Document:

kl10k123108x111_32809.htm

     

    
      Exhibit
10.11

      

      SECURITIES
PURCHASE AGREEMENT

      

      This
Securities Purchase Agreement (this “Agreement”) is dated as of
February 17, 2009, by and among KL Energy Corporation, a Nevada corporation (the
“Company”), and the
investors identified on the signature pages hereto (each, an “Investor” and collectively,
the “Investors”).

       

      WHEREAS,
subject to the terms and conditions set forth in this Agreement and pursuant to
Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”),
Rule 506 promulgated thereunder, and Regulations S under the
Securities Act, the Company desires to issue and sell to the Investors, and the
Investors, severally and not jointly, desire to purchase from the Company
certain securities of the Company, as more fully described in this
Agreement.

       

      A G R E E M E N
T

       

      NOW,
THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement,
and for other good and valuable consideration the receipt and adequacy of which
are hereby acknowledged, the Company and the Investors agree as
follows:

       

      ARTICLE
1.

       

      DEFINITIONS

       

      1.1.           Definitions

       

      .  In
addition to the terms defined elsewhere in this Agreement, for all purposes of
this Agreement, the following terms shall have the meanings indicated in this
Section 1.1:

       

      “Affiliate” means any Person
that, directly or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with a Person, as such terms are used
in and construed under Rule 144.

       

      “Business Day” means any day
except Saturday, Sunday and any day which is a U.S. federal legal
holiday

       

      “Common Stock” means the
common stock of the Company, par value $0.001 per share, and any securities into
which such common stock may hereafter be reclassified or for which it may be
exchanged as a class.

       

      “Investment Amount” means,
with respect to each Investor, the investment amount indicated on such
Investor’s signature page to this Agreement.

       

      “Material Adverse Effect”
means any of (i) a material and adverse effect on the legality, validity or
enforceability of this Agreement, (ii) a material and adverse effect on the
results of operations, assets, prospects, business or condition (financial or
otherwise) of the Company and the subsidiaries, taken as a whole, or
(iii) a material adverse impairment to the Company’s ability to perform on
a timely basis any of its obligations under this Agreement.

       

      
        
          
            

            OC
286,368,249v2 2-11-09

          

           

        

        
           

          
            

          

        

        
           

        

      

      “Person” means an individual
or corporation, partnership, trust, incorporated or unincorporated association,
joint venture, limited liability company, joint stock company, government (or an
agency or subdivision thereof) or other entity of any kind.

       

      “Shares” means the shares of
Common Stock issued or issuable to the Investors pursuant to this
Agreement.

       

      “Trading Day” means a day on
which the Common Stock is traded in the over-the-counter market, as reported by
the OTC Bulletin Board (or any similar organization or agency succeeding to its
functions of reporting prices); provided, that in the event that the Common
Stock is not listed or quoted as set forth in the foregoing, then Trading Day
shall mean a Business Day.

       

      “Trading Market” means
whichever of the New York Stock Exchange, the American Stock Exchange, the
NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ Capital Market
or OTC Bulletin Board on which the Common Stock is listed or quoted for trading
on the date in question.

       

      ARTICLE
2.

       

      PURCHASE
AND SALE

      2.1.           Closing

       

      .  Subject
to the terms and conditions set forth in this Agreement, at the closing of the
purchase and sale of the Shares (the “Closing”) the Company shall
issue and sell to each Investor, and each Investor shall, severally and not
jointly, purchase from the Company, the number of Shares set forth on each
respective Investor’s signature page attached hereto, at a per Share purchase
price of $0.22, in consideration of the Investor’s payment of the Investment
Amount set forth thereon.  (All references herein are to United States
Dollars).  The Closing shall take place at the offices of Greenberg
Traurig, LLP on the Business Day on which all of the conditions set forth in
Sections 5.1 and
5.2 hereof are satisfied, or such other date as the parties may agree
(the “Closing Date”), or
at such other location and/or time as the parties may agree.

       

      2.2.           Closing
Deliveries.

       

      i)           On
or prior to the Closing, the Company shall deliver or cause to be delivered to
each Investor this Agreement duly executed by the Company (the “Company
Deliverables”).

       

      (b)           On
or prior to the Closing Date, each Investor shall deliver or cause to be
delivered to the Company the following (the “Investor
Deliverables”):

       

      (i)           this
Agreement duly executed by the Investor; and

       

      (ii)           such
Investor’s Investment Amount, in United States dollars and in immediately
available funds, by wire transfer to an account designated in writing by the
Company for such purpose.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      Within 5
Business Days of the Closing Date, the Company shall deliver or cause to be
delivered one or more stock certificates evidencing the Shares issued to the
Investors by the Company pursuant to the terms of this Agreement purchased by
each Investor, as indicated on each such Investor’s signature page attached
hereto;

       

      ARTICLE
3.

