f8k022610ex10i_recovery.htm


    Exhibit
10.1

     

    CREDIT
AGREEMENT

     

    THIS
CREDIT AGREEMENT (together with all Exhibits hereto, and as supplemented,
modified, amended or restated from time to time in the manner provided herein,
this “Agreement”),
effective as of January 29, 2010 (the “Effective Date”), is
by and between RECOVERY ENERGY, INC., a Nevada corporation (“Borrower”), and
HEXAGON INVESTMENTS, LLC, a Colorado limited liability company (“Lender”).

     

    RECITALS

     

    A. Borrower
has acquired certain oil and gas properties, as described in Exhibit A
attached hereto, together with all improvements located thereon, including,
without limitation, any fixtures, structures and appurtenances now or later to
be located thereon (the “Oil and Gas
Properties”);

     

    B. Pursuant
to that certain Letter Agreement re Acquisition Loan for Nebraska Properties,
from Lender to Borrower, dated January 29, 2010 (the “Letter Agreement”),
Lender has extended a term loan to Borrower in the principal amount of
$4,500,000, which was used by Borrower in connection with the acquisition of the
Oil and Gas Properties;

     

    C. Borrower
and Lender desire to enter into this Agreement and the other Loan Documents (as
defined below) in order to replace and restate the agreements set forth in the
Letter Agreement, and more fully set forth the terms of the transactions
described in the Letter Agreement; and

     

    D. Lender
and Borrower have agreed to replace and restate the Letter Agreement by the
execution and delivery of this Agreement and the other Loan
Documents.

     

    AGREEMENT

     

    NOW,
THEREFORE, in consideration of the premises and the mutual covenants and
agreements contained herein, the parties hereto agree as follows:

     

    I.   DEFINITIONS AND
REFERENCES

     

    Section
1.1 Defined
Terms. As used
in this Agreement, each of the following terms shall have the meaning given it
in this Section 1.1 or
in the sections and subsections referred to below:

     

    “Agreement” has the
meaning set forth in the introductory paragraph.

     

    “Applicable Environmental
Law” means any law, order, rule or regulation pertaining to health or the
environment (as the same now exist or are hereafter enacted and/or
amended).

     

    “Borrower” has the
meaning set forth in the introductory paragraph.

     

    “Business Day” means
any day which is not a Saturday, a Sunday or a legal holiday on which commercial
banks are authorized or required to be closed in Denver, Colorado.

     

    “Collateral” means all
tangible or intangible real or personal property which, under the terms of any
Security Document, is or is purported to be covered thereby or subject
thereto.

     

    
      
        
        

      

      
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    “Debt” means, as to
any Person, all indebtedness, liabilities and obligations of such Person,
whether primary or secondary, direct or indirect, absolute or
contingent.

     

    “Default” means any
Event of Default and any default, event or condition which would, with the
giving of any requisite notice and/or the passage of time, constitute an Event
of Default.

     

    “Default Rate” is
20.00% per annum.

     

    “Earned Properties”
has the meaning set forth in Section
7.1(b).

     

    “Event of Default” has
the meaning set forth in Section 7.1.

     

    “Fiscal Quarter” means
a three-month period ending on the last day of March, June, September or
December of any year.

     

    “Fiscal Year” means a
twelve-month period ending on December 31 of any year.

     

    “GAAP” means those
generally accepted accounting principles and practices which are recognized as
such by the Financial Accounting Standards Board (or any generally recognized
successor) and which, in the case of Borrower: (a) are applied for all
periods in a consistent manner, and (b) are consistently applied for all
periods after the date hereof so as to properly reflect the financial condition,
and the results of operations and changes in financial position, of
Borrower.

     

    “Gross Proceeds of
Production” means the gross proceeds from the sale of hydrocarbon
production attributable to the Oil and Gas Properties and actually received by
or on behalf of Borrower during any calendar month, less Third-Party Proceeds for
the same calendar month associated with the Oil and Gas Properties.

     

    “Initial Engineering
Report” means the engineering report dated December 8, 2009, covering the
Oil and Gas Properties, prepared by Kent B. Lina, Certified Petroleum
Engineer.

     

    “Initial Financial
Statement” means the financial statement of Borrower dated as of
December 31, 2009, a copy of which has heretofore been delivered by
Borrower to Lender.

     

    “Lien” means, with
respect to any property or assets, any right or interest therein of a creditor
to secure Debt owed to him or any other arrangement with such creditor which
provides for the payment of such Debt out of such property or assets or which
allows him to have such Debt satisfied out of such property or assets prior to
the general creditors of any owner thereof, including any lien, mortgage,
security interest, pledge, deposit, production payment, rights of a vendor under
any title retention or conditional sale agreement or lease substantially
equivalent thereto, or any other charge or encumbrance for security purposes,
whether arising by law or agreement or otherwise, but excluding any right of
offset which arises without agreement in the ordinary course of
business.

     

    “Loan Documents” means
this Agreement, the Security Documents, the Note, and all other agreements,
certificates, legal opinions and other documents, instruments and writings
heretofore or hereafter delivered in connection herewith or therewith pertaining
to the Loan.

     

    “Loan” has the meaning
set forth in Section 2.1.

     

    “Maturity Date” means
December 1, 2010.

     

    
      
        
        

      

      
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    “Monthly Statement”
has the meaning set forth in Section
6.1(c).

     

    “Mortgages” means (i)
that certain Mortgage, Security Agreement, Assignment of Production and
Proceeds, Financing Statement and Fixture Filing, dated as of January 29, 2010,
from Borrower in favor of Lender, covering the Oil and Gas Properties located in
the State of Colorado, and (ii) that certain Deed of Trust, Mortgage, Security
Agreement, Assignment of Production and Proceeds, Financing Statement and
Fixture Filing, dated as of January 29, 2010, from Borrower for the benefit of
Lender, covering the Oil and Gas Properties located in the State of
Nebraska.

     

    “Net Proceeds” means
for any calendar month, Gross Proceeds of Production less the sum of
(i) Permitted Expenses paid during such calendar month and not accrued in
any previous period and (ii) Permitted Expenses accrued during the relevant
calendar month but not actually paid.

     

    “Note” has the meaning
set forth in Section 2.1.

     

    “Obligated Person”
means Borrower or any other Person now or hereafter liable for repayment of any
or all of the Obligations, whether by guaranty or otherwise.

     

    “Obligations” means
all Debt from time to time owing by Borrower to Lender under or pursuant to any
of the Loan Documents. “Obligation” means any
part of the Obligations.

     

    “Oil and Gas
Properties” has the meaning set forth in Recital A.

     

    “Permitted Expenses”
means, for each period for which the Net Proceeds is determined, the sum of the
following, to the extent only that Borrower has been billed for such or the
payment obligation of Borrower with respect thereto has otherwise accrued during
the relevant period only and to the extent not already deducted in any
remittance to Borrower and without duplication of any item: (a) lease operating
expenses attributable to the Oil and Gas Properties; (b) transportation and
marketing expenses attributable to the Oil and Gas Properties; (c) facility
lease expenses attributable to the Oil and Gas Properties; and (d) production
and ad valorem taxes attributable to Borrower’s share of Gross Proceeds of
Production.

     

    “Person” means an
individual, corporation, partnership, association, joint-stock company, trust or
trustee thereof, estate or executor thereof, limited liability company,
unincorporated organization or joint venture, court or governmental unit or any
agency or subdivision thereof, or any other legally recognizable
entity.

     

    “Security Documents”
means the Mortgages and all other security agreements, deeds of trust,
mortgages, chattel mortgages, pledges, guaranties, financing statements,
continuation statements, extension agreements and other agreements or
instruments now, heretofore, or hereafter delivered by any or all of the
Obligated Persons or any other person to Lender in connection with this
Agreement or any transaction contemplated hereby, to secure or guaranty the
payment of any part of the Obligations or the performance of any other duties
and obligations of any or all of the Obligated Persons under the Loan Documents,
whenever made or delivered.

     

    “Third-Party Proceeds”
means that portion, if any, of proceeds from the sale of hydrocarbon production
attributable to the interest of, and owned by, any Person other than Borrower in
any oil and gas property received by Borrower (including royalty interests,
overriding royalty interests, net profits interests, production payments and
other interests payable out of or measured by production).

     

    
      
        
        

      

      
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    Section
1.2 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 and modifications of
such agreement, instrument or document, provided that nothing contained in this
section shall be construed to authorize any such renewal, extension or
modification.

