Document:

exv10w3

Exhibit 10.3

NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR ANY APPLICABLE STATE SECURITIES LAWS,
AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS (I) PURSUANT
TO REGISTRATION UNDER THE ACT OR (II) IN COMPLIANCE WITH AN EXEMPTION THEREFROM AND ACCOMPANIED, IF
REQUESTED BY THE COMPANY, WITH AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT
SUCH TRANSFER IS IN COMPLIANCE WITH AN EXEMPTION THEREFROM (UNLESS SUCH TRANSFER IS TO AN AFFILIATE
OF THE REGISTERED HOLDER).

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS

EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON

TRANSFER SET FORTH IN SECTION 4 OF THIS WARRANT

			
	 	 	 
	Warrant No. 01
	 	Date of Issuance: October 7, 2008

PANDA ETHANOL, INC.

COMMON STOCK PURCHASE WARRANT

     Panda Ethanol, Inc., a Nevada corporation (the “Company”), for value received, hereby
certifies that BALKAN VENTURES LLC, a Delaware limited liability company, or its registered assigns
(the “Registered Holder”), is entitled, subject to the terms and conditions set forth below, to
purchase from the Company, in whole or in part, at any time and from time to time during the period
commencing on the date of issuance and ending on October 7, 2013 and shall be void thereafter (the
“Exercise Period”), 4,475,446 shares of Common Stock, $0.001 par value per share, of the Company,
at an exercise price of $0.25 per share. The shares purchasable upon exercise of this warrant
(“Warrant”) and the exercise price per share, each as adjusted from time to time pursuant to the
provisions of this Warrant, are hereinafter referred to as the “Warrant Shares” and the “Exercise
Price,” respectively.

     The Warrant Shares are intended to represent a seven and one half percent (7.5%) ownership
interest in the Company (the “Desired Percentage Ownership”), calculated as of the date of original
issuance of this Warrant on a fully diluted basis, as if all Convertible Securities had been fully
converted into shares of Common Stock and any outstanding Options had been fully exercised (and the
resulting securities fully converted into shares of Common Stock, if so convertible), and taking
into consideration the Company’s issuance of the other Company Warrants and its Series A
Convertible Preferred Stock issued as of the date hereof, such number of Warrant Shares subject to
adjustment from time to time as provided in this Warrant. In the event the number of Warrant
Shares represented by this Warrant do not result in a 7.5% ownership interest in the Company, as of
the date of original issuance of this Warrant, then the number of Warrant Shares purchaseable upon
exercise of this Warrant shall be increased to achieve the Desired Percentage Ownership.

     1. Exercise.

          (a) This Warrant may be exercised by the Registered Holder by surrendering this Warrant, along
with the purchase form appended hereto as Exhibit A duly executed and completed by the
Registered Holder or by the Registered Holder’s duly authorized attorney, at

 

 

the principal office
of the Company, or at such other office or agency as the Company may designate by notice in writing
to the Registered Holder, accompanied by either (i) cash or certified cashier’s check payable to
the Company (or wire transfer of immediately available funds), in lawful money of the United
States, of the Exercise Price payable in respect of the number of Warrant Shares purchased upon
such exercise (the “Aggregate Exercise Price”), or (ii) a written notice to the Company that the
Registered Holder is exercising this Warrant on a “cashless” exercise basis by authorizing the
Company to withhold from issuance a number of shares of Common Stock issuable upon such exercise of
the Warrant which when multiplied by the Fair Market Value (as defined in Article 3 hereof)
of the Common Stock is equal to the Aggregate Exercise Price (and such withheld shares shall no
longer be issuable under this Warrant).

          (b) Each exercise of this Warrant shall be deemed to have been effected immediately prior to
the close of business on the day on which this Warrant and the completed purchase form shall have
been surrendered to the Company as provided in subsection 1(a) above (the “Exercise Date”). At
such time, the person or persons in whose name or names any certificates for Warrant Shares shall
be issuable upon such exercise as provided in subsection 1(c) below shall be deemed to have become
the holder or holders of record of the Warrant Shares represented by such certificates.

          (c) Within ten (10) days after the date of exercise of this Warrant, the Company, at its
expense, will cause to be issued in the name of, and delivered to, the Registered Holder, or as
such Holder (upon payment by such Holder of any applicable transfer taxes) may direct, a
certificate or certificates for the number of full Warrant Shares to which the Registered Holder
shall be entitled upon such exercise plus, in lieu of any fractional share to which the Registered
Holder would otherwise be entitled, cash in an amount determined pursuant to Section 3
hereof; provided, however, that the Company shall not be required to pay any tax
that may be payable in respect of any transfer involving the issuance and delivery of any such
certificate upon exercise in a name other than that of the Registered Holder and the Company shall
not be required to issue or deliver certificates until the person or person requesting the issuance
thereof shall have paid the Company the amount of tax or shall have established to the Company that
such tax has been paid. Notwithstanding the foregoing, the Registered Holder shall be solely
responsible for any income taxes payable and arising from the issuance or exercise of this Warrant,
or any ad valorem property or intangible tax assessed against the Registered Holder.

          (d) The Company shall assist and cooperate with any Registered Holder required to make any
governmental filings or obtain any governmental approvals prior to or in connection with any
exercise of this Warrant (including, without limitation, making any filings required to be made by
the Company).

          (e) Notwithstanding any other provision of this Warrant, if the exercise of all or any portion
of this Warrant is to be made in connection with a registered public offering, a sale of the
Company or any other transaction or event, such exercise may, at the election of the
Registered Holder, be conditioned upon consummation of such transaction or event in which case
such exercise shall not be deemed effective until the consummation of such transaction or event.

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     2. Adjustments. In order to prevent dilution of the rights granted under this Warrant and to grant
the Registered Holder certain additional rights, the Exercise Price shall be subject to adjustment
from time to time as provided in this Section 2 and the number of Warrant Shares shall be
subject to adjustment from time to time as provided in this Section 2.

          (a) Adjustment for Stock Splits and Combinations. If the Company shall at any time
after the date on which this Warrant was first issued (the “Original Issue Date”), while this
Warrant remains outstanding and unexpired in whole or in part, effect a subdivision (by any stock
split or otherwise) of the outstanding Common Stock into a greater number of shares, the Exercise
Price in effect immediately before that subdivision shall be proportionately decreased and the
number of shares of Common Stock obtainable upon exercise of this Warrant shall be proportionately
increased. Conversely, if the Company shall at any time after the Original Issue Date combine (by
reverse stock split or otherwise) the outstanding shares of Common Stock into a smaller number of
shares, the Exercise Price in effect immediately before the combination shall be proportionately
increased and the number of shares of Common Stock obtainable upon exercise of this Warrant shall
be proportionately decreased. Any adjustment under this paragraph shall become effective at the
close of business on the date the subdivision or combination becomes effective

          (b) Adjustment for Certain Dividends and Distributions. In the event the Company at
any time after the Original Issue Date, while this Warrant remains outstanding and unexpired in
whole or in part, shall make or issue, or fix a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in additional shares of
Common Stock, then and in each such event the Exercise Price then in effect immediately before such
event shall be decreased as of the time of such issuance or, in the event such a record date shall
have been fixed, as of the close of business on such record date, by multiplying the Exercise Price
then in effect by a fraction:

               (i) the numerator of which shall be the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close of business on such record
date; and

               (ii) the denominator of which shall be the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close of business on such record
date plus the number of shares of Common Stock issuable in payment of such dividend or
distribution;

and the number of shares of Common Stock obtainable upon exercise of this Warrant shall be
proportionately increased by multiplying the number of Warrant Shares then purchasable by the
inverse of the fraction set forth above (i.e., the numerator shall be subparagraph (ii) above and
the denominator shall be subparagraph (i) above); provided, however, that if such
record date
shall have been fixed and such dividend is not fully paid or if such distribution is not fully made
on the date fixed therefor, the Exercise Price shall be recomputed accordingly as of the close of
business on such record date and thereafter the Exercise Price shall be adjusted pursuant to this
paragraph as of the time of actual payment of such dividends or distributions.

