exv10w3



 





Exhibit 10.3




CONVERSION AGREEMENT




This CONVERSION AGREEMENT (this “Agreement”) is made and entered into as of the 5th day
of June, 2007 by and among:





	(1)	 	CANARGO ENERGY CORPORATION, a Delaware Corporation (the “Company”);
	 
	(2)	 	PERSISTENCY, a company incorporated under the laws of the Cayman Islands (“Persistency”); and
	 
	(3)	 	CANARGO LIMITED, a company incorporated under the laws of Guernsey (“CanArgo Limited”).





WHEREAS





	(A)	 	On 28 June 2006 Persistency and the Subordinated Noteholders entered into an agreement
pursuant to which the Subordinated Noteholders sold to Persistency US$5 million of the
principal amount of the Senior Subordinated Convertible Guaranteed Notes due 1 September 2009
(the “Subordinated Notes”) issued under and pursuant to that certain Note and Warrant Purchase
Agreement (the “NWPA”) dated as of 3 March 2006, as amended, by and among the Company and the
Subordinated Noteholders.
	 
	(B)	 	The Subordinated Noteholders and Persistency have certain rights under the NWPA and the
ancillary documents associated therewith, which include, without limitation the right pursuant
to Section 11.7 of the NWPA to convert the principal amount of each Subordinated Note from
time to time in whole or in part into Tethys Common Stock (as defined in the NWPA).
	 
	(C)	 	To the extent that they hold Subordinated Notes, Persistency are willing to agree to convert
their Subordinated Notes into Tethys Common Stock in accordance with Section 11.7 of the NWPA
at a price of US$2.50 per share of Tethys Common Stock on the terms and subject to the
conditions set out in this Agreement.





IT IS AGREED as follows:





	1	 	DEFINITIONS AND INTERPRETATION
	 
	1.1	 	In this Agreement the following words and expressions shall, unless the context otherwise
requires, have the following meanings:
	 
	 	 	“Business Day” means any day other than a Saturday, a Sunday or a day on which commercial
banks in New York City, Toronto or London are required or authorized to be closed;
	 
	 	 	“Conversion” has the meaning ascribed in Clause 3.1 of this Agreement;
	 
	 	 	“Conversion Date” means the date five Business Days from the date of satisfaction of the
conditions specified in Clause 2.1 of this Agreement;
	 
	 	 	“Conversion Stock” has the meaning ascribed to it in Clause 3.1 of this Agreement;




 









 






	 	 	“Note Purchase Agreement” means the Note Purchase Agreement dated as of 25 July 2005 by
and among the Company, Ingalls & Snyder Value Partners L.P. and the Purchasers (as defined
therein);
	 
	 	 	“12% Note Purchase Agreement” means the Note Purchase Agreement dated as of 28 June 2006
by and between the Company and Persistency;
	 
	 	 	“Senior Noteholders” means the holders of the Senior Secured Notes;
	 
	 	 	“Senior Secured Notes” means the Senior Secured Notes due 25 July 2009;
	 
	 	 	“Subordinated Noteholders” means the holders of the Subordinated Notes;
	 
	 	 	“Tethys” means Tethys Petroleum Limited, a company incorporated under the laws of the
Bailiwick of Guernsey and an indirect subsidiary of the Company;
	 
	 	 	“Tethys Common Stock” means the ordinary shares with a nominal value of $0.10 each in the
capital of Tethys; and
	 
	 	 	“Tethys Share Pledge” means the pledge over certain of the Tethys Common Stock granted to
the Senior Noteholders pursuant to the Security Interest Agreement dated 9 February 2007
by and among CanArgo Limited, Tethys, Ingalls & Snyder LLC and others party thereto.
	 
	1.2	 	Words and expressions defined in the NWPA shall have the same meanings herein except in so
far as expressly varied by or inconsistent with the provisions of this Agreement.
	 
	2	 	CONDITIONS PRECEDENT
	 
	2.1	 	Persistency agrees that it shall convert the entire principal amount outstanding under its
Subordinated Note into shares of Tethys Common Stock pursuant to Section 11.7 of the NWPA
conditional upon the prior or contemporaneous satisfaction or waiver of the following
conditions:






	 	(a)	 	The Senior Noteholders and the Company shall have entered into a letter
agreement releasing certain rights and providing certain consents under the Note
Purchase Agreement to permit the Conversion and the transactions contemplated thereby
in compliance with the terms of the Note Purchase Agreement; and
	 
	 	(b)	 	Ingalls & Snyder LLC, as the Security Agent, shall have provided the
requisite consent to release the Conversion Stock from the Tethys Share Pledge.






	2.2	 	Persistency agrees to provide a guaranty in substantially the form of Schedule 2 attached
hereto (the “Senior Note Guaranty”) to the Senior Noteholders.
	 
	2.3	 	Notwithstanding Clause 2.1 the Required Holders (as defined in the NWPA) shall be entitled by
notice in writing given to the Company to waive (to such extent as they may think fit)
compliance with the conditions stated in Clauses 2.1(a) and (b).
	 
	2.4	 	If any of the conditions in Clause 2.1 has not been satisfied or waived by 8 June 2007 (or by
such later date as may be agreed in writing between Persistency, and the Company), then,




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	 	 	without prejudice to any accrued
rights of the parties arising in
respect of any of the provisions of
this Agreement, this Agreement
shall, thereupon cease to have
effect.
	 
