Exhibit 10.1

 

Execution

 

$31,000,000

 

CREDIT AND GUARANTY AGREEMENT

 

dated

 

September 29, 2016

 

BETWEEN

 

LILIS ENERGY, INC.,

 

as Borrower,

 

The Guarantors Party Hereto,

 

as Guarantors,

 

The Lenders Party Hereto,

 

as Lenders, and

 

T.R Winston & Company, LLC,

 

as Collateral Agent

 

 

 

  

TABLE OF CONTENTS

 

  Page       Article I DEFINITIONS 1       1.1 Definitions 1 1.2 Accounting
Terms and Determinations; Changes in Accounting 18 1.3 References 19 1.4
Amendment of Defined Instruments 19 1.5 Joint Preparation; Construction of
Indemnities and Releases 19 1.6 Time References 19       Article II TERMS OF
FACILITY 20       2.1 Closing Date Term Loans 20 2.2 Reserved 20 2.3 Notes 20
2.4 Facility Increase 20 2.5 Interest Rates; Payment of Interest 21 2.6
Conditions to Closing Date Loans 21 2.7 Maturity of Notes 23 2.8 Principal
Payment 23       Article III GENERAL PROVISIONS 23       3.1 General Provisions
as to Payments 23 3.2 Taxes 24 3.3 Default Interest 25 3.4 Prepayments 25 3.5
Prepayment Premium 26 3.6 Additional Costs; Capital Adequacy 26       Article IV
COLLATERAL 28       4.1 Security 28       Article V GUARANTY 28       5.1
Guaranty 28 5.2 Limitation of Guaranty 29 5.3 Contribution 29 5.4 Authorization;
Other Agreements 29 5.5 Guaranty Absolute and Unconditional 30 5.6 Waivers 31
5.7 Reliance 31

 

 i

 

  

Article VI REPRESENTATIONS AND WARRANTIES 31       6.1 Existence and Power 32
6.2 Authorization; Contravention 32 6.3 Binding Effect 32 6.4 Subsidiaries 32
6.5 Disclosure 33 6.6 Financial Information 33 6.7 Litigation 33 6.8 ERISA Plans
33 6.9 Taxes and Filing of Tax Returns 34 6.10 Title to Properties; Liens;
Environmental Liability 34 6.11 Business Compliance 35 6.12 Licenses, Permits,
Etc. 35 6.13 Compliance with Laws 36 6.14 Governmental Consent 36 6.15
Investment Company Act 36 6.16 State Utility; No Governmental Limitations on
Liens 36 6.17 Refunds; Certain Contracts 37 6.18 No Default 37 6.19
Anti-Terrorism Laws 37 6.20 Flood Matters 38 6.21 Solvency 38 6.22 Eligible
Contract Participant 38 6.23 Intellectual Property 38       Article VII
COVENANTS 38       7.1 Reserved 38 7.2 Financial Statements; Reserve and Other
Reports; Certain Required Notices from Borrower; Additional Information 38 7.3
Inspection of Properties and Books 41 7.4 Maintenance of Security; Insurance;
Authorization to File Financing Statements; Operating Accounts; Transfer Orders
41 7.5 Payment of Taxes and Claims 42 7.6 Payment of Debt; Additional Debt;
Payment of Accounts; Restrictions on Payments on the SOS Note 43 7.7 Negative
Pledge 44 7.8 Loans and Advances to Others; Investments; Restricted Payments;
Subsidiaries 44 7.9 Consolidation, Merger, Maintenance, Change of Control;
Disposition of Property; Restrictive Agreements; Hedging Agreements;
Modification of Organizational Documents; Issuance of Equity Interests 45 7.10
Primary Business; Continuous Operations; Location of Borrower’s Office;
Ownership of Assets 46 7.11 Operation of Properties and Equipment; Compliance
with and Maintenance of Contracts; Duties as Nonoperator 47 7.12 Transactions
with Affiliates 48 7.13 Plans 49 7.14 Compliance with Laws and Documents 49 7.15
Certain Financial Covenants 49 7.16 Additional Documents; Quantity of Documents;
Title Data; Additional Information 49 7.17 Environmental Indemnification 50 7.18
Anti-Terrorism Laws 51

 

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Article VIII DEFAULTS; REMEDIES 51       8.1 Events of Default; Acceleration of
Maturity 51 8.2 Remedies 53 8.3 Suits for Enforcement 53 8.4 Remedies Cumulative
54 8.5 Remedies Not Waived 54       Article IX MISCELLANEOUS 54       9.1
Amendments, Waivers and Consents 54 9.2 Reserved 54 9.3 Indemnity 54 9.4
Expenses 55 9.5 Taxes 56 9.6 Survival 56 9.7 Applicable Law; Venue 56 9.8 WAIVER
OF JURY TRIAL AND EXEMPLARY DAMAGES 57 9.9 Waiver of Deficiency Statute; Other
Waivers 57 9.10 Headings 57 9.11 Counterparts 57 9.12 Invalid Provisions,
Severability 57 9.13 Communications Via Internet 58 9.14 USA Patriot Act Notice
58 9.15 EXCULPATION PROVISIONS 58 9.16 Right of First Refusal 59       Article X
SETOFF; TREATMENT OF PARTIAL PAYMENTS 59       10.1 Setoff 59 10.2 Adjustments
59       Article XI BENEFIT OF AGREEMENT; ASSIGNMENTS 60       11.1 Successors
and Assigns 60 11.2 Assignments; Effective Date; Participations 60 11.3
Dissemination of Information 61       Article XII NOTICES 61       12.1 Notices
61 12.2 Change of Address 62       Article XIII ENTIRE AGREEMENT

 

 iii

 

  

CREDIT AND GUARANTY AGREEMENT

 

THIS CREDIT AND GUARANTY AGREEMENT is entered into as of September 29, 2016, by
and among Lilis Energy, Inc., a Nevada corporation (together with its permitted
successors and assigns, the “Borrower”), Brushy Resources, Inc., a Delaware
Corporation (“Brushy”), ImPetro Operating, LLC, a Delaware limited liability
company (“Operating”) and ImPetro Resources, LLC, a Delaware limited liability
company (“Resources”, and together with Brushy and Operating, the “Initial
Guarantors”), the lenders party hereto (each a “Lender” and together, the
“Lenders”), and T.R Winston & Company, LLC, as collateral agent for the Lenders
(the “Collateral Agent”). Certain terms used herein are defined in Section 1.1.

 

RECITALS:

 

A.           The Borrower has requested, and the Lender has agreed to make
available to the Borrower, a multiple draw term loan facility subject to the
terms and conditions set forth in this Agreement (a) to refinance certain
existing indebtedness of the Borrower, (b) to fund the Borrower’s development
programs, acquisitions and working capital and (c) for working capital purposes;

 

B.           The Borrower desires to secure the Obligations under this Agreement
by granting to the Lender a security interest in and Lien on the Collateral; and

 

C.           Subject to the terms hereof, the Guarantors are willing to
guarantee the Obligations of the Borrower;

 

NOW, THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:

 

Article I
DEFINITIONS

 

1.1           Definitions. The following terms, as used herein, have the
following meanings:

 

“Acceptable Hedging Transactions” means all Hedging Transactions entered into by
the Borrower or any Guarantor in the ordinary course of its business, which if
secured by Liens on any Collateral is subject to an intercreditor or collateral
sharing agreement reasonably acceptable to the Required Lenders.

 

“Accordion Advance” has the meaning given to such term in Section 2.4.1 hereof.

 

“Affiliate” means, with respect to a Person, (a) any Person owning, Controlling
or holding with power to vote ten percent (10%) or more of the outstanding
voting interests of the referenced Person, (b) any Person ten percent (10%) or
more of whose outstanding voting interests are directly or indirectly owned,
Controlled or held with power to vote by the referenced Person, (c) any Person
directly or indirectly Controlling, Controlled by or under common Control with
the referenced Person, (d) any relative within the third degree of kindred of
the referenced Person, or (e) any officer, director, limited liability company
manager, trustee, beneficiary, employee or general partner of the referenced
Person or of any Person referred to in clauses (a), (b), (c) or (d) of this
definition. The term Affiliate shall include Affiliates of Affiliates (and so
on).

 

 1

 

  

“Agreement” or “Credit Agreement” means this Credit Agreement, as the same may
hereafter be modified or amended from time to time.

 

“Anti-Terrorism Laws” mean any Laws relating to terrorism or money laundering,
including Executive Order No. 13224 and the USA Patriot Act.

 

“Asset Ratio” means, as of the date of any determination (i) the principal
amount of all Loans outstanding hereunder, divided by (ii) the sum of (a) the
PV-10 Value of all Oil and Gas Properties of the Borrower and its Subsidiaries
and (b) the Fair Market Value of all undeveloped acreage owned by the Borrower
and its Subsidiaries.

 

“Assignment Agreement” has the meaning given to such term in Section 11.2.1
hereof.

 

“Board of Governors” means the Board of Governors of the Federal Reserve System.

 

“Borrower” has the meaning given to such term in the preamble to this Agreement.

 

“Borrowing Date” means a date on which a Loan is made hereunder.

 

“Business Day” means any day that is not a Saturday, Sunday or other day on
which commercial banks in Dallas, Texas, are authorized or required by Law to
remain closed.

 

“Capital Stock” means:

 

(iii)        in the case of a corporation, corporate stock;

 

(iv)         in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock;

 

(v)           in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and

 

(iv)         any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person;

 

but excluding from all of the foregoing any debt securities convertible into
Capital Stock, whether or not such debt securities include any right of
participation with Capital Stock.

 

“Capitalized Lease” of a Person means any lease of Property by such Person as
lessee which would be capitalized on a balance sheet of such Person prepared in
accordance with generally accepted accounting principles,

 

“Capitalized Lease Obligations” of a Person means the amount of the obligations
of such Person under Capitalized Leases which would be shown as a liability on a
balance sheet of such Person prepared in accordance with generally accepted
accounting principles.

 

 2

 

  

“Cash Equivalents” means:

 

(i)          United States dollars;

 

(ii)         securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality of the United
States government (provided that the full faith and credit of the United States
is pledged in support of those securities) having maturities of not more than
six months from the date of acquisition;

 

(iii)        deposit accounts, certificates of deposit, money market accounts
and eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers’ acceptances with maturities not exceeding six months
and overnight bank deposits, in each case, with the Lender or with any domestic
commercial bank having capital and surplus in excess of $500,000,000 and whose
senior unsecured debt either (a) is rated at least “A-l” by S&P and at least
“P-I” by Moody’s, or (b) has a Thompson Bank Watch Rating of “B” or better;

 

(iv)         repurchase obligations with a term of not more than thirty (30)
days for underlying securities of the types described in clauses (ii) and (iii)
above entered into with any financial institution meeting the qualifications
specified in clause (iii) above;

 

(v)          commercial paper having the highest ratings categories obtainable
from Moody’s or S&P and in each case maturing within six months after the date
of acquisition;

 

(vi)         securities issued and fully guaranteed by any state, commonwealth
or territory of the United States of America, or by any political subdivision or
taxing authority thereof, rated at least “A” by Moody’s or S&P and having
maturities of not more than three hundred sixty-five (365) days from the date of
acquisition; and

 

(vii)        money market funds at least ninety-five (95%) of the assets of
which constitute Cash Equivalents of the kinds described in clauses (i) through
(vi) of this definition,

 

“Cash Taxes” for any fiscal quarter of the Borrower and its Subsidiaries, means
federal income taxes and state taxes actually paid by the Borrower and its
Subsidiaries during such quarter.

 

“Change of Control Event” means (a) the acquisition of ownership, directly or
indirectly, beneficially or of record, by any Person or group of Persons acting
jointly or otherwise in concert of Capital Stock representing more than
thirty-five (35%) of the aggregate ordinary voting power represented by the
issued and outstanding Capital Stock of Borrower, or (b) during any period of
twelve (12) consecutive calendar months, the occupation of a majority of the
seats (other than vacant seats) on the board of directors of Borrower by Persons
who were neither (i) nominated by the board of directors of Borrower, nor (ii)
appointed by directors so nominated; in each case whether as a result of a
tender or exchange offer, open market purchases, privately negotiated purchases
or otherwise.

 

“Closing” means the consummation of the transactions contemplated herein.

 

“Closing Date” means the date on which the Closing occurs.

 

 3

 

  

“Closing Date Commitment” has the meaning set forth in Section 2.1.1.

 

“Collateral” means the Property pledged as security for the Notes and the other
Obligations, including all of the following of the Borrower and each Guarantor:

 

(i)          accounts receivable;

 

(ii)         equipment, goods, inventory and fixtures;

 

(iii)        documents, instruments and chattel paper;

 

(iv)         letter-of-credit rights;

 

(v)          securities collateral;

 

(vi)         investment property, including all Capital Stock owned by the
Borrower and each Guarantor;

 

(vii)        intellectual property;

 

(viii)      commercial tort claims;

 

(ix)         general intangibles;

 

(x)          deposit accounts;

 

(xi)         money;

 

(xii)        supporting obligations;

 

(xiii)      books and records;

 

(xiv)        real property;

 

(xv)         to the extent not covered by clauses (i) through (xiv) above,
choses in action and all other personal property of the Borrower and each
Guarantor, whether tangible or intangible;

 

(xvi)        proceeds and products of each of the foregoing and all accessions
to, substitutions and replacements for, and rents, profits and products of, each
of the foregoing, and any and all proceeds of any insurance, indemnity, warranty
or guaranty payable to the Borrower or any Guarantor from time to time with
respect to any of the foregoing;

 

(xvii)      Hedging Agreements and Hedging Transactions;

 

(xviii)     As-Extracted Collateral;

 

(xix)        Oil and Gas Properties; and

 

 4

 

  

(xx)         all other existing and future tangible and intangible assets of the
Borrower or any Guarantor.

 

Notwithstanding the foregoing, the Collateral will not include any of the
following assets or property (collectively, the “Excluded Assets”):

 

(i)          any asset or property right of the Borrower or any Guarantor of any
nature:

 

(a)          if the grant of a security interest shall constitute or result in
(i) the abandonment, invalidation or unenforceability of such asset or property
right of the Borrower or any Guarantor or loss of use of such asset or property
right or (ii) a breach, termination or default under any lease, license,
contract or agreement to which the Borrower or such Guarantor is party (other
than to the extent that any such term would be rendered ineffective pursuant to
Sections 9-406, 9-407, 9-408 or 9-409 of the Uniform Commercial Code (or any
successor provision or provisions) of any relevant jurisdiction or any other
applicable Law (including the United States Bankruptcy Code)); and

 

(b)          to the extent that any applicable Law prohibits the creation of a
security interest thereon (other than to the extent that any such Law would be
rendered ineffective pursuant to any other applicable Law);

 

provided, however, that such lease, license, contract, property rights or other
agreement will cease to be an Excluded Asset immediately and automatically at
such time as the condition causing such abandonment, invalidation,
unenforceability or prohibition is remedied or otherwise becomes ineffective
and, to the extent severable, any portion of such lease, license, contract,
property rights or other agreement that does not result in any of the
consequences specified in clauses (a) and (b) above will not be an Excluded
Asset; and

 

(ii)         deposit and securities accounts the balance of which consists
exclusively of (a) withheld income taxes and federal, state or local employment
taxes in such amounts as are required to be paid to the IRS or state or local
government agencies within the following two months with respect to employees of
the Borrower or any Guarantor, (b) amounts required to be paid over to an
employee benefit plan pursuant to DOL Reg. Sec. 2510.3-102 on behalf of or for
the benefit of employees of the Borrower or any Guarantor, and (c) all
segregated deposit accounts constituting (and the balance of which consists
solely of funds set aside in connection with) tax accounts and payroll accounts.

 

“Collateral Agent” has the meaning given to such term in Section 4.1.4 hereof.

 

“Commitment” means (a) for each Lender, the amount set forth opposite such
Lender’s name on Schedule 2.1 hereto under the heading “Total Commitment”, which
amount may be modified from time to time pursuant to the terms of this Agreement
and (b) as to all Lenders, the aggregate commitment of all Lenders to make Loans
hereunder, which shall be in an aggregate not less than $31,000,000 on the
Closing Date.

 

 5

 

  

“Commitment Fee” means an amount equal to two percent (2%) of the initial
principal amount of (i) for each Lender, such Lender’s Commitment as of the
Closing Date and (ii) as to all Lenders, the total aggregate Commitments of all
Lenders as of the Closing Date.

 

“Commodity Hedging Transaction” means any swap transaction, cap, floor, collar,
exchange transaction, forward transaction, or other exchange or protection
transaction relating to hydrocarbons or any option with respect to any such
transaction, including derivative financial instruments.

 

“Compliance Certificate” means a certificate, substantially in the form attached
hereto entitled “Form of Compliance Certificate”, executed by a Responsible
Representative and furnished to the Lenders from time to time in accordance with
Section 7.2.1.

 

“Contingent Obligation” See Guarantee.

 

“Control,” “Controlling” and “Controlled by” mean the ability (directly or
indirectly through one or more intermediaries) to direct or cause the direction
of the management or affairs of a Person, whether through the ownership of
voting interests, by contract or otherwise.

 

“CT”, with respect to any stated time of day, means such time of day generally
in effect in the Central Time Zone as in effect in the State of Texas.

 

“Debt” or “Indebtedness” of any Person means at any date, without duplication:

 

(i)          all obligations of such Person for money borrowed, including (a)
the obligations of such Person for money borrowed by a partnership of which such
Person is a general partner, (b) obligations, whether or not assumed, which are
secured in whole or in part by the Property of such Person or payable out of the
proceeds or production from Property of such Person, and (c) any obligations of
such Person in respect of letters of credit and repurchase agreements;

 

(ii)         all obligations of such Person evidenced by notes, debentures,
bonds or similar instruments;

 

(iii)        all obligations of such Person to pay the deferred purchase price
of Property or services (except trade accounts arising in the ordinary course of
business if interest is not paid or accrued thereon);

 

(iv)         all Capitalized Lease Obligations of such Person;

 

(v)          all liabilities which in accordance with applicable accounting
principles would be included in determining total liabilities as shown on the
liability side of a balance sheet;

 

(vi)         all obligations of such Person under Hedging Agreements and Hedging
Transactions;

 

(vii)        all Guarantees by such Person; and

 

(viii)      all Off-Balance Sheet Debt.

 

 6

 

  

“Default” means the occurrence of an Event of Default or any event which with
notice, lapse of time or both would, unless cured or waived, become an Event of
Default.

 

“Default Rate” means a per annum interest rate equal to two percent (2.00%) per
annum in excess of the rate of interest otherwise payable on the Notes.

 

“Distributions” means dividends, distributions or other payments to Persons on
account of their being the holders of Capital Stock or other Equity Interests in
the Borrower.

 

“Dollars” and “$” means dollars in lawful currency of the United States of
America.

 

“Environmental Complaint” means any written or oral complaint, order, directive,
claim, citation, notice of environmental report or investigation, or other
notice by any Governmental Authority or any other Person with respect to (a) air
emissions, (b) spills, releases, or discharges to soils, any improvements
located thereon, surface water, groundwater, or the sewer, septic, waste
treatment, storage, or disposal systems servicing any Property of the Borrower
or any Guarantor, (c) solid or liquid waste disposal, (d) the use, generation,
storage, transportation, or disposal of any Hazardous Substance, or (e) other
environmental, health, or safety matters affecting any Property of the Borrower
or any Guarantor or the business conducted thereon.

 

“Environmental Law” means (a) the following federal laws as they may be cited,
referenced, and amended from time to time: the Clean Air Act, the Clean Water
Act, the Safe Drinking Water Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the Endangered Species Act, the Resource
Conservation and Recovery Act, the Hazardous Materials Transportation Act, the
Superfund Amendments and Reauthorization Act, and the Toxic Substances Control
Act; (b) any and all equivalent environmental statutes of any state in which
Property of the Borrower or any Guarantor is situated, as they may be cited,
referenced and amended from time to time; (c) any rules or regulations
promulgated under or adopted pursuant to the above federal and state laws; and
(d) any other equivalent federal, state, or local statute or any requirement,
rule, regulation, code, ordinance, or order adopted pursuant thereto, including
those relating to the generation, transportation, treatment, storage, recycling,
disposal, handling, or Release of Hazardous Substances.

 

“Environmental Liability” means any claim, demand, obligation, cause of action,
accusation, allegation, order, violation, damage, injury, judgment, penalty or
fine, cost of enforcement, cost of remedial action or any other cost or expense
whatsoever, including reasonable attorneys’ fees and disbursements, resulting
from the violation or alleged violation of any Environmental Law or the
imposition of any Environmental Lien.

 

“Environmental Lien” means a Lien in favor of a Tribunal or other Person (i) for
any liability under an Environmental Law or (ii) for damages arising from or
costs incurred by such Tribunal or other Person in response to a release or
threatened release of Hazardous Substances into the environment.

 

 7

 

  

“Equity Interest” means, with respect to any Person, an ownership and other
equity interest, including Capital Stock and other Securities, in such Person
and rights to convert into an ownership or other equity interest, including
Capital Stock and other Securities, in such Person or to otherwise acquire an
ownership or other equity interest, including Capital Stock and other
Securities, in such Person and ownership of or rights to share in the revenues
or profits of such Person.

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended
from time to time, together with all presently effective and future regulations
issued pursuant thereto.

 

“Event of Default” has the meaning given such term in Section 8.1 hereof.

 

“Executive Order No. 13224” shall mean Executive Order No. 13224 on Terrorist
Financing, effective September 24, 2001, as the same has been, or shall
hereafter be, renewed, extended, amended or replaced.

 

“Fair Market Value” means, with respect to any asset or property, the sale value
that would be obtained in an arm’s-length free-market transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy. Fair Market Value of an asset or
property in excess of $1,000,000 shall be determined by the Board of Directors
of the Borrower acting in good faith, in which event it shall be evidenced by a
resolution of the Board of Directors, and any lesser Fair Market Value shall be
determined by an officer of the Borrower acting in good faith.

 

“FATCA” means current Sections 1471 through 1474 of the Internal Revenue Code
(and any similar amended or successor versions that are substantively
comparable) and any applicable Treasury Regulations promulgated thereunder or
published administrative guidance implementing such Sections, whether in
existence on the date hereof or promulgated or published thereafter.

