Contract
EXHIBIT
10.3
THIS
SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE, AND IS BEING
OFFERED AND SOLD PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT AND SUCH LAWS. THIS SECURITY MAY NOT BE SOLD OR
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OR SUCH OTHER LAWS.
6
% CONVERTIBLE DEBENTURE
Company: Tidelands Oil &
Gas Corporation
Company Address: 0000 Xxxx
Xxxxxxx Xxxx, Xxx Xxxxxxx, Xxxxx 00000
Closing Date: May 9,
2008
Maturity Date: May 9,
2011
Principal Amount:
$1,000,000
Tidelands
Oil & Gas Corporation, a Nevada corporation, and any successor or resulting
corporation by way of merger, consolidation, sale or exchange of all or
substantially all of the assets or otherwise (the “Company”), for value
received, hereby promises to pay to the Holder (as such term is hereinafter
defined), or such other Person (as such term is hereinafter defined) upon order
of the Holder, on the Maturity Date (as such term is hereinafter defined), the
Principal Amount (as such term is hereinafter defined), as such sum may be
adjusted pursuant to Article 3, and to pay interest thereon with such interest
commencing to accrue as of the date hereof and payable on a monthly basis,
commencing on the 15th day of
the month following the month of issuance of this Debenture, and on the Maturity
Date (except that, if any such date is not a Business Day, then such payment
shall be due on the next succeeding Business Day), at the rate of six percent (6
%) per annum, subject to adjustment as set forth in Section 7 hereof (the “Interest Rate”). All interest
payable on the Principal Amount of this Debenture shall be calculated on the
basis of a year of 365 or 366 days, as the case may be, for the actual number of
days (including the first day but excluding the last day) occurring in the
period for which such interest is payable. Payment of interest on
this Debenture shall be in cash or, at the option of the Holder, in shares of
Common Stock of the Company valued at the then applicable Conversion Price (as
defined herein). This Debenture may not be prepaid without the
written consent of the Holder.
ARTICLE
1
DEFINITIONS
SECTION
1.1 Definitions. The
terms defined in this Article whenever used in this Debenture have the following
respective meanings:
(i) “Affiliate” has the meaning
ascribed to such term in Rule 12b-2 under the Securities Exchange Act of 1934,
as amended.
(ii) “Bankruptcy Code” means the
United States Bankruptcy Code of 1986, as amended (11 U.S.C. §§ 101 et. seq.).
(iii) “Business Day” means a day
other than Saturday, Sunday or any day on which banks located in the State of
California are authorized or obligated to close.
(iv) “Capital Shares” means the
Common Stock and any other shares of any other class or series of capital stock,
whether now or hereafter authorized and however designated, which have the right
to participate in the distribution of earnings and assets (upon dissolution,
liquidation or winding-up) of the Company.
(v) “Closing Date” means the
closing date set forth in the first paragraph of this Debenture.
(vi) “Common Shares” or “Common Stock” means shares of
the Company’s Common Stock.
(vii) “Common Stock Issued at
Conversion”, when used with reference to the securities deliverable upon
conversion of this Debenture, means all Common Shares now or hereafter
Outstanding and securities of any other class or series into which this
Debenture hereafter shall have been changed or substituted, whether now or
hereafter created and however designated.
(viii) “Conversion” or “conversion” means the
repayment by the Company of the Principal Amount of this Debenture (and, to the
extent the Holder elects as permitted by Section 3.1, accrued and unpaid
interest thereon) by the delivery of Common Stock on the terms provided in
Section 3.2, and “convert,” “converted,” “convertible” and like words
shall have a corresponding meaning.
(ix) “Conversion Date” means any
day on which all or any portion of the Principal Amount of this Debenture is
converted in accordance with the provisions hereof.
(x) “Conversion Notice” means a
written notice of conversion substantially in the form annexed hereto as Exhibit
A.
(xi) “Conversion Price” on any date
of determination means the applicable price for the conversion of this Debenture
into Common Shares on such day as set forth in Section 3.1(a).
(xii) “Current Market Price” on any
date of determination means the closing price of a Common Share on such day as
reported in the “pink sheets” through the Interdealer Trading Quotation System;
provided, if such security is not traded on the over the counter market via the
pink sheets, then the closing price on the NASDAQ OTCBB Exchange; provided further,
that, if such security is not listed or admitted to trading on the NASDAQ OTCBB,
as reported on the principal national security exchange or quotation system on
which such security is quoted or listed or admitted to trading, or, if not
quoted or listed or admitted to trading on any national securities exchange or
quotation system, the closing bid price of such security on the over-the-counter
market on the day in question as reported by Bloomberg LP or a similar generally
accepted reporting service, as the case may be.
(xiii) “Debenture” or “Debentures” means this
Convertible Debenture of the Company or such other convertible debenture(s)
exchanged therefor as provided in Section 2.1.
(xiv) “Discount Multiplier” has the
meaning set forth in Section 3.1(a).
(xv) “Event of Default” has the
meaning set forth in Section 6.1.
(xvi) “Holder” means Golden Gate
Investors, Inc., any successor thereto, or any Person to whom this Debenture is
subsequently transferred in accordance with the provisions hereof.
(xvii) “Interest Payment Due Date”
means any date upon which interest is due to be paid by the Company to the
Holder, as set forth in the opening paragraph of this Debenture.
(xviii) “Market Disruption Event”
means any event that results in a material suspension or limitation of trading
of the Common Shares.
(xix) “Maturity Date” means the
maturity date set forth in the first paragraph of this Debenture.
(xx) “Maximum Rate” has the meaning
set forth in Section 6.4.
