Exhibit 10.1

SECURITIES PURCHASE AGREEMENT

This SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of June 7, 2008,
is by and among Royale Energy, Inc., a California corporation with headquarters
located at 7676 Hazard Center Drive, Suite 1500, San Diego, California 92108
(the “Company”), and the undersigned buyers (each, a “Buyer” and collectively,
the “Buyers”).

RECITALS

A. The Company and each Buyer is executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by
Section 4(2) of the Securities Act of 1933, as amended (the “1933 Act”), and
Rule 506 of Regulation D (“Regulation D”) as promulgated by the United States
Securities and Exchange Commission (the “SEC”) under the 1933 Act.

B. Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms
and conditions stated in this Agreement, (i) that aggregate number of shares of
the common stock, no par value, of the Company (the “Common Stock”), set forth
opposite such Buyer’s name in column (3) on the Schedule of Buyers (which
aggregate amount for all Buyers together shall be 547,945 shares of Common Stock
and shall collectively be referred to herein as the “Common Shares”) and (ii) a
warrant to acquire up to that number of additional shares of Common Stock set
forth opposite such Buyer’s name in column (4) on the Schedule of Buyers (the
“Warrants”), in the form attached hereto as Exhibit A (as exercised,
collectively, the “Warrant Shares”).

C. At the Closing, the parties hereto shall execute and deliver a Registration
Rights Agreement, in the form attached hereto as Exhibit B (the “Registration
Rights Agreement”), pursuant to which the Company has agreed to provide certain
registration rights with respect to the Registrable Securities (as defined in
the Registration Rights Agreement), under the 1933 Act and the rules and
regulations promulgated thereunder, and applicable state securities laws.

D. The Common Shares, the Warrants and the Warrant Shares are collectively
referred to herein as the “Securities.”

AGREEMENT

NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and each Buyer hereby
agree as follows:

 

1. PURCHASE AND SALE OF COMMON SHARES AND WARRANTS.

(a) Common Shares and Warrants. Subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6 and 7 below, the Company shall issue and sell
to each Buyer,

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and each Buyer severally, but not jointly, agrees to purchase from the Company
on the Closing Date (as defined below), the number of Common Shares, as is set
forth opposite such Buyer’s name in column (3) on the Schedule of Buyers, along
with the Warrants to acquire that number of Warrant Shares as is set forth
opposite such Buyer’s name in column (4), on the Schedule of Buyers.

(b) Closing. The closing (the “Closing”) of the purchase of the Common Shares
and the Warrants by the Buyers shall occur at the offices of Greenberg Traurig,
LLP, 77 W. Wacker Drive, Suite 2400, Chicago, Illinois 60601. The date and time
of the Closing (the “Closing Date”) shall be 10:00 a.m., New York time, on the
first (1st) Business Day on which the conditions to the Closing set forth in
Sections 6 and 7 below are satisfied or waived (or such later date as is
mutually agreed to by the Company and each Buyer). As used herein “Business Day”
means any day other than a Saturday, Sunday or other day on which commercial
banks in New York, New York are authorized or required by law to remain closed.

(c) Purchase Price. The aggregate purchase price for the Common Shares and the
Warrants to be purchased by each Buyer (the “Purchase Price”) shall be the
amount set forth opposite such Buyer’s name in column (5) on the Schedule of
Buyers. Each Buyer shall pay its respective Purchase Price for its Common Shares
and related Warrants to be purchased by such Buyer at the Closing.

(d) Form of Payment. On the Closing Date, (i) each Buyer shall pay its
respective Purchase Price to the Company for the Common Shares and the Warrants
to be issued and sold to such Buyer at the Closing, by wire transfer of
immediately available funds in accordance with the Company’s written wire
instructions and (ii) the Company shall deliver to each Buyer (A) one or more
stock certificates, free and clear of all restrictive and other legends (except
as expressly provided in Section 5(c) hereof), evidencing the number of Common
Shares such Buyer is purchasing as is set forth opposite such Buyer’s name in
column (3) of the Schedule of Buyers and (B) a Warrant pursuant to which such
Buyer shall have the right to acquire such number of Warrant Shares as is set
forth opposite such Buyer’s name in column (4) of the Schedule of Buyers, in all
cases duly executed on behalf of the Company and registered in the name of such
Buyer or its designee.

 

2. BUYER’S REPRESENTATIONS AND WARRANTIES.

Each Buyer, severally and not jointly, represents and warrants to the Company
with respect to only itself that:

(a) Organization; Authority. Such Buyer is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with the requisite power and authority to enter into and to
consummate the transactions contemplated by the Transaction Documents (as
defined below) to which it is a party and otherwise to carry out its obligations
hereunder and thereunder.

(b) No Public Sale or Distribution. Such Buyer is (i) acquiring the Common
Shares and the Warrants and (iii) upon exercise of its Warrants will acquire the
Warrant Shares issuable upon exercise thereof, in each case, for its own account
and not with a view towards, or for

 

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resale in connection with, the public sale or distribution thereof, except
pursuant to sales registered or exempted under the 1933 Act; provided, however,
that by making the representations herein, such Buyer does not agree, or make
any representation or warranty, to hold any of the Securities for any minimum or
other specific term and reserves the right to dispose of the Securities at any
time in accordance with or pursuant to a registration statement or an exemption
under the 1933 Act. Such Buyer is acquiring the Securities hereunder in the
ordinary course of its business. Such Buyer does not presently have any
agreement or understanding, directly or indirectly, with any Person to
distribute any of the Securities.

(c) Accredited Investor Status. Such Buyer is an “accredited investor” as that
term is defined in Rule 501(a) of Regulation D.

(d) Reliance on Exemptions. Such Buyer understands that the Securities are being
offered and sold to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying in part upon the truth and accuracy of, and such Buyer’s
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of such Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of such Buyer to acquire the
Securities.

(e) Information. Such 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 which have been
requested by such Buyer. Such Buyer and its advisors, if any, have been afforded
the opportunity to ask questions of the Company. Neither such inquiries nor any
other due diligence investigations conducted by such Buyer or its advisors, if
any, or its representatives shall modify, amend or affect such Buyer’s right to
rely on the Company’s representations and warranties contained herein or any
representations and warranties contained in any other Transaction Document or
any other document or instrument executed and/or delivered in connection with
this Agreement or the consummation of the transaction contemplated hereby. Such
Buyer understands that its investment in the Securities involves a high degree
of risk. Such 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.

(f) No Governmental Review. Such Buyer understands that no United States federal
or state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities or the fairness or
suitability of the investment in the Securities nor have such authorities passed
upon or endorsed the merits of the offering of the Securities.

(g) Transfer or Resale. Such Buyer understands that except as provided in the
Registration Rights Agreement and Section 4(h) hereof: (i) the Securities have
not been and are not being registered under the 1933 Act or any state securities
laws, and may not be offered for sale, sold, assigned or transferred unless
(A) subsequently registered thereunder, (B) such Buyer shall have delivered to
the Company (if requested by the Company) an opinion of counsel to such Buyer,
in a form reasonably acceptable to the Company, to the effect that such
Securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption

 

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from such registration, or (C) such Buyer provides the Company with reasonable
assurance that such Securities can be sold, assigned or transferred pursuant to
Rule 144 or Rule 144A promulgated under the 1933 Act (or a successor rule
thereto) (collectively, “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 (as defined in Section 3(s))
through whom the sale is made) may be deemed to be an underwriter (as that term
is defined in the 1933 Act) may require compliance with some other exemption
under the 1933 Act or the rules and regulations of the SEC promulgated
thereunder; and (iii) neither the Company nor any other Person is under any
obligation to register the Securities under the 1933 Act or any state securities
laws or to comply with the terms and conditions of any exemption thereunder.

(h) Validity; Enforcement. This Agreement has been duly and validly authorized,
executed and delivered on behalf of such Buyer and constitutes the legal, valid
and binding obligations of such Buyer enforceable against such Buyer in
accordance with their respective terms, except as such enforceability may be
limited by general principles of equity or to applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation and other similar laws relating to, or
affecting generally, the enforcement of applicable creditors’ rights and
remedies.

(i) No Conflicts. The execution, delivery and performance by such Buyer of this
Agreement and the Registration Rights Agreement and the consummation by such
Buyer of the transactions contemplated hereby and thereby will not (i) result in
a violation of the organizational documents of such Buyer or (ii) conflict with,
or constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which such Buyer is a party, or (iii) result in a violation of any
law, rule, regulation, order, judgment or decree (including federal and state
securities laws) applicable to such Buyer, except in the case of clauses
(ii) and (iii) above, for such conflicts, defaults, rights or violations which
would not, individually or in the aggregate, reasonably be expected to have a
material adverse effect on the ability of such Buyer to perform its obligations
hereunder.

(j) Residency. Such Buyer is a resident of that jurisdiction specified below its
address on the Schedule of Buyers.

(k) Certain Trading Activities. Such Buyer has not directly or indirectly, nor
has any Person acting on behalf of or pursuant to any understanding with such
Buyer, engaged in any transactions in the securities of the Company (including,
without limitation, any Short Sales involving the Company’s securities) since
the time that such Buyer was first contacted by the Placement Agent (as defined
below) regarding the investment in the Company contemplated by this Agreement
through the date hereof. “Short Sales” include, without limitation, all “short
sales” as defined in Rule 200 promulgated under Regulation SHO under the 1934
Act (“Regulation SHO”) and all types of direct and indirect stock pledges,
forward sale contracts, options, puts, calls, swaps and similar arrangements
(including on a total return basis), and sales and other transactions through
non-U.S. broker dealers or foreign regulated brokers (but shall not be deemed to
include the location and/or reservation of borrowable shares of Common Stock).
Such Buyer does not as of the date hereof, and will not immediately following
the Closing, own

 

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10% or more of the Company’s issued and outstanding shares of Common Stock
(calculated based on the assumption that all Equivalents (as defined below)
owned by such Buyer, whether or not presently exercisable or convertible, have
been fully exercised or converted (as the case may be) but taking into account
any limitations on exercise or conversion (including “blockers”) contained
therein).

(l) General Solicitation. Such Buyer is not purchasing the Securities as a
result of any advertisement, article, notice or other communication regarding
the Securities published in any newspaper, magazine or similar media or
broadcast over television or radio or presented at any seminar.

 

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company represents and warrants to each of the Buyers that:

(a) Organization and Qualification. Each of the Company and its “Subsidiaries”
(which for purposes of this Agreement means any Person in which the Company,
directly or indirectly, owns capital stock or holds an equity or similar
interest) are entities duly organized and validly existing and in good standing
under the laws of the jurisdiction in which they are formed, and have the
requisite power and authorization to own their properties and to carry on their
business as now being conducted and as presently proposed to be conducted. Each
of the Company and its Subsidiaries is duly qualified as a foreign entity to do
business and is in good standing in every jurisdiction in which its ownership of
property or the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have a Material Adverse Effect. As used in this
Agreement, “Material Adverse Effect” means any material adverse effect on
(i) the business, properties, assets, liabilities, operations (including results
thereof), condition (financial or otherwise) or prospects of the Company and its
Subsidiaries, individually or taken as a whole, (ii) the transactions
contemplated hereby or in the other Transaction Documents or (iii) the authority
or ability of the Company to perform its obligations under the Transaction
Documents (as defined below). The Company has no Subsidiaries. The Company owns
various contractual economic interests in oil and gas well drilling programs and
joint working interest contractual arrangements in oil and gas well drilling
programs, and none of such interests could be considered a Subsidiary hereunder.

(b) Authorization; Enforcement; Validity. The Company has the requisite power
and authority to enter into and perform its obligations under this Agreement and
the other Transaction Documents and to issue the Securities in accordance with
the terms hereof and thereof. The execution and delivery of this Agreement and
the other Transaction Documents by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby (including, without
limitation, the issuance of the Common Shares, the issuance of the Warrants and
the reservation for issuance and issuance of the Warrant Shares issuable upon
exercise of the Warrants) have been duly authorized by the Company’s board of
directors and (other than the filing with the SEC of one or more Registration
Statements in accordance with the requirements of the Registration Rights
Agreement, a Form D with the SEC and any other filings as may be required by any
state securities agencies) no further filing, consent or authorization is
required by the Company, its board of directors or its stockholders or other

 

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governing body. This Agreement and the other Transaction Documents have been
duly executed and delivered by the Company, and constitutes the legal, valid and
binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, except as such enforceability may be
limited by general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of applicable creditors’ rights and
remedies and except as rights to indemnification and to contribution may be
limited by federal or state securities law. “Transaction Documents” means,
collectively, this Agreement, the Warrants, the Registration Rights Agreement,
the Irrevocable Transfer Agent Instructions (as defined in Section 5(b)) and
each of the other agreements and instruments entered into by the parties hereto
in connection with the transactions contemplated hereby and thereby.

