Document:

EMPLOYMENT AGREEMENT

INDEPENDENT SALES REPRESENTATIVE AGREEMENT

This Independent Sales Representative Agreement is made and entered this 5th day of September, 2006 by and between VOXTECH PRODUCTS, INC., a Connecticut corporation (the “Company”), PHYSICIANS REMOTE SOLUTIONS, INC., a Florida corporation (“PRS”) and DANIEL P. ELSBREE, residing at 5347 N. Glenwood Ave., #3, Chicago, Illinois  60640, (“Elsbree”).

W I T N E S S E T H:

WHEREAS, the Company desires to retain Elsbree as an independent sales representative upon the terms and conditions set forth in this Agreement; and

WHEREAS, Elsbree desires to be so retained by the Company, upon the terms and conditions set forth in this Agreement; and

WHEREAS, Elsbree, by reason of the nature of his duties, will be provided access to the Company’s trade secrets and other confidential information and the Company desires to maintain the confidentiality of such; and

WHEREAS, Elsbree and the Company desire to terminate any agreements heretofore made by and between them. 

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

1.

Retention.

The Company hereby retains Elsbree as a non-exclusive independent sales representative for the sale of the Company’s licensed DR SPEAK software (the “Software”), and Elsbree agrees to be so retained. Elsbree hereby agrees to use his best efforts to effect sales of the Software during full business time.

2.

Compensation.

In consideration of the services to be performed hereunder, the Company shall pay to Elsbree an amount representing 20% of (a) the sales price received by the Company from the sale of the Software made by Elsbree during his retention hereunder (b) less any returns or allowances. All such compensation shall be paid to Elsbree within ten days of the receipt thereof by the Company. The sales price shall be determined from time to time by the Company.

3.

Expenses.

The Company shall provide to Elsbree at the Company’s expense a laptop computer to be used by Elsbree in demonstrating the Software (the “Laptop”) and reimburse Elsbree for expenses 

incurred by him not to exceed $150 during any thirty day period. Elsbree shall not be entitled to reimbursement of any other expense incurred by him.

4.

Independent Contractor

Elsbree shall be and remain an independent contractor and shall not be an employee of either the Company or PRS.

5.

Termination.

a.

The Company shall have the right to terminate its retention of Elsbree hereunder for cause at any time if:

1.

Elsbree shall be convicted by a court of competent and final jurisdiction of any crime (whether or not involving the Company) which constitutes a felony in the jurisdiction involved or shall be habitually drunk or intoxicated in public or otherwise commit acts of moral turpitude in such a manner as to materially and adversely reflect upon the reputation of the Company; or

2.

Elsbree shall commit any act of embezzlement or similar material dishonest and injurious conduct against the Company; or

3.

Elsbree shall fail or refuse to use his best efforts during full business time to effect sales of the Software.

b.

Either the Company or Elsbree party may terminate the retention of Elsbree at any time on not less than thirty days notice to the other party 

c.

Upon the termination of Elsbree’s retention, Elsbree shall promptly return the laptop to the Company.

6.

Registration of the Shares

PRS hereby agrees to register the Shares, as that term is defined in Section 8 hereof under the Securities Act of 1933 for public resale by Elsbree.  Notwithstanding the foregoing, Elsbree hereby agrees that none of the Shares may be sold pursuant to such registration prior to the time that he sells a minimum of five of the Software systems on behalf of the Company for which the Company shall have received full payment

7.

Notices.

All notices, requests, demands, waivers, consents, approvals or other communications required or permitted hereunder shall be in writing and shall be deemed to have been given when delivered to the address set forth below and addressed as follows:

2

If to the Company:

Physicians Remote Solutions, Inc.

64 Secretariat Court

Tinton Falls, NJ 07724

If to Elsbree:

Daniel P. Elsbree

5347 N. Glenwood Ave., #3

Chicago, IL 60640

Any party may by notice change the address to which notice or other communications to it are to be delivered or mailed.

8.

Termination of Prior Agreements.

Elsbree and PRS hereby agree that any and all prior agreements, both written and oral, by and between them are hereby terminated and shall be of no force and effect and neither of them shall have any obligation to the other thereunder. PRS hereby acknowledges that prior to such termination, Elsbree has earned and fully paid for 50,000 shares of the Company’s common stock, $0.00001 par value pursuant to an employment agreement entered into July 2006 (the “Shares”). As a condition to the issuance of the certificate representing the shares, Elsbree shall have first executed the investment representations, covenants and acknowledgements attached hereto as Exhibit A; and

9.

