paxton10q093008ex10-23.htm


    
      

      

    

    Exhibit
10.23

    


    PAXTON
ENERGY, INC.

    


    SECURITY
AGREEMENT

    


    This
Security Agreement (the “Agreement”) is made
and entered into as of September 3, 2008, by and between Paxton Energy,
Inc., a Nevada corporation (the “Debtor”), in favor of
each of the secured parties listed on Exhibit A attached to
this Agreement (each a “Secured Party” and
together the “Secured
Parties”).

    


    RECITALS

    


    Each of
the Secured Parties have entered into Subscription Agreements with the Debtor
pursuant to which the Secured Parties shall purchase Notes and be issued shares
of restricted common stock of the Company (all as defined in the Subscription
Agreements) from the Debtor.  The parties intend that the Debtor’s
obligations to repay the Notes be secured by all of the assets of the
Debtor.

    


    AGREEMENT

    


    In
consideration of the purchase of the Units by the Secured Parties and for other
good and valuable consideration, the Debtor hereby agrees with the Secured
Parties as follows:

    


    1.         Grant of
Security Interest.

    


    (a)           To
secure the Debtor’s full and timely performance of all of the Debtor’s
obligations and liabilities to the Secured Parties pursuant to the Notes
(including, without limitation, Debtor’s obligations to timely pay the principal
amount of, and interest on, the Notes and any other amounts payable with respect
to the Note) (the “Obligations”), the
Debtor hereby grants to the Secured Parties as a whole, and to each individual
Secured Party the undivided percentage interest in the Collateral that is set
forth opposite such Secured Party’s name on Exhibit A (the “Participating
Interest”), a continuing lien on and security interest (the “Security Interest”)
in, all of the Debtor’s right, title and interest in and to its personal
property and assets (both tangible and intangible), including, without
limitation, the following, whether now owned or hereafter acquired and wherever
located: (a) all Receivables; (b) all Equipment; (c) all Fixtures; (d) all
General Intangibles; (e) all Inventory; (f) all Investment Property; (g) all
Deposit Accounts; (h) all Cash; (i) all other Goods of the Debtor; (j) all Oil
and Gas Interest; and (k) all Proceeds of each of the foregoing and all
accessions to, and replacements for, each of the foregoing (the “Collateral”). The
Security Interest shall be a first and prior interest in all of the
Collateral.  Notwithstanding anything to the contrary stated above,
the Secured Parties agree that Debtor may sell a portion of the working interest
in Cook # 6 well as contemplated by the Amendatory Letter Agreement dated
July 21, 2008 between the Company and Bayshore Exploration LLC a copy of
which is attached as an exhibit to Exhibit D to the Subscription
Agreement.

    


    


    
      
        
           


        

        
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    (b)          The
following terms shall have the following meanings for purposes of this
Agreement:

    


    “Account” means any “account,”
as such term is defined in the UCC (as defined below), now owned or hereafter
acquired by Debtor or in which Debtor now holds or hereafter acquires any
interest and, in any event, shall include, without limitation, all accounts
receivable, book debts, rights to payment and other forms of obligations (other
than forms of obligations evidenced by Chattel Paper, Documents or Instruments)
now owned or hereafter received or acquired by or belonging or owing to Debtor
whether or not arising out of goods or software sold or services rendered by
Debtor or from any other transaction, whether or not the same involves the sale
of goods or services by Debtor and all of Debtor’s rights in, to and under all
purchase orders or receipts now owned or hereafter acquired by it for goods or
services, and all of Debtor’s rights to any goods represented by any of the
foregoing, and all monies due or to become due to Debtor under all purchase
orders and contracts for the sale of goods or the performance of services or
both by Debtor or in connection with any other transaction (whether or not yet
earned by performance on the part of Debtor), now in existence or hereafter
occurring, including, without limitation, the right to receive the proceeds of
said purchase orders and contracts, and all collateral security and guarantees
of any kind given by any Person with respect to any of the
foregoing.

    


    “Cash” means all cash, money,
currency, and liquid funds, wherever held, in which Debtor now or hereafter
acquires any right, title, or interest.

    


    “Chattel Paper” means any
“chattel paper,” as such term is defined in the UCC, now owned or hereafter
acquired by Debtor or in which Debtor now holds or hereafter acquires any
interest.

    


    “Deposit Accounts” means any
“deposit accounts,” as such term is defined in the UCC, and includes any
checking account, savings account, or certificate of deposit, now owned or
hereafter acquired by Debtor or in which Debtor now holds or hereafter acquires
any interest.

    


    “Documents” means any
“documents,” as such term is defined in the UCC, now owned or hereafter acquired
by Debtor or in which Debtor now holds or hereafter acquires any
interest.

