Document:

Exhibit
      10.1

    
 

    WARRANT
      EXCHANGE AGREEMENT

    

    WARRANT
      EXCHANGE AGREEMENT, dated as of August 5, 2008 (this “Agreement”), by and
      between PURE BIOFUELS CORP., a Nevada corporation (the “Company”), and
      PLAINFIELD PERU II LLC, a Delaware limited liability company (“LLCII”).
      Capitalized terms used and not otherwise defined herein shall have the meanings
      assigned to such terms in the Securities Purchase Agreement, dated as of
      September 12, 2007, as amended by an amendment executed on March 26, 2008 (the
      “Purchase Agreement”), by and between the Company, LLCII and PLAINFIELD PERU I
      LLC (“LLCI”), a Delaware limited liability company (together with LLCII, the
“Purchaser”) or the Loan Agreement (as defined in the Purchase Agreement) if
      such capitalized term is not defined in the Purchase Agreement.

    

    WITNESSETH:

    

    WHEREAS,
      (A) LLCII is a holder of warrants to purchase (i) 59,104,912 shares of Common
      Stock at an exercise price of $0.30 and (ii) 122,605 shares of Common Stock
      at
      an exercise price of $0.01; and (B) LLCII has the rights to acquire warrants
      to
      purchase 57,823,130 shares of Common Stock at an exercise price to be determined
      but not greater than $0.30 (the “Warrant Rights” and together with the warrants
      described in subclause (A) above, the “Warrants”);

    

    WHEREAS,
      LLCII desires, for valid business reasons, to consummate an exchange of the
      Warrants pursuant to the terms hereof;

    

    WHEREAS,
      the Company has determined that it is in its best interest to recapitalize
      its
      capital structure through the exchange of the Warrants pursuant to the terms
      hereof as a plan of reorganization; and

    

    WHEREAS,
      for Federal income tax purposes, it is intended that this Agreement shall
      qualify as a “reorganization” within the meaning of Section 368(a) of the
      Internal Revenue Code of 1986, as amended, and the regulations promulgated
      thereunder (the “Code”).

    

    NOW,
      THEREFORE, in consideration of the foregoing premises and of the
      representations, warranties, covenants and agreements contained in this
      Agreement, and other good and valuable consideration, the receipt and
      sufficiency of which are hereby acknowledged, the parties agree as
      follows:

    

    1. Agreement
      to Exchange.
      LLCII
      and the Company agree that LLCII shall exchange all of the Warrants for
78,033,765
      shares
      of
      Common Stock (the “Exchange Shares”). Upon issuance of the Exchange Shares to
      LLCII, the Warrants will be null and void and of no further force or effect.
      The
      parties agree to issue the Exchange Shares in the name of PLAINFIELD PERU II
      LLC. 

    

    2. Surrender
      of Warrant Certificates.
      Concurrently with the execution of this Agreement and the issuance of the
      Exchange Shares, LLCII shall surrender the Warrants it holds in certificated
      form (which do not include the uncertificated Warrant Rights) to the Company,
      upon which surrender LLCII shall be deemed to be the holder of record of the
      Exchange Shares.

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    3. Issuance
      of Exchange Shares.
      Upon
      surrender by LLCII of the Warrants it holds in certificated form (which do
      not
      include the uncertificated Warrant Rights) pursuant to Section 2 hereof, the
      Company agrees to adopt this plan of reorganization and shall issue and deliver
      to LLCII the Exchange Shares issuable to LLCII pursuant to this Agreement,
      registered in the name of LLCII with the Transfer Agent.

     

    4. Registration
      Rights. The
      Company and LLCII agree that the Exchange Shares shall constitute “Registrable
      Securities” under the Registration Rights Agreement.

    

    5. Representations
      and Warranties of the Company.
      In
      order to induce LLCII to enter into this Agreement, the Company hereby
      represents and warrants to and agrees with LLCII that:

    

    (i) All
      Exchange Shares shall, when issued in exchange for the Warrants, be duly
      authorized, validly issued, fully paid and non-assessable, and free of any
      liens, encumbrances and preemptive or similar rights, and shall not be in
      violation of the Company’s Articles of Incorporation or Bylaws or any Applicable
      Law.

    

    (ii) The
      Company has the corporate power and authority to execute, deliver and perform
      the terms and provisions of this Agreement and has taken all necessary corporate
      action to authorize the execution, delivery and performance by it of this
      Agreement. The Company has duly executed and delivered this Agreement, and
      this
      Agreement constitutes its legal, valid and binding obligation enforceable in
      accordance with its terms, except to the extent that the enforceability thereof
      may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
      or other similar laws generally affecting creditors’ rights and by equitable
      principles (regardless of whether enforcement is sought in equity or at
      law).

