SECURITIES PURCHASE AGREEMENT BY AND AMONG GULF WESTERN PETROLEUM CORPORATION AND METAGE FUNDS LIMITED AND NCIM LIMITED Dated as of September 10, 2007
Exhibit
10.1
BY
AND AMONG
GULF
WESTERN PETROLEUM CORPORATION
AND
METAGE
FUNDS LIMITED
AND
NCIM
LIMITED
Dated
as of September 10, 2007
TABLE
OF CONTENTS
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Page
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SECTION
1. Purchase and Sale of Securities
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5
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1.1
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Purchase
and Sale of Note, Closing Shares and Warrant
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5
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1.2
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The
Closing Date
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5
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1.3
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Form
of Payment
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5
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SECTION
2. Buyer’s Representations And Warranties
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6
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2.1
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Investment
Purpose
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6
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2.2
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Economic
Loss, Suitability and Sophistication
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6
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2.3
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Accredited
Investor Status
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6
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2.4
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Reliance
on Exemptions
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6
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2.5
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Information
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6
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2.6
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No
Governmental Review
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7
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2.7
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Transfer
or Resale
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7
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2.8
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Legends
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7
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2.9
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Authorization;
Enforcement; Validity
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8
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2.10
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Residency
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8
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2.11
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Recent
Activity
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8
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SECTION
3. Representations And Warranties Of The Company
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8
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3.1
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Organization
and Qualification
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9
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3.2
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Authorization;
Enforcement; Validity
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9
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3.3
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Capitalization
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10
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3.4
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Issuance
of Securities
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11
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3.5
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No
Conflicts
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11
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3.6
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SEC
Documents; Financial Statements
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13
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3.7
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Absence
of Certain Changes
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14
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3.8
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Absence
of Litigation
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14
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3.9
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No
Undisclosed Events, Liabilities, Developments or
Circumstances
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14
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3.10
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Acknowledgment
Regarding Buyer’s Purchase of Note and Warrant
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14
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3.11
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Employee
Relations
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15
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3.12
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Intellectual
Property Rights
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15
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3.13
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Environmental
Laws
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15
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3.14
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Title
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16
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3.15
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Insurance
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17
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3.16
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Regulatory
Permits
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17
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3.17
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Internal
Accounting Controls; Disclosure Controls and Procedures; Books and
Records
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18
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3.18
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Tax
Status
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18
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3.19
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Transactions
With Affiliates
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19
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3.20
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Application
of Takeover Protections; Rights Agreement
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19
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3.21
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Foreign
Corrupt Practices
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19
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3.22
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Outstanding
Indebtedness, Permitted Indebtedness and Liens
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19
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3.23
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Ranking
of Note
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20
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3.24
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Oil
and Gas Property
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20
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3.25
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Leases,
Performance of Obligations
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21
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3.26
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Operation
of Oil and Gas Property, Marketing
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21
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3.27
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Tangible
Assets
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22
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3.28
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Investment
Company
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22
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SECTION
4. Affirmative Covenants
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22
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4.1
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Best
Efforts
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22
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4.2
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Reporting
Status
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22
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4.3
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Use
of Proceeds
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22
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4.4
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Financial
Information
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22
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4.5
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Reservation
of Shares
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23
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4.6
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Listing
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23
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4.7
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Disclosure
of Transactions and Other Material Information
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23
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4.8
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Notices
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23
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4.9
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Compliance
with Laws and Maintenance of Permits
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24
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4.10
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Inspection
and Audits
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24
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4.11
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Insurance
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25
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4.12
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Collateral
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26
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4.13
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Taxes
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26
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4.14
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Intellectual
Property
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26
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4.15
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Patriot
Act, Investor Secrecy Act and Office of Foreign Assets
Control
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26
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4.16
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Drilling
Title Opinions
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27
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4.17
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Security
Covenants
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27
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4.18
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Subsidiary
Interests
|
28
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4.19
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Submission
of Matters to a Stockholder Vote
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28
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4.20
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Subsidiary
Certificates
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28
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SECTION
5. Negative Covenants
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29
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5.1
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Stay,
Extension and Usury Laws
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29
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5.2
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Payment
Restrictions Affecting Subsidiaries
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29
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5.3
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Prepayments
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29
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5.4
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Indebtedness
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29
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5.5
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Liens
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29
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5.6
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Sale
of Collateral
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30
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5.7
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Corporate
Existence; Leases
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30
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5.8
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Restrictions
on Loans; Investments; Subsidiary Equity
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30
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5.9
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Equipment
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31
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5.10
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Affiliate
Transactions
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31
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5.11
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Settling
of Accounts
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31
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5.12
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Limitation
on Sale and Leaseback Transactions
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31
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5.13
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Investment
Company
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31
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5.14
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Leases
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31
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5.15
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Restriction
on Purchases or Payments
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32
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5.16
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No
Avoidance of Obligations
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32
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5.17
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Regulation
M
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32
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SECTION
6. Conditions To The Obligation Of The Company To Sell
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32
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SECTION
7. Conditions To The Obligation Of The Buyer To Purchase
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33
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ii
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SECTION
8. Indemnification
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35
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SECTION
9. Right to Participate in Future Financing
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37
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SECTION
10. Governing Law; Miscellaneous.
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38
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10.1
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Governing
Law; Jurisdiction; Jury Trial
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38
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10.2
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Counterparts
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38
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10.3
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Headings
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39
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10.4
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Severability
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39
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10.5
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Entire
Agreement; Amendments
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39
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10.6
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Notices
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39
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10.7
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Successors
and Assigns
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40
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10.8
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No
Third Party Beneficiaries
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40
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10.9
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Survival
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40
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10.10
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Further
Assurances
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40
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10.11
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Termination
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41
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10.12
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No
Strict Construction
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41
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10.13
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Remedies
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41
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10.14
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Payment
Set Aside
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41
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10.15
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Transfer
Agent Instructions
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41
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10.16
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Interpretative
Matters
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42
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iii
SECURITIES
PURCHASE AGREEMENT (the “Agreement”), dated as of
September 10, 2007, by and among Gulf Western Petroleum Corporation, a Nevada
corporation, with principal offices located at ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇,
▇▇▇▇▇▇▇, ▇▇▇▇▇, ▇▇▇▇▇ (together with its predecessors, the
“Company”), and Metage Funds Limited and NCIM Limited (together
with their respective successors and assigns, individually and collectively,
“Buyer”).
WHEREAS:
A. The
Company and Buyer are executing and delivering this Agreement in reliance upon
the exemption from securities registration afforded by Rule 506 of
Regulation D (“Regulation D”) as promulgated by the
United States Securities and Exchange Commission (the “SEC”)
under the Securities Act of 1933, as amended (the “1933
Act”).
B. Buyer
wishes to purchase from the Company and the Company, wishes to sell to Buyer,
upon the terms and conditions stated in this Agreement, (1) 1,500,000 shares
(the “Closing Shares”) of the Company’s common stock, par value
$0.001 per share (“Common Stock”), (2) senior secured notes, in
the form attached as Exhibit A, in an original aggregate principal amount
of $3,700,000 (such notes collectively, as they may be amended, supplemented,
restated or modified and in effect from time to time, the
“Note”), and (3) a warrant, in the form attached as Exhibit
B, to acquire an aggregate number of shares of the Company’s Common Stock,
equal to the quotient of $900,000 divided by the Warrant Exercise Price (as
defined in the Warrant), at a exercise price per share equal to the Warrant
Exercise Price (such warrant, as it may be amended, supplemented, restated
or
modified and in effect from time to time, being referred to as the
“Warrant”; and the shares of Common Stock issuable from time to
time upon exercise of the Warrant being referred to as the “Warrant
Shares”).
C. The
Note shall be convertible into shares of Common Stock in accordance with the
terms of the Note (the shares of Common Stock issuable upon conversion of the
Note being referred to herein as the “Conversion
Shares”).
D. Contemporaneously
with the execution and delivery of this Agreement, the parties hereto are
executing and delivering a Registration Rights Agreement (as the same may be
amended, supplemented, restated or modified and in effect from time to time,
the
“Registration Rights Agreement”), pursuant to which the Company
agrees to provide certain registration rights under the 1933 Act and all other
securities laws, with respect to the Closing Shares, the Conversion Shares
and
the Warrant Shares.
E. Contemporaneously
with the closing of the purchase and sale of the Note and the Warrant (the
“Closing”), the parties hereto and the Subsidiaries (as defined
in Section 3.1) will execute and deliver a Security Agreement (as the same
may
be amended, supplemented, restated or modified and in effect from time to time,
the “Security Agreement”), pursuant to which the Company and
its Subsidiaries will agree to provide the Collateral Agent, as agent for Buyer,
with a security interest in substantially all assets of the
Company.
F. Contemporaneously
with the Closing, the Subsidiaries will execute and deliver a Guaranty (as
the
same may be amended, supplemented, restated or modified and in effect from
time
to time, together, the “Guaranty”), pursuant to which the
Subsidiaries will agree to guarantee certain obligations of the Company (the
guarantees under the Guaranty, including any such guarantee added after the
Closing, being referred to herein as the
“Guarantees”).
G. Contemporaneously
with the Closing, the parties hereto will execute and deliver a Pledge Agreement
(as the same may be amended, supplemented, restated or modified and in effect
from time to time, together, the “Pledge Agreement”), pursuant
to which the Company will agree to pledge all of the capital stock and other
equity in the Subsidiaries to Metage Funds Limited, as the Collateral Agent
for
the Buyer (the “Collateral Agent”), as collateral for the
Note.
H. Contemporaneously
with the Closing, Buyer and the Debtors (as defined in the Security Agreement)
will execute and deliver one or more mortgages, deeds of trust, assignments
of
production, security agreements, fixture filings and financing statements (the
“Mortgages”), pursuant to which the Debtors will agree to grant
to Buyer a security interest in certain real and personal property, rights,
titles, interests and estates described therein.
NOW
THEREFORE, the Company and Buyer hereby agree as follows:
SECTION
1.
PURCHASE
AND SALE OF SECURITIES
1.1 Purchase
and Sale of Note, Closing Shares and Warrant. Subject
to the satisfaction (or waiver) of the conditions set forth in Sections 6 and
7
below, the Company shall issue and sell to Buyer, and Buyer agrees to purchase
from the Company, (i) the Closing Shares, (ii) the Note in the principal amount
of $3,700,000 and (iii) the Warrant to purchase a number of shares of Common
Stock equal to $900,000, divided by the Warrant Exercise Price. The
aggregate purchase price (the “Purchase Price”) for the Note,
the Closing Shares and Warrant purchased by Buyer shall be
$3,700,000. All references herein and in each of the other
Transaction Documents (as defined in Section 7) to “dollars” or
“$” shall mean the lawful money of the United
States of
America.
1.2 The
Closing Date. The
date and time of the Closing (the “Closing Date”) shall be
10:00 a.m., Houston, Texas time, on the first Business Day following the date
of
this Agreement, subject to the satisfaction (or waiver) of all of the conditions
to the Closing set forth in Sections 6 and 7 (or such later or earlier date
as
is mutually agreed to by the Company and Buyer). The Closing shall
occur on the Closing Date at the offices of ▇▇▇▇▇▇ & ▇▇▇▇▇▇, L.L.P., ▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇,
▇▇▇▇▇▇▇,
▇▇▇▇▇ ▇▇▇▇▇, or at such other place as the Company and Buyer may designate
in
writing. As used in this Agreement, “Business Day”
means any day other than Saturday, Sunday or other day on
which commercial banks
in Houston, Texas are authorized or required by law to remain
closed.
1.3 Form
of Payment. On
the Closing Date, (i) Buyer shall pay the Purchase Price to the Company for
the
Closing Shares, Note and Warrant to be issued and sold to Buyer on the Closing
Date, by wire transfer of immediately available funds in accordance with the
Company’s written wire instructions, and (ii) the Company shall deliver to Buyer
(A) certificates representing the Closing Shares, (B) the Note, and (C) the
Warrant, in each case duly executed on behalf of the Company and registered
in
the name of Buyer.
SECTION
2.
BUYER'S REPRESENTATIONS
AND WARRANTIES
Buyer
represents and warrants, as of the date of this Agreement and the Closing Date,
with respect to only itself, that:
2.1 Investment
Purpose. Buyer
(i) is acquiring the Note (along with the related Guaranty), the Closing Shares
and the Warrant purchased by Buyer hereunder, and (ii) upon conversion (if
any)
of the Note will acquire the Conversion Shares issuable upon conversion thereof,
and (iii) upon any exercise of the Warrant will acquire the Warrant Shares
issuable upon such exercise thereof, (the Note, the Conversion Shares, the
Closing Shares, the Guarantees, the Warrant and the Warrant Shares being
collectively referred to herein as the “Securities”) for
Buyer’s own account and not with a view towards, or for resale in connection
with, the public sale or distribution thereof, except pursuant to sales
registered under, or exempted from the registration requirements of, the 1933
Act.
2.2 Economic
Loss, Suitability and Sophistication. Buyer
(i) is able to bear the economic risk of losing its entire investment in the
Securities and (ii) is able to bear such risk for an indefinite period of
time. Buyer has evaluated the risks involved in investing in the
Securities and has determined that the Securities are a suitable investment
for
Buyer. Buyer’s overall commitment to investments which are not
readily marketable is not disproportionate to its net worth. Buyer’s
investment in the Securities will not cause such overall commitment to become
excessive. Buyer has such knowledge and experience in financial and
business matters that it is capable of evaluating the risks and merits of this
investment.
2.3 Accredited
Investor Status. Buyer
is an “accredited investor” as that term is defined in Rule 501(a) of Regulation
D inasmuch as Buyer is a company not formed for the specific purpose of making
an investment in the Securities and Buyer’s total assets are in excess of
$5,000,000.
2.4 Reliance
on Exemptions. Buyer
understands that the Securities are being offered and sold to it in reliance
on
specific exemptions from the registration requirements of securities laws and
that the Company is relying in part upon the truth and accuracy of, and Buyer’s
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of Buyer to acquire the
Securities. For purposes hereof, “securities laws”
means the securities laws, legislation and regulations of,
and the instruments,
policies, rules, orders, codes, notices and interpretation notes of, the
securities regulatory authorities (including the SEC) of the United States
and
any applicable states and other jurisdictions.
2.5 Information. Buyer
and its advisors, if any, have been furnished with all materials relating to
the
business, finances and operations of the Company and materials relating to
the
offer and sale of the Securities that have been requested by
Buyer. Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company. Buyer understands that
its investment in the Securities involves a high degree of
risk. Buyer has sought such accounting, legal and tax advice as it
has considered necessary to make an informed investment decision with respect
to
its acquisition of the Securities.