Entire Agreement: Amendment.

10.

This Agreement represents the entire agreement between the parties with respect to the subject matter hereof and shall not be modified or affected by any offer, proposal, statement or representation, oral or written, made by or for either party. Whenever the masculine pronoun is used, it includes the feminine pronoun, and the singular includes the plural, and vice versa, where the context requires. This Agreement may not be amended or modified except by an instrument in writing signed by the Company and Elsbree.

11.

Severability. Successors and Assigns.

Should any provision or clause hereof be held to be invalid, such invalidity shall not affect any other provision or clause hereof which can be given effect without such invalid provision. This Agreement shall inure to the benefit of and be binding upon the Company, its successors and assigns and upon Elsbree and his heirs, executors, administrators, or other legal representatives.

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12.

Laws Applicable and Exclusive Venue.

This Agreement shall be governed by and construed in accordance with the internal laws of the State of Florida venue shall lie in the state and federal courts in the State of Florida.

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

PHYSICIANS REMOTE SOLUTIONS, INC. 

VOXTECH PRODUCTS, INC.,

By: /s/Christopher LaRose 

By: /s/Christopher LaRose

Its: President

Its: President

DANIEL P. ELSBREE

/s/ Daniel P. Elsbree 

4

EXHIBIT A

Physicians Remote Solutions, Inc.

64 Secretariat Court

Tinton Falls, NJ 07724

Gentlemen:

Reference is made to the Independent Sales Representative Agreement between us and Voxtech Products, Inc.

In order to induce you to issue the Shares, as that term is defined in the Employment Agreement, to me, I hereby confirm the following:

Prior to any discussion between you and me with respect to the Shares, I had an existing relationship with you.

Neither you nor any other person or entity offered to sell me the Shares by means of: (i) any advertisement, article, notice or other communication published in any newspaper, magazine or similar medium, or broadcast over television or radio, (ii) any seminar or meeting whose attendees have been invited by any general solicitation or general advertising, or (iii) any other form of general solicitation or advertising.

At the time I became entitled to receive the Shares:

 

I had no need for liquidity with respect to my investment in the Shares to satisfy any existing or contemplated need, undertaking or indebtedness and I was able to bear the economic risk of the investment in the Shares for an indefinite period, including the risk of losing all of my investment. If I lose my entire investment in the Shares, the loss would not materially adversely affect my standard of living or that of my family.

I acknowledged and understood that the Shares had not been registered under the Securities Act of 1933 (the “Act”) and that they therefore must be held indefinitely unless they are subsequently registered under the Act or an exemption from such registration is available. Accordingly, I will bear the investment risk of the Shares for an indefinite period of time.

I was fully aware that Rule 144 under the Act as then in effect permits sales of “restricted securities” such as the Shares only if a minimum of one year has elapsed since the later of the date the shares were acquired from you or an affiliate of you and only upon compliance with the other requirements of such Rule. I recognize that you may not comply with the conditions which, among others, would permit me to sell the Shares pursuant to Rule 144. If such Rule is available to me, I may make only routine sales of the Shares in limited amounts in accordance with the terms and conditions of such Rule.

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I understood that you are the only person which may register the Shares under the Act and, other than as expressly set forth herein, that you have no obligation to do so.

I have acquired the Shares solely for my account for investment and not with a view toward distribution or fractionalization.

In the event that I at any time contemplate the disposition (whether by sale, exchange, gift, or other form of transfer) of the Shares, I will first notify you of such proposed disposition and will thereafter cooperate with you in complying with all applicable requirements of State and Federal securities laws which in the opinion of your counsel, must be satisfied prior the making of such disposition.

I have not and will not sell, hypothecate, or otherwise transfer or dispose of any or all of the Shares unless (a) the Shares have been registered under the Act or (b) I first deliver to you a written opinion satisfactory to you and you counsel to the effect that an exemption from registration under the Act is available with respect to such disposition. I shall bear the cost of my own counsel.

Prior to the execution of any agreement with you, I understood that the purchase of the Shares is subject to a high degree of risk.

