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Exhibit 10.4
 
 
 
SUBORDINATION AND POSTPONEMENT AGREEMENT
 
THIS SUBORDINATION AND POSTPONEMENT AGREEMENT (this “Agreement”) dated as of
October 16, 2015 is by and among Hydrocarb Energy Corporation, a Nevada
corporation (“Borrower”), Shadow Tree Capital Management LLC, a Delaware limited
liability company, as agent for the Senior Lenders defined below (in such
capacity, together with its successors in such capacity, “Agent”), and Typenex
Co-Investment, LLC, a Utah limited liability company (“Subordinated Lender”).
 
W I T N E S S E T H:
 
WHEREAS, Borrower and Agent are party to a Credit Agreement dated as of August
15, 2014 (such agreement, as it may be amended, restated or replaced from time
to time, the “Credit Agreement”) pursuant to which the lenders party thereto
(the “Senior Lenders”) have advanced to Borrower certain secured loans and may
advance to Borrower certain additional secured loans (any and all such loans
advanced now or in the future pursuant to the Credit Agreement, and any and all
payment obligations pursuant to any such loans and under the terms of the Credit
Agreement, the “Senior Secured Loans”);
 
WHEREAS, pursuant to the terms of the Credit Agreement, Borrower and Agent have
agreed that Borrower shall raise certain additional capital investments in the
form of equity or subordinated debt or a combination thereof and on terms
acceptable to Agent;
 
WHEREAS, Subordinated Lender is willing to make a loan to Borrower in the
original principal amount of $1,730,000.00 and to be evidenced by a certain
Secured Convertible Promissory Note, Pledge Agreement, Securities Purchase
Agreement, and certain other documents entered into in conjunction therewith
(such loan and governing documents in the form and on the terms appended to this
Agreement as Exhibit “A”, the “Subordinated Loan”), and is willing to make the
Subordinated Loan subject to the terms of this Agreement, and Agent, on behalf
of the Senior Lenders, is willing to permit Borrower to accept the Subordinated
Loan on the terms set forth in the Subordinated Loan and in this Agreement;
 
NOW THEREFORE, in consideration of the premises and the mutual covenants and
agreements herein contained and other good and valuable consideration, the
receipt of which is hereby acknowledged by each party to this Agreement, the
undersigned parties hereto agree as follows:
 
1.           In this Agreement:
 
“Agent” has the meaning set forth in the preamble hereto.
 
“Affected Collateral” has the meaning set forth in Section 7 of this Agreement.
 
“Borrower” has the meaning set forth in the preamble hereto.
 
“Credit Agreement” has the meaning set forth in the first Whereas clause at the
forepart of this Agreement.
 
“Enforcement Action” shall mean for Subordinated Lender to make demand for
payment of or accelerate the maturity of the Subordinated Loan, take possession
of or collect any of the collateral for the Junior Obligations, commence the
enforcement (by judicial proceedings or otherwise) of any of the rights and
remedies existing or available under any of the Subordinated Loan documents, at
law or in equity against Borrower. Notwithstanding the foregoing, the term
Enforcement Action shall not include an action by Subordinated Lender (a) for
specific performance of Borrower’s obligations to deliver shares of common stock
of Borrower pursuant to the Subordinated Loan documents, or (b) to foreclose on
the Pledged Shares following a breach by Borrower of its obligations pursuant to
the Subordinated Loan documents.
 
 
 
 
 
 
 

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“Insolvency Proceeding” means any receivership, bankruptcy, liquidation,
proposal, winding-up or similar proceeding.
 
“Junior Obligations” means all present and future obligations of Borrower to the
Subordinated Lender for any reason whatsoever (including costs of enforcement).
 
“Junior Security” has the meaning set forth in Section 7 of this Agreement.
 
“Lenders” means Agent on the one hand, and the Subordinated Lender on the other
hand; and “Lender” means either of them as the context requires.
 
“March Note” means that certain Secured Convertible Promissory Note issued by
Borrower to Subordinated Lender on March 5, 2015 in the original principal
amount of $350,000.00.
 
“Person” means an individual, partnership, corporation, limited liability
company, association, trust, unincorporated organization or any other entity or
organization, including a government agency or political subdivision thereof.
 