     

    Section
1.3 References
and Titles. All
references in this Agreement to Exhibits, Schedules, articles, sections,
subsections and other subdivisions refer to the Exhibits, Schedules, articles,
sections, subsections and other subdivisions of this Agreement unless expressly
provided otherwise. Titles appearing at the beginning of any subdivisions are
for convenience only and do not constitute any part of such subdivisions and
shall be disregarded in construing the language contained in such subdivisions.
The words “this Agreement”, “this instrument”, “herein”, “hereof”, “hereby”,
“hereunder” and words of similar import refer to this Agreement as a whole and
not to any particular subdivision unless expressly so limited The phrases “this
section” and “this subsection” and similar phrases refer only to the sections or
subsections hereof in which such phrases occur. The word “or” has the inclusive
meaning frequently identified by the phrase “and/or”. The term “including” means
“including without limitation”. Pronouns in masculine, feminine and neuter
genders shall be construed to include any other gender, and words in the
singular form shall be construed to include the plural and vice versa, unless
the context otherwise requires.

     

    Section
1.4 Calculations
And Determinations. All
interest accruing under the Loan Documents shall be calculated on the basis of
actual days elapsed (including the first day but excluding the last) and a year
of 360 days. Unless otherwise expressly provided herein or unless Lender
otherwise consents, all financial statements and reports furnished to Lender
hereunder shall be prepared and all financial computations and determinations
pursuant hereto shall be made in a manner consistent with GAAP.

     

    II.           THE
LOAN

     

    Section
2.1 The
Loan.

     

    (a) Lender
has made a term loan to Borrower in the amount of $4,500,000.00 (the “Loan”) pursuant to
the Letter Agreement.

     

    (b) Lender
and Borrower hereby agree that the Letter Agreement is deemed amended, restated
and replaced by this Agreement and the other Loan Documents.

     

    (c) The Loan
is evidenced by a promissory note made by Borrower to the order of Lender, dated
as of the Effective Date, in an amount equal to $4,500,000.00 (the “Note”). All of the
terms and conditions of the Note are incorporated herein by this
reference.

     

    (d) The Loan
shall bear interest at a rate of 15.00% per annum.

     

    Section
2.2 Mandatory
Payments. Each
month, 100% of the Net Proceeds shall be used to repay the Loan.

     

    Section
2.3 Voluntary
Prepayments.
Borrower shall have the right to prepay the Loan at any time, in whole or in
part, without penalty or premium.

     

    
      
        
        

      

      
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    III.           SECURITY;
TAXES

     

    Section
3.1 Security. The
Obligations will be secured by any and all Security Documents executed and
delivered contemporaneously with the execution and delivery of this Agreement
and any additional Security Documents hereafter delivered by any Obligated
Person.

     

    Section
3.2 Perfection And Protection Of
Security Interests And
Liens.
Borrower will from time to time deliver to Lender any amendments, financing
statements, continuation statements, extension agreements and other documents,
properly completed and executed (and acknowledged when required) by Borrower in
form and substance reasonably satisfactory to Lender, which Lender may request
for the purpose of perfecting, confirming or protecting Lender’s Liens and other
rights in the Collateral.

     

    Section 3.3 Taxes. All
payments by Borrower of principal of, and interest on, the Loan and all other
amounts payable hereunder shall be made free and clear of and without deduction
for any present or future income, excise, stamp or franchise taxes and other
taxes, fees, duties, withholdings or other charges of any nature whatsoever
imposed by any taxing authority, but excluding franchise taxes and taxes imposed
on or measured by Lender’s net income or receipts (such non-excluded items being
called “Taxes”). In the event
that any withholding or deduction from any payment to be made by Borrower
hereunder is required in respect of any Taxes pursuant to any applicable law,
rule or regulation, Borrower will: (a) pay directly to the relevant authority
the full amount required to be so withheld or deducted; (b) promptly forward to
Lender an official receipt or other documentation satisfactory to Lender
evidencing such payment to such authority; and (c) pay Lender such additional
amount or amounts as may be necessary to ensure that the net amount actually
received by Lender will equal the full amount Lender would have received had no
such withholding or deduction been required. Moreover, if any Taxes are directly
asserted against Lender with respect to any payment received by Lender
hereunder, Lender may pay such Taxes and Borrower will promptly pay such
additional amounts (including any penalties, interest or expenses) as may be
necessary in order that the net amount received by Lender after the payment of
such Taxes (including any Taxes on such additional amount) shall equal the
amount Lender would have received had not such Taxes been asserted. If Borrower
fails to pay any Taxes when due to the appropriate taxing authority or fail to
remit to Lender the required receipts or other required documentary evidence,
then Borrower shall indemnify, save and hold harmless Lender from and against
any incremental Taxes, interest or penalties that may become payable by Lender
as a result of any such failure.

     

    Section
3.4 Letters
in Lieu; Reimbursement of Permitted Expenses.
Borrower agrees to execute such letters in lieu of transfer orders, payment
orders, division orders and any other similar such instruments as may be needed
to direct payment of all proceeds from production attributable to Borrower’s
interest in the Oil and Gas Properties by purchasers of oil and gas production
into an account established in Lender’s name established for the receipt of such
funds (the “Proceeds
Account”). Borrower hereby authorizes and directs all such pipeline
companies, purchasers, transporters, operators, if appropriate, and other
parties owing monies to Borrower under contracts comprising the Oil and Gas
Properties, to pay such amounts direct to the Proceeds Account, and such
authorization shall continue until the Loan is paid in full or as otherwise
directed by Lender. No party making payment shall have any responsibility to see
to the application of any funds paid to the Proceeds Account but shall be fully
protected in making such payment as provided herein. Should Lender bring suit
against any third party for collection of any amounts or sums payable to the
Proceeds Account (and Lender shall have the right to bring any such suit), it
may sue either in its own name or in the name of Borrower with Borrower’s
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      unreasonably
withheld; provided that, if an Event of Default has occurred Borrower’s consent
shall not be required.  Each month, if Lender approves the Monthly
Statement (which approval shall not be unreasonably withheld, conditioned or
delayed), Lender will release (a) Third-Party Proceeds, (b) any Net Proceeds
associated with the Earned Properties, and (c) Permitted Expenses and any other
funds due to Borrower within 5 Business Days of receipt of each Monthly
Statement; provided, however, Lender does not hereby waive any of its rights
under the default and remedies provisions of this Agreement. All remaining funds
in the Proceeds Account after each such release shall be used to repay the
Loan.  Receipt of funds pursuant to this Section 3.4 shall not
be deemed a payment of the Loan or other Obligations until the Lender has
approved the applicable Monthly Statement and the funds described in subsections
(a), (b) and (c) above have been released, and upon such release, any remaining
amounts shall be credited at that time as a payment of the
Loan.

    

    


     

    IV.           CONDITIONS
PRECEDENT TO LOAN

     

    Section
4.1 Conditions
Precedent. Lender
shall have no obligation under this Agreement unless Lender shall have received
all of the following, duly executed and delivered and in form, substance and
date satisfactory to Lender: (a) the Note, (b) the Security Documents
(c) evidence satisfactory to Lender that the Collateral has been and
continues to be operated in a reasonable and prudent manner without giving rise
to any liabilities or obligations under any Applicable Environmental Law
(d) all other Loan Documents, and (e) such other documents,
certificates and instruments as Lender or its counsel may have reasonably
requested, such documents, certificates and instruments to be satisfactory to
Lender and its counsel in all respects in their sole discretion.

     

    V.           REPRESENTATIONS
AND WARRANTIES

     

    Section
5.1 Borrower’s
Representations and Warranties. To
induce Lender to enter into this Agreement and to make the Loan, Borrower
represents and warrants to Lender (which representations and warranties shall
survive the delivery of the Note and shall be deemed to be continuing
representations and warranties until repayment in full of the Loan)
that:

     

    (a) No Default. Borrower
is not in default in the performance of any of the covenants and agreements
contained herein. No event has occurred and is continuing which constitutes a
Default.

     

    (b) Organization and Good
Standing. Borrower is a corporation duly organized, validly existing and
in good standing under the laws of the State of Nevada, having all powers
required to carry on its business and enter into and carry out the transactions
contemplated hereby. Borrower is duly qualified, in good standing, and
authorized to do business in all other jurisdictions wherein the character of
the properties owned or held by it or the nature of the business transacted by
it makes such qualification necessary.

