Document:

Exhibit
10.1

CANO
PETROLEUM, INC.

STOCK
OPTION AGREEMENT

 

               
Cano Petroleum, Inc., a Delaware
corporation whose address is 309 West Seventh Street, Suite 1600, Fort Worth,
Texas 76102 (the “Company”),
hereby grants Gerald W. Haddock
(collectively with any registered assigns,  the “Holder”) an Option (the “Option”)to acquire from the Company an
aggregate of Fifty Thousand (50,000) shares (the “Option Shares”) of  the common stock, par value
$0.0001 per share of the Company (“Common
Stock”) at any time during the Option Period (defined below).

 

1.            
Exercise; Issuance of Certificates; Payment for Shares.

 

               
(a)          
Purchase Price.  The purchase price of each Option Share
issuable upon exercise of this Option shall be $4.00 per Option Share, subject
to adjustment as provided in Section 5 hereof (“Purchase Price”).

 

               
(b)          
Option Exercise.  The purchase rights represented by this
Option may be exercised by the Holder, in whole or in part, at any time, and
from time to time during the Option Period, by the surrender and presentment of
this Option accompanied by a duly executed Notice of Exercise in the form
attached hereto (the “Exercise Notice”),
together with the payment of the aggregate Purchase Price (the “Aggregate Purchase Price”) for the
number of Option Shares specified in the Exercise Notice in the manner
specified in Section 1(d) or 1(e) hereof, all of which shall be presented to
the Company at its principal office.

 

               
(c)           Option Period.  The “Date of Grant” of this Option is
December 16, 2004.  The “Option
Period” shall commence on the first day immediately following
the  expiration of six months from the Date of Grant (the “Exercise Commencement Date”) and shall
continue until the Expiration Date.  The “Expiration Date” shall mean that date which is the tenth
anniversary of the Exercise Commencement Date.

 

               
(d)          
Payment of Purchase Price.  The Aggregate Purchase Price of the
Option Shares being acquired upon exercise of this Option shall be paid by the
Holder to the Company by delivery of a wire transfer of immediately available
funds or a certified bank or cashier’s check payable to the order of the
Company in the amount of the Aggregate Purchase Price which shall be determined
by multiplying the Purchase Price by the number of Option Shares specified in
the Exercise Notice to be purchased upon such exercise.

 

               
(e)           Cashless Exercise of Options. 
Notwithstanding any provisions to the contrary in this Option, the Holder, at
its option, may, in lieu of paying the Aggregate Purchase Price in cash
pursuant to Section 1(d) hereof, require that the Company reduce the number of
Option Shares to be delivered to such Holder upon the exercise of the Options
then being exercised by the number of Option Shares having an aggregate Net
Value as of the date of surrender equal to the Aggregate Purchase Price of all
Options Shares issuable upon such exercise.  The “Net Value” of an Option Share shall
mean the Fair Market Value minus the Purchase Price of such Option Share; the “Fair Market Value” shall mean (i) in the
event the Common Stock is listed on a national stock exchange or NASDAQ, the
average closing sales price on such exchange or NASDAQ for the 20 trading days
immediately preceding the date of exercise; (ii) in the event (i) is
inapplicable but the Common Stock is quoted in the over-the-counter market, the
mean of the bid and asked prices of the Common Stock on the date of exercise;
or (iii) in the event (i) and (ii) are inapplicable, the fair market value of a
share of the Common Stock as determined in good faith by the Board of Directors
of the Company.

 

               
(f)            Issuance of Certificates.  As soon as
practicable after full or partial exercise of this Option, the Company at its
expense shall cause to be issued in the name of and delivered to the Holder or
such other persons as directed by the Holder, a certificate or certificates for
the total number of Option Shares for which this Option is being exercised in
such denominations as instructed by the Holder (or, in the case of a cashless
exercise under Section 1(e) hereof, the Common Stock into which the Option
Shares are convertible), together with any other securities and property to
which the Holder is entitled upon exercise under the terms of this
Option.   In the event this Option is only partially exercised, a new
Option evidencing the right to acquire the number of Option Shares with respect
to which this Option shall not then have been exercised shall be executed,
issued and delivered by the Company to the Holder simultaneously with the
delivery of the certificates representing the Option Shares so purchased.