2.6 No
Governmental Review. Buyer
understands that no Governmental Entity has passed on or made any recommendation
or endorsement of the Securities or the fairness or suitability of an investment
in the Securities nor have such authorities passed upon or endorsed the merits
of the offering of the Securities. As used in this Agreement,
“Governmental Entity” means the government of the United States
or any other nation, or any political subdivision thereof, whether state,
provincial or local, or any agency (including any self-regulatory agency or
organization), authority, instrumentality, regulatory body, court, central
bank
or other entity exercising executive, legislative, judicial, taxing, regulatory
or administration powers or functions of or pertaining to government over the
Company or any of its Subsidiaries, or any of their respective properties,
assets or undertakings.
2.7 Transfer
or Resale. Buyer
understands that, except as provided in the Registration Rights Agreement,
(i)
the Securities have not been and are not being registered under the 1933 Act
or
any other securities laws, and may not be offered for sale, sold, assigned
or
transferred unless (A) subsequently registered thereunder, (B) Buyer shall
have
delivered to the Company an opinion of counsel, in generally acceptable form
and
substance to the Company, to the effect that such Securities to be sold,
assigned or transferred may be sold, assigned or transferred pursuant to one
or
more specified exemptions from such registration, or (C) Buyer provides the
Company with reasonable assurance that such Securities can be sold, assigned
or
transferred pursuant to Rule 144 promulgated under the 1933 Act, as amended
(or
a successor rule thereto) (“Rule 144”); (ii) any sale of the
Securities made in reliance on Rule 144 may be made only in accordance with
the
terms of Rule 144, and further, if Rule 144 is not applicable, any resale of
the
Securities under circumstances in which the seller (or the person through whom
the sale is made) may be deemed to be an underwriter (as that term is defined
in
the ▇▇▇▇ ▇▇▇) may require compliance with some other exemption under the 1933
Act or any other securities laws; (iii) except as set forth in the
Registration Rights Agreement, neither the Company nor any other person is
under
any obligation to register the Securities under the 1933 Act or any other
securities laws; and (iv) the ability of the Company to register the Closing
Shares, the Conversion Shares and the Warrant Shares may be limited by the
rules
and regulations of the SEC, state securities authorities, and the published
and
unpublished interpretations of their respective staffs.
2.8 Legends. Buyer
understands that the certificates or other instruments representing the Note
and
the Warrant and, until such time as the sale of the Closing Shares, the
Conversion Shares and the Warrant Shares have been registered under the
1933 Act as contemplated by the Registration Rights Agreement, the stock
certificates representing the Closing Shares, the Conversion Shares and Warrant
Shares, except as set forth below, shall bear a restrictive legend in the
following form (the “1933 Act Legend”) (and a stop-transfer
order may be placed against transfer of such stock
certificates):
THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR
APPLICABLE STATE SECURITIES LAWS OR (B) AN OPINION OF COUNSEL, IN GENERALLY
ACCEPTABLE FORM AND SUBSTANCE, THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT
OR APPLICABLE STATE SECURITIES LAWS PURSUANT TO SPECIFIED EXEMPTIONS THEREFROM
OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT AND APPLICABLE
EXEMPTIONS FROM STATE SECURITIES LAWS.
The
legend set forth above shall be removed and the Company shall issue a
certificate without the 1933 Act Legend to the holder of the Securities upon
which it is stamped, if (i) such Securities are registered and sold under
the 1933 Act, (ii) in connection with a sale transaction, such holder
provides the Company with an opinion of counsel, in generally acceptable form
and substance, to the effect that a public sale, assignment or transfer of
the
Securities may be made without registration under the 1933 Act and other
securities laws pursuant to one or more specified exemptions, (iii) such
holder provides the Company with reasonable assurances that the Securities
can
be sold pursuant to Rule 144(k) promulgated under the 1933 Act (or a
successor rule thereto), or (iv) such holder provides the Company
reasonable assurances that the Securities have been or are being sold pursuant
to Rule 144.
2.9 Authorization;
Enforcement; Validity. Buyer
is validly existing and has the requisite power and authority to purchase the
Securities pursuant to this Agreement. This Agreement and the
Registration Rights Agreement have been duly and validly authorized, executed
and delivered on behalf of Buyer and are valid and binding agreements of Buyer
enforceable against Buyer in accordance with their respective
terms. The Security Agreement, the Registration Rights Agreement and
each of the other agreements entered into and other documents executed by Buyer
in connection with the transactions contemplated hereby and thereby as of the
Closing will have been duly and validly authorized, executed and delivered
on
behalf of Buyer as of the Closing and will be valid and binding agreements
of
Buyer, enforceable against Buyer in accordance with their respective
terms.
2.10 Residency. Metage
Funds Limited is a Cayman domiciled entity and is organized and operated from
the Cayman Islands. NCIM Capital Limited is organized under the laws
of England and its principal place of business is in London,
England
2.11 Recent
Activity. Neither
Buyer nor any “affiliate” (as such term is defined in Rule 405 under the ▇▇▇▇
▇▇▇) of Buyer or any broker or dealer acting on their behalf has sold or
purchased, or offered to sell or purchase, the Common Stock within the preceding
60 days.
SECTION
3.
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
The
Company represents and warrants, as of the date of this Agreement and on the
Closing Date, to Buyer, that:
3.1 Organization
and Qualification. Set
forth in Schedule 3.1 is a true and correct list of the Company’s
Subsidiaries and the jurisdiction in which each is organized or incorporated,
together with their respective jurisdictions of organization and the percentage
of the outstanding capital stock or other equity interests of each such entity
that is held by the Company or any of its Subsidiaries. Other than
with respect to the entities listed on Schedule 3.1, the Company does not
directly or indirectly own any security or beneficial ownership interest, in
any
other Person (including through joint venture or partnership agreements) or
have
any interest in any other Person. Each of the Company and its
Subsidiaries is a corporation, limited liability company, partnership or other
entity and is duly organized or formed and validly existing in good standing
under the laws of the jurisdiction in which it is incorporated or organized
and
has the requisite corporate, partnership, limited liability company or other
organizational power and authority to own its properties and to carry on its
business as now being conducted and as proposed to be conducted by the Company
and its Subsidiaries. Each of the Company and its Subsidiaries is
duly qualified to do business and is in good standing in every jurisdiction
in
which such qualification is required, except to the extent that the failure
to
be so qualified or be in good standing could not have and could not be,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. As used in this Agreement, “Material Adverse
Effect” means any material adverse effect on (i) the business,
properties, assets, operations, results of operations, or condition (financial
or otherwise) of the Company and its Subsidiaries, taken as a whole, or (ii)
the
authority or ability of the Company or any other Person (other than Buyer)
party
to any of the Transaction Documents to enter into the Transaction Documents
and
perform its obligations thereunder. The Company holds all right,
title and interest in and to 100% of the capital stock, equity or similar
interests of each of its Subsidiaries, in each case, free and clear of any
Liens
(as defined below) other than Permitted Liens, including any restriction on
the
use, voting, transfer, receipt of income or other exercise of any attributes
of
free and clear ownership by a current holder (other than restrictions arising
under federal or state securities laws), and no such Subsidiary owns capital
stock or holds an equity or similar interest in any other Person. As used in
this Agreement, “Lien” means with respect to any asset, any
mortgage, lien, pledge, hypothecation, charge, security interest, or
encumbrance of any kind (including any of the foregoing created by, arising
under or evidenced by any conditional sale or other title retention agreement,
the interest of a lessor with respect to a Capital Lease Obligation, or any
financing lease having substantially the same economic effect as any of the
foregoing); “Subsidiary” means any entity in which the Company,
directly or indirectly, owns capital stock or holds an equity or similar
interest (at the time of this Agreement or at any time thereafter);
“Capital Lease Obligation” means, as to any Person, any
obligation that is required to be classified and accounted for as a capital
lease on a balance sheet of such Person prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”), and the
amount of such obligation shall be the capitalized amount thereof, determined
in
accordance with GAAP; and “Person” means an individual, a
limited liability company, a partnership, a joint venture, a corporation, a
trust, an unincorporated organization, a Governmental Entity or any other legal
entity.
3.2 Authorization;
Enforcement; Validity. The
Company and each of the Subsidiaries have the requisite corporate, limited
liability company or limited partnership power and authority (as the case may
be) to enter into and perform their obligations under this Agreement, the
Registration Rights Agreement, the Irrevocable Transfer Agent Instructions
(as
set forth in Section 9(q)), the Note, the Warrant, the Security Agreement,
the
Mortgages, the Guaranty, the Pledge Agreement and each of the other agreements
or instruments to which they are a party or by which they are bound and which
are entered into by the parties hereto in connection with the transactions
contemplated hereby and thereby (collectively, the “Transaction
Documents”), and to issue the Securities in accordance with the terms
hereof and thereof assuming in each case the truth and accuracy of Buyer’s
representations and warranties in the Transaction Documents. The
execution and delivery of the Transaction Documents by the Company and each
of
the Subsidiaries and the consummation by the Company and each of the
Subsidiaries of the transactions contemplated hereby and thereby, including
the
issuance of the Note, the Closing Shares and the Warrant and the reservation
for
issuance and the issuance of the Conversion Shares and the Warrant Shares,
have
been duly authorized by the respective boards of directors, members, managers,
stockholders or other equityholders, as applicable, of the Company and each
of
the Subsidiaries and no further consent or authorization is required by the
Company, any of the Subsidiaries or any of their respective boards of directors,
members, managers, stockholders or other equityholders, as
applicable. This Agreement and the other Transaction Documents dated
of even date herewith have been duly executed and delivered by the Company
and
each other Person (other than Buyer or the Collateral Agent) party thereto,
and
constitute the valid and binding obligations of the Company and each of the
Subsidiaries, enforceable against the Company and each of the Subsidiaries
in
accordance with their respective terms, except as may be limited by bankruptcy,
insolvency, fraudulent conveyance or similar laws affecting creditors’ rights
generally and general principles of equity. As of the Closing, the
Transaction Documents dated after the date of this Agreement and on or prior
to
the Closing Date shall have been duly executed and delivered by the Company
and
each of the Subsidiaries and shall constitute the valid and binding obligations
of the Company and each of the Subsidiaries, enforceable against the Company
and
each of the Subsidiaries in accordance with their respective terms, except
as
may be limited by bankruptcy, insolvency, fraudulent conveyance or similar
laws
affecting creditors’ rights generally and general principles of
equity.
3.3 Capitalization. As
of the date of this Agreement and as of the Closing Date, (i) the authorized
capital stock of the Company consists of (i) 1,200,000,000 shares of Common
Stock, of which 52,289,662 shares are issued and outstanding, 9,000,000 shares
are reserved for issuance pursuant to the Company’s 2007 Non Qualified Stock
Option Plan (the “Option Plan”), including 3,625,000 shares
issuable pursuant to outstanding awards under the Option Plan, and 13,170,000
shares are issuable and reserved for issuance pursuant to securities issued
or
to be issued (other than the Note, the Warrant and the Closing Shares, and
other
than pursuant to the Option Plan), exercisable or exchangeable for, or
convertible into, shares of Common Stock, (ii) no shares of Common Stock are
reserved for issuance under any plan or agreement, other than with respect
to
the Note and Warrant and the shares of Common Stock reserved for issuance under
the Option Plan, and (iii) there are no other securities of the Company issued,
outstanding or reserved for issuance. All of such outstanding or
issuable shares have been, or upon issuance will be, validly issued and are,
or
upon issuance will be, fully paid and nonassessable. Except as set
forth on Schedule 3.3 or as provided for in the Option Plan, (A) no
shares of the capital stock of the Company are subject to preemptive rights
or
any other similar rights; (B) there are no outstanding options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into or exercisable for, any
shares of capital stock of the Company or any of its Subsidiaries, or contracts,
commitments, understandings or arrangements by which the Company or any of
its
Subsidiaries is or may become bound to issue additional shares of capital stock
of the Company or any of its Subsidiaries or options, warrants, scrip, rights
to
subscribe to, calls or commitments of any character whatsoever relating to,
or
securities or rights convertible into or exercisable for, any shares of capital
stock of the Company or any of its Subsidiaries; (C) there are no outstanding
securities or instruments of the Company or any of its Subsidiaries that contain
any redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to redeem a security of the Company or any of its
Subsidiaries, and there are no other stockholder agreements or similar
agreements to which the Company, any of its Subsidiaries, or, to the Company’s
Knowledge, any holder of the Company’s capital stock is a party; (D) there
are no securities or instruments containing anti-dilution or similar provisions
that will or may be triggered by the issuance of the Securities; and (E) the
Company does not have any stock appreciation rights or “phantom stock” plans or
agreements or any similar plan or agreement. The Company has
furnished to Buyer true and correct copies of the Company’s Certificate of
Incorporation, as amended and in effect on the date of this Agreement (the
“Certificate of Incorporation”), and the Company’s Bylaws, as
amended and in effect on the date of this Agreement (the
“Bylaws”), the organizational documents of each of the
Company’s Subsidiaries, as amended and in effect on the date of this Agreement,
and all documents and instruments containing the terms of all securities, if
any, that are convertible into, or exercisable or exchangeable for, Common
Stock, and the material rights of the holders thereof in respect
thereto. All of the equity interests of each of the Subsidiaries are
certificated or otherwise represented in tangible form. “To the
Company’s Knowledge” and similar language means the actual knowledge of
▇. ▇▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇ “▇▇▇” Nastat, and ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇ (the
“Management Members”).
3.4 Issuance
of Securities. The
Closing Shares are duly authorized and, upon issuance in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable and free
from
all taxes and Liens with respect to the issuance thereof, with the holders
being
entitled to all rights accorded to a holder of shares of Common
Stock. Upon issuance and payment therefor in accordance with this
Agreement, the Note will be duly authorized and shall be (i) free from all
taxes
and Liens with respect to the issuance thereof and (ii) entitled to the rights
set forth therein. At least 14,500,000 shares of Common Stock
(subject to adjustment pursuant to the Company’s covenant set forth in Section
4.7 below) have been duly authorized and reserved for issuance upon exercise
of
the Warrant and conversion of the Note. Upon conversion of the Note
or upon exercise in accordance with such Warrant, the Conversion Shares or
Warrant Shares (as the case may be) will be validly issued, fully paid and
nonassessable and free from all taxes and Liens with respect to the issuance
thereof, with the holders being entitled to all rights accorded to a holder
of
shares of Common Stock issued upon each such exercise, subject to restrictions
on transfer pursuant to the Transaction Documents and federal and state
securities laws.