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          (c) Adjustment for Reclassification, Exchange and Substitution. If at any time after
the Original Issue Date, while this Warrant remains outstanding and unexpired in whole or in part,
the Common Stock issuable upon exercise of this Warrant is changed into the same or a different
number of shares of any class or classes of stock, this Warrant will thereafter represent the right
to acquire such number and kind of securities as would have been issuable as a result of exercise
of this Warrant and the Exercise Price therefor shall be appropriately adjusted, all subject to
further adjustment in this Section 2.

          (d) Adjustments for Other Dividends and Distributions. In the event the Company at
any time after the Original Issue Date, while this Warrant remains outstanding and unexpired in
whole or in part, shall make or issue, or fix a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in securities of the
Company (other than shares of Common Stock) or in cash or other property (other than cash out of
earnings or earned surplus, determined in accordance with generally accepted accounting
principles), then and in each such event provision shall be made so that the Registered Holder
shall receive upon exercise hereof, in addition to the number of shares of Common Stock issuable
hereunder, the kind and amount of securities of the Company and/or cash and other property which
the Registered Holder would have been entitled to receive had this Warrant been exercised into
Common Stock on the date of such event and had the Registered Holder thereafter, during the period
from the date of such event to and including the Exercise Date, retained any such securities
receivable, giving application to all adjustments called for during such period under this
Section 2 with respect to the rights of the Registered Holder.

          (e) Adjustment for Mergers or Reorganizations, etc. Any reorganization,
recapitalization, reclassification, consolidation, merger, sale of all or substantially all of the
Company’s assets or other transaction involving the Company in which the Common Stock is converted
into or exchanged for securities, cash or other property while this Warrant remains outstanding and
unexpired in whole or in part (other than a transaction covered by subsections 2(a),
2(b) or 2(d)) is referred to herein as an “Organic Change”. Prior to the
consummation of any such Organic Change, the Company shall make appropriate provision (in form and
substance reasonably satisfactory to the Registered Holders of a majority of the Warrants then
remaining outstanding and unexpired) to ensure that the Registered Holder shall have the right to
receive, in lieu of or in addition to (as the case may be) such shares of Common Stock immediately
acquirable and receivable upon exercise of this Warrant, the kind and amount of securities, cash or
other property as may be issued or payable with respect to or in exchange for the number of shares
of Common Stock immediately acquirable and receivable upon exercise of this Warrant had such
Organic Change not taken place. In such case, appropriate adjustment (in form and substance
reasonably satisfactory to the Registered Holders of a majority of the Warrants then remaining
outstanding and unexpired) shall be made with respect to the Registered Holder’s rights and
interests to ensure that the provisions of this Section 2 shall thereafter be applicable to
the Warrants (including, in the case of any Organic Change where the successor entity or purchasing
entity is other than the Company, an immediate reduction to the
Exercise Price to the value of the Common Stock reflected by the terms of the Organic Change
and a corresponding increase in the number of shares of Common Stock acquirable and receivable upon
exercise of this Warrant, if the value so reflected is less than the Exercise Price then in effect
immediately prior to such Organic Change). The Company shall not effect any reorganization,
recapitalization, consolidation or merger unless, prior to the consummation

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thereof, the successor
entity (if other than the Company) resulting from the consolidation or merger or the entity
purchasing such assets assumes by written instrument (in form and substance reasonably satisfactory
to the Registered Holders of a majority of the Warrants then remaining outstanding and unexpired)
the obligation to deliver to each Registered Holder such shares of stock, securities or assets as,
in accordance with the foregoing provisions, such holder may be entitled to acquire; provided, that
any assumption shall not relieve the Company of its obligations hereunder.

          (f) Adjustments to the Conversion Prices for Certain Dilutive Issuances.

               (i) Special Definitions. For purposes of this Section 2(f), the following
definitions apply:

                    (A) “Additional Shares of Common Stock” shall mean all shares of Common Stock issued (or,
pursuant to Section 2(f)(iii), deemed to be issued) by the Company after the Original Issue
Date other than shares of Common Stock issued or issuable:

(1) upon conversion of shares of Series A Convertible
Preferred Stock;

(2) in connection with the Company’s agreements in effect
prior to the Original Issue Date to pay for administrative
services and director fees in shares of Common Stock;

(3) as a dividend or distribution on Series A Convertible
Preferred Stock; or

(4) for which adjustment of the Exercise Price is made
pursuant to Section 2(f)(iv).

                    (B) “Convertible Securities” shall mean any evidences of indebtedness, shares (other than
Common Stock and Series A Preferred Stock) or other securities convertible into or exchangeable for
Common Stock.

                    (C) “Options” shall mean rights, options or warrants to subscribe for, purchase or otherwise
acquire either Common Stock or Convertible Securities.

               (ii) No Adjustment of Exercise Price. Any provision herein to the contrary
notwithstanding, no adjustment to the Exercise Price shall be made in respect of the issuance of
Additional Shares of Common Stock unless the consideration per share (determined pursuant to
Section 2(f)(v) hereof) for an Additional Share of Common Stock issued or deemed
to be issued by the Company is less than the Exercise Price in effect on the date of, and
immediately prior to, such issue.

               (iii) Deemed Issuance of Additional Shares of Common Stock. In the event the Company
at any time or from time to time after the Original Issue Date while this Warrant remains
outstanding and unexpired in whole or in part shall issue any Options or

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Convertible Securities or
shall fix a record date for the determination of holders of any class of securities then entitled
to receive any such Options or Convertible Securities, then the maximum number of shares (as set
forth in the instrument relating thereto without regard to any provisions contained therein
designed to protect against dilution) of Common Stock issuable upon the exercise of such Options
or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the
time of such issuance or, in case such a record date shall have been fixed, as of the close of
business on such record date, provided further that in any such case in which Additional Shares of
Common Stock are deemed to be issued:

                    (A) no further adjustments to the Exercise Price shall be made upon the subsequent issue of
Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or
exchange of such Convertible Securities;

                    (B) if such Options or Convertible Securities by their terms provide, with the passage of time
or otherwise, for any increase in the consideration payable to the Company, or decrease in the
number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the
Exercise Price computed upon the original issue thereof (or upon the occurrence of a record date
with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase
or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such Convertible Securities
(provided, however, that no such adjustment of the Exercise Price shall effect Common Stock
previously issued upon conversion of the Company’s preferred stock); and

                    (C) no readjustment pursuant to clause (A) or (B) above shall have the effect of increasing
the Exercise Price to an amount which exceeds the lower of (a) the Exercise Price on the original
adjustment date or (b) the Exercise Price that would have resulted from any issuance of Additional
Shares of Common Stock between the original adjustment date and such readjustment date.

               (iv) Adjustment of Exercise Price Upon Issuance of Additional Shares of Common Stock.
In the event the Company at any time after the Original Issue Date while this Warrant remains
outstanding and unexpired in whole or in part shall issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued pursuant to
Section 2(f)(iii)) without consideration or for consideration per share less than the
Exercise Price in effect on the date of and immediately prior to such issue, then the Exercise
Price shall be reduced, concurrently with such issue, to the lowest price per share for which any
Additional Share of Common Stock has been issued; provided, that if the Additional Shares of Common
Stock are issued without consideration, the Exercise Price shall be reduced to $0.001.

               (v) Determination of Consideration. For purposes of this Section 2(f), the
consideration received by the Company in connection with the issuance of any Additional Shares of
Common Stock shall be computed as follows:

                    (A) Cash and Property. Such consideration shall:

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(1) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Company, excluding
amounts paid or payable for accrued interest or accrued
dividends;

(2) insofar as it consists of property other than cash, be
computed at the fair value thereof at the time of such
issuance, as determined by an independent financial expert
selected by the Company who is reasonably acceptable to the
Registered Holder; and

(3) in the event Additional Shares of Common Stock are issued
together with other shares or securities or other assets of
the Company for consideration which covers both cash and
property, be the proportion of such consideration so
received, computed as provided in clauses (1) and (2) above,
as determined by an independent financial expert selected by
the Company who is reasonably acceptable to the Registered
Holder.

                    (B) Options and Convertible Securities. The consideration per share received by the
Company for Additional Shares of Common Stock deemed to have been issued pursuant to
Section 2(f)(iii) relating to Options and Convertible Securities shall be determined by
dividing:

(1) the total amount, if any, received or receivable by the
Company as consideration for the issuance of such Options or
Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments
relating thereto, without regard to any provision contained
therein designed to protect against dilution) payable to the
Company upon the exercise of such Options or the conversion
or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such
Options for Convertible Securities and the conversion or
exchange of such Convertible Securities, by

(2) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to
any provision contained therein designed to
protect against the dilution) issuable upon the exercise of
such Options or conversion or exchange of such Convertible
Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible
Securities.