(c) Issuance of Securities. The issuance of the Common Shares and the Warrants
are duly authorized and upon issuance in accordance with the terms of the
Transaction Documents shall be validly issued, fully paid and non-assessable and
free from all taxes, liens, charges and other encumbrances with respect to the
issue thereof. As of the Closing, the Company shall have reserved from its duly
authorized capital stock not less than 120% of the maximum number of shares of
Common Stock issuable upon exercise of the Warrants (without regard to any
limitations on the exercise of the Warrants set forth therein). Upon exercise in
accordance with the Warrants the Warrant Shares will be validly issued, fully
paid and nonassessable and free from all preemptive or similar rights, taxes,
liens, charges and other encumbrances with respect to the issue thereof, with
the holders being entitled to all rights accorded to a holder of Common Stock.
Subject to the accuracy of the representations and warranties of the Buyers in
this Agreement, the offer and issuance by the Company of the Securities is
exempt from registration under the 1933 Act.

(d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the issuance of
the Common Shares, the Warrants and Warrant Shares and the reservation for
issuance of the Warrant Shares) will not (i) result in a violation of the
Articles of Incorporation (as defined in Section 3(r)) (including, without
limitation, any certificates of designation contained therein) or other
organizational documents of the Company or any of its Subsidiaries or Bylaws (as
defined in Section 3(r)), (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its Subsidiaries is a party, or (iii) result in a violation of any law,
rule, regulation, order, judgment or decree (including foreign, federal and
state securities laws and regulations and the rules and regulations of The
Nasdaq Global Market (the “Principal Market”) applicable to the Company or any
of its Subsidiaries or by which any property or asset of the Company or any of
its Subsidiaries is bound or affected except, in the case of clause (ii) or
(iii) above, to the extent such violations that could not reasonably be expected
to have a Material Adverse Effect.

(e) Consents. The Company is not required to obtain any consent, authorization
or order of, or make any filing or registration (other than the filing with the
SEC of one or more Registration Statements in accordance with the requirements
of the Registration Rights

 

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Agreement, a Form D with the SEC and any other filings as may be required by any
state securities agencies) with, any court, governmental agency or any
regulatory or self-regulatory agency or any other Person in order for it to
execute, deliver or perform any of its obligations under the Transaction
Documents, in each case, in accordance with the terms thereof. All consents,
authorizations, orders, filings and registrations which the Company is required
to obtain pursuant to the Transaction Documents at or prior to the Closing have
been obtained or effected on or prior to the Closing Date, and neither the
Company nor any of its Subsidiaries are aware of any facts or circumstances
which might prevent the Company from obtaining or effecting any of the
registration, application or filings contemplated by the Transaction Documents.
The Company is not in violation of the requirements of the Principal Market and
has no knowledge of any facts or circumstances which could reasonably lead to
delisting or suspension of the Common Stock in the foreseeable future.

(f) Acknowledgment Regarding Buyer’s Purchase of Securities. The Company
acknowledges and agrees that each Buyer is acting solely in the capacity of an
arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that no Buyer is (i) an officer
or director of the Company or any of its Subsidiaries, (ii) an “affiliate” (as
defined in Rule 144) of the Company or any of its Subsidiaries or (iii) to its
knowledge, a “beneficial owner” of more than 10% of the shares of Common Stock
(as defined for purposes of Rule 13d-3 of the Securities Exchange Act of 1934,
as amended (the “1934 Act”)). The Company further acknowledges that no Buyer is
acting as a financial advisor or fiduciary of the Company or any of its
Subsidiaries (or in any similar capacity) with respect to the Transaction
Documents and the transactions contemplated hereby and thereby, and any advice
given by a 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 such Buyer’s purchase of the Securities. The Company
further represents to each Buyer that the Company’s decision to enter into the
Transaction Documents has been based solely on the independent evaluation by the
Company and its representatives.

(g) No General Solicitation; Placement Agent’s Fees. Neither the Company, nor
any of its Subsidiaries or affiliates, nor any Person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D) in connection with the offer or sale of the
Securities. The Company shall be responsible for the payment of any placement
agent’s fees, financial advisory fees, or brokers’ commissions (other than for
persons engaged by any Buyer or its investment advisor) relating to or arising
out of the transactions contemplated hereby. Other than JP Turner & Company,
L.L.C. (the “Placement Agent”), neither the Company nor any of its Subsidiaries
has engaged any placement agent or other agent in connection with the sale of
the Securities.

(h) No Integrated Offering. None of the Company, its Subsidiaries or any of
their affiliates, nor any Person acting on their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of the
issuance of any of the Securities under the 1933 Act, whether through
integration with prior offerings or otherwise, or cause this offering of the
Securities to require approval of stockholders of the Company under any
applicable stockholder approval provisions, including, without limitation, under
the rules and regulations of any exchange or automated quotation system on which
any of the securities of the Company are listed or designated. None

 

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of the Company, its Subsidiaries, their affiliates nor any Person acting on
their behalf will take any action or steps referred to in the preceding sentence
that would require registration of the issuance of any of the Securities under
the 1933 Act or cause the offering of any of the Securities to be integrated
with other offerings.

(i) Dilutive Effect. The Company understands and acknowledges that the number of
Warrant Shares will increase in certain circumstances. The Company further
acknowledges that its obligation to issue the Warrant Shares upon exercise of
the Warrants in accordance with this Agreement and the Warrants is, absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interests of other stockholders of the Company.

(j) 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, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Articles of Incorporation or other
organizational documents or the laws of the jurisdiction of its incorporation or
otherwise which is or could become applicable to any Buyer as a result of the
transactions contemplated by this Agreement, including, without limitation, the
Company’s issuance of the Securities and any Buyer’s ownership of the
Securities. The Company and its board of directors have taken all necessary
action, if any, in order to render inapplicable any stockholder rights plan or
similar arrangement relating to accumulations of beneficial ownership of shares
of Common Stock or a change in control of the Company or any of its
Subsidiaries.

(k) SEC Documents; Financial Statements. During the two (2) years prior to the
date hereof, the Company has timely 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 1934 Act (all of the foregoing filed prior
to the date hereof and all exhibits included therein and financial statements,
notes and schedules thereto and documents incorporated by reference therein
being hereinafter referred to as the “SEC Documents”). The Company has delivered
to the Buyers or their respective representatives true, correct and complete
copies of each of the SEC Documents not available on the EDGAR system. As of
their respective dates, the SEC Documents complied in all material respects with
the requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and 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 the
light of the circumstances under which they were made, not misleading. As of
their respective dates, the financial statements of the Company included in the
SEC Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto as in effect as of the time of filing. Such 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 or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments which will not be material, either individually or in the
aggregate). No other

 

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information provided by or on behalf of the Company to the Buyers which is not
included in the SEC Documents, including, without limitation, information
referred to in Section 2(e) of this Agreement, contains any untrue statement of
a material fact or omits to state any material fact necessary in order to make
the statements therein not misleading, in the light of the circumstance under
which they are or were made.

(l) Absence of Certain Changes. Since the date of the Company’s most recent
audited or reviewed financial statements contained in a Form 10-K, there has
been no material adverse change and no material adverse development in the
business, assets, liabilities, properties, operations (including results
thereof), condition (financial or otherwise) or prospects of the Company or any
of its Subsidiaries. Since the date of the Company’s most recent audited
financial statements contained in a Form 10-K, neither the Company nor any of
its Subsidiaries has (i) declared or paid any dividends, (ii) sold any assets,
individually or in the aggregate, outside of the ordinary course of business or
(iii) made any material capital expenditures, individually or in the aggregate,
outside of the ordinary course of business. Neither the Company nor any of its
Subsidiaries has taken any steps to seek protection pursuant to any law or
statute relating to bankruptcy, insolvency, reorganization, liquidation or
winding up, nor does the Company or any Subsidiary have any knowledge or reason
to believe that any of their respective creditors intend to initiate involuntary
bankruptcy proceedings or any actual knowledge of any fact which would
reasonably lead a creditor to do so. The Company and its Subsidiaries,
individually and on a consolidated basis, are not as of the date hereof, and
after giving effect to the transactions contemplated hereby to occur at the
Closing, will not be Insolvent (as defined below). For purposes of this
Section 3(l), “Insolvent” means, (I) with respect to the Company and its
Subsidiaries, on a consolidated basis, (i) the present fair saleable value of
the Company’s and its Subsidiaries’ assets is less than the amount required to
pay the Company’s and its Subsidiaries’ total Indebtedness (as defined in
Section 3(s)), (ii) the Company and its Subsidiaries are unable to pay their
debts and liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured or (iii) the Company and its
Subsidiaries intend to incur or believe that they will incur debts that would be
beyond their ability to pay as such debts mature; and (II) with respect to the
Company and each Subsidiary, individually, (i) the present fair saleable value
of the Company’s or any of its Subsidiaries’ assets is less than the amount
required to pay each of their respective total Indebtedness, (ii) the Company or
any of its Subsidiaries are unable to pay their respective debts and
liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured or (iii) the Company or any of its
Subsidiaries intend to incur or believe that they will incur debts that would be
beyond their respective ability to pay as such debts mature. Neither the Company
nor any of its Subsidiaries has engaged in business or in any transaction, and
is not about to engage in business or in any transaction, for which the
Company’s or such Subsidiary’s remaining assets constitute unreasonably small
capital.

(m) No Undisclosed Events, Liabilities, Developments or Circumstances. No event,
liability, development or circumstance has occurred or exists, or is reasonably
expected to exist or occur with respect to the Company, any of its Subsidiaries
or their respective business, properties, liabilities, prospects, operations
(including results thereof) or condition (financial or otherwise), that would be
required to be disclosed by the Company under applicable securities laws on a
registration statement on Form S-1 filed with the SEC relating to an issuance
and sale by the Company of its Common Stock and which has not been publicly
announced or which could have a Material Adverse Effect.

 

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(n) Conduct of Business; Regulatory Permits. Neither the Company nor any of its
Subsidiaries is in violation of any term of or in default under its Articles of
Incorporation, any certificate of designation, preferences or rights of any
other outstanding series of preferred stock of the Company or any of its
Subsidiaries or Bylaws or their organizational charter, certificate of formation
or certificate of incorporation or bylaws, respectively. Neither the Company nor
any of its Subsidiaries is in violation of any judgment, decree or order or any
statute, ordinance, rule or regulation applicable to the Company or any of its
Subsidiaries, and neither the Company nor any of its Subsidiaries will conduct
its business in violation of any of the foregoing, except in all cases for
possible violations which could not, individually or in the aggregate, have a
Material Adverse Effect. Without limiting the generality of the foregoing, the
Company is not in violation of any of the rules, regulations or requirements of
the Principal Market and has no knowledge of any facts or circumstances that
could reasonably lead to delisting or suspension of the Common Stock by the
Principal Market in the foreseeable future. Since January 1, 2006, (i) the
Common Stock has been designated for quotation on the Principal Market,
(ii) trading in the Common Stock has not been suspended by the SEC or the
Principal Market and (iii) the Company has received no communication, written or
oral, from the SEC or the Principal Market regarding the suspension or delisting
of the Common Stock from the Principal Market. The Company and each of its
Subsidiaries possess all certificates, authorizations and permits issued by the
appropriate regulatory authorities necessary to conduct their respective
businesses, except where the failure to possess such certificates,
authorizations or permits would not have, individually or in the aggregate, a
Material Adverse Effect, and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.