3.5 No
Conflicts. The
execution and delivery of this Agreement and the other Transaction Documents
by
the Company and each of the Subsidiaries, the performance by the Company and
each of the Subsidiaries of its obligations thereunder and the consummation
by
the Company and each of the Subsidiaries of the transactions contemplated
thereby (including the reservation for issuance and issuance of the Warrant
Shares) will not (i) result in a violation of the certificate or articles of
incorporation, certificate or articles of organization, bylaws, operating
agreement, partnership agreement or any other governing documents, as
applicable, of any such Person; (ii) conflict with, or constitute a breach
or default (or an event which, with the giving of notice or passage of time
or
both, constitutes or would constitute a breach or default) under, or give to
others any right of termination, amendment, acceleration or cancellation of,
or
other remedy with respect to, any agreement, indenture or instrument to which
any such Person is a party; (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including securities laws and the rules
and regulations, if any, of the Principal Market (as defined in Section 3.16))
applicable to any such Person or by which any property or asset of any such
Person is bound or affected. Neither the Company nor any of the
Subsidiaries is or has been in violation of any term of or in default under
(or
with the giving of notice or passage of time or both would be in violation
of or
default under) any contract, agreement, mortgage, indebtedness, indenture,
instrument, judgment, decree or order or any Law applicable to the Company
or
its Subsidiaries, except where such violation or default could not reasonably
be
expected to have a Material Adverse Effect or to result in the acceleration
of
any Indebtedness (as defined below) or other obligation. The business
of the Company and its Subsidiaries has not been and is not being conducted,
in
violation of any Law of any Governmental Entity except as could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. Except for the filings and listings expressly
contemplated by the Registration Rights Agreement and the filing of instruments
to perfect security interests, and filings to be made pursuant to Section 4.2
hereof, neither the Company nor any of the Subsidiaries is or has been required
to obtain any consent, authorization or order of, or make any filing or
registration with, any court or Governmental Entity in order for it to execute,
deliver or perform any of its obligations under or contemplated by the
Transaction Documents in accordance with the terms hereof or
thereof. As used in this Agreement, “Laws” means all
present federal, state, local or foreign laws, statutes, rules, regulations,
ordinances and codes, together with all administrative or judicial orders or
decrees, consent agreements, licenses, authorizations and permits of, and
agreements with, any Governmental Entity; “Indebtedness” of any
Person means, without duplication (A) all indebtedness for borrowed money,
(B)
all obligations issued, undertaken or assumed as the deferred purchase price
of
property or services (other than unsecured account trade payables that are
(i)
entered into or incurred in the ordinary course of the Company’s and its
Subsidiaries’ business, (ii) on terms that require full payment within 90 days
from the date entered into or incurred, and (iii) not unpaid in excess of 120
days from the date entered into or incurred, or are being contested in good
faith and as to which such reserve as is required by GAAP has been made, (C)
all
reimbursement or payment obligations with respect to letters of credit, surety
bonds and other similar instruments, (D) all obligations evidenced by notes,
bonds, debentures, redeemable capital stock or similar instruments, including
obligations so evidenced incurred in connection with the acquisition of
property, assets or businesses, (E) all indebtedness created or arising under
any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with
the proceeds of such indebtedness (even though the rights and remedies of the
seller, bank or other financing source under such agreement in the event of
default are limited to repossession or sale of such property), (F) all Capital
Lease Obligations, (G) all indebtedness referred to in clauses (A) through
(F)
above secured by (or for which the holder of such indebtedness has an existing
right, contingent or otherwise, to be secured by) any mortgage, lien, pledge,
charge, security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by any Person, even though the
Person that owns such assets or property has not assumed or become liable for
the payment of such indebtedness, and (H) all Contingent Obligations in respect
of indebtedness or obligations of others of the kinds referred to in clauses
(A)
through (G) above; and “Contingent Obligation” means, as to any
Person, any direct or indirect liability, contingent or otherwise, of that
Person with respect to any indebtedness, lease, dividend or other obligation
of
another Person if the primary purpose or intent of the Person incurring such
liability, or the primary effect thereof, is to provide assurance to the obligee
of such liability that such liability will be paid or discharged, or that any
agreements relating thereto will be complied with, or that the holders of such
liability will be protected (in whole or in part) against loss with respect
thereto.
3.6 SEC
Documents; Financial Statements. Since
June 30, 2006, the Company has filed all reports, schedules, forms, statements
and other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the Securities and Exchange Act of 1934, as amended
(the “1934 Act”) (all of the foregoing filed prior to the date
this representation is made (including all exhibits included therein and
financial statements and schedules thereto and documents incorporated by
reference therein) being referred to herein as the “SEC
Documents” and the Company’s consolidated balance sheet as of May 31,
2007, as included in the Company’s quarterly report on Form 10-QSB for the
period then ended, as filed with the SEC on July 17, 2007, being referred to
herein as the “Most Recent Balance Sheet”). A
complete and accurate list of the SEC Documents is available on the SEC’s web
site at ▇▇▇.▇▇▇.▇▇▇. As of their respective dates, the SEC Documents
complied in all material respects with the securities laws. None of
the SEC Documents, at the time they were filed with the SEC, contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein,
in
light of the circumstances under which they were made, not
misleading. As of their respective dates, the consolidated financial
statements of the Company and its Subsidiaries included in the SEC Documents
complied as to form in all material respects with applicable accounting
requirements and the securities laws with respect thereto. Such
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes) and fairly present in
all
material respects the financial position of the Company and its Subsidiaries
as
of the dates thereof and the results of their operations and cash flows for
the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments). The accounting firm that has expressed
its opinion with respect to the consolidated financial statements included
in
the Company’s registration statement on Form SB-2, File No. 333-B3759 (the
“Audit Opinion”) is independent of the Company pursuant to the
standards set forth in Rule 2-01 of Regulation S-X promulgated by the SEC and
such firm was otherwise qualified to render the Audit Opinion under applicable
securities laws. Each other accounting firm that since such filing
has conducted or will conduct a review or audit of any of the Company’s
consolidated financial statements is independent of the Company pursuant to
the
standards set forth in Rule 2-01 of Regulation S-X promulgated by the SEC and
is
otherwise qualified to conduct such review or audit and render an audit opinion
under applicable securities laws.
3.7 Absence
of Certain Changes. Neither
the Company nor any of the Subsidiaries has taken any steps, and neither the
Company nor any such Subsidiary expects to take any steps to seek protection
pursuant to any bankruptcy law nor, to the Company’s Knowledge, is there any (i)
reason to believe that the creditors of such Person intend to initiate
involuntary bankruptcy proceedings or (ii) any fact that would reasonably lead
a
creditor to do so. Neither the Company nor any Subsidiary is as of
the date this representation is made, nor after giving effect to the
transactions contemplated hereby or by any of the other Transaction Documents
will be, Insolvent (as defined below). As used in this Agreement,
“Insolvent” means, with respect to any Person, (i) the present
fair saleable value of such Person’s assets is less than (A) the total amount of
liabilities (including contingent liabilities) of such Person or (B) the
amount required to pay such Person’s probable liabilities on its existing total
indebtedness, contingent or otherwise, as such indebtedness becomes absolute
and
due (ii) such Person is unable to pay its debts and liabilities, subordinated,
contingent or otherwise, as such debts and liabilities become absolute and
matured, (iii) such Person intends to incur, or believes that it will
incur, debts that would be beyond its ability to pay as such debts mature or
(iv) such Person has unreasonably small capital with which to conduct the
business in which it is engaged as such business is now conducted and is
proposed to be conducted.
3.8 Absence
of Litigation. There
is not any action, suit, proceeding, inquiry or investigation
(“Litigation”) before or by any court, public board,
Governmental Entity, self-regulatory organization or body pending or, to the
Company’s Knowledge, threatened against or affecting the Company or any of its
Subsidiaries. To the Company’s Knowledge, no director or officer of
the Company or any of its Subsidiaries has been involved in securities-related
Litigation during the past five years.
3.9 No
Undisclosed Events, Liabilities, Developments or Circumstances. Except
as set forth on Schedule 3.9, since December 31, 2006, there has been no
Material Adverse Effect and no circumstances exist that, individually or in
the
aggregate, could reasonably be expected to be, cause or have a Material Adverse
Effect except as disclosed in the Schedules to this Agreement. Except
(A) as and to the extent disclosed or reserved against on the Most Recent
Balance Sheet, (B) as incurred since the date thereof in the ordinary course
of
business consistent with past practice, (C) as incurred at the Closing Date
under the Note and the other Transaction Documents or in connection with the
transactions contemplated thereby, or (D) as set forth on Schedule 3.9,
neither the Company, nor any of its Subsidiaries has any liabilities or
obligations of any nature, whether known or unknown, absolute, accrued,
contingent or otherwise and whether due or to become due.
3.10 Acknowledgment
Regarding Buyer’s Purchase of Note and Warrant. The
Company acknowledges and agrees that Buyer is acting solely in the capacity
of
an arm’s length purchaser with respect to the Company in connection with this
Agreement and the other Transaction Documents and the transactions contemplated
hereby and thereby. The Company further acknowledges that Buyer is
not acting as a financial advisor or fiduciary of any party to this Agreement
or
any of the other Transaction Documents (or in any similar capacity) with respect
to this Agreement and the other Transaction Documents and the transactions
contemplated hereby and thereby, and any advice given by Buyer or any of its
representatives or agents in connection with the Transaction Documents and
the
transactions contemplated hereby and thereby is merely incidental to Buyer’s
purchase of the Securities. The Company further represents to Buyer
that the decision of each of the Company and the Subsidiaries to enter into
the
Transaction Documents has been based solely on the independent evaluation by
the
Company, the Subsidiaries and their representatives.
3.11 Employee
Relations. Neither
the Company nor any of its Subsidiaries is involved in any labor union dispute
nor, to the Knowledge of the Company, is any such dispute
threatened. None of the employees of either the Company or any of its
Subsidiaries is or has been a member of a union that relates to such employee’s
relationship with the Company and neither the Company nor any of its
Subsidiaries is a party to a collective bargaining
agreement. Schedule 3.11 lists each individual who will be
employed by the Company or retained by the Company as of the Closing
Date. Such individuals constitute all of the employees and
consultants necessary to conduct the Company’s business as presently
conducted. Except as set forth on Schedule 3.11, to the
Company’s Knowledge, no such individual is, has been, or is expected to be, in
violation of any material term of any employment contract, confidentiality,
disclosure or proprietary information agreement or non-competition agreement,
or
any other contract or agreement or any restrictive covenant, and, to the
Company’s Knowledge, the employment of each such individual does not, has not
and will not subject the Company or any of its Subsidiaries to any liability
with respect to any of the foregoing matters. The Company and each of
its Subsidiaries is and has been in compliance with all Laws relating to
employment and employment practices, terms and conditions of employment and
wages and hours except as could not reasonably be expected to have a Material
Adverse Effect.
3.12 Intellectual
Property Rights. The
Company and its Subsidiaries own or possess adequate rights or licenses to
use
all trademarks, trademark applications and registrations, trade names, service
marks, service ▇▇▇▇ registrations, service names, patents, patent rights, patent
applications, copyrights (whether or not registered), inventions, licenses,
approvals, governmental authorizations, trade secrets and other intellectual
property rights (collectively, “Intellectual Property”)
necessary to conduct their respective businesses as now
conducted. The Company and its Subsidiaries have taken reasonable
security measures to protect the secrecy, confidentiality and value of all
of
their material Intellectual Property.
3.13 Environmental
Laws. Each
of the Company and its Subsidiaries (i) is, and has at all times been, in
compliance in all material respects with any and all Environmental Laws (as
defined below) and has not violated any Environmental Laws, (ii) has no,
and has never had any, liability for failure to comply with any Environmental
Law, (iii) has received all permits, licenses or other approvals required of
it
under applicable Environmental Laws to conduct its business as presently
conducted, and (iv) is in compliance with all terms and conditions of
any such permit, license or approval except with respect to clauses (i) through
(iv) as could not reasonably be expected to have a Material Adverse
Effect. As used in this Agreement, “Environmental
Laws” means all Laws relating to any matter arising out of or relating
to public health and safety, or pollution or protection of the environment
(including ambient air, surface water, groundwater, land surface or subsurface
strata) or workplace, including any of the foregoing relating to the presence,
use, production, generation, handling, transport, treatment, storage, disposal,
distribution, discharge, emission, release, threatened release, control or
cleanup of any Hazardous Materials, including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, 42 U.S.C. §9601 et seq., as
amended (“CERCLA”), the Resource Conservation and Recovery Act of 1976, as
amended, 42 U.S.C. §6901, et seq., the Clean Air Act, 42 U.S.C. §7401, et seq.,
as amended, the Federal Water Pollution Control Act, 33 U.S.C. §1251, et seq.,
as amended, the Oil Pollution Act of 1990, 33 U.S.C. §2701, et seq., and the
Toxic Substances ▇▇▇▇▇▇▇ ▇▇▇, ▇▇ ▇.▇.▇. §▇▇▇▇, et seq.