	3	 	CONVERSION
	 
	3.1	 	Subject to the terms of Clause 2, on and with effect from the Conversion Date, Persistency
shall convert the entire outstanding principal amount of the Subordinated Notes held by them
into 2 million shares of Tethys Common Stock (the “Conversion Stock”) pursuant to the NWPA
(the “Conversion”).
	 
	3.2	 	Accrued interest through the Conversion Date in respect of the Subordinated Notes held by
Persistency shall be payable by the Company in cash to Persistency on the Conversion Date.
	 
	3.3	 	The Conversion Stock to be issued to Persistency pursuant to this Clause 3 to affect the
Conversion shall be satisfied by the transfer on the Conversion Date by CanArgo Limited of the
requisite amount of the Conversion Stock due to Persistency with full title guarantee in
consideration for the cancellation of the Subordinated Note held by Persistency.
	 
	4	 	WARRANTS
	 
	4.1	 	The consideration payable to Persistency for the conversion of their Subordinated Note into
Tethys Common Stock pursuant to Clause 3 shall be the issue by the Company of warrants (the
“Compensation Warrants”) to purchase up to an aggregate of 5 million shares, at an exercise
price of $1.00 per share (subject to adjustment), of the Company’s common stock par value
$0.10 per share (the “Compensation Warrants Shares”). The Compensation Warrants issuable to
Persistency pursuant to this Clause 4.1 shall be issued to Persistency on the Conversion Date.
	 
	4.2	 	The Compensation Warrants to be issued to Persistency shall be substantially in the form set
out in Schedule 1, with such changes thereto, if any, as may be approved by Persistency and
the Company.
	 
	5	 	GENERAL
	 
	5.1	 	Representations and Warranties
	 
	 	 	Persistency hereby repeats its representations and warranties to the Company set forth in
the 12% Note Purchase Agreement with the same effect as if set forth in full herein, and,
in connection therewith, Persistency hereby further represents, warrants, acknowledges and
agrees with the Company that neither the Conversion Stock, the Compensation Warrants nor
the Compensation Warrant Shares (collectively the “Securities”) have been registered under
the United States Securities Act of 1933, as amended (the “Securities Act”) or any other
state, provincial or foreign securities laws (such laws together with the Securities Act
being collectively referred to herein as “Securities Laws”), the Securities are
“restricted securities” as defined in Rule 144 promulgated under the Securities Act and
the Securities may not be sold, transferred or offered for sale except in compliance with
all applicable Securities Laws and the rules and regulations promulgated thereunder. The
certificates evidencing the Securities shall be imprinted with suitable restrictive
legends reflecting the foregoing.




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	5.2	 	Further Assurance
	 
	 	 	The parties shall at their own cost do or procure the doing of all such acts and things
and/or execute or procure the execution of all such documents as are reasonably required
to give effect to the provisions of this Agreement.
	 
	5.3	 	Assignment
	 
	 	 	No party shall be entitled to assign in whole or in part any rights and/or obligations
arising under this Agreement to a third party without the prior written consent of the
other parties.
	 
	5.4	 	Entire Agreement
	 
	 	 	This Agreement together with the NWPA constitute the entire agreement among the parties
with respect to the matters dealt with herein and supersedes any previous agreement among
the parties in relation to such matters.
	 
	5.5	 	Variation
	 
	 	 	No variation of this Agreement shall be valid or effective unless made by an instrument in
writing signed by the parties hereto.
	 
	5.6	 	Waiver
	 
	 	 	No waiver by either party of any of the requirements hereof or of any of its rights
hereunder shall be effective unless given in writing and signed by or on behalf of that
party and no forbearance, delay or indulgence by either party in enforcing the provisions
of this Agreement shall prejudice or restrict the rights of that party nor shall any
waiver by that party of any of the requirements hereof or any of its rights hereunder
release the other from full performance of its remaining obligations stated herein.
	 
	5.7	 	Severability
	 
	 	 	Each provision of this Agreement shall be construed separately and (save as otherwise
expressly provided herein) none of the provisions hereof shall limit or govern the extent,
application or construction of any other of them and notwithstanding that any provision of
this Agreement may prove to be illegal or unenforceable the remaining provisions of this
Agreement shall continue in full force and effect.
	 
	5.8	 	Counterparts, Facsimile Execution and Delivery
	 
	 	 	This Agreement may be executed in any number of counterparts and by each of the parties on
separate counterparts each of which when executed and delivered shall be deemed to be an
original, but all the counterparts together shall constitute one and the same agreement.
Delivery of an executed counterpart of a signature page to this Agreement by telecopy
shall be equally effective as the delivery of a manually executed counterpart of this
Agreement.
	 
	5.9	 	Law and Jurisdiction
	 
	5.9.1	 	This Agreement shall be governed by and construed in accordance with the law of the State of
New York.




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	5.9.2	 	Each party hereby submits to the non-exclusive jurisdiction of the Courts of New York as
regards any claim, dispute or matter arising out of or in connection with this Agreement and
its implementation and effect.
	 
	5.10	 	Binding Effect
	 
	 	 	This Agreement shall be binding upon the parties hereto and their successors in interest
and assigns.
	 