       

      REPRESENTATIONS
AND WARRANTIES

       

      3.1.           Representations and
Warranties of the Company

       

      .  Except
as set forth under the corresponding section of the disclosure schedules of the
Company delivered by the Company to Investors contemporaneously with this
Agreement (the “Disclosure
Schedules”), which Disclosure Schedules shall be deemed a part hereof and
shall be deemed to qualify any representation or warranty otherwise made herein
to the extent of such disclosure, the Company hereby makes the following
representations and warranties to each Investor:

       

      (a)           Organization and
Qualification.  The Company is duly incorporated or otherwise
organized, validly existing and in good standing under the laws of the State of
Nevada, with the requisite power and authority to own and use its properties and
assets and to carry on its business as currently conducted.  The
Company is duly qualified to conduct its business as presently conducted and is
in good standing as a foreign corporation in each jurisdiction in which the
nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the aggregate, have
or reasonably be expected to result in a Material Adverse Effect.

       

      (b)           Subsidiaries.  KL
Energy Services, LLC, KL Energy, LLC, KL Management, LLC and Western Biomass
Energy, LLC (“WBE”) constitute all of the direct and indirect subsidiaries of
the Company  (the “Subsidiaries”).  Other
than WBE, of which the Company owns approximately 61% of the outstanding
membership interests, KL Energy, LLC and KL Management, LLC, of which the
Company owns approximately 53% of the outstanding membership interests, the
Company owns, directly or indirectly, all of the capital stock or other equity
interests of each Subsidiary free and clear of any Liens, and all the issued and
outstanding shares of capital stock of each Subsidiary are validly issued and
are fully paid, non-assessable and free of preemptive and similar rights to
subscribe for or purchase securities.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      (c)           Authorization;
Enforcement.  The Company has the requisite corporate power and
authority to enter into and to consummate the transactions contemplated by this
Agreement and otherwise to carry out its obligations hereunder.  The
execution and delivery of this Agreement by the Company and the consummation by
it of the transactions contemplated hereby have been duly authorized by all
necessary action on the part of the Company and no further action is required by
the Company, its board of directors or its stockholders in connection
therewith.  This Agreement has been (or upon delivery will have been)
duly executed by the Company and, when delivered in accordance with the terms
hereof, will constitute the valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of, creditors’ rights and remedies or by
other equitable principles of general application.

       

      (d)           No
Conflicts.  The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby do not and will not (i) conflict with or violate any
provision of the Company’s articles of incorporation or bylaws, or
(ii) conflict with, or constitute a default under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, credit facility, debt or other instrument or other understanding to
which the Company is a party or by which any property or asset of the Company is
bound or affected, or (iii) result in a violation of any law, rule,
regulation, order, judgment, injunction, decree or other restriction of any
court or governmental authority to which the Company is subject, or by which any
property or asset of the Company is bound or affected; except in the case of
each of clauses (ii) and (iii), such as could not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect.

       

      (e)           Filings, Consents and
Approvals.  The Company is not required to obtain any consent,
waiver, authorization or order of, give any notice to, or make any filing or
registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of this Agreement, other than
(i) filings required by state securities laws, (ii) the filing of a
Notice of Sale of Securities on Form D with the Securities and Exchange
Commission (the “SEC”) under Regulation D of the Securities Act; and
(iii) a current report on Form 8-K relating to the transactions
contemplated by this Agreement (collectively, the “Required
Approvals”).

       

      (f)           Issuance of the
Securities.  The Shares have been duly authorized and, when
issued and paid for in accordance with this Agreement, will be duly and validly
issued, fully paid and nonassessable, free and clear of all liens, charges,
encumbrances, security interests, rights of first refusal, rights of
participation or other restrictions of any kind (individually, a “Lien” and collectively, the
“Liens”) other than
restrictions on transfer provided for in this Agreement.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      (g)           Title to
Assets.  The Company has good and marketable title to property
owned by it that is material to its business, free and clear of all Liens,
except for Liens as do not materially affect the value of such property and do
not materially interfere with the use made and proposed to be made of such
property by the Company. Any real property and facilities held under lease by
the Company are held by them under valid, subsisting and enforceable leases of
which the Company is in compliance, except as could not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect.

       

      (h)           No Integrated
Offering. Assuming the accuracy of the Investors’ representations and
warranties set forth in Sections 3.2, 3.3 and
3.4, neither the Company, nor any of its Affiliates, nor any Person
acting on its or their behalf has, directly or indirectly, made any offers or
sales of any security or solicited any offers to buy any security, under
circumstances that would cause this offering of the Shares to be integrated with
prior offerings by the Company for purposes of the Securities Act or any
applicable shareholder approval provisions of any Trading Market on which any of
the securities of the Company are listed or designated.