“Pledged Shares” means the shares of common stock of Borrower pledged by an
affiliate of Borrower as collateral for the Subordinated Loan.
 
“Prior Subordination Agreement” means that certain Subordination and
Postponement Agreement dated March 5, 2015 by and among Borrower, Agent and
Subordinated Lender.
 
“Senior Lenders” has the meaning set forth in the first Whereas clause at the
forepart of this Agreement.
 
“Senior Obligations” means all present and future obligations of Borrower to
Senior Lenders and/or Agent for any reason whatsoever (including costs of
enforcement), and includes, but is not limited to, the Senior Secured Loans.
 
“Senior Secured Loans” has the meaning set forth in the first Whereas clause at
the forepart of this Agreement.
 
“Senior Security” means all present and future security granted by Borrower to
Senior Lenders as security for the payment and performance of the Senior
Obligations.
 
“Standstill Notice” has the meaning set forth in Section 8 of this Agreement.
 
“Standstill Period” has the meaning set forth in Section 8 of this Agreement.
 
“Subordinated Lender” has the meaning set forth in the preamble hereto.
 
“Subordinated Loan” has the meaning set forth in the third Whereas clause at the
forepart of this Agreement.
 
2.           Agent, on behalf of Agent and the Senior Lenders, hereby consents
to the creation of the Junior Obligations by Borrower on the terms set forth in
the Subordinated Loan (i.e., as set forth in Exhibit A) and in this
Agreement.  The Subordinated Lender hereby consents and agrees to the
subordination in right of payment of the Junior Obligations to the Senior
Obligations on the terms set forth in this Agreement.
 
3.           Except to the extent permitted pursuant to Section 4, payment of
the Junior Obligations is hereby subordinated and postponed to payment of the
Senior Obligations.  For greater certainty, except to the extent permitted
pursuant to Section 4, the Subordinated Lender hereby agrees that it shall not
receive any cash payments of principal, interest or any other amounts in respect
of the Junior Obligations, or exercise any right of set-off which it now has or
hereafter may have in respect of the Junior Obligations, until the Senior
Obligations have been paid and satisfied in full. Other than payments in the
form of common stock of Borrower permitted pursuant to Section 4 and such cash
payments as may be permitted pursuant to Section 4 and Section 5, if any amount
in respect of the Junior Obligations is received by any Subordinated Lender in
contravention of the foregoing provisions, such amount shall be held by such
Subordinated Lender in trust for Agent and shall be immediately paid to Agent in
precisely the form received (except for endorsement or assignment by
Subordinated Lender to Agent where necessary).  In the event of the failure of
Subordinated Lender to make any such endorsement or assignment to Agent, Agent
or any of its officers or employees is hereby irrevocably authorized to make
same as attorney-in-fact for Subordinated Lender.
 
 
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4.           Notwithstanding anything to the contrary contained herein, at any
time, pursuant to the terms of the Subordinated Loan, Borrower may pay to the
Subordinated Lender, and the Subordinated Lender may receive from Borrower,
payments of interest on and principal of the Junior Obligations in the form of
shares of common stock of Borrower.
 
5.           The parties acknowledge that the effect of the terms of this
Agreement, and Section 3 in particular, is to prohibit Borrower from making any
payment with respect to the Junior Obligations other than in the form of shares
of common stock of Borrower, unless the Senior Obligations first are paid in
full or the Agent first consents in writing.  If Borrower shall raise new
capital in the form of equity or subordinated debt or a combination thereof on
terms acceptable to the Agent, and provided that Borrower is not in default
under any terms of the Credit Agreement, Agent may, in its sole and unfettered
discretion and acting solely in its own interests and the interests of the
Senior Lenders, decide to consent to the use of the proceeds of such new capital
raise to pay some portion or all of the Junior Obligations in cash without
requiring that the Senior Obligations first be paid in full.
 
6.           Borrower agrees not to pay any principal, interest or other amounts
in respect of the Junior Obligations in contravention of the provisions of
Sections 3 and 4.
 
