Potential
persons who are to respond to the collection of information contained
in
this form are not required to respond unless the form displays a
currently
valid OMB control number.
(Date
of Event which Requires Filing of this Statement)
If
the
filing person has previously filed a statement on Schedule 13G to report the
acquisition that is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following
box
[ ].
Note:
Schedules filed in paper format shall include a signed original and five copies
of the schedule, including all exhibits. See Rule 13d-7 for other parties to
whom copies are to be sent.
*
The
remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities,
and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The
information required on the remainder of this cover page shall not be deemed
to
be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934
("Act") or otherwise subject to the liabilities of that section of the Act
but
shall be subject to all other provisions of the Act (however, see the
Notes).
SCHEDULE
13D
CUSIP
No. 27031F103
Page
2 of 13
1
NAMES OF REPORTING PERSONS:
YA
Global Investments, L.P.
I.R.S. IDENTIFICATION NOS. OF ABOVE
PERSONS
(ENTITIES ONLY):
2
CHECK THE APPROPRIATE BOX IF A MEMBER
OF A GROUP
(SEE INSTRUCTIONS):
(a) o
(b) x
3
SEC USE ONLY:
4
SOURCE OF FUNDS (SEE INSTRUCTIONS):
WC
(See Item 3)
5
CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS
IS
REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e):
o
6
CITIZENSHIP OR PLACE OF ORGANIZATION:
Cayman
Islands
7
SOLE VOTING POWER:
NUMBER OF
0
SHARES
8
SHARED VOTING POWER:
BENEFICIALLY
OWNED BY
12,630,000
shares plus 72,187,894 shares issuable upon exercise of Warrants
or
conversion of Debentures (see Item 5(a) below)
EACH
9
SOLE DISPOSITIVE POWER:
REPORTING
PERSON
0
WITH
10
SHARED DISPOSITIVE POWER:
12,630,000
shares plus 72,187,894 shares issuable upon exercise of Warrants
or
conversion of Debentures (see Item 5(a) below)
11
AGGREGATE AMOUNT BENEFICIALLY OWNED
BY EACH
REPORTING PERSON:
12,630,000
shares plus 72,187,894 shares issuable upon exercise of Warrants
or
conversion of Debentures (see Item 5(a) below)
12
CHECK IF THE AGGREGATE AMOUNT IN ROW
(11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS):
o
13
PERCENT OF CLASS REPRESENTED BY AMOUNT
IN ROW
(11):
9.88%
in shares; 42.4% upon potential issuance upon conversion of Debentures
(see Item 5(a) below)
14
TYPE OF REPORTING PERSON (SEE
INSTRUCTIONS):
PN
SCHEDULE
13D
CUSIP
No. 27031F103
Page 3
of 13
1
NAMES OF REPORTING PERSONS:
Yorkville
Advisors, LLC
I.R.S. IDENTIFICATION NOS. OF ABOVE
PERSONS
(ENTITIES ONLY):
2
CHECK THE APPROPRIATE BOX IF A MEMBER
OF A GROUP
(SEE INSTRUCTIONS):
(a) o
(b) x
3
SEC USE ONLY:
4
SOURCE OF FUNDS (SEE INSTRUCTIONS):
AF
5
CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS
IS
REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e):
o
6
CITIZENSHIP OR PLACE OF ORGANIZATION:
Delaware
7
SOLE VOTING POWER:
NUMBER OF
0
SHARES
8
SHARED VOTING POWER:
BENEFICIALLY
OWNED BY
12,630,000
shares plus 72,187,894 shares issuable upon exercise of Warrants
or
conversion of Debentures (see Item 5(a) below)
EACH
9
SOLE DISPOSITIVE POWER:
REPORTING
PERSON
0
WITH
10
SHARED DISPOSITIVE POWER:
12,630,000
shares plus 72,187,894 shares issuable upon exercise of Warrants
or
conversion of Debentures (see Item 5(a) below)
11
AGGREGATE AMOUNT BENEFICIALLY OWNED
BY EACH
REPORTING PERSON:
12,630,000
shares plus 72,187,894 shares issuable upon exercise of Warrants
or
conversion of Debentures (see Item 5(a) below)
12
CHECK IF THE AGGREGATE AMOUNT IN
ROW
(11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS):
o
13
PERCENT OF CLASS REPRESENTED BY AMOUNT
IN ROW
(11):
9.88%
in shares; 42.4% upon potential issuance upon conversion of
Debentures
(see Item 5(a) below)
14
TYPE OF REPORTING PERSON (SEE
INSTRUCTIONS):
CO
SCHEDULE
13D
CUSIP
No. 27031F103
Page 4
of 13
1
NAMES OF REPORTING PERSONS:
Mark
Angelo
I.R.S. IDENTIFICATION NOS. OF ABOVE
PERSONS
(ENTITIES ONLY):
2
CHECK THE APPROPRIATE BOX IF A MEMBER
OF A GROUP
(SEE INSTRUCTIONS):
(a) o
(b) x
3
SEC USE ONLY:
4
SOURCE OF FUNDS (SEE INSTRUCTIONS):
AF
5
CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS
IS
REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e):
o
6
CITIZENSHIP OR PLACE OF ORGANIZATION:
United
States
7
SOLE VOTING POWER:
NUMBER OF
0
SHARES
8
SHARED VOTING POWER:
BENEFICIALLY
OWNED BY
12,630,000
shares plus 72,187,894 shares issuable upon exercise of Warrants
or
conversion of Debentures (see Item 5(a) below)
EACH
9
SOLE DISPOSITIVE POWER:
REPORTING
PERSON
0
WITH
10
SHARED DISPOSITIVE POWER:
12,630,000
shares plus 72,187,894 shares issuable upon exercise of Warrants
or
conversion of Debentures (see Item 5(a) below)
11
AGGREGATE AMOUNT BENEFICIALLY OWNED
BY EACH
REPORTING PERSON:
12,630,000
shares plus 72,187,894 shares issuable upon exercise of Warrants
or
conversion of Debentures (see Item 5(a) below)
12
CHECK IF THE AGGREGATE AMOUNT IN
ROW
(11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS):
o
13
PERCENT OF CLASS REPRESENTED BY AMOUNT
IN ROW
(11):
9.88%
in shares; 42.4% upon potential issuance upon conversion of
Debentures
(see Item 5(a) below)
14
TYPE OF REPORTING PERSON (SEE
INSTRUCTIONS):
IN
SCHEDULE
13D
CUSIP
No. 27031F103
Page 5
of 13
ITEM
1.SECURITY
AND ISSUER
This
statement on Schedule 13D relates to the common stock, par value $0.001 per
share (the "Common Stock," or the “Shares”), of Falcon Natural Gas Corp., a
Nevada corporation (the "Issuer"). The principal executive offices of the Issuer
are located at: 2500 City West Blvd., Suite 300, Houston, TX77042.
ITEM
2.IDENTITY
AND BACKGROUND
(a)
- (c)
This statement is being filed by YA Global Investments, L.P. (“YA Global”)
(f/k/a Cornell Capital Partners, L.P.), Yorkville Advisors, LLC (“Yorkville”)
and Mark Angelo (“Angelo”) (YA Global, Yorkville and Angelo collectively, the
“Reporting Persons”). The filing of this statement on Schedule 13D and any
future amendments hereto, and the inclusion of information herein and therein,
shall not be construed as an admission that any of the Reporting Persons, for
the purpose of Section 13(d) of the Act or otherwise, is the beneficial owner
of
any shares of Common Stock.
YA
Global, a Cayman Islands exempt limited partnership, whose business address
is
101 Hudson Street, Suite 3700, Jersey City, New Jersey07302, is a private
equity fund that is primarily engaged in the business in investing in securities
and other investment opportunities. Yorkville, a Delaware LLC, whose business
address is 101 Hudson Street, Suite 3700, Jersey City, New Jersey07302, is
the
Investment Manager of YA Global. Angelo, whose business address is 101 Hudson
Street, Suite 3700, Jersey City, New Jersey07302, is the Portfolio Manager
of
YA Global and President and Managing Member of Yorkville. Angelo is a citizen
of
the United States.
(d)
None
of
the Reporting Persons has, during the last five years, been convicted in a
criminal proceeding (excluding traffic violations or similar
misdemeanors).
(e)
None
of
the Reporting Persons has, during the last five years, been a party to a civil
proceeding of a judicial or administrative body of competent jurisdiction and
as
a result of such proceeding was or is subject to a judgment, decree or final
order enjoining future violations of, or prohibiting or mandating activities
subject to, federal or state securities laws or finding any violation with
respect to such laws.
(f)
YA
Global is a Cayman Islands exempt limited partnership. Yorkville is a Delaware
limited liability company. Angelo is a citizen of the United
States.
ITEM
3.SOURCE
AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
The
Reporting Persons purchased the Common Shares reported on the cover pages hereof
to be held by the Reporting Persons (the “Common Shares”) through conversion of
debt evidenced by convertible debentures issued by the Company dated January29,2007, and a corresponding reduction in the principal balance of such debt in
the
amount of $101,000 in accordance with the terms of such debentures. The capital
used to acquire the Debentures reported on the cover pages hereof to be held
by
the Reporting Persons (the “Debentures”) and the Warrants reported on the cover
pages hereof to be held by the Reporting Persons (the “Warrants”) was derived
from general
working capital of YA Global made in the ordinary course of
business.
A total
of approximately $12,810,715 was paid in the original acquisition of the
Debentures and Warrants reported herein.
SCHEDULE
13D
CUSIP
No. 27031F103
Page 6
of 13
ITEM
4.PURPOSE
OF TRANSACTION
On
March29, 2006, pursuant to a Securities Purchase Agreement (the "Securities Purchase
Agreement No.1") dated April 19, 2005, and a Forbearance Agreement (the
“Forbearance Agreement No. 1”) dated March 26, 2006, by and among the Issuer and
YA Global, YA Global received a Warrant to purchase Common Stock, initially
exercisable for up to 23,000,000 shares of Common Stock (the "Warrant No. 1")
at
various exercise prices. A copy of the Securities Purchase Agreement No. 1,
Forbearance Agreement No. 1, and the Warrant No. 1 are attached hereto as
Exhibits 20, 19, and 1 respectively and incorporated herein by
reference.
On
January 29, 2007, pursuant to a Securities Purchase Agreement (the "Securities
Purchase Agreement No.2"), by and among the Issuer and YA Global, YA Global
purchased (i) an 8% Convertible Debenture, in the principal amount of
$8,905,465, through exchange of debentures originally obtained pursuant to
the
Securities Purchase Agreement No. 1 (the "Debenture No.1"); and (ii) an 8%
Convertible Debenture, in the principal amount of $655,555 (the "Debenture
No.2"). The Debenture No. 1 and Debenture No. 2 are convertible into shares
of
Common Stock at a price equal to the lower of (i) $0.10 or (ii) 80% of the
lowest volume weighted average price over the previous five trading days. A
copy
of the Securities Purchase Agreement No. 2 and the Debenture No. 1 and Debenture
No. 2 are attached hereto as Exhibits 4, 3, and 2 respectively and incorporated
herein by reference.
On
April19, 2007, YA Global and the Issuer entered into an agreement amending the
Securities Purchase Agreement No. 2. A copy of this agreement is attached hereto
as Exhibit 5, and incorporated herein by reference.
On
July25, 2007, the Issuer issued to YA Global a Promissory Note (the “Note”) in the
principal amount of $2,598,889. The Note bore interest at 14%. A copy of the
Note is attached hereto as Exhibit 9 and incorporated herein by
reference.
On
September 19, 2007, YA Global, through exchange of the Note, acquired a
Convertible Debenture (the “Debenture No. 3”) in the principal amount of
$2,598,889, with an interest rate equal to the Wall Street Journal Prime Rate
plus 2.25%. The Debenture No. 3 is convertible into shares of Common Stock
at a
price equal to the lower of (i) $0.02 or (ii) 80% of the lowest volume weighted
average price over the previous five trading days. A copy of Debenture No.
3 is
attached hereto as Exhibit 10 and incorporated herein by reference.
On
September 28, 2007, pursuant to a Securities Purchase Agreement (the "Securities
Purchase Agreement No. 3"), YA Global purchased (i) a Convertible Debenture,
in
the principal amount of $650,806 (the "Debenture No. 4") with an interest rate
equal to the Wall Street Journal Prime Rate plus 2.25%; and (ii) received a
right to purchase a Warrant to purchase Common Stock, initially exercisable
for
up to 290,000,000 shares of Common Stock (the "Warrant No.2") at $0.02 per
share, (together with the Securities Purchase Agreement No.1 and No.2, Debenture
No.1-No.3, and Warrants No.1 and No.2, collectively the “Financial
Transactions”) The Debenture No. 4 is convertible into shares of Common Stock at
a price equal to the lower of (i) $0.02 or (ii) 80% of the lowest volume
weighted average price over the previous five trading days. A copy of the
Securities Purchase Agreement No. 3, Debenture No. 4, and the Warrant No. 2
are
attached hereto as Exhibits 13, 11, and 12, respectively and incorporated herein
by reference. In connection with the Securities Purchase Agreement No. 3, YA
Global and the
Issuer
also entered into a Conveyance of Overriding Royalty Interest (the “ORRI”), and
an Amended and Restated Security Agreement, each dated on or about September28,2007. A copy of the ORRI is attached hereto as Exhibit 17, and the Amended
and
Restated Security Agreement as Exhibit 15, and incorporated herein by
reference.
SCHEDULE
13D
CUSIP
No. 27031F103
Page 7
of 13
Concurrently
with the closing of the Financial Transactions contemplated by the Securities
Purchase Agreement No.1-No.3 (except in connection with transactions pursuant
to
the Securities Purchase Agreement of January 2007), the Issuer and YA Global
entered into Registration Rights Agreements (the "Registration Rights
Agreements"), on each of the dates thereof pursuant to which the Issuer agreed
to provide certain registration rights with respect to the shares of Common
Stock issuable upon conversion of Debentures No.1-No.4 and exercise of the
Warrants No.1 and No.2 under the Securities Act of 1933, as amended (the "1933
Act") and the rules and regulations promulgated thereunder, and applicable
state
securities laws. The Registration Rights Agreements are attached hereto as
Exhibits 7 and 14 and incorporated herein by reference.
In
addition to the Forbearance Agreement No. 1, YA Global and the Issuer also
entered into Forbearance Agreements dated January 29, 2007, and September 28,2007 (the “Forbearance Agreements No. 2 and 3). The January 29, 2007,
Forbearance Agreement, among other terms, contained a provision amending the
exercise price of the Warrant No. 1 to $0.10 per share. A copy of the
Forbearance Agreements 2 and 3 are attached hereto as Exhibits 6 and 16,
respectively, and incorporated herein by reference.
In
a
letter dated January7, 2008, YA Global indicated to the Issuer its understanding of provisions
in
the Debentures regarding limitations on ownership of shares of Common Stock.
That understanding was that such provisions enabled YA Global to effectuate
the
conversion of existing principal balance of the debentures into the shares
of
Common Stock currently owned by the Reporting Persons as reported herein. A
copy
of this letter is attached hereto as Exhibit 18 and incorporated herein by
reference.
The
Reporting Persons initially acquired the debentures set forth above (the
“Debentures”) and the warrants set forth above (the “Warrants”) for investment
purposes in the ordinary course of business because the Reporting Persons
believed they represented an attractive investment opportunity.
The
Reporting Persons acquired the Common Shares on January 10, 2008 through
conversion of
debt
evidenced by convertible debentures issued by the Company dated January 29,2007, and a corresponding reduction in the principal balance of such debt in
the
amount of $101,000 in accordance with the terms of such debentures, in
the
midst of discussions the Reporting Persons have had with the Issuer’s management
concerning the direction of the Issuer’s business. On January 7, 2008, YA Global
sent a letter to the Issuer’s management indicating that it was considering
calling a special meeting of the Company’s shareholders for the purpose of
electing members of the Issuer’s board of directors. The Reporting Persons do
not have that purpose as of the date of this filing and do not anticipate
calling such a meeting.
On
January 16, 2008, YA Global, derivatively on behalf of the Issuer, instituted
litigation against management of the Issuer in the Supreme Court of New York.
The litigation relates to alleged breach of fiduciary duty, self-dealing, and
other mismanagement of the Issuer by the Issuer’s management. The litigation was
not filed because of, nor is it otherwise related to, the acquisition by the
Reporting Persons of the Common Shares. This litigation may seek and obtain
relief that would effectuate some or all of the actions relating to the Issuer
set forth below.
The
Reporting Persons evaluate the investment in the Issuer on an ongoing basis
and
reserve the right to take action regarding the Issuer, including, without
limitation, attempting to elect or have elected new management or members of
the
Issuer’s board of directors, or otherwise influencing the Issuer’s governance,
attempting to influence or change the Issuer’s operations or business
development plans, business strategy, future plans, competitive position,
strategy, capital structure or capital management policy, including, without
limitation, through potential discussions with management, directors, other
shareholders, existing or potential strategic partners or competitors of the
Issuer, industry analysts, investment and financing professionals and/or other
third parties. Such matters and discussions may materially affect, and result
in, the Reporting Persons’ modifying their investment in the Issuer, exchanging
information with any of such persons pursuant to appropriate confidentiality
or
similar agreements or otherwise, working together with any of such persons
pursuant to joint agreements or otherwise, proposing changes in the Issuer’s
operations, governance, capitalization or strategic plans, or in proposing
or
engaging in one or more other actions set forth herein. Factors that may
influence the Reporting Persons’ actions include, but are not limited to, their
views regarding the Issuer’s operations, business strategy, prospects, financial
position and/or strategic direction, the outcome of the discussions and actions
referenced herein, price levels of the Common Stock, availability of funds,
subsequent developments affecting the Issuer, other investment and business
opportunities available to the Reporting Persons, conditions in the securities
market, general economic and industry conditions and other factors that the
Reporting Persons may deem relevant from time to time.
SCHEDULE
13D
CUSIP
No. 27031F103
Page 8
of 13
Although
none of the Reporting Persons have any specific plan or proposal to acquire
or
dispose of the shares of Common Stock, the Reporting Persons at any time and
from time to time may (i) acquire additional shares or securities of the Issuer,
(ii) dispose of any or all of its securities of the Issuer, (iii) enter into
privately negotiated derivative transactions with institutional counterparties
to hedge the market risk of some or all of its positions in the securities
of
the Issuer, depending upon the factors described herein and/or other investment
considerations or (iv) exercise its rights in connection with a bankruptcy
case
of the Issuer.
ITEM
5.INTEREST
IN SECURITIES OF THE ISSUER
(a)
Debentures No. 1 and No. 2 are convertible into shares of Common Stock of the
Issuer at a price per share equal to the lower of (i) $0.10 or (ii) 80% of
the
lowest Volume Weighted Average Price (“VWAP”) of such Common Stock during the
five previous trading days. Debentures No. 3 and No. 4 are convertible into
shares of Common Stock of the Issuer at a price per share equal to the lower
of
(i) $0.02 or (ii) 80% of the lowest VWAP of such Common Stock during the five
previous trading days. Given the current market conditions for the Issuer’s
Common Stock, with prevailing prices well below $0.02 per share, the Reporting
Persons have the right to receive and beneficially own a mathematically
limitless number of shares of the Issuer’s Common Stock, limited practically
only by the 200,000,000 shares of Common Stock the Issuer has authorized for
issuance. As of the day before the date of this filing, the conversion price
of
the Debentures was $0.0082 (80% of the applicable VWAP of $0.0103) and the
outstanding principal balance of the Debentures was $11.9 million; accordingly,
if the Issuer had a sufficient number of shares authorized for issuance, YA
Global could obtain approximately 1.15 billion shares of Common Stock (and
if
this conversion price was lower, the number of shares obtainable by YA Global
would be correspondingly higher). Even if the market price of the Common Stock
rose above $0.10, YA Global could obtain more shares upon conversion than the
Issuer has authorized for issuance.
According
to Worldwide Stock Transfer, LLC, the Issuer’s transfer agent, as of January 18,2008, there are 127,812,106 shares of Common Stock of the Issuer outstanding.
Accordingly, the Reporting Persons’ beneficial ownership equals the 72,187,894
shares representing the difference in outstanding and authorized shares, plus
the 12,630,000 shares of Common Stock actually owned, for a total of 84,817,894
shares. This figure represents 42.4% of the 200,000,000 that would be
outstanding if YA Global were to exercise its right to obtain all shares of
Common Stock it could obtain through conversion of the Debentures up to the
number of shares of Common Stock currently authorized. This percentage figure
will not be subject to change absent a significant increase in the number of
shares authorized for issuance by the Issuer, or a significant increase in
the
market price of the Issuer’s common stock, each of which would cause the
percentage beneficial ownership of the Reporting Persons to decrease. The
Reporting Persons did not acquire any of the Common Shares for the purpose
of,
and do not otherwise have a plan or purpose to, compel or otherwise encourage
the Issuer to increase the number of shares of authorized Common
Stock.
SCHEDULE
13D
CUSIP
No. 27031F103
Page 9
of 13
The
Warrants may not be exercised or converted if, after such exercise or
conversion, the Reporting Persons would beneficially own, as determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934 and the
rules and regulations promulgated thereunder, including, without limitation,
any
beneficial ownership determinations based on any Reporting Persons being deemed
part of a group for purposes of Section 13(d), more than 4.99% of the number
of
shares of Common Stock then issued and outstanding, unless the Reporting Persons
elect to increase or decrease their ownership limit (with any increase only
being effective on 65 days prior written notice to the Issuer) to a different
percentage. Consequently, none of the shares issuable upon exercise of the
Warrants are beneficially owned by any of the Reporting Persons.
(b)
YA
Global has the sole power to vote and to dispose of all of the Common Shares
it
owns. Yorkville, as the Investment Manager, has the sole power to direct the
vote and/or to direct the disposition of the Common Shares directly owned by
YA
Global. Angelo, as the Portfolio Manager of YA Global and President and Managing
Member of Yorkville, has the sole power to direct the vote and/or to direct
the
disposition of the Common Shares directly owned by YA Global.
Yorkville,
as the Investment Manager of YA Global, and Angelo as the Portfolio Manager
of
YA Global and Managing Member of Yorkville, may be deemed to have a beneficial
ownership in the aforementioned shares of Common Stock. The filing of this
statement on Schedule 13D and any future amendments hereto, and the inclusion
of
information herein and therein, shall not be construed as an admission that
any
of the Reporting Persons, for the purpose of Section 13(d) of the Act or
otherwise, is the beneficial owner of any shares of Common Stock.
(c)
The
trading activity for YA Global for the last 60 days is as follows:
Security
Trade
Date
Side
Done
Avg
Prc
FNGC
11/13/07
Sell
118,152
$0.0152
FNGC
11/14/07
Sell
50,000
$0.0140
FNGC
12/3/07
Sell
200,000
$0.0143
FNGC
12/4/07
Sell
150,000
$0.0144
FNGC
12/5/07
Sell
100,000
$0.0135
FNGC
12/6/07
Sell
100,000
$0.0105
FNGC
12/7/07
Sell
100,000
$0.0110
FNGC
12/10/07
Sell
250,000
$0.0090
FNGC
12/11/07
Sell
100,000
$0.0081
FNGC
12/12/07
Sell
200,000
$0.0094
FNGC
12/13/07
Sell
200,000
$0.0052
FNGC
12/14/07
Sell
200,000
$0.0053
FNGC
12/17/07
Sell
50,000
$0.0083
FNGC
12/18/07
Sell
50,000
$0.0067
FNGC
12/19/07
Sell
50,000
$0.0063
FNGC
12/20/07
Sell
50,000
$0.0060
FNGC
12/21/07
Sell
150,000
$0.0073
FNGC
12/24/2007
Sell
100,000
$0.0077
FNGC
12/26/2007
Sell
100,000
$0.0080
FNGC
12/27/07
Sell
100,000
$0.0100
FNGC
12/28/07
Sell
100,000
$0.0100
FNGC
12/31/07
Sell
2,745,000
$0.0081
SCHEDULE
13D
CUSIP
No. 27031F103
Page 10
of 13
In
addition, as described above, the Reporting Persons acquired the Common Shares
upon conversion of outstanding Debentures on January 10, 2008. In the January7,2008, letter, YA Global indicated to the Issuer its interpretation of the
Debentures that, because the occurrence of one or more events of default (as
set
forth in the Debentures), the blocker provision contained in the Debentures
limiting YA Global’s percentage ownership of the Common Stock of the Issuer was
no longer applicable in accordance with the terms of the Debentures, thereby
enabling YA Global to effectuate the conversion of a portion of the existing
principal balance of the Debentures into the shares of Common Stock currently
owned by the Reporting Persons as reported herein.
(d)
No
person other than the Reporting Persons are known to have the right to receive
or the power to direct the receipt of dividends from, or the proceeds from
the
sale of the shares of Common Stock issuable to YA Global.
(e)
Not
applicable.
ITEM
6.
CONTRACTS,
ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO SECURITIES
OF THE ISSUER
As
described in Item 4 above, on March 29, 2006, pursuant to a Securities Purchase
Agreement, dated April 19, 2005, and Forbearance Agreement by and among the
Issuer, YA Global received a right to purchase a Warrant to purchase Common
Stock, initially exercisable for up to 23,000,000 shares of Common
Stock.
On
January 29, 2007, pursuant to a Securities Purchase Agreement, by and among
the
Issuer, YA Global purchased (i) an 8% Convertible Debenture, in the principal
amount of $8,905,465 and; (ii) an 8% Convertible Debenture, in the principal
amount of $655,555.
On
April19, 2007, the Issuer and YA Global entered into an agreement amending the
January 19, 2007, Securities Purchase Agreement, to provide for an increase
in
the principal amount of convertible debentures to by purchased pursuant thereto
and an increase of $55,555 in the principal outstanding on the Debenture No.
2.
On
July25, 2007, the Issuer issued to YA Global a Promissory Note in the principal
amount of $2,598,889. The Note bore interest at 14%.
On
September 19, 2007, YA Global, through exchange of the Note, acquired a
Convertible Debenture in the principal amount of $2,598,889, with an interest
rate equal to the Wall Street Journal Prime Rate plus 2.25%.
SCHEDULE
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On
September 28, 2007, pursuant to a Securities Purchase Agreement, YA Global
purchased (i) a Convertible Debenture, in the principal amount of $650,806
with
an interest rate equal to the Wall Street Journal Prime Rate plus 2.25%; and
(ii) received a right to purchase a Warrant to purchase Common Stock, initially
exercisable for up to 290,000,000 shares of Common Stock, In connection with
the
Securities Purchase Agreement, the parties also entered into a Conveyance of
Overriding Royalty Interest and an Amended and Restated Security Agreement.
Each
of these agreements served as security for the various convertible debentures
issued by the Issuer to YA Global, and the Conveyance of Overriding Royalty
Interest provided YA Global with a claim on any royalties, if any, resulting
from the Issuer’s development of particular properties in which the Issuer had
an interest.
Concurrently
with the closing of the Financial Transactions contemplated by the Securities
Purchase Agreement No.1-No.3, the Issuer and YA Global entered into Registration
Rights Agreements (except for the Financing Transaction related to the January
2007 Securities Purchase Agreement (the "Registration Rights Agreements"),
on
each of the dates thereof pursuant to which the Issuer agreed to provide certain
registration rights with respect to the shares of Common Stock issuable upon
conversion of Debentures No.1-No.4 and exercise of the Warrants No.1 and No.2
under the Securities Act of 1933, as amended and the rules and regulations
promulgated thereunder, and applicable state securities laws.
In
a
letter dated January7, 2008, YA Global indicated to the Issuer its understanding of provisions
in
the Debentures regarding limitations on ownership of shares of Common Stock,
enabling YA Global to effectuate the conversion of existing principal balance
of
the debentures into the shares of Common Stock currently owned by the Reporting
Persons as reported herein.
YA
Global
and the Issuer entered into Forbearance Agreements dated January 29, 2007 and
September 28, 2007. Those agreements are referenced as Exhibits 6 and 16,
respectively. The January 29, 2007, forbearance agreement reduced the exercise
price of all warrants issued by the Issuer to YA Global prior to the date
thereof, to $0.10.
In
addition to the agreements referenced above, the Reporting Persons from time
to
time may enter into and dispose of additional cash-settled equity swap or
similar derivative transactions with one or more counterparties that are based
upon the value of the Shares, which transactions may be significant in amount.
The profit, loss and/or return on such additional contracts may be wholly or
partially dependent on the market value of the Shares, the relative value of
the
Shares in comparison to one or more other financial instruments, indexes or
securities, a basket or group of securities in which the Shares may be included,
or a combination of any of the foregoing.
ITEM
7.MATERIAL
TO BE FILED AS EXHIBITS
The
following documents are filed as appendices and exhibits:
EXHIBITS
1.
Warrants
to purchase, in the aggregate, 23,000,000 shares of Common Stock
at
various exercised prices issued to YA Global (incorporated by reference
to
Exhibit 4.1 to the Current Report on Form
8-K filed
by Falcon Natural Gas Corp. on April 4, 2006).
2.
$8,905,465
Principal Amount 8.0% Senior Secured Convertible Debenture, dated
January29, 2007 (incorporated by reference to Exhibit 99.2 to the Current
Report
on Form
8-K filed
by Falcon Natural Gas Corp. on March 1, 2007)..
3.
$655,555
Principal Amount 8.0% Amendment No. 1 to Convertible Debenture,
dated
January 29, 2007 (incorporated by reference to Exhibit 99.4 to
the Current
Report on Form
8-K filed
by Falcon Natural Gas Corp. on March 1,2007).
SCHEDULE
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No. 27031F103
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4.
Securities
Purchase Agreement, dated January 29, 2007, by and among Falcon
Natural
Gas Corp. and YA Global (incorporated
by reference to Exhibit 99.3 to the Current Report on Form
8-K filed
by Falcon Natural Gas Corp. on March 1,2007)
5.
Amendment
No. 1 to Securities Purchase Agreement dated April 19,2007.
6.
Forbearance
Agreement between YA Global and Falcon Natural Gas Corp. dated
January 29,2007 (incorporated
by reference to Exhibit 99.1 to the Current Report on Form
8-K filed
by Falcon Natural Gas Corp. on March 1,2007).
7.
Registration
Rights Agreement, dated April 19, 2005, by and among Falcon
Natural Gas
Corp. and YA Global (incorporated by reference to Exhibit 99.9
to the
Current Report on Form
8-K filed
by Falcon Natural Gas Corp. on April 20,2005).
8.
(NONE)
9.
Promissory
Note in the principal amount of principal amount of $2,598,889,
with an
interest rate equal to the Wall Street Journal Prime Rate plus
2.25%
issued by Falcon Natural Gas Corp. to YA Global, dated July25,2007.
10.
$2,598,889
Principal Amount (Wall Street Journal Prime Rate plus 2.25%)
Convertible
Debenture, dated September 19, 2007 issued by Falcon Natural
Gas Corp. to
YA Global.
11.
$650,806
Principal Amount (Wall Street Journal Prime Rate plus 2.25%)
Convertible
Debenture, dated September 19, 2007 issued by Falcon Natural
Gas Corp. to
YA Global.
12.
Warrant
to purchase up to 290,000,000 shares of Common Stock @ $0.02,
dated
September 28, 2007.
13.
Securities
Purchase Agreement, dated September 28, 2007, by and among
Falcon Natural
Gas Corp. and YA Global.
14.
Registration
Rights Agreement, dated September 28, 2007, by and among Falcon
Natural
Gas Corp. and YA Global.
15.
Amended
and Restated Security Agreement dated September 28, 2007, by
and among
Falcon Natural Gas Corp. and YA
Global.
16.
Forbearance
Letter Agreement by and among Falcon Natural Gas Corp. and
YA Global dated
September 28, 2007.
17.
Agreement
of Conveyance of Overriding Royalty Interest by and among Falcon
Natural
Gas Corp. and YA Global dated September 28,2007.
18.
Letter
of January 28, 2007, from YA Global to Saul Deutsch, Chairman
of Falcon
Natural Gas Corp.
19.
Forbearance
Letter Agreement by and among Falcon Natural Gas Corp and YA
Global dated
March 26, 2006.
20.
Securities
Purchase Agreement, dated April 19, 2005, by and among Falcon
Natural Gas
Corp. and YA Global (incorporated
by reference to Exhibit 99.6 to the Current Report on Form
8-K filed
by Falcon Natural Gas Corp. on April 20,2005)
21.
Joint
Filing Agreement, by and among the Reporting Persons, dated
as of January22, 2008
SCHEDULE
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SIGNATURE
After
reasonable inquiry and to the best of each of the undersigned's knowledge and
belief, each certifies that the information set forth in this statement is
true,
complete and correct.
AMENDMENT
NO. 1 TO CONVERTIBLE DEBENTURE AND SECURITIES PURCHASE
AGREEMENT
This
Amendment No. 1 (“Amendment”)
to the
Convertible Debenture in the principal amount of $600,000 dated January 29,2007
(the “Convertible
Debenture”)
and
the Securities Purchase Agreement dated January 29, 2007 (the “SPA”),
is
made as of April 19, 2007, by and among Cornell Capital Partners, L.P.
(“Cornell”)
and
Falcon Natural Gas Corporation (the “Company”).
WHEREAS,
the
Company and Cornell entered into the SPA on January 29, 2007, pursuant to
which
the Company issued to Cornell that certain 8% Secured Convertible Debenture,
denominated No. FNGC-2 due January 29, 2010;
WHEREAS,
Cornell
and the Company have agreed to the provision by Cornell to the Company of
additional $55,555 in financing pursuant to the same terms as provided in
the
Convertible Debenture; and
WHEREAS,
in
response and in accordance with that understanding, the parties to this
Agreement desire to amend the Convertible Debenture and the SPA.
NOW
THEREFORE,
in
consideration of the foregoing, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto
agree as follows:
Section
1. Amendment
to the Preface of the Convertible Debenture.
The
first two paragraphs of the Convertible Debenture are hereby amended
and restated in their entirety as follows:
“This
Convertible Debenture (the “Debenture”)
is
issued on January 29, 2007 (the “Closing Date”)
by
Falcon
Natural Gas Corporation,
a
Nevada corporation (the “Company”),
to
Cornell
Capital Partners, LP (together
with its permitted successors and assigns, the “Holder”)
pursuant to exemptions from registration
under
the Securities Act of 1933, as amended, and pursuant to that certain Securities
Purchase Agreement dated January 29, 2007 (the “Securities
Purchase Agreement”).