Prior to the execution of any agreement with you, I was given access to review all of your books, records, correspondence and other documents.

There have never been any oral or written contracts, understandings, agreements or arrangements pursuant to which I may at any date sell or otherwise dispose of any or all of the Shares or cause the title in them to vest in any other person or entity.

There have never been any oral or written contracts, understandings, agreements or arrangements between any other person or entity and me by which any such person or entity will benefit in such manner as to be deemed equivalent to an owner of any of the Shares, including, but not limited to, the application of income received from a sale of the Shares.

I hereby confer full authority upon you (a) to instruct your transfer agent not to transfer any of the Shares until it has received a written opinion from your counsel to the effect that the Shares have been registered under the Act or an exemption from such registration is available and (b) to affix to the certificates representing the Shares a legend to the following effect:

THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW. NEITHER THE SHARES NOR ANY INTEREST THEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS IN THE ABSENCE OF REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW, OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND THE CORPORATION SHALL HAVE
RECEIVED, AT THE EXPENSE OF THE HOLDER HEREOF, EVIDENCE OF SUCH EXEMPTION REASONABLY SATISFACTORY TO THE CORPORATION, WHICH UPON REQUEST OF THE CORPORATION, MUST INCLUDE, AMONG OTHER THINGS, AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION.

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As used in this letter, the term “Shares” shall also refer to any securities into which such securities may become converted, subdivided, or split up in connection with a merger, reclassification, recapitalization or reorganization of you and all securities distributed in connection therewith.

Sincerely,

/s/ Daniel P. Elsbree

Daniel P. Elsbree

Dated: September 5, 2006

7Exhibit
10.1

NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS WARRANT NOR THE
SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE WARRANT AND THE SECURITIES INTO WHICH
THIS WARRANT IS EXERCISABLE MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
WARRANT OR THE SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A
GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER
SAID ACT.  NOTWITHSTANDING THE FOREGOING,
THE WARRANT AND THE SECURITIES INTO WHICH THIS WARRANT IS EXERCISABLE MAY BE
PLEDGED PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE 1933 ACT
IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE WARRANT OR THE SECURITIES INTO WHICH THIS WARRANT IS
EXERCISABLE.

CANO PETROELUM, INC.

WARRANT TO PURCHASE COMMON STOCK

	
  No. W-

  	
   

  	
  September 6, 2006

  

 

Void
After March 6, 2008

THIS
CERTIFIES THAT, for value received,                          ,
with its principal office at                                                                                                                  ,
or its successors and permitted assigns (the “Holder”), is entitled to subscribe for
and purchase at the Exercise Price (defined below) from Cano Petroleum, Inc., a
Delaware corporation, with its principal office at 801 Cherry St., Suite 3200,
Fort Worth, Texas 76102 (the “Company”) up to          
shares of the common stock of the Company, par value $.0001 per
share (the “Common Stock”),
subject to adjustment as provided herein. 
This Warrant is one of a series of Warrants being issued pursuant to the
terms of the Securities Purchase Agreement, dated August 25, 2006, among the
Company and the original Holder of this Warrant and the other parties named
therein (the “Purchase
Agreement”).  Capitalized
terms not otherwise defined herein shall have the respective meanings ascribed
to such terms in the Purchase Agreement.

1.                                      DEFINITIONS. 
As used herein, the following terms shall have the meanings
ascribed to them below:

 

(a)                                  “Exercise Period” shall mean the
period commencing 180 days after the date hereof and ending March 6, 2008 at
5:00 p.m. Eastern Standard Time, unless sooner exercised or terminated as
provided below.

(b)                                  “Exercise Price” shall mean $4.79 per
share, subject to adjustment pursuant to Section 5 below.

(c)                                  “Warrant Shares” shall mean the shares
of the Common Stock issued upon exercise of this Warrant, subject to adjustment
pursuant to the terms herein, including but not limited to adjustment pursuant
to Section 5 below.

2.                                      EXERCISE OF WARRANT.

2.1                               Method of Exercise.  The rights represented by this Warrant may be
exercised in whole or in part at any time during the Exercise Period, by
delivery of the following to the Company at its address set forth above (or at
such other address as it may designate by notice in writing to the Holder):

(a)                                  an
executed Notice of Exercise in the form attached hereto;

(b)                                  payment
of the Exercise Price either (i) in cash or by check or wire transfer of
immediately available funds, or (ii) pursuant to a Cashless Exercise, as
described below; and

(c)                                  this
Warrant.