(xxi) “Outstanding” when used with
reference to Common Shares or Capital Shares (collectively, “Shares”) means, on any date
of determination, all issued and outstanding Shares, and includes all such
Shares issuable in respect of outstanding scrip or any certificates representing
fractional interests in such Shares; provided, however, that any
such Shares directly or indirectly owned or held by or for the account of the
Company or any Subsidiary of the Company shall not be deemed “Outstanding” for purposes
hereof.
(xxii) “Person” means an individual,
a corporation, a partnership, an association, a limited liability company, an
unincorporated business organization, a trust or other entity or organization,
and any government or political subdivision or any agency or instrumentality
thereof.
(xxiii) “Principal Amount” means, for
any date of calculation, the principal sum set forth in the first paragraph of
this Debenture (including all amounts represented by (a) any cash advances made
by Holder to the Company and (b) the principal amount of the Promissory Note
delivered to the Company by the Holder) and for which Xxxxxx has not theretofore
furnished a Conversion Notice in compliance with Section 3.2.
(xxiv) “Promissory Note” means that
certain Secured Promissory Note in the principal amount of $800,000 of even date
herewith issued by Golden Gate Investors, Inc. to Tidelands Oil & Gas
Corporation, as the same may be amended from time to time.
(xxv) “SEC” means the United States
Securities and Exchange Commission.
(xxvi) “Securities Act” means the
Securities Act of 1933, as amended, and the rules and regulations of the SEC
thereunder, all as in effect at the time.
(xxvii) “Securities Purchase
Agreement” means that certain Securities Purchase Agreement of even date
herewith by and among the Company and Holder, as the same may be amended from
time to time.
(xxviii) “Subsidiary” means any entity
of which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are owned directly or indirectly by the Company.
(xxix) “Trading Day” means any day on
which (i) purchases and sales of securities on the principal national security
exchange or quotation system on which the Common Shares are traded are reported
thereon, or, if not quoted or listed or admitted to trading on any national
securities exchange or quotation system, as reported by Bloomberg LP or a
similar generally accepted reporting service, as the case may be, (ii) at least
one bid for the trading of Common Shares is reported and (iii) no Market
Disruption Event occurs.
(xxx) “Trading Market means the
NASDAQ OTCBB, or, to the extent the Company becomes eligible to list its Common
Stock on any other national security exchange or quotation system, upon official
notice of listing on any such exchange or system, as the case may be, it shall
be the “Trading Market.”
(xxxi) “Volume Weighted Average
Price” per
Common Share means the volume weighted average price of the Common Shares during
any Trading Day as reported in the “pink sheets” through the Interdealer Trading
Quotation System; provided, if such security is not traded on the over the
counter market via the pink sheets, then the volume weighted average price on
the NASDAQ OTCBB; provided further,
that, if such security is not listed or admitted to trading on the NASDAQ OTCBB,
as reported on the principal national security exchange or quotation system on
which such security is quoted or listed or admitted to trading, or, if not
quoted or listed or admitted to trading on any national securities exchange or
quotation system, the volume weighted average price of the Common Shares during
any Trading Day on the over-the-counter market as reported by Bloomberg LP or a
similar generally accepted reporting service, as the case may be.
All
references to “cash” or “$” herein means currency of the United States of
America.
ARTICLE
2
EXCHANGES,
TRANSFER AND REPAYMENT
SECTION
2.1 Registration of Transfer of
Debentures. This Debenture, when presented for registration of transfer,
shall (if so required by the Company) be duly endorsed, or be accompanied by a
written instrument of transfer in form reasonably satisfactory to the Company
duly executed, by the Holder duly authorized in writing.
SECTION
2.2 Loss, Theft, Destruction of
Debenture. Upon receipt of evidence satisfactory to the
Company of the loss, theft, destruction or mutilation of this Debenture and, in
the case of any such loss, theft or destruction, upon receipt of indemnity or
security reasonably satisfactory to the Company, or, in the case of any such
mutilation, upon surrender and cancellation of this Debenture, the Company shall
make, issue and deliver, in lieu of such lost, stolen, destroyed or mutilated
Debenture, a new Debenture of like tenor and unpaid Principal Xxxxxx dated as of
the date hereof (which shall accrue interest from the most recent Interest
Payment Due Date on which an interest payment was made in full). This
Debenture shall be held and owned upon the express condition that the provisions
of this Section 2.2 are exclusive with respect to the replacement of a
mutilated, destroyed, lost or stolen Debenture and shall preclude any and all
other rights and remedies notwithstanding any law or statute existing or
hereafter enacted to the contrary with respect to the replacement of negotiable
instruments or other securities without the surrender thereof.
SECTION
2.3 Who Deemed Absolute
Owner. The Company may deem the Person in whose name this
Debenture shall be registered upon the registry books of the Company to be, and
may treat it as, the absolute owner of this Debenture (whether or not this
Debenture shall be overdue) for the purpose of receiving payment of or on
account of the Principal Amount of this Debenture, for the conversion of this
Debenture and for all other purposes, and the Company shall not be affected by
any notice to the contrary. All such payments and such conversions
shall be valid and effectual to satisfy and discharge the liability upon this
Debenture to the extent of the sum or sums so paid or the conversion or
conversions so made.
SECTION
2.4 Repayment at
Maturity. At the Maturity Date, the Company shall repay the
outstanding Principal Amount of this Debenture in whole in cash, together with
all accrued and unpaid interest thereon, in cash, to the Maturity
Date.
ARTICLE
3
CONVERSION
OF DEBENTURE
SECTION
3.1 Conversion; Conversion
Price; Valuation Event.
At the
option of the Holder, this Debenture may be converted, either in whole or in
part, up to the full Principal Amount hereof into Common Shares (calculated as
to each such conversion to the nearest 1/100th of a share), at any time and from
time to time on any Business Day, subject to compliance with Section 3.2. The
number of Common Shares into which this Debenture may be converted is equal to
the dollar amount of the Debenture being converted divided by the Conversion
Price. The “Conversion
Price” shall be equal to the lesser of (i) $0.50, or (ii) 80% of the
average of the 3 lowest Volume Weighted Average Prices during the 20 Trading
Days prior to Holder’s election to convert (the percentage figure being a “Discount Multiplier”). The
Company reserves the right to increase the number of Trading Days in clause (ii)
above, as it deems appropriate.