       

      (i)           No General
Solicitation.  Neither the Company nor any person acting on
behalf of the Company has offered or sold any of the Shares by any form of
general solicitation or general advertising.  The Company has offered
the Shares for sale only to the Investors and certain other “accredited
investors” within the meaning of Rule 501 under the Securities
Act.

       

      (j)           SEC Reports; Financial
Statements.  Except for the Quarterly Report on Form 10-Q for
the quarter ended September 30, 2008, the Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it
under the Securities Act and the Exchange Act, including pursuant to Section
13(a) or 15(d) thereof, for the period commencing on October 1, 2008 through the
date hereof (the foregoing materials, including the exhibits thereto and
documents incorporated by reference therein, being collectively referred to
herein as the "SEC
Reports") on a timely basis or has received a valid extension of such
time of filing and has filed any such SEC Reports prior to the expiration of any
such extension.  As of their respective dates, the SEC Reports
complied in all material respects with the requirements of the Securities Act
and the Exchange Act and the rules and regulations of the Commission promulgated
thereunder, as applicable, and none of the SEC Reports, when filed, contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.  The financial statements of the Company included in the
SEC Reports complied in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto as in effect at the time of filing.  Such financial statements
have been prepared in accordance with United States generally accepted
accounting principles applied on a consistent basis during the periods involved
("GAAP"), except as may
be otherwise specified in such financial statements or the notes thereto and
except that unaudited financial statements may not contain all footnotes
required by GAAP, and fairly present in all material respects the financial
position of the Company and its consolidated subsidiaries as of and for the
dates thereof and the results of operations and cash flows for
the periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      (k)           Material Changes;
Undisclosed Events, Liabilities or Developments.  Except for
matters relating to the Company’s guarantee with respect to the Security
National Bank loan to WBE and the Company’s loan from Wells Fargo Bank which
have been disclosed to the Investors, since the date of the latest audited
financial statements included within the SEC Reports, except as specifically
disclosed in a subsequent SEC Report, (i) there has been no event, occurrence or
development that has had or that could reasonably be expected by the Company to
result in a Material Adverse Effect, (ii) the Company has not incurred any
liabilities (contingent or otherwise) other than (A) trade payables and accrued
expenses incurred in the ordinary course of business consistent with past
practice and (B) liabilities not required to be reflected in the Company's
financial statements pursuant to GAAP or disclosed in filings made with the
Commission, (iii) the Company has not altered its method of accounting, (iv) the
Company has not declared or made any dividend or distribution of cash or other
property to its stockholders or purchased, redeemed or made any agreements to
purchase or redeem any shares of its capital stock and (v) the Company has not
issued any equity securities to any officer, director or Affiliate, except
pursuant to existing Company stock option plans.  The Company does not
have pending before the Commission any request for confidential treatment of
information.

       

      (l)           Litigation.  Except
for the ongoing arbitration relating to Willmark Energy, LLC, there is no
action, suit, inquiry, notice of violation, proceeding or investigation pending
or, to the knowledge of the Company, threatened against or affecting the
Company, any Subsidiary or any of their respective properties before or by any
court, arbitrator, governmental or administrative agency or regulatory authority
(federal, state, county, local or foreign) (collectively, an "Action") which
materially  adversely affects or challenges the legality, validity or
enforceability of this Agreement or the Shares.  The Commission has
not issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the Exchange
Act or the Securities Act.

       

      (m)           Labor
Relations.  No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company which could reasonably be expected to result in a Material Adverse
Effect.  None of the Company's or its Subsidiaries' employees is a
member of a union that relates to such employee's relationship with the Company,
and neither the Company or any of its Subsidiaries is a party to a collective
bargaining agreement, and the Company and its Subsidiaries believe that their
relationships with their employees are good.  No executive officer, to
the knowledge of the Company, is, or is now expected to be, in violation of any
material term of any employment contract, confidentiality, disclosure or
proprietary information agreement or non-competition agreement, or any other
contract or agreement or any restrictive covenant, and the continued employment
of each such executive officer does not subject the Company or any of its
Subsidiaries to any liability with respect to any of the foregoing
matters.  The Company and its Subsidiaries are in compliance with all
U.S. federal, state, local and foreign laws and regulations relating to
employment and employment practices, terms and conditions of employment and
wages and hours, except where the failure to be in compliance could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      (n)           Compliance.  Except
for matters relating to the Company’s guarantee with respect to the Security
National Bank loan to WBE and the Company’s loan from Wells Fargo Bank which
have been disclosed to the Investors, neither the Company nor any Subsidiary (i)
is in default under or in violation of (and no event has occurred that has not
been waived that, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or any
Subsidiary received notice of a claim that it is in default under or that it is
in violation of, any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is in
violation of any order of any court, arbitrator or governmental body, or (iii)
is or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal, state
and local laws applicable to its business and all such laws that affect the
environment, except in each case as could not have or reasonably be expected to
result in a Material Adverse Effect.

