EXHIBIT 10.1

SECURITIES PURCHASE AGREEMENT

This SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated August 4, 2009, 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) the 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 shall be 552,764 shares of Common Stock
and shall collectively be referred to herein as the “Common Shares”), (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, in the
form attached hereto as Exhibit A (the “Series A Warrants”) (as exercised,
collectively, the “Series A Warrant Shares”), (iii) a warrant to acquire up to
that number of additional shares of Common Stock set forth opposite such Buyer’s
name in column (5) on the Schedule of Buyers, in the form attached hereto as
Exhibit A-1 (the “Series A-1 Warrants”) (as exercised, collectively, the “Series
A-1 Warrant Shares”), (iv) a warrant to acquire up to that number of additional
shares of Common Stock set forth opposite such Buyer’s name in column (6) on the
Schedule of Buyers, in the form attached hereto as Exhibit B (the “Series B
Warrants”) (as exercised, collectively, the “Series B Warrant Shares”), and (iv)
a warrant to acquire up to that number of additional shares of Common Stock set
forth opposite such Buyer’s name in column (7) on the Schedule of Buyers, in the
form attached hereto as Exhibit C (the “Series C Warrants”) (as exercised,
collectively, the “Series C Warrant Shares”). The Series A Warrants, the Series
A-1 Warrants, the Series B Warrants and the Series C Warrants are collectively
referred to herein as the “Warrants.” The Series A Warrant Shares, the Series
A-1 Warrant Shares, the Series B Warrant Shares and the Series C Warrant Shares
are collectively referred to herein as 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 D (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 0 and 0 below, the Company shall issue and sell to each Buyer, 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
(i) the Series A Warrants to acquire up to that number of Series A Warrant
Shares as is set forth opposite such Buyer’s name in column (4) on the Schedule
of Buyers, (ii) the Series A-1 Warrants to acquire up to that number of Series
A-1 Warrant Shares as is set forth opposite such Buyer’s name in column (5) on
the Schedule of Buyers, (iii) the Series B Warrants to acquire up to that number
of Series B Warrant Shares as is set forth opposite such Buyer’s name in column
(6) on the Schedule of Buyers and (iv) the Series C Warrants to acquire up to
that number of Series C Warrant Shares as is set forth opposite such Buyer’s
name in column (7) 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 3100, 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
0 and 0 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 (8) 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

 

3

 

 

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

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 0 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, (B) a Series A Warrant
pursuant to which such Buyer shall have the right to acquire up to such number
of Series A Warrant Shares as is set forth opposite such Buyer’s name in column
(4) of the Schedule of Buyers, (C) a Series A-1 Warrant pursuant to which such
Buyer shall have the right to acquire up to such number of Series A-1 Warrant
Shares as is set forth opposite such Buyer’s name in column (5) of the Schedule
of Buyers, (D) a Series B Warrant pursuant to which such Buyer shall have the
right to acquire up to such number of Series B Warrant Shares as is set forth
opposite such Buyer’s name in column (6) of the Schedule of Buyers and (E) a
Series C Warrant pursuant to which such Buyer shall have the right to acquire up
to such number of Series C Warrant Shares as is set forth opposite such Buyer’s
name in column (7) 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 (ii) 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
resale in connection with, the public sale or distribution thereof, except
pursuant to sales registered or exempted under the 1933 Act; provided, however,
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.

 

3

 

 

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

 

(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 0 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 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 below)
through whom the sale is made) may be deemed to be an

 

4

 

 

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

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 such Buyer was first contacted by the Placement Agent
in July 2009 regarding the transaction 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 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 10% or more of
the Company’s issued and outstanding shares of Common Stock (calculated based on
the assumption that all Equivalents

 

5

 

 

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

(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 any of 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

 

6

 

 

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

board of directors or its stockholders or other 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 below) 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). The issuance of the Warrant Shares is duly
authorized, and 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 below) (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 below), (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, without limitation, foreign, federal and state
securities laws and regulations and the rules and regulations of the Nasdaq
Capital 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.

 

7

 

 

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

 

(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 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

 

8

 

 

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

. 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 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,
Bylaws 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

 

9

 

 

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

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 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 0 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,
after giving effect to the transactions contemplated hereby to occur at the
Closing and the exercise of all Warrants for cash, will not be Insolvent (as
defined below). For purposes of this Section 0, “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 below), (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

 

10

 

 

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

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 (i) except as disclosed in Schedule 3(m), 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 (ii) could have a
Material Adverse Effect.