    

    (iii) No
      order,
      consent, approval, license, authorization or validation of, or filing, recording
      or registration with, or exemption by, any Governmental Authority is required
      to
      be obtained or made by, or on behalf of, the Company to authorize, or is
      required to be obtained or made by, or on behalf of, the Company in connection
      with (a) the execution, delivery and performance of this Agreement, (b) the
      legality, validity, binding effect or enforceability of this Agreement, or
      (c)
      the issuance of the Exchange Shares to LLCII and the registration of the
      Exchange Shares with the Transfer Agent.

    

    (iv)
      Neither the execution, delivery or performance by the Company of this Agreement,
      nor compliance by it with the terms and provisions thereof, (a) will contravene
      any provision of any law, statute, rule or regulation or any order, writ,
      injunction or decree of any court or Governmental Authority, (b) will conflict
      with or result in any breach of any of the terms, covenants, conditions or
      provisions of, or constitute a default under, or result in the creation or
      imposition of (or the obligation to create or impose) any Encumbrance, upon
      any
      of the property or assets of the Company or any of its Subsidiaries pursuant
      to
      the terms of any indenture, mortgage, deed of trust, credit agreement or loan
      agreement, or any other agreement, contract or instrument, in each case to
      which
      Company or any of its Subsidiaries is a party or by which it or any of the
      Company or any of its Subsidiaries or property or assets is bound or to which
      the Company or any of its Subsidiaries may be subject, except for any violation
      of the terms of the applicable provisions of the Purchase Agreement, the Notes,
      the Loan Agreement and the Loan Documents that are being waived pursuant to
      Section 7 of this Agreement or on the signature pages hereto, or (c) will
      violate any provision of the certificate or articles of incorporation,
      certificate of formation, limited liability company agreement or by-laws (or
      equivalent organizational documents), as applicable, of the Company or any
      of
      its Subsidiaries.

     

    
      
         

      

      
        -2-

        
          

        

      

      
         

      

    

    (v) (a)
      Upon
      issuance of the Exchange Shares, the authorized Capital Stock of the Company
      will consist solely of 250,000,000 shares of Common Stock and 1,000,000 shares
      of preferred stock, of which 155,721,636
      shares
      of Common Stock (assuming no additional exercises of existing stock options
      described in Schedule 4.7 to this Agreement) and no shares of preferred stock
      will be issued and outstanding, no shares are held in treasury and 71,153,414
      shares
      of Common Stock (such amount does not include any shares,
      warrants
or
      other
      convertible or exchangeable securities that
      may
      be issued pursuant to the Agreement
      and Plan of Merger, dated as of December 4, 2007, by and among the Company,
      Pure
      Biofuels del Peru S.A.C., Interpacific Oil S.A.C. and certain Target
      Stockholders identified therein, as amended on January 23, 2008 (the “Merger
      Agreement”),
      Section
      3.6(m) of the Purchase Agreement,
      or the
      Notes as PIK Interest (as defined in the Notes))
      will be
      reserved for issuance upon the exercise of outstanding warrants, options and
      other convertible or exchangeable securities (other than the Exchange Shares).
      Schedule 4.7 to this Agreement sets forth the capitalization of the Company
      as
      of the issuance of the Exchange Shares.

    

    (b)
       Except
      as
      set forth on Schedule 4.7 to this Agreement, as of the date of this Agreement,
      there are and upon issuance of the Exchange Shares there will be (i) no
      outstanding options, warrants, agreements, conversion rights, exchange rights,
      preemptive rights or other rights (whether contingent or not) to subscribe
      for,
      purchase or acquire any issued or unissued shares of Capital Stock of the
      Company or any Subsidiary, and (ii) no restrictions upon, or Contracts or
      understandings of the Company or any Subsidiary, or, to the knowledge of the
      Company, Contracts or understandings of any other Person, with respect to,
      the
      voting or transfer of any shares of Capital Stock of the Company or any
      Subsidiary.

    

    (vi)
      No
      agent, broker, Person or firm acting on behalf of the Company or its Affiliates
      is, or will be, entitled to any fee, commission or broker’s or finder’s fees
      from any of the parties hereto, or from any Person controlling, controlled
      by,
      or under common control with any of the parties hereto, in connection with
      this
      Agreement or any of the transactions contemplated hereby.

    

    6. Representations
      and Warranties of LLCII.
      LLCII
      represents and warrants to the Company that:

    

    
      
         

      

      
        -3-

        
          

        

      

      
         

      

    

    (i) LLCII
      has
      the power to execute, deliver and perform its obligations under this Agreement
      and has taken all action necessary to authorize the execution, delivery and
      performance by it of this Agreement and to consummate the transactions
      contemplated hereby. No other proceedings on the part of LLCII are necessary
      for
      such authorization, execution, delivery and consummation. LLCII has duly
      executed and delivered this Agreement. This Agreement constitutes a legal,
      valid
      and binding obligation of LLCII, enforceable against LLCII in accordance with
      its terms, except as such enforceability may be limited by applicable
      bankruptcy, insolvency, reorganization, moratorium or other similar laws
      relating to or affecting the enforcement of creditors’ rights generally or
      general principles of equity (regardless of whether such enforceability is
      considered in a proceeding in equity or at law).