(o) Foreign Corrupt Practices. Neither the Company nor any of its Subsidiaries
nor any director, officer, nor to the Company’s knowledge, any 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 or any of its
Subsidiaries (i) used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expenses relating to political activity;
(ii) made any direct or indirect unlawful payment to any foreign or domestic
government official or employee from corporate funds; (iii) violated or is in
violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as
amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment,
kickback or other unlawful payment to any foreign or domestic government
official or employee.

(p) Sarbanes-Oxley Act. The Company and each Subsidiary is in material
compliance with all applicable requirements of the Sarbanes-Oxley Act of 2002
that are effective as of the date hereof, and all applicable rules and
regulations promulgated by the SEC thereunder that are effective as of the date
hereof.

(q) Transactions With Affiliates. Other than the grant of stock options
disclosed on Schedule 3(q) and other than as disclosed in the SEC Documents,
none of the officers, directors or employees of the Company or any of its
Subsidiaries is presently a party to any transaction with the Company or any of
its Subsidiaries (other than for ordinary course services as

 

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employees, officers or directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any such officer, director or employee or, to the knowledge of the
Company or any of its Subsidiaries, any corporation, partnership, trust or other
entity in which any such officer, director, or employee has a substantial
interest or is an officer, director, trustee or partner.

(r) Equity Capitalization. As of the date hereof, the authorized capital stock
of the Company consists of (i) 10,000,000 shares of Common Stock, of which
7,965,854 are issued and outstanding and 388,708 shares are reserved for
issuance pursuant to securities (other than the Common Shares and the Warrants)
exercisable or exchangeable for, or convertible into, shares of Common Stock and
(ii) 147,500 shares of Series AA preferred stock, 57,411 of which are issued and
outstanding. 33,087 shares of Common Stock are held in treasury. All of such
outstanding shares are duly authorized and have been, or upon issuance will be,
validly issued and are fully paid and nonassessable. 2,798,927 shares of the
Company’s issued and outstanding Common Stock on the date hereof are as of the
date hereof owned by Persons who are “affiliates” (as defined in Rule 405 of the
1933 Act and calculated based on the assumption that only officers, directors
and holders of at least 10% of the Company’s issued and outstanding Common Stock
are “affiliates” without conceding that any such Persons are “affiliates” for
purposes of federal securities laws) of the Company or any of its Subsidiaries.
To the Company’s knowledge, except as disclosed in the SEC Documents, no Person
owns 10% or more of the Company’s issued and outstanding shares of Common Stock
(calculated based on the assumption that all Equivalents, whether or not
presently exercisable or convertible, have been fully exercised or converted (as
the case may be) taking account of any limitations on exercise or conversion
(including “blockers”) contained therein without conceding that such identified
Person is a 10% stockholder for purposes of federal securities laws). Except as
disclosed in Schedule 3(r): (i) none of the Company’s or any Subsidiary’s
capital stock is subject to preemptive rights or any other similar rights or any
liens or encumbrances suffered or permitted by the Company or any Subsidiary;
(ii) 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 or exchangeable for, any 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 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 or exchangeable for, any capital stock of the
Company or any of its Subsidiaries; (iii) there are no outstanding debt
securities, notes, credit agreements, credit facilities or other agreements,
documents or instruments evidencing Indebtedness (as defined in Section 3(s)) of
the Company or any of its Subsidiaries or by which the Company or any of its
Subsidiaries is or may become bound; (iv) there are no financing statements
securing obligations in any material amounts, either individually or in the
aggregate, filed in connection with the Company or any of its Subsidiaries;
(v) there are no agreements or arrangements under which the Company or any of
its Subsidiaries is obligated to register the sale of any of their securities
under the 1933 Act (except pursuant to the Registration Rights Agreement);
(vi) there are no outstanding securities or instruments of the Company or any of
its Subsidiaries which 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

 

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its Subsidiaries; (vii) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; (viii) neither the Company nor any Subsidiary has any stock
appreciation rights or “phantom stock” plans or agreements or any similar plan
or agreement; and (ix) neither the Company nor any of its Subsidiaries have any
liabilities or obligations required to be disclosed in the SEC Documents which
are not so disclosed in the SEC Documents, other than those incurred in the
ordinary course of the Company’s or its Subsidiaries’ respective businesses and
which, individually or in the aggregate, do not or could not have a Material
Adverse Effect. The Company has furnished to the Buyers true, correct and
complete copies of the Company’s Articles of Incorporation, as amended and as in
effect on the date hereof (the “Articles of Incorporation”), and the Company’s
bylaws, as amended and as in effect on the date hereof (the “Bylaws”), and the
terms of all securities convertible into, or exercisable or exchangeable for,
shares of Common Stock and the material rights of the holders thereof in respect
thereto that have not been disclosed in the SEC Documents.

(s) Indebtedness and Other Contracts. Except as disclosed on Schedule 3(s) or in
the SEC Documents, neither the Company nor any of its Subsidiaries (i) has any
outstanding Indebtedness (as defined below), (ii) is a party to any contract,
agreement or instrument, the violation of which, or default under which, by the
other party(ies) to such contract, agreement or instrument could reasonably be
expected to result in a Material Adverse Effect, (iii) is in violation of any
term of or in default under any contract, agreement or instrument relating to
any Indebtedness, except where such violations and defaults would not result,
individually or in the aggregate, in a Material Adverse Effect, or (iv) is a
party to any contract, agreement or instrument relating to any Indebtedness, the
performance of which, in the judgment of the Company’s officers, has or is
expected to have a Material Adverse Effect. For purposes of this Agreement:
(x) “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 (including, without limitation,
“capital leases” in accordance with generally accepted accounting principles)
(other than trade payables entered into in the ordinary course of business),
(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 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 or bank under
such agreement in the event of default are limited to repossession or sale of
such property), (F) all monetary obligations under any leasing or similar
arrangement which, in connection with generally accepted accounting principles,
consistently applied for the periods covered thereby, is classified as a capital
lease, (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 which 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; (y) “Contingent Obligation” means, as to any Person, any
direct or indirect liability, contingent or otherwise, of that Person

 

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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; and
(z) “Person” means an individual, a limited liability company, a partnership, a
joint venture, a corporation, a trust, an unincorporated organization, any other
entity and a government or any department or agency thereof.

(t) Absence of Litigation. Except as disclosed in the SEC Documents, there is no
action, suit, proceeding, inquiry or investigation before or by the Principal
Market, any court, public board, government agency, self-regulatory organization
or body pending or, to the knowledge of the Company, threatened against or
affecting the Company or any of its Subsidiaries, the Common Stock or any of the
Company’s or its Subsidiaries’ officers or directors which is outside of the
ordinary course of business or individually or in the aggregate material to the
Company.

(u) Insurance. The Company and each of its Subsidiaries are insured by insurers
of recognized financial responsibility 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. Neither the
Company nor any such Subsidiary has been refused any insurance coverage sought
or applied for, and neither the Company nor any such Subsidiary has any reason
to believe that it will be unable to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would not
have a Material Adverse Effect.

(v) Employee Relations. Neither the Company nor any of its Subsidiaries is a
party to any collective bargaining agreement or employs any member of a union.
The Company believes that its and its Subsidiaries’ relations with their
respective employees are good. No executive officer (as defined in Rule 501(f)
promulgated under the 1933 Act) or other key employee of the Company or any of
its Subsidiaries has notified the Company or any such Subsidiary that such
officer intends to leave the Company or any such Subsidiary or otherwise
terminate such officer’s employment with the Company or any such Subsidiary. No
executive officer or other key employee of the Company or any of its
Subsidiaries is, or is now expected to be, in violation of any material term of
any employment contract, confidentiality, disclosure or proprietary information
agreement, non-competition agreement, or any other contract or agreement or any
restrictive covenant, and the continued employment of each such executive
officer or other key employee (as the case may be) does not subject the Company
or any of its Subsidiaries to any liability with respect to any of the foregoing
matters. The Company and its Subsidiaries are in compliance with all federal,
state, local and foreign laws and regulations respecting labor, employment and
employment practices and benefits, terms and conditions of employment and wages
and hours, except where failure to be in compliance would not, either
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect.

(w) Title. Except with respect to oil, gas and mineral leases, working
interests, royalties, production payments and similar oil, gas and mineral
interests (“Oil & Gas

 

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Interests”), the Company and its Subsidiaries have good and marketable title in
fee simple to all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company and its
Subsidiaries, in each case, free and clear of all liens, encumbrances and
defects except such as do not materially affect the value of such property and
do not interfere with the use made and proposed to be made of such property by
the Company and any of its Subsidiaries. Any real property and facilities held
under lease by the Company or any of its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company or any of its Subsidiaries. The Company
and its Subsidiaries have legal, valid and binding and enforceable rights with
respect to all their Oil & Gas Interests, free and clear of all liens,
encumbrances and defects except such as (i) are normal and customary in the oil
and gas drilling and development business and (ii) do not materially affect the
value of such Oil & Gas Interests and do not interfere with the use made and
proposed to be made of such Oil & Gas Interests by the Company or any of its
Subsidiaries

(x) Intellectual Property Rights. The Company and its Subsidiaries own or
possess adequate rights or licenses to use all trademarks, trade names, service
marks, service mark registrations, service names, patents, patent rights,
copyrights, original works, inventions, licenses, approvals, governmental
authorizations, trade secrets and other intellectual property rights and all
applications and registrations therefor (“Intellectual Property Rights”)
necessary to conduct their respective businesses as now conducted and as
presently proposed to be conducted. None of the Company’s or its Subsidiaries’
Intellectual Property Rights have expired, terminated or been abandoned, or are
expected to expire, terminate or be abandoned, within three years from the date
of this Agreement. The Company has no knowledge of any infringement by the
Company or any of its Subsidiaries of Intellectual Property Rights of others.
There is no claim, action or proceeding being made or brought, or to the
knowledge of the Company or any of its Subsidiaries, being threatened, against
the Company or any of its Subsidiaries regarding their Intellectual Property
Rights. The Company is not aware of any facts or circumstances which might give
rise to any of the foregoing infringements or claims, actions or proceedings.
The Company and each of its Subsidiaries have taken reasonable security measures
to protect the secrecy, confidentiality and value of all of their Intellectual
Property Rights.

(y) Environmental Laws. The Company and its Subsidiaries (i) to the best of the
Company’s knowledge, are in compliance with all Environmental Laws (as defined
herein), (ii) have received all permits, licenses or other approvals required of
them under applicable Environmental Laws to conduct their respective businesses
and (iii) are in compliance with all terms and conditions of any such permit,
license or approval where, in each of the foregoing clauses (i), (ii) and (iii),
the failure to so comply could be reasonably expected to have, individually or
in the aggregate, a Material Adverse Effect. The term “Environmental Laws” means
all federal, state, local or foreign laws relating to pollution or protection of
human health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata), including,
without limitation, laws relating to emissions, discharges, releases or
threatened releases of chemicals, pollutants, contaminants, or toxic or
hazardous substances or wastes (collectively, “Hazardous Materials”) into the
environment, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal,

 

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transport or handling of Hazardous Materials, as well as all authorizations,
codes, decrees, demands or demand letters, injunctions, judgments, licenses,
notices or notice letters, orders, permits, plans or regulations issued,
entered, promulgated or approved thereunder.

(z) Subsidiary Rights. The Company or one of its Subsidiaries has the
unrestricted right to vote, and (subject to limitations imposed by applicable
law) to receive dividends and distributions on, all capital securities of its
Subsidiaries as owned by the Company or such Subsidiary.

(aa) Tax Status. The Company and each of its Subsidiaries (i) has timely 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
timely 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 (iii) has set aside
on its books provision reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply, except in each case where the failure to file, pay or set aside would not
have a Material Adverse Effect. There are no unpaid taxes in any material amount
claimed to be due by the taxing authority of any jurisdiction, and the officers
of the Company and its Subsidiaries know of no basis for any such claim. The
Company is not operated in such a manner as to qualify as a passive foreign
investment company, as defined in Section 1297 of the U.S. Internal Revenue Code
of 1986, as amended.