     

    (c) Authorization.
Borrower has duly taken all action necessary to authorize the execution and
delivery by it of the Loan Documents and to authorize the consummation of the
transactions contemplated thereby and the performance of its obligations
thereunder.

     

    (d) No Conflicts or
Consents. The execution and delivery by the various Obligated Persons of
the Loan Documents to which each is a party, the performance by each of its
obligations under such Loan Documents, and the consummation of the transactions
contemplated by the various Loan Documents, do not and will not:
(1) conflict with any provision of: (A) any domestic or foreign law,
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      (B) the
governing documents of any Obligated Person, or (C) any agreement, judgment,
license, order or permit applicable to or binding upon any Obligated Person,
(2) result in the acceleration of any Debt owed by any Obligated Person, or
(3) result in or require the creation of any Lien upon any assets or
properties of any Obligated Person except as expressly contemplated by the Loan
Documents. Except as expressly contemplated by the Loan Documents, no consent,
approval, authorization or order of, and no notice to or filing with, any court
or governmental authority or third party is required in connection with the
execution, delivery or performance by any Obligated Person of any Loan Document
or to consummate any transactions contemplated by the Loan
Documents.

    

     

    (e) Enforceable
Obligations. This Agreement is, and the other Loan Documents when duly
executed and delivered will be, legal and binding obligations of each Obligated
Person which is a party hereto or thereto, enforceable in accordance with their
respective terms, except as limited by bankruptcy, insolvency, fraudulent
conveyance or similar laws of general application relating to the enforcement of
creditors’ rights and as limited by general equitable principles.

     

    (f) Initial Financial
Statement. The Initial Financial Statement fairly presents Borrower’s
financial position at the date thereof. Since the date of the Initial Financial
Statement, no material adverse change has occurred in Borrower’s financial
condition or business.

     

    (g) Other Obligations.
Borrower has no outstanding Debt of any kind (including contingent obligations,
tax assessments, and unusual forward or long-term commitments) which is not
shown in the Initial Financial Statement or which has not been previously
disclosed in writing to Lender.

     

    (h) Full Disclosure. No
certificate, statement or other information delivered herewith or heretofore by
Borrower to Lender in connection with the negotiation of this Agreement or in
connection with any transaction contemplated hereby contains any untrue
statement of a material fact or omits to state any material fact known to
Borrower necessary to make the statements contained herein or therein not
misleading in any material respect as of the date made or deemed made. At the
date of this Agreement, Borrower is not aware of any material fact that has not
been disclosed to Lender in writing which could materially and adversely affect
Borrower’s properties, businesses, prospects or condition (financial or
otherwise). To the best of Borrower’s knowledge, the Initial Engineering Report
is based upon complete and accurate factual information in all material
respects.

     

    (i) Litigation. Except as
disclosed in the Initial Financial Statement or as otherwise previously
disclosed in writing by Borrower to Lender: (1) there are no actions, suits
or legal, equitable, arbitrative or administrative proceedings pending, or to
the knowledge of Borrower threatened, against any Obligated Person before any
federal, state, municipal or other court, department, commission, body, board,
bureau, agency, or instrumentality, domestic or foreign, which do or may
materially and adversely affect any Obligated Person, any affiliate of Borrower,
any Obligated Person’s ownership or use of any of its assets or properties, its
business or financial condition or prospects, or the right or ability of any
Obligated Person to enter into the Loan Documents or perform its obligations
thereunder and (2) there are no outstanding judgments, injunctions, writs,
rulings or orders by any such governmental entity against any Obligated Person
which have or may have any such effect.

     

    (j) Title to Properties.
Borrower has title to the Oil and Gas Properties as represented and warranted in
Section 2.1(B)
of each of the Mortgages.

     

    
      
        
        

      

      
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    (k) Place of Business.
The chief executive office and principal place of business of Borrower are
located at the addresses of Borrower set forth in the signature pages
hereto.

     

    (l) Taxes. All tax
returns required to be filed by Borrower in any jurisdiction prior to the date
hereof have been filed; all taxes, assessments, fees and other governmental
charges upon Borrower or upon any of its properties, income or franchises, which
are due and payable have been paid, or adequate reserves have been provided for
payment thereof.

     

    (m) Use of Proceeds.
Borrower is not engaged principally, or as one of its important activities, in
the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulation U or X of the Board of
Governors of the Federal Reserve System), and no part of the proceeds of Loan
will be used to purchase or carry any such margin stock or to extend credit to
any Person for the purpose of purchasing or carrying any such margin stock.
Neither Borrower nor any Person acting on Borrower’s behalf has taken or will
take any action which might cause this Agreement or the Note or the application
of the proceeds of the Loan to violate either of said Regulations U or X or
any other regulation of the Board of Governors of the Federal Reserve System or
to violate the Securities Exchange Act of 1934, in each case as now in effect or
as the same may hereafter be in effect.

     

    (n) Environmental
Matters. As of the date of this Agreement, neither Borrower nor any
property of Borrower, including any of the Oil and Gas Properties, is in
violation, in any material respect, of any Applicable Environmental Law,
assuming disclosure to the applicable governmental authorities of all relevant
facts, conditions and circumstances pertaining thereto. There is no existing,
pending or, to the best knowledge of Borrower, threatened investigation or
inquiry by any governmental authority in connection with Borrower or any
property of Borrower under any Applicable Environmental Law. Borrower has taken
all reasonable steps necessary to determine that no hazardous substances or
solid wastes have been disposed of or otherwise released on or to any of the Oil
and Gas Properties or any other property of Borrower. Borrower has not caused or
permitted the disposal or other release of any hazardous substance or solid
waste (as defined in any Applicable Environmental Law) on or to any of the Oil
and Gas Properties or any other property of Borrower, except in accordance with
all Applicable Environmental Laws.

     

    (o) Investment Company Act Not
Applicable. Borrower is not an “investment company” or a person
“controlled” by an “investment company” within the meaning of the Investment
Company Act of 1940, as amended.

     

    (p) Capital
Structure.  As of the Effective Date, 10,991,889 shares of
Borrower’s common stock are issued and outstanding, and such common stock
represents all of the issued stock of Borrower.  The 1,000,000 shares
of common stock in the Borrower, to be issued to Lender pursuant to
Section 6.1(b)(5) below, have been duly and validly authorized for issuance
by Borrower and when issued by Borrower to Lender will be duly authorized,
validly issued, fully paid and non-assessable and will not be subject to any
preemptive or similar rights.

     

    VI.           COVENANTS
OF BORROWER

     

    Section
6.1 Affirmative
Covenants.
Borrower warrants, covenants and agrees that, until the full and final payment
of the Obligations and the termination of this Agreement, unless Lender has
previously agreed otherwise in writing:

     

    
      
        
        

      

      
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    (a) Payment and
Performance. Borrower will pay all amounts due under the Loan Documents
in accordance with the terms thereof and will in all respects observe, perform
and comply with every covenant, term and condition in the Loan
Documents.

     

    (b) Post-Effective Date
Deliverables. On or prior to February 25, 2010, Borrower will deliver to
Lender:

     

    (1) the
Note;

     

    (2) duly
executed copies of all Security Documents necessary to create first and prior
Liens in the Oil and Gas Properties in favor of Lender;

     

    (3) copies of
the letters in lieu of transfer orders, payment orders, division orders and
other similar such instruments described in Section 3.4;
and

     

    (4) stock
certificates representing 1,000,000 newly issued shares of Borrower’s common
stock, par value $0.0001 per share, duly issued to Lender, as
stockholder.

     

    (c) Monthly Statements.
Within 20 Business Days of the end of each calendar month, Borrower shall
deliver a statement to Lender (a “Monthly Statement”),
setting forth for the prior month: (a) the amount of production sold from the
Oil and Gas Properties (excluding any production sold from the Earned
Properties) and the price received for such production, (b) the production sold
from the Earned Properties and the price received for such production, (c)
Third-Party Proceeds paid to Lender identified by third-party and amount,
(d) reimbursements of Permitted Expenses, (e) the dollar amount and
estimated time remaining before Borrower has recovered all of its costs of
drilling, testing, completing and operating the Earned Properties, (f) the
status of Borrower’s capital raising efforts, and (g) such other
information as Lender may reasonably request.

