Document:

Exhibit
10.4

 

THE
SECURITIES OFFERED HEREIN HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES
ACT OF 1933, AS AMENDED (THE “1933 ACT”) AND MAY NOT BE OFFERED OR SOLD IN THE
UNITED STATES OR TO U.S. PERSONS (AS THAT TERMS IS DEFINED IN THE 1933 ACT)
UNLESS THE SECURITIES ARE REGISTERED UNDER THE 1933 ACT, OR AN EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE 1933 ACT IS AVAILABLE. THIS SUBSCRIPTION
IS EXECUTED IN RELIANCE UPON THE EXEMPTIONS PROVIDED BY RULE 506 OF REGULATION
D UNDER THE 1933 ACT.

 

SUBSCRIPTION

 

THIS SUBSCRIPTION (the “Subscription”) has been executed by the
undersigned in connection with the offering of 1,000,000 shares of common
stock, par value $0.001 (hereinafter referred to as the “Stock”), of Cano
Petroleum, Inc., a corporation organized under the laws of the State of
Delaware (hereinafter referred to as the “Issuer”).  There is no minimum offering.  The Stock being subscribed for pursuant to
this Subscription has not been registered under the 1933 Act.  The offer of the Stock and, if this
Subscription is accepted by the Issuer, the sale of Stock, is being made in
reliance upon Rule 506 of Regulation D promulgated under the 1933 Act. (All
dollar amounts in this Subscription are expressed in U.S. Dollars).

 

ARTICLE 1

SUBSCRIPTION

 

Subscription

 

1.1           The undersigned (the
“Subscriber”), as principal, hereby subscribe to purchase, in the aggregate, a
minimum of One Million (1,000,000) shares of Common Stock (the “Shares”),
having a purchase price of $4.14 per Share for an aggregate purchase price of
$4,140,000 (the “Subscription Price”).

 

Minimum Subscription

 

1.2                                 A minimum number of 1,000,000
Shares must be purchased by the Subscriber.

 

Method of Payment

 

1.3           The Subscriber shall
pay the Subscription Price by delivering good funds in United States Dollars by
way of wire transfer of funds to the Issuer and concurrent with the execution
and delivery of this Subscription.  The
wire transfer instructions are:

 

Wires from Correspondent Banks
Worldwide:

 

	
  Beneficiary Bank:

  	
  Worth National Bank

  
	
   

  	
  801 Cherry
  Street, unit 27

  
	
   

  	
  Fort
  Worth, TX 76102

  
	
   

  	
  Tel: 817-877-2023

  
	
  Beneficiary:

  	
  Cano Petroleum, Inc.

  
	
  ABA Routing#:

  	
  111907568

  
	
  Account Number:

  	
  31012914

  

 

 

As soon as reasonably
practicable after September 14, 2005 (the “Closing Date”) the Company shall
issue and cause to be delivered to the Subscriber a certificate or certificates
representing the
Shares (the “Certificates”) pursuant to Article 6 hereof.  Upon receipt of the Certificates, the
Subscriber shall deliver the full Subscription Funds to the wire instructions provided above.  The Subscriber acknowledges that the
subscription for Shares hereunder may be rejected in whole or in part by the
Issuer in its sole discretion.

ARTICLE 2

REPRESENTATIONS AND WARRANTIES OF
THE SUBSCRIBER

 

Representations
and Warranties

 

2.1           The Subscriber
represents and warrants in all material respects to the Issuer, with the intent
that the Issuer will rely thereon in accepting this Subscription, that:

 

(a)                                  Experience.  The Subscriber is sufficiently experienced in
financial and business matters to be capable of evaluating the merits and risks
of its investments, and to make an informed decision relating thereto, and to
protect its own interests in connection with the purchase of the Shares;

 

(b)                                 Own Account.  The Subscriber is purchasing the Shares as
principal for its own account.  The
Subscriber is not purchasing the Stock with an intent or view towards further
sale thereof, and has not pre-arranged any sale with any other subscriber;

 

(c)                                  Not Underwriter.  The Subscriber is not an underwriter, or
dealer in, the Stock, and the Subscriber is not participating, pursuant to a
contractual agreement, in a distribution of the Stock;

 

(d)                                 Importance of
Representations.  The
Subscriber understands that the Stock are being offered and sold to it in
reliance on an exemption from the registration requirements of the 1933 Act,
and that the Issuer is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and understandings of
the Subscriber set forth herein in order to determine the applicability of such
exemptions and the suitability of the Subscriber to acquire the Stock;

 

(e)                                  Registration.  The Issuer shall use its best efforts to file
a registration statement to be filed with and declared effective by the
Securities and Exchange Commission (the “SEC”) at the earliest practicable date
after the Closing Date.  The Subscriber
represents and warrants and hereby agrees that all offers and sales of the
Securities shall be made only pursuant to such registration or to an exemption
from registration;

 

(f)                                    Risk.  The Subscriber acknowledges that the purchase
of the Stock involves a high degree of risk, is aware of the risks and further
acknowledges that it can bear the economic risk of the Stock, including the
total loss of its investment;

 

(g)                                 Current
Information.  The
Subscriber has been furnished with or has acquired copies of all requested
information concerning the Issuer, including a copies of reports filed by the
Issuer pursuant to the United States Securities Exchange Act of 1934, as
amended (the “1934 Act”) and copies of press releases issued by the Issuer;

 

2

 

(h)                                 Independent
Investigation.  The Subscriber, in making the decision to
subscribe for the Shares, has relied upon independent investigations made by it
and its purchaser representatives, if any, and the Subscriber and such
representatives, if any, have, prior to making this Subscription, been given
access and the opportunity to examine all material contracts and documents
relating to this offering and an opportunity to ask questions of, and to
receive answers from, the Issuer or any person acting on its behalf concerning
the terms and conditions of this offering. 
The Subscriber and its advisors, if any, have been furnished with access
to all materials relating to the business, finances and operation of the Issuer
and materials relating to the offer and sale of the Shares which have been
requested.  The Subscriber and its
advisors, if any, have received complete and satisfactory answers to any such
inquiries;