       

      (o)           Transactions With Affiliates
and Employees.  Except as set forth in the SEC Reports, none of
the officers or directors of the Company and, to the knowledge of the Company,
none of the employees of the Company is presently a party to any transaction
with the Company or any Subsidiary (other than for services as employees,
officers and directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
entity in which any officer, director, or any such employee has a substantial
interest or is an officer, director, trustee or partner, in each case in excess
of $60,000 other than (i) for payment of salary or consulting fees for services
rendered, (ii) reimbursement for expenses incurred on behalf of the Company and
(iii) for other employee benefits, including stock option agreements under any
stock option plan of the Company.

       

      (p)           Listing and Maintenance
Requirements.  The Company's Common Stock is registered
pursuant to Section 12(g) of the Exchange Act, and the Company has taken no
action designed to, or which to its knowledge is likely to have the effect of,
terminating the registration of the Common Stock under the Exchange Act nor has
the Company received any notification that the Commission is contemplating
terminating such registration.  The Company has not, in the 12 months
preceding the date hereof, received notice from any Trading Market on which the
Common Stock is or has been listed or quoted to the effect that the Company is
not in compliance with the listing or maintenance requirements of such Trading
Market. The Company is, and has no reason to believe that it will not in the
foreseeable future continue to be, in compliance with all such listing and
maintenance requirements.

       

      (q)           Disclosure.  All
disclosure furnished by or on behalf of the Company to the Investors regarding
the Company, its business and the transactions contemplated hereby, including
the Disclosure Schedules to this Agreement, with respect to the representations
and warranties made herein are true and correct with respect to such
representations and warranties and do not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      (r)           Tax
Status.  Except for matters that would not, individually or in
the aggregate, have or reasonably be expected to result in a Material Adverse
Effect, the Company and each Subsidiary has filed all necessary federal, state
and foreign income and franchise tax returns and has paid or accrued all taxes
shown as due thereon, and the Company has no knowledge of a tax deficiency which
has been asserted or threatened against the Company or any
Subsidiary.

       

      (s)           No Undisclosed Events,
Liabilities, Developments or Circumstances.  Except for the
transactions contemplated by this Agreement, no event, liability, development or
circumstance has occurred or exists with respect to the Company or its business,
properties, prospects, operations or financial condition, that is required to
be, and has not been, disclosed, by the Company under applicable securities laws
on a Current Report on Form 8-K filed with the SEC.

       

      3.2.           Representations and
Warranties of the Investors

       

      .  Each
Investor hereby, for itself and for no other Investor, represents and warrants
to the Company as follows:

       

      (a)           Organization;
Authority.  If an entity, such Investor is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization with the requisite corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by this Agreement and
otherwise to carry out its obligations hereunder. The execution and delivery of
this Agreement and the performance by such Investor of the transactions
contemplated herein have been duly authorized by all necessary corporate or, if
such Investor is not a corporation, such partnership, limited liability company
or other applicable like action, on the part of such Investor.  This
Agreement has been duly executed by such Investor, and when delivered by such
Investor in accordance with the terms hereof, will constitute the valid and
legally binding obligation of such Investor, enforceable against it in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally the enforcement of, creditors’
rights and remedies or by other equitable principles of general
application.

       

      (b)           Investment
Intent.  Such Investor is acquiring the Shares as principal for
its own account for investment purposes only and not with a view to or for
distributing or reselling such Shares or any part thereof, without prejudice,
however, to such Investor’s right at all times to sell or otherwise dispose of
all or any part of such Shares in compliance with applicable federal and state
securities laws.  Subject to the immediately preceding sentence,
nothing contained herein shall be deemed a representation or warranty by such
Investor to hold the Shares for any period of time.  Such Investor is
acquiring the Shares hereunder in the ordinary course of its business. Such
Investor does not have any agreement or understanding, directly or indirectly,
with any Person to distribute any of the Shares.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      (c)           Investor
Status.  At the time such Investor was offered the Shares, it
was, and at the date hereof it is, an “accredited investor” as defined in
Rule 501(a) under the Securities Act.  Such Investor is not a
registered broker-dealer under Section 15 of the Exchange Act.

       

      (d)           General
Solicitation.  Such Investor is not purchasing the Shares as a
result of any advertisement, article, notice or other communication regarding
the Shares published in any newspaper, magazine or similar media or broadcast
over television or radio or presented at any seminar or any other general
solicitation or general advertisement.