    


    “Equipment” means any
“equipment,” as such term is defined in the UCC, now owned or hereafter acquired
by Debtor or in which Debtor now holds or hereafter acquires any interest and
any and all additions, upgrades, substitutions and replacements of any of the
foregoing, together with all attachments, components, parts, equipment and
accessories installed thereon or affixed thereto, now owned or hereafter
acquired by Debtor or in which Debtor now holds or hereafter acquires
interest.

    


    
      
        
           


        

        
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    “Fixtures” means any
“fixtures,” as such term is defined in the UCC, together with all right, title
and interest of Debtor in and to all extensions, improvements, betterments,
accessions, renewals, substitutes, and replacements of, and all additions and
appurtenances to any of the foregoing property, and all conversions of the
security constituted thereby, immediately upon any acquisition or release
thereof or any such conversion, as the case may be, now owned or hereafter
acquired by Debtor or in which Debtor now holds or hereafter acquires any
interest.

    


    “General Intangibles” means
any “general intangibles,” as such term is defined in the UCC, now owned or
hereafter acquired by Debtor or in which Debtor now holds or hereafter acquires
any interest and, in any event, shall include, without limitation, all right,
title and interest that Debtor may now or hereafter have in or under any
contracts, rights to payment, payment intangibles, confidential information,
interests in partnerships, limited liability companies, corporations, joint
ventures and other business associations, permits, goodwill, claims in or under
insurance policies, including unearned premiums and premium adjustments,
uncertificated securities, deposit, checking and other bank accounts, but shall
not include any Intellectual Property.

    


    “Goods” means any “goods,” as
such term is defined in the UCC, now owned or hereafter acquired by Debtor or in
which Debtor now holds or hereafter acquires any interest.

    


    “Instruments” means any
“instrument,” as such term is defined in the UCC, now owned or hereafter
acquired by Debtor or in which Debtor now holds or hereafter acquires any
interest.

    


    “Inventory” means any
“inventory,” as such term is defined in the UCC, now owned or hereafter acquired
by Debtor or in which Debtor now holds or hereafter acquires any interest, and,
in any event, shall include, without limitation, all inventory, goods and other
personal property that are held by or on behalf of Debtor for sale or lease or
are furnished or are to be furnished under a contract of service or that
constitute raw materials, work in process or materials used or consumed or to be
used or consumed in Debtor’s business, or the processing, packaging, promotion,
delivery or shipping of the same, and all finished goods, whether or not the
same is in transit or in the constructive, actual or exclusive possession of
Debtor or is held by others for Debtor’s account, including, without limitation,
all goods covered by purchase orders and contracts with suppliers and all goods
billed and held by suppliers and all such property that may be in the possession
or custody of any carriers, forwarding agents, truckers, warehousemen, vendors,
selling agents or other Persons.

    


    “Investment Property” means
any “investment property,” as such term is defined in the UCC, and includes
certificated securities, uncertificated securities, money market funds and U.S.
Treasury bills or notes, now owned or hereafter acquired by Debtor or in which
Debtor now holds or hereafter acquires any interest.

    


    
      
        
           


        

        
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    “Lien” means any mortgage,
deed of trust, pledge, hypothecation, assignment for security, security
interest, encumbrance, levy, lien or charge of any kind, whether voluntarily
incurred or arising by operation of law or otherwise, against any property, any
conditional sale or other title retention agreement, any lease in the nature of
a security interest, and the filing of any financing statement (other than a
precautionary financing statement with respect to a lease that is not in the
nature of a security interest) under the UCC or comparable law of any
jurisdiction.

    


    “Oil and Gas Interests” means
all of Debtor’s leasehold interests, working interests or any other interest of
any nature in oil and gas properties or exploration ventures, including all
income and proceeds and rights to income and proceeds therefrom.

    


    “Person” means any individual,
sole proprietorship, partnership, joint venture, trust, unincorporated
organization, association, corporation, limited liability company, institution,
public benefit corporation, other entity or government (whether federal, state,
county, city, municipal, local, foreign, or otherwise, including any
instrumentality, division, agency, body or department thereof).

    


    “Proceeds” means “proceeds,”
as such term is defined in the UCC and, in any event, shall include, without
limitation, (a) any and all Accounts, Chattel Paper, Instruments, cash or other
forms of money or currency or other proceeds payable to Debtor from time to time
in respect of the Collateral, (b) any and all proceeds of any insurance,
indemnity, warranty or guaranty payable to Debtor from time to time with respect
to any of the Collateral, (c) any and all payments (in any form whatsoever) made
or due and payable to Debtor from time to time in connection with any
requisition, confiscation, condemnation, seizure or forfeiture of all or any
part of the Collateral by any governmental authority (or any Person acting under
color of governmental authority), (d) the proceeds, damages, or recovery based
on any claim of Debtor against third parties (i) for past, present or
future infringement of any copyright, patent or patent license or (ii) for past,
present or future infringement or dilution of any trademark or trademark license
or for injury to the goodwill associated with any trademark, trademark
registration or trademark licensed under any trademark license and (e) any and
all other amounts from time to time paid or payable under or in connection with
any of the Collateral.

