LEASE ACQUISITION AGREEMENT

LEASE ACQUISITION AGREEMENT

This Lease Acquisition Agreement (this “ Agreement ”), executed February 24, 2011 (the “ Execution Date ”), effective as of March 1, 2011 (the “ Effective Date ), is between Wapiti Oil & Gas, L.L.C., a limited liability company duly organized in the State of Delaware, located at 800 Gessner, Suite #1000, Houston, Texas, 77024 (“ Seller ”), and Recovery Energy, Inc., a Nevada corporation, located at 1515 Wynkoop, Suite 200, Denver Colorado 80202 (“ Buyer ”).  Seller and Buyer are sometimes referred to herein as a “ Party ” or, together, as the “ Parties .”

RECITALS

WHEREAS, Seller owns certain oil and gas leases located in Laramie County, Wyoming as set forth on Exhibit A (the “ Leases ”), insofar and only insofar as the Leases cover approximately 8,356 net acres of land as described on Exhibit A (the “ Lands ”);

 

WHEREAS, Seller desires to sell and Buyer desires to purchase all of Seller’s interest in the Leases upon the terms and conditions set forth in this Agreement.

 

NOW THEREFORE, in consideration of the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Buyer and Seller agree as follows:

PURCHASE AND SALE

1.1   Purchase and Sale .  Subject to the terms and conditions of this Agreement, and for the consideration set forth in Article 2, Buyer agrees to purchase from Seller and Seller agrees to sell, assign and deliver to Buyer, all of Seller’s right, title and interest in and to the following (collectively, the “ Assets ”):

 

(a)   The Leases, insofar and only insofar as the Leases cover the Lands;

 

(b)   All unitization, pooling and communitization agreements, declarations, orders, and the units created thereby relating to the properties and interests described in Section 1.1(a) and to the production of oil, gas and other hydrocarbons (“ Hydrocarbons ”), if any, attributable to said properties and interests, and all surface leases, permits, rights-of-way, easements and other surface rights agreements used or held in connection with the exploration, drilling, production, gathering, treatment, processing, storing, sale or disposal of Hydrocarbons or produced water from the interests described in Section 1.1(a), including those listed on Exhibit B ; and

 

(c)   To the extent transferable and in Seller’s possession, all of Seller’s land records, lease records, contract files, data, title records (including abstracts of title, title opinions and memoranda, title curative documents, broker run sheets and landowner contact information) and other records relating to the items described in Sections 1.1(a) and 1.1(b) (collectively, the “ Records ”).

PURCHASE PRICE

2.1            Purchase Price .  The purchase price for the Assets shall be in two components as set forth below (together, the “ Purchase Price ”):

 

(a)   Cash .  A cash amount equal to Six Million Four Hundred Sixty-Nine Thousand Five Hundred Fifty-Two Dollars ($6,469,552), payable at Closing by wire of immediately available funds (the “ Closing Payment ”).

 

(b)   Shares .  Two Million Three Hundred Twelve Thousand Nine Hundred Forty-Two (2,312,942) fully paid, non-assessable shares (the “ Shares ”) of common stock, par value $0.0001 per share (“ Common Stock ”), of Buyer, free and clear of any liens or encumbrances (the “ Stock Payment ”).  If, between the Execution Date and the Closing Date, the shares of Common Stock shall be changed into a different number or class of shares by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment, or a stock dividend thereon shall be declared with a record date within such period, appropriate adjustments shall be made to the Stock Payment.

 

(c)   “ Net Acre ” shall mean (i) Seller’s undivided working interest in the leasehold estate created by the applicable Lease multiplied by (ii) the number of acres covered by the Lease multiplied by (iii) the lessor’s percentage interest in the oil and gas mineral fee estate in the land covered by the Lease. “ Allocated Value ” with respect to a Lease shall mean the Per Acre Price multiplied by the number of Net Acres set forth in Exhibit A for such Lease. The “ Per Acre Price ” means a combination of $800 cash and 308.64 Shares.