3.14 Title. Except
as set forth in Schedule 3.14, neither the Company nor any of its
Subsidiaries has any interest in Oil and Gas Property or any oil, gas or other
mineral drilling, exploration or development rights. The Company and
each of its Subsidiaries has valid title to all personal property currently
possessed by them that is material to the business of such Person, in each
case
free and clear of all Liens except such as are described in
Schedule 3.14 and Permitted Liens. The Company and each
of its Subsidiaries has indefeasible title to all Oil and Gas Property owned
(rather than leased) by such Person (the “Owned Oil and Gas
Property”) as set forth on Schedule 3.14, in each case free and
clear of all Liens, other than Permitted Liens, except such as are described
in
Schedule 3.14. As used in this Agreement, “Permitted
Lien” means (I) Liens created by the Security Documents; (II) Liens for
taxes or other governmental charges not at the time due and payable, or which
are being contested in good faith by appropriate proceedings diligently
prosecuted, so long as foreclosure, distraint, sale or other similar proceedings
have not been initiated, and in each case for which the Company and its
Subsidiaries maintain adequate reserves in accordance with GAAP in respect
of
such taxes and charges; (III) Liens arising in the ordinary course of business
in favor of carriers, warehousemen, mechanics and materialmen, or other similar
Liens imposed by law, which remain payable without penalty or which are being
contested in good faith by appropriate proceedings diligently prosecuted, which
proceedings have the effect of preventing the forfeiture or sale of the property
subject thereto, and in each case for which adequate reserves in accordance
with
GAAP are being maintained; (IV) Liens arising in the ordinary course of business
in connection with worker’s compensation, unemployment compensation and other
types of social security (excluding Liens arising under ERISA); (V) attachments,
appeal bonds (and cash collateral securing such bonds), judgments and other
similar Liens, for sums not exceeding $100,000 in the aggregate for the Company
and its Subsidiaries, arising in connection with court proceedings,
provided that the execution or other enforcement of such Liens is
effectively stayed; (VI) easements, rights of way, restrictions, minor defects
or irregularities in title and other similar Liens arising in the ordinary
course of business and not materially detracting from the value of the property
subject thereto and not interfering in any material respect with the ordinary
conduct of the business of the Company or any of its Subsidiaries; (VII) surety
bonds, bids, performance bonds, and similar obligations (exclusive of
obligations for the payment of borrowed money) obtained by the Company and
its
Subsidiaries in the ordinary course of business for the purpose of satisfying
federal, state, provincial and territorial and/or local legal requirements
for
owning and operating their oil and gas properties; (VIII) Oil and Gas Liens;
and
(IX) Liens arising solely by virtue of any statutory or common law provision
relating to banker’s liens, rights of set-off or similar rights and remedies and
burdening only deposit accounts or other funds maintained with a creditor
depository institution, provided that no such deposit account is a
dedicated cash collateral account or is subject to restrictions against access
by the depositor in excess of those set forth by regulations promulgated by
the
Board of Governors of the U.S. Federal Reserve System and that no such deposit
account is intended by the Company or any of its Subsidiaries to provide
collateral to the depository institution. As used in this Agreement,
“Security Documents” means the Security Agreement, the
Guaranty, the Pledge Agreement, the Mortgages and any other agreements,
documents and instruments executed concurrently herewith or at any time
hereafter pursuant to which the Company, its Subsidiaries, or any other Person
either (i) guarantees payment or performance of all or any portion of the
obligations hereunder or under any other instruments delivered in connection
with the transactions contemplated hereby and by the other Transaction
Documents, and/or (ii) provides, as security for all or any portion of such
obligations, a Lien on any of its assets in favor of Buyer, as any or all of
the
same may be amended, supplemented, restated or otherwise modified from time
to
time. “Oil and Gas Liens” means (i) Liens of
operators and non operators under joint operating agreements arising in the
ordinary course of the business of the Company or its Subsidiaries to secure
amounts owing, which amounts are not yet due and will be paid in accordance
with
customary business practices, as same exist on the date hereof, or are being
contested in good faith by appropriate proceedings diligently prosecuted, so
long as foreclosure, distraint, sale or other similar proceedings have not
been
initiated, and in each case for which the Company and its Subsidiaries maintain
adequate reserves in accordance with GAAP in respect of such taxes and charges;
(ii) Liens on an oil or gas producing property to secure obligations incurred
or
guarantees of obligations incurred (in each case, other than Indebtedness)
in
connection with or necessarily incidental to commitments for the purchase or
sale of, or the transportation or distribution of, the production from such
property which obligations are not yet due and will be paid in accordance with
customary business practices, as same exist on the date hereof, or are being
contested in good faith by appropriate proceedings diligently prosecuted, so
long as foreclosure, sale or other similar proceedings have not been initiated;
and (iii) Liens on pipelines or pipelines facilities that arise by operation
of
law securing obligations which are not yet due and will be paid in accordance
with customary business practices, as same exist on the date hereof, or are
being contested in good faith by appropriate proceedings diligently prosecuted,
so long as foreclosure, sale or other similar proceedings have not been
initiated, and in each case for which the Company and its Subsidiaries maintain
adequate reserves in accordance with GAAP in respect of such taxes and
charges.
3.15 Insurance. The
Company and each of its Subsidiaries have insurance policies (or the operators
of its non-operated properties are required to carry insurance policies) against
such losses and risks and in such amounts as management of the Company believes
to be prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged.
3.16 Regulatory
Permits. Except
as could not, individually or in the aggregate, reasonably be expected to have
a
Material Adverse Effect (as defined in Section 3.1) or a material adverse effect
on the production, extraction, transportation or sale of oil, gas, minerals
or
other hydrocarbons from any portion of the Owned Oil and Gas Property (as
defined in Section 3.14) that is producing oil, gas, minerals and/or other
hydrocarbons at the time this representation is made, the Company and its
Subsidiaries possess all certificates, authorizations, approvals, licenses
and
permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses as conducted at
the
time this representation is made (“Permits”), and neither the
Company nor any such Subsidiary has received any notice of proceedings relating
to the revocation or modification of any such Permit. Without
limiting the foregoing, the Company and its Subsidiaries possess all Permits
necessary to produce, extract, transport and sell the oil, gas and other
minerals in that portion of Oil and Gas Property that is producing oil, gas,
minerals and/or other hydrocarbons at the time this representation is
made. Except as could not reasonably be expected to have a Material
Adverse Effect, the Company and its Subsidiaries have no reason to believe
that
they will not be able to obtain necessary Permits as and when necessary to
enable the Company to produce, extract, transport and sell the oil, gas,
minerals and other hydrocarbons in the Oil and Gas Property. The
Company is not in violation of any of the rules, regulations or requirements
of
the OTC Bulletin Board (the “Principal
Market”).
3.17 Internal
Accounting Controls; Disclosure Controls and Procedures; Books and
Records. The
Company has, and has caused each of its Subsidiaries to, at all times keep
books, records and accounts with respect to all of such Person’s business
activities, in accordance with sound accounting practices and GAAP consistently
applied. The Company and each of its Subsidiaries maintains a system
of internal accounting controls sufficient to provide reasonable assurance
that
(i) transactions are executed in accordance with management’s general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset and liability accountability, (iii)
access to assets or incurrence of liability is permitted only in accordance
with
management’s general or specific authorization and (iv) the recorded
accountability for assets and liabilities is compared with the existing assets
and liabilities at reasonable intervals and appropriate action is taken with
respect to any differences. The Company has filed all certifications
and statements required by (A) Rule 13a-14 or Rule 15d-14 under
the 1934 Act and (B) Section 906 of Sarbanes Oxley with respect to any
Company SEC Documents. The Company maintains disclosure controls and
procedures required by Rule 13a-15 or Rule 15d-15 under the
1934 Act; except as set forth in Schedule 3.17, such disclosure
controls and procedures are, and at all times have been, effective to ensure
that the information required to be disclosed by the Company in the reports
that
it files with or submits to the SEC (X) is recorded, processed, summarized
and reported accurately within the time periods specified in the SEC’s rules and
forms and (Y) is accumulated and communicated to the Company’s management,
including its principal executive officer and principal financial officer,
as
appropriate to allow timely decisions regarding required
disclosure. The Company maintains internal control over financial
reporting required by Rule 13a-14 or Rule 15d-14 under the
1934 Act; except as set forth in Schedule 3.17, such internal
control over financial reporting is, and has at all times been, effective and
does not contain, and has not contained, any material weaknesses.
3.18 Tax
Status. Except
as set forth in Schedule 3.18, the Company and each of its Subsidiaries
(i) has made or filed all foreign, federal and state income and all other tax
returns, reports and declarations required by any jurisdiction to which it
is
subject, (ii) has paid all taxes and other governmental assessments and charges
that are material in amount, shown or determined to be due on such returns,
reports and declarations, except those being contested in good faith and for
which the Company has made appropriate reserves on its books, and (iii) has
set
aside on its books provisions reasonably adequate for the payment of all taxes
for periods subsequent to the periods to which such returns, reports or
declarations (referred to in clause (i) above) apply. Except as set
forth in Schedule 3.18, there are no unpaid taxes in any material amount
claimed in writing to be due from the Company or any of its Subsidiaries by
the
taxing authority of any jurisdiction, and there is no basis for any such
claim. Neither the Company nor any of its Subsidiaries is a “United
States real property holding corporation” (“USRPHC”) as that
term is defined in Section 897(c)(2) of the Internal Revenue Code of 1986,
as
amended, and the Treasury Regulations promulgated thereunder.
3.19 Transactions
With
Affiliates. Except
as set forth on Schedule 3.19, no Related Party (as defined below) of the
Company or any of its Subsidiaries, nor any Affiliate thereof, is presently,
or
will be as a result of the transactions contemplated by this Agreement and
the
other Transaction Documents, a party to any transaction, contract, agreement,
instrument, commitment, understanding or other arrangement or relationship
with
the Company or any of its Subsidiaries, whether for the furnishing of services
to or by, providing for rental of real or personal property to or from, or
otherwise requiring payments or consideration to or from any such Related
Party. Except as set forth on Schedule 3.19, no Related Party
of the Company or any of its Subsidiaries, or any of their respective
Affiliates, has any direct or indirect ownership interest in any Person (other
than ownership of less than 2% of the outstanding common stock of a publicly
traded corporation) in which the Company or any of its Subsidiaries has any
direct or indirect ownership interest or with which the Company or any of its
Subsidiaries competes or has a business
relationship. “Related Party” means a Person’s or
any of its subsidiary’s officers, directors, persons who were officers or
directors at any time, from and as of December 31, 2007, stockholders (other
than any holder of less than 5% of the outstanding shares of such Person),
or
Affiliates of such Person. As used in this Agreement,
“Affiliate” means, with respect to any Person, another Person
that, directly or indirectly, (i) has a 5% equity interest in that Person,
(ii) has a common ownership with that Person, (iii) controls that Person,
(iv) is controlled by that Person or (v) shares common control with that Person;
and “control” or “controls” means that a
Person has the power, direct or indirect, to conduct or govern the policies
of
another Person.
3.20 Application
of
Takeover Protections; Rights Agreement. The
Company and its board of directors have taken all necessary action, if any,
in
order to render inapplicable any control share acquisition, business
combination, or other similar anti-takeover provision under the Certificate
of
Incorporation or any certificates of designations or the laws of the
jurisdiction of its formation or incorporation to the transactions contemplated
by this Agreement, the Company’s issuance of the Securities in accordance with
the terms hereof and any Buyer’s ownership of the Securities. The
Company has not adopted a stockholder rights plan or similar arrangement
relating to accumulations of beneficial ownership of Common Stock or a change
in
control of the Company.
3.21 Foreign
Corrupt Practices. Neither
the Company, nor any of its Subsidiaries, nor any director, officer, agent,
employee or other person acting on behalf of the Company or any of its
Subsidiaries has, in the course of its actions for, or on behalf of, the
Company, used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expenses relating to political activity; made
any direct or indirect unlawful payment to any foreign or domestic government
official or employee from corporate funds; violated or is in violation of any
provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or
made
any unlawful bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or
employee.
3.22 Outstanding
Indebtedness, Permitted Indebtedness and Liens. Except
as set forth on Schedule 3.22, (i) neither the Company nor any of
its Subsidiaries has any, and upon consummation of the transactions contemplated
hereby and by the other Transaction Documents will not have any, outstanding
Indebtedness or trade account payables other than pursuant to the Transaction
Documents, (ii) there are no, and upon consummation of the transactions
contemplated hereby and by the other Transaction Documents there will not be
any, Liens other than Permitted Liens on any of the assets of the Company and
its Subsidiaries, and (iii) there are no, and upon consummation of the
transactions contemplated hereby and by the other Transaction Documents there
will not be any, Uniform Commercial Code financing statements or similar
filings, registrations or recordings evidencing Liens in respect of any
obligations of Indebtedness of any amounts filed against the Company or any
of
its Subsidiaries or any of their respective assets, other than under the
Security Agreement.
3.23 Ranking
of
Note. No
Indebtedness of the Company is, or will be upon consummation of the transactions
contemplated hereby and by the other Transaction Documents, senior to or pari
passu with the Note in right of payment, whether with respect of payment of
redemptions, interest or principal.
3.24 Oil
and
Gas Property. Schedule
3.24 contains a complete and correct list of all the (i) real property;
leasehold interests; fee interests; oil, gas and other mineral interests
drilling, exploration and development rights; pooling, spacing, communitization
and unitization rights and interests; royalty interests, overriding royalty
interests, and other interests in payments out of or pursuant to production;
other rights and interests in and to oil, gas and other minerals, including
contractual rights to production, concessions, back in after payout interests,
net profits interests, working interests, carried working interests and
participation interests (including all Hydrocarbon Property (as defined in
the
Mortgages)); and (ii) any options, acquisition agreements, joint development
agreements, area of mutual interest agreements, farmins, farmouts, exploration
agreements or other contractual rights for the acquisition or earning of any
interests of the types set forth in subpart (i) hereof (including any of the
foregoing acquired after the date of this Agreement and all facilities, fixtures
and equipment relating or incidental to such interests, singularly, an
“Oil and Gas Property” and collectively, the “Oil and
Gas Properties”), which list identifies all of the Oil and Gas
Properties and specifies which of the Company and its Subsidiaries leases,
owns
or possesses each of the Oil and Gas Properties. The oil, gas and/or
mineral leases, deeds, pooling, spacing, communitization and unitization orders,
rights and agreement and contracts and other agreements, as set forth in
Schedule 3.24 included in the Oil and Gas Properties (not including
easements, rights of way, access agreements, surface damage agreements, surface
use agreements or similar agreements that pertain to the Oil and Gas Property)
are collectively referred to herein as the
“Leases”. Except as set forth in Schedule
3.24, the Company or one of its Subsidiaries possesses indefeasable title to
the Oil and Gas Property, free and clear of all Liens (other than Permitted
Liens) and encumbrances that could impair the ability of the Company and its
Subsidiaries to realize the benefits of the rights provided to any of them
under
the Leases. Except as set forth on Schedule 3.24, there are no
pending or, to the Company’s Knowledge, threatened in writing condemnation,
eminent domain or similar proceedings, or litigation or other proceedings
affecting any Oil and Gas Property, or any portion or portions
thereof. Except as set forth on Schedule 3.24, no well
included in the Oil and Gas Properties is subject to a Payout Balance and
Schedule 3.24 correctly reflects the Payout Balance for each well listed
thereon as being subject to a Payout Balance. “Payout
Balance” means the status, as of the date set forth in Schedule
3.24 of the recovery by the Company, its Subsidiaries or a third person of
a
cost amount specified in the contract relating to a well out of the revenue
from
such well where the net revenue interest of the Company or any of its
Subsidiaries therein will be reduced or the working interest therein will be
increased when such amount has been recovered.