    


    “Receivables” means all of
Debtor’s Accounts, Instruments, Documents, Chattel Paper, Supporting
Obligations, and letters of credit and Letter of Credit Rights.

    


    “Supporting Obligations” means
any “supporting obligations,” as such term is defined in the UCC, now owned or
hereafter acquired by Debtor or in which Debtor now holds or hereafter acquires
any interest.

    


    “UCC” means the Uniform
Commercial Code as the same may, from time to time, be in effect in the State of
California; provided, that in the
event that, by reason of mandatory provisions of law, any or all of the
attachment, perfection or priority of, or remedies with respect to, Secured
Party’s Lien on any Collateral is governed by the Uniform Commercial Code as
enacted and in effect in a jurisdiction other than the State of California, the
term “UCC” shall mean the Uniform Commercial Code as enacted and in effect, from
time to time, in such other jurisdiction solely for purposes of the provisions
thereof relating to such attachment, perfection, priority or remedies and for
purposes of definitions related to such provisions.  Unless otherwise
defined herein, terms that are defined in the UCC and used herein shall have the
meanings given to them in the UCC.

    


    
      
        
           


        

        
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    2.         Representations
and Warranties.  The Debtor hereby
represents and warrants to the Secured Party that:

    


    (a)          Ownership
of Collateral.  Except for the
Security Interest granted to the Secured Parties pursuant to this Agreement, the
Debtor has rights in or the power to transfer the Collateral free and clear of
any adverse lien, security interest or encumbrance except as created by this
Security Interest.  No financing statements covering any Collateral or
any proceeds thereof are on file in any public office (other than filings
listing Secured Parties as the secured party).

    


    (b)          Valid
Security Interest.  The Security
Interest granted pursuant to this Agreement will constitute a valid and
continuing perfected security interest in favor of the Secured Parties in the
Collateral for which perfection is governed by the UCC.  Such Security
Interest will be prior to all other liens on the Collateral.

    


    (c)          Organization
and Good Standing.  The Debtor has
been duly incorporated, and is validly existing and in good standing, under the
laws of the State of Nevada and has a Nevada corporate identification number of
C17329-2004.

    


    (d)          Location,
State of Incorporation and Name of Debtor.  Debtor’s chief
executive office is located at 4120 Douglas Blvd, Suite 306-428, Granite Bay, CA
95746.  Debtor’s state of incorporation is Nevada and the exact legal
name of the organization is as set forth in the first paragraph of this
Agreement.

    


    3.         Rights
and Obligations of Secured Parties.

    


    (a)          Ratable
Sharing of Collateral.  Each Secured
Party acknowledges and it is the intent of the Secured Parties that the Security
Interest granted by Debtor is evidenced by a single Security Agreement and each
Secured Party hereby agrees (and each Secured Party hereby irrevocably advises
and instructs Debtor to recognize) that each Secured Party shall participate in
the percentage of the total amount of any Collateral and proceeds of the
Collateral calculated by multiplying the Debtor’s total Obligations by each
Secured Party’s Participating Interest in the Collateral as set forth on Exhibit
A.

    


    (b)          Event of
Default.  If an Event of
Default shall have occurred and is continuing, those Secured Parties, who are
not officers or directors of the Company, holding a majority of the
Participating Interests in the Collateral shall notify Robert K. Henrichsen,
M.D.  (the “Secured Party
Representative”) of such default and direct the Secured Party
Representative with the course of action to take in enforcing the Secured
Parties’ rights and remedies under this Agreement against the Debtor and
Collateral including foreclosing on the Collateral if necessary.  In
the event of foreclosure on the Collateral, if the Collateral is not purchased
by a third party at a trustees sale or otherwise as provided under the UCC, the
Secured Party Representative shall cause title to vest in the names of each
Secured Party, as tenants in common, with undivided interests in the Collateral
in accordance with its Participating Interest.  The Secured Parties
may also direct Secured Party Representative to exercise any further rights or
remedies under this Agreement, the Purchase Agreement, or Notes; provided,
however, that any interest in or amounts recorded with respect to the Collateral
shall be vested in the names of each Secured Party in accordance
herewith.  Any proceeds received from any such foreclosure, remedial
action, redemption or receivership proceeding related to the Collateral shall be
shared between the Secured Parties pari passu in a manner
proportionate to their undivided interest in the Collateral at the time of
determination.