 

“Final Maturity Date”, “Final Maturity” or “Maturity Date” means with respect to
the Loans under the Notes, the earlier of (i) September 30, 2019, or (ii) that
date that the Obligations become due in accordance with Section 8.2.1.

 

“Financial Statements” has the meaning given to such term in Section 2.6.2
hereof.

 

“Fraudulent Transfer Laws” has the meaning given to such term in Section 5.2
hereof.

 

“Foreign Lender” means any Lender that is organized under the laws of a
jurisdiction other than that in which the Borrower is resident for tax purposes.
For the purpose of this definition, the United States, each State thereof and
the District of Columbia shall be deemed to constitute a single jurisdiction.

 

“Funded Debt” means the obligations of the Borrower and its consolidated
subsidiaries described in clauses (i) and (ii) of the definition of Debt.

 

 8

 

  

“GAAP” means those generally accepted accounting principles and practices which
are recognized as such by the American Institute of Certified Public Accountants
acting through its Accounting Principles Board or by the Financial Accounting
Standards Board or through other appropriate boards or committees thereof. Any
accounting principle or practice required to be changed by the Accounting
Principles Board or Financial Accounting Standards Board (or other appropriate
board or committee of such Boards) in order to continue as a generally accepted
accounting principle or practice may be so changed. In the event of a change in
GAAP, the Loan Documents shall continue to be construed in accordance with GAAP
as in existence on the date hereof.

 

“Governmental Authority” means any nation, country, commonwealth, territory,
government, state, county, parish, municipality, or other political subdivision
and any entity exercising executive, legislative, judicial, regulatory, or
administrative functions of or pertaining to government.

 

“Guarantee” or “Contingent Obligation” by or of any Person means any obligation,
contingent or otherwise, of such Person directly or indirectly guaranteeing or
in effect guaranteeing any Debt, leases, dividends or other obligations of any
other Person (for purposes of this definition, a “primary obligation”) and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) any primary obligation
or any Property constituting direct or indirect security therefor (whether
arising by virtue of partnership arrangements, by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, to make
reimbursement in connection with any letter of credit or to maintain financial
statement conditions, by comfort letter or other similar undertaking of support
or otherwise) or (ii) entered into for the purpose of assuring in any other
manner the obligee of any primary obligation of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part) with
the amount of any Guarantee or Contingent Obligation being deemed to be equal to
the stated or determinable amount of the primary obligation in respect of which
such Guarantee is made or Contingent Obligation is incurred or, if not stated or
determinable, the maximum primary obligation which could reasonably be
anticipated to arise in respect thereof. The term Guarantee (or Contingent
Obligation) includes the pledging or other encumbrance of assets by a Person to
secure the obligations of another Person and restrictions or limitations on a
Person or its assets agreed to in connection with the obligations of another
Person, but does not include endorsements for collection or deposit in the
ordinary course of business; and “Guaranteed” by a Person or “incurring a
Contingent Obligation” or words of similar import shall mean the act or
condition of providing a Guarantee by such Person or such Person becoming
contingently obligated or permitting a Guarantee or Contingent Obligation of
such Person to exist or come into existence.

 

“Guaranteed Obligations” has the meaning given to such term in Section 5.1
hereof.

 

“Guarantor” means at any time the Initial Guarantors and any Person who has
executed or does execute a Guaranty, which is in effect at such time.

 

“Guaranty” means the guaranty of a Guarantor guarantying all or a portion of the
Obligations as set forth in Article V hereof.

 

 9

 

  

“Hazardous Substance” means flammables, explosives, radioactive materials,
hazardous wastes, asbestos, or any material containing asbestos, polychlorinated
biphenyls (PCBs), toxic substances or related materials, petroleum, petroleum
products, associated oil or natural gas exploration, production, and development
wastes, or any substances defined as “hazardous substances,” “hazardous
materials,” “hazardous wastes,” or “toxic substances” under the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, the
Superfund Amendments and Reauthorization Act, as amended, the Hazardous
Materials Transportation Act, as amended, the Resource Conservation and Recovery
Act, as amended, the Toxic Substances Control Act, as amended, or any other
Environmental Laws.

 

“Hedge Termination Value” means, in respect of any one or more Hedging
Transactions, after taking into account the effect of any legally enforceable
netting agreement relating to such Hedging Transactions, (a) for any date on or
after the date such Hedging Transactions have been closed out and termination
value(s) determined in accordance therewith, such termination value(s) and (b)
for any date prior to the date referenced in clause a preceding, the amount(s)
determined as the mark-to-market value(s) for such Hedging Transactions, as
determined by the counterparties to such Hedging Transactions.

 

“Hedging Agreement” means any International Swap Dealers Association, Inc.
Master Agreement or other agreement and all schedules and exhibits attached
thereto and incorporated therein that set forth set forth one or more Hedging
Transactions or the general terms upon which a Person may enter into one or more
Hedging Transactions.

 

“Hedging Transaction” means a Commodity Hedging Transaction or a Rate Management
Transaction or any other transaction with respect to any swap, forward, future
or derivative transaction or option or similar transaction, whether exchange
traded, “over-the-counter” or otherwise, involving, or settled by reference to,
one or more rates, currencies, commodities, equity or debt instruments or
securities, or economic, financial or pricing indices or measures of economic,
financial or pricing risk or value or any similar transaction or any combination
of these transactions.

 

“Indebtedness” See Debt.

 

“Indemnified Party” means (i) the Lenders and each of their shareholders,
officers, directors, employees, agents, attorneys-in-fact, and Affiliates and
(ii) each trustee for the benefit of the Lenders under any Security Document.

 

“Initial Guarantor” has the meaning given to such term in the preamble to this
Agreement.

 

“Insolvency Proceeding” of any Person means any application (whether voluntary
or instituted by another Person) for or the consent to the appointment of a
receiver, trustee, conservator, custodian, or liquidator of such Person or of
all or a substantial part of the Property of such Person, or the filing of a
petition (whether voluntary or instituted by another Person) commencing a case
under Title 11 of the United States Code, seeking liquidation, reorganization,
or rearrangement or taking advantage of any bankruptcy, insolvency, debtor’s
relief, or other similar Law of the United States, the State of Texas, or any
other jurisdiction.

 

 10

 

  

“Interest Payment Date” means for the Loans made under the Notes, the first day
of January, April, July and October of each year commencing with January 1,
2017, and upon maturity of the Notes (whether stated or upon acceleration).

 

“Investment” means, for any Person: (a) the acquisition (whether for cash,
Property, services or securities or otherwise) of Equity Interests of any other
Person, the contribution of capital to any other Person, or any agreement to
make any such acquisition (including, without limitation, any “short sale” or
any sale of any securities at a time when such securities are not owned by the
Person entering into such short sale) or capital contribution; (b) the making of
any deposit with, or advance, loan or capital contribution to, assumption of
Debt of, purchase or other acquisition of any other Debt or equity participation
or interest in, or other extension of credit to, any other Person (including the
purchase of Property from another Person subject to an understanding or
agreement, contingent or otherwise, to resell such Property to such Person, but
excluding any such advance, loan or extension of credit having a term not
exceeding ninety (90) days representing the purchase price of inventory, goods
or services sold or provided by such Person in the ordinary course of business);
(c) the purchase or acquisition (in one or a series of transactions) of Property
of another Person that constitutes a business unit or (d) the entering into of
any guarantee of, or other Contingent Obligation (including the deposit of any
Equity Interests to be sold) with respect to, Debt or other liability of any
other Person and (without duplication) any amount committed to be advanced, lent
or extended to such Person.

 

“Law” means at any time with respect to any Person or its Property, any statute,
law, executive order, treaty, ordinance, order, writ, injunction, judgment,
ruling, decree, regulation, or determination of an arbitrator, court or other
Governmental Authority, existing at such time which are applicable to or binding
upon such Person or any of its Property or to which such Person or any of its
Property is subject.

 

“Lender” has the meaning given to such term in the preamble to this Agreement.

 

“Lien” means, as to any Property of any Person, (a) any mortgage, deed of trust,
lien, pledge, hypothecation, or security interest in, on or of such Property, or
any other charge or encumbrance on any such asset to secure Debt or liabilities,
but excluding any right to netting or setoff, (b) the interest of a vendor under
any conditional sale agreement or title retention agreement (or any financing
lease having substantially the same economic effect as any of the foregoing)
relating to such Property, (c) in the case of Securities, any purchase option,
call or similar right of a third party with respect to such Securities and (d)
the signing or filing of a financing statement which names the Person as debtor,
or the signing of any security agreement authorizing any other Person as the
secured party thereunder to file any financing statement which names such Person
as debtor (in each case, other than precautionary filings).

 

“Loan” means a loan or advance made by the Lenders pursuant to this Agreement,
or the aggregate outstanding amount of all such loans or advances, as the
context may require.

 

“Loan Documents” shall mean this Agreement, the Notes, the Security Documents,
and all other documents and instruments now or hereafter delivered pursuant to
the terms of or in connection with this Agreement, the Notes or the Security
Documents, and all renewals and extensions of, amendments and supplements to,
and restatements of, any or all of the foregoing from time to time in effect
(exclusive of term sheets and commitment letters).

 

 11

 

  

“Loan Party” means each of the Borrower and the Guarantors.

 

“Margin Regulations” means Regulations T, U and X of the Board of Governors, as
in effect from time to time.

 

“Material Adverse Effect” shall mean (i) for any Loan Party, any material
adverse effect on the business, operations, Properties, results of operations or
condition (financial or otherwise) of such Loan Party, (ii) for any Loan Party,
any material adverse effect upon such Loan Party’s ability to repay its material
Obligations under the Loan Documents, (iii) any material adverse effect upon any
Collateral or (iv) any material adverse effect on the priority or enforceability
of the Liens securing the Note.

 

“Material Agreement” means, with respect to any Person, any written or oral
agreement, contract, commitment, or understanding to which such Person is a
party, by which such Person is directly or indirectly bound, or to which any
Property of such Person may be subject, which is not cancelable by such Person
upon notice of ninety (90) days or less without (i) liability for further
payment in excess of $1,000,000 or (ii) forfeiture of Property having an
aggregate value in excess of $1,000,000.

 

“Material Debt” means, as to any Person, Debt (other than, with respect to the
Borrower, the Notes but including Hedging Transactions) of such Person in the
principal amount aggregating in excess of $1,000,000. For purposes of
determining Material Debt, the “principal amount” of the obligations of such
Person in respect of any Hedging Transaction at any time shall be the Hedge
Termination Value.

 

“Mortgages” mean deeds of trust, mortgages, assignments of production,
collateral mortgages, and acts of pledge (and security agreements included
therein) in form and substance reasonably acceptable to the Lenders covering Oil
and Gas Properties and the personality located thereon or primarily associated
therewith, executed or to be executed by the appropriate Person as security for
the Obligations and other indebtedness described therein.

 

“Note” means one or more senior secured notes issued pursuant hereto, in
substantially the form attached hereto entitled “Form of Senior Secured Note”,
duly executed by the Borrower and payable to the order of each Lender, including
any amendment, modification, renewal or replacement of such promissory note,
which Note shall be in the amount of such Lender’s Commitment. The aggregate
principal amount of Notes shall be $50,000,000.

 

“Notice of Assignment” has the meaning given to such term in Section 11.2.2
hereof.

 

“Obligated Parties” mean the Borrower and any other Persons, including the
Guarantors, from time to time obligated by Guarantee or otherwise to pay all or
any portion of the Obligations.

 

 12

 

  

“Obligations” shall mean, without duplication, (i) all Debt evidenced by the
Notes, (ii) the obligation of the Borrower for the payment of the fees, late
charges and prepayment charges, if any, payable hereunder or under the other
Loan Documents, (iii) all other obligations and liabilities of the Borrower to
the Lenders, now existing or hereafter incurred, under, arising out of or in
connection with any Loan Document, including the reimbursement of attorneys’
fees incurred by the Lenders from time to time in connection with waivers and
amendments to or enforcement of the Loan Documents, and (iv) all other
obligations and liabilities of the Borrower to the Lenders, now existing or
hereafter incurred; and to the extent that any of the foregoing includes or
refers to the payment of amounts deemed or constituting interest, only so much
thereof as shall have accrued, been earned and which remains unpaid at each
relevant time of determination.

 

“OFAC” means the Office of Foreign Assets Control of the United States
Department of the Treasury, or any successor Governmental Authority.

 

“Off-Balance Sheet Debt” means, with respect to a Person, (a) any repurchase
indebtedness, liability or obligation of such Person with respect to accounts or
notes receivable sold by such Person, (b) any indebtedness, liability or
obligation of such Person under any sale and leaseback transaction which is not
a Capitalized Lease Obligation, (c) any indebtedness, liability or obligation of
such Person under any synthetic, off-balance sheet or tax retention lease, or
(d) any indebtedness, liability or obligation of such Person arising with
respect to any other transaction, or agreement for the use or possession of any
Property, which is the functional equivalent, or takes the place, of borrowing
but which does not constitute a liability on the balance sheet of such Person.

 

“Oil and Gas Properties” means fee, leasehold, or other interests in or under
mineral estates or oil, gas, and other liquid or gaseous hydrocarbon leases with
respect to Properties situated in the United States or offshore from any State
of the United States, including, without limitation, overriding royalty and
royalty interests, leasehold estate interests, net profits interests, production
payment interests, and mineral fee interests, together with contracts executed
in connection therewith and all tenements, hereditaments, appurtenances and
Properties appertaining, belonging, affixed, or incidental thereto.

 

“Organizational Documents” means, as to any Person, the articles of
incorporation, articles of limited partnership, articles of formation or similar
organizational documents, as applicable, of such Person.

 

“Participant” has the meaning given to such term in Section 11.2.1 hereof.

 

“Permitted Indebtedness” means (i) the Obligations, (ii) unsecured accounts
payable incurred in the ordinary course of business, (iii) unsecured Debt
incurred by the Borrower or any Guarantor on or after the Security Satisfaction
Date; provided, that the aggregate amount of interest on such Debt payable in
cash shall not exceed $5,000,000 per annum, (iv) Debt arising on or after the
Security Satisfaction Date under Acceptable Hedging Transactions and under the
Hedging Agreement(s) governing such Acceptable Hedging Transactions (but only to
the extent such Debt arises in connection with Acceptable Hedging Transactions)
and (v) the SOS Note.

 

 13

 

  

“Permitted Investments” means:

 

(i)          any Investment in the Borrower;

 

(ii)         any Investment in Cash Equivalents;

 

(iii)        any Investments received (A) in compromise of obligations with
respect to trade creditors or customers that were incurred in the ordinary
course of business, including pursuant to any plan of reorganization or similar
arrangement upon the bankruptcy or insolvency of any trade creditor or customer
or (B) in compromise of obligations relating to or in resolution of litigation,
arbitration or other disputes with Persons that are not Affiliates;

 

(iv)         Investments received in satisfaction of judgments, foreclosure of
Liens or settlement of Debt;

 

(v)          Acceptable Hedging Transactions;

 

(vi)         Investments in accounts receivable, prepaid expenses, negotiable
instruments held for collection and lease, utility and worker’s compensation,
performance and other similar deposits provided to third parties and
endorsements for collection or deposit arising in the ordinary course of
business and not for speculative purposes;

 

(vii)        advances, deposits and prepayments for purchases of any assets; and

 

(viii)      loans or advances in the ordinary course of business for bona fide
business purposes of the Borrower and its Subsidiaries (including travel,
entertainment and relocation expenses).

 

In connection with any Property contributed or transferred to any Person as an
Investment, such Property shall be equal to the Fair Market Value at the time of
the Investment, without regard to subsequent changes in value. With respect to
any Investment, the Borrower may, in its sole discretion, allocate or reallocate
all or any portion of any Investment to one or more applicable clauses above so
that the entire Investment is a Permitted Investment.

 

“Permitted Liens” means, with respect to any Property, each of the following:

 

(i)          Liens securing the Obligations;

 

(ii)         the following, if the validity and amount thereof are being
contested in good faith and by appropriate legal proceedings and so long as (a)
levy and execution thereon have been stayed and continue to be stayed, (b) they
do not in the aggregate materially detract from or threaten the value of such
Property, or materially impair the use thereof in the operation of the business
of the owner of such Property, and (c) a reserve therefor, if appropriate, has
been established: claims and Liens for Taxes due and payable; claims and Liens
upon and defects of title to real and personal property; claims and Liens of
landlords, repairmen, mechanics, materialmen, warehousemen, or carriers, or
similar Liens; and adverse judgments on appeal;

 

(iii)        Liens for Taxes not past due;

 

(iv)         landlords’, carriers’, warehousemen’s, repairmen’s, mechanics’ and
materialmen’s Liens for services or materials (or other like Liens that do not
secure Debt) for which payment is not past due;

 

 14

 

  

(v)          operators’ Liens incurred pursuant to oil and gas joint operating
agreements entered into by the owner of such Property in the ordinary course of
business which secure obligations not past due;

 

(vi)         Liens in favor of the lessor on the Property being leased under any
Capitalized Lease permitted hereunder; and

 

(vii)        minor defects in title to an Oil and Gas Property not in any case
materially detracting from the value of such Property;

 

provided, that Liens described in clauses (ii) through (vi) shall remain
Permitted Liens only for so long as no action to enforce any of such Liens has
been commenced and; provided, further, no intention to subordinate the first
priority Liens granted to secure the Obligations is hereby implied or expressed
or is to be inferred by the permitted existence of such Permitted Liens,

 

“Person” means a natural person, a corporation, a partnership, a limited
partnership, a limited liability company, an association, a joint venture, a
trust or any other entity or organization including a government or political
subdivision or any governmental agency or instrumentality thereof.

 

“Plan” means any employee benefit plan which is covered by Title IV of ERISA.

 

“Property”, “property” or “asset” means any interest in any kind of property or
asset, whether real, personal or mixed, tangible or intangible.

 

“Proved Reserves” means “Proved Reserves” as defined in the Petroleum Resources
Management System as in effect at the time in question prepared by the Oil and
Gas Reserves Committee of the Society of Petroleum Engineers and reviewed and
jointly sponsored by the World Petroleum Council, the American Association of
Petroleum Geologists and the Society of Petroleum Evaluation Engineers (or any
generally recognized successor organizations).

 

“Purchaser” has the meaning given to such term in Section 11.2.1 hereof.

 

“PV-10 Value” means with respect to any Oil and Gas Property, the net present
value of the oil and gas to be produced from the Proved Reserves from such Oil
and Gas Property, calculated using a discount rate of ten percent (10.00%) per
annum and estimates of reserves, prices, production rates and costs reasonably
acceptable to the Required Lenders.

 

“Rate Management Transaction” means any transaction (including an agreement with
respect thereto) now existing or hereafter entered into by the Borrower which is
a rate swap, basis swap, forward rate transaction, commodity swap, commodity
option, equity or equity index swap, equity or equity index option, bond option,
interest rate option, foreign exchange transaction, cap transaction, floor
transaction, collar transaction, forward transaction, currency swap transaction,
cross-currency rate swap transaction, currency option or any other similar
transaction (including any option with respect to any of these transactions) or
any combination thereof, whether linked to one or more interest rates, foreign
currencies, commodity prices, equity prices or other financial measures.

 

 15

 

  

“Regulation U” means Regulation U of the Board of Governors, as in effect from
time to time.

 

“Release of Hazardous Substances” means any emission, spill, release, disposal,
or discharge, except in accordance with a valid permit, license, certificate, or
approval of the relevant Governmental Authority, of any Hazardous Substance into
or upon (a) the air, (b) soils or any improvements located thereon, (c) surface
water or groundwater, or (d) the sewer or septic system, or the waste treatment,
storage, or disposal system servicing any Property of the Borrower or any
Guarantor, with respect to which the Borrower or any Guarantor is legally
obligated to respond under applicable Environmental Laws, by notifying the
relevant Governmental Authority, investigating or undertaking corrective action.

 

“Representative’s Certificate” means a certificate signed by a Responsible
Representative.

 

“Required Lenders” means Lenders holding Loans in excess of fifty percent (50%)
of the Loans outstanding as of any date of determination.

 

“Requirement of Law” means, as to any Person, its Organizational Documents, and
all applicable Laws.

 

“Responsible Representative” means the Chairman, President, Chief Executive
Officer, Chief Financial Officer or Vice President of the Borrower, or any other
officer of the Borrower duly authorized by the Borrower’s board of directors.

 

“Restricted Payment” means the occurrence of any of the following:

 

(i)          any withdrawal from the Borrower or any Guarantor of cash by any
owner of an Equity Interest in the Borrower or any such Guarantor or the
declaration or payment of any cash dividend on, or the incurrence of any
liability to make, or the making of, any other cash payment in respect of, any
Equity Interests in the Borrower or any Guarantor other than preferred Equity
Interests of the Borrower in place as of the Closing Date;

 

(ii)         any cash payment on account of the purchase, redemption or other
retirement of any Equity Interests in the Borrower or any Guarantor, or of any
warrant, option or other right to acquire such Equity Interests, or any other
cash payment made in respect thereof, either directly or indirectly; or

 

(iii)        the repayment by the Borrower or any Guarantor in cash of any Debt
owed to an Affiliate (other than repayments to the Borrower), except as
specifically permitted by the Loan Documents.

 

“ROFR Financing” shall have the meaning given to such term in Section 8.16.1.

 

“ROFR Initiation Notice” shall have the meaning given to such term in Section
8.16.1.

 

“ROFR Option” shall have the meaning given to such term in Section 8.16.2.

 

 16

 

  

“SEC” means the United States Securities Exchange Commission.

 

“Security” means any stock, share, voting trust certificate, limited or general
partnership interest, member interest, bond debenture, note, or other evidence
of indebtedness, secured or unsecured, convertible, subordinated or otherwise,
or in general any instrument commonly known as a “security” or any certificate
of interest, share or participation in temporary or interim certificates for the
purchase or acquisition of, or any right to subscribe to, purchase or acquire
any of the foregoing.

 

“Security Documents” means the security instruments executed and delivered in
satisfaction of the condition set forth in Section 5.2.3, and all other
documents and instruments at any time executed as security for all or any
portion of the Obligations, as such instruments may be amended, restated, or
supplemented from time to time.

