Document:

ex3-1.htm

Exhibit 3.1

 

AMENDED AND RESTATED

PRECIOUS METALS PROCESSING AGREEMENT

This Amended and Restated Precious Metals Processing Agreement (this “Agreement”) is made as of August 10, 2011 between the following parties:

WALTER O. BREEDING,

an individual residing at 2114-57th St., Lubbock, TX,

in his personal capacity,

and on behalf of WOB EQUITIES, INC.,

and also acting as the Power of Attorney for

the BREEDING FAMILY ESTATE TRUST

(collectively, the “Owner”)

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ENSURGE NM, LLC,

a Utah registered limited liability company whose principal executive offices are located

at 2825 E. Cottonwood Parkway, Suite 500, Salt Lake City, UT

(“EnsurgeNM”)

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ENSURGE, INC.,

a Nevada registered corporation whose principal executive offices are located

at 2825 E. Cottonwood Parkway, Suite 500, Salt Lake City, UT

(“Ensurge Parent”)

RECITALS

WHEREAS:

A.           In this Agreement, the term “Ensurge” shall mean, jointly and severally, EnsurgeNM, Ensurge Parent and any other wholly owned entity of Ensurge Parent in the United States of America;

B.           The Owner and Ensurge Parent previously entered into that certain Precious Metals Processing Agreement dated August 5, 2011 (the “Prior Agreement”);

C.           The Owner, Ensurge and Ensurge Parent desire to enter into this Agreement to amend and restate the Prior Agreement in its entirety to, among other things, (i) add EnsurgeNM as a party to this Agreement, (ii) grant to Ensurge certain exclusivity rights with respect to the Tailings (as defined below), and (iii) provide that this Agreement may not be assigned by Ensurge without the prior written consent of St. George Investments, LLC, an Illinois limited liability company (“SGI”);

D.           The subject matter of this Agreement is the crushed black sand ore tailings (the “Tailings”), which are currently located on a certain property in New Mexico, as described in Appendix A to this Agreement, within a storage yard that is currently enclosed by a chain-link fence (the “Storage Yard”);

  

  

  

E.           The Owner owns the Tailings, but does not own the Storage Yard;

F.           The Tailings may have significant concentrations of valuable metals and/or other elements, including gold, silver, platinum, rhodium and palladium (the “Valuable Metals”);

G.            Ensurge is engaged in the mining business and is interested in processing the Tailings to recover the Valuable Metals, in consideration for paying certain royalties and other payments, and undertaking certain other obligations, as further described below; and

H.           The parties to this Agreement and Turnbull Capital Management, LLC (“Turnbull”) entered into a Memorandum of Understanding dated as of May 6, 2011, which is superseded by this Agreement; Turnbull is not a party to this Agreement, but shall be recognized as a third-party beneficiary hereunder;

NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree to enter into this legally binding agreement, with the following terms and conditions:

	
1.

	
Representations of the Owner:

The Owner represents and warrants as follows:

(a)      The Owner has the capacity to enter into and perform its obligations under this Agreement, and Walter O. Breeding (“Breeding”) has the authority to execute and deliver this Agreement on behalf of the Owner and to ensure that the obligations of the Owner are performed as contemplated by this Agreement. This Agreement has been duly executed and delivered by Breeding, on behalf of the Owner, and all entities associated therewith, and is a valid and legally binding agreement of the Owner, enforceable in accordance with its terms.

(b)      The Owner owns the Tailings, and the execution of this Agreement, and the performance by the parties of the covenants contained in this Agreement, will not violate any agreement or arrangement, to which the Owner is a party or otherwise, to the best of the Owner’s knowledge, information and belief.

	
2.

	
Representations of Ensurge:

Ensurge represents and warrants as follows:

	
  

	
(a)

	
EnsurgeNM and Ensurge Parent each has the capacity to enter into and perform its obligations under this Agreement, and all required corporate actions have been taken by each of them to authorize it to enter into and perform its obligations under this Agreement, and this Agreement has been duly executed and delivered by each of them and is a valid and legally binding agreement of each of them, enforceable in accordance with its terms.

	
  

	
(b)

	
The execution of this Agreement, and the performance by the parties of the covenants contained in this Agreement, will not violate any agreement or arrangement, to which EnsurgeNM or Ensurge Parent is a party or otherwise, to the best of Ensurge’s knowledge, information and belief.

 

3.      No Other Representations: This Agreement contains the whole agreement between the parties hereto relating to the subject matter hereof, and there are no warranties, representations, terms, conditions or collateral agreements expressed, implied or statutory, other than as expressly set forth in this Agreement. Without limiting the foregoing, the Owner makes no representations regarding the Tailings, or the existence or concentration of Valuable Metals in the Tailings, which are being made available to Ensurge pursuant to this Agreement on an “as is”, “where is” basis. The Owner makes no representations regarding the total quantity of the Tailings.

 

  

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4.

	
Covenants of The Owner:

 

(a)      Consent to Ensurge’s Processing of the Tailings, etc.: The Owner hereby consents to Ensurge’s undertaking all actions with regard to the Tailings that Ensurge in its discretion, acting reasonably, believes appropriate or desirable, for the following purposes (and for no other purpose):

 

 

	
  

	
(i)

	
processing the maximum practicable and economical amount of Valuable Metals from the Tailings, such being determined at the discretion of Ensurge.

	
  

	
(ii)

	
processing the Tailings to the maximum practicable and economical extent (that is, for greater certainty, to the extent that such processing is financially and technically feasible at the discretion of Ensurge), and

	
  

	
(iii)

	
selling the Valuable Metals, on behalf of, and as agent for, the Owner, to qualified commercial purchasers, so as to realize the maximum practicable and economical Gross Sale Proceeds (as defined below in paragraph 8(a)) for the Valuable Metals, as determined at the discretion of Ensurge,

In furtherance of the foregoing purposes, the actions which Ensurge may do to the Tailings (including the Valuable Metals) include the following: (i) sampling and testing, (ii) transporting and moving, (iii) extracting materials from, and/or (iv) refining.

(b)      Appointment of Ensurge as Agent for the Sale Valuable Metals: The Owner hereby appoints Ensurge to act as the Owner’s sole and exclusive agent for the sale of the Valuable Metals.

(c)      Cooperation and Consultation with Ensurge in Third Party Dealings: The Owner hereby agrees to cooperate and consult with Ensurge regarding all matters relating to this Agreement, including, without limitation, dealing with, and satisfying the requirements of, federal, state and/or local government officials and departments, as well as private contractors and other third parties, regarding the Tailings and their location, transportation, and processing. The Owner shall provide whatever consents and other appropriate documentation that may be required to implement the purposes of this Agreement. Without limiting the foregoing, the Owner shall cooperate with Ensurge in dealing with the landowner of the Property (the “Landowner”), as appropriate, as further described below in paragraph 5(p), and also in dealing with the applicable officials working for the State of New Mexico.

Notwithstanding the other provisions of this paragraph 4(c), and for greater certainty, Ensurge shall remain solely responsible for dealing with, and satisfying the requirements of, federal, state and/or local government officials and departments, as well as private contractors and other parties, regarding the Tailings and the implementation of Ensurge’s obligations under this Agreement, and Ensurge shall solicit the Owner’s involvement only as Ensurge believes necessary or desirable, in Ensurge’s discretion.

  

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If the Owner has reason to believe that Ensurge is not properly satisfying the requirements of federal, state and/or local government officials and/or departments, and the Owner also has notified Ensurge of its belief and the reasons therefor, and has provided Ensurge with 30 days notice to address Owner’s concerns, without any response from Ensurge in relation thereto, then the Owner may deal directly with such officials and/or departments, at the Owner’s own initiative, acting reasonably, to avoid or mitigate any possible adverse consequences to the Owner’s interest in the Tailings, after attempting to consult with Ensurge regarding the situation and cooperating with Ensurge, as appropriate.

(d)      General Cooperation and Consultation with Ensurge: The Owner shall generally cooperate and consult with Ensurge on all matters relating to this Agreement, as each such other party may request from time to time.

(e)      Exclusivity: The Owner covenants and agrees that Ensurge shall have the exclusive right to process and undertake any other actions contemplated herein with respect to the Tailings during the term of this Agreement and that the Owner shall not grant any such rights to any third party during the term of this Agreement without the prior written consent of Ensurge.

	
5.

	
Covenants of Ensurge:

(a)      Confirm and Secure the Location of the Tailings: Ensurge shall ensure that the Tailings are located at a site (which may or may not be the Storage Yard) that does not jeopardize at any time the Owner’s interest in the Tailings or their value to the Owner or the ability of the parties to perform their respective obligations under this Agreement. If for any reason the Tailings must be moved to avoid such adverse consequences, then Ensurge shall arrange and implement such a move, at Ensurge’s own expense, in consultation with the Owner. Ensurge shall be responsible for leasing or buying any property (other than the Storage Yard, as further described below in paragraph 5(p)) at which the Tailings are to be located or processed at any time, as may be required or appropriate, and Ensurge shall be solely responsible for any remediation or other costs or expenses associated with processing the Tailings at any such property (including the Storage Yard), as further described below in paragraph 5(q) hereof.

Ensurge shall secure the location of the Tailings at all times, taking such care and precautions with the Tailings as are reasonable and prudent in the circumstances (by commercial standards in the North American mining industry), to avoid any theft or other loss in value of the Tailings to the Owner. The steps that may be appropriate for Ensurge to take include adding new fencing at the location of the Tailings (with the relevant landowner’s consent, as required) and/or potentially hiring private security guards to monitor and protect the Tailings from theft or other loss in value to the Owner.

(b)      Conduct Additional Testing of the Tailings (“Phase 1”): Ensurge shall conduct such testing of the Tailings, at Ensurge’s own expense, as is appropriate in order to identify all of the elements contained in the Tailings, with a view to using such knowledge to process the maximum economically practicable value from the Tailings, as to be determined at the discretion of Ensurge. This additional testing may be performed by Advanced Analytical, LLC (current Web site: www.aaassaylabs.com) (“Advanced”) or any other testing facility in Ensurge’s discretion, acting reasonably. This initial testing shall be referenced herein as “Phase 1”.