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          (g) Certificate as to Adjustments. Upon the occurrence of each adjustment or
readjustment of the Exercise Price pursuant to this Section 2, the Company at its expense
shall promptly compute such adjustment or readjustment in accordance with the terms hereof and
furnish to the Registered Holder a certificate setting forth such adjustment or readjustment
(including the kind and amount of securities, cash or other property for which this Warrant shall
be exercisable and the Exercise Price) and showing in detail the facts upon which such adjustment
or readjustment is based. The Company shall, upon the written request at any time of the
Registered Holder, promptly furnish or cause to be furnished to the Registered Holder a certificate
setting forth (i) the Exercise Price then in effect and (ii) the number of shares of Common Stock
and the amount, if any, of other securities, cash or property which then would be received upon the
exercise of this Warrant, and shall cause a copy of such certificate to be delivered personally or
transmitted by facsimile to the Registered Holder.

          (h) Participation Rights. Except as provided in this Section 2(h), if the
Company proposes to issue Additional Shares of Common Stock at a per share consideration less than
Fair Market Value, the Company shall first offer (the “Participation Offer”) to the Registered
Holder the opportunity to purchase in connection with such proposed issuance a number of such
Additional Shares of Common Stock as may be designated by the Registered Holder, not to exceed the
number of shares equal to the product of (y) the aggregate number of Additional Shares of Common
Stock to be issued by the Company in the proposed transaction and (z) a fraction, the numerator of
which shall be the number of shares of fully diluted Common Stock held by the Registered Holder
(assuming conversion of all Convertible Securities and exercise of all Options held by the
Registered Holder) and the denominator of which shall be the number of shares of fully diluted
Common Stock then outstanding (assuming conversion of all outstanding Convertible Securities and
exercise of all outstanding Options). The Company shall give written notice to the Registered
Holder of the Participation Offer (the “Participating Offer Notice”) at least 20 days prior to the
proposed issuance date. The Participation Offer Notice shall specify the proposed transaction
pursuant to which the Additional Shares of Common Stock are to be issued, the number of Additional
Shares of Common Stock to be issued, the amount and type of consideration to be received therefor,
and the date on which the proposed transaction is to be consummated. The Registered Holder shall
notify the Company in writing within 10 days after the date of receipt of the Participation Offer
Notice if the Registered Holder wishes to exercise the participation rights hereof and the number
of shares the Registered Holder wishes to acquire in the Participation Offer in accordance
herewith. The Participation Offer shall be conditioned upon the Company’s sale or other transfer
of Additional Shares of Common Stock pursuant to the transactions contemplated in the Participation
Offer Notice. This Section 2(h) shall not apply to any sale pursuant to a public offering
registered under the Act.

     3. Fractional
Shares. The Company shall not be required upon the exercise of this Warrant to issue any fractional
shares, but shall make an adjustment therefor in cash on the basis of the fair market value (“Fair
Market Value”) per share of Common Stock, such Fair Market Value to be determined as follows:

          (a) If traded on a securities exchange, the Fair Market Value shall be deemed to be the
average of the per share closing prices of the Common Stock on such exchange over the thirty (30)
day period ending three (3) days prior to the date of determination. If traded over the counter,
the Fair Market Value shall be deemed to be the average of the per share closing bid or

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sales
prices (whichever is applicable) over the thirty (30) day period ending three (3) days prior to the
date of determination; or

          (b) If at any time the Common Stock is not listed on any securities exchange or quoted in the
over-the-counter market, the Fair Market Value shall be the fair value thereof, as determined in
good faith jointly by the Board of Directors of the Company and the Registered Holder; provided,
however, that if such parties are unable to reach agreement within a reasonable period of time, the
Fair Market Value shall be determined in good faith by an independent reputable appraiser,
nationally recognized accounting firm or investment banking firm selected jointly by the Company
and the Registered Holder or, if that selection cannot be made within ten (10) days of either party
notifying the other of the inability to reach agreement, by an independent reputable appraiser,
nationally recognized accounting firm or investment banking firm selected by the American
Arbitration Association in accordance with its rules; and provided further, that the independent
appraiser or firm is instructed only to determine whether or not the Fair Market Value is greater
than the amount determined by the Company, taking into account discounts and valuation methods
customary in the industry, and if it greater than the amount determined by the Company, then the
determination of the Fair Market Value; and provided further, the Registered Holder and not the
Company shall pay the fees and expenses of such independent appraiser or firm incurred in
connection with determining the Fair Market Value if such independent appraiser or firm determines
that the Fair Market Value is no greater than the amount determined by the Company, otherwise the
Company shall pay all such fees and expenses.

     4. Requirements for Transfer.

          (a) This Warrant and the Warrant Shares shall not be sold or transferred unless either (i)
they first shall have been registered under the Act or (ii) the Company first shall have been
furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect
that such sale or transfer is exempt from the registration requirements of the Act.

          (b) Notwithstanding the foregoing, no registration or opinion of counsel shall be required for
(i) a transfer by a Registered Holder which is a corporation to a wholly-owned subsidiary of such
corporation or to a corporation owned by the same parent entity of such corporation, a transfer by
a Registered Holder which is a partnership to a partner of such partnership or a retired partner of
such partnership or to the estate of any such partner or retired partner, or a transfer by a
Registered Holder which is a limited liability company to a member of
such limited liability company or a retired member or to the estate of any such member or
retired member, provided that, as a condition to the Company effecting such transfer, the
transferee in each case agrees in writing to be subject to the terms of this Section 4, or
(ii) a transfer made in accordance with Rule 144 under the Act.

          (c) Each certificate representing Warrant Shares shall bear a legend substantially in the
following form:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS

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AMENDED, AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED
UNLESS AND UNTIL SUCH SECURITIES ARE REGISTERED
UNDER SUCH ACT OR UNLESS SOLD PURSUANT TO AN
EXEMPTION THEREFROM OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY IS OBTAINED TO THE
EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED.”

     The foregoing legend shall be removed from the certificates representing any Warrant Shares,
at the request of the holder thereof, at such time as they become eligible for resale without
limitations pursuant to Rule 144 under the Act.

     5. No Impairment. The Company will not, by amendment of its charter or through reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out of all such terms and in
the taking of all such action as may be necessary or appropriate in order to protect the rights of
the holder of this Warrant against impairment. Without limiting the generality of the foregoing,
the Company will (a) not increase the par value of any shares of Common Stock obtainable upon the
exercise of this Warrant and (b) take all such actions as may be necessary or appropriate in order
that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of this Warrant.

     6. Notices of Record Date, etc. In the event:

          (a) the Company shall take a record of the holders of its Common Stock (or other stock or
securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling
or enabling them to receive any dividend or other distribution, or to receive any right to
subscribe for or purchase any shares of stock of any class or any other securities, or to receive
any other right; or

          (b) of any Organic Change; or

          (c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company,

then, and in each such case, the Company will deliver or cause to be delivered to the Registered
Holders at least twenty (20) days prior to the record date specified therein (or such shorter
period approved by the Registered Holder) and at least twenty (20) days prior to the effective date
of such event specified in clause (b) or (c) hereof a notice specifying, as the case may be, (i)
the record date for such dividend, distribution or right, and the amount and character of such
dividend, distribution or right, or (ii) the effective date on which such Organic Change,
dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of
which the holders of record of Common Stock (or such other stock or securities at the time

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deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common
Stock (or such other stock or securities) for securities or other property deliverable upon such
Organic Change, dissolution, liquidation or winding-up; provided, however, that the failure to
deliver such notice or any defect therein or in the delivering thereof shall not affect the
validity of the corporate action required to be specified in such notice. Nothing herein shall
prohibit the Registered Holder from exercising this Warrant during the twenty (20) day period
commencing on the date of such notice.