 

(i)                                     No Written or
Oral Representations.  No person
has made to the Subscriber any written or oral representations

 

(i)                                                             that any person will resell or
repurchase the Stock,

 

(ii)                                                          that any person will refund the
purchase price of the Stock, or

 

(iii)                                                       as to the future price or value of
the Stock;

 

(j)                                     No
Recommendation or Endorsement.  The Subscriber understands that no federal or
state agency has passed on or made any recommendation or endorsement of the
Stock;

 

(k)                                  Partnership,
Corporation or Trust.  If
the Subscriber is a partnership, corporation or trust, the person executing
this Subscription on its behalf represents and warrants that

 

(i)                                     he or she has
made due inquiry to determine the truthfulness of the representations and
warranties made pursuant to this Subscription, and

 

(ii)                                  he or she is
duly authorized (and if the undersigned is a trust, by the trust agreement) to
make this investment and to enter into and execute this Subscription on behalf
of such entity;

 

(l)                                     Non-Affiliate
Status.  The Subscriber is not an
affiliate of the Issuer nor is any affiliate of the Subscriber an affiliate of
the Issuer.  In the event that the
Subscriber is or becomes an affiliate of the Issuer, the Subscriber
acknowledges that the Stock held by it will be subject to certain resale
restrictions under the 1933 Act;

 

(m)                               Other
Subscribers.  The Subscriber acknowledges that Shares
may be issued to other purchasers under this offering concurrently with the
Closing;

 

(n)                                 No
Advertisement or General Solicitation.  The sale of the Shares has not been
advertised through any article, notice or other communication published in any
newspaper, magazine, or similar media or broadcast over television or radio; or
through any seminar or meeting whose attendees have been invited by any general
solicitation or general advertising;

 

(o)                                 Accredited Investor. 
The Subscriber is (i) an “accredited investor” as that term is defined
in Rule 501 of the General Rules and Regulations under the 1933 Act by reason
of Rule

 

3

 

501(a)(3), (ii) experienced in making investments of
the kind described in this Agreement and the related documents, (iii) able, by
reason of the business and financial experience of its officers (if an entity)
and professional advisors (who are not affiliated with or compensated in any
way by the Company or any of its Affiliates or selling agents), to protect its
own interests in connection with the transactions described in this
Subscription, and to evaluate the merits and risks of an investment in the
Stock, and (iv) able to afford the entire loss of its investment in the Stock.;

 

(p)                                 Hedging Transactions. 
The Subscriber acknowledges and agrees that all offers and sales of the
Stock, as applicable, by the Subscriber shall be made only pursuant to
registration of the Stock under the 1933 Act, or pursuant to an available
exemption from the registration requirements of the 1933 Act.;

 

(q)                                 Beneficial Ownership. 
Upon consummation of the transactions contemplated by this Subscription,
the Subscriber will be the beneficial owner of the Stock issued to it pursuant
to this Subscription;

 

(r)                                    Restriction on Transfer. 
The Subscriber understands and acknowledges that the Issuer will not
allow any transfer or other disposition of the Stock until the Stock has been
registered under the 1933 Act or an exemption from such registration is
available.  The Certificate(s) shall bear
the following legend in addition to any other legend required under this
Subscription:

 

THESE
SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR
SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
OR AN OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY ACCEPTABLE TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.

 

Non-Merger and Survival

 

2.2           The representations and warranties of
the Subscribers contained herein will be true at the date of execution of this
Subscription by the Subscribers and as of the Closing Date in all material
respects as though such representations and warranties were made as of such
times and shall survive the Closing Date and the delivery of the Certificates.

 

Indemnity

 

2.3           The Subscriber agrees to indemnify
and hold harmless the Issuer from and against any and all claims, demands,
actions, suits, proceedings, assessments, judgments, damages, costs, losses and
expenses, including attorney’s fees incurred in contesting any such claim and
any payment made in good faith in settlement of any claim (subject to the right
of the Subscriber to defend any such claim), resulting from the breach of any
representation or warranty of such party under this Subscription.

 

4

 

ARTICLE 3

REPRESENTATIONS AND WARRANTIES OF
THE ISSUER

 

3.1           The Issuer, upon
taking up and accepting this Subscription, represents and warrants in all
material respects to the Subscriber, with the intent that the Subscriber will
rely thereon in making this Subscription, that:

 

(a)                                  Legality.  The Issuer has the requisite corporate power
and authority to accept this Subscription and to issue, sell and deliver the
Shares; this Subscription and the issuance, sale and delivery of the Shares
hereunder and the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action by the Issuer and upon issuance,
the Shares will be fully paid and non-assessable; this Subscription and the
Shares have been duly and validly executed and delivered by and on behalf of
the Issuer, and are valid and binding agreements of the Issuer, enforceable in
accordance with their respective terms, except as enforceability may be limited
by general equitable principles, bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium, or other laws affecting creditors’ rights
generally;

 

(b)                                 Transfer.  Provided that
a registration statement in respect of the Shares is in effect as required under
all applicable securities laws, such Shares shall be freely transferable on the
books and records of the Issuer, provided that the sale is made to a bona-fide
purchaser and that the prospectus delivery requirements are met;  The Issuer further agrees to cause its
transfer agent to process any such transfer within three (3) business days.

 

(c)                                  Listed Company Status. 
The Issuer is required to make current filings with the SEC pursuant to
Section 13 or 15(d) of the 1934 Act,
the Stock is presently listed on the American Stock Exchange and the Issuer has
received no notice, either oral or written, with respect to its continued
eligibility for such listing;

 

(d)                                 Listing of Shares. 
Subject to notification to the American Stock Exchange of actual
issuance, the Shares are listed on the American Stock Exchange.