If the
Holder elects to convert a portion of the Debenture and, on the day that the
election is made, the Volume Weighted Average Price per share of the Company’s
Common Stock is below $0.07, the Company shall have the right to prepay that
portion of the Debenture that Holder elected to convert, plus any accrued and
unpaid interest, at 100% of such amount. In the event that the Company elects to
prepay that portion of the Debenture, Holder shall have the right to withdraw
its Conversion Notice.
SECTION
3.2 Exercise of Conversion
Privilege. (i) Conversion of this Debenture may be exercised
on any Business Day by the Holder by telecopying an executed and completed
Conversion Notice to the Company. Each date on which a Conversion
Notice is telecopied to the Company in accordance with the provisions of this
Section 3.2 shall constitute a Conversion Date. The Company shall
convert this Debenture and issue the Common Stock Issued at Conversion in the
manner provided below in this Section 3.2, and all voting and other rights
associated with the beneficial ownership of the Common Stock Issued at
Conversion shall vest with the Holder, effective as of the Conversion Date at
the time specified in the Conversion Notice. The Conversion Notice
also shall state the name or names (with addresses) of the persons who are to
become the holders of the Common Stock Issued at Conversion in connection with
such conversion. As promptly as practicable after the receipt of the Conversion
Notice as aforesaid, but in any event not more than two (2) Business Days after
the Company’s receipt of such Conversion Notice, the Company shall (a) issue the
Common Stock Issued at Conversion in accordance with the provisions of this
Article 3 and (b) cause to be mailed for delivery by overnight courier (x) a
certificate or certificate(s) representing the number of Common Shares to which
the Holder is entitled by virtue of such conversion and (y) cash, as provided in
Section 3.3, in respect of any fraction of a Common Share deliverable upon such
conversion. Such conversion shall be deemed to have been effected at
the time at which the Conversion Notice indicates, and at such time the rights
of the Holder of this Debenture, as such (except if and to the extent that any
Principal Amount thereof remains unconverted), shall cease and the Person and
Persons in whose name or names the Common Stock Issued at Conversion shall be
issuable shall be deemed to have become the holder or holders of record of the
Common Shares represented thereby, and all voting and other rights associated
with the beneficial ownership of such Common Shares shall at such time vest with
such Person or Persons. The Conversion Notice shall constitute a
contract between the Holder and the Company, whereby the Holder shall be deemed
to subscribe for the number of Common Shares which it will be entitled to
receive upon such conversion and, in payment and satisfaction of such
subscription (and for any cash adjustment to which it is entitled pursuant to
Section 3.4), to surrender this Debenture and to release the Company from all
liability thereon (except if and to the extent that any Principal Amount thereof
remains unconverted). No cash payment aggregating less than $1.00
shall be required to be given unless specifically requested by the
Holder.
(ii) If, at
any time after the date of this Debenture, (a) the Company challenges, disputes
or denies the right of the Holder hereof to effect the conversion of this
Debenture into Common Shares or otherwise dishonors or rejects any Conversion
Notice delivered in accordance with this Section 3.2 or (b) any third party who
is not and has never been an Affiliate of the Holder commences any lawsuit or
legal proceeding or otherwise asserts any claim before any court or public or
governmental authority which seeks to challenge, deny, enjoin, limit, modify,
delay or dispute the right of the Holder hereof to effect the conversion of this
Debenture into Common Shares, then the Holder shall have the right, but not the
obligation, by written notice to the Company, to require the Company to promptly
redeem this Debenture for cash at one hundred percent (100%) of the Principal
Amount thereof, together with all accrued and unpaid interest thereon to the
date of redemption. Under any of the circumstances set forth above,
the Company shall be responsible for the payment of all costs and expenses of
the Holder, including reasonable legal fees and expenses, as and when incurred
in defending itself in any such action or pursuing its rights hereunder (in
addition to any other rights of the Holder).
(iii) The
Holder shall be entitled to exercise its conversion privilege notwithstanding
the commencement of any case under the Bankruptcy Code. In the event
the Company is a debtor under the Bankruptcy Code, the Company hereby waives to
the fullest extent permitted any rights to relief it may have under 11 U.S.C. §
362 in respect of the Holder’s conversion privilege. The Company
hereby waives to the fullest extent permitted any rights to relief it may have
under 11 U.S.C. § 362 in respect of the conversion of this
Debenture. The Company agrees, without cost or expense to the Holder,
to take or consent to any and all action necessary to effectuate relief under 11
U.S.C. § 362.
SECTION
3.3 Fractional
Shares. No fractional Common Shares or scrip representing
fractional Common Shares shall be delivered upon conversion of this
Debenture. Instead of any fractional Common Shares which otherwise
would be delivered upon conversion of this Debenture, the Company shall pay a
cash adjustment in respect of such fraction in an amount equal to the same
fraction multiplied by the Current Market Price on the Conversion
Date. No cash payment of less than $1.00 shall be required to be
given unless specifically requested by the Holder.