 

(d)   Deposit .  Concurrently with the execution and delivery of this Agreement, Buyer will wire transfer to Seller a cash deposit (the “ Deposit ”) equal to One Million Two Hundred Thousand Dollars ($1,200,000). The Deposit will be credited to the Purchase Price at Closing, and is not refundable except as provided in this Agreement. If all conditions precedent to the obligations of Buyer set forth herein have been met and the transactions contemplated by this Agreement are not consummated on or before the Closing Date because of the failure of Buyer to perform any of its material obligations hereunder or the breach of any representation herein by Buyer, then in such event, Seller shall have the option to terminate this Agreement, in which case Seller shall retain the Deposit as liquidated damages on account of Buyer’s failure to perform its obligations under this Agreement or Buyer’s breach of any representation under this Agreement. With respect to the liquidated damages described in this Section 2.1(d), the Parties hereby acknowledge and agree that, at the time this Agreement was entered into: (i) the anticipated damages in the event a Party fails to perform hereunder were difficult to ascertain; (ii) the Parties mutually intended to liquidate such damages in advance; (iii) the amount of such liquidated damages is a reasonable estimate of the potential actual damages such breach would cause; and (iv) such liquidated damages are not so disproportionate to any possible loss as to constitute a penalty.

 

2.2            Adjustments to Purchase Price .  At Closing, the Purchase Price shall be adjusted according to this Section 2.2 without duplication as follows:

 

 

 

 

(a)   adjusted upward by any rental and other maintenance costs attributable to the Leases paid by Seller that are attributable to the period after the Effective Date (rentals for the period in which the Effective Date occurs shall be pro-rated as of the Effective Date; payments made under a paid up oil and gas lease shall be considered a bonus payment and not an advanced rental payment); and

 

(b)   adjusted downward by the sum of all Defect Values in accordance with Section 4.6, and the Allocated Value of each Lease excluded pursuant to Sections 4.7 or 4.9.

 

All such adjustments to the Purchase Price shall be set forth on a “ Settlement Statement ” which Seller shall prepare and provide to Buyer at least two (2) business days before Closing.  The Settlement Statement shall include all adjustments to the Purchase Price, including the Closing Payment and the Stock Payment, and be approved by Buyer and Seller on or before Closing. The Purchase Price, as so adjusted, shall be paid at Closing and is referred to herein as the “ Closing Amount .”

BUYER’S INSPECTION

TITLE DEFECTS

4.1            Defensible Title .  The term “ Defensible Title ” means such title, in and to a Lease that, subject to and except for Permitted Encumbrances: (i) results in Seller owning the number of Net Acres set forth in Exhibit A for such Lease; (ii) entitles Seller to not less than an 80% net revenue interest in the Lease (“ NRI ”); (iii) obligates Seller to bear a percentage of the costs and expenses for the maintenance, development, operation and the production relating to the Lease (“ Working Interest ”) equal to the Working Interest shown in Exhibit A for such Lease, unless any increase in Working Interest is accompanied by a proportionate increase in NRI; and (iv) is free and clear of liens, security interests, encumbrances, claims, lis pendens, and any other defects that would create a material impairment of use and enjoyment of, or loss of interest in, the affected Lease.

 

 

 

4.2            Permitted Encumbrances .  The term “ Permitted Encumbrances ” shall mean:

 

(a)   lessors’ royalties, overriding royalties, net profits interests, production payments, reversionary interests and similar burdens if the net cumulative effect of such burdens does not operate to reduce the NRI, on a Lease-by-Lease basis, below 80%;

 

(b)   the terms and conditions of the Leases;

 

(c)   all rights to consent by, required notices to, filings with, or other actions by federal, state or local governmental bodies, in connection with the conveyance of the applicable Lease if the same are customarily sought after Closing;

 

(d)   rights of reassignment contained in any agreement providing for reassignment upon the surrender or expiration of any Lease;

 

(e)   easements, rights-of-way, servitudes, permits, surface leases and other rights with respect to surface operations, on, over or in respect of any of the Leases or any restriction on access thereto that do not materially interfere with the operation of the affected Lease;

 