FOR
VALUE RECEIVED,
the
Company hereby promises to pay to the Holder or its successors and assigns
the
principal sum of Six Hundred Fifty-Five Thousand Five Hundred Fifty-Five
Dollars
($655,555) together with accrued but unpaid interest on or before January29,2010 (the “Maturity
Date”)
in
accordance with the following terms:”
Section
2. Amendment
to the Preface of the SPA.
The
second paragraph under the recitatitions on the first page of the SPA is
hereby
amended and restated in its entirety as follows:
WHEREAS,
the
parties desire that, upon the terms and subject to the conditions contained
herein, the Company shall issue and sell to the Buyer(s), as provided herein,
and the Buyer(s) shall purchase up to Six Hundred Fifty-Five Thousand Five
Hundred Fifty-Five Dollars ($655,555) of secured convertible debentures (the
“Convertible
Debentures”),
which
shall be convertible into shares of the Company’s common stock, par value
$0.00001 (the “Common
Stock”)
(as
converted, the “Conversion
Shares”);
of
which Six Hundred Thousand Dollars ($600,000) shall be funded within five
(5)
business day following the date hereof (the “Closing”),
and
Fifty Five Thousand Five Hundred Fifty-Five Dollars ($55,555) shall be provided
on April ___, 2007 (the “Second
Closing,”
and
together with the Closing, the “Closings”)
for a
total purchase price of up to Six Hundred Fifty-Five Thousand Five Hundred
Fifty-Five Dollars ($655,555), (the “Purchase
Price”)
in the
respective amounts set forth opposite each Buyer(s) name on Schedule I (the
“Subscription
Amount”).
Section
3. Amendment
to Section 1(b) of the SPA.
Section
1(b) of the SPA is hereby amended and restated in its entirety as
follows:
…
(b)Closing
Date.
The
closing of the purchase and sale of the Convertible Debentures (the
“Closing”)
shall
take place at 10:00 a.m. Eastern Standard Time on the fifth day following
the
date hereof, subject to notification of satisfaction of the conditions to
such
Closing set forth in Sections 6 and 7 below ( the “Closing
Date”).
The
Closing shall occur on the respective Closing Date at the offices of Yorkville
Advisors, LLC, 3700 Hudson Street, Suite 3700, Jersey City, New Jersey07302
(or
such other place as is mutually agreed to by the Company and the Buyer).
The
Second Closing shall take place at 4:00 p.m. Eastern Standard Time on April19,2007, or such other time as the parties may agree.
Section
4. Amendment
to Section 4(g) of the SPA.
Section
4(g) of the SPA is hereby amended and restated in its entirety as
follows:
…
(g)
…
(iv)
Simultaneously with the Second Closing, the Company shall pay a fee to the
Buyer
of $5,555, to be paid directly from the proceeds of the Second
Closing.
Section
5. Representations
and Warranties of the Company.
The
Company hereby represents and warrants that, as of the date hereof, each
of the
representations and warranties it made in Section 3 of the SPA remain in
full
force and effect.
Section
6. Effect
of Amendment.
Except
as amended hereby, the Convertible Debenture and the SPA shall continue in
full
force and effect and are hereby incorporated herein by this reference. The
Company affirms that the obligation to repay all amounts related to the
provision of funds to it by Cornell pursuant to the Second Closing is secured
by
the security set forth in Section 1(b) of the Convertible Debenture.
Section
7. Governing Law.
This
Amendment shall be governed by and construed under the laws of the State
of New
Jersey.
2
Section
8. Titles and Subtitles.
The
titles of the sections and subsections of this Amendment are for convenience
of
reference only and are not to be considered in construing this
Amendment.
Section
9. Counterparts.
This
Amendment may be executed in counterparts, each of which shall be deemed
an
original, and all of which shall constitute one and the same
instrument.
IN
WITNESS WHEREOF,
the
parties hereto have caused this Amendment to be signed as of the date first
set
forth above.
CORNELL
CAPITAL PARTNERS, LP
By:
Yorkville Advisors, LLC
FALCON
NATURAL GAS CORP.
Its:
Investment Manager
By:_____________________________
Name:
Mark Angelo
Its:
Portfolio Manager
By:________________________________________
Name: Saul S. Deutsch
Title: Chief Financial
Officer
3
Exhibit
5b
AMENDMENT
NO. 2 TO CONVERTIBLE DEBENTURE AND SECURITIES PURCHASE
AGREEMENT
This
Amendment No. 2 (“Amendment”)
to the
Convertible Debenture in the principal amount of $600,000 dated January 29,2007
(the “Convertible
Debenture”)
and
the Securities Purchase Agreement dated January 29, 2007 (the “SPA”),
is
made as of June 19, 2007, by and among Cornell Capital Partners, L.P.
(“Cornell”)
and
Falcon Natural Gas Corporation (the “Company”).
WHEREAS,
the
Company and Cornell entered into the SPA on January 29, 2007, pursuant to
which
the Company issued to Cornell that certain 8% Secured Convertible Debenture,
denominated No. FNGC-2 due January 29, 2010;
WHEREAS,
Cornell
and the Company have agreed to the provision by Cornell to the Company of
additional $55,555 in financing pursuant to the same terms as provided in
the
Convertible Debenture; and
WHEREAS,
the
Company is not currently compliant in its obligations under the Convertible
Debenture and the SPA with respect to the timely filing of the Company’s reports
under the Securities Exchange Act of 1934, as amended (the “1934
Act”)
and
Cornell agrees to provide a forbearance to the Company for such
failure.
WHEREAS,
in
response and in accordance with that understanding, the parties to this
Agreement desire to amend the Convertible Debenture and the SPA.
NOW
THEREFORE,
in
consideration of the foregoing, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto
agree as follows:
Section
1.Amendment
to the Preface of the Convertible Debenture.
The
first two paragraphs of the Convertible Debenture are hereby amended and
restated in their entirety as follows:
“This
Convertible Debenture (the “Debenture”)
is
issued on January 29, 2007 (the “Closing Date”)
by
Falcon
Natural Gas Corporation,
a
Nevada corporation (the “Company”),
to
Cornell
Capital Partners, LP (together
with its permitted successors and assigns, the “Holder”)
pursuant to exemptions from registration
under
the Securities Act of 1933, as amended, and pursuant to that certain Securities
Purchase Agreement dated January 29, 2007 (the “Securities Purchase
Agreement”).
FOR
VALUE RECEIVED,
the
Company hereby promises to pay to the Holder or its successors and assigns
the
principal sum of Seven Hundred Eleven Thousand One Hundred Ten Dollars
($711,110) together with accrued but unpaid interest on or before January29,2010 (the “Maturity
Date”)
in
accordance with the following terms:”
Section
2.Amendment
to the Preface of the SPA.
The
second paragraph under the recitatitions on the first page of the SPA is
hereby
amended and restated in its entirety as follows:
“WHEREAS,
the
parties desire that, upon the terms and subject to the conditions contained
herein, the Company shall issue and sell to the Buyer(s), as provided herein,
and the Buyer(s) shall purchase up to Seven Hundred Eleven Thousand One Hundred
Ten Dollars ($711,110) of secured convertible debentures (the “Convertible
Debentures”),
which
shall be convertible into shares of the Company’s common stock, par value
$0.00001 (the “Common
Stock”)
(as
converted, the “Conversion
Shares”);
of
which Six Hundred Thousand Dollars ($600,000) shall be funded within five
(5)
business day following the date hereof (the “Closing”),
Fifty-Five Thousand Five Hundred Fifty-Five Dollars ($55,555) was provided
on
April 25, 2007 (the “Second
Closing”),
and
Fifty-Five Thousand Five Hundred Fifty-Five Dollars ($55,555) will be provided
within three (3) business days of the date of this document (the “Third
Closing,”
and
together with the First Closing and the Second Closing, the “Closings”)
for a
total purchase price of up to Seven Hundred Eleven Thousand One Hundred Ten
Dollars ($711,110), (the “Purchase
Price”)
in the
respective amounts set forth opposite each Buyer(s) name on Schedule I (the
“Subscription
Amount”).”
Section
3.Amendment
to Section 1(b) of the SPA.
Section
1(b) of the SPA is hereby amended and restated in its entirety as
follows:
“.
.
.
(b)Closing
Date.
The
closing of the purchase and sale of the Convertible Debentures (the
“Closing”)
shall
take place at 10:00 a.m. Eastern Standard Time on the fifth day following
the
date hereof, subject to notification of satisfaction of the conditions to
such
Closing set forth in Sections 6 and 7 below ( the “Closing
Date”).
The
Closing shall occur on the respective Closing Date at the offices of Yorkville
Advisors, LLC, 3700 Hudson Street, Suite 3700, Jersey City, New Jersey07302
(or
such other place as is mutually agreed to by the Company and the Buyer).
The
Third Closing shall take place at 4:00 p.m. Eastern Standard Time on June19,2007.”
Section
4.Amendment
to Section 4(g) of the SPA.
Section
4(g) of the SPA is hereby amended and restated in its entirety as
follows:
“…
(g)
…
(iv) Simultaneously
with the Third Closing, the Company shall pay a fee to the Buyer of $5,555,
to
be paid directly from the proceeds of the Third Closing.”
Section
5.Representations
and Warranties of the Company.
Except
as set forth in this Amendment, the Company hereby represents and warrants
that,
as of the date hereof, each of the representations and warranties it made
in
Section 3 of the SPA remain in full force and effect.
Section
6.Additional
Forbearance.
The
Company and Cornell hereby acknowledge that the Company has not timely filed
its
Annual Report on Form 10-KSB for the year ended December 31, 2006 and,
therefore, the Company is not currently in compliance with certain of its
obligations under the Convertible Debenture and SPA with respect to filing
reports under the 1934 Act. Cornell hereby agrees to waive on a one-time
basis
the Company’s default under the Convertible Debenture and SPA with respect to
the Company’s failure to timely file its Annual Report on Form 10-KSB for the
year ended December 31, 2006 and agrees to forbear from exercising its
rights and remedies under the Convertible Debenture, SPA and other Transactions
Documents executed in connection therewith, if the Company files its Annual
Report on Form 10-KSB for the year ended December 31, 2006 on or before
July 15, 2007.
2
Section
7.Effect
of Amendment.
Except
as amended hereby, the Convertible Debenture and the SPA shall continue in
full
force and effect and are hereby incorporated herein by this reference. The
Company affirms that the obligation to repay all amounts related to the
provision of funds to it by Cornell pursuant to the Second Closing is secured
by
the security set forth in Section 1(b) of the Convertible Debenture.
Section
8.Governing Law.
This
Amendment shall be governed by and construed under the laws of the State
of New
Jersey.
Section
9.Titles and Subtitles.
The
titles of the sections and subsections of this Amendment are for convenience
of
reference only and are not to be considered in construing this
Amendment.
Section
10.Counterparts.
This
Amendment may be executed in counterparts, each of which shall be deemed
an
original, and all of which shall constitute one and the same
instrument.
IN
WITNESS WHEREOF,
the
parties hereto have caused this Amendment to be signed as of the date first
set
forth above.
FOR
VALUE RECEIVED on or about July 19, 2007, the
undersigned, FALCON
NATURAL GAS CORP., a
Nevada
corporation (the “Company”),
promises to pay CORNELL
CAPITAL PARTNERS, L.P.
(the
“Lender”)
at 101
Hudson Street, Suite 3700, Jersey City, New Jersey07302 or other address
as the
Lender shall specify in writing, the principal sum of Two
Million Five Hundred Ninety-Eight Thousand Eight Hundred Eighty-Nine U.S.
Dollars and 00/100 ($2,598,889) (the
“Principal
Amount”)
and
interest at the annual rate of fourteen percent (14%) on the unpaid balance
pursuant to the following terms:
1.Principal
and Interest.
For
value
received on the date hereof the Company hereby promises to pay to the order
of
the Lender in lawful money of the United States of America and in immediately
available funds the Principal Amount, together with interest on the unpaid
principal of this Note on or before December 1, 2007. The parties acknowledge
that their intent is that the amount due and owing on this Note be converted
into convertible debentures of the Company pursuant to the transaction set
forth
in the term sheet attached as Exhibit A hereto and that they will act in
good
faith to finalize that transaction.
2.Right
of Prepayment.
The
Company at its option shall have the right to prepay, with three (3) business
days advance written notice, a portion or all outstanding principal plus
accrued
Interest under this Note.
3.Use
of Proceeds.
The
Company acknowledges that the proceeds received in exchange for this Note
shall
be used for general working capital purposes and to make the payments described
in Exhibit B hereto. The
Company hereby acknowledges and consents that certain of the proceeds underlying
this Note shall be used to make the payments described in Exhibit B hereto.
4.Waiver
and Consent.
To the
fullest extent permitted by law and except as otherwise provided herein,
the
Company waives demand, presentment, protest, notice of dishonor, suit against
or
joinder of any other person, and all other requirements necessary to charge
or
hold the Company liable with respect to this Note.
5.Costs,
Indemnities and Expenses.
In the
event of default as described herein, the Company agrees to pay all reasonable
fees and costs incurred by the Lender in collecting or securing or attempting
to
collect or secure this Note, including reasonable attorneys’ fees and expenses,
whether or not involving litigation, collecting upon any judgments and/or
appellate or bankruptcy proceedings. The Company agrees to pay any documentary
stamp taxes, intangible taxes or other taxes which may now or hereafter apply
to
this Note or any payment made in respect of this Note, and the Company agrees
to
indemnify and hold the Lender harmless from and against any liability, costs,
attorneys’ fees, penalties, interest or expenses relating to any such taxes, as
and when the same may be incurred.
6.Event
of Default.
An
“Event
of Default”
shall
be deemed to have occurred upon the occurrence of any of the following: (i)
the
Company should fail for any reason or for no reason to make any payment of
the
interest or principal pursuant to this Note within ten (10) days of the date
due
as prescribed herein; (ii) the Company shall fail to observe or perform any
other covenant, agreement or warranty contained in, or otherwise commit any
material breach or default of any material provision of this Note or any
of the
Transaction Documents (as defined in the Securities Purchase Agreements between
the Company and the Lender dated on or about January 29, 2007; April 19,2005;
and October 17, 2005), which is not cured within ten (10) days notice of
the
default; (iii) the Company or any subsidiary of the Company shall commence,
or there shall be commenced against the Company or any subsidiary of the
Company
under any applicable bankruptcy or insolvency laws as now or hereafter in
effect
or any successor thereto, or the Company or any subsidiary of the Company
commences any other proceeding under any reorganization, arrangement, adjustment
of debt, relief of debtors, dissolution, insolvency or liquidation or similar
law of any jurisdiction whether now or hereafter in effect relating to the
Company or any subsidiary of the Company or there is commenced against the
Company or any subsidiary of the Company any such bankruptcy, insolvency
or
other proceeding which remains undismissed for a period of sixty-one (61)
days;
or the Company or any subsidiary of the Company is adjudicated insolvent
or
bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or the Company or any subsidiary of the Company suffers
any appointment of any custodian, private or court appointed receiver or
the
like for it or any substantial part of its property which continues undischarged
or unstayed for a period of sixty one (61) days; or the Company or any
subsidiary of the Company makes a general assignment for the benefit of
creditors; or the Company or any subsidiary of the Company shall fail to
pay, or
shall state that it is unable to pay, or shall be unable to pay, its debts
generally as they become due; or the Company or any subsidiary of the Company
shall call a meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or the Company or any subsidiary
of
the Company shall by any act or failure to act expressly indicate its consent
to, approval of or acquiescence in any of the foregoing; or any corporate
or
other action is taken by the Company or any subsidiary of the Company for
the
purpose of effecting any of the foregoing; or (iv) a breach by the Company
of
its obligations, or an event of default, under any agreements entered into
between the Company and the Lender which is not cured by any applicable cure
period set forth therein.
Upon
an
Event of Default (as defined above), the entire principal balance and accrued
interest outstanding under this Note, and all other obligations of the Company
under this Note, shall be immediately due and payable without any action
on the
part of the Lender, interest shall accrue on the unpaid principal balance
at
twenty four percent (24%) or the highest rate permitted by applicable law,
if
lower, and the Lender shall be entitled to seek and institute any and all
remedies available to it.
2
7.Maximum
Interest Rate.
In no
event shall any agreed to or actual interest charged, reserved or taken by
the
Lender as consideration for this Note exceed the limits imposed by New Jersey
law. In the event that the interest provisions of this Note shall result
at any
time or for any reason in an effective rate of interest that exceeds the
maximum
interest rate permitted by applicable law, then without further agreement
or
notice the obligation to be fulfilled shall be automatically reduced to such
limit and all sums received by the Lender in excess of those lawfully
collectible as interest shall be applied against the principal of this Note
immediately upon the Lender’s receipt thereof, with the same force and effect as
though the Company had specifically designated such extra sums to be so applied
to principal and the Lender had agreed to accept such extra payment(s) as
a
premium-free prepayment or prepayments.
8.Secured
Nature of the Note.
This
Note
is secured by (i) the Security Agreement between the Company and the Lender
dated November 2, 2005 (the “Security
Agreement”)
and
(ii) mortgages by the Company in favor of the Lender executed in connection
with
the Securities Purchase Agreement dated on or about January 29, 2007, between
the Company and the Lender, and the obligations of the Company under this
Note
shall be secured thereby.
9.Issuance
of Capital Stock.
So long
as any portion of this Note is outstanding, the Company shall not, without
the
prior written consent of the Lender, (i) issue or sell shares of common stock
or
preferred stock without consideration or for a consideration per share less
than
the fair market value of the common stock determined immediately prior to
its
issuance, (ii) issue any warrant, option, right, contract, call, or other
security instrument granting the holder thereof, the right to acquire common
stock without consideration or for a consideration less than such common
stock’s
fair market value determined immediately prior to it’s issuance, or (iii) enter
into any security instrument granting the holder a security interest in any
and
all assets of the Company, or (iv) file any registration statement on Form
S-8.
10.Cancellation
of Note.
Upon
the repayment by the Company of all of its obligations hereunder to the Lender,
including, without limitation, the principal amount of this Note, plus accrued
but unpaid interest, the indebtedness evidenced hereby shall be deemed canceled
and paid in full. Except as otherwise required by law or by the provisions
of
this Note, payments received by the Lender hereunder shall be applied first
against expenses and indemnities, next against interest accrued on this Note,
and next in reduction of the outstanding principal balance of this
Note.
11.Severability.
If any
provision of this Note is, for any reason, invalid or unenforceable, the
remaining provisions of this Note will nevertheless be valid and enforceable
and
will remain in full force and effect. Any provision of this Note that is
held
invalid or unenforceable by a court of competent jurisdiction will be deemed
modified to the extent necessary to make it valid and enforceable and as
so
modified will remain in full force and effect.
3
12.Amendment
and Waiver.
This
Note may be amended, or any provision of this Note may be waived, provided
that
any such amendment or waiver will be binding on a party hereto only if such
amendment or waiver is set forth in a writing executed by the parties hereto.
The waiver by any such party hereto of a breach of any provision of this
Note
shall not operate or be construed as a waiver of any other breach.
13.Successors.
Except
as otherwise provided herein, this Note shall bind and inure to the benefit
of
and be enforceable by the parties hereto and their permitted successors and
assigns.
14.Assignment.
This
Note shall not be directly or indirectly assignable or delegable by the Company.
The Lender may assign this Note as long as such assignment complies with
the
Securities Act of 1933, as amended.
15.No
Strict Construction.
The
language used in this Note will be deemed to be the language chosen by the
parties hereto to express their mutual intent, and no rule of strict
construction will be applied against any party.
16.Further
Assurances.
Each
party hereto will execute all documents and take such other actions as the
other
party may reasonably request in order to consummate the transactions provided
for herein and to accomplish the purposes of this Note.
17.Notices,
Consents, etc. Any
notices, consents, waivers or other communications required or permitted
to be
given under the terms hereof must be in writing and will be deemed to have
been
delivered: (i) upon receipt, when delivered personally; (ii) upon receipt,
when
sent by facsimile (provided confirmation of transmission is mechanically
or
electronically generated and kept on file by the sending party); or (iii)
one
(1) trading day after deposit with a nationally recognized overnight delivery
service, in each case properly addressed to the party to receive the same.
The
addresses and facsimile numbers for such communications shall be:
or
at
such other address and/or facsimile number and/or to the attention of such
other
person as the recipient party has specified by written notice given to each
other party three (3) trading days prior to the effectiveness of such change.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender's facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or (C)
provided by a nationally recognized overnight delivery service, shall be
rebuttable evidence of personal service, receipt by facsimile or receipt
from a
nationally recognized overnight delivery service in accordance with clause
(i),
(ii) or (iii) above, respectively.
18.Remedies,
Other Obligations, Breaches and Injunctive Relief.
The
Lender’s remedies provided in this Note shall be cumulative and in addition to
all other remedies available to the Lender under this Note, at law or in
equity
(including a decree of specific performance and/or other injunctive relief),
no
remedy of the Lender contained herein shall be deemed a waiver of compliance
with the provisions giving rise to such remedy and nothing herein shall limit
the Lender’s right to pursue actual damages for any failure by the Company to
comply with the terms of this Note. No remedy conferred under this Note upon
the
Lender is intended to be exclusive of any other remedy available to the Lender,
pursuant to the terms of this Note or otherwise. No single or partial exercise
by the Lender of any right, power or remedy hereunder shall preclude any
other
or further exercise thereof. The failure of the Lender to exercise any right
or
remedy under this Note or otherwise, or delay in exercising such right or
remedy, shall not operate as a waiver thereof. Every right and remedy of
the
Lender under any document executed in connection with this transaction may
be
exercised from time to time and as often as may be deemed expedient by the
Lender. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Lender and that the remedy at
law
for any such breach may be inadequate. The Company therefore agrees that,
in the
event of any such breach or threatened breach, the Lender shall be entitled,
in
addition to all other available remedies, to an injunction restraining any
breach, and specific performance without the necessity of showing economic
loss
and without any bond or other security being required.
5
19.Governing
Law; Jurisdiction.
All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of
New
Jersey, without giving effect to any choice of law or conflict of law provision
or rule (whether of the State of New Jersey or any other jurisdictions) that
would cause the application of the laws of any jurisdictions other than the
State of New Jersey. Each party hereby irrevocably submits to the exclusive
jurisdiction of the Superior Court of the State of New Jersey sitting in
Hudson
County, New Jersey and the United States Federal District Court for the District
of New Jersey sitting in Newark, New Jersey, for the adjudication of any
dispute
hereunder or in connection herewith or therewith, or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it
is not
personally subject to the jurisdiction of any such court, that such suit,
action
or proceeding is brought in an inconvenient forum or that the venue of such
suit, action or proceeding is improper. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof to such party at the
address for such notices to it under this Agreement and agrees that such
service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to
serve
process in any manner permitted by law.
20.No
Inconsistent Agreements.
None of
the parties hereto will hereafter enter into any agreement, which is
inconsistent with the rights granted to the parties in this Note.
21.Third
Parties.
Nothing
herein expressed or implied is intended or shall be construed to confer upon
or
give to any person or entity, other than the parties to this Note and their
respective permitted successor and assigns, any rights or remedies under
or by
reason of this Note.
22.Waiver
of Jury Trial.
AS A MATERIAL INDUCEMENT FOR THE LENDER TO LOAN TO THE COMPANY THE MONIES
HEREUNDER, THE COMPANY HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING RELATED IN ANY WAY TO THIS AGREEMENT AND/OR ANY AND ALL OF THE
OTHER
DOCUMENTS ASSOCIATED WITH THIS TRANSACTION.
23.Entire
Agreement. This
Note (including any recitals hereto) set forth the entire understanding of
the
parties with respect to the subject matter hereof, and shall not be modified
or
affected by any offer, proposal, statement or representation, oral or written,
made by or for any party in connection with the negotiation of the terms
hereof,
and may be modified only by instruments signed by all of the parties
hereto.
6
EXHIBIT
A
Term
Sheet
7
EXHIBIT
B
Use
of Proceeds
Of
the
proceeds of this Note, $1,920,000 will be paid directly by the Lender to
pay
Petrogulf Corporation.
8
IN
WITNESS WHEREOF,
this
Promissory Note is executed by the undersigned as of the date
hereof.
CORNELL
CAPITAL PARTNERS, LP
By:
Yorkville Advisors, LLC
Its:
Investment Manager
By:
______________________________
Name:
Mark Angelo
Its: Portfolio
Manager
FALCON
NATURAL GAS CORP.
By:
______________________________
Name:
Saul S. Deutsch
Title:
Chief Financial Officer
9
Exhibit
10
Dated:
September _____, 2007
THIS
SECURED DEBENTURE, AND THE SECURITIES INTO WHICH IT IS CONVERTIBLE
(COLLECTIVELY, THE “SECURITIES”),
HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE. THE SECURITIES ARE BEING
OFFERED PURSUANT TO A SAFE HARBOR FROM REGISTRATION UNDER REGULATION D
PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“ACT”).
THE SECURITIES ARE “RESTRICTED”
AND MAY NOT BE OFFERED OR SOLD UNLESS THE SECURITIES ARE REGISTERED UNDER THE
ACT, PURSUANT TO REGULATION D OR PURSUANT TO AVAILABLE EXEMPTIONS FROM THE
REGISTRATION REQUIREMENTS OF THE ACT AND THE COMPANY WILL BE PROVIDED WITH
OPINION OF COUNSEL OR OTHER SUCH INFORMATION AS IT MAY REASONABLY REQUIRE TO
CONFIRM THAT SUCH EXEMPTIONS ARE AVAILABLE. FURTHER HEDGING TRANSACTIONS
INVOLVING THE SECURITIES MAY NOT BE MADE EXCEPT IN COMPLIANCE WITH THE
ACT.
FALCON
NATURAL GAS CORPORATION
SENIOR
SECURED CONVERTIBLE DEBENTURE
September
____, 2009
No.
FNGC-3
US$2,598,889
This
Convertible Debenture (the “Debenture”)
is
issued on September _____, 2007 (the “Closing Date”)
by
Falcon
Natural Gas Corporation,
a
Nevada corporation (the “Company”),
to
YA
Global Investments, LP (together
with its permitted successors and assigns, the “Holder”)
pursuant to exemptions from registration
under
the Securities Act of 1933.
WHEREAS,
the
Company has issued to the Holder, and the Holder has purchased from the Company
a Promissory Note on July 19, 2007, in the amount of $2,598,889 (the “Promissory
Note”), for which the Holder paid the entire purchase price on July 19,2007.
WHEREAS,
the
Company has agreed to accept the Promissory Note as payment in full for this
Debenture.
FOR
VALUE RECEIVED,
the
Company hereby promises to pay to the Holder or its successors and assigns
the
principal sum of Two Million Five Hundred Ninety-Eight Thousand Eight Hundred
Eighty-Nine Dollars ($2,598,889) together with accrued but unpaid interest
on or
before January ____, 2010 (the “Maturity
Date”)
in
accordance with the following terms:
1
Section
1.
(a)Interest.
Interest shall accrue on the outstanding principal balance hereof at an annual
rate equal to The Wall Street Journal Prime Rate, as quoted by the print edition
of the United States version of The Wall Street Journal, plus two and
one-quarter percent (2.25%) (“Interest
Rate”).
Interest shall be calculated on the basis of a 365-day year and the actual
number of days elapsed, to the extent permitted by applicable law. Interest
hereunder shall be paid on the first day of each calendar quarter (i.e., January
1, April 1, July 1, and October 1), and shall be payable in arrears (or sooner
as otherwise provided herein) to the Holder or its assignee in whose name this
Debenture is registered on the records of the Company regarding registration
and
transfers of Debentures in cash.
(b)Security.
The
Debenture is
secured by (i) a security interest in all of the assets of the Company and
of
each of the Company's subsidiaries as evidenced by the Amended and Restated
Security Agreement of even date herewith (the “Security
Agreement”),
and
(ii) a lien on certain equipment and real estate in the States of Louisiana,
Texas, and Oklahoma as evidenced by the mortgage of even date herewith, covering
the property or properties more fully described therein (the “Real
Estate Security”
and
together with the Security Agreement collectively the “Security
Documents”).
(c)Repayment
of Principal.
Commencing
on January 1, 2008, and continuing on the first date of each calendar month
thereafter, the Company shall make a cash principal payment to the Holder in
an
amount equal to fifty percent (50%) of the Company’s Net Revenues for the
preceding calendar month. For the purposes of this paragraph, the term “Net
Revenues” shall mean gross revenues less expenses of the Company, reasonably and
actually incurred, in connection with the operations of wells or properties
in
which the Company has an interest. Such expenses shall not include corporate
overhead or other selling, general, or administrative expenses.
(d)Use
of
Proceeds.
The
proceeds to the Company in exchange for the Company’s issuance of this Debenture
have been disbursed to Petrogulf Corporation for specific drilling expenses
as
set forth in the First Amended Full and Final Release, Settlement, and Indemnity
Agreement dated September ____, 2007 and agreements and understandings ancillary
thereto.
Section
2.Events
of Default.
(a) An
“Event
of Default”,
wherever used herein, means any one of the following events (whatever the reason
and whether it shall be voluntary or involuntary or effected by operation of
law
or pursuant to any judgment, decree or order of any court, or any order, rule
or
regulation of any administrative or governmental body):
(i) Any
default in the payment of the principal of, interest on or other charges in
respect of this Debenture, free of any claim of subordination, as and when
the
same shall become due and payable (whether on Interest Payment Date, Principal
Payment Date, a Conversion Date or the Maturity Date or by acceleration or
otherwise (collectively, the “Payment
Date”))
which
is not cured within 15 days of the applicable Payment Date;
2
(ii) The
Company or any subsidiary of the Company shall commence, or there shall be
commenced against the Company or any subsidiary of the Company under any
applicable bankruptcy or insolvency laws as now or hereafter in effect or any
successor thereto, or the Company or any subsidiary of the Company commences
any
other proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of
any
jurisdiction whether now or hereafter in effect relating to the Company or
any
subsidiary of the Company or there is commenced against the Company or any
subsidiary of the Company any such bankruptcy, insolvency or other proceeding
which remains undismissed for a period of 61 days; or the Company or any
subsidiary of the Company is adjudicated insolvent or bankrupt; or any order
of
relief or other order approving any such case or proceeding is entered; or
the
Company or any subsidiary of the Company suffers any appointment of any
custodian, private or court appointed receiver or the like for it or any
substantial part of its property which continues undischarged or unstayed for
a
period of sixty one (61) days; or the Company or any subsidiary of the Company
makes a general assignment for the benefit of creditors; or the Company or
any
subsidiary of the Company shall fail to pay, or shall state that it is unable
to
pay, or shall be unable to pay, its debts generally as they become due; or
the
Company or any subsidiary of the Company shall call a meeting of its creditors
with a view to arranging a composition, adjustment or restructuring of its
debts; or the Company or any subsidiary of the Company shall by any act or
failure to act expressly indicate its consent to, approval of or acquiescence
in
any of the foregoing; or any corporate or other action is taken by the Company
or any subsidiary of the Company for the purpose of effecting any of the
foregoing;
(iii) The
Company or any subsidiary of the Company shall default in any of its obligations
under any other debenture or any mortgage, credit agreement or other facility,
indenture agreement, factoring agreement or other instrument under which there
may be issued, or by which there may be secured or evidenced any indebtedness
for borrowed money or money due under any long term leasing or factoring
arrangement of the Company or any subsidiary of the Company in an amount
exceeding $100,000, whether such indebtedness now exists or shall hereafter
be
created and such default shall result in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise become
due and payable;
(iv) The
Common Stock shall cease to be quoted for trading or listing for trading on
any
of (a) the American Stock Exchange, (b) New York Stock Exchange, (c) the Nasdaq
National Market, (d) the Nasdaq Capital Market, or (e) the Nasdaq OTC Bulletin
Board (“OTC”)
(each,
a “Primary
Market”)
and
shall not again be quoted or listed for trading on any Primary Market within
five (5) Trading Days of such delisting;
(v) The
Company or any subsidiary of the Company shall be a party to any Change of
Control Transaction (as defined in Section
6);
(vi) The
Company shall fail for any reason to deliver Common Stock certificates to the
Holder prior to the fifth (5th)
Trading
Day after a Conversion Date or the Company shall provide notice to the Holder,
including by way of public announcement, at any time, of its intention not
to
comply with requests for conversions of this Debenture in accordance with the
terms hereof.
(vii) The
Company shall fail to observe or perform any other covenant, agreement or
warranty contained in, or otherwise commit any breach or default of any
provision of this Debenture (except as may be covered by Section
2(a)(i)
hereof)
which is not cured by the Holder within 15 days of the Holder delivering written
notice to the Company specifying the failure, breach or default or any
Transaction Document (as defined in Section
6)
which
is not cured within the time prescribed therein, if any;
3
(b) During
the time that any portion of this Debenture is outstanding, if any Event of
Default has occurred, the full principal amount of this Debenture, together
with
interest and other amounts owing in respect thereof, to the date of acceleration
shall become at the Holder's election, immediately due and payable in cash,
provided
however,
the
Holder may request (but shall have no obligation to request) payment of such
amounts in Common Stock of the Company. If an Event of Default occurs and
remains uncured, the Conversion Price shall be reduced to the lower of twenty
percent (20%) of the VWAP on the Closing Date or twenty-five percent (25%)
of
the Market Conversion Price. Furthermore, in addition to any other remedies,
the
Holder shall have the right (but not the obligation) to convert this Debenture
at any time after (x) an Event of Default or (y) the Maturity Date at the
Conversion Price then in-effect. The Holder need not provide and the Company
hereby waives any presentment, demand, protest or other notice of any kind,
and
the Holder may immediately and without expiration of any grace period enforce
any and all of its rights and remedies hereunder and all other remedies
available to it under applicable law. Such declaration may be rescinded and
annulled by Holder at any time prior to payment hereunder. No such rescission
or
annulment shall affect any subsequent Event of Default or impair any right
consequent thereon. Upon an Event of Default, notwithstanding any other
provision of this Debenture or any Transaction Document, the Holder shall have
no obligation to comply with or adhere to any limitations, if any, on the
conversion of this Debenture or the sale of the Underlying Shares.
Section
3.Redemptions.