	5.11	 	Notices
	 
	 	 	All notices, demands, elections, requests and communications provided for hereunder shall
be in writing and sent: (a) by telefacsimile if the sender on the same day sends a
confirming copy of such notice by a recognized overnight delivery service (charges
prepaid), or (b) by registered or certified mail with return receipt requested (postage
prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any
such notice must be sent:






	 	(i)	 	if to Persistency, to Persistency at their address as set
forth on the books maintained by the Company, or at such other address as
Persistency shall have specified to the Company in writing,
	 
	 	(ii)	 	if to the Company, to the Company at its principal
executive office to the attention of Chief Executive Officer, or at such
other address as the Company shall have specified to Persistency in writing;
	 
	 	(iii)	 	if to CanArgo Limited, to CanArgo Limited at its
principal executive office for the attention of the Chief Executive Officer,
or at such other address as CanArgo Limited shall have specified to the
Company in writing.






Notices under this Section 5.10 will be deemed given only when actually received.



[signature pages follows]




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IN WITNESS of which the parties have executed and delivered this document as a deed on the date
first before written.



SIGNED by




	 	 	 	 	 
	 
	 	 	 
	For and on behalf of CANARGO
ENERGY CORPORATION	 	 
	 
	 	 	 	 
	Name:
	 	 	 	 
	 

	 	 

	 	 
	 
	 	 	 	 
	Title:
	 	 	 	 
	 

	 	 

	 	 
	 
	 	 	 	 
	 	 	 
	For and on behalf of PERSISTENCY	 	 
	 
	 	 	 	 
	Name:
	 	 	 	 
	 

	 	 

	 	 
	 
	 	 	 	 
	Title:
	 	 	 	 
	 

	 	 

	 	 
	 
	 	 	 	 
	SIGNED by	 	 
	 
	 	 	 
	For and on behalf of
CANARGO LIMITED	 	 
	 
	 	 	 	 
	Name:
	 	 	 	 
	 

	 	 

	 	 
	 
	 	 	 	 
	Title:
	 	 	 	 
	 

	 	 

	 	 






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	AGREED AND ACKNOWLEDGED	 	 
	 
	 	 	 	 
	INGALLS & SNYDER LLC	 	 
	 
	 	 	 	 
	By:
	 	 	 	 
	 

	 	 

	 	 
	 
	 	 	 	 
	Name:
	 	 	 	 
	 

	 	 

	 	 
	 
	 	 	 	 
	Title:
	 	 	 	 
	 

	 	 

	 	 
	 
	 	 	 	 
	INGALLS & SNYDER VALUE PARTNERS L.P.
	 
	 	 	 	 
	By:
	 	 	 	 
	 

	 	 

	 	 
	 
	 	 	 	 
	Name:
	 	 	 	 
	 

	 	 

	 	 
	 
	 	 	 	 
	Title:
	 	 	 	 
	 

	 	 

	 	 
	 
	 	 	 	 
	PENRITH LTD	 	 
	 
	 	 	 	 
	By:
	 	 	 	 
	 

	 	 

	 	 
	 
	 	 	 	 
	Name:
	 	 	 	 
	 

	 	 

	 	 
	 
	 	 	 	 
	Title:
	 	 	 	 
	 

	 	 

	 	 
	 
	 	 	 	 
	 	 	 
	THOMAS GIPSON	 	 
	 
	 	 	 	 
	 	 	 
	ROBERT GIPSON	 	 







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SCHEDULES




SCHEDULE 1




Form of Warrant Certificate




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SCHEDULE 1




FORM OF WARRANT



THE WARRANTS REPRESENTED HEREBY AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANTS
(COLLECTIVELY, THE “WARRANT SECURITIES”), HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE “ACT”), OR REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY OTHER
JURISDICTION IN RELIANCE UPON EXEMPTIONS FROM SUCH REGISTRATION AFFORDED UNDER THE ACT AND
APPLICABLE SECURITIES LAWS OF OTHER JURISDICTIONS. THE WARRANT SECURITIES REPRESENTED HEREBY MAY
NOT BE OFFERED, SOLD, HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS REGISTERED UNDER THE ACT OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT IS APPLICABLE (IN WHICH CASE THE ISSUER
SHALL HAVE RECEIVED AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE
ISSUER TO SUCH EFFECT) AND THE PROVISIONS OF ALL OTHER APPLICABLE SECURITIES LAWS ARE OBSERVED.




CANARGO ENERGY CORPORATION




Incorporated Under the Laws of the State of Delaware




	 	 	 	 	 	 	 	 	 
	 	 	No.                     	 	 	 	5,000,000 Common
	 

	 	 	 	 	 	 	 	Stock Purchase Warrants






CERTIFICATE FOR COMMON STOCK

PURCHASE WARRANTS



1. Warrant, This Warrant Certificate certifies that Persistency, a company incorporated
under the laws of the Cayman Islands (“Persistency”), or registered assigns (the “Registered
Holder”), is the registered owner of the above indicated number of Warrants expiring on the
Expiration Date, as hereinafter defined. One (1) Warrant entitles the Registered Holder to purchase
one (1) share of the common stock, $.10 par value (a “Share”), of CanArgo Energy Corporation, a
Delaware corporation (the “Company”), from the Company at a purchase price of One Dollar ($1.00)
(the “Exercise Price”) at any time during the Exercise Period, as hereinafter defined, upon
surrender of this Warrant Certificate with the exercise form hereon duly completed and executed and
accompanied by payment of the Exercise Price at the principal office of the Company.