3.25 Leases,
Performance of Obligations. All
of the Leases are valid and in full force and effect and are enforceable against
all parties thereto. Neither the Company nor any of its Subsidiaries
nor, to the Company’s Knowledge, any other party thereto is in default in any
material respect under any of such Leases and no event has occurred which with
the giving of notice and/or the passage of time could constitute a default
under, or otherwise give any party the right to terminate, any of such Leases,
or affect the Company’s or any of its Subsidiaries’ interest in and title to the
Oil and Gas Property arising under any of such Leases. No Lease is
subject to termination, modification or acceleration as a result of the
transactions contemplated hereby and the transactions contemplated hereby
(including the granting of the Mortgages) will not make any right of first
refusal exercisable by any third party with respect to any of the Oil and Gas
Properties. Except as set forth in Schedule 3.25, all of the
Leases will remain in full force and effect upon, and permit, the consummation
of the transactions contemplated hereby and by the other Transaction Documents
(including the granting of leasehold mortgages). There are no
restrictions applicable to any Oil and Gas Property that would interfere with
the Company’s or any of its Subsidiary’s making an assignment or granting of a
Mortgage to any Buyer as contemplated by the Security Documents, including
any
requirement under any Lease. The Leases will by their terms remain in
effect for at least as long as oil, gas or other minerals are produced in paying
quantities, all required royalty payments are made or they are otherwise
maintained by operations.
3.26 Operation
of Oil and Gas Property, Marketing. Except
as set forth in Schedule 3.26, all of the ▇▇▇▇▇ on the Oil and Gas
Properties have been drilled and completed, or plugged and abandoned, at legal
locations within the boundaries set forth in the appropriate Lease; and no
such
well is subject to penalties on allowables after the date hereof because of
any
overproduction or violation of applicable laws, rules, regulations, permits
or
judgments, orders or decrees of any court or governmental body or agency which
would prevent such well from being entitled to its full legal and regular
allowance from and after the date hereof as prescribed by any court or
Governmental Entity. Except as set forth in Schedule 3.26,
there are no joint operating agreements applicable to any Oil and Gas
Property. The Company and the Subsidiaries will not be obligated, as
of the Closing Date or thereafter, including by virtue of a prepayment
arrangement, make-up right under a production sales contract containing a “take
or pay” or similar provision, production payment, buydowns, buyouts, or any
other arrangement, (i) to deliver hydrocarbons, or proceeds from the sale
thereof, attributable to any of the Oil and Gas Properties at some future time
without then or thereafter receiving the full contract price therefor, or (ii)
to deliver oil or gas (or cash in lieu thereof) from any Oil and Gas Property
to
other owners of interests as a result of past production by the Company or
the
Subsidiaries or any of their predecessors in excess of the share to which it
was
entitled with respect to such Oil and Gas Property. Except as set
forth in Schedule 3.26, no Person has any call upon, option to purchase
or similar right to obtain production from any portion of the Oil and Gas
Property and no Oil and Gas Property or production therefrom is subject to
any
forward sales contract or other hedging arrangement. Except as set
forth in Schedule 3.26, all oil and gas production proceeds payable by
the Company or its Subsidiaries to others from the Oil and Gas Properties under
the applicable terms of the Leases or under applicable Laws, including all
royalties, overriding royalties and net profits interests, have been disbursed
and all deductions from those oil and gas production proceeds have been made
in
accordance with the applicable terms and conditions of those Leases and Laws,
except for revenues which are properly being suspended or held in accordance
with applicable Laws, and (iii) the Company and its Subsidiaries are in
compliance in all material respects with all applicable Laws pertaining to
escheatment.
3.27 Tangible
Assets. The
Company and its Subsidiaries have defensible title to all of their tangible
assets (the “Assets”), all of which are free and clear of any
Lien, other than Permitted Liens, and include all assets necessary for the
conduct of the Company’s business as presently proposed to be
conducted. The Assets that are pipelines, facilities, fixtures,
equipment, and other personal property have been maintained in all material
respects in accordance with normal industry practice, and are in good operating
condition and repair (subject to normal wear and tear), and are suitable for
the
purposes for which they are now used and proposed to be used. There
are no existing agreements, options, commitments or rights with, of or to any
Person to acquire any assets, or any interests therein.
3.28 Investment
Company. The
Company is not, and upon each Closing will not be, an “investment company,” a
company controlled by an “investment company,” or an “affiliated person” of, or
“promoter” or “principal underwriter” for, an “investment company,” as such
terms are defined in the Investment Company Act of 1940, as amended (the
“Investment Company Act”).
SECTION
4.
AFFIRMATIVE
COVENANTS
4.1 Best
Efforts. Each
party shall use its reasonable best efforts to timely satisfy each of the
conditions to be satisfied by it as provided in Sections 6 and 7 of this
Agreement.
4.2 Reporting
Status. Until
the latest of (i) the date that is one year after the date as of which the
Investors (as that term is defined in the Registration Rights Agreement) may
sell all of the Closing Shares and all of the Warrant Shares without restriction
pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto)
and (ii) the date on which neither the Note nor the Warrant remains outstanding
(the period ending on such latest date, the “Reporting
Period”), the Company shall file all reports required to be filed with
the SEC pursuant to the 1934 Act in a timely manner (including any extensions
of
the applicable time frames permitted by Rule 12b-25 under the 1934 Act pursuant
to timely filed Forms 12b-25), and the Company shall not terminate its status
as
an issuer required to file reports under the 1934 Act even if the securities
laws would otherwise permit such termination.
4.3 Use
of Proceeds. The
Company will use the proceeds from the sale of the Closing Shares, Note and
Warrant as set forth on Schedule 4.3.
4.4 Financial
Information. The
Company agrees to send the following to each Investor (as defined in the
Registration Rights Agreement) during the Reporting Period (i) unless the
following are filed with the SEC through ▇▇▇▇▇ and are immediately available
to
the public through the ▇▇▇▇▇ system, within one Business Day after the filing
thereof with the SEC, a copy of each of its quarterly reports on Form 10-QSB
or
10-Q and annual reports on Form 10-KSB or 10-K, as the case may be (each, a
“Periodic Report”), Current Reports on Form 8-K, registration
statements (other than on Form S-8) and amendments and supplements to each
of
the foregoing, (ii) unless immediately available through Bloomberg Financial
Markets (or any successor thereto), facsimile copies of all press releases
issued by the Company or any of its Subsidiaries, contemporaneously with the
issuance thereof, and (iii) copies of any notices and other information made
available or given to the stockholders of the Company generally,
contemporaneously with the making available or giving thereof to the
stockholders.
4.5 Reservation
of Shares. The
Company shall take all action necessary to at all times have authorized, and
reserved for the purpose of issuance, no less than the aggregate number of
shares of Common Stock issuable upon Conversion of the Note and exercise of
the
Warrant.
4.6 Listing. The
Company shall take all actions necessary to remain eligible for quotation of
its
Common Stock on the OTC Bulletin Board and to cause all of the Registrable
Securities (as defined in the Registration Rights Agreement) covered by a
registration statement to be quoted thereon, unless listed on a national
securities exchange.
4.7 Disclosure
of Transactions and Other Material Information. Contemporaneous
with or prior to the earlier of (i) the Company’s first public announcement of
the transactions contemplated hereby and (ii) 4:00 p.m. (New York City time)
on
the fourth Business Day following the Closing Date, the Company shall file
the
Announcing 8-K with the SEC. The “Announcing Form
8-K,” (x) shall describe the terms of the transactions contemplated by
the Transaction Documents, including the purchase of the Closing Shares, Note
and Warrant, (y) shall include as exhibits to such Form 8-K this Agreement
(including the schedules hereto), the form of Note, the Registration Rights
Agreement, the form of Warrant, the form of Security Agreement, the form of
Guaranty, the form of Pledge Agreement, and the form of Mortgage, and (z) shall
include any other information required to be disclosed therein pursuant to
any
securities laws or other Laws. Unless required by Law, the Company
shall not make any public announcement regarding the transactions contemplated
hereby prior to the Closing. From and after the filing of the
Announcing Form 8-K with the SEC, Buyer shall not be in possession of any
material non-public information received from the Company, any of its
Subsidiaries or any of their respective officers, directors, employees or
agents. In the event that the Company believes that a notice or
communication to any Buyer or Investor after the filing date of the Announcing
8-K, contains material, non-public information relating to the Company or any
of
its Subsidiaries, the Company so shall indicate to Buyer or Investor
contemporaneously with delivery of such notice or communication, and such
indication shall provide Buyer or Investor the means to refuse to receive such
notice or communication; and in the absence of any such indication, the holders
of the Securities shall be allowed to presume that all matters relating to
such
notice or communication do not constitute material, non-public information
relating to the Company or any of its Subsidiaries. If the Buyer or
Investor elects to receive material, non-public information from the Company,
each Buyer or Investor shall as a condition to receiving such information
execute and deliver to the Company a confidentiality agreement with respect
thereto in such form as the Company may request to comply with federal and
state
securities laws.
4.8 Notices. From
the date of this Agreement until the first date following the Closing Date
on
which no Note is outstanding and the Security Agreement has terminated, the
Company shall and shall cause each of its Subsidiaries to:
(i) Locations. Promptly
(but in no event less than 20 days prior to the occurrence thereof) notify
Buyer
of the proposed opening of any new place of business or new location of
Collateral (as defined in the Security Agreement), the closing of any existing
place of business or location of Collateral, any change in the location of
such
Person’s books, records and accounts (or copies thereof), the opening or closing
of any post office box, the opening or closing of any bank account or, if any
of
the Collateral consists of Goods (as defined in the Security Agreement) of
a
type normally used in more than one state, the use of any such Goods in any
state other than a state in which such Person has previously advised Buyer
that
such Goods will be used.
(ii) Names
and Trade Names. Notify Buyer in writing (A) at least 30 days in
advance of any change in such Person’s legal name and (B) within 10 days of the
change of the use of any trade name, assumed name, fictitious name or division
name not previously disclosed to Buyer in writing.
All
of
the foregoing notices shall be provided by the Company or applicable Subsidiary
to Buyer in writing.
4.9 Compliance
with Laws and Maintenance of Permits. From
the date of this Agreement until the first date following the Closing Date
on
which neither the Note nor the Warrant is outstanding and the Security Agreement
has terminated, the Company shall, and shall cause each of its Subsidiaries
to,
maintain all governmental consents, franchises, certificates, licenses,
authorizations, approvals and permits, the lack of which would reasonably be
expected to have individually or in the aggregate a Material Adverse Effect,
and
the Company and each of its Subsidiaries shall remain in compliance with all
Laws (including Environmental Laws and Laws relating to taxes, employer and
employee contributions and similar items, securities, ERISA or employee health
and safety) the failure with which to comply would reasonably be expected to
have individually or in the aggregate a Material Adverse Effect on such
Person.
4.10 Inspection
and Audits. From
the date of this Agreement until the first date following the Closing Date
on
which the Note is no longer outstanding and the Security Agreement has
terminated, (i) the Company shall, and shall cause each of its Subsidiaries
to,
permit Buyer, or any Persons designated by Buyer, to call at such Person’s
places of business at any reasonable times, and, without hindrance or delay,
to
inspect, examine and audit the Collateral and to inspect, audit, check and
make
extracts from such Person’s books, records, journals, orders, receipts and any
correspondence and other data relating to such Person’s business, the Collateral
or any transactions between the parties hereto, and shall have the right to
make
such verification concerning such Person’s business as Buyer may consider
reasonable under the circumstances; and (ii) Buyer, through its officers,
employees or agents shall have the right, at any time and from time to time,
in
Buyer’s name, to verify the validity, amount or any other matter relating to any
of the Company’s and its Subsidiaries’ Accounts (as defined in the Security
Agreement), by mail, telephone, telecopy, electronic mail or
otherwise. Notwithstanding anything to the contrary herein, upon
written request to the Company by any Buyer, the Company shall promptly provide
Buyer with any financial, operating or other type of information requested
by
Buyer, subject to Buyer’s execution of a confidentiality agreement reasonably
acceptable to the Company with respect to such information, which execution
shall constitute a waiver, with respect to any material non-public information
regarding the Company and the Subsidiaries provided to Buyer directly in
response to such written request, of the restriction herein on the Company’s
disclosure to Buyer of material non-public information.
4.11 Insurance. From
the date of this Agreement until the first date following the Closing Date
on
which the Note is no longer outstanding and the Security Agreement has
terminated, the Company shall, and shall cause each of its Subsidiaries
to:
(i) Keep
the Collateral properly housed (to the extent customary in the oil and gas
business) and insured for the full insurable value thereof against loss or
damage by fire, theft, explosion, sprinklers, collision (in the case of motor
vehicles) and such other risks with companies that regularly insure Persons
engaged in businesses similar to that of the Company or applicable Subsidiary,
such coverage and the premiums payable in respect thereof to be acceptable
in
scope and amount to the Collateral Agent. Within 60 days after the
filing of the Announcing 8-K, original (or certified) copies of such policies
of
insurance shall be delivered to Buyer, together with evidence of payment of
all
premiums therefor, and shall contain an endorsement, in form and substance
reasonably acceptable to Collateral Agent, showing loss under such insurance
policies payable to Collateral Agent. Such endorsement, or an
independent instrument furnished to the Collateral Agent, shall provide that
the
insurance company shall give the Collateral Agent at least 30 days’ written
notice before any such policy of insurance is altered or canceled and that
no
act, whether willful or negligent, or default of such Company or applicable
Subsidiary or any other Person shall affect the right of the Collateral Agent
to
recover under such policy of insurance in case of loss or damage.
(ii) Maintain,
at its expense, such public liability and third party property damage insurance
with companies that regularly insure Persons engaged in businesses similar
to
that of the Company or applicable Subsidiary, such coverage and the premiums
payable in respect thereof to be acceptable in scope and amount to the
Collateral Agent. Within 60 days after the filing of the Announcing
8-K, original (or certified) copies of such policies have been delivered to
Buyer, together with evidence of payment of all premiums therefor; each such
policy shall contain an endorsement showing the Collateral Agent as an
additional insured thereunder and providing that the insurance company shall
give Collateral Agent at least 30 days’ written notice before any such policy
shall be altered or canceled.
If
the
Company or any of its Subsidiaries at any time or times hereafter shall fail
to
obtain or maintain any of the policies of insurance required above or to pay
any
premium relating thereto, Buyer, without waiving or releasing any obligation
or
default by the Company hereunder, may (but shall be under no obligation to)
obtain and maintain such policies of insurance and pay such premiums and take
such other actions with respect thereto as Buyer deems
advisable. Such insurance, if obtained by Buyer, may, but need not,
protect the Company’s and its Subsidiaries’ interests or pay any claim made by
or against the Company and its Subsidiaries with respect to the
Collateral. Such insurance may be more expensive than the cost of
insurance the Company and its Subsidiaries may be able to obtain on their own
and may be cancelled only upon the Company and its Subsidiaries’ providing
evidence that they have obtained the insurance as required above. All
sums disbursed by Buyer in connection with any such actions, including court
costs, expenses, other charges relating thereto and reasonable attorneys’ fees,
shall constitute Indebtedness under the Note, shall be payable on demand by
the
Company to Buyer and, until paid, shall bear interest at the highest rate then
applicable to principal under the Note.