(c)      Conduct Phase 2 Testing (Pilot Project): Ensurge shall engage Advanced (or another third party selected by Ensurge, acting reasonably), at Ensurge’s own expense, to construct a small scale processing facility, through which Advanced (or such other third party) will process up to two tons of the Tailings as a pilot project, to establish the possible yields of Valuable Metals from the Tailings. This testing shall be referenced herein as “Phase 2” testing. Ensurge shall be responsible for all costs associated with Phase 2 Testing, including the costs of transporting one or more shipments of the Tailings to be used in such testing.

  

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(d)      Construct an Onsite Processing Facility: Following the completion of Phase 2 testing, Ensurge shall construct, at its own expense, an onsite processing facility (the “Processing Facility”) at the location of the Tailings. The Processing Facility shall be capable of processing the maximum economically practicable amount of Valuable Metals from the Tailings to be determined at the discretion of Ensurge.

The Processing Facility shall be constructed at such a scale and processing capacity that it will process the Valuable Metals from the Tailings at a minimum of at least 10,000 tons of Tailings per annum, if in each case such scale and capacity is reasonably practicable and economically feasible to construct at the discretion of Ensurge. The Processing Facility and any other equipment associated with the Processing Facility shall be the property of Ensurge.

(e)      Operate the Processing Facility: Following completion of the Processing Facility, Ensurge shall operate the facility, at its own expense. as expeditiously as possible at the discretion of Ensurge.

(f)      Weigh the Tailings Prior to Processing: Ensurge shall weigh all Tailings that are submitted to the Processing Facility for processing, at its own expense, using such scales and procedures as are reasonably appropriate in the circumstances, having regard to commercial standards in the North American mining industry. Ensurge shall keep detailed records of the amount of Tailings that are processed each day at the facility, including the basis and calculation method for the relevant figures, and Ensurge shall submit those records to the Owner on at least a weekly basis.

(g)      Secure and Protect the Valuable Metals: Ensurge shall take such steps and adopt such procedures to secure and protect the Valuable Metals that are processed from the Tailings from theft or other loss. Such steps and procedures are expected to include security guards and video surveillance, as well as appropriate internal controls and supervisory procedures. Such steps and procedures shall be in general compliance with accepted commercial standards in the North American mining industry. Ensurge shall promptly inform the Owner if there are any suspected or actual losses of processed Tailings or Valuable Metals as a result of theft or other causes.

(h)      Arrange for Refining of the Valuable Metals: Ensurge may submit the Valuable Metals to one or more qualified commercial refiners if at the sole discretion of Ensurge, such refining shall be technically and economically feasible. In such case, Ensurge shall generally strive to ensure that no more than approximately 14 days’ supply of Valuable Metals is in the custody of any individual refiner at any time, having regard to the processing “run rate” of the Refining Facility and also subject to the minimum inventory of Valuable Metals that is reasonably required by the refiner in accordance with its normal refining processes, unless the Owner otherwise agrees (acting reasonably).

(i)      Compliance with All Laws: Ensurge shall comply with all applicable laws and regulations (including with rulings or orders issued by applicable government departments, regulatory bodies or courts), in all matters relating to the Tailings and Ensurge’s processing or movement of the Tailings or otherwise in connection with Ensurge’s implementation of this Agreement, including obtaining all necessary permits and approvals.

  

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(j)      Sale of the Valuable Metals: Ensurge shall sell the Valuable Metals as agent for the Owner and on the Owner’s behalf, at the highest practicable price for each sale. The frequency of such sales shall be based upon the output of the Processing Facility and the capability of the commercial Refining Facility.

	
  

	
(k)

	
Reporting, Books and Records, etc.:

	
  

	
(i)

	
Maintain Books and Records and Allow for Inspection: Ensurge shall maintain proper books and records relating to its dealings in the Tailings and all matters relating to Ensurge’s implementation of this Agreement. Ensurge shall make all such books and records available for inspection by the Owner, promptly upon request, at Ensurge’s Corporate office where such records shall be maintained.

	
  

	
(ii)

	
Have Sufficient Accounting Staff for Adequate Internal Controls: Ensurge shall maintain sufficient internal accounting and booking staff (or shall retain qualified outsourced staff), such that Ensurge’s internal financial controls relating to Ensurge’s dealings in the Tailings are adequate, in accordance with generally accepted auditing practices. The foregoing requirement shall only apply following the second anniversary of the date of this Agreement, if this Agreement has not been terminated prior to such anniversary in accordance with the termination provisions in this Agreement.

	
  

	
(iii)

	
Independent Audit by Qualified CPA Firm: Ensurge shall have its annual financial statements audited and quarterly financial statements reviewed by a qualified, independent CPA firm at all times during the term of this Agreement. At the request of Owner, Ensurge shall authorize its auditing firm to make itself available and provide all information relating to the Tailings and Ensurge’s implementation of this Agreement, at the expense of Owner.

	
  

	
(iv)

	
Report of Monthly Activity: Without limiting the foregoing, within fifteen days following the completion of each calendar month (or part month) in which Tailings have been processed at the Processing Facility, Ensurge shall provide a report that specifies the following items, for the relevant month: (A) the tonnage of Tailings processed; (B) the amount of each Valuable Metal extracted from the Tailings (to the extent such amount is reasonably identifiable at such time); and (C) the amount of sales of Valuable Metals in the month (broken down by type of metal, price received per ounce or other unit, the quantity of each sale and such other pertinent information as is reasonable in the circumstances and is reasonably identifiable at such time).

	
  

	
(v)

	
General Obligation to Keep Other Parties Informed: Ensurge shall keep the Owner informed of the progress of Ensurge’s implementation of this Agreement and any significant developments relating to the subject matter of this Agreement, on a regular basis and immediately when there has been any significant, unexpected development.

(l)      Consult with the Owner: Ensurge shall regularly consult with the Owner regarding Ensurge’s proposed method of implementing its obligations under this Agreement. Ensurge shall listen to the Owner’s ideas and suggestions regarding alternative possible methods for such implementation, and Ensurge shall in good faith consider such ideas and suggestions, with a view to optimizing the operational and financial results to the Owner from this Agreement. Ensurge shall provide the Owner with such additional information and access to the Processing Facility as the Owner may request, where the Owner determines (acting reasonably) that the results being achieved from the extraction process are unsatisfactory.

  

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(m)      Obtain Insurance: As soon as practicable following commencement of the processing of Tailings at the Extraction Facility, Ensurge shall obtain a reasonably appropriate amount of insurance, at its own expense, on the facility and covering all operational aspects of the facility, including general liability insurance and such other coverage as is reasonably appropriate in the circumstances.

(n)      Signing Payment by Ensurge. Ensurge shall make an initial payment to the Owner of $15,000.00 (fifteen thousand dollars) within 5 business days of the signing of this agreement.

(o)       Monthly Payment by Ensurge. Ensurge shall make a monthly payment to the Owner in the amount of $1,000 (one thousand dollars) during the term of this Agreement, the intent of which, as outlined below, is to allow the Owner to make rental payments in that amount to the Landowner under the Tailings Agreement, as defined below in paragraph 5(p).

(p)      Tailings Agreement with the Landowner: The Owner and the Landowner have executed and delivered a Tailings Agreement dated August 3, 2011 (the “Tailings Agreement”), which establishes a lease arrangement (the “Lease”) between the Landowner, as lessor, and the Owner, as lessee, with respect to the Storage Yard. Ensurge is not a party to the Tailings Agreement, but is recognized as a third-party beneficiary thereunder. References to the Tailings Agreement herein do not obligate Ensurge to any performance thereunder, and are made for reference purposes only, unless otherwise set forth herein.

Under the Tailings Agreement, the Owner is obligated to pay to the Landowner an initial signing payment of $15,000.00 (fifteen thousand dollars), within ten (10) business days of the date of that agreement. It is the Owner's intent and instruction that the payment from Ensurge in that amount, referenced herein in paragraph 5(n), may be made directly to the Landowner on the Owner’s behalf, or to the Owner on account of such payment, promptly upon the execution and delivery of this Agreement.

In addition, under the Tailings Agreement the Owner is obligated to pay to the Landowner monthly cash rent of $1,000.00 (one thousand dollars) during the term of the Lease, which monthly payment obligation begins on the first day of the first calendar month after (i) the date when the construction of the Processing Facility begins on the Storage Yard or (ii) the date which is six (6) months after the date of the Tailings Agreement, whichever comes first. It is the Owner's intent and instruction that Ensurge may pay that amount, with that timing, directly to the Landowner on the Owner’s behalf, or to the Owner, in fulfillment of Ensurge's obligation as set forth in paragraph 5(o) herein.

All royalty payments required to be paid to the Landowner under the Tailings Agreement shall be paid by the Owner, from the Owner’s royalty payments set forth in this Agreement.

Under the Tailings Agreement, the Owner may construct, modify and/or make improvements to buildings, fences and/or water systems on the Storage Yard (collectively, “Improvements”), at the Owner’s own expense; provided that such Improvements shall not be removed upon termination of the Lease, but instead shall remain on the Storage Yard and ownership shall be transferred to the Landowner on such termination, at no charge, unless the Landowner requests their removal, in which case the Improvements shall be removed at the Owner’s own expense within 30 days following termination of the Lease, unless additional time is granted by the Landowner in writing. The Owner also has the right to put up signs on the Storage Yard, provided that such signs shall be removed by the Owner at the end of the Lease, unless the Landowner otherwise agrees in writing. In addition, if the Owner must remove the communications tower in the Storage Yard in connection with the extraction process, then the Owner must dismantle and then remove it at the Owner’s own expense, and the Owner must give to the Landowner the dismantled pieces at no charge to the Landowner. The Tailings Agreement also provides the Owner with the right to place and subsequently remove from the Storage Yard any personal property (including portable buildings and equipment), at the Owner’s own expense. Ensurge hereby agrees to comply with the foregoing provisions on the Owner’s behalf, at no charge to the Owner.