     Upon due presentment for transfer or exchange of this Warrant Certificate at the principal
office of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and
evidencing in the aggregate a like number of Warrants shall be issued in exchange for this Warrant
Certificate, subject to the limitations provided herein, upon payment of any tax or governmental
charge imposed in connection with such transfer. Subject to the terms hereof the Company shall
deliver Warrant Certificates in required whole number denominations to Registered Holders in
connection with any transfer or exchange permitted hereunder.



     This Warrant is issued pursuant to the provisions of that certain Conversion Agreement dated
June 4, 2007 by and among the Company, CanArgo Limited (a company incorporated under the laws of



9









 







the Island of Guernsey), and Persistency (the “Conversion Agreement”). Any capitalized terms not
otherwise expressly defined herein shall have the meaning ascribed thereto in the Conversion
Agreement.


2. Restrictive Legends. Each Warrant Certificate shall bear legends substantially in the
form of the legends that appear at the beginning of this Warrant Certificate. Each certificate
representing Shares issued upon exercise of a Warrant, unless such Shares are then registered under
the Securities Act of 1933, as amended (the “Act”), shall bear a legend in substantially the
following form:



“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITES ACT OF
1933, AS AMENDED (THE“ACT”) OR REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY OTHER
JURISDICTION IN RELIANCE UPON EXEMPTIONS FROM SUCH REGISTRATION AFFORDED UNDER THE ACT AND SUCH
APPLICABLE LAWS OF OTHER JURISDICTIONS. THE SHARES REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD,
HYPOTHECATED OR OTHERWISE TRANSFERRED UNLESS REGISTERED UNDER THE ACT OR AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS UNDER THE ACT IS APPLICABLE (IN WHICH CASE THE ISSUER SHALL HAVE RECEIVED
AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE ISSUER TO SUCH EFFECT)
AND THE PROVISIONS OF ALL OTHER APPLICABLE SECURITIES LAWS ARE OBSERVED.”



Each such certificate representing Shares may also bear such legend relating to the issuance of
such Shares pursuant to any applicable securities laws as counsel for the Company shall reasonably
deem appropriate.



3. Exercise. Subject to the terms hereof: the Warrants, evidenced by this Warrant
Certificate, may be exercised at the Exercise Price in whole or in part at any time during the
period (the “Exercise Period”) commencing on the next Business Day after the first anniversary of
the Conversion Date as contemplated by Section 4 of the Conversion Agreement and terminating at the
close of business on the earlier of: (i) September 1, 2009; or (ii) or shall be exercised on such
sooner date at the election of the Company and upon at least thirty (30) days prior written notice
to the Registered Holder in the event that: (a) the Manavi M12 well indicates, by way of an
independent engineering report, sustainable production, if developed, in excess of 7,500 barrels of
oil per day or (b) all the warrants originally issued under that certain Note and Warrant Purchase
Agreement dated as of March 3, 2006 by and among the Company and the purchasers listed therein are
exercised by the holders thereof and the average closing price for the Company’s Common Stock on
the American Stock Exchange or, if the Common Stock is not then listed for trading on the American
Stock Exchange (“AMEX”) then the Oslo Stock Exchange, is above U.S. $2.00 (or its equivalent in
NOK, and in any case adjusted for any stock dividends, stock split, its reverse split,
recapitalization or reorganization) for a period of five consecutive trading days (the “Expiration
Date”). The Exercise Period may also be extended by the Company’s Board of Directors.




     A Warrant shall be deemed to have been exercised in immediately prior to the close of business
on the date (the “Exercise Date”) of the surrender to the Company at its principal offices of this
Warrant Certificate with the exercise form attached hereto executed by the Registered Holder and
accompanied by payment to the Company, in cash or by official bank or certified check, of an amount
equal to the aggregate Exercise Price, in lawful money of the United States of America.



     The person entitled to receive the Shares issuable upon exercise of a Warrant or Warrants
(“Warrant Shares”) shall be treated for all purposes as the holder of such Warrant Shares as of the
close of business on the Exercise Date. The Company shall not be obligated to issue any fractional
share interests in Warrant Shares issuable or deliverable on the exercise of any Warrant or script
or cash with respect thereto, but, if Company elects not to issue a fractional share, the Company
will pay a cash



10









 







adjustment in respect of any fraction of a Warrant Share which would otherwise be issuable in an
amount equal to the same fraction of the amount by which the market price of a Share on the date of
exercise exceeds the Exercise Price, such market price to be determined in good faith by the Board
of Directors of the Company. If more than one Warrant shall be exercised at one time by the same
Registered Holder, the number of full Shares which shall be issuable on exercise thereof shall be
computed on the basis of the aggregate number of full shares issuable on such exercise.



     Promptly, and in any event within ten business days after the Exercise Date, the Company shall
cause to be issued and delivered to the person or persons entitled to receive the same, a
certificate or certificates for the number of Warrant Shares deliverable on such exercise.



     The Company may deem and treat the Registered Holder of the Warrants at any time as the
absolute owner thereof for all purposes, and the Company shall not be affected by any notice to the
contrary. The Warrants shall not entitle the Registered Holder thereof to any of the rights of
shareholders or to any dividend declared on the Shares unless the Registered Holder shall have
exercised the Warrants and thereby purchased the Warrant Shares prior to the record date for the
determination of holders of Shares entitled to such dividend or other right.