    


    
      
        
           


        

        
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    (c)          Secured
Party Representative Fees.  In the event that
the Secured Party Representative is required to take any action on behalf of the
Secured Parties in enforcing the Secured Parties’ rights and remedies under this
Agreement, the Secured Parties shall pay the Secured Party Representative a fee
of 2% of all amounts collected by the Secured Party Representative (the “Representative
Fee”).  The Representative Fee shall be in addition to all
third party fees and costs, including attorney fees and costs, incurred by
Secured Party Representative in connection with the exercise of such
remedies.

    


    (d)          Actions
by Secured Parties; Settlement of Claims.  All actions by
Secured Parties or decisions effecting the rights of the Secured Parties
including any settlement of claims the Secured Parties may have against Debtor
shall only be effected by those Secured Parties, who are not officers or
directors of the Company, holding a majority of the Participating Interest in
the Collateral.

    


    4.         Covenants.  The Debtor
covenants and agrees with the Secured Parties that, from and after the date of
this Agreement until the Obligations are paid in full:

    


    (a)          Other
Liens.  Except for the
Security Interest, the Debtor has rights in or the power to transfer the
Collateral and its title and will be able to do so hereafter free from any
adverse lien, security interest or encumbrance (other than purchase money
security interests that will be discharged upon Debtor’s payment of the purchase
price for the applicable property), and the Debtor will defend the Collateral
against the claims and demands of all persons at any time claiming the same or
any interest therein.

    


    (b)          Further
Documentation.  At any time and
from time to time, upon the written request of a Secured Party, and at the sole
expense of the Debtor, the Debtor will promptly and duly authenticate and
deliver such further instruments and documents and take such further action as
the Secured Party may reasonably request for the purpose of obtaining or
preserving the full benefits of this Agreement and of the rights and powers
herein granted (with the exception of filing any financing or continuation
statements under the UCC in effect with respect to the Liens created hereby,
which shall be the responsibility of the Secured Parties), including, without
limitation, filing any financing or continuation statements under the UCC in
effect with respect to the Liens created hereby, obtaining acknowledgment (as
reasonably acceptable to the Secured Party) of any bailee having possession of
any Collateral that it holds the Collateral for the benefit of the Secured
Party.  The Debtor also hereby authorizes the Secured Parties file any
such financing or continuation statement without the authentication of the
Debtor to the extent permitted by applicable law, and to describe the collateral
covered by any such statements as “all assets of the Debtor,” “all personal
property of the Debtor” or words of similar effect.  A reproduction of
this Agreement shall be sufficient as a financing statement (or as an exhibit to
a financing statement on form UCC-1) for filing by the Secured Parties any
jurisdiction.

    


    
      
        
           


        

        
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    (c)          Indemnification.  The Debtor agrees
to defend, indemnify and hold harmless the Secured Parties against any and all
liabilities, costs and expenses (including, without limitation, legal fees and
expenses) (“Liabilities”):
(i) with respect to, or resulting from, any delay in paying, any and all
excise, sales or other taxes which may be payable or determined to be payable
with respect to any of the Collateral, (ii) with respect to, or resulting
from, any delay in complying with any law, rule, regulation or order of any
governmental authority applicable to any of the Collateral or (iii) in
connection with any of the transactions contemplated by this
Agreement.  However, Debtor shall have no obligation hereunder to
indemnify or hold harmless the Secured Parties for any Liabilities that have
arisen as a result of the Secured Parties’ willful misconduct or gross
negligence.

    


    (d)          Maintenance
of Records.  The Debtor will
keep and maintain at its own expense complete and satisfactory records of the
Collateral.

    


    (e)          Inspection
Rights.  The Secured
Parties shall have full access during normal business hours, and upon reasonable
prior notice, to all the books, corre­spondence and other records of the
Debtor relating to the Collateral.  The Secured Parties or their
repre­sentatives may examine such records and make photocopies or otherwise
take extracts from such records.  The Debtor agrees to render to the
Secured Parties, at the Debtor’s expense, such clerical and other assistance as
may be reasonably requested with regard to the exercise of its rights pursuant
to this paragraph.

    


    (f)          Compliance
with Laws, etc.  The Debtor will comply in all material
respects with all laws, rules, regulations and orders of any governmental
authority applicable to any part of the Collateral or to the operation of the
Debtor’s business; provided, however, that the
Debtor may contest any such law, rule, regulation or order in any reasonable
manner which does not, in the reasonable opinion of the Debtor, adversely affect
the Secured Parties’ rights or the priority of its liens on the
Collateral.