 

“Security Satisfaction Date” means the first date that all Security Documents
required pursuant to Section 4.1 have been delivered to the Collateral Agent.

 

“SOS Note” means that certain subordinated promissory note, dated June 23, 2016,
issued by the Borrower to SOSV Investments LLC, as may be amended, supplemented
or modified from time to time.

 

“Subsidiary” means for any Person, any corporation or other entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are at the time directly or indirectly owned, collectively, by such Person and
any Subsidiaries of such Person. The term Subsidiary shall include Subsidiaries
of Subsidiaries (and so on).

 

“Taxes” means all taxes, assessments, filing or other fees, levies, imposts,
duties, deductions, withholdings, stamp taxes, interest equalization taxes,
capital transaction taxes, foreign exchange taxes or charges, or other charges
of any nature whatsoever from time to time or at any time imposed by any Law or
Tribunal.

 

“Test Period” means, as the last day of any fiscal quarter of the Borrower, the
four prior consecutive fiscal quarters of Borrower, the last of which ends on
such date.

 

“Transferee” means any Person to which a Lender has sold, assigned or
transferred any of the Obligations, as authorized hereunder and including any
Person acquiring, by purchase, assignment, transfer (including transfers by
operation of law) or participation from any such purchaser, assignee or
transferee, any part of such Obligations.

 

“Tribunal” means any court, tribunal, governmental body, agency, arbitration
panel, or instrumentality.

 

“UCC” shall mean the Uniform Commercial Code as from time to time in effect in
the State of Texas.

 

“USA Patriot Act” means the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Pub.
L. No. 107-56, 115 Stat. 272 (2001), as the same has been, or shall hereafter
be, renewed, extended, amended or replaced.

 

 17

 

  

“Warrant” means that certain Common Stock Purchase Warrant, dated June 22, 2016
issued by the Borrower to each of the original Lenders party hereto.

 

1.2           Accounting Terms and Determinations; Changes in Accounting.

 

1.2.1           Unless otherwise specified herein, all accounting terms used
herein and all references to accounting matters shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with GAAP,
applied on a basis consistent (except for changes concurred in by the
independent public accountants and with respect to which the Borrower shall have
promptly notified the Lenders becoming aware thereof) with the most recent
financial statements of the Borrower delivered to the Lenders. Accounting
principles are applied on a “consistent basis” when the accounting principles
applied in a current period are comparable in all material respects to those
accounting principles applied in a preceding period. Changes in the application
of accounting principles which do not have a material impact on calculating the
financial covenants herein shall be deemed comparable in all material respects
to accounting principles applied in a preceding period.

 

1.2.2           The Borrower will not change its method of accounting, other
than immaterial changes in methods, changes permitted by applicable accounting
principles and changes required by a change in applicable accounting principles,
without the prior written consent of the Required Lenders, which consent shall
not be unreasonably withheld. To enable the ready and consistent determination
of compliance by the Borrower with its obligations under this Agreement, neither
the Borrower nor any of its Subsidiaries will change the manner in which either
the last day of its fiscal year or the last day of the first three (3) fiscal
quarters of its fiscal years is calculated without the prior written consent of
the Required Lenders, which consent shall not be unreasonably withheld.

 

1.2.3           The fiscal year of the Borrower shall end on December 31 of such
year.

 

 18

 

  

1.3           References. References in this Agreement to Exhibits, Schedules,
Annexes, Appendixes, Attachments, Articles, Sections, Recitals or clauses shall
be to exhibits, schedules, annexes, appendixes, attachments, articles, sections,
recitals or clauses of this Agreement, unless expressly stated to the contrary.
References in this Agreement to “hereby,” “herein,” “hereinafter,”
“hereinabove,” “hereinbelow,” “hereof,” “hereunder” and words of similar import
shall be to this Agreement in its entirety and not only to the particular
Exhibit, Schedule, Annex, Appendix, Attachment, Article, or Section in which
such reference appears. Exhibits and Schedules to any Loan Document shall be
deemed incorporated by reference in such Loan Document. References to any
document, instrument, or agreement (a) shall include all exhibits, schedules,
and other attachments thereto, and (b) shall include all documents, instruments,
or agreements issued or executed in replacement thereof. This Agreement, for
convenience only, has been divided into Articles and Sections; and it is
understood that the rights and other legal relations of the parties hereto shall
be determined from this instrument as an entirety and without regard to the
aforesaid division into Articles and Sections and without regard to headings
prefixed to such Articles or Sections. The phrases “this Section” and “this
clause” and similar phrases refer only to the sections or clauses hereof in
which such phrases occur. Whenever the context requires, reference herein made
to the single number shall be understood to include the plural; and likewise,
the plural shall be understood to include the singular. Definitions of terms
defined in the singular or plural shall be equally applicable to the plural or
singular, as the case may be, unless otherwise indicated. Words denoting sex
shall be construed to include the masculine, feminine and neuter, when such
construction is appropriate; and specific enumeration shall not exclude the
general but shall be construed as cumulative; the word “or” is not exclusive;
the word “including” (in its various forms) shall mean “including, without
limitation”; in the computation of periods of time, the word “from” means “from
and including” and the words “to” and “until” mean “to but excluding”; and all
references to money refer to the legal currency of the United States of America.
The Exhibits, Schedules, Annexes, Appendixes and Attachments attached to this
Agreement and items referenced as being attached to this Agreement are
incorporated herein and shall be considered a part of this Agreement for all
purposes. Except as otherwise indicated, references in this Agreement to
statutes, sections, or regulations are to be construed as including all
statutory or regulatory provisions consolidating, amending, replacing,
succeeding, or supplementing the statute, section, or regulation referred to.
References in this Agreement to “writing” include printing, typing, lithography,
facsimile reproduction, and other means of reproducing words in a tangible
visible form. References in this Agreement to agreements and other contractual
instruments shall be deemed to include all exhibits and appendices attached
thereto and all subsequent amendments and other modifications to such
instruments, but only to the extent such amendments and other modifications are
not prohibited by the terms of this Agreement.

 

1.4           Amendment of Defined Instruments. Unless the context otherwise
requires or unless otherwise provided herein, the terms defined in this
Agreement which refer to a particular agreement, instrument or document also
refer to and include all renewals, extensions, modifications, amendments and
restatements of such agreement, instrument or document, provided that nothing
contained in this Section shall be construed to authorize any such renewal,
extension, modification, amendment or restatement,

 

1.5           Joint Preparation; Construction of Indemnities and Releases. This
Agreement, the other Loan Documents have been reviewed and negotiated by
sophisticated parties with access to legal counsel, and no rule of construction
shall apply hereto or thereto which would require or allow any Loan Document to
be construed against any party because of its role in drafting such Loan
Document.

 

1.6           Time References. Unless otherwise indicated, all references to a
time of day refer to the time of day in the Central Time Zone for such day, as
generally in effect in the state of Texas.

 

 19

 

  

Article II
TERMS OF FACILITY

 

2.1           Closing Date Term Loans.

 

2.1.1           Subject to the terms and conditions of this Agreement and in
reliance upon the representation and warranties of the Loan Parties hereto, each
Lender agrees severally and not jointly to lend to the Borrower on the Closing
Date the amount set forth opposite such Lender’s name on Schedule 2.1 under the
heading “Closing Date Commitment” (such amount being referred to as such
Lender’s “Closing Date Commitment”).

 

2.2           Reserved.

 

2.3           Notes.

 

2.3.1           The Loans shall be evidenced by one or more Notes issued by the
Borrower, payable to the order of each Lender with a Commitment hereunder.

 

2.3.2           The outstanding principal of the Notes reflected by the
notations (whether handwritten, electronic or otherwise) by the Lenders on their
records shall be deemed rebuttably presumptive evidence of the principal amount
owing on the respective Note.

 

2.3.3           Each Lender will record each payment of principal or interest
made by the Borrower with respect thereto on its books, and may, if such Lender
so elects in connection with any transfer or enforcement of its Note, endorse on
the schedule (modified as such Lender shall deem advisable) forming a part
thereof appropriate notations to evidence the foregoing information with respect
to each such Loan then outstanding; provided that the failure of the Lender to
make any such recordation or endorsement shall not affect the obligations of the
Borrower hereunder or under the applicable Note. Each Lender is hereby
irrevocably authorized by the Borrower so to endorse such Lender’s Note and to
attach to and make a part of the Note a continuation of any such schedule
(modified as the Lender shall deem advisable) as and when required.

 

2.4           Facility Increase.

 

2.4.1           Borrower may from time to time request and receive an increase,
or increases, to the Term Loan in one or more advances to increase the maximum
amount of principal hereunder not to exceed $50,000,000, subject to the
following terms (each, an “Accordion Advance”): (i) on the date of any Accordion
Advance (A) no Event of Default shall be in existence and continuing, (B) no
Event of Default would occur as a result of any Accordion Advance, and (C)
Borrower shall have executed and delivered a promissory note or notes in
substantially the same form as the Notes to evidence the increase set forth
herein. Borrower acknowledges and agrees that no Accordion Advance is a
committed amount hereunder, and no Lender shall have any obligation to advance
any Accordion Advance, until such time that such Accordion Advance is approved
in writing by Lenders holding Loans in excess of sixty percent (60%) of the then
outstanding Loans.

 

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2.4.2           Borrower shall give the Lenders written notice requesting the
Accordion Advance at least five (5) days prior to the date upon which the
Borrower requests such Accordion Advance be made. The Lenders shall inform
Borrower in writing within three (3) days after receiving such notice from the
Borrower (the “Request Period”) whether any Lender or Lenders have committed to
making such an Accordion Advance, it being understood that any such commitment
shall operate to amend the definition of Commitment hereunder to include such
commitment, and, once funded, shall operate to amend the definition of Loan
hereunder to include the amount of such Accordion Advance. Subject to the terms
and conditions of this Agreement, the Accordion Advance shall be made available
to the Borrower by depositing the same, in immediately available funds, into an
account specified by the Borrower. Borrower agrees that Borrower shall execute
such additional documentation as Required Lenders shall reasonably request in
order to document the Accordion Advance, including, but not limited to, a
promissory note or notes substantially in the form of the Notes.

 

2.5           Interest Rates; Payment of Interest.

 

2.5.1           The unpaid principal of the Notes shall bear interest from the
date hereof, at a rate per annum equal to six percent (6.00%) per annum or such
higher rate as is specified in Section 3.3.

 

2.5.2           Accrued interest shall be payable in arrears on each Interest
Payment Date; provided that, interest accrued pursuant to Section 3.3 shall be
payable on demand.

 

2.5.3           Each determination hereunder of interest on the Notes and fees
hereunder based on per annum calculations shall be computed on the basis of a
year of three hundred sixty (360) days and paid for the actual number of days
elapsed (including the first day but excluding the last day).

 

2.6           Conditions to Closing Date Loans. No Lender shall be obligated to
make Closing Date Loans hereunder unless the following conditions shall have
been satisfied or waived by the Required Lenders:

 

2.6.1           Receipt of Loan Documents and Other Items. On or prior to the
Closing Date, the Lenders shall have received the following, in each case in
form and substance reasonably satisfactory to the Lenders:

 

(i)          the duly executed Notes for each Lender in the amount at least
equal to its Available Commitment;

 

(ii)         copies of the Organizational Documents, and all amendments thereto,
of each Loan Party, accompanied by certificates that such copies are correct and
complete, one issued by the Secretary of State of the state of incorporation or
formation of each such Loan Party, dated a current date;

 

(iii)        certificates of incumbencies and signatures of all officers of each
Loan Party who will be authorized to execute or attest any of the Loan
Documents;

 

(iv)         copies of resolutions approving the Loan Documents and authorizing
the transactions contemplated therein, duly adopted by the governing authority
of each Loan Party accompanied by certificates of an authorized representative
reasonably acceptable to the Required Lenders, that such copies are true and
correct copies of resolutions duly adopted at the meeting of, or by the
unanimous written consent of, the authorized body of each Loan Party and that
such resolutions constitute all the resolutions adopted with respect to such
transactions, have not been amended, modified or revoked in any respect and are
in full force and effect as of the Closing Date;

 

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(v)          certificates of good standing (or equivalent) for each Loan Party,
dated a current date, to the effect that such Loan Party is in good standing
with respect to the payment of franchise or other Taxes and, if required by Law,
is duly qualified to transact business in such jurisdiction;

 

(vi)         confirmation, reasonably acceptable to the Required Lenders, of the
title of the Borrower, free and clear of Liens, other than Permitted Liens, to
Oil and Gas Properties that in the aggregate have value as Collateral of no less
than eighty percent (80%) of the aggregate value as Collateral of all Proved
Reserves from the Oil and Gas Properties;

 

(vii)        confirmation reasonably acceptable to the Required Lenders that the
Oil and Gas Properties of the Borrower are in compliance in all material
respects with applicable Environmental Laws;

 

(viii)      certificates of insurance from the insurance companies insuring the
Borrower and each other Loan Party which will execute any Loan Documents,
confirming insurance for the Borrower and each such other Loan Party meeting the
standards of Section 7.1.4(iv);

 

(ix)         payment of (i) the Commitment Fee to each Lender and (ii) any
reasonable legal fees and expenses or estimates thereof of one (1) legal counsel
to the Lenders for which invoices or estimates have been presented on or before
the Closing Date;

 

(x)          if requested by the Required Lenders, a certificate from an
authorized representative reasonably acceptable to the Required Lenders
certifying that to the best of such individual’s knowledge as to the truth and
correctness in all material respects of each representation and warranty
contained in Article VI hereof as of the Closing Date and that no Default or
Event of Default exists as of the Closing Date;

 

(xi)         any consents, approvals, authorizations of a Governmental Authority
or other third party required for the valid execution, delivery and the
performance of this Agreement or any other Loan Documents by the Borrower or any
other Loan Party; and

 

(xii)        an amended and restated Warrant.

 

2.6.2           Financial Statements. On the Closing Date, each Lender shall
have received and reviewed: (i) the consolidated audited financial statements of
Borrower and its Subsidiaries as of December 31, 2015 and (ii) the consolidated
unaudited financial statements of Borrower and its Subsidiaries as of June 30,
2016 (together the “Financial Statements”).

 

2.6.3           No Material Adverse Effect. No Material Adverse Effect shall
have occurred since August 22, 2016.

 

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2.7           Maturity of Notes.

 

2.7.1           The Notes shall finally mature no later than the Final Maturity
Date, and any unpaid principal of the Notes and accrued, unpaid interest thereon
shall be due and payable on such date.

 

2.8           Principal Payment.

 

2.8.1           The Borrower shall pay all principal of the Loans, all accrued
and unpaid interest thereon, and all other Obligations to the Lenders on the
Final Maturity Date.

 

Article III
GENERAL PROVISIONS

 

3.1           General Provisions as to Payments.

 

3.1.1           All payments of principal and interest on the Notes and of fees
hereunder shall be made, without setoff, deduction or counterclaim, by 12:00
p.m. CT on the date such payments are due in federal or other funds immediately
available at the office of the Lenders referred to in Article XII and, if not
made by such time or in immediately available funds, then such payment shall be
deemed made when such funds are available to the applicable Lender for its full
and unrestricted use. Whenever any payment of principal of or interest on the
Notes or of fees hereunder shall be due on a day which is not a Business Day,
the date for payment thereof shall be extended to the next succeeding Business
Day. If the date for any payment is extended by operation of law or otherwise,
interest thereon shall be payable for such extended time.

 

3.1.2           All payments made by the Borrower on the Notes shall be made
free and clear of, and without reduction by reason of, any Taxes.

 

3.1.3           All payments shall be denominated in Dollars.

 

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3.2           Taxes.

 

3.2.1           All payments by the Borrower hereunder and under the other Loan
Documents shall be made without setoff or counterclaim and free and clear of and
without deduction for any taxes, levies, imposts, duties, charges, fees,
deductions, withholdings, compulsory loans, restrictions or conditions of any
nature now or hereafter imposed or levied by any jurisdiction or any political
subdivision thereof or taxing or other authority therein, unless the Borrower is
required by law (as determined in the good faith discretion of the Borrower) to
make such deduction or withholding. Subject to Section 3.2.2, if any
Non-Excluded Taxes are required to be withheld with respect to any amount
payable by the Borrower hereunder, the Borrower will pay to the applicable
Lender, on the date on which such amount is due and payable hereunder, such
additional amount in Dollars as shall be necessary to enable such Lender to
receive the same net amount which such Lender would have received on such due
date had no such Non-Excluded Taxes been required to be withheld. For purposes
of this Agreement, “Non-Excluded Taxes” are any taxes, levies, imposts, duties,
charges, fees, deductions or withholdings of any nature now or hereafter imposed
or levied by any jurisdiction or any political subdivision thereof or taxing or
other authority therein other than (A) any United States federal withholding tax
imposed pursuant to FATCA or (B) net income taxes (however denominated),
franchise taxes (imposed in lieu of net income taxes), branch profits taxes and
any other similar taxes imposed on any Lender by the jurisdiction under the laws
of which such Lender is organized or in which its principal office is located or
through which it holds the Notes or any political subdivision, taxing authority
or other authority thereof or therein, or as a result of a present or former
connection between such Lender and the jurisdiction imposing such tax other than
a connection arising solely as a result of such Lender having executed,
delivered or performed its obligations or received payments under, or enforced,
this Agreement. The Borrower will deliver promptly to the applicable Lender
certificates or other valid vouchers for all taxes or other charges deducted
from or paid with respect to payments made by the Borrower hereunder. If the
Borrower reasonably believes that such Non-Excluded Taxes were not correctly or
reasonably asserted, the applicable Lender will use reasonable efforts to
cooperate with the Borrower to obtain a refund of such taxes (which shall be
repaid to the Borrower so long as such efforts would not, in the good faith
determination of such Lender, result in any material additional costs, expenses
or risks or be otherwise disadvantageous to it).

 

3.2.2           Notwithstanding anything to the contrary contained herein, the
Borrower will not be required to make any additional payment to or for the
account of any Lender with respect to any Non-Excluded Taxes under Section 3.2.3
by reason of (i) a breach by such Lender of any certification or representation
set forth in any form furnished to the Borrower under Section 3.2.5 or such
Lender’s failure or inability to furnish under Section 3.2.5 an original or an
extension or renewal of any form required under Section 3.2.5, or (ii) if such
Non-Excluded Taxes are taxes required to be withheld on amounts payable to such
Lender at the time such Lender becomes a party to this Agreement (or changes its
place of organization or principal office).

 

3.2.3           If a Lender determines, in its reasonable discretion, that it
has received a refund of any taxes as to which it has been indemnified by a
Borrower under Section 3.2.1 or with respect to which the Borrower has paid
additional amounts pursuant to Section 3.2.1, it shall pay over such refund to
the Borrower, net of all out-of-pocket expenses of such Lender and without
interest (other than any interest paid by the relevant governmental authority
with respect to such refund). Each Lender agrees, that upon the occurrence of
any event giving rise to a tax as to which it has been indemnified by the
Borrower or with respect to which the Borrower has paid additional amounts
pursuant to Section 3.2.1, it will use reasonable efforts to mitigate the effect
of any such event, including by designating another lending office (if
available) for any Note affected by such event and by completing and delivering
or filing any tax-related forms which would reduce or eliminate such tax or
additional amounts.

 

3.2.4           Subject to Section 3.2.2, the Borrower will indemnify each
Lender for the full amount of Non-Excluded Taxes imposed on or paid by such
Lender and any liability (including penalties, interest and reasonable expenses)
arising therefrom or with respect thereto, whether or not such Non-Excluded
Taxes were correctly or legally asserted. Payments under any indemnification
provided for in this Section 3.2.4 shall be made within thirty (30) days from
the date such Lender makes written demand therefor describing such Non-Excluded
Taxes in reasonable detail.

 

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3.2.5           Any Foreign Lender that is entitled to an exemption from or
reduction of withholding tax under the law of the jurisdiction in which the
Borrower is resident for tax purposes, or pursuant to any treaty to which such
jurisdiction is a party, with respect to payments hereunder shall deliver to the
Borrower, at the time or times prescribed by law or reasonably requested by the
Borrower, such properly completed and executed documentation prescribed by law
as will permit such payments to be made without withholding or at a reduced rate
of withholding. In addition, any Lender, if requested by the Borrower, shall
deliver such other documentation prescribed by law or reasonably requested by
the Borrower as will enable the Borrower to determine whether or not such Lender
is subject to backup withholding or information reporting requirements. Without
limiting the generality of the foregoing, each Foreign Lender shall deliver to
the Borrower (in such number of copies as shall be requested by the recipient)
on or prior to the date on which such Foreign Lender becomes a Lender under this
Agreement (and from time to time thereafter upon the request of the Borrower,
but only if such Foreign Lender is legally entitled to do so), whichever of the
following is applicable:

 

(i)          duly completed copies of Internal Revenue Service Form W-8BEN
claiming eligibility for benefits of an income tax treaty to which the United
States is a party;

 

(ii)         duly completed copies of Internal Revenue Service Form W-8ECI;

 

(iii)        in the case of a Foreign Lender claiming the benefits of the
exemption for portfolio interest under section 881(c) of the Internal Revenue
Code, (x) a certificate to the effect that such Foreign Lender is not (A) a
“bank” within the meaning of section 881(c)(3)(A) of the Internal Revenue Code,
(B) a “10 percent shareholder” of any Borrower within the meaning of section
881(c)(3)(B) of the Internal Revenue Code, or (C) a “controlled foreign
corporation” described in section 881(c)(3)(C) of the Internal Revenue Code and
(y) duly completed copies of Internal Revenue Service Form W-8BEN; or

 

(iv)         any other form prescribed by law as a basis for claiming exemption
from or a reduction in United States Federal withholding tax duly completed
together with such supplementary documentation as may be prescribed by law to
permit the Borrower to determine the withholding or deduction required to be
made.

 

3.3           Default Interest. At the option of the Required Lenders, the
principal of the Notes shall bear interest at the Default Rate during any time
an Event of Default exists and continues, and, to the extent not prohibited by
Law, overdue interest on the Notes shall bear interest at the Default Rate.