 

(e)                                  Proper
Organization.  The Issuer
is a corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation and is duly qualified as a
foreign corporation in all jurisdictions where the failure to be so qualified
would have a materially adverse effect on its business, taken as whole;

 

(f)                                    No Legal
Proceedings.  There is no
action, suit or proceeding before or by any court or any governmental agency or
body, domestic or foreign, now pending or to the knowledge of the Issuer,
threatened, against or affecting the Issuer, or any of its properties or
assets, which might result in any material adverse change in the condition
(financial or otherwise) or in the earnings, business affairs or business
prospects of the Issuer, or which might materially and adversely affect the
properties or assets thereof;

 

(g)                                 Non-Default.  The Issuer is not in default in the
performance or observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust or other material
instrument or agreement to which it is a party or by which it or its property
may be bound; and

 

5

 

(h)                                 Non-Contravention.  The execution and delivery of this
Subscription and the consummation of the issuance of the Shares and the
transactions contemplated by this Agreement do not and will not conflict with
or result in a breach by the Issuer of any of the terms or provisions of, or constitute a
default under, the Certificate of Incorporation or Bylaws of the Issuer, or any
indenture, mortgage, deed of trust, or other material agreement or instrument
to which the Issuer is a party or by which it or any of its properties or
assets are bound, or any existing applicable decree, judgment or order of any
court, Federal or state regulatory body, administrative agency or other
domestic governmental body having jurisdiction over the Issuer or any of its
properties or assets.  

 

Non-Merger and Survival

 

3.2           The representations and warranties of
the Issuer contained herein will be true at the date of execution of this
Subscription by the Issuer and as of the Closing Date in all material respects
as though such representations and warranties were made as of such times and
shall survive the Closing Date and the delivery of the Certificates.

 

Indemnity

 

3.3           The Issuer agrees to indemnify and
hold harmless the Subscriber from and against any and all claims, demands,
actions, suits, proceedings, assessments, judgments, damages, costs, losses and
expenses, including attorney’s fees incurred in contesting any such claim and
any payment made in good faith in settlement of any claim (subject to the right
of the Issuer to defend any such claim), resulting from the breach of any
representation, warranty or covenant of such party under this Subscription.

 

ARTICLE 4

COVENANTS OF THE ISSUER

 

Covenants of the Issuer

 

4.1                                 The Issuer
covenants and agrees with the Subscriber that:

 

(a)                                  Filings.  The Issuer will make all necessary filings in
connection with the sale of the Shares as required by the laws and regulations
of all appropriate jurisdictions;

 

(b)                                 Section 13
Compliance.  The Issuer
shall, from and after the Closing Date, use its best efforts to comply with the
requirements of Section 13 of the 1934 Act and maintain the listing of the
Common Stock on the American Stock Exchange or other quotation medium;

 

(c)                                  Rule 144
Opinion.  The Issuer will, upon written
request by the Subscriber, take such steps as are necessary to cause its
counsel to issue an opinion to the Issuer’s transfer agent allowing the
Subscriber to offer and sell any Shares issued in reliance on the applicable
provisions of Rule 144 provided that the holding period and other requirements
of such Rule 144 are met.  The costs of
obtaining such an opinion shall be borne by the Issuer; and

 

(d)                                 Use of Proceeds.  The Issuer will apply the Subscription Price,
together will all other subscription funds received from other subscribers
under this offering, for general corporate and working capital purposes.

 

6

 

Survival

 

4.2           The covenants set
forth in this Article 4 shall survive the Closing for the benefit of the
Subscriber.

 

ARTICLE 5

DEMAND REGISTRATION RIGHTS

 

Registration
Statement

 

5.1           Upon the Closing,
the Issuer shall use its best efforts to file a registration statement under
the 1933 Act and under any applicable Blue Sky laws registering the resale of
Shares and shall use its best efforts to cause such registration statement to
be declared effective by the Commission at the earliest practicable date, all
at the Issuer’s sole cost and expense.  Such best efforts shall include
promptly responding to all comments received by the staff of the SEC, and
promptly preparing and filing amendments to such registration statement which
are responsive to the comments received from the staff of the SEC, and in no
event later than twenty-one (21) days from receipt by the Issuer of the
comments of the staff of the SEC.  Such registration statement shall name
the Subscriber as a selling shareholder and shall provide for the sale of the
Shares by the Subscriber from time to time directly to purchasers or in the
over-the-counter market or through or to securities brokers or dealers that may
receive compensation in the form of discounts, concessions, or
commissions.  The Issuer shall provide the Subscriber with such number of
copies of the prospectus as shall be reasonably requested to facilitate the sale
of the Shares.  None of the foregoing shall in any way limit the
Subscriber’s rights to sell the Shares in reliance on an exemption from the
registration requirements under the 1933 Act in connection with a particular
transaction.

 

Currency
of Registration Statement

 

5.2           The Issuer shall use
its best efforts to maintain the currency of the registration statement filed
with the SEC and under all applicable Blue Sky laws in respect of the Shares
for 24 months from the Closing Date.