4.12 Collateral. From
the date of this Agreement until the first date following the Closing Date
on
which the Note is no longer outstanding, the Company shall, and shall cause
its
Subsidiaries to maintain the Collateral in good condition, repair and order
(ordinary wear and tear excepted) and shall make all necessary repairs to the
Equipment (as defined in the Security Agreement) and replacements thereof so
that the operating efficiency and the value thereof shall at all times be
preserved and maintained.
4.13 Taxes. From
the date of this Agreement until the first date following the Closing Date
on
which the Note is no longer outstanding, the Company shall, and shall cause
each
of its Subsidiaries to file all required tax returns and pay all of its taxes
when due, subject to any extensions granted by the applicable taxing authority,
including taxes imposed by federal, state or municipal agencies, and shall
cause
any Liens for taxes to be promptly released; provided, that Person shall
have the right to contest the payment of such taxes in good faith by appropriate
proceedings so long as (i) the amount so contested is shown on such
Person’s financial statements; (ii) the contesting of any such payment does
not give rise to a Lien for taxes; (iii) such Person keeps on deposit with
the Collateral Agent (such deposit to be held without interest) an amount of
money which, in the sole judgment of the Collateral Agent, is sufficient to
pay
such taxes and any interest or penalties that may accrue thereon; and
(iv) if such Person fails to prosecute such contest with reasonable
diligence, the Collateral Agent may apply the money so deposited in payment
of
such taxes. If the Company or applicable Subsidiary fails to pay any
such taxes (other than taxes not yet due, subject to an extension or subject
to
a contest) and in the absence of any such contest by such Person, Buyer may
(but
shall be under no obligation to) advance and pay any sums required to pay any
such taxes and/or to secure the release of any Lien therefor, and any sums
so
advanced by Buyer shall constitute Indebtedness under the Note, shall be payable
by the Company to Buyer on demand, and, until paid, shall bear interest at
the
highest rate then applicable to principal under the Note.
4.14 Intellectual
Property. From
the date of this Agreement until the first date following the Closing Date
on
which the Note is no longer outstanding, the Company shall and shall cause
each
of its Subsidiaries to maintain adequate licenses, patents, patent applications,
copyrights, service marks and trademarks to continue its business as presently
proposed to be conducted by it or as hereafter conducted by it, unless the
failure to maintain any of the foregoing would not reasonably be expected to
have a Material Adverse Effect.
4.15 Patriot
Act, Investor Secrecy Act and Office of Foreign Assets Control. As
required by federal law and Buyer’s policies and practices, Buyer may need to
obtain, verify and record certain customer identification information and
documentation in connection with opening or maintaining accounts, or
establishing or continuing to provide services, and, from the date of this
Agreement until the first date following the Closing Date on which the Note
is
no longer outstanding, the Company agrees to, and shall cause each of its
Subsidiaries to, provide such information as reasonably requested by
Buyer.
4.16 Drilling
Title Opinions. From
the date of this Agreement until the first date following the Closing Date
on
which the Note is no longer outstanding, prior to the Company’s or any of its
Subsidiaries’ drilling on any of the Oil and Gas Property, the Company or such
Subsidiary will obtain a customary drilling title opinion with respect to such
drillsite. Upon written request to the Company by Buyer, the Company
shall promptly provide Buyer with a copy of such drilling title
opinion.
4.17 Security
Covenants. From
the date of this Agreement until the first date following the Closing Date
on
which the Note is no longer outstanding, Company shall, and shall cause each
of
its Subsidiaries to, at its own cost and expense, cause to be promptly and
duly
taken, executed, acknowledged and delivered all such further acts, documents
and
assurances as may from time to time be necessary or as Buyer or the Collateral
Agent may from time to time request in order to carry out the intent and
purposes of this Agreement, the Security Documents and the other Transaction
Documents and the transactions contemplated hereby and thereby, including all
such actions to establish, create, preserve, protect and perfect a first
priority Lien (subject only to Permitted Liens) in favor of the Collateral
Agent
for the benefit of Buyer on the Collateral (as each term is defined in the
Security Agreement, and including Collateral acquired after the date hereof),
including on any and all assets of the Company and each of its Subsidiaries,
whether now owned or hereafter acquired.
(i) Without
limiting the generality of the foregoing, in the event that the Company or
any
of its Subsidiaries shall, at any time from the date of this Agreement until
the
first date following the Closing Date on which the Note is no longer
outstanding, acquire or form any new Subsidiary after the date hereof, the
Company shall, or shall cause the respective Subsidiary to cause such new
Subsidiary, upon such acquisition or concurrently with such formation, as
applicable, (A) to execute, and thereafter perform its obligations under, the
Security Agreement and the Guaranty and to take such other action (including
authorizing the filing of such UCC financing statements and delivering
certificates in respect of the equity securities of such Subsidiary) as shall
be
necessary or appropriate to establish, create, preserve, protect and perfect
a
first priority Lien (subject only to Permitted Liens) in favor of Collateral
Agent for the benefit of Collateral Agent and Buyer on all assets, both real
and
personal, in which such new Subsidiary has or may thereafter acquire any
interest, (B) to execute such other Security Documents, in form and content
acceptable to Collateral Agent, as may be required or requested by Collateral
Agent in connection with the actions contemplated by the preceding clause (A),
and (C) to deliver such proof of corporate (or comparable) action, incumbency
of
officers, opinions of counsel and other documents as Collateral Agent shall
have
required or requested.
(ii) From
the date of this Agreement until the first date following the Closing Date
on
which the Note is no longer outstanding, (A) the Company shall, and shall cause
each of its Subsidiaries to, take such action from time to time as shall be
necessary to ensure that each of its Subsidiaries is a wholly-owned Subsidiary,
and that Collateral Agent shall have, for the benefit of Collateral Agent and
Buyer, a first priority Lien on all capital stock or other equity securities
of
each of its Subsidiaries concurrently with acquisition or formation of such
Subsidiary; and (B) in the event that any additional capital stock or other
equity securities shall be issued by any of its Subsidiaries, the Company shall
or shall cause each of its Subsidiaries to, concurrently with such issuance,
deliver to Collateral Agent, to the extent required by the applicable Security
Documents, the certificates evidencing such securities, accompanied by undated
powers executed in blank and to take such other action as Collateral Agent
shall
request to perfect the security interest created therein pursuant to such
Security Documents. As used in this Agreement, “Capital
Stock” means any and all shares, interests, participations or other
equivalents (however designated) of capital stock of a corporation, any and
all
equivalent ownership interests in a Person (other than a corporation) and any
and all warrants, rights or options to purchase any of the
foregoing.
(iii) At
any time from the date of this Agreement until the first date following the
Closing Date on which the Note is no longer outstanding, concurrently with
the
acquisition by the Company or any of its Subsidiaries, of any real estate or
Oil
and Gas Property leasehold interests, the Company shall deliver or cause to
be
delivered to the Collateral Agent, with respect to such real estate, (A) a
mortgage or deed of trust, as applicable, in form and substance satisfactory
to
the Collateral Agent, executed by the title holder thereof, (B) with
respect to any real estate owned by the Company not constituting Oil and Gas
Property, an ALTA lender’s title insurance policy issued by a title insurer
reasonably satisfactory to the Collateral Agent in form and substance and in
amounts reasonably satisfactory to the Collateral Agent ensuring the Collateral
Agent’s first priority Lien on such real estate, free and clear of all defects,
encumbrances and Liens except Permitted Liens.
(iv) From
the date of this Agreement until the first date following the Closing Date
on
which the Note is no longer outstanding, the Company shall, and shall cause
each
of its Subsidiaries to, (A) refrain from engaging to any substantial extent
in
any business other than the exploration and development of natural gas and
oil
reserves within the United States and business reasonably related thereto or
in
furtherance thereof, and (B) preserve, renew and keep in full force and effect
their respective material rights, privileges and franchises necessary or
desirable in the normal conduct of their business.
4.18 Subsidiary
Interests. From
the date of this Agreement until the first date following the Closing Date
on
which the Note is no longer outstanding, all of the equity interests of each
of
the Subsidiaries shall be certificated or otherwise represented in tangible
form.
4.19 Submission
of Matters to a Stockholder Vote. From
the date of this Agreement until the earlier of the (i) second anniversary
of
the Closing Date, the Company shall comply with the requirements of Section
312.03 of the New York Stock Exchange Listed Company Manual as to matters
requiring the prior approval of the Company’s stockholders or (ii) the date on
which the Common Stock is listed on the Toronto Stock Exchange.
4.20 Subsidiary
Certificates. By
no later than the third date following the Closing Date, the Company shall
deliver to the Buyer certificates representing 100% of the ownership interests
in each of the Subsidiaries (and corresponding stock powers executed in
blank).
SECTION
5.
NEGATIVE
COVENANTS
From
the
date hereof until the date the Note is no longer outstanding, the Company
covenants and agrees as follows:
5.1 Stay,
Extension and Usury Laws. 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 that
would prohibit or forgive it from paying all or any portion of any principal
of,
or interest or premium on the Note as contemplated herein or therein, wherever
enacted, now or at any time hereafter in force, or which may affect the
covenants or the performance of any of the Transaction Documents; and the
Company (to the extent it may lawfully do so) hereby expressly waives all
benefit or advantage of any such Law, and covenants that it will not, by resort
to any such law, hinder, delay or impede the execution of any power herein
granted to any Buyer, but will suffer and permit the execution of every such
power as though no such law has been enacted.
5.2 Payment
Restrictions Affecting Subsidiaries. The
Company shall not, nor will it permit any of its Subsidiaries to, enter into
or
assume any agreement prohibiting or otherwise restricting the creation or
assumption of any Lien upon its properties or assets, whether now owned or
hereafter acquired, or requiring the grant of any security for an obligation,
except to the extent any such agreement provides for Permitted
Liens. Except as provided herein, the Company shall not and shall not
cause or permit its Subsidiaries to directly or indirectly create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
consensual restriction of any kind on the ability of any such Subsidiary
to: (1) pay dividends or make any other distribution on any of such
Subsidiary’s capital stock owned by the Company or any other Subsidiary; (2) pay
any Indebtedness owed to the Company or any other Subsidiary; (3) make loans
or
advances to the Company or any other Subsidiary; or (4) transfer any of its
property or assets to the Company or any other Subsidiary.
5.3 Prepayments. The
Company shall not, nor will it permit any of its Subsidiaries to, prepay any
Indebtedness that is in parity with or subordinate to the Note by structure
or
contract.
5.4 Indebtedness. The
Company shall not, and shall cause each of its Subsidiaries not to, create,
incur, assume, extend the term of, or guaranty or otherwise become obligated
with respect to, any Indebtedness other than Indebtedness under the Note issued
pursuant to this Agreement, except that the Company and its Subsidiaries may
incur Indebtedness for borrowed money and trade payables in an aggregate amount
outstanding not in excess of $1,750,000 in addition to permitted Indebtedness
identified in Schedule 3.22 outstanding on the Closing Date.
5.5 Liens. The
Company shall not, and shall cause each of its Subsidiaries not to, grant any
Lien, claim, security interest or other encumbrance whatsoever on any of its
assets, other than Permitted Liens.
5.6 Sale
of Collateral. Neither
the Company nor any of the Subsidiaries shall sell, transfer, farm-out, assign
or dispose of any Oil and Gas Property (and any of the Collateral used in
connection with the operation of such Oil and Gas Property) (a
“Collateral Disposition”), without the prior written consent of
the holders of at least 51% of the aggregate principal amount of the Notes
then
outstanding, which consent shall not be unreasonably withheld.
5.7 Corporate
Existence; Leases. The
Company shall maintain its corporate existence and shall not sell all or any
material portion of the Company’s assets (including, for the avoidance of any
doubt, all or any material portion of the assets of the Subsidiaries in the
aggregate). From the date of this Agreement until the first date
following the Closing Date on which the Note is not outstanding, the Company
shall, and shall cause each of its Subsidiaries to, refrain from violating,
breaching or defaulting under in any respect, or taking or failing to take
any
action that (with or without notice or lapse of time or both) would constitute
a
violation or breach of, or default under, any term or provision of any Lease
to
which the Company or any of its Subsidiaries is a party, except to the extent
such violation, breach or default, action or inaction would not and would not
be
reasonably expected to have, either individually or in the aggregate, a Material
Adverse Effect
5.8 Restrictions
on Loans; Investments; Subsidiary Equity. The
Company shall not, and shall not permit any of its Subsidiaries to, (i) except
for Permitted Investments (as defined herein) in which the Collateral Agent
or
any other holder of the Note has a valid, perfected first priority security
interest, make any loans to, or investments in, any other person or entity,
including through lending money, deferring the purchase price of property or
services (other than trade accounts receivable on terms of 90 days or less),
purchasing any note, bond, debenture or similar instrument, entering into any
letter of credit, guaranteeing (or taking any action that has the effect of
guaranteeing) any obligations of any other person or entity, or acquiring any
equity securities of, or other ownership interest in, or making any capital
contribution to any other entity, (ii) invest in, participate in, lease,
purchase, obtain or otherwise acquire any real property, facilities, or oil,
gas
or other mineral drilling, exploration or development rights, concessions,
working interests or participation interests (collectively,
“Interests”) in which the Collateral Agent, on behalf of Buyer
and any other holder of the Note, is not provided with a valid, perfected first
priority security interest, subject to Permitted Liens, in such Interests on
or
prior to the date that is the earliest of (A) the tenth Business Day of the
subsequent calendar quarter, (B) 20 Business Days after the date on which the
aggregate acquisition price of such investments, participations, leases,
purchases or acquisitions exceeds $500,000 during a calendar quarter, and (C)
concurrently with any investment, participation, lease, purchase or acquisition
that has an acquisition price that individually exceeds $1,000,000, or (iii)
issue, transfer or pledge any capital stock or equity interest in any Subsidiary
to any Person other than the Company. “Permitted
Investments” means any investment in (A) direct obligations of the
United States or obligations guaranteed by the United States, in each
case which mature and become payable within 90 days of the investment by the
Company or any Subsidiary, (B) commercial paper rated at least A-1 by Standard
& Poor’s Ratings Service and P-1 by ▇▇▇▇▇’▇ Investors Services, Inc., (C)
time deposits with, including certificates of deposit issued by, any office
located in the United States of any bank or trust company which is
organized under the laws of the United States or any State thereof and has
capital, surplus and undivided profits aggregating at least $250,000,000 and
which issues (or the parent of which issues) certificates of deposit or
commercial paper with a rating described in clause (B) above, in each case
which
mature and become payable within 90 days of the investment by the Company or
any
Subsidiary, (D) repurchase agreements with respect to securities described
in
clause (A) above entered into with an office of a bank or trust company meeting
the criteria specified in clause (C) above, provided in each case that
such investment matures and becomes payable within 90 days of the investment
by
the Company or any Subsidiary, (E) any money market or mutual fund which invests
only in the foregoing types of investments and the liquidity of which is
satisfactory to the Collateral Agent, or (F) non-monetary proceeds of Permitted
Collateral Dispositions.