 

3.4           Prepayments.

 

3.4.1           Borrower shall have the right at any time or from time to time
to prepay, in whole or in part, the Loans; provided that Borrower shall (a) pay
at the time of such prepayment all accrued but unpaid interest due and owing
hereunder, (b) have delivered a notice of payment as required pursuant to
Section 3.4.4, and (c) pay any applicable prepayment premium due pursuant to
Section 3.5.

 

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3.4.2           At the option of the Required Lenders, upon the consummation of
each disposition of all or any part of its assets outside the ordinary course of
business Borrower prepay the outstanding principal amount of the Loans in an
amount equal to fifty percent (50%) of the amount by which the cash net proceeds
(taking into account any underwriting discounts or commissions and other
reasonable transaction costs, fees and expenses properly attributable to such
transaction payable in connection therewith, excluding any of the foregoing
payable to Borrower, any Guarantor, any Subsidiary or any Affiliate of any of
the foregoing) of such disposition exceeds $500,000.

 

3.4.3           Borrower shall give the Lenders at least one (1) Business Day’s
prior written notice of each prepayment proposed to be made by Borrower pursuant
to Sections 3.4.1 or 3.4.2, specifying the principal amount thereof to be
prepaid and the prepayment date. Notice of such prepayment having been given,
the principal amount of the Loan specified in such notice, together with
interest thereon to the date of prepayment, shall become due and payable on such
prepayment date.

 

3.5           Prepayment Premium. Upon any prepayment (i) pursuant to Section
3.4.1 or (ii) following an Event of Default pursuant to Section 8.1.11, the
Borrower shall pay a prepayment premium in an amount equal to six percent (6%)
of the amount of such prepayment, it being understood that no such premium shall
be payable in connection with a prepayment pursuant to Section 3.4.2 or any
payments following an Event of Default under any section of this Agreement other
than Section 8.1.11.

 

3.6           Additional Costs; Capital Adequacy.

 

3.6.1           If any new law, rule or regulation, or any change after the date
hereof in the interpretation or administration of any applicable law, rule or
regulation by any Governmental Authority, central bank or comparable agency
charged with the interpretation or administration thereof, or compliance by any
Lender with any request or directive (whether or not having the force of law) of
any such authority, central bank or comparable agency in connection therewith
issued, promulgated or enacted after the date hereof shall:

 

(i)          subject any Lender to any tax, duty or other charge with respect to
its Loans, its Note or its Commitment, or shall change the basis of taxation of
payments to any Lender of the principal of or interest on its Loans or any other
amounts due under this Agreement or its Commitment, in each case except for any
tax on, or changes in the rate of tax on the overall net income of, or franchise
taxes payable by, such Lender or its Applicable Lending Office or any
Non-Excluded Taxes covered by Section 3.2; or

 

(ii)         impose, modify or deem applicable any reserve (including, without
limitation, any such requirement imposed by the Board of Governors of the
Federal Reserve System), special deposit, insurance assessment or similar
requirement against assets of, deposits with or for the account of, or credit
extended by, any Lender or shall impose on any Lender any other condition
affecting its Loans, its Note or its Commitment; or

 

(iii)        impose on any Lender any other conditions or requirements with
respect to this Agreement, the other Loan Documents, the Loans or such Lender’s
Commitment;

 

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and the result of any of the foregoing is to increase the cost to such Lender of
making, funding, issuing, renewing, extending or maintaining any Loan or such
Lender’s Commitment, or to reduce the amount of any sum received or receivable
by such Lender under this Agreement or under its Note with respect thereto, by
an amount deemed by such Lender to be material, then, promptly upon demand by
such Lender (and in any event within thirty (30) days after demand by such
Lender) and delivery to the Borrower of the certificate required by clause (c)
hereof, the Borrower shall pay to such Lender the additional amount or amounts
as will compensate such Lender for such increased cost or reduction.

 

3.6.2      If any Lender shall determine that any change after the date hereof
in any existing applicable law, rule or regulation or any new law, rule or
regulation regarding capital adequacy, or any change therein, or any change
after the date hereof in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or any new request or directive of
general applicability regarding capital adequacy (whether or not having the
force of law) of any such authority, central bank or comparable agency issued,
promulgated or enacted after the date hereof, has or would have the effect of
reducing the rate of return on capital of such Lender (or its parent
corporation) as a consequence of such Lender’s obligations hereunder to a level
below that which such Lender (or its parent corporation) could have achieved but
for such law, change, request or directive (taking into consideration its
policies with respect to capital adequacy) by an amount deemed by such Lender to
be material, then from time to time, promptly upon demand by such Lender (and in
any event within thirty (30) days after demand by such Lender) the Borrower
shall pay to such Lender such additional amount or amounts as will compensate
such Lender (or its parent corporation) for such reduction; provided, however,
that notwithstanding anything herein to the contrary, (i) the Dodd-Frank Wall
Street Reform and Consumer Protection Act and all requests, rules, guidelines or
directives thereunder or issued in connection therewith, and (ii) all requests,
rules, guidelines or directives promulgated by any Lender for International
Settlements, the Basel Committee on Banking Supervision (or any successor or
similar authority) or the United States regulatory authorities, in each case
pursuant to Basel III, shall be deemed to be a change in law giving rise to a
payment or indemnity obligation by the Borrowers under this Section 3.6.2,
regardless of the date enacted, adopted or issued.

 

3.6.3      Each Lender will promptly notify the Borrower of any event of which
it has knowledge, occurring after the date hereof, which will entitle such
Lender to compensation pursuant to this Section 3.6 and will designate a
different lending office if such designation will avoid the need for, or reduce
the amount of, such compensation and will not, in the judgment of such Lender,
be otherwise disadvantageous to such Lender; provided that the Borrower shall
not be required to compensate a Lender pursuant to this Section 3.6 for any
amounts incurred more than three months prior to the date that such Lender
notifies the Borrower of such Lender’s intention to claim compensation therefor;
and provided further that, if the circumstances giving rise to such claim have a
retroactive effect, then such three-month period shall be extended to include
the period of such retroactive effect. A certificate of any Lender claiming
compensation under this Section and setting forth in reasonable detail the
additional amount or amounts to be paid to it hereunder and the calculations
used in determining such additional amount or amounts shall be conclusive in the
absence of manifest error. In determining such amount, such Lender may use any
reasonable averaging and attribution methods.

 

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Article IV
COLLATERAL

 

4.1          Security.

 

4.1.1      In order to secure the prompt payment and performance of the
Obligations, as and when due, the Borrower hereby grants to the Collateral
Agent, for the benefit of itself and the Lenders, a security interest in and
Lien on the Collateral and all proceeds thereof.

 

4.1.2      The Borrower will cause the appropriate Person to execute and deliver
to the Lenders within ninety (90) days following the request therefor (or such
later date as agreed by the Required Lenders) each of the following documents
and instruments at its own cost and expense:

 

(i)      Mortgages granting a Lien on all Oil and Gas Properties owned by the
Borrower and each Guarantor from time to time, and the Borrower shall pay the
reasonable fees and expenses of one (1) legal counsel for the Lenders in each
local jurisdiction where such properties are located in connection with such
mortgages; and

 

(ii)      waiver of operator’s Lien in favor of the Lenders from ImPetro
Resources, LLC and ImPetro Operating, LLC.

 

4.1.3      All documents delivered or to be delivered hereunder shall be in form
and substance reasonably satisfactory to the Required Lenders and their counsel.

 

4.1.4      All Liens to be created by delivery of the documents referred to in
this Section shall be first and prior perfected Liens in favor of the Persons
identified therein, subject only to Permitted Liens.

 

4.1.5      Each Lender hereby appoints T.R. Winston & Company, LLC as collateral
agent (the “Collateral Agent”) hereunder to act on its behalf with respect to
the creation, perfection and enforcement of all Liens granted to the Lenders on
the Collateral and authorizes the Collateral Agent to (i) execute and deliver
the Security Documents and accept delivery thereof on its behalf from any Loan
Party, (ii) take such action on its behalf and to exercise all rights, powers
and remedies and perform the duties as are expressly delegated to Collateral
Agent under such Security Documents and (iii) exercise such powers as are
reasonably incidental thereto. The Collateral Agent, as a non-fiduciary agent
for the Borrower, shall maintain a register showing the principal amount (and
stated interest) of the Notes owing to each Lender from time to time and such
register shall, absent manifest error, conclusively be presumed to be correct
and accurate.

 

Article V
GUARANTY

 

5.1         Guaranty. To induce the Lenders to make credit available to or for
the benefit of the Borrower, each Guarantor hereby, jointly and severally,
absolutely, unconditionally and irrevocably guarantees, as primary obligor and
not merely as surety, the full and punctual payment when due, whether at stated
maturity or earlier, by reason of acceleration, mandatory prepayment or
otherwise in accordance with any Loan Document, of all the Obligations of the
Borrower whether existing on the date hereof or hereinafter incurred or created
(the “Guaranteed Obligations”). This Guaranty by each Guarantor hereunder
constitutes a guaranty of payment and not of collection.

 

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5.2          Limitation of Guaranty. Any term or provision of this Guaranty or
any other Loan Document to the contrary notwithstanding, the maximum aggregate
amount for which any Guarantor shall be liable hereunder shall not exceed the
maximum amount for which such Guarantor can be liable without rendering this
Guaranty or any other Loan Document, as it relates to such Guarantor, subject to
avoidance under applicable Law relating to fraudulent conveyance or fraudulent
transfer (including the Uniform Fraudulent Conveyance Act, the Uniform
Fraudulent Transfer Act and Section 548 of title 11 of the United States Code or
any applicable provisions of comparable requirements of Law) (collectively,
“Fraudulent Transfer Laws”). Any analysis of the provisions of this Guaranty for
purposes of Fraudulent Transfer Laws shall take into account the right of
contribution established in Section 5.3 and, for purposes of such analysis, give
effect to any discharge of intercompany debt as a result of any payment made
under the Guaranty.

 

5.3         Contribution. Without limiting any right under applicable law for
contribution, to the extent that any Guarantor shall be required hereunder to
pay any portion of any Guaranteed Obligation exceeding the greater of (a) the
amount of the value actually received by such Guarantor and its Subsidiaries
from the Loans and other Obligations and (b) the amount such Guarantor would
otherwise have paid if such Guarantor had paid the aggregate amount of the
Guaranteed Obligations (excluding the amount thereof repaid by the Borrower) in
the same proportion as such Guarantor’s net worth on the date enforcement is
sought hereunder bears to the aggregate net worth of all the Guarantors on such
date, then such Guarantor shall be reimbursed by such other Guarantors for the
amount of such excess, pro rata, based on the respective net worth of such other
Guarantors on such date. Such contribution rights shall be subordinate and
subject in right of payment to the obligations of such Guarantors under the Loan
Documents and no Guarantor shall exercise such rights of contribution until all
Obligations have been paid in full.

 

5.4         Authorization; Other Agreements. The Lenders are hereby authorized,
without notice to or demand upon any Guarantor and without discharging or
otherwise affecting the obligations of any Guarantor hereunder and without
incurring any liability hereunder, from time to time, to do each of the
following:

 

5.4.1      (i) modify, amend, supplement or otherwise change, (ii) accelerate or
otherwise change the time of payment or (iii) waive or otherwise consent to
noncompliance with, any Guaranteed Obligation or any Loan Document;

 

5.4.2      apply to the Guaranteed Obligations any sums by whomever paid or
however realized in such order as provided in the Loan Documents;

 

5.4.3      refund at any time any payment received by any Lender in respect of
any Guaranteed Obligation;

 

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5.4.4      (i) sell, exchange, enforce, waive, substitute, liquidate, terminate,
release, abandon, fail to perfect, subordinate, accept, substitute, surrender,
exchange, affect, impair or otherwise alter or release any Collateral for any
Guaranteed Obligation or any other guaranty therefor in any manner, (ii)
receive, take and hold additional Collateral to secure any Guaranteed
Obligation, (iii) add, release or substitute any one or more other Guarantors,
makers or endorsers of any Guaranteed Obligation or any part thereof and (iv)
otherwise deal in any manner with the Borrower and any other Guarantor, maker or
endorser of any Guaranteed Obligation or any part thereof; and

 

5.4.5      settle, release, compromise, collect or otherwise liquidate the
Guaranteed Obligations.

 

5.5         Guaranty Absolute and Unconditional. Each Guarantor hereby waives
and agrees not to assert any defense (other than the performance in full and
payment in full of the Guaranteed Obligations), whether arising in connection
with or in respect of any of the following or otherwise, and hereby agrees that
its obligations under this Guaranty are irrevocable, absolute and unconditional
and shall not be discharged as a result of or otherwise affected by any of the
following (which may not be pleaded and evidence of which may not be introduced
in any proceeding with respect to this Guaranty, in each case except as
otherwise agreed in writing by the Required Lenders):

 

5.5.1      the invalidity or unenforceability of any obligation of the Borrower
or any other Guarantor under any Loan Document or any other agreement or
instrument relating thereto (including any amendment, consent or waiver
thereto), or any security for, or other guaranty of, any Guaranteed Obligation
or any part thereof, or the lack of perfection or continuing perfection or
failure of priority of any security for the Guaranteed Obligations or any part
thereof;

 

5.5.2      the absence of (i) any attempt to collect any Guaranteed Obligation
or any part thereof from the Borrower or any other Guarantor or other action to
enforce the same or (ii) any action to enforce any Loan Document or any Lien
thereunder;

 

5.5.3      the failure by any Person to take any steps to perfect and maintain
any Lien on, or to preserve any rights with respect to, any Collateral;

 

5.5.4      any workout, insolvency, bankruptcy proceeding, reorganization,
arrangement, liquidation or dissolution by or against the Borrower, any other
Guarantor or any of the Borrower’s other Subsidiaries or any procedure,
agreement, order, stipulation, election, action or omission thereunder,
including any discharge or disallowance of, or bar or stay against collecting,
any Guaranteed Obligation (or any interest thereon) in or as a result of any
such proceeding;

 

5.5.5      any foreclosure, whether or not through judicial sale, and any other
sale or other disposition of any Collateral or any election following the
occurrence of an Event of Default by any Lender to proceed separately against
any Collateral in accordance with such Secured Party’s rights under any
applicable Law; or

 

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5.5.6      any other defense, setoff, counterclaim or any other circumstance
that might otherwise constitute a legal or equitable discharge of the Borrower,
any other Guarantor or any of the Borrower’s other Subsidiaries, in each case
other than the performance in full and payment in full of the Guaranteed
Obligations.

 

5.6         Waivers. To the fullest extent permitted by applicable Law, each
Guarantor hereby unconditionally and irrevocably waives and agrees not to assert
any claim, defense (other than performance in full and the payment in full of
the Guaranteed Obligations), setoff or counterclaim based on diligence,
promptness, presentment, requirements for any demand or notice hereunder
including any of the following: (a) any demand for payment or performance and
protest and notice of protest; (b) any notice of acceptance; (c) any
presentment, demand, protest or further notice or other requirements of any kind
with respect to any Guaranteed Obligation (including any accrued but unpaid
interest thereon) becoming immediately due and payable; and (d) any other notice
in respect of any Guaranteed Obligation or any part thereof, and any defense
arising by reason of any disability or other defense of the Borrower or any
other Guarantor. To the fullest extent permitted by applicable law, each
Guarantor further unconditionally and irrevocably agrees not to (x) enforce or
otherwise exercise any right of subrogation or any right of reimbursement or
contribution or similar right against the Borrower or any other Guarantor by
reason of any Loan Document or any payment made thereunder except as
specifically set forth herein or (y) assert any claim, defense, setoff or
counterclaim it may have against any other Loan Party or set off any of its
obligations to such other Loan Party against obligations of such Loan Party to
such Guarantor, until the Guaranteed Obligations have been paid in full. No
obligation of any Guarantor hereunder shall be discharged other than by complete
performance. Each Guarantor further waives any right such Guarantor may have
under any applicable Law to require any Lender to seek recourse first against
the Borrower or any other Person, or to realize upon any Collateral for any of
the Obligations, as a condition precedent to enforcing such Guarantor’s
liability and obligations under this Guaranty.

 

5.7          Reliance. Each Guarantor hereby assumes responsibility for keeping
itself informed of the financial condition of the Borrower, each other Guarantor
and any other guarantor, maker or endorser of any Guaranteed Obligation or any
part thereof, and of all other circumstances bearing upon the risk of nonpayment
of any Guaranteed Obligation or any part thereof that diligent inquiry would
reveal, and each Guarantor hereby agrees that no Lender shall have any duty to
advise any Guarantor of information known to it regarding such condition or any
such circumstances. In the event any Lender, in its sole discretion, undertakes
at any time or from time to time to provide any such information to any
Guarantor, such Lender shall be under no obligation to (a) undertake any
investigation not a part of its regular business routine, (b) disclose any
information that such Lender, pursuant to accepted or reasonable commercial
finance or banking practices, wishes to maintain confidential or (c) make any
future disclosures of such information or any other information to any
Guarantor.

 

Article VI
REPRESENTATIONS AND WARRANTIES

 

The Borrower and, to the extent applicable to any Guarantor, such Guarantor
hereby represents and warrants to the Lenders as follows with the intention that
the Lenders shall rely thereon without any investigation or verification by the
Lenders or their counsel:

 

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6.1         Existence and Power. The Borrower:

 

6.1.1      is a corporation, duly organized, validly existing and in good
standing under the laws of the State of Delaware.

 

6.1.2      has all corporate powers and all governmental licenses,
authorizations, consents and approvals required to carry on its business as now
conducted.

 

6.1.3      is duly qualified to transact business as a foreign entity in each
jurisdiction where the nature of its business requires the same.

 

6.2         Authorization; Contravention. The execution, delivery and
performance by each Person (other than the Lenders) purporting to execute this
Agreement and the other Loan Documents are within such Person’s power, have been
duly authorized by all necessary action, require no action by or in respect of,
or filing with, any governmental body, agency or official (except that the
perfection of Liens created by certain of the Security Documents may require the
filing of financing statements or Mortgages in the appropriate recordation
offices), and do not contravene, or constitute a default under, any provision of
applicable law or regulation (including the Margin Regulations) or any agreement
creating or governing such Person or any agreement, judgment, injunction, order,
decree or other instrument binding upon such Person or result in the creation or
imposition of any Lien on any Property of the Borrower which could reasonably
expected to have a Material Adverse Effect, except Permitted Liens and Liens
securing the Obligations.

 

6.3         Binding Effect.

 

6.3.1      This Agreement constitutes a valid and binding agreement of the
Borrower; the Notes, when executed and delivered in accordance with this
Agreement, will constitute the valid and binding obligations of the Borrower;
the Security Documents, when executed and delivered in accordance with this
Agreement, will constitute valid and binding obligations of each Person
purporting to execute the same, in each case except as (i) may be limited by
bankruptcy, insolvency or similar laws affecting creditors’ rights generally and
(ii) rights of acceleration and the availability of equitable remedies may be
limited by equitable principles of general applicability.

 

6.3.2      Each Loan Document is enforceable against each Person (other than the
Lenders) executing same in accordance with its terms except as (i) the
enforceability thereof may be limited by bankruptcy, insolvency or similar laws
affecting creditors’ rights generally and (ii) rights of acceleration and the
availability of equitable remedies may be limited by equitable principles of
general applicability.

 

6.4         Subsidiaries.

 

6.4.1      The Borrower has no Subsidiaries as of the date hereof except as
disclosed on Exhibit 6.4.1 and, if subsequent to the date hereof, as
specifically approved by the Required Lenders in writing in their reasonable
discretion.

 

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6.5         Disclosure. No document, certificate or statement delivered to the
Lenders by or on behalf of the Borrower or any Guarantor in connection with the
transactions contemplated hereby contains any untrue statement of a material
fact, or omits to state a material fact required to be stated in order to make
the statements contained herein or therein, taken as a whole, not misleading in
light of the circumstances under which such statements were made. All
information heretofore furnished by the Borrower or any Guarantor to the Lenders
for purposes of or in connection with this Agreement or any transaction
contemplated hereby is, and all such information hereafter furnished by the
Borrower to the Lenders will be, true and accurate in every material respect or
based on reasonable estimates on the date as of which such information is stated
or certified. The Borrower has disclosed to the Lenders in writing any and all
facts known to the Borrower after diligent inquiry (except facts of general
public knowledge) which materially and adversely affect or may affect (to the
extent the Borrower can now reasonably foresee) the business, operations,
prospects or condition, financial or otherwise, of the Borrower or the ability
of the Borrower to perform its obligations under this Agreement.

 

6.6         Financial Information.

 

6.6.1      (i) To the knowledge of the Responsible Representatives, the
Financial Statements fairly present the financial position of the Borrower and
its Subsidiaries at the respective dates thereof.

 

(ii)      Except as disclosed in a writing delivered by the Borrower to the
Lenders prior to the execution and delivery of this Agreement, since the dates
referenced in the financial information referred to in clause (i) immediately
preceding above, to the knowledge of the Responsible Representatives there has
been no Material Adverse Effect.

 

6.6.2      (i) For each Guarantor, to the knowledge of the Responsible
Representatives, the financial information of such Guarantor delivered to the
Lenders in connection with the request for this credit facility fairly presents
the financial position of such Guarantor at the respective dates thereof.

 

(ii)      For each Guarantor, except as disclosed in a writing delivered by such
Guarantor to the Lenders prior to the execution and delivery of this Agreement,
since the dates referenced in the financial information referred to in clause
(i) immediately preceding above, to the knowledge of the Responsible
Representatives, there has been no Material Adverse Effect.

 

6.7         Litigation.

 

6.7.1      (i) Except as disclosed in the Borrower’s public filings with the
SEC, there is no material action, suit or proceeding pending against, or to the
knowledge of the Borrower threatened in writing against or affecting the
Borrower before any Tribunal or arbitrator.

 

(ii)      For each Guarantor, except as disclosed in the Borrower’s public
filings with the SEC, there is no material action, suit or proceeding pending
against, or to the knowledge of the Borrower threatened in writing against or
affecting such Guarantor before any Tribunal or arbitrator.

 

6.8         ERISA Plans. The Borrower does not currently sponsor, maintain or
contribute to or has at any time sponsored, maintained or contributed to any
Plan.