 

Indemnification
of Subscriber by Issuer

 

5.3           To the extent
permitted by law, the Issuer will indemnify the Subscriber, within the meaning
of Section 15 of the 1933 Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Subscription
Agreement, and each underwriter, if any, and each person who controls any
underwriter within the meaning of Section 15 of the 1933 Act, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or treated, to the extent such expenses, claims, losses,
damages or liabilities arise out of or are based on any untrue statement (or
alleged untrue statement) of a material fact contained in any registration
statement, prospectus, offering circular or other document, or any amendment or
supplement thereto, incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading,
or any violation by the Issuer of the 1933 Act or any rule or regulation
promulgated under the 1933 Act applicable to the Issuer in connection with any
such registration, qualification or compliance, and the Issuer will reimburse
the Subscriber, each of its officers and directors and partners, and each
person controlling the Subscriber, each such underwriter and each person who
controls any such underwriter, for any legal and any other expense reasonably
incurred in connection with investigation,

 

7

 

preparing or defending any such claim, loss, damage, liability or action,
provided, however, that the indemnity contained herein shall not apply to
amounts paid in settlement of any claim, loss, damage, liability or expense if
settlement is effected without the consent of the Issuer (which consent shall
not unreasonably be withheld); provided, further, that the Issuer will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission or alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to the Issuer by the Subscriber,
such controlling person or such underwriter specifically for use therein.  Notwithstanding the foregoing, insofar as the
foregoing indemnity relates to any such untrue statement (or alleged untrue
statement) or omission (or alleged omission) made in the preliminary prospectus
but eliminated or remedied in the amended prospectus on file with the SEC at
the time the registration statement becomes effective or in the final
prospectus filed with the SEC pursuant to Rule 424(b) of the SEC, the indemnity
agreement herein shall not inure to the benefit of any underwriter or (if there
is no underwriter) the Subscriber if a copy of the final prospectus filed pursuant
to Rule 424(b) was not furnished to the person or entity asserting the loss,
liability, claim or damage at or prior to the time such furnishing is required
by the 1933 Act.

 

Indemnification
of Issuer by Subscriber

 

5.4           To the extent
permitted by law, the Subscriber will indemnify the Issuer, each of its
directors and officers, affiliates, counsel, advisors, employees and, each
underwriter, if any, of the Issuer’s securities covered by such a registration
statement, each person who controls the Issuer or such underwriter within the
meaning of Section 15 of the 1933 Act, and each other person selling the Issuer’s
securities covered by such registration statement, each of such person’s
officers and directors and each person controlling such persons within the
meaning of Section 15 of the 1933 Act, against all claims, losses, damages and
liabilities (or actions in respect thereof), including attorneys fees and
costs, arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein or necessary to make the statements therein not
misleading to the extent, and only to the extent, that such misstatement or
omission is based upon written information provided by the Subscriber expressly
for inclusion therein, and will reimburse the Issuer, such other person, such
directors, officers, persons, underwriters or control persons for any legal or
other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action; provided, however,
that the indemnity contained herein shall not apply to amounts paid in
settlement of any claim, loss, damage, liability or expense if settlement is
effected without the consent of the Subscriber (which consent shall not be
unreasonably withheld). Notwithstanding the foregoing, the liability of the
Subscriber under this Section 5.4 shall be limited in an amount equal to the
net proceeds from the sale of the shares sold by the Subscriber, unless such
liability arises out of or is based on wilful conduct by the Subscriber.

 

ARTICLE 6

ISSUANCE OF CERTIFICATES

 

As soon as reasonably practicable following the Closing Date, the
Issuer will prepare and issue one or more Certificates for the Shares
registered in such name or names as specified by the Subscriber and cause the
same to be delivered to the Subscriber pursuant to the delivery instructions
provided by the Subscriber.

 

8

 

ARTICLE 7

CLOSING

 

Closing shall be effected
through the acceptance of this Subscription by the Issuer and the taking up of
the Subscription Funds by the Issuer.

 

ARTICLE
8

GENERAL PROVISIONS

 

Governing Law

 

8.1           This Subscription
shall be governed by and construed under the law of the State of Delaware
without regard to its choice of law provision. 
Any disputes arising out of, in connection with, or with respect to this
Subscription, the subject matter hereof, the performance or non-performance of
any obligation hereunder, or any of the transactions contemplated hereby shall
be adjudicated in a Court of competent civil jurisdiction sitting in the City
of Wilmington, Delaware and nowhere else.

 

Successors and Assigns

 

8.2           This Subscription
shall inure to the benefit of and be binding on the respective successors and
assigns of the parties hereto.

 

Execution by Counterparts and Facsimile

 

8.3           This Subscription
may be executed in counterparts and by facsimile, each of which when executed
by any party will be deemed to be an original and all of which counterparts
will together constitute one and the same Subscription.

 

[Remainder of page intentionally left blank.]

 

9

 

SIGNATURE PAGE FOR ENTITIES

 

IN WITNESS WHEREOF, the undersigned represents that the
foregoing statements are true and that it caused this Subscription to be duly
executed on its behalf on this 13th day of  September, 2005.

 

 

	
  Stewart Flink

  	
   

  	
  /s/ Stewart Flink

  	
   

  
	
  Printed Name

  	
   

  	
  Signature

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Managing Member

  	
   

  	
   

  
	
  Printed Title

  	
   

  	
   

  

 

 

Agreed to this 14th day of September, 2005:

 

CANO
PETROLEUM, INC.

 

	
  Per:

  	
  /s/ Michael J. Ricketts

  	
   

  
	
   

  	
   

  
	
  Print Name:

  	
  Michael J. Ricketts

  
				

 

This is page 11 to the Subscription by the above subscriber to Cano
Petroleum, Inc. dated as stated above.

 

 

Full
Name and Address of Subscriber for Registration Purposes:

 

	
  NAME:

  	
   

  	
  Crestview Capital Master, LLC

  
	
   

  	
   

  	
   

  
	
  ADDRESS:

  	
   

  	
  95 Revere Drive, Suite A, Northbrook, IL
  60062

  
	
   

  	
   

  	
   

  
	
  TEL.NO.:

  	
   

  	
  847-418-8322

  
	
   

  	
   

  	
   

  
	
  FAX NO.:

  	
   

  	
  847-559-5807

  
	
   

  	
   

  	
   

  
	
  EMAIL ADDRESS:

  	
   

  	
  stewart@crestviewcap.com

  
	
   

  	
   

  	
   

  
	
  CONTACT NAME:

  	
   

  	
  Stewart Flink

  
	
   

  	
   

  	
   

  

Delivery
Instructions (if different from Registration Name):

 

NAME:

 

ADDRESS:

 

TEL.NO.:

 

FAX  NO.:

 

CONTACT NAME:

 

SPECIAL INSTRUCTIONS:

 

 

 

This is page 12 to the Subscription by the above subscriber to Cano
Petroleum, Inc.