Upon the exercise of the rights represented by this
Warrant, shares of Common Stock shall be issued for the Warrant Shares so
purchased, and shall be registered in the name of the Holder or persons affiliated
with the Holder, if the Holder so designates, within a reasonable time after
the rights represented by this Warrant shall have been so exercised and shall
be issued in certificate form and delivered to the Holder, if so requested.

The person in whose name any Warrant Shares are to be
issued upon exercise of this Warrant shall be deemed to have become the holder
of record of such shares on the date on which this Warrant was surrendered and
payment of the Exercise Price was made, irrespective of the date of issuance of
the shares of Common Stock, except that, if the date of such surrender and
payment is a date when the stock transfer books of the Company are closed, such
person shall be deemed to have become the holder of such shares at the close of
business on the next succeeding date on which the stock transfer books are
open.

2.2                               Cashless Exercise.  Notwithstanding any provisions herein to
the contrary, if, at any time during the Exercise Period, the Current Market
Price (as defined below) of one share of Common Stock is greater than the
Exercise Price (at the date of calculation as set forth below), in lieu of
exercising this Warrant by payment of cash, the Holder may exercise this
Warrant by a cashless exercise by surrender of this Warrant at the principal
office of the Company together with the properly endorsed Notice of Exercise
and the Company shall issue to the Holder a number of shares of Common Stock
computed using the following formula:

 2
 

 

 

	
  X =

  	
   

  	
  Y (B-A)

  	
   

  
	
   

  	
   

  	
  B

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Where:                                                         X =

  	
   

  	
  the number of shares of Common Stock to be issued to
  the Holder.

  
	
   

  	
   

  	
   

  
	
  Y =

  	
   

  	
  the number of shares of Common Stock purchasable
  upon exercise of all of the Warrant or, if only a portion of the Warrant is
  being exercised, the portion of the Warrant being exercised.

  
	
   

  	
   

  	
   

  
	
  A =

  	
   

  	
  the Exercise Price.

  
	
   

  	
   

  	
   

  
	
  B =

  	
   

  	
  the Current Market Price of one share of Common
  Stock.

  

 

“Current Market Price”
means on any particular date:

(a)                                  if the Common
Stock is traded on the Nasdaq Capital Market, the Nasdaq Global Market or the
Nasdaq Global Select Market, the average of the closing prices of the Common
Stock on such market over the five trading days ending immediately prior to the
applicable date of valuation;

(b)                                  if the Common
Stock is traded on any registered national stock exchange but is not traded on
the Nasdaq Capital Market, the Nasdaq Global Market or the Nasdaq Global Select
Market, the average of the closing prices of the Common Stock on such exchange
over the five trading days ending immediately prior to the applicable date of
valuation

(c)                                  if the Common
Stock is traded over-the-counter, but not on the Nasdaq Capital Market, the
Nasdaq Global Market, the Nasdaq Global Select Market or a registered national
stock exchange, the average of the closing bid prices over the 30-day period
ending immediately prior to the applicable date of valuation; and

(d)                                  if there is no
active public market for the Common Stock, the value thereof, as determined in
good faith by the Board of Directors of the Company upon due consideration of
the proposed determination thereof by the Holder.

2.3                               Partial Exercise.  If this Warrant is exercised in part
only, the Company shall, upon surrender of this Warrant, execute and deliver,
within 10 days of the date of exercise, a new Warrant evidencing the rights of
the Holder, or such other person as shall be designated in the Notice of
Exercise, to purchase the balance of the Warrant Shares purchasable
hereunder.  In no event shall this Warrant
be exercised for a fractional Warrant Share, and the Company shall not
distribute a Warrant exercisable for a fractional Warrant Share.  Fractional Warrant Shares shall be treated as
provided in Section 6 hereof.

2.4                                 Delivery. 
Certificates for shares purchased hereunder shall be transmitted by the
transfer agent of the Company to the Holder by crediting the account of the
Holder’s prime broker with the Depository Trust Company through its Deposit
Withdrawal Agent Commission system if the Company is a participant in such
system (and so long as the legend may be removed in accordance with Section
2(h) of the Purchase Agreement), and otherwise by physical delivery to the
address specified by the Holder in the Notice of Exercise.