 

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2.            
Shares Fully Paid; Reservation of Shares. 
The Company hereby agrees that it will at all times have authorized and will
reserve and keep available, solely for issuance and delivery to the Holder,
that number of shares of its Common Stock (or other securities and property)
that may be required from time to time for issuance and delivery upon the
exercise of this Option.  All Option Shares when issued in accordance with
this Option shall be duly and validly issued, shall be fully paid and
nonassessable, free and clear of any claim, lien, encumbrance, or security
interest of any kind whatsoever, and free from all preemptive rights of any
security holders of the Company.  The Company shall take all action as may
be necessary to assure that such Option Shares (and any other securities and
property) may be issued and delivered as provided herein without violation of
any applicable law or regulation, or of any requirements, of any domestic
securities exchange or inter-dealer quotation system upon which the Common
Stock may be listed.

 

3.            
Assignment of Option. 
All of the covenants and provisions of this Option by or for the benefit of the
Holder shall be binding upon and shall inure to the benefit of its heirs,
successors, and permitted assigns hereunder.  This Option may be sold,
transferred, assigned, or hypothecated only in compliance with Section 6
herein.  Any assignment shall be made by surrender of this Option to the
Company, together with a duly executed assignment in the form attached hereto (“Assignment Form”), whereupon the
Company shall, without charge, execute and deliver a new Option containing the
same terms and conditions of this Option in the name of the assignee as named
in the Assignment Form, and this Option shall be cancelled at that time.

 

4.            
Covenant and Warranty Regarding Freely
Tradable Option Shares.   The Company represents,
warrants and covenants that the Company shall take all necessary actions, at
its expense, either to cause the issuance of the Option Shares to Holder upon
exercise of the Option to be registered under the Securities Act of 1933 (the “Securities Act”), so that the Option
Shares received by  Holder upon exercise of the Option shall be “freely
tradeable” (subject only to restrictions, if any, arising due to Holder’s
capacity as an affiliate or statutory insider of the Company), or to cause the
Option Shares to be registered under the Securities Act for subsequent resale
by Holder, or to assure that subsequent resale by Holder of Option Shares in
public market transactions shall be exempt from registration under the
Securities Act.

 

5.            
Adjustment of Purchase Price and Number of
Option Shares.   The number of Option Shares shall be
proportionately adjusted (and the Purchase Price shall be inversely
proportionally adjusted) for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company.  If the Company declares,
pays, or makes any dividend or other distribution upon its outstanding shares
of Common Stock payable in securities or other property (excluding cash
dividends from current income and dividends payable in shares of Common Stock,
but including, without limitation, shares of any other class of the Company’s
stock or stock or other securities convertible into or exchangeable for Common
Stock or any other class of the Company’s stock or other interests in the
Company or its assets (“Convertible
Securities”)), a proportionate part of those securities or that
other property shall be set aside by the Company and delivered to the Holder in
the event that the Holder exercises this Option.   Upon the
occurrence of any of the following events, the Company shall cause an effective
provision to be made so that the Holder shall have the right thereafter, by the
exercise of this Option, to acquire for the Aggregate Purchase Price described
in this Option the kind and amount of shares of stock and other securities,
property (including cash), and interests as would be issued or payable with
respect to or in exchange for the number of Option Shares that are then purchasable
pursuant to this Option as if such Option Shares had been issued to the Holder
immediately prior to such event: (A) reclassification, capital reorganization,
or other change of outstanding Common Stock (other than a change described
above), (B) consolidation or merger of the Company with or into another
corporation or entity, or (C) spin-off of assets, a subsidiary, or any
affiliated entity, or the sale, lease, pledge, mortgage, conveyance, or
exchange of a significant portion of the Company’s assets taken as a whole, in
a transaction pursuant to which the Company’s shareholders of record are to
receive securities or other interests in a successor entity.