SECTION
3.4 Adjustments. The
Conversion Price and the number of shares deliverable upon conversion of this
Debenture are subject to adjustment from time to time as follows:
(i) Reclassification,
Etc. In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another Person
(where the Company is not the survivor or where there is a change in or
distribution with respect to the Common Stock of the Company), sell, convey,
transfer or otherwise dispose of all or substantially all its property, assets
or business to another Person, or effectuate a transaction or series of related
transactions in which more than fifty percent (50%) of the voting power of the
Company is disposed of (each, a “Fundamental Corporate
Change”) and, pursuant to the terms of such Fundamental Corporate Change,
shares of common stock of the successor or acquiring corporation, or any cash,
shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation (“Other Property”) are to be
received by or distributed to the holders of Common Stock of the Company, then
the Holder of this Debenture shall have the right thereafter, at its sole
option, to (x) require the Company to prepay this Debenture for cash at one
hundred percent (100%) of the Principal Amount thereof, together with all
accrued and unpaid interest thereon to the date of prepayment, (y) receive
the number of shares of common stock of the successor or acquiring corporation
or of the Company, if it is the surviving corporation, and Other Property as is
receivable upon or as a result of such Fundamental
Corporate Change by a holder of the number of shares of Common Stock into which
the outstanding portion of this Debenture may be converted at the Conversion
Price applicable immediately prior to such Fundamental Corporate Change, or
(z) require the Company, or such successor, resulting or purchasing
corporation, as the case may be, to, without benefit of any additional
consideration therefor, execute and deliver to the Holder a debenture with
substantial identical rights, privileges, powers, restrictions and other terms
as this Debenture in an amount equal to the amount outstanding under this
Debenture immediately prior to such Fundamental Corporate Change. For
purposes hereof, “common stock
of the successor or acquiring corporation” shall include stock of such
corporation of any class which is not preferred as to dividends or assets over
any other class of stock of such corporation and which is not subject to
prepayment and shall also include any evidences of indebtedness, shares of stock
or other securities which are convertible into or exchangeable for any such
stock, either immediately or upon the arrival of a specified date or the
happening of a specified event and any warrants or other rights to subscribe for
or purchase any such stock. The foregoing provisions shall similarly
apply to successive Fundamental Corporate Changes.
SECTION
3.5 Certain Conversion
Limits.
The
Company shall not effect any conversion of this Debenture, and a Holder shall
not have the right to convert any portion of this Debenture, to the extent that
after giving effect to the conversion, as set forth on the applicable Conversion
Notice, such Holder (together with such Holder’s Affiliates, and any other
person or entity acting as a group together with such Holder or any of such
Holder’s Affiliates) would beneficially own in excess of the Beneficial
Ownership Limitation (as defined below). For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned by
such Holder and its Affiliates shall include the number of shares of Common
Stock issuable upon conversion of this Debenture with respect to which such
determination is being made, but shall exclude the number of shares of Common
Stock which are issuable upon (A) conversion of the remaining, unconverted
principal amount of this Debenture beneficially owned by such Holder or any of
its Affiliates and (B) exercise or conversion of the unexercised or unconverted
portion of any other securities of the Company subject to a limitation on
conversion or exercise analogous to the limitation contained herein (including,
without limitation, any other Debentures or warrants to purchase shares of the
Company’s Common Stock) beneficially owned by such Holder or any of its
Affiliates. Except as set forth in the preceding sentence, for
purposes of this Section 3.5, beneficial ownership shall be calculated in
accordance with Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder. To the extent that the limitation contained
in this Section 3.5 applies, the determination of whether this Debenture is
convertible (in relation to other securities owned by such Holder together with
any Affiliates) and of which principal amount of this Debenture is convertible
shall be in the sole discretion of such Holder, and the submission of a
Conversion Notice shall be deemed to be such Holder’s determination of whether
this Debenture may be converted (in relation to other securities owned by such
Holder together with any Affiliates) and which principal amount of this
Debenture is convertible, in each case subject to such aggregate percentage
limitations. To ensure compliance with this restriction, each Holder
will be deemed to represent to the Company each time it delivers a Conversion
Notice that such Conversion Notice has not violated the restrictions set forth
in this paragraph and the Company shall have no obligation to verify or confirm
the accuracy of such determination. In addition, a determination as
to any group status as contemplated above shall be determined in accordance with
Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder. For purposes of this Section 3.5, in determining the
number of outstanding shares of Common Stock, a Holder may rely on the number of
outstanding shares of Common Stock provided to the Holder in writing by the
Company after Holder makes such request or in the event that the Company files,
any of the following with the Securities and Exchange Commission, the most
recent of the following: (A) the Company's most recent Form 10-QSB or Form
10-KSB, as the case may be, (B) a more recent public announcement by the
Company; or (C) a more recent notice by the Company or the Company’s transfer
agent setting forth the number of shares of Common Stock
outstanding. Upon the written or oral request of a Holder, the
Company shall within two Trading Days confirm orally and in writing to such
Holder the number of shares of Common Stock then outstanding on the records of
the Company as of the date of the request. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to
the conversion or exercise of securities of the Company, including this
Debenture, by such Holder or its Affiliates since the date as of which such
number of outstanding shares of Common Stock was reported. The “Beneficial Ownership
Limitation” shall be 4.99% of the number of shares of the Common Stock
outstanding immediately after giving effect to the issuance of shares of Common
Stock issuable upon conversion of this Debenture held by the
Holder. The Beneficial Ownership Limitation provisions of this
Section 3.5 may be waived by such Holder, at the election of such Holder, upon
not less than 61 days’ prior notice to the Company, to, at the sole discretion
of the Holder, either change the Beneficial Ownership Limitation to (i) 9.99% of
the number of shares of the Common Stock outstanding immediately after giving
effect to the issuance of shares of Common Stock upon conversion of the
Debenture held by the Holder and the provisions of this Section 3.5 shall
continue to apply, or (ii) remove any Beneficial Ownership Limitation under this
Debenture. The provisions of this paragraph shall be construed and
implemented in a manner otherwise than in strict conformity with the terms of
this Section 3.5 to correct this paragraph (or any portion hereof) which may be
defective or inconsistent with the intended Beneficial Ownership Limitation
herein contained or to make changes or supplements necessary or desirable to
properly give effect to such limitation. If any court of competent
jurisdiction shall determine that the foregoing limitation is ineffective to
prevent a Holder from being deemed the beneficial owner of more than 9.99% of
the then outstanding shares of Common Stock, then the Company shall prepay such
portion of this Debenture as shall cause such Holder not to be deemed the
beneficial owner of more than 9.99% of the then outstanding shares of Common
Stock. Upon such determination by a court of competent jurisdiction,
the Holder shall have no interest in or rights under such portion of the
Debenture. Any and all interest paid on or prior to the date of such
determination shall be deemed interest paid on the remaining portion of this
Debenture held by the Holder. Such prepayment shall be for cash at a
prepayment price of one hundred percent (100%) of the Principal Amount thereof,
together with all accrued and unpaid interest thereon to the date of
prepayment. The limitations contained in this paragraph shall apply
to a successor holder of this Debenture.