(bb) Internal Accounting and Disclosure Controls. 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
liabilities 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 difference. The
Company maintains disclosure controls and procedures (as such term is defined in
Rule 13a-14 under the 1934 Act) that are effective in ensuring that information
required to be disclosed by the Company in the reports that it files or submits
under the 1934 Act is recorded, processed, summarized and reported, within the
time periods specified in the rules and forms of the SEC, including, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits under the
1934 Act is accumulated and communicated to the Company’s management, including
its principal executive officer or officers and its principal financial officer
or officers, as appropriate, to allow timely decisions regarding required
disclosure. Neither the Company nor any of its Subsidiaries has received any
notice or correspondence from any accountant relating to any potential material
weakness in any part of the system of internal accounting controls of the
Company or any of its Subsidiaries.

(cc) Off Balance Sheet Arrangements. There is no transaction, arrangement, or
other relationship between the Company or any of its Subsidiaries and an
unconsolidated or other off balance sheet entity that is required to be
disclosed by the Company in its 1934 Act filings and is not so disclosed or that
otherwise could be reasonably likely to have a Material Adverse Effect.

 

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(dd) Investment Company Status. The Company is not, and upon consummation of the
sale of the Securities will not be, an “investment company,” an affiliate of 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.

(ee) Acknowledgement Regarding Buyers’ Trading Activity. It is understood and
acknowledged by the Company (i) that, other than as contemplated by
Section 2(k), following the public disclosure of the transactions contemplated
by the Transaction Documents, in accordance with the terms thereof, none of the
Buyers have been asked by the Company or any of its Subsidiaries to agree, nor
has any Buyer agreed with the Company or any of its Subsidiaries, to desist from
purchasing or selling, long and/or short, securities of the Company, or
“derivative” securities based on securities issued by the Company or to hold the
Securities for any specified term; (ii) that any Buyer, and counter parties in
“derivative” transactions to which any such Buyer is a party, directly or
indirectly, presently may have a “short” position in the Common Stock which were
established prior to such Buyer’s knowledge of the transactions contemplated by
the Transaction Documents, and (iii) that each Buyer shall not be deemed to have
any affiliation with or control over any arm’s length counter party in any
“derivative” transaction. The Company further understands and acknowledges that
following the public disclosure of the transactions contemplated by the
Transaction Documents pursuant to the Press Release one or more Buyers may
engage in hedging and/or trading activities at various times during the period
that the Securities are outstanding, including, without limitation, during the
periods that the value of the Warrant Shares deliverable with respect to the
Securities are being determined and (b) such hedging and/or trading activities,
if any, can reduce the value of the existing stockholders’ equity interest in
the Company both at and after the time the hedging and/or trading activities are
being conducted. The Company acknowledges that such aforementioned hedging
and/or trading activities do not constitute a breach of this Agreement or any
other Transaction Document or any of the documents executed in connection
herewith or therewith.

(ff) Manipulation of Price. Neither the Company nor any of its Subsidiaries has,
and, to the knowledge of the Company, no Person acting on their behalf has,
(i) taken, directly or indirectly, any action designed to cause or to result in
the stabilization or manipulation of the price of any security of the Company or
any of its Subsidiaries to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or paid any compensation for
soliciting purchases of, any of the Securities (other than the Placement Agent),
or (iii) paid or agreed to pay to any person any compensation for soliciting
another to purchase any other securities of the Company or any of its
Subsidiaries.

(gg) U.S. Real Property Holding Corporation. Neither the Company nor any of its
Subsidiaries is, or has ever been, and so long as any of the Securities are held
by any of the Buyers, shall become a U.S. real property holding corporation
within the meaning of Section 897 of the Internal Revenue Code of 1986, as
amended, and the Company and each Subsidiary shall so certify upon Buyer’s
request.

 

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(hh) Registration Eligibility. The Company is eligible to register the
Registrable Securities for resale by the Buyers using Form S-3 promulgated under
the 1933 Act.

(ii) Transfer Taxes. On the Closing Date, all stock transfer or other taxes
(other than income or similar taxes) which are required to be paid in connection
with the sale and transfer of the Securities to be sold to each Buyer hereunder
will be, or will have been, fully paid or provided for by the Company, and all
laws imposing such taxes will be or will have been complied with.

(jj) Bank Holding Company Act. Neither the Company nor any of its Subsidiaries
is subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”) and
to regulation by the Board of Governors of the Federal Reserve System (the
“Federal Reserve”). Neither the Company nor any of its Subsidiaries or
affiliates owns or controls, directly or indirectly, five percent (5%) or more
of the outstanding shares of any class of voting securities or twenty-five
percent (25%) or more of the total equity of a bank or any equity that is
subject to the BHCA and to regulation by the Federal Reserve. Neither the
Company nor any of its Subsidiaries or affiliates exercises a controlling
influence over the management or policies of a bank or any entity that is
subject to the BHCA and to regulation by the Federal Reserve.

(kk) Shell Company Status. The Company is not, and has never been, an issuer
identified in Rule 144(i)(1).

(ll) Disclosure. The Company confirms that neither it nor any other Person
acting on its behalf has provided any of the Buyers or their agents or counsel
with any information that constitutes or could reasonably be expected to
constitute material, nonpublic information concerning the Company or any of its
Subsidiaries, other than the existence of the transactions contemplated by this
Agreement and the other Transaction Documents. The Company understands and
confirms that each of the Buyers will rely on the foregoing representations in
effecting transactions in securities of the Company. All disclosure provided to
the Buyers regarding the Company and its Subsidiaries, their businesses and the
transactions contemplated hereby, including the Schedules to this Agreement,
furnished by or on behalf of the Company or any of its Subsidiaries is true and
correct and does not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
Each press release issued by the Company or any of its Subsidiaries during the
twelve (12) months preceding the date of this Agreement did not at the time of
release contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they are made,
not misleading. No event or circumstance has occurred or information exists with
respect to the Company or any of its Subsidiaries or its or their business,
properties, liabilities, prospects, operations (including results thereof) or
conditions (financial or otherwise), which, under applicable law, rule or
regulation, requires public disclosure at or before the date hereof or
announcement by the Company but which has not been so publicly announced or
disclosed. The Company acknowledges and agrees that no Buyer makes or has made
any representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in Section 2.

 

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4. COVENANTS.

(a) Best Efforts. Each party shall use its best efforts timely to satisfy each
of the conditions to be satisfied by it as provided in Sections 6 and 7 of this
Agreement.

(b) Form D and Blue Sky. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly after such filing. The Company shall, on or before the Closing
Date, take such action as the Company shall reasonably determine is necessary in
order to obtain an exemption for, or to, qualify the Securities for sale to the
Buyers at the Closing pursuant to this Agreement under applicable securities or
“Blue Sky” laws of the states of the United States (or to obtain an exemption
from such qualification), and shall provide evidence of any such action so taken
to the Buyers on or prior to the Closing Date. The Company shall make all
filings and reports relating to the offer and sale of the Securities required
under applicable securities or “Blue Sky” laws of the states of the United
States following the Closing Date.

(c) Reporting Status. Until the date on which the Buyers shall have sold all of
the Registrable Securities (as defined below) (the “Reporting Period”), the
Company shall timely file all reports required to be filed with the SEC pursuant
to the 1934 Act, and the Company shall not terminate its status as an issuer
required to file reports under the 1934 Act even if the 1934 Act or the rules
and regulations thereunder would no longer require or otherwise permit such
termination.

(d) Use of Proceeds. The Company shall use the proceeds from the sale of the
Securities solely for general working capital purposes.

(e) 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 EDGAR and are
available to the public through the EDGAR system, within one (1) Business Day
after the filing thereof with the SEC, a copy of its Annual Reports on Form 10-K
and Quarterly Reports on Form 10-Q, any interim reports or any consolidated
balance sheets, income statements, stockholders’ equity statements and/or cash
flow statements for any period other than annual, any Current Reports on Form
8-K and any registration statements (other than on Form S-8) or amendments filed
pursuant to the 1933 Act, (ii) on the same day as the release thereof, facsimile
copies of all press releases issued by the Company or any of its Subsidiaries
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.

(f) Listing. The Company shall promptly secure the listing of all of the
Registrable Securities (as defined in the Registration Rights Agreement) upon
each national securities exchange and automated quotation system, if any, upon
which the Common Stock is then listed (subject to official notice of issuance)
and shall maintain such listing of all Registrable Securities from time to time
issuable under the terms of the Transaction Documents on such national
securities exchange or automated quotation system. The Company shall maintain
the Common Stock’s authorization for quotation on the Principal Market, the New
York Stock Exchange or the Nasdaq Global Select Market (each, an “Eligible
Market”). Neither the Company nor any

 

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of its Subsidiaries shall take any action which could be reasonably expected to
result in the delisting or suspension of the Common Stock on an Eligible Market.
The Company shall pay all fees and expenses in connection with satisfying its
obligations under this Section 4(f).

(g) Fees. The Company shall reimburse Cranshire Capital, L.P. (“Cranshire”) or
its designee(s) (in addition to any other expense amounts paid to any Buyer
prior to the date of this Agreement) for all reasonable costs and expenses
incurred by it or its affiliates in connection with the transactions
contemplated by the Transaction Documents in an amount not to exceed $35,000
(including, without limitation, all reasonable legal fees and disbursements in
connection therewith, documentation and implementation of the transactions
contemplated by the Transaction Documents and due diligence in connection
therewith), which amount shall be non-accountable and withheld by Cranshire from
its Purchase Price at the Closing or paid by the Company upon termination of
this Agreement so long as such termination did not occur as a result of a
material breach by Cranshire of any of its obligations hereunder (as the case
may be). The Company shall be responsible for the payment of any placement
agent’s fees, financial advisory fees, or broker’s commissions (other than for
Persons engaged by any Buyer) relating to or arising out of the transactions
contemplated hereby (including, without limitation, any fees payable to the
Placement Agent, who is the Company’s sole placement agent in connection with
the transactions contemplated by this Agreement). The Company shall pay, and
hold each Buyer harmless against, any liability, loss or expense (including,
without limitation, reasonable attorney’s fees and out-of-pocket expenses)
arising in connection with any claim relating to any such payment. Except as
otherwise set forth in the Transaction Documents, each party to this Agreement
shall bear its own expenses in connection with the sale of the Securities to the
Buyers.

(h) Pledge of Securities. Notwithstanding anything to the contrary contained in
Section 2(g), the Company acknowledges and agrees that the Securities may be
pledged by a Buyer in connection with a bona fide margin agreement or other loan
or financing arrangement that is secured by the Securities. The pledge of
Securities shall not be deemed to be a transfer, sale or assignment of the
Securities hereunder, and no Buyer effecting a pledge of Securities shall be
required to provide the Company with any notice thereof or otherwise make any
delivery to the Company pursuant to this Agreement or any other Transaction
Document. The Company hereby agrees to execute and deliver such documentation as
a pledgee of the Securities may reasonably request in connection with a pledge
of the Securities to such pledgee by a Buyer.

(i) Disclosure of Transactions and Other Material Information. The Company
shall, on or before 8:30 a.m., New York time, on the first (1st) Business Day
after the date of this Agreement, issue a press release (the “Press Release”)
reasonably acceptable to the Buyers disclosing all the material terms of the
transactions contemplated by the Transaction Documents. On or before 8:30 a.m.,
New York time, on the second (2nd) Business Day following the date of this
Agreement, the Company shall file a Current Report on Form 8-K describing all
the material terms of the transactions contemplated by the Transaction Documents
in the form required by the 1934 Act and attaching all the material Transaction
Documents (including, without limitation, this Agreement (and all schedules to
this Agreement), and the form of Warrants and the Registration Rights Agreement)
(including all attachments, the “8-K Filing”). From and after the issuance of
the Press Release, the Company shall have disclosed all material, nonpublic
information delivered to any of the Buyers by the Company or any of its
Subsidiaries, or any of

 

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their respective officers, directors, employees or agents (if any) in connection
with the transactions contemplated by the Transaction Documents. The Company
shall not, and the Company shall cause each of its Subsidiaries and each of its
and their respective officers, directors, employees and agents, not to, provide
any Buyer with any material, nonpublic information regarding the Company or any
of its Subsidiaries from and after the issuance of the Press Release without the
express prior written consent of such Buyer, except as expressly contemplated by
Section 4(o)(viii). In the event of a breach of the foregoing covenant by the
Company, or any of its Subsidiaries, or any of its or their respective officers,
directors, employees and agents (as determined in the reasonable good faith
judgment of such Buyer), in addition to any other remedy provided herein or in
the Transaction Documents, such Buyer shall have the right to make a public
disclosure, in the form of a press release, public advertisement or otherwise,
of such material, nonpublic information without the prior approval by the
Company, any of its Subsidiaries, or any of its or their respective officers,
directors, employees or agents. No Buyer shall have any liability to the
Company, any of its Subsidiaries, or any of its or their respective officers,
directors, employees, stockholders or agents, for any such disclosure. Subject
to the foregoing, neither the Company, its Subsidiaries nor any Buyer shall
issue any press releases or any other public statements with respect to the
transactions contemplated hereby; provided, however, that the Company shall be
entitled, without the prior approval of any Buyer, to make any press release or
other public disclosure with respect to such transactions (i) in substantial
conformity with the 8-K Filing and contemporaneously therewith and (ii) as is
required by applicable law and regulations (provided that in the case of clause
(i) each Buyer shall be consulted by the Company in connection with any such
press release or other public disclosure prior to its release). Without the
prior written consent of the applicable Buyer, the Company shall not (and shall
cause each of its Subsidiaries and affiliates to not) disclose the name of such
Buyer in any filing (other than the 8-K Filing), announcement, release or
otherwise.