4. Net Issue Conversion. Notwithstanding anything in this Warrant to the contrary, the
Registered Holder hereof may, subject to the prior concurrence of the Company, in lieu of
exercising this Warrant in the manner provided above in Section 3, elect to convert this Warrant
into Warrant Shares equal in number to the value of the exercised Warrants by so indicating on the
Form of Election to Purchase attached hereto, in which event the Registered Holder shall receive a
number of Warrant Shares equal to following shall occur.





[(X multiplied by (Y minus Z)] divided by Y;




where:




X = Number of Warrants Converted




Y = Fair Market Value of one share of Common Stock




Z = Exercise Price


For purposes of the above, “Fair Market Value” shall equal the closing price for the Company’s
Common Stock on the Exercise Date, as reported on the AMEX or, if the Common Stock is not then
listed for trading on the AMEX, then the dollar equivalent of such closing price as reported on the
Oslo Stock Exchange on the Exercise Date.



5. Reservation of Shares and Payment of Taxes. The Company covenants that it will at all
times reserve and have available from its authorized Common Stock such number of shares as shall
then be issuable on the exercise of outstanding Warrants. The Company covenants that all Warrant
Shares which shall be so issuable shall be duly and validly issued, fully paid and nonassessable,
and free from all taxes, liens and charges with respect to the issue thereof.




     The Registered Holder shall pay all documentary, stamp or similar taxes and other government
charges that may be imposed with respect to the issuance, transfer or delivery of any Warrants and
Warrant Shares on exercise of the Warrants. In the event the Warrants or Warrant Shares are to be
delivered in a name other than the name of the Registered Holder of the Warrant Certificate, no
such



11









 







delivery shall be made unless the person requesting the same has paid the amount of any such taxes
or charges incident thereto.



     6. Registration of Transfer. The Warrant Certificates may be transferred in whole or
in part, provided any such transfer complies with all applicable foreign and United States federal
and state securities laws and, if requested by the Company, the Registered Holder delivers to the
Company an opinion of counsel to that effect, in form and substance reasonably acceptable to the
Company. Warrant Certificates to be transferred shall be surrendered to the Company at its
principal office. The Company shall execute, issue and deliver in exchange therefore the Warrant
Certificate or Certificates which the Registered Holder making the transfer shall be entitled to
receive.



     The Company shall keep transfer books at its principal office which shall register Warrant
Certificates and the transfer thereof. On due presentment of any Warrant Certificate for
registration of transfer at such office, the Company shall execute, issue and deliver to the
transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate
number of Warrants. All Warrant Certificates presented for registration of transfer or exercise
shall be duly endorsed or be accompanied by a written instrument or instruments of transfer in form
and substance satisfactory to the Company. The Company may require payment of a sum sufficient to
cover any tax or other government charge that may be imposed in connection therewith.



     All Warrant Certificates so surrendered, or surrendered for exercise, or for exchange in case
of mutilated Warrant Certificates, shall be promptly cancelled by the Company and thereafter
retained by the Company until the Expiration Date. Prior to due presentment for registration of
transfer thereof the Company may treat the Registered Holder of any Warrant Certificate as the
absolute owner thereof (notwithstanding any notations of ownership or writing thereon made by
anyone other than the Company), and the Company shall not be affected by any notice to the
contrary.


7. Loss or Mutilation. On receipt by the Company of evidence satisfactory as to the
ownership of and the loss, theft, destruction or mutilation of this Warrant Certificate, the
Company shall execute and deliver, in lieu thereof a new Warrant Certificate representing an equal
aggregate number of Warrants. In the case of loss, theft or destruction of any Warrant Certificate,
the individual requesting issuance of a new Warrant Certificate shall be required to indemnify the
Company in an amount satisfactory to the Company. In the event a Warrant Certificate is mutilated,
such Certificate shall be surrendered and canceled by the Company prior to delivery of a new
Warrant Certificate. Applicants for a new Warrant Certificate shall also comply with such other
reasonable regulations as the Company may prescribe.



8. Adjustment of Shares. The number and kind of securities issuable upon exercise of a
Warrant or to be delivered upon the redemption of Warrants hereunder shall be subject to adjustment
from time to time upon the happening of certain events (“Adjustment Event”), as follows:




     (a) If the Company shall, at any time prior to the complete exercise of the Warrants evidenced
hereby, declare or pay to the holders of its outstanding Shares, a dividend payable in any kind of
shares of stock or other securities of the Company, or in property, or otherwise than in cash, the
Registered Holder upon thereafter exercising the Warrants evidenced hereby as herein provided shall
be entitled to receive for the Exercise Price, in addition to one Warrant Share, such additional
share or shares of stock or scrip representing fractions of a share or other securities or property
as the Registered Holder would have received in the form of such dividend if he had been the holder
of record of such Warrant Share on the record date for the determination of common stockholders
entitled to receive such dividend.