 

2Exhibit 10.27

 

“Certain portions of this
Exhibit have been omitted and filed separately with the Commission based upon a
request for confidential treatment.”

 

Contract
for the Sale of

 

Uranium
Concentrates

 

from

 

URI, Inc.

 

to

 

UG
U.S.A., Inc.

 

 

THIS CONTRACT
is made and entered into as of this 12th day of August 2003, by
and between URI, Inc., a Delaware corporation having its principal offices
in Dallas, Texas (hereinafter referred to as “URI”) and UG U.S.A., Inc. a
Georgia corporation having its principal offices in Atlanta, Georgia
(hereinafter referred to as “UG”).

 

WITNESSETH:

 

WHEREAS, URI desires to sell U308, as defined
herein; and

 

WHEREAS, UG has a need for and desires to
purchase a quantity of said U308 from URI; and

 

NOW, THEREFORE, in consideration of the premises above recited and the
mutual covenants hereinafter set forth, the parties hereto (hereinafter
referred to as the “Parties”) agree to the following terms and conditions:

 

Article 1
– Definitions

 

When used
herein with initial or complete capitalization, the terms set forth below shall
have the definitions provided.  Words
importing persons include corporations and words importing only the singular
include the plural and vice versa where the context requires.

 

1.1           Annual
Notice shall mean that notice to be given by UG pursuant to Article 4.1,
which shall identify the Binding Quantity to be purchased during the next
Delivery Year, the non-binding Delivery Date(s), and the binding Convertor(s)
to which deliveries are to be made.

 

1.2           Binding
Delivery Notice shall mean that notice to be given by UG pursuant to Article 4.2,
which shall identify the Binding Delivery Date in a Delivery Year.

 

1

 

1.3           Binding
Quantity shall mean the firm quantity of U308 to be purchased by UG during
a Delivery Year.

 

1.4           Book
Transfer shall mean the account-to-account transfer of U3O8 at the
Convertor from the concentrates account of URI, or an account designated by
URI, to the account of UG, or an account designated by UG.

 

1.5           Contract shall
mean this document, including any Exhibit(s) hereto.

 

1.6           Convertor
shall mean the operator of the conversion facility or the conversion facility
itself of ConverDyn or Cameco Corporation, as specified by UG in accordance
with Article 4, or Comurhex, if mutually agreed to in writing by URI and
UG.

 

1.7           Delivery has the
meaning assigned to it in Article 5.

 

1.8           Delivery
Date shall mean the date upon or by which the Delivery Quantity shall be
scheduled for delivery to UG.

 

1.9           Delivery
Quantity shall mean the total Binding Quantity to be delivered on a
specific Delivery Date within a Delivery Year during the term of the Contract.

 

1.10         Delivery
Year shall mean each Calendar Year during the initial term and any
extensions of this Contract.

 

1.11         Force Majeure
shall be as defined in Article 10.1(a) through (d).

 

1.12         GDP-IPD
shall mean the Gross Domestic Product Implicit Price Deflator as published in
the Survey of Current Business by the U.S. Department of Commerce,
Bureau of Economic Analysis.

 

2

 

1.13         Index
Value shall mean the most recent and available Gross Domestic Product
Implicit Price Deflator quarterly value, as published in the Survey of
Current Business by the U.S. Department of Commerce, Bureau of Economic
Analysis.

 

1.14         Laws
and Regulations shall mean all applicable statutes, regulations, codes,
laws, licenses, decisions, orders, directives, interpretations, policy
statements, regulatory guides, rules, criteria, and license requirements
enforced or issued by any applicable government, federal, state, or local, or
any governmental agency, authority, or body.

 

1.15         Natural
UF6 shall mean uranium in its natural, unenriched state, having a
concentration of the isotope U235 of at least 0.711 weight percent (w/o), which
uranium is in the form of natural uranium hexafluoride.

 

1.16         Nominal
Quantity shall mean the non-binding estimate of the quantity of U308 to be
provided by URI and purchased by UG during a Delivery Year.

 

1.17         U3O8
shall mean uranium as triuranium octoxide (U3O8) contained in uranium
concentrates of domestic U.S. origin which conform to the specifications set
forth in Article 8 or which are otherwise accepted by the Convertor.  Unless otherwise indicated, all measurements
expressed in pounds shall refer to pounds (avoirdupois weight) of U3O8
contained in such concentrates.

 

1.18         U235 shall mean
the isotope of uranium with the atomic weight 235.

 

Article 2
– Term of Contract

 

2.1           The
initial term of this Contract shall begin on January 1, 2005 and will end
on December 31, 2008, unless earlier terminated or extended in accordance
with the applicable provisions of this Contract.

 

3

 

Article 3
– Scope of Contract

 

3.1           URI
shall provide quantities of U308 to be specified by UG pursuant to Article 4.  URI shall deliver the U308 in accordance with
Article 5.    The U308 shall meet
the specifications provided in Article 8.

 

3.2           The
Nominal Quantity of U308 to be sold and delivered in each Delivery Year shall
be 300,000 lbs U3O8, plus or minus fifteen percent (+/-15%).

 

3.3           UG
and URI agree that URI’s obligation to supply U308 hereunder is not limited to
the success of any specific uranium development project to be undertaken by
URI, and that URI has the right to supply U3O8 to be delivered hereunder from
any source whatsoever, provided such U3O8 is of U.S. origin.  Notwithstanding this, URI represents that it
presently has under lease or otherwise secured sufficient economically recoverable
uranium reserves to satisfy the requirements of this Contract.