 

(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, 2007, (i) the Common Stock has been listed or
designated for quotation on the Nasdaq Global Market or the Principal Market,
(ii) trading in the Common Stock has not been suspended by the SEC, the Nasdaq
Global Market or the Principal Market and (iii) except as disclosed in Schedule
3(n), the Company has received no communication, written or oral, from the SEC,
the Nasdaq Global Market or the Principal Market regarding the suspension or
delisting of the Common Stock from the Nasdaq Global Market or 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

 

11

 

 

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

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 00 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 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) 20,000,000 shares of Common Stock, of which 8,506,098 are issued and
outstanding and 418,173 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, 52,784 of which are issued and outstanding. 32,619 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. 3,238,692 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

 

12

 

 

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

“blockers”) contained therein without conceding that such identified Person is a
10% stockholder for purposes of federal securities laws). Except as disclosed in
Schedule 00: (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 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 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 00 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

 

13

 

 

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

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 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 Nasdaq Global Market or
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. There has not been, and to the
knowledge of the Company, there is not pending or contemplated, any
investigation by the SEC involving the Company, any of its Subsidiaries or any
current of former director or officer of the Company or any of its Subsidiaries.
The SEC has not issued any stop order or other order suspending the
effectiveness of any registration statement filed by the Company under the 1933
Act or the 1934 Act.

 

14

 

 

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

 

(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 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

 

15

 

 

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

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, 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.

 

16

 

 

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

 

(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 maintains internal control over financial reporting (as such term
is defined in Rule 13a-15(f) under the 1934 Act) that is effective to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles, including 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-15(e) 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 or
other Person relating to any potential material weakness or significant
deficiency in any part of the Company’s internal control over financial
reporting.

 

(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.

 

17

 

 

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

 

(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 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

 

18

 

 

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

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 any
Buyer’s request.

(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, or subject
to, Rule 144(i).

 

(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,
non-public 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

 

19

 

 

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

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 0.

4.

COVENANTS.

 

(a)

Best Efforts

. Each Buyer shall use its best efforts timely to satisfy each of the conditions
to be satisfied by it as provided in Section 0 of this Agreement. The Company
shall use its best efforts timely to satisfy each of the conditions to be
satisfied by it as provided in Section 0 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 (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

 

20

 

 

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

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 or designation for quotation (as
the case may be) of all of the Registrable Securities upon each national
securities exchange and automated quotation system, if any, upon which the
Common Stock is then listed or designated for quotation (as the case may be)
(subject to official notice of issuance) and shall maintain such listing or
designation for quotation (as the case may be) 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, the Nasdaq Global Select Market or the Nasdaq
Global Market (each, an “Eligible Market”). Neither the Company nor any 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 0.

 

(g)

Fees

. The Company shall reimburse Cranshire Capital, L.P. (“Cranshire”) or its
designee(s) for all costs and expenses incurred by it or its affiliates in
connection with the transactions contemplated by the Transaction Documents
(including, without limitation, all legal fees and disbursements in connection
therewith, documentation and implementation of the transactions contemplated by
the Transaction Documents and due diligence and regulatory filings in connection
therewith), plus $13,686.04 incurred by Cranshire in connection with prior
negotiations with the Company, which aggregate amount shall be withheld by
Cranshire from its Purchase Price at the Closing or paid by the Company upon
termination of this Agreement on demand by Cranshire 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), less $10,000 which was previously
advanced to Cranshire by the Company. If the amount so withheld at Closing by
Cranshire was less than the aggregate amount of costs and expenses actually
incurred by it or its affiliatesin connection with the transactions contemplated
by the Transaction Documents, the Company shall promptly reimburse Cranshire on
demand for all such costs and expenses not so reimbursed through such
withholding at the Closing. 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 attorneys’ fees and out-of-pocket
expenses) arising in connection with any claim relating to any such payment.
Except as

 

21

 

 

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

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 0, 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), the form of Warrants and the form of 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,
non-public information (if any) delivered to any of the Buyers by the Company or
any of its Subsidiaries, or any of their respective officers, directors,
employees or agents 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, non-public
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 00. In the event of a breach
of any of the foregoing covenants 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, non-public
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, 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

 

22

 

 