(f)   liens created under deeds of trust, mortgages and similar instruments by the lessor under a Lease covering the lessor’s surface and mineral interests in the land covered thereby which would customarily be accepted in taking oil and gas leases or purchasing undeveloped oil and gas leases and for which the lessee would customarily seek a subordination of such lien to the oil and gas leasehold estate prior to conducting drilling activities on the Lease;

 

(g)   all rights reserved to or vested in any governmental, statutory or public authority to control or regulate any of the Leases in any manner, and all applicable laws, rules and orders of governmental authorities;

 

(h)   the lack of any formal probate in the chain of title to a lessor’s interest covered by any of the Leases;

 

(i)   the lack of a recorded release of any prior expired oil and gas lease covering any portion of the Lands;

 

(j)   any question of the legitimacy of a survey or the lack of a survey;

 

(k)   all claims, charges, burdens, contracts, agreements, instruments, obligations, defects and irregularities affecting the Leases that do not have a material adverse effect on the use, operation or ownership of the Leases to the end that a prudent person engaged in the oil and gas business with knowledge of all of the relevant facts and their legal bearing would be willing to accept the same; and

 

(l)   such Title Defects that Buyer waives.

 

 

 

 

4.3            Title Defect .  The term “ Title Defect ” means, with respect to a Lease, any lien, encumbrance, adverse claim, default, expiration, failure, defect in or objection to real property title, other than Permitted Encumbrances, that alone or in combination with other defects renders Seller’s title to the Lease less than Defensible Title.

 

4.4            Defect Value .  “ Defect Value ” means the amount by which the value of the applicable Lease has been reduced by a Title Defect. The Defect Value shall be determined by the Parties in good faith taking into account all relevant factors, including the following:

 

(a)   If the Title Defect is a lien or encumbrance on the Lease, the Defect Value shall be the cost of removing such lien or encumbrance, not to exceed the Allocated Value of the affected Lease.

 

(b)   If the Title Defect is an actual reduction in NRI below 80%, the Defect Value shall be the Allocated Value for the affected Lease, proportionately reduced by the ratio of the actual NRI to 80% (e.g., if the actual NRI is 75%; then the Defect Value would be 5/80ths of the Allocated Value).

 

(c)   If the Title Defect is that the actual Net Acres covered by the Lease is less than the number of Net Acres set forth in Exhibit A for such Lease, the Defect Value shall be an amount equal to such difference in Net Acres multiplied by the Per Acre Price.

 

4.5            Notice of Title Defects .  On or before February 25, 2011 at 5:00 p.m. Central Time (the “ Defect Notice Date ”), Buyer shall deliver to Seller a written notice of Title Defects describing in reasonable detail: (i) the Title Defect; (ii) the basis of the Title Defect; and (iii) a good faith estimate of the Defect Value. The failure of Buyer to timely notify the Seller of a Title Defect on or before the Defect Notice Date shall be deemed a waiver by Buyer of such Title Defect except for any Defect that constitutes a breach of Seller’s special warranty of title contained in this Agreement.

 

4.6            Defect Adjustments .  If a Lease is affected by a Title Defect, the Purchase Price will be reduced under Section 2.2 by the Defect Value attributable thereto unless: (i) Buyer agrees to waive the Title Defect; or (ii) Seller cures the Title Defect to Buyer’s reasonable satisfaction on or before 5:00 p.m. Central Time three business days prior to Closing (the “ Title Defect Deadline ”).

 

4.7            Unresolved Title Disputes . If, by the Title Defect Deadline, the Parties have not resolved any dispute regarding (i) the existence and scope of a Title Defect, (ii) the amount of the Defect Value or (iii) the adequacy of Title Defect curative materials furnished by Seller, then the affected Leases shall be retained by Seller and excluded from Closing and the Purchase Price shall be reduced by an amount equal to the Per Acre Price multiplied by the number of Net Acres for such excluded Lease set forth on Exhibit A .