  

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Under paragraph 17 of the Tailings Agreement, Ensurge is given the right, in its discretion, to remedy or correct any default by the Owner which results in termination of the Lease, in which case the Lease is deemed to be replaced by a new lease (the “New Lease”) between the Landowner, as lessor, and Ensurge, as lessee, which shall commence on the initial termination date and be based on the same terms and conditions as those set forth in the Tailings Agreement. In that event, the royalty payments due to the Landowner under the New Lease shall be paid by Ensurge and shall be deducted from the royalty payments otherwise payable to the Owner under this Agreement.

In the event that the Owner shall default on the Tailings Agreement, by not paying the monthly cash rent due to the Landowner, which monthly cash rent payment was made by Ensurge to Owner on a timely basis pursuant to paragraph 5(o), or by not paying the monthly royalties due to the Landowner, resulting (in either case) in termination of the Lease and replacement thereof by a New Lease with Ensurge as aforesaid, then Ensurge shall make those payments directly to the Landowner. Any such payments that Ensurge makes to the Landowner under the New Lease, Ensurge will deduct that amount from each monthly royalty payment due to the Owner hereunder. In the event, that such rental or royalty payments are made by Ensurge,the royalty payments due to the Owner hereunder also shall decline by 2 percentage points (that is, reducing the royalty payments specified to be payable directly to the Owner hereunder from 28% to 26%, or from 33% to 31%, as the case may be), from the time such payments are made by Ensurge until the project has reached termination.

(q)      Remediate the Storage Yard: Without limiting Ensurge’s other obligations under this Agreement, following completion of the extraction process for all of the Tailings, and following any movement of the Tailings from one location to another, Ensurge shall, at its own expense, remediate the relevant property or properties, as required by the State of New Mexico. Ensurge also shall comply with the Landowner’s requirements which are specified in paragraph 9 of the Tailings Agreement, at no charge to the Owner.

(r)      Non-Compete in New Mexico: The Owner has been pursuing, and may continue to pursue, various mining and mineral extraction opportunities in the State of New Mexico, apart from the Tailings. Ensurge hereby agrees to disclose to the Owner any other mining or mineral extraction opportunities in the State of New Mexico which Ensurge intends to pursue. Upon such disclosure, the Owner’s consent shall be required in order for Ensurge to pursue the opportunity, provided that such consent shall not be unreasonably withheld, and further provided that the Owner must demonstrate to Ensurge the following: (i) that the Owner had independent prior knowledge of the opportunity, and (ii) that the Owner either was pursuing the opportunity or had plans to pursue it which predated the notice from Ensurge. The Owner may, in its sole discretion, disclose opportunities of this nature to Ensurge, with a view to pursuing them in concert with Ensurge. Notwithstanding any other provision of this Agreement, Ensurge shall not pursue any mining or mineral extraction opportunity within 100 miles of Carrizozo, New Mexico, during the term of this Agreement, without the Owner’s prior written consent, in the Owner’s sole discretion.

  

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6.           Covenants of Ensurge Parent:  Ensurge Parent hereby guarantees the performance of EnsurgeNM’s obligations hereunder and to cause EnsurgeNM to perform its obligations hereunder.

	
7.

	
Payment Provisions – Milestone Payments:

 

(a)      Signing Payment: Ensurge shall pay a total of $300,000.00 (three hundred thousand dollars) (the “Signing Payment”) to the Owner and to the order of the Owner, promptly upon execution of this Agreement, as follows:

	
  

	
(i)

	
To the Owner: The sum of $270,000.00 (two hundred and seventy thousand dollars); and

	
  

	
(ii)

	
To Turnbull, by This Order of the Owner: The sum of $30,000.00 (thirty thousand dollars).

(b)      Facility Construction Milestone Payment: Ensurge shall pay a total of $500,000.00 (five hundred thousand dollars) (the “Facility Construction Milestone Payment”) when the Processing Facility’s construction is initiated, allocated as follows:

	
  

	
(i)

	
To the Owner: The sum of $450,000.00 (four hundred and fifty thousand dollars); and

	
  

	
(ii)

	
To Turnbull, by This Order of the Owner: The sum of $50,000.00 (fifty thousand dollars).

Notwithstanding the foregoing, the Facility Construction Milestone Payment shall become due and payable on the date which is nine (9) months from the date of this Agreement, if in fact the Processing Facility’s construction has not been initiated by such date; provided that (i) the Owner shall extend the foregoing due date on a month-to-month basis, for a total of up to three (3) extra months, where the reason for the delay in achieving the milestone was beyond Ensurge’s reasonable control, and (ii) Ensurge may, in its discretion, choose not to make the Facility Construction Milestone Payment on the due date, in which case this Agreement shall terminate in accordance with paragraph 10(a), unless the parties otherwise agree.

The Owner shall further extends the foregoing due date to accommodate any delay that continues past the foregoing time limit, where such delay has been solely caused by the failure of the State of New Mexico or any other governmental department to issue, on a timely basis, the required permits for construction and operation of the Processing Facility, provided that Ensurge has diligently and expeditiously satisfied all of the requirements for such permits.

(c)      Facility Completion Milestone Payment: Ensurge shall pay a total of $500,000.00 (five hundred thousand dollars) (the “Facility Completion Milestone Payment”) upon completion of the Processing Facility, which shall be deemed to have occurred on the earliest of the following dates: (i) the date when the facility has operated for at least 30 days at a level that is reasonably similar to its designed parameters, or (ii) the date that is six months from the initial operation of the facility, regardless of its operating levels. The Facility Completion Milestone Payment shall be paid to the Owner and to the order of the Owner, allocated as follows:

	
  

	
(i)

	
To the Owner: The sum of $450,000.00 (four hundred and fifty thousand dollars); and

  

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(ii) 

	
To Turnbull, by This Order of the Owner: The sum of $50,000.00 (fifty thousand dollars).

Notwithstanding the foregoing, the Facility Completion Milestone Payment shall become due and payable on the date which is twenty (20) months from the date of this Agreement, if in fact the Extraction Facility has not been completed by such date; provided that (i) the Owner shall extend the foregoing due date on a month-to-month basis, for a total of up to (3) extra months, where the reason for the delay in achieving the milestone was beyond Ensurge’s reasonable control, and (ii) Ensurge may, in its discretion, choose not to make the Facility Completion Milestone Payment on the due date, in which case this Agreement shall terminate in accordance with paragraph 10(a), unless the parties otherwise agree.

The Owner shall further extend the foregoing due date to accommodate any delay that continues past the foregoing time limit, where such delay has been solely caused by the failure of the State of New Mexico or any other governmental department to issue, on a timely basis, the required permits for construction and operation of the Processing Facility, provided that Ensurge has diligently and expeditiously satisfied all of the requirements for such permits.

(d)      Logistics for Satisfaction of Payments: The Owner shall provide wire transfer instructions, or check delivery instructions, for any payments to be made to Owner under this Agreement and shall obtain such instructions from Turnbull as well, and provide the same to Ensurge. Ensurge shall either execute a wire transfer or deliver a cashier’s check, in each case representing immediately available funds, to the Owner and Turnbull, as required to satisfy each of the Signing Payment, the Facility Construction Milestone Payment and the Facility Completion Milestone Payment (which three types of payment are collectively referred to herein as “Milestone Payments”), as well as the royalty payments described below in paragraph 8.

	
8.

	
Payment Provisions – Royalty Payments and Fees:

(a)      Definition of Gross Sale Proceeds: For purposes of this Agreement, “Gross Sale Proceeds” shall mean the gross proceeds received from the sale of the Tailings (including Valuable Metals) that are processed or sold during the term of this Agreement, before any deductions as defined below:

For greater certainty and without limitation, Gross Sale Proceeds shall not include deductions for any of the following items: (i) charges or costs for transportation of the Tailings to places where the Tailings are to be extracted, refined or sold; or (ii) charges or costs associated with extracting or refining Valuable Elements from the Tailings (including capital costs for the Processing Facility or otherwise).

(b)      Royalty Payments: Ensurge shall make the following royalty payments, in cash, within fifteen (15) days from the date when Ensurge receives Gross Sale Proceeds from the refiner (or from any other type of purchaser of the Tailings, including the Valuable Metals):

(i)           To the Owner: 28% of the Gross Sale Proceeds from the first 60,000 short tons of Tailings processed and sold, and 33% of the Gross Sale Proceeds from any and all Tailings in excess of 60,000 short tons that are processed and sold.

(ii)           To Turnbull, by This Order of the Owner: 4% of the Gross Sale Proceeds from any and all Tailings processed and sold.

  

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9.           Payment Provisions – Continuation Payments: Ensurge shall pay to the Owner and to the order of the Owner the total sum of $500,000.00, allocated as to $450,000.00 to the Owner and as to $50,000.00 to Turnbull, annually in October of each year, commencing in October 2014, until termination of this Agreement, if in the immediately prior calendar quarter (ending June of the same year), the total royalties paid to the Owner and to the order of the Owner in respect of such quarter aggregated to less than $500,000.

The Owner shall extend the foregoing due date to accommodate any delay that continues past the foregoing time limit, where such delay has been solely caused by the failure of the State of New Mexico or any other governmental department to issue, on a timely basis, the required permits for construction and operation of the Processing Facility, provided that Ensurge has diligently and expeditiously satisfied all of the requirements for such permits.

10.           Term and Termination of this Agreement: The term of this Agreement shall commence on the date hereof and shall continue until terminated in accordance with the following provisions:

(a)       Presumed Termination for Failure to Make Milestone Payments: This Agreement shall be deemed to have been terminated by Ensurge upon any failure by Ensurge to make a Milestone Payment on a timely basis; specifically, within five (5) business days in the case of the due date for the Signing Payment and within ten (10) business days of the due date in the case of either the Facility Construction Milestone Payment or the Facility Completion Milestone Payment.

(b)      Presumed Termination for Failure to Make Continuation Payments: This Agreement shall be deemed to have been terminated by Ensurge upon any failure by Ensurge to make a Continuation Payment on a timely basis; specifically, within seven (7) business days of the due date for such payment.

