon the Note
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 Fundamental Transaction is expected to become
effective or close, 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 the Company or any of the Subsidiaries, the Company shall
simultaneously file such notice with the Commission pursuant to a Current Report
on Form 8-K.  The Holder shall remain entitled to convert this Note during the
20-day period commencing on the date such notice is delivered to it or him
except as may otherwise be expressly set forth herein.

iii. Notice Regarding Change of Control Transaction.  If the Company shall enter
into a Change of Control Transaction, it will provide notice to the Holder at
least twenty (20) calendar days prior to the effective date of the Change of
Control Transaction.  Immediately prior to the Change of Control Transaction,
the outstanding principal and accrued interest shall either, at the
determination of the Required Holders, (i) become immediately due and payable or
(ii) convert into shares of Common Stock of the Company at the Conversion Price.
 
 
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Section 7.                      Negative Covenants. As long as at least 25% of
the original aggregate principal amount of all Notes remains outstanding (and
treating any Notes owned by the Company or any Affiliate of the Company as not
outstanding for such purpose), unless the Required Holders shall have otherwise
given prior written consent, the Company shall not, and shall not permit any of
the Subsidiaries to, directly or indirectly:
 
a) other than Permitted Indebtedness, enter into, create, incur, assume,
guarantee or suffer to exist any indebtedness for borrowed money of any kind,
including, but not limited to, a guarantee, 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;

b) other than 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
subject to the Security Agreement;

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 the Holder (which limitation shall expressly not apply to any
proposal to increase the number of authorized shares of the Company’s Common
Stock);

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 as permitted or required
under the Transaction Documents;

e) repay, repurchase or offer to repay, repurchase or otherwise acquire any
indebtedness, other than the Notes if on a pro-rata basis;

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

g) enter into any transaction with any Affiliate of the 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 the Company (even if less than a
quorum otherwise required for board approval);

(h) except for Excluded Securities, offer, sell, grant any option to purchase or
offer, sell or grant any right to reprice its securities, or otherwise dispose
of or issue (or announce any offer, sale, grant or any option to purchase or
other disposition) any Common Stock, or Common Stock Equivalents, entitling any
Person to acquire shares of Common Stock, at an effective price per share less
than the then Conversion Price (such lower price, the "Base Conversion Price"
and such issuances collectively, a "Dilutive Issuance"), as adjusted hereunder
(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 is issued in connection with
such issuance, be entitled to receive shares of Common Stock at an effective
price per share which is less than the Conversion Price, such issuance shall be
deemed to have occurred for less than the Conversion Price); or
 
 
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(i)           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) and except as shall have been effected with the consent of
the Holders in accordance with Section 7:

i. any default in the payment of (A) the principal amount of any Note or (B)
interest and other amounts owing to a Holder on any Note, as and when the same
shall become due and payable (whether on a Conversion Date or the Maturity Date
or by acceleration or otherwise) which default is not cured within 5 calendar
days;
 
ii. the Company shall fail to observe or perform any other covenant or agreement
contained in the Notes (other than a breach by the Company of its obligations to
deliver shares of Common Stock to the Holder upon conversion, which breach is
addressed in clause (xi) below) which failure is not cured, if possible to cure,
within the earlier to occur of (A) five (5) Trading Days after notice of such
failure sent by the Holder or by any other Holder to the Company and (B) 10
Trading Days after the Company has become or should have become aware of such
failure;

iii. a default or event of default (subject to any grace or cure period provided
in the applicable agreement, document or instrument) shall occur under (A) any
of the Transaction Documents or (B) any other material agreement, lease,
document or instrument to which the Company or any Subsidiary is obligated (and
not covered by clause (vi) below);

iv. any representation or warranty made in this Note or any other Transaction
Document shall be untrue or incorrect in any material respect as of the date
when made or deemed made;
 