     

    (d) Books, Financial Statements
and Records. Borrower will at all times maintain full and accurate books
of account and records, will maintain a standard system of accounting in
accordance with GAAP and will furnish the following statements and reports to
Lender at Borrower’s expense: (1) as soon as available and in any event within
60 days after the end of each Fiscal Quarter, commencing with the Fiscal
Quarter ending March 31, 2010, unaudited consolidated and consolidating
financial statements of Borrower for such Fiscal Quarter and for the
then-current Fiscal Year, prepared by Borrower in reasonable detail and in
accordance with GAAP and containing at least a balance sheet, statements of
earnings and cash flow and a reconciliation of Borrower’s equity, setting forth
in comparative form the corresponding figures for the preceding Fiscal Year,
each certified as true by an officer of Borrower; (2) by June 30, 2010, update
of the Initial Engineering Report, and (3) by April 1 of each year,
commencing April 1, 2011, an engineering report and economic evaluation
prepared as of the preceding December 31 by one or more independent
petroleum engineers chosen by Borrower and reasonably acceptable to Lender,
covering the Oil and Gas Properties. Each such engineering report shall be in
form and substance satisfactory to Lender and shall contain information and
analysis comparable in scope to that contained in the Initial Engineering
Report.

     

    (e) Other Information and
Inspections. Borrower will furnish to Lender any information which Lender
may from time to time reasonably request concerning any covenant, provision or
condition of the Loan Documents or any matter in connection with Borrower’s
business and operations. Borrower will permit representatives appointed by
Lender, including independent 

     

    
      
        
        

      

      
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      accountants,
agents, attorneys, appraisers and any other persons, to visit and inspect, at
their sole risk (and, except during the continuance of an Event of Default, at
their cost and expense), any of Borrower’s property, including its books of
account, other books and records, and any facilities or other business assets,
and to make extra copies therefrom and photocopies and photographs thereof, and
to write down and record any information such representatives obtain, and
Borrower shall permit Lender or its representatives to investigate and verify
the accuracy of the information furnished to Lender in connection with the Loan
Documents and to discuss all such matters with its officers, managers, employees
and representatives.

    

     

    (f) Notice of Material
Events. Borrower will promptly notify Lender: (1) of any material
adverse change in the financial condition of Borrower, (2) of the
occurrence of any Default, (3) of the acceleration of the maturity of any
Debt owed by Borrower or of any material default by Borrower under any
indenture, mortgage, agreement, contract or other instrument to which Borrower
is a party or by which Borrower or any of Borrower’s properties is bound,
(4) of any uninsured claim of $50,000 or more asserted against Borrower or
any of its properties, and (5) of the filing of any suit or proceeding
against Borrower (or the occurrence of any material development in any such suit
or proceeding) in which an adverse decision could have a material adverse effect
upon Borrower’s financial condition, business or operations (or could result in
a judgment not covered by insurance of $50,000 or more against Borrower). Upon
the occurrence of any of the foregoing, Borrower will take all necessary or
appropriate steps to remedy promptly any such material adverse change, Default,
or default, to protect against any such adverse claim, to defend any such suit
or proceeding, and to resolve all controversies on account of any of the
foregoing. Borrower will also notify Lender in writing at least 20 Business Days
prior to the date that Borrower changes its name or the location of its chief
executive office or principal place of business or the place where it keeps its
books and records concerning the Collateral.

     

    (g) Maintenance of Existence and
Qualifications. Borrower will maintain and preserve its existence and its
rights and franchises in full force and effect and will qualify to do business
in all states or jurisdictions where required by applicable law, except where
the failure so to qualify will not have any material adverse effect on
Borrower.

     

    (h) Maintenance of
Properties. Borrower will in all respects maintain, preserve, protect and
keep all property operated by Borrower and used or useful in the conduct of its
business in accordance with the standards of a reasonable and prudent operator,
and for all other property of Borrower, will use commercially reasonable efforts
to cause all such other property to be maintained, preserved and kept in
accordance with the standards of a reasonable and prudent operator.

     

    (i) Payment of Trade Debt,
Taxes, etc. Borrower will: (1) timely file all required tax returns;
(2) timely pay all taxes, assessments, and other governmental charges or
levies imposed upon it or upon its income, profits or property; (3) pay all
Debt owed by it on ordinary trade terms to vendors, suppliers and other Persons
providing goods and services used by it in the ordinary course of its business;
and (4) maintain appropriate accruals and reserves for all of the foregoing
Debt in accordance with its present system of accounting. Borrower will pay and
discharge in all material respects, when due, all other Debt, taxes or
assessments now or hereafter owed by it. Borrower may, however, delay paying or
discharging any such Debt so long as it is in good faith contesting the validity
thereof by appropriate proceedings and has set aside on its books adequate
reserves therefor.

     

    (j) Insurance. Borrower
will maintain with financially sound and reputable insurance companies insurance
with respect to its business, operations and properties, in at least such
amounts and against at least such risks as are usually insured against in the
same general area by companies of established repute engaged in the same or a
similar business.

     

    
      
        
        

      

      
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    (k) Payment of Expenses.
Borrower will be responsible for payment of all reasonable costs and expenses
incurred by or on behalf of Lender (including attorneys’ fees) in connection
with: (1) the preparation, execution and delivery of this Agreement and the
other Loan Documents (including any and all future amendments or supplements
thereto or restatements thereof), and any and all consents, waivers or other
documents or instruments relating thereto, (2) the filing, recording,
refiling and re-recording of any Security Documents and any other documents or
instruments or further assurances required to be filed or recorded or refiled or
re-recorded by the terms of any Loan Document, (3) the examination of
Borrower’s title to the Collateral, and (4) the enforcement, after the
occurrence of a Default or an Event of Default, of the Loan
Documents.  All payments referred to in the prior sentence, and all
expenses related to the update to the Initial Engineering Report referred to in
Section
6.2(d)(2), shall be paid pursuant to Section 5.10 of each of the
Mortgages.

     

    (l) Performance on Borrower’s
Behalf. If Borrower fails to pay any taxes, insurance premiums or other
amounts it is required to pay under any Loan Document, Lender may pay the same.
Borrower shall immediately reimburse Lender for any such payments, and each
amount paid shall constitute a part of the Obligations, shall be secured by the
Security Documents and shall bear interest at the Default Rate, from the date
such amount is paid by Lender until the date such amount is repaid to
Lender.

     

    (m) Compliance with Agreements
and Law. Borrower will perform all obligations it is required to perform
under the terms of each indenture, mortgage, deed of trust, security agreement,
lease, franchise, agreement, contract or other instrument or obligation to which
it is a party or by which it or any of its properties is bound in such a way
that they result in no material adverse effect upon the Oil and Gas Properties
or Borrower’s ability to perform its obligations under this Agreement. Borrower
will in all respects conduct its business and affairs in compliance with all
laws, regulations, and orders applicable thereto (including those relating to
pollution and other environmental matters).

     

    (n) Certifications of
Compliance. Borrower will furnish to Lender at Borrower’s expense all
certifications which Lender from time to time reasonably requests, as to the
accuracy and validity of or compliance with all representations, warranties and
covenants made by Borrower in the Loan Documents, the satisfaction of all
conditions contained therein, and all other matters pertaining
thereto.

     

    (o) Additional Security
Documents; Amendments. Promptly after a request therefor by Lender at any
time and from time to time, Borrower will execute and deliver to Lender such
additional Security Documents or amendments to existing Security Documents as
Lender may deem necessary or appropriate in order to grant to Lender a first
priority perfected lien on and security interest in the Oil and Gas Properties.
Without limiting the foregoing, upon receipt of assignments covering the Earned
Properties, Borrower shall promptly execute amendments to the Security Documents
to reflect Borrower’s ownership of the Earned Properties.

     

    (p) Environmental
Matters. Borrower will promptly notify Lender in writing of any existing,
pending or threatened investigation or inquiry by any governmental authority in
connection with any Applicable Environmental Law of which Borrower becomes
aware. Borrower will take all reasonable steps necessary to ensure that no
hazardous substances or solid wastes will be disposed of 

     

    
      
        
        

      

      
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      or
otherwise released on or to any of the property owned by Borrower in violation
of any Applicable Environmental Law. Borrower will keep all of its property in
all respects free of any hazardous substance or solid waste (other than
hazardous substances and solid wastes normally used or generated in the ordinary
course of operation of Borrower’s facilities and that are properly stored,
maintained and disposed of in accordance with Applicable Environmental Laws) and
will remove the same (or if removal is prohibited by law, take, at its sole
expense, whatever actions are required by law) in accordance with Applicable
Environmental Laws. Upon Lender’s request, at any time and from time to time
during the term of this Agreement (but no more often than once per calendar year
in the absence of the occurrence and continuance of an Event of Default),
Borrower will provide to Lender, at Borrower’s sole expense, an inspection or
audit, to be conducted by an engineering or consulting firm approved by Lender,
of the properties owned or operated by Borrower indicating the compliance by
Borrower in all material respects with all Applicable Environmental
Laws.