In the case of a presumed termination pursuant to this paragraph , Ensurge shall not remain obligated to make the Continuation Payment that it failed to make, which resulted in the deemed termination. However, Ensurge shall not be reimbursed for any prior Milestone Payments, Continuation Payments or royalty payments previously made by Ensurge.

(c)      Termination by Notice from Ensurge: Ensurge may terminate this Agreement at any time upon 60 days’ notice to the Owner, for any reason, provided that, upon the effective date of such termination, Ensurge shall cease to have any rights to any of the Tailings that have not been processed and sold prior to such termination date.

(d)      Termination by the Owner for Cause: The Owner may terminate this Agreement at any time upon 30 days’ notice to Ensurge, where Ensurge has committed a material breach of its obligations under this Agreement; provided that, where such breach is capable of being cured by Ensurge and Ensurge wishes to cure such breach, it may do so, in which case this Agreement shall not terminate, provided that the breach is reasonably considered to have been cured within 30 days of the notice from the Owner. Further, Ensurge may challenge the Owner’s assertion that a material breach has occurred, in which event, if the parties are unable to resolve the dispute, it shall be submitted to arbitration in accordance with paragraph 12(l) hereof, where the matter will be settled.

(e)      Automatic Termination: This Agreement shall automatically and immediately terminate if at any time Ensurge shall be adjudged bankrupt or take advantage of any statute offering relief for insolvent debtors.

  

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(f)      Effect of Termination: Any termination of this Agreement shall cause all obligations of the parties to cease as of the termination date; provided, however, that the parties’ rights and obligations in respect of any actions, omissions or other matters occurring prior to the termination date shall continue, except as otherwise expressly provided in this Agreement. Further, any payment obligations relating to Tailings that were fully processed or sold prior to the termination date shall continue following termination of this Agreement.

11.           Indemnification: Each party hereby agrees to indemnify and hold harmless the other two parties, and such other parties’ respective officers, directors, members, partners, employees and each person who owns or controls either of them, from and against any losses, claims, damages, liabilities and expenses whatsoever (including the reasonable costs of investigating or defending any action) to which they or any of them may become subject, arising out of the first party’s entering into or implementing this Agreement or the first party’s failure to comply with any provision of this Agreement.

12.           Other Covenants of the Parties:

(a)      Uncrushed Head Ore: The Tailings that were previously sampled by Ensurge represent ore that has been crushed, milled, washed and reduced to fine mesh (which Tailings are referred to herein as “Prepared Tailings”). There is substantial additional ore on the Property that as yet is uncrushed (and otherwise unprepared) as of the date of this Agreement (the “Unprepared Head Ore”). The Unprepared Head Ore is currently outside the chain-link fence that bounds the Storage Yard. For greater certainty, the Unprepared Head Ore is not subject to this Agreement (i.e., it shall not be considered Tailings) and remains the property of the Owner, unaffected by this Agreement. Accordingly (and in other words), the Tailings include only Prepared Tailings and does not include Unprepared Head Ore. Notwithstanding the foregoing, however, the Owner has agreed, as additional inducement to Ensurge to enter into this Agreement and perform its obligations hereunder, to pay to Ensurge an amount equal to ten percent (10%) of the net income, if any, received by the Owner from extracting metals from the Unprepared Head Ore. For greater certainty, the Owner shall remain free and unfettered in its discretion as to whether and how to extract metals from the Unprepared Head Ore. This obligation to pay a ten percent (10%) share of net income shall expire (i) upon any termination of this Agreement prior to the processing of at least fifty percent (50%) of the Tailings by Ensurge; or (ii) at all events, twelve (12) years from the date of this Agreement, whether or not by such date the Owner has extracted any metals from the Unprepared Head Ore.

(b)      Carve-Out of a Portion of the Tailings: The Owner shall be entitled to remove a total of 2,000 tons of the Tailings, which must be weighed on the date of removal, to be selected at the Owner’s discretion from the Tailings, at no charge to the Owner, but also at the Owner’s own expense in terms of the removal costs, at any time within six months from the date of this Agreement; provided that the removed Tailings shall not come from pile #1 (as designated on the map attached hereto as Appendix A). Ensurge and the Owner shall cooperate with each other, as appropriate, to facilitate such removal and to confirm the amount of Tailings that have been removed. The Owner shall provide reasonable prior notice to Ensurge, before the date when such Tailings are intended to be removed. Tailings shall only be removed while a representative of Ensurge is in observance of the removal of the 2,000 tons of Tailings and approves of the quantity and the pile from which the Tailings were removed. Upon such removal, the removed Tailings shall be deemed not to have been included in the Tailings under this Agreement. To the extent that the Owner has not removed the specified amount of Tailings, in whole or in part, within six calendar months from the date of this Agreement, then the Owner’s right to remove a portion of the Tailings under this paragraph shall cease.

  

-12-

  

(c)      Residual Tailings: As Ensurge engages in the processing Valuable Metals from the Tailings using the Processing Facility, the Owner shall have the right, but not the obligation, to take possession of the “residual Tailings” (i.e., the residual output from the facility, excluding the Valuable Metals extracted and collected by the facility, which Ensurge has determined it does not wish to reprocess in the facility), at no charge or expense to the Owner, provided that that the Owner shall be responsible for bearing its own removal costs.

(d)      Unprocessed Tailings: Ensurge shall advise the Owner promptly, if and when Ensurge determines, during the term of this Agreement, that it will not process certain specific portions of the Tailings at the Processing Facility, because Ensurge has determined, in its discretion, that it is not economically or technically feasible to do so. In that event, the Owner shall have the right, but not the obligation, to take possession of those unprocessed Tailings, at no charge or expense to the Owner, provided that the Owner shall be responsible for bearing its own removal costs.

(e)      Ensurge Shall Not Pay Any of its Costs “in Specie”: Ensurge shall not pay any of its costs or expenses incurred pursuant to this Agreement, or in any way connected with the Tailings, by way of providing the applicable vendor or service provider with a portion of the Tailings (i.e., including the Valuable Metals). Instead, Ensurge shall pay all such costs and expenses fully in cash, from its own financial resources. Without limiting the foregoing, in dealings with Refiners and other vendors and service providers, Ensurge shall seek to avoid any embedded or hidden consideration accruing to such parties in the form of their retention of a portion of the Tailings (including the Valuable Metals).

(f)      The Owner May Take Valuable Metals instead of Cash Royalties: If Ensurge is successful in extracting Valuable Metals from the Tailings and accordingly commences a program to sell such Valuable Metals as agent for the Owner, then the Owner may, in its discretion, direct Ensurge, from time to time, to deliver some of the Valuable Metals to the Owner, prior to sending the Valuable Metals to the refiners, (or to the Owner’s chosen custodian), such Valuable Metals to be valued as of the date of the Owner’s written exercise of this option, in lieu of some or all of the cash royalties otherwise payable to the Owner under paragraph 8. The Owner shall provide adequate notice to Ensurge of this election, in each instance. Owner shall pay any additional expenses associated with obtaining these Valuable Metals from Ensurge.

(g)      Tax Considerations: For greater certainty, each party shall be responsible for its own tax liabilities in connection with this Agreement; provided that the parties shall cooperate in good faith, acting reasonably, to address tax matters, tax elections and other structural and contractual issues that have tax consequences, in a manner that is efficient and beneficial to the parties.

(h)      Each Party to Bear its Own Costs: Except as expressly provided for herein, each party hereto shall bear its own costs in connection with this Agreement and its subject matter, whether such costs were incurred before or after the date of this Agreement. Notwithstanding the foregoing, if any party should institute any action or proceeding to enforce or interpret any term or provision hereof, then the party prevailing in such action or proceeding shall be entitled to its reasonable attorneys’ fees and out-of-pocket disbursements from the non-prevailing party or parties.

(i)      Amendment or Replacement of this Agreement: The parties may mutually decide to amend or replace this Agreement, in each party’s sole discretion, and with the consent of all of the parties hereto, if the parties determine that it would be beneficial to do so. In that event, the parties shall negotiate such amendments or replacement agreement in good faith, with a view to furthering the purposes of this Agreement.

  

-13-

  

(j)      Public Disclosure: This Agreement shall be kept confidential by the parties; and no matters relating to this Agreement and the Tailings may not be disclosed to any third party; except as follows: (i) Ensurge may publicly disclose this Agreement or its major provisions, and the key facts relating to its implementation, if and to the extent that Ensurge considers such disclosure to be necessary or desirable, given Ensurge’s status as a public company that is subject to public disclosure obligations under applicable law; and (ii) each party may disclose this Agreement, with approval from the other party, and matters relating to its implementation to its professional advisors and to a limited number of specifically identified third parties (such as, without limitation, specific banks, investors or prospective investors, and other financial institutions), where such disclosure is considered necessary or desirable by the disclosing party; and (iii) any party may disclose this Agreement and matters relating to its implementation if required by any applicable law, regulation or court, or to make or defend claims pursuant to this Agreement. Notwithstanding the foregoing, however, the Owner may publicly disclose the major provisions of this Agreement, but not until after Ensurge has approved of the form, content and timing of such disclosure. The Owner shall not disclose the subsequent status of implementation of the provisions of this Agreement, without Ensurge’s prior written consent.

(k)      Owner Representative: The Owner shall designate a single individual as the “Owner Representative”, who is authorized and directed to ensure that the Owner’s obligations hereunder are performed and satisfied and generally to represent the Owner in connection with all matters relating to this Agreement, for dealings with Ensurge and other parties. The Owner may change the Owner Representative from time to time in its sole discretion, by notice to the other parties hereto. The Owner hereby designates Breeding as the initial Owner Representative. In the event of the death or incapacity of the Owner Representative, the Owner shall designate a replacement Owner Representative as soon as practicable.

(l)      Arbitration: In the event of any disputes, controversies or claims arising from an alleged breach of this Agreement or relating to the implementation of this Agreement by the parties, the parties hereby agree to be bound by binding arbitration to be conducted in Lubbock, Texas in accordance with the Commercial Arbitration Rules of the American Arbitration Association. All disputes arising out of or related to this Agreement over issues concerning technical mining or metallurgical matters shall be resolved by arbitrators who are experts in the relevant fields. The applicable substantive law shall be the laws of the State of Texas and discovery shall be conducted pursuant to the rules of the arbitrator.