The
Company at its option shall have the right to redeem a portion or all amounts
outstanding under this Debenture prior to the Maturity Date provided
that
as of
the date of the Holder’s receipt of a Redemption Notice (as defined herein) (i)
the Closing Bid Price of the of the Common Stock, as reported by Bloomberg,
LP,
is less than the Fixed Conversion Price, (ii) at least the number of Conversion
Shares representing all principal and accrued interest then due and payable
by
the Company pursuant to the Debenture are registered for sale under the
Securities Act of 1933, and (iii) no Event of Default has occurred. The Company
shall pay an amount equal to the principal amount being redeemed plus a
redemption premium (“Redemption
Premium”)
equal
to twenty percent (20%) of the principal amount being redeemed, and accrued
interest, (collectively referred to as the “Redemption
Amount”).
In
order to make a redemption, the Company shall first provide written notice
to
the Holder of its intention to make a redemption (the “Redemption
Notice”)
setting forth the amount of principal it desires to redeem. After receipt of
the
Redemption Notice the Holder shall have three (3) business days to elect to
convert all or any portion of this Debenture, subject to the limitations set
forth in Section
4(b).
On the
fourth (4th)
business day after the Redemption Notice, the Company shall deliver to the
Holder the Redemption Amount with respect to the principal amount redeemed
after
giving effect to conversions effected during the three (3) business day period.
4
Section
4.Conversion.
(a)Conversion
at Option of Holder.
(i) This
Debenture shall be convertible into shares of Common Stock (“Conversion
Shares”)
at the
option of the Holder, in whole or in part at any time and from time to time,
after the Original Issue Date (as defined in Section
6)
(subject to the limitations on conversion set forth in Section
4(b)
hereof).
The number of shares of Common Stock issuable upon a conversion hereunder equals
the quotient obtained by dividing (x) the outstanding amount of this Debenture
to be converted by (y) the Conversion Price (as defined in Section
4(c)(i)).
The
Company shall deliver Common Stock certificates to the Holder prior to the
Fifth
(5th)
Trading
Day after a Conversion Date.
(ii) Notwithstanding
anything to the contrary contained herein, if on any Conversion Date: (1) the
number of shares of Common Stock at the time authorized, unissued and unreserved
for all purposes, or held as treasury stock, is insufficient to pay principal
and interest hereunder in shares of Common Stock; (2) the Common Stock is not
listed or quoted for trading on the OTC or on a Subsequent Market; (3) the
Company has failed to timely satisfy its conversion; or (4) the issuance of
such
shares of Common Stock would result in a violation of Section
4(b),
then,
at the option of the Holder, the Company, in lieu of delivering shares of Common
Stock pursuant to Section
4(a)(i),
shall
deliver, within three (3) Trading Days of each applicable Conversion Date,
an
amount in cash equal to the product of the outstanding principal amount to
be
converted plus any interest due therein divided by the Conversion Price, chosen
by the Holder, and multiplied by the highest closing price of the stock from
date of the conversion notice until the date that such cash payment is
made.
Further,
if the Company shall not have delivered any cash due in respect of conversion
of
this Debenture or as payment of interest thereon by the fifth (5th)
Trading
Day after the Conversion Date, the Holder may, by notice to the Company, require
the Company to issue shares of Common Stock pursuant to Section
4(a),
except
that for such purpose the Conversion Price applicable thereto shall be the
lesser of the Conversion Price on the Conversion Date and the Conversion Price
on the date of such Holder demand. Any such shares will be subject to the
provisions of this Section.
(iii) The
Holder shall effect conversions by delivering to the Company a completed notice
in the form attached hereto as Exhibit A (a “Conversion
Notice”).
The
date on which a Conversion Notice is delivered is the “Conversion
Date.”
Unless
the Holder is converting the entire principal amount outstanding under this
Debenture, the Holder is not required to physically surrender this Debenture
to
the Company in order to effect conversions. Conversions hereunder shall have
the
effect of lowering the outstanding principal amount of this Debenture plus
all
accrued and unpaid interest thereon in an amount equal to the applicable
conversion. The Holder and the Company shall maintain records showing the
principal amount converted and the date of such conversions. In the event of
any
dispute or discrepancy, the records of the Holder shall be controlling and
determinative in the absence of manifest error.
5
(b)Certain
Conversion Restrictions.
A
Holder may not convert this Debenture or receive shares of Common Stock as
payment of interest hereunder to the extent such conversion or receipt of such
interest payment would result in the Holder, together with any affiliate
thereof, beneficially owning (as determined in accordance with Section 13(d)
of
the Exchange Act and the rules promulgated thereunder) in excess of 4.99% of
the
then issued and outstanding shares of Common Stock, including shares issuable
upon conversion of, and payment of interest on, this Debenture held by such
Holder after application of this Section. Since the Holder will not be obligated
to report to the Company the number of shares of Common Stock it may hold at
the
time of a conversion hereunder, unless the conversion at issue would result
in
the issuance of shares of Common Stock in excess of 4.99% of the then
outstanding shares of Common Stock without regard to any other shares which
may
be beneficially owned by the Holder or an affiliate thereof, the Holder shall
have the authority and obligation to determine whether the restriction contained
in this Section will limit any particular conversion hereunder and to the extent
that the Holder determines that the limitation contained in this Section
applies, the determination of which portion of the principal amount of this
Debenture is convertible shall be the responsibility and obligation of the
Holder. If the Holder has delivered a Conversion Notice for a principal amount
of this Debenture that, without regard to any other shares that the Holder
or
its affiliates may beneficially own, would result in the issuance in excess
of
the permitted amount hereunder, the Company shall notify the Holder of this
fact
and shall honor the conversion for the maximum principal amount permitted to
be
converted on such Conversion Date in accordance with the periods described
in
Section
4(a)(i)
and, at
the option of the Holder, either retain any principal amount tendered for
conversion in excess of the permitted amount hereunder for future conversions
or
return such excess principal amount to the Holder. The provisions of this
Section may be waived by a Holder (but only as to itself and not to any other
Holder) upon not less than 65 days prior notice to the Company. Other Holders
shall be unaffected by any such waiver.
(c)Conversion
Price and Adjustments to Conversion Price.
(i) The
conversion price in effect on any Conversion Date shall be, at the sole option
of the Holder, equal to either (a) $0.02 (the “Fixed
Conversion Price”)
or (b)
eighty percent (80%) of the lowest Volume Weighted Average Price
(“VWAP”)
of the
Common Stock during the five (5) trading days immediately preceding the
Conversion Date as quoted by Bloomberg, LP (the “Market
Conversion Price”).
The
Fixed Conversion Price and the Market Conversion Price are collectively referred
to as the “Conversion
Price.”
The
Conversion Price may be adjusted pursuant to the other terms of this Debenture.
Notwithstanding the restriction set forth in Section
4(a)(ii)
the
Holder shall have the absolute right to convert any or all of this Debenture
at
the Fixed Conversion Price free of such restriction.
(ii) If
the
Company, at any time while this Debenture is outstanding, shall (a) pay a
stock dividend or otherwise make a distribution or distributions on shares
of
its Common Stock or any other equity or equity equivalent securities payable
in
shares of Common Stock, (b) subdivide outstanding shares of Common Stock into
a
larger number of shares, (c) combine (including by way of reverse stock split)
outstanding shares of Common Stock into a smaller number of shares, or (d)
issue
by reclassification of shares of the Common Stock any shares of capital stock
of
the Company, then the Fixed Conversion Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of Common Stock outstanding after
such
event. Any adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
re-classification.
6
(iii) If
the
Company, at any time while this Debenture is outstanding, shall issue rights,
options or warrants to all holders of Common Stock (and not to the Holder)
entitling them to subscribe for or purchase shares of Common Stock at a price
per share less than the Fixed Conversion Price, then the Fixed Conversion Price
shall be multiplied by a fraction, of which the denominator shall be the number
of shares of the Common Stock (excluding treasury shares, if any) outstanding
on
the date of issuance of such rights or warrants (plus the number of additional
shares of Common Stock offered for subscription or purchase), and of which
the
numerator shall be the number of shares of the Common Stock (excluding treasury
shares, if any) outstanding on the date of issuance of such rights or warrants,
plus the number of shares which the aggregate offering price of the total number
of shares so offered would purchase at the Fixed Conversion Price. Such
adjustment shall be made whenever such rights or warrants are issued, and shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such rights, options or warrants. However,
upon
the expiration of any such right, option or warrant to purchase shares of the
Common Stock the issuance of which resulted in an adjustment in the Fixed
Conversion Price pursuant to this Section, if any such right, option or warrant
shall expire and shall not have been exercised, the Fixed Conversion Price
shall
immediately upon such expiration be recomputed and effective immediately upon
such expiration be increased to the price which it would have been (but
reflecting any other adjustments in the Fixed Conversion Price made pursuant
to
the provisions of this Section after the issuance of such rights or warrants)
had the adjustment of the Fixed Conversion Price made upon the issuance of
such
rights, options or warrants been made on the basis of offering for subscription
or purchase only that number of shares of the Common Stock actually purchased
upon the exercise of such rights, options or warrants actually
exercised.
(iv) If
the
Company or any subsidiary thereof, as applicable, at any time while this
Debenture is outstanding, shall issue shares of Common Stock or rights,
warrants, options or other securities or debt that are convertible into or
exchangeable for shares of Common Stock (“Common
Stock Equivalents”)
entitling any Person to acquire shares of Common Stock, at a price per share
less than the Fixed Conversion Price (if the holder of the Common Stock or
Common Stock Equivalent so issued shall at any time, whether by operation of
purchase price adjustments, reset provisions, floating conversion, exercise
or
exchange prices or otherwise, or due to warrants, options or rights per share
which is issued in connection with such issuance, be entitled to receive shares
of Common Stock at a price per share which is less than the Fixed Conversion
Price, such issuance shall be deemed to have occurred for less than the Fixed
Conversion Price), then, at the sole option of the Holder, the Fixed Conversion
Price shall be adjusted to mirror the conversion, exchange or purchase price
for
such Common Stock or Common Stock Equivalents (including any reset provisions
thereof) at issue. Such adjustment shall be made whenever such Common Stock
or
Common Stock Equivalents are issued. The Company shall notify the Holder in
writing, no later than one (1) business day following the issuance of any Common
Stock or Common Stock Equivalent subject to this Section, indicating therein
the
applicable issuance price, or of applicable reset price, exchange price,
conversion price and other pricing terms. No adjustment under this Section
shall
be made as a result of issuances and exercises of options to purchase shares
of
Common Stock issued for compensatory purposes pursuant to any of the Company's
stock option or stock purchase plans.
7
(v) If
the
Company, at any time while this Debenture is outstanding, shall distribute
to
all holders of Common Stock (and not to the Holder) evidences of its
indebtedness or assets or rights or warrants to subscribe for or purchase any
security, then in each such case the Fixed Conversion Price at which this
Debenture shall thereafter be convertible shall be determined by multiplying
the
Fixed Conversion Price in effect immediately prior to the record date fixed
for
determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the Closing Bid Price determined
as
of the record date mentioned above, and of which the numerator shall be such
Closing Bid Price on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of the Common Stock as
determined by the Board of Directors in good faith. In either case the
adjustments shall be described in a statement provided to the Holder of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
(vi) In
case
of any reclassification of the Common Stock or any compulsory share exchange
pursuant to which the Common Stock is converted into other securities, cash
or
property, the Holder shall have the right thereafter to, at its option, (A)
convert the then outstanding principal amount, together with all accrued but
unpaid interest and any other amounts then owing hereunder in respect of this
Debenture into the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of the Common Stock following
such reclassification or share exchange, and the Holder of this Debenture shall
be entitled upon such event to receive such amount of securities, cash or
property as the shares of the Common Stock of the Company into which the then
outstanding principal amount, together with all accrued but unpaid interest
and
any other amounts then owing hereunder in respect of this Debenture could have
been converted immediately prior to such reclassification or share exchange
would have been entitled, or (B) require the Company to prepay the outstanding
principal amount of this Debenture, plus all interest and other amounts due
and
payable thereon. The entire prepayment price shall be paid in cash. This
provision shall similarly apply to successive reclassifications or share
exchanges.
(vii) The
Company shall at all times reserve and keep available out of its authorized
Common Stock the full number of shares of Common Stock issuable upon conversion
of all outstanding amounts under this Debenture; and within three (3) Business
Days following the receipt by the Company of a Holder's notice that such minimum
number of Underlying Shares is not so reserved, the Company shall promptly
reserve a sufficient number of shares of Common Stock to comply with such
requirement.
(viii) All
calculations under this Section
4
shall be
rounded to the nearest $0.0001 or whole share.
(ix) Whenever
the Conversion Price is adjusted pursuant to Section
4
hereof,
the Company shall promptly mail to the Holder a notice setting forth the
Conversion Price after such adjustment and setting forth a brief statement
of
the facts requiring such adjustment.
8
(x) If
(A)
the Company shall declare a dividend (or any other distribution) on the Common
Stock; (B) the Company shall declare a special nonrecurring cash dividend on
or
a redemption of the Common Stock; (C) the Company shall authorize the granting
to all holders of the Common Stock rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any rights; (D) the
approval of any stockholders of the Company shall be required in connection
with
any reclassification of the Common Stock, any consolidation or merger to which
the Company is a party, any sale or transfer of all or substantially all of
the
assets of the Company, of any compulsory share exchange whereby the Common
Stock
is converted into other securities, cash or property; or (E) the Company shall
authorize the voluntary or involuntary dissolution, liquidation or winding
up of
the affairs of the Company; then, in each case, the Company shall cause to
be
filed at each office or agency maintained for the purpose of conversion of
this
Debenture, and shall cause to be mailed to the Holder at its last address as
it
shall appear upon the stock books of the Company, at least twenty (20) calendar
days prior to the applicable record or effective date hereinafter specified,
a
notice stating (x) the date on which a record is to be taken for the purpose
of
such dividend, distribution, redemption, rights or warrants, or if a record
is
not to be taken, the date as of which the holders of the Common Stock of record
to be entitled to such dividend, distributions, redemption, rights or warrants
are to be determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to become
effective or close, and the date as of which it is expected that holders of
the
Common Stock of record shall be entitled to exchange their shares of the Common
Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or share exchange,
provided, that the failure to mail such notice or any defect therein or in
the
mailing thereof shall not affect the validity of the corporate action required
to be specified in such notice. The Holder is entitled to convert this Debenture
during the 20-day calendar period commencing the date of such notice to the
effective date of the event triggering such notice.
(xi) In
case
of any (1) merger or consolidation of the Company or any subsidiary of the
Company with or into another Person, or (2) sale by the Company or any
subsidiary of the Company of more than one-half of the assets of the Company
in
one or a series of related transactions, a Holder shall have the right to (A)
exercise any rights under Section
2(b),
(B)
convert the aggregate amount of this Debenture then outstanding into the shares
of stock and other securities, cash and property receivable upon or deemed
to be
held by holders of Common Stock following such merger, consolidation or sale,
and such Holder shall be entitled upon such event or series of related events
to
receive such amount of securities, cash and property as the shares of Common
Stock into which such aggregate principal amount of this Debenture could have
been converted immediately prior to such merger, consolidation or sales would
have been entitled, or (C) in the case of a merger or consolidation, require
the
surviving entity to issue to the Holder a convertible Debenture with a principal
amount equal to the aggregate principal amount of this Debenture then held
by
such Holder, plus all accrued and unpaid interest and other amounts owing
thereon, which such newly issued convertible Debenture shall have terms
identical (including with respect to conversion) to the terms of this Debenture,
and shall be entitled to all of the rights and privileges of the Holder of
this
Debenture set forth herein and the agreements pursuant to which this Debentures
were issued. In the case of clause (C), the conversion price applicable for
the
newly issued shares of convertible preferred stock or convertible Debentures
shall be based upon the amount of securities, cash and property that each share
of Common Stock would receive in such transaction and the Conversion Price
in
effect immediately prior to the effectiveness or closing date for such
transaction. The terms of any such merger, sale or consolidation shall include
such terms so as to continue to give the Holder the right to receive the
securities, cash and property set forth in this Section upon any conversion
or
redemption following such event. This provision shall similarly apply to
successive such events.
9
(d)Other
Provisions.
(i) The
Company covenants that it will at all times reserve and keep available out
of
its authorized and unissued shares of Common Stock solely for the purpose of
issuance upon conversion of this Debenture and payment of interest on this
Debenture, each as herein provided, free from preemptive rights or any other
actual contingent purchase rights of persons other than the Holder, not less
than such number of shares of the Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares set
forth in this Debenture) be issuable (taking into account the adjustments and
restrictions of Sections
2(b) and 4(c))
upon
the conversion of the outstanding principal amount of this Debenture and payment
of interest hereunder. The Company covenants that all shares of Common Stock
that shall be so issuable shall, upon issue, be duly and validly authorized,
issued and fully paid, nonassessable and, if the Underlying Shares Registration
Statement has been declared effective under the Securities Act, registered
for
public sale in accordance with such Underlying Shares Registration
Statement.
(ii) Upon
a
conversion hereunder the Company shall not be required to issue stock
certificates representing fractions of shares of the Common Stock, but may
if
otherwise permitted, make a cash payment in respect of any final fraction of
a
share based on the Closing Bid Price at such time. If the Company elects not,
or
is unable, to make such a cash payment, the Holder shall be entitled to receive,
in lieu of the final fraction of a share, one whole share of Common
Stock.
(iii) The
issuance of certificates for shares of the Common Stock on conversion of this
Debenture shall be made without charge to the Holder thereof for any documentary
stamp or similar taxes that may be payable in respect of the issue or delivery
of such certificate, provided that the Company shall not be required to pay
any
tax that may be payable in respect of any transfer involved in the issuance
and
delivery of any such certificate upon conversion in a name other than that
of
the Holder of such Debenture so converted and the Company shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that
such
tax has been paid.
(iv) Nothing
herein shall limit a Holder's right to pursue actual damages or declare an
Event
of Default pursuant to Section
2
herein
for the Company 's failure to deliver certificates representing shares of Common
Stock upon conversion within the period specified herein and such Holder shall
have the right to pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief, in each case without the need to post a bond or provide
other
security. The exercise of any such rights shall not prohibit the Holder from
seeking to enforce damages pursuant to any other Section hereof or under
applicable law.
10
(v) In
addition to any other rights available to the Holder, if the Company fails
to
deliver to the Holder such certificate or certificates pursuant to Section
4(a)(i) by
the
fifth (5th)
Trading
Day after the Conversion Date, and if after such fifth (5th)
Trading
Day the Holder purchases (in an open market transaction or otherwise) Common
Stock to deliver in satisfaction of a sale by such Holder of the Underlying
Shares which the Holder anticipated receiving upon such conversion (a
“Buy-In”),
then
the Company shall (A) pay in cash to the Holder (in addition to any remedies
available to or elected by the Holder) the amount by which (x) the Holder's
total purchase price (including brokerage commissions, if any) for the Common
Stock so purchased exceeds (y) the product of (1) the aggregate number of shares
of Common Stock that such Holder anticipated receiving from the conversion
at
issue multiplied by (2) the market price of the Common Stock at the time of
the
sale giving rise to such purchase obligation and (B) at the option of the
Holder, either reissue a Debenture in the principal amount equal to the
principal amount of the attempted conversion or deliver to the Holder the number
of shares of Common Stock that would have been issued had the Company timely
complied with its delivery requirements under Section
4(a)(i).
For
example, if the Holder purchases Common Stock having a total purchase price
of
$11,000 to cover a Buy-In with respect to an attempted conversion of Debentures
with respect to which the market price of the Underlying Shares on the date
of
conversion was a total of $10,000 under clause (A) of the immediately preceding
sentence, the Company shall be required to pay the Holder $1,000. The Holder
shall provide the Company written notice indicating the amounts payable to
the
Holder in respect of the Buy-In.
Section
5.Notices.
Any
notices, consents, waivers or other communications required or permitted to
be
given under the terms hereof must be in writing and will be deemed to have
been
delivered: (i) upon receipt, when delivered personally; (ii) upon receipt,
when
sent by facsimile (provided confirmation of transmission is mechanically or
electronically generated and kept on file by the sending party); or (iii) one
(1) Trading Day after deposit with a nationally recognized overnight delivery
service, in each case properly addressed to the party to receive the same.
The
addresses and facsimile numbers for such communications shall be:
or
at
such other address and/or facsimile number and/or to the attention of such
other
person as the recipient party has specified by written notice given to each
other party three (3) business days prior to the effectiveness of such change.
Written confirmation of receipt (i) given by the recipient of such notice,
consent, waiver or other communication, (ii) mechanically or electronically
generated by the sender's facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or (iii)
provided by a nationally recognized overnight delivery service, shall be
rebuttable evidence of personal service, receipt by facsimile or receipt from
a
nationally recognized overnight delivery service in accordance with clause
(i),
(ii) or (iii) above, respectively.
Section
6.Definitions.
For the
purposes hereof, the following terms shall have the following
meanings:
“Approved
Stock Plan”
means
a
stock option plan that has been approved by the Board of Directors of the
Company prior to the date of the Securities Purchase Agreement, pursuant to
which the Company’s securities may be issued only to any employee, officer or
director for services provided to the Company.
“Business
Day”
means
any day except Saturday, Sunday and any day which shall be a federal legal
holiday in the United States or a day on which banking institutions are
authorized or required by law or other government action to close.
“Change
of Control Transaction”
means
the occurrence of (a) an acquisition after the date hereof by an individual
or
legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the
Exchange Act) of effective control (whether through legal or beneficial
ownership of capital stock of the Company, by contract or otherwise) of in
excess of fifty percent (50%) of the voting securities of the Company (except
that the acquisition of voting securities by the Holder shall not constitute
a
Change of Control Transaction for purposes hereof), (b) a replacement at one
time or over time of more than one-half of the members of the board of directors
of the Company which is not approved by a majority of those individuals who
are
members of the board of directors on the date hereof (or by those individuals
who are serving as members of the board of directors on any date whose
nomination to the board of directors was approved by a majority of the members
of the board of directors who are members on the date hereof), (c) the merger,
consolidation or sale of fifty percent (50%) or more of the assets of the
Company or any subsidiary of the Company in one or a series of related
transactions with or into another entity, or (d) the execution by the Company
of
an agreement to which the Company is a party or by which it is bound, providing
for any of the events set forth above in (a), (b) or (c).
12
“Closing
Bid Price”
means
the price per share in the last reported trade of the Common Stock on a Primary
Market or on the exchange which the Common Stock is then listed as quoted by
Bloomberg, LP.
“Commission”
means
the Securities and Exchange Commission.
“Common
Stock”
means
the common stock, par value $0.00001, of the Company and stock of any other
class into which such shares may hereafter be changed or
reclassified.
“Conversion
Date”
shall
mean the date upon which the Holder gives the Company notice of their intention
to effectuate a conversion of this Debenture into shares of the Company’s Common
Stock as outlined herein.
“Exchange
Act”
means
the Securities Exchange Act of 1934, as amended.
“Excluded
Securities”
means,
(a) shares issued or deemed to have been issued by the Company pursuant to
an
Approved Stock Plan (b) shares of Common Stock issued or deemed to be issued
by
the Company upon the conversion, exchange or exercise of any right, option,
obligation or security outstanding on the date prior to date of the Securities
Purchase Agreement, provided that the terms of such right, option, obligation
or
security are not amended or otherwise modified on or after the date of the
Securities Purchase Agreement, and provided that the conversion price, exchange
price, exercise price or other purchase price is not reduced, adjusted or
otherwise modified and the number of shares of Common Stock issued or issuable
is not increased (whether by operation of, or in accordance with, the relevant
governing documents or otherwise) on or after the date of the Securities
Purchase Agreement, and (c) the shares of Common Stock issued or deemed to
be issued by the Company upon conversion of this Debenture.
“Original
Issue Date”
shall
mean the date of the first issuance of this Debenture regardless of the number
of transfers and regardless of the number of instruments, which may be issued
to
evidence such Debenture.
“Person”
means
a
corporation, an association, a partnership, organization, a business, an
individual, a government or political subdivision thereof or a governmental
agency.
“Securities
Act”
means
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.
“Trading
Day”
means
a
day on which the shares of Common Stock are quoted on the OTC or quoted or
traded on such Primary Market on which the shares of Common Stock are then
quoted or listed; provided, that in the event that the shares of Common Stock
are not listed or quoted, then Trading Day shall mean a Business
Day.
“Transaction
Documents”
wherever used herein, means the Securities Purchase Agreements of April 19,2005; October 17, 2005; and January 29, 2007, and any other agreement executed
or delivered in connection therewith; and all other documents, contracts,
agreements, promissory notes and evidences of indebtedness now or hereafter
existing between the Company and/or its subsidiaries and the Holder, whether
or
not related to the indebtedness evidenced by this Debenture.
13
“Underlying
Shares”
means
the shares of Common Stock issuable upon conversion of this Debenture or as
payment of interest in accordance with the terms hereof.
“Underlying
Shares Registration Statement”
means
a
registration statement meeting the requirements set forth in the Registration
Rights Agreement, covering among other things the resale of the Underlying
Shares and naming the Holder as a “selling stockholder” thereunder.
Section
7. Except
as
expressly provided herein, no provision of this Debenture shall alter or impair
the obligations of the Company, which are absolute and unconditional, to pay
the
principal of, interest and other charges (if any) on, this Debenture at the
time, place, and rate, and in the coin or currency, herein prescribed. This
Debenture is a direct obligation of the Company. This Debenture ranks pari
passu
with all other Debentures now or hereafter issued under the terms set forth
herein. As long as this Debenture is outstanding, the Company shall not and
shall cause their subsidiaries not to, without the consent of the Holder, (i)
amend its certificate of incorporation, bylaws or other charter documents so
as
to adversely affect any rights of the Holder; (ii) repay, repurchase or offer
to
repay, repurchase or otherwise acquire shares of its Common Stock or other
equity securities other than as to the Underlying Shares to the extent permitted
or required under the Transaction Documents; or (iii) enter into any agreement
with respect to any of the foregoing.
Section
8. This
Debenture shall not entitle the Holder to any of the rights of a stockholder
of
the Company, including without limitation, the right to vote, to receive
dividends and other distributions, or to receive any notice of, or to attend,
meetings of stockholders or any other proceedings of the Company, unless and
to
the extent converted into shares of Common Stock in accordance with the terms
hereof.
Section
9. If
this
Debenture is mutilated, lost, stolen or destroyed, the Company shall execute
and
deliver, in exchange and substitution for and upon cancellation of the mutilated
Debenture, or in lieu of or in substitution for a lost, stolen or destroyed
Debenture, a new Debenture for the principal amount of this Debenture so
mutilated, lost, stolen or destroyed but only upon receipt of evidence of such
loss, theft or destruction of such Debenture, and of the ownership hereof,
and
indemnity, if requested, all reasonably satisfactory to the
Company.
Section
10. No
indebtedness of the Company is senior to this Debenture in right of payment,
whether with respect to interest, damages or upon liquidation or dissolution
or
otherwise. Without the Holder’s consent, the Company will not and will not
permit any of their subsidiaries to, directly or indirectly, enter into, create,
incur, assume or suffer to exist any indebtedness of any kind, on or with
respect to any of its property or assets now owned or hereafter acquired or
any
interest therein or any income or profits there from that is senior in any
respect to the obligations of the Company under this Debenture.
Section
11. This
Debenture shall be governed by and construed in accordance with the laws of
the
State of New Jersey, without giving effect to conflicts of laws thereof. Each
of
the parties consents to the jurisdiction of the Superior Courts of the State
of
New Jersey sitting in Hudson County, New Jersey and the U.S. District Court
for the District of New Jersey sitting in Newark, New Jersey in connection
with
any dispute arising under this Debenture and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on
forumnonconveniens
to the
bringing of any such proceeding in such jurisdictions.
14
Section
12. If
the
Company fails to strictly comply with the terms of this Debenture, then the
Company shall reimburse the Holder promptly for all fees, costs and expenses,
including, without limitation, attorneys’ fees and expenses incurred by the
Holder in any action in connection with this Debenture, including, without
limitation, those incurred: (i) during any workout, attempted workout, and/or
in
connection with the rendering of legal advice as to the Holder’s rights,
remedies and obligations, (ii) collecting any sums which become due to the
Holder, (iii) defending or prosecuting any proceeding or any counterclaim to
any
proceeding or appeal; or (iv) the protection, preservation or enforcement of
any
rights or remedies of the Holder.
Section
13. Any
waiver by the Holder of a breach of any provision of this Debenture shall not
operate as or be construed to be a waiver of any other breach of such provision
or of any breach of any other provision of this Debenture. The failure of the
Holder to insist upon strict adherence to any term of this Debenture on one
or
more occasions shall not be considered a waiver or deprive that party of the
right thereafter to insist upon strict adherence to that term or any other
term
of this Debenture. Any waiver must be in writing.
Section
14. If
any
provision of this Debenture is invalid, illegal or unenforceable, the balance
of
this Debenture shall remain in effect, and if any provision is inapplicable
to
any person or circumstance, it shall nevertheless remain applicable to all
other
persons and circumstances. If it shall be found that any interest or other
amount deemed interest due hereunder shall violate applicable laws governing
usury, the applicable rate of interest due hereunder shall automatically be
lowered to equal the maximum permitted rate of interest. The Company covenants
(to the extent that it may lawfully do so) that it shall not at any time insist
upon, plead, or in any manner whatsoever claim or take the benefit or advantage
of, any stay, extension or usury law or other law which would prohibit or
forgive the Company from paying all or any portion of the principal of or
interest on this Debenture as contemplated herein, wherever enacted, now or
at
any time hereafter in force, or which may affect the covenants or the
performance of this indenture, and the Company (to the extent it may lawfully
do
so) hereby expressly waives all benefits or advantage of any such law, and
covenants that it will not, by resort to any such law, hinder, delay or impeded
the execution of any power herein granted to the Holder, but will suffer and
permit the execution of every such as though no such law has been
enacted.
Section
15. Whenever
any payment or other obligation hereunder shall be due on a day other than
a
Business Day, such payment shall be made on the next succeeding Business
Day.
Section
16. This
Debenture is exchangeable for an equal aggregate principal amount of Debentures
of different authorized denominations, as requested by the Holder surrendering
the same. No service charge will be made for such registration of transfer
or
exchange.
15
Section
17. THE
PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT ANY
OF
THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON
OR
ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION
DOCUMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL
OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT
FOR
THE PARTIES’ ACCEPTANCE OF THIS AGREEMENT.
[REMAINDER
OF PAGE INTENTIONLLY LEFT BLANK]
16
IN
WITNESS WHEREOF,
the
Company has caused this Secured Convertible Debenture to be duly executed by
a
duly authorized officer as of the date set forth above.
COMPANY:
FALCON
NATURAL GAS CORP.
By:
Name:
Saul
S. Deutsch
Title:
Chief
Financial Officer
17
EXHIBIT
A
CONVERSION
NOTICE
(To
be executed by the Holder in order to Convert the
Debenture)
TO:
The
undersigned hereby irrevocably elects to convert $of
the
principal amount of the above Debenture into Shares of Common Stock of
FALCON
NATURAL GAS CORP.,
according to the conditions stated therein, as of the Conversion Date written
below.
Conversion
Date:
Amount
to be converted:
$
Conversion
Price:
$
Number
of shares of Common Stock to be issued:
Amount
of Debenture
Unconverted:
$
Please
issue the shares of Common Stock in the following name and to the following
address:
THIS
SECURED DEBENTURE, AND THE SECURITIES INTO WHICH IT IS CONVERTIBLE
(COLLECTIVELY, THE “SECURITIES”),
HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE. THE SECURITIES ARE BEING
OFFERED PURSUANT TO A SAFE HARBOR FROM REGISTRATION UNDER REGULATION D
PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“ACT”).
THE SECURITIES ARE “RESTRICTED”
AND MAY NOT BE OFFERED OR SOLD UNLESS THE SECURITIES ARE REGISTERED UNDER THE
ACT, PURSUANT TO REGULATION D OR PURSUANT TO AVAILABLE EXEMPTIONS FROM THE
REGISTRATION REQUIREMENTS OF THE ACT AND THE COMPANY WILL BE PROVIDED WITH
OPINION OF COUNSEL OR OTHER SUCH INFORMATION AS IT MAY REASONABLY REQUIRE TO
CONFIRM THAT SUCH EXEMPTIONS ARE AVAILABLE. FURTHER HEDGING TRANSACTIONS
INVOLVING THE SECURITIES MAY NOT BE MADE EXCEPT IN COMPLIANCE WITH THE
ACT.
This
Convertible Debenture (the “Debenture”)
is
issued on September 28, 2007 (the “Closing Date”)
by
Falcon
Natural Gas Corporation,
a
Nevada corporation (the “Company”),
to
YA
Global Investments, LP (together
with its permitted successors and assigns, the “Holder”)
pursuant to exemptions from registration
under
the Securities Act of 1933, as amended, and pursuant to that certain Securities
Purchase Agreement dated September 28, 2007 (the “Securities
Purchase Agreement”).
FOR
VALUE RECEIVED,
the
Company hereby promises to pay to the Holder or its successors and assigns
the
principal sum of Six Hundred Fifty Thousand Eight Hundred and Six Dollars
($610,806) together with accrued but unpaid interest on or before January 28,2010 (the “Maturity
Date”)
in
accordance with the following terms:
Section
1.
(a)Interest.
Interest shall accrue on the outstanding principal balance hereof at an annual
rate equal to The Wall Street Journal Prime Rate, as quoted by the print edition
of the United States version of The Wall Street Journal, plus two and
one-quarter percent (2.25%) (“Interest
Rate”).
Interest shall be calculated on the basis of a 365-day year and the actual
number of days elapsed, to the extent permitted by applicable law. Interest
hereunder shall be paid on the first day of each calendar quarter (i.e., January
1, April 1, July 1, and October 1), and shall be payable in arrears (or sooner
as otherwise provided herein) to the Holder or its assignee in whose name this
Debenture is registered on the records of the Company regarding registration
and
transfers of Debentures in cash.
1
(b)Security.
The
Debenture is
secured by (i) a security interest in all of the assets of the Company and
of
each of the Company's subsidiaries as evidenced by the Amended and Restated
Security Agreement of even date herewith (the “Security
Agreement”),
and
(ii) a lien on certain equipment and real estate in the States of Louisiana,
Texas, and Oklahoma as evidenced by the mortgage of even date herewith, covering
the property or properties more fully described therein (the “Real
Estate Security”
and
together with the Security Agreement collectively the “Security
Documents”).