     (b) If the Company shall, while any Warrants evidenced hereby remain in force, effect a
recapitalization of such character that the Shares covered hereby shall be changed into or become



12









 







exchangeable for a larger or smaller number of shares, then thereafter, the number of Shares which
the Registered Holder shall be entitled to purchase hereunder, shall be increased or decreased, as
the case may be, in direct proportion to the increase or decrease in the number of Shares of the
Company by reason of such recapitalization, and the Exercise Price (per Share) shall in the case of
an increase in the number of Shares be proportionately reduced, and in the case of a decrease in
the number of shares be proportionately increased.



     (c) In case of any reorganization of the Company (or any other corporation the stock or other
securities of which are at the time receivable upon exercise of a Warrant) or in case the Company
(or any such other corporation) shall merge into or with or consolidate with another corporation or
convey all or substantially all of its assets to another corporation or enter into a business
combination of any form as a result of which the Shares or other securities receivable upon
exercise of a Warrant are converted into other stock or securities of the same or another
corporation, then and in each such case, the Registered Holder of a Warrant, upon exercise of the
purchase right at any time after the consummation of such reorganization, consolidation, merger,
conveyance or combination, shall be entitled to receive, in lieu of the Shares or other securities
to which such Registered Holder would have been entitled had he exercised the purchase right
immediately prior thereto, such stock and securities which such Registered Holder would have owned
immediately after such event with respect to the Shares and other securities for which a Warrant
may have been exercised immediately before such event had the Registered Holder exercised the
Warrant immediately prior to such event.



     (d) In case the Company shall at any time prior to the exercise of a Warrant evidenced hereby
make any distribution of its assets to holders of its Shares by way of a liquidating or partial
liquidating dividend or by way of a return of capital, or other than as a dividend payable out of
earnings or any surplus legally available for dividends under the laws of the state of its
incorporation, then the Registered Holder upon thereafter exercising such Warrant as herein
provided after the date of record for the determination of those holders of Shares entitled to such
distribution of assets, shall be entitled to receive for the Exercise Price, in addition to a
Warrant Share, the amount of such assets (or at the option of the Company, a sum equal to the value
thereof at the time of such distribution to holders of Shares as such value is determined by the
Board of Directors of the Company in good faith) which would have been payable to the Registered
Holder had he been the holder of record of such Warrant Share receivable upon exercise of such
Warrant on the record date for the determination of those entitled to such distribution.



     The Company shall mail to the holder of this Certificate at least twenty (20) days prior to
any Adjustment Event a notice specifying the date on which any such Adjustment Event is to occur
together with a description thereof.



     In each case of an adjustment in the Shares or other securities receivable upon the exercise
of a Warrant, the Company shall promptly notify the Registered Holder of such adjustment. Such
notice shall set forth the facts upon which such adjustment is based.


9. Reduction in Exercise Price .




     The Company’s Board of Directors may, at its sole discretion, reduce the Exercise Price of the
Warrants in effect at any time either for the life of the Warrants or any shorter period of time
determined by the Company’s Board of Directors. The Company shall promptly notify the Registered
Holders of any such reduction in the Exercise Price. Notwithstanding the foregoing, in no event
shall the number of Shares issuable to the holders of the Warrants pursuant to this Section 9 cause
the holders of the Warrants collectively to own in excess of 19.9% of the outstanding Common Stock
of the Company as at the date of the Note Purchase Agreement unless the Company has obtained the
prior approval of its stockholders as required by Section 713 of the AMEX Company Guide as in
effect from time to time, provided,



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however, that the Company shall use commercially reasonable efforts to diligently seek to obtain
such approval of its stockholders.


10. Notices. All notices, demands, elections, requests and communications provided for
hereunder shall be in writing and sent




     (a) by telefacsimile if the sender on the same day sends a confirming copy of such notice by a
recognized overnight delivery service (charges prepaid), or



     (b) by registered or certified mail with return receipt requested (postage prepaid), or




     (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must
be sent:



          (i) if to the Registered Holder or its nominee, to the Registered Holder or its nominee at the
address of the Registered Holder as set forth on the books maintained by the Company, or at such
other address as such Registered Holder or nominee shall have specified to the Company in writing,




          (ii) if to the Company, to the Company at its principal executive office to the attention of
Chief Executive Officer, or at such other address as the Company shall have specified to the holder
of each Warrant in writing.




     Notices under this Section 10 will be deemed given only when actually received.


11. General Provisions. This Warrant Certificate shall be construed and enforced in
accordance with, and governed by, the laws of the State of Delaware, where the Company maintains
its registered offices. Except as otherwise expressly stated herein, time is of the essence in
performing hereunder. The headings of this Warrant Certificate are for convenience in reference
only and shall not limit or otherwise affect the meaning hereof.




     IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed as of
the ___ day of ___, 2007.



	 	 	 	 	 	 	 	 	 
	 	 	CanArgo Energy Corporation  
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 	 	 
	 	 	 	 	 
	 

	 	Title:	 	 	 	 	 	 
	 	 	 	 	 





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CanArgo Energy Corporation




     The following abbreviations, when used in the inscription on the face of this instrument,
shall be construed as though they were written out in full according to applicable laws or
regulations:



	 	 	 	 
	TEN COM — as tenants in common

TEN ENT — as tenants by the entireties

JR TEN — as joint tenants with right of survivorship and not as tenants in common

	 	 	UNIF GIFT MIN ACT-
Custodian



 

(Cust)       (Minor)

under Uniform Gifts
to Minor Act                     .

                    (State)
	 	 	 	 




Additional abbreviations may also be used though not in the above list.