       

      (e)           Access to
Information.  Such Investor acknowledges that it has been
afforded (i) the opportunity to ask such questions as it has deemed
necessary of, and to receive answers from, representatives of the Company
concerning the terms and conditions of the offering of the Shares and the merits
and risks of investing in the Shares; (ii) access to information about the
Company and the subsidiaries and their respective financial condition, results
of operations, business, properties, management and prospects sufficient to
enable it to evaluate its investment; and (iii) the opportunity to obtain
such additional information that the Company possesses or can acquire without
unreasonable effort or expense that is necessary to make an informed investment
decision with respect to the investment.

       

      (f)           No
Conflicts.  The execution, delivery and performance by such
Investor of this Agreement and the consummation by such Investor of the
transactions contemplated hereunder will not (i) result in a violation of
the organizational documents, if any, of such Investor, (ii) conflict with,
or constitute a default under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which such Investor is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree applicable to
such Investor, except in the case of clauses (ii) and (iii) above, that do not
otherwise affect the ability of such Investor to consummate the transactions
contemplated hereby.

       

      (g)           Restricted
Securities.  The Investors understand that the Shares are
characterized as “restricted securities” under the U.S. federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the Securities Act only
in certain limited circumstances.

       

      (h)           No Legal, Tax or Investment
Advice.  Such Investor understands that nothing in this
Agreement or any other materials presented by or on behalf of the Company to
such Investor in connection with the purchase of the Shares constitutes legal,
tax or investment advice.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      (i)           Independent Investment
Decision.  Such Investor has independently evaluated the merits
of its decision to purchase the Shares pursuant to this Agreement, and such
Investor confirms that it has not relied on the advice of any other Investor’s
business and/or legal counsel in making such decision.  Such Investor
has not relied on the business or legal advice of the Company or any of its
agents, counsel or Affiliates in making its investment decision hereunder, and
confirms that none of such Persons has made any representations or warranties to
such Investor in connection with the transactions contemplated by this
Agreement.

       

      3.3.           Representations and
Warranties of Non-U.S. Investors

       

        Each
Investor who is a Non-U.S. person (as defined herein) hereby represents and
warrants to the Company as follows:

       

      (a)           This
Agreement is made by the Company with such Investor who is a Non-U.S. person in
reliance upon such Non-U.S. person’s representations, warranties and covenants
made in this Section 3.3.

       

      (b)           Such
Non-U.S. person has been advised and acknowledges that:

       

      (i)           the
Shares have not been, and when issued, will not be registered under the
Securities Act, the securities laws of any state of the United States or the
securities laws of any other country;

       

      (ii)           in
issuing and selling the Shares to such Non-U.S. person pursuant hereto, the
Company is relying upon the “safe harbor” provided by Regulation S and/or on
Section 4(2) under the Securities Act;

       

      (iii)           it
is a condition to the availability of the Regulation S “safe harbor” that
the Shares not be offered or sold in the United States or to a U.S. person (as
defined herein) until the expiration of a period of one year following the
Closing Date; and

       

      (iv)           notwithstanding
the foregoing, prior to the expiration of one year after the Closing (the “Restricted Period”), the
Shares may be offered and sold by the holder thereof only if such offer and sale
is made in compliance with the terms of this Agreement and
either:  (A) if the offer or sale is within the United States or
to or for the account of a U.S. person (as such terms are defined in Regulation
S), the securities are offered and sold pursuant to an effective registration
statement or pursuant to Rule 144 promulgated by the SEC pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the SEC having substantially the same
effect as such Rule (“Rule 144”) or pursuant
to an exemption from the registration requirements of the Securities Act; or
(B) the offer and sale is outside the United States and to other than a
U.S. person.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (c)           As
used herein, the term “United States” means and includes the United States of
America, its territories and possessions, any State of the United States, and
the District of Columbia, and the term “U.S. person” (as defined in
Regulation S) means:

       

      (i)           a
natural person resident in the United States;

       

      (ii)           any
partnership or corporation organized or incorporated under the laws of the
United States;

       

      (iii)           any
estate of which any executor or administrator is a U.S. person;

       

      (iv)           any
trust of which any trustee is a U.S. person;

       

      (v)           any
agency or branch of a foreign entity located in the United States;

       

      (vi)           any
nondiscretionary account or similar account (other than an estate or trust) held
by a dealer or other fiduciary for the benefit or account of a U.S.
person;

       

      (vii)           any
discretionary account or similar account (other than an estate or trust) held by
a dealer or other fiduciary organized, incorporated and (if an individual)
resident in the United States; and

       

      (viii)                      a
corporation or partnership organized under the laws of any foreign jurisdiction
and formed by a U.S. person principally for the purpose of investing in
securities not registered under the Securities Act, unless it is organized or
incorporated, and owned, by accredited investors (as defined in Rule 501(a)
under the Securities Act) who are not natural persons, estates or
trusts.