7.           If for any reason whatsoever the Senior Security becomes
unperfected or unenforceable against any property, assets or undertaking of
Borrower (the “Affected Collateral”), and if for any reason whatsoever
Subordinated Lender shall be granted, by judicial action or otherwise, a
security interest in the Affected Collateral (“Junior Security”), the security
interest in the Affected Collateral constituted by the Junior Security shall be
held by Subordinated Lender in trust for Agent and shall be assigned and
transferred to Agent promptly upon request by Agent; and if Subordinated Lender
receives any proceeds in respect of its said security interest in the Affected
Collateral, Subordinated Lender shall promptly account to Agent for all such
proceeds, shall hold such proceeds in trust for Agent, and shall immediately pay
such proceeds to Agent in cash.
 
8.           Until the Senior Obligations have been paid and satisfied in full
in cash, Subordinated Lender may not and shall not: (i) except as permitted
below, commence any Enforcement Action of any kind whatsoever against Borrower
or any of its assets (including any collateral) to recover all or any part of
the Junior Obligations other than in the form of common stock of Borrower; (2)
enforce any Junior Security; or (3) join with any creditor in bringing any
proceeding against Borrower under any liquidation, conservatorship, bankruptcy,
reorganization, rearrangement, debtor’s relief, or other insolvency law now or
hereafter existing. If an event of default has occurred under the Subordinated
Loan, subject to the limitations set forth herein, Subordinated Lender may
commence an Enforcement Action at any time after sixty (60) days (the
“Standstill Period”) after Agent has received a written notice (a “Standstill
Notice”) from Subordinated Lender of such default, which default was not cured
or waived prior to Subordinated Lender’s taking the actions described
herein.  In the event Borrower is the subject of a bankruptcy proceeding or any
other proceeding that limits Senior Lenders’ ability to exercise their remedies,
the running of the Standstill Period shall be tolled until the lifting of the
automatic stay or the removal of any other limitation on Senior Lenders’ ability
to exercise their remedies in order to permit Senior Lenders to foreclose their
liens, provided further that when such automatic stay is lifted or such other
limitation is removed, Subordinated Lender shall not take any action described
herein until a new Standstill Period, beginning with the lifting of such
automatic stay or the removal of such limitation, has expired. If Senior Lenders
receive a Standstill Notice and the default described therein is cured or waived
before the expiration of such Standstill Period, and before Subordinated Lender
may take any Enforcement Action, then Agent must receive another Standstill
Notice and a new Standstill Period (subject to tolling and other provisions of
this Section 8) must have expired before Subordinated Lender may commence an
Enforcement Action.
 
 
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9.           So long as any Senior Obligations remain unpaid, and except as
provided herein, Subordinated Lender and Borrower will not (i) establish a
sinking fund for the payment or prepayment of or otherwise arrange for the
defeasance of any Junior Obligations; (ii) amend, modify or alter in any way the
terms of the Junior Obligations, the Subordinated Loan documents, or any
document, agreement, instrument or certificate relating thereto in a manner to
shorten the maturity thereof or to cause any installment thereof to be due on an
earlier date or to change the amount of any installment payment thereof or to
increase the interest rate thereon or to otherwise materially and adversely
affect Senior Lenders, or (iii) (as to Subordinated Lender) exercise any
remedies with respect to any of the Junior Obligations or any collateral other
than the Pledged Shares at any time securing payment or performance thereof,
except as permitted in Section 8 hereto.  Subordinated Lender agrees that it
will not challenge, object to or in any respect inhibit or otherwise interfere
with Senior Lenders’ enforcement of any of their rights or remedies in respect
of the Senior Obligations or this Agreement.
 
10.           Agent may continue, without notice to Subordinated Lender, to lend
monies, extend credit and make other accommodations to or for the account of
Borrower in reliance upon this Agreement. All payments received by Agent in
respect of the Senior Obligations may be applied, reversed, and reapplied, in
whole or in part, to any of the Senior Obligations, without impairing or
affecting this agreement.
 