    


    (g)          Payment
of Obligations.  The Debtor will
pay promptly when due all taxes, assessments and governmental charges or levies
imposed upon the Collateral or with respect to any its income or profits derived
from the Collateral, as well as all claims of any kind (including, without
limitation, claims for labor, materials and supplies) against or with respect to
the Collateral, except that no such charge need be paid if (i) the validity
of such charge is being contested in good faith by appropriate pro­ceedings,
(ii) such proceedings do not involve any material danger of the sale,
forfeiture or loss of any of the Collateral or any interest in the Collateral
and (iii) such charge is adequately reserved against on the Debtor’s books
in accordance with generally accepted accounting principles.

    


    (h)          Limitation
on Liens on Collateral.  The Debtor will
not create, incur or permit to exist, will defend the Collateral against, and
will take such other action as is necessary to remove, any lien or claim on or
to the Collateral, other than the Security Interest, and will defend the right,
title and interest of the Secured Parties in and to any of the Collateral
against the claims and demands of all other persons.

    


    
      
        
           


        

        
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    (i)           Limitations
on Dispositions of Collateral.  The Debtor will
not sell, transfer, lease, or otherwise dispose of any of the Collateral, or
attempt, offer or contract to do so.

    


    (j)           Further
Identification of Collateral.  The Debtor will
furnish to the Secured Parties from time to time statements and schedules
further identifying and describing the Collateral and such other reports in
connection with the Collateral as the Secured Parties may reasonably request,
all in reasonable detail.  If Debtor shall obtain rights to any new
Collateral, the provisions of this Agreement shall automatically apply
thereto.  Debtor shall give prompt notice in writing to Secured
Parties with respect to any such new Collateral.

    


    (k)          Notice of
Change of State of Incorporation.  The Debtor will
provide written notice to the Secured Parties at least 30 days prior to a change
of the Debtor’s state of incorporation.  The Debtor will provide
written notice to the Secured Parties at least 30 days prior to a change in the
location of its chief executive office.

    


    (l)           No
Merger.  The Debtor will
not merge or consolidate into or transfer any of the Collateral to any other
Person without the prior written consent of the Secured Parties.

    


    (m)         Change of
Debtor’s Name.  The Debtor will
provide written notice to the Secured Parties at least 20 days prior to a change
in the Debtor’s name.

    


    5.         Event of
Default; Secured Party’s Appointment as Attorney-in-Fact.

    


    (a)          Event of
Default.  For purposes of
this Agreement, the occurrence of any one of the following events (each, an
“Event of
Default”) shall constitute a default hereunder and under the
Note:

    


    (i)           The
Debtor’s failure to pay or discharge the Obligations in full in accordance with
the terms of the Note;

    


    (ii)           A
material breach of a representation or warranty made by the Debtor under the
Purchase Agreement as of the date thereof;

    


    
      
        
           


        

        
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    (iii)          The
insolvency of the Debtor, the commission of any act of bankruptcy by the Debtor,
the execution by the Debtor of a general assignment for the benefit of
creditors, the filing by or against the Debtor of a petition in bankruptcy or
any petition for relief under the federal bankruptcy act or the continuation of
such petition without dismissal for a period of ninety (90) days or more, or the
appointment of a receiver or trustee to take possession of the property or
assets of the Debtor; or

    


    (iv)          If
any amendment to or termination of a financing statement naming the Debtor as
debtor and the Secured Parties as secured party, or any correction statement
with respect thereto, is filed in any jurisdiction by any party other than the
Secured Parties or their counsel, without the prior written consent of the
Secured Parties.

    


    (b)          Powers.  The Debtor hereby
appoints the Secured Parties and any officer or agent of the Secured Parties,
with full power of substitution, as its attorney-in-fact with full irrevocable
power and authority in the place of the Debtor and in the name of the Debtor or
its own name, from time to time in the Secured Parties’ discretion so long as an
Event of Default has occurred and is continuing, for the purpose of carrying out
the terms of this Agreement, to take any appropriate action and to authenticate
any instrument which may be necessary or desirable to accomplish the purposes of
this Agreement.  Without limiting the foregoing, so long as an Event
of Default has occurred and is continuing, the Secured Parties shall have the
right, without notice to, or the consent of, the Debtor, to do any of the
following on the Debtor’s behalf:

    


    (i)           to
pay or discharge any taxes or liens levied or placed on or threatened against
the Collateral;

    


    (ii)          to
direct any party liable for any payment under any of the Collateral to make
payment of any and all amounts due or to become due thereunder directly to the
Secured Parties or as the Secured Parties directs;

    