The
Company is also providing the Holder with a
Conveyance of Overriding Royalty Interest, dated of even date herewith (the
“ORRI
Conveyance”).
(c)Repayment
of Principal.
Commencing
on January 1, 2008, and continuing on the first date of each calendar month
thereafter, the Company shall make a cash principal payment to the Holder in
an
amount equal to fifty percent (50%) of the Company’s Net Revenues for the
preceding calendar month. For the purposes of this paragraph, the term “Net
Revenues” shall mean gross revenues less expenses of the Company, reasonably and
actually incurred, in connection with the operations of wells or properties
in
which the Company has an interest. Such expenses shall not include corporate
overhead or other selling, general, or administrative expenses.
(d)Use
of
Proceeds.
The
proceeds to the Company in exchange for the Company’s issuance of this Debenture
shall be immediately disbursed to Petrogulf Corporation for specific drilling
expenses as set forth in the First Amended Full and Final Release, Settlement,
and Indemnity Agreement dated September 7, 2007 and agreements and
understandings ancillary thereto.
Section
2.Events
of Default.
(a) An
“Event
of Default”,
wherever used herein, means any one of the following events (whatever the reason
and whether it shall be voluntary or involuntary or effected by operation of
law
or pursuant to any judgment, decree or order of any court, or any order, rule
or
regulation of any administrative or governmental body):
(i) Any
default in the payment of the principal of, interest on or other charges in
respect of this Debenture, free of any claim of subordination, as and when
the
same shall become due and payable (whether on Interest Payment Date, Principal
Payment Date, a Conversion Date or the Maturity Date or by acceleration or
otherwise (collectively, the “Payment
Date”))
which
is not cured within 15 days of the applicable Payment Date;
(ii) The
Company or any subsidiary of the Company shall commence, or there shall be
commenced against the Company or any subsidiary of the Company under any
applicable bankruptcy or insolvency laws as now or hereafter in effect or any
successor thereto, or the Company or any subsidiary of the Company commences
any
other proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of
any
jurisdiction whether now or hereafter in effect relating to the Company or
any
subsidiary of the Company or there is commenced against the Company or any
subsidiary of the Company any such bankruptcy, insolvency or other proceeding
which remains undismissed for a period of 61 days; or the Company or any
subsidiary of the Company is adjudicated insolvent or bankrupt; or any order
of
relief or other order approving any such case or proceeding is entered; or
the
Company or any subsidiary of the Company suffers any appointment of any
custodian, private or court appointed receiver or the like for it or any
substantial part of its property which continues undischarged or unstayed for
a
period of sixty one (61) days; or the Company or any subsidiary of the Company
makes a general assignment for the benefit of creditors; or the Company or
any
subsidiary of the Company shall fail to pay, or shall state that it is unable
to
pay, or shall be unable to pay, its debts generally as they become due; or
the
Company or any subsidiary of the Company shall call a meeting of its creditors
with a view to arranging a composition, adjustment or restructuring of its
debts; or the Company or any subsidiary of the Company shall by any act or
failure to act expressly indicate its consent to, approval of or acquiescence
in
any of the foregoing; or any corporate or other action is taken by the Company
or any subsidiary of the Company for the purpose of effecting any of the
foregoing;
2
(iii) The
Company or any subsidiary of the Company shall default in any of its obligations
under any other debenture or any mortgage, credit agreement or other facility,
indenture agreement, factoring agreement or other instrument under which there
may be issued, or by which there may be secured or evidenced any indebtedness
for borrowed money or money due under any long term leasing or factoring
arrangement of the Company or any subsidiary of the Company in an amount
exceeding $100,000, whether such indebtedness now exists or shall hereafter
be
created and such default shall result in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise become
due and payable;
(iv) The
Common Stock shall cease to be quoted for trading or listing for trading on
any
of (a) the American Stock Exchange, (b) New York Stock Exchange, (c) the Nasdaq
National Market, (d) the Nasdaq Capital Market, or (e) the Nasdaq OTC Bulletin
Board (“OTC”)
(each,
a “Primary
Market”)
and
shall not again be quoted or listed for trading on any Primary Market within
five (5) Trading Days of such delisting;
(v) The
Company or any subsidiary of the Company shall be a party to any Change of
Control Transaction (as defined in Section
6);
(vi) The
Company shall fail for any reason to deliver Common Stock certificates to the
Holder prior to the fifth (5th)
Trading
Day after a Conversion Date or the Company shall provide notice to the Holder,
including by way of public announcement, at any time, of its intention not
to
comply with requests for conversions of this Debenture in accordance with the
terms hereof.
(vii) The
Company shall fail to observe or perform any other covenant, agreement or
warranty contained in, or otherwise commit any breach or default of any
provision of this Debenture (except as may be covered by Section
2(a)(i)
hereof)
which is not cured by the Holder within 15 days of the Holder delivering written
notice to the Company specifying the failure, breach or default or any
Transaction Document (as defined in Section
6)
which
is not cured within the time prescribed therein, if any;
3
(b) During
the time that any portion of this Debenture is outstanding, if any Event of
Default has occurred, the full principal amount of this Debenture, together
with
interest and other amounts owing in respect thereof, to the date of acceleration
shall become at the Holder's election, immediately due and payable in cash,
provided
however,
the
Holder may request (but shall have no obligation to request) payment of such
amounts in Common Stock of the Company. If an Event of Default occurs and
remains uncured, the Conversion Price shall be reduced to the lower of twenty
percent (20%) of the VWAP on the Closing Date or twenty-five percent (25%)
of
the Market Conversion Price. Furthermore, in addition to any other remedies,
the
Holder shall have the right (but not the obligation) to convert this Debenture
at any time after (x) an Event of Default or (y) the Maturity Date at the
Conversion Price then in-effect. The Holder need not provide and the Company
hereby waives any presentment, demand, protest or other notice of any kind,
and
the Holder may immediately and without expiration of any grace period enforce
any and all of its rights and remedies hereunder and all other remedies
available to it under applicable law. Such declaration may be rescinded and
annulled by Holder at any time prior to payment hereunder. No such rescission
or
annulment shall affect any subsequent Event of Default or impair any right
consequent thereon. Upon an Event of Default, notwithstanding any other
provision of this Debenture or any Transaction Document, the Holder shall have
no obligation to comply with or adhere to any limitations, if any, on the
conversion of this Debenture or the sale of the Underlying Shares.
Section
3.Redemptions.
The
Company at its option shall have the right to redeem a portion or all amounts
outstanding under this Debenture prior to the Maturity Date provided
that
as of
the date of the Holder’s receipt of a Redemption Notice (as defined herein) (i)
the Closing Bid Price of the of the Common Stock, as reported by Bloomberg,
LP,
is less than the Fixed Conversion Price, (ii) at least the number of Conversion
Shares representing all principal and accrued interest then due and payable
by
the Company pursuant to the Debenture are registered for sale under the
Securities Act of 1933, and (iii) no Event of Default has occurred. The Company
shall pay an amount equal to the principal amount being redeemed plus a
redemption premium (“Redemption
Premium”)
equal
to twenty percent (20%) of the principal amount being redeemed, and accrued
interest, (collectively referred to as the “Redemption
Amount”).
In
order to make a redemption, the Company shall first provide written notice
to
the Holder of its intention to make a redemption (the “Redemption
Notice”)
setting forth the amount of principal it desires to redeem. After receipt of
the
Redemption Notice the Holder shall have three (3) business days to elect to
convert all or any portion of this Debenture, subject to the limitations set
forth in Section
4(b).
On the
fourth (4th)
business day after the Redemption Notice, the Company shall deliver to the
Holder the Redemption Amount with respect to the principal amount redeemed
after
giving effect to conversions effected during the three (3) business day period.
Section
4.Conversion.
(a)Conversion
at Option of Holder.
(i) This
Debenture shall be convertible into shares of Common Stock (“Conversion
Shares”)
at the
option of the Holder, in whole or in part at any time and from time to time,
after the Original Issue Date (as defined in Section
6)
(subject to the limitations on conversion set forth in Section
4(b)
hereof).
The number of shares of Common Stock issuable upon a conversion hereunder equals
the quotient obtained by dividing (x) the outstanding amount of this Debenture
to be converted by (y) the Conversion Price (as defined in Section
4(c)(i)).
The
Company shall deliver Common Stock certificates to the Holder prior to the
Fifth
(5th)
Trading
Day after a Conversion Date.
4
(ii) Notwithstanding
anything to the contrary contained herein, if on any Conversion Date: (1) the
number of shares of Common Stock at the time authorized, unissued and unreserved
for all purposes, or held as treasury stock, is insufficient to pay principal
and interest hereunder in shares of Common Stock; (2) the Common Stock is not
listed or quoted for trading on the OTC or on a Subsequent Market; (3) the
Company has failed to timely satisfy its conversion; or (4) the issuance of
such
shares of Common Stock would result in a violation of Section
4(b),
then,
at the option of the Holder, the Company, in lieu of delivering shares of Common
Stock pursuant to Section
4(a)(i),
shall
deliver, within three (3) Trading Days of each applicable Conversion Date,
an
amount in cash equal to the product of the outstanding principal amount to
be
converted plus any interest due therein divided by the Conversion Price, chosen
by the Holder, and multiplied by the highest closing price of the stock from
date of the conversion notice until the date that such cash payment is
made.
Further,
if the Company shall not have delivered any cash due in respect of conversion
of
this Debenture or as payment of interest thereon by the fifth (5th)
Trading
Day after the Conversion Date, the Holder may, by notice to the Company, require
the Company to issue shares of Common Stock pursuant to Section
4(a),
except
that for such purpose the Conversion Price applicable thereto shall be the
lesser of the Conversion Price on the Conversion Date and the Conversion Price
on the date of such Holder demand. Any such shares will be subject to the
provisions of this Section.
(iii) The
Holder shall effect conversions by delivering to the Company a completed notice
in the form attached hereto as Exhibit A (a “Conversion
Notice”).
The
date on which a Conversion Notice is delivered is the “Conversion
Date.”
Unless
the Holder is converting the entire principal amount outstanding under this
Debenture, the Holder is not required to physically surrender this Debenture
to
the Company in order to effect conversions. Conversions hereunder shall have
the
effect of lowering the outstanding principal amount of this Debenture plus
all
accrued and unpaid interest thereon in an amount equal to the applicable
conversion. The Holder and the Company shall maintain records showing the
principal amount converted and the date of such conversions. In the event of
any
dispute or discrepancy, the records of the Holder shall be controlling and
determinative in the absence of manifest error.
(b)Certain
Conversion Restrictions.
A
Holder may not convert this Debenture or receive shares of Common Stock as
payment of interest hereunder to the extent such conversion or receipt of such
interest payment would result in the Holder, together with any affiliate
thereof, beneficially owning (as determined in accordance with Section 13(d)
of
the Exchange Act and the rules promulgated thereunder) in excess of 4.99% of
the
then issued and outstanding shares of Common Stock, including shares issuable
upon conversion of, and payment of interest on, this Debenture held by such
Holder after application of this Section. Since the Holder will not be obligated
to report to the Company the number of shares of Common Stock it may hold at
the
time of a conversion hereunder, unless the conversion at issue would result
in
the issuance of shares of Common Stock in excess of 4.99% of the then
outstanding shares of Common Stock without regard to any other shares which
may
be beneficially owned by the Holder or an affiliate thereof, the Holder shall
have the authority and obligation to determine whether the restriction contained
in this Section will limit any particular conversion hereunder and to the extent
that the Holder determines that the limitation contained in this Section
applies, the determination of which portion of the principal amount of this
Debenture is convertible shall be the responsibility and obligation of the
Holder. If the Holder has delivered a Conversion Notice for a principal amount
of this Debenture that, without regard to any other shares that the Holder
or
its affiliates may beneficially own, would result in the issuance in excess
of
the permitted amount hereunder, the Company shall notify the Holder of this
fact
and shall honor the conversion for the maximum principal amount permitted to
be
converted on such Conversion Date in accordance with the periods described
in
Section
4(a)(i)
and, at
the option of the Holder, either retain any principal amount tendered for
conversion in excess of the permitted amount hereunder for future conversions
or
return such excess principal amount to the Holder. The provisions of this
Section may be waived by a Holder (but only as to itself and not to any other
Holder) upon not less than 65 days prior notice to the Company. Other Holders
shall be unaffected by any such waiver.
5
(c)Conversion
Price and Adjustments to Conversion Price.
(i) The
conversion price in effect on any Conversion Date shall be, at the sole option
of the Holder, equal to either (a) $0.02 (the “Fixed
Conversion Price”)
or (b)
eighty percent (80%) of the lowest Volume Weighted Average Price
(“VWAP”)
of the
Common Stock during the five (5) trading days immediately preceding the
Conversion Date as quoted by Bloomberg, LP (the “Market
Conversion Price”).
The
Fixed Conversion Price and the Market Conversion Price are collectively referred
to as the “Conversion
Price.”
The
Conversion Price may be adjusted pursuant to the other terms of this Debenture.
Notwithstanding the restriction set forth in Section
4(a)(ii)
the
Holder shall have the absolute right to convert any or all of this Debenture
at
the Fixed Conversion Price free of such restriction.
(ii) If
the
Company, at any time while this Debenture is outstanding, shall (a) pay a
stock dividend or otherwise make a distribution or distributions on shares
of
its Common Stock or any other equity or equity equivalent securities payable
in
shares of Common Stock, (b) subdivide outstanding shares of Common Stock into
a
larger number of shares, (c) combine (including by way of reverse stock split)
outstanding shares of Common Stock into a smaller number of shares, or (d)
issue
by reclassification of shares of the Common Stock any shares of capital stock
of
the Company, then the Fixed Conversion Price shall be multiplied by a fraction
of which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of Common Stock outstanding after
such
event. Any adjustment made pursuant to this Section shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
re-classification.
(iii) If
the
Company, at any time while this Debenture is outstanding, shall issue rights,
options or warrans to all holders of Common Stock (and not to the Holder)
entitling them to subscribe for or purchase shares of Common Stock at a price
per share less than the Fixed Conversion Price, then the Fixed Conversion Price
shall be multiplied by a fraction, of which the denominator shall be the number
of shares of the Common Stock (excluding treasury shares, if any) outstanding
on
the date of issuance of such rights or warrants (plus the number of additional
shares of Common Stock offered for subscription or purchase), and of which
the
numerator shall be the number of shares of the Common Stock (excluding treasury
shares, if any) outstanding on the date of issuance of such rights or warrants,
plus the number of shares which the aggregate offering price of the total number
of shares so offered would purchase at the Fixed Conversion Price. Such
adjustment shall be made whenever such rights or warrants are issued, and shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such rights, options or warrants. However,
upon
the expiration of any such right, option or warrant to purchase shares of the
Common Stock the issuance of which resulted in an adjustment in the Fixed
Conversion Price pursuant to this Section, if any such right, option or warrant
shall expire and shall not have been exercised, the Fixed Conversion Price
shall
immediately upon such expiration be recomputed and effective immediately upon
such expiration be increased to the price which it would have been (but
reflecting any other adjustments in the Fixed Conversion Price made pursuant
to
the provisions of this Section after the issuance of such rights or warrants)
had the adjustment of the Fixed Conversion Price made upon the issuance of
such
rights, options or warrants been made on the basis of offering for subscription
or purchase only that number of shares of the Common Stock actually purchased
upon the exercise of such rights, options or warrants actually
exercised.
6
(iv) If
the
Company or any subsidiary thereof, as applicable, at any time while this
Debenture is outstanding, shall issue shares of Common Stock or rights,
warrants, options or other securities or debt that are convertible into or
exchangeable for shares of Common Stock (“Common
Stock Equivalents”)
entitling any Person to acquire shares of Common Stock, at a price per share
less than the Fixed Conversion Price (if the holder of the Common Stock or
Common Stock Equivalent so issued shall at any time, whether by operation of
purchase price adjustments, reset provisions, floating conversion, exercise
or
exchange prices or otherwise, or due to warrants, options or rights per share
which is issued in connection with such issuance, be entitled to receive shares
of Common Stock at a price per share which is less than the Fixed Conversion
Price, such issuance shall be deemed to have occurred for less than the Fixed
Conversion Price), then, at the sole option of the Holder, the Fixed Conversion
Price shall be adjusted to mirror the conversion, exchange or purchase price
for
such Common Stock or Common Stock Equivalents (including any reset provisions
thereof) at issue. Such adjustment shall be made whenever such Common Stock
or
Common Stock Equivalents are issued. The Company shall notify the Holder in
writing, no later than one (1) business day following the issuance of any Common
Stock or Common Stock Equivalent subject to this Section, indicating therein
the
applicable issuance price, or of applicable reset price, exchange price,
conversion price and other pricing terms. No adjustment under this Section
shall
be made as a result of issuances and exercises of options to purchase shares
of
Common Stock issued for compensatory purposes pursuant to any of the Company's
stock option or stock purchase plans.
(v) If
the
Company, at any time while this Debenture is outstanding, shall distribute
to
all holders of Common Stock (and not to the Holder) evidences of its
indebtedness or assets or rights or warrants to subscribe for or purchase any
security, then in each such case the Fixed Conversion Price at which this
Debenture shall thereafter be convertible shall be determined by multiplying
the
Fixed Conversion Price in effect immediately prior to the record date fixed
for
determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the Closing Bid Price determined
as
of the record date mentioned above, and of which the numerator shall be such
Closing Bid Price on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of the Common Stock as
determined by the Board of Directors in good faith. In either case the
adjustments shall be described in a statement provided to the Holder of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
7
(vi) In
case
of any reclassification of the Common Stock or any compulsory share exchange
pursuant to which the Common Stock is converted into other securities, cash
or
property, the Holder shall have the right thereafter to, at its option, (A)
convert the then outstanding principal amount, together with all accrued but
unpaid interest and any other amounts then owing hereunder in respect of this
Debenture into the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of the Common Stock following
such reclassification or share exchange, and the Holder of this Debenture shall
be entitled upon such event to receive such amount of securities, cash or
property as the shares of the Common Stock of the Company into which the then
outstanding principal amount, together with all accrued but unpaid interest
and
any other amounts then owing hereunder in respect of this Debenture could have
been converted immediately prior to such reclassification or share exchange
would have been entitled, or (B) require the Company to prepay the outstanding
principal amount of this Debenture, plus all interest and other amounts due
and
payable thereon. The entire prepayment price shall be paid in cash. This
provision shall similarly apply to successive reclassifications or share
exchanges.
(vii) The
Company shall at all times reserve and keep available out of its authorized
Common Stock the full number of shares of Common Stock issuable upon conversion
of all outstanding amounts under this Debenture; and within three (3) Business
Days following the receipt by the Company of a Holder's notice that such minimum
number of Underlying Shares is not so reserved, the Company shall promptly
reserve a sufficient number of shares of Common Stock to comply with such
requirement.
(viii) All
calculations under this Section
4
shall be
rounded to the nearest $0.0001 or whole share.
(ix) Whenever
the Conversion Price is adjusted pursuant to Section
4
hereof,
the Company shall promptly mail to the Holder a notice setting forth the
Conversion Price after such adjustment and setting forth a brief statement
of
the facts requiring such adjustment.
(x) If
(A)
the Company shall declare a dividend (or any other distribution) on the Common
Stock; (B) the Company shall declare a special nonrecurring cash dividend on
or
a redemption of the Common Stock; (C) the Company shall authorize the granting
to all holders of the Common Stock rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any rights; (D) the
approval of any stockholders of the Company shall be required in connection
with
any reclassification of the Common Stock, any consolidation or merger to which
the Company is a party, any sale or transfer of all or substantially all of
the
assets of the Company, of any compulsory share exchange whereby the Common
Stock
is converted into other securities, cash or property; or (E) the Company shall
authorize the voluntary or involuntary dissolution, liquidation or winding
up of
the affairs of the Company; then, in each case, the Company shall cause to
be
filed at each office or agency maintained for the purpose of conversion of
this
Debenture, and shall cause to be mailed to the Holder at its last address as
it
shall appear upon the stock books of the Company, at least twenty (20) calendar
days prior to the applicable record or effective date hereinafter specified,
a
notice stating (x) the date on which a record is to be taken for the purpose
of
such dividend, distribution, redemption, rights or warrants, or if a record
is
not to be taken, the date as of which the holders of the Common Stock of record
to be entitled to such dividend, distributions, redemption, rights or warrants
are to be determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to become
effective or close, and the date as of which it is expected that holders of
the
Common Stock of record shall be entitled to exchange their shares of the Common
Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or share exchange,
provided, that the failure to mail such notice or any defect therein or in
the
mailing thereof shall not affect the validity of the corporate action required
to be specified in such notice. The Holder is entitled to convert this Debenture
during the 20-day calendar period commencing the date of such notice to the
effective date of the event triggering such notice.
8
(xi) In
case
of any (1) merger or consolidation of the Company or any subsidiary of the
Company with or into another Person, or (2) sale by the Company or any
subsidiary of the Company of more than one-half of the assets of the Company
in
one or a series of related transactions, a Holder shall have the right to (A)
exercise any rights under Section
2(b),
(B)
convert the aggregate amount of this Debenture then outstanding into the shares
of stock and other securities, cash and property receivable upon or deemed
to be
held by holders of Common Stock following such merger, consolidation or sale,
and such Holder shall be entitled upon such event or series of related events
to
receive such amount of securities, cash and property as the shares of Common
Stock into which such aggregate principal amount of this Debenture could have
been converted immediately prior to such merger, consolidation or sales would
have been entitled, or (C) in the case of a merger or consolidation, require
the
surviving entity to issue to the Holder a convertible Debenture with a principal
amount equal to the aggregate principal amount of this Debenture then held
by
such Holder, plus all accrued and unpaid interest and other amounts owing
thereon, which such newly issued convertible Debenture shall have terms
identical (including with respect to conversion) to the terms of this Debenture,
and shall be entitled to all of the rights and privileges of the Holder of
this
Debenture set forth herein and the agreements pursuant to which this Debentures
were issued. In the case of clause (C), the conversion price applicable for
the
newly issued shares of convertible preferred stock or convertible Debentures
shall be based upon the amount of securities, cash and property that each share
of Common Stock would receive in such transaction and the Conversion Price
in
effect immediately prior to the effectiveness or closing date for such
transaction. The terms of any such merger, sale or consolidation shall include
such terms so as to continue to give the Holder the right to receive the
securities, cash and property set forth in this Section upon any conversion
or
redemption following such event. This provision shall similarly apply to
successive such events.
9
(d)Other
Provisions.
(i) The
Company covenants that it will at all times reserve and keep available out
of
its authorized and unissued shares of Common Stock solely for the purpose of
issuance upon conversion of this Debenture and payment of interest on this
Debenture, each as herein provided, free from preemptive rights or any other
actual contingent purchase rights of persons other than the Holder, not less
than such number of shares of the Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares set
forth in this Debenture) be issuable (taking into account the adjustments and
restrictions of Sections
2(b) and 4(c))
upon
the conversion of the outstanding principal amount of this Debenture and payment
of interest hereunder. The Company covenants that all shares of Common Stock
that shall be so issuable shall, upon issue, be duly and validly authorized,
issued and fully paid, nonassessable and, if the Underlying Shares Registration
Statement has been declared effective under the Securities Act, registered
for
public sale in accordance with such Underlying Shares Registration
Statement.
(ii) Upon
a
conversion hereunder the Company shall not be required to issue stock
certificates representing fractions of shares of the Common Stock, but may
if
otherwise permitted, make a cash payment in respect of any final fraction of
a
share based on the Closing Bid Price at such time. If the Company elects not,
or
is unable, to make such a cash payment, the Holder shall be entitled to receive,
in lieu of the final fraction of a share, one whole share of Common
Stock.
(iii) The
issuance of certificates for shares of the Common Stock on conversion of this
Debenture shall be made without charge to the Holder thereof for any documentary
stamp or similar taxes that may be payable in respect of the issue or delivery
of such certificate, provided that the Company shall not be required to pay
any
tax that may be payable in respect of any transfer involved in the issuance
and
delivery of any such certificate upon conversion in a name other than that
of
the Holder of such Debenture so converted and the Company shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that
such
tax has been paid.
(iv) Nothing
herein shall limit a Holder's right to pursue actual damages or declare an
Event
of Default pursuant to Section
2
herein
for the Company 's failure to deliver certificates representing shares of Common
Stock upon conversion within the period specified herein and such Holder shall
have the right to pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief, in each case without the need to post a bond or provide
other
security. The exercise of any such rights shall not prohibit the Holder from
seeking to enforce damages pursuant to any other Section hereof or under
applicable law.
(v) In
addition to any other rights available to the Holder, if the Company fails
to
deliver to the Holder such certificate or certificates pursuant to Section
4(a)(i) by
the
fifth (5th)
Trading
Day after the Conversion Date, and if after such fifth (5th)
Trading
Day the Holder purchases (in an open market transaction or otherwise) Common
Stock to deliver in satisfaction of a sale by such Holder of the Underlying
Shares which the Holder anticipated receiving upon such conversion (a
“Buy-In”),
then
the Company shall (A) pay in cash to the Holder (in addition to any remedies
available to or elected by the Holder) the amount by which (x) the Holder's
total purchase price (including brokerage commissions, if any) for the Common
Stock so purchased exceeds (y) the product of (1) the aggregate number of shares
of Common Stock that such Holder anticipated receiving from the conversion
at
issue multiplied by (2) the market price of the Common Stock at the time of
the
sale giving rise to such purchase obligation and (B) at the option of the
Holder, either reissue a Debenture in the principal amount equal to the
principal amount of the attempted conversion or deliver to the Holder the number
of shares of Common Stock that would have been issued had the Company timely
complied with its delivery requirements under Section
4(a)(i).
For
example, if the Holder purchases Common Stock having a total purchase price
of
$11,000 to cover a Buy-In with respect to an attempted conversion of Debentures
with respect to which the market price of the Underlying Shares on the date
of
conversion was a total of $10,000 under clause (A) of the immediately preceding
sentence, the Company shall be required to pay the Holder $1,000. The Holder
shall provide the Company written notice indicating the amounts payable to
the
Holder in respect of the Buy-In.
10
Section
5.
Notices.
Any
notices, consents, waivers or other communications required or permitted to
be
given under the terms hereof must be in writing and will be deemed to have
been
delivered: (i) upon receipt, when delivered personally; (ii) upon receipt,
when
sent by facsimile (provided confirmation of transmission is mechanically or
electronically generated and kept on file by the sending party); or (iii) one
(1) Trading Day after deposit with a nationally recognized overnight delivery
service, in each case properly addressed to the party to receive the same.
The
addresses and facsimile numbers for such communications shall be:
or
at
such other address and/or facsimile number and/or to the attention of such
other
person as the recipient party has specified by written notice given to each
other party three (3) business days prior to the effectiveness of such change.
Written confirmation of receipt (i) given by the recipient of such notice,
consent, waiver or other communication, (ii) mechanically or electronically
generated by the sender's facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or (iii)
provided by a nationally recognized overnight delivery service, shall be
rebuttable evidence of personal service, receipt by facsimile or receipt from
a
nationally recognized overnight delivery service in accordance with clause
(i),
(ii) or (iii) above, respectively.
Section
6.Definitions.
For the
purposes hereof, the following terms shall have the following
meanings:
“Approved
Stock Plan”
means
a
stock option plan that has been approved by the Board of Directors of the
Company prior to the date of the Securities Purchase Agreement, pursuant to
which the Company’s securities may be issued only to any employee, officer or
director for services provided to the Company.
“Business
Day”
means
any day except Saturday, Sunday and any day which shall be a federal legal
holiday in the United States or a day on which banking institutions are
authorized or required by law or other government action to close.
“Change
of Control Transaction”
means
the occurrence of (a) an acquisition after the date hereof by an individual
or
legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the
Exchange Act) of effective control (whether through legal or beneficial
ownership of capital stock of the Company, by contract or otherwise) of in
excess of fifty percent (50%) of the voting securities of the Company (except
that the acquisition of voting securities by the Holder shall not constitute
a
Change of Control Transaction for purposes hereof), (b) a replacement at one
time or over time of more than one-half of the members of the board of directors
of the Company which is not approved by a majority of those individuals who
are
members of the board of directors on the date hereof (or by those individuals
who are serving as members of the board of directors on any date whose
nomination to the board of directors was approved by a majority of the members
of the board of directors who are members on the date hereof), (c) the merger,
consolidation or sale of fifty percent (50%) or more of the assets of the
Company or any subsidiary of the Company in one or a series of related
transactions with or into another entity, or (d) the execution by the Company
of
an agreement to which the Company is a party or by which it is bound, providing
for any of the events set forth above in (a), (b) or (c).
12
“Closing
Bid Price”
means
the price per share in the last reported trade of the Common Stock on a Primary
Market or on the exchange which the Common Stock is then listed as quoted by
Bloomberg, LP.
“Commission”
means
the Securities and Exchange Commission.
“Common
Stock”
means
the common stock, par value $0.00001, of the Company and stock of any other
class into which such shares may hereafter be changed or
reclassified.
“Conversion
Date”
shall
mean the date upon which the Holder gives the Company notice of their intention
to effectuate a conversion of this Debenture into shares of the Company’s Common
Stock as outlined herein.
“Exchange
Act”
means
the Securities Exchange Act of 1934, as amended.
“Excluded
Securities”
means,
(a) shares issued or deemed to have been issued by the Company pursuant to
an
Approved Stock Plan (b) shares of Common Stock issued or deemed to be issued
by
the Company upon the conversion, exchange or exercise of any right, option,
obligation or security outstanding on the date prior to date of the Securities
Purchase Agreement, provided that the terms of such right, option, obligation
or
security are not amended or otherwise modified on or after the date of the
Securities Purchase Agreement, and provided that the conversion price, exchange
price, exercise price or other purchase price is not reduced, adjusted or
otherwise modified and the number of shares of Common Stock issued or issuable
is not increased (whether by operation of, or in accordance with, the relevant
governing documents or otherwise) on or after the date of the Securities
Purchase Agreement, and (c) the shares of Common Stock issued or deemed to
be issued by the Company upon conversion of this Debenture.
“Original
Issue Date”
shall
mean the date of the first issuance of this Debenture regardless of the number
of transfers and regardless of the number of instruments, which may be issued
to
evidence such Debenture.
“Person”
means
a
corporation, an association, a partnership, organization, a business, an
individual, a government or political subdivision thereof or a governmental
agency.
“Securities
Act”
means
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.
“Trading
Day”
means
a
day on which the shares of Common Stock are quoted on the OTC or quoted or
traded on such Primary Market on which the shares of Common Stock are then
quoted or listed; provided, that in the event that the shares of Common Stock
are not listed or quoted, then Trading Day shall mean a Business
Day.
“Transaction
Documents”
wherever used herein, means the Securities Purchase Agreement or any other
agreement delivered in connection with the Securities Purchase Agreement,
including, without limitation, the Security Documents, the ORRI Conveyance,
the
Irrevocable Transfer Agent Instructions, and the Registration Rights Agreement;
the Securities Purchase Agreements of April 19, 2005; October 17, 2005; and
(on
or about) January 20, 2007 and any other agreement executed or delivered in
connection therewith; and all other documents, contracts, agreements, promissory
notes and evidences of indebtedness now or hereafter existing between the
Company and/or its subsidiaries and the Holder, whether or not related to the
indebtedness evidenced by this Debenture.
13
“Underlying
Shares”
means
the shares of Common Stock issuable upon conversion of this Debenture or as
payment of interest in accordance with the terms hereof.
“Underlying
Shares Registration Statement”
means
a
registration statement meeting the requirements set forth in the Registration
Rights Agreement, covering among other things the resale of the Underlying
Shares and naming the Holder as a “selling stockholder” thereunder.
Section
7. Except
as
expressly provided herein, no provision of this Debenture shall alter or impair
the obligations of the Company, which are absolute and unconditional, to pay
the
principal of, interest and other charges (if any) on, this Debenture at the
time, place, and rate, and in the coin or currency, herein prescribed. This
Debenture is a direct obligation of the Company. This Debenture ranks pari
passu
with all other Debentures now or hereafter issued under the terms set forth
herein. As long as this Debenture is outstanding, the Company shall not and
shall cause their subsidiaries not to, without the consent of the Holder, (i)
amend its certificate of incorporation, bylaws or other charter documents so
as
to adversely affect any rights of the Holder; (ii) repay, repurchase or offer
to
repay, repurchase or otherwise acquire shares of its Common Stock or other
equity securities other than as to the Underlying Shares to the extent permitted
or required under the Transaction Documents; or (iii) enter into any agreement
with respect to any of the foregoing.
Section
8. This
Debenture shall not entitle the Holder to any of the rights of a stockholder
of
the Company, including without limitation, the right to vote, to receive
dividends and other distributions, or to receive any notice of, or to attend,
meetings of stockholders or any other proceedings of the Company, unless and
to
the extent converted into shares of Common Stock in accordance with the terms
hereof.
Section
9. If
this
Debenture is mutilated, lost, stolen or destroyed, the Company shall execute
and
deliver, in exchange and substitution for and upon cancellation of the mutilated
Debenture, or in lieu of or in substitution for a lost, stolen or destroyed
Debenture, a new Debenture for the principal amount of this Debenture so
mutilated, lost, stolen or destroyed but only upon receipt of evidence of such
loss, theft or destruction of such Debenture, and of the ownership hereof,
and
indemnity, if requested, all reasonably satisfactory to the
Company.
Section
10. No
indebtedness of the Company is senior to this Debenture in right of payment,
whether with respect to interest, damages or upon liquidation or dissolution
or
otherwise. Without the Holder’s consent, the Company will not and will not
permit any of their subsidiaries to, directly or indirectly, enter into, create,
incur, assume or suffer to exist any indebtedness of any kind, on or with
respect to any of its property or assets now owned or hereafter acquired or
any
interest therein or any income or profits there from that is senior in any
respect to the obligations of the Company under this Debenture.
14
Section
11. This
Debenture shall be governed by and construed in accordance with the laws of
the
State of New Jersey, without giving effect to conflicts of laws thereof. Each
of
the parties consents to the jurisdiction of the Superior Courts of the State
of
New Jersey sitting in Hudson County, New Jersey and the U.S. District Court
for the District of New Jersey sitting in Newark, New Jersey in connection
with
any dispute arising under this Debenture and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on
forumnonconveniens
to the
bringing of any such proceeding in such jurisdictions.