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

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 Applicable Date (as
defined below), 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 on the date immediately following the forty-five (45) Trading Day
anniversary of the Applicable Date (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, 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 (whether occurring during the Restricted Period or at any time
thereafter) is referred to as a “Subsequent Placement”). Notwithstanding the
foregoing, this Section 00 shall not apply in respect of the issuance of (A)
shares of Common Stock or standard options to purchase Common Stock to
directors, officers or employees of the Company in their capacity as such
pursuant to an Approved Share Plan, 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 850,610
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

 

23

 

 

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

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 33,166 shares of Common Stock at an initial exercise price of $1.99 per
share, in the form provided to the Buyers on the date hereof; “Placement Agent
Warrant Shares” means the shares of Common Stock issuable to the Placement Agent
upon exercise of the Placement Agent Warrant; and “Approved Share Plan” means
any employee benefit plan which has been approved by the board of directors of
the Company prior to or subsequent to the date hereof pursuant to which shares
of Common Stock and standard options to purchase Common Stock may be issued to
any employee, officer or director for services provided to the Company in their
capacity as such. It is expressly understood and agreed that the offer and sale
by the Company of a Direct Participation Interest shall not constitute a
Subsequent Placement only if the offer and sale of such Direct Participation
Interest and such Direct Participation Interest (i) does not include or involve
any security (as defined under the 1933 Act) (other than the Direct
Participation Interest itself, which constitutes a security under the 1993 Act)
or other equity interest or equity-linked interest in the Company, any
Subsidiary or any other Person and (ii) amounts paid or received in respect of
any such Direct Participation Interest are derived solely from the oil and gas
well leases underlying such Direct Participation Interest and not from any other
business or operations of the Company or any of its Subsidiaries. “Direct
Participation Interest” means a fractional undivided working interest in oil and
gas well leases acquired by the Company.

 

(l)

Reservation of Shares

. So long as any of the Warrants are outstanding, 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.

(n)       Variable Rate Transaction. From the date hereof until the eighteen
(18) month anniversary of the Applicable Date, 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

 

24

 

 

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

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, without limitation, 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 the eighteen (18)
month anniversary of the Applicable Date, neither the Company nor any of its
Subsidiaries shall, directly or indirectly, effect any Subsequent Placement
unless the Company shall have first complied with this Section 00. “Applicable
Date” means the first date on which the resale by the Buyers of all Registrable
Securities is covered by one or more effective Registration Statements (as
defined in the Registration Rights Agreement) (and each prospectus contained
therein is available for use on such date). The Company acknowledges and agrees
that the right set forth in this Section 00 is a right granted by the Company,
separately, to each Buyer.

(i)        The Company shall deliver to each Buyer an irrevocable 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 the six (6) month anniversary of the Applicable Date
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 00 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”).

 

(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, if the
Undersubscription Amounts subscribed for exceed the difference between the total
of all

 

25

 

 

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

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 000 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 000 above multiplied by a fraction, (i) the numerator of which shall be
the number or amount of Offered Securities the Company actually proposes to
issue, sell or exchange (including Offered Securities to be issued or sold to
Buyers pursuant to this Section 00 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 000 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

 

26

 

 

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

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 00 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 or be required to consent to any
amendment to or termination of, or grant any waiver under, any agreement
previously entered into with the Company or any instrument received from the
Company.

 

(viii)    Notwithstanding anything to the contrary in this Section 00 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
00. The Company shall not be permitted to deliver more than one such Offer
Notice to such Buyer in any sixty (60) day period.

(ix)      The restrictions contained in this Section 00 shall not apply in
connection with the issuance of any Excluded Securities. The Company shall not
circumvent the provisions of this Section 00 by providing terms or conditions to
one Buyer that are not provided to all.

(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

 

27

 

 

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

. 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 andthe 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 a form acceptable to each of 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 0, and stop transfer instructions to
give effect to Section 0 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 0, 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 00 below. The Company 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 0 will be inadequate and agrees, in
the event of a breach or threatened breach by the Company of the provisions of
this Section 0, 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 (as defined in the Registration Rights Agreement). 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 Securities have been issued (or will be issued
in the case of the Warrant Shares) pursuant to an exemption from registration or
qualification under the

 

28

 

 

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

1933 Act and applicable state securities laws, and except as set forth below,
the Securities 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 00 above or any other legend (i) while a registration
statement (including a Registration Statement) covering the resale of such
Securities is effective under the 1933 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 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 00, 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

 

29

 

 

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

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
Closing Sale Price (as defined below) of the Common Stock on the Trading Day
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, in addition to all other remedies
available to such Buyer, 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 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 Closing Sale Price of the Common Stock on
the Trading Day immediately preceding the Required Delivery Date.