13.           Notices: All notices permitted or required to be given under this Agreement shall be sufficiently given for all purposes if (i) made in writing and delivered personally, or (ii) sent by documented overnight delivery service, or, to the extent receipt is confirmed, by email transmission, to the following addresses:

If to the Owner:

Walter O. Breeding

c/o WOB Equities, Inc.

P.O. Box 12391

Lubbock, TX 79452

Tel/Fax: 806-762-6399

Mobile: 806-241-1042

Email: wobequities@gmail.com

With a copy to (for emailed notices): walterbreeding1@aol.com

  

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If to Ensurge:

Ensurge NM, LLC

2825 E Cottonwood Parkway, Suite 500

Salt Lake City, UT 84121

Tel: 801-990-3457

Fax: 801-990-3111

Email: jordan.estra@ensurgegold.com

With a copy to (for emailed notices): jeff.hanks@ensurgegold.com

Either party hereto may change its address for purposes of this paragraph by written notice given in the manner provided above.

	
14.

	
General Provisions:

(a)      Not a Partnership: This Agreement does not establish a partnership between the parties. No party has the right to bind any other party without the expressed written consent of such other party; provided that Ensurge shall act as agent for the Owner in the sale of the Tailings (including Valuable Metals), as stipulated in this Agreement.

(b)      Entire Agreement; Amendment: As stated in paragraph 3, this Agreement constitutes the entire understanding and agreement among the parties hereto regarding the subject matter hereof and supersedes all prior agreements and understandings relating thereto. This Agreement may only be amended in writing, signed by the parties hereto.

(c)      No Waiver, etc.: No failure on the part of any party in exercising any of its rights or remedies hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or remedy, preclude any other or further exercise thereof or the exercise of any other right or remedy at law or in equity or otherwise. Except as otherwise expressly provided herein, no waiver of any provision of this Agreement, including this paragraph, shall be effective otherwise than by an instrument in writing executed by the duly authorized representative(s) of the party making such waiver.

(d)      Severability: If any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, then this Agreement shall continue in full force and effect without such provision; provided that no such severability shall be effective if it materially reduces the economic benefit of this Agreement to any party, without the consent of such party.

(e)      Successors and Assigns, etc.: This Agreement shall inure to the benefit of, and shall be binding on, the executors, administrators, estates, heirs, legal successors, assigns and representatives of the parties hereto. Notwithstanding the foregoing, this Agreement shall not be assignable by Ensurge for so long as SGI is the holder of debt securities issued by Ensurge (the “SGI Indebtedness”) except with SGI’s prior written consent; provided, however, the foregoing restriction on assignments by Ensurge shall be terminated at such time that the SGI Indebtedness has been repaid in full by Ensurge.

(f)      Specific Enforcement: The parties hereto agree that irreparable damage for which money damages would not be an adequate remedy would occur in the event that any provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that, in addition to any other remedies that a party may have at law or equity, the parties shall be entitled to seek an injunction of injunctions to prevent any breach of this Agreement and to enforce specifically the terms hereof.

  

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(g)      Time is of the Essence: Time is of the essence in this Agreement.

(h)      Governing Law: This shall be governed in all respects by the laws of the State of Texas, without regard to the provisions relating to conflicts of laws among different jurisdictions.

(i)      Execution of this Agreement: This Agreement may be executed through the use of separate signature pages or in any number of counterparts with the same effect as if the parties executing such counterparts had all executed one counterpart; and the parties agree that faxed signatures or emailed, scanned signatures shall be as effective as if originals.

[The remainder of this page has been intentionally left blank.]

  

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(j)      Cancellation of Prior Agreement: Upon the execution of this Agreement, the Prior Agreement shall be cancelled, null and void and of no further force and effect, and no party thereto shall have any further liability or obligation thereunder.

IN WITNESS of this Agreement, the parties have executed and delivered this Agreement as of the date first written above.

	  	
WALTER O. BREEDING, in his personal capacity,

	  	
and on behalf of WOB EQUITIES, INC., and

	  	
also acting as the Power of Attorney for the BREEDING

	  	
FAMILY ESTATE TRUST

	  	  
	  	  
	  	
/s/ Walter O. Breeding

	  	
Walter O. Breeding

	  	  
	  	  
	  	  
	  	  
	  	
ENSURGE NM, LLC

	  	  
	  	  
	  	  
	  	
By: /s/ Jordan Estra

	  	
       Jordan Estra

	  	
       Chief Executive

	  	  
	  	  
	  	  
	  	  
	  	
ENSURGE INC.

	  	  
	  	  
	  	  
	  	
By: /s/ Jordan Estra

	  	
       Jordan Estra

	  	
       Chief Executive

  

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APPENDIX A

DESCRIPTION AND MAP OF THE PROPERTY

The Property is described as follows: 6589 Hwy 380, Carrizozo, NM 88301.

[Insert the map of the Property, with a designation of “Pile #1”]

[The map should also identify the Storage Yard]

 

 

 

 

-18-ex3-2.htm

Exhibit 3.2

 

COMPANY NOTE

	
$280,500.00

	
August 17, 2011

ENSURGE, INC.

 

Secured Convertible Promissory Note

 

FOR VALUE RECEIVED, EnSurge, Inc., a Nevada corporation (the “Borrower”), hereby promises to pay to the order of Bristol Investment Fund, Ltd., a Cayman Islands limited company, or its successors or assigns (the “Lender,” and together with the Borrower, the “Parties”), the principal sum of $280,500.00 together with all accrued and unpaid interest thereon, fees incurred or other amounts owing hereunder, all as set forth below in this Secured Convertible Promissory Note (this “Note”). This Note is issued pursuant to that certain Securities Purchase Agreement of even date herewith, entered into by and among the Borrower, EnSurge NM, LLC, a Utah limited liability company (“EnSurge NM”), the Lender, St. George Investments, LLC, an Illinois limited liability company (“SGI”), and John M. Fife (“Agent”) as agent thereunder (the “Purchase Agreement”). Defined terms used herein but not otherwise defined shall have the meanings ascribed thereto in the Purchase Agreement.

 

1.           Principal and Interest Payments. Interest on the unpaid principal balance of this Note shall not accrue unless and until the occurrence of an Event of Default (as defined below), provided that upon the occurrence of an Event of Default, the Outstanding Balance (as defined below) of this Note shall accrue interest at the rate of 18.00% per annum, compounded daily, from and after the date of the occurrence of the Event of Default, whether before or after judgment. Interest shall accrue on the basis of a 360 day year for the actual number of days elapsed. The Borrower shall pay to the Lender all outstanding amounts due hereunder in a payment due on or before the date that is ninety (90) days from the date hereof (the “Maturity Date”). All payments owing hereunder shall be in lawful money of the United States of America delivered to the Lender at the address furnished to the Borrower for that purpose. All payments shall be applied first to (a) costs of collection, if any, then to (b) fees and penalties, if any, then to (c) accrued and unpaid interest, and thereafter (d) to principal. For purposes hereof, the term “Outstanding Balance” means the sum of the outstanding principal balance of this Note and any accrued but unpaid interest, collection and enforcement costs, and any other fees and penalties incurred under this Note.

 

2.           Original Issue Discount.  The Borrower acknowledges that the principal amount of this Note exceeds the Purchase Price and that such excess consists of (a) the Lender’s share of the OID, and (b) the Lender’s share of the Transaction Expenses, both of which shall be fully earned and charged to the Borrower upon the execution of this Note and paid to the Lender as part of the outstanding principal balance as set forth in this Note.   

 

3.           Conversion.

 

(a)           Optional Conversion. At any time or from time to time prior to payment in full of the entire Outstanding Balance, the Lender shall have the right, at the Lender’s option, to convert the Outstanding Balance, in whole or in part (the “Conversion Amount”), into shares of common stock, par value $0.001 per share (the “Common Stock”), of the Borrower. The number of shares of Common Stock to be issued upon a conversion hereunder shall be determined by dividing (1) the Conversion Amount by (2) $1.00 (as may be adjusted pursuant to the terms hereof, the “Conversion Price”); provided, however, that if the Outstanding Balance is not paid as of the Maturity Date, the Conversion Price shall be the lower of $1.00 (as adjusted pursuant to the terms hereof) or the Market Price (as defined below). For purposes hereof, the “Market Price” is defined as 80% of the lowest closing bid price (the “Closing Bid Price”) during the ten (10) Trading Days immediately preceding the Conversion Date (as defined below), if applicable.  The trading data used to compute the Closing Bid Price shall be as reported by Bloomberg, LP (“Bloomberg”), or if such information is not then being reported by Bloomberg, then as reported by such other data information source as may be selected by the Lender. For the avoidance of doubt, conversions shall not be considered prepayments of this Note made by Borrower pursuant to Section 4 below.

 

  

  

  

 

(b)           Conversion Mechanics. In order to convert this Note into Common Stock, the Lender shall give written notice to the Borrower at its principal corporate office or the notice address provided in the Purchase Agreement (which notice, notwithstanding anything herein to the contrary, may be given via facsimile, email, or other means in the discretion of the Lender) pursuant to the forms attached hereto as Exhibit A (the “Conversion Notice”) and Exhibit A-1 (the “Conversion Worksheet”) of the election to convert the same pursuant to this Section 3 (the date on which a Conversion Notice is given, a “Conversion Date”).  Such Conversion Notice shall state the Conversion Amount, the number of shares of Common Stock to which the Lender is entitled pursuant to the Conversion Notice (the “Conversion Shares”), and the account into which the shares of Common Stock are to be deposited (the “Lender Account”).  The Borrower shall immediately, but in no event later than three (3) Trading Days after receipt of a Conversion Notice (the “Delivery Date”), deliver the Conversion Shares to the Lender Account. Notwithstanding anything to the contrary herein, all such deliveries of Conversion Shares shall be electronic, via DWAC.  In the event the Borrower fails to deliver the Conversion Shares on or before the Delivery Date, in addition to all other remedies available to the Lender hereunder or under any other Transaction Documents and at law or in equity, a penalty equal to 1.5% of the Conversion Amount shall be added to the balance of this Note per day until such Conversion Shares are delivered.  The conversion shall be deemed to have been made immediately prior to the close of business on the date of the Conversion Notice, and the person or entity entitled to receive the shares of Common Stock upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date.