Section
12. If
the
Company fails to strictly comply with the terms of this Debenture, then the
Company shall reimburse the Holder promptly for all fees, costs and expenses,
including, without limitation, attorneys’ fees and expenses incurred by the
Holder in any action in connection with this Debenture, including, without
limitation, those incurred: (i) during any workout, attempted workout, and/or
in
connection with the rendering of legal advice as to the Holder’s rights,
remedies and obligations, (ii) collecting any sums which become due to the
Holder, (iii) defending or prosecuting any proceeding or any counterclaim to
any
proceeding or appeal; or (iv) the protection, preservation or enforcement of
any
rights or remedies of the Holder.
Section
13. Any
waiver by the Holder of a breach of any provision of this Debenture shall not
operate as or be construed to be a waiver of any other breach of such provision
or of any breach of any other provision of this Debenture. The failure of the
Holder to insist upon strict adherence to any term of this Debenture on one
or
more occasions shall not be considered a waiver or deprive that party of the
right thereafter to insist upon strict adherence to that term or any other
term
of this Debenture. Any waiver must be in writing.
Section
14. If
any
provision of this Debenture is invalid, illegal or unenforceable, the balance
of
this Debenture shall remain in effect, and if any provision is inapplicable
to
any person or circumstance, it shall nevertheless remain applicable to all
other
persons and circumstances. If it shall be found that any interest or other
amount deemed interest due hereunder shall violate applicable laws governing
usury, the applicable rate of interest due hereunder shall automatically be
lowered to equal the maximum permitted rate of interest. The Company covenants
(to the extent that it may lawfully do so) that it shall not at any time insist
upon, plead, or in any manner whatsoever claim or take the benefit or advantage
of, any stay, extension or usury law or other law which would prohibit or
forgive the Company from paying all or any portion of the principal of or
interest on this Debenture as contemplated herein, wherever enacted, now or
at
any time hereafter in force, or which may affect the covenants or the
performance of this indenture, and the Company (to the extent it may lawfully
do
so) hereby expressly waives all benefits or advantage of any such law, and
covenants that it will not, by resort to any such law, hinder, delay or impeded
the execution of any power herein granted to the Holder, but will suffer and
permit the execution of every such as though no such law has been
enacted.
Section
15. Whenever
any payment or other obligation hereunder shall be due on a day other than
a
Business Day, such payment shall be made on the next succeeding Business
Day.
15
Section
16. This
Debenture is exchangeable for an equal aggregate principal amount of Debentures
of different authorized denominations, as requested by the Holder surrendering
the same. No service charge will be made for such registration of transfer
or
exchange.
Section
17. THE
PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT ANY
OF
THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON
OR
ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION
DOCUMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL
OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT
FOR
THE PARTIES’ ACCEPTANCE OF THIS AGREEMENT.
[REMAINDER
OF PAGE INTENTIONLLY LEFT BLANK]
16
IN
WITNESS WHEREOF,
the
Company has caused this Secured Convertible Debenture to be duly executed by
a
duly authorized officer as of the date set forth above.
COMPANY:
FALCON
NATURAL GAS CORP.
By:
Name:
Saul S. Deutsch
Title:
Chief
Financial Officer
17
EXHIBIT
A
CONVERSION
NOTICE
(To
be executed by the Holder in order to Convert the
Debenture)
TO:
The
undersigned hereby irrevocably elects to convert
$_____________________________of
the
principal amount of the above Debenture into Shares of Common Stock of
FALCON
NATURAL GAS CORP.,
according to the conditions stated therein, as of the Conversion Date written
below.
Conversion
Date:
Amount
to be converted:
$
Conversion
Price:
$
Number
of shares of Common Stock to be issued:
Amount
of Debenture
Unconverted:
$
Please
issue the shares of Common Stock in the following name and to the
following address:
THE
SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN A FORM REASONABLY
SATISFACTORY TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT
OR
APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER
SAID
ACT.
Falcon
Natural Gas Corporation, a Nevada corporation (the “Company”),
hereby certifies that, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, YA
Global Investments, L.P.
(the
“Holder”),
the
registered holder hereof or its permitted assigns, is entitled, subject to
the
terms set forth below, to purchase from the Company upon surrender of this
Warrant, at any time or times on or after the date hereof, but not after
11:59 P.M. Eastern Time on the Expiration Date (as defined herein) up to
Two Hundred Ninety Million (290,000,000) fully paid and nonassessable shares
of
Common Stock (as defined herein) of the Company (the “Warrant
Shares”)
at the
exercise price per share provided in Section 1(b) below or as subsequently
adjusted; provided, however, that in no event shall the holder be entitled
to
exercise this Warrant for a number of Warrant Shares in excess of that number
of
Warrant Shares which, upon giving effect to such exercise, would cause the
aggregate number of shares of Common Stock beneficially owned by the holder
and
its affiliates to exceed 4.99% of the outstanding shares of the Common Stock
following such exercise, except within sixty (60) days of the Expiration Date
(however, such restriction may be waived by Holder (but only as to itself and
not to any other holder) upon not less than 65 days prior notice to the
Company). For purposes of the foregoing proviso, the aggregate number of shares
of Common Stock beneficially owned by the holder and its affiliates shall
include the number of shares of Common Stock issuable upon exercise of this
Warrant with respect to which the determination of such proviso is being made,
but shall exclude shares of Common Stock which would be issuable upon
(i) exercise of the remaining, unexercised Warrants beneficially owned by
the holder and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
beneficially owned by the holder and its affiliates (including, without
limitation, any convertible notes or preferred stock) subject to a limitation
on
conversion or exercise analogous to the limitation contained herein. Except
as
set forth in the preceding sentence, for purposes of this paragraph, beneficial
ownership shall be calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended. For purposes of this Warrant, in determining
the number of outstanding shares of Common Stock a holder may rely on the number
of outstanding shares of Common Stock as reflected in (1) the Company’s most
recent Form 10-QSB or Form 10-KSB, as the case may be, (2) a more recent public
announcement by the Company or (3) any other notice by the Company or its
transfer agent setting forth the number of shares of Common Stock outstanding.
Upon the written request of any holder, the Company shall promptly, but in
no
event later than one (1) Business Day following the receipt of such notice,
confirm in writing to any such holder the number of shares of Common Stock
then
outstanding. In any case, the number of outstanding shares of Common Stock
shall
be determined after giving effect to the exercise of Warrants (as defined below)
by such holder and its affiliates since the date as of which such number of
outstanding shares of Common Stock was reported.
Section
1.
(a) This
Warrant is one of the warrants issued pursuant to Section 1(a) of the Securities
Purchase Agreement (“Securities
Purchase Agreement”)
dated
the date hereof between the Company and the Buyers listed on Schedule I thereto
or issued in exchange or substitution thereafter or replacement thereof. Each
Capitalized term used, and not otherwise defined herein, shall have the meaning
ascribed thereto in the Securities Purchase Agreement.
(b)Definitions.
The
following words and terms as used in this Warrant shall have the following
meanings:
(i) “Approved
Stock Plan”
means
a
stock option plan that has been approved by the Board of Directors of the
Company prior to the date of the Securities Purchase Agreement, pursuant to
which the Company’s securities may be issued only to any employee, officer or
director for services provided to the Company.
(ii) “Business
Day”
means
any day other than Saturday, Sunday or other day on which commercial banks
in
the City of New York are authorized or required by law to remain
closed.
(iii) “Closing
Bid Price”
means
the closing bid price of Common Stock as quoted on the Principal Market (as
reported by Bloomberg Financial Markets (“Bloomberg”)
through its “Volume at Price” function).
(iv) “Common
Stock”
means
(i) the Company’s common stock, par value $0.00001 per share, and
(ii) any capital stock into which such Common Stock shall have been changed
or any capital stock resulting from a reclassification of such Common
Stock.
(v) “Event
of Default”
means
an event of default under the Securities Purchase Agreement or the Convertible
Debentures issued in connection therewith.
2
(vi) “Excluded
Securities”
means,
(a) shares issued or deemed to have been issued by the Company pursuant to
an
Approved Stock Plan, (b) shares of Common Stock issued or deemed to be issued
by
the Company upon the conversion, exchange or exercise of any right, option,
obligation or security outstanding on the date prior to date of the Securities
Purchase Agreement, provided that the terms of such right, option, obligation
or
security are not amended or otherwise modified on or after the date of the
Securities Purchase Agreement, and provided that the conversion price, exchange
price, exercise price or other purchase price is not reduced, adjusted or
otherwise modified and the number of shares of Common Stock issued or issuable
is not increased (whether by operation of, or in accordance with, the relevant
governing documents or otherwise) on or after the date of the Securities
Purchase Agreement, and (c) the shares of Common Stock issued or deemed to
be issued by the Company upon conversion of the Convertible Debentures or
exercise of the Warrants.
(ix) “Options”
means
any rights, warrants or options to subscribe for or purchase Common Stock or
Convertible Securities.
(x) “Person”
means
an individual, a limited liability company, a partnership, a joint venture,
a
corporation, a trust, an unincorporated organization and a government or any
department or agency thereof.
(xi) “Primary
Market”
means
on any of (a) the American Stock Exchange, (b) New York Stock Exchange, (c)
the
Nasdaq Global Market, (d) the Nasdaq Capital Market, or (e) the Nasdaq OTC
Bulletin Board (“OTCBB”)
(xii) “Securities
Act”
means
the Securities Act of 1933, as amended.
(xiii) “Warrant”
means
this Warrant and all Warrants issued in exchange, transfer or replacement
thereof.
(xiv) “Warrant
Exercise Price”
shall
be $0.02 or as subsequently adjusted as provided in Section 8 hereof.
(c) Other
Definitional Provisions.
(i) Except
as
otherwise specified herein, all references herein (A) to the Company shall
be deemed to include the Company’s successors and (B) to any applicable law
defined or referred to herein shall be deemed references to such applicable
law
as the same may have been or may be amended or supplemented from time to time.
(ii) When
used
in this Warrant, the words “herein”,
“hereof”,
and
“hereunder”
and
words of similar import, shall refer to this Warrant as a whole and not to
any
provision of this Warrant, and the words “Section”,
“Schedule”,
and
“Exhibit”
shall
refer to Sections of, and Schedules and Exhibits to, this Warrant unless
otherwise specified.
3
(iii) Whenever
the context so requires, the neuter gender includes the masculine or feminine,
and the singular number includes the plural, and vice versa.
Section
2.Exercise
of Warrant.
(a) Subject
to the terms and conditions hereof, this Warrant may be exercised by the holder
hereof then registered on the books of the Company, pro rata as hereinafter
provided, at any time on any Business Day on or after the opening of business
on
such Business Day, commencing with the first day after the date hereof, and
prior to 11:59 P.M. Eastern Time on the Expiration Date (i) by delivery of
a written notice, in the form of the subscription notice attached as
Exhibit
A
hereto
(the “Exercise
Notice”),
of
such holder’s election to exercise this Warrant, which notice shall specify the
number of Warrant Shares to be purchased, payment to the Company of an
amount equal to the Warrant Exercise Price(s) applicable to the Warrant Shares
being purchased, multiplied by the number of Warrant Shares (at the
applicable Warrant Exercise Price) as to which this Warrant is being
exercised (plus any applicable issue or transfer taxes) (the “Aggregate
Exercise Price”)
in
cash or wire transfer of immediately available funds and the surrender of this
Warrant (or an indemnification undertaking with respect to this Warrant in
the
case of its loss, theft or destruction) to a common carrier for overnight
delivery to the Company as soon as practicable following such date
(“Cash
Basis”)
or
(ii) if at the time of exercise, the Warrant Shares are not subject to an
effective registration statement or if an Event of Default has occurred, by
delivering an Exercise Notice and in lieu of making payment of the Aggregate
Exercise Price in cash or wire transfer, elect instead to receive upon such
exercise the “Net Number” of shares of Common Stock determined according to the
following formula (the “Cashless
Exercise”):
Net
Number = (A
x
B) – (A x C)
B
For
purposes of the foregoing formula:
A
= the
total number of Warrant Shares with respect to which this Warrant is then being
exercised.
B
= the
Closing Bid Price of the Common Stock on the date of exercise of the
Warrant.
C
= the
Warrant Exercise Price then in effect for the applicable Warrant Shares at
the
time of such exercise.
In
the
event of any exercise of the rights represented by this Warrant in compliance
with this Section 2, the Company shall on or before the fifth (5th)
Business Day following the date of receipt of the Exercise Notice, the Aggregate
Exercise Price and this Warrant (or an indemnification undertaking with respect
to this Warrant in the case of its loss, theft or destruction) and the receipt
of the representations of the holder specified in Section 6 hereof, if requested
by the Company (the “Exercise
Delivery Documents”),
and
if the Common Stock is DTC eligible, credit such aggregate number of shares
of
Common Stock to which the holder shall be entitled to the holder’s or its
designee’s balance account with The Depository Trust Company; provided, however,
if the holder who submitted the Exercise Notice requested physical delivery
of
any or all of the Warrant Shares, or, if the Common Stock is not DTC eligible
then the Company shall, on or before the fifth (5th)
Business Day following receipt of the Exercise Delivery Documents, issue and
surrender to a common carrier for overnight delivery to the address specified
in
the Exercise Notice, a certificate, registered in the name of the holder, for
the number of shares of Common Stock to which the holder shall be entitled
pursuant to such request. Upon delivery of the Exercise Notice and Aggregate
Exercise Price referred to in clause (i) or (ii) above the holder of this
Warrant shall be deemed for all corporate purposes to have become the holder
of
record of the Warrant Shares with respect to which this Warrant has been
exercised. In the case of a dispute as to the determination of the Warrant
Exercise Price, the Closing Bid Price or the arithmetic calculation of the
Warrant Shares, the Company shall promptly issue to the holder the number of
Warrant Shares that is not disputed and shall submit the disputed determinations
or arithmetic calculations to the holder via facsimile within one (1) Business
Day of receipt of the holder’s Exercise Notice.
4
(b) If
the
holder and the Company are unable to agree upon the determination of the Warrant
Exercise Price or arithmetic calculation of the Warrant Shares within one (1)
day of such disputed determination or arithmetic calculation being submitted
to
the holder, then the Company shall immediately submit via facsimile (i) the
disputed determination of the Warrant Exercise Price or the Closing Bid Price
to
an independent, reputable investment banking firm or (ii) the disputed
arithmetic calculation of the Warrant Shares to its independent, outside
accountant. The Company shall cause the investment banking firm or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and the holder of the results no later than forty-eight
(48) hours from the time it receives the disputed determinations or
calculations. Such investment banking firm’s or accountant’s determination or
calculation, as the case may be, shall be deemed conclusive absent manifest
error.
(c) Unless
the rights represented by this Warrant shall have expired or shall have been
fully exercised, the Company shall, as soon as practicable and in no event
later
than five (5) Business Days after any exercise and at its own expense, issue
a
new Warrant identical in all respects to this Warrant exercised except it shall
represent rights to purchase the number of Warrant Shares purchasable
immediately prior to such exercise under this Warrant exercised, less the number
of Warrant Shares with respect to which such Warrant is exercised.
(d) No
fractional Warrant Shares are to be issued upon any pro rata exercise of this
Warrant, but rather the number of Warrant Shares issued upon such exercise
of
this Warrant shall be rounded up or down to the nearest whole
number.
(e) If
the
Company or its Transfer Agent shall fail for any reason or for no reason to
issue to the holder within ten (10) days of receipt of the Exercise
Delivery Documents, a certificate for the number of Warrant Shares to which
the
holder is entitled or to credit the holder’s balance account with The Depository
Trust Company for such number of Warrant Shares to which the holder is entitled
upon the holder’s exercise of this Warrant, the Company shall, in addition to
any other remedies under this Warrant or otherwise available to such holder,
pay
as additional damages in cash to such holder on each day the issuance of such
certificate for Warrant Shares is not timely effected an amount equal to 0.025%
of the product of (A) the sum of the number of Warrant Shares not issued to
the
holder on a timely basis and to which the holder is entitled, and (B) the
Closing Bid Price of the Common Stock for the trading day immediately preceding
the last possible date which the Company could have issued such Common Stock
to
the holder without violating this Section 2.
5
(f) If
within
ten (10) days after the Company’s receipt of the Exercise Delivery Documents,
the Company fails to deliver a new Warrant to the holder for the number of
Warrant Shares to which such holder is entitled pursuant to Section 2 hereof,
then, in addition to any other available remedies under this Warrant, or
otherwise available to such holder, the Company shall pay as additional damages
in cash to such holder on each day after such tenth (10th)
day
that such delivery of such new Warrant is not timely effected in an amount
equal
to 0.25% of the product of (A) the number of Warrant Shares represented by
the portion of this Warrant which is not being exercised and (B) the
Closing Bid Price of the Common Stock for the trading day immediately preceding
the last possible date which the Company could have issued such Warrant to
the
holder without violating this Section 2.
Section
3.Covenants
as to Common Stock.
The
Company hereby covenants and agrees as follows:
(a) This
Warrant is, and any Warrants issued in substitution for or replacement of this
Warrant will upon issuance be, duly authorized and validly issued.
(b) All
Warrant Shares which may be issued upon the exercise of the rights represented
by this Warrant will, upon issuance, be validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issue thereof.
(c) During
the period within which the rights represented by this Warrant may be exercised,
the Company will at all times have authorized and reserved at least one hundred
percent (100%) of the number of shares of Common Stock needed to provide for
the
exercise of the rights then represented by this Warrant and the par value of
said shares will at all times be less than or equal to the applicable Warrant
Exercise Price. If at any time the Company does not have a sufficient number
of
shares of Common Stock authorized and available, then the Company shall call
and
hold a special meeting of its stockholders within sixty (60) days of that
time for the sole purpose of increasing the number of authorized shares of
Common Stock.
(d) If
at any
time after the date hereof the Company shall file a registration statement,
the
Company shall include the Warrant Shares issuable to the holder, pursuant to
the
terms of this Warrant and shall maintain, so long as any other shares of Common
Stock shall be so listed, such listing of all Warrant Shares from time to time
issuable upon the exercise of this Warrant; and the Company shall so list on
each national securities exchange or automated quotation system, as the case
may
be, and shall maintain such listing of, any other shares of capital stock of
the
Company issuable upon the exercise of this Warrant if and so long as any shares
of the same class shall be listed on such national securities exchange or
automated quotation system.
6
(e) The
Company will not, by amendment of its Articles of Incorporation or through
any
reorganization, transfer of assets, consolidation, merger, dissolution, issue
or
sale of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed by
it
hereunder, but will at all times in good faith assist in the carrying out of
all
the provisions of this Warrant and in the taking of all such action as may
reasonably be requested by the holder of this Warrant in order to protect the
exercise privilege of the holder of this Warrant against dilution or other
impairment, consistent with the tenor and purpose of this Warrant. The Company
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Warrant Exercise Price then in effect,
and (ii) will take all such actions as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this
Warrant.
(f) This
Warrant will be binding upon any entity succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company’s
assets.
Section
4.Taxes.
The
Company shall pay any and all taxes, except any applicable withholding, which
may be payable with respect to the issuance and delivery of Warrant Shares
upon
exercise of this Warrant.
Section
5.Warrant
Holder Not Deemed a Stockholder.
Except
as otherwise specifically provided herein, no holder, as such, of this Warrant
shall be entitled to vote or receive dividends or be deemed the holder of shares
of capital stock of the Company for any purpose, nor shall anything contained
in
this Warrant be construed to confer upon the holder hereof, as such, any of
the
rights of a stockholder of the Company or any right to vote, give or withhold
consent to any corporate action (whether any reorganization, issue of stock,
reclassification of stock, consolidation, merger, conveyance or otherwise),
receive notice of meetings, receive dividends or subscription rights, or
otherwise, prior to the issuance to the holder of this Warrant of the Warrant
Shares which he or she is then entitled to receive upon the due exercise of
this
Warrant. In addition, nothing contained in this Warrant shall be construed
as
imposing any liabilities on such holder to purchase any securities (upon
exercise of this Warrant or otherwise) or as a stockholder of the Company,
whether such liabilities are asserted by the Company or by creditors of the
Company. Notwithstanding this Section 5, the Company will provide the holder
of
this Warrant with copies of the same notices and other information given to
the
stockholders of the Company generally, contemporaneously with the giving thereof
to the stockholders.
Section
6.Representations
of Holder.
The
holder of this Warrant, by the acceptance hereof, represents that it is
acquiring this Warrant and the Warrant Shares for its own account for investment
only and not with a view towards, or for resale in connection with, the public
sale or distribution of this Warrant or the Warrant Shares, except pursuant
to
sales registered or exempted under the Securities Act; provided, however, that
by making the representations herein, the holder does not agree to hold this
Warrant or any of the Warrant Shares for any minimum or other specific term
and
reserves the right to dispose of this Warrant and the Warrant Shares at any
time
in accordance with or pursuant to a registration statement or an exemption
under
the Securities Act. The holder of this Warrant further represents, by acceptance
hereof, that, as of this date, such holder is an “accredited investor” as such
term is defined in Rule 501(a)(1) of Regulation D promulgated by the
Securities and Exchange Commission under the Securities Act (an “Accredited
Investor”).
Upon
exercise of this Warrant the holder shall, if requested by the Company, confirm
in writing, in a form satisfactory to the Company, that the Warrant Shares
so
purchased are being acquired solely for the holder’s own account and not as a
nominee for any other party, for investment, and not with a view toward
distribution or resale and that such holder is an Accredited Investor. If such
holder cannot make such representations because they would be factually
incorrect, it shall be a condition to such holder’s exercise of this Warrant
that the Company receive such other representations as the Company considers
reasonably necessary to assure the Company that the issuance of its securities
upon exercise of this Warrant shall not violate any United States or state
securities laws.
7
Section
7.Ownership
and Transfer.
(a) The
Company shall maintain at its principal executive offices (or such other office
or agency of the Company as it may designate by notice to the holder hereof),
a
register for this Warrant, in which the Company shall record the name and
address of the person in whose name this Warrant has been issued, as well as
the
name and address of each transferee. The Company may treat the person in whose
name any Warrant is registered on the register as the owner and holder thereof
for all purposes, notwithstanding any notice to the contrary, but in all events
recognizing any transfers made in accordance with the terms of this
Warrant.
Section
8.Adjustment
of Warrant Exercise Price and Number of Shares.
The
Warrant Exercise Price and the number of shares of Common Stock issuable upon
exercise of this Warrant shall be adjusted from time to time as
follows:
(a)Adjustment
of Warrant Exercise Price and Number of Shares upon Issuance of Common
Stock.
If and
whenever on or after the Issuance Date of this Warrant, the Company issues
or
sells, or is deemed to have issued or sold, any shares of Common
Stock (other than Excluded Securities) for a consideration per share less
than a price (the “Applicable
Price”)
equal
to the Warrant Exercise Price in effect immediately prior to such issuance
or
sale, then immediately after such issue or sale the Warrant Exercise Price
then
in effect shall be reduced to an amount equal to such consideration per share.
Upon each such adjustment of the Warrant Exercise Price hereunder, the number
of
Warrant Shares issuable upon exercise of this Warrant shall be adjusted to
the
number of shares determined by multiplying the Warrant Exercise Price in effect
immediately prior to such adjustment by the number of Warrant Shares issuable
upon exercise of this Warrant immediately prior to such adjustment and dividing
the product thereof by the Warrant Exercise Price resulting from such
adjustment.
(b)Effect
on Warrant Exercise Price of Certain Events.
For
purposes of determining the adjusted Warrant Exercise Price under Section 8(a)
above, the following shall be applicable:
(i)Issuance
of Options.
If
after the date hereof, the Company in any manner grants any Options and the
lowest price per share for which one share of Common Stock is issuable upon
the
exercise of any such Option or upon conversion or exchange of any convertible
securities issuable upon exercise of any such Option is less than the Applicable
Price, then such share of Common Stock shall be deemed to be outstanding and
to
have been issued and sold by the Company at the time of the granting or sale
of
such Option for such price per share. For purposes of this Section 8(b)(i),
the
lowest price per share for which one share of Common Stock is issuable upon
exercise of such Options or upon conversion or exchange of such Convertible
Securities shall be equal to the sum of the lowest amounts of consideration
(if
any) received or receivable by the Company with respect to any one share of
Common Stock upon the granting or sale of the Option, upon exercise of the
Option or upon conversion or exchange of any convertible security issuable
upon
exercise of such Option. No further adjustment of the Warrant Exercise Price
shall be made upon the actual issuance of such Common Stock or of such
convertible securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange of such convertible
securities.
8
(ii)Issuance
of Convertible Securities.
If the
Company in any manner issues or sells any convertible securities and the lowest
price per share for which one share of Common Stock is issuable upon the
conversion or exchange thereof is less than the Applicable Price, then such
share of Common Stock shall be deemed to be outstanding and to have been issued
and sold by the Company at the time of the issuance or sale of such convertible
securities for such price per share. For the purposes of this
Section 8(b)(ii), the lowest price per share for which one share of Common
Stock is issuable upon such conversion or exchange shall be equal to the sum
of
the lowest amounts of consideration (if any) received or receivable by the
Company with respect to one share of Common Stock upon the issuance or sale
of
the convertible security and upon conversion or exchange of such convertible
security. No further adjustment of the Warrant Exercise Price shall be made
upon
the actual issuance of such Common Stock upon conversion or exchange of such
convertible securities, and if any such issue or sale of such convertible
securities is made upon exercise of any Options for which adjustment of the
Warrant Exercise Price had been or are to be made pursuant to other provisions
of this Section 8(b), no further adjustment of the Warrant Exercise Price shall
be made by reason of such issue or sale.
(iii)Change
in Option Price or Rate of Conversion.
If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion or exchange of any convertible
securities, or the rate at which any convertible securities are convertible
into
or exchangeable for Common Stock changes at any time, the Warrant Exercise
Price
in effect at the time of such change shall be adjusted to the Warrant Exercise
Price which would have been in effect at such time had such Options or
convertible securities provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold and the number of Warrant Shares issuable
upon
exercise of this Warrant shall be correspondingly readjusted. For purposes
of
this Section 8(b)(iii), if the terms of any Option or convertible security
that
was outstanding as of the Issuance Date of this Warrant are changed in the
manner described in the immediately preceding sentence, then such Option or
convertible security and the Common Stock deemed issuable upon exercise,
conversion or exchange thereof shall be deemed to have been issued as of the
date of such change. No adjustment pursuant to this Section 8(b) shall be
made if such adjustment would result in an increase of the Warrant Exercise
Price then in effect.
9
(iv)Calculation
of Consideration Received.
If any
Common Stock, Options or convertible securities are issued or sold or deemed
to
have been issued or sold for cash, the consideration received therefore will
be
deemed to be the net amount received by the Company therefore. If any Common
Stock, Options or convertible securities are issued or sold for a consideration
other than cash, the amount of such consideration received by the Company will
be the fair value of such consideration, except where such consideration
consists of marketable securities, in which case the amount of consideration
received by the Company will be the market price of such securities on the
date
of receipt of such securities. If any Common Stock, Options or convertible
securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity, the amount of
consideration therefore will be deemed to be the fair value of such portion
of
the net assets and business of the non-surviving entity as is attributable
to
such Common Stock, Options or convertible securities, as the case may be. The
fair value of any consideration other than cash or securities will be determined
jointly by the Company and the holders of Warrants representing at least
two-thirds (b) of the Warrant Shares issuable upon exercise of the Warrants
then
outstanding. If such parties are unable to reach agreement within ten (10)
days after the occurrence of an event requiring valuation (the “Valuation
Event”),
the
fair value of such consideration will be determined within five (5) Business
Days after the tenth (10th)
day
following the Valuation Event by an independent, reputable appraiser jointly
selected by the Company and the holders of Warrants representing at least
two-thirds (b) of the Warrant Shares issuable upon exercise of the Warrants
then
outstanding. The determination of such appraiser shall be final and binding
upon
all parties and the fees and expenses of such appraiser shall be borne jointly
by the Company and the holders of Warrants.
(v)Integrated
Transactions.
In case
any Option is issued in connection with the issue or sale of other securities
of
the Company, together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the Options
will be deemed to have been issued for a consideration of $.01.
(vi)Treasury
Shares.
The
number of shares of Common Stock outstanding at any given time does not include
shares owned or held by or for the account of the Company, and the disposition
of any shares so owned or held will be considered an issue or sale of Common
Stock.
(vii)Record
Date.
If the
Company takes a record of the holders of Common Stock for the purpose of
entitling them (1) to receive a dividend or other distribution payable in
Common Stock, Options or in convertible securities or (2) to subscribe for
or purchase Common Stock, Options or convertible securities, then such record
date will be deemed to be the date of the issue or sale of the shares of Common
Stock deemed to have been issued or sold upon the declaration of such dividend
or the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be.
(c)Adjustment
of Warrant Exercise Price upon Subdivision or Combination of Common
Stock.
If the
Company at any time after the date of issuance of this Warrant subdivides (by
any stock split, stock dividend, recapitalization or otherwise) one or more
classes of its outstanding shares of Common Stock into a greater number of
shares, any Warrant Exercise Price in effect immediately prior to such
subdivision will be proportionately reduced and the number of shares of Common
Stock obtainable upon exercise of this Warrant will be proportionately
increased. If the Company at any time after the date of issuance of this Warrant
combines (by combination, reverse stock split or otherwise) one or more classes
of its outstanding shares of Common Stock into a smaller number of shares,
any
Warrant Exercise Price in effect immediately prior to such combination will
be
proportionately increased and the number of Warrant Shares issuable upon
exercise of this Warrant will be proportionately decreased. Any adjustment
under
this Section 8(c) shall become effective at the close of business on the
date the subdivision or combination becomes effective.
10
(d)Distribution
of Assets.
If the
Company shall declare or make any dividend or other distribution of its assets
(or rights to acquire its assets) to holders of Common Stock, by way of return
of capital or otherwise (including, without limitation, any distribution of
cash, stock or other securities, property or options by way of a dividend,
spin
off, reclassification, corporate rearrangement or other similar transaction)
(a
“Distribution”),
at
any time after the issuance of this Warrant, then, in each such
case:
(i) any
Warrant Exercise Price in effect immediately prior to the close of business
on
the record date fixed for the determination of holders of Common Stock
entitledto
receive the Distribution shall be reduced, effective as of the close of business
on such record date, to a price determined by multiplying such Warrant Exercise
Price by a fraction of which (A) the numerator shall be the Closing Sale Price
of the Common Stock on the trading day immediately preceding such record date
minus the value of the Distribution (as determined in good faith by the
Company’s Board of Directors) applicable to one share of Common Stock, and (B)
the denominator shall be the Closing Sale Price of the Common Stock on the
trading day immediately preceding such record date; and
(ii) either
(A) the number of Warrant Shares obtainable upon exercise of this Warrant shall
be increased to a number of shares equal to the number of shares of Common
Stock
obtainable immediately prior to the close of business on the record date fixed
for the determination of holders of Common Stock entitled to receive the
Distribution multiplied by the reciprocal of the fraction set forth in the
immediately preceding clause (i), or (B) in the event that the Distribution
is
of common stock of a company whose common stock is traded on a national
securities exchange or a national automated quotation system, then the holder
of
this Warrant shall receive an additional warrant to purchase Common Stock,
the
terms of which shall be identical to those of this Warrant, except that such
warrant shall be exercisable into the amount of the assets that would have
been
payable to the holder of this Warrant pursuant to the Distribution had the
holder exercised this Warrant immediately prior to such record date and with
an
exercise price equal to the amount by which the exercise price of this Warrant
was decreased with respect to the Distribution pursuant to the terms of the
immediately preceding clause (i).
(e)Certain
Events.
If any
event occurs of the type contemplated by the provisions of this Section 8
but not expressly provided for by such provisions (including, without
limitation, the granting of stock appreciation rights, phantom stock rights
or
other rights with equity features), then the Company’s Board of Directors will
make an appropriate adjustment in the Warrant Exercise Price and the number
of
shares of Common Stock obtainable upon exercise of this Warrant so as to protect
the rights of the holders of the Warrants; provided, except as set forth in
section 8(c),that no such adjustment pursuant to this Section 8(e) will increase
the Warrant Exercise Price or decrease the number of shares of Common Stock
obtainable as otherwise determined pursuant to this Section 8.
11
(f)Voluntary
Adjustments By Company.
The
Company may at any time during the term of this Warrant reduce the then current
Exercise Price to any amount and for any period of time deemed appropriate
by
the Board of Directors of the Company.
(g)Notices.
(i) Immediately
upon any adjustment of the Warrant Exercise Price, the Company will give written
notice thereof to the holder of this Warrant, setting forth in reasonable
detail, and certifying, the calculation of such adjustment.
(ii) The
Company will give written notice to the holder of this Warrant at least ten
(10)
days prior to the date on which the Company closes its books or takes a record
(A) with respect to any dividend or distribution upon the Common Stock,
(B) with respect to any pro rata subscription offer to holders of Common
Stock or (C) for determining rights to vote with respect to any Organic
Change (as defined below), dissolution or liquidation, provided that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to such holder.
(iii) The
Company will also give written notice to the holder of this Warrant at least
ten
(10) days prior to the date on which any Organic Change, dissolution or
liquidation will take place, provided that such information shall be made known
to the public prior to or in conjunction with such notice being provided to
such
holder.
Section
9.Purchase
Rights; Reorganization, Reclassification, Consolidation, Merger or
Sale.
(a) In
addition to any adjustments pursuant to Section 8 above, if at any time the
Company grants, issues or sells any Options, Convertible Securities or rights
to
purchase stock, warrants, securities or other property pro rata to the record
holders of any class of Common Stock (the “Purchase
Rights”),
then
the holder of this Warrant will be entitled to acquire, upon the terms
applicable to such Purchase Rights, the aggregate Purchase Rights which such
holder could have acquired if such holder had held the number of shares of
Common Stock acquirable upon complete exercise of this Warrant immediately
before the date on which a record is taken for the grant, issuance or sale
of
such Purchase Rights, or, if no such record is taken, the date as of which
the
record holders of Common Stock are to be determined for the grant, issue or
sale
of such Purchase Rights.