    (iii)          to
ask for or demand, collect, and receive payment of and receipt for, any payments
due or to become due at any time in respect of or arising out of any
Collateral;

    


    (iv)          to
commence and prosecute any suits, actions or proceedings at law or in equity in
any court of competent jurisdiction to enforce any right in respect of any
Collateral;

    


    (v)          to
defend any suit, action or proceeding brought against the Debtor with respect to
any Collateral;

    


    (vi)         to
settle, compromise or adjust any suit, action or proceeding described in
subsection (v) above and to give such discharges or releases in connection
therewith as the Secured Parties may deem appropriate;

    


    (vii)         to
assign any patent right included in the Collateral of Debtor (along with the
goodwill of the business to which any such patent right pertains), throughout
the world for such term or terms, on such conditions, and in such manner, as the
Secured Parties shall in its sole discretion determine; and

    


    
      
        
           


        

        
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    (viii)        generally,
to sell, transfer, pledge and make any agreement with respect to or otherwise
deal with any of the Collateral and to take, at the Secured Parties’ option and
the Debtor’s expense, any actions which the Secured Parties deem necessary to
protect, preserve or realize upon the Collateral and the Secured Parties’ liens
on the Collateral and to carry out the intent of this Agreement, in each case to
the same extent as if the Secured Parties were the absolute owner of the
Collateral for all purposes.

     

    The
Debtor hereby ratifies whatever actions the Secured Parties shall lawfully do or
cause to be done in accordance with this Section 5.  This power of
attorney shall be a power coupled with an interest and shall be
irrevocable.

    


    (c)          No Duty
on Secured Parties’ Part.  The powers
conferred on the Secured Parties by this Section 5 are solely to protect the
Secured Parties’ interests in the Collateral and shall not impose any duty upon
it to exercise any such powers.  The Secured Parties shall be
accountable only for amounts that it actually receives as a result of the
exercise of such powers, and neither the Secured Parties nor any of their
officers, directors, employees or agents shall, in the absence of willful
misconduct or gross negligence, be responsible to the Debtor for any act or
failure to act pursuant to this Section 5.

    


    6.         Performance
by Secured Parties Debtor’s Obligations.  If the Debtor
fails to perform or comply with any of its agreements or covenants contained in
this Agreement and the Secured Parties perform or comply, or otherwise cause
performance or compliance, with such agreement or covenant in accordance with
the terms of this Agreement, then the reasonable expenses of the Secured Parties
incurred in connection with such performance or compliance shall be payable by
the Debtor to the Secured Parties on demand and shall constitute Obligations
secured by this Agreement.

    


    7.         Remedies.  If an Event of
Default has occurred and is continuing, the Secured Parties may exercise, in
addition to all other rights and remedies granted to it in this Agreement and in
any other instrument or agreement relating to the Obligations, all rights and
remedies of a secured party under the UCC.  Without limiting the
foregoing, the Secured Parties, without demand of performance or other demand,
present­ment, protest, advertisement or notice of any kind (except any
notice required by law) to or upon the Debtor or any other person (all of which
demands, defenses, advertisements and notices are hereby waived), may in such
circumstances collect, receive, appropriate and realize upon any or all of the
Collateral, and/or may sell, lease, assign, give an option or options to
purchase, or otherwise dispose of and deliver any or all of the Collateral (or
contract to do any of the foregoing), in one or more parcels at a public or
private sale or sales, at any exchange, broker’s board or office of any Secured
Party or elsewhere upon such terms and conditions as the Secured Parties may
deem advisable, for cash or on credit or for future delivery without assumption
of any credit risk.  The Secured Parties shall have the right upon any
such public sale or sales and, to the extent permitted by law, upon any such
private sale or sales, to purchase all or any part of the Collateral so sold,
free of any right or equity of redemption in the Debtor, which right or equity
is hereby waived or released.  To the extent permitted by applicable
law, the Debtor waives all claims, damages and demands it may acquire against
the Secured Parties arising out of the exercise by the Secured Parties of any of
its rights hereunder.  If any notice of a proposed sale or other
disposition of Collateral shall be required by law, such notice shall be deemed
reasonable and proper if given at least five (5) days before such sale or other
disposition.  The Debtor shall remain liable for any deficiency if the
proceeds of any sale or other disposition of the Collateral are insufficient to
pay the Obligations and the fees and disbursements of any attorneys employed by
the Secured Parties to collect such deficiency.

    


    
      
        
           


        

        
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    8.         Private
Sale and Compliance with Law.