 

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6.9         Taxes and Filing of Tax Returns.

 

6.9.1      (i) Except as disclosed in the Borrower’s public filings with the
SEC, the Borrower has filed or properly extended all returns required to have
been filed or extended with respect to material Taxes and has paid all material
Taxes shown to be due and payable by it on such returns, including interest and
penalties, and all other material Taxes which are payable by it, to the extent
the same have become due and payable (unless, with respect to such other
material Taxes, the criteria set forth in Section 7.5 are being met). The
Borrower does not know of any proposed assessment of Taxes against it in excess
of $1,000,000 except as disclosed in writing delivered by the Borrower to the
Lenders, and all liabilities for material Taxes of the Borrower are adequately
provided for.

 

(ii)      For each Guarantor, except as disclosed in the Borrower’s public
filings with the SEC, such Guarantor has filed or properly extended all returns
required to have been filed or extended with respect to material Taxes and has
paid all material Taxes shown to be due and payable by it on such returns,
including interest and penalties, and all other material Taxes which are payable
by it, to the extent the same have become due and payable (unless, with respect
to such other Taxes, the criteria set forth in Section 7.5 are being met). Such
Guarantor does not know of any proposed assessment of Taxes against it in excess
of $1,000,000 except as disclosed in writing delivered by such Guarantor to the
Lenders, and all liabilities for Taxes of such Guarantor are adequately provided
for.

 

6.10       Title to Properties; Liens; Environmental Liability.

 

6.10.1      (i) The Borrower has good and defensible record title to all Oil and
Gas Properties purported to be owned by it and good and marketable title to all
other Property purported to be owned by it, subject only to Permitted Liens. The
Liens covering the Collateral when granted shall be valid, enforceable, first
and prior Liens in favor of the Lenders, subject only to Permitted Liens.

 

(ii)      For each Guarantor, such Guarantor has good and defensible record
title to all Oil and Gas Properties purported to be owned by it and good and
marketable title to all other Property purported to be owned by it, subject only
to Permitted Liens. The Liens covering the Collateral when granted shall be
valid, enforceable, first and prior Liens in favor of the Lenders, subject only
to Permitted Liens.

 

6.10.2      (i) The Borrower has not (a) received notice or otherwise learned of
any Environmental Liability arising in connection with (1) any non-compliance
with or violation of the requirements of any Environmental Law or (2) the
release or threatened release of any Hazardous Substance into the environment or
(b) received notice or otherwise learned of any federal or state investigation
evaluating whether any remedial action is needed to respond to a release or
threatened release of any Hazardous Substance into the environment for which the
Borrower is or may be liable, in each case which would be reasonably expected to
have a Material Adverse Effect.

 

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(ii)      For each Guarantor, such Guarantor has not (a) received notice or
otherwise learned of any Environmental Liability arising in connection with (1)
any noncompliance with or violation of the requirements of any Environmental Law
or (2) the release or threatened release of any Hazardous Substance into the
environment or (b) received notice or otherwise learned of any federal or state
investigation evaluating whether any remedial action is needed to respond to a
release or threatened release of any Hazardous Substance into the environment
for which such Guarantor is or may be liable, in each case which would be
reasonably expected to have a Material Adverse Effect.

 

6.10.3      (i) Except in accordance with applicable Law or the terms of a valid
permit, license, certificate, or approval of the relevant Governmental
Authority, no Release of Hazardous Substances by the Borrower from, affecting,
or related to any Property of the Borrower has occurred that would reasonably be
expected to have a Material Adverse Effect.

 

(ii)      For each Guarantor, except in accordance with applicable Law or the
terms of a valid permit, license, certificate, or approval of the relevant
Governmental Authority, no Release of Hazardous Substances by such Guarantor
from, affecting, or related to any Property of such Guarantor has occurred that
would reasonably be expected to have a Material Adverse Effect.

 

6.10.4      (i) To the knowledge of the Responsible Representatives, no
Environmental Complaints have been received by the Borrower.

 

(ii)      For each Guarantor, to the knowledge of the Responsible
Representatives, no Environmental Complaints have been received by such
Guarantor.

 

6.11        Business Compliance.

 

6.11.1      (i) The Borrower has performed and abided by all obligations
required to be performed by it to the extent required under each license,
permit, order, authorization, grant, contract, agreement, or regulation to which
it is a party or by which it or any of its Property is bound, in each case
except as would not be reasonably expected to have a Material Adverse Effect.

 

(ii)      For each Guarantor, such Guarantor has performed and abided by all
obligations required to be performed by it to the extent required under each
license, permit, order, authorization, grant, contract, agreement, or regulation
to which it is a party or by which it or any of its Property is bound, in each
case except as would not be reasonably expected to have a Material Adverse
Effect.

 

6.12        Licenses, Permits, Etc.

 

6.12.1   (i) The Borrower possesses such valid franchises, certificates of
convenience and necessity, operating rights, licenses, permits, consents,
authorizations, exemptions and orders of Tribunals as are necessary to carry on
its business as now being conducted and to own its Properties.

 

(ii)      For each Guarantor, such Guarantor possesses such valid franchises,
certificates of convenience and necessity, operating rights, licenses, permits,
consents, authorizations, exemptions and orders of Tribunals as are necessary to
carry on its business as now being conducted and to own its Properties.

 

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6.13       Compliance with Laws.

 

6.13.1      (i) The business and operations of the Borrower have been and are
being conducted in accordance with all applicable Laws, in each case except as
would not be reasonably expected to have a Material Adverse Effect.

 

(ii)      For each Guarantor, the business and operations of such Guarantor have
been and are being conducted in accordance with all applicable Laws, in each
case except as would not be reasonably expected to have a Material Adverse
Effect.

 

6.14       Governmental Consent.

 

6.14.1      (i) No consent, approval or authorization of, or declaration or
filing with, any Governmental Authority is required for the valid execution,
delivery and the performance of this Agreement, any other Loan Documents by the
Borrower (other than protective filings or filings necessary to perfect the
Liens granted to the Lenders under the Loan Documents).

 

(ii)      For each Guarantor, no consent, approval or authorization of, or
declaration or filing with, any Governmental Authority is required for the valid
execution, delivery and the performance of any Loan Document by such Guarantor
(other than protective filings or filings necessary to perfect the Liens granted
to the Lenders under the Loan Documents).

 

6.15        Investment Company Act. (i) The Borrower is not an “investment
company,” or a company “controlled” by an “investment company,” within the
meaning of the Investment Company Act of 1940, as amended.

 

(ii)      For each Guarantor, such Guarantor is not an “investment company,” or
a company “controlled” by an “investment company,” within the meaning of the
Investment Company Act of 1940, as amended.

 

6.16       State Utility; No Governmental Limitations on Liens.

 

6.16.1      (i) The Borrower is not defined as a “utility” under the laws of the
State of Texas or any other jurisdiction wherein the Borrower is required to
qualify to do business.

 

(ii)      For each Guarantor, such Guarantor is not defined as a “utility” under
the laws of the State of Texas or any other jurisdiction wherein such Guarantor
is required to qualify to do business.

 

6.16.2      (i) To the knowledge of the Responsible Representatives, the
Borrower is not subject to any state or federal Law that would limit its ability
to have Liens placed on any of its Property.

 

 36

 

 

(ii)      For each Guarantor, to the knowledge of the Responsible
Representatives, such Guarantor is not subject to any state or federal Law that
would limit its ability to have Liens placed on any of its Property.

 

6.17       Refunds; Certain Contracts.

 

6.17.1      (i) No orders of, proceedings pending before, or other requirements
of, the Federal Energy Regulatory Commission, the Texas Railroad Commission, or
any Governmental Authority exist which could result in the Borrower being
required to refund any portion of the proceeds received or to be received from
the sale of hydrocarbons constituting part of the Collateral.

 

(ii)      For each Guarantor, no orders of, proceedings pending before, or other
requirements of, the Federal Energy Regulatory Commission, the Texas Railroad
Commission, or any Governmental Authority exist which could result in such
Guarantor being required to refund any portion of the proceeds received or to be
received from the sale of hydrocarbons constituting part of the Collateral.

 

6.17.2      (i) The Borrower is not obligated by virtue of any prepayment made
under any contract containing a “take-or-pay” or “prepayment” provision or under
any similar agreement to deliver hydrocarbons produced from or allocated to any
of the Collateral at some future date without receiving full payment therefor
within ninety (90) days of delivery.

 

(ii)      For each Guarantor, such Guarantor is not obligated by virtue of any
prepayment made under any contract containing a “take-or-pay” or “prepayment”
provision or under any similar agreement to deliver hydrocarbons produced from
or allocated to any of the Collateral at some future date without receiving full
payment therefor within ninety (90) days of delivery.

 

6.17.3      (i) The Borrower has not produced gas subject to, and neither the
Borrower nor any of the Collateral is subject to, balancing rights of third
parties or subject to balancing duties under governmental requirements.

 

(ii)      For each Guarantor, such Guarantor has not produced gas subject to,
and neither the Guarantor nor any of the Collateral is subject to, balancing
rights of third parties or subject to balancing duties under governmental
requirements.

 

6.18       No Default. No Default has occurred which is continuing as of the
date hereof.

 

6.19       Anti-Terrorism Laws.

 

6.19.1      Anti-Terrorism Laws. None of the Obligated Parties nor any Affiliate
of any Obligated Party is in violation of any Anti-Terrorism Law or knowingly
engages in or conspires to engage in any transaction that evades or avoids, or
has the purpose of evading or avoiding, or attempts to violate, any of the
prohibitions set forth in any Anti-Terrorism Law.

 

6.19.2      OFAC. None of the Obligated Parties nor any Affiliate of any
Obligated Party is in violation of any rules or regulations promulgated by OFAC
or of any economic or trade sanctions or engages in any transaction administered
and enforced by OFAC or conspires to engage in any transaction that evades or
avoids, or has the purpose of evading or avoiding, or attempts to violate, any
of the prohibitions set forth in any rules or regulations promulgated by OFAC.

 

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6.20       Flood Matters. No “Building” (as defined in the applicable Flood
Insurance Regulation) or “Manufactured (Mobile) Home” (as defined in the
applicable Flood Insurance Regulation) is located on any Mortgaged Property
within an area having special flood hazards and in which flood insurance is
available under the Flood Insurance Regulations, and no “Building” or
“Manufactured (Mobile) Home” will be encumbered by the Mortgages.

 

6.21       Solvency. Immediately after the Closing (a) the fair value of the
assets of the Borrower and its Subsidiaries (taken as a whole), at a fair
valuation, will exceed its debts and liabilities, subordinated, contingent or
otherwise, at a fair valuation; (b) the present fair saleable value of the
property of the Borrower and its Subsidiaries (taken as a whole) will be greater
than the amount that will be required to pay the probable liability of its debts
and other liabilities, subordinated, contingent or otherwise, as such debts and
other liabilities become absolute and matured; (c) the Borrower will be able to
pay its debts and liabilities, subordinated, contingent or otherwise, as such
debts and liabilities become absolute and matured; and (d) the Borrower and its
Subsidiaries (taken as a whole) will not have unreasonably small capital with
which to conduct the business in which it is engaged as such businesses are now
conducted and are proposed to be conducted following the date hereof.

 

6.22       Eligible Contract Participant. As of the date of this Agreement the
Borrower is, and as of the date of the Borrower’s entry into any Commodity
Hedging Transaction the Borrower will be, an “Eligible Contract Participant” as
defined in 7 U.S.C. § 1a(l8).

 

6.23       Intellectual Property. Each Loan Party owns or holds a valid and
enforceable license to use all intellectual property necessary to conduct its
business as currently conducted. No claim has been asserted or is pending by any
Person with respect to the use of any such intellectual property or challenging
or questioning the validity or effectiveness of any such intellectual property;
and no Loan Party knows of any valid basis for any such claim. The use of such
intellectual property by any Loan Party does not infringe on the rights of any
Person, except for such claims and infringements as do not, in the aggregate,
give rise to a Material Adverse Effect.

 

Article VII
COVENANTS

 

So long as any principal of or interest on the Notes shall remain unpaid or any
other portion of the Obligations remains outstanding, the Borrower will (or will
cause the appropriate Person to) duly perform and observe each and all of the
covenants and agreements hereinafter set forth:

 

7.1        Reserved.

 

7.2        Financial Statements; Reserve and Other Reports; Certain Required
Notices from Borrower; Additional Information. The Borrower will furnish to the
Lenders:

 

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(i)      as soon as available and in any event within one hundred thirty-five
(135) days after the end of each fiscal year of the Borrower, copies of the
consolidated statement of assets and liabilities of the Borrower and its
consolidated Subsidiaries as of the end of such fiscal year, and copies of the
related statements of revenues and expenses, operations, changes in owners’
equity and cash flow for such fiscal year, setting forth in each case in
comparative form the figures for the previous fiscal year, all in reasonable
detail; such financial statements to be audited by a firm of independent
certified public accountants selected by the Borrower and reasonably acceptable
to the Required Lenders and accompanied by the unqualified opinion of such
accountants;

 

(ii)      on or before seventy-five (75) days after the last day of each fiscal
quarter of the Borrower, (a) a copy of the unaudited consolidated statement of
assets and liabilities of the Borrower and its consolidated Subsidiaries as at
the close of such quarter and from the beginning of such fiscal year to the end
of such quarter, (b) a copy of the related statements of revenues and expenses,
operations, changes in owners’ equity and cash flows for the quarter just ended
and for that portion of the year ending on such last day, all in reasonable
detail and prepared on a basis consistent with the financial statements
previously delivered by the Borrower under this Section and (c) an
identification of all Contingent Obligations and Guarantees;

 

(iii)      simultaneously with the delivery of each set of financial statements
pursuant to the preceding clauses of this Section, a Compliance Certificate of
the Borrower stating that such financial statements fairly and accurately
reflect in all material respects the financial condition and results of
operation of the Borrower for the periods and as of the dates set forth therein,
and that the signers have reviewed the terms of this Agreement and the other
Loan Documents, and have made, or caused to be made under their supervision, a
review of the transactions and financial condition of the Borrower during the
fiscal period covered by such financial statements, and that such review has not
disclosed the existence during such period, and that the signers do not have
knowledge of the existence as of the date of such certificate, of any condition
or event which constitutes a Default, or, if any such condition or event existed
or exists, specifying the nature and period of existence thereof and what action
the Borrower has taken or is taking or proposes to take with respect thereto;

 

(iv)      within thirty (30) days after each filing thereof by the Borrower and
each Guarantor with any Governmental Authority (if copies thereof have been
requested by the Required Lenders), complete copies of the federal and state
income tax returns so filed;

 

(v)      as soon as available, and in any event on or before March 31 of each
year during the term of this Agreement, engineering reports in form and
substance reasonably satisfactory to the Required Lenders, certified by an
independent consulting petroleum engineers selected by the Borrower and
reasonably acceptable to the Required Lenders as fairly and accurately setting
forth (a) the proven and producing, shut-in, behind-pipe, and undeveloped oil
and gas reserves (separately classified as such) attributable to the Oil and Gas
Properties of the Borrower as of January 1 of such year, (b) the aggregate
present value of the future net income with respect to such Properties,
discounted at a stated per annum discount rate of proven and producing reserves,
(c) projections of the annual rate of production, gross income, and net income
with respect to such proven and producing reserves, and (d) information with
respect to the “take-or-pay,” “prepayment,” and gas-balancing liabilities of the
Borrower and other Persons with respect to such Properties. For purposes of this
clause, the petroleum engineering firm of either Forrest A. Garb and Associates,
or Cawley, Gillsepe & Associates, Inc. shall be deemed to be acceptable to the
Lenders with respect to all Oil and Gas Properties in the Permian Basin and Mr.
Kent Lina shall be deemed to be acceptable to the Lenders with respect to all
Oil and Gas Properties in the DJ Basin;

 

 39

 

  

(vi)      as soon as available, and in any event on or before September 30 of
each year during the term of this Agreement, engineering reports in form and
substance reasonably satisfactory to the Required Lenders setting forth (a) the
proven and producing, shut-in, behind-pipe, and undeveloped oil and gas reserves
(separately classified as such) attributable to the Oil and Gas Properties of
the Borrower as of July 1 of such year, (b) the aggregate present value of the
future net income with respect to such Properties, discounted at a stated per
annum discount rate of proven and producing reserves, (c) projections of the
annual rate of production, gross income, and net income with respect to such
proven and producing reserves, and (d) information with respect to the
“take-or-pay,” “prepayment,” and gas-balancing liabilities of the Borrower and
other Persons with respect to such Properties;

 

(vii)      simultaneously with the delivery of such production and other reports
under clauses (i) and (ii) above, a Representative’s Certificate certifying
that, to the best of such signatory’s knowledge, such engineering and other
reports are true, accurate and complete in all material respects for the periods
covered in such reports; provided that to the extent such reports include
projections of future volumes of production and future costs, it is understood
that such estimates are necessarily based upon professional opinions, and the
Borrower does not warrant that such opinions will ultimately prove to have been
accurate.

 

(viii)      within ten (10) days after any material change in insurance coverage
by the Borrower from that previously disclosed to the Lenders, a report
describing such change, and, within thirty (30) days after each request by the
Required Lenders, certificates of insurance from the insurance companies
insuring the Borrower, describing the insurance coverage of the Borrower within
ten (10) days after the Borrower’s incurring any Contingent Obligation or
Guarantee, a report describing such Contingent Obligation or Guarantee in
reasonable detail;

 

(ix)      within five (5) Business Days after any Responsible Representative
becomes aware of the occurrence of any condition or event which constitutes a
Default, a Representative’s Certificate specifying the nature of such condition
or event, the period of existence thereof, what action the Borrower has taken or
is taking and proposes to take with respect thereto and the date, if any, on
which it is estimated the same will be remedied;

 

(x)      within five (5) Business Days after the Borrower’s or any Guarantor’s
learning of any claim, demand, action, event, condition, report or investigation
indicating any potential or actual liability of the Borrower or any Guarantor
arising in connection with (a) the noncompliance with or violation of the
requirements of any Environmental Law, (b) the release or threatened release of
any Hazardous Substance into the environment, or (c) the existence of any
Environmental Lien on any Properties of the Borrower or any Guarantor, notice
thereof;

 

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(xi)      within five (5) Business Days of the Borrower’s or any Guarantor’s
learning of any litigation or other event or circumstance which could reasonably
be expected to have a Material Adverse Effect, notice thereof;

 

(xii)      within five (5) Business Days after the occurrence thereof, notice of
the change in identity or address of any Person remitting to the Borrower
proceeds from the sale of hydrocarbon production from or attributable to any
Collateral;

 

(xiii)      within five (5) Business Days after any Responsible Representative
learns of any Change of Control Event, notice of such Change of Control Event;
and

 

(xiv)      with reasonable promptness, such other information relating directly
or indirectly to the financial condition, business, results of operations or
Properties of the Borrower or any Guarantor as from time to time may reasonably
be requested by the Required Lenders.

 

7.3         Inspection of Properties and Books.

 

7.3.1      The Borrower will permit any officer, employee or representative of
one Lender designated by the Required Lenders in writing to the Borrower to
visit and inspect any of its Properties, to examine its books of account (and to
make copies thereof and take extracts therefrom) and to discuss its affairs,
finances and accounts (including transactions, agreements and other relations
with any shareholders) with, and to be advised as to the same by, its officers
and independent public accountants, all upon at least five (5) Business Days’
notice and at such reasonable times during normal business hours and intervals
as such designated Lender may desire and, if an Event of Default has occurred
and is continuing, at the expense of the Borrower.

 

7.3.2      Each Guarantor will permit any officer, employee or representative of
one Lender designated by the Required Lenders in writing to the Borrower to
visit and inspect any of its Properties, to examine its books of account (and to
make copies thereof and take extracts therefrom) and to discuss its affairs,
finances and accounts (including transactions, agreements and other relations
with any shareholders) with, and to be advised as to the same by, its officers
and independent public accountants, all upon at least five (5) Business Days’
notice and at such reasonable times during normal business hours and intervals
as the Required Lenders may desire and, if an Event of Default has occurred and
is continuing, at the expense of the Borrower.

 

7.4         Maintenance of Security; Insurance; Authorization to File Financing
Statements; Operating Accounts; Transfer Orders.

 

7.4.1      (i) The Borrower shall execute and deliver, or cause the appropriate
Person to execute and deliver, to the Lenders all mortgages, deeds of trust,
security agreements, financing statements, assignments and such other documents
and instruments (including division and transfer orders), and supplements and
amendments thereto, and take such other actions as the Required Lenders deem
reasonably necessary or desirable in order to (a) grant and maintain as valid,
enforceable, first-priority, perfected Liens (subject only to the Permitted
Liens), all Liens granted to secure the Obligations or (b) monitor or control
the proceeds from Collateral.

 

(ii)      The Borrower and each Guarantor which has granted a security interest
to the Lenders, as applicable, authorizes the Lenders to complete and file, from
time to time, financing statements naming the Borrower and each such Guarantor,
as applicable, as debtor to perfect Liens granted to secure the Obligations.

 

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(iii)      The Borrower shall take such action as may be requested from time to
time by the Required Lenders to maintain, or cause to be in effect at all times,
first and prior Liens (subject to Permitted Liens) in favor of the Lenders by
instruments executed by the appropriate Person and properly recorded in the
applicable jurisdictions on Oil and Gas Properties having an aggregate PV-10
Value of at least eighty percent (80%) of the PV-10 Value of all such Oil and
Gas Properties.

