ex_10-1.htm


    
      
        
          

        

         

      

    

    THIS
SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.  IT
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITY UNDER SUCH ACT OR
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.

     

    JAYHAWK
ENERGY, INC.

     

     

    CONVERTIBLE
PROMISSORY NOTE

     

    


    $800,000.00 Post
Falls, Idaho

    Dated as
of July 30, 2008

    


    Jayhawk Energy, Inc., a Colorado
corporation (the “Company”), for value
received, hereby promises to pay to __________,
or its registered assigns (“Holder”), the sum of
Eight Hundred Thousand Dollars ($800,000.00) on the terms and conditions set
forth hereinafter.  Payment for all amounts due hereunder shall be
made by mail to the registered address of Holder.

    


    The following is a statement of the
rights of Holder of this Note and the conditions to which this Note is subject,
and to which Holder hereof, by the acceptance of this Note, agrees:

    


    1.           Maturity; Partial
Prepayment.  The principal hereof and any unpaid accrued
interest hereon, as set forth below, shall be due and payable on the earlier to
occur of:  (i) July 30, 2009 (“Maturity Date”); and
(ii) when declared due and payable by Holder upon the occurrence of an Event of
Default (as defined below).

    


     

    2.           Interest.  The
Company shall pay interest at the rate of the lower
of (i) 12 percent per annum; or (ii) the maximum allowable rate under applicable
laws (such rate, the “Interest Rate”) on
the principal of this Note outstanding during the period beginning on the date
of this Note and ending on the date that the principal amount of this Note is
repaid in full.  Interest shall be calculated on the basis of a
360-day year for the actual number of days elapsed.  Interest accruing
on this Note shall be due and payable at the Maturity Date or upon the
occurrence of an Event of Default.  The Company shall pay the interest
due on this Note by delivering to Holder cash equal to the outstanding principal
amount of the Note plus any due and unpaid interest.  If there occurs
an acceleration or prepayment of the Note prior to the Maturity Date in
accordance with the terms hereof, all interest due and payable at such time on
the principal amount due shall be paid in full.  All payments
hereunder are to be applied first to reasonable costs and fees referred to
herein, second to the payment of accrued interest, and the remaining balance to
the payment of principal.

    


    
      
        
        

      

      
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    3.           Events of
Default.  If any of the events specified in this Section 3
shall occur (herein individually referred to as an “Event of Default”),
Holder may, so long as such condition exists, declare the entire principal and
unpaid accrued interest hereon immediately due and payable, by notice in writing
to the Company:

    


    (a)           Default
in the payment of the principal or unpaid accrued interest of this Note when due
and payable; or

    


    (b)           The
institution by the Company of proceedings to be adjudicated as bankrupt or
insolvent, or the consent by it to institution of bankruptcy or insolvency
proceedings against it or the filing by it of a petition or answer or consent
seeking reorganization or release under the Federal Bankruptcy Act, or any other
applicable Federal or state law, or the consent by it to the filing of any such
petition or the appointment of a receiver, liquidator, assignee, trustee or
other similar official of the Company, or of any substantial part of its
property, or the making by it of an assignment for the benefit of creditors, or
the taking of corporate action by the Company in furtherance of any such action;
or

    


    (c)           If,
within 60 calendar days after the commencement of an action against the Company,
without the consent or acquiescence of the Company (and service of process in
connection therewith on the Company) seeking any bankruptcy, insolvency,
reorganization, liquidation, dissolution or similar relief under any present or
future statute, law or regulation, such action shall not have been resolved in
favor of the Company or all orders or proceedings thereunder affecting the
operations or the business of the Company stayed, or if the stay of any such
order or proceeding shall thereafter be set aside, or if, within 60 calendar
days after the appointment without the consent or acquiescence of the Company of
any trustee, receiver or liquidator of the Company or of all or any substantial
part of the properties of the Company, such appointment shall not have been
vacated.