    

     

    (q) Registration Rights.
If at any time prior to payment in full of the Debt Borrower grants registration
rights covering any of the stock of Borrower to any other equity investor in
Borrower, then Borrower agrees to grant similar registration rights to
Lender.

     

    (r) Insurance.  On
or prior to March 31, 2010, Borrower shall deliver to Lender certificates from
Borrower’s insurance broker setting forth the insurance maintained by Borrower,
stating that such insurance is in full force and effect, and naming Lender as an
additional insured.

     

    Section
6.2 Negative
Covenants.
Borrower warrants, covenants and agrees that until the full and final payment of
the Obligations and the termination of this Agreement, unless Lender has
previously agreed otherwise in writing:

     

    (a) Limitation on Liens.
Borrower will not create, assume or permit to exist any mortgage, deed of trust,
pledge, encumbrance, lien or charge of any kind (including any security interest
in or vendor’s lien on property purchased under conditional sales or other title
retention agreements and including any lease intended as security or in the
nature of a title retention agreement) upon any of Borrower’s properties or
assets, whether now owned or hereafter acquired, except: (i) Liens at any time
existing in favor of Lender; and (ii) statutory Liens for taxes, statutory or
contractual mechanics’ and materialmen’s Liens incurred in the ordinary course
of business, and other similar Liens incurred in the ordinary course of
business; provided that such Liens secure only Debt which is not delinquent or
which is being contested as provided in Section 6.1(h).

     

    (b) Additional Debt.
Borrower will not create, incur, assume or permit to exist Debt of Borrower
except (i) the Loan, and (ii) Debt described in Section
6.1(i).

     

    (c) Limitation on Sales of
Collateral. Borrower will not sell, transfer, lease, exchange, alienate
or dispose of any of the Collateral except as follows (and the following
exceptions shall be subject to any limitations contained in the Security
Documents) (i) oilfield equipment, service and supply assets sold in the
ordinary course of business and (ii) inventory (including oil and gas sold
as produced) which is sold in the ordinary course of business.

     

    (d) Limitation on Credit
Extensions. Borrower will not extend credit, make advances or make
loans.

     

    (e) Fiscal Year. Borrower
will not change its fiscal year.

     

    
      
        
        

      

      
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    (f) Amendment of
Contracts. Borrower will not amend or permit any amendment to (to the
extent that Borrower has the power to prevent such amendment) any contract which
could reasonably be foreseen to release, qualify, limit, make contingent or
otherwise have any material adverse effect upon, the rights and benefits of
Lender under or acquired pursuant to any of the Security Documents.

     

    (g) Reorganizations;
Combinations; Change of Control. Borrower will not change its name or the
nature of its business, reorganize, liquidate, dissolve, enter into any merger
or other combination, or permit to occur any change in control of Borrower from
that in existence on the date hereof.

     

    (h) Hedging Transactions.
Without Lender’s prior written consent, Borrower will not at any time enter into
or be or become a party to any one or more hedging transactions with respect to
its oil and gas production.  If Borrower enters into a hedging
transaction with Lender’s prior written consent, and at any time prior to the
earlier of the  Maturity Date or the full and final payment of the
Obligations, Borrower is thereafter required to make a margin call payment in
connection with such hedging transaction, Borrower shall have the right, upon
reasonable prior notice to Lender, to request an advance on the Loan in the
amount of the required margin call payment, and Lender shall make such advance,
subject to satisfaction of the conditions set forth below.  Any such
advance made by Lender shall increase the principal amount outstanding on the
Loan, and shall bear interest at the rate provided in Section
2.1(d).  Lender’s obligation to make an advance to Borrower pursuant
to this Section 6.2(h) shall be subject to the following
conditions:

     

    (1) No
Default or Event of Default shall have occurred under any Loan
Documents;

     

    (2) The
maximum amount of advances made by Lender under this Section 6.2(h) shall
not exceed $2,250,000 in the aggregate; and

     

    (3) If the
amount of any such advance would cause the total amount outstanding under the
Loan to exceed $4,500,000, execution of an amendment to the Note to reflect the
new outstanding balance.

     

    Lender
and Borrower agree to promptly enter into such amendments of the Loan Documents
as may be necessary or appropriate to properly document the obligations under
this Section 6.2(h).

     

    (i) Capital Expenditures;
Development Drilling. Borrower will not make (whether in one transaction
or a series of transactions) capital expenditures, including expenses for
development drilling, for the period from the Effective Date until the repayment
in full of the Obligations; provided however, Borrower
shall be permitted to make capital expenditures necessary to retain the Earned
Properties.

     

    VII.           EVENTS
OF DEFAULT AND REMEDIES

     

    Section
7.1 Events
of Default. Each of
the following events constitutes an Event of Default under this
Agreement:

     

    
      
        
        

      

      
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    (a) Borrower
fails to pay any Obligation when due and payable, whether at a date for the
payment of a fixed installment or contingent or other payment to Lender or as a
result of acceleration or otherwise; or

     

    (b) Borrower
fails to raise sufficient capital to enable it to meet Borrower’s drilling
obligations necessary to earn and retain the Comanche Prospect Leases and Omega
Prospect Leases, as set forth in Section 11 of that certain Purchase and Sale
Agreement, dated January 29, 2010, between Borrower, as buyer, and Edward Mike
Davis, L.L.C., as seller (the “Earned
Properties”).

     

    (c) Borrower
fails to raise sufficient capital prior to October 29, 2010 to enable it to
repay the Obligations in full prior to the Maturity Date.

     

    (d) Any
“default” or “event of default” occurs under any Loan Document which defines
either term; or

     

    (e) Borrower
fails to duly observe, perform or comply with any covenant, agreement, condition
or provision of any Loan Document;

     

    (f) Any
representation or warranty previously, presently or hereafter made in writing by
or on behalf of any Obligated Person in connection with any Loan Document shall
prove to have been false or incorrect in any material respect on any date on or
as of which made; or

     

    (g) Any
Obligated Person:

     

    (1) suffers
the entry against it of a judgment, decree or order for relief by a court of
competent jurisdiction in an involuntary proceeding commenced under any
applicable bankruptcy, insolvency or other similar law of any jurisdiction now
or hereafter in effect, including the federal Bankruptcy Code, as from time to
time amended, or has any such proceeding commenced against it which remains
undismissed for a period of 60 days; or

     

    (2) suffers
the appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official for a substantial part of its assets or for any
part of the Oil and Gas Properties in a proceeding brought against or initiated
by it, and such appointment is neither made ineffective nor discharged within
60 days after the making thereof, or such appointment is consented to,
requested by, or acquiesced to by it; or

     

    (3) commences
a voluntary case under any applicable bankruptcy, insolvency or similar law now
or hereafter in effect, including the federal Bankruptcy Code, as from time to
time amended; or applies for or consents to the entry of an order for relief in
an involuntary case under any such law or to the appointment of or taking
possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator
or other similar official of any substantial part of its assets or any part of
the Oil and Gas Properties; or makes a general assignment for the benefit of
creditors; or fails generally to pay (or admits in writing its inability to pay)
its debts as such debts become due; or takes action in furtherance of any of the
foregoing; or

     

    (4) suffers
the entry against it of a final judgment for the payment of money in excess of
$100,000 (not covered by insurance), unless the same is discharged within 60
days after the date of entry thereof or an appeal or appropriate proceeding for
review thereof is taken within such period and a stay of execution pending such
appeal is obtained; or

     

    
      
        
        

      

      
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    (5) suffers
the entry of an order issued by any court or tribunal taking, seizing or
apprehending all or any substantial part of its property or any part of the Oil
and Gas Properties and bringing the same into the custody of such court or
tribunal, and such order is not stayed or released within 30 days after the
entry thereof; or

     

    (h) Any
default, including the expiration of any applicable period of grace, occurs with
respect to any other indebtedness owed by Borrower to any Person.