 

(c)           No Fractional Shares. Conversion calculations pursuant to Section 3(a) shall be rounded up to the nearest whole share, and no fractional shares shall be issuable by the Borrower upon conversion of this Note or any portion thereof. All shares issuable upon conversion of this Note or any portion thereof shall be aggregated for purposes of determining whether such conversion would result in the issuance of a fractional share.

 

(d)           No Impairment.  The Borrower will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Borrower, but will at all times in good faith assist in the carrying out of all the provisions of this Section 3 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the Lender against impairment.

 

  

2

  

 

4.           Prepayment by the Borrower. So long as no Event of Default shall have occurred and the Borrower shall have a sufficient number of shares of Common Stock authorized to accommodate conversion of the Outstanding Balance, the Borrower may, in its sole and absolute discretion and upon giving the Lender not less than five (5) Trading Days written notice (a “Prepayment Notice”), pay in cash all or any portion of the Outstanding Balance at any time prior to the Maturity Date, provided that in the event the Borrower elects to prepay all or any portion of the Outstanding Balance, it shall pay to the Lender 110% of the portion of the Outstanding Balance the Borrower elects to prepay. Notwithstanding the foregoing, in conjunction with any prepayment hereunder, the Borrower must also make a simultaneous prepayment pursuant to the SGI Note (as defined below). All such prepayments shall be allocated between this Note and the SGI Note pro rata, based on the Outstanding Balance of each this Note and the SGI Note. For example, if the Outstanding Balance under this Note is equal to $150,000 and the Outstanding Balance of the SGI Note is equal to $100,000 at the time of prepayment, and the Borrower desires to prepay $100,000 of the Outstanding Balances of such notes, the Borrower shall pay $66,000 to the Borrower and $44,000 to SGI. If the Borrower delivers a Prepayment Notice and fails to pay the specified prepayment amount due to the Lender within two (2) Trading Days following the date of prepayment set forth in the Prepayment Notice, the Borrower shall forever forfeit its right to repay this Note pursuant to this Section.

 

5.            Certain Adjustments. The number and class of securities into which this Note may be converted under Section 3 shall be subject to adjustment in accordance with the following provisions:

 

(a)           Computation of Adjusted Conversion Price.  Except as hereinafter provided, in case the Borrower shall at any time after the date hereof issue or sell any (i) shares of Common Stock or preferred shares convertible into Common Stock, or (ii) debt, warrants, options or other instruments or securities convertible into or exercisable for shares of Common Stock (together herein referred to as “Equity Securities”), in each case for consideration (or with a conversion price or exercise price) per share of Common Stock less than the Conversion Price in effect immediately prior to the issuance or sale of such securities or instruments, or without consideration, other than for Excepted Issuances (as defined below), then forthwith upon such issuance or sale, the Conversion Price shall (until another such issuance or sale) be reduced to the price equal to the price (or conversion price or exercise price) of any such securities or instruments; provided, however, that in no event shall the Conversion Price be adjusted pursuant to this computation to an amount in excess of the Conversion Price in effect immediately prior to such computation.  For the purposes of this Section 5, the term Conversion Price shall mean the Conversion Price per share set forth in Section 3(a) hereof, as adjusted from time to time pursuant to the provisions of this Section.

 

“Excepted Issuances” shall mean, collectively, (i) the Borrower’s issuance of securities in connection with strategic license agreements and other partnering arrangements so long as such issuances are not for the purpose of raising capital and in which holders of such securities or debt are not at any time granted registration rights, and (ii) the Borrower’s issuance of Common Stock or the issuance or grant of options to purchase Common Stock to employees, directors, and consultants, pursuant to plans or agreements which are constituted or in effect on the date of this Note, provided that such issuances are at or above the closing bid price on the date of issuance.

 

  

3

  

 

For purposes of any computation to be made in accordance with this Section 5, the following provisions shall be applicable:

 

(i)           In case of the issuance or sale of any Equity Securities for consideration part or all of which shall be cash, the amount of the cash consideration shall be deemed to be the amount of cash received by the Borrower for such Equity Securities (or, if Equity Securities are offered by the Borrower for subscription, the subscription price, or, if such securities shall be sold to underwriters or dealers for public offering without a subscription price, the public offering price, before deducting therefrom any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or other persons or entities performing similar services), or any expenses incurred in connection therewith and less any amounts payable to security holders or any affiliate thereof, including, without limitation, any employment agreement, royalty, consulting agreement, covenant not to compete, earnout or contingent payment right or similar arrangement, agreement or understanding, whether oral or written; all such amounts shall be valued at the aggregate amount payable thereunder whether such payments are absolute or contingent and irrespective of the period or uncertainty of payment, the rate of interest, if any, or the contingent nature thereof.

 

(ii)           In case of the issuance or sale (otherwise than as a dividend or other distribution on any capital stock of the Borrower) of Equity Securities for consideration part or all of which shall be other than cash, the amount of the consideration other than cash shall be deemed to be the value of such consideration as determined in good faith by the Board of Directors of the Borrower.

 

(iii)           Equity Securities issuable by way of dividend or other distribution on any capital stock of the Borrower shall be deemed to have been issued immediately after the opening of business on the day following the record date for the determination of stockholders entitled to receive such dividend or other distribution and shall be deemed to have been issued without consideration.

 

(iv)           The reclassification of securities of the Borrower other than Equity Securities into securities including Equity Securities shall be deemed to involve the issuance of such Equity Securities for consideration other than cash immediately prior to the close of business on the date fixed for the determination of security holders entitled to receive such securities, and the value of the consideration allocable to such securities shall be determined as provided in this Section 5.

 

(v)           The number of Equity Securities at any one time outstanding shall include the aggregate number of shares of Common Stock issued or issuable (subject to readjustment upon the actual issuance thereof) upon the exercise of then outstanding options, rights, warrants, and convertible and exchangeable securities.

 

  

4

  

(b)           Adjustment for Reorganization or Recapitalization. If, while this Note remains outstanding and unconverted, there shall be a reorganization or recapitalization of the Borrower (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), all necessary or appropriate lawful provisions shall be made so that the Lender shall thereafter be entitled to receive upon conversion of this Note, the greatest number of shares of stock or other securities or property that a holder of the class of securities deliverable upon conversion of this Note would have been entitled to receive in such reorganization or recapitalization if this Note had been converted immediately prior to such reorganization or recapitalization, all subject to further adjustment as provided in this Section 5. If the per share consideration payable to the Lender for such class of securities in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be determined in good faith by the  Board of Directors of the Borrower. The foregoing provisions of this subsection shall similarly apply to successive reorganizations or recapitalizations and to the stock or securities of any other corporation that are at the time receivable upon the conversion of this Note. In all events, appropriate adjustment shall be made in the application of the provisions of this Note (including adjustment of the Conversion Price and number of shares of Common Stock into which this Note is then convertible pursuant to the terms and conditions of this Note) with respect to the rights and interests of the Lender after the transaction, to the end that the provisions of this Note shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable or issuable after such reorganization or recapitalization upon conversion of this Note.

 

(c)            Adjustments for Split, Subdivision or Combination of Shares.  If the Borrower at any time while this Note remains outstanding and unconverted, shall split or subdivide any class of securities into which this Note may be converted into a different number of securities of the same class, the number of shares of such class issuable upon conversion of this Note immediately prior to such split or subdivision shall be proportionately increased and the Conversion Price and any other applicable prices for such class of securities shall be proportionately decreased. If the Borrower at any time while this Note, or any portion hereof, remains outstanding and unconverted shall combine any class of securities into which this Note may be converted, into a different number of securities of the same class, the number of shares of such class issuable upon conversion of this Note immediately prior to such combination shall be proportionately decreased and the Conversion Price and any other applicable prices for such class of securities shall be proportionately increased.

 

(d)            Adjustments for Dividends in Stock or Other Securities or Property. If, while this Note remains outstanding and unconverted, the holders of any class of securities as to which conversion rights under this Note exist at the time shall have received, or, on or after the record date fixed for the determination of eligible stockholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash) of the Borrower by way of dividend, then and in each case, this Note shall represent the right to acquire, in addition to the number of shares of such class of security receivable upon conversion of this Note, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property (other than cash) of the Borrower that such holder would hold on the date of such conversion had such holder been the holder of record of the class of security receivable upon conversion of this Note on the date hereof and had thereafter, during the period from the date hereof to and including the date of such conversion, retained such shares and/or all other additional stock available to such holder as aforesaid during said period, giving effect to all adjustments called for during such period by the provisions of this Section 5.

 

  

5

  

 

(e)           Adjustments for Spin Offs. If, at any time while any portion of this Note remains outstanding and unconverted, the Borrower spins off or otherwise divests itself of a part of its business or operations or disposes of all or of a part of its assets in a transaction (the “Spin Off”) in which the Borrower, in addition to or in lieu of any other compensation received and retained by the Borrower for such business, operations or assets, causes securities of another entity (the “Spin Off Securities”) to be issued to security holders of the Borrower, the Borrower shall cause (i) to be reserved Spin Off Securities equal to the number thereof which would have been issued to the Lender had the entire balance of this Note outstanding on the record date (the “Record Date”) for determining the amount and number of Spin Off Securities to be issued to security holders of the Borrower been converted as of the close of business on the Trading Day immediately before the Record Date (the “Reserved Spin Off Shares”), and (ii) to be issued to the Lender on the conversion of all or any portion of this Note, such amount of the Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares multiplied by (y) a fraction, of which (I) the numerator is the principal amount of the portion of the Outstanding Balance then being converted, and (II) the denominator is the entire Outstanding Balance of this Note. In the event of any Spin Off, (i) the Lender shall have the right to convert the Outstanding Balance by delivering a Conversion Notice to the Borrower within ten (10) days of receipt of notice of such Spin Off from the Borrower, or (ii) immediately upon the consummation of a Spin Off, all amounts owed under this Note shall accelerate and be immediately due and payable in the sole discretion of the Lender.