(j) Additional Registration Statements. Until the Effective Date (as defined in
the Registration Rights Agreement) of the initial Registration Statement
required to be filed by the Company pursuant to Section 2(a) of the Registration
Rights Agreement which covers all of the securities required to be covered
thereunder and at any time while such Registration Statement is not effective,
the Company shall not file a registration statement under the 1933 Act relating
to securities that are not the Registrable Securities.

(k) Additional Issuance of Securities. The Company agrees that for the period
commencing on the date hereof and ending one hundred twenty (120) days after the
Effective Date of the initial Registration Statement required to be filed by the
Company pursuant to Section 2(a) of the Registration Rights Agreement which
covers all of the securities required to be covered thereunder (the “Restricted
Period”), neither the Company nor any of its Subsidiaries shall directly or
indirectly issue, offer, sell, grant any option to purchase, or otherwise
dispose of (or announce any issuance, offer, sale, grant or any option to
purchase or other disposition of) any of their respective equity or equity
equivalent securities, including, without limitation, any debt,

 

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preferred stock, rights, options, warrants or other instrument that is at any
time and under any circumstances convertible into or exchangeable for, or
otherwise entitles the holder thereof to receive, capital stock and other
securities of the Company (including, without limitation, any securities of the
Company or any Subsidiary which entitle the holder thereof to acquire Common
Stock at any time, including without limitation, any debt, preferred stock,
rights, options, warrants or other instrument that is at any time convertible
into or exchangeable for, or otherwise entitles the holder thereof to receive,
Common Stock or other securities that entitle the holder to receive, directly or
indirectly, Common Stock) (collectively with such capital stock or other
securities of the Company, “Equivalents”) (any such issuance, offer, sale,
grant, disposition or announcement being referred to as a “Subsequent
Placement”). Notwithstanding the foregoing, this Section 4(k) shall not apply in
respect of the issuance of (A) shares of Common Stock or standard options to
purchase Common Stock issued to directors, officers, employees or consultants of
the Company in connection with their service as directors or officers of the
Company, their employment by the Company or their retention as consultants by
the Company pursuant to an equity compensation program or other contract or
arrangement approved by the board of directors of the Company (or the
compensation committee of the board of directors of the Company), provided that
all such issuances after the date hereof pursuant to this clause (A) do not, in
the aggregate, exceed more than 5% of the Common Stock issued and outstanding
immediately prior to the date hereof, (B) shares of Common Stock issued upon the
conversion or exercise of Equivalents issued prior to the date hereof, provided
that such Equivalents have not been amended since the date of this Agreement to
increase the number of shares issuable thereunder or to lower the exercise or
conversion price thereof or otherwise materially change the terms or conditions
thereof in any manner that adversely affects any of the Buyers, (C) shares of
Common Stock and standard warrants to purchase Common Stock as equity kickers in
connection with bona fide lending transactions involving only non-convertible
debt, the primary purpose of which is not to raise capital, and which are
approved in good faith by the Company’s Board of Directors, provided that all
such issuances after the date hereof pursuant to this clause (C) do not, in the
aggregate, exceed 739,726 shares of Common Stock (including, without limitation,
shares of Common Stock issuable upon exercise of such standard warrants)
(adjusted for stock splits, combinations and the like), (D) the Warrant Shares,
(E) the Placement Agent Warrant (as defined below), provided that such Placement
Agent Warrant has not been amended since the Closing Date to increase the number
of shares issuable thereunder or to lower the exercise price thereof or
otherwise materially change the terms or conditions thereof in any manner that
adversely affects any of the Buyers, and (F) the Placement Agent Warrant Shares
(as defined below) (each of the foregoing in clauses (A) through (F),
collectively the “Excluded Securities”). “Placement Agent Warrant” means the
warrant to be issued by the Company to the Placement Agent on the Closing Date
to purchase up to 32,877 shares of Common Stock at an initial exercise price of
$7.30 per share, in the form provided to the Buyers on the date hereof; and
“Placement Agent Warrant Shares” means the shares of Common Stock issuable to
the Placement Agent upon exercise of the Placement Agent Warrant.

(l) 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
120% of the maximum number of shares of Common Stock issuable upon exercise of
the Warrants (without regard to any limitations on the exercise of the Warrants
set forth therein).

(m) Conduct of Business. The business of the Company and its Subsidiaries shall
not be conducted in violation of any law, ordinance or regulation of any
governmental entity, except where such violations would not result, either
individually or in the aggregate, in a Material Adverse Effect.

 

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(n) Variable Rate Transaction. From the date hereof until 18 months after the
Effective Date of the initial Registration Statement required to be filed by the
Company pursuant to Section 2(a) of the Registration Rights Agreement which
covers all of the securities required to be covered thereunder, the Company and
each Subsidiary shall be prohibited from effecting or entering into an agreement
to effect any Subsequent Placement involving a “Variable Rate Transaction.” The
term “Variable Rate Transaction” shall mean a transaction in which the Company
or any Subsidiary (i) issues or sells any Equivalents either (A) at a
conversion, exercise or exchange rate or other price that is based upon and/or
varies with the trading prices of or quotations for the shares of Common Stock
at any time after the initial issuance of such Equivalents, or (B) with a
conversion, exercise or exchange price that is subject to being reset at some
future date after the initial issuance of such Equivalents or upon the
occurrence of specified or contingent events directly or indirectly related to
the business of the Company or the market for the Common Stock, other than
pursuant to a customary “weighted average” anti-dilution provision or
(ii) enters into any agreement (including, but not limited to, an equity line of
credit) whereby the Company or any Subsidiary may sell securities at a future
determined price (other than standard and customary “preemptive” or
“participation” rights). Each Buyer shall be entitled to obtain injunctive
relief against the Company and its Subsidiaries to preclude any such issuance,
which remedy shall be in addition to any right to collect damages.

(o) Participation Right. From the date hereof until eighteen (18) months after
the Effective Date of the initial Registration Statement required to be filed by
the Company pursuant to Section 2(a) of the Registration Rights Agreement which
covers all of the securities required to be covered thereunder, neither the
Company nor any of its Subsidiaries shall, directly or indirectly, effect any
Subsequent Placement (other than a Direct Participation (as defined below))
unless the Company shall have first complied with this Section 4(o). The Company
acknowledges and agrees that the right set forth in this Section 4(o) is a right
granted by the Company, separately, to each Buyer.

(i) The Company shall deliver to each Buyer a written notice (the “Offer
Notice”) of any proposed or intended issuance or sale or exchange (the “Offer”)
of the securities being offered (the “Offered Securities”) in a Subsequent
Placement, which Offer Notice shall (w) identify and describe the Offered
Securities, (x) describe the price and other terms upon which they are to be
issued, sold or exchanged, and the number or amount of the Offered Securities to
be issued, sold or exchanged, (y) identify the Persons (if known) to which or
with which the Offered Securities are to be offered, issued, sold or exchanged
and (z) offer to issue and sell to or exchange with such Buyer in accordance
with the terms of the Offer (I) 100% of the Offered Securities through the date
that is one hundred twenty (120) days after the Effective Date of the initial
Registration Statement required to be filed by the Company pursuant to
Section 2(a) of the Registration Rights Agreement which covers all of the
securities required to be covered thereunder and (II) thereafter, at least 50%
of the Offered Securities, provided that the number of Offered Securities which
such Buyer shall have the right to subscribe for under this Section 4(o) shall
be (a) based on such Buyer’s pro rata portion of the aggregate number of Common
Shares purchased hereunder by all Buyers (the “Basic Amount”), and (b) with
respect to each Buyer that elects to purchase its Basic Amount, any additional
portion of the Offered Securities attributable to the Basic Amounts of other
Buyers as such Buyer shall indicate it will purchase or acquire should the other
Buyers subscribe for less than their Basic Amounts (the “Undersubscription
Amount”).

 

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(ii) To accept an Offer, in whole or in part, such Buyer must deliver a written
notice to the Company prior to the end of the fifth (5th) Business Day after
such Buyer’s receipt of the Offer Notice (the “Offer Period”), setting forth the
portion of such Buyer’s Basic Amount that such Buyer elects to purchase and, if
such Buyer shall elect to purchase all of its Basic Amount, the
Undersubscription Amount, if any, that such Buyer elects to purchase (in either
case, the “Notice of Acceptance”). If the Basic Amounts subscribed for by all
Buyers are less than the total of all of the Basic Amounts, then such Buyer who
has set forth an Undersubscription Amount in its Notice of Acceptance shall be
entitled to purchase, in addition to the Basic Amounts subscribed for, the
Undersubscription Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the total
of all the Basic Amounts and the Basic Amounts subscribed for (the “Available
Undersubscription Amount”), such Buyer who has subscribed for any
Undersubscription Amount shall be entitled to purchase only that portion of the
Available Undersubscription Amount as the Basic Amount of such Buyer bears to
the total Basic Amounts of all Buyers that have subscribed for Undersubscription
Amounts, subject to rounding by the Company to the extent it deems reasonably
necessary. Notwithstanding the foregoing, if the Company desires to modify or
amend the terms and conditions of the Offer prior to the expiration of the Offer
Period, the Company may deliver to each Buyer a new Offer Notice and the Offer
Period shall expire on the fifth (5th) Business Day after such Buyer’s receipt
of such new Offer Notice.

(iii) The Company shall have ten (10) Business Days from the expiration of the
Offer Period above (i) to offer, issue, sell or exchange all or any part of such
Offered Securities as to which a Notice of Acceptance has not been given by a
Buyer (the “Refused Securities”) pursuant to a definitive agreement(s) (the
“Subsequent Placement Agreement”), but only to the offerees described in the
Offer Notice (if so described therein) and only upon terms and conditions
(including, without limitation, unit prices and interest rates) that are not
more favorable to the acquiring Person or Persons or less favorable to the
Company than those set forth in the Offer Notice and (ii) to publicly announce
(a) the execution of such Subsequent Placement Agreement, and (b) either (x) the
consummation of the transactions contemplated by such Subsequent Placement
Agreement or (y) the termination of such Subsequent Placement Agreement, which
shall be filed with the SEC on a Current Report on Form 8-K with such Subsequent
Placement Agreement and any documents contemplated therein filed as exhibits
thereto.

(iv) In the event the Company shall propose to sell less than all the Refused
Securities (any such sale to be in the manner and on the terms specified in
Section 4(o)(iii) above), then such Buyer may, at its sole option and in its
sole discretion, reduce the number or amount of the Offered Securities specified
in its Notice of Acceptance to an amount that shall be not less than the number
or amount of the Offered Securities that such Buyer elected to purchase pursuant
to Section 4(o)(ii) above multiplied by a fraction, (i) the numerator of which
shall be the number or amount of Offered Securities

 

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the Company actually proposes to issue, sell or exchange (including Offered
Securities to be issued or sold to Buyers pursuant to this Section 4(o) prior to
such reduction) and (ii) the denominator of which shall be the original amount
of the Offered Securities. In the event that any Buyer so elects to reduce the
number or amount of Offered Securities specified in its Notice of Acceptance,
the Company may not issue, sell or exchange more than the reduced number or
amount of the Offered Securities unless and until such securities have again
been offered to the Buyers in accordance with Section 4(o)(i) above.