 3
 

 

3.                                      COVENANTS OF THE COMPANY.

3.1                               Covenants as to Warrant
Shares.  The Company covenants and
agrees that if at any time during the Exercise Period the number of authorized
but unissued shares of Common Stock shall not be sufficient to permit exercise
of this Warrant, the Company will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock (or other securities as provided herein) to such number
of shares as shall be sufficient for such purposes.

3.2                               No Impairment.  Except and to the extent as waived or
consented to by the Holder or otherwise in accordance with Section 10 hereof,
the Company will not, by amendment of its Certificate of Incorporation (as such
may be amended from time to time), or through any means, avoid or seek to avoid
the observance or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith assist in the
carrying out of all the provisions of this Warrant and in the taking of all
such action as may be necessary or appropriate in order to protect the exercise
rights of the Holder against impairment.

3.3                               Notices of Record Date.  In the event of any taking by the Company of
a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend which is the same as cash dividends paid in previous
quarters) or other distribution, the Company shall mail to the Holder, at least
ten days prior to the date specified herein, a notice specifying the date on
which any such record is to be taken for the purpose of such dividend or
distribution.

4.                                      REPRESENTATIONS OF HOLDER.

4.1                               Acquisition of Warrant
for Personal Account.  The Holder
represents and warrants that it is acquiring the Warrant and the Warrant Shares
solely for its account and not with a present view toward the public or
distribution of said Warrant or Warrant Shares or any part thereof and has no
intention of selling or distributing said Warrant or Warrant Shares or any
arrangement or understanding with any other persons regarding the sale or
distribution of said Warrant or the Warrant Shares.  The Holder will not, directly or indirectly,
offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to
buy, purchase or otherwise acquire or take a pledge of) the Warrant except in
accordance with the Securities Act and will not, directly or indirectly, offer,
sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy,
purchase or otherwise acquire or take a pledge of) the Warrant Shares except in
accordance with the Securities Act.

4.2                               Securities Are Not
Registered.

(a)                                  The Holder
understands that the offer and sale of the Warrant or the Warrant Shares have
not been registered under the Securities Act on the basis that no distribution
or public offering of the stock of the Company is to be effected.  The Holder realizes that the basis for the
exemption may not be present if, notwithstanding its representations, the
Holder has a present intention of acquiring the securities for a fixed or
determinable period in the

 4
 

 

future, selling (in connection with a distribution or
otherwise), granting any participation in, or otherwise distributing the
securities.  The Holder has no such
present intention.

(b)                                  The Holder
recognizes that the Warrant and the Warrant Shares must be held indefinitely
unless they are subsequently registered under the Securities Act or an
exemption from such registration is available. 
The Holder recognizes that the Company has no obligation to register the
Warrant or, except as provided in the Purchase Agreement, the Warrant Shares,
or to comply with any exemption from such registration.

(c)                                  The Holder is
aware that neither the Warrant nor the Warrant Shares may be sold pursuant to
Rule 144 adopted under the Securities Act unless certain conditions are met,
including, among other things, the existence of a public market for the shares,
the availability of certain current public information about the Company, the
resale following the required holding period under Rule 144 and the number of
shares being sold during any three month period not exceeding specified
limitations.  Holder is aware that any
such sale made in reliance on Rule 144, if Rule 144 is available, may be made
only in accordance with the terms of Rule 144.

4.3                               Disposition of Warrant
and Warrant Shares.  Holder
understands that this Warrant and until such time as the resale of the Warrant
Shares have been registered under the 1933 Act as contemplated by the Registration
Rights Agreement, the stock certificates representing the Warrant Shares,
except as set forth below, shall bear any legend as required by the “blue sky”
laws of any state and a restrictive legend in substantially the following form
(and a stop-transfer order may be placed against transfer of this warrant or
such stock certificates):

[NEITHER THE
ISSUANCE AND SALE OF THIS WARRANT NOR THE SECURITIES INTO WHICH THIS WARRANT IS
EXERCISABLE HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN] REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS.  THE SECURITIES
MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE
OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A
GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER
SAID ACT. 
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED
PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE 1933 ACT IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.