       

      As used
herein, the term “Non-U.S.
person” means any person who is not a U.S. person or is deemed not to be
a U.S. person under Rule 902(k)(2) of the Securities Act.

       

      (d)           Such
Non-U.S. person agrees that with respect to the Shares until the expiration of
the Restricted Period:

       

      (i)           such
Non-U.S. person, its agents or its representatives have not and will not solicit
offers to buy, offer for sale or sell any of the Shares, or any beneficial
interest therein, in the United States or to or for the account of a U.S. person
during the Restricted Period; and

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (ii)           notwithstanding
the foregoing, prior to the expiration of the Restricted Period, the Shares may
be offered and sold by the holder thereof only if such offer and sale is made in
compliance with the terms of this Agreement and either:  (A) if
the offer or sale is within the United States or to or for the account of a U.S.
person (as such terms are defined in Regulation S), the securities are offered
and sold pursuant to an effective registration statement or pursuant to
Rule 144 under the Securities Act or pursuant to an exemption from the
registration requirements of the Securities Act; or (B) the offer and sale
is outside the United States and to other than a U.S. person; and

       

      (iii)           such
Non-U.S. person shall not engage in hedging transactions with regard to the
Shares unless in compliance with the Securities Act.

       

      The
foregoing restrictions are binding upon subsequent transferees of the Shares,
except for transferees pursuant to an effective registration
statement.  Such Non-U.S. person agrees that after the Restricted
Period, the Shares may be offered or sold within the United States or to or for
the account of a U.S. person only pursuant to applicable securities
laws.

       

      (e)           Such
Non-U.S. person has not engaged, nor is it aware that any party has engaged, and
such Non-U.S. person will not engage or cause any third party to engage, in any
directed selling efforts (as such term is defined in Regulation S) in the
United States with respect to the Shares.

       

      (f)           Such
Non-U.S. person:  (i) is domiciled and has its principal place of
business outside the United States; (ii) certifies it is not a U.S. person
and is not acquiring  the Shares for the account or benefit of any
U.S. person; and (iii) at the time of the Closing Date, the Non-U.S. person
or persons acting on Non-U.S. person’s behalf in connection therewith will be
located outside the United States.

       

      (g)           At
the time of offering to such Non-U.S. person and communication of such Non-U.S.
person’s order to purchase the Shares and at the time of such Non-U.S. Person’s
execution of this Agreement, the Non-U.S. person or persons acting on Non-U.S.
person’s behalf in connection therewith were located outside the United
States.

       

      (h)           Such
Non-U.S. person is not a “distributor” (as defined in Regulation S) or a
“dealer” (as defined in the Securities Act).

       

      (i)           Such
Non-U.S. person acknowledges that the Company shall make a notation in its stock
books regarding the restrictions on transfer set forth in this Section 3.3 and
shall transfer such shares on the books of the Company only to the extent
consistent therewith.

       

      In
particular, such Non-U.S. person acknowledges that the Company shall refuse to
register any transfer of the Shares not made in accordance with the provisions
of Regulation S, pursuant to registration under the Securities Act or pursuant
to an available exemption from registration.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      3.4.           Representations by Non-U.S.
Persons.  If an Investor is a Non-U.S. person, such Investor
hereby represents that such Investor is satisfied as to the full observance of
the laws of such Investor’s jurisdiction in connection with any invitation to
subscribe for the Shares or any use of the Agreements, including (i) the
legal requirements within such Investor’s jurisdiction for the purchase of
Shares, (ii) any foreign exchange restrictions applicable to such purchase,
(iii) any governmental or other consents that may need to be obtained and
(iv) the income tax and other tax consequences, if any, that may be
relevant to the purchase, holding, redemption, sale or transfer of such
securities.  Such Investor’s subscription and payment for, and such
Investor’s continued beneficial ownership of, the Shares will not violate any
applicable securities or other laws of such Investor’s
jurisdiction.

       

      ARTICLE
4.

       

      OTHER
AGREEMENTS OF THE PARTIES

       

      4.1.           i)

       

      The Shares may only be disposed of in
compliance with state and federal securities laws.  In connection with
any transfer of the Shares other than pursuant to an effective registration
statement, to the Company, to an Affiliate of an Investor or in connection with
a pledge as contemplated in Section 4.1(b),
the Company may require the transferor thereof to provide to the Company an
opinion of counsel selected by the transferor, the form and substance of which
opinion shall be reasonably satisfactory to the Company, to the effect that such
transfer does not require registration of such transferred Shares under the
Securities Act.