SECTION
3.6 Surrender of
Debentures. Upon any redemption of this Debenture pursuant to
Sections 3.2, 3.5 or 6.2, or upon maturity pursuant to Section 2.4, the Holder
shall either deliver this Debenture by hand to the Company at its principal
executive offices or surrender the same to the Company at such address by
nationally recognized overnight courier. Payment of the redemption
price or the amount due on maturity specified in Section 2.4, shall be made by
the Company to the Holder against receipt of this Debenture (as provided in this
Section 3.5) by wire transfer of immediately available funds to such account(s)
as the Holder shall specify by written notice to the Company. If
payment of such redemption price is not made in full by the redemption date, or
the amount due on maturity is not paid in full by the Maturity Date, the Holder
shall again have the right to convert this Debenture as provided in Article 3
hereof or to declare an Event of Default.
ARTICLE
4
STATUS;
RESTRICTIONS ON TRANSFER
SECTION
4.1 Status of
Debenture. This Debenture constitutes a legal, valid and
binding obligation of the Company, enforceable in accordance with its terms
subject, as to enforceability, to general principles of equity and to principles
of bankruptcy, insolvency, reorganization and other similar laws of general
applicability relating to or affecting creditors’ rights and remedies
generally.
SECTION
4.2 Restrictions on
Transfer. This Debenture, and any Common Shares deliverable
upon the conversion hereof, have not been registered under the Securities
Act. The Holder by accepting this Debenture agrees that this
Debenture and the shares of Common Stock to be acquired as interest on and upon
conversion of this Debenture may not be assigned or otherwise transferred unless
and until (i) the Company has received the opinion of counsel for the Holder
that this Debenture or such shares may be sold pursuant to an exemption from
registration under the Securities Act, provided that the Company will not
require opinions of counsel for transactions involving transfers to Affiliates
of the Holder or pursuant to Rule 144 promulgated by the SEC under the
Securities Act, except in unusual circumstances, or (ii) a registration
statement relating to this Debenture or such shares has been filed by the
Company and declared effective by the SEC.
Each
certificate for shares of Common Stock deliverable hereunder shall bear a legend
as follows unless and until such securities have been sold pursuant to an
effective registration statement under the Securities Act:
“The
securities represented by this certificate have not been registered under the
Securities Act of 1933, as amended (the “Securities Act”). The
securities may not be offered for sale, sold or otherwise transferred except (i)
pursuant to an effective registration statement under the Securities Act or (ii)
pursuant to an exemption from registration under the Securities Act in respect
of which the issuer of this certificate has received an opinion of counsel
reasonably satisfactory to the issuer of this certificate to such
effect. Copies of the agreement covering both the purchase of the
securities and restrictions on their transfer may be obtained at no cost by
written request made by the holder of record of this certificate to the
Secretary of the issuer of this certificate at the principal executive offices
of the issuer of this certificate.”
ARTICLE
5
COVENANTS
SECTION
5.1 Conversion. The
Company shall cause the transfer agent, not later than two (2) Business Days
after the Company’s receipt of a Conversion Notice, to issue and deliver to the
Holder the requisite shares of Common Stock Issued at Conversion.
SECTION
5.2 Notice of
Default. If any one or more events occur which constitute or
which, with notice, lapse of time, or both, would constitute an Event of
Default, the Company shall forthwith give notice to the Holder, specifying the
nature and status of the Event of Default or such other event(s), as the case
may be.
SECTION
5.3 Payment of
Obligations. So long as this Debenture shall be outstanding,
the Company shall pay, extend, or discharge at or before maturity, all its
respective material obligations and liabilities, including, without limitation,
tax liabilities, except where the same may be contested in good faith by
appropriate proceedings.
SECTION
5.4 Compliance with
Laws. So long as this Debenture shall be outstanding, the
Company shall comply with all applicable laws, ordinances, rules, regulations
and requirements of governmental authorities, except for such noncompliance
which would not have a material adverse effect on the business, properties,
prospects, condition (financial or otherwise) or results of operations of the
Company and the Subsidiaries.
SECTION
5.5 Inspection of Property,
Books and Records. So long as this Debenture shall be
outstanding, the Company shall keep proper books of record and account in which
full, true and correct entries shall be made of all material dealings and
transactions in relation to its business and activities and shall permit
representatives of the Holder at the Holder’s expense to visit and inspect any
of its respective properties, to examine and make abstracts from any of its
respective books and records, not reasonably deemed confidential by the Company,
and to discuss its respective affairs, finances and accounts with its respective
officers and independent public accountants, all at such reasonable times and as
often as may reasonably be desired.
SECTION
5.6 Reservation of Stock
Issuable Upon Conversion. The Company shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of this Debenture,
such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of this Debenture; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of this Debenture, in addition to such other remedies
as shall be available to the holder of this Debenture, the Company will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes, including, without limitation,
engaging in best efforts to obtain the requisite shareholder approval to file an
amendment to the charter of the Company.