     7. Reservation of Stock. The Company covenants that for the duration of the Exercise Period, the
Company will at all times reserve and keep available, from its authorized and unissued Common Stock
solely for issuance and delivery upon the exercise of this Warrant and free of preemptive rights,
such number of Warrant Shares and other securities, cash and/or property, as from time to time
shall be issuable upon the exercise of this Warrant. The Company further covenants that it shall,
from time to time, take all steps necessary to increase the authorized number of shares of its
Common Stock if at any time the authorized number of shares of Common Stock remaining unissued is
insufficient to permit the exercise of this Warrant.

     8. Issuance Upon Exercise. All shares of Common Stock issuable upon exercise of this Warrant will
be duly and validly issued, fully paid and nonassessable and will be free of restrictions on
transfer, other than restrictions on transfer under any agreement between the Registered Holder and
the Company and under applicable state and federal securities laws, and will be free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any
transfer occurring contemporaneously or otherwise specified herein). The Company shall take all
such actions as may be necessary to ensure that all such shares of Common Stock may be so issued
without violation of any applicable law or governmental regulation or any requirements of any
domestic stock exchange upon which shares of Common Stock may be listed (except for official notice
of issuance which shall be immediately delivered by the Company upon each such issuance).

     9. Exchange of Warrants. Upon the surrender by the Registered Holder, properly endorsed, to the
Company at the principal office of the Company, the Company will, subject to the provisions of
Section 4 hereof, issue and deliver to or upon the order of such Holder, at the Company’s
expense, a new Warrant or Warrants of like tenor, in the name of the Registered Holder or as the
Registered Holder may direct, calling in the aggregate on the face or faces thereof for the number
of shares of Common Stock (or other securities, cash and/or property) then issuable upon exercise
of this Warrant.

     10. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the Company (an
affidavit of a Registered Holder shall be satisfactory) of the ownership and loss, theft,
destruction or mutilation of any certificate evidencing this Warrant and in the case of loss, theft
or destruction, upon delivery of an indemnity agreement of the Registered Holder in form reasonably
satisfactory to the Company, or in the case of mutilation, upon surrender and cancellation of such
certificate, the Company shall, at its expense, execute and deliver in lieu of such certificate, a
new certificate of like kind representing the same rights represented by such lost, stolen,
destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.

11

 

     11. Transfers, etc.

          (a) The Company shall maintain a register at its principal executive office containing the
name and address of the Registered Holder of this Warrant. The Registered Holder may change its or
his address as shown on the warrant register by written notice to the Company requesting such
change.

          (b) Subject to the provisions of Section 4 hereof, this Warrant and all rights
hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly
executed assignment (in the form of Exhibit B hereto) at the principal executive office of
the Company.

          (c) Until any transfer of this Warrant is made in the warrant register, the Company may treat
the Registered Holder as the absolute owner hereof for all purposes; provided,
however, that if and when this Warrant is properly assigned in blank, the Company may (but
shall not be obligated to) treat the bearer hereof as the absolute owner hereof for all purposes,
notwithstanding any notice to the contrary.

          (d) The Company shall not close its books against the transfer of this Warrant or any share of
Common Stock issued or issuable upon the exercise of this Warrant in any manner which interferes
with the timely exercise of this Warrant. The Company shall from time to time take all such action
as may be necessary to ensure that the par value per share of the unissued Common Stock acquirable
upon exercisable of this Warrant is at all times equal to or less than the Exercise Price then in
effect.

     12. Delivering of Notices, etc. Any notice, request, demand or other communication required or
permitted to be given to a party pursuant to the provisions of this Agreement will be in writing
and will be effective and deemed given under this Agreement on the earliest of: (a) the date of
personal delivery, (b) the date of transmission by facsimile, with confirmed transmission and
receipt, (c) two (2) days after deposit with a nationally-recognized courier or overnight service,
or (d) five (5) days after mailing via certified mail, return receipt requested. All notices not
delivered personally or by facsimile will be sent with postage and other charges prepaid and
properly addressed to the party to be notified at the address set forth for such party:

If to the Registered Holder:

Balkan Ventures LLC

20 Dayton Avenue

Greenwich, CT 06830

Fax: 203-552-1910

Attn: Jason Cook

If to the Company:

Panda Ethanol, Inc.

4100 Spring Valley Road, Suite 1002

Dallas, Texas 75244

Phone: 972-361-1000

12

 

Fax: 972-361-1001

Attn: General Counsel

     Any party hereto (and such party’s permitted assigns) may change such party’s address for
receipt of future notices hereunder by giving written notice to the Company and the other parties
hereto.

     13. No Rights or Liabilities as Stockholder. Subject to the provisions of Sections 2 and
6 hereof, until the exercise of this Warrant, the Registered Holder shall not have or
exercise any rights by virtue hereof as a stockholder of the Company, including, without
limitation, the right to vote, to receive dividends and other distributions or to receive notice
of, or attend meetings of stockholders or any other proceedings of the Company. Notwithstanding
the foregoing, in the event (a) the Company effects a split of the Common Stock by means of a stock
dividend and the Exercise Price of and the number of Warrant Shares are adjusted as of the date of
the distribution of the dividend (rather than as of the record date for such dividend), and (b) the
Registered Holder exercises this Warrant between the record date and the distribution date for such
stock dividend, the Registered Holder shall be entitled to receive, on the distribution date, the
stock dividend with respect to the shares of Common Stock acquired upon such exercise,
notwithstanding the fact that such shares were not outstanding as of the close of business on the
record date for such stock dividend.

     14. Amendment or Waiver. This Warrant is one of a series of Warrants issued by the Company, all of
like tenor, except as to the number of shares of Common Stock subject thereto (collectively, the
“Company Warrants”). Any term of this Warrant may be amended or waived upon the written consent of
the Company and the holders of Company Warrants representing at least a majority of the number of
shares of Common Stock then subject to outstanding Company Warrants; provided that any such
amendment or waiver must apply to all Company Warrants then outstanding; and provided
further that the number of Warrant Shares subject to this Warrant, the Exercise Price of
this Warrant, the number of shares or class of stock obtainable upon exercise of this Warrant, the
provisions of Section 2 and the provisions of Section 3 may not be amended, and the right to
exercise this Warrant may not be waived, without the written consent of the holder of this Warrant.
The Company shall promptly give notice to all holders of the Company Warrants of any amendments
effected in accordance with this Section 14. No special consideration may be given to any
holder as inducement to waive or amend this Warrant unless such consideration is given equally and
ratably to all holders.

     15. Successors and Assigns. This Warrant shall be binding upon and inure to the benefit of the
Registered Owner and its assigns, and shall be binding upon any entity succeeding to the Company by
consolidation, merger or acquisition of all or substantially all of the Company’s assets. The
Company may not assign this Warrant or any rights or obligations hereunder without the prior
written consent of the Registered Holder. The Registered Holder may assign this Warrant without
the Company’s prior written consent.

     16. Remedies. In the event of a breach by the Company of any of their obligations under this
Warrant, the Registered Holder, in addition to being entitled to exercise all rights granted by
law, including recovery of damages, will be entitled to specific performance of its rights under
this Warrant. The Company agrees that monetary damages would not provide

13

 

adequate compensation for any losses incurred by reason of its breach of any of the provisions of
this Warrant and hereby further agrees that, in the event of any action for specific performance in
respect of such breach, it shall waive the defense that a remedy at law would be adequate.

     17. Section Headings. The section headings in this Warrant are for the convenience of the parties
and in no way alter, modify, amend, limit or restrict the contractual obligations of the parties.

     18. Registration Rights. The Company agrees to grant to the Registered Holder all the rights
of a “Holder” under the Company’s Registration Rights Agreement dated as of November 9, 2007 (the
“Rights Agreement”), including, without limitation, the registration rights contained therein, and
agrees to amend the Rights Agreement to allow the Registered Holder to be made party thereto so
that (i) the Warrant Shares upon exercise of this Warrant shall be “Registrable Securities”
thereunder and (ii) the Registered Holder shall be a “Holder” for all purposes of such Rights
Agreement, and the Registered Holder agrees to deliver a counterpart signature page to the Rights
Agreement, as amended, thereby becoming a party thereto.

     19. Counterparts. This Warrant may be executed in two or more counterparts, each of which will be
deemed an original but all of which together will constitute one and the same instrument.