    

    (ii) The
      execution, delivery and performance by LLCII of this Agreement does not and
      will
      not (a) violate any organizational document of LLCII, (b) contravene any
      material Applicable Law, (c) require any consent of any Governmental Authority
      or other Person, except where the failure to obtain such consent would not,
      individually or in the aggregate, reasonably be expected to have a material
      adverse effect on the ability of LLCII to perform its obligations under this
      Agreement, or (d) constitute a default under any Contract binding upon LLCII,
      except for any such defaults that would not, individually or in the aggregate,
      reasonably be expected to have a material adverse effect on the ability of
      LLCII
      to perform its obligations under this Agreement.

    

    (iii) LLCII
      has
      not engaged any brokers, finders or agents, and neither the Company has, nor
      will, incur, directly or indirectly, as a result of any action taken by LLCII,
      any liability for brokerage or finders’ fees or agents’ commissions or any
      similar charges under this Agreement or the transactions contemplated
      hereby.

    

    7. Waiver
      of the Purchase Agreement and the Notes.
      Notwithstanding anything to the contrary contained in the Purchase Agreement
      and
      the Notes, the Purchaser waives compliance by the Company of its applicable
      obligations contained in the applicable provisions of the Purchase Agreement
      only with respect to this Agreement, the Purchaser acknowledges and agrees
      that
      as a result of such waiver the execution of this Agreement by the Company and
      performance of its obligations hereunder will not violate the terms of the
      applicable provisions of the Purchase Agreement or the Notes and the issuance
      of
      the Exchange Shares shall not cause any adjustment to the Conversion Price
      of
      the Notes. LLCI is executing this Agreement only with respect to this Section
      7.

    

    8. Purchase
      Agreement and Transaction Documents.
      The
waiver
      in
      Section 7 above is
      limited
      as specified and shall not constitute a modification, acceptance or waiver
      of
      any other provision of the Purchase Agreement, or the other Transaction
      Documents. Except as set forth in Section 7 above,
      the
      Purchase Agreement and the other Transaction Documents shall continue in full
      force and effect in accordance with their terms.

     

    9. Certain
      Taxes.
      The
      Company shall pay any and all documentary, stamp or similar issue or transfer
      taxes payable in respect of the issue or delivery of the Exchange
      Shares.

    

    
      
         

      

      
        -4-

        
          

        

      

      
         

      

    

    10. Incorporation
      of Provisions from the Purchase Agreement.
      The
      provisions of Sections 13.2 and 13.3 of the Purchase Agreement are incorporated
      by reference herein (as if set forth in full in this section) so that this
      Agreement shall be subject to the terms and provisions of such sections of
      the
      Purchase Agreement.

    

    11. Waiver;
      Exercise of Rights and Remedies.
      Any
      provision of this Agreement may be amended or waived if, and only if, such
      amendment or waiver is in writing and signed by LLCII and the Company (and
      in
      the case of any amendment of Section 7 only, LLCI). No failure or delay by
      any
      party in exercising any right, power or privilege hereunder shall operate as
      a
      waiver thereof nor shall any single or partial exercise thereof preclude any
      other or further exercise thereof or the exercise of any other right, power
      or
      privilege. The rights and remedies herein provided shall be cumulative and
      not
      exclusive of any rights or remedies provided by law.

    

    12. Counterparts.
      This
      Agreement may be executed in any number of counterparts and by the different
      parties hereto on separate counterparts, each of which counterparts when
      executed and delivered shall be an original, but all of which shall together
      constitute one and the same instrument. A complete set of counterparts shall
      be
      lodged with each of the parties hereto.

    

    13. Reorganization.
      The
      Company, LLCI and LLCII intend, and shall take the position, that the exchange
      of the Warrants pursuant to this Agreement should be characterized as a
      reorganization within the meaning of Section 368(a) of the Code and shall not
      take any position on any United States tax filing that is inconsistent with
      such
      characterization.

    

    [Remainder
      of page intentionally left blank.]

     

    
      
         

      

      
        -5-

        
          

        

      

      
         

      

    

    IN
      WITNESS WHEREOF, LLCII, LLCI and the Company have each duly caused this
      Agreement to be executed on the day and year first written above.

    

    PURE
      BIOFUELS CORP.