 

6.            
Transfer to Comply with the Securities Act. 
Neither this Option nor the Option Shares or any other security issued or
issuable upon exercise of this Option may be offered or sold except in
compliance with the Securities Act. The Company may cause the following legend,
or its equivalent, to be set forth on each certificate representing the Option
Shares, or any other security issued or issuable upon exercise of this Option,
not theretofore distributed to the public or sold to underwriters, as defined
by the Securities Act:

 

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“The shares represented by this Certificate may not be
offered for sale, sold, assigned, pledged, hypothecated, or otherwise
transferred except pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the “Securities Act”), or pursuant to an
exemption from registration under the Securities Act, the availability of which
is to be established to the satisfaction of the Company.”

 

The Holder agrees that it will not offer for sale,
sell, assign, pledge, hypothecate, or otherwise transfer (a “Disposition”) the Option, the Option
Shares, or any other securities issued or issuable upon exercise of this Option
unless the Disposition of such securities is registered under the Securities
Act and the securities laws of all other applicable jurisdictions or an
exemption therefrom is available as supported by an opinion of counsel
reasonably satisfactory to the Company.  Subject to the preceding, the
Option and the Option Shares, and any other securities issued or issuable upon
exercise of this Option are assignable in whole or in part by the Holder.

 

7.            
Representations by Holder. 
By acceptance of this Option, the Holder hereby represents and covenants: 
(a) that any securities purchased upon exercise of this Option or acquired upon
conversion thereof shall be acquired for investment purposes only and not with
a view to, or for sale in connection with, any distribution thereof within the
meaning of Section 2(11) of the Securities Act; (b) that the Holder has had
such opportunity as such Holder has deemed adequate to obtain from representatives
of the Company such information as is necessary to permit the Holder to
evaluate the merits and risks of its investment in the Company; (c) that the
Holder is able to bear the economic risk of holding such securities as may be
acquired pursuant to the exercise of this Option for an indefinite period; (d)
that the Holder understands that the securities acquired pursuant to the
exercise of this Option will not be registered under the Securities Act (except
as otherwise provided herein) and will be “restricted securities” within
the meaning of Rule 144 under the Securities Act and that the exemption from
registration under Rule 144 will not be available for at least one year from
the date of exercise of this Option, and even then will not be available unless
a public market then exists for the securities, adequate information concerning
the Company is then available to the public, and other terms and conditions of
Rule 144 are complied with.

 

8.            
No Impairment.  The
Company covenants that it will not, by amendment of its Certificate of
Incorporation or bylaws, or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observation or performance of any
of the terms of this Option, but will at all times in good faith assist in
carrying out all those terms and in taking all action necessary or appropriate
to protect the rights of the Holder against dilution or other impairment.

 

9.            
Further Assurances. 
The Company will take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable Option Shares or other securities upon the exercise of all
Options from time to time outstanding.

 

10.          
Notices.  All notices,
demands, requests, certificates, or other communications by the Company to the
Holder and by the Holder to the Company shall be in writing and shall be deemed
to have been delivered, given, and received when personally given or on the
fifth calendar day after it is mailed by registered or certified mail to the
Holder, postage pre-paid and addressed to the Holder at his last registered
address or, if the Holder has designated, by notice in writing to the Company,
any other address, to such other address; and, if to the Company, addressed to
it at that address appearing on page 1 of this Option Agreement.  The
Company may change its address for purposes of service of notice by written
notice to the Holder at the address provided above, and the Holder may change
its address by written notice to the Company.

 

11.          
Binding Effect.  This
Option shall be binding upon any corporation or other entity succeeding the
Company by merger, consolidation, or other acquisition and the benefits of this
Option shall inure to the Holder’s heirs, legal representatives, successors,
and assigns.

 

12.          
Applicable Law.  This
Option shall be governed by and construed in accordance with the substantive
laws of the State of Delaware, without giving effect to the principles of the
conflict of laws.