     

    Upon the
occurrence of an Event of Default described in subsection (f)(1), (f)(2) or
(f)(3) of this Section
7.1, all of the Obligations shall thereupon be immediately due and
payable, without presentment, demand, protest, notice of protest, declaration or
notice of acceleration or intention to accelerate, or any other notice or
declaration of any kind, all of which are hereby expressly waived by Borrower.
During the continuance of any other Event of Default, Lender at any time and
from time to time (unless all Events of Default have theretofore been remedied)
may declare any or all of the Obligations immediately due and payable, and all
such Obligations shall thereupon be immediately due and payable.

     

    Section
7.2 Remedies. If any
Event of Default shall occur, Lender may protect and enforce its rights under
the Loan Documents by any appropriate proceedings, including proceedings for
specific performance of any covenant or agreement contained in any Loan
Document, and Lender may enforce the payment of any Obligations due or enforce
any other legal or equitable right. All rights, remedies and powers conferred
upon Lender under the Loan Documents shall be deemed cumulative and not
exclusive of any other rights, remedies or powers available under the Loan
Documents or at law or in equity.

     

    Section
7.3 Indemnity.
Borrower hereby agrees to indemnify, defend and hold harmless Lender and its
successors and assigns and the respective agents, affiliates, officers,
directors and employees of Lender and its successors and assigns from and
against any and all claims, losses, demands, actions, causes of action and
liabilities whatsoever (including reasonable attorneys’ fees and expenses and
costs and expenses reasonably incurred in investigating, preparing or defending
against any litigation or claim, action, suit, proceeding or demand of any kind
or character) arising out of or resulting from: (a) the Loan Documents
(including the enforcement thereof), except to the extent such claims, losses
and liabilities are proximately caused by Lender’s gross negligence, bad faith
or willful misconduct, (b) any violation of any Applicable Environmental
Law, (c) any act, omission, event or circumstance resulting from or in
connection with the ownership, construction, occupancy, operation, use and/or
maintenance of the Oil and Gas Properties, regardless of whether the act,
omission, event or circumstance constituted a violation of any Applicable
Environmental Law at the time of its existence of occurrence, and (d) any
and all claims or proceedings (whether brought by a private party or
governmental agencies) for bodily injury, property damage, abatement or
remediation, environmental damage or impairment or any other injury or damage
resulting from or relating to any hazardous or toxic substance, solid waste or
contaminated material located upon or migrating into, from or through any of the
Oil and Gas Properties (whether or not the release of such materials was caused
by Borrower, a tenant or subtenant or a prior owner, tenant or subtenant on the
Oil and Gas Properties and whether or not the alleged liability is attributable
to the handling, storage, generation, transportation, removal or disposal of
such substance, waste or material or the mere presence of such substance, waste
or material on the Oil and Gas Properties), for which Lender may have liability
due to the making of the Loan, the granting of the Security Documents, the
exercise of Lender’s rights under the Loan Documents or Otherwise. WITHOUT
LIMITATION, IT IS THE INTENTION OF BORROWER, AND BORROWER AGREES, THAT THE
FOREGOING INDEMNITIES
SHALL APPLY TO EACH INDEMNIFIED PARTY WITH RESPECT TO CLAIMS, DEMANDS,
LIABILITIES, LOSSES, DAMAGES, CAUSES OF ACTION, JUDGMENTS, PENALTIES, COSTS AND
EXPENSES (INCLUDING REASONABLE ATTORNEYS’ FEES) WHICH IN WHOLE OR IN PART ARE
CAUSED BY OR ARISE OUT OF THE NEGLIGENCE OF SUCH (AND/OR ANY OTHER) INDEMNIFIED
PARTY. 

     

    
      
        
        

      

      
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    However,
such indemnities shall not apply to any particular indemnified party (but shall
apply to the other indemnified parties) to the extent the subject of the
indemnification is caused by or arises out of the gross negligence, bad faith or
willful misconduct of such particular indemnified party. The foregoing
indemnities shall not terminate upon the Maturity Date or upon the release,
foreclosure or other termination of the Security Documents, but will survive the
Maturity Date, foreclosure of the Security Documents or conveyances in lieu of
foreclosure, and the repayment of the Loan and the discharge and release of the
Security Documents and the other documents evidencing and/or securing the
Loan.

     

    VIII.           MISCELLANEOUS

     

    Section
8.1 Waiver
and Amendment. No
failure or delay by Lender in exercising any right, power or remedy which it may
have under any of the Loan Documents shall operate as a waiver thereof or of any
other right, power or remedy, nor shall any single or partial exercise by Lender
of any such right, power or remedy preclude any other or further exercise
thereof or of any other right, power or remedy. No waiver of any provision of
any Loan Document and no consent to any departure therefrom shall ever be
effective unless it is in writing and signed by Lender, and then such waiver or
consent shall be effective only in the specific instances and for the purposes
for which given and to the extent specified in such writing. No notice to or
demand on any Obligated Person shall in any case of itself entitle any Obligated
Person to any other or further notice or demand in similar or other
circumstances. No modification or amendment of or supplement to this Agreement
or the other Loan Documents shall be valid or effective unless the same is in
writing and signed by the party against whom it is sought to be
enforced.

     

    Section
8.2 Survival
of Agreements; Cumulative Nature. All of
the Obligated Persons’ various representations, warranties, covenants and
agreements in the Loan Documents shall survive the execution and delivery of
this Agreement and the other Loan Documents and the performance hereof and
thereof, including the making or granting of the Loan and the delivery of the
Note and the other Loan Documents, and shall further survive until all of the
Obligations are paid in full to Lender and all of Lender’s obligations to
Borrower are terminated. All statements and agreements contained in any
certificate or other instrument delivered to Lender under any Loan Document
shall be deemed representations and warranties by Borrower to Lender and/or
agreements and covenants of Borrower under this Agreement. The representations,
warranties, and covenants made by the Obligated Persons in the Loan Documents,
and the rights, powers, and privileges granted to Lender in the Loan Documents,
are cumulative, and no Loan Document shall be construed in the context of
another to diminish, nullify, or otherwise reduce the benefit to Lender of any
such representation, warranty, covenant, right, power or privilege. In
particular and without limitation, no exception set out in this Agreement to any
representation, warranty or covenant herein contained shall apply to any similar
representation, warranty or covenant contained in any other Loan Document, and
each such similar representation, warranty or covenant shall be subject only to
those exceptions which are expressly made applicable to it by the terms of the
various Loan Documents.

     

    
      
        
        

      

      
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    Section
8.3 Notices. All
notices, requests, consents, demands and other communications required or
permitted under any Loan Document shall be in writing and, unless otherwise
specifically provided in such Loan Document, shall be deemed sufficiently given
or furnished if delivered by personal delivery, by expedited delivery service
with proof of delivery, or by registered or certified United States mail, return
receipt requested, postage prepaid, at the addresses specified on the signature
pages hereto (unless changed by similar notice in writing given by the
particular Person whose address is to be changed). Any such notice or
communication shall be deemed to have been given upon receipt.

     

    Section
8.4 Parties
in Interest. All
grants, covenants and agreements contained in the Loan Documents shall bind and
inure to the benefit of the parties thereto and their respective successors and
assigns; provided, however, that no Obligated Person may assign or transfer any
of its rights or delegate any of its duties or obligations under any Loan
Document without the prior consent of Lender.

     

    Section
8.5 Governing
Law. The
Loan Documents shall be deemed contracts and instruments made under the laws of
the State of Colorado and shall be construed and enforced in accordance with and
governed by the laws of the State of Colorado and the laws of the United States
of America, except (a) to the extent that the law of another jurisdiction
is expressly elected in a Loan Document, and (b) with respect to specific
Liens, or the perfection thereof, evidenced by Security Documents covering real
or personal property which by the laws applicable thereto are required to be
construed under the laws of another jurisdiction. Borrower hereby irrevocably
submits itself to the non-exclusive jurisdiction of the state and federal courts
of the State of Colorado.

