Date of Issuance: July 16, 2010 9% CONVERTIBLE DEBENTURE Due April 16, 2011
NEITHER
THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OF THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
Date of
Issuance: July 16, 2010
$20,000
9%
CONVERTIBLE DEBENTURE
Due April
16, 2011
THIS
DEBENTURE is a duly authorized 9% Convertible Debenture of MEGOLA, INC., a
Nevada corporation (the “Company”) issued to TANGIERS INVESTORS, LP (the
“Holder”) and designated as its 9% Convertible Debenture, due April 16, 2011
(the “Debenture”).
FOR VALUE
RECEIVED, the Company promises to pay to the Holder, the principal sum of Twenty
Thousand ($20,000) on April 6, 2011 or such earlier date as this Debenture is
required or permitted to be repaid as provided hereunder (the “Maturity Date”),
and to pay interest to the Holder on the aggregate unconverted and then
outstanding principal amount of this Debenture at the rate of 9% per annum,
payable on the Maturity Date, unless the Debenture is converted to shares
of common stock in accordance with the terms and conditions herein.
THE
COMPANY MAY PREPAY ANY PORTION OF THE PRINCIPAL AMOUNT ALONG WITH ANY
ACCRUED INTEREST OF THIS DEBENTURE AT ANY TIME.
This
Debenture is subject to the following additional provisions:
Section 1. Exchange. This Debenture is
exchangeable for an equal aggregate principal amount of Debentures of different
authorized denominations, as requested by the Holder surrendering the same. No
service charge will be made for such registration of transfer or
exchange.
Section 2. Transferability. This
Debenture may be transferred or exchanged only in compliance with applicable
federal and state securities laws and regulations. Prior to due presentment to
the Company for transfer of this Debenture, the Company and any agent of the
Company may treat the Person in whose name this Debenture is duly registered on
the Debenture Register as the owner hereof for the purpose of receiving payment
as herein provided and for all other purposes, whether or not this Debenture is
overdue, and neither the Company nor any such agent shall be affected by notice
to the contrary.
Section
3.
Events of Default.
a) "Event of
Default", wherever used herein, means any one of the following events (whatever
the reason and whether it shall be voluntary or involuntary or effected by
operation of law or pursuant to any judgment, decree or order of any court, or
any order, rule or regulation of any administrative or governmental
body):
i) any
default in the payment of the principal of, interest (including Late Fees) on,
or liquidated damages in respect to this Debenture, free of any claim of
subordination, as and when the same shall become due and payable (whether on a
Conversion Date or the Maturity Date or by acceleration or otherwise) which
default is not cured, if possible to cure, within 3 days of notice of such
default sent by the Holder;
ii) the
Company or any of its subsidiaries shall commence, or there shall be commenced
against the Company or any such subsidiary a case under any applicable
bankruptcy or insolvency laws as now or hereafter in effect or any successor
thereto, or the Company commences any other proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or
liquidation or similar law of any jurisdiction whether now or hereafter in
effect relating to the Company or any subsidiary thereof or there is commenced
against the Company or any subsidiary thereof any such bankruptcy, insolvency or
other proceeding which remains undismissed for a period of 30 days; or the
Company or any subsidiary thereof is adjudicated insolvent or bankrupt; or any
order of relief or other order approving any such case or proceeding is entered;
or the Company or any subsidiary thereof suffers any appointment of any
custodian or the like for it or any substantial part of its property which
continues undischarged or unstayed for a period of 60 days; or the Company or
any subsidiary thereof makes a general assignment for the benefit of creditors;
or the Company shall fail to pay, or shall state that it is unable to pay, or
shall be unable to pay, its debts generally as they become due; or the Company
or any subsidiary thereof shall call a meeting of its creditors with a view to
arranging a composition, adjustment or restructuring of its debts; or the
Company or any subsidiary thereof shall by any act or failure to act expressly
indicate its consent to, approval of or acquiescence in any of the foregoing; or
any corporate or other action is taken by the Company or any subsidiary thereof
for the purpose of effecting any of the foregoing;
(iii) at
any time commencing 90 days after the date hereof, the Company shall thereafter
fail to timely file all reports required to be filed by it with the SEC pursuant
to Section 13 or 15(d) of the Securities and Exchange Act of 1934, as amended
(the “Exchange Act”), or otherwise required by the Exchange Act; or
(iv)
at any time
commencing 180 days after the date hereof or following the declaration of
effectiveness of any registration statement registering Common Stock issuable
pursuant to a conversion of the principal amount or interest under this
Debenture (whichever is later), the Common Stock of the Company shall
cease to be quoted for trading or listing for trading on any of (a) the American
Stock Exchange, (b) New York Stock Exchange, (c) the Nasdaq National Market, (d)
the Nasdaq Capital Market, or (e) the NASD OTC Bulletin Board (“OTC”) (each, a “Primary Market”) and
shall not again be quoted or listed for trading on any Primary Market within
five (5) trading days of such delisting.