For purposes of this Agreement, “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, L.P. (“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

 

30

 

 

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

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 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 stock dividend, stock split, stock combination or other similar
transaction during such period; and “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) unless such
day is otherwise designated as a Trading Day in writing by the applicable Buyer.

6.

CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.

(a)       The obligation of the Company hereunder to issue and sell the Common
Sharesand 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 other Transaction
Documents to which it is a party and delivered the same to the Company.

(ii)       Such Buyer and each other Buyer shall have delivered to the Company
the Purchase Price (less, in the case of Cranshire, the amounts withheld
pursuant to Section 0) for the Common Shares and the related Warrantsbeing
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.

 

31

 

 

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

7.

CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.

(a)       The obligation of each Buyer hereunder to purchase the Common
Sharesand 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 other 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 Buyersand the related Series A Warrants, Series A-1 Warrants, Series
B Warrants and Series C Warrants (for such number of Warrant Shares as is set
forth across from such Buyer’s name in columns (4), (5), (6) and (7) of the
Schedule of Buyers, respectively) 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.

(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 0 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.

 

32

 

 

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

(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
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 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.

(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, then such Buyer shall have the
right to terminate its obligations under this Agreement with respect to itself
at any time on or after the close of business on such date without liability of
such Buyer to any other party; provided, however, (i) the right to terminate
this Agreement under this Section 0 shall not be available to such Buyer if

 

33

 

 

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

the failure of the transactions contemplated by this Agreement to have been
consummated by such date is the result of such Buyer’s breach of this Agreement
and (ii) the abandonment of the sale and purchase of the Common Shares and
Warrants shall be applicable only to such Buyer providing such written notice,
provided further that no such termination shall affect any obligation of the
Company under this Agreement to reimburse such Buyer for the expenses described
in Section 0 above. Nothing contained in this Section 0 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 TO, 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.

 

(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,”

 

34

 

 

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

“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 solely 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 solely with respect to the matters covered herein
and therein; provided, however, nothing contained in this Agreement or any other
Transaction Document shall (or shall be deemed to) (i) have any effect on any
agreements any Buyer has entered into with the Company or any of its
Subsidiaries prior to the date hereof with respect to any prior investment made
by such Buyer in the Company or (ii) waive, alter, modify or amend in any
respect any obligations of the Company or any of its Subsidiaries, or any rights
of or benefits to any Buyer or any other Person, in any agreement entered into
prior to the date hereof between or among the Company and/or any of its
Subsidiaries and any Buyer and all such agreements shall continue in full force
and effect. 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 hereunder,
and any amendment or to, or waiver of any provision of, this Agreement made in
conformity with the provisions of this Section 0 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 in the case of a waiver) 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, all holders of Common Shares or all
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

 

35

 

 

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

. 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 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 3100

Chicago, Illinois 60601

Telephone: (312) 456-8400

Facsimile: (312) 456-8435

Attention: Peter H. Lieberman, Esq.

 

Todd A. Mazur, Esq.

 

36

 

 

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

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 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 a 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 00.

 

(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

 

37

 

 

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

. 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
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 0, 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 solely 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 0 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. For clarification purposes, the
Recitals are part of this Agreement. 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

 

38

 

 

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

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.

 

(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

 

39

 

 

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

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.

[signature pages follow]

40

 

 

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

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: Co-President, Co-Chief Executive
Officer, Chief Financial Officer and Secretary

 

 

 

 

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

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/ Mitchell P. Kopin
By:       Mitchell P. Kopin
Its:        President

 

 

 

 

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

SCHEDULE OF BUYERS

 

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

 

 

 

 

 

 

 

 

Buyer

Address and Facsimile Number

Number of Common Shares

Number of

Series A Warrants

Number of

Series A-1 Warrants

Number of

Series B Warrants

Number of

Series C Warrants

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

Facsimile: (847) 562-9031

 

552,764

329,850

1,808

511,628

306,977

$1,100,000.36

Greenberg Traurig, LLP
77 W. Wacker Drive, Suite 3100
Chicago, Illinois 60601
Attention: Peter H. Lieberman

Todd A. Mazur
Facsimile: (312) 456-8435 Telephone: (312) 456-8400

 

 

 

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

EXHIBITS

Exhibit A

Form of Series A Warrant

Exhibit A-1

Form of Series A-1 Warrant

Exhibit B

Form of Series B Warrant

Exhibit C

Form of Series C Warrant

Exhibit D

Form of Registration Rights Agreement