 

4.8            Termination .  Notwithstanding the foregoing, if the sum of all Defect Values exceeds 10% of the Purchase Price, either Buyer or Seller may terminate this Agreement upon written notice to the other Party delivered no later than the Title Defect Deadline; provided , however , that Buyer, in its sole discretion, may elect to waive all or any portion of any Title Defect to reduce the sum of all Defect Values below such percentage in which event this Agreement shall remain in full force and effect. If this Agreement is terminated pursuant to this Section 4.8, Seller shall promptly refund the Deposit to Buyer.

 

 

 

4.9            Consents .  Except for the Permitted Encumbrances, to Seller’s knowledge there are no required consents to assignment of the Leases. If Buyer discovers any consents to assign during the course of its due diligence activities, it shall notify Seller immediately. Seller shall use commercially reasonable efforts to obtain such consents prior to Closing. Except for consents and approvals which are customarily obtained post-Closing (including federal, state, or other governmental approvals), if a consent to assign any Lease has not been obtained, then at Buyer’s election the affected Lease(s) shall either be (i) conveyed to Buyer and the respective consents obtained by Buyer post-Closing (provided that Seller shall continue to cooperate with Buyer after Closing to obtain such consent), or (ii) retained by Seller and the Purchase Price shall be reduced by the Allocated Value of such Lease(s).

SELLER’S REPRESENTATIONS AND WARRANTIES

Seller makes the following representations and warranties as of the date of the Agreement and again as of the Closing Date:

 

5.1            Status .  Seller is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly qualified to carry on its business in the State where the Assets are located.

 

5.2            Power .  Seller has all requisite power and authority to carry on its business as presently conducted. The execution and delivery of this Agreement does not, and the fulfillment of and compliance with the terms and conditions hereof will not, as of the Closing Date, violate, or be in conflict with, any material provision of Seller’s governing documents, or any material provision of any agreement or instrument to which Seller is a party or by which it is bound, or any judgment, decree, order, statute, rule or regulation applicable to Seller.

 

5.3            Authorization and Enforceability .  This Agreement constitutes Seller’s legal, valid and binding obligation, enforceable in accordance with its terms, subject, however, to the effects of bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other laws for the protection of creditors, as well as to general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law.

 

5.4            No Liens .  Except for the Permitted Encumbrances, the Leases will be conveyed to Buyer at Closing free and clear of all liens and encumbrances arising by, through or under Seller but not otherwise.

 

5.5            Liability for Brokers’ Fees .  Seller has not incurred any liability, contingent or otherwise, for brokers’ or finders’ fees relating to the transactions contemplated by this Agreement for which Buyer shall have any responsibility whatsoever.

 

5.6            No Bankruptcy .  There are no bankruptcy proceedings pending, being contemplated by or, threatened against Seller.

 

 

 

5.7            Litigation .  There are no actions or suits pending against Seller with respect to the Leases and, to Seller’s knowledge, there is no proceeding, claim or investigation pending or threatened with respect to the Leases.

 

5.8            Lease Status/Rentals .  The Leases are in full force and effect in accordance with their respective terms and all obligations under the Leases have been fully performed, including the proper and timely payment of all rentals and other payments due under the Leases. Seller has not received a written notice of any request or demand for payments, adjustments of payments or performance pursuant to obligations under the Leases that is still outstanding or a written notice of default with respect to the payment or calculation of rentals that has not been cured.

 

5.9            Accuracy of the Records .  Seller makes no representations regarding the accuracy or completeness of any of the Records; provided , however , Seller does represent that: (i) all of the Records are files, or copies thereof, that Seller has used in the ordinary course of operating and owning the Leases; (ii) Seller has made, or prior to Closing will make, all Records in its possession available to Buyer; and (iii) Seller has not intentionally withheld any of the Records from Buyer.

 

5.10            Joint Operating Agreements .  There are no joint operating agreements covering or affecting the Leases.

 

5.11            Preferential Rights to Purchase, AMI and Farmout Obligations .  There are no preferential rights to purchase affecting the Leases or area of mutual interest agreements, farm-out agreements or similar agreements which entitle any third party to receive a portion of Seller’s interest in the Assets.