11.           Subordinated Lender assumes responsibility for keeping itself
informed of the financial condition of Borrower and any guarantors of the Senior
Obligations and the Junior Obligations and of all other circumstances bearing
upon the risk of nonpayment of the Senior Obligations or the Junior Obligations;
and agrees that Agent shall have no duty to advise Subordinated Lender of
information known to Agent regarding any such condition or circumstances.  If
Agent, in its sole discretion, undertakes, at any time or from time to time, to
provide any such information to Subordinated Lender, Agent shall be under no
obligation to subsequently update any such information or to provide any other
information to Subordinated Lender on any subsequent occasion.
 
12.           Borrower consents to each Lender providing information regarding
Borrower to the other Lenders from time to time if it wishes to do so.
 
13.           Borrower acknowledges receipt of notice of and consents to the
terms contained herein, and also agrees to hold its properties and assets in
accordance with the priorities set out herein.
 
14.           No waiver shall be deemed to be made by Agent of any of its rights
hereunder unless the same shall be in writing signed on behalf of Agent and each
such waiver, if any, shall be a waiver only with respect to the specific matter
or matters to which the waiver relates and shall in no way impair the rights of
Agent or the obligations of Subordinated Lender to Agent in any other respect at
any other time.
 
15.           Subordinated Lender agrees not to transfer, assign, encumber or
otherwise deal with its interest in the Junior Obligations and any Junior
Security, or enter into any agreement to do so, unless the transferee executes
and delivers to Agent a joinder agreement substantially in the form of Exhibit
“B” attached hereto.  Any purported transfer, assignment or encumbrance of an
interest in the Junior Obligations or any Junior Security in violation of the
terms of this Section 15 shall be null and void.
 
 
 
 
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16.           Upon payment and satisfaction of the Senior Obligations in full,
Agent shall, at the expense of Borrower and reasonably promptly after receipt of
a written request from Borrower and Subordinated Lender, execute and deliver a
release of this agreement, together with any other documents and assurances as
may be reasonably required in connection with such release.
 
17.           All communications provided for or permitted hereunder shall be in
writing and delivered to the addressee by prepaid private courier or sent by
email to the applicable address and to the attention of the officer of the
addressee as follows:
 
to Subordinated Lender, at:
 
Typenex Co-Investment, LLC
303 East Wacker Drive, Suite 1040
Chicago, Illinois 60601
Attn:  John Fife
Email: jfife@chicagoventure.com

 
with a copy to (which copy shall not constitute notice):
 
Hansen Black Anderson Ashcraft PLLC
3051 West Maple Loop Drive, Suite 325
Lehi, Utah 84043
Att:  Jonathan K. Hansen, Esq.
Email:  jhansen@hbaalaw.com

to Borrower, at:
 
c/o HydroCarb Energy Corporation
800 Gessner, Suite 375
Houston, TX 77024
Attention: Charles Dommer
Email: cdommer@hydrocarb.com

 
with a copy to (which copy shall not constitute notice):
 
James Wes Christian
Christian, Smith & Jewell, L.L.P.
2302 Fannin, Suite 500
Houston, TX 77002
Email: jchristian@csj-law.com

to Agent, at:

Shadow Tree Capital Management LLC
7 Renaissance Square, 5th Floor
White Plains, NY 10601
Attention: Eric Keiter
Email: ekeiter@shadowtreecapital.com
 

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with a copy to (which copy shall not constitute notice):

Marino Partners LLP
15 Fisher Lane, Suite. 200
White Plains, NY 10528
Attention: Robert Cromwell
Email: rcromwell@marinollp.com

Any communication transmitted by prepaid private courier shall be deemed to have
been validly and effectively given or delivered on the business day after which
it is submitted for delivery.  Any communication transmitted by email shall be
deemed to have been validly and effectively given or delivered on the day on
which it is transmitted to the recipient’s email account at the host server, if
transmitted on a business day on or before 5:00 p.m. (local time of the intended
recipient), and otherwise on the next following business day.  Any party may
change its address for service by notice given in the foregoing manner
 