    


    4.           Holder’s Rights Upon Event
of Default.  Upon the occurrence and continuance of any Event
of Default, Holder in its sole and absolute discretion shall have the right
to:

    


    (i)           convert
all of the principal amount and unpaid accrued interest attributable to this
Note into shares of preferred stock of the Company that are convertible into
Common Stock at a conversion price of $1.75 per share; or

    


    (ii)           declare
all unpaid interest and principal immediately due and payable and exercise all
other legal rights in connection therewith.

    


    
      
        
        

      

      
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    5.           Conversion; Optional
Reinvestment.

    


    (a)           Optional
Conversion.  Holder may elect at its sole discretion to convert
the outstanding principal balance and unpaid accrued interest on this Note into
shares of Common Stock at any time.  The number of shares of Common
Stock to be issued upon such conversion shall be equal to the quotient obtained
by dividing (a) the outstanding principal and unpaid accrued interest due on
this Note on the date of conversion, by (b) the conversion price of $1.75 per
share (“Conversion Price”). The Common Stock received by Holder pursuant to the
conversion of the Note shall be referred to as the “Conversion
Shares.”

    


    (b)           Identical
Terms.  The Common Stock, as the case may be, received by
Holder pursuant to the conversion of the Note hereunder shall have identical
rights, preferences and privileges as those shares received by investors
currently holding or subscribing for Common Stock, as applicable.

    


    (c)           Conversion
Procedure.  If this Note is to be converted, written notice
shall be delivered by Holder to the Company, at its address set forth on the
signature page hereto, notifying the Company of the conversion to be effected,
specifying the principal amount of the Note to be converted, the amount of
accrued interest to be converted, and a statement of commitment to surrender to
the Company, in the manner and at the place designated, the
Note.  Holder will surrender this Note within 10 business days after
receiving the Conversion Shares hereunder.  Promptly upon receipt of
this Note, the Company will issue a new note on the same terms as provided
herein for any amount of this Note not being converted.

    


    (d)           Delivery of Stock
Certificates.  As promptly as practicable after the conversion
of this Note but in no event later than 15 calendar days after the date of
delivery of the notice to the Company under Section 5(c), the Company at its
expense will issue and deliver to Holder a certificate or certificates for the
number of full shares of the Common Stock issuable upon such
conversion.  Upon conversion of the Note, the Company shall take all
such actions as are necessary in order to insure that the Conversion Shares
issuable with respect to such conversion shall be validly issued, fully paid and
nonassessable.

    


    (e)           Mechanics and Effect of
Conversion.  No fractional shares of Common Stock shall be
issued upon conversion of this Note.  In lieu of the Company issuing
any fractional shares to Holder upon the conversion of this Note, the Company
shall pay to Holder the amount of outstanding principal and interest that is not
so converted, such payment to be in the form as provided below.  Upon
conversion of this Note, the Company shall be forever released from all of its
obligations and liabilities under this Note (to the extent of the amounts
converted), except that the Company shall be obligated to pay Holder, within 10
business days after the date of such conversion, any interest accrued and unpaid
or unconverted to and including the date of such conversion, and no
more.

    


    
      
        
        

      

      
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    (f)           Notices of Record Date,
etc.  In the event of:

    


    (i)           any
taking by the Company of a record of holders of any class of securities of the
Company for the purpose of determining holders thereof who are entitled to
receive any dividend (other than a cash dividend payable out of earned surplus
at the same rate as that of the last such cash dividend theretofore paid) or
other distribution, or any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right; or

     

    (ii)           any
capital reorganization of the Company, any reclassification or recapitalization
of the capital stock of the Company or any transfer of all or substantially all
of the assets of the Company to any other person or any consolidation or merger
involving the Company; or

     

    (iii)           any
voluntary or involuntary dissolution, liquidation or winding-up of the
Company;

    


    the
Company will mail to Holder at least 20 calendar days prior to the earliest date
specified therein, a notice specifying:

    


    (A)           The
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right; and

    


    (B)           The
date on which any such reorganization, reclassification, transfer,
consolidation, merger, dissolution, liquidation or winding-up is expected to
become effective and the record date for determining stockholders entitled to
vote thereon.