 

(f)            No Change Necessary. The form of this Note need not be changed because of any adjustment in the number and class of securities issuable upon its conversion.

 

6.           Further Adjustments. In case at any time or, from time to time, the Borrower shall take any action that affects the class of securities into which this Note may be converted under Section 3, other than an action described herein, then, unless such action will not have a material adverse effect upon the rights of the Lender, the number and class of securities into which this Note is convertible shall be adjusted in such a manner and at such time as shall be equitable under the circumstances.

 

7.           Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment pursuant to Section 5 or Section 6, the Borrower at its sole expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Lender a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Borrower shall, upon the written request at any time of the Lender, furnish or cause to be furnished to the Lender a like certificate setting forth (i) such adjustments and readjustments, and (ii) the number and class of securities and the amount, if any, of other property which at the time would be received upon the conversion of this Note under Section 3.

 

8.           Security. This Note is secured by that certain Security Agreement of even date herewith (the “Borrower Security Agreement”) executed by the Borrower in favor of Agent (in its capacity as Agent for the Lender and Bristol as set forth in the Purchase Agreement) encumbering certain assets of the Borrower, as more specifically set forth in the Borrower Security Agreement, all the terms and conditions of which are hereby incorporated into and made a part of this Note. This Note is also secured by that certain Security Agreement of even date herewith (the “EnSurge NM Security Agreement,” and together with the Borrower Security Agreement, the “Security Agreements”) executed by EnSurge NM in favor of Agent (in its capacity as Agent for the Lender and Bristol as set forth in the Purchase Agreement) encumbering certain assets of EnSurge NM, as more specifically set forth in the EnSurge NM Security Agreement, all the terms and conditions of which are hereby incorporated into and made a part of this Note. This Note is further secured by that certain Membership Unit Pledge Agreement executed by the Borrower in favor of the Lender (the “Pledge Agreement”), all the terms of which are hereby incorporated and made a part of this Note, pursuant to which the Borrower is pledging all of the outstanding equity of EnSurge NM as security for the Borrower’s obligations under the Transaction Documents.

 

  

6

  

 

9.           Change of Control.  In the event of (i) any transaction or series of related transactions (including any reorganization, merger or consolidation) that results in the transfer of 50% or more of the outstanding voting power of the Borrower or EnSurge NM, or (ii) a sale of all or substantially all of the assets of the Borrower or EnSurge NM to another person or entity, this Note shall be automatically due and payable in cash. The Borrower will give the Lender not less than ten (10) business days prior written notice of the occurrence of any events referred to in this Section 9.

 

10.           Representations and Warranties of the Borrower.  In addition to the representations and warranties set forth in the Purchase Agreement, the Security Agreements and the Pledge Agreement, which are incorporated herein, the Borrower hereby represents and warrants to the Lender that:

 

(a)           The Borrower understands and acknowledges that the number of Conversion Shares issuable upon conversion of this Note will increase in certain circumstances. The Borrower further acknowledges that its obligation to issue Conversion Shares upon conversion of this Note in accordance with its terms is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Borrower;

 

(b)           The Borrower’s Common Stock is registered under Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”);

 

(c)           The Borrower is not and for at least the last 12 months prior to the date hereof has not been a “shell company,” as defined in paragraph (i)(1)(i) of Rule 144 or Rule 12(b)(­2) of the Exchange Act;

 

(d)           The Borrower is subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act and has filed all required reports under Section 13 or Section 15(d) of the Exchange Act during the 12 months prior to the date hereof (or for such shorter period that the Borrower was required to file such reports); and

 

  

7

  

(e)           The issuance of this Note has been duly authorized by the Borrower. Upon conversion in accordance with the terms of this Note, the Conversion Shares, when issued, will be validly issued, fully paid and non-assessable, free from all taxes, liens, claims, pledges, mortgages, restrictions, obligations, security interests and encumbrances of any kind, nature and description. The Borrower has reserved from its duly authorized capital stock the appropriate number of shares of Common Stock for issuance upon conversion of this Note as required by the terms of this Note.

 

11.           Affirmative and Negative Covenants. In addition to the covenants set forth in the Purchase Agreement, the Security Agreements and the Pledge Agreement, the Borrower covenants and agrees, while any portion of this Note remains outstanding and unconverted, as follows:

 

(a)           The Borrower shall do all things necessary to preserve and keep in full force and effect its corporate existence including, without limitation, maintain all licenses or similar qualifications required by it to engage in its business in all jurisdictions in which it is at the time so engaged; and continue to engage in business of the same general type as conducted as of the date hereof; and continue to conduct its business substantially as now conducted or as otherwise permitted hereunder;

 

(b)           The Borrower shall pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property before the same shall become delinquent or in default, which, if unpaid, might reasonably be expected to give rise to liens or charges upon such properties or any part thereof, unless, in each case, the validity or amount thereof is being contested in good faith by appropriate proceedings and the Borrower has maintained adequate reserves with respect thereto in accordance with GAAP;

 

(c)           The Borrower shall comply in all material respects with all federal, state and local laws and regulations, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations and requirements (collectively, “Requirements”) of all governmental bodies, departments, commissions, boards, insurers, courts, authorities, officials or officers which are applicable to the Borrower or any of its properties, except where the failure to so comply would not have a Material Adverse Effect on the Borrower or any of its properties; provided, however, that nothing provided herein shall prevent the Borrower from contesting the validity or the application of any Requirements;

 

(d)           The Borrower shall keep proper records and books of account with respect to its business activities, in which proper entries, reflecting all of their financial transactions, are made in accordance with GAAP;

 

(e)           From the date hereof until the date that is six (6) months after the date that all the Conversion Shares either have been sold by the Lender, or may permanently be sold by the Lender without any restrictions pursuant to Rule 144 (the “Registration Period”), the Borrower shall file with the Securities and Exchange Commission (the “SEC”) in a timely manner all required reports under Sections 13 or 15(d) of the Exchange Act and such reports shall conform to the requirement of the Exchange Act and the SEC for filing thereunder;

 

  

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(f)           The Borrower shall furnish to the Lender, so long as the Lender owns any Common Stock, promptly upon request, (i) a written statement by the Borrower that it has complied with the reporting requirements of Rule 144, (ii) a copy of the most recent annual or quarterly report of the Borrower and such other reports and documents so filed by the Borrower, and (iii) such other information as may be reasonably requested to permit the Lender to sell such securities pursuant to Rule 144 without registration;

 

(g)           During the Registration Period, the Borrower shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations thereunder would otherwise permit such termination;

 

(h)           On the date hereof and at all times prior to the repayment in full of this Note, the Borrower shall reserve the number of shares required by the Share Reserve for the purpose of, among other things, the conversion of this Note.  The Borrower represents that it has sufficient authorized and unissued shares of Common Stock available to create the Share Reserve after considering all other commitments that may require the issuance of Common Stock. The Borrower shall take all action reasonably necessary to at all times have authorized, and reserved for the purpose of issuance, such number of shares of Common Stock as shall be necessary to effect the full conversion of the Note multiplied by two (2). If at any time the Share Reserve is insufficient to effect the full conversion of the Note, the Borrower shall increase the Share Reserve accordingly. If the Borrower does not have sufficient authorized and unissued shares of Common Stock available to increase the Share Reserve, the Borrower shall call and hold a special meeting of the stockholders within thirty (30) days of such occurrence, for the sole purpose of increasing the number of authorized shares. The Borrower’s management shall recommend to the stockholders to vote in favor of increasing the number of shares of Common Stock authorized. Management shall also vote all of its shares in favor of increasing the number of authorized shares of Common Stock. The Borrower shall use its best efforts to cause such additional shares of Common Stock to be authorized so as to comply with the requirements of this Section 11(h);

 

(i)           The Common Stock shall be listed or quoted for trading on any of (i) NYSE Amex, (ii) the New York Stock Exchange, (iii) the Nasdaq Global Market, (iv) the Nasdaq Capital Market, (v) the OTC Bulletin Board, or (f) the OTCQX or OTCQB (each, a “Primary Market”). The Borrower shall promptly secure the listing of all of its securities issuable under the terms of the Transaction Documents upon each national securities exchange and automated quotation system, if any, upon which the Common Stock is then listed (subject to official notice of issuance) and shall maintain such listing of all securities from time to time issuable under the terms of the Transaction Documents;

 

(j)           The Borrower shall notify the Lender in writing, promptly upon learning thereof, of any litigation or administrative proceeding commenced or threatened against the Borrower involving a claim in excess of $100,000.00;

 

(k)           The Borrower shall use the proceeds from this Note for working capital and general corporate purposes only; and

 

  

9

  

(l)           The Borrower shall notify the Lender in writing, promptly upon the occurrence of any Event of Default.

 

12.           Default. Upon each occurrence of any of the following events (each, an “Event of Default”), (a) the Outstanding Balance shall immediately increase to the higher of (i) 125% of the Outstanding Balance immediately prior to the occurrence of the Event of Default, and (ii) 125% of the value of the Conversion Shares if the entire Outstanding Balance were converted pursuant to Section 3 above and sold at the highest closing price for the Common Stock during the period the Event of Default was continuing, and (b) this Note shall accrue interest at the rate of 1.5% per month, compounding daily, whether before or after judgment (the “Trigger Effects”); provided, however, that (1) in no event shall the Trigger Effects be applied more than two times, and (2) notwithstanding any provision to the contrary herein, in no event shall the applicable interest rate at any time exceed the maximum interest rate allowed under applicable law. Additionally, upon the occurrence of an Event of Default, the Lender may by written notice to the Borrower declare the entire Outstanding Balance immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding; provided, however, that upon the occurrence or existence of any Event of Default described in Section 12(f) or (g), immediately and without notice, all outstanding obligations payable by the Borrower hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding:

 

(a)           Failure to Pay. The Borrower shall fail to make any payment when due and payable under the terms of this Note including, without limitation, any payment of costs, fees, interest, principal or other amount due hereunder.

 

(b)           Judgment.  A judgment is entered against the Borrower for an amount in excess of $100,000.