    


    (a)          Secured
Parties shall not incur any liability as a result of the sale of Collateral, or
any part thereof, at any private sale conducted in a commercially reasonable
manner.  Debtor hereby waives any claim against Secured Parties
arising by reason of the fact that the price at which Collateral may have been
sold at such a private sale conducted in a commercially reasonable manner was
less than the price which might have been obtained at a public sale or was less
than the aggregate amount of the Obligations, even if Secured Parties accept the
first offer received and does not offer Collateral to more than one
offeree.

    


    (b)          Debtor
agrees that in any sale of any of the Collateral whenever an event of default
hereunder shall have occurred and be continuing, Lender is hereby authorized to
comply with any limitation or restriction in connection with such sale as it may
be advised by counsel is necessary in order to avoid any violation of applicable
law or in order to obtain any required approval of the sale or of the purchaser
by any governmental regulatory authority or official, and Debtor further agrees
that such compliance shall not result in such sale being considered or deemed
not to have been made in a commercially reasonable manner, nor shall Secured
Parties be liable or accountable to Debtor for any discount allowed by reason of
the fact that such Collateral is sold in compliance with any such limitation or
restriction.

    


    9.         Application
of Payments with Respect to the Collateral.  In the event of
any foreclosure, sale or other disposition of or realization in any manner upon
any of the Collateral, all monies or other property collected or received by the
Secured Parties or their representatives or counsel with respect to the
Collateral, in excess of the amount paid to discharge liens upon the Collateral
(if any), shall be distributed by the Secured Parties as follows:

    


    (a)          First:
to the ratable, pari
passu payment of any advances made by any of the Secured Parties to
satisfy any lien or other claim that may impair the Collateral, ratably
according to the total amounts owing to the respective Secured Party as a result
of such advances;

    


    (b)          Second:
to the Secured Parties and their representatives and counsel in the amount of,
and to apply to, the payment of reasonable costs and expenses incurred by
Secured Parties representatives and counsel in connection with the
administration and enforcement of the foreclosed upon Collateral, as the case
may be, including the reasonable fees and out-of-pocket expenses of counsel
employed by the Secured Parties to the extent that such fees, advances, costs
and expenses, shall not previously have been paid or reimbursed to the Secured
Parties; and

    


    (c)          Third:
to each Secured Party, pari
passu, in a manner proportionate to its Participating Interests in the
Collateral at the time of determination until all indebtedness and other
obligations owed by Debtor under the Notes have been satisfied in full, then any
excess amount to Debtor.

    


    
      
        
           


        

        
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    10.       Limitation
on Duties Regarding Preservation of Collateral.  The Secured
Parties’ sole duty with respect to the custody, safekeeping and preservation of
the Collateral, under Section 9-207 of the UCC or otherwise, shall be to
deal with it in the same manner as the Secured Parties deal with similar
property for their own account.  Neither the Secured Parties nor any
of their directors, officers, employees or agents shall be liable for failure to
demand, collect or realize upon all or any part of the Collateral or for any
delay in doing so or shall be under any obligation to sell or otherwise dispose
of any Collateral upon the request of the Debtor or otherwise.

    


    11.       Powers
Coupled with an Interest.  All
authorizations and agencies contained in this Agreement with respect to the
Collateral are irrevocable and are powers coupled with an interest.

    


    12.       No
Waiver; Cumulative Remedies.  The Secured
Parties shall not by any act (except by a written instrument pursuant to
Section 14(f) hereof), delay, indulgence, omission or otherwise be deemed
to have waived any right or remedy hereunder or to have acquiesced in any
default under the Notes or in any breach of any of the terms and conditions of
this Agreement.  No failure to exercise, nor any delay in exercising,
on the part of the Secured Parties, any right, power or privilege hereunder
shall operate as a waiver thereof.  No single or partial exercise of
any right, power or privilege hereunder shall preclude any other or further
exercise thereof or the exercise of any other right, power or
privilege.  A waiver by the Secured Parties of any right or remedy
under this Agreement on any one occasion shall not be construed as a bar to any
right or remedy which the Secured Parties would otherwise have on any subsequent
occasion.  The rights and remedies provided in this Agreement are
cumulative, may be exercised singly or concurrently and are not exclusive of any
rights or remedies provided by law.

    


    13.       Termination
of Security Interest.  Upon satisfaction
of the Debtor’s obligations pursuant to the Note, or conversion of the Notes
into shares of the Company’s equity securities pursuant to the terms of the
Notes, the security interest granted herein shall terminate and all rights to
the Collateral shall revert to the Debtor.  Upon any such termination,
the Secured Parties shall authenticate and deliver to the Debtor such documents
as the Debtor may reasonably request to evidence such termination.

    


    


    
      
        
           


        

        
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    14.       Miscellaneous.