18.           THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OR
POLICIES OF CONFLICTS OF LAWS OF SUCH STATE.  ANY LEGAL ACTION OR PROCEEDING
WITH RESPECT TO THIS AGREEMENT SHALL BE BROUGHT IN THE STATE AND FEDERAL COURTS
LOCATED IN WESTCHESTER COUNTY, NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS
AGREEMENT, EACH PARTY HEREBY ACCEPTS FOR ITSELF AND (TO THE EXTENT PERMITTED BY
LAW) IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION
OF THE AFORESAID COURTS. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY OBJECTION,
INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON
THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE
BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS. THIS
SUBMISSION TO JURISDICTION IS NON-EXCLUSIVE AND DOES NOT PRECLUDE A PARTY FROM
OBTAINING JURISDICTION OVER ANOTHER PARTY IN ANY COURT OTHERWISE HAVING
JURISDICTION.  EACH PARTY HEREBY IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS
OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE
MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO
SUCH PERSON AT THE ADDRESS SPECIFIED IN SECTION 13.01, SUCH SERVICE TO BECOME
EFFECTIVE UPON SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT
OR ANY LENDER OR ANY HOLDER OF A NOTE OR BORROWER TO SERVE PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW.
 
19.           This Agreement shall enure only to the benefit of the Lenders and
their respective successors and permitted assigns and shall not enure to the
benefit of any other person.  For greater certainty and without limiting the
generality of the foregoing, the terms and conditions contained in this
Agreement may not be relied upon by Borrower, any person claiming through
Borrower (including a receiver or trustee in bankruptcy of Borrower) or any
person other than the Lenders. This Agreement shall not apply so as to diminish
the rights of the respective Lenders (as such rights would have existed but for
the provisions of this agreement) against Borrower (including any person
claiming through Borrower such as a receiver or trustee in bankruptcy of
Borrower) or any other person. Borrower and Subordinated Lender hereby consent
to the assignment by Agent of its benefits and obligations under this Agreement
to any other party.
 
20.           Senior Lender acknowledges that cash payments were made by
Borrower to Subordinated Lender under the March Note and Senior Lender waives
any claims it may have under the Prior Subordination Agreement with respect to
such cash payments. The parties agree that upon cancellation of the March Note,
the Prior Subordination Agreement shall be cancelled, null and void and of no
further force and effect, and no party thereto shall have any further liability
or obligation thereunder.
 
[The balance of this page is intentionally blank. Signature page follows.]
 
 
 
 
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IN WITNESS WHEREOF the parties hereto have executed this Agreement effective as
of the date first set forth above.
 
SHADOW TREE CAPITAL MANAGEMENT LLC,
AGENT FOR THE SENIOR LENDERS
             
By:
/s/ Samuel A. Gradess    
Name: Samuel A. Gradess
Title: Manager
 

TYPENEX CO-INVESTMENT, LLC

By: Red Cliffs Investments, Inc., its Manager

By:
/s/ John Fife    
Name: John Fife
Title: President
         
HYDROCARB ENERGY CORPORATION
             
By:
/s/ Kent P. Watts    
Name: Kent P. Watts
Title: CEO
 

 
 
 
 
 
 
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EXHIBIT “A”
 

 
FORM OF THE SUBORDINATED LOAN GOVERNING DOCUMENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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EXHIBIT “B”
 

 
JOINDER AGREEMENT
 
We refer to the Subordination and Postponement Agreement made among Hydrocarb
Energy Corporation, a Nevada corporation (the “Borrower”), Shadow Tree Capital
Management LLC, a Delaware limited liability company, as agent for certain
senior lenders (the “Agent”), and __________________, a _________ __________
(“Subordinated Lender”) dated as of _______, 2015 (the “Agreement”). For good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, we hereby agree to become a party to the Agreement as a
Subordinated Lender, hereby agree to the status and treatment of all present and
future obligations of Borrower to us as “Junior Obligations” under the terms of
the Agreement, and hereby agree to observe and perform all of our obligations as
the Subordinated Lender under the terms of the Agreement.
 
DATED this ______ day of ______________________________, _______.
 
IF SUBORDINATED LENDER IS NOT AN INDIVIDUAL:
 
Legal Name of Subordinated Lender (Please print):
           
By:
   
Authorized Signatory

 
IF SUBORDINATED LENDER IS AN INDIVIDUAL:
 

           
Name of Subordinated Lender (Please print)
 
Signature
           
Witness
   

 
 
 
 
 

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