The legend set forth above shall be removed and the
Company shall issue this Warrant or a certificate without such legend to the
holder of the Warrant Shares upon which it is stamped, if,

 5
 

 

unless otherwise required by state securities laws,
(i) the Warrant or such Warrant Shares, as applicable, are registered for
resale under the 1933 Act, (ii) in connection with a sale, assignment or other
transfer, such holder provides the Company with an opinion of counsel, in a
generally acceptable form, to the effect that such sale, assignment or transfer
of the Warrant or the Warrant Shares, as applicable, may be made without
registration under the applicable requirements of the 1933 Act, or (iii) such
holder provides the Company with reasonable assurance that the Warrant or the Warrant
Shares, as applicable can be sold, assigned or transferred pursuant to Rule
144(k).

5.                                      ADJUSTMENT OF EXERCISE PRICE.  In the event of changes in the
outstanding Common Stock of the Company by reason of stock dividends,
split-ups, recapitalizations, reclassifications, combinations or exchanges of
shares, separations, reorganizations, liquidations, or the like (other than as
set forth in Section 7), the number and class of shares available under the
Warrant in the aggregate and the Exercise Price shall be correspondingly
adjusted to give the Holder, on exercise for the same aggregate Exercise Price,
the total number, class, and kind of shares as the Holder would have owned had
the Warrant been exercised prior to the event and had the Holder continued to hold
such shares until after the event requiring adjustment.  The form of this Warrant need not be changed
because of any adjustment in the number, class, and kind of shares subject to
this Warrant.  The Company shall promptly
provide a certificate from its Chief Executive Officer notifying the Holder in
writing of any adjustment in the Exercise Price and/or the total number, class,
and kind of shares issuable upon exercise of this Warrant, which certificate
shall specify the Exercise Price and number, class and kind of shares under
this Warrant after giving effect to such adjustment.

6.                                      FRACTIONAL SHARES.  No fractional shares shall be
issued upon the exercise of this Warrant as a consequence of any adjustment
pursuant hereto.  All Warrant Shares
(including fractions) issuable upon exercise of this Warrant may be aggregated
for purposes of determining whether the exercise would result in the issuance
of any fractional share.  If, after
aggregation, the exercise would result in the issuance of a fractional share,
the Company shall, in lieu of issuance of any fractional share, pay the Holder
otherwise entitled to such fraction a sum in cash equal to the product
resulting from multiplying the Current Market Price of the Common Stock on the
date of exercise of the Warrant by such fraction.

7.                                      CERTAIN EVENTS.  In the event
of, at any time during the Exercise Period, any capital reorganization, or any
reclassification of the capital stock of the Company (other than a change in
par value or from par value to no par value or no par value to par value or as
a result of a stock dividend or subdivision, split-up or combination of
shares), or the consolidation or merger of the Company with or into another
corporation (other than a merger solely to effect a reincorporation of the
Company into another state), in each case, in which the stockholders of the
Company immediately prior to such capital reorganization, reclassification,
consolidation or merger, will hold less than a majority of the outstanding
shares of the Company or resulting corporation immediately after such capital
reorganization, reclassification, consolidation or merger, or the sale or other
disposition of all or substantially all of the properties and assets of the
Company and its subsidiaries, taken as a whole, in its entirety to any other
person, other than sales or other dispositions that do not require stockholder
approval (each, an “Event”),
then, as a condition of such Event, lawful and adequate provision shall be made
whereby each Holder shall thereafter have the right to purchase and receive
upon the basis and upon the terms and conditions herein specified and in lieu
of the Warrant Shares immediately theretofore issuable

 6
 

 

upon exercise of the Warrant, such shares of stock,
securities or assets as would have been issuable or payable with respect to or
in exchange for a number of Warrant Shares equal to the number of Warrant
Shares immediately theretofore issuable upon exercise of the Warrant, had such
Event not taken place, and in any such case appropriate provision shall be made
with respect to the rights and interests of each Holder to the end that the
provisions hereof (including, without limitation, provision for adjustment of
the Exercise Price) shall thereafter be applicable, as nearly equivalent as may
be practicable in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise hereof.  The Company shall not effect any such Event
unless prior to or simultaneously with the consummation thereof the successor
corporation (if other than the Company) resulting from such consolidation or
merger, or the corporation purchasing or otherwise acquiring such assets or
other appropriate corporation or entity shall assume the obligation to deliver
to the Holder, at the last address of the Holder appearing on the books of the
Company, such shares of stock, securities or assets as, in accordance with the
foregoing provisions, the Holder may be entitled to purchase, and the other
obligations under this Warrant.  The
provisions of this Section 7 shall similarly apply to successive
reorganizations, reclassifications, consolidations, mergers, sales, transfers
or other dispositions.