5.9 Equipment. The
Company shall not, and shall cause each of its Subsidiaries not to, (i) permit
any Equipment to become a fixture to Oil and Gas Property unless such Oil and
Gas Property is owned or leased by such Person and is subject to a mortgage
in
favor of the Collateral Agent, for the benefit of Buyer, and if such Oil and
Gas
Property is leased, is subject to a landlord’s agreement in favor of Buyer on
terms acceptable to the Collateral Agent, or (ii) permit any Equipment to become
an accession to any other personal property unless such personal property is
subject to a first priority perfected Lien, subject to Permitted Liens, in
favor
of the Collateral Agent, for the benefit of Buyer and any other holders of
the
Note.
5.10 Affiliate
Transactions. The
Company shall not, and shall cause each of its Subsidiaries not to, enter into,
amend, modify or supplement any transaction, contract, agreement, instrument,
commitment, understanding or other arrangement with any Related Party, except
for customary employment arrangements and benefit programs, on reasonable terms,
that are not otherwise prohibited by this Agreement.
5.11 Settling
of Accounts. The
Company shall not, and shall cause each of its Subsidiaries not to, sell,
discount, settle or adjust any Account (as defined in the Security Agreement);
provided, that the Company and its Subsidiaries may (i) discount or
settle past due Accounts on an arm’s length basis in the ordinary course of
business, and (ii) provide early payment discounts in respect of Accounts in
the
ordinary course of business, consistent with past practice.
5.12 Limitation
on Sale and Leaseback Transactions. The
Company shall not, and shall cause each of its Subsidiaries not to, directly
or
indirectly, enter into any arrangement with any Person whereby in a
substantially contemporaneous transaction the Company or any of its Subsidiaries
sells or transfers all or substantially all of its right, title and interest in
an asset and, in connection therewith, acquires or leases back the right to
use
such asset.
5.13 Investment
Company. The
Company shall not become an “investment company,” a company controlled by an
“investment company,” or an “affiliated person” of, or “promoter” or “principal
underwriter” for, an “investment company,” as such terms are defined in the
Investment Company Act of 1940.
5.14 Leases. The
Company shall not, and shall cause each of its Subsidiaries not to, violate,
breach or default under in any respect, or take or fail to take any action
that
(with or without notice or lapse of time or both) would constitute a violation
or breach of, or default under, any term or provision of, or would result in
a
reversion of rights to a Person under, any Lease to which the Company or any
of
its Subsidiaries is a party, except to the extent such violation, breach or
default, action or in-action could not reasonably be expected, individually
or
in the aggregate, to have a Material Adverse Effect.
5.15 Restriction
on
Purchases or Payments. The
Company shall not, and shall cause each of its Subsidiaries not to, (i) declare,
set aside or pay any dividends on or make any other distributions (other than
dividends or distributions to the Company’s stockholders consisting solely of
the Company’s capital stock) in respect of any capital stock; provided
however, that any Subsidiary may declare, set aside or pay any dividends on
or
make any other distributions (whether in cash, stock, equity securities or
property) in respect of any of its capital stock that is held solely by the
Company or by a domestic Subsidiary, provided that 100% of the equity of such
domestic Subsidiary is directly or indirectly owned by the Company, such
domestic Subsidiary is controlled by the Company and such domestic Subsidiary
is
a party to the Guaranty Agreement and the Security Agreement, or (ii) purchase,
redeem or otherwise acquire, directly or indirectly, any shares of the Company’s
capital stock, except repurchases of unvested shares in connection with the
termination of the employment relationship with any employee pursuant to stock
option or purchase agreements in effect on the date of this Agreement or
provisions of stock options or restricted stock issued under the Option Plan
permitting “net exercise” or retention of shares to pay taxes.
5.16 No
Avoidance of Obligations. The
Company shall not, and shall cause each of its Subsidiaries not to, enter into
any agreement which would limit or restrict the Company’s or any of its
Subsidiaries’ ability to perform under, or take any other voluntary action to
avoid or seek to avoid the observance or performance of any of the terms to
be
observed or performed by it under, this Agreement, the Note and the other
Transaction Documents.
5.17 Regulation
M. Neither
the Company, nor its Subsidiaries nor any Affiliates of the foregoing will
take
any action prohibited by Regulation M under the 1934 Act, in connection with
the
offer, sale and delivery of the Securities contemplated hereby.
5.18 Company
Contracts. The
Company shall not, and shall not permit its Subsidiaries to, enter into any
gas
purchase agreement, or any similar agreement, until each prospective customer
or
joint-operator, as the case may be, delivers to the Company and the Collateral
Agent a duly executed acknowledgment and agreement to the Notice of Assignment
of Proceeds substantially in the form of Exhibit B to the Security
Agreement.
SECTION
6.
CONDITIONS
TO THE OBLIGATION OF THE COMPANY TO SELL
The
obligation of the Company to issue and sell the Closing Shares, Note and Warrant
to Buyer at the Closing is subject to the satisfaction, at or before the Closing
Date, of each of the following conditions, provided that these conditions are
for the Company’s sole benefit and may be waived by the Company at any time in
its sole discretion by providing Buyer with prior written notice
thereof:
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(a)
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Buyer
shall have executed each of the Transaction Documents to which it
is a
party and delivered the same to the
Company.
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(b)
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Buyer
shall have delivered to the Company the Purchase Price for the Closing
Shares, Note and Warrant being purchased by Buyer at the Closing
by wire
transfer of immediately available funds pursuant to the wire instructions
provided by the Company.
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(c)
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The
representations and warranties of Buyer herein shall be true and
correct
as of the date when made and as of the Closing Date as though made
at that
time (except for representations and warranties that speak as of
a
specific date, which shall be true and correct as of such date),
and Buyer
shall have performed, satisfied and complied with the covenants,
agreements and conditions required by the Transaction Documents to
be
performed, satisfied or complied with by Buyer at or prior to the
Closing
Date.
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SECTION
7.
CONDITIONS
TO THE OBLIGATION OF THE BUYER TO PURCHASE
The
obligation of Buyer to purchase the Closing Shares, Note and Warrant from the
Company at the Closing is subject to the satisfaction, at or before the Closing
Date, of each of the following conditions, provided that these conditions are
for Buyer’s sole benefit and may be waived only by Buyer at any time in its sole
discretion by providing the Company with prior written notice
thereof:
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(a)
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Each
of the Company and each other Person (other than Buyer and the Collateral
Agent) party to the Transaction Documents shall have executed and
delivered the same to Buyer.
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(b)
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The
representations and warranties of the Company herein and in all
Transaction Documents shall be true and correct as of the date when
made
and as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date,
which
shall be true and correct as of such date) and the Company shall
have
performed, satisfied and complied with the covenants, agreements
and
conditions required by the Transaction Documents to be performed,
satisfied or complied with by the Company at or prior to the Closing
Date. Buyer shall have received a certificate, executed by the
chief executive officer of the Company, dated as of the Closing Date,
to
the foregoing effect and as to such other matters as may be reasonably
requested by Buyer.
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(c)
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Buyer
shall have received the opinions of ▇▇▇▇▇▇ & ▇▇▇▇▇▇, LLP, ▇▇▇▇ Silbey
▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇, LLP and Morris, Laing, ▇▇▇▇▇, ▇▇▇▇▇ & ▇▇▇▇▇▇▇,
Chartered, each dated as of the Closing Date, which opinions will
collectively address, among other things, certain laws of the States
of
Nevada, Texas, and Kansas applicable to the transactions contemplated
hereby and the security interests provided pursuant to the Security
Agreement, in form, scope and substance reasonably satisfactory to
Buyer.
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(d)
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The
Company shall have executed and delivered to Buyer the Note and
Warrant.
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(e)
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The
Board of the Company shall have adopted, and not rescinded or otherwise
amended or modified, resolutions consistent with Section 3(b)
above and in a form reasonably acceptable to Buyer (the
“Resolutions”).
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(f)
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As
of the Closing Date, the Company shall have reserved out of its authorized
and unissued Common Stock a sufficient number of shares to cover
the
exercise of the Warrant and the Conversion of the
Note.
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(g)
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The
Company shall have delivered to Buyer a certificate evidencing the
incorporation (or other organization) and good standing of the Company
and
each Subsidiary in such entity’s state or other jurisdiction of
incorporation or organization issued by the Secretary of State (or
other
applicable authority) of such state or jurisdiction of incorporation
or
organization as of a date within 20 days of the Closing
Date.
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(h)
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The
Company shall have delivered to Buyer a secretary’s certificate, dated as
of the Closing Date, certifying as to (A) the Resolutions,
(B) the Certificate of Incorporation, certified as of a date within
20 days of the Closing Date, by the Secretary of State of Nevada,
(C) the Bylaws of the Company, (D) the certificate or articles of
incorporation or other organizational documents of each of the Company’s
Subsidiaries, each certified as of a date within 20 days of the Closing
Date, by the Secretary of State of the state of such entity’s jurisdiction
of incorporation or organization, and (E) the bylaws or other similar
documents of each of the Company’s Subsidiaries, each as in effect at the
Closing.
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(i)
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The
Company shall have delivered to Buyer a letter from the Company’s transfer
agent certifying the number of shares of Common Stock outstanding
as of a
date within five Business Days of the Closing
Date.
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(j)
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The
Company and its Subsidiaries shall have delivered and pledged to
Buyer all
the Collateral, in each case in accordance with the Security Agreement,
the Pledge Agreement and the other Security
Documents.
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(k)
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The
Company and its Subsidiaries shall have given, executed, delivered,
filed
and/or recorded all Security Documents, Mortgages with respect to
all of
the Oil and Gas Property, and any other financing statements, notices,
instruments, documents, agreements and other papers that may be necessary
or desirable (in the reasonable judgment of Buyer) to create, preserve,
perfect or validate the security interest in all of the assets of
the
Company and its Subsidiaries granted to Buyer pursuant to the Security
Agreement and to enable Buyer to exercise and enforce its rights
with
respect to such security interest.
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(l)
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The
Company shall have delivered to Buyer drill site title opinions,
in form
and substance acceptable to Buyer, with respect to all of the Oil
and Gas
Property that is producing, or on which drilling has commenced or
is
imminent for, oil, gas, minerals and/or other hydrocarbons (the
“Producing
Property”).
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(m)
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The
Company shall have delivered to Buyer “▇▇▇▇▇▇▇ reports,” in form and
substance acceptable to Buyer, with respect to all of the Oil and
Gas
Property (other than the Producing
Property).
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(n)
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The
Company shall have reimbursed Buyer’s expenses in connection with the
transactions contemplated by this Agreement and the other Transaction
Documents pursuant to Section 8(b)
hereof.
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(o)
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The
Company shall have delivered to Buyer such other documents relating
to the
transactions contemplated by this Agreement as Buyer or its counsel
may
reasonably request.
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SECTION
8.
INDEMNIFICATION;
EXPENSES; TAXES
(i) In
consideration of Buyer’s execution and delivery of the Transaction Documents and
acquiring the Securities thereunder and in addition to all of the Company’s and
its Subsidiaries’ other obligations under the Transaction Documents, the Company
shall defend, protect, indemnify and hold harmless Buyer and each other holder
of the Securities and all of their stockholders, partners, officers, directors,
members, managers, employees and direct or indirect investors and any of the
foregoing Persons’ agents or other representatives (including those retained in
connection with the transactions contemplated by this Agreement) (collectively,
the “Indemnitees”) from and against any and all actions, causes
of action, suits, claims, losses, costs, penalties, fees, liabilities and
damages, and expenses in connection therewith (irrespective of whether any
such
Indemnitees is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys’ fees and disbursements (the
“Indemnified Liabilities”), incurred by any Indemnitees as a
result of, or arising out of, or relating to (a) any misrepresentation or
breach of any representation or warranty made by the Company or any of its
Subsidiaries in any of the Transaction Documents or any other certificate,
instrument or document contemplated hereby or thereby, (b) any breach of
any covenant, agreement or obligation of the Company or any of its Subsidiaries
contained in the Transaction Documents or any other certificate, instrument
or
document contemplated hereby or thereby, (c) any cause of action, suit or
claim brought or made against such Indemnitees and arising out of or resulting
from the execution, delivery, performance or enforcement of the Transaction
Documents in accordance with the terms thereof or any other certificate,
instrument or document contemplated hereby or thereby in accordance with the
terms thereof (other than a cause of action, suit or claim brought or made
against an Indemnitee by such Indemnitee’s owners, investors or Affiliates),
(d) any other transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of the issuance of the Securities,
or
(e) the status of Buyer or holder of the Securities as an investor in the
Company. To the extent that the foregoing undertaking by the Company
may be unenforceable for any reason, the Company shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities that is permissible under applicable law. Except as
otherwise set forth herein, the mechanics and procedures with respect to the
rights and obligations under this Section 8 shall be the same as those set
forth
in Section 6 of the Registration Rights Agreement, including those
procedures with respect to the settlement of claims and the Company’s rights to
assume the defense of claims.
(ii) The
Company shall reimburse Buyer’s expenses in connection with the transactions
contemplated by this Agreement and the other Transaction Documents to the extent
that the amount of such expenses exceeds $10,000.