FORM OF ASSIGNMENT




(To be Executed by the Registered Holder if He

Desires to Assign Warrants Evidenced by the

Within Warrant Certificate)




     FOR VALUE RECEIVED                                          hereby sells,
assigns and transfers (                    ) Warrants, evidenced by the within Warrant Certificate, and does
hereby irrevocably constitute and appoint                                          Attorney to transfer the said
Warrants evidenced by the within Warrant Certificates on the books of the Company, with full power
of substitution.



	 
	Dated:
                                                            .         
                                                                                                               .

                                                                                                                        Signature






Notice: The above signature must correspond with the name as written upon the Face of the
Warrant Certificate in every particular, without alteration or enlargement or any change
whatsoever.



Signature Guaranteed:




SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE FOLLOWING STOCK
EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK EXCHANGE, AMERICAN STOCK EXCHANGE, OR
MIDWEST STOCK EXCHANGE.




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FORM OF ELECTION TO PURCHASE



(To be Executed by the Holder if he Desires to Exercise

the Warrants Evidenced by the Warrant Certificate)



To CanArgo Energy Corporation:




     [The
undersigned hereby irrevocably elects to exercise                                         (     ) Warrants, evidenced by the within
Warrant Certificate for, and to purchase thereunder,                                         
(                    ) full shares of Common Stock issuable upon exercise of said
Warrants and delivery of $                     and payment of any applicable taxes.



     OR



     [The
undersigned hereby irrevocably elects to convert                                          (     ) Warrants, evidenced by the within
Warrant Certificate, and to acquire Warrant Shares pursuant to the “Net Issue Conversion” provision
in Section 4 thereof, and, upon payment of any applicable taxes, to acquire Warrant Shares
thereunder.]



     The undersigned hereby warrants and represents that he/it is an “accredited investor” as
defined under Rule 501(a) of the Securities Act of 1933, as amended and accordingly the Warrants
being exercised and the securities deliverable upon exercise thereof have been registered under the
Act or are exempt from registration thereunder.



     Please register the certificates for such share as follows:


Please insert taxpayer identification

Or social security number (if any)                                                            .




 




(Please print name)




 




(Please print address)




     If said number of Warrants shall not be all the Warrants evidenced by the within Warrant
Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so
exercised be registered in the name of the undersigned at the following address and deliver the
Certificate to that address:



 




(Please print address)




(SIGNATURES CONTINUED ON FOLLOWING PAGE)




     Dated:                           Signature:                                                            .



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NOTICE: The above signature must correspond with the name as written upon the face of the
within Warrant Certificate in every particular, without alteration or enlargement or any change
whatsoever. If the certificate representing the shares is to be registered in a name other than
that in which the within Warrant Certificate is registered, the signature of the holder hereof must
be guaranteed.



Signature
Guaranteed:                                                                     
            .



SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE FOLLOWING STOCK
EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK EXCHANGE, AMERICAN STOCK EXCHANGE, OR
MIDWEST STOCK EXCHANGE.




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SCHEDULE 2




Form of Senior Note Guaranty




GUARANTY AGREEMENT

__, 2007



This Guaranty Agreement (the “Agreement”) is made as of ___, 2007 by and among Persistency, a
Cayman Islands partnership (“Persistency”), each of the holders of Senior Indebtedness (as defined
below) that are a signatory hereto, and Ingalls & Snyder LLC (“I&S”) as agent for the Senior
Indebtedness holders. Capitalized terms not defined herein shall have the meanings ascribed to
them in that certain Note and Warrant Purchase Agreement dated June 28, 2006 by and among CanArgo
Energy Corporation (“CanArgo”) and Persistency.



WHEREAS, holders of the Senior Subordinated Notes of CanArgo have been given an exchange offer in
which such holders exchange such Senior Subordinated Notes for shares of capital stock of Tethys
Petroleum Limited (“Tethys”) and Persistency has agreed to exchange $5 million in aggregate
principal amount of its Senior Subordinated Notes for 2,000,000 shares of Tethys (the “Tethys
Shares”).



NOWWHEREFORE, the parties agree as follows:





	 	1.	 	Guaranty. In the event that (i) an Event of Default has occurred and is
continuing in respect of the Senior Secured Notes (“Senior Indebtedness”) purchased
pursuant to that certain Note Purchase Agreement dated as of July 25, 2005, and (ii) as a
result of such Event of Default any Senior Indebtedness is accelerated by the holders
thereof (a “Trigger Event”), I&S may require that Persistency purchase from I&S, within
thirty business days from delivery of notice by I&S to Persistency, an amount of Senior
Secured Notes with an aggregate principal amount equal to the Note Amount, for an aggregate
purchase price of $5 million in immediately available funds (the “Senior Note Purchase”).
For the purpose of clarity, under no circumstances shall the Senior Note Purchase apply to
Senior Subordinated Notes owned by any of the parties. The “Note Amount” shall be equal to
$5 million minus all accrued but unpaid interest and other amounts owing on the date Senior
Note Purchase takes place in respect of an aggregate principal amount of the Senior Secured
Notes equal to the Note Amount. Notwithstanding the foregoing, Persistency may choose to
deliver to I&S the Tethys Shares in lieu of effecting the Senior Note Purchase. In
addition, if the fair market value of Persistency’s assets fall below $50 million,
Persistency shall notify I&S of such event and, regardless of whether (i) through (ii)
above have occurred, I&S may require Persistency to effect the Senior Note Purchase or
deliver the Tethys Shares within thirty business days.
	 