8.                                      LIMITATION ON BENEFICIAL OWNERSHIP.  The Company shall not effect any exercise
of the Warrant, and the older shall not have the right to exercise any of the
Warrant, to the extent that after giving effect to such exercise, the
beneficial owner of such shares (together with such person’s affiliates) would
have acquired, through exercise of the Warrant or otherwise, beneficial
ownership of a number of shares of common stock that exceeds the percentage, if
any, set forth opposite the Holder’s name in column (8) of the schedule of
buyers to the securities purchase agreement (“maximum percentage”) of the
number of shares of common stock outstanding immediately after giving effect to
such conversion.  For purposes of this
Section 8, beneficial ownership shall be calculated in accordance with section
13(d) of the Securities Exchange Act of 1934, as amended.  For purposes of this Section 8, in
determining the number of outstanding shares of common stock, the Holder may
rely on the number of outstanding shares of common stock as reflected in (1)
the Company’s most recent Form 10-K, Form 10-KSB, Form 10-Q, Form 10-QSB or
Form 8-K, as the case may be, (2) a more recent public announcement by the
Company, or (3) any other notice by the Company or the transfer agent setting
forth the number of shares of Common Stock outstanding.  for any reason at any time, upon the written request
of the Holder, the Company shall within one (1) business day following the
receipt of such notice, confirm orally and in writing to the Holder the number
of shares of Common Stock then outstanding. 
In any case, the number of outstanding shares of 

Common Stock shall be determined after giving effect to the conversion or
exercise of securities of the Company, including the Warrant, by the Holder and
its affiliates since the date as of which such number of outstanding shares of
Common Stock was reported.  By written
notice to the Company, the Holder may from time to time increase or decrease
the maximum percentage to any other percentage specified in such notice;
provided that (i) any such increase will not be effective until the sixty-first
(61st) day after
such notice is delivered to the Company, and (ii) any such increase or decrease
will apply only to the Holder providing such written notice.  Notwithstanding the foregoing, if the Holder
has elected “no limit” in column (8) of the Schedule of Buyers to the
Securities Purchase Agreement, the limitations set forth in this Section 8
shall not be applicable to Holder.

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9.                                      STOCKHOLDER RIGHTS.  This Warrant in and of itself
shall not entitle the Holder to any voting rights or other rights as a
stockholder of the Company.

10.                               LOST, STOLEN, MUTILATED OR DESTROYED WARRANT.  If this Warrant is lost, stolen,
mutilated or destroyed, the Company may, on such terms as to indemnity or
otherwise as it may reasonably impose (which shall, in the case of a mutilated
Warrant, include the surrender thereof), issue a new Warrant of like
denomination and tenor as the Warrant so lost, stolen, mutilated or
destroyed.  Any such new Warrant shall
constitute an original contractual obligation of the Company, whether or not
the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time
enforceable by anyone.

11.                               MODIFICATIONS AND WAIVER.  This Warrant and any provision hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the Company and (i) Purchasers holding Warrants representing a
majority of the number of Warrant Shares then issuable upon exercise of the
then unexercised Warrants, provided,
however, that such modification, amendment or waiver is made with
respect to all unexercised Warrants issued pursuant to the Purchase Agreement
and does not adversely affect the Holder without adversely affecting all
holders of Warrants in a similar manner; or (ii) the Holder.

12.                               NOTICES, ETC. 
All notices required or permitted hereunder shall be in
writing and shall be deemed effectively given: (a) upon personal delivery
to the party to be notified, (b) when sent by confirmed email, telex or
facsimile if sent during normal business hours of the recipient, if not, then on
the next business day, (c) five days after having been sent by registered
or certified mail, return receipt requested, postage prepaid, or (d) one
business day after deposit with a nationally recognized overnight courier,
specifying next day delivery, with written verification of receipt.  All communications shall be sent to the
Company at the address listed on the signature page and to the Holders at the
addresses on the Company records, or at such other address as the Company or
Holder may designate pursuant to this Section 11.