b) If any Event
of Default occurs and is continuing, the full principal amount of this
Debenture, together with interest and other amounts owing in respect thereof, to
the date of acceleration shall become at the Holder's election, immediately due
and payable in cash. The Holder need not provide and the Company hereby waives
any presentment, demand, protest or other notice of any kind, and the Holder may
immediately and without expiration of any grace period enforce any and all of
its rights and remedies hereunder and all other remedies available to it under
applicable law. Such declaration may be rescinded and annulled by Xxxxxx at any
time prior to payment hereunder and the Holder shall have all rights as a
Debenture holder until such time, if any, as the full payment under this Section
shall have been received by it. No such rescission or annulment shall affect any
subsequent Event of Default or impair any right consequent thereon.
Section
4. Conversion.
i) At any time after the Original Issue
Date until this Debenture is no longer outstanding, this Debenture, including
interest and principal, shall be convertible into shares of Common Stock at the
lower of $0.01 per share or a price of seventy percent (70%) of the average of
the two lowest volume weighted average prices (“VWAPs”), determined on the then
current trading market for the Company’s common stock, for ten (10) trading days
prior to conversion (the “Set Price”), at the option of the Holder, in whole at
any time and from time to time. The Holder shall effect conversions
by delivering to the Company the form of Notice of Conversion attached hereto as
Annex A (a "Notice of Conversion"), specifying the date on which such conversion
is to be effected (a "Conversion Date"). If no Conversion Date is specified in a
Notice of Conversion, the Conversion Date shall be the date that such Notice of
Conversion is provided hereunder. To effect conversions hereunder, the Holder
shall not be required to physically surrender Debentures to the Company. The
Company shall deliver any objection to any Notice of Conversion within 2
Business Days of receipt of such notice. In the event of any dispute or
discrepancy, the records of the Holder shall be controlling and determinative in
the absence of manifest error. The Holder and any assignee, by acceptance of
this Debenture, acknowledge and agree that, by reason of the provisions of this
paragraph, following conversion of a portion of this Debenture, the unpaid and
unconverted principal amount of this Debenture may be less than the amount
stated on the face hereof.
ii) Shares from any
such conversion delivered to Company by 4:00pm EST will be delivered to Holder
by 2:30pm EST within 2 (two) business days of conversion notice delivery (see
4(i)). If those shares are not delivered in accordance with this timeframe
stated in this Section 4(ii), at any time for any reason prior to offering those
shares for sale in a private transaction or in the public market through its
broker, Holder may rescind that particular conversion to have the conversion
amount returned to the note balance with the conversion shares returned to the
Borrower. The Company will
make its commercially reasonable best efforts to deliver shares to Holder same
day / next day. For each conversion, in the event that shares are not
delivered by the third business day (inclusive of the day of the conversion), a
penalty of $2,000 per day will be assessed for each day after the third business
day (inclusive of the day of the conversion) until share delivery is made. Any
such penalty will be added to the principal balance of the Note, under Holders
expectation that any penalty amounts will tack back to the original date of the
note). If the Company does not request the issuance of the shares underlying
this Debenture after receipt of a notice of conversion within three (3) business
days following the period allowed for any objection, Xxxx Xxxxxx shall, in his
personal capacity, be responsible for any differential in the value of the
converted shares underlying this Debenture between the value of the closing
price on the date the shares should have been delivered (the third business day
following the submission of a conversion request) and the date the shares are
actually delivered. The Holder and any assignee, by acceptance of this
Debenture, acknowledge and agree that, by reason of the provisions of this
paragraph, following conversion of a portion of this Debenture, the unpaid and
unconverted principal amount of this Debenture may be less than the amount
stated on the face hereof.