     20. Severability. The provisions of this Warrant will be deemed severable and the invalidity or
unenforceability of any provision hereof will not affect the validity or enforceability of the
other provisions hereof; provided that if any provision of this Warrant, as applied to any party or
to any circumstance, is adjudged by a court or governmental body not to be enforceable in
accordance with its terms, the parties agree that the court or governmental body making such
determination will have the power to modify the provision in a manner consistent with its
objectives such that it is enforceable, and/or to delete specific words or phrases, and in its
reduced form, such provision will then be enforceable and will be enforced.

     21. Titles and Subtitles. The article and section headings contained in this Warrant are inserted
for convenience only and will not affect in any way the meaning or interpretation of this Warrant.

     22. Third Parties. Nothing in this Warrant, express or implied, is intended to confer upon any
person other than the parties hereto and their successors and assigns, any rights or remedies under
or by reason of this Warrant.

     23. Governing Law. This Warrant and the performance of the transactions and the obligations of the
parties hereunder will be governed by and construed and enforced in accordance with the laws of the
State of Texas, without giving effect to any choice of law principles.

14

 

     IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and attested by its duly
authorized officers under its corporate seal and to be dated the Date of Issuance hereof.

	 	 	 	 	 	 	 
	 

	 	By:	 	/s/ Darol Lindloff	 	 
	 

	 	Name:
	 	Darol Lindloff

	 	 
	 

	 	Title:	 	President and CEO	 	 

[Corporate Seal]

ATTEST:

/s/
Jonathan Quenzer

15

 

EXHIBIT
A

PURCHASE FORM

			
	 	 	 
	To:                                         
	 	Dated:                     

     The undersigned, pursuant to the provisions set forth in the attached Warrant (No. ___),
hereby irrevocably elects to purchase
                                         shares of the Common Stock covered by such
Warrant.

     The undersigned herewith makes payment of the full exercise price for such shares at the price
per share provided for in such Warrant, which is $___ in lawful money of the United States.

	 	 	 	 	 	 	 
	 	 	[                                                             ]	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 
	 

	 	Name:
	 	 	 	 
	 

	 	Title:	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Address:	 	 	 	 
	 

	 	 	 	 

	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	 

	 	 

16

 

EXHIBIT B

ASSIGNMENT FORM

     FOR VALUE RECEIVED,                                                              hereby sells, assigns
 and
transfers all of the rights of the undersigned under the attached Warrant (No. ___) with respect
to the number of shares of Common Stock covered thereby set forth below, unto:

	 	 	 	 	 
	Name of Assignee	 	Address	 	No. of Shares
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 

Dated:                                        

	 	 	 	 	 	 	 
	 	 	[                                                             ]	 	 
	 
	 	 	 	 	 	 
	 
	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	Title:	 	 	 	 

	 	 	 	 	 
	Signature Guaranteed:	 	 
	 
	 	 	 	 
	By:
	 	 	 	 
	 

	 	 

	 	 

The signature should be guaranteed by an eligible guarantor institution (banks, stockbrokers,
savings and loan associations and credit unions with membership in an approved signature guarantee
medallion program) pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934.exv10w4

Exhibit 10.4

EXECUTION COPY

SECURITIES PURCHASE AGREEMENT

     This Securities Purchase Agreement (this “Agreement”) is made as of October 6, 2008,
by and among Panda Ethanol, Inc., Nevada corporation (the “Company”), and PLC II, LLC, a
Delaware limited liability company (the “Investor”).

     WHEREAS, the Company desires to sell and issue to the Investor, and the Investor desires to
purchase and acquire from the Company, securities of the Company as described in this Agreement on
the terms and subject to the conditions hereinafter set forth.

     NOW, THEREFORE, in consideration of the premises, the respective representations, warranties
and agreements set forth in this Agreement, and other good and valuable consideration the receipt
and sufficiency of which are hereby acknowledged, and intending to be legally bound, the parties
hereby agree as follow:

ARTICLE I

DEFINITIONS

     1.1 Definitions. As used herein, the following terms shall have the respective
meanings ascribed to them below:

     “Certificate of Designations” shall mean the Certificate of Designations of the Series
A Convertible Preferred Stock, attached hereto as Exhibit A.

     “Closing” has the meaning ascribed to such term in Section 2.1.

     “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, and
any successor statute thereto.

     “Company Disclosure Schedule” shall mean that certain schedule attached hereto as
Annex I qualifying the representations and warranties contained in Article III.

     “Company Material Adverse Effect” shall mean any event, condition or contingency that
has had, or is reasonably likely to have, a material adverse effect on the business, assets,
liabilities, results of operations, prospects or financial condition of the Company and its
Subsidiaries, taken as a whole..

     “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to
time, and all regulations promulgated thereunder.

     “Interim Completion Waiver” shall mean that certain Waiver to Financing Agreement and
Depositary and Disbursement Agreement, dated as of October 6, 2008, by and among Panda Hereford
Ethanol, L.P., Société Générale, as Administrative Agent, and the Majority Lenders.

     “GAAP” shall mean United States generally accepted accounting principles, consistently
applied.

 

 

     “Governmental Authority” shall mean any federal, state, municipal or other
governmental authority, department, commission, board, agency or other instrumentality.

     “Governmental Rules” shall mean all laws, statutes, rules, regulations, codes,
ordinances, writs, orders or decrees of any Governmental Authority.

     “Lien” shall mean a lien, claim, charge, security interest or encumbrance of any kind
other than restrictions on transfer as provided under applicable securities laws.

     “Person” shall mean any individual, corporation, partnership, limited liability
company, limited liability partnership, joint venture, estate, trust, cooperative, foundation,
union, syndicate, league, consortium, coalition, committee, society, firm, company or other
enterprise, association, organization or other entity or Governmental Authority.

     “Registration Rights Agreement” shall mean the Registration Rights Agreement, by and
between the Company and the Investor, in the form of Exhibit B hereto.

     “SEC” shall mean the Securities and Exchange Commission.

     “Securities Act” shall mean the Securities Act of 1933, as amended from time to time,
and all regulations promulgated thereunder.

     “Subsidiary” shall mean, when used with respect to any Person, any other Person,
whether incorporated or unincorporated, of which (i) more than fifty percent of the securities or
other ownership interests or (ii) securities or other interests having by their terms ordinary
voting power to elect more than fifty percent of the board of directors or others performing
similar functions with respect to such corporation or other organization, is directly or indirectly
owned or controlled by such Person or by any one or more of its Subsidiaries.

     “Transaction Documents” shall mean (i) the Registration Rights Agreement, the
Certificate of Designations and the Warrant and (ii) those other agreements, certificates and
documents entered into or delivered between the Investor and the Company related to, ancillary to,
or in connection with this Agreement, the Registration Rights Agreement, the Certificate of
Designations or the Warrant.

     “Warrant” shall mean the Common Stock Purchase Warrant, attached hereto as Exhibit
C.

ARTICLE II

PURCHASE AND SALE; CLOSING

     2.1 Sale and Issuance of Securities. Subject to the terms and conditions of this
Agreement, the Investor agrees to purchase and acquire at the Closing, and the Company agrees to
sell and issue to the Investor at the Closing, for the aggregate purchase price set forth herein,
25,000 shares of the Company’s Series A Convertible Preferred Stock (the “Series A Preferred
Stock”), 6,515,471 shares of the Company’s Common Stock (the “Common Stock”), and the
Warrant.

2

 

     2.2 Closing. The purchase and sale of the securities (the “Closing”) shall
take place at the offices of the Company at 4100 Spring Valley Road, Suite 1002, Dallas, Texas
75244, or such other place as may be agreed upon by the parties. At the Closing, upon and subject
to the terms and conditions of this Agreement, the Company shall deliver to the Investor (i) a
certificate representing the Series A Preferred Stock that the Investor is purchasing and the
Warrant against payment of $2,500,000 by wire transfer to the account specified in writing by the
Company, and (ii) a certificate representing the Common Stock that the Investor is purchasing upon
conversion of the outstanding principal and accrued interest under that certain Promissory Note of
the Company, dated July 29, 2008, payable to the order of Panda Energy International, Inc. (the
“Promissory Note”), against cancellation of the Promissory Note. The loan agreement
pursuant to which the Promissory Note was issued will also terminate as contemplated in Section
6.13 of this Agreement.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     Except as set forth on the Company Disclosure Schedule, which when read together with this
Article III shall be deemed to be representations and warranties by the Company, the Company hereby
represents and warrants to the Investor as follows:

     3.1 Organization; Good Standing. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Nevada. The Company has the corporate
power and authority to conduct its business as now being conducted and is duly qualified to do
business and is in good standing as a foreign corporation in all jurisdictions in which the nature
of the business conducted by it, and/or the character of the assets owned or leased by it, makes
such qualification necessary, except for those jurisdictions in which the failure to be so
qualified or to be in good standing would not, individually or in the aggregate, limit the
Company’s ability to consummate the transactions hereby contemplated or have a Company Material
Adverse Effect.