 

3.4           URI
agrees that the failure of URI to maintain reserves as provided hereby and to
proceed deliberately to produce the U3O8 from the properties it controls on
such a schedule as is reasonably anticipated to maintain URI in a position
to sell and deliver U3O8 to UG in accordance with this Contract shall not
constitute a Force Majeure under Article 9 hereof.

 

3.5           URI
agrees that it will not, without prior written consent of UG, dedicate, use, or
sell to third parties, U3O8 from its properties that, at the time of entering
into a new sales commitment, will reduce the recoverable balance of U3O8 in
these properties to an amount less than the amount required to be supplied to
UG hereunder.

 

4

 

Article 4 – Notices

 

4.1           UG
shall establish the Binding Quantity, which shall be no less than 255,000 lbs
U3O8 and no more than 345,000 lbs U3O8, to be in effect for a given Delivery
Year by written notification to URI, given by September 1 of each year
preceding a Delivery Year (“Annual Notice”). 
The Annual Notice shall also set out the non-binding Delivery Date(s), a
maximum of two (2) deliveries per Delivery Year, on which UG will require
the Delivery Quantity of U308 to be delivered, and the binding Convertor(s) to
which the deliveries are to be made.  UG
may elect only one delivery location for a given Delivery Quantity, but may
elect different delivery locations for different Delivery Quantities within a
given Delivery Year.

 

4.2           UG
shall provide a binding notice of the Delivery Date(s) at least one hundred and
twenty (120) days prior to the Delivery Date by written notification to URI (“Binding
Delivery Notice”).  However, delivery in
Delivery Year 2005 shall occur between January 1, 2005 and January 31,
2005, unless otherwise agreed.

 

Article 5
– Delivery

 

5.1           Delivery
shall mean Delivery of the U308 by URI as set forth in Article 4.1, by
Book Transfer to a Convertor.

 

5.2           Delivery
shall be deemed to have been effected when the U308 is credited to UG’s or a
designated account of UG at the Convertor.

 

5.3           URI
shall request Convertor to provide written confirmation to UG that delivery has
occurred.

 

5

 

Article 6
– Price

 

6.1           Payment
will be made in U.S. Dollars.  All prices
for U308 delivered pursuant to this Contract shall be expressed in terms of
U.S. Dollars per pound ($/lb) U3O8.

 

6.2           The
Price shall be $[REDACTED] per pound U3O8, which
shall be adjusted from the fourth quarter 2003 until the quarter immediately
preceding a quarter of Delivery by changes in the GDP-IPD Index Value.  The price includes any transfer fees that may
be imposed by the Convertor at the time of Delivery to UG.

 

6.3           In
the event that the basis for the GDP-IPD is substantially modified or the Index
is discontinued, the appropriate adjustment to the Index Value or selection of
a substitute index, as applicable, shall be made by agreement of the Parties.  If the Index is converted from one base
period to a new base period, U.S. Department of Commerce re-basing factors will
be applied so that the basis for determining the percent change between the
Index figures is not altered.

 

6.4           Under
these price adjustment provisions, the percentage change from the Base Index
Value to the Index Value at time of Delivery will be calculated and rounded to
three (3) decimal places and all dollar values calculated and rounded to
two (2) decimal places.  If the
first digit discarded is less than five (5), then the last digit retained shall
not be changed; if the first digit discarded is greater than five (5), and if such first digit is five (5) and is followed
by at least one digit other than zero, then the last digit retained shall be
increased by one.  See Exhibit 1 for
an example of a price calculation.

 

Article 7
– Invoicing and Payment

 

7.1           URI
shall make delivery by Book Transfer to an account designated by UG at a
Convertor.  URI shall prepare and
transmit, in accordance with Article 16, a final invoice for one hundred
percent (100%) of an amount equal to: 
the weight of the

 

6

 

U3O8 in pounds (avoirdupois weight) based on
the Convertor’s notice of transfer at the Convertor, multiplied by the unit price
as specified in Article 6 hereof. 
URI shall indicate on any final invoice the publication(s) used to
obtain any Index Values used in the price computation.  UG shall pay to URI the amount specified in the
final invoice within thirty (30) days after the later of (1) the actual
Delivery Date or (2) receipt by UG of the final invoice.

 

7.2           URI
shall pay all taxes (other than UG’s income taxes, if any) duties, royalties,
or charges levied or imposed on the U3O8 prior to and coincident with
Delivery.  All taxes, duties, or charges
of any kind imposed on the U3O8 subsequent to Delivery shall be paid by
UG.  Any book transfer fees imposed by
the Convertor shall be paid by URI.

 

7.3           Any
additional shipping cost (if any) incurred by URI as a result of Delivery to
Comurhex shall be for UG’s account.

 

7.6           All
amounts due and payable to URI hereunder shall be paid by wire transfer to the
account of URI or its nominee at a financial institution of URI’s choice in the
United States, to be designated on each and every invoice.

 

7.7           Any
amount due and payable by either Party under this Contract which is not paid by
the time specified herein shall bear interest accruable from the date payment
was due until the date payment is finally received, at a rate per annum equal
to the Prime Rate of interest, as published by Citibank N.A., New York, New
York.

 

Article 8
– Specifications

 

8.1           The
U308 delivered hereunder will meet the Convertor’s specifications in effect at
the time of Delivery.  UG shall not be
obligated to accept or pay for U308 delivered hereunder unless such U308 meets
such Convertor’s specifications, or as otherwise has been accepted by
Convertor.  Notwithstanding any other

 

7

 

provisions of this Contract to the contrary,
in the event that any U308 delivered under this Contract is acceptable to the
Convertor, only if defined surcharges and treatment charges are paid, URI shall
pay or cause to be paid such treatment charges or surcharges to the applicable
Convertor, and UG shall be obligated to accept and pay for such U308.

 

8.2           Convertor’s
procedures for weighing, sampling, and assaying, as they may be amended from
time to time, shall apply.  All weighing,
sampling, and assaying charges shall be the responsibility of URI.