Section
5. Dividends and
Restructuring
i) If the
Company, at any time while this Debenture is outstanding: (A) shall pay a stock
dividend or otherwise make a distribution or distributions on shares of its
Common Stock or any other equity or equity equivalent securities payable in
shares of Common Stock (which, for avoidance of doubt, shall not include any
shares of Common Stock issued by the Company pursuant to this Debenture,
including as interest thereon), (B) subdivide outstanding shares of Common
Stock into a larger number of shares, (C) combine (including by way of reverse
stock split) outstanding shares of Common Stock into a smaller number of shares,
or (D) issue by reclassification of shares of the Common Stock any shares of
capital stock of the Company, then the Set Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding before such event and of which
the denominator shall be the number of shares of Common Stock outstanding after
such event. Any adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
re-classification.
ii) Whenever
the Set Price is adjusted pursuant to any of Section 4, the Company shall
promptly mail to each Holder a notice setting forth the Set Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
iii) If
(A) the Company shall declare a dividend (or any other distribution) on the
Common Stock; (B) the Company shall declare a special nonrecurring cash dividend
on or a redemption of the Common Stock; (C) the Company shall authorize the
granting to all holders of the Common Stock rights or warrants to subscribe for
or purchase any shares of capital stock of any class or of any rights; (D) the
approval of any stockholders of the Company shall be required in
connection with any reclassification of the Common Stock, any consolidation or
merger to which the Company is a party, any sale or transfer of all
or substantially all of the assets of the Company, of any compulsory share
exchange whereby the Common Stock is converted into other securities, cash or
property; (E) the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Company; then, in
each case, the Company shall cause to be filed at each office or agency
maintained for the purpose of conversion of the Debentures, and shall cause to
be mailed to the Holders at their last addresses as they shall appear
upon the stock books of the Company, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of the Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, that the
failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. Holders are entitled to convert Debentures during the 20-day
period commencing the date of such notice to the effective date of the event
triggering such notice.
iv) If,
at any time while this Debenture is outstanding, (A) the Company effects any
merger or consolidation of the Company with or into another Person, (B) the
Company effects any sale of all or substantially all of its assets in one or a
series of related transactions, (C) any tender offer or exchange offer (whether
by the Company or another Person) is completed pursuant to which holders of
Common Stock are permitted to tender or exchange their shares for other
securities, cash or property, or (D) the Company effects any reclassification of
the Common Stock or any compulsory share exchange pursuant to which the Common
Stock is effectively converted into or exchanged for other securities, cash or
property (in any such case, a "Fundamental Transaction"), then upon any
subsequent conversion of this Debenture, the Holder shall have the right to
receive, for each Underlying Share that would have been issuable upon such
conversion absent such Fundamental Transaction, the same kind and amount of
securities, cash or property as it would have been entitled to receive upon the
occurrence of such Fundamental Transaction if it had been, immediately prior
to such Fundamental Transaction, the holder of one share
of Common Stock (the "Alternate Consideration"). For purposes of any
such conversion, the determination of the Set Price shall be appropriately
adjusted to apply to such Alternate Consideration based on the amount of
Alternate Consideration issuable in respect of one share of Common Stock in such
Fundamental Transaction, and the Company shall apportion the Set Price among the
Alternate Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration. If holders of Common
Stock are given any choice as to the securities, cash or property to
be received in a Fundamental Transaction, then the Holder shall be
given the same choice as to the Alternate consideration it receives upon any
conversion of this Debenture following such Fundamental Transaction. To the
extent necessary to effectuate the foregoing provisions, any successor to the
Company or surviving entity in such Fundamental Transaction shall issue to the
Holder a new debenture consistent with the foregoing provisions and evidencing
the Holder's right to convert such debenture into Alternate Consideration. The
terms of any agreement pursuant to which a Fundamental Transaction is effected
shall include terms requiring any such successor or surviving entity to comply
with the provisions of this paragraph (c) and insuring that this Debenture (or
any such replacement security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction. If any Fundamental
Transaction constitutes or results in a Change of Control Transaction, then at
the request of the Holder delivered before the 90th day
after such Fundamental Transaction, the Company (or any such successor or
surviving entity) will purchase the Debenture from the Holder for a purchase
price, payable in cash within five Trading Days after such request (or,
if later, on the effective date of the Fundamental Transaction),
equal to the 100% of the remaining unconverted principal amount of this
Debenture on the date of such request, plus all accrued and unpaid interest
thereon, plus all other accrued and unpaid amounts due hereunder.