    

    By:
      /s/
      Luis
      Goyzueta                     

    Name:
      Luis Goyzueta

    Title:  
      CEO

     

    PLAINFIELD
      PERU II LLC

     

    By:
      /s/
      Steven
      Segaloff                   

    Name:
      Steven Segaloff

    Title:  
      Authorized Individual

     

    PLAINFIELD
      PERU I LLC (only with respect to Section 7 of this Agreement)

     

    By:
      /s/
      Steven
      Segaloff                  

    Name:
      Steven Segaloff

    Title:  
      Authorized Individual

    

    Notwithstanding
      anything to the contrary contained in the Loan Agreement and the Loan Documents,
      the Lender and the Administrative Agent waive compliance by the Company, the
      Borrowers and the Subsidiary Guarantors of their applicable obligations
      contained in the applicable provisions of the Loan Agreement and the Loan
      Documents only with respect to this Agreement and the transactions contemplated
      hereby and the Lender and the Administrative Agent acknowledge and agree that
      the execution of this Agreement by the Company and performance of its
      obligations hereunder will not violate the terms of the applicable provisions
      of
      the Loan Agreement and the Loan Documents. The waiver in this paragraph is
      limited as specified and shall not constitute a modification, acceptance or
      waiver of any other provision of the Loan Agreement or the other Loan Documents.
      Except as set forth in this paragraph, the Loan Agreement and other Loan
      Documents shall continue in full force and effect in accordance with their
      terms. Each of the Company and the Subsidiary Guarantor hereby ratifies and
      confirms its Guaranty.

    

     

    PLAINFIELD
      SPECIAL SITUATIONS MASTER FUND LIMITED

     

    By:
      /s/
      Steven
      Segaloff                 
  

    Name:
      Steven Segaloff

    Title:  
      Authorized Individual

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    PURE
      BIOFUELS CORP.

     

    By:
      /s/
      Luis
      Goyzueta                     

    Name:
      Luis Goyzueta

    Title:  
      CEO

    

    PURE
      BIOFUELS DEL PERU S.A.C.

    

    By:
      /s/
      Luis
      Goyzueta                     

    Name:
      Luis Goyzueta

    Title:  
      Apoderado

    

    PALMA
      INDUSTRIAL S.A.C.

    

    By:
      /s/
      Luis
      Goyzueta                     

    Name:
      Luis Goyzueta

    Title:  
      Apoderado

    

    ACEITE
      PUCALLPA S.A.C.

    

    By: /s/
      Gonzalo
      Campos                 

    Name:
      Gonzalo Campos

    Title:  
      General Manager

    

    PALMAS
      TROPICALES S.A.C.

    

    By:
      /s/
      Gonzalo
      Campos                 

    Name:
      Gonzalo Campos

    Title:  
      General Manager

    

    PUCAPALMA
      S.A.C.

    

    By:
      /s/
      Gonzalo
      Campos                 

    Name: Gonzalo
      Campos

    Title:  
      General Manager

    

    ECOPALMA
      S.A.C.

    

    By:
      /s/
      Gonzalo
      Campos                 

    Name:
      Gonzalo Campos

    Title:  
      General Manager

    

    PALMAS
      DE
      ORIENTE S.A.C.

    

    By:
      /s/
      Gonzalo
      Campos                 

    Name:
      Gonzalo Campos

    Title:  
      General Managerex_10-1.htm

    
      
        
          

        

         

      

    

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

     

    JAYHAWK
ENERGY, INC.

     

     

    CONVERTIBLE
PROMISSORY NOTE

     

    

    $800,000.00 Post
Falls, Idaho

    Dated as
of July 30, 2008

    

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

    

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

    

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

    

     

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

    

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

       

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

       

    

    5.           Conversion; Optional
Reinvestment.

    

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

    

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

    

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

    

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

    

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

    

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

       

    

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

    

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

     

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

     

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

    

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

    

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

    

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

    

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

    

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

    

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

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

    

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

    

     

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

     

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

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

       

    

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

     

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

     

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

    

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

    

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

    

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

    

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

       

    

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

    

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

    

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

    

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

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

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

    

       Jayhawk Energy,
Inc.,

      a Colorado
corporation

    
 

    
 

     By:          
Lindsay
Gorrill

        
  
  Its:           President

     

    

    Name of
Holder:                   ____________

    Address:                                ____________

    ____________

    ____________

    
 

    Telephone:

    Facsimile:                               ____________

     

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

    NOTICE OF
CONVERSION

    (To be
Signed Only Upon Conversion of Note)

     

    

    To
Jayhawk Energy, Inc.:

    

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

    

    Dated:                                                      

     

    

    (signature must conform in all
respects to name

    of holder as specified on the face
of the Note)

    

    Address:

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

       

    

    EXHIBIT
1

    Historical Financial
Statements

     

     

    EXHIBIT
2

    Capitalization
Table

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