(iii) Any
and all payments by or on account of any obligation of the Company or any of
its
Subsidiaries under this Agreement, the Note, the Warrant or any other
Transaction Document shall be made without any set-off, counterclaim or
deduction and free and clear of and without deduction for any Indemnified Taxes;
provided that if the Company or any of its Subsidiaries shall be required to
deduct any Indemnified Taxes from such payments, then (i) the sum payable shall
be increased as necessary so that after making all required deductions
(including Indemnified Taxes imposed or asserted on or attributable to amounts
payable under this Section 8), Buyer receives an amount equal to the sum it
would have received had no such deductions been made, (ii) the Company, or
such
Subsidiary as applicable, shall make such deductions and (iii) the Company
or
such Subsidiary shall pay the full amount deducted to the relevant Governmental
Authority in accordance with applicable law. “Indemnified
Taxes” means, with respect to Buyer, or any other recipient of payment
to be made by or on account of any obligations of the Company or any of its
Subsidiaries under this Agreement, the Note, the Warrant or under any other
Transaction Document, all Taxes other than income or franchise taxes imposed
on
(or measured by) such recipient’s net income by the United States of America or
such other jurisdiction under the laws of which such recipient is organized
or
its principal offices are located. “Taxes” means any
present or future tax, levy, impost, duty, fee, assessment, deduction,
withholding or other charge of any nature and whatever called, by whomsoever,
on
whomsoever and wherever imposed, levied, collected, withheld or assessed,
including interest, penalties, additions to tax and any similar liabilities
with
respect thereto.
(iv) The
Company shall indemnify Buyer, within ten (10) Business Days after written
demand therefor, for the full amount of any Indemnified Taxes paid by Buyer,
on
or with respect to any payment by or on account of any obligation of the Company
or any of its Subsidiaries under this Agreement, the Note, the Warrant and
the
other Transaction Documents (including Indemnified Taxes imposed or asserted
on
or attributable to amounts payable under this Section 8) and any penalties,
interest and reasonable expenses arising therefrom or with respect thereto,
whether or not such Indemnified Taxes were correctly or legally imposed or
asserted by the relevant Governmental Authority. A certificate of
Buyer as to the amount of such payment or liability under this Section 8 shall
be delivered to the Company and shall be conclusive absent manifest
error.
SECTION
9.
RIGHT
TO PARTICIPATE IN FUTURE FINANCING
Subject
to the exceptions described below, each of the Company and its Subsidiaries
agrees that during the period beginning on the date hereof and ending on the
later of (i) the six-month anniversary of the Closing and (ii) 60 days after
the
first date following the Closing on which no Note remains outstanding, neither
the Company nor its Subsidiaries will (x) contract with any party for any debt
or equity financing (including any debt financing with an equity component),
(y)
issue any debt or equity securities of the Company or any Subsidiary or
securities convertible, exchangeable or exercisable into or for debt
or equity securities of the Company or any Subsidiary
(including debt securities with an equity component) or (z) engage in “farm-out”
financing transactions or similar transactions which do not have operating
obligations by the financing party as a material component, in any form (a
“Future Offering”), unless, after it has received an offer
regarding a Future Offering that it has a bona fide intention to accept, it
shall have first delivered to Buyer (or its designee appointed by Buyer) written
notice (the “Future Offering Notice”) reporting that it has
received and is prepared to accept such offer and providing Buyer an option
(the
“Buyer Purchase Option”) to purchase up to 25% of the total
amount of securities to be issued in such Future Offering (the limitations
referred to in this and the preceding sentence are collectively referred to
as
the “Capital Raising Limitations”). No Future
Offering Notice shall contain any material non-public information regarding
the
Company or any of its Subsidiaries. Upon the written request of any
Buyer made within five Business Days after its receipt of a Future Offering
Notice (an “Additional Information Request”), the Company shall
provide Buyer with such additional information regarding the proposed Future
Offering, including terms and conditions and use of proceeds thereof, as Buyer
shall reasonably request. Buyer may exercise its Buyer Purchase
Option by delivering written notice to the Company within five Business Days
after the later of (i) Buyer’s receipt of a Future Offering Notice or (ii)
Buyer’s receipt of all of the information reasonably requested by Buyer in an
Additional Information Request (the “Buyer Purchase Notice
Date”), which notice shall state the quantity or percentage of
securities being offered in the Future Offering that Buyer will
purchase. The Company shall have 60 days following the Buyer Purchase
Notice Date to sell the securities of the Future Offering (other than the
securities to be purchased by Buyer pursuant to this Section 9.16), upon terms
and conditions no more favorable to the purchasers thereof than specified in
the
Future Offering Notice. The exercise of the Buyer Purchase Option
shall be contingent upon, and contemporaneous with, the consummation of such
Future Offering. In connection with such consummation, Buyer (if it
exercises the Buyer Purchase Option) shall deliver to the Company duly and
properly executed originals of any documents reasonably required by the Company,
and in form and substance reasonably satisfactory to Buyer, to effectuate such
Future Offering together with payment of the purchase price for the securities
being purchased by Buyer in such Future Offering, and the Company shall promptly
issue to Buyer the securities purchased thereby. In the event the
Company has not sold such securities of the Future Offering within such 60-day
period, the Company shall not thereafter issue or sell such securities or any
other securities subject to this Section 9.16 without first offering such
securities to Buyer in the manner provided in this Section
9.16. Buyer shall not be required to participate or exercise its
right of participation with respect to a particular Future Offering in order
to
exercise its right of participation with respect to later Future
Offerings. The Capital Raising Limitations shall not apply to (i) any
transaction involving the Company’s issuances of securities (A) as consideration
in a merger or consolidation (the primary purpose or material result of which
is
not to raise or obtain equity capital or cash), (B) in connection with any
strategic partnership or joint venture (the primary purpose or material result
of which is not to raise or obtain equity capital or cash), or (C) as
consideration for the acquisition of a business, product, license or other
assets by the Company (the primary purpose or material result of which is not
to
raise or obtain equity capital or cash) or (ii) Exempted Issuances (as defined
in the Warrant).
SECTION
10.
GOVERNING
LAW; MISCELLANEOUS.
10.1 Governing
Law; Jurisdiction; Jury Trial. All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of New
York, without giving effect to any choice of law or conflict of law provision
or
rule (whether of the State of New York or any other jurisdiction) that would
cause the application of the laws of any jurisdiction other than the State
of
New York. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in New York City (Borough
of Manhattan), New York, 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, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding
is
improper. 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 to such party at the address for such
notices to it under this Agreement 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 HEREBY IRREVOCABLY WAIVES
ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING
OUT
OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
10.2 Counterparts. This
Agreement and any amendments hereto may be executed and delivered in one or
more
counterparts, and by the different parties hereto in separate counterparts,
each
of which when executed shall be deemed to be an original, but all of which
taken
together shall constitute one and the same agreement, and shall become effective
when counterparts have been signed by each party hereto and delivered to the
other parties hereto, it being understood that all parties need not sign the
same counterpart. In the event that any signature to this Agreement
or any amendment hereto is delivered by facsimile transmission or by e-mail
delivery of a “.pdf” format data file, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature
is
executed) with the same force and effect as if such facsimile or “.pdf”
signature page were an original thereof. At the request of any party
each other party shall promptly re-execute an original form of this Agreement
or
any amendment hereto and deliver the same to the other party. No
party hereto shall raise the use of a facsimile machine or e-mail delivery
of a
“.pdf” format data file to deliver a signature to this Agreement or any
amendment hereto or the fact that such signature was transmitted or communicated
through the use of a facsimile machine or e-mail delivery of a “.pdf” format
data file as a defense to the formation or enforceability of a contract, and
each party hereto forever waives any such defense.
10.3 Headings. The
headings of this Agreement are for convenience of reference and shall not form
part of, or affect the interpretation of, this Agreement.
10.4 Severability. If
any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or
the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.
10.5 Entire
Agreement; Amendments. This
Agreement supersedes all other prior oral or written agreements between Buyer,
the Company, its Subsidiaries, their Affiliates and Persons acting on their
behalf with respect to the matters discussed herein, and this Agreement and
the
instruments referenced herein contain the entire understanding of the parties
with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor Buyer makes
any representation, warranty, covenant or undertaking with respect to such
matters. No provision of this Agreement may be amended, modified or
supplemented other than by an instrument in writing signed by the Company and
the holders of at least 51% of the aggregate principal amount of the Notes
than
outstanding. Any such amendment shall bind all holders of the Note
and the Warrant. No such amendment shall be effective to the extent
that it applies to less than all of the holders of the Note or Warrant then
outstanding.
10.6 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 receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by
the
sending party); or (iii) one Business 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:
If
to the
Company:
Gulf
Western Petroleum Corporation
▇▇▇▇
▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇,
▇▇▇▇▇ ▇▇▇▇▇
Facsimile: (▇▇▇)
▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇
▇. ▇▇▇▇▇▇
If
to the
Holder:
Metage
Funds Limited
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Attention: ▇▇▇
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Facsimile: ▇▇▇
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NCIM
Limited
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▇
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▇▇▇▇▇▇,
▇▇▇▇▇▇▇ ▇▇▇▇ OLR
Attention: ▇▇▇▇▇▇
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Facsimile: ▇▇▇
▇▇▇ ▇▇▇ ▇▇▇▇
or
at
such other address and/or facsimile number and/or to the attention of such
other
person as the recipient party has specified by written notice to the other
party
at least five Business Days prior to the effectiveness of such
change. Written confirmation of receipt (A) given by the recipient of
such notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender’s facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by a nationally recognized overnight delivery
service shall be rebuttable evidence of personal service, receipt by facsimile
or deposit with a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.
10.7 Successors
and Assigns. This
Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors and assigns, including any purchasers of the
Securities. The Company shall not assign this Agreement or any rights
or obligations hereunder without the prior written consent of
Buyer. Buyer may assign some or all of its rights hereunder without
the consent of the Company; provided, however, that any such assignment
shall not release Buyer from its obligations hereunder unless such obligations
are assumed by such assignee (as evidenced in
writing). Notwithstanding anything to the contrary contained in the
Transaction Documents, Buyer shall be entitled to pledge the Securities in
connection with a bona fide margin account or other loan or financing
arrangement secured by the Securities.
10.8 No
Third
Party Beneficiaries. This
Agreement is intended for the benefit of the parties hereto and their respective
permitted successors and assigns and, to the extent provided in Section 8
hereof, each Indemnitee, and is not for the benefit of, nor may any provision
hereof be enforced by, any other Person.
10.9 Survival. Unless
this Agreement is terminated under Section 10.11, the representations and
warranties of the Company and Buyer contained in Sections 2 and 3, the
agreements and covenants set forth in Sections 4, 5 and 9, and the
indemnification and contribution provisions set forth in Section 8, shall
survive the Closing. Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.
10.10 Further
Assurances. Each
party shall do and perform, or cause to be done and performed, all such further
acts and things, and shall execute and deliver all such other agreements,
certificates, instruments and documents, as the other party may reasonably
request in order to carry out the intent and accomplish the purposes of this
Agreement and the consummation of the transactions contemplated
hereby.
10.11 Termination. In
the event that the Closing shall not have occurred on or before the third
Business Day following the date of this Agreement due to the Company’s or
Buyer’s failure to satisfy the conditions set forth in Sections 6 and 7 above
(and the nonbreaching party’s failure to waive such unsatisfied condition(s)),
the nonbreaching party shall have the option to terminate this Agreement with
respect to such breaching party at the close of business on such date without
liability of any party to any other party.
10.12 No
Strict
Construction. The
language used in this Agreement will be deemed to be the language chosen by
the
parties to express their mutual intent, and no rules of strict construction
will
be applied against any party.
10.13 Remedies. Buyer
and each holder of the Securities shall have all rights and remedies set forth
in the Transaction Documents and all rights and remedies that Buyer and holders
have been granted at any time under any other agreement or contract and all
of
the rights that Buyer and holders have under any law. Any Person
having any rights under any provision of this Agreement shall be entitled to
enforce such rights specifically, to recover damages by reason of any breach
of
any provision of this Agreement and to exercise all other rights granted by
law.
10.14 Payment
Set Aside. To
the extent that the Company or any of its Subsidiaries makes a payment or
payments to Buyer pursuant to this Agreement, the Registration Rights Agreement,
the Note, the Warrant, the Guaranty or any other Transaction Document or Buyer
enforces or exercises its rights hereunder or thereunder, and such payment
or
payments or the proceeds of such enforcement or exercise or any part thereof
are
subsequently invalidated, declared to be fraudulent or preferential, set aside,
recovered from, disgorged by or are required to be refunded, repaid or otherwise
restored to the Company or any of its Subsidiaries, by a trustee, receiver
or
any other Person under any law (including any bankruptcy law, state or federal
law, common law or equitable cause of action), then to the extent of any such
restoration the obligation or part thereof originally intended to be satisfied
shall be revived and continued in full force and effect as if such payment
had
not been made or such enforcement or setoff had not occurred.
10.15 Transfer
Agent Instructions. The
Company shall issue irrevocable instructions to its transfer agent in the form
attached hereto as Exhibit C (the “Irrevocable Transfer Agent
Instructions”), and any subsequent transfer agent, to issue
certificates or credit shares to the applicable balance accounts at the
Depository Trust Company (“DTC”), registered in the name of
Buyer or its nominee(s), for the Closing Shares, the Conversion Shares and
the
Warrant Shares. Prior to registration and sale of the Closing Shares,
Conversion Shares and the Warrant Shares under the 1933 Act, all such
certificates shall bear the restrictive legend specified in Section
2.8. The Company warrants that no instruction other than the
Irrevocable Transfer Agent Instructions referred to in this Section 10.15 and
stop transfer instructions to give effect to Section 2.7 with respect to the
Closing Shares, the Conversion Shares or Warrant Shares prior to their
registration and sale, respectively, under the 1933 Act will be given by the
Company to its transfer agent.
10.16 Interpretative
Matters. Unless
the context otherwise requires, (a) all references to Sections, Schedules
or Exhibits are to Sections, Schedules or Exhibits contained in or attached
to
this Agreement, (b) each accounting term not otherwise defined in this Agreement
has the meaning assigned to it in accordance with GAAP as applied by the
Company, (c) words in the singular or plural include the singular and
plural and pronouns stated in either the masculine, the feminine or neuter
gender shall include the masculine, feminine and neuter, and (d) the use of
the word “including” in this Agreement shall be by way of example rather than
limitation.
IN
WITNESS WHEREOF, Buyer and the Company have caused this Securities
Purchase Agreement to be duly executed as of the date first written
above.
COMPANY:
GULF
WESTERN PETROLEUM CORPORATION
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By:
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/s/ Wm.
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Name:
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▇. ▇▇▇
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Title:
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Chairman
and CEO
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[Additional
signature page follows]
BUYER:
METAGE
FUNDS LIMITED
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By:
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/s/ ▇▇▇
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Name:
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Title:
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Investment
Manager
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NCIM
LIMITED
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By:
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/s/ ▇.▇.
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Name:
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▇.▇.
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Title:
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Manager
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