(v) Upon the closing of the issuance, sale or exchange of all or less than all
of the Refused Securities, such Buyer shall acquire from the Company, and the
Company

shall issue to such Buyer, the number or amount of Offered Securities specified
in its Notice of Acceptance. The purchase by such Buyer of any Offered
Securities is subject in all cases to the preparation, execution and delivery by
the Company and such Buyer of a separate purchase agreement relating to such
Offered Securities reasonably satisfactory in form and substance to such Buyer
and its counsel.

(vi) Any Offered Securities not acquired by a Buyer or other Persons in
accordance with this Section 4(o) may not be issued, sold or exchanged until
they are again offered to such Buyer under the procedures specified in this
Agreement.

(vii) The Company and each Buyer agree that if any Buyer elects to participate
in the Offer, neither the Subsequent Placement Agreement with respect to such
Offer nor any other transaction documents related thereto (collectively, the
“Subsequent Placement Documents”) shall include any term or provision whereby
such Buyer shall be required to agree to any restrictions on trading as to any
securities of the Company owned by such Buyer prior to such Subsequent Placement
more restrictive in any material respect than the restrictions contained in the
Transaction Documents.

(viii) Notwithstanding anything to the contrary in this Section 4(o) and unless
otherwise agreed to by such Buyer, the Company shall either confirm in writing
to such Buyer that the transaction with respect to the Subsequent Placement has
been abandoned or shall publicly disclose its intention to issue the Offered
Securities, in either case in such a manner such that such Buyer will not be in
possession of any material, non-public information, by the tenth (10th) day
following delivery of the Offer Notice. If by such tenth (10th) day, no public
disclosure regarding a transaction with respect to the Offered Securities has
been made, and no notice regarding the abandonment of such transaction has been
received by such Buyer, such transaction shall be deemed to have been abandoned
and such Buyer shall not be deemed to be in possession of any material,
non-public information with respect to the Company or any of its Subsidiaries.
Should the Company decide to pursue such transaction with respect to the Offered
Securities, the Company shall provide such Buyer with another Offer Notice and
such Buyer will again have the right of participation set forth in this
Section 4(o). The Company shall not be permitted to deliver more than one such
Offer Notice to such Buyer in any sixty (60) day period.

 

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(ix) The restrictions contained in this Section 4(o) shall not apply in
connection with the issuance of any Excluded Securities. The Company shall not
circumvent the provisions of this Section 4(o) by providing terms or conditions
to one Buyer that are not provided to all.

“Direct Participation” means any working interest, royalty interest or other
contractual right with respect to oil and gas well leases in which the Company
may from time to time sell undivided working interests and/or other economic
contractual interests, provided that none of the foregoing shall include or
involve the sale of any security (as defined under the 1933 Act) or other equity
interest in the Company, any Subsidiary or any other Person.

(p) Passive Foreign Investment Company. The Company shall conduct its business
in such a manner as will ensure that the Company will not be deemed to
constitute a passive foreign investment company within the meaning of
Section 1297 of the U.S. Internal Revenue Code of 1986, as amended.

 

5. REGISTER; TRANSFER AGENT INSTRUCTIONS; LEGEND.

(a) Register. The Company shall maintain at its principal executive offices (or
such other office or agency of the Company as it may designate by notice to each
holder of Securities), a register for the Common Shares and the Warrants in
which the Company shall record the name and address of the Person in whose name
the Common Shares and the Warrants have been issued (including the name and
address of each transferee), the number of Common Shares held by such Person and
the number of Warrant Shares issuable upon exercise of the Warrants held by such
Person. The Company shall keep the register open and available at all times
during business hours for inspection of any Buyer or its legal representatives.

(b) Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent and any subsequent transfer agent in the form
acceptable to the Buyers (the “Irrevocable Transfer Agent Instructions”) to
issue certificates or credit shares to the applicable balance accounts at The
Depository Trust Company (“DTC”), registered in the name of each Buyer or its
respective nominee(s), for the Common Shares and the Warrant Shares in such
amounts as specified from time to time by each Buyer to the Company upon
delivery of the Common Shares or the exercise of the Warrants (as the case may
be). The Company represents and warrants that no instruction other than the
Irrevocable Transfer Agent Instructions referred to in this Section 5(b), and
stop transfer instructions to give effect to Section 2(g) hereof, will be given
by the Company to its transfer agent with respect to the Securities, and that
the Securities shall otherwise be freely transferable on the books and records
of the Company, as applicable, to the extent provided in this Agreement and the
other Transaction Documents. If a Buyer effects a sale, assignment or transfer
of the Securities in accordance with Section 2(g), the Company shall permit the
transfer and shall promptly instruct its transfer agent to issue one or more
certificates or credit shares to the applicable balance accounts at DTC in such
name and in such denominations as specified by such Buyer to effect such sale,
transfer or assignment. In the event that such sale, assignment or transfer
involves Common Shares or Warrant Shares sold, assigned or transferred pursuant
to an effective registration statement or in compliance with Rule 144, the
transfer agent shall issue such shares to such Buyer, assignee or transferee (as
the case may be) without any restrictive legend in accordance with Section 5(d)
below. The Company

 

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acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to a Buyer. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5(b) will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5(b), that a Buyer shall be entitled,
in addition to all other available remedies, to an order and/or injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required. The Company shall cause its counsel to issue the legal opinion
referred to in the Irrevocable Transfer Agent Instructions to the Company’s
transfer agent on each Effective Date. Any fees (with respect to the transfer
agent, counsel to the Company or otherwise) associated with the issuance of such
opinion or the removal of any legends on any of the Securities shall be borne by
the Company.

(c) Legends. Each Buyer understands that the certificates or other instruments
representing the Common Shares and the Warrants and, until such time as the
resale of the Common Shares and the Warrant Shares (as the case may be) have
been registered under the 1933 Act as contemplated by the Registration Rights
Agreement or are eligible for sale pursuant to Rule 144, the stock certificates
representing the Common Shares and the Warrant Shares (as the case may be),
except as set forth below, shall bear any legend as required by the “blue sky”
laws of any state and a restrictive legend in substantially the following form
(and a stop-transfer order may be placed against transfer of such stock
certificates):

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [EXERCISABLE] HAVE BEEN] [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 (B) AN OPINION OF COUNSEL TO THE HOLDER
(IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY,
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD OR ELIGIBLE
TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

(d) Removal of Legends. Certificates evidencing Securities shall not be required
to contain the legend set forth in Section 5(c) above or any other legend
(i) while a registration statement (including the Registration Statement)
covering the resale of such Securities is effective under the Securities Act,
(ii) following any sale of such Securities pursuant to Rule 144 (assuming the
transferor is not an affiliate of the Company), (iii) if such Securities are
eligible to be sold, assigned or transferred under Rule 144 (provided that a
Buyer provides the Company with reasonable assurances that such Securities are
eligible for sale, assignment or transfer under

 

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Rule 144 which shall not include an opinion of counsel), (iv) in connection with
a sale, assignment or other transfer (other than under Rule 144) provided such
Buyer provides the Company with an opinion of counsel to such Buyer, in a
generally acceptable form, to the effect that such sale, assignment or transfer
of the Securities may be made without registration under the applicable
requirements of the 1933 Act or (v) if such legend is not required under
applicable requirements of the 1933 Act (including, without limitation,
controlling judicial interpretations and pronouncements issued by the SEC). If a
legend is not required pursuant to the foregoing, the Company shall no later
than two (2) Trading Days (as defined below) following the delivery by a Buyer
to the Company or the transfer agent (with notice to the Company) of a legended
certificate representing such Securities (endorsed or with stock powers
attached, signatures guaranteed, and otherwise in form necessary to affect the
reissuance and/or transfer, if applicable), together with any other deliveries
from such Buyer as may be required above in this Section 5(d), as directed by
such Buyer, either: (A) deliver (or cause to be delivered to) such Buyer a
certificate representing such Securities that is free from all restrictive and
other legends or (B) credit the balance account of such Buyer’s or such Buyer’s
nominee with DTC with a number of shares of Common Stock equal to the number of
Common Shares or Warrant Shares (as the case may be) represented by the
certificate or exercise notice (as the case may be) so delivered by such Buyer
(the date by which such certificate is required to be delivered to such Buyer or
such credit is so required to be made to the balance account of such Buyer’s or
such Buyer’s nominee with DTC pursuant to the foregoing is referred to herein as
the “Required Delivery Date”).

(e) Failure to Timely Deliver; Buy-In. If the Company fails to (i) issue and
deliver (or cause to be delivered) to a Buyer by the Required Delivery Date a
certificate representing the Securities so delivered to the Company by such
Buyer that is free from all restrictive and other legends or (ii) credit the
balance account of such Buyer’s or such Buyer’s nominee with DTC for such number
of shares of Common Shares or Warrant Shares so delivered to the Company, then,
in addition to all other remedies available to such Buyer, the Company shall pay
in cash to such Buyer on each day after the Required Delivery Date that the
issuance or credit of such shares is not timely effected an amount equal to 1%
of the product of (A) the sum of the number of shares of Common Shares or
Warrant Shares (as the case may be) not issued to such Buyer on a timely basis
and to which such Buyer is entitled and (B) the VWAP (as defined below) of the
shares of Common Stock for the five (5) Trading Day period immediately preceding
the Required Delivery Date. In addition to the foregoing, if the Company fails
to so properly deliver such unlegended certificates or so properly credit the
balance account of such Buyer’s or such Buyer’s nominee with DTC by the Required
Delivery Date, and if on or after the Required Delivery Date such Buyer
purchases (in an open market transaction or otherwise) shares of Common Stock to
deliver in satisfaction of a sale by such Buyer of shares of Common Stock that
such Buyer anticipated receiving from the Company without any restrictive legend
(a “Buy-In”), then the Company shall, within three (3) Trading Days after such
Buyer’s request and in such Buyer’s sole discretion, either (i) pay cash to such
Buyer in an amount equal to such Buyer’s total purchase price (including
brokerage commissions, if any) for the shares of Common Stock so purchased (the
“Buy-In Price”), at which point the Company’s obligation to deliver such
certificate or credit such Buyer’s balance account shall terminate and such
shares shall be cancelled, or (ii) promptly honor its obligation to deliver to
such Buyer a certificate or certificates or credit such Buyer’s DTC account
representing such number of shares of Common Stock that would have been issued
if the Company timely complied with its obligations hereunder and pay cash to
such

 

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Buyer in an amount equal to the excess (if any) of the Buy-In Price over the
product of (A) such number of shares of Common Shares or Warrant Shares (as the
case may be) that the Company was required to deliver to such Buyer by the
Required Delivery Date times (B) the average VWAP of the Common Stock for the
five (5) Trading Day period immediately preceding the Required Delivery Date.

For purposes of this Section 5(e), “VWAP” means, for any security as of any
date, the dollar volume-weighted average price for such security on the
Principal Market (or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock is then traded) during the period
beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York
time, as reported by Bloomberg Financial Markets (“Bloomberg”) through its
“Volume at Price” function or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on
the electronic bulletin board for such security during the period beginning at
9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, as
reported by Bloomberg, or, if no dollar volume-weighted average price is
reported for such security by Bloomberg for such hours, the average of the
highest closing bid price and the lowest closing ask price of any of the market
makers for such security as reported in the “pink sheets” by Pink Sheets LLC
(formerly the National Quotation Bureau, Inc.). If VWAP cannot be calculated for
such security on such date on any of the foregoing bases, the VWAP of such
security on such date shall be the fair market value as mutually determined by
the Company and the Buyer. If the Company and the Buyer are unable to agree upon
the fair market value of such security, then they shall agree in good faith on a
reputable investment bank to make such determination of fair market value, whose
determination shall be final and binding and whose fees and expenses shall be
borne by the Company. All such determinations shall be appropriately adjusted
for any share dividend, share split or other similar transaction during such
period. “Trading Day” means any day on which the Common Stock is traded on the
Principal Market, or, if the Principal Market is not the principal trading
market for the Common Stock, then on the principal securities exchange or
securities market on which the Common Stock is then traded; provided that
“Trading Day” shall not include any day on which the Common Stock is scheduled
to trade on such exchange or market for less than 4.5 hours or any day that the
Common Stock is suspended from trading during the final hour of trading on such
exchange or market (or if such exchange or market does not designate in advance
the closing time of trading on such exchange or market, then during the hour
ending at 4:00:00 p.m., New York time).