    


    (g)           Reservation of Stock
Issuable Upon Conversion.  The Company shall, before the
conversion of this Note into Common Stock pursuant to the terms set forth
herein, increase the number of authorized but unissued shares of Common Stock as
necessary, and at all times reserve and keep available out of such duly
authorized but unissued shares of Common Stock, such number of its duly
authorized Common Stock as shall be sufficient to effect the conversion of the
Note pursuant to the terms set forth herein.  If at any relevant time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of the entire outstanding principal amount
of this Note, in addition to such other remedies as shall be available to
Holder, the Company will use its best efforts to forthwith take such corporate
action as may be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such
purposes.

    


    6.           Prepayment.  Upon
5 calendar days’ prior written notice to Holder, the Company may at any time
prepay in whole or in part, the principal sum, plus accrued interest to date of
such prepayment, of this Note; provided that, after the date of such notice and
prior to the proposed prepayment date, Holder may elect to convert such amounts
to the issued securities of the Company at the Conversion Price in accordance
with the terms of Section 5.

    


    
      
        
        

      

      
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               7.           Subscription
Rights.  So long as this Note is outstanding, Holder shall have
the right to participate in any offering of the Company’s securities on the same
terms and conditions as the other subscribers to such offering.

    


    8.           Representations and
Warranties. The Company hereby represents and warrants:

    


     

    (a)           Due Organization and
Qualification.  The Company is an entity duly incorporated or
otherwise organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization (as applicable), with the
requisite power and authority to own and use its properties and assets and to
carry on its business as currently conducted.  The Company is in no
violation or default of any of the provisions of its respective certificate or
articles of incorporation, bylaws or other organizational or charter
documents.  The Company is duly qualified to conduct business and is
in good standing as a foreign corporation or other entity in each jurisdiction
in which the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not have or reasonably be expected to result
in (i) a material adverse effect on the legality, validity or enforceability of
this Convertible Promissory Note or the Warrant (“The Transaction
Documents”), (ii) a material adverse effect on the results of operations,
assets, business, prospects or condition (financial or otherwise) of the
Company, or (iii) a material adverse effect on the Company’s ability to perform
in any material respect on a timely basis its obligations under any Transaction
Document (any of (i), (ii) or (iii), a “Material Adverse
Effect”) and to the Company’s knowledge no proceeding has been instituted
in any such jurisdiction revoking, limiting or curtailing or seeking to revoke,
limit or curtail such power and authority or qualification.

     

    (b)           Authorization;
Enforcement.  The Company has the requisite corporate power and
authority to enter into and to consummate the transactions contemplated by each
of the Transaction Documents and otherwise to carry out its obligations
hereunder and thereunder.  The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly authorized by all necessary
action on the part of the Company and no further action is required by the
Company, its board of directors or its shareholders in connection
therewith.  Each Transaction Document has been (or upon delivery will
have been) duly executed by the Company and, when delivered in accordance with
the terms hereof and thereof, will constitute the valid and binding obligation
of the Company enforceable against the Company in accordance with its terms
except (i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of
creditors’ rights generally and (ii) as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies.

     

    
      
        
        

      

      
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    (c)           No
Conflicts.  The execution, delivery and performance of the
Transaction Documents by the Company, the issuance and sale of the securities
and the consummation by the Company of the other transactions contemplated
hereby and thereby do not and will not (i) conflict with or violate any
provision of the Company’s certificate or articles of incorporation, bylaws or
other organizational or charter documents, or (ii) conflict with or result in a
violation of any law, rule, regulation, order, judgment, injunction, decree or
other restriction of any court or governmental authority to which the Company is
subject (including federal and state securities laws and regulations), or by
which any property or asset of the Company is bound or affected.

     

    (d)           Litigation.  There
is no action, suit, inquiry, notice of violation, proceeding or investigation
pending or, to the knowledge of the Company, threatened against or affecting the
Company before or by any court, arbitrator, governmental or administrative
agency or regulatory authority (federal, state, county, local or foreign)
(collectively, an “Action”) which (i)
adversely affects or challenges the legality, validity or enforceability of any
of the Transaction Documents or the securities or (ii) could, if there were an
unfavorable decision, have or reasonably be expected to result in a Material
Adverse Effect.  Neither the Company, nor any director or officer
thereof, is or has been the subject of any Action involving a claim of violation
of or liability under federal or state securities laws or a claim of breach of
fiduciary duty.