 

(iv)      The Borrower and each Guarantor will at all times maintain or cause to
be maintained hazard and liability insurance and additional insurance covering
such risks as are customarily carried by businesses similarly situated, all such
insurance to be in amounts and from insurers reasonably acceptable to the
Required Lenders, maintained by Borrower, naming the Lenders as loss payee or as
an additional insured, as applicable, and, upon any renewal of any such
insurance and at other times upon request by the Required Lenders, promptly
furnish to the Lenders evidence, reasonably satisfactory to the Required
Lenders, of the maintenance of such insurance. The Lenders shall have the right
to collect, and the Borrower hereby assigns to the Lenders, any and all monies
that may become payable under any policies of insurance by reason of damage,
loss, or destruction of any of the Collateral. In the event of any damage, loss,
or destruction for which insurance proceeds relating to business interruption,
if any, or Collateral exceeds $500,000, the Required Lenders may, at their
option, apply all such sums or any part thereof received by it toward the
payment of the Obligations, whether matured or unmatured, application to be made
first to interest and then to principal, and shall deliver to the Borrower the
balance, if any, after such application has been made. In the event of any such
damage, loss, or destruction for which insurance proceeds are $500,000 or less,
provided that no Event of Default has occurred and is continuing, the Lenders
shall deliver any such proceeds received by it to the Borrower. In the event any
Lender receives insurance proceeds not attributable to Collateral, such Lender
shall deliver any such proceeds to the Borrower.

 

7.4.2      The Borrower and each Guarantor shall upon reasonable request of the
Required Lenders, execute such transfer orders, letters-in-lieu of transfer
orders or division orders as the Required Lenders may from time to time request
in respect of the Collateral to effect a transfer and delivery to the Lenders of
the proceeds of production attributable to the Collateral.

 

7.5         Payment of Taxes and Claims.

 

7.5.1      The Borrower will pay (i) all Taxes imposed upon it or any of its
assets or with respect to any of its franchises, business, income or profits
before any material penalty or interest accrues thereon and (ii) all material
claims (including claims for labor, services, materials and supplies) for sums
which have become due and payable and which have or might become a Lien (other
than a Permitted Lien) on any of its assets; provided, however, that no payment
of such Taxes or claims shall be required if (a) the amount, applicability or
validity thereof is currently being contested in good faith by appropriate
proceedings promptly initiated and diligently conducted, (b) the Borrower shall
have set aside on its books reserves (segregated to the extent required by
applicable accounting principles) reasonably deemed by it to be adequate with
respect thereto and (c) if material, the Borrower has notified the Lenders of
such circumstances, in detail reasonably satisfactory to the Required Lenders.

 

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7.5.2      Each Guarantor will pay (i) all Taxes imposed upon it or any of its
assets or with respect to any of its franchises, business, income or profits
before any material penalty or interest accrues thereon and (ii) all material
claims (including claims for labor, services, materials and supplies) for sums
which have become due and payable and which have or might become a Lien (other
than a Permitted Lien) on any of its assets; provided however, that no payment
of such Taxes or claims shall be required if (a) the amount, applicability or
validity thereof is currently being contested in good faith by appropriate
proceedings promptly initiated and diligently conducted, (b) such Guarantor
shall have set aside on its books reserves (segregated to the extent required by
applicable accounting principles) reasonably deemed by it to be adequate with
respect thereto and (c) if material, such Guarantor has notified the Lenders of
such circumstances, in detail reasonably satisfactory to the Required Lenders.

 

7.6         Payment of Debt; Additional Debt; Payment of Accounts; Restrictions
on Payments on the SOS Note.

 

7.6.1      The Borrower will (a) pay, renew or extend or cause to be paid,
renewed or extended the principal of, and the prepayment charge, if any, and
interest on all Debt heretofore or hereafter incurred or assumed by it when and
as the same shall become due and payable unless such payment is prohibited by
the Loan Documents or would cause an Event of Default hereunder; (b) faithfully
perform, observe and discharge all unwaived covenants, conditions and
obligations within any applicable periods of grace imposed on it by any
instrument evidencing such Debt or by any indenture or other agreement securing
such Debt or pursuant to which such Debt is issued unless such performance,
observance or discharge would cause an Event of Default hereunder; and (c) not
permit the occurrence of any act or omission which would constitute a default
under any such instrument, indenture or agreement.

 

7.6.2      Each Guarantor will (a) pay, renew or extend or cause to be paid,
renewed or extended the principal of, and the prepayment charge, if any, and
interest on all Debt heretofore or hereafter incurred or assumed by it when and
as the same shall become due and payable unless such payment is prohibited by
the Loan Documents or would cause an Event of Default hereunder; (b) faithfully
perform, observe and discharge all unwaived covenants, conditions and
obligations within any applicable periods of grace imposed on it by any
instrument evidencing such Debt or by any indenture or other agreement securing
such Debt or pursuant to which such Debt is issued unless such performance,
observance or discharge would cause an Event of Default hereunder; and (c) not
permit the occurrence of any act or omission which would constitute a default
under any such instrument, indenture or agreement.

 

7.6.3      The Borrower will not create, incur or suffer to exist any Debt,
except without duplication (a) Debt under the Loan Documents and (b) other
Permitted Indebtedness.

 

7.6.4      No Guarantor will create, incur or suffer to exist any Debt, except
without duplication (a) Debt under the Loan Documents and (b) other Permitted
Indebtedness.

 

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7.6.5      The Borrower shall pay all of its trade and other accounts payable
within ninety (90) days after the invoice date therefor, unless such payables
are being contested in good faith by appropriate proceedings or other written
protest thereof.

 

7.6.6      Each Guarantor shall pay all of its trade and other accounts payable
within ninety (90) days after the invoice date therefor, unless such payables
are being contested in good faith by appropriate proceedings or other written
protest thereof.

 

7.7         Negative Pledge. (i) The Borrower will not create, suffer to exist
or otherwise allow any Liens to be on or otherwise to affect any of its Property
whether now owned or hereafter acquired, except Permitted Liens.

 

(ii)      No Guarantor will create, suffer to exist or otherwise allow any Liens
to be on or otherwise to affect any of its Property whether now owned or
hereafter acquired, except Permitted Liens.

 

7.8         Loans and Advances to Others; Investments; Restricted Payments;
Subsidiaries.

 

7.8.1      The Borrower will not make or suffer to exist any loan, advance or
extension of credit to any Person except (a) Permitted Indebtedness, (b)
Permitted Investments, (c) trade and customer accounts receivable which are for
goods furnished or services rendered in the ordinary course of business and
which are payable in accordance with customary trade terms and (d) advances to
employees of the Borrower and its Subsidiaries for payment of expenses in the
ordinary course of business.

 

7.8.2      No Guarantor will make or suffer to exist any loan, advance or
extension of credit to any Person except (a) Permitted Indebtedness, (b)
Permitted Investments, (c) trade and customer accounts receivable which are for
goods furnished or services rendered in the ordinary course of business and
which are payable in accordance with customary trade terms and (d) advances to
employees of the Borrower and its Subsidiaries for payment of expenses in the
ordinary course of business.

 

7.8.3      The Borrower will not make any capital contribution to, or make any
Investment in, or purchase or make a commitment to purchase any interest in, any
Person except as permitted by Section 7.8.1.

 

7.8.4      No Guarantor will make any capital contribution to or make any
Investment in, or to purchase or make a commitment to purchase any interest in,
any Person except as permitted by Section 7.8.2.

 

7.8.5      (i) The Borrower will not, directly or indirectly, make any
Restricted Payment without the prior written consent of the Required Lenders
except as specifically permitted in the definition of such defined term.

 

(ii)      No Guarantor will, directly or indirectly, make any Restricted Payment
without the prior written consent of the Required Lenders except as specifically
permitted in the definition of such defined term.

 

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7.8.6      (i) The Borrower shall not form or acquire any Subsidiaries, either
directly or indirectly through other Subsidiaries, without the prior written
consent of the Required Lenders, which consent shall not be unreasonably
withheld, and, if given, may be conditioned on such Subsidiary’s execution of an
unlimited guaranty of the Obligations, each in form and substance satisfactory
to the Required Lenders.

 

(ii)      No Guarantor will form or acquire any Subsidiaries, either directly or
indirectly through other Subsidiaries, without the prior written consent of the
Required Lenders, which consent shall not be unreasonably withheld, and, if
given, may be conditioned on such Subsidiary’s execution of a joinder to this
Agreement and other reasonably requested documents and instruments, each in form
and substance reasonably satisfactory to the Required Lenders.

 

7.9         Consolidation, Merger, Maintenance, Change of Control; Disposition
of Property; Restrictive Agreements; Hedging Agreements; Modification of
Organizational Documents; Issuance of Equity Interests.

 

7.9.1      (i) The Borrower will not (a) consolidate or merge with or into any
other Person, (b) sell, lease or otherwise transfer all or substantially all of
its Property to any other Person, (c) terminate, or fail to maintain, its
existence as the type of entity represented in Section 6.1 and in its state of
formation represented in Section 6.1, (d) terminate, or fail to maintain, its
good standing and qualification to transact business in all jurisdictions where
the nature of its business requires the same (except where the failure to
maintain its good standing or qualification could not reasonably be expected to
have a Material Adverse Effect) or (e) permit a Change of Control Event to
occur.

 

(ii)      No Guarantor will (a) consolidate or merge with or into any other
Person other than a Guarantor or the Borrower, (b) sell, lease or otherwise
transfer all or substantially all of its Property to any other Person other than
the Borrower or another Guarantor unless such Person assumes the applicable
Guarantor’s Obligations hereunder, (c) terminate, or fail to maintain, its
existence as the type of entity represented in Section 6.1 and in its state of
formation represented in Section 6.1, or (d) terminate, or fail to maintain, its
good standing and qualification to transact business in all jurisdictions where
the nature of its business requires the same (except where the failure to
maintain its good standing or qualification could not reasonably be expected to
have a Material Adverse Effect).

 

7.9.2      (i) The Borrower will not sell, encumber, or otherwise transfer all
or any portion of the Collateral, any Property having PV-10 Value, or any of its
other Property, except for (a) sales of oil and gas after severance in the
ordinary course of business, or (b) the sale or other disposition of equipment
destroyed, worn out, damaged, or having only salvage value or no longer used or
useful in the business of the Borrower.

 

(ii)      No Guarantor will sell, encumber, or otherwise transfer all or any
portion of the Collateral, any Property having PV-10 Value, or any of its other
Property, except for (a) sales of oil and gas after severance in the ordinary
course of business or (b) the sale or other disposition of equipment destroyed,
worn out, damaged, or having only salvage value or no longer used or useful in
the business of such Guarantor.

 

 45

 

 

7.9.3      The Borrower will not be or become party to or bound by any agreement
(including any undertaking in connection with the incurrence of Debt or issuance
of securities) which imposes any material limitation on the disposition of the
Collateral taken as a whole.

 

7.9.4      (i) The Borrower will not enter into any Hedging Transaction unless
such Hedging Transaction is an Acceptable Hedging Transaction.

 

(ii)      No Guarantor will enter into any Hedging Transaction unless such
Hedging Transaction is an Acceptable Hedging Transaction.

 

(iii)      The Borrower will not cause or permit any material Hedging
Transaction now existing or hereafter entered into by the Borrower to be
amended, modified, terminated, negated through the Borrower’s entry into one or
more new Hedging Transactions with the opposing effect, or liquidated.

 

(iv)      No Guarantor will cause or permit any material Hedging Transaction now
existing or hereafter entered into by such Guarantor to be amended, modified,
terminated, negated through such Guarantor’s entry into one or more new Hedging
Transactions with the opposing effect, or liquidated.

 

(v)      The Borrower will not cause or permit any material Hedging Agreement
now existing or hereafter entered into by the Borrower to be amended, modified
or terminated.

 

(vi)      No Guarantor cause or permit any material Hedging Agreement now
existing or hereafter entered into by such Guarantor to be amended, modified or
terminated.

 

7.9.5      (i) The Borrower will not amend its Organizational Documents in any
respect which would be materially adverse to the interests of the Lenders.

 

(ii)      No Guarantor will amend its Organizational Documents in any respect
which would be materially adverse to the interests of the Lenders.

 

7.10        Primary Business; Continuous Operations; Location of Borrower’s
Office; Ownership of Assets.

 

7.10.1      (i) The primary business of the Borrower shall at all times be and
remain the oil and gas exploration, development and production business. The
Borrower shall continuously remain in operation in a manner reasonably necessary
to manage its Properties and business affairs.

 

(ii)      The primary business of each Guarantor shall at all times be and
remain the oil and gas exploration, development and production business. Each
Guarantor shall continuously remain in operation in a manner reasonably
necessary to manage its Properties and business affairs.

 

7.10.2      The location of the Borrower’s principal place of business and
executive office shall remain at the address for the Borrower set forth on the
signature page hereof, unless at least ten (10) days prior to any change in such
address the Borrower provides the Lenders with written notice of such pending
change.

 

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7.10.3      (i) The Borrower will at all times own, both beneficially and of
record, all assets reflected in its financial statements delivered to the
Lenders from time to time, subject only to Permitted Liens and unless such
assets are disposed in a manner not inconsistent with the terms of this
Agreement.

 

(ii)      Each Guarantor will at all times own, both beneficially and of record,
all assets reflected in its financial statements delivered to the Lenders from
time to time except as otherwise specifically disclosed therein and unless such
assets are disposed in a manner not inconsistent with the terms of this
Agreement.

 

7.11        Operation of Properties and Equipment; Compliance with and
Maintenance of Contracts; Duties as Nonoperator.

 

7.11.1      (i) The Borrower shall at all times maintain, develop and operate
its Oil and Gas Properties in a good and workmanlike manner and will observe and
comply in all material respects with all of the terms and provisions, express or
implied, of all oil and gas leases relating to such Oil and Gas Properties so
long as such oil and gas leases are capable of producing hydrocarbons in
commercial quantities, to the extent that the failure to so observe and comply
could reasonably be expected to have a Material Adverse Effect.

 

(ii)      Each Guarantor shall at all times maintain, develop and operate its
Oil and Gas Properties in a good and workmanlike manner and will observe and
comply in all material respects with all of the terms and provisions, express or
implied, of all oil and gas leases relating to such Oil and Gas Properties so
long as such oil and gas leases are capable of producing hydrocarbons in
commercial quantities, to the extent that the failure to so observe and comply
could reasonably be expected to have a Material Adverse Effect.

 

(iii)      The Borrower and each Guarantor shall remain as the named operator
for each oil or gas well in which it now or hereafter owns an interest if (a) it
or such Guarantor is the operator thereof on the date hereof or becomes the
operator thereof subsequent hereto and (b) such well is now or hereafter becomes
Collateral.

 

(iv)      The Borrower shall at all times, maintain, preserve and keep all
operating equipment used or useful with respect to the Oil and Gas Properties of
the Borrower in proper repair, working order and condition, and make all
necessary or appropriate repairs, renewals, replacements, additions and
improvements thereto so that the efficiency of such operating equipment shall at
all times be properly preserved and maintained, provided that no item of
operating equipment need be so repaired, renewed, replaced, added to or
improved, if the Borrower shall in good faith determine that such action is not
necessary or desirable for the continued efficient and profitable operation of
the business of the Borrower.

 

(v)      Each Guarantor shall at all times, maintain, preserve and keep all
operating equipment used or useful with respect to the Oil and Gas Properties of
such Guarantor in proper repair, working order and condition, and make all
necessary or appropriate repairs, renewals, replacements, additions and
improvements thereto so that the efficiency of such operating equipment shall at
all times be properly preserved and maintained, provided that no item of
operating equipment need be so repaired, renewed, replaced, added to or
improved, if such Guarantor shall in good faith determine that such action is
not necessary or desirable for the continued efficient and profitable operation
of the business of such Guarantor.

 

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7.11.2      (i) The Borrower shall comply with all agreements applicable to or
relating to its Oil and Gas Properties or the production and sale of
hydrocarbons therefrom and all applicable proration and conservation Laws of the
jurisdictions in which such Properties are located, to the extent that the
failure to so comply with such Laws or agreements could reasonably be expected
to have a Material Adverse Effect.

 

(ii)      Each Guarantor shall comply with all agreements applicable to or
relating to its Oil and Gas Properties or the production and sale of
hydrocarbons therefrom and all applicable proration and conservation Laws of the
jurisdictions in which such Properties are located, to the extent that the
failure to so comply with such Laws or agreements could reasonably be expected
to have a Material Adverse Effect.

 

7.11.3      With respect to the Oil and Gas Properties referred to in this
Section which are operated by operators other than the Borrower, an Affiliate of
the Borrower or a Guarantor, the Borrower shall not be obligated itself to
perform any undertakings contemplated by the covenants and agreements contained
in this Section which are performable only by such operators and are beyond the
control of the Borrower, but the Borrower shall use commercially reasonable
efforts to cause such operators to perform such undertakings.

 

7.11.4      (i) The Borrower will not amend, alter or change in any respect
which could reasonably be expected to be materially adverse to the interests of
the Borrower or the Lenders any agreements relating to the operations or
business arrangements of the Borrower or the compression, gathering, sale or
transportation of oil and gas from the Oil and Gas Properties without the prior
written consent of the Required Lenders, which consent shall not be unreasonably
withheld.

 

(ii)      No Guarantor will amend, alter or change in any respect which could
reasonably be expected to be materially adverse to the interests of such
Guarantor or the Lenders any agreements relating to the operations or business
arrangements of such Guarantor or the compression, gathering, sale or
transportation of oil and gas from the Oil and Gas Properties without the prior
written consent of the Required Lenders, which consent shall not be unreasonably
withheld.

 

7.12        Transactions with Affiliates.

 

7.12.1      (i) The Borrower will not engage in any transaction with an
Affiliate, except for (i) transactions that are in the ordinary course of
Borrower’s, such Guarantor’s or such Subsidiary’s business, upon fair and
reasonable terms that are no less favorable to Borrower, such Guarantor or such
Subsidiary than would be obtained in an arm’s length transaction with a
non-affiliated Person, (ii) transactions between Borrower and any Guarantor or
Subsidiary of the Borrower or any Guarantor, (iii) transactions set forth on
Schedule 7.12 or (iv) as otherwise permitted by the Loan Documents.

 

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(ii)      No Guarantor will engage in any transaction with an Affiliate, except
for (i) transactions that are in the ordinary course of Borrower’s, such
Guarantor’s or such Subsidiary’s business, upon fair and reasonable terms that
are no less favorable to Borrower, such Guarantor or such Subsidiary than would
be obtained in an arm’s length transaction with a non-affiliated Person, (ii)
transactions between Borrower and any Guarantor or Subsidiary of the Borrower or
any Guarantor, (iii) transactions between any Guarantor and any other Guarantor
or Subsidiary of the Borrower or any Guarantor, (iii) transactions set forth on
Schedule 7.12 or (iv) as otherwise permitted by the Loan Documents.

 

7.13       Plans.

 

7.13.1      (i) The Borrower will not assume or otherwise become subject to an
obligation to contribute to or maintain any Plan or acquire any Person which has
at any time had an obligation to contribute to or maintain any Plan.

 

(ii)      No Guarantor will assume or otherwise become subject to an obligation
to contribute to or maintain any Plan or acquire any Person which has at any
time had an obligation to contribute to or maintain any Plan.

 

7.14       Compliance with Laws and Documents.

 

7.14.1      (i) The Borrower will not, directly or indirectly, violate the
provisions of any Laws, its Organizational Documents or any Material Agreement,
if such violation, alone or when combined with all other such violations, could
reasonably be expected to have or does have a Material Adverse Effect.

 

(ii)      No Guarantor will, directly or indirectly, violate the provisions of
any Laws, its Organizational Documents or any Material Agreement, if such
violation, alone or when combined with all other such violations, could
reasonably be expected to have or does have a Material Adverse Effect.

 

7.15       Certain Financial Covenants.

 

7.15.1      At all times while there are Loans outstanding, the Asset Ratio
shall not exceed 1.0.

 

7.16       Additional Documents; Quantity of Documents; Title Data; Additional
Information.

 

7.16.1      The Borrower shall execute and deliver or cause to be executed and
delivered such other and further instruments or documents as in the reasonable
judgment of the Required Lenders may be required to better effectuate the
transactions contemplated herein and in the other Loan Documents.

 

7.16.2      Reserved.

 

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7.16.3      Within sixty (60) days following a written request therefor from the
Required Lenders, the Borrower shall cause to be delivered to the Lenders title
opinions, in form and substance and from attorneys reasonably acceptable to the
Required Lenders, or other confirmation of title reasonably acceptable to the
Required Lenders, covering Oil and Gas Properties that are covered by the
Mortgages and constitute not less than eighty percent (80%) by PV-10 Value of
the Oil and Gas Properties; and promptly, but in any event within sixty (60)
days following notice from the Required Lenders of any defect, material in the
reasonable opinion of the Required Lenders, in the title of the mortgagor under
any Mortgage to any Oil and Gas Property covered thereby, clear such title
defect, and in the event any such title defects are not cured in a timely
manner, pay all reasonable and documented related costs and fees incurred by the
Required Lenders in attempting to do so.

 

7.16.4      The Borrower shall furnish to the Lenders, promptly upon the request
of the Required Lenders, such additional financial or other information
concerning the assets, liabilities, operations, and transactions of the Borrower
and each Guarantor as the Required Lenders may from time to time reasonably
request; and notify the Lenders not less than ten (10) days prior to the
occurrence of any condition or event that may change the proper location for the
filing of any financing statement or other public notice or recording for the
purpose of perfecting a Lien in any Collateral, including any change in its name
or state of organization; and upon the reasonable request of the Required
Lenders, execute such additional Security Documents as may be reasonably
necessary or appropriate in connection therewith.

 

7.17      Environmental Indemnification. The Borrower shall, on a current basis,
indemnify, defend and hold each Indemnified Party harmless on a current basis
from and against any and all claims, losses, damages, liabilities, fines,
penalties, charges, administrative and judicial proceedings and orders,
judgments, remedial actions, requirements and enforcement actions of any kind,
and all costs and expenses incurred in connection therewith (including, without
limitation, reasonable attorneys’ fees and expenses), arising directly or
indirectly, in whole or in part, from (a) the presence of any Hazardous
Substances on, under, or from any Property of the Borrower, whether prior to or
during the term hereof, (b) any activity carried on or undertaken on or off any
Property of the Borrower, whether prior to or during the term hereof, and
whether by the Borrower or any predecessor in title, employee, agent,
contractor, or subcontractor of the Borrower or any other person at any time
occupying or present on such Property, in connection with the handling,
treatment, removal, storage, decontamination, cleanup, transportation, or
disposal of any Hazardous Substances at any time located or present on or under
such Property, (c) any residual contamination on or under any Property of the
Borrower, or (d) any contamination of any Property or natural resources arising
in connection with the generation, use, handling, storage, transportation or
disposal of any Hazardous Substances by the Borrower or any employee, agent,
contractor, or subcontractor of the Borrower while such persons are acting
within the scope of their relationship with the Borrower, irrespective of
whether any of such activities were or will be undertaken in accordance with
applicable requirements of law, AND REGARDLESS OF WHETHER ANY PERSON (INCLUDING
THE PERSON FROM WHOM INDEMNIFICATION IS SOUGHT) ALLEGES OR PROVES THE SOLE,
CONCURRENT, CONTRIBUTORY OR COMPARATIVE NEGLIGENCE OF THE PERSON SEEKING
INDEMNIFICATION OR OF ANY OTHER INDEMNIFIED PARTY, OR THE SOLE OR CONCURRENT
STRICT LIABILITY IMPOSED ON THE PERSON SEEKING INDEMNIFICATION OR ON ANY OTHER
INDEMNIFIED PARTY, but not any of the foregoing in this Section arising from the
willful misconduct or the gross negligence on the part of the Indemnified Party
seeking indemnification under this Section; with the foregoing indemnity
surviving satisfaction of all obligations and the termination of this Agreement.