 

6. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.

(a) The obligation of the Company hereunder to issue and sell the Common Shares
and the related Warrants to each 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
each Buyer with prior written notice thereof:

(i) Such 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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(ii) Such Buyer and each other Buyer shall have delivered to the Company the
Purchase Price (less, in the case of Cranshire, the amount withheld pursuant to
Section 4(g)) for the Common Shares and the related Warrants being purchased by
such Buyer at the Closing by wire transfer of immediately available funds
pursuant to the wire instructions provided by the Company.

(iii) The representations and warranties of such Buyer shall be true and correct
in all material respects as of the date when made and as of the Closing Date as
though originally 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 such Buyer shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by such Buyer at or prior
to the Closing Date.

 

7. CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.

(a) The obligation of each Buyer hereunder to purchase the Common Shares and the
related Warrants 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 each Buyer’s sole benefit and may be waived by such Buyer at
any time in its sole discretion by providing the Company with prior written
notice thereof:

(i) The Company shall have duly executed and delivered to such Buyer (A) each of
the Transaction Documents and (B) the Common Shares (in such numbers as is set
forth across from such Buyer’s name in column (3) of the Schedule of Buyers and
the related Warrants (in such numbers as is set forth across from such Buyer’s
name in column (4) of the Schedule of Buyers) being purchased by such Buyer at
the Closing pursuant to this Agreement.

(ii) Such Buyer shall have received the opinion of Strasburger & Price, LLP, the
Company’s outside counsel, dated as of the Closing Date, in the form acceptable
to such Buyer.

(iii) The Company shall have delivered to such Buyer a copy of the Irrevocable
Transfer Agent Instructions, in the form acceptable to such Buyer, which
instructions shall have been delivered to and acknowledged in writing by the
Company’s transfer agent.

(iv) The Company shall have delivered to such Buyer a certificate evidencing the
formation and good standing of the Company and each of its Subsidiaries in each
such entity’s jurisdiction of formation issued by the Secretary of State (or
comparable office) of such jurisdiction of formation as of a date within ten
(10) days of the Closing Date.

(v) The Company shall have delivered to such Buyer a certificate evidencing the
Company’s qualification as a foreign corporation and good standing issued by the
Secretary of State (or comparable office) of each jurisdiction in which the
Company conducts business and is required to so qualify, as of a date within ten
(10) days of the Closing Date.

 

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(vi) The Company shall have delivered to such Buyer a certified copy of the
Articles of Incorporation as certified by the California Secretary of State
within ten (10) days of the Closing Date.

(vii) The Company shall have delivered to such Buyer a certificate, executed by
the Secretary of the Company and dated as of the Closing Date, as to (i) the
resolutions consistent with Section 3(b) as adopted by the Company’s board of
directors in a form reasonably acceptable to such Buyer, (ii) the Articles of
Incorporation and (iii) the Bylaws, each as in effect at the Closing, in the
form acceptable to such Buyer.

(viii) Each and every representation and warranty of the Company 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 in all respects with the covenants,
agreements and conditions required to be performed, satisfied or complied with
by the Company at or prior to the Closing Date. Such 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 such Buyer in the form acceptable to such Buyer.

(ix) The Company shall have delivered to such Buyer a letter from the Company’s
transfer agent certifying the number of shares of Common Stock outstanding on
the Closing Date immediately prior to the Closing.

(x) The Common Stock (I) shall be designated for quotation or listed on the
Principal Market and (II) shall not have been suspended, as of the Closing Date,
by the SEC or the Principal Market from trading on the Principal Market nor
shall suspension by the SEC or the Principal Market have been threatened, as of
the Closing Date, either (A) in writing by the SEC or the Principal Market or
(B) by falling below the minimum maintenance requirements of the Principal
Market.

(xi) The Company shall have obtained all governmental, regulatory or third party
consents and approvals, if any, necessary for the sale of the Securities,
including without limitation, those required by the Principal Market.

(xii) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction that prohibits the
consummation of any of the transactions contemplated by the Transaction
Documents.

(xiii) Since the date of execution of this Agreement, no event or series of
events shall have occurred that reasonably would have or result in a Material
Adverse Effect.

 

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(xiv) The Company shall have obtained approval of the Principal Market to list
the Common Shares and the Warrant Shares.

(xv) The Company shall have delivered to such Buyer such other documents
relating to the transactions contemplated by this Agreement as such Buyer or its
counsel may reasonably request.

 

8. TERMINATION.

In the event that the Closing shall not have occurred with respect to a Buyer on
or before ten (10) days from the date hereof due to the Company’s or such
Buyer’s failure to satisfy the conditions set forth in Sections 6 and 7 above
(and a non-breaching party’s failure to waive such unsatisfied condition(s)),
any such non-breaching party at any time shall have the right to terminate its
obligations under this Agreement with respect to such breaching party on or
after the close of business on such date without liability of such non-breaching
party to any other party; provided, however, that the abandonment of the sale
and purchase of the Common Shares and the Warrants shall be applicable only to
such non-breaching party providing such written notice; provided further,
notwithstanding any such termination the Company shall remain obligated to
reimburse the non-breaching Buyers for the expenses described in Section 4(g)
above. Nothing contained in this Section 8 shall be deemed to release any party
from any liability for any breach by such party of the terms and provisions of
this Agreement or the other Transaction Documents or to impair the right of any
party to compel specific performance by any other party of its obligations under
this Agreement or the other Transaction Documents.

 

9. MISCELLANEOUS.

(a) 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 jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York. 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 WITH OR ARISING OUT OF
THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

(b) Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party. In the event that any signature is delivered by
facsimile transmission or by an e-mail which contains a portable document format
(.pdf) file of an executed signature page, such signature page 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 signature page
were an original thereof.

 

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(c) Headings; Gender. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement. Unless the context clearly indicates otherwise, each pronoun herein
shall be deemed to include the masculine, feminine, neuter, singular and plural
forms thereof. The terms “including,” “includes,” “include” and words of like
import shall be construed broadly as if followed by the words “without
limitation.” The terms “herein,” “hereunder,” “hereof” and words of like import
refer to this entire Agreement instead of just the provision in which they are
found.

(d) 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.

(e) Entire Agreement; Amendments. This Agreement, the other Transaction
Documents and the schedules and exhibits attached hereto and thereto and the
instruments referenced herein and therein supersede all other prior oral or
written agreements between the Buyers, the Company, their affiliates and Persons
acting on their behalf with respect to the matters contained herein and therein,
and this Agreement, the other Transaction Documents, the schedules and exhibits
attached hereto and thereto and the instruments referenced herein and therein
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 any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be amended or waived other than by an instrument in writing signed
by the Company and the holders of at least a majority of the Common Shares
issued and issuable hereunder, and any amendment or to, or waiver of any
provision of, this Agreement made in conformity with the provisions of this
Section 9(e) shall be binding on all Buyers and holders of Securities, as
applicable, provided that any party may give a waiver in writing as to itself.
No such amendment or waiver (unless given pursuant to the foregoing proviso)
shall be effective to the extent that it applies to less than all of the holders
of the Common Shares then outstanding. No consideration shall be offered or paid
to any Person to amend or consent to a waiver or modification of any provision
of any of the Transaction Documents unless the same consideration also is
offered to all of the parties to the Transaction Documents, holders of Common
Shares or holders of the Warrants (as the case may be). The Company has not,
directly or indirectly, made any agreements with any Buyers relating to the
terms or conditions of the transactions contemplated by the Transaction
Documents except as set forth in the Transaction Documents. Without limiting the
foregoing, the Company confirms that, except as set forth in this Agreement, no
Buyer has made any commitment or promise or has any other obligation to provide
any financing to the Company, any Subsidiary or otherwise.

(f) 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 (1) Business Day after deposit with an

 

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overnight courier service with next day delivery specified, 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:    Royale Energy, Inc.    7676 Hazard Center Drive, Suite
1500    San Diego, California 92108    Telephone:   (619) 881-2800    Facsimile:
  (619) 881-2899    Attention:   Stephen M. Hosmer With a copy (for
informational purposes only) to:    Strasburger & Price, LLP    600 Congress
Avenue, Suite 1600    Austin, Texas 78701    Telephone:   (512) 499-3600   
Facsimile:   (512) 499-3660    Attention:   Lee Polson If to the Transfer Agent:
   American Stock Transfer    59 Maiden Lane    New York, NY 10038    Telephone:
  (718) 921-8257    Facsimile:   (718) 236-4588    Attention:   Joe Alicia

If to a Buyer, to its address and facsimile number set forth on the Schedule of
Buyers, with copies to such Buyer’s representatives as set forth on the Schedule
of Buyers,

 

with a copy (for informational purposes only) to:    Greenberg Traurig, LLP   
77 W. Wacker Drive, Suite 2400    Chicago, Illinois 60602    Telephone:  
(312) 456-8400    Facsimile:   (312) 456-8435    Attention:   Peter H.
Lieberman, Esq.      Todd A. Mazur, Esq.

 

or to 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 given to
each other party five (5) days prior to the effectiveness of such change
provided, that Greenberg Traurig, LLP shall only be provided

 

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copies of notices sent to Cranshire. 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 an overnight courier service shall
be rebuttable evidence of personal service, receipt by facsimile or receipt from
an overnight courier service in accordance with clause (i), (ii) or (iii) above,
respectively.

(g) 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 any of the Securities. The Company shall not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of the holders of at least a majority of the aggregate number of
Registrable Securities issued and issuable under the Transaction Documents,
including, without limitation, by way of a Fundamental Transaction (as defined
in the Warrants) (unless the Company is in compliance with the applicable
provisions governing Fundamental Transactions set forth in the Warrants). A
Buyer may assign some or all of its rights hereunder in connection with transfer
of any of its Securities without the consent of the Company to no more than five
(5) Persons (and, with the consent of the Company (which consent shall not be
unreasonably withheld), to more than five (5) Persons), in which event such
assignee shall be deemed to be a Buyer hereunder with respect to such assigned
rights.

(h) No Third Party Beneficiaries. This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns, and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person, other than the Indemnitees referred to in Section 9(k).

(i) Survival. The representations, warranties, agreements and covenants shall
survive the Closing. Each Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.

(j) 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 any 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.

(k) Indemnification. In consideration of each Buyer’s execution and delivery of
the Transaction Documents and acquiring the Securities thereunder and in
addition to all of the Company’s other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless each
Buyer and each holder of any Securities and all of their stockholders, partners,
members, officers, directors, employees and direct or indirect investors and any
of the foregoing Persons’ agents or other representatives (including, without
limitation, 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 Indemnitee 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 Indemnitee as a result of, or

 

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arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in any of the Transaction
Documents, (b) any breach of any covenant, agreement or obligation of the
Company contained in any of the Transaction Documents or (c) any cause of
action, suit or claim brought or made against such Indemnitee by a third party
(including for these purposes a derivative action brought on behalf of the
Company) and arising out of or resulting from (i) the execution, delivery,
performance or enforcement of any of the Transaction Documents, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, (iii) any
disclosure properly made by such Buyer pursuant to Section 4(i), or (iv) the
status of such Buyer or holder of the Securities as an investor in the Company
pursuant to the transactions contemplated by the Transaction Documents, except,
with respect to (1) clause (a), to the extent such Indemnified Liability arises
solely from a Buyer’s material misrepresentation or material breach of any
representation or warranty made by such Buyer in this Agreement and (2) clause
(c), to the extent such Indemnified Liability arises from an Indemnitee’s gross
negligence, bad faith or willful misconduct. 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 which 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 9(k) shall be the same as those set
forth in Section 6 of the Registration Rights Agreement.

(l) 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. Notwithstanding
anything contained in this Agreement to the contrary, or any references to
“Buyers” herein, Cranshire and the Company acknowledge and agree that Cranshire
is the only Buyer party to the transactions contemplated by this Agreement.