 

Article 9
– Default

 

9.1           In
the event that URI is in default by failing to make a scheduled U308 Delivery, provided
such failure to deliver is not caused by Force Majeure, and provided such
default continues for a period of thirty (30) days after notice from UG to URI
specifying the events of default, then UG shall have the option, without
prejudice to any other rights and remedies, to terminate this Contract or such
Delivery, and the damages payable to UG by URI shall be limited to the amount,
if any, by which the cost of replacement U308 exceeds the cost of such U308, if
such Delivery had been purchased under this Contract; provided, however, that
UG shall use its best efforts to obtain such replacement U308 at the lowest
available cost; and

 

9.2           In
the event that UG is in default by failing to accept or pay for a conforming
scheduled U308 Delivery, provided such failure to accept is not caused by Force
Majeure, and provided such default continues for a period of thirty (30) days
after notice from URI to UG specifying the events of default, and provided such
default substantially impairs the value of the whole Contract, then URI shall
have the option, without prejudice to any other rights and remedies, to
terminate this Contract or such Delivery, and the damages payable to URI by UG
shall be limited to the amount, if any, by which the resale price of the U308
is less than

 

8

 

the Contract
price of such U308, if such Delivery had been accepted under this Contract;
provided, however, that URI shall use its best efforts to resell such U308 at
the highest available price.

 

Article 10
– Force Majeure

 

10.1         If
the performance of this Contract or any obligation hereunder is prevented,
restricted, or interfered with by any cause or unforeseeable circumstance
beyond the reasonable control of the Party so failing (Force Majeure),
including, but not limited to:

 

(a)           an
act of God or the public enemy, fire, explosion, perils of the sea, flood,
drought, war, riot, sabotage, accident, terrorist acts, or embargo;

 

(b)           interruptions of or delay in transportation, inadequacy or
shortage or failure of supply of materials (other than the U308 to be supplied
hereunder), equipment breakdowns, or labor trouble from whatever cause arising;

 

(c)           compliance by UG or URI with any order, action, direction,
or request of any court, governmental office, department, agency, authority, or
committee thereof; or

 

(d)           refusal, non-grant, revocation, or suspension of any permit,
license, authorization, or certificate or consent by any governmental authority
necessary for the performance of this Contract;

 

then, except as provided in Article 10.2
below, the Party so affected, upon giving prompt written notice to the other
Party, including the cause or circumstance and the expected duration of such
cause or circumstance, shall be excused from performing such obligation to the
extent of such prevention, restriction, or

 

9

 

interference; provided, however, that the
Party so affected shall have used its best efforts to avoid such cause or
circumstance or to remove the consequences thereof, and shall continue
performance of its obligations hereunder with the utmost dispatch whenever the
Force Majeure situation has ceased and shall provide information on a timely
basis regarding the circumstances and any change or cessation of the impediment
to performance.

 

10.2         In
the event that, due a Force Majeure, URI’s performance, with respect to any
Delivery or Deliveries, as the case may be, shall be delayed or otherwise
significantly impaired:

 

(a)           for a period of sixty (60) days or longer, then UG shall
have the right to cancel that Delivery;

 

(b)           for a period of one hundred eighty (180) days or longer,
then UG shall have the right to cancel any one and up to all Deliveries
remaining under this Contract, or reduce future Deliveries of U308 under this
Contract.  In case all remaining
Deliveries are cancelled, the Contract is terminated.

 

Article 11
– Warranties

 

11.1         URI represents and
warrants that:

 

(a)           It
has all requisite corporate power, authority, and right to enter into this
Contract and perform its obligations hereunder and, by entering into this
Contract, is not in breach of or default under any other agreement;

 

(b)           it has obtained all approvals of any government,
governmental agency, authority, or body which are necessary for URI to enter
into this Contract;

 

10

 

(c)           it shall convey upon Delivery all its right, title, and
interest in and to the U308 to UG;

 

(d)           the U308 will be delivered to UG free and clear of any
liens, encumbrances, or restrictions. 
URI will, at no cost of expense to UG, take such action as may be
required to discharge any lien or claim made with respect to the U308 or any
party thereof by any third party; and

 

(e)           the U308 will conform to the specifications set forth under Article 8
– Specifications.

 

(f)            the U308 was not obtained under any arrangement or
transaction designed to circumvent the provisions of the Suspension Agreements
(signed October 1992, and as amended) between the U.S. Department of Commerce
and the Russian Federation.

 

11.2         UG represents and
warrants that:

 

(a)           It
has all requisite corporate power, authority, and right to enter into this
Contract and perform its obligations hereunder and, by entering into this
Contract, is not in breach of or default under any other agreement; and

 

(b)           it has obtained all approvals of any government,
governmental agency, authority, or body which are necessary for UG to enter
into this Contract.

 

Article 12
– Title and Risk of Loss

 

12.1         Title
to and risk of loss of or damage to the U308 and containers for U3O8 shall pass
from URI to UG upon Delivery.

 

11

 

Article 13
– Licenses and Authorizations

 

13.1         The
Parties shall comply with all applicable Laws and Regulations and take all such
actions as are necessary to obtain and maintain in full force and effect during
the term of this Contract any and all licenses, authorizations, and consents
required for the proper performance of their obligations hereunder.

 

13.2         Upon
request, each Party shall provide the other a copy of each license, approval, or
permit obtained pursuant to, or necessary for performance in connection with, this
Contract.

 

Article 14
- Assignment

 

14.1         Except
as hereinafter otherwise provided, neither this Contract, nor any duties to be
performed hereunder, nor any monies to become due hereunder shall be assigned,
delegated, or otherwise disposed of by either Party without the prior written
consent of the other party; provided, however, that UG may assign its interest
in this Contract to an affiliate without the necessity of obtaining such a
consent.