       

      (b)           Certificates
evidencing the Shares will contain the following legend or one similar thereto,
until such time as they are not required pursuant to the Securities Act and
applicable state securities laws as evidenced by a legal opinion of counsel to
the transferor to such effect, the substance of which shall be reasonably
acceptable to the Company:

       

      THESE
SHARES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      (c)           Each
Investor, severally and not jointly with the other Investors, agrees that such
Investor will sell any Shares only pursuant to either the registration
requirements of the Securities Act, including any applicable prospectus delivery
requirements, or an exemption therefrom, and that if Shares are sold pursuant to
a Registration Statement, they will be sold in compliance with the plan of
distribution set forth therein, and acknowledges that the removal of the
restrictive legend from certificates representing Shares as set forth in this
Section 4.1 is
predicated upon the Company’s reliance upon this understanding.

       

      4.2.           Non-Public
Information

       

      .  The
Company covenants and agrees that neither it nor any other Person acting on its
behalf will provide any Investor or its agents or counsel with any information
that the Company believes constitutes material non-public information, unless
prior thereto such Investor shall have executed a written agreement regarding
the confidentiality and use of such information.  The Company
understands and confirms that each Investor shall be relying on the foregoing
representations in effecting transactions in securities of the
Company.

       

      ARTICLE
5.

       

      CONDITIONS
PRECEDENT TO CLOSING

       

      5.1.           Conditions Precedent to the
Obligations of the Investors to Purchase Securities

       

      .  The
obligation of each Investor to acquire the Shares at the Closing is subject to
the satisfaction or waiver by such Investor, at or before the Closing, of each
of the following conditions:

       

      (a)           Representations and
Warranties.  The representations and warranties of the Company
shall be true and correct in all material respects (except for those
representations and warranties that are qualified by materiality or Material
Adverse Effect, which shall be true and correct in all respects) as of the date
when made and as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date, which shall
remain true and correct as of such specific date).

       

      (b)           Performance.  The
Company shall have performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by it at or prior to the
Closing.

       

      (c)           No
Injunction.  No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction that
prohibits the consummation of the transactions contemplated by this
Agreement.

       

      (d)           Adverse
Changes.  Since the date of execution of this Agreement, no
event or series of events shall have occurred that reasonably could have or
result in a Material Adverse Effect or a material adverse change with respect to
the Company.

       

      (e)           Company
Deliverables.  The Company shall have delivered the Company
Deliverables in accordance with Section 2.2(a).

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      (f)           Termination.  This
Agreement shall not have been terminated as to such Investor in accordance with
Section 6.5.

       

      5.2.           Conditions Precedent to the
Obligations of the Company to Sell Securities

       

      .  The
obligation of the Company to sell the Shares at the Closing is subject to the
satisfaction or waiver by the Company, at or before the Closing, of each of the
following conditions:

       

      (a)           Representations and
Warranties.  The representations and warranties of the
Investors shall be true and correct in all material respects (except for those
representations and warranties that are qualified by materiality or Material
Adverse Effect, which shall be true and correct in all respects) as of the date
when made and as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date, which shall
remain true and correct as of such specific date).

       

      (b)           Performance.  Each
Investor shall have performed, satisfied and complied in all material respects
with all covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by such Investor at or prior to the
Closing.

       

      (c)           No
Injunction.  No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction that
prohibits the consummation of the transactions contemplated by this
Agreement.

       

      (d)           Investors
Deliverables.  Each Investor shall have delivered its Investors
Deliverables in accordance with Section 2.2(b).

       

      (e)           Termination.  This
Agreement shall not have been terminated as to such Investor in accordance with
Section 6.5.

       

      ARTICLE
6.

       

      MISCELLANEOUS

       

      6.1.           Fees and
Expenses

       

      .  Each
party shall pay the fees and expenses of its advisers, counsel, accountants and
other experts, if any, and all other expenses incurred by such party incident to
the negotiation, preparation, execution, delivery and performance of this
Agreement.

       

      6.2.           Entire
Agreement

       

      .  This
Agreement contains the entire understanding of the parties with respect to the
subject matter hereof and supersede all prior agreements, understandings,
discussions and representations, oral or written, with respect to such matters,
which the parties acknowledge have been merged into such documents, exhibits and
schedules.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      6.3.           Notices

       

      .  All
notices or other communications under this Agreement shall be in writing and
shall be deemed given (i) when delivered personally by hand (with written
confirmation of receipt), (ii) when sent by facsimile (with written
confirmation of transmission) or (iii) one Business Day following the day
sent by overnight courier (with written confirmation of receipt), in each case
at the following addresses and facsimile numbers (or to such other address or
facsimile number as a party may have specified by notice given to the other
party pursuant to this provision):

       

      
        	
                    If to
      the Company:

              	
                KL
      Energy Corporation

              	 
      
	 
      	
                306
      East St. Joseph Street, Suite 200

              	 
      
	 
      	
                Rapid
      City, South Dakota  57701

              	 
      
	 
      	
                Facsimile:
      (605) 718-1372

              	 
      
	 
      	
                Attention:
      _Steve Corcoran

              	 
      
	 
      	 
      	 
      
	
                    With a
      copy to:

              	
                Holland
      & Hart LLP

              	 
      
	 
      	
                8390
      E. Crescent Parkway, Suite 400

              	 
      
	 
      	
                Greenwood
      Village, Colorado 80111

              	 
      
	 
      	
                Facsimile:
      303-713-6305

              	 
      
	 
      	
                Attention:  Amy
      Bowler, Esq.