     3.2 Subsidiaries. Each of the Company’s Subsidiaries is set forth on Section 3.2 of
the Company Disclosure Schedule and is a corporation or other legal entity duly organized, validly
existing and in good standing under the laws of its jurisdiction of organization. Each of the
Company’s Subsidiaries has the power and authority to conduct its business as now being conducted
and is duly qualified to do business and is in good standing as a foreign corporation or other
legal entity in all jurisdictions in which the nature of the business conducted by it, and/or the
character of the assets owned or leased by it, makes such qualification necessary, except for those
jurisdictions in which the failure to be so qualified or to be in good standing would not,
individually or in the aggregate, limit the Company’s ability to consummate the transactions hereby
contemplated or have a Company Material Adverse Effect. When used in Sections 3.5 through 3.16, the
term “Company” shall include the Company and each of its Subsidiaries

     3.3 Authority; Execution and Delivery; Enforceability. The Company has the corporate
power and authority to execute and deliver this Agreement and the Transaction Documents and to
consummate the transactions hereby and thereby contemplated. The execution and delivery by the
Company of this Agreement and the Transaction Documents and the consummation by the Company of the
transactions hereby and thereby contemplated have been authorized by all necessary corporate action
of the Company. The Company has duly executed

3

 

and delivered this Agreement and the Transaction Documents, and, assuming the due execution
and delivery of this Agreement and the Transaction Documents by each party thereto (other than the
Company), this Agreement and the Transaction Documents constitute valid and binding obligations of
the Company and are enforceable against the Company in accordance with its and their respective
terms, except as such enforceability may be limited by bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or other similar laws relating to or affecting creditors’
rights generally or general equitable principles (whether considered in a proceeding at equity or
in law).

     3.4 Capitalization. (a) Prior to giving effect to the transactions contemplated by
this Agreement, the Company is authorized to issue 250,000,000 shares of Common Stock, 31,770,193
of which are issued and outstanding as of the date hereof, and 100,000,000 shares of Preferred
Stock, of which 100,000 shares have been designated Series A Convertible Preferred Stock and none
of which are issued and outstanding as of the date hereof.

     (b) The outstanding shares of Common Stock are all duly and validly authorized and issued,
fully paid and nonassessable. All outstanding Common Stock, options and other securities of the
Company were issued in accordance with the registration or qualification provisions of the
Securities Act and any relevant state securities laws (including, without limitation, anti-fraud
provisions) or, subject in part to the truth and accuracy of each purchaser’s representations to
the Company at the time of the purchase thereof, pursuant to valid exemptions therefrom.

     (c) The shares of Series A Preferred Stock and Common Stock when issued to Investor in
accordance with the terms of this Agreement shall be legally and validly issued, fully paid and
non-assessable, free and clear of all Liens. The shares of Common Stock issuable upon conversion of
the Series A Preferred Stock and issuable upon exercise of the Warrants have been duly and validly
reserved on the books and records of the Company and, when issued upon conversion of the Series A
Preferred Stock in accordance with the terms of the Certificate of Designations or when issued upon
exercise of the Warrants in accordance with the terms thereof, as the case may be, and applicable
Governmental Rules, shall be legally and validly issued, fully paid and nonassessable, free and
clear of all Liens.

     (d) Except as set forth on the Company Disclosure Schedule, there are no outstanding options,
warrants, rights (including conversion or preemptive rights) or agreements for the purchase or
acquisition from the Company of any shares of its capital stock. No holder of shares of Common
Stock or any other security of the Company or any other person is entitled to any preemptive right,
right of first refusal or similar right as a result of the issuance of the securities contemplated
by this Agreement or otherwise, nor is the Company a party to or aware of any voting trust,
agreement or arrangement the holders of voting stock of the Company affecting the exercise of the
voting rights of such stock.

     3.5 Non-Contravention. Neither the execution and delivery of this Agreement and the
Transaction Documents by the Company, nor the consummation of the transactions hereby and thereby
contemplated by the Company, will (i) constitute any violation or breach of the articles of
incorporation or the by-laws (or comparable organizational documents in the case of Subsidiaries)
of the Company; (ii) constitute a default under or a violation or breach of, or result in the
acceleration of any obligation under, any provision of any contract to which the Company

4

 

is a party or by which any of the assets of the Company may be affected; (iii) assuming the
consents and approvals described in Section 3.6 have been received, violate any Governmental Rules
affecting the Company; or (iv) result in the creation of any Lien on any of the assets of the
Company, other than, in the case of foregoing clauses (ii), (iii), and (iv), those defaults,
violations, breaches, accelerations and Liens which, individually or in the aggregate, would not
have a Company Material Adverse Effect.

     3.6 Consents and Approvals. Except as set forth in the Company Disclosure Schedule, no
consent, approval or authorization of, or declaration, filing or registration with, any
Governmental Authority or any other Person is required on behalf of the Company in connection with
the execution, delivery or performance of this Agreement and the Transaction Documents or the
consummation of the transactions contemplated hereby and thereby, other than such consents,
approvals and authorizations of, and declarations, filings and registrations the failure of which
to obtain, make or otherwise effect which would not, individually or in the aggregate, result in a
Company Material Adverse Effect.

     3.7 SEC Reports and Financial Statements. (a) The Company has filed all forms,
reports and documents required to be filed by it with the SEC since November 13, 2006
(collectively, the “SEC Reports”). The SEC Reports (i) were prepared in all material
respects in accordance with the requirements of the Securities Act or the Exchange Act, as the case
may be; and (ii) did not at the time they were filed contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary in order to make
the statements made therein, in the light of the circumstances under which they were made, not
misleading.

     (b) Each of the financial statements (including, in each case, any notes thereto) contained
in the SEC Reports (the “Financial Statements”) (i) was prepared from the books of account
and other financial records of the Company, (ii) was prepared in accordance with GAAP applied on a
consistent basis throughout the periods indicated (except as may be indicated in the notes thereto)
and (iii) presented fairly in all material respects the financial position of the Company as at the
respective dates thereof and the results of its operations and its cash flows for the respective
periods indicated therein except as otherwise noted therein (subject, in the case of unaudited
statements, to the omission of footnotes and normal and recurring year-end adjustments which were
not and are not expected, individually or in the aggregate, to have a Company Material Adverse
Effect).

     (c) Except for liabilities and obligations reflected on the June 30, 2008 balance sheet of
the Company included in the SEC Reports (including the notes thereto), liabilities and obligations
disclosed in the SEC Reports (including exhibits thereto) filed prior to the date of this Agreement
and other liabilities and obligations incurred in the ordinary course of business since June 30,
2008, the Company has no liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) of a nature required to be disclosed on a balance sheet prepared in
accordance with GAAP which, individually or in the aggregate, would cause a Company Material
Adverse Effect.

     3.8 Litigation. There is no action, suit, proceeding or investigation pending or, to
the Company’s knowledge, currently threatened against the Company that questions the validity of
this Agreement, the Transaction Documents or the right of the Company to enter into such

5

 

agreements or to consummate the transactions contemplated hereby or thereby. The Company is
not subject to or in default under any judgment, order, writ, agreement, injunction or decree of
any court or Governmental Authority.

     3.9 No Finder. Except as set forth in the Company Disclosure Schedule, neither the
Company, nor any party acting on its behalf, has paid or become obligated to pay any fee or
commission to any broker, finder or intermediary for or on account of the transactions contemplated
hereby.