 

5.12            Dedications .  No Hydrocarbons attributable to the Leases are subject to any agreement or contract for the processing, gathering, transportation or sale of Hydrocarbons.

 

5.13            Tax Partnerships .  The Assets are not subject to any tax partnership agreements requiring a partnership income tax return to be filed under Subchapter K of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986, as amended (the “ Code ”).

 

5.14             Compliance With Laws.  To Seller’s knowledge, Se ller and each of its subsidiaries are in compliance with and are not in default under or in violation of any applicable federal, state, local or foreign law, statute, ordinance, rule, regulation, judgment, order, injunction, decree or agency requirement of any Governmental Entity (as defined in Exhibit D ) (collectively, “Laws” and each, a “Law”) and neither Seller nor any of its subsidiaries has received any written notice or, to Seller’s knowledge, other communication from any Governmental Entity regarding any actual or possible violation of, or failure to comply with, any Law, including environmental laws, in any material respect.

 

5.15            No Operations .  Seller has not conducted oil and gas exploration, development or production operations on the Leases, or any lands pooled or unitized therewith.

 

 

 

5.16            Own Account .  Seller is acquiring the Shares as principal for its own account and not with a view to or for distributing or reselling the Shares or any part thereof in violation of the Securities Act of 1933, as amended (the “ Securities Act ”) or any applicable state securities law, and has no present intention of distributing any of the Shares in violation of the Securities Act or any applicable state securities law; provided , however , that Seller intends to distribute the Shares to its members, and no such distribution will take place to a member of Seller unless such member has represented to Seller that (i) such member is acquiring the Shares as principal for its own account and not with a view to or for distributing or reselling the Shares or any part thereof in violation of the Securities Act or any applicable state securities law, and has no present intention of distributing any of the Shares in violation of the Securities Act or any applicable state securities law, and (ii) such member is an “accredited investor” as defined in Rule 501(a) under the Securities Act.

 

5.17            Seller Status .  Seller  is an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act.  Seller’s principal executive offices are in the state of Texas.

BUYER’S REPRESENTATIONS AND WARRANTIES

Buyer makes the following representations and warranties as of the Closing Date:

 

6.1            Status .  Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada and is duly qualified to carry on its business in the State where the Leases are located.

 

6.2            Power .  Buyer has all requisite power and authority to carry on its business as presently conducted. Buyer has the requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Buyer and no other corporate proceedings on the part of Buyer are necessary to authorize the consummation of the transactions contemplated hereby. The execution and delivery of this Agreement does not, and the fulfillment of and compliance with the terms and conditions hereof will not, as of the Closing Date, violate, or be in conflict with, any material provision of Buyer’s governing documents, or any material provision of any agreement or instrument to which Buyer is a party or by which it is bound, or any judgment, decree, order, statute, rule or regulation applicable to Buyer.

 

6.3            Authorization and Enforceability .  This Agreement constitutes Buyer’s legal, valid and binding obligation, enforceable in accordance with its terms, subject, however, to the effects of bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other laws for the protection of creditors, as well as to general principles of equity, regardless whether such enforceability is considered in a proceeding in equity or at law.

 

6.4            Liability for Brokers’ Fees .  Buyer has not incurred any liability, contingent or otherwise, for brokers’ or finders’ fees relating to the transactions contemplated by this Agreement for which Seller shall have any responsibility whatsoever.

 

6.5            Buyer’s Evaluation .  Buyer is an experienced and knowledgeable investor in the oil and gas business. Buyer has been advised by legal, tax and other professional counsel and has relied solely upon its own expertise concerning the transaction contemplated by this Agreement, the Leases and the value thereof.

 

 

 

6.6            Qualified to Hold Leases .  To Buyer’s knowledge, Buyer is eligible under all applicable laws and regulations to own the Leases.