              	 
      
	 
      	 
      	 
      
	
                    If to
      an Investor:

              	
                To
      the address set forth under such Investor’s name on the signature pages
      hereof;

              	 
      
	 
      	 
      	 
      
	
                    With a
      copy to:

              	
                Greenberg
      Traurig, LLP

              	 
      
	 
      	
                3161
      Michelson Drive, Suite 1000

              	 
      
	 
      	
                Irvine,
      California 92612

              	 
      
	 
      	
                Facsimile:
      949-732-6501

              	 
      
	 
      	
                Attention:  Raymond
      A. Lee, Esq.

              	 
      

      

       

      or such
other address as may be designated in writing hereafter, in the same manner, by
such Person.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      6.4.           Amendments; Waivers; No
Additional Consideration

       

      .  No
provision of this Agreement may be waived or amended at or prior to the Closing
except in a written instrument signed by the Company and each
Investor.  No provision of this Agreement may be waived or amended
after the Closing except in a written instrument signed by the Company and the
Investors holding a majority of the Shares.  No waiver of any default
with respect to any provision, condition or requirement of this Agreement shall
be deemed to be a continuing waiver in the future or a waiver of any subsequent
default or a waiver of any other provision, condition or requirement hereof, nor
shall any delay or omission of either party to exercise any right hereunder in
any manner impair the exercise of any such right.

       

      6.5.           Termination

       

      .  This
Agreement may be terminated prior to Closing:

       

      (a)           by
mutual written agreement of the Investors and the Company; and

       

      (b)           by
the Company or an Investor (as to itself but no other Investor) upon written
notice to the other, if the Closing shall not have taken place by 6:30 p.m.
Eastern time on the date which is February 17, 2009 (the “Outside Date”); provided, that the
right to terminate this Agreement under this Section 6.5(b)
shall not be available to any Person whose failure to comply with its
obligations under this Agreement has been the cause of or resulted in the
failure of the Closing to occur on or before such time.

       

      Upon a
termination in accordance with this Section 6.5, the
Company and the terminating Investor(s) shall not have any further obligation or
liability to the other and no Investor will have any liability to any other
Investor under this Agreement as a result therefrom.

       

      6.6.           Construction

       

      .  The
headings herein are for convenience only, do not constitute a part of this
Agreement and shall not be deemed to limit or affect any of the provisions
hereof.  The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent, and no rules of
strict construction will be applied against any party.  This Agreement
shall be construed as if drafted jointly by the parties, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any provisions of this Agreement.

       

      6.7.           Successors and
Assigns

       

      .  This
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and permitted assigns.  The Company may not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of the Investors.  Investor may assign any or all of its
rights under this Agreement to any Person to whom such Investor assigns or
transfers any Shares, provided such transferee agrees in writing to be bound,
with respect to the transferred Shares, by the provisions hereof that apply to
the “Investors.”

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

       

      6.8.           Governing
Law

       

      .  This
Agreement shall be governed by and construed exclusively in accordance with the
laws of the State of California, without giving effect to any principle or
doctrine regarding conflict of laws.

       

      6.9.           Survival

       

      .  The
representations, warranties, agreements and covenants contained herein shall
survive the Closing and the delivery of the Shares.

       

      6.10.                      Execution

       

      .  This
Agreement may be executed in two or more counterparts, all of which when taken
together shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the
other party, it being understood that both parties need not sign the same
counterpart.  In the event that any signature is delivered by
facsimile transmission, such signature shall create a valid and binding
obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such facsimile signature page
were an original thereof.

       

      6.11.                      Severability

       

      .  If
any provision of this Agreement is held to be invalid or unenforceable in any
respect, the validity and enforceability of the remaining terms and provisions
of this Agreement shall not in any way be affected or impaired thereby and the
parties will attempt to agree upon a valid and enforceable provision that is a
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Agreement.

       

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      SIGNATURE
PAGES FOLLOW]kl10k123108x112_32809.htm

    Exhibit 10.12

     

    

     

     

     

    
      
         

      

      
        Exhibit
10.12 Page 1

        
          

        

      

      
         

      

       

      

       

       

      
        
           

        

        
          Exhibit
10.12 Page 2

          
            

          

        

        
           

        

         

        

         

        Exhibit 10.12 Page 2

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