 

14.2         URI
shall have the right to assign its interest in this Contract to an affiliate or
subsidiary of URI or to a trust, corporation, or other entity utilized by URI
for purposes of financing URI’s uranium operations; provided that URI, as
assignor, shall warrant and guarantee the performance hereunder of any such
assignee affiliate, subsidiary, trust, corporation, or other entity.

 

14.3         This
Contract shall not be deemed an asset of either Party and, in the event a Party
enters into any voluntary or involuntary receivership, bankruptcy, or
insolvency proceeding, the other Party may, upon ten (10) days written
notice, terminate the Contract.

 

12

 

Article 15
- Confidentiality

 

15.1          The
terms and conditions, including prices, of this Contract and all information
and communications exchanged by the Parties with respect to this Contract shall
be confidential, except that UG or URI may disclose all terms and conditions of
this Contract to its affiliates, and neither Party shall disclose the same to any
third party without the prior written consent of the other Party, which consent
shall not be unreasonably withheld; provided, however, that either UG or URI
may disclose to other parties, to the extent necessary to ensure the efficient
operation of this Contract, to enforce any right hereunder or to remedy any
breach of the agreement contained herein, or as may otherwise be required by
law, government agency or regulation, or court of competent jurisdiction.

 

ARTICLE 16
– NOTICES

 

16.1         All
notices and communications required or permitted herein shall be in writing and
shall be deemed properly given if hand delivered, sent by certified mail,
express mail or courier, or sent by telecopy or other similar graphic
electronic means and confirmed in writing by certified or express mail,
courier, or hand delivered, and addressed as follows:

 

	
  (a) to
  UG:

  	
   

  	
  UG
  U.S.A., Inc.

  
	
   

  	
   

  	
  115
  Perimeter Center Place, N.E.

  
	
   

  	
   

  	
  Suite 647

  
	
   

  	
   

  	
  Atlanta,
  Georgia 30346

  
	
   

  	
   

  	
  Attn:
  Manager, Contract Administration

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Telephone:
  770-396-3971

  
	
   

  	
   

  	
  Telecopy:
  770-396-3974

  
	
   

  	
   

  	
  Email:         trading@ugusainc.com

  

 

13

 

	
  (b) to
  URI:

  	
   

  	
  URI, Inc.

  
	
   

  	
   

  	
  650 South
  Edmonds Lane

  
	
   

  	
   

  	
  Suite 108

  
	
   

  	
   

  	
  Lewisville,
  TX 75067

  
	
   

  	
   

  	
  Attn:  Mr. Paul
  Willmott

  
	
   

  	
   

  	
            President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Telephone:

  	
  (972)
  219-3330

  
	
   

  	
   

  	
  Telecopy:

  	
  (972)
  219-3311

  
	
   

  	
   

  	
  Email:

  	
  pkwu308i@aol.com

  

 

Article 17
– Governing Law

 

17.1         This
Contract shall be governed in all respects by and construed in accordance with
the Laws of the State of Georgia.

 

Article 18
– Limit of Liability

 

18.1         Unless
otherwise specified in the Contract, the Parties shall not be responsible for
any incidental or consequential damages or losses arising out of the
performance of or failure to perform their obligations under this Contract, including,
but not limited to, replacement power costs or loss of revenue or loss of
anticipated profits.

 

Article 19
– Nonwaiver and Complete Agreement

 

19.1         Failure
of either UG or URI to enforce any of the provisions hereof, or failure to
require strict performance by the other Party of any of the provisions hereof,
shall not release either of the Parties from any of its obligations under this
Contract, and shall not be deemed a waiver of any right to insist upon
performance thereof, or of either Party’s rights or remedies under this
Contract or by law, and shall in no way affect the validity of any term or
condition or any part thereof, or the right of either Party thereafter to
strictly enforce each and every provision. No purported oral modification or recession
of this Contract by an employee or agent

 

14

 

of
the Parties shall operate as a waiver of any of the provisions hereof.

 

19.2         This
written Contract is intended as the final, complete, and exclusive statement of
the terms of the agreement between the Parties. All prior proposals,
communications, negotiations, understandings, and representations relating to
the subject matter of this Contract, whether verbal or written, are hereby
abrogated, superseded, and withdrawn. The Parties agree that parole or
extrinsic evidence may not be used to vary or contradict the express terms of
this Contract and that recourse may not be had to alleged prior dealings or
course of performance to explain or supplement the express terms of this
Contract. This Contract shall not be amended or modified, and no waiver of any
provisions hereof shall be effective, unless set forth in a written instrument
signed by both Parties.

 

Article 20
– Miscellaneous

 

20.1         If
any provision of this Contact is or subsequently becomes invalid or
unenforceable for any reason whatsoever, such invalidity shall not affect the
validity or operation of any other term, clause, or provision, except only to
the extent necessary to overcome such invalidity.  The Parties shall cooperate to negotiate
mutually acceptable terms to replace any invalid or unenforceable provision.

 

20.2         Article headings
appearing in this Contract are inserted for convenience of reference only, and
shall in no way be construed to be interpretations of text.

 

20.3         This
Contract may be signed in one or more counterparts, each of which shall be
deemed an original.

 

15

 

IN WITNESS WHEREOF, the Parties hereto have
duly caused this Contract to be executed as of the day and year first above
written.

 

 

	
  URI, INC.

  	
   

  	
   

  	
   

  	
  UG U.S.A., Inc.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
   

  	
  Title:

  	
   

  	
   

  
								

 

16

 

Exhibit 1

 

 

Assumptions:  Example 

 

	
  Delivery Date:

  	
  January 17, 2005

  
	
  Delivery Quantity:

  	
  100,000 lbs U308

  
	
  Base Index Value:

  	
  118.5

  
	
  Index Value:

  	
  120.5

  
			

 

Price
Calculation:

 

[REDACTED]

 

Total Due
= $[REDACTED]/lb U308 x 100,000 lbs U308 =
$[REDACTED]

 

Payment due thirty (30) days after the U308 Delivery
Date, or February 16, 2005

 

17

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