(m) Remedies. Each Buyer and each holder of any Securities shall have all rights
and remedies set forth in the Transaction Documents and all rights and remedies
which such holders have been granted at any time under any other agreement or
contract and all of the rights which such holders have under any law. Any Person
having any rights under any provision of this Agreement shall be entitled to
enforce such rights specifically (without posting a bond or other security), to
recover damages by reason of any breach of any provision of this Agreement and
to exercise all other rights granted by law. Furthermore, the Company recognizes
that in the event that it fails to perform, observe, or discharge any or all of
its obligations under the Transaction Documents, any remedy at law may prove to
be inadequate relief to the Buyers. The Company therefore agrees that the Buyers
shall be entitled to seek specific performance and/or temporary, preliminary and
permanent injunctive or other equitable relief from any court of competent
jurisdiction in any such case without the necessity of proving actual damages
and without posting a bond or other security.

(n) Withdrawal Right. Notwithstanding anything to the contrary contained in (and
without limiting any similar provisions of) the Transaction Documents, whenever
any Buyer exercises a right, election, demand or option under a Transaction
Document and the Company does not timely perform its related obligations within
the periods therein provided, then such Buyer may rescind or withdraw, in its
sole discretion from time to time upon written notice to the Company, any
relevant notice, demand or election in whole or in part without prejudice to its
future actions and rights

 

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(o) Payment Set Aside. To the extent that the Company makes a payment or
payments to any Buyer hereunder or pursuant to any of the other Transaction
Documents or any of the Buyers enforce or exercise their 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, a trustee,
receiver or any other Person under any law (including, without limitation, any
bankruptcy law, foreign, 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.

(p) Independent Nature of Buyers’ Obligations and Rights. The obligations of
each Buyer under the Transaction Documents are several and not joint with the
obligations of any other Buyer, and no Buyer shall be responsible in any way for
the performance of the obligations of any other Buyer under any Transaction
Document. Nothing contained herein or in any other Transaction Document, and no
action taken by any Buyer pursuant hereto or thereto, shall be deemed to
constitute the Buyers as, and the Company acknowledges that the Buyers do not so
constitute, a partnership, an association, a joint venture or any other kind of
group or entity, or create a presumption that the Buyers are in any way acting
in concert or as a group or entity with respect to such obligations or the
transactions contemplated by the Transaction Documents or any matters, and the
Company acknowledges that the Buyers are not acting in concert or as a group,
and the Company shall not assert any such claim, with respect to such
obligations or the transactions contemplated by the Transaction Documents. The
decision of each Buyer to purchase Securities pursuant to the Transaction
Documents has been made by such Buyer independently of any other Buyer. Each
Buyer acknowledges that no other Buyer has acted as agent for such Buyer in
connection with such Buyer making its investment hereunder and that no other
Buyer will be acting as agent of such Buyer in connection with monitoring such
Buyer’s investment in the Securities or enforcing its rights under the
Transaction Documents. The Company and each Buyer confirms that each Buyer has
independently participated with the Company in the negotiation of the
transaction contemplated hereby with the advice of its own counsel and advisors.
Each Buyer shall be entitled to independently protect and enforce its rights,
including, without limitation, the rights arising out of this Agreement or out
of any other Transaction Documents, and it shall not be necessary for any other
Buyer to be joined as an additional party in any proceeding for such purpose.
The use of a single agreement to effectuate the purchase and sale of the
Securities contemplated hereby was solely in the control of the Company, not the
action or decision of any Buyer, and was done solely for the convenience of the
Company and not because it was required or requested to do so by any Buyer. It
is expressly understood and agreed that each provision contained in this
Agreement and in each other Transaction Document is between the Company and a
Buyer, solely, and not between the Company and the Buyers collectively and not
between and among the Buyers.

 

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(q) Certain Adjustments.

(i) If and whenever on or after the date hereof until the earlier to occur of
(i) the five (5) year anniversary of the Closing Date or (ii) the date on which
the Buyers no longer hold any Registrable Securities, the Company issues or
sells (or in accordance with the provisions set forth in Section 2 of the
Warrants is deemed to have issued or sold) (whether through a Subsequent
Placement or otherwise) any shares of Common Stock or Equivalents (including the
issuance or sale of shares of Common Stock or Equivalents owned or held by or
for the account of the Company, but excluding any Excluded Securities issued or
sold or deemed to have been issued or sold) for a consideration per share that
has a discount greater than 15% from the highest of (i) the Closing Sale Price
(as defined below) on the date the term sheet relating to such issuance or sale
(or deemed issuance or sale) is executed, (ii) the Closing Sale Price on the
date the purchase agreement relating to such issuance or sale (or deemed
issuance or sale) is executed and (iii) the Closing Sale Price on the date such
issuance or sale (or deemed issuance or sale) is consummated (such greatest
discount being referred to as the “Applicable Discount”) (the foregoing a
“Dilutive Issuance”), then immediately after such Dilutive Issuance, the Company
shall issue without the payment of additional consideration, in connection with
such Dilutive Issuance, a number of additional shares of Common Stock to each of
the Buyers equal to difference between (1) the aggregate number of shares of
Common Stock that would have been issued to such Buyer at the Closing had such
Applicable Discount applied to the Share Price (as defined below), based on such
Buyer’s Purchase Price paid at the Closing minus (2) the aggregate number of
shares of Common Stock equal to the sum of the number of shares of Common Stock
initially issued to such Buyer at the Closing (adjusted for stock splits,
combinations, dividends and the like), plus, to the extent there has been a
previous issuance of Adjustment Shares (as defined below) to such Buyer, the
number of Adjustment Shares previously issued to such Buyer (adjusted for stock
splits, combinations, dividends and the like). For purposes of this
Section 9(q), (I) “Share Price” means $8.59 per share (as adjusted for stock
splits, combinations, dividends and the like); (II) “Adjustment Shares” means
shares of Common Stock issued to pursuant to this Section 9(q); and (III)
“Closing Sale Price” means, for any security as of any date, the last closing
trade price for such security on the Principal Market, as reported by Bloomberg,
or, if the Principal Market begins to operate on an extended hours basis and
does not designate the closing trade price, then the last trade price of such
security prior to 4:00:00 p.m., New York time, as reported by Bloomberg, or, if
the Principal Market is not the principal securities exchange or trading market
for such security, the last trade price of such security on the principal
securities exchange or trading market where such security is listed or traded as
reported by Bloomberg, or if the foregoing does not apply, the last trade price
of such security in the over-the-counter market on the electronic bulletin board
for such security as reported by Bloomberg, or, if no last trade price is
reported for such security by Bloomberg, the average of the ask prices of any
market makers for such security as reported in the “pink sheets” by Pink Sheets
LLC (formerly the National Quotation Bureau, Inc.). If the Closing Sale Price
cannot be calculated for a security on a particular date on any of the foregoing
bases, the Closing Sale Price of such security on such date shall be the fair
market value as mutually determined by the Company and the applicable Buyer. If
the Company and such Buyer are unable to agree upon the fair market value of
such security, then such dispute shall be resolved in

 

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accordance with the procedures in Section 13 of such Buyer’s Warrants. All such
determinations shall appropriately adjusted for any stock dividend, stock split,
stock combination or other similar transaction during such period. For purposes
of the foregoing, the consideration per share at which the Company issues or
sells (or is deemed to have issued or sold) shares of Common Stock or
Equivalents shall be determined in accordance with the provisions of
Section 2(b) of the Warrants issued to the Buyers pursuant to this Agreement.
Promptly following the occurrence of each Dilutive Issuance giving rise to the
obligation to issue any Adjustment Shares (but in no event more than three
(3) Trading Days thereafter), the Company shall issue irrevocable instructions
authorizing and directing its transfer agent to issue (and the Company shall
cause its transfer agent to promptly deliver (but in no event in more than three
(3) Trading Days) such Adjustment Shares to each Buyer. The Company represents,
warrants and covenants that the issuance of all Adjustment Shares will be duly
authorized and upon issuance in accordance with the terms of the Transaction
Documents shall be validly issued, fully paid and non-assessable and free from
all taxes, liens, charges and other encumbrances with respect to the issue
thereof.

(ii) In implementation of the foregoing, to the extent that an issuance of
Adjustment Shares would result in a Buyer or any of its affiliates beneficially
owning in excess of 9.99% (the “Maximum Percentage”) of the outstanding shares
of Common Stock immediately following such issuance, then the Company shall
initially only issue such number of Adjustment Shares that would result in such
Buyer (together with such Buyer’s affiliates) beneficially owning the Maximum
Percentage of the outstanding shares of Common Stock, and, except as otherwise
provided below, no other Adjustment Shares shall be issuable under this
Section 9(q). After such initial issuance, and until all Adjustment Shares which
otherwise would have been issued under this Section 9(q) have been issued, from
time to time the Company will issue such number of such unissued Adjustment
Shares so that such Buyer (together such Buyer’s affiliates) will beneficially
own only the Maximum Percentage of the outstanding shares of Common Stock. Such
Buyer shall make representations and warranties to the Company regarding its
(together with its affiliates’) beneficial ownership to effectuate the
foregoing. The Maximum Percentage limitation contained in this paragraph and the
limitation on exercise contained in Section 1(f)(i) of the Warrants issued to
the such Buyer pursuant to this Agreement shall be coordinated so that the
aggregate beneficial ownership of such Buyer (together with its affiliates) does
not exceed the Maximum Percentage limitation. In connection therewith, issuances
pursuant to this Section 9(q) shall take precedence over issuances of any
Warrants Shares issuable to such Buyer. The provisions of this paragraph shall
be implemented in a manner otherwise than in strict conformity with the terms
this paragraph to correct this paragraph (or any portion hereof) which may be
defective or inconsistent with the intended Maximum Percentage beneficial
ownership limitation herein contained or to make changes or supplements
necessary or desirable to properly give effect to such Maximum Percentage
limitation. The limitations contained in this paragraph shall apply to assignees
of such Buyer hereunder. The holders of Common Stock of the Company shall be
third party beneficiaries of this paragraph and the Company may not waive this
paragraph without the consent of holders of a majority of its Common Stock. For
the purposes of this paragraph, beneficial ownership and all determinations and
calculations (including, without limitation, with respect to calculations of
percentage ownership) shall be determined by such Buyer in accordance with
Section 13(d) of the 1934 Act and the rules and regulations promulgated
thereunder.

[signature pages follow]

 

38

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IN WITNESS WHEREOF, Buyer and the Company have caused their respective signature
page to this Agreement to be duly executed as of the date first written above.

 

COMPANY: ROYALE ENERGY, INC. By:  

/s/ Stephen M. Hosmer

Name:   Stephen M. Hosmer Title:   Executive Vice President & Chief Financial
Officer

--------------------------------------------------------------------------------

IN WITNESS WHEREOF, Buyer and the Company have caused their respective signature
page to this Agreement to be duly executed as of the date first written above.

 

BUYER: CRANSHIRE CAPITAL, L.P. By:   Downsview Capital, Inc. Its:   General
Partner

/s/ Mitch Kopin

By:   Mitch Kopin Its:   President

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SCHEDULE OF BUYERS

 

(1)    (2)    (3)    (4)    (5)    (6)

Buyer

  

Address and Facsimile Number

   Aggregate
Number of
Common
Shares    Aggregate
Number of
Warrant
Shares    Purchase Price   

Legal Representative’s

Address and Facsimile Number

Cranshire Capital, L.P.

  

3100 Dundee Road, Suite 703

Northbrook, Illinois 60062

Attn: Mitchell P. Kopin

   547,945    191,781    $3,999,998.50   

Greenberg Traurig, LLP

77 W. Wacker Drive, Suite 2400

Chicago, Illinois 60601

   Facsimile: (847) 562-9031             Attention:    Peter H. Lieberman      
            Todd A. Mazur                Facsimile:    (312) 456-8435         
      Telephone:    (312) 456-8400

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EXHIBITS

 

Exhibit A   Form of Warrant Exhibit B   Form of Registration Rights Agreement

 

Schedule 3(q)   Transactions with Affiliates Schedule 3(r)   Capitalization
Schedule 3(s)   Indebtedness and Other Contracts