    


    (a)          Successors
and Assigns.  The terms and conditions
of this Agreement shall be binding upon the Debtor and its successors and
assigns, as well as all persons who become bound as a debtor to this Agreement
and inure to the benefit of the Secured Parties and their successors and
assigns.  Nothing in this Agreement, express or implied, is intended
to confer upon any party other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations or liabilities
under or by reason of this Agreement, except as expressly provided in this
Agreement.

    


    (b)          Governing
Law.  This Agreement
and all acts and transactions pursuant hereto and the rights and obligations of
the parties hereto shall be governed, construed and interpreted in accordance
with the laws of the State of California, without giving effect to principles of
conflicts of law.

    


    (c)          Counterparts.  This Agreement
may be executed in two or more counterparts, each of which shall be deemed an
original and all of which together shall constitute one instrument.

    


    (d)          Titles
and Subtitles.  The titles and
subtitles used in this Agreement are used for convenience only and are not
to be considered in construing or interpreting this Agreement.

    


    (e)          Notices.  Any notice
required or permitted by this Agreement shall be in writing and shall be deemed
sufficient upon receipt, when delivered personally or by courier, overnight
delivery service or confirmed facsimile, or 48 hours after being deposited in
the U.S. mail as certified or registered mail with postage prepaid, if such
notice is addressed to the party to be notified at such party’s address or
facsimile number as
set forth below or as subsequently modified by written notice.

    


    (f)           Amendments
and Waivers.  Any term of this
Agreement may be amended with the written consent of the parties or their
respective successors and assigns.  Any amendment or waiver effected
in accordance with this Section 11(f) shall be binding upon the parties and
their respective successors and assigns.

    


    (g)          Severability.  If one or more
provisions of this Agreement are held to be unenforceable under applicable law,
the parties agree to renegotiate such provision in good faith, in order to
maintain the economic position enjoyed by each party as close as possible to
that under the provision rendered unenforceable.  In the event that
the parties cannot reach a mutually agreeable and enforceable replacement for
such provision, then (i) such provision shall be excluded from this
Agreement, (ii) the balance of the Agreement shall be interpreted as if
such provision were so excluded and (iii) the balance of the Agreement
shall be enforceable in accordance with its terms.

     

     

    
      
         

      

      
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    (h)          Entire
Agreement.  This Agreement,
and the documents referred to herein constitute the entire agreement between the
parties hereto pertaining to the subject matter hereof, and any and all other
written or oral agreements existing between the parties hereto concerning such
subject matter are expressly canceled.

     

     

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    IN
WITNESS WHEREOF, the parties have executed this Security Agreement as of the
date first written above.

    


    


    
      	 
      	
              DEBTOR:

            
	 
      	 
      
	 
      	
              PAXTON
      ENERGY, INC.

            
	 
      	 
      
	 
      	
              By:
      /s/ Robert Freiheit

            
	 
      	
                    Robert
      Freiheit, President

            
	 
      	
                    Address:  2533
      North Carson Street, #6232

            
	 
      	
                    Carson
      City, NV  89706

            
	 
      	
                    Facsimile
      Number:   (916)
791-0289

            


    

    


    


    


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    IN WITNESS WHEREOF, the parties have
executed this Securities Agreement as of the date first written
above.

    


    


    
      	 
      	
              SECURED
      PARTIES:

            
	 
      	 
      
	 
      	
              /s/
      SEE ATTACHED SCHEDULE

            
	 
      	
              (Secured
      Party)

            
	 
      	
              By:

            
	 
      	
              Name:

            
	 
      	
              Title:

            
	 
      	
              ADDRESS
      FOR NOTICE

            
	 
      	
              c/o:

            
	 
      	
              Street:

            
	 
      	
              City/State/Zip:

            
	 
      	
              Attention:

            
	 
      	
              Tel:

            
	 
      	
              Fax:

            
	 
      	
              Email:

            


    

    


    


    


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    EXHIBIT
A

    


    SCHEDULE
OF SECURED PARTIES

    


    


    
      	
              Name and Address of
      Secured Party

            	
              Original Principal
      Amount

              of
      Note

            	
              Participating Interest
      in Collateral in %

            
	
               Auction
      Specialists, Inc.

               

            	
              50,000

            	
              16.67%

            
	
               Derek
      R. Freiheit

               

            	
              25,000

            	
              8.33%

            
	
               Mary
      Lou Freiheit

               

            	
              50,000

            	
              16.67%

            
	
               David
      Hauck

               

            	
              75,000

            	
              25.00%

            
	
               Big
      Sky Trust, Robert Henrichsen, Trustee

               

            	
              75,000

            	
              25.00%

            
	
               Howard
      S. Landa

               

            	
              25,000

            	
              8.33%

            
	
               

               TOTAL

               

            	
               

              $300,000.00

               

            	
               

              100%