 

(c)           Failure to Deliver Shares.  The Borrower (or its transfer agent) shall fail to deliver the Conversion Shares as provided under Section 3(b) of this Note or the shares of Common Stock required to be delivered upon exercise of the Warrants.

 

(d)           Breaches of Covenants. The Borrower or its subsidiaries, if any, shall fail to observe or perform any other covenant, obligation, condition or agreement contained in this Note or any of the other Transaction Documents, including without limitation all reporting covenants and covenants to timely file all required quarterly and annual reports and any other filings required pursuant to Rule 144.

 

(e)           Representations and Warranties. Any representation, warranty, certificate, or other statement (financial or otherwise) made or furnished by or on behalf of the Borrower to the Lender in writing included in this Note or in connection with any of the Transaction Documents, or as an inducement to the Lender to enter into this Note or any of the other Transaction Documents, shall be false, incorrect, incomplete or misleading in any material respect when made or furnished or become false thereafter.

 

  

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(f)           Failure to Pay Debts; Voluntary Bankruptcy. If any of the Borrower’s assets are assigned to its creditors, if the Borrower fails to pay its debts generally as they become due, or if the Borrower files any petition, proceeding, case or action for relief under any bankruptcy, reorganization, insolvency or moratorium law, rule, regulation, statute or ordinance (collectively, “Laws and Rules”), or any other Law and Rule for the relief of, or related to, debtors.

 

(g)           Involuntary Bankruptcy. If any involuntary petition is filed under any bankruptcy or similar Law or Rule against the Borrower, or a receiver, trustee, liquidator, assignee, custodian, sequestrator or other similar official is appointed to take possession of any of the assets or properties of the Borrower or any guarantor.

 

(h)           Governmental Action. If any governmental or regulatory authority takes or institutes any action that will materially affect the Borrower’s financial condition, operations or ability to pay or perform the Borrower’s obligations under this Note.

 

(i)           Share Reserve. The Borrower’s failure to maintain the Share Reserve pursuant to the Purchase Agreement.

 

(j)           An Event of Default Under the SGI Note. An event of default shall have occurred under the terms of that certain Secured Convertible Promissory Note dated August 17, 2011, issued by Borrower in favor of SGI pursuant to the Purchase Agreement, as the same may be amended from time to time (the “SGI Note”).

 

(k)           Assignment of EnSurge NM Services Contract. Any assignment, whether by the Borrower or EnSurge NM, of the EnSurge NM Services Contract, or any rights or obligations of the Borrower or EnSurge NM thereunder, without the Lender’s prior written consent to such assignment.

 

(l)           Confession. The Lender does not receive its Confession, in original form, on or before August 22, 2011.

 

13.           Ownership Limitation. Notwithstanding the provisions of this Note, if at any time after the date hereof, the Lender shall or would receive shares of Common Stock in payment of interest or principal under this Note or upon conversion of this Note, so that the Lender would, together with other shares of Common Stock held by it or its Affiliates, own or beneficially own by virtue of such action or receipt of additional shares of Common Stock a number of shares exceeding 9.99% of the number of shares of Common Stock outstanding on such date (the “9.99% Cap”), the Borrower shall not be obligated and shall not issue to the Lender shares of Common Stock which would exceed the 9.99% Cap, but only until such time as the 9.99% Cap would no longer be exceeded by any such receipt of shares of Common Stock by the Borrower. The foregoing limitations are enforceable, unconditional and non-waivable and shall apply to all Affiliates and assigns of the Lender.

 

14.           No Rights or Liabilities as Stockholder. This Note does not by itself entitle the Lender to any voting rights or other rights as a stockholder of the Borrower. In the absence of conversion of this Note, no provisions of this Note, and no enumeration herein of the rights or privileges of the Lender, shall cause the Lender to be a stockholder of the Borrower for any purpose.

 

  

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15.           Unconditional Obligation. No provision of this Note shall alter or impair the obligation of the Borrower, which is absolute and unconditional, to pay the principal of, and interest on, this Note at the time, place, and rate, and in the currency or where contemplated herein in shares of Common Stock, as applicable, as herein prescribed.  This Note is a direct obligation of the Borrower.

 

16.           Confession of Judgment. Upon the occurrence of an Event of Default, in addition to any other rights or remedies the Lender may have under the Transaction Documents or applicable law, the Lender shall have the right, but not the obligation, to cause the Confession of Judgment attached to the Purchase Agreement to be entered into a court of competent jurisdiction.

 

17.           Binding Effect. This Note shall be binding on the Parties and their respective heirs, successors, and assigns; provided, however, that the Borrower shall not assign its rights hereunder in whole or in part without the express written consent of the Lender.

 

18.           Governing Law; Venue. The terms of this Note shall be construed in accordance with the laws of the State of Utah as applied to contracts entered into by Utah residents within the State of Utah which contracts are to be performed entirely within the State of Utah.  With respect to any disputes arising out of or related to this Note, the Parties consent to the exclusive personal jurisdiction of, and venue in, the state courts located in Salt Lake County, State of Utah (or in the event of federal jurisdiction, any United States District Court for the District of Utah), and hereby waive, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdiction or to any claim that such venue of the suit, action or proceeding is improper.

 

19.           Severability. If any part of this Note is construed to be in violation of any law, such part shall be modified to achieve the objective of the Parties to the fullest extent permitted by law and the balance of this Note shall remain in full force and effect.

 

20.           Attorneys’ Fees. If any action at law or in equity is necessary to enforce this Note or to collect payment under this Note, the Lender shall be entitled to recover reasonable attorneys’ fees directly related to such enforcement or collection actions.

 

21.            Amendments and Waivers; Remedies. No failure or delay on the part of a Party hereto in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to a Party hereto at law, in equity or otherwise. Any amendment, supplement or modification of or to any provision of this Note, any waiver of any provision of this Note, and any consent to any departure by either Party from the terms of any provision of this Note, shall be effective (i) only if it is made or given in writing and signed by the Borrower and the Lender and (ii) only in the specific instance and for the specific purpose for which made or given.

 

  

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22.           Notices. All notices, requests, demands, claims and other communications hereunder shall be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly given if it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient, as set forth in the Purchase Agreement. Any Party may send any notice, request, demand, claim or other communication hereunder to the intended recipient at the address set forth in the Purchase Agreement using any other means (including personal delivery, expedited courier, messenger service, facsimile, ordinary mail, or electronic mail), but no such notice, request, demand, claim or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient or receipt is confirmed electronically or by return mail.  Any Party may change the address to which notices, requests, demands, claims and other communications hereunder are to be delivered by giving the other Party notice in any manner herein set forth.

 

23.            Entire Agreement. This Note, together with the Security Agreements, the Pledge Agreement, and the other Transaction Documents, contains the complete understanding and agreement of the Borrower and the Lender and supersedes all prior representations, warranties, agreements, arrangements, understandings, and negotiations with respect to the subject matter thereof. THIS NOTE, TOGETHER WITH THE SECURITY AGREEMENTS, THE PLEDGE AGREEMENT, AND THE OTHER TRANSACTION DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY ALLEGED PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

 

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IN WITNESS WHEREOF, the Borrower has executed this Note as of the date set forth above.

Exhibits

Exhibit A – Conversion Notice

Exhibit A-1 – Conversion Worksheet

	  	
THE BORROWER:

	  	  
	  	
ENSURGE, INC.

	  	  
	  	  
	  	
By: /s/ Jordan Mark Estra

	  	
Name: Jordan M. Estra

	  	
Title:  President and Chief Executive Officer

 

 

ACKNOWLEDGED, ACCEPTED AND AGREED:

 

BRISTOL INVESTMENT FUND, LTD.

By: /s/ Paul Kessler

Name: Paul Kessler

Title: Director

[Signature page to Secured Convertible Secured Promissory Note]

  

 

  

EXHIBIT A

BRISTOL INVESTMENT FUND, LTD.

6353 WEST SUNSET BOULEVARD, SUITE 4006

HOLLYWOOD, CALIFORNIA 90028

Date:                                           

EnSurge, Inc.                                                                           VIA FAX:  ________________

2825 East Cottonwood Parkway, Suite 500

Salt Lake City, Utah 84121

Attn:  Jordan Estra

CONVERSION NOTICE

The above-captioned Lender hereby gives notice to EnSurge, Inc., a Nevada corporation (the “Company”), pursuant to that certain Secured Convertible Promissory Note made by the Company in favor of the Lender on August 17, 2011 (the “Note”), that the Lender elects to convert the portion of the Note balance set forth below into fully paid and non-assessable shares of Common Stock of the Company as of the date of conversion specified below.  Such conversion shall be based on the Conversion Price set forth below. In the event of a conflict between this Conversion Notice and the Note, the Note shall govern, or, in the alternative, at the election of the Lender in its sole discretion, the Lender may provide a new form of Conversion Notice to conform to the Note.

	
  

	
A.

	
Date of conversion:

	
____________

	
  

	
B.

	
Conversion #:

	
  ____________

	
  

	
C.

	
Conversion Amount:

	
  ____________

	
  

	
D.

	
Lowest closing bid price _____ (of last 10 Trading Days per Exhibit A-1)

	
  

	
E.

	
Conversion Factor:  80%

	
  

	
F.

	
Conversion Price:  _______________ ($1.00; unless the Note is not paid prior to maturity, in which event it shall be the lower of (i) $1.00, and (ii) D multiplied by E)

	
  

	
G.

	
Conversion Shares:  _______________ (C divided by F)

	
  

	
H.

	
Remaining Note Balance:  ____________

Please transfer the Conversion Shares electronically (via DWAC) to the following account:

Broker:  _____________________________               Address:  _____________________                    

DTC#:   _____________________________                                 _____________________                  

Account #: __________________________                                  _____________________

Account Name: _______________________

Sincerely,

BRISTOL INVESTMENT FUND, LTD.

By:  _______________________________________

Name:  _____________________________________

Title:  ______________________________________

  

  

 

  

EXHIBIT A-1

CONVERSION WORKSHEET

	
Trading Day

	
Closing Bid Price

	
Lowest (Yes or No)

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