 

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7.18       Anti-Terrorism Laws. Neither the Borrower nor any of the other
Obligated Parties shall (a) deal in, or otherwise engage in any transaction
relating to, any property or interests in property blocked pursuant to Executive
Order No. 13224; or (b) engage in or conspire to engage in any transaction that
evades or avoids, or has the purpose of evading or avoiding, or attempts to
violate, (i) any of the prohibitions set forth in Executive Order No. 13224 or
the USA Patriot Act or (ii) any prohibitions set forth in the rules or
regulations issued by OFAC or any sanctions against targeted foreign countries,
terrorism sponsoring organizations, and international narcotics traffickers
based on U.S. foreign policy. The Borrower shall deliver to the Lenders any
certification or other evidence requested from time to time by the Required
Lenders, in its reasonable discretion, confirming the Obligated Parties’
compliance with this Section.

 

Article VIII
DEFAULTS; REMEDIES

 

8.1         Events of Default; Acceleration of Maturity. If any one or more of
the following events (each an “Event of Default”) has occurred and has not been
waived by the Required Lenders (whatever the reason for such Event of Default
and whether it shall be voluntary or involuntary or be effected by operation of
law or pursuant to any judgment, decree or order of any court or any order, rule
or regulation of any administrative or governmental body or otherwise):

 

8.1.1      (i) the Borrower shall fail to pay, when due, any principal of (a)
any Note or (b) any other Debt of the Borrower to the Lenders.

 

(ii)      the Borrower shall fail to pay when due, any interest, fees or other
amounts payable hereunder and not covered by clause (i) above, if such failure
shall continue unremedied for a period of three (3) Business Days.

 

8.1.2      (i) the Borrower shall fail to observe or perform any covenant or
agreement contained in Sections 7.2, 7.4, 7.6.2, 7.7, 7.8, 7.9 , 7.12, 7.15, or
7.16.3.

 

(ii)      any Guarantor shall (a) fail to comply with the provisions of its
Guaranty, (b) revoke or attempt to revoke such Guarantor’s Guaranty in whole or
in part or deny the validity or enforceability in whole or in part of such
Guarantor’s Guaranty or (c) fail to confirm in a writing reasonably satisfactory
to the Required Lenders that such Guarantor’s Guaranty is enforceable in
accordance with its terms within five (5) Business Days following a written
request therefor.

 

8.1.3      Any Loan Party shall fail to observe or perform any covenant or
agreement contained in this Agreement, the other Loan Documents (other than
those covered by Sections 8.1.1 or 8.1.2), for a period of thirty (30) days
after the earlier to occur of (i) such Loan Party becoming aware thereof or (ii)
receipt by such Loan Party of written notice specifying such default from any
Lender.

 

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8.1.4      An Insolvency Proceeding shall be commenced by or against the
Borrower, which in the case of an involuntary Insolvency Proceeding, shall
remain undismissed or unstayed for a period of thirty (30) days; or an order for
relief shall be entered against the Borrower under the federal bankruptcy laws
as now or hereafter in effect which remains undismissed or unstayed for a period
of thirty (30) days.

 

8.1.5      An Insolvency Proceeding shall be commenced by or against any
Guarantor, which in the case of an involuntary Insolvency Proceeding, shall
remain undismissed or unstayed for a period of thirty (30) days; or an order for
relief shall be entered against any Guarantor under the federal bankruptcy laws
as now or hereafter in effect which remains undismissed or unstayed for a period
of thirty (30) days.

 

8.1.6      (i) the Borrower (a) shall default in the payment of any of its
Material Debts (other than the Note) and such default shall continue beyond any
applicable cure period, (b) shall default in the performance or observance of
any other provision contained in any agreements or instruments evidencing or
governing such Material Debt and such default is not waived and continues beyond
any applicable cure period or (c) any other event or condition occurs which
results in the acceleration of such Material Debt.

 

(ii)      Any Guarantor (a) shall default in the payment of any of its Material
Debts (other than the Guaranty) and such default shall continue beyond any
applicable cure period, (b) shall default in the performance or observance of
any other provision contained in any agreements or instruments evidencing or
governing such Material Debt and such default is not waived and continues beyond
any applicable cure period or (c) any other event or condition occurs which
results in the acceleration of such Material Debt.

 

8.1.7      (i) one or more judgments or orders for the payment of money
aggregating in excess of $1,000,000 shall be rendered against the Borrower which
in the reasonable opinion of the Required Lenders is not adequately covered by
insurance, and such judgment or order (a) shall continue unsatisfied or unstayed
(unless bonded with a supersede as bond at least equal to such judgment or
order) for a period of sixty (60) days or (b) is not fully paid and satisfied at
least thirty (30) days prior to the date on which any of its Property may be
lawfully sold to satisfy such judgment or order.

 

(ii)      one or more judgments or orders for the payment of money aggregating
in excess of $1,000,000 shall be rendered against any Guarantor which in the
opinion of the Required Lenders is not adequately covered by insurance, and such
judgment or order (a) shall continue unsatisfied or unstayed (unless bonded with
a supersede as bond at least equal to such judgment or order) for a period of
sixty (60) days or (b) is not fully paid and satisfied at least thirty (30) days
prior to the date on which any of its Property may be lawfully sold to satisfy
such judgment or order.

 

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8.1.8      any representation, warranty, certification or statement made or
deemed to have been made by or on behalf of the Borrower in this Agreement or by
the Borrower or any other Person in any certificate, financial statement or
other document delivered pursuant to this Agreement shall prove to have been
incorrect in any material respect when made. Without limiting the generality of
the foregoing sentence, such incorrect representation, warranty, certification
or statement shall be deemed to be incorrect in a material respect if such
incorrect representation, warranty, certification or statement (i) could
reasonably be expected to have any material adverse effect upon the validity,
performance or enforceability of any Loan Document, (ii) is or might reasonably
be expected to be material and adverse to the financial condition or business
operations of any Person or to the prospects of any Person, (iii) could
reasonably be expected to materially impair any Person’s ability to fulfill its
obligations under the terms and conditions of the Loan Documents or (iv) could
reasonably be expected to materially impair the Lenders’ ability to receive full
and timely payment of the Notes.

 

8.1.9      (i) any material license, franchise, permit, or authorization issued
to the Borrower by any Tribunal is forfeited, revoked, or not renewed; or any
proceeding seeking forfeiture or revocation thereof is instituted and is not
resolved or dismissed within one (1) year of the date of the publication of the
order instituting such proceeding, in each case to the extent resulting in a
Material Adverse Effect.

 

(ii)      any material license, franchise, permit, or authorization issued to
any Guarantor by any Tribunal is forfeited, revoked, or not renewed; or any
proceeding seeking forfeiture or revocation thereof is instituted and is not
resolved or dismissed within one (1) year of the date of the publication of the
order instituting such proceeding, in each case to the extent resulting in a
Material Adverse Effect.

 

8.1.10            any of the Security Documents shall for any reason fail to
create a valid and perfected first priority Lien in favor of the Collateral
Agent in any Collateral purported to be covered thereby except as expressly
permitted by the terms thereof.

 

8.1.11      a Change of Control Event shall occur.

 

8.2         Remedies. Upon the occurrence and during the continuation of an
Event of Default, the Required Lenders may (i) declare the outstanding principal
of and accrued interest on the Notes to be, and the same shall thereupon
forthwith become, due and payable without presentment, demand, protest, notice
of intent to accelerate, notice of acceleration or other notice of any kind, all
of which are hereby waived by the Borrower, (ii) proceed to foreclose the Liens
securing the Notes, (iii) terminate all commitments under Article II and (iv)
take such other actions as are permitted by law or the Loan Documents; provided
that in the case of any of the Events of Default specified in Sections 8.1.4 and
8.1.5 with respect to the Borrower, without any notice to the Borrower or any
other act by the Lenders, the Notes (together with accrued interest thereon and
all fees, expenses and other Obligations) shall become immediately due and
payable without presentment, demand, protest, notice of intent to accelerate,
notice of acceleration or other notice of any kind, all of which are hereby
waived by the Borrower.

 

8.3         Suits for Enforcement. In case any one or more of the Events of
Default specified in Section 8.1 shall have occurred and be continuing, the
Lenders may, at their option and upon the direction of the Required Lenders,
proceed to protect and enforce their rights either by suit in equity or by
action at law, or both, whether for the specific performance of any covenant or
agreement contained in this Agreement or in aid of the exercise of any power
granted in this Agreement.

 

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8.4         Remedies Cumulative. No remedy herein conferred upon the Lenders is
intended to be exclusive of any other remedy and each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise.

 

8.5         Remedies Not Waived. No course of dealing and no delay in exercising
any rights under this Agreement or under the other Loan Documents shall operate
as a waiver of any rights hereunder or thereunder of the Lenders.

 

Article IX
MISCELLANEOUS

 

9.1         Amendments, Waivers and Consents. Any provision of this Agreement,
the Notes or the other Loan Documents may be amended or waived (either generally
or in a particular instance and either retroactively or prospectively) by a
written instrument signed by the Borrower and the Required Lenders, and any
consent required of the Required Lenders herein must be in writing; provided
that no such amendment or waiver shall, unless signed by all the Lenders
affected thereby (or, in the case of clause (e) or (f) below, each Lender) (a)
increase or decrease the Commitment of any Lender or subject any Lender to any
additional obligation (other than any increases pursuant to Section 2.4), (b)
reduce or forgive the principal of or rate of interest on any Note or any fees
to the Lenders hereunder (other than the application of the default rate of
interest pursuant to Section 3.2), (c) postpone the date fixed for any payment
of principal of or interest on any Note or any fees to the Lenders hereunder or
for the termination of the Commitments, (d) change the percentage of the
Commitments or of the aggregate unpaid principal amount of the Notes which shall
be required for the Lenders or any of them to take any action under this Section
or any other provision of this Agreement, (e) release, or subordinate the
Collateral Agent’s Liens, if any, on all or substantially all of the Collateral
of (f) release any Guarantor from the Guaranty. Delivery of an executed
counterpart of such written instrument or of the signature page of such written
instrument by telecopy, e-mail, facsimile transmission, electronic mail in
“portable document format” (“.pdf’) form or other electronic means intended to
preserve the original graphic and pictorial appearance of the item being sent
shall be effective delivery of a manually executed counterpart of such written
instrument.

 

9.2          Reserved.

 

9.3          Indemnity.

 

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9.3.1      Whether or not any credit is ever extended hereunder, and in addition
to any other indemnifications herein or in any other Loan Documents, the
Borrower agrees to indemnify and defend and hold harmless on a current basis
each Indemnified Party, from and against any and all liabilities, losses,
damages, costs, interest, charges, counsel fees and other expenses and penalties
of any kind which any of the Indemnified Parties may sustain or incur in
connection with any investigative, administrative or judicial proceeding
(whether or not the Lenders shall be designated a party thereto) or otherwise by
reason of or arising out of the execution and delivery of this Agreement or any
of the other Loan Documents and/or the consummation of the transactions
contemplated hereby or thereby. The indemnification provisions in this Section
shall be enforceable regardless of whether the liability is based on past or
present acts, past, present or future claims or legal requirements (including
any past, present or future bulk sales law, environmental law, fraudulent
transfer act, occupational safety and health law, or products liability,
securities or other legal requirement), AND REGARDLESS OF WHETHER ANY PERSON
(INCLUDING THE PERSON FROM WHOM INDEMNIFICATION IS SOUGHT) ALLEGES OR PROVES THE
SOLE, CONCURRENT, CONTRIBUTORY OR COMPARATIVE NEGLIGENCE OF THE PERSON SEEKING
INDEMNIFICATION OR OF ANY OTHER INDEMNIFIED PARTY, OR THE SOLE OR CONCURRENT
STRICT LIABILITY IMPOSED ON THE PERSON SEEKING INDEMNIFICATION OR ON ANY OTHER
INDEMNIFIED PARTY, but not any of the foregoing in this Section arising from the
willful misconduct or the gross negligence on the part of the Indemnified Party
seeking indemnification under this Section with the foregoing indemnity
surviving satisfaction of all obligations and the termination of this Agreement.

 

9.3.2      Any amount to be paid under Section 9.3 to any Lender shall be a
demand obligation owing by the Borrower and shall bear interest from the date of
expenditure by such Lender until paid at a per annum rate equal to the Default
Rate. The obligations of the Borrower under Section 9.3 shall survive payment of
the Notes and the assignment of any right hereunder.

 

9.4         Expenses.

 

9.4.1      In addition to legal fees and expenses payable pursuant to Section
4.1.1(i), if any, whether or not any credit is extended hereunder, the Borrower
shall pay (i) all reasonable and documented out-of-pocket expenses of the
Lenders, including fees and disbursements of one (1) counsel for the Lenders,
incurred in connection with the preparation of this Agreement and the other Loan
Documents (including the furnishing of any written or oral opinions or advice
incident to this transaction), one (i) legal counsel for the Lenders in each
local jurisdiction where the Oil and Gas Properties owned by the Borrower and
each Guarantor properties are located, due diligence and title review expenses
associated with the Loan Parties’ Oil and Gas Properties, engineering costs, the
recordation of the Loan Documents, any waiver or consent hereunder or any
amendment hereof or thereof or any Default or alleged Default hereunder or
thereunder, and (ii) if an Event of Default occurs, all reasonable and
documented out-of-pocket expenses incurred by the Lenders, including fees and
disbursements of one (1) counsel for the Lenders in connection with such Event
of Default and collection and other enforcement proceedings resulting therefrom,
one (i) legal counsel for the Lenders in each local jurisdiction where the Oil
and Gas Properties owned by the Borrower and each Guarantor properties are
located in connection with foreclosure upon such properties, fees of one (1)
auditor, one (1) consultant, engineers and other Persons incurred in connection
therewith (including the supervision, maintenance or disposition of Collateral)
and investigative expenses incurred by the Required Lenders in connection
therewith, which amounts shall be deemed compensatory in nature and liquidated
as to amount upon notice to the Borrower by the Lenders,

 

9.4.2      THE BORROWER SHALL INDEMNIFY THE LENDERS AGAINST ANY TRANSFER TAXES,
DOCUMENTARY TAXES, ASSESSMENTS OR CHARGES MADE BY ANY GOVERNMENTAL AUTHORITY BY
REASON OF THE EXECUTION AND DELIVERY OF THIS AGREEMENT OR THE OTHER LOAN
DOCUMENTS.

 

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9.4.3      Any amount to be paid under Section 9.4 shall be a demand obligation
owing by the Borrower and shall bear interest from the date of expenditure until
paid at a per annum rate equal to the Default Rate. The obligations of the
Borrower under Section 9.4 shall survive payment of the Notes and the assignment
of any right hereunder.

 

9.5         Taxes. The Borrower will, to the extent it may lawfully do so, pay
all Taxes (including interest and penalties but expressly excluding federal or
state income taxes) which may be payable in respect of the execution and
delivery of this Agreement or the other Loan Documents, or in respect of any
amendment of or waiver under or with respect to the foregoing, and will save the
Lenders harmless on a current basis against any loss or liability resulting from
nonpayment or delay in payment of any such Taxes (as limited above), other than
income taxes payable by the Lenders. The obligations of the Borrower under this
Section shall survive the payment of the Notes and the assignment of any right
hereunder.

 

9.6         Survival. All representations and warranties made by or on behalf of
the Borrower in this Agreement, the other Loan Documents or in any certificate
or other instrument delivered by it or in its behalf under any of the foregoing
shall be considered to have been relied upon by the Lenders and shall survive
the delivery to the Lenders of such Loan Documents or the extension of the Loans
(or any part thereof), regardless of any investigation made by or on behalf of
any Lenders.

 

9.7          Applicable Law; Venue.

 

9.7.1      This Agreement has been negotiated, is being executed and delivered,
and will be performed in whole or in part, in the State of New York. This
Agreement, the other Loan Documents, the entire relationship of the parties
hereto, and any litigation between the parties (whether grounded in contract,
tort, statute, law or equity) shall be governed by, construed in accordance
with, and interpreted and enforced pursuant to the Laws of the State of New York
(and the applicable federal Laws of the United States of America) without giving
effect to its choice of law principles, except to the extent the Laws of any
jurisdiction where Collateral is located require application of such Laws with
respect to such Collateral.

 

9.7.2      The Borrower hereby irrevocably submits to the non-exclusive
jurisdiction of any United States federal or New York state court sitting in New
York County, New York in any action or proceeding arising out of or relating to
any Loan Documents and the Borrower hereby irrevocably agrees that all claims in
respect of such action or proceeding may be heard and determined in any such
court, and the Borrower hereby specifically consents to the jurisdiction of the
State District Courts of New York County, New York and the United States
District Court for the Southern District of New York. Nothing herein shall limit
the right of the Lenders to bring proceedings against the Borrower in the courts
of any other jurisdiction. Any judicial proceeding by the Borrower against the
Lenders or any Affiliate of any Lender involving, directly or indirectly, any
matter in any way arising out of, related to, or connected with any Loan
Document shall be brought only in the State District Courts of New York County,
New York, or in the United States District Court for the Southern District of
New York.

 

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9.8         WAIVER OF JURY TRIAL AND EXEMPLARY DAMAGES. THE BORROWER HEREBY
KNOWINGLY, VOLUNTARILY, INTENTIONALLY, IRREVOCABLY, AND UNCONDITIONALLY WAIVES
(A) ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING, COUNTERCLAIM,
OR OTHER LITIGATION THAT RELATES TO OR ARISES OUT OF ANY OF THIS AGREEMENT OR
ANY OTHER LOAN DOCUMENT OR THE ACTS OR OMISSIONS OF THE LENDER IN THE
ENFORCEMENT OF ANY OF THE TERMS OR PROVISIONS OF THIS AGREEMENT OR ANY OTHER
LOAN DOCUMENT OR OTHERWISE WITH RESPECT THERETO AND (B) TO THE MAXIMUM EXTENT
NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH
LITIGATION ANY SPECIAL DAMAGES (AS DEFINED BELOW). THE PROVISIONS OF THIS
SECTION ARE A MATERIAL INDUCEMENT FOR THE LENDERS ENTERING INTO THIS AGREEMENT.
AS USED IN THIS SECTION, “SPECIAL DAMAGES” INCLUDES ALL SPECIAL, CONSEQUENTIAL,
EXEMPLARY, OR PUNITIVE DAMAGES (REGARDLESS OF HOW NAMED).

 

9.9         Waiver of Deficiency Statute; Other Waivers.

 

9.9.1           The Borrower waives any rights the Borrower has under, or any
requirements imposed by, Sections 51.003, 51.004 and 51.005 of the Texas
Property Code, as amended.

 

9.9.2           Each Guarantor waives any rights such Guarantor has under, or
any requirements imposed by, (i) Section 17.001 of the Texas Civil Practice and
Remedies Code, as amended, (ii) Rule 31 of the Texas Rules of Civil Procedure,
as amended, and (iii) Sections 51.003, 51.004 and 51.005 of the Texas Property
Code, as amended.

 

9.10        Headings. The headings in this Agreement are for purposes of
reference only and shall not limit or otherwise affect the meaning hereof and
words such as “hereunder” or” herein” shall refer to the entirety of this
Agreement unless specifically indicated otherwise.

 

9.11        Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original and all of which together shall
constitute, one and the same instrument. This Agreement shall become effective
at such time as the counterparts hereof which, when taken together, bear the
signature of the Borrower and the Lenders, shall be delivered to or be in the
possession of the Lenders. Delivery of an executed counterpart of a signature
page of this Agreement by telecopy, e-mail, facsimile transmission, electronic
mail in “portable document format” (“.pdf’) form or other electronic means
intended to preserve the original graphic and pictorial appearance of the item
being sent shall be effective as a delivery of a manually executed counterpart
of this Agreement.

 

9.12        Invalid Provisions, Severability. If any provision of this Agreement
or the other Loan Documents is held to be illegal, invalid, or unenforceable
under present or future laws effective during the term hereof or thereof, such
provision shall be fully severable, this Agreement and the other Loan Documents
shall be construed and enforced as if such illegal, invalid, or unenforceable
provision had never comprised a part thereof, and the remaining provisions
hereof and thereof shall remain in full force and effect and shall not be
affected by the illegal, invalid, or unenforceable provision or by its severance
therefrom. Furthermore, in lieu of such illegal, invalid or unenforceable
provision there shall be added automatically as a part of this Agreement or the
other Loan Documents a provision as similar in terms to such illegal, invalid,
or unenforceable provision as may be possible and be legal, valid and
enforceable.

 

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9.13        Communications Via Internet. The Borrower and each Guarantor (by its
or his/her execution of a Guaranty) hereby authorizes the Lenders and their
counsel and agents to communicate and transfer documents and other information
(including confidential information) concerning this transaction or the Borrower
and such Guarantor and the business affairs of the Borrower and such Guarantor
via the Internet or other electronic communication without regard to the lack of
security of such communications,

 

9.14        USA Patriot Act Notice. The Lenders hereby notify the Borrower and
the other Obligated Parties that pursuant to the requirements of the USA Patriot
Act, they are required to obtain, verify and record information that identifies
the Borrower and the other Obligated Parties, which information includes the
name and address of the Borrower and the other Obligated Parties and other
information that will allow them to identify the Borrower and the other
Obligated Parties in accordance with such Act.