12
(b) Any
recapitalization, reorganization, reclassification, consolidation, merger,
sale
of all or substantially all of the Company’s assets to another Person or other
transaction in each case which is effected in such a way that holders of Common
Stock are entitled to receive (either directly or upon subsequent liquidation)
stock, securities or assets with respect to or in exchange for Common Stock
is
referred to herein as an “Organic
Change.”
Prior
to the consummation of any (i) sale of all or substantially all of the Company’s
assets to an acquiring Person or (ii) other Organic Change following which
the
Company is not a surviving entity, the Company will secure from the Person
purchasing such assets or the successor resulting from such Organic Change
(in
each case, the “Acquiring
Entity”)
a
written agreement (in form and substance satisfactory to the holders of Warrants
representing at least two-thirds (iii) of the Warrant Shares issuable upon
exercise of the Warrants then outstanding) to deliver to each holder of Warrants
in exchange for such Warrants, a security of the Acquiring Entity evidenced
by a
written instrument substantially similar in form and substance to this Warrant
and satisfactory to the holders of the Warrants (including an adjusted warrant
exercise price equal to the value for the Common Stock reflected by the terms
of
such consolidation, merger or sale, and exercisable for a corresponding number
of shares of Common Stock acquirable and receivable upon exercise of the
Warrants without regard to any limitations on exercise, if the value so
reflected is less than any Applicable Warrant Exercise Price immediately prior
to such consolidation, merger or sale). Prior to the consummation of any other
Organic Change, the Company shall make appropriate provision (in form and
substance satisfactory to the holders of Warrants representing a
majorityof
the
Warrant Shares issuable upon exercise of the Warrants then outstanding) to
insure that each of the holders of the Warrants will thereafter have the right
to acquire and receive in lieu of or in addition to (as the case may be) the
Warrant Shares immediately theretofore issuable and receivable upon the exercise
of such holder’s Warrants (without regard to any limitations on exercise),
such shares of stock, securities or assets that would have been issued or
payable in such Organic Change with respect to or in exchange for the number
of
Warrant Shares which would have been issuable and receivable upon the exercise
of such holder’s Warrant as of the date of such Organic Change (without taking
into account any limitations or restrictions on the exercisability of this
Warrant).
Section
10.Lost,
Stolen, Mutilated or Destroyed Warrant.
If this
Warrant is lost, stolen, mutilated or destroyed, the Company shall promptly,
on
receipt of an indemnification undertaking (or, in the case of a mutilated
Warrant, the Warrant), issue a new Warrant of like denomination and tenor as
this Warrant so lost, stolen, mutilated or destroyed.
Section
11.Notice.
Any
notices, consents, waivers or other communications required or permitted to
be
given under the terms of this Warrant must be in writing and will be deemed
to
have been delivered: (i) upon receipt, when delivered personally;
(ii) upon receipt, when sent by facsimile (provided confirmation of receipt
is received by the sending party transmission is mechanically or electronically
generated and kept on file by the sending party); or (iii) one Business Day
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
If
to a
holder of this Warrant, to it at the address and facsimile number set forth
on
Exhibit C
hereto,
with copies to such holder’s representatives as set forth on Exhibit C,
or at
such other address and facsimile as shall be delivered to the Company upon
the
issuance or transfer of this Warrant. Each party shall provide five days’ prior
written notice to the other party of any change in address or facsimile number.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, facsimile, waiver or other communication, (or (B) provided by a
nationally recognized overnight delivery service shall be rebuttable evidence
of
personal service, receipt by facsimile or receipt from a nationally recognized
overnight delivery service in accordance with clause (i), (ii) or (iii) above,
respectively.
Section
12.Date.
The
date of this Warrant is set forth on page 1 hereof. This Warrant, in all
events, shall be wholly void and of no effect after the close of business on
the
Expiration Date, except that notwithstanding any other provisions hereof, the
provisions of Section 8(b) shall continue in full force and effect after
such date as to any Warrant Shares or other securities issued upon the exercise
of this Warrant.
Section
13.Amendment
and Waiver.
Except
as otherwise provided herein, the provisions of the Warrants may be amended
and
the Company may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if the Company has obtained the
written consent of the holders of Warrants representing at least two-thirds
of
the Warrant Shares issuable upon exercise of the Warrants then outstanding;
provided that, except for Section 8(d), no such action may increase the Warrant
Exercise Price or decrease the number of shares or class of stock obtainable
upon exercise of any Warrant without the written consent of the holder of such
Warrant.
14
Section
14.Descriptive
Headings; Governing Law.
The
descriptive headings of the several sections and paragraphs of this Warrant
are
inserted for convenience only and do not constitute a part of this Warrant.
The
corporate laws of the State of Nevada shall govern all issues concerning the
relative rights of the Company and its stockholders. All other questions
concerning the construction, validity, enforcement and interpretation of this
Agreement shall be governed by the internal laws of the State of New Jersey,
without giving effect to any choice of law or conflict of law provision or
rule
(whether of the State of New Jersey or any other jurisdictions) that would
cause
the application of the laws of any jurisdictions other than the State of New
Jersey. Each party hereby irrevocably submits to the exclusive jurisdiction
of
the state and federal courts sitting in Hudson County and the United States
District Court for the District of New Jersey, for the adjudication of any
dispute hereunder or in connection herewith or therewith, or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that
the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to
such
party at the address for such notices to it under this Agreement and agrees
that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.
Section
15.Waiver
of Jury Trial.
AS
A MATERIAL INDUCEMENT FOR EACH PARTY HERETO TO ENTER INTO THIS WARRANT, THE
PARTIES HERETO HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
RELATED IN ANY WAY TO THIS WARRANT AND/OR ANY AND ALL OF THE OTHER DOCUMENTS
ASSOCIATED WITH THIS TRANSACTION.
REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK
15
IN
WITNESS WHEREOF,
the
Company has caused this Warrant to be signed as of the date first set forth
above.
FALCON
NATURAL GAS CORPORATION
By:
Name: Saul
S. Deutsch
Title:
Chief
Financial Officer
16
EXHIBIT
A TO WARRANT
EXERCISE
NOTICE
TO
BE EXECUTED
BY
THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
FALCON
NATURAL GAS CORPORATION
The
undersigned holder hereby exercises the right to purchase ______________ of
the
shares of Common Stock (“Warrant
Shares”)
of
Falcon Natural Gas Corporation (the “Company”),
evidenced by the attached Warrant (the “Warrant”).
Capitalized terms used herein and not otherwise defined shall have the
respective meanings set forth in the Warrant.
Specify
Method of exercise by check mark:
1.
___ Cash
Exercise
(a)
Payment
of Warrant Exercise Price.
The
holder shall pay the Aggregate Exercise Price of $______________ to the Company
in accordance with the terms of the Warrant.
(b)
Delivery
of Warrant Shares.
The
Company shall deliver to the holder _________
Warrant
Shares in accordance with the terms of the Warrant.
2.
___ Cashless
Exercise
(a)
Payment
of Warrant Exercise Price.
In lieu
of making payment of the Aggregate Exercise Price, the holder elects to receive
upon such exercise the Net Number of shares of Common Stock determined in
accordance with the terms of the Warrant.
(b)
Delivery
of Warrant Shares.
The
Company shall deliver to the holder _________
Warrant
Shares in accordance with the terms of the Warrant.
Date:
_______________ __, ______
Name
of
Registered Holder
By:
Name:
Title:
EXHIBIT
B TO WARRANT
FORM
OF WARRANT POWER
FOR
VALUE RECEIVED,
the
undersigned does hereby assign and transfer to ________________, Federal
Identification No. __________, a warrant to purchase ____________ shares of
the capital stock of Falcon Natural Gas Corporation represented by warrant
certificate no. _____, standing in the name of the undersigned on the books
of said corporation. The undersigned does hereby irrevocably constitute and
appoint ______________, attorney to transfer the warrants of said corporation,
with full power of substitution in the premises.
Dated:
By:
Name:
Title:
B-1
Exhibit
13
SECURITIES
PURCHASE AGREEMENT
THISSECURITIES
PURCHASE AGREEMENT
(this
“Agreement”),
dated
as of September 28, 2007, by and among FALCON
NATURAL GAS CORP.,
a Nevada
corporation (the “Company”),
and
the Buyers listed on Schedule I attached hereto (individually, a
“Buyer”
or
collectively “Buyers”).
WITNESSETH
WHEREAS,
the
Company and the Buyer(s) are executing and delivering this Agreement in reliance
upon an exemption from securities registration pursuant to Section 4(2) and/or
Rule 506 of Regulation D (“Regulation
D”)
as
promulgated by the U.S. Securities and Exchange Commission (the “SEC”)
under
the Securities Act of 1933, as amended (the “Securities
Act”);
WHEREAS,
the
parties desire that, upon the terms and subject to the conditions contained
herein, the Company shall issue and sell to the Buyer(s), as provided herein,
and the Buyer(s) shall purchase (i) up to Five Million Five Hundred Forty-Five
Thousand Nine Hundred Sixty Nine Dollars ($5,545,969) of secured convertible
debentures in the form attached hereto as “Exhibit
A”
(the
“Convertible
Debentures”),
which
shall be convertible into shares of the Company’s common stock, par value
$0.00001 (the “Common
Stock”)
(as
converted, the “Conversion
Shares”),
and
(ii) warrants substantially in the form attached hereto as “Exhibit
B”
(the
“Warrants”),
to
acquire up to that number of additional shares of Common Stock set forth
opposite such Buyer’s name in column (5) of the Schedule I (as exercised, the
“Warrant
Shares”)
of
which Two Million Five Hundred Ninety-Eight Thousand Eight Hundred Eighty-Nine
Dollars ($2,598,889) was funded on or about July 19, 2007, as evidenced by
that
certain Convertible Debenture (the “Existing
Debenture”)
of
that date issued by the Company to YA Global Investments, L.P. (the
“Existing
Funding”);
Six
Hundred Ten Thousand Eight Hundred and Six Dollars ($650,806) shall be funded
on
or before September 30, 2007 (together with the Existing Funding, the
“First
Closing”);
and
Two Million Two Hundred Ninety-Six Thousand Two Hundred Seventy-Four
($2,296,274) shall be funded at the time required by the First Amendment to
the
Supplemental Agreement dated September 7, 2007 (the “Supplemental
Agreement”),
between the Company and the parties collectively referred to as “Petrogulf”
therein (the “Second
Closing”)
(individually referred to as a “Closing”
collectively referred to as the “Closings”),
for a
total purchase price of up to Five Million Five Hundred Forty-Five Thousand
Nine
Hundred Sixty Nine Dollars ($5,545,969), (the “Purchase
Price”)
in the
respective amounts set forth opposite each Buyer(s) name on Schedule I (the
“Subscription
Amount”);
WHEREAS,
contemporaneously with the execution and delivery of this Agreement, the parties
hereto are executing and delivering a Registration Rights Agreement (the
“Registration
Rights Agreement”)
pursuant to which the Company has agreed to provide certain registration rights
under the Securities Act and the rules and regulations promulgated there under,
and applicable state securities laws;
WHEREAS,
the
Convertible Debentures are secured by (i) a security interest in all of the
assets of the Company and of each of the Company's subsidiaries as evidenced
by
the Amended and Restated Security Agreement of even date herewith (the
“Security
Agreement”),
and
(ii) a lien on certain equipment and real estate in the States of Louisiana,
Texas, and Oklahoma as evidenced by existing mortgages covering the property
or
properties more fully described therein (the “Real
Estate Security”
and
together with the Security Agreement collectively the “Security
Documents”);
WHEREAS,
the
Company is providing to the buyer a
Conveyance of Overriding Royalty Interest, dated of even date herewith (the
“ORRI
Conveyance”);
WHEREAS,
contemporaneously with the execution and delivery of this Agreement, the parties
hereto are executing and delivering Irrevocable Transfer Agent Instructions
(the
“Irrevocable
Transfer Agent Instructions”);
and
WHEREAS,
the
Convertible Debentures, the Conversion Shares, the Warrants, and the Warrant
Shares collectively are referred to herein as the “Securities”).
NOW,
THEREFORE,
in
consideration of the mutual covenants and other agreements contained in this
Agreement the Company and the Buyer(s) hereby agree as follows:
1.PURCHASE
AND SALE OF CONVERTIBLE DEBENTURES.
(a)Purchase
of Convertible Debentures.
Subject
to the satisfaction (or waiver) of the terms and conditions of this Agreement,
each Buyer agrees, severally and not jointly, to purchase at each Closing and
the Company agrees to sell and issue to each Buyer, severally and not jointly,
at each Closing, Convertible Debentures in amounts corresponding with the
Subscription Amount set forth opposite each Buyer’s name on Schedule I hereto
and the Warrants to acquire up that number of Warrant Shares as set forth
opposite such Buyer’s name in column (5) on Schedule I .
(b)Closing
Dates.
The
First Closing of the purchase and sale of the Convertible Debentures and
Warrants shall take place on or before 4:00 p.m. Eastern Standard Time on
September 30, 2007, subject to notification of satisfaction of the conditions
to
the First Closing set forth herein and in Sections 6 and 7 below (or such other
date as is mutually agreed to by the Company and the Buyer(s)) (the
“First
Closing Date”)
and
the Second Closing of the purchase and sale of the Convertible Debentures shall
take place at 4:00 p.m. Eastern Standard Time on the funding date required
by
the Supplemental Agreement, subject to notification of satisfaction of the
conditions to the Second Closing set forth herein and in Sections 6 and 7 below
(or such other date as is mutually agreed to by the Company and the Buyer(s))
(the “Second
Closing Date”)
(collectively referred to a the “Closing
Dates”).
The
Closings shall occur on the respective Closing Dates at the offices of Yorkville
Advisors, LLC, 3700 Hudson Street, Suite 3700, Jersey City, New Jersey07302
(or
such other place as is mutually agreed to by the Company and the Buyer(s)).
(c)Form
of Payment.
Subject
to the satisfaction of the terms and conditions of this Agreement, on each
Closing Date, (i) the Buyers shall deliver to the Company such aggregate
proceeds for the Convertible Debentures and Warrants to be issued and sold
to
such Buyer at such Closing, minus the fees to be paid directly from the proceeds
of such Closing as set forth herein, and (ii) the Company shall deliver to
each Buyer, Convertible Debentures and Warrants which such Buyer is purchasing
at such Closing in amounts indicated opposite such Buyer’s name on Schedule I,
duly executed on behalf of the Company. As to the First Closing, the face value
of the Existing Debenture shall be deemed payment in full by YA Global
Investments, L.P. for Convertible Debentures in the same face amount it is
purchasing in such Closing.
2
2.BUYER’S
REPRESENTATIONS AND WARRANTIES.
Each
Buyer represents and warrants, severally and not jointly, that:
(a)Investment
Purpose.
Each
Buyer is acquiring the Securities for its own account for investment only and
not with a view towards, or for resale in connection with, the public sale
or
distribution thereof, except pursuant to sales registered or exempted under
the
Securities Act; provided, however, that by making the representations herein,
such Buyer reserves the right to dispose of the Securities at any time in
accordance with or pursuant to an effective registration statement covering
such
Securities or an available exemption under the Securities Act. Such Buyer does
not presently have any agreement or understanding, directly or indirectly,
with
any Person to distribute any of the Securities.
(b)Accredited
Investor Status.
Each
Buyer is an “Accredited
Investor”
as
that
term is defined in Rule 501(a)(3) of Regulation D.
(c)Reliance
on Exemptions.
Each
Buyer understands that the Securities are being offered and sold to it in
reliance on specific exemptions from the registration requirements of United
States federal and state securities laws and that the Company is relying in
part
upon the truth and accuracy of, and such Buyer’s compliance with, the
representations, warranties, agreements, acknowledgments and understandings
of
such Buyer set forth herein in order to determine the availability of such
exemptions and the eligibility of such Buyer to acquire the
Securities.
(d)Information.
Each
Buyer and its advisors (and his or, its counsel), if any, have been furnished
with all materials relating to the business, finances and operations of the
Company and information he deemed material to making an informed investment
decision regarding his purchase of the Securities, which have been requested
by
such Buyer. Each Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company and its management. Neither such
inquiries nor any other due diligence investigations conducted by such Buyer
or
its advisors, if any, or its representatives shall modify, amend or affect
such
Buyer’s right to rely on the Company’s representations and warranties contained
in Section 3 below. Each Buyer understands that its investment in the Securities
involves a high degree of risk. Each Buyer is in a position regarding the
Company, which, based upon employment, family relationship or economic
bargaining power, enabled and enables such Buyer to obtain information from
the
Company in order to evaluate the merits and risks of this investment. Each
Buyer
has sought such accounting, legal and tax advice, as it has considered necessary
to make an informed investment decision with respect to its acquisition of
the
Securities.
(e)No
Governmental Review.
Each
Buyer understands that no United States federal or state agency or any other
government or governmental agency has passed on or made any recommendation
or
endorsement of the Securities, or the fairness or suitability of the investment
in the Securities, nor have such authorities passed upon or endorsed the merits
of the offering of the Securities.
3
(f)Transfer
or Resale.
Each
Buyer understands that except as provided in the Registration Rights Agreement:
(i) the Securities have not been and are not being registered under the
Securities Act or any state securities laws, and may not be offered for sale,
sold, assigned or transferred unless (A) subsequently registered thereunder,
(B)
such Buyer shall have delivered to the Company an opinion of counsel, in a
generally acceptable form, to the effect that such Securities to be sold,
assigned or transferred may be sold, assigned or transferred pursuant to an
exemption from such registration requirements, or (C) such Buyer provides the
Company with reasonable assurances (in the form of seller and broker
representation letters) that such Securities can be sold, assigned or
transferred pursuant to Rule 144, Rule 144(k), or Rule 144A promulgated under
the Securities Act, as amended (or a successor rule thereto) (collectively,
“Rule
144”),
in
each case following the applicable holding period set forth therein; (ii) any
sale of the Securities made in reliance on Rule 144 may be made only in
accordance with the terms of Rule 144 and further, if Rule 144 is not
applicable, any resale of the Securities under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules
and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
person is under any obligation to register the Securities under the Securities
Act or any state securities laws or to comply with the terms and conditions
of
any exemption thereunder.
(g)Legends.
Each
Buyer agrees to the imprinting, so long as is required by this Section 2(g),
of
a restrictive legend in substantially the following form:
THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT PURPOSES AND NOT WITH A
VIEW
TOWARD RESALE AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR
AN
OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS.
4
Certificates
evidencing the Conversion Shares or Warrant Shares shall not contain any legend
(including the legend set forth above), (i) while a registration statement
(including the Registration Statement) covering the resale of such security
is
effective under the Securities Act, (ii) following any sale of such Conversion
Shares or Warrant Shares pursuant to Rule 144, (iii) if such Conversion Shares
or Warrant Shares are eligible for sale under Rule 144(k), or (iv) if such
legend is not required under applicable requirements of the Securities Act
(including judicial interpretations and pronouncements issued by the staff
of
the SEC). The Company shall cause its counsel to issue a legal opinion to the
Company’s transfer agent promptly after the effective date (the “Effective
Date”)
of a
Registration Statement if required by the Company’s transfer agent to effect the
removal of the legend hereunder. If all or any portion of the Convertible
Debentures or Warrants are exercised by a Buyer that is not an Affiliate of
the
Company (a “Non-Affiliated
Buyer”)
at a
time when there is an effective registration statement to cover the resale
of
the Conversion Shares or the Warrant Shares, such Conversion Shares or Warrant
Shares shall be issued free of all legends. The Company agrees that following
the Effective Date or at such time as such legend is no longer required under
this Section 2(g), it will, no later than three (3) Trading Days following
the
delivery by a Non-Affiliated Buyer to the Company or the Company’s transfer
agent of a certificate representing Conversion Shares or Warrant Shares, as
the
case may be, issued with a restrictive legend (such third Trading Day, the
“Legend
Removal Date”),
deliver or cause to be delivered to such Non-Affiliated Buyer a certificate
representing such shares that is free from all restrictive and other legends.
The Company may not make any notation on its records or give instructions to
any
transfer agent of the Company that enlarge the restrictions on transfer set
forth in this Section. Each Buyer acknowledges that the Company’s agreement
hereunder to remove all legends from Conversion Shares or Warrant Shares is
not
an affirmative statement or representation that such Conversion Shares or
Warrant Shares are freely tradable. Each Buyer, severally and not jointly with
the other Buyers, agrees that the removal of the restrictive legend from
certificates representing Securities as set forth in this Section 3(g) is
predicated upon the Company’s reliance that the Buyer will sell any Securities
pursuant to either the registration requirements of the Securities Act,
including any applicable prospectus delivery requirements, or an exemption
therefrom, and that if Securities are sold pursuant to a Registration Statement,
they will be sold in compliance with the plan of distribution set forth
therein.
(h)Authorization,
Enforcement.
This
Agreement has been duly and validly authorized, executed and delivered on behalf
of such Buyer and is a valid and binding agreement of such Buyer enforceable
in
accordance with its terms, except as such enforceability may be limited by
general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation and other similar laws relating to,
or
affecting generally, the enforcement of applicable creditors’ rights and
remedies.
(i)Receipt
of Documents.
Each
Buyer and his or its counsel has received and read in their entirety: (i) this
Agreement and each representation, warranty and covenant set forth herein and
the Transaction Documents (as defined herein); (ii) all due diligence and other
information necessary to verify the accuracy and completeness of such
representations, warranties and covenants; (iii) the Company’s Form 10-KSB for
the fiscal year ended December 31, 2005; (iv) the Company’s Form 10-QSB for the
fiscal quarter ended September 30, 2005 and (v) answers to all questions each
Buyer submitted to the Company regarding an investment in the Company; and
each
Buyer has relied on the information contained therein and has not been furnished
any other documents, literature, memorandum or prospectus.
(j)Due
Formation of Corporate and Other Buyers.
If the
Buyer(s) is a corporation, trust, partnership or other entity that is not an
individual person, it has been formed and validly exists and has not been
organized for the specific purpose of purchasing the Securities and is not
prohibited from doing so.
5
(k)No
Legal Advice From the Company.
Each
Buyer acknowledges, that it had the opportunity to review this Agreement and
the
transactions contemplated by this Agreement with his or its own legal counsel
and investment and tax advisors. Each Buyer is relying solely on such counsel
and advisors and not on any statements or representations of the Company or
any
of its representatives or agents for legal, tax or investment advice with
respect to this investment, the transactions contemplated by this Agreement
or
the securities laws of any jurisdiction.
3.REPRESENTATIONS
AND WARRANTIES OF THE COMPANY.
Except
as
set forth under the corresponding section of the Disclosure Schedules which
Disclosure Schedules shall be deemed a part hereof and to qualify any
representation or warranty otherwise made herein to the extent of such
disclosure, the Company hereby makes the representations and warranties set
forth below to each Buyer:
(a)Subsidiaries.
All of
the direct and indirect subsidiaries of the Company are set forth on
Schedule
3(a).
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.
(b)Organization
and Qualification.
The
Company and its subsidiaries are corporations duly organized and validly
existing in good standing under the laws of the jurisdiction in which they
are
incorporated, and have the requisite corporate power to own their properties
and
to carry on their business as now being conducted. Each of the Company and
its
subsidiaries is duly qualified as a foreign corporation to do business and
is in
good standing in every jurisdiction in which the nature of the business
conducted by it makes such qualification necessary, except to the extent that
the failure to be so qualified or be in good standing would not have or
reasonably be expected to result in (i) a material adverse effect on the
legality, validity or enforceability of any Transaction Document, (ii) a
material adverse effect on the results of operations, assets, business or
condition (financial or otherwise) of the Company and the subsidiaries, taken
as
a whole, or (iii) a material adverse effect on the Company’s ability to perform
in any material respect on a timely basis its obligations under any Transaction
Document (any of (i), (ii) or (iii), a “Material
Adverse Effect”)
and no
proceeding has been instituted in any such jurisdiction revoking, limiting
or
curtailing or seeking to revoke, limit or curtail such power and authority
or
qualification.
6
(c)Authorization,
Enforcement, Compliance with Other Instruments.
(i) The Company has the requisite corporate power and authority to enter
into and perform its obligations under this Agreement, the Convertible
Debentures, the Warrants, the Security Documents, the ORRI Conveyance, the
Registration Rights Agreement, the Irrevocable Transfer Agent Instructions,
and
each of the other agreements entered into by the parties hereto in connection
with the transactions contemplated by this Agreement (collectively the
“Transaction
Documents”)
and to
issue the Securities in accordance with the terms hereof and thereof, (ii)
the
execution and delivery of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated hereby and thereby,
including, without limitation, the issuance of the Securities, the reservation
for issuance and the issuance of the Conversion Shares, and the reservation
for
issuance and the issuance of the Warrant Shares, have been duly authorized
by
the Company’s Board of Directors and no further consent or authorization is
required by the Company, its Board of Directors or its stockholders, (iii)
the
Transaction Documents have been duly executed and delivered by the Company,
(iv)
the Transaction Documents constitute the valid and binding obligations of the
Company enforceable against the Company in accordance with their terms, except
as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
or
similar laws relating to, or affecting generally, the enforcement of creditors’
rights and remedies. Except for the Company’s failure to have current periodic
reports on file with the Securities and Exchange Commission, the authorized
officer of the Company executing the Transaction Documents knows of no reason
why the Company cannot file the Registration Statement as required under the
Registration Rights Agreement or perform any of the Company’s other obligations
under the Transaction Documents.
(d)Capitalization.
The
authorized capital stock of the Company consists of ______ shares of Common
Stock and ________ shares of Preferred Stock, par value $____ (“Preferred
Stock”)
of
which _______________ shares of Common Stock and zero shares of Preferred Stock
are issued and outstanding. All of the outstanding shares of capital stock
of
the Company are validly issued, fully paid and nonassessable, have been issued
in compliance with all federal and state securities laws, and none of such
outstanding shares was issued in violation of any preemptive rights or similar
rights to subscribe for or purchase securities. Except as disclosed in Schedule
3(d) or any prior transaction with the Buyer or affiliates of the Buyer: (i)
none of the Company's capital stock is subject to preemptive rights or any
other
similar rights or any liens or encumbrances suffered or permitted by the
Company; (ii) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to,
or
securities or rights convertible into, or exercisable or exchangeable for,
any
capital stock of the Company or any of its subsidiaries, or contracts,
commitments, understandings or arrangements by which the Company or any of
its
subsidiaries is or may become bound to issue additional capital stock of the
Company or any of its subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to,
or
securities or rights convertible into, or exercisable or exchangeable for,
any
capital stock of the Company or any of its subsidiaries; (iii) there are no
outstanding debt securities, notes, credit agreements, credit facilities or
other agreements, documents or instruments evidencing indebtedness of the
Company or any of its subsidiaries or by which the Company or any of its
subsidiaries is or may become bound; (iv) there are no financing statements
securing obligations in any material amounts, either singly or in the aggregate,
filed in connection with the Company or any of its subsidiaries; (v) there
are
no outstanding securities or instruments of the Company or any of its
subsidiaries which contain any redemption or similar provisions, and there
are
no contracts, commitments, understandings or arrangements by which the Company
or any of its subsidiaries is or may become bound to redeem a security of the
Company or any of its subsidiaries; (vi) there are no securities or instruments
containing anti-dilution or similar provisions that will be triggered by the
issuance of the Securities; (vii) the Company does not have any stock
appreciation rights or "phantom stock" plans or agreements or any similar plan
or agreement; and (viii) the Company and its subsidiaries have no liabilities
or
obligations required to be disclosed in the SEC Documents but not so disclosed
in the SEC Documents, other than those incurred in the ordinary course of the
Company's or its subsidiaries' respective businesses and which, individually
or
in the aggregate, do not or would not have a Material Adverse Effect. The
Company has furnished to the Buyers true, correct and complete copies of the
Company's Certificate of Incorporation, as amended and as in effect on the
date
hereof (the “Certificate
of Incorporation”),
and
the Company's Bylaws, as amended and as in effect on the date hereof (the
“Bylaws”),
and
the terms of all securities convertible into, or exercisable or exchangeable
for, shares of Common Stock and the material rights of the holders thereof
in
respect thereto. No further approval or authorization of any stockholder, the
Board of Directors of the Company or others is required for the issuance and
sale of the Securities. There are no stockholders agreements, voting agreements
or other similar agreements with respect to the Company’s capital stock to which
the Company is a party or, to the knowledge of the Company, between or among
any
of the Company’s stockholders.
7
(e)Issuance
of Securities.
The
issuance of the Convertible Debentures and the Warrants is duly authorized
and
free from all taxes, liens and charges with respect to the issue thereof. Upon
conversion in accordance with the terms of the Convertible Debentures or
exercise in accordance with the Warrants, as the case may be, the Conversion
Shares and Warrant Shares, respectively, when issued will be validly issued,
fully paid and nonassessable, free from all taxes, liens and charges with
respect to the issue thereof. The Company has reserved from its duly authorized
capital stock the appropriate number of shares of Common Stock as set forth
in
this Agreement.
(f)No
Conflicts.
The
execution, delivery and performance of the Transaction Documents by the Company
and the consummation by the Company of the transactions contemplated hereby
and
thereby (including, without limitation, the issuance of the Convertible
Debentures and the Warrants, and reservation for issuance and issuance of the
Conversion Shares and the Warrant Shares) will not (i) result in a violation
of
any certificate of incorporation, certificate of formation, any certificate
of
designations or other constituent documents of the Company or any of its
subsidiaries, any capital stock of the Company or any of its subsidiaries or
bylaws of the Company or any of its subsidiaries or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) in any respect under, or give to others any rights
of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Company or any of its subsidiaries is
a
party, or (iii) result in a violation of any law, rule, regulation, order,
judgment or decree (including foreign, federal and state securities laws and
regulations and the rules and regulations of the National Association of
Securities Dealers Inc.’s OTC Bulletin Board) applicable to the Company or any
of its subsidiaries or by which any property or asset of the Company or any
of
its subsidiaries 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.
The
business of the Company and its subsidiaries is not being conducted, and shall
not be conducted in violation of any material law, ordinance, or regulation
of
any governmental entity. Except as specifically contemplated by this Agreement
and as required under the Securities Act and any applicable state securities
laws, the Company is not required to obtain any consent, authorization or order
of, or make any filing or registration with, any court or governmental agency
in
order for it to execute, deliver or perform any of its obligations under or
contemplated by this Agreement or the Registration Rights Agreement in
accordance with the terms hereof or thereof. All consents, authorizations,
orders, filings and registrations which the Company is required to obtain
pursuant to the preceding sentence have been obtained or effected on or prior
to
the date hereof. The Company and its subsidiaries are unaware of any facts
or
circumstance, which might give rise to any of the foregoing.
8
(g)SEC
Documents; Financial Statements.
Except
for the Company’s annual report on Form 10-KSB for the year ended December 31,2006, and the first two quarterly reports for fiscal year 2007, the Company
has
filed all reports, schedules, forms, statements and other documents required
to
be filed by it with the SEC under the Securities Exchange Act of 1934, as
amended (the “Exchange
Act”),
for
the two years preceding the date hereof (or such shorter period as the Company
was required by law or regulation to file such material) (all of the foregoing
filed prior to the date hereof or amended after the date hereof and all exhibits
included therein and financial statements and schedules thereto and documents
incorporated by reference therein, being hereinafter referred to as the
“SEC
Documents”)
on
timely basis or has received a valid extension of such time of filing and has
filed any such SEC Document prior to the expiration of any such extension.
The
Company has delivered to the Buyers or their representatives, or made available
through the SEC’s website at http://www.sec.gov., true and complete copies of
the SEC Documents. As of their respective dates, the SEC Documents complied
in
all material respects with the requirements of the Exchange Act and the rules
and regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were filed with
the
SEC, 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. As of their respective dates, the financial statements
of
the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. Such financial statements have
been
prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in
all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided by or on behalf of the Company
to
the Buyers which is not included in the SEC Documents, including, without
limitation, information referred to in Section 2(i) of this Agreement, contains
any untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements therein, in the light of the
circumstance under which they are or were made and not misleading.
(h)10(b)-5.
The SEC
Documents do not include any untrue statements of material fact, nor do they
omit to state any material fact required to be stated therein necessary to
make
the statements made, in light of the circumstances under which they were made,
not misleading.
(i)Absence
of Litigation.
There
is no action, suit, proceeding, inquiry or investigation before or by any court,
public board, government agency, self-regulatory organization or body pending
against or affecting the Company, the Common Stock or any of the Company’s
subsidiaries, wherein an unfavorable decision, ruling or finding would (i)
have
a Material Adverse Effect.
9
(j)Acknowledgment
Regarding Buyer’s Purchase of the Convertible Debentures.
The
Company acknowledges and agrees that each Buyer is acting solely in the capacity
of an arm’s length purchaser with respect to this Agreement and the transactions
contemplated hereby. The Company further acknowledges that each Buyer is not
acting as a financial advisor or fiduciary of the Company (or in any similar
capacity) with respect to this Agreement and the transactions contemplated
hereby and any advice given by each Buyer or any of their respective
representatives or agents in connection with this Agreement and the transactions
contemplated hereby is merely incidental to such Buyer’s purchase of the
Securities. The Company further represents to each Buyer that the Company’s
decision to enter into this Agreement has been based solely on the independent
evaluation by the Company and its representatives.
(k)No
General Solicitation.
Neither
the Company, nor any of its affiliates, nor any person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D under the Securities Act) in connection
with
the offer or sale of the Securities.
(l)No
Integrated Offering.
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 require
registration of the Securities under the Securities Act or cause this offering
of the Securities to be integrated with prior offerings by the Company for
purposes of the Securities Act.
(m)Employee
Relations.
Neither
the Company nor any of its subsidiaries is involved in any labor dispute or,
to
the knowledge of the Company or any of its subsidiaries, is any such dispute
threatened. None of the Company’s or its subsidiaries’ employees is a member of
a union and the Company and its subsidiaries believe that their relations with
their employees are good.
(n)Intellectual
Property Rights.
The
Company and its subsidiaries own or possess adequate rights or licenses to
use
all trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and rights necessary to conduct
their
respective businesses as now conducted. The Company and its subsidiaries do
not
have any knowledge of any infringement by the Company or its subsidiaries of
trademark, trade name rights, patents, patent rights, copyrights, inventions,
licenses, service names, service marks, service mark registrations, trade secret
or other similar rights of others, and, to the knowledge of the Company there
is
no claim, action or proceeding being made or brought against, or to the
Company’s knowledge, being threatened against, the Company or its subsidiaries
regarding trademark, trade name, patents, patent rights, invention, copyright,
license, service names, service marks, service mark registrations, trade secret
or other infringement; and the Company and its subsidiaries are unaware of
any
facts or circumstances which might give rise to any of the
foregoing.