Section 6. Reservation of Shares. The
Company covenants that it will at all times reserve and keep available out of
its authorized and unissued shares of Common Stock solely for the purpose of
issuance upon conversion of the Debenture
Section 7. Notices. Any and all notices
or other communications or deliveries to be provided by the Holders hereunder,
including, without limitation, any Notice of Conversion, shall be in
writing and delivered personally, by facsimile, sent by a nationally
recognized overnight courier service, addressed to the Company, at the
address set forth or such other address or facsimile number as the Company
may specify for such purposes by notice to the Holders delivered in accordance
with this Section. Any and all notices or other communications or deliveries to
be provided by the Company hereunder shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service addressed to each Holder at the facsimile
telephone number or address of such Xxxxxx appearing on the
books of the Company, or if no such facsimile telephone number
or address appears, at the principal place of business of the Holder. Any notice
or other communication or deliveries hereunder shall be
deemed given and effective on the earliest of (i) the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:30 p.m. (New
York City time), (ii) the date after the date of transmission,
if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section later than 5:30
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York
City time) on such date, (iii) the second Business Day following the
date of mailing, if sent by nationally recognized overnight courier
service, or (iv) upon actual receipt by the party to whom such notice
is required to be given.
Section 8. Definitions.
For the purposes hereof, in addition to the terms defined elsewhere in this
Debenture: (a) capitalized terms not otherwise defined herein have the meanings
given to such terms in the Purchase Agreement, and (b) the following terms shall
have the following meanings:
"Business
Day" means any day except Saturday, Sunday and any day which shall be a federal
legal holiday in the United States or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"Common
Stock" means the common stock, $.001 par value per share, of the Company
and stock of any other class into which such shares may hereafter have been
reclassified or changed.
"Person"
means a corporation, an association, a partnership, organization, a business, an
individual, a government or political subdivision thereof or a governmental
agency.
"Securities
Act" means the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder
"Set
Price" shall have the meaning set forth in Section 4.
Section 9. Obligations.
Except as expressly provided herein, no provision of this Debenture shall alter
or impair the obligation of the Company, which is absolute and unconditional, to
pay the principal of, interest and liquidated damages (if any) on, this
Debenture at the time, place, and rate, and in the coin or currency, herein
prescribed. This Debenture is a direct debt obligation of the Company. This
Debenture ranks pari passu with all other Debentures now or hereafter issued
under the terms set forth herein. As long as this Debenture is outstanding, the
Company shall not and shall cause it subsidiaries not to, without the consent of
the Holder, (a) amend its certificate of incorporation, bylaws or other charter
documents so as to adversely affect any rights of the Holder; (b) repay,
repurchase or offer to repay, repurchase or otherwise acquire more than a de
minimis number of shares of its Common Stock or other equity securities other
than as to the Underlying Shares to the extent permitted or required hereunder;
or (c) enter into any agreement with respect to any of the
foregoing.
Section 10. Lost or
Stolen. If this Debenture shall be mutilated, lost, stolen or destroyed,
the Company shall execute and deliver, in exchange and substitution for and upon
cancellation of a mutilated Debenture, or in lieu of or in substitution for a
lost, stolen or destroyed Debenture, a new Debenture for the principal amount of
this Debenture so mutilated, lost, stolen or destroyed but only upon receipt of
evidence of such loss, theft or destruction of such Debenture, and of the
ownership hereof, and indemnity, if requested, all reasonably satisfactory to
the Company.