 

9.15        EXCULPATION PROVISIONS.

 

9.15.1         EACH OF THE PARTIES HERETO SPECIFICALLY AGREES THAT IT HAS A DUTY
TO READ THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AND AGREES THAT IT IS
CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS AGREEMENT AND THE OTHER
LOAN DOCUMENTS; THAT IT HAS IN FACT READ THIS AGREEMENT AND IS FULLY INFORMED
AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS, CONDITIONS AND EFFECTS OF THIS
AGREEMENT; THAT IT HAS BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS
CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS AGREEMENT AND
THE OTHER LOAN DOCUMENTS, AND HAS RECEIVED THE ADVICE OF ITS ATTORNEY IN
ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS; AND THAT IT
RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT IN SOME ASPECTS OF
THE TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS RESPONSIBILITY FOR SUCH
LIABILITY. EACH PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE
VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS AGREEMENT OR THE
OTHER LOAN DOCUMENTS ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF
SUCH PROVISION OR THAT THE PROVISION IS NOT “CONSPICUOUS.”

 

9.15.2         In the event of a dispute over the meaning or application of this
Agreement and the indemnities contained herein, the Lenders and the Borrower
agree that this Agreement and indemnities contained herein shall be construed
fairly and reasonably and neither more strongly for nor against either party.

 

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9.16        Right of First Refusal.

 

9.16.1         If at any time the Borrower determines to seek to incur any Debt
to finance acquisitions and/or development of oil and gas properties while any
Loans are outstanding (each a “ROFR Financing”), Borrower shall furnish written
notice to the Lenders (the “ROFR Initiation Notice”). Such ROFR Initiation
Notice shall state (i) the amount of such financing, (ii) the proposed
acquisition target or property to be developed, (iii) to the extent permitted
under any applicable non-disclosure or other restrictions, the terms of the ROFR
Financing and (iv) that such proposed financing is to be consummated no earlier
than fifteen (15) days following the date of such ROFR Initiation Notice.

 

9.16.2         For a period of fifteen (15) days following delivery of the ROFR
Initiation Notice, the Lenders shall have the option (the “ROFR Option”) to
provide the ROFR Financing on terms no less favorable to the Borrower as set
forth in the ROFR Initiation Notice, and otherwise satisfactory to the Borrower.

 

9.16.3         Each Lender’s option to participate in a ROFR Financing shall be
exercisable by delivering written notice to such effect prior to the expiration
of such fifteen (15) day period to the Borrower. In order for such election to
be effective, each Lender must commit to provide the full amount of the ROFR
Financing; provided, that to the extent that more than one Lender agrees to
provide a ROFR Financing, each participating Lender shall be entitled to
participate pro rata based on the amount of Loans held by such Lender compared
to the aggregate amount of Loans held by all Lender so participating.

 

9.16.4         The closing of any ROFR Financing to be provided by the Lenders
shall occur no later than the date specified in the ROFR Initiation Notice.

 

9.16.5         The provisions of this Section 8.16 shall not apply, and there
shall be no ROFR Option with respect to, to any proposed financing the proceeds
of which are used to, in whole or in part, or which is incurred in connection
with a transaction that would, repay all Loans then outstanding.

 

Article X
SETOFF; TREATMENT OF PARTIAL PAYMENTS

 

10.1        Setoff. In addition to, and without limitation of, any rights of the
Lenders under applicable law, if any Event of Default occurs, any and all
deposits (including all account balances, whether provisional or final and
whether or not collected or available) and any other indebtedness at any time
held or owing by the Lenders or any Affiliate thereof to or for the credit or
account of the Borrower may be offset and applied toward the payment of the
Obligations, whether or not the Obligations, or any part hereof, shall then be
due. Such Lender or Affiliate thereof making such an offset and application
shall give the Borrower written notice of such offset and application promptly
after effecting it.

 

10.2        Adjustments. In the event that any payments made hereunder on the
Obligations at any particular time are insufficient to satisfy in full the
Obligations due and payable at such time, such payments shall be applied (i)
first, to that portion of the Obligations consisting of fees and expenses then
due and payable, (ii) second, to that portion of the Obligations consisting of
accrued, unpaid interest then due and payable, (iii) third, to that portion of
the Obligations consisting of principal then due and payable, and (iv) last, to
any other Obligations or, to the extent not prohibited by Law, to the
Obligations in such other order as the Required Lenders might elect.

 

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Article XI
BENEFIT OF AGREEMENT; ASSIGNMENTS

 

11.1        Successors and Assigns. The terms and provisions of the Loan
Documents shall be binding upon and inure to the benefit of the Borrower, the
Guarantors and the Lenders and their respective successors and permitted
assigns, except that neither the Borrower nor the Guarantors shall have any
right to assign their rights or obligations under the Loan Documents.

 

11.2        Assignments; Effective Date; Participations.

 

11.2.1           Any Lender may at any time assign to one or more banks or other
entities (each a “Purchaser”) all or any part of its rights and obligations
under the Loan Documents. Such assignment shall be in such form as may be agreed
by the parties thereto and, provided no Event of Default is continuing,
reasonably acceptable to the Borrower (the “Assignment Agreement”). So long as
no Event of Default has occurred and is continuing, the consent of the Borrower
shall be required prior to an assignment becoming effective with respect to a
Purchaser which is not a Lender or an Affiliate thereof. Each such assignment
shall (unless it is to a Lender or an Affiliate thereof or the Borrower and the
Required Lenders otherwise consent) be in the amount of at least $1,000,000 (or
any whole multiple of $500,000 in excess thereof), unless the relevant
assignment is to an Affiliate of the assigning Lender or is an assignment of the
entire Commitment of the assigning Lender (calculated as of the date of the
assignment). Promptly following receipt of an executed Assignment Agreement, the
Purchaser shall send to the Borrower a copy thereof. No Purchaser shall be
permitted to have an initial Commitment of less than $1,000,000, although such
minimum Commitment may consist of an aggregate amount acquired by such Purchaser
from two or more Lenders.

 

11.2.2           Upon delivery to the Borrower and the Lenders of a notice of
assignment in form and substance reasonably satisfactory to the Borrower and the
Required Lenders (a “Notice of Assignment”), together with any consents required
by Section 11.2.1 above, such assignment shall become effective on the effective
date specified in such Notice of Assignment. The Notice of Assignment shall
contain a representation by the Purchaser to the effect that none of the
consideration used to make the purchase of the Commitment and Loans under the
applicable Assignment Agreement are “plan assets” as defined under ERISA and
that the rights and interests of the Purchaser in and under the Loan Documents
will not be “plan assets” under ERISA. On and after the effective date of such
assignment, such Purchaser shall for all purposes be a Lender party to this
Credit Agreement and any other Loan Document executed by the Lenders and shall
have all the rights and obligations of a Lender under the Loan Documents, to the
same extent as if it were an original party hereto, and no further consent or
action by the Borrower or the Lenders shall be required to release the
transferor Lender with respect to the percentage of the Aggregate Commitment and
Loans assigned to such Purchaser. If the assignor no longer holds any rights or
obligations under this Agreement, such assignor shall cease to be a “Lender”
hereunder, except that its rights to indemnification and reimbursement of
expenses shall survive such assignment and shall not be affected thereby. Upon
the consummation of any assignment to a Purchaser pursuant to this
Section 11.2.2, the transferor Lender and the Borrower shall make appropriate
arrangements so that replacement Notes are issued to such transferor Lender and
new Notes or, as appropriate, replacement Notes, are issued to such Purchaser,
in each case in principal amounts reflecting their Commitment, as adjusted
pursuant to such assignment.

 

 60

 

 

11.2.3           Any Lender may at any time grant to one or more Persons (each a
“Participant”) participating interests in its Commitment or its Note. In the
event of any such grant by a Lender of a participating interest to a
Participant, whether or not upon notice to the Borrowers, such Lender shall
remain responsible for the performance of its obligations hereunder, and the
Borrower and the Collateral Agent shall continue to deal solely and directly
with such Lender in connection with such Lender’s rights and obligations under
this Agreement. Any agreement pursuant to which any Lender may grant such a
participating interest shall provide that such Lender shall retain the sole
right and responsibility to enforce the obligations of the Borrower hereunder,
including, without limitation, the right to approve any amendment, modification
or waiver of any provision of this Agreement; provided that such participation
agreement may provide that such Lender will not agree to any modification,
amendment or waiver of this Agreement described in the proviso to the first
sentence of Section 9.1 without the consent of the Participant. Each Lender that
sells a participation interest pursuant to this Section 11.2.3 shall notify the
Borrower and the Collateral Agent of the principal amount of each such
Participant’s participation interest with respect to the Notes. In the event
that any Lender sells to a Participant participating interests in all or any
portion of its Note and the other rights and interests of that Lender hereunder,
such Lender, as non-fiduciary agent on behalf of Borrower, shall maintain a
register on which it enters the name of all such Participants and the principal
amount (and stated interest) of the portion of the Note subject to the
participation.

 

11.3         Dissemination of Information. The Borrower and each Guarantor
authorizes each Lender to disclose to any Transferee and any prospective
Transferee any and all information in the Lender’s possession concerning the
Borrower, the Guarantors and their respective Affiliates.

 

Article XII
NOTICES

 

12.1         Notices. Except as otherwise specifically permitted herein, all
notices, requests and other communications to any party hereunder shall be in
writing (including electronic transmission, facsimile transmission or similar
writing) and shall be given to such party: (x) in the case of the Borrower, at
its address or facsimile number set forth on the signature pages hereof, (y) in
the case of any Lender, at its address or facsimile number set forth on the
signature pages hereof or (z) in the case of any party, at such other address or
facsimile number as such party may hereafter specify for the purpose by notice
to the Lenders and the Borrower in accordance with the provisions of this
Section. Each such notice, request or other communication shall be effective (i)
if given by facsimile transmission, when transmitted to the facsimile number
specified in this Section and confirmation of .receipt is received (the receipt
thereof shall be deemed to have been acknowledged upon the sending Person’s
receipt of its facsimile machine’s confirmation of successful transmission;
provided that if the day on which such facsimile is received is not a Business
Day or is after 4:00 p.m. CT on a Business Day, then the receipt of such
facsimile shall be deemed to have been acknowledged on the next following
Business Day), (ii) if given by mail, three (3) Business Days after such
communication is deposited in the mail with first class postage prepaid,
addressed as aforesaid, or (iii) if given by any other means, when delivered
(or, in the case of electronic transmission, received) at the address specified
in this Section; except that notices to any Lender under Article II shall not be
effective until received by such Lender.

 

12.2         Change of Address. The Borrower and the Lenders may each change the
address for service of notice upon it by a notice in writing to the other party
hereto.

 

(Signature Page follows)

 

 61

 

 

Article XIII
ENTIRE AGREEMENT

 

THIS AGREEMENT CONSTITUTES THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH
RESPECT TO THE SUBJECT HEREOF AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN
THE PARTIES HERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT HEREOF.
FURTHERMORE, IN THIS REGARD, THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT AMONG
THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF SUCH PARTIES.

 

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH PARTIES.

 

In witness whereof, the undersigned have executed this Agreement as of the day
and year first above written.

 

 

BORROWER:

 

LILIS ENERGY, INC.

 

216 16th Street, Suite 1350 By: /s/ Abraham Mirman Denver, Colorado 80202 Name:
Abraham Mirman Telephone: (210) 999-5400 Title: Chief Executive Officer
Attention: Ariella Fuchs           INITIAL GUARANTORS:       BRUSHY RESOURCES,
INC.         By: /s/ Abraham Mirman   Name: Abraham Mirman   Title: Chief
Executive Officer and President       IMPETRO OPERATING, LLC       By: /s/ Mike
Pawelek   Name: Mike Pawelek   Title: CEO       IMPETRO RESOURCES, LLC       By:
/s/ Mike Pawelek   Name: Mike Pawelek   Title: CEO and President

 

 

 

 

  LENDER:       Trace Capital Inc.         By: /s/ Jennifer Nadj   Name:
Jennifer Nadj   Title: President    

 

 

 

 

  LENDER:       Pacific Capital Management       By: /s/ Jonathan Glaser   Name:
Jonathan Glaser   Title: Managing Member

 

 

 

 

  LENDER:       MAC & CO. A/C YVRF1001002 ITF   VERTEX FUND ITF VERTEX ONE ASSET
  MANAGEMENT INC.         By: /s/ John Thiessen   Name: John Thiessen   Title:
Director

 

 

 

 

  LENDER:       Bryan Ezralow as Trustee of the   Bryan Ezralow 1994 Trust u/t/d
12/22/1994         By: /s/ Bryan Ezralow   Name: Bryan Ezralow   Title: Trustee

 

 

 

 

  LENDER:       EMSE, LLC, a Delaware limited liability company       By: /s/
Bryan Ezralow   Name: Bryan Ezralow as Trustee of the   Bryan Ezralow 1994 Trust
u/t/d 12/22/1994   Title: Manager and Member

 

 

 

 

  LENDER:       Elevado Investment Company, LLC,   a Delaware limited liability
company       By: /s/ Bryan Ezralow   Name: Bryan Ezralow as Trustee of the  
Ezralow Family Trust u/t/d 12/09/1980   Title: Manager and Member

 

 

 

 

  LENDER:       Bryan Ezralow as Trustee of the Marc Ezralow   Irrevocable Trust
u/t/d 06/01/2004       By: /s/ Bryan Ezralow   Name: Bryan Ezralow   Title:
Trustee

 

 

 

 

  LENDER:       Marc Ezralow as Trustee of the   Marc Ezralow 1997 Trust u/t/d
11/26/1997       By: /s/ Marc Ezralow   Name: Marc Ezralow   Title: Trustee

 

 

 

 

  LENDER:       Marc Ezralow as Trustee of the   SPA Trust u/t/d 09/13/2004    
  By: /s/ Marc Ezralow   Name: Marc Ezralow   Title: Trustee

 

 

 

 

  LENDER:       David Michael Leff as Trustee of the David Leff   Family Trust
u/t/d 02/03/1988       By: /s/ David Michael Leff   Name: David Michael Leff  
Title: Trustee

 

 

 

 

  LENDER:       Equity Trust Company Custodian FBO: Marshall S.
Ezralow Roth IRA       By: /s/ Marshall S. Ezralow   Name: Marshall S. Ezralow  
Title: Participant

 

 

 

 

  LENDER:       David Leff as Trustee of the   C & R Irrevocable Trust u/t/d
11/05/2007       By: /s/ David M. Leff   Name: David M. Leff   Title: Trustee

 

 

 

 

  LENDER:       Gary E. Freedman as Trustee of the Freedman   2006 Irrevocable
Trust u/t/d 02/27/2006       By: /s/ Gary E. Freedman   Name: Gary E. Freedman
as Trustee of the   Freedman 2006 Irrevocable Trust u/t/d 2/27/2006   Title:
David Leff as Agent

 

 

 

 

  LENDER:       Gary E. Freedman as Trustee of the Freedman   Family Trust u/t/d
5/25/1982       By: /s/ Gary E. Freedman   Name: Gary E. Freedman as Trustee of
the   Freedman Family Trust u/t/d 5/25/1982   Title: David Leff as Agent

 

 

 

 

  LENDER:       J. STEVEN EMERSON ROTH IRA,   PERSHING LLC AS CUSTODIAN      
By: /s/ J. Steven Emerson   Name: J. Steven Emerson   Title: Self Directed IRA

 

 

 

 

  LENDER:       J. STEVEN EMERSON IRA R/O IT,   PERSHING LLC AS CUSTODIAN      
By: /s/ J. Steven Emerson   Name: J. Steven Emerson   Title: Self Directed IRA

 

 

 

 

  COLLATERAL AGENT:       T.R. Winston & Company, LLC       By: /s/ G. Tyler
Runnels   Name: G. Tyler Runnels   Title: Chairman and CEO        

 

Signature Page

to Credit and Guaranty Agreement

 

 

 

 

FORM OF SENIOR SECURED NOTE

 

$[_],000,000 New York, New York [         ] [ ], 2016

 

FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned (the “Borrower”) promises
to pay to the order of [___________] (“Lender”), at [___________________], the
amount of $[_],000,000, or so much thereof as may be advanced and be outstanding
under this Senior Secured Note pursuant to the Credit and Guaranty Agreement
dated of even date herewith by and between the Borrower, the Lender and the
other lenders party thereto (as amended, restated, or supplemented from time to
time, the “Credit Agreement”), together with interest at the rates and
calculated as provided in the Credit Agreement.

 

Reference is hereby made to the Credit Agreement for matters governed thereby,
including, without limitation, certain events which will entitle the holder
hereof to accelerate the maturity of all amounts due hereunder. Capitalized
terms used but not defined in this Note shall have the meanings assigned to such
terms in the Credit Agreement.

 

The date and amount of each Loan made by the Lender to the Borrower, and each
payment made on account of the principal thereof, will be recorded by the Lender
on its books and, prior to any transfer of this Note, may be endorsed by the
Lender on the schedules attached hereto or any continuation thereof or on any
separate record maintained by the Lender. Failure to make any such notation or
to attach a schedule shall not affect the Lender’s or the Borrower’s rights or
obligations in respect of such Loans or affect the validity of such transfer by
the Lender of this Note.

 

This Note is issued pursuant to and shall be governed by the Credit Agreement
and the holder of the Note shall be entitled to the benefits of the Credit
Agreement. This Note shall finally mature on the Final Maturity Date.

 

Without being limited thereto or thereby, this Note is secured by the Security
Documents.

 

The Borrower, and each surety, endorser, guarantor, and other party ever liable
for payment of any sums of money payable on this Note, jointly and severally
waive presentment and demand for payment, protest, notice of protest and
nonpayment, and notice of the intention to accelerate, and agree that their
liability on this Note shall not be affected by any renewal or extension in the
time of payment hereof, by any indulgences, or by any release or change in any
security for the payment of this Note, and hereby consent to any and all
renewals, extensions, indulgences, releases, or changes, regardless of the
number of such renewals, extensions, indulgences, releases, or changes.

 

THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE STATE OF NEW YORK
WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW.

 

  Lilis Energy, Inc.         By:     Name:     Title:  

 

 1

 

 

LOANS AND PAYMENT OF
PRINCIPAL AND INTEREST

 

 

Principal

Amount of
Loan Principal Paid
or Prepaid Amount of
Interest Paid Unpaid Principal
Balance Interest Paid to                                                        
                                                                               
                                                                               
                                                                               
                                                                               
                                                                               
                                                                               
               

 

 2

 

 

FORM OF COMPLIANCE CERTIFICATE

 

________________, 20_

 

[Lender Contact Information]

 

  Re: Credit and Guaranty Agreement dated [September] [__], 2016, by and between
Lilis Energy, Inc., as borrower, Brushy Resources Inc., ImPetro Operating, LLC
and ImPetro Resources, LLC, as guarantors, and the lenders party thereto (as
amended, restated, or supplemented from time to time, the “Credit Agreement”).
Terms defined in the Credit Agreement are used herein as therein defined unless
otherwise defined herein.

 

Ladies and Gentlemen:

 

Pursuant to applicable requirements of the Credit Agreement, the undersigned, as
a Responsible Representative of the Borrower, hereby certifies to you the
following information is true and correct as of the date hereof or for the
period indicated, as the case may be:

 

[1.          To the best of the knowledge of the undersigned, no Default exists
as of the date hereof or has occurred since the date of our previous
certification to you, if any.]

 

[1.          To the best of the knowledge of the undersigned, the following
Defaults exist as of the date hereof or have occurred since the date of our
previous certification to you, if any, and the actions set forth below are being
taken to remedy such circumstances:]

 

2.          The compliance of the Borrower with certain financial covenants of
the Credit Agreement, as of the close of business on
                              (the “Determination Date”), is evidenced by the
following:

 

(a)          [TO COME]

 

3.          To the best knowledge of the undersigned, the financial statements
being delivered to the Lenders concurrently herewith pursuant to the Credit
Agreement fairly and accurately reflect in all material respects the financial
condition and results of operation of the Persons identified therein for the
periods and as of the dates set forth therein.

 

4.The circled answers to the following statements are each true and correct as
of the Determination Date:

 

  (a) The annual statement of assets and liabilities of the Borrower as of its
most recent fiscal year-end and the related financial statements have been
delivered to the Lenders pursuant to Section 7.2.1(i). YES NO

 

 1

 

 

  (b) The quarterly statement of assets and liabilities of the Borrower as of
the last day of its most recently ended fiscal quarter (other than the last
fiscal quarter of each fiscal year) and the related financial statements have
been delivered to the Lenders pursuant to Section 7.2.1(ii). YES NO

 

  (c) The federal income tax return for the year most recently ended for each
Person indicated below has been properly filed with the appropriate Tribunal and
(if a copy thereof has been requested by the Required Lenders) a copy thereof
has been delivered to the Lenders pursuant to Section 7.2.1 (iv),

 

  (i) of the Borrower. YES NO         (ii) of                     . YES NO      
  (iii) of                     . YES NO         (iv) of                     .
YES NO

 

  5. The oil and gas production report being delivered by the Borrower to the
Lenders under Section 7.2.2 of the Credit Agreement is, to the best knowledge of
the undersigned, in compliance with the provisions of such Section and to the
best knowledge of the undersigned is true and correct in all material respects
as of the date thereof and for the time periods covered thereby.

 

The undersigned has reviewed the terms of this Agreement and the other Loan
Documents, and has made, or caused to be made under my supervision, a review of
the transactions and financial condition of the Borrower during the period
covered by the financial statements included herewith, and such review has not
disclosed the existence during such period, and the undersigned does not have
knowledge of the existence as of the date of this certificate, of any condition
or event which constitutes a Default, except as set forth in paragraph I above.

 

Each capitalized term used but not defined herein shall have the meaning
assigned to such term in the Credit Agreement.

 

  Very truly yours,           [______________________]

 

 2

 

 

EXHIBIT 6.4.1

 

SUBSIDIARIES

 

Brushy Resources, Inc.

 

Impetro Resources, LLC

 

Impetro Operating, LLC