 
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v. the Company or any Significant Subsidiary (as such term is defined in Rule
1-02(w) of Regulation S-X)  shall be subject to a Bankruptcy Event;
 
vi. the Common Stock shall not be eligible for listing or quotation for trading
on a Trading Market and shall not be eligible to resume listing or quotation for
trading thereon within five Trading Days;

vii. the Company shall fail for any reason to deliver certificates to a Holder
prior to the fifth Trading Day after a Conversion Date pursuant to Section 4(c)
or any Forced Conversion Date pursuant to Section 6(d) or the Company shall
provide at any time notice to the Holder, including by way of public
announcement, of the Company’s intention to not honor requests for conversions
of any Notes in accordance with the terms hereof;

viii. the Company or any Subsidiary shall default in any of its obligations
under any mortgage, credit agreement or other facility, indenture agreement,
factoring agreement or other instrument under which there may be issued, or by
which there may be secured or evidenced any indebtedness for borrowed money or
money due under any long term leasing or factoring arrangement of the Company in
an amount exceeding $250,000, whether such indebtedness now exists or shall
hereafter be created and such default shall result in such indebtedness becoming
or being declared due and payable prior to the date on which it would otherwise
become due and payable;

ix. the Company shall be a party to any Change of Control Transaction or
Fundamental Transaction, shall agree to sell or dispose of all or in excess of
50% of its assets in one or more related transactions (whether or not such sale
would constitute a Change of Control Transaction) other than inventory in the
ordinary course of business, or shall redeem or repurchase more than a de
minimis number of its outstanding shares of Common Stock or other equity
securities of the Company, provided, however, that the Company shall be entitled
to enter into farmout contracts, farmin contracts, operating or joint operating
agreements of up to 50% of the Company’s leased acreage; or

x. the Company shall materially breach any Transaction Document.

b) Remedies Upon Event of Default. If an Event of Default occurs, the
outstanding principal amount of this Note, plus accrued but unpaid interest, and
other amounts owing in respect thereof through the date of acceleration, shall
become, at the Holder’s election and upon notice thereof to the Company,
immediately due and payable in cash.  Commencing upon the occurrence of any
Event of Default and so long as an Event of Default remains uncured, the
interest rate on this Note shall accrue at an interest rate equal to 18% per
annum.  In connection with such acceleration described herein, the Holder need
not provide, and the Company hereby waives, any presentment, demand, protest or
other notice of any kind, and the Holder may immediately 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 the Holder shall have all rights as a
holder of the Note until such time, if any, as the 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.
 
 
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Section 9.                      Miscellaneous.
 
a) Notices.  Any and all notices or other communications or deliveries to be
provided by the Holder hereunder, including, without limitation, any Notice of
Conversion, shall be in writing and delivered personally, by facsimile, or sent
by a nationally recognized overnight courier service, addressed to the Company,
at the address set forth above, or such other facsimile number or address as the
Company may specify for such purposes by notice to the Holder delivered in
accordance with this Section 9(a).  Any and all notices or other communications
or deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, or sent by a nationally recognized overnight
courier service addressed to each Holder at the facsimile number or address of
the Holder appearing on the books of the Company, or if no such facsimile number
or address appears on the books of the Company, at the principal place of
business of such 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 at the facsimile number 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 at the facsimile number 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. nationally recognized
overnight courier service or (iv) upon actual receipt by the party to whom such
notice is required to be given.
 
b) Absolute Obligation. Except as expressly provided herein, no provision of
this Note shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal, liquidated damages and accrued
interest, as applicable, on this Note at the time, place, and rate, and in the
coin or currency, herein prescribed.  This Note is a direct debt obligation of
the Company.  This Note ranks pari passu with all other Notes now or hereafter
issued under the terms set forth herein.
 
c) Lost or Mutilated Note.  If this Note shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Note, or in lieu of or in substitution
for a lost, stolen or destroyed Note, a new Note for the principal amount of
this Note so mutilated, lost, stolen or destroyed, but only upon receipt of
evidence of such loss, theft or destruction of such Note, and of the ownership
hereof, reasonably satisfactory to the Company.
 
 
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d) Governing Law.  All questions concerning the construction, validity,
enforcement and interpretation of this Note 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, Borough of Manhattan (the “New
York Courts”).  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 Note 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 Note or the transactions contemplated hereby.
If any party shall commence an action or proceeding to enforce any provisions of
this Note, 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) Amendments, Waivers. No provision of the Notes may be waived, modified,
supplemented or amended except in a written instrument signed by the Company and
Required Holders, which upon execution of such written instrument shall be
effective as to all Notes then outstanding.  Any waiver by the Company or the
Required Holders of a breach of any provision of the Notes 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 the Notes.  The failure of the Company or the
Required Holders to insist upon strict adherence to any term of the Note 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 the Notes on any other occasion.  Any waiver by the Company or the Required
Holders must be in writing.
 