Section 11. Jurisdiction. All questions
concerning the construction, validity, enforcement and interpretation of this
Debenture shall be governed by and construed and enforced in accordance with the
internal laws of the State of California, without regard to the principles of
conflicts of law thereof. Each party agrees that all legal proceedings
concerning the interpretations, enforcement and defense of the transactions
contemplated hereby (whether brought against a party hereto or its respective
affiliates, directors, officers, shareholders, employees or agents) shall be
commenced in the state and federal courts sitting in California. Each party
hereto hereby irrevocably submits to the exclusive jurisdiction of the
California courts for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein, and
hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, or such California courts are improper or inconvenient venue for
such proceeding. Each party hereby irrevocably waives personal service of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to such party at the address in
effect for notices to it under this Debenture and agrees that such
Service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. Each party hereto hereby
irrevocably waives, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal proceeding arising out of or relating to
this Debenture or the transactions contemplated hereby. If either party shall
commence an action or proceeding to enforce any provisions of this Debenture,
then the prevailing party in such action or proceeding shall be reimbursed by
the other party for its attorneys’ fees and other costs and expenses incurred
with the investigation, preparation and prosecution of such action or
proceeding.
Section 12. Waiver. Any
waiver by the Holder shall not operate as or be construed to be a waiver of any
other breach of such provision or of any breach of any other provision of this
Debenture. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Debenture on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Debenture. Any waiver
must be in writing.
Section 13. Piggy Back Registration
Rights. For six months from the date of this Debenture, the Holders shall
be entitled to “piggyback” registration rights on registrations initiated by the
Company on forms which permit the general sale of securities to the public,
subject to customary cut-backs if deemed necessary or advisable by the
underwriters for any such registration; except for any draw down or “Pipe”
transactions.
Section 14. Unenforceability.
If any provision of this Debenture is invalid, illegal or unenforceable, the
balance of this Debenture shall remain in effect, and if any provision is
inapplicable to any person or circumstance, it shall nevertheless remain
applicable to all other persons and circumstances. If it shall be found that any
interest or other amount deemed interest due hereunder violates applicable laws
governing usury, the applicable rate of interest due hereunder shall
automatically be lowered to equal the maximum permitted rate of interest. The
Company covenants (to the extent that it may lawfully do so) that it shall not
at any time insist upon, plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay, extension or usury law or other law which
would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on the Debentures as contemplated herein, wherever
enacted, now or at any time hereafter in force, or which may affect the
covenants or the performance of this indenture, and the Company (to the extent
it may lawfully do so) hereby expressly waives all benefits or advantage of any
such law, and covenants that it will not, by resort to any such law, hinder,
delay or impeded the execution of any power herein granted to the Holder, but
will suffer and permit the execution of every such as though no such law has
been enacted.
Section 15. Business Day.
Whenever any payment or other obligation hereunder shall be due on a day other
than a Business Day, such payment shall be made on the next succeeding Business
Day.
*********************
Signature
Page Follows
IN
WITNESS WHEREOF, the Company has caused this Convertible Debenture to be duly
executed by a duly authorized officer as of the date first above
indicated
MEGOLA,
INC.
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By:
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Name:
Xxxx Xxxxxx
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Title:
CEO
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ANNEX
A
NOTICE OF
CONVERSION
The
undersigned hereby elects to convert principal under the 9% Convertible
Debenture of MEGOLA, INC. (the "Company"), due on _________, 20____, into
____________ shares of common stock, $.001 par value per share (the "Common
Stock"), of the Company according to the conditions hereof, as of the date
written below. If shares are to be issued in the name of a person other than the
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to the
holder for any conversion, except for such transfer taxes, if any.
By the
delivery of this Notice of Conversion the undersigned represents and warrants to
the Company that its ownership of the Company's Common Stock does not exceed the
amounts determined in accordance with Section 13(d) of the Exchange Act,
specified under Section 4 of this Debenture.
Conversion
calculations:
Date
to Effect Conversion: ________________________
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70%
of the average of the two lowest VWAPs for 10 trading days prior to
conversion.
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________________________________________ | ||
Principal
Amount of Debentures to be Converted:
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__________________________________________ | ||
Interest
Amount of Debentures to be Converted
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_______________________________________ | ||
Number
of shares of Common Stock to be issued:
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___________________________________ | ||
Signature:
____________________________
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Name:
_______________________________
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Address:
_____________________________
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