 

6.7            Capitalization .  As of the date of this Agreement, the authorized capital stock of Buyer consists of 100,000,000 shares of Common Stock and 10,000,000 shares of preferred stock. As of the date of this Agreement, there were 58,450,234 shares of Common Stock issued and outstanding, no shares of preferred stock issued and outstanding and no shares of Common Stock reserved for issuance pursuant to Buyer’s equity incentive plans. Except for the convertible notes disclosed on Schedule 6.7 , no bonds, debentures, notes or other indebtedness having the right to vote (or convertible into or exchangeable for securities having the right to vote) on any matters on which stockholders of Buyer may vote are issued or outstanding. All issued and outstanding shares of Buyer’s capital stock are, and all shares that may be issued or granted pursuant to the conversion of the convertible notes disclosed on Schedule 6.7 or the exercise of the warrants disclosed on Schedule 6.7 will be, when issued or granted in accordance with the respective terms thereof, duly authorized, validly issued, fully paid and non-assessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. Except as disclosed on Schedule 6.7 , there are no outstanding or authorized: (i) options, warrants, preemptive rights, subscriptions, calls, or other rights, convertible securities, agreements, claims or commitments of any character obligating Buyer or any of its subsidiaries to issue, transfer or sell any shares of capital stock or other equity interest in, Buyer or any of its subsidiaries or securities convertible into or exchangeable for such shares or equity interests; (ii) obligations of Buyer or any of its subsidiaries to repurchase, redeem or otherwise acquire any capital stock of Buyer or any of its subsidiaries or any such securities or agreements listed in clause (i) of this sentence; or (iii) voting trusts or similar agreements to which Buyer or any of its subsidiaries is a party with respect to the voting of the capital stock of Buyer or any of its subsidiaries.

 

6.8            Status of Securities .  The Shares to be issued pursuant to this Agreement have been duly authorized by all necessary corporate action. When issued and sold against receipt of the consideration therefor as provided in this Agreement, the Shares will be validly issued, fully paid and nonassessable and will not subject the holders thereof to personal liability. The issuance, sale and delivery of the Shares is not subject to any preemptive right of stockholders of Buyer arising under law or the Articles of Incorporation or Bylaws or to any contractual right of first refusal or other right granted by Buyer in favor of any person or entity.

 

6.9            Exempt from Registration .  The offer and sale of the Shares made pursuant to this Agreement will be in compliance with the Securities Act, or other applicable securities laws and will be exempt from the registration requirements of the Securities Act or other applicable securities laws.

 

6.10            No General Solicitation .  Neither Buyer nor any of its Affiliates, nor, to Buyer’s knowledge, any person acting on its or its behalf, has engaged in any form of “general solicitation” or “general advertising” (within the meaning of Regulation D) in connection with the offer or sale of the Shares.

 

 

6.11            No Integrated Offering .  To Buyer’s knowledge, neither Buyer nor any of its Affiliates, nor any person acting on its or their behalf, has, directly or indirectly, at any time within the past six months made any offers or sales of any Buyer security or solicited any offers to buy any Buyer security, under circumstances that would require registration of the issuance of any of the Shares under the Securities Act, whether through integration with prior offerings or otherwise.

 

6.12           Investment Company Status . Buyer is not, and upon consummation of the sale of the Shares pursuant to this Agreement, will not be, an “investment company,” a company controlled by an “investment company” or an “affiliated person” of, or “promoter” or “principal underwriter” of, an “investment company,” as such terms are defined in the Investment Company Act of 1940, as amended.

 

6.13            SEC Reports .  Except as disclosed in Schedule 6.13 , Buyer has timely filed with the Securities and Exchange Commission (the “ SEC ”) all forms, reports, schedules, proxy statements (collectively, and in each case including all exhibits and schedules thereto and documents incorporated by reference therein and including all registration statements and prospectuses filed with the SEC, the “ SEC Reports ”) required to be filed by Buyer with the SEC since January 1, 2010. As of its date of filing, to Buyer’s knowledge, each SEC Report complied in all material respects with the requirements of the Securities Exchange Act of 1934 (the “ Exchange Act ”) or the Securities Act, and none of such SEC Reports (including any and all financial statements included therein) contained when filed (except to the extent revised or superseded by a subsequent filing with the SEC that is publicly available prior to the date hereof) any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading.