SECTION
5.7 No
Impairment. Except and to the extent waived or consented to by
the Holder or as otherwise permitted under the terms hereof, the Company will
not, by amendment of its Certificate of Incorporation or similar corporate
charter or through any reorganization, 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 Company, but will at all times in good
faith assist in the carrying out of all the provisions of this Debenture and in
the taking of all such action as may be necessary or appropriate in order to
protect the exercise rights of the Holder against impairment.
ARTICLE
6
EVENTS
OF DEFAULT; REMEDIES
SECTION
6.1 Events of
Default. “Event of Default” wherever
used herein means any one of the following events:
(i) the
Company shall default in the payment of principal of or interest on this
Debenture as and when the same shall be due and payable and, in the case of an
interest payment default, such default shall continue for five (5) Business Days
after the date such interest payment was due, or the Company shall fail to
perform or observe any other covenant, agreement, term, provision, undertaking
or commitment under this Debenture or the Securities Purchase Agreement and such
default shall continue for a period of ten (10) Business Days after the delivery
to the Company of written notice that the Company is in default hereunder or
thereunder;
(ii) any of
the representations, warranties, or covenants made by the Company herein, in the
Securities Purchase Agreement or in any certificate or financial or other
written statements heretofore or hereafter furnished by or on behalf of the
Company in connection with the execution and delivery of this Debenture or the
Securities Purchase Agreement shall be false or misleading in a material respect
on the Closing Date;
(iii) under the
laws of any jurisdiction not otherwise covered by clauses (iv) and (v) below,
the Company or any Subsidiary (A) becomes insolvent or generally not able to pay
its debts as they become due, (B) admits in writing its inability to pay its
debts generally or makes a general assignment for the benefit of creditors, (C)
institutes or has instituted against it any proceeding seeking (x) to adjudicate
it a bankrupt or insolvent, (y) liquidation, winding-up, reorganization,
arrangement, adjustment, protection, relief or composition of it or its debts
under any law relating to bankruptcy, insolvency, reorganization or relief of
debtors including any plan of compromise or arrangement or other corporate
proceeding involving or affecting its creditors or (z) the entry of an order for
relief or the appointment of a receiver, trustee or other similar person for it
or for any substantial part of its properties and assets, and in the case of any
such official proceeding instituted against it (but not instituted by it),
either the proceeding remains undismissed or unstayed for a period of sixty (60)
calendar days, or any of the actions sought in such proceeding (including the
entry of an order for relief against it or the appointment of a receiver,
trustee, custodian or other similar official for it or for any substantial part
of its properties and assets) occurs or (D) takes any corporate action to
authorize any of the above actions;
(iv) the entry
of a decree or order by a court having jurisdiction in the premises adjudging
the Company or any Subsidiary a bankrupt or insolvent, or approving as properly
filed a petition seeking reorganization, arrangement, adjustment or composition
of or in respect of the Company under the Bankruptcy Code or any other
applicable Federal or state law, or appointing a receiver, liquidator, assignee,
trustee or sequestrator (or other similar official) of the Company or of any
substantial part of its property, or ordering the winding-up or liquidation of
its affairs, and any such decree or order continues and is unstayed and in
effect for a period of sixty (60) calendar days;
(v) the
institution by the Company or any Subsidiary of proceedings to be adjudicated a
bankrupt or insolvent, or the consent by it to the institution of bankruptcy or
insolvency proceedings against it, or the filing by it of a petition or answer
or consent seeking reorganization or relief under the Bankruptcy Code or any
other applicable federal or state law, or the consent by it to the filing of any
such petition or to the appointment of a receiver, liquidator, assignee, trustee
or sequestrator (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 admission by it in writing of its inability to pay its debts
generally as and when they become due, or the taking of corporate action by the
Company in furtherance of any such action;
a final
judgment or final judgments for the payment of money shall have been entered by
any court or courts of competent jurisdiction against the Company and remains
undischarged for a period (during which execution shall be effectively stayed)
of thirty (30) days, provided that the
aggregate amount of all such judgments at any time outstanding (to the extent
not paid or to be paid, as evidenced by a written communication to that effect
from the applicable insurer, by insurance) exceeds One Hundred Thousand Dollars
($100,000), and provided further that such aggregate amount shall exclude the
$233,492.86 promissory note payable to Cerrell Associates, Inc dated January 22,
2008, the $76,656.12 promissory note payable to CH*IV International dated
January 22, 2008, the $56,899.18 promissory note payable to Det Norske Veritas
(USA), Inc dated January 22, 2008, the $155,496.69 promissory note payable to
Entrix, Inc dated January 22, 2008, the $475,177.51 promissory note payable to
Pillsbury Xxxxxxxx Xxxx Xxxxxxx, LLP dated January 22, 2008, the $21,632.60
promissory note payable to TORP Technology dated January 22, 2008, and the
$176,922.98 promissory note payable to Project Consulting Services dated January
22, 2008 (collectively, these seven promissory notes are referred to as “Excluded Notes”);
(vi) it
becomes unlawful for the Company to perform or comply with its obligations under
this Debenture or the Securities Purchase Agreement in any respect;
(vii) the
Common Shares shall no longer be traded in the over the counter market via the
NASDAQ OTCBB or shall be suspended from trading on the NASDAQ OTCBB, and shall
not be reinstated, relisted or such suspension lifted, as the case may be,
within five (5) days;
(viii) the
Company shall fail to timely file all reports required to be filed by it with
the Commission (as defined in the Securities Purchase Agreement) pursuant to
Section 13 or 15(d) of the Exchange Act (as defined in the Securities Purchase
Agreement), or otherwise required by the Exchange Act; or
(ix) the
Company shall default (giving effect to any applicable grace period) in the
payment of principal or interest as and when the same shall become due and
payable, under any indebtedness, individually or in the aggregate, of more than
One Hundred Thousand Dollars ($100,000), excluding the Excluded
Notes.