     

    Section
8.6 Limitation
on Interest. Lender
and the Obligated Persons intend to contract in strict compliance with
applicable usury law from time to time in effect. In furtherance thereof such
persons stipulate and agree that none of the terms and provisions contained in
the Loan Documents shall ever be construed to create a contract to pay, for the
use, forbearance or detention of money, interest in excess of the maximum amount
of interest permitted to be charged by applicable law from time to time in
effect. Neither any Obligated Person nor any present or future guarantors,
endorsers, or other Persons hereafter becoming liable for payment of any
Obligation shall ever be liable for unearned interest thereon or shall ever be
required to pay interest thereon in excess of the maximum amount that may be
lawfully charged under applicable law from time to time in effect, and the
provisions of this section shall control over all other provisions of the Loan
Documents which may be in conflict or apparent conflict herewith. Lender
expressly disavows any intention to charge or collect excessive unearned
interest or finance charges in the event the maturity of any Obligation is
accelerated. If: (a) the maturity of any Obligation is accelerated for any
reason, (b) any Obligation is prepaid and as a result any amounts held to
constitute interest are determined to be in excess of the legal maximum, or
(c) Lender or any other holder of any or all of the Obligations shall
otherwise collect moneys which are determined to constitute interest which would
otherwise increase the interest on any or all of the Obligations to an amount in
excess of that permitted to be charged by applicable law then in effect, then
all such sums determined to constitute interest in excess of such legal limit
shall, without penalty, be promptly applied to reduce the then outstanding
principal of the related Obligations or, at Lender’s option, promptly returned
to Borrower or the other payor thereof upon such determination.

     

    Section
8.7 Severability. If any
term or provision of any Loan Document shall be determined to be illegal or
unenforceable all other terms and provisions of the Loan Documents shall
nevertheless remain effective and shall be enforced to the fullest extent
permitted by applicable law.

     

    
      
        
        

      

      
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    Section
8.8 Counterparts. This
Agreement may be separately executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed shall be deemed to constitute one and the same Agreement. Delivery of
this Agreement and the other documents to be delivered in connection herewith by
any party may be effected, without limitation, by faxing a signed counterpart of
any such document to Lender (any party that effects delivery in such manner
hereby agreeing to transmit promptly to each of the other parties an actual
signed counterpart).

     

    Section
8.9 Conflicts. To the
extent of any irreconcilable conflicts between the provisions of this Agreement
and the provisions of any of the Loan Documents, the provisions of this
Agreement shall prevail.

     

    Section
8.10 Entire
Agreement. This
Agreement, the Note, the Security Documents and the other Loan Documents from
time to time executed in connection herewith state the entire agreement between
the parties with respect to the subject matter hereof.

     

    Section
8.11 Waiver
Of Jury Trial.
EACH OF BORROWER AND LENDER HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION: (A) ARISING UNDER THIS AGREEMENT
OR ANY OTHER LOAN DOCUMENT, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM IN RESPECT OF
THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT. EACH OF BORROWER AND LENDER HEREBY
AGREES THAT THE OTHER MAY FILE A COPY OF THIS AGREEMENT WITH ANY COURT AS
WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR
RIGHTS TO TRIAL BY JURY.

     

    [Signature
Page follows]

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

     

    IN
WITNESS WHEREOF, this Agreement is executed as of the date first written
above.

     

    
      	
              Borrower:

            
	 
      
	
              RECOVERY
      ENERGY, INC.

            
	
              By:

            	
              /s/
      Jeffrey A. Beunier

            
	 
      	
              Jeffrey
      A. Beunier, Chief Executive Officer

            
	 
      	 
      
	 
      	 
      
	 
      	 
      
	
              Address:

            	
              1515
      Wynkoop Street, Suite 200

            
	 
      	
              Denver,
      Colorado 80202

            
	 
      	 
      
	 
      	 
      
	
              Facsimile:

            	
              (888)
      887-4449

            
	 
      	 
      
	 
      	 
      
	 
      	 
      
	
              Lender:

            
	 
      
	
              HEXAGON
      INVESTMENTS, LLC

            
	 
      
	
              By:   Hexagon
      Investments, Inc., Manager

            
	
              By:

            	
              /s/
      Brian Fleischmann

            
	 
      	
              Brian
      Fleischmann, President

            
	 
      	 
      
	 
      	 
      
	 
      	 
      
	
              Address:

            	
              730
      17th Street, Suite 800

            
	 
      	
              Denver,
      Colorado 80202

            
	 
      	 
      
	 
      	 
      
	
              Facsimile:

            	
              (303)
      571-1221

            
	 
      	 
      


    

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

    


    EXHIBIT
A

    OIL AND GAS
PROPERTIES

    


    WILKE (DILL EAST FIELD)
LEASES and LANDS:

     

    
    

     

    
      	Lessor:	Gary
      L. Schneider, Individually and as heir of Maxine Schneider,
      deceased
	Lessee: 	Edward Mike Davis,
      L.L.C.
	Dated: 	May 20,
    2008
	Recorded:	Book 206 OG, Page
      44
	Description: 	Township 15 North,
      Range 56 West
	 	Section
      5:  S/2


    

     

    
      	Lessor:	Peggy
      Atkins and Howard Atkins, wife and husband
	Lessee:  	Edward Mike Davis,
      L.L.C.
	Dated:	May 20,
    2008
	Recorded: 	Book 206 OG, Page
      48
	Description: 	Township 15 North,
      Range 56 West
	 	Section
      5:  S/2


    

     

    
      
        	Lessor:	Galeen
      B. Hergenrader and Kenneth Hergenrader, wife and
  husband
	Lessee:    	Edward Mike Davis,
      L.L.C.
	Dated:  	May 16,
    2008
	Recorded: 	Book 206 OG, Page
      52
	Description:  	Township 15 North,
      Range 56 West
	 	Section
      5:  S/2


      

       

    

    
      
        	Lessor:	Paula
      Wilke, a/k/a Paula J. Wilke and Erwin Wilke, Jr., wife and
      husband
	Lessee:	Edward Mike Davis,
      L.L.C.
	Dated:  	June 26,
    2008
	Recorded:  	Book 206 OG, Page
      132
	Description:   	Township 15 North,
      Range 56 West
	 	Section
      5:  S/2


      

       

    

    
      	Amendment of Oil and
      Gas Dated: 	July 9,
    2008
	Recorded: 	Book 206 OG, Page
      221
	Description:  	Township 15 North,
      Range 56 West
	 	Section
      5:  S/2


    

     

    
    

    WILKE (DILL EAST FIELD)
WELLS

     

    
      	Well
      Name: 	Wilke
  24-5
	Located:	SE/4SW/4 of Section
      5, T15N-R56W, Kimball County, NE
	API:  26105226270000   	Working
      Interest:  87.50%    Net Revenue
      Interest: 70.00%
	Equipment and
      Inventory:	consisting of a
      pumping unit, rods, tubing and casing


    

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

     

    
      	Well Name:	Wilke
  23-5
	Located: 	NE/4SW/4 of Section
      5, T15N-R56W, Kimball County, NE
	API:  26105226250000	Working
      Interest:  87.50%    Net Revenue
      Interest: 70.00%
	Equipment and
      Inventory:	consisting of a
      pumping unit, rods, tubing and casing


    

     

    
      
        	Well
      Name:  	Wilke
  34-5
	Located:	SW/4SE/4 of Section
      5, T15N-R56W, Kimball County, NE
	API:  26105226290000 	Working
      Interest:  87.50%    Net Revenue
      Interest: 70.00%
	Equipment and
      Inventory:	consisting of a
      pumping unit, rods, tubing and casing


      

       

    

    
      	Well
      Name: 	Wilke
  33-5
	Located: 	NW/4SE/4 of Section
      5, T15N-R56W, Kimball County, NE
	API:  26105226280000    	Working
      Interest:  87.50%    Net Revenue
      Interest: 70.00%
	Equipment and
      Inventory: 	consisting of a
      pumping unit, rods, tubing and casing


    

     

    
      	Well
      Name: 	Wilke
  44-5
	Located: 	SE/4SE/4 of Section
      5, T15N-R56W, Kimball County, NE
	API:  26105226320000  	Working
      Interest:  87.50%    Net Revenue
      Interest: 70.00%
	Equipment and
      Inventory:	consisting of a
      pumping unit, rods, tubing and casing


    

     

    
      	Well
      Name: 	Wilke
  14-5
	Located: 	SW/4SW/4 of Section
      5, T15N-R56W, Kimball County, NE
	API:  26105226520000	Working
      Interest:  87.50%    Net Revenue
      Interest: 70.00%
	Equipment and
      Inventory:	consisting of a
      pumping unit, rods, tubing and casing


    

     

    Wilke
Tank Battery consisting of 8 400 bbl tanks and an 8 foot treater.