 

6.14            Undisclosed Liabilities .  Except for liabilities included or reserved for in the unaudited consolidated balance sheet of Buyer as of September 30, 2010 or disclosed in the notes thereto included in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, as filed with the SEC, neither Buyer nor any of its subsidiaries had, and since such date none of them has incurred, liabilities, including contingent liabilities, or any other obligations whatsoever that are or could be material (individually or in the aggregate) to Buyer and its subsidiaries of a nature required (if known) to be disclosed on a consolidated balance sheet or in the related notes thereto, taken as a whole, except liabilities incurred in the ordinary course of business subsequent to September 30, 2010 that would not, in the aggregate, reasonably be expected to have a material adverse effect on the business, results of operations or financial condition of Buyer and its subsidiaries, taken as a whole.

 

6.15            Absence of Changes .  To Buyer’s knowledge, since December 31, 2010, there has not occurred or continued to exist any event, change, occurrence, effect, fact, circumstance or condition which, individually or in the aggregate, has had, or is reasonably likely to have a material adverse effect on the business, results of operations or financial condition of Buyer and its subsidiaries, taken as a whole.

 

 

 

6.16            Financial Statements .  The consolidated financial statements (including all related notes and schedules) of Buyer included in the SEC Reports fairly present in all material respects the consolidated financial position of Buyer and its consolidated subsidiaries, as at the respective dates thereof, and the consolidated results of their operations and their consolidated cash flows for the respective periods then ended (subject, in the case of the unaudited statements, to normal year-end audit adjustments and to any other adjustments described therein, including the notes thereto) in conformity with United States generally accepted accounting principles (except, in the case of the unaudited statements, as permitted by the SEC) applied on a consistent basis during the periods involved (except as may be indicated therein or in the notes thereto).

 

6.17            Compliance with Law .  To Buyer’s knowledge, Buyer and each of its subsidiaries are in compliance with and are not in default under or in violation of any applicable Law, except where such non-compliance, default or violation would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the business, results of operations or financial condition of Buyer and its subsidiaries, taken as a whole. Since January 1, 2010, neither Buyer nor any of its subsidiaries has received any written notice or, to Buyer’s knowledge, other communication from any Governmental Entity regarding any actual or possible violation of, or failure to comply with, any Law, except as would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the business, results of operations or financial condition of Buyer and its subsidiaries, taken as a whole.

 

6.18            Litigation .  Except as would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on the business, results of operations or financial condition of Buyer and its subsidiaries, taken as a whole, (a) there is no investigation or review pending (or, to the knowledge of Buyer, threatened) by any Governmental Entity with respect to Buyer or any of its subsidiaries, (b) there are no actions, suits, inquiries, investigations or proceedings pending (or, to the knowledge of Buyer, threatened) against or affecting Buyer or any of its subsidiaries, or any of their respective properties at law or in equity and (c) there are no orders, judgments or decrees of, or before, any Governmental Entity.

COVENANTS AND AGREEMENTS

7.1            Covenants and Agreements of Seller .

 

(a)   Seller covenants and agrees with Buyer that, from the Execution Date until the Closing Date, Seller shall not: (i) commit to drill any wells on the Lands or conduct any oil and gas exploration, development or production operations on the Leases, or any lands pooled or unitized therewith; (ii) abandon any part of the Leases (except the abandonment of Leases upon the expiration of their respective primary terms); (iii) sell, transfer, assign, convey or otherwise dispose of any of the Leases, or any interest therein; (iv) enter into any farmout agreement, farmin agreement or any other contract affecting the Leases; (v) modify or terminate any Lease; or (vi) create any lien, security interest or encumbrance on the Leases, the Hydrocarbons attributable to the Leases, or the proceeds thereof.

 

(b)   Each Party covenants and agrees with the other Party  that, from the Execution Date until the Closing Date, that Party shall deliver promptly to the other Party written notice of: (i) any claim with respect to any of the Assets; (ii) any breach of any representation or warranty included in this Agreement; or (iii) any notice of violation of any Law.