13.                               ACCEPTANCE.  Receipt
of this Warrant by the Holder shall constitute acceptance of and agreement to
all of the terms and conditions contained herein.

14.                               GOVERNING LAW; JURISDICTION; JURY TRIAL.  All questions concerning the
construction, validity, enforcement and interpretation of this Warrant shall be
governed by the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York.  Each party hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in The City of
New York, Borough of Manhattan, for the adjudication of any dispute hereunder
or in connection herewith or with any transaction contemplated hereby or
discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper.  Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Warrant and agrees that
such service shall constitute good and sufficient service of process and notice
thereof.  Nothing contained

 8
 

 

herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.  EACH PARTY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH
OR ARISING OUT OF THIS WARRANT OR ANY TRANSACTION CONTEMPLATED HEREBY.

15.                               DESCRIPTIVE HEADINGS. 
The descriptive headings of the several paragraphs of this Warrant are
inserted for convenience only and do not constitute a part of this Warrant. The
language in this Warrant shall be construed as to its fair meaning without
regard to which party drafted this Warrant.

16.                               SEVERABILITY.  The
invalidity or unenforceability of any provision of this Warrant in any
jurisdiction shall not affect the validity or enforceability of such provision
in any other jurisdiction, or affect any other provision of this Warrant, which
shall remain in full force and effect.

[Signature Page Follows]

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IN WITNESS WHEREOF,
the Company has caused this Warrant to be executed by its duly authorized
officer as of September 6, 2006.

	
   

  	
   

  	
  CANO PETROLEUM, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ S. Jeffrey Johnson

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  S. Jeffrey Johnson

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
  Chairman and Chief Executive Officer

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address:

  	
  801 Cherry St., Suite 3200

  
	
   

  	
   

  	
   

  	
  Fort Worth, Texas 76102

  
	
   

  	
   

  	
   

  	
  Attention: Morris B. Smith and

  
	
   

  	
   

  	
   

  	
  James K. Teringo, Jr.

  
	
   

  	
   

  	
   

  	
  Facsimile: (817) 334-0222

  
							

 

 10

 

NOTICE OF EXERCISE

TO:  CANO PETROLEUM, INC.

(1)                                 The
undersigned hereby elects to (check one box only):

o                                    purchase
                
shares of the Common Stock of Cano Petroleum, Inc. (the “Company”) pursuant
to the terms of the attached Warrant, and tenders herewith payment of the
exercise price in full for such shares, together with all applicable transfer
taxes, if any.

o                                    purchase
the number of shares of Common Stock of the Company by cashless exercise
pursuant to the terms of the Warrant as shall be issuable upon cashless
exercise of the portion of the Warrant relating to                 
shares, and shall tender payment of all applicable transfer taxes, if any.

(2)                                 Please
issue a certificate or certificates representing said shares of Common Stock in
the name of the undersigned or in such other name as is specified below:

	
  

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Name)

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Address)

  	
   

  	
   

  

 

(3)                                 The
undersigned represents that (i) the aforesaid shares of Common Stock are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares;
(ii) the undersigned is aware of the Company’s business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision regarding its investment in the Company;
(iii) the undersigned is experienced in making investments of this type and has
such knowledge and background in financial and business matters that the
undersigned is capable of evaluating the merits and risks of this investment
and protecting the undersigned’s own interests; (iv) the undersigned is aware
that the aforesaid shares of Common Stock may not be sold pursuant to Rule 144
adopted under the Securities Act unless certain conditions are met and until
the undersigned has held the shares for the number of years prescribed by Rule
144, that among the conditions for use of the Rule is the availability of
current information to the public about the Company and the Company has not
made such information available and has no present plans to do so; and (v) the
undersigned agrees not to make any disposition of all or any part of the
aforesaid shares of Common Stock unless and until there is then in effect a
registration statement under the Securities Act covering such proposed
disposition and such disposition is made in accordance with said registration
statement, or the undersigned has provided the Company with an opinion of counsel
satisfactory to the Company, stating that such registration is not required.

 

	
   

  	
   

  	
   

  
	
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  (Signature)

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  (Print name)

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