      3.10 Exempt Offering. Subject in part to the truth and accuracy of the Investor’s
representations set forth in Article IV of this Agreement, the offer, sale and issuance of the
securities, as contemplated by and in conformity with this Agreement are exempt from the
registration requirements of Section 5 of the Securities Act by virtue of Section 4(2) thereof, and
from the registration or qualification requirements of any other applicable federal or state
securities laws, and the issuance of the Common Stock upon conversion of the Series A Preferred
Stock in accordance with the Certificate of Designations and upon exercise of the Warrant in
accordance with the terms therein will be exempt from such registration and qualification
requirements, and neither the Company nor any authorized agent acting on its behalf will take any
action hereafter that would cause the loss of such exemption.

     3.11 Agreements. Other than as attached as an exhibit to the Company’s public filings
with the SEC, the Company is not a party to, and none of its properties, rights or assets are bound
by, any material contract, agreement, lease, power of attorney, guaranty, surety arrangement, or
other commitment, whether written or oral.

     3.12 Related-Party Transactions. No employee, officer or director of the Company or
member of his or her immediate family is indebted to the Company, nor is the Company indebted (or
committed to make loans or extend or guarantee credit) to any of them. Except as set forth in the
Company’s SEC filings, none of such persons and no “affiliate” or “associate” (as those terms are
defined in Rule 405 promulgated under the 1933 Act) of any such person has had any direct or
indirect ownership interest in, or other material interest in the Company, or any firm or
corporation (i) with which the Company is affiliated, (ii) with which the Company has a business
relationship, (iii) that competes with the Company, (iv) which purchases from or sells, licenses or
furnishes to the Company any goods, property or services; or (v) which is a party to any contract
or agreement to which the Company is a party or by which it may be bound or affected; provided,
however that no representation or warranty is made with respect to stock in publicly traded
companies that may compete with the Company owned by employees, officers or directors of the
Company and members of their immediate families.

     3.13 Title to Property and Assets. The Company has good and marketable title to all of
its properties and assets, in each case, except as set forth in the SEC filings and except for
liens arising from current taxes not yet due and payable, free and clear of any mortgages, pledges,
liens, encumbrances, security interests or charges of any kind.

     3.14 Tax Returns, Payments and Elections. The Company has filed all tax returns and
reports (including information returns and reports) as required by law. These returns and reports
are true and correct in all material respects. The Company has paid all taxes and other assessments
due, except those contested by it in good faith. The provision for taxes of the

6

 

Company as shown in the Financial Statements is adequate for taxes due or accrued as of the
date thereof. The Company has not elected to be treated as a Subchapter S corporation pursuant to
Section 1362(a) of the Code, nor has it made any other elections pursuant to the Code (other than
elections that relate solely to methods of accounting, depreciation or amortization) that would
have a material effect on the Company, its financial condition, its business as presently conducted
or proposed to be conducted or any of its properties or material assets. Since the date of the
Financial Statements, the Company has not incurred any taxes, assessments or governmental charges
other than in the ordinary course of business. The Company has withheld or collected from each
payment made to each of its employees, the amount of all taxes (including, but not limited to,
federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act
taxes) required to be withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositories.

     3.15 Insurance. All insurance policies maintained by the Company are in full force and
effect and the Company is not in default of any provision thereof. The Company has not received
notice from any issuer of any such insurance policies of its intention to cancel or refusal to
renew any policy issued by it.

     3.16 Disclosure. None of this Agreement or any other statements or certificates made
or delivered to the Investor in connection herewith and the transactions contemplated hereby
contains any untrue statement of a material fact or omits to state a material fact necessary to
make the statements herein or therein, in light of the circumstances in which they were made, not
misleading.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE INVESTOR

     The Investor hereby represents and warrants to the Company as follows:

     4.1 Organization and Good Standing. The Investor is duly organized, validly existing
and in good standing under the laws of its jurisdiction of formation.

     4.2 Corporate Authority; Execution and Delivery; Enforceability. The Investor has the
requisite power and authority to execute and deliver this Agreement and the Transaction Documents
to which it is a party and to consummate the transactions hereby and thereby contemplated. The
execution and delivery by the Investor of this Agreement and the Transaction Documents to which it
is a party and the consummation by the Investor of the transactions hereby and thereby contemplated
have been authorized by all necessary action (corporate or otherwise). The Investor has duly
executed and delivered this Agreement and the Transaction Documents to which it is a party, and,
assuming the due execution and delivery of this Agreement and the Transaction Documents by each
party thereto (other than the Investor), this Agreement and the Transaction Documents to which it
is a party constitute valid and binding obligations of the Investor and are enforceable against the
Investor in accordance with its and their respective terms, except as such enforceability may be
limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other
similar laws relating to or affecting creditors’ rights generally or general equitable principles
(whether considered in a proceeding at equity or in law).

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     4.3 Non-Contravention. Neither the execution and delivery of this Agreement or the
Transaction Documents to which it is a party by the Investor, nor the consummation of the
transactions hereby or thereby contemplated by the Investor, will (i) constitute any violation or
breach of the organizational documents of the Investor; or (ii) violate any Government Rule
affecting the Investor, other than any such violations which, individually or in the aggregate,
would not prevent the Investor from consummating the transactions contemplated by this Agreement
and the Transaction Documents.

     4.4 Consents and Approvals. No consent, approval or authorization of, or declaration,
filing or registration with, any Governmental Authority or third party is required on behalf of the
Investor in connection with the execution, delivery or performance of this Agreement or the
Transaction Documents to which it is a party and all documents contemplated hereby or thereby or
the transactions contemplated hereby and thereby, other than such consents, approvals and
authorizations of, and declarations, filings and registrations with, third parties that are
required to report beneficial ownership of the Company’s Common Stock which will be filed with the
appropriate Governmental Authority or the failure of which to obtain, make or otherwise effect
which would not, individually or in the aggregate, prevent the Investor from consummating the
transactions contemplated by this Agreement and the Transaction Documents.

     4.5 Litigation. There is no action, suit, claim, proceeding, arbitration or
investigation pending or, to the knowledge of the Investor, threatened against or affecting the
Investor with respect to the propriety or validity of the transactions contemplated hereby.

     4.6 No Finder. Neither the Investor nor any party acting on the Investor’s behalf has
paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or
on account of the transactions contemplated hereby.

     4.7 Investment Representations. The Investor hereby acknowledges and agrees that the
securities purchased hereunder will not be registered under the Securities Act or any state
securities laws and may not be offered or sold except pursuant to registration or an exemption from
the registration requirements of the Securities Act and all applicable state securities laws. In
this connection, the Investor understands Rule 144 promulgated under the Securities Act, as
presently in effect, and understands the resale limitations imposed thereby and by the Securities
Act.

     4.8 Accredited Investor The Investor represents that: (i) the Investor is an
“accredited investor” (as such term is defined in Regulation D under the Securities Act) and is
acquiring the securities for its own account, for investment purposes only, and not with a view to
the resale or offer for sale thereof or with any present intention of distributing or selling or
offering for sale any of such securities; and (ii) the Investor is capable of bearing the economic
risk of such investment, including a complete loss of the investment in the securities.

ARTICLE V

CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PARTIES

     5.1 Conditions to Investor’s Obligations at the Closing. The obligation of the
Investor to purchase the securities being purchased by it under Article II of this Agreement is
subject to

8

 

the fulfillment of each of the following conditions, any or all of which may be waived in
whole or in part by the Investor:

     (a) The Company shall have performed and complied in all material respects with all
agreements, obligations and conditions contained in this Agreement that are required to be
performed or complied by it on or before the Closing.

     (b) The Certificate of Designations shall have been duly filed with and accepted by the
Secretary of State of the State of Nevada.

     (c) The Interim Completion Waiver shall have contemporaneously been deemed effective in
accordance with its terms.

     (d) The Company shall have executed and delivered the Registration Rights Agreement.

     (e) All authorizations, approvals or permits, if any, of any Governmental Authority that are
required in connection with the lawful issuance and sale of the securities pursuant to this
Agreement shall be duly obtained and effective as of the Closing.

     (f) The Company shall have executed and delivered the Warrant.

     (g) The Company shall have delivered to the Investor (i) a certificate representing the Series
A Preferred Stock to be purchased by the Investor, and (ii) a certificate representing the Common
Stock to be purchased by the Investor, each which shall be issued in the Investor’s name.