SECTION
6.2 Acceleration of Maturity;
Rescission and Annulment. If an Event of Default occurs and is
continuing, then and in every such case the Holder may, in Holder’s sole and
absolute discretion, by a notice in writing to the Company, rescind any
outstanding Conversion Notice and declare that any or all amounts owing or
otherwise outstanding under this Debenture are immediately due and payable and
upon any such declaration this Debenture or such portion thereof, as applicable,
shall become immediately due and payable in cash at a price of one hundred
percent (100%) of the Principal Amount thereof, together with all accrued and
unpaid interest thereon to the date of payment; provided, however, in the case
of any Event of Default described in clauses (iii), (iv), (v) or (vii) of
Section 6.1, all amounts owing or otherwise outstanding under this Debenture
automatically shall become immediately due and payable without the necessity of
any notice or declaration as aforesaid. In the event that the Company
is obligated to pay any amount to the Holder in connection with an acceleration
of the maturity of this Debenture as set forth herein, the Company shall first
apply against such amount an amount equal to the outstanding amount owed by the
Holder to the Company under the Promissory Note, if any, and the amount
otherwise owed by the Company to the Holder in connection with an acceleration
of the maturity of this Debenture shall be reduced by the outstanding amount
owed by the Holder to the Company under the Promissory Note, with the Promissory
Note deemed paid by Holder to the extent of and with respect to such amount, and
if the amount due from the Company to the Holder in connection with an
acceleration of the maturity of this Debenture is equal to or greater than the
outstanding amount owed under the Promissory Note, the Company shall cancel and
deem the Promissory Note as paid in full in connection with the application of
the amount owed by the Holder to the Company under Promissory Note against the
amount otherwise owed by the Company to the Holder hereunder. The
Company shall immediately pay in cash to the Holder any remaining amount owed by
the Company to the Holder in connection with the acceleration of the maturity of
this Debenture as described herein, after the application of the outstanding
amount owed under the Promissory Note, if any, to such obligation.
SECTION
6.3 Late Payment
Penalty. If any portion of the principal of or interest on
this Debenture shall not be paid within ten (10) days of when it is due, the
Discount Multiplier under this Debenture shall decrease by one percentage point
(1%) for each period of ten (10) Business Days that any portion of such amount
remains unpaid by the Company for all conversions of this Debenture
thereafter.
SECTION
6.4 Maximum Interest
Rate. Notwithstanding anything herein to the contrary, if at
any time the applicable interest rate as provided for herein shall exceed the
maximum lawful rate which may be contracted for, charged, taken or received by
the Holder in accordance with any applicable law (the “Maximum Rate”), the rate of
interest applicable to this Debenture shall be limited to the Maximum
Rate. To the greatest extent permitted under applicable law, the
Company hereby waives and agrees not to allege or claim that any provisions of
this Debenture could give rise to or result in any actual or potential violation
of any applicable usury laws.
SECTION
6.5 Remedies Not
Waived. No course of dealing between the Company and the
Holder or any delay in exercising any rights hereunder shall operate as a waiver
by the Holder.
SECTION
6.6 Remedies. The
Company acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder, by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Debenture will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Debenture, that the Holder shall be entitled
to all other available remedies at law or in equity, and in addition to the
penalties assessable herein, to an injunction or injunctions restraining,
preventing or curing any breach of this Debenture and to enforce specifically
the terms and provisions thereof, without the necessity of showing economic loss
and without any bond or other security being required.
SECTION
6.7 Payment of
Certain Amounts. Whenever pursuant to this Debenture the Company is
required to pay an amount in excess of the Principal Amount plus accrued and
unpaid interest, the Company and the Holder agree that the actual damages to the
Holder from the receipt of cash payment on this Debenture may be difficult to
determine and the amount to be so paid by the Company represents stipulated
damages and not a penalty and is intended to compensate the Holder in part for
loss of the opportunity to convert this Debenture and to earn a return from the
sale of shares of Common Stock acquired upon conversion of this Debenture at a
price in excess of that price paid for such shares pursuant to this Debenture.
The Company and the Holder hereby agree that such amount of stipulated damages
is not disproportionate to the possible loss to the Holder from the receipt of a
cash payment without the opportunity to convert this Debenture into shares of
Common Stock.
SECTION
6.8 Filing of
Form 8-K. On or before the fourth Business Day following the date
hereof, the Company shall file a Current Report on Form 8-K describing the terms
of the transactions contemplated by the Documents (as defined in the Securities
Purchase Agreement), as required by the terms of the Securities Purchase
Agreement, in the form required by the Exchange Act and attaching the material
Documents (including, without limitation, the Securities Purchase Agreement and
this Debenture) as exhibits to such filing (the “8-K Filing”). In
the event that the Company does not file the 8-K Filing within four Business
Days following the date hereof, the Discount Multiplier under this Debenture
shall decrease by one percentage point (1%) for each period of five Business
Days that the 8-K Filing is not filed by the Company following the date hereof
for all conversions of this Debenture thereafter.
ARTICLE
7
INTEREST
RATE ADJUSTMENT
SECTION
7.1 Interest Rate
Adjustment. In the event that the Common Stock shall trade on
the Trading Market at a price per share that is $0.01 per share or lower at any
time during the six month period commencing on the date hereof and ending on the
six month anniversary of the date hereof (as adjusted for any stock splits,
stock dividends, combinations, subdivisions, recapitalizations or the like),
then (i) the Interest Rate shall immediately be increased to Nine and
Three-Quarters Percent (9 ¾ %) and shall remain at such level for the duration
of this Debenture; and (ii) the Company shall, within three Business Days of the
written request of the Holder prepay to the Holder the amount of interest that
would be otherwise paid under this Debenture from the date of such written
request through the Maturity Date (such amount referred to herein as the “Interest
Prepayment”). In the event that after the payment by the
Company of the Interest Prepayment all or any of the Principal Amount of this
Debenture is converted by Holder or redeemed pursuant to the terms of this
Debenture prior to the Maturity Date, then the Holder shall repay the
corresponding pro rata portion of the Interest Prepayment equal to the amount of
the Interest Prepayment that is represented by such portion of the Principal
Amount at such time that that is so converted or redeemed (taking into account
both the amount of the Principal Amount so converted or redeemed and the date
upon which such amount is so converted or redeemed).