 
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f) Severability.  If any provision of this Note is invalid, illegal or
unenforceable, the balance of this Note 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. The 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 the Company from paying
all or any portion of the principal of or interest on this Note as contemplated
herein, wherever enacted, now or at any time hereafter in force, or which may
affect the covenants or the performance of this Note, and the 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 the Holder,
but will suffer and permit the execution of every such as though no such law has
been enacted.
 
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 Note and shall not be deemed to limit or affect any of
the provisions hereof.

i) Secured Obligation.  The obligations of the Company under this Note are
secured by certain assets of the Company pursuant to the Security Agreement,
dated as of January 9, 2015, between the Company and the Secured Parties (as
defined therein).

*********************

 
(Signature Pages Follow)
 
 
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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a
duly authorized officer as of the date first above indicated.

PEGASI ENERGY RESOURCES CORP.
 
 
By:__________________________________________
     Name: Jonathan Waldron
     Title: Chief Financial Officer
 
   

 
 
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ANNEX A

NOTICE OF CONVERSION

To be delivered to:

Pegasi Energy Resources Corp.
218 N. Broadway, Suite 204
Tyler, Texas 75702
Attn:  Chief Financial Officer
Facsimile Number:

The undersigned hereby elects to convert principal under the 12% Senior Secured
Convertible Note of Pegasi Energy Resources Corp., a Nevada corporation (the
“Company”), into shares of common stock (the “Common Stock”), of the 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 the 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 its ownership of the Common Stock does not exceed
the amounts specified under Section 4 of this Note, as determined in accordance
with Section 13(d) of the Exchange Act.

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 Note to be Converted:

Signature:

Name:

Address for Delivery of Common Stock Certificates:

Or

DWAC Instructions:

Broker No:                                           
Account No:                                       
 
 
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Schedule I

CONVERSION SCHEDULE

The 12% Senior Secured Convertible Note in the aggregate principal amount of
$____________ are issued by Pegasi Energy Resources Corp., a Nevada
corporation.  This Conversion Schedule reflects conversions made under Section 4
of the above referenced Note.

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
               
 
 
 
                                                     

 
 
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Schedule II
INDEBTEDNESS
(as of December 31, 2014)
 
1. Secured Convertible Debt
               
Principal
 
Accrued Interest
 
Total
Balance of Teton Notes Payable (secured only by stock of Pegasi Energy Resources
Corp., a Texas corporation)
 
8,160,646
 
2,923,969
 
11,084,615
             
2. Equipment Lease Obligations
                   
Balance Outstanding
   
Xerox (Photocopier/Scanner/Fax)
     
4,175
   
Ford Motor Company (F-150 Truck)
     
5,035
               
9,210
3. Trade Accounts Payable
                   
Balance Outstanding
   
PERC
     
166,371
   
POI
     
535,917
   
TRR
     
40,378
               
742,666
4. Related Party Payables
                   
Balance Outstanding
   
Due to TR Energy
     
123,411
   
Payable to M Neufeld
     
120,000
   
Payable to W Sudderth
     
120,000
   
Accrued Salary for M Neufeld
     
1,473,958
   
Accrued Salary for W Sudderth
     
1,326,563
   
Accrued Salary for J Waldron
     
36,587
   
Accrued Rent for Jefferson Office
     
282,000
               
3,482,519
             
5. Provision for Liquidated Damages
     
48,808
 
48,808
                               
Total Indebtedness
 
15,367,818

 
Notes

(i)     Secured Convertible Debt:  Simple interest of $158,079 on the Teton
Notes is accrued on a quarterly basis.  All principal and accrued interest is
payable on December 31st, 2015.  This debt will continue to be accrued over the
life of the Note.

 
 
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(ii)     Related Party Payables: Since March 15th, 2010 Messrs. Neufeld &
Sudderth have received no salary.  Their salary will continue to be accrued at
$475,000 in total per annum over the life of the Note.

(iii)     Employees are paid every 2 weeks.  The related 2 week accrual of
approximately $25,000 in salary expense has not been included in Schedule II.

(iv)     All the company’s rental agreements are on a month-to-month basis.  The
monthly cash rent obligation of $2,800 has not been included in Schedule
II.  The Jefferson Field Office and Equipment Storage Facility is rented from a
related party on a month-to-month basis.  This rent of $4,500 per month will
continue to be accrued over the life of the Note.

(v)     The Company made a provision for liquidated damages following the delay
in securing an effective registration statement in 2008.  This provision is
being accrued at an interest rate of 18% per annum.

 
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