     5.2 Conditions to Company’s Obligations at the Closing. The obligation of the Company
to issue the securities being issued by it under Article II of this Agreement is subject to the
fulfillment of each of the following conditions, any or all of which may be waived in whole or in
part by the Company:

     (a) The Investor shall have performed and complied in all material respects with all
agreements, obligations and conditions contained in this Agreement that are required to be
performed or complied by it on or before the Closing.

     (b) All authorizations, approvals or permits, if any, of any Governmental Authority that are
required in connection with the lawful issuance and sale of the securities pursuant to this
Agreement shall be duly obtained and effective as of the Closing.

     (c) The Investor shall have executed and delivered the Registration Rights Agreement.

     (d) The Investor shall have delivered the purchase price for the securities purchased
hereunder in accordance with Section 2.2 of this Agreement.

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ARTICLE VI

MISCELLANEOUS

     6.1 Survival. The warranties, representations and covenants of the Company and
Investors contained in or made pursuant to this Agreement shall survive the execution and delivery
of this Agreement and the Closing and shall in no way be affected by any investigation of the
subject matter thereof made by or on behalf of the Investors or the Company.

     6.2 Expenses. Irrespective of whether the Closing is effected, the Company shall pay
all costs and expenses that it incurs with respect to the negotiation, execution, delivery and
performance of this Agreement. If the Closing is effected, the Company shall reimburse the Investor
for all reasonable out-of-pocket expenses incurred by the Investors in connection therewith. If any
action at law or in equity is necessary to enforce or interpret the terms of this Agreement or the
Transaction Documents, the prevailing party shall be entitled to reasonable attorney’s fees, costs
and necessary disbursements in addition to any other relief to which such party may be entitled.

     6.3 Use of Proceeds. The net proceeds from the sale of the securities issued by the
Company hereunder shall be used for general and administrative purposes.

     6.4 Assignment. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, executors, administrators, successors and permitted
assigns. This Agreement may not be assigned by the Company or the Investor without the prior
written consent of the other party. Nothing in this Agreement, express or implied, is intended to
confer upon any party other than the parties hereto or their respective successors and assigns any
rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.

     6.5 Governing Law. This Agreement shall be governed by and construed under the laws of
the State of Texas without application of principles of conflicts of law.

     6.6 No Modification Except in Writing. This Agreement shall not be changed, modified,
or amended except by a writing signed by the party to be affected by such change, modification or
amendment, and this Agreement may not be discharged except by performance in accordance with its
terms or by a writing signed by the party to which performance is to be rendered.

     6.7 Entire Agreement. This Agreement, together with any Schedules and Exhibits hereto,
sets forth the entire agreement and understanding among the parties as to the subject matter hereof
and merges and supersedes all prior discussions, agreements and understandings of every kind and
nature among them.

     6.8 Severability. If any provision of this Agreement or the application of any
provision hereof to any person or circumstances is held invalid, the remainder of this Agreement
and the application of such provision to other persons or circumstances shall not be affected
unless the provision held invalid shall substantially impair the benefits of the remaining portions
of this Agreement.

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     6.9 Counterparts. This Agreement may be executed in multiple counterparts, each of
which shall be deemed an original, but all of which together shall constitute one and the same
instrument.

     6.10 Captions. The captions appearing in this Agreement are inserted only as a matter
of convenience and for reference and in no way define, limit or describe the scope and intent of
this Agreement or any of the provisions hereof.

     6.11 Specific Performance. The parties hereto hereby agree than in addition to any
other rights a party may have hereunder, such party may seek specific performance of the terms
hereof and that any breach or threatened breach of this Agreement shall be the proper subject of a
temporary or permanent injunction or restraining order. If a party or its assigns institutes any
action or proceeding to specifically enforce the provisions hereof, any person against whom such
action or proceeding is brought hereby waives the claim or defense therein that such party or such
personal representative has an adequate remedy at law, and such person shall not offer in any such
action or proceeding the claim or defense that such remedy at law exists.

     6.12 Termination. This Agreement may be terminated at any time on or after October 8,
2008, by either party with written notice to the other party in the event the Closing has not taken
place.

     6.13 Loan Agreement. The Company acknowledges that at Closing, upon cancellation of
the Promissory Note, the Amended and Restated Loan Agreement dated July 29, 2008 between the
Company and Panda Energy International, Inc. shall immediately terminate and the Company will have
no further rights to request borrowings thereunder.

[SIGNATURE PAGE FOLLOWS]

11

 

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

	 	 	 	 	 
	 	 	THE COMPANY:
	 
	 	 	PANDA ETHANOL, INC.
	 
	 	 	 	 
	 

	 	By:	 	/s/ Darol Lindloff
	 

	 	
 

	 

	 	Name:	 	Darol Lindloff
	 

	 	Title:	 	President and CEO
	 
	 	 	 	 
	 	 	THE INVESTOR:
	 
	 	 	PLC II, LLC
	 
	 	 	 	 
	 

	 	By:	 	/s/ William C. Nordland
	 

	 	 

	 

	 	Name:	 	William C. Nordland
	 

	 	Title:	 	Senior Vice President

12

 

ANNEX I

COMPANY DISCLOSURE SCHEDULE

13

 

3.2 Subsidiaries of Panda Ethanol, Inc.

Each Subsidiary is formed and organized under the laws of the State of Delaware.

Panda Ethanol Acquisitions, LLC

Panda Ethanol Holdings, LLC

Panda Ethanol Management, LLC

Panda Ethanol Pool, LLC

Panda Global Services Haskell, LLC

Panda Global Services Hereford, LLC

Panda Global Services Lincoln, LLC

Panda Global Services Muleshoe, LLC

Panda Global Services Sherman, LLC

Panda Global Services Yuma, LLC

Panda Grain, LLC

Panda Haskell I, LLC

Panda Haskell II, LLC

Panda Haskell Ethanol, L.P.

Panda Haskell Holdings, LLC

Panda Hereford Ethanol, L.P.

Panda Hereford Holdings, LLC

Panda Lincoln Holdings, LLC

Panda Muleshoe Ethanol, LLC

Panda Muleshoe Holdings, LLC

Panda Sherman I, LLC

Panda Sherman II, LLC

Panda Sherman Ethanol, L.P.

Panda Sherman Holdings, LLC

Panda Transportation Company, LLC

Panda Yuma I, LLC

Panda Yuma II, LLC

Panda Yuma Ethanol, L.P.

Panda Yuma Holdings, LLC

PEI Lincoln I, LLC

PEI Lincoln II, LLC

PEI Lincoln Ethanol, L.P.

PGS Ethanol Holdings, LLC

PHE I, LLC

PHE II, LLC

14

 

3.4 Capitalization

Options to acquire 470,000 shares of Common Stock granted under the Company’s 2006 Amended and
Restated Long-Term Incentive Plan are outstanding.

Each outstanding options has an exercise price of $2 per share; vest 50% on December 31, 2008 and
the remainder on December 31, 2009; and expire on April 18, 2018, unless sooner terminated in
accordance with their terms.

A maximum of 3,333,333 shares of Common Stock may be issued under the Plan.

Warrant to be issued to Balkan Ventures LLC exercisable for a number of shares of Common Stock
equal to 7.5% of the outstanding Common Stock at Closing, calculated on a fully diluted basis and
taking into account the issuance of all the securities contemplated by this Agreement. This
warrant is identical to the Warrant except as to the number of shares of Common Stock subject
thereto.

3.6 Filings with Governmental Authorities

Filing of the Certificate of Designations with the Secretary of State of the State of Nevada

Filings, registrations and declarations required by the Registration Rights Agreement

Filings pursuant to the Section 13 of the Securities and Exchange Act of 1934 and the rules and
regulations promulgated thereunder that require disclosure of this Agreement, the Transaction
Documents and transactions contemplated hereby and thereby, including Current Reports on Form 8-K

Any filings pursuant to Regulation D of the Securities Act of 1933 and applicable state securities
law that may be deemed necessary or advisable

3.9 Fees

The Company engaged Imperial Capital LLC and Energy Capital Solutions to advise the Company with
respect to certain financing matters. The Company is not obligated to pay any fees or commissions
pursuant to its engagement with respect to the transactions contemplated by this Agreement and the
Transaction Documents.

15

 

EXHIBIT A

CERTIFICATE OF DESIGNATIONS

16

 

EXHIBIT B

REGISTRATION RIGHTS AGREEMENT

17

 

EXHIBIT C

WARRANT

18

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