	 	2.	 	Agreement to Subordinate Right of Payment. In the event that Persistency
effects the Senior Note Purchase, Persistency agrees that amounts owing on the portion of
the Senior Indebtedness purchased by Persistency pursuant to the Senior Note Purchase shall
be junior in right of payment to the Senior Secured Notes owned by I&S (but shall remain
senior to all other indebtedness of CanArgo).
	 
	 	3.	 	Termination of Guaranty
	 
	 	 	 	At any time after the occurrence of a Trigger Event, Persistency may give notice to I&S that
the guaranty must be exercised or will terminate on the twentieth day after such notice. If
such notice




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	 	 	 	is given, the Purchase Option granted in the Intercreditor Agreement will also terminate on
the thirtieth day after the date of such notice.
	 
	 	 	 	In addition, the Guaranty shall automatically terminate and be of no further force and
effect if (i) the conversion of Persistency’s senior subordinated indebtedness into Tethys
Shares is subject to a successful claim of fraudulent conveyance or (ii) Persistency
exercises its Purchase Option (as that term is defined in the Intercreditor Agreement of
even date hereof) set forth in such Intercreditor Agreement.
	 
	 	4.	 	Representations and Warranties.






	 	a.	 	Persistency. Persistency represents to each I&S that:






	 	i.	 	it has full legal capacity, power and authority to
execute, deliver and perform this Agreement;
	 
	 	ii.	 	the execution, delivery and performance by
Persistency of this Agreement have been duly authorized by all necessary
legal action on the part of Persistency; the execution, delivery and
performance of this Agreement will not (a) conflict with any provision of
any governing instrument applicable to Persistency or (b) result in any
Material breach of any terms or provisions of, or constitute a Material
default under, any Material contract, agreement or instrument to which
Persistency is a party or by which Persistency is bound;
	 
	 	iii.	 	this Agreement constitutes a legal, valid and
binding obligation enforceable against Persistency in accordance with its
terms, except as such enforceability may be limited by (a) applicable
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
affecting the enforcement of creditors’ rights generally and (b) general
principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law); and
	 
	 	iv.	 	Persistency is an institutional accredited
investor.






	 	b.	 	 I&S. I&S represents to Persistency that:






	 	i.	 	it has full legal capacity, power and authority to
execute, deliver and perform this Agreement;
	 
	 	ii.	 	the execution, delivery and performance by it of
this Agreement have been duly authorized by all necessary legal action on
its part;
	 
	 	iii.	 	the execution, delivery and performance of this
Agreement will not (a) conflict with any provision of any governing
instrument applicable to it or (b) result in any Material breach of any
terms or provisions of, or constitute a Material default under, any
Material contract, agreement or instrument to which it is a party or by
which it is bound;
	 
	 	iv.	 	this Agreement constitutes a legal, valid and
binding obligation enforceable against it in accordance with its terms,
except as such enforceability may be limited by (a) applicable
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
affecting the enforcement of creditors’ rights generally and (b) general
principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law);
	 
	 	v.	 	it is an institutional accredited investor; and
	 
	 	vi.	 	it owns the Senior Indebtedness set forth opposite
such Senior Indebtedness Holder’s name on Exhibit A hereto.






	 	5.	 	Indemnification.






	 	a.	 	Persistency indemnifies and agrees to hold I&S harmless from damages
arising from any Material breach of any of Persistency’s representations and
warranties contained in this Agreement.




19









 






	 	b.	 	I&S indemnifies and agrees to hold Persistency harmless from damages
arising from any Material breach of any of its representations and warranties
contained in this Agreement.






	 	6.	 	Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the
extent of such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall
(to the full extent permitted by law) not invalidate or render unenforceable such provision
in any other jurisdiction.
	 
	 	7.	 	Counterparts. This Agreement may be executed in any number of counterparts,
each of which shall be an original but all of which together shall constitute one
instrument. Each counterpart may consist of a number of copies hereof, each signed by less
than all, but together signed by all, of the parties hereto.
	 
	 	8.	 	Governing Law. This Agreement shall be construed and enforced in accordance
with, and the rights of the parties shall be governed by, the law of the State of New York
excluding choice of law principles of the law of such State that would require the
application of the laws of a jurisdiction other than such State.
	 
	 	9.	 	Submission to Jurisdiction. For the purposes of any action or proceeding
involving this Agreement, Persistency and each Senior Indebtedness Holder shall cause its
Subsidiaries to, expressly submit to the nonexclusive jurisdiction of all federal and state
courts sitting in the Borough of Manhattan, City and State of New York and consents that
any order, process, notice of motion or other application to or by any of said courts or a
judge thereof may be served within or without such court’s jurisdiction by registered mail
or by personal service, provided that a reasonable time for appearance is allowed. Each
party irrevocably waives any objection that it may now or hereafter have to the laying of
venue of any suit, action or proceeding arising out of or relating to this Agreement, the
Notes or any other agreement or document referred to herein or therein brought in any
federal or state court sitting in the City and State of New York, and hereby further
irrevocably waives any claim that any such suit, action or proceeding brought in any such
court has been brought in an inconvenient forum.






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