    


    LUKASSEN LEASES and
LANDS:

     

    
      	Lessor:	Antelope Energy
      Company, LLC, a Colorado limited liability company
	Lessee: 	Edward Mike Davis,
      L.L.C.
	Dated:	August 4,
    2008
	Recorded: 	Book 206 OG, Page
      647
	Covering:	INSOFAR AND ONLY
      INSOFAR AS THE LEASE COVERS:
	 	TOWNSHIP 16 NORTH,
      RANGE 56 WEST, 6th
  P.M.
	 	Section
      34:  S/2SW/4SW/4


    

     

    
      	Lessor:	Marian J. Payne, a
      single woman
	Lessee:	Edward Mike Davis,
      L.L.C.
	Dated:  	July 25,
    2008
	Recorded: 	Book 206 OG, Page
      487
	Correction of
      Description Recorded: 	Book 207, Page
      354
	Covering:  	INSOFAR AND ONLY
      INSOFAR AS THE LEASE COVERS:
	 	TOWNSHIP 15 NORTH,
      RANGE 56 WEST, 6th
  P.M.
	 	Section
      3:  N/2 of Lot 4, also described as
  N/2NW/4NW/4


    

     

    
      	Lessor:	Judith
      Ann Mays, a married woman dealing in her sole and separate
      property
	Lessee: 	Edward Mike Davis,
      L.L.C.
	Dated:   	July 25,
    2008
	Recorded:	Book 206 OG, Page
      487
	Correction of
      Description Recorded: 	Book 207, Page
      356
	Covering: 	INSOFAR AND ONLY
      INSOFAR AS THE LEASE COVERS:
	 	TOWNSHIP 15 NORTH,
      RANGE 56 WEST, 6th
      P.M.
	 	Section
      3:  N/2 of Lot 4, also described as
  N/2NW/4NW/4


    

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

     

    
      	Lessor:	William
      O. Smith a/k/a William Otis Smith and Rita Marie Smith, husband and
      wife
	Lessee:	Edward Mike Davis,
      L.L.C.
	Dated:  	May 16,
    2008
	Recorded:	Book 206 OG, Page
      33
	Correction of
      Description Recorded:  	Book 207, Page
      352
	Covering:  	INSOFAR AND ONLY
      INSOFAR AS THE LEASE COVERS:
	 	TOWNSHIP 15 NORTH,
      RANGE 56 WEST, 6th
      P.M.
	 	Section
      3:  N/2 of Lot 4, also described as
  N/2NW/4NW/4


    

     

    
      
        	Lessor:	Rita
      J. Bingaman f/k/a Rita Jeanne Smith and Gary P. Bingaman, wife and
      husband
	Lessee:    	Edward Mike Davis,
      L.L.C.
	Dated: 	May 16,
    2008
	Recorded:       	Book 206 OG, Page
      29
	Correction of
      Description Recorded:    	Book 207, Page
      350
	Covering:  	INSOFAR AND ONLY
      INSOFAR AS THE LEASE COVERS:
	 	TOWNSHIP 15 NORTH,
      RANGE 56 WEST, 6th
  P.M.
	 	Section
      3:  N/2 of Lot 4, also described as
  N/2NW/4NW/4


      

    

     

    
      	Lessor:	Mary
      L. Soper, individually and as Trustee of the Ronald R. Soper Family Trust,
      dated October 4, 1995
	Lessee:  	Edward Mike Davis,
      L.L.C.
	Dated:	July 15,
    2009
	Recorded: 	Book 208 OG, Page
      760
	Covering: 	INSOFAR AND ONLY
      INSOFAR AS THE LEASE COVERS:
	 	TOWNSHIP 15 NORTH,
      RANGE 56 WEST, 6th
  P.M.
	 	Section
      3:  N/2 of Lot 4, also described as
  N/2NW/4NW/4


    

     

    
      	Lessor:	Steven Knigge, a
      single man
	Lessee:  	Edward Mike Davis,
      L.L.C.
	Dated: 	July 15,
    2009
	Recorded:	Book 208 OG, Page
      763
	Covering:    	INSOFAR AND ONLY
      INSOFAR AS THE LEASE COVERS:
	 	TOWNSHIP 15 NORTH,
      RANGE 56 WEST, 6th
  P.M.
	 	Section
      3:  N/2 of Lot 4, also described as
  N/2NW/4NW/4


    

     

    
      	Lessor: 	Linda McDowall,
      f.k.a. Linda Wilson, a single woman
	Lessee: 	Edward Mike Davis,
      L.L.C.
	Dated:	July 15,
    2009
	Recorded:  	Book 208 OG, Page
      766
	Covering:  	INSOFAR AND ONLY
      INSOFAR AS THE LEASE COVERS:
	 	TOWNSHIP 15 NORTH,
      RANGE 56 WEST, 6th
  P.M.
	 	Section
      3:  N/2 of Lot 4, also described as
  N/2NW/4NW/4


    

     

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

     

    
      
        	Lessor: 	Marla Knigge, f.k.a.
      Marla Teasley, a single woman
	Lessee: 	Edward Mike Davis,
      L.L.C.
	Dated:	July 15,
    2009
	Recorded:  	Book 208 OG, Page
      769
	Covering: 	INSOFAR AND ONLY
      INSOFAR AS THE LEASE COVERS:
	 	TOWNSHIP 15 NORTH,
      RANGE 56 WEST, 6th
  P.M.
	 	Section
      3:  N/2 of Lot 4, also described as
  N/2NW/4NW/4


      

    

    


    LUKASSEN
WELL

     

    
      	Well Name:	Lukassen
    14-34
	Located:  	S/2SW/4SW/4 of
      Section 34, T16N-R56W, Kimball County, NE
	API: 26105226450000	Working
      Interest:  100.00%    Net Revenue
      Interest: 80.00%
	Equipment and
      Inventory: 	consisting of a
      pumping unit, rods, tubing and casing


    

     

    Lukassen
Tank Battery consisting of 3 – 400 bbl tanks and a 4 foot treater

     

    PIEPER LEASE and
LANDS:

     

    
    

     

    
      	Lessor:  	Dean Reed and
      Beaulah Reed, husband and wife
	Lessee:  	King Resources
      Company
	Dated:	August 10,
      1966
	Recorded: 	Book 583, Page
      71
	Description:	Township 1 North,
      Range 53 West
	 	Section
      29:  NE/4


    

     

    
      PIEPER
WELL

       

      
        	Well Name:	Pieper
    #3-29
	Located: 	NE/4 of Section 29,
      T1N-R53W, Washington County, CO
	API:  05-121-08367	Working
      Interest:  100.00%    Net Revenue
      Interest: 80.00%
	Equipment and
      Inventory:	consisting of a
      pumping unit, rods, tubing and casing


      

       

    

    Pieper
Tank Battery consisting of 2 – PR&R 500 bolted bbl tanks and a 6 X 20
vertical inside leg cold weather treater

    


    OMEGA PROSPECT LEASES and
LANDS:

     

    
      	Lessor:	Katharine
      E. Nelson,, Individually and as Trustee of the Katharine E. Nelson Living
      Trust, dated 5-19-2003
	Lessee:    	Edward Mike Davis,
      L.L.C.
	Dated:   	September 20,
      2008
	Recorded: 	Book 131 OG, Page
      455, in Banner County, Nebraska
	Description:  	Township 17 North,
      Range 55 West, 6th
  P.M.
	 	Section
      11:  NE, S2


    

     

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

     

    
      	Lessor:	Ruth
      L. Pile, individually and as Trustee of the Ruth L. Pile Revocable Trust,
      dated 6-26-1998
	Lessee:	Edward Mike Davis,
      L.L.C.
	Dated:   	October 9,
      2008
	Recorded:	Book 131 OG, Page
      459, in Banner County, Nebraska
	Description:	Township 17 North,
      Range 55 West, 6th
  P.M.
	 	Section
      12:  W/2


    

     

    COMANCHE FARMS PROSPECT
LEASES and LANDS:

     

    
      	Lessor:	State of
      Colorado    Lease # OG 8056.4
	 	State Board of Land
      Commissioners
	Lessee:	Contex Energy
      Company
	Dated: 	August 19,
      2004
	Recorded:	Reception Number B
      4199551, in Arapahoe County, Colorado
	Description:	Township 4 South,
      Range 62 West, 6th
  P.M.
	 	Section
      36:  ALL


    

     

     

    24