 

 

 

7.2            Government Approval .  If any approval or consent by any federal, state or local or governmental authority is required to vest Defensible Title to any of the Leases in Buyer, and if the same are customarily sought after Closing, Seller shall use its reasonable commercial efforts to assist Buyer in obtaining all such required approvals or consents at Buyer’s expense.

 

7.3            Buyer Securities .  During the period from the date of this Agreement until the Closing, Buyer shall not declare, set aside or pay any dividend or other distribution, whether payable in cash, stock or any other property or right, with respect to its capital stock; and Buyer shall not, nor shall it permit any of its subsidiaries to, (i) issue, grant, sell, transfer, pledge, dispose of or encumber any additional shares of, or securities convertible into or exchangeable for, or options, warrants, calls, commitments or rights of any kind to acquire, in excess of 500,000  shares of capital stock of any class or of any other such securities or agreements of Buyer or any of its subsidiaries at a net price that is less than $2.43 per share of Common Stock (as such number of shares and price per share may be adjusted to reflect any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment after the date of this Agreement), other than issuances of shares of Common Stock pursuant to securities, options, warrants, calls, commitments or rights existing at the date of this Agreement; (ii) redeem, purchase or otherwise acquire directly or indirectly any of its capital stock or any other securities or agreements of the type described in clause (i) of this Section 7.3; or (iii) enter into an agreement, contract, commitment or arrangement to do any of the foregoing.

 

7.4            Registration Rights .  Buyer shall comply with and perform the covenants and agreements set forth on Exhibit D (the “ Registration Provisions ”).  The Registration Provisions shall survive the Closing.

 

7.5            Noncompetition .  For the period of one (1) year after the Closing Date (the “ Noncompetition Term ”), Seller agrees not to purchase or acquire in any manner, directly or indirectly, any Additional Interests (as defined below) within the Lands or within two (2) miles of the Lands (the “ Covered Area ”).

 

(a)   “ Additional Interests ” means any and all oil and gas right, title or interest covering all or any portion of the Covered Area acquired, directly or indirectly, by Seller during the Noncompetition Term, including lease, purchase, option, farm-out, farm-in, acreage contribution, bottom hole contribution, sublease, exploration, pooling or similar agreement or arrangement, and including fee, mineral, overriding royalty and royalty interests. If any Additional Interests include lands located within the Covered Area and lands located outside the boundaries of the Covered Area, only that portion of such Additional Interests covering the land within the Covered Area shall be deemed to be included within the Covered Area and offered to Buyer.

 

(b)   If any Additional Interests are acquired by Seller, Seller shall on or before thirty (30) days after the acquisition deliver written notice to Buyer with full particulars relative to such acquisition (i.e. net acres, net revenue interest, bonus, back-in, price, etc.) (the “ Acquisition Notice ”).

 

 

 

 

(c)   Buyer shall have thirty (30) days after receipt of the Acquisition Notice in which to deliver to Seller Buyer’s election whether to acquire such Additional Interests from Seller (“ Buyer’s Election ”) at Seller’s cost. Buyer’s failure to deliver Buyer’s Election within the applicable time period shall be deemed conclusively to be an election by Buyer not to acquire such Additional Interests from Seller. If Buyer does not elect to acquire an Additional Interest, Seller may retain such Additional Interest free and clear of all of the terms of this Agreement.

 

(d)   If Buyer elects to acquire any Additional Interests pursuant to this Section 7.5, Seller shall tender to Buyer an assignment of Seller’s interest in and to such Additional Interests, substantially in the form of Exhibit C . Assignments of the Additional Interests pursuant this Section 7.5 shall contain a special warranty of title against liens and encumbrances arising by, through or under Seller, but not otherwise, and shall not contain any overriding royalty interest reservations in favor of Seller, other than the overriding royalty interests currently burdening the Additional Interests as of the date of the acquisition by Seller.

 

(e)   If Buyer elects to acquire any Additional Interests and Seller does not assign such Additional Interests to Buyer pursuant to this Section 7.5, Buyer shall retain