10
(o)Environmental
Laws.
The
Company and its subsidiaries are (i) in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants (“Environmental
Laws”),
(ii)
have received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
are in compliance with all terms and conditions of any such permit, license
or
approval.
(p)Title.
All
real property and facilities held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use
made
and proposed to be made of such property and buildings by the Company and its
subsidiaries.
(q)Insurance.
The
Company and each of its subsidiaries is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts
as
management of the Company believes to be prudent and customary in the businesses
in which the Company and its subsidiaries are engaged. Neither the Company
nor
any such subsidiary has been refused any insurance coverage sought or applied
for and neither the Company nor any such subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as
may
be necessary to continue its business at a cost that would not materially and
adversely affect the condition, financial or otherwise, or the earnings,
business or operations of the Company and its subsidiaries, taken as a
whole.
(r)Regulatory
Permits.
The
Company and its subsidiaries possess all material certificates, authorizations
and permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses, and neither the
Company nor any such subsidiary has received any notice of proceedings relating
to the revocation or modification of any such certificate, authorization or
permit.
(s)Internal
Accounting Controls.
The
Company and each of its subsidiaries maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management’s general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and
to
maintain asset accountability, and (iii) the recorded amounts for assets are
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(t)No
Material Adverse Breaches, etc.
Neither
the Company nor any of its subsidiaries is subject to any charter, corporate
or
other legal restriction, or any judgment, decree, order, rule or regulation
which in the judgment of the Company’s officers has or is expected in the future
to have a Material Adverse Effect on the business, properties, operations,
financial condition, results of operations or prospects of the Company or its
subsidiaries. Neither the Company nor any of its subsidiaries is in breach
of
any contract or agreement which breach, in the judgment of the Company’s
officers, has or is expected to have a Material Adverse Effect on the business,
properties, operations, financial condition, results of operations or prospects
of the Company or its subsidiaries.
11
(u)Tax
Status.
The
Company and each of its subsidiaries has made and filed all federal and state
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject and (unless and only to the extent that
the
Company and each of its subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) has
paid
all taxes and other governmental assessments and charges that are material
in
amount, shown or determined to be due on such returns, reports and declarations,
except those being contested in good faith and has set aside on its books
provision reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply.
There are no unpaid taxes in any material amount claimed to be due by the taxing
authority of any jurisdiction, and the officers of the Company know of no basis
for any such claim.
(v)Certain
Transactions.
Except
for arm’s length transactions pursuant to which the Company makes payments in
the ordinary course of business upon terms no less favorable than the Company
could obtain from third parties and other than the grant of stock options
disclosed in the SEC Documents, none of the officers, directors, or employees
of
the Company is presently a party to any transaction with the Company (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 corporation, partnership, trust or other entity
in
which any officer, director, or any such employee has a substantial interest
or
is an officer, director, trustee or partner.
(w)Fees
and Rights of First Refusal.
The
Company is not obligated to offer the securities offered hereunder on a right
of
first refusal basis or otherwise to any third parties including, but not limited
to, current or former shareholders of the Company, underwriters, brokers, agents
or other third parties.
(x)Investment
Company.
The
Company is not, and is not an affiliate of, and immediately after receipt of
payment for the Securities, will not be or be an affiliate of, an “investment
company” within the meaning of the Investment Company Act of 1940, as amended.
The Company shall conduct its business in a manner so that it will not become
subject to the Investment Company Act.
(y)Registration
Rights.
Other
than each of the Buyers, no Person has any right to cause the Company to effect
the registration under the Securities Act of any securities of the Company.
There are no outstanding registration statements not yet declared effective
and
there are no outstanding comment letters from the SEC or any other regulatory
agency.
(z)Private
Placement.
Assuming the accuracy of the Buyers’ representations and warranties set forth in
Section 2, no registration under the Securities Act is required for the offer
and sale of the Securities by the Company to the Buyers as contemplated hereby.
The issuance and sale of the Securities hereunder does not contravene the rules
and regulations of the Primary Market.
12
(aa)(RESERVED)
(bb)Manipulation
of Price.
The Company has not, and to its knowledge no one acting on its behalf has,
(i)
taken, directly or indirectly, any action designed to cause or to result in
the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of any of the Securities, (ii) sold, bid for,
purchased, or, paid any compensation for soliciting purchases of, any of the
Securities, or (iii) paid or agreed to pay to any Person any compensation for
soliciting another to purchase any other securities of the Company, other than,
in the case of clauses (ii) and (iii), compensation paid to the Company’s
placement agent in connection with the placement of the Securities.
(cc)Dilutive
Effect.
The
Company understands and acknowledges that the number of Conversion Shares
issuable upon conversion of the Convertible Debentures and the Warrant Shares
issuable upon exercise of the Warrants will increase in certain circumstances.
The Company further acknowledges that its obligation to issue Conversion Shares
upon conversion of the Convertible Debentures in accordance with this Agreement
and the Convertible Debentures and its obligation to issue the Warrant Shares
upon exercise of the Warrants in accordance with this Agreement and the
Warrants, in each case, is absolute and unconditional regardless of the dilutive
effect that such issuance may have on the ownership interests of other
stockholders of the Company.
4. COVENANTS.
(a)Best
Efforts.
Each
party shall use its best efforts to timely satisfy each of the conditions to
be
satisfied by it as provided in Sections 6 and 7 of this Agreement.
(b)Form
D.
The
Company agrees to file a Form D with respect to the Securities as required
under
Regulation D and to provide a copy thereof to each Buyer promptly after such
filing. The Company shall, on or before the Closing Date, take such action
as
the Company shall reasonably determine is necessary to qualify the Securities,
or obtain an exemption for the Securities for sale to the Buyers at the Closing
pursuant to this Agreement under applicable securities or “Blue Sky” laws of the
states of the United States, and shall provide evidence of any such action
so
taken to the Buyers on or prior to the Closing Date.
(c)Reporting
Status.
Until
the earlier of (i) the date as of which the Buyer(s) may sell all of the
Securities without restriction pursuant to Rule 144(k) promulgated under the
Securities Act (or successor thereto), or (ii) the date on which (A) the Buyers
shall have sold all the Securities and (B) none of the Convertible Debentures
or
Warrants are outstanding (the “Registration
Period”),
the
Company shall file in a timely manner all reports required to be filed with
the
SEC pursuant to the Exchange Act and the regulations of the SEC thereunder,
and
the Company shall not terminate its status as an issuer required to file reports
under the Exchange Act even if the Exchange Act or the rules and regulations
thereunder would otherwise permit such termination.
(d)Use
of
Proceeds.
The
Company will use the proceeds from the sale of the Convertible Debentures for
general corporate and working capital purposes.
13
(e)Reservation
of Shares.
On the
date hereof, the Company shall reserve for issuance to the Buyers 135,000,000
shares for issuance upon conversions of the Convertible Debentures and 2,000,000
shares for issuance upon exercise of the Warrants (collectively, the
“Share
Reserve”).
The
Company represents that it has sufficient authorized and unissued shares of
Common Stock available to create the Share Reserve after considering all other
commitments that may require the issuance of Common Stock. Within sixty (60)
days of the date hereof, the Company shall call and hold a special meeting
of
the shareholders, for the sole purpose of increasing the number of shares of
authorized Common Stock to Three Billion (3,000,000,000) and, if such provision
is approved, shall immediately reserve an additional Two Billion (2,000,000,000)
shares for conversion of the Convertible Debentures and existing convertible
debentures and Two Hundred Ninety Million (290,000,000) shares for the warrants
and existing warrants. The Company’s management shall recommend to the
shareholders to vote in favor of increasing the number of shares of Common
Stock
authorized. Management shall also vote all of its shares in favor of increasing
the number of authorized shares of Common Stock.
(f)RESERVED
(g)Fees
and Expenses.
(i) The
Company shall pay all of its costs and expenses incurred by it connection with
the negotiation, investigation, preparation, execution and delivery of the
Transaction Documents.
(ii) The
Company shall pay a fee of Five Hundred Fifty-Four Thousand Five Hundred
Ninety-Six Dollars ($554,596), which shall be used to compensate Yorkville
Advisors LLC (“Yorkville”)
for
monitoring and managing the investment by YA Global Investments, L.P.
(“YA
Global”)
described herein, pursuant to Yorkville’s existing advisory obligations to YA
Global.
(iii) The
Company shall pay a structuring fee to Yorkville Advisors LLC of Twenty Five
Thousand Dollars ($25,000). At the Company’s option, some or all of this amount
may be payable from the proceeds of the of the First Closing.
(iv) The
Company shall pay Yorkville Advisors, LLC a non-refundable due diligence fee
of
Fifteen Thousand Dollars ($15,000), which shall be payable whether or not any
Closing occurs.
(h)Corporate
Existence.
So long
as any of the Convertible Debentures remain outstanding, the Company shall
not
directly or indirectly consummate any merger, reorganization, restructuring,
reverse stock split consolidation, sale of all or substantially all of the
Company’s assets or any similar transaction or related transactions (each such
transaction, an “Organizational
Change”)
unless, prior to the consummation an Organizational Change, the Company obtains
the written consent of each Buyer. In any such case, the Company will make
appropriate provision with respect to such holders’ rights and interests to
insure that the provisions of this Section 4(h) will thereafter be applicable
to
the Convertible Debentures.
14
(i)Transactions
With Affiliates.
So long
as any Convertible Debentures are outstanding, the Company shall not, and shall
cause each of its subsidiaries not to, enter into, amend, modify or supplement,
or permit any subsidiary to enter into, amend, modify or supplement any
agreement, transaction, commitment, or arrangement with any of its or any
subsidiary’s officers, directors, person who were officers or directors at any
time during the previous two (2) years, stockholders who beneficially own five
percent (5%) or more of the Common Stock, or Affiliates (as defined below)
or
with any individual related by blood, marriage, or adoption to any such
individual or with any entity in which any such entity or individual owns a
five
percent (5%) or more beneficial interest (each a “Related
Party”),
except for (a) customary employment arrangements and benefit programs on
reasonable terms, (b) any investment in an Affiliate of the Company, (c) any
agreement, transaction, commitment, or arrangement on an arms-length basis
on
terms no less favorable than terms which would have been obtainable from a
person other than such Related Party, (d) any agreement, transaction,
commitment, or arrangement which is approved by a majority of the disinterested
directors of the Company; for purposes hereof, any director who is also an
officer of the Company or any subsidiary of the Company shall not be a
disinterested director with respect to any such agreement, transaction,
commitment, or arrangement. “Affiliate”
for
purposes hereof means, with respect to any person or entity, another person
or
entity that, directly or indirectly, (i) has a ten percent (10%) or more equity
interest in that person or entity, (ii) has ten percent (10%) or more common
ownership with that person or entity, (iii) controls that person or entity,
or
(iv) shares common control with that person or entity. “Control”
or
“controls”
for
purposes hereof means that a person or entity has the power, direct or indirect,
to conduct or govern the policies of another person or entity.
(j)Transfer
Agent.
The
Company covenants and agrees that, in the event that the Company’s agency
relationship with the transfer agent should be terminated for any reason prior
to a date which is two (2) years after the Closing Date, the Company shall
immediately appoint a new transfer agent and shall require that the new transfer
agent execute and agree to be bound by the terms of the Irrevocable Transfer
Agent Instructions (as defined herein).
(k)Restriction
on Issuance of the Capital Stock.
So long
as any Convertible Debentures are outstanding, the Company shall not, without
the prior written consent of the Buyer(s), (i) issue or sell shares of Common
Stock or Preferred Stock without consideration or for a consideration per share
less than the bid price of the Common Stock determined immediately prior to
its
issuance, (ii) issue any preferred stock, warrant, option, right, contract,
call, or other security or instrument granting the holder thereof the right
to
acquire Common Stock without consideration or for a consideration less than
such
Common Stock’s Bid Price determined immediately prior to it’s issuance, (iii)
enter into any security instrument granting the holder a security interest
in
any and all assets of the Company, or (iv) file any registration statement
on
Form S-8.
(l) Neither
the Buyer(s) nor any of its affiliates have an open short position in the Common
Stock of the Company, and the Buyer(s) agrees that it shall not, and that it
will cause its affiliates not to, engage in any short sales of or hedging
transactions with respect to the Common Stock as long as any Convertible
Debentures shall remain outstanding.
15
(m)Rights
of First Refusal.
For
eighteen (18) months from the date hereof, if
the
Company intends to raise additional capital by the issuance or sale of capital
stock of the Company, including without limitation shares of any class of common
stock, any class of preferred stock, options, warrants or any other securities
convertible or exercisable into shares of common stock (whether the offering
is
conducted by the Company, underwriter, placement agent or any third party)
the
Company shall be obligated to offer to the Buyers such issuance or sale of
capital stock, by providing in writing the principal amount of capital it
intends to raise and outline of the material terms of such capital raise, prior
to the offering such issuance or sale of capital stock to any third
parties including, but not limited to, current or former officers or directors,
current or former shareholders and/or investors of the obligor, underwriters,
brokers, agents or other third parties. The Buyers shall have ten (10)
business days from receipt of such notice of the sale or issuance of capital
stock to accept or reject all or a portion of such capital raising offer.
(n)RESERVED
(o)Additional
Registration Statements.
Until
the effective date of the initial Registration Statement, the Company will
not
file a registration statement under the Securities Act relating to securities
that are not the Securities.
(p)Review
of Public Disclosures.
All SEC
filings (including, without limitation, all filings required under the Exchange
Act, which include Forms 10-Q and 10-QSB, 10-K and 10K-SB, 8-K, etc) and other
public disclosures made by the Company, including, without limitation, all
press
releases, investor relations materials, and scripts of analysts meetings and
calls, shall be reviewed and approved for release by the Company’s attorneys
and, if containing financial information, the Company’s independent certified
public accountants.
(q)Disclosure
of Transaction.
Within
three Business Days following the date of this Agreement, the Company shall
file
a Current Report on Form 8-K describing the terms of the transactions
contemplated by the Transaction Documents in the form required by the Exchange
Act and attaching the material Transaction Documents (including, without
limitation, this Agreement, the form of the Convertible Debenture, the form
of
Warrant and the form of the Registration Rights Agreement) as exhibits to such
filing.
16
5.TRANSFER
AGENT INSTRUCTIONS.
(a) The
Company shall issue the Irrevocable Transfer Agent Instructions to its transfer
agent, and any subsequent transfer agent, irrevocably appointing David Gonzalez,
Esq. as the Company’s agent for purpose instructing its transfer agent to issue
certificates or credit shares to the applicable balance accounts at The
Depositary Trust Company (“DTC”),
registered in the name of each Buyer or its respective nominee(s), for the
Conversion Shares and the Warrant Shares issued upon conversion of the
Convertible Debentures or exercise of the Warrants as specified from time to
time by each Buyer to the Company upon conversion of the Convertible Debentures
or exercise of the Warrants. The Company shall not change its transfer agent
without the express written consent of the Buyers, which may be withheld by
the
Buyers in their sole discretion. The Company warrants that no instruction other
than the Irrevocable Transfer Agent Instructions referred to in this Section
5,
and stop transfer instructions to give effect to Section 2(g) hereof (in the
case of the Conversion Shares or Warrant Shares prior to registration of such
shares under the Securities Act) will be given by the Company to its transfer
agent, and that the Securities shall otherwise be freely transferable on the
books and records of the Company as and to the extent provided in this Agreement
and the other Transaction Documents. If a Buyer effects a sale, assignment
or
transfer of the Securities in accordance with Section 2(f), the Company shall
promptly instruct its transfer agent to issue one or more certificates or credit
shares to the applicable balance accounts at DTC in such name and in such
denominations as specified by such Buyer to effect such sale, transfer or
assignment and, with respect to any transfer, shall permit the transfer. In
the
event that such sale, assignment or transfer involves Conversion Shares or
Warrant Shares sold, assigned or transferred pursuant to an effective
registration statement or pursuant to Rule 144, the transfer agent shall issue
such Securities to the Buyer, assignee or transferee, as the case may be,
without any restrictive legend. Nothing in this Section 5 shall affect in any
way the Buyer’s obligations and agreement to comply with all applicable
securities laws upon resale of Conversion Shares. The Company acknowledges
that
a breach by it of its obligations hereunder will cause irreparable harm to
the
Buyer by vitiating the intent and purpose of the transaction contemplated
hereby. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 5 will be inadequate and agrees,
in
the event of a breach or threatened breach by the Company of the provisions
of
this Section 5, that the Buyer(s) shall be entitled, in addition to all
other available remedies, to an injunction restraining any breach and requiring
immediate issuance and transfer, without the necessity of showing economic
loss
and without any bond or other security being required.
6.CONDITIONS
TO THE COMPANY’S OBLIGATION TO SELL.
The
obligation of the Company hereunder to issue and sell the Convertible Debentures
to the Buyer(s) at the Closings is subject to the satisfaction, at or before
the
Closing Dates, of each of the following conditions, provided that these
conditions are for the Company’s sole benefit and may be waived by the Company
at any time in its sole discretion:
(a) Each
Buyer shall have executed the Transaction Documents and delivered them to the
Company.
(b) The
Buyer(s) shall have delivered to the Company the Purchase Price for the
Convertible Debentures and Warrants in the respective amounts as set forth
next
to each Buyer as set forth on Schedule I attached hereto, minus any fees to
be
paid directly from the proceeds the Closings as set forth herein, by wire
transfer of immediately available U.S. funds pursuant to the wire instructions
provided by the Company. As to YA Global Investments, Inc. the face value of
the
Note shall be deemed payment in full for Convertible Debentures in the same
face
amount it is purchasing in the First Closing.
(c) The
representations and warranties of the Buyer(s) shall be true and correct in
all
material respects as of the date when made and as of the Closing Dates as though
made at that time (except for representations and warranties that speak as
of a
specific date), and the Buyer(s) shall have performed, satisfied and complied
in
all material respects with the covenants, agreements and conditions required
by
this Agreement to be performed, satisfied or complied with by the Buyer(s)
at or
prior to the Closing Dates.
17
7.CONDITIONS
TO THE BUYER’S OBLIGATION TO PURCHASE.
(a) The
obligation of the Buyer(s) hereunder to purchase the Convertible Debentures
at
the First Closing is subject to the satisfaction, at or before the First Closing
Date, of each of the following conditions:
(i) The
Company shall have executed the Transaction Documents and delivered the same
to
the Buyers.
(ii) The
Common Stock shall be authorized for quotation or trading on the Primary Market,
trading in the Common Stock shall not have been suspended for any reason, and
all the Conversion Shares issuable upon the conversion of the Convertible
Debentures shall be approved for listing or trading on the Primary Market.
(iii) The
representations and warranties of the Company shall be true and correct in
all
material respects (except to the extent that any of such representations and
warranties is already qualified as to materiality in Section 3 above, in which
case, such representations and warranties shall be true and correct without
further qualification) as of the date when made and as of the First Closing
Date
as though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed, satisfied
and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the First Closing Date
(iv) The
Company shall have executed and delivered to the Buyer(s) the Convertible
Debentures and Warrants in the respective amounts set forth opposite each
Buyer’s name on Schedule I attached hereto.
(v) The
Buyers shall have received an opinion of counsel from counsel to the Company
in
a form satisfactory to the Buyers.
(vi) The
Company shall have provided to the Buyers a true copy of a certificate of good
standing evidencing the formation and good standing of the Company from the
secretary of state (or comparable office) from the jurisdiction in which the
Company is incorporated, as of a date within 10 days of the First Closing
Date.
(vii) The
Company shall have delivered to the Buyers a certificate, executed by the
Secretary of the Company and dated as of the First Closing Date, as to (i)
the
resolutions consistent with Section 3(c) as adopted by the Company's Board
of
Directors in a form reasonably acceptable to such Buyer, (ii) the Certificate
of
Incorporation and (iii) the Bylaws, each as in effect at the First
Closing.
(viii) The
Company shall have filed a form UCC-1 or such other forms as may be required
to
perfect the Buyer’s interest in the Pledged Property as detailed in the Security
Agreement dated the date hereof and provided proof of such filing to the
Buyer(s).
(ix) The
Company shall have created the Share Reserve.
18
(x) The
Irrevocable Transfer Agent Instructions, in form and substance satisfactory
to
the Buyer, shall have been delivered to and acknowledged in writing by the
Company’s transfer agent.
(xi) Petrogulf
Corporation and necessary affiliates (together “Petrogulf”),
and
the Company, shall have executed the First Amended Full and Final Release,
Settlement, and Indemnity Agreement, all documents necessary to effectuate
that
agreement, and all other documents necessary to settle the lawsuit in Harris
County, Texas filed by Petrogulf (styled Cause No. 2007-14649), and to release
YA Global Investments, Inc. from all claims and liabilities.
(b) The
obligation of the Buyer(s) hereunder to accept the Convertible Debentures at
the
Second Closing is subject to the satisfaction, at or before the Second Closing
Date, of each of the following conditions:
(i) The
Common Stock shall be authorized for quotation or trading on the Primary Market,
trading in the Common Stock shall not have been suspended for any reason, and
all the Conversion Shares issuable upon the conversion of the Convertible
Debentures shall be approved for listing or trading on the Primary Market.
(ii) The
representations and warranties of the Company shall be true and correct in
all
material respects (except to the extent that any of such representations and
warranties is already qualified as to materiality in Section 3 above, in which
case, such representations and warranties shall be true and correct without
further qualification) as of the date when made and as of the Second Closing
Date as though made at that time (except for representations and warranties
that
speak as of a specific date) and the Company shall have performed, satisfied
and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the Second Closing Date.
(iii) The
Company shall have executed and delivered to the Buyers the Convertible
Debentures in the respective amounts set forth opposite each Buyers name on
Schedule I attached hereto.
(iv) The
Company shall have certified, in a certificate executed by an officer of the
Company and dated as of the Second Closing Date, that all conditions to the
Second Closing have been satisfied.
19
8.INDEMNIFICATION.
(a) In
consideration of the Buyer’s execution and delivery of this Agreement and
acquiring the Convertible Debentures and the Conversion Shares hereunder, and
in
addition to all of the Company’s other obligations under this Agreement, the
Company shall defend, protect, indemnify and hold harmless the Buyer(s) and
each
other holder of the Convertible Debentures and the Conversion Shares, and all
of
their officers, directors, employees and agents (including, without
limitation, those retained in connection with the transactions contemplated
by
this Agreement) (collectively, the “Buyer
Indemnitees”)
from
and against any and all actions, causes of action, suits, claims, losses, costs,
penalties, fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Buyer Indemnitee is a party to the action
for
which indemnification hereunder is sought), and including reasonable attorneys’
fees and disbursements (the “Indemnified
Liabilities”),
incurred by the Buyer Indemnitees or any of them as a result of, or arising
out
of, or relating to (a) any misrepresentation or breach of any representation
or
warranty made by the Company in this Agreement, the Convertible Debentures
or
the other Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby, (b) any breach of any covenant, agreement or
obligation of the Company contained in this Agreement, or the other Transaction
Documents or any other certificate, instrument or document contemplated hereby
or thereby, or (c) any cause of action, suit or claim brought or made against
such Buyer Indemnitee and arising out of or resulting from the execution,
delivery, performance or enforcement of this Agreement or any other instrument,
document or agreement executed pursuant hereto by any of the parties hereto,
any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Convertible Debentures
or
the status of the Buyer or holder of the Convertible Debentures the Conversion
Shares, as a Buyer of Convertible Debentures in the Company. To the extent
that
the foregoing undertaking by the Company may be unenforceable for any reason,
the Company shall make the maximum contribution to the payment and satisfaction
of each of the Indemnified Liabilities, which is permissible under applicable
law.
(b) In
consideration of the Company’s execution and delivery of this Agreement, and in
addition to all of the Buyer’s other obligations under this Agreement, the Buyer
shall defend, protect, indemnify and hold harmless the Company and all of its
officers, directors, employees and agents (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the “Company
Indemnitees”)
from
and against any and all Indemnified Liabilities incurred by the Indemnitees
or
any of them as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Buyer(s) in this Agreement, instrument or document contemplated hereby or
thereby executed by the Buyer, (b) any breach of any covenant, agreement or
obligation of the Buyer(s) contained in this Agreement, the Transaction
Documents or any other certificate, instrument or document contemplated hereby
or thereby executed by the Buyer, or (c) any cause of action, suit or claim
brought or made against such Company Indemnitee based on material
misrepresentations or due to a material breach and arising out of or resulting
from the execution, delivery, performance or enforcement of this Agreement,
the
Transaction Documents or any other instrument, document or agreement executed
pursuant hereto by any of the parties hereto. To the extent that the foregoing
undertaking by each Buyer may be unenforceable for any reason, each Buyer shall
make the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities, which is permissible under applicable law.
9.GOVERNING
LAW: MISCELLANEOUS.
(a)Governing
Law.
This
Agreement shall be governed by and interpreted in accordance with the laws
of
the State of New Jersey without regard to the principles of conflict of laws.
The parties further agree that any action between them shall be heard in Hudson
County, New Jersey, and expressly consent to the jurisdiction and venue of
the
Superior Court of New Jersey, sitting in Hudson County and the United States
District Court for the District of New Jersey sitting in Newark, New Jersey
for
the adjudication of any civil action asserted pursuant to this
Paragraph.
20
(b)Counterparts.
This
Agreement may be executed in two or more identical counterparts, all of which
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.
In
the event any signature page is delivered by facsimile transmission, the party
using such means of delivery shall cause four (4) additional original executed
signature pages to be physically delivered to the other party within five (5)
days of the execution and delivery hereof.
(c)Headings.
The
headings of this Agreement are for convenience of reference and shall not form
part of, or affect the interpretation of, this Agreement.
(d)Severability.
If any
provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or
the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.
(e)Entire
Agreement, Amendments.
This
Agreement supersedes all other prior oral or written agreements between the
Buyer(s), the Company, their affiliates and persons acting on their behalf
with
respect to the matters discussed herein, and this Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor any Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision
of
this Agreement may be waived or amended other than by an instrument in writing
signed by the party to be charged with enforcement.
(f)Notices.
Any
notices, consents, waivers, or other communications required or permitted to
be
given under the terms of this Agreement must be in writing and will be deemed
to
have been delivered (i) upon receipt, when delivered personally; (ii) upon
confirmation of receipt, when sent by facsimile; (iii) three (3) days after
being sent by U.S. certified mail, return receipt requested, or (iv) one (1)
day
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
If
to the
Buyer(s), to its address and facsimile number on Schedule I, with copies to
the
Buyer’s counsel as set forth on Schedule I. Each party shall provide five (5)
days’ prior written notice to the other party of any change in address or
facsimile number.
(g)Successors
and Assigns.
This
Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors and assigns. Neither the Company nor any Buyer
shall
assign this Agreement or any rights or obligations hereunder without the prior
written consent of the other party hereto.
(h)No
Third Party Beneficiaries.
This
Agreement is intended for the benefit of the parties hereto and their respective
permitted successors and assigns, and is not for the benefit of, nor may any
provision hereof be enforced by, any other person.
(i)Survival.
Unless
this Agreement is terminated under Section 9(l), the representations and
warranties of the Company and the Buyer(s) contained in Sections 2 and 3, the
agreements and covenants set forth in Sections 4, 5 and 9, and the
indemnification provisions set forth in Section 8, shall survive the Closing
for
a period of two (2) years following the date on which the Convertible Debentures
are converted in full. The Buyer(s) shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.
(j)Publicity.
The
Company and the Buyer(s) shall have the right to approve, before issuance any
press release or any other public statement with respect to the transactions
contemplated hereby made by any party; provided, however, that the Company
shall
be entitled, without the prior approval of the Buyer(s), to issue any press
release or other public disclosure with respect to such transactions required
under applicable securities or other laws or regulations (the Company shall
use
its best efforts to consult the Buyer(s) in connection with any such press
release or other public disclosure prior to its release and Buyer(s) shall
be
provided with a copy thereof upon release thereof).
22
(k)Further
Assurances.
Each
party shall do and perform, or cause to be done and performed, all such further
acts and things, and shall execute and deliver all such other agreements,
certificates, instruments and documents, as the other party may reasonably
request in order to carry out the intent and accomplish the purposes of this
Agreement and the consummation of the transactions contemplated
hereby.
(l)Termination.
In the
event that the First Closing shall not have occurred with respect to the Buyers
on or before five (5) business days from the date hereof due to the Company’s or
the Buyer’s failure to satisfy the conditions set forth in Sections 6 and 7
above (and the non-breaching party’s failure to waive such unsatisfied
condition(s)), the non-breaching party shall have the option to terminate this
Agreement with respect to such breaching party at the close of business on
such
date without liability of any party to any other party; provided, however,
that
if this Agreement is terminated by the Company pursuant to this Section 9(l),
the Company shall remain obligated to reimburse the Buyer(s) for the fees and
expenses of Yorkville Advisors LLC described in Section 4(g) above (other than
the amounts set forth in Section 4(g)(i)).
(m)Brokerage.
The
Company represents that no broker, agent, finder or other party has been
retained by it in connection with the transactions contemplated hereby and
that
no other fee or commission has been agreed by the Company to be paid for or
on
account of the transactions contemplated hereby.
(n)No
Strict Construction.
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.
[REMAINDER
PAGE INTENTIONALLY LEFT BLANK]
23
IN
WITNESS WHEREOF,
each
Buyer and the Company have caused their respective signature page to this
Securities Purchase Agreement to be duly executed as of the date first written
above.
COMPANY:
FALCON
NATURAL GAS CORP.
By:
Name: Saul
S. Deutsch
Title: Chief
Financial Officer
24
IN
WITNESS WHEREOF,
each
Buyer and the Company have caused their respective signature page to this
Securities Purchase Agreement to be duly executed as of the date first written
above.
BUYERS:
YA
GLOBAL INVESTMENTS, L.P.
By:
Yorkville
Advisors, LLC
Its:
Investment
Manager
By:
Name:
Mark
Angelo
Its:
Portfolio
Manager
25
SCHEDULE
I
SCHEDULE
OF BUYERS
SCHEDULE
I
SCHEDULE
OF BUYERS
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Buyer
Subscription Amount
Number of
Warrant Shares
Legal Representative’s
Address and Facsimile
Number
First Closing
Second Closing
First Closing
YA Global Investments, L.P.
101 Hudson Street, Suite 3700 JerseyCity, NJ07303 Attention:
Mark Angelo Telephone:
(201) 985-8300 Facsimile:
(201) 985-8266 Residence:
Cayman Islands
$
3,249,695
$
2,296,274
290,000,000
with a strike price of $0.02 and a term of five (5) years.
David
Gonzalez, Esq. 101
Hudson Street, Suite 3700 JerseyCity, New Jersey07302 Telephone:
(201) 985-8300 Facsimile:
(201) 985-8266
DISCLOSURE
SCHEDULE
EXHIBIT
A
FORM
OF CONVERTIBLE DEBENTURE
2
EXHIBIT
B
FORM
OF WARRANT
3
Exhibit
14
REGISTRATION
RIGHTS AGREEMENT
THIS
REGISTRATION RIGHTS AGREEMENT
(this
“Agreement”),
dated
as of September 28, 2007, by and among FALCON
NATURAL GAS CORPORATION,
a Nevada
corporation (the “Company”),
and
the undersigned Buyers listed on Schedule I attached hereto (each, a
“Buyer”
and
collectively, the “Buyers”).
WHEREAS:
A. In
connection with the Securities Purchase Agreement by and among the parties
hereto of even date herewith (the “Securities
Purchase Agreement”),
the
Company has agreed, upon the terms and subject to the conditions of the
Securities Purchase Agreement, to issue and sell to the Buyers secured
convertible debentures (the “Convertible
Debentures”)
which
shall be convertible into shares of the Company’s common stock, par value $0.001
per share (the “Common
Stock,”
as
converted, the “Conversion
Shares”)
in
accordance with the terms of the Convertible Debentures. Capitalized terms
not
defined herein shall have the meaning ascribed to them in the Securities
Purchase Agreement.
B. To
induce
the Buyers to execute and deliver the Securities Purchase Agreement, the Company
has agreed to provide certain registration rights under the Securities Act
of
1933, as amended, and the rules and regulations thereunder, or any similar
successor statute (collectively, the “Securities
Act”),
and
applicable state securities laws.
NOW,
THEREFORE,
in
consideration of the premises and the mutual covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which
are
hereby acknowledged, the Company and the Buyers hereby agree as
follows:
1.DEFINITIONS.
As
used
in this Agreement, the following terms shall have the following
meanings:
(a) “Effectiveness
Deadline”
means,
with respect to the initial Registration Statement required to be filed
hereunder, the 105th calendar day following the date filed and, with respect
to
any additional Registration Statements which may be required pursuant to Section
3(c), the 90th calendar day following the date on which the Company files such
additional Registration Statement is required hereunder; provided, however,
in
the event the Company is notified by the Commission that one of the above
Registration Statements will not be reviewed or is no longer subject to further
review and comments, the Effectiveness Date as to such Registration Statement
shall be the fifth Trading Day following the date on which the Company is so
notified if such date precedes the dates required above.
(b) “Filing
Deadline”
means,
with respect to the initial Registration Statement required hereunder, the
45th
calendar day following the date the Buyer delivers a written notice requesting
the Company to file such Registration Statement, with respect to any additional
Registration Statements which may be required pursuant to Section 3(c), the
30th
day following the date on which the Company first knows, or reasonably should
have known that such additional Registration Statement is required
hereunder.
(c) “Person”
means
a
corporation, a limited liability company, an association, a partnership, an
organization, a business, an individual, a governmental or political subdivision
thereof or a governmental agency.
(d) “Prospectus”
means
the prospectus included in a Registration Statement (including, without
limitation, a prospectus that includes any information previously omitted from
a
prospectus filed as part of an effective registration statement in reliance
upon
Rule 430A promulgated under the Securities Act), as amended or supplemented
by
any prospectus supplement, with respect to the terms of the offering of any
portion of the Registrable Securities covered by a Registration Statement,
and
all other amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.
