EXHIBIT 10.3
CONVERTIBLE PROMISSORY NOTE
Lender: National Petroleum Corporation
597 W. Waterview Drive
Green Valley, AZ 85614
Borrower: Natural Resource Group, Inc.
1789 W. Littleton Blvd.
Littleton, CO 80120
Maximum Principal Amount: $350,000.00
Date of Issuance: January 12, 2012
Maturity Date: January 11, 2014
1. Principal and Interest.
1.1 Principal Draws. The Maximum Principal Amount is made available
by Lender to Borrower in multiple draws. The initial draw
extended upon issuance of this Note is $150,000. Two additional
draws of $100,000 each are made available to Borrower upon its
written request made at any time within six (6) months of the
Date of Issuance and in conformity with paragraph 2, below.
1.2 Promise to Repay. Borrower hereby promises to repay to the order
of Lender the Principal drawn pursuant to paragraph 1.1 at the
place and in the manner hereinafter provided, together with
interest thereon at the rates described below, and any and all
other amounts which may be due and payable hereunder.
1.3 Maturity Date. This Note shall mature, and all sums remaining due
hereunder shall be due and payable in full, on the Maturity Date
set forth above.
1.4 Interest. Interest on the Principal shall accrue at a rate of 10%
per annum on principal sums drawn by Borrower.
1.5 Interest Payment. Borrower shall pay to Lender the interest
described in paragraph 1.4, above, monthly. All interest accrued
through the last day of each month shall be paid by Borrower and
delivered to Lender not later than the 5th day of the following
month.
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1.6 Place of Payment. The Principal and Interest shall be payable at
the address of Lender set forth at the head of this Note. Lender
may by written notice to Borrower designate a different place of
payment.
1.7 Principal Payment. The entire principal balance shall be due at
the Maturity Date.
1.8 Surrender Upon Payment. Upon payment in full of the Principal and
Interest hereunder this Note shall be surrendered by Lender to
Borrower for cancellation.
2. Purpose. The purpose of this extension of credit is to fund Borrower's
additional development operations in conformity with the terms and
provisions of Participation Agreement dated of even date herewith, and
Borrower's expected expenditures in connection therewith are as detailed in
Exhibit "B-1" attached hereto and made a part hereof by reference. The
terms and provisions of such Participation Agreement are incorporated
herein, and made a part hereof, by reference. Draws upon this Note are
available to Borrower as each preceding phase of additional development is
completed as set forth in said Exhibit "B-1".
3. Security. Borrower hereby grants to Lender, and this Note shall be secured
by, a first priority Deed of Trust, Mortgage and Security Agreement,
together with UCC financing statements, covering the Oil and Gas Leases
described in Exhibit "A" attached hereto, together with the wells, casing,
piping, pumps, motors, jacks, tanks, gathering lines, pipe lines and all
other oil and gas field equipment located thereon and used in connection
therewith, and the oil and gas produced therefrom, whether now owned or
hereafter acquired, additions and accessions thereto, the proceeds
therefrom and products thereof (the "Collateral"). The Parties understand
and agree that the security shall not include any property or assets of
Borrower except for the Collateral. In the event of any sale by Borrower of
the Collateral, or Borrower's working interest in the Collateral, the Deed
of Trust, Mortgage and Security Agreement shall continue in force and
remain a lien against the Collateral, unless this Note is paid and
discharged in full. The Parties hereby agree that the proceeds from any
such sale shall be due to Lender in (a) an amount sufficient to satisfy all
Principal, Interest and such other sums as may be due Lender as hereinafter
provided, or (b) the entire amount of the sale, whichever is less. It is
the Parties intent that this Note and the Deed of Trust, Mortgage and
Security Agreement shall be binding upon any successor or assign of
Borrower with respect to the Collateral.
4. Election to Convert. Lender shall have the right, at any point during the
life of this Note, to convert the then remaining Principal balance to a 10%
Working Interest in the Collateral. Lender shall make such election by
giving written notice to Borrower. Upon such notice (a) Borrower shall
assign to Lender, within 10 days of receiving notice, a 10% working.
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interest in the Collateral; and a 10% interest in all wells owned by
Borrower on such leases in which Lender does not already own a 20% Modified
Net Profits Interest (as such Interest is described in the Participation
Agreement); and (b) all Principal owed by Borrower to Lender shall be
converted to such working interest, so that Borrower shall no longer owe
Lender any Principal amount. Upon conversion, the parties shall enter in a
Joint Accounting Agreement designating Assignor (its successors or assigns)
as "Operator" for the mutual interest of the working interest owners, such
Operating Agreement to be substantially in the form of the then most recent
version of AAPL Form 610 Joint Operating Agreement with COPAS Accounting
Procedures for Onshore Operations. Interest shall continue to accrue
(payable monthly by Borrower as herein provided) until: (i) the Joint
Operating Agreement is executed; and (ii) the first day of the month within
which Borrower has delivered and recorded a good and sufficient Assignment
and Bill of Sale to the 10% working interest and such Assignment and Bill
of Sale is made effective (i.e., Lender entitled to its proportionate share
of revenue, subject to its share of operating expense). In the event the
election to convert is made by Lender at a time when less than the Maximum
Principal Amount ($350,000) is due and owing, then the working interest
into which Lender shall convert shall be reduced proportionately (e.g., if
the Principal amount then outstanding is $187,500, then Lender shall be
entitled to convert into a 5% working interest).
5. Event of Default. The occurrence of any one or more of the following events
shall constitute an Event of Default:
a. Borrower fails make any payment of Interest or Principal due
hereunder, and such failure shall remain unremedied for a period
of five (5) business days.
b. Lender shall fail to advance funds upon Borrower's request for
draw, unless Borrower has failed to conform to the purposes of
this Note.