     

    9.           Successors and Assigns;
Assignment.  Except as otherwise expressly provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties
hereto.  Nothing in this Note, express or implied, is intended to
confer upon any party, other than the parties hereto and their successors and
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Note, except as expressly provided herein.  The Company may not
assign this Note or any of the rights or obligations referenced herein without
the prior written consent of Holder.

    


    10.           Waiver and
Amendment.  Any provision of this Note may be amended, waived
or modified upon the written consent of the Company and Holder.

    


    11.           Waiver of
Notice.  The Company hereby waives notice, presentment, demand,
protest and notice of dishonor.

    


    12.           Treatment of
Note.  To the extent permitted by generally accepted accounting
principles, the Company will treat, account and report the Note as debt and not
equity for accounting purposes and with respect to any returns filed with
Federal, state or local tax authorities.

    


    
      
        
        

      

      
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    13.           Notices.  Any
notice, request or other communication required or permitted hereunder shall be
in writing and shall be deemed to have been duly given if personally delivered
or if sent by nationally recognized courier service or mailed by registered or
certified mail, postage prepaid, to the respective addresses of the parties as
set forth on the signature page hereof or if sent by facsimile to the respective
facsimile numbers of the parties set forth on the signature page
hereof.  Any party hereto may by notice so given change its address
for future notice hereunder.  Notice shall conclusively be deemed to
have been given and received when personally delivered or 3 business days after
deposited in the mail or one business day after sent by courier or upon
confirmation of facsimile delivery in the manner set forth above.

    


    14.           No Stockholder
Rights.  Nothing contained in this Note shall be construed as
conferring upon Holder or any other person the right to vote or to consent or to
receive notice as a stockholder in respect of meetings of stockholders for the
election of directors of the Company or any other matters or any rights
whatsoever as a stockholder of the Company; and no dividends or interest shall
be payable or accrued in respect of this Note or the interest represented hereby
or the securities into which this Note is convertible hereunder until, and only
to the extent that, this Note shall have been converted.

    


    15.           Governing
Law.  This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado, excluding that body of law
relating to conflict of laws.

    


    16.           Heading;
References.  All headings used herein are used for convenience
only and shall not be used to construe or interpret this Note.  Except
as otherwise indicated, all references herein to Sections refer to Sections
hereof.


    
      
         


      

      
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    IN WITNESS WHEREOF, the
Company has caused this Note to be issued as of the date first written
above.

    


       Jayhawk Energy,
Inc.,

      a Colorado
corporation

    
 

    
 

     By:          
Lindsay
Gorrill

        
  
  Its:           President

     

    


    Name of
Holder:                   ____________

    Address:                                ____________

    ____________

    ____________

    
 

    Telephone:

    Facsimile:                               ____________

     


    
      
         


      

      
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    NOTICE OF
CONVERSION

    (To be
Signed Only Upon Conversion of Note)

     

    


    To
Jayhawk Energy, Inc.:

    


    The
undersigned, holder of the $____________ Convertible Note of Jayhawk Energy,
Inc., due _______________ (the “Note”), hereby agrees to surrender the Note for
conversion into ________________shares of Common Stock of Jayhawk Energy, Inc.,
to the extent of ________________________ dollars ($____________) unpaid
principal amount of the Note, and________________________ dollars
($____________) unpaid accrued interest under the Note and requests that the
certificates for such shares be issued in the name of, and delivered to,
_________________________________________________, whose address is
_________________________________________________________.  Conversion
should be effected as of ___________________.

    


    Dated:                                                      

     

    


    (signature must conform in all
respects to name

    of holder as specified on the face
of the Note)

    


    Address:

     

    
      
        
        

      

      
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    EXHIBIT
1

    Historical Financial
Statements

     

     

    EXHIBIT
2

    Capitalization
Table