ARTICLE
8
MISCELLANEOUS
SECTION
8.1 Notice of Certain
Events. In the case of the occurrence of any event described
in Section 3.4 of this Debenture, the Company shall cause to be mailed to the
Holder of this Debenture at its last address as it appears in the Company’s
security registry, at least twenty (20) days prior to the applicable record,
effective or expiration date hereinafter specified (or, if such twenty (20)
days’ notice is not possible, at the earliest possible date prior to any such
record, effective or expiration date), a notice thereof, including, if
applicable, a statement of (y) the date on which a record is to be taken for the
purpose of such dividend, distribution, issuance or granting of rights, options
or warrants, or if a record is not to be taken, the date as of which the holders
of record of Common Stock to be entitled to such dividend, distribution,
issuance or granting of rights, options or warrants are to be determined or (z)
the date on which such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up is expected to become effective, and the
date as of which it is expected that holders of record of Common Stock will be
entitled to exchange their shares for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale transfer,
dissolution, liquidation or winding-up.
SECTION
8.2 Register. The
Company shall keep at its principal office a register in which the Company shall
provide for the registration of this Debenture. Upon any transfer of
this Debenture in accordance with Articles 2 and 4 hereof, the Company shall
register such transfer on the Debenture register.
SECTION
8.3 Withholding. To
the extent required by applicable law, the Company may withhold amounts for or
on account of any taxes imposed or levied by or on behalf of any taxing
authority in the United States having jurisdiction over the Company from any
payments made pursuant to this Debenture.
SECTION
8.4 Transmittal of
Notices. Any notices, consents, waivers, or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered (i) upon
receipt, when delivered personally; (ii) upon confirmation of receipt, when sent
by facsimile; (iii) three (3) days after being sent by U.S. certified mail,
return receipt requested, or (iv) one (1) day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
(1) If
to the Company, to:
Tidelands
Oil & Gas Corporation
0000 Xxxx
Xxxxxxx Xxxx
San
Antonio, Texas 78248
Telephone: 000-000-0000
Facsimile: 000-000-0000
(2) If
to the Holder, to:
Golden
Gate Investors, Inc.
0000
Xxxxxxxxx Xxxxxx, Xxxxx 000
La Jolla,
California 92037
Telephone: 000-000-0000
Facsimile: 000-000-0000
Each of
the Holder or the Company may change the foregoing address by notice given
pursuant to this Section 8.4.
SECTION
8.5 Attorneys’
Fees. Should any party hereto employ an attorney for the
purpose of enforcing or construing this Debenture, or any judgment based on this
Debenture, in any legal proceeding whatsoever, including insolvency, bankruptcy,
arbitration, declaratory relief or other litigation, the prevailing party shall
be entitled to receive from the other party or parties thereto reimbursement for
all reasonable attorneys' fees and all reasonable costs, including but not
limited to service of process, filing fees, court and court reporter costs,
investigative costs, expert witness fees, and the cost of any bonds, whether
taxable or not, and that such reimbursement shall be included in any judgment or
final order issued in that proceeding. The "prevailing party" means
the party determined by the court to most nearly prevail and not necessarily the
one in whose favor a judgment is rendered.
SECTION
8.6 Governing
Law. This Debenture shall be governed by, and construed in
accordance with, the laws of the State of California (without giving effect to
conflicts of laws principles). With respect to any suit, action or
proceedings relating to this Debenture, the Company irrevocably submits to the
exclusive jurisdiction of the courts of the State of California sitting in San
Diego and the United States District Court located in the City of San Diego and
hereby waives, to the fullest extent permitted by applicable law, any claim that
any such suit, action or proceeding has been brought in an inconvenient
forum. Subject to applicable law, the Company agrees that final
judgment against it in any legal action or proceeding arising out of or relating
to this Debenture shall be conclusive and may be enforced in any other
jurisdiction within or outside the United States by suit on the judgment, a
certified copy of which judgment shall be conclusive evidence thereof and the
amount of its indebtedness, or by such other means provided by law.
SECTION
8.7 Headings. The
headings of the Articles and Sections of this Debenture are inserted for
convenience only and do not constitute a part of this Debenture.
SECTION
8.8 Payment
Dates. Whenever any payment hereunder shall be due on a day
other than a Business Day, such payment shall be made on the next succeeding
Business Day.
SECTION
8.9 Binding
Effect. Each Holder by accepting this Xxxxxxxxx agrees to be
bound by and comply with the terms and provisions of this
Debenture.
SECTION
8.10 No Stockholder
Rights. Except as otherwise provided herein, this Debenture
shall not entitle the Holder to any of the rights of a stockholder of the
Company, including, without limitation, the right to vote, to receive dividends
and other distributions, or to receive any notice of, or to attend, meetings of
stockholders or any other proceedings of the Company, unless and to the extent
converted into shares of Common Stock in accordance with the terms
hereof.
SECTION
8.11 Facsimile
Execution. Facsimile execution of this Debenture shall be
deemed original.
IN WITNESS WHEREOF, the Company has caused this
Debenture to be signed by its duly authorized officer on the date of this
Debenture.
TIDELANDS
OIL & GAS CORPORATION
By: /s/ Xxxxx X.
Xxxxx
Name: Xxxxx X.
Xxxxx
Title:
Chief Executive
Officer