6. Prepayment. Borrower may prepay the Note at any time prior to the Maturity
Date, in whole or in part, without any penalty or fee of any sort. Prior to
prepaying the Note, Borrower shall give written notice to Lender of its
intent to prepay. Upon receiving such notice, Lender shall have ten (10)
days to provide Borrower with written notice of its intent to convert the
Principal to a working interest as provided in paragraph 4, above. If
Lender does not send written notice of its election to convert, then
Lender's right to convert shall expire and Borrower may terminate the Note
by repaying the Principal.
7. Failure to Pay on or Before the Maturity Date. If Borrower fails to pay the
Principal due on this Note contemporaneously with or prior to the Maturity
Date, and such failure is not remedied within 30 days, the following shall
apply:
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a. Lender shall be entitled to seek and obtain an order appointing
Receiver of the Collateral for purposes of protecting,
preserving, operating and maintaining the Collateral.
b. Lender shall have a Power of Sale concerning all of the
Collateral. Power of sale shall mean that Lender shall have the
right to sell and convey all or part of Borrower's working
interest in the Collateral. Lender shall endeavor in good faith
to obtain market value for Borrower's working interest in the
Collateral, but if the sale is conducted by judicial means
(judicial foreclosure, receiver's sale, or other proceedings
before a Court of competent jurisdiction) the sole procedures
authorized by such Court shall be deemed to satisfy the Lender's
obligations under the preceding sentence. Lender shall apply the
proceeds of any sale to the Principal and Interest on this Note,
as well as the costs of any sale (subject to the limitations on
attorney's fees set forth in paragraph 8, below). Any remaining
proceeds from the sale after satisfaction of Principal, Interest
and costs shall be tendered to Borrower. Any deficiency shall
remain due from Borrower.
c. As an alternative to the remedy described in such paragraph 7b,
above, Lender shall have the right to the assignment of 50% of
Borrower's ownership interest in the Collateral. This right may
be enforced by specific performance in a court of law. Such 50%
ownership interest shall be assigned to Lender by good and
sufficient Assignment and Bill of Sale, and the parties shall
enter into a mutually acceptable Joint Operating Agreement and
COPAS accounting procedures (as provided in paragraph 4, above)
naming a mutually acceptable operator. Upon the assignment of 50%
of its ownership interest in the Collateral by Borrower to
Lender, this Note shall terminate, and Borrower shall have no
further obligation to Lender. Lender may exercise the right
described in this paragraph by sending written notice to Borrower
of such intent to exercise. Upon receiving such notice Borrower
shall assign the interest to Lender within ten (10) business
days.
d. The remedies provided for in subparagraphs b. and c, above are
mutually exclusive.
8. Attorney's Fees. If the indebtedness represented by this Note or any part
thereof is collected in bankruptcy, receivership, other judicial
proceedings, or by exercise of the Power of Sale, or if this Note is placed
in the hands of a collection agency, Borrower agrees to pay, in addition to
the Principal and Interest, reasonable collection and attorney's fees and
costs, not to exceed $20,000, incurred in collection by Lender. The
limitation on attorney's fees shall not apply if it is determined by a
Court of competent jurisdiction that any defenses, objections or other
legal obstacles to Lender's enforcement of this Note, and the remedies
provided for herein, were pled and asserted by, or on behalf of, Borrower
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in bad faith or for the purpose of hindering and delaying enforcement
without just cause or excuse.
9. Representations, Warranties, and Covenants of Borrower and Lender. All
representations, warranties, covenants, choice of law provisions, headings,
waivers, severability, and notice provisions, listed in the Participation
Agreement to which this Note is attached as an Exhibit shall apply to this
Note. In the event of a conflict between this Note and the Participation
Agreement, the Participation Agreement shall govern.
10. Waiver. Borrower waives presentment, demand and notice of dishonor and
protest with respect to this Note.
IN WITNESS WHEREOF, Natural Resource Group, Inc. has caused this Note to be
executed in its corporate name and this Note to be dated, issued and delivered,
all on the date first written above.
Borrower Lender
NATURAL RESOURCE GROUP, INC. NATIONAL PETROLEUM CORPORATION
/s/ Paul Laird /s/ Ron McGinnis
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By: Paul Laird, President By: Ron McGinnis, President
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ADDENDUM TO PROMISSORY NOTE
This document is an Addendum to the Promissory Note issued by Natural
Resource Group, Inc. ("Borrower") to National Petroleum Corporation ("Lender"),
dated January 17, 2012.
WHEREAS Borrower acquired the Collateral (described in the Promissory Note
and used as security for that Note) from Energy Oil and Gas, Inc. ("EOGI") in
December 2010; and
WHEREAS part of the consideration for such acquisition was a Promissory
Note issued by Borrower to EOGI which was secured by a first priority lien on
the Collateral; and
WHEREAS the remaining balance on the Promissory Note issued to EOGI is
approximately $190,000;
WHEREAS EOGI has agreed to modify its Promissory Note with Borrower so that
EOGI's security interest on the Assets is second in priority and subordinate to
Borrower's Deed of Trust, Mortgage and Security Agreement granted to Lender;
THEREFORE, EOGI hereby agrees that its security interest in the Assets
shall be second in priority to the full satisfaction of Lender's security
interest in the Collateral, and that Lender's security interest shall be a first
priority deed of trust, mortgage and security agreement.
AGREED and EXECUTED this 17 day of January, 2012.
ENERGY OIL AND GAS, INC.
By: /s/ Duane Bacon
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Duane Bacon, President
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