 

13.          
Additional Grant of Option at Discretion
of Board of Directors.  This Option is granted to Gerald W.
Haddock (“Haddock”) in
consideration of his agreement to use his expertise, experience, skill and
knowledge to furnish the Company with consulting services on certain
matters.  The Board of Directors shall give due

 

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consideration to granting Haddock an additional
option, on the same terms as this Option, as a bonus based upon the successful
performance of, and additional value to the Company of, those services and such
other factors as the Board deems relevant;  provided, however, that the
grant of an additional option shall be at the discretion of the Board of
Directors.

 

14.          
Mutual Rescission of Prior Option Grant. 
Haddock and the Company previously entered into a Stock Option Agreement dated
December 10, 2004.  That Stock Option Agreement is hereby mutually
rescinded ab initio.

 

 

IN
WITNESS WHEREOF,
the parties hereto have entered into this Stock Option Agreement, this 16th
day of December, 2004.

 

 

CANO PETROLEUM, INC.

 

 

	
  By:

  	
   

  	
   

  	
   

  
	
  Printed Name and Title:

  	
   

  	
   

  	
  GERALD W. HADDOCK

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

4

 

ASSIGNMENT

 

 

               
FOR VALUE RECEIVED,
the undersigned hereby sell(s), assign(s), and transfer(s) unto , the rights
represented by the within Option to purchase __________ (________) shares of
the Common Stock of Cano Petroleum, Inc., a Delaware corporation, pursuant to
the terms and conditions of this Option held by the undersigned.  The
undersigned hereby authorizes and directs the Company (i) to issue and deliver
to the above-named assignee a new Option pursuant to which the rights to
purchase being assigned may be exercised, and (ii) if there are rights to
purchase Option Shares remaining pursuant to the undersigned’s Option after the
assignment contemplated herein, to issue and deliver to the undersigned a new
Option evidencing the right to purchase the number of Option Shares remaining
after issuance and delivery of this Option to the above-named assignee. 
Except for the number of shares that may be purchased, the new Options to be
issued and delivered by the Company are to contain the same terms and
conditions as the undersigned’s Option.  To complete the assignment
contemplated by this Assignment, the undersigned irrevocably appoints                            as
the undersigned’s attorney-in-fact to transfer this Option and the rights
thereunder on the books of the Company with the full power of substitution for
these purposes.

 

	
  Date:

  	
   

  
	
   

  	
   

  
	
  Printed Name of the
  Holder:

  	
   

  
	
   

  	
   

  
	
  Signature:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
					

 

 

 

 

(Signature must correspond with the name as written
upon the face of this Option, in every particular, without alteration or enlargement,
or any change whatsoever, with signature guaranteed.)

 

5

 

                                                                                 
NOTICE OF EXERCISE

 

               
The undersigned Holder of an Option to purchase shares of Common Stock Cano
Petroleum, Inc., a Delaware corporation, hereby elects to purchase, pursuant to
the provisions of the Holder’s Option dated _________, 2004 held by the
undersigned, the following number of such shares                           (_______);
and requests that the Certificate for such shares be issued in the name of, and
delivered to ______________________, whose address is
_____________________________________________; and further requests, if the
number of shares transferred are not all the shares that may be acquired
pursuant to the unexercised portion of this Option, that a new Option of like
tenor for the remaining shares that may be acquired pursuant to this Option be
issued and delivered to the undersigned.

 

 

	
  Dated:

  	
   

  
	
   

  	
   

  
	
  Printed Name:

  	
   

  
	
  Signature:

  	
   

  
	
  Address:

  	
   

  
	
  IRS ID No.

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

(Signature must conform in all respects to the name of
Holder as specified on the face of this Option.)

 

6Exhibit 10.3

                                    CONFIRMATION

TO: MICHAEL GREEN

         This is to confirm renewal of the employment agreement made as of
October 1, 2000, for a further one year period commencing on October 1, 2004,
and ending on September 30, 2005, under the same terms and conditions,
including, the terms relating to compensation.

         Dated at Markham this 1st day of October, 2004

         MIAD SYSTEMS LTD.

         Per: /s/ Michael Green
              -------------------------
              Michael Green - President

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