(e) “Registrable
Securities”
means
all of (i) the Conversion Shares issuable upon conversion of the Convertible
Debentures, (ii) any additional shares issuable in connection with any
anti-dilution provisions in the Convertible Debentures (without giving effect
to
any limitations on exercise set forth in the Convertible Debentures) and (iii)
any shares of Common Stock issued or issuable with respect to the Conversion
Shares, the Convertible Debentures, as a result of any stock split, dividend
or
other distribution, recapitalization or similar event or otherwise, without
regard to any limitations on the conversion of the Convertible
Debentures.
(f) “Registration
Statement”
means
the registration statements required to be filed hereunder and any additional
registration statements contemplated by Section 3(c), including (in each case)
the Prospectus, amendments and supplements to such registration statement or
Prospectus, including pre- and post-effective amendments, all exhibits thereto,
and all material incorporated by reference or deemed to be incorporated by
reference in such registration statement.
(g) “Required
Registration Amount”
means
(i) 300% (or such lesser amount as the SEC may permit as evidenced in comments
received to a filed Registration Statement) of the number of Conversion Shares
issued and issuable pursuant to the Convertible Debentures as of the trading
day
immediately preceding the applicable date of determination (without regard
to
any limitations on conversion of the Convertible Debentures).
(h) “Rule
415”
means
Rule 415 promulgated by the Commission 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 Commission having substantially the same purpose and
effect as such Rule.
2
2.REGISTRATION.
(a) On
or
prior to each Filing Deadline, the Company shall prepare and file with the
SEC a
Registration Statement on Form S-1 or SB-2 (or, if the Company is then eligible,
on Form S-3) covering the resale of all of the Registrable Securities. The
Registration Statement prepared pursuant hereto shall register for resale at
least the number of shares of Common Stock equal to the Required Registration
Amount as of date the Registration Statement is initially filed with the SEC.
The Registration Statement shall contain the “Selling
Stockholders”
and
“Plan
of Distribution”
sections in substantially the form attached hereto as Exhibit
A
and
contain all the required disclosures set forth on Exhibit
B.
The
Company shall use its best efforts to have the Registration Statement declared
effective by the SEC as soon as practicable, but in no event later than the
Effectiveness Deadline. By 9:30 am on the date following the date of
effectiveness, the Company shall file with the SEC in accordance with Rule
424
under the 1933 Act the final Prospectus to be used in connection with sales
pursuant to such Registration Statement. The Company shall cause the
Registration Statement to remain effective until all of the Registrable
Securities have been sold or may be sold without volume restrictions pursuant
to
Rule 144(k), as determined by the counsel to the Company pursuant to a written
opinion letter to such effect, addressed and acceptable to the Company’s
transfer agent and the affected Holders (“Registration
Period”).
Prior
to the filing of the Registration Statement with the SEC, the Company shall
furnish a copy of the Initial Registration Statement to the Buyers for their
review and comment. The Buyers shall furnish comments on the Initial
Registration Statement to the Company within twenty-four (24) hours of the
receipt thereof from the Company.
(b)Failure
to File or Obtain Effectiveness of the Registration Statement.
If: (i)
a Registration Statement is not filed on or prior to its Filing Date (if the
Company files a Registration Statement without affording the Holders the
opportunity to review and comment on the same as required by Section 3(a),
the
Company shall not be deemed to have satisfied this clause (i)), or (ii) the
Company fails to file with the SEC a request for acceleration in accordance
with
Rule 461 promulgated under the Securities Act, within five Trading Days of
the
date that the Company is notified (orally or in writing, whichever is earlier)
by the SEC that a Registration Statement will not be “reviewed,” or not subject
to further review, or (iii) a Registration Statement filed or required to be
filed hereunder is not declared effective by the SEC by its Effectiveness
Deadline, or (iv) after the effectiveness, a Registration Statement ceases
for
any reason to remain continuously effective as to all Registrable Securities
for
which it is required to be effective, or the Holders are otherwise not permitted
to utilize the Prospectus therein to resell such Registrable Securities for
more
than 30 consecutive calendar days or more than an aggregate of 40 calendar
days
during any 12-month period (which need not be consecutive calendar days) (any
such failure or breach being referred to as an “Event”),
then
in addition to any other rights the holders of the Convertible Debentures may
have hereunder or under applicable law, on each such Event date and on each
monthly anniversary of each such Event date (if the applicable Event shall
not
have been cured by such date) until the applicable Event is cured, the Company
shall pay to each holder of Convertible Debentures an amount in cash, as partial
liquidated damages (“Liquidated
Damages”)
and
not as a penalty, equal to 2.0% of the aggregate purchase price paid by such
holder pursuant to the Securities Purchase Agreement for any Convertible
Debentures then held by such holder. The parties agree that (1) the Company
shall not be liable for Liquidated Damages under this Agreement with respect
to
any Warrants or Warrant Shares and (2) the maximum aggregate Liquidated Damages
payable to a holder of Convertible Debentures under this Agreement shall be
twenty-four percent (24%) of the aggregate Purchase Price paid by such holder
pursuant to the Securities Purchase Agreement. The partial Liquidated Damages
pursuant to the terms hereof shall apply on a daily pro-rata basis for any
portion of a month prior to the cure of an Event.
3
(c)Liquidated
Damages.
The
Company and the Buyer hereto acknowledge and agree that the sums payable under
subsection 2(b) above shall constitute liquidated damages and not penalties
and
are in addition to all other rights of the Buyer, including the right to call
a
default. The parties further acknowledge that (i) the amount of loss or damages
likely to be incurred is incapable or is difficult to precisely estimate, (ii)
the amounts specified in such subsections bear a reasonable relationship to,
and
are not plainly or grossly disproportionate to, the probable loss likely to
be
incurred in connection with any failure by the Company to obtain or maintain
the
effectiveness of a Registration Statement, (iii) one of the reasons for the
Company and the Buyer reaching an agreement as to such amounts was the
uncertainty and cost of litigation regarding the question of actual damages,
and
(iv) the Company and the Buyer are sophisticated business parties and have
been
represented by sophisticated and able legal counsel and negotiated this
Agreement at arm’s length.
3.RELATED
OBLIGATIONS.
(a) The
Company shall, not less than three (3) Trading Days prior to the filing of
each
Registration Statement and not less than one (1) Trading Day prior to the filing
of any related amendments and supplements to all Registration Statements (except
for annual reports on Form 10-K or Form 10-KSB), furnish to each Buyer copies
of
all such documents proposed to be filed, which documents (other than those
incorporated or deemed to be incorporated by reference) will be subject to
the
reasonable and prompt review of such Buyers, The Company shall not file a
Registration Statement or any such Prospectus or any amendments or supplements
thereto to which the Buyers shall reasonably object in good faith; provided
that,
the Company is notified of such objection in writing no later than two (2)
Trading Days after the Buyers have been so furnished copies of a Registration
Statement.
(b) The
Company shall (i) prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to a Registration Statement and
the
Prospectus used in connection with such Registration Statement, which prospectus
is to be filed pursuant to Rule 424 promulgated under the Securities Act, as
may
be necessary to keep such Registration Statement effective at all times during
the Registration Period, and prepare and file with the SEC such additional
Registration Statements in order to register for resale under the Securities
Act
all of the Registrable Securities; (ii) cause the related Prospectus to be
amended or supplemented by any required Prospectus supplement (subject to the
terms of this Agreement), and as so supplemented or amended to be filed pursuant
to Rule 424; (iii) respond as promptly as reasonably possible to any comments
received from the SEC with respect to a Registration Statement or any amendment
thereto and as promptly as reasonably possible provide the Buyers true and
complete copies of all correspondence from and to the SEC relating to a
Registration Statement (provided that the Company may excise any information
contained therein which would constitute material non-public information as
to
any Buyer which has not executed a confidentiality agreement with the Company);
and (iv) comply with the provisions of the Securities Act with respect to the
disposition of all Registrable Securities of the Company covered by such
Registration Statement until such time as all of such Registrable Securities
shall have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof as set forth in such Registration
Statement. In the case of amendments and supplements to a Registration Statement
which are required to be filed pursuant to this Agreement (including pursuant
to
this Section 3(b)) by reason of the Company’s filing a report on Form 10-KSB,
Form 10-QSB or Form 8-K or any analogous report under the Securities Exchange
Act of 1934, as amended (the “Exchange
Act”),
the
Company shall incorporate such report by reference into the Registration
Statement, if applicable, or shall file such amendments or supplements with
the
SEC on the same day on which the Exchange Act report is filed which created
the
requirement for the Company to amend or supplement the Registration Statement.
4
(c) If
during
the Registration Period, the number of Registrable Securities at any time
exceeds the number of shares of Common Stock then registered in a Registration
Statement, then the Company shall file as soon as reasonably practicable but
in
any case prior to the applicable Filing Deadline, an additional Registration
Statement covering the resale by the Buyers of not less than 300% of the number
of such Registrable Securities.
(d) The
Company shall furnish to each Buyer whose Registrable Securities are included
in
any Registration Statement, without charge, (i) at least one (1) copy of such
Registration Statement as declared effective by the SEC and any amendment(s)
thereto, including financial statements and schedules, all documents
incorporated therein by reference, all exhibits and each preliminary prospectus,
(ii) ten (10) copies of the final prospectus included in such Registration
Statement and all amendments and supplements thereto (or such other number
of
copies as such Buyer may reasonably request) and (iii) such other documents
as
such Buyer may reasonably request from time to time in order to facilitate
the
disposition of the Registrable Securities owned by such Buyer.
(e) The
Company shall use its best efforts to (i) register and qualify the Registrable
Securities covered by a Registration Statement under such other securities
or
“blue sky” laws of such jurisdictions in the United States as any Buyer
reasonably requests, (ii) prepare and file in those jurisdictions, such
amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications
in
effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; provided, however, that the Company shall not
be
required in connection therewith or as a condition thereto to (w) make any
change to its articles of incorporation or by-laws, (x) qualify to do business
in any jurisdiction where it would not otherwise be required to qualify but
for
this Section 3(d), (y) subject itself to general taxation in any such
jurisdiction, or (z) file a general consent to service of process in any such
jurisdiction. The Company shall promptly notify each Buyer who holds Registrable
Securities of the receipt by the Company of any notification with respect to
the
suspension of the registration or qualification of any of the Registrable
Securities for sale under the securities or “blue sky” laws of any jurisdiction
in the United States or its receipt of actual notice of the initiation or threat
of any proceeding for such purpose.
5
(f) As
promptly as practicable after becoming aware of such event or development,
the
Company shall notify each Buyer in writing of the happening of any event as
a
result of which the Prospectus included in a Registration Statement, as then
in
effect, includes an untrue statement of a material fact or omission to state
a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (provided that in no event shall such notice contain any material,
nonpublic information), and promptly prepare a supplement or amendment to such
Registration Statement to correct such untrue statement or omission, and deliver
ten (10) copies of such supplement or amendment to each Buyer. The Company
shall
also promptly notify each Buyer in writing (i) when a Prospectus or any
Prospectus supplement or post-effective amendment has been filed, and when
a
Registration Statement or any post-effective amendment has become effective
(notification of such effectiveness shall be delivered to each Buyer by
facsimile on the same day of such effectiveness), (ii) of any request by the
SEC
for amendments or supplements to a Registration Statement or related prospectus
or related information, and (iii) of the Company’s reasonable determination
that a post-effective amendment to a Registration Statement would be
appropriate.
(g) The
Company shall use its best efforts to prevent the issuance of any stop order
or
other suspension of effectiveness of a Registration Statement, or the suspension
of the qualification of any of the Registrable Securities for sale in any
jurisdiction within the United States of America and, if such an order or
suspension is issued, to obtain the withdrawal of such order or suspension
at
the earliest possible moment and to notify each Buyer who holds Registrable
Securities being sold of the issuance of such order and the resolution thereof
or its receipt of actual notice of the initiation or threat of any proceeding
for such purpose.
(h) If,
after
the execution of this Agreement, a Buyer believes, after consultation with
its
legal counsel, that it could reasonably be deemed to be an underwriter of
Registrable Securities, at the request of any Buyer, the Company shall furnish
to such Buyer, on the date of the effectiveness of the Registration Statement
and thereafter from time to time on such dates as a Buyer may reasonably request
(i) a letter, dated such date, from the Company’s independent certified public
accountants in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
and (ii) an opinion, dated as of such date, of counsel representing the Company
for purposes of such Registration Statement, in form, scope and substance as
is
customarily given in an underwritten public offering, addressed to the
Buyers.
(i) If,
after
the execution of this Agreement, a Buyer believes, after consultation with
its
legal counsel, that it could reasonably be deemed to be an underwriter of
Registrable Securities, at the request of any Buyer, the Company shall make
available for inspection by (i) any Buyer and (ii) one (1) firm of
accountants or other agents retained by the Buyers (collectively, the
“Inspectors”)
all
pertinent financial and other records, and pertinent corporate documents and
properties of the Company (collectively, the “Records”),
as
shall be reasonably deemed necessary by each Inspector, and cause the Company’s
officers, directors and employees to supply all information which any Inspector
may reasonably request; provided, however, that each Inspector shall agree,
and
each Buyer hereby agrees, to hold in strict confidence and shall not make any
disclosure (except to a Buyer) or use any Record or other information which
the
Company determines in good faith to be confidential, and of which determination
the Inspectors are so notified, unless (a) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement or is otherwise required under the Securities Act, (b) the release
of
such Records is ordered pursuant to a final, non-appealable subpoena or order
from a court or government body of competent jurisdiction, or (c) the
information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement of which
the Inspector and the Buyer has knowledge. Each Buyer agrees that it shall,
upon
learning that disclosure of such Records is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, the Records deemed confidential.
6
(j) The
Company shall hold in confidence and not make any disclosure of information
concerning a Buyer provided to the Company unless (i) disclosure of such
information is necessary to comply with federal or state securities laws, (ii)
the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to
the
public other than by disclosure in violation of this Agreement or any other
agreement. The Company agrees that it shall, upon learning that disclosure
of
such information concerning a Buyer is sought in or by a court or governmental
body of competent jurisdiction or through other means, give prompt written
notice to such Buyer and allow such Buyer, at the Buyer’s expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
(k) The
Company shall use its best efforts either to cause all the Registrable
Securities covered by a Registration Statement (i) to be listed on each
securities exchange on which securities of the same class or series issued
by
the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange or (ii) the
inclusion for quotation on the National Association of Securities Dealers,
Inc.
OTC Bulletin Board for such Registrable Securities. The Company shall pay all
fees and expenses in connection with satisfying its obligation under this
Section 3(j).
(l) The
Company shall cooperate with each Buyer who holds Registrable Securities being
offered and, to the extent applicable, to facilitate the timely preparation
and
delivery of certificates (not bearing any restrictive legend) representing
the
Registrable Securities to be offered pursuant to a Registration Statement and
enable such certificates to be in such denominations or amounts, as the case
may
be, as the Buyers may reasonably request and registered in such names as the
Buyers may request.
(m) The
Company shall use its best efforts to cause the Registrable Securities covered
by the applicable Registration Statement to be registered with or approved
by
such other governmental agencies or authorities as may be necessary to
consummate the disposition of such Registrable Securities.
(n) The
Company shall make generally available to its security holders as soon as
practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions
of
Rule 158 under the Securities Act) covering a twelve (12) month period beginning
not later than the first day of the Company’s fiscal quarter next following the
effective date of the Registration Statement.
(o) The
Company shall otherwise use its best efforts to comply with all applicable
rules
and regulations of the SEC in connection with any registration
hereunder.
7
(p) Within
two (2) business days after a Registration Statement which covers Registrable
Securities is declared effective by the SEC, the Company shall deliver, and
shall cause legal counsel for the Company to deliver, to the transfer agent
for
such Registrable Securities (with copies to the Buyer whose Registrable
Securities are included in such Registration Statement) confirmation that such
Registration Statement has been declared effective by the SEC in the form
attached hereto as Exhibit
C.
(q) The
Company shall take all other reasonable actions necessary to expedite and
facilitate disposition by each Buyer of Registrable Securities pursuant to
a
Registration Statement.
4.OBLIGATIONS
OF THE BUYERS.
(a) Each
Buyer agrees that, upon receipt of any notice from the Company of the happening
of any event of the kind described in Section 3(f) or the first sentence of
Section 3(e), such Buyer will immediately discontinue disposition of Registrable
Securities pursuant to any Registration Statement covering such Registrable
Securities until such Buyer’s receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or the first sentence of Section
3(e) or receipt of notice that no supplement or amendment is required.
Notwithstanding anything to the contrary, the Company shall cause its transfer
agent to deliver unlegended certificates for shares of Common Stock to a
transferee of a Buyer in accordance with the terms of the Securities Purchase
Agreement in connection with any sale of Registrable Securities with respect
to
which a Buyer has entered into a contract for sale prior to the Buyer’s receipt
of a notice from the Company of the happening of any event of the kind described
in Section 3(f) or the first sentence of 3(e) and for which the Buyer has not
yet settled.
(b) Each
Buyer covenants and agrees that it will comply with the prospectus delivery
requirements of the Securities Act as applicable to it or an exemption therefrom
in connection with sales of Registrable
Securities pursuant to the Registration Statement.
5.EXPENSES
OF REGISTRATION.
All
expenses incurred in connection with registrations, filings or qualifications
pursuant to Sections 2 and 3, including, without limitation, all registration,
listing and qualifications fees, printers, legal and accounting fees shall
be
paid by the Company.
6.INDEMNIFICATION.
With
respect to Registrable Securities which are included in a Registration Statement
under this Agreement:
8
(a) To
the
fullest extent permitted by law, the Company will, and hereby does, indemnify,
hold harmless and defend each Buyer, the directors, officers, partners,
employees, agents, representatives of, and each Person, if any, who controls
any
Buyer within the meaning of the Securities Act or the Exchange Act (each, an
“Indemnified
Person”),
against any losses, claims, damages, liabilities, judgments, fines, penalties,
charges, costs, reasonable attorneys’ fees, amounts paid in settlement or
expenses, joint or several (collectively, “Claims”)
incurred in investigating, preparing or defending any action, claim, suit,
inquiry, proceeding, investigation or appeal taken from the foregoing by or
before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto (“Indemnified
Damages”),
to
which any of them may become subject insofar as such Claims (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out
of
or are based upon: (i) any untrue statement or alleged untrue statement of
a
material fact in a Registration Statement or any post-effective amendment
thereto or in any filing made in connection with the qualification of the
offering under the securities or other “blue sky” laws of any jurisdiction in
which Registrable Securities are offered (“Blue
Sky Filing”),
or
the omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; (ii) any
untrue statement or alleged untrue statement of a material fact contained in
any
final prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading; or (iii) any violation or alleged violation by the Company
of the Securities Act, the Exchange Act, any other law, including, without
limitation, any state securities law, or any rule or regulation there under
relating to the offer or sale of the Registrable Securities pursuant to a
Registration Statement (the matters in the foregoing clauses (i) through (iii)
being, collectively, “Violations”).
The
Company shall reimburse the Buyers and each such controlling person promptly
as
such expenses are incurred and are due and payable, for any legal fees or
disbursements or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a): (x) shall not apply to a Claim by an Indemnified Person arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by such Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement or any such amendment thereof or supplement thereto; (y) shall not
be
available to the extent such Claim is based on a failure of the Buyer to deliver
or to cause to be delivered the prospectus made available by the Company, if
such prospectus was timely made available by the Company pursuant to Section
3(c); and (z) shall not apply to amounts paid in settlement of any Claim if
such settlement is effected without the prior written consent of the Company,
which consent shall not be unreasonably withheld. Such indemnity shall remain
in
full force and effect regardless of any investigation made by or on behalf
of
the Indemnified Person and shall survive the transfer of the Registrable
Securities by the Buyers pursuant to Section 9 hereof.
(b) In
connection with a Registration Statement, each Buyer agrees to severally and
not
jointly indemnify, hold harmless and defend, to the same extent and in the
same
manner as is set forth in Section 6(a), the Company, each of its directors,
each
of its officers, employees, representatives, or agents and each Person, if
any,
who controls the Company within the meaning of the Securities Act or the
Exchange Act (each an “Indemnified
Party”),
against any Claim or Indemnified Damages to which any of them may become
subject, under the Securities Act, the Exchange Act or otherwise, insofar as
such Claim or Indemnified Damages arise out of or is based upon any Violation,
in each case to the extent, and only to the extent, that such Violation occurs
in reliance upon and in conformity with written information furnished to the
Company by such Buyer expressly for use in connection with such Registration
Statement; and, subject to Section 6(d), such Buyer will reimburse any legal
or
other expenses reasonably incurred by them in connection with investigating
or
defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 6(b) and the agreement with respect to contribution
contained in Section 7 shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of such
Buyer, which consent shall not be unreasonably withheld; provided, further,
however, that the Buyer shall be liable under this Section 6(b) for only that
amount of a Claim or Indemnified Damages as does not exceed the net proceeds
to
such Buyer as a result of the sale of Registrable Securities pursuant to such
Registration Statement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Party
and shall survive the transfer of the Registrable Securities by the Buyers
pursuant to Section 9. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(b) with
respect to any prospectus shall not inure to the benefit of any Indemnified
Party if the untrue statement or omission of material fact contained in the
prospectus was corrected and such new prospectus was delivered to each Buyer
prior to such Buyer’s use of the prospectus to which the Claim
relates.
9
(c) Promptly
after receipt by an Indemnified Person or Indemnified Party under this Section
6
of notice of the commencement of any action or proceeding (including any
governmental action or proceeding) involving a Claim, such Indemnified Person
or
Indemnified Party shall, if a Claim in respect thereof is to be made against
any
indemnifying party under this Section 6, deliver to the indemnifying party
a
written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party
so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as
the
case may be; provided, however, that an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses of
not
more than one (1) counsel for such Indemnified Person or Indemnified Party
to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by
such
counsel in such proceeding. The Indemnified Party or Indemnified Person shall
cooperate fully with the indemnifying party in connection with any negotiation
or defense of any such action or claim by the indemnifying party and shall
furnish to the indemnifying party all information reasonably available to the
Indemnified Party or Indemnified Person which relates to such action or claim.
The indemnifying party shall keep the Indemnified Party or Indemnified Person
fully apprised at all times as to the status of the defense or any settlement
negotiations with respect thereto. No indemnifying party shall be liable for
any
settlement of any action, claim or proceeding effected without its prior written
consent; provided, however, that the indemnifying party shall not unreasonably
withhold, delay or condition its consent. No indemnifying party shall, without
the prior written consent of the Indemnified Party or Indemnified Person,
consent to entry of any judgment or enter into any settlement or other
compromise which does not include as an unconditional term thereof the giving
by
the claimant or plaintiff to such Indemnified Party or Indemnified Person of
a
release from all liability in respect to such claim or litigation. Following
indemnification as provided for hereunder, the indemnifying party shall be
subrogated to all rights of the Indemnified Party or Indemnified Person with
respect to all third parties, firms or corporations relating to the matter
for
which indemnification has been made. The failure to deliver written notice
to
the indemnifying party within a reasonable time of the commencement of any
such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is prejudiced in its ability to defend such
action.
10
(d) The
indemnification required by this Section 6 shall be made by periodic payments
of
the amount thereof during the course of the investigation or defense, as and
when bills are received or Indemnified Damages are incurred.
(e) The
indemnity agreements contained herein shall be in addition to (i) any cause
of action or similar right of the Indemnified Party or Indemnified Person
against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
7.CONTRIBUTION.
To
the
extent any indemnification by an indemnifying party is prohibited or limited
by
law, the indemnifying party agrees to make the maximum contribution with respect
to any amounts for which it would otherwise be liable under Section 6 to the
fullest extent permitted by law; provided, however, that: (i) no seller of
Registrable Securities guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
fraudulent misrepresentation; and (ii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received
by
such seller from the sale of such Registrable Securities.
8.REPORTS
UNDER THE EXCHANGE ACT.
With
a
view to making available to the Buyers the benefits of Rule 144 promulgated
under the Securities Act or any similar rule or regulation of the SEC that
may
at any time permit the Buyers to sell securities of the Company to the public
without registration (“Rule
144”)
the
Company agrees to:
(a) make
and
keep public information available, as those terms are understood and defined
in
Rule 144;
(b) file
with
the SEC in a timely manner all reports and other documents required of the
Company under the Securities Act and the Exchange Act so long as the Company
remains subject to such requirements (it being understood that nothing herein
shall limit the Company’s obligations under Section 4(c) of the Securities
Purchase Agreement) and the filing of such reports and other documents as are
required by the applicable provisions of Rule 144; and
(c) furnish
to each Buyer so long as such Buyer owns Registrable Securities, promptly upon
request, (i) a written statement by the Company that it has complied with the
reporting requirements of Rule 144, the Securities Act and the Exchange Act,
(ii) a copy of the most recent annual or quarterly report of the Company and
such other reports and documents so filed by the Company, and (iii) such other
information as may be reasonably requested to permit the Buyers to sell such
securities pursuant to Rule 144 without registration.
11
9.AMENDMENT
OF REGISTRATION RIGHTS.
Provisions
of this Agreement may be amended and the observance thereof may be waived
(either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and Buyers who
then
hold at least two-thirds (2/3) of the Registrable Securities. Any amendment
or
waiver effected in accordance with this Section 9 shall be binding upon
each Buyer and the Company. No such amendment shall be effective to the extent
that it applies to fewer than all of the holders of the Registrable Securities.
No consideration shall be offered or paid to any Person to amend or consent
to a
waiver or modification of any provision of any of this Agreement unless the
same
consideration also is offered to all of the parties to this
Agreement.
10.MISCELLANEOUS.
(a) A
Person
is deemed to be a holder of Registrable Securities whenever such Person owns
or
is deemed to own of record such Registrable Securities or owns the right to
receive the Registrable Securities. If the Company receives conflicting
instructions, notices or elections from two (2) or more Persons with respect
to
the same Registrable Securities, the Company shall act upon the basis of
instructions, notice or election received from the registered owner of such
Registrable Securities.
(b)No
Piggyback on Registrations.
Except
as set forth on Schedule
10(b)
attached
hereto, neither the Company nor any of its security holders (other than the
Buyers in such capacity pursuant hereto) may include securities of the Company
in the initial Registration Statement other than the Registrable Securities.
The
Company shall not file any other registration statements until the initial
Registration Statement required hereunder is declared effective by the SEC,
provided that this Section 10(b) shall not prohibit the Company from filing
amendments to registration statements already filed.
(c)Piggy-Back
Registrations.
If at
any time during the Registration Period there is not an effective Registration
Statement covering all of the Registrable Securities and the Company shall
determine to prepare and file with the SEC a registration statement relating
to
an offering for its own account or the account of others under the Securities
Act of any of its equity securities, other than on Form S-4 or Form S-8 (each
as
promulgated under the Securities Act) or their then equivalents relating to
equity securities to be issued solely in connection with any acquisition of any
entity or business or equity securities issuable in connection with the stock
option or other employee benefit plans, then the Company shall send to each
Buyer a written notice of such determination and, if within fifteen (15) days
after the date of such notice, any such Buyer shall so request in writing,
the
Company shall include in such registration statement all or any part of such
Registrable Securities such Buyer requests to be registered; provided,
however,
that,
the Company shall not be required to register any Registrable Securities
pursuant to this Section 10(c) that are eligible for resale pursuant to Rule
144(k) promulgated under the Securities Act or that are the subject of a then
effective Registration Statement.
12
(d) Any
notices, consents, waivers or other communications required or permitted to
be
given under the terms of this Agreement must be in writing and will be deemed
to
have been delivered: (i) upon receipt, when delivered personally; (ii) upon
receipt, when sent by facsimile (provided confirmation of transmission is
mechanically or electronically generated and kept on file by the sending party);
or (iii) one (1) business day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be:
If
to an
Buyer, to its address and facsimile number on the Schedule of Buyers attached
hereto, with copies to such Buyer’s representatives as set forth on the Schedule
of Buyers or to such other address and/or facsimile number and/or to the
attention of such other person as the recipient party has specified by written
notice given to each other party five (5) days prior to the effectiveness of
such change. Written confirmation of receipt (A) given by the recipient of
such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender’s facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by a courier or overnight courier service shall
be
rebuttable evidence of personal service, receipt by facsimile or receipt from
a
nationally recognized overnight delivery service in accordance with clause
(i),
(ii) or (iii) above, respectively.
(e) Failure
of any party to exercise any right or remedy under this Agreement or otherwise,
or delay by a party in exercising such right or remedy, shall not operate as
a
waiver thereof.
13
(f) The
laws
of the State of New Jersey shall govern all issues concerning the relative
rights of the Company and the Buyers as its stockholders. All other questions
concerning the construction, validity, enforcement and interpretation of this
Agreement shall be governed by the internal laws of the State of New Jersey,
without giving effect to any choice of law or conflict of law provision or
rule
(whether of the State of New Jersey or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the State of New
Jersey. Each party hereby irrevocably submits to the non-exclusive jurisdiction
of the Superior Courts of the State of New Jersey, sitting in Hudson County,
New
Jersey and federal courts for the District of New Jersey sitting Newark, New
Jersey, for the adjudication of any dispute hereunder or in connection herewith
or with any transaction contemplated hereby or discussed herein, and hereby
irrevocably waives, and agrees not to assert in any suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of any such
court, that such suit, action or proceeding is brought in an inconvenient forum
or that the venue of such suit, action or proceeding is improper. Each party
hereby irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by mailing a copy thereof
to
such party at the address for such notices to it under this Agreement and agrees
that such service shall constitute good and sufficient service of process and
notice thereof. Nothing contained herein shall be deemed to limit in any way
any
right to serve process in any manner permitted by law. If any provision of
this
Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity
or unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT
TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY.
(g) This
Agreement shall inure to the benefit of and be binding upon the permitted
successors and assigns of each of the parties hereto.
(h) The
headings in this Agreement are for convenience of reference only and shall
not
limit or otherwise affect the meaning hereof.
(i) This
Agreement may be executed in identical counterparts, each of which shall be
deemed an original but all of which shall constitute one and the same agreement.
This Agreement, once executed by a party, may be delivered to the other party
hereto by facsimile transmission of a copy of this Agreement bearing the
signature of the party so delivering this Agreement.
(j) Each
party shall do and perform, or cause to be done and performed, all such further
acts and things, and shall execute and deliver all such other agreements,
certificates, instruments and documents, as the other party may reasonably
request in order to carry out the intent and accomplish the purposes of this
Agreement and the consummation of the transactions contemplated
hereby.
(k) 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.
(l) This
Agreement is intended for the benefit of the parties hereto and their respective
permitted successors and assigns, and is not for the benefit of, nor may any
provision hereof be enforced by, any other Person.
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]
14
IN
WITNESS WHEREOF,
each
Buyer and the Company have caused their signature page to this Registration
Rights Agreement to be duly executed as of the date first above
written.
COMPANY:
FALCON
NATURAL GAS CORP.
By:
Name:
Saul
S. Deutsch
Title:
Chief
Financial Officer
15
IN
WITNESS WHEREOF,
each
Buyer and the Company have caused their signature page to this Registration
Rights Agreement to be duly executed as of the date first above
written.
Attention:
Troy Rillo, Esq. or David Gonzalez,
Esq.
EXHIBIT
A
SELLING
STOCKHOLDERS
AND
PLAN OF DISTRIBUTION
Selling
Stockholders
The
shares of Common Stock being offered by the selling stockholders are issuable
upon conversion of the convertible debentures and upon exercise of the warrants.
For additional information regarding the issuance of those convertible notes
and
warrants, see “Private Placement of Convertible Debentures and Warrants” above.
We are registering the shares of Common Stock in order to permit the selling
stockholders to offer the shares for resale from time to time. Except as
otherwise notes and except for the ownership of the convertible Debentures
and
the warrants issued pursuant to the Securities Purchase Agreement, the selling
stockholders have not had any material relationship with us within the past
three years.
The
table
below lists the selling stockholders and other information regarding the
beneficial ownership of the shares of Common Stock by each of the selling
stockholders. The second column lists the number of shares of Common Stock
beneficially owned by each selling stockholder, based on its ownership of the
convertible debentures and warrants, as of ________, 200_, assuming conversion
of all convertible debentures and exercise of the warrants held by the selling
stockholders on that date, without regard to any limitations on conversions
or
exercise.
The
third
column lists the shares of Common Stock being offered by this prospectus by
the
selling stockholders.
In
accordance with the terms of a registration rights agreement with the selling
stockholders, this prospectus generally covers the resale of at least 300%
of
the number of Conversion Shares issued and issuable pursuant to the convertible
debentures as of the trading day immediately preceding the date the registration
statement is initially filed with the SEC, and.
Because
the conversion price of the convertible debentures may be adjusted, the number
of shares that will actually be issued may be more or less than the number
of
shares being offered by this prospectus. The fourth column assumes the sale
of
all of the shares offered by the selling stockholders pursuant to this
prospectus.
Under
the
terms of the convertible debentures and the warrants, a selling stockholder
may
not convert the convertible debentures or exercise the warrants to the extent
such conversion or exercise would cause such selling stockholder, together
with
its affiliates, to beneficially own a number of shares of Common Stock which
would exceed 4.99% of our then outstanding shares of Common Stock following
such
conversion or exercise, excluding for purposes of such determination shares
of
Common Stock issuable upon conversion of the convertible debentures which have
not been converted and upon exercise of the warrants which have not been
exercised. The number of shares in the second column does not reflect this
limitation. The selling stockholders may sell all, some or none of their shares
in this offering. See "Plan of Distribution."
Name of Selling Stockholder
Number of Shares Owned Prior to Offering
Maximum Number of Shares to be Sold Pursuant to this Prospectus
Number of Shares Owned After Offering
YA
Global Investments, L.P. (1)
(1) YA
Global
Investments, L.P. is a Cayman Island limited partnership. It is managed by
Yorkville Advisors, LLC. Investment decisions for Yorkville Advisors are made
by
Mark Angelo, its portfolio manager.
Plan
of Distribution
Each
Selling Stockholder (the “Selling
Stockholders”)
of the
common stock and any of their pledgees, assignees and successors-in-interest
may, from time to time, sell any or all of their shares of common stock on
the
__________ or any other stock exchange, market or trading facility on which
the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. A Selling Stockholder may use any one or more of the
following methods when selling shares:
·
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
·
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
·
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
·
an
exchange distribution in accordance with the rules of the applicable
exchange;
·
privately
negotiated transactions;
·
broker-dealers
may agree with the Selling Stockholders to sell a specified number
of such
shares at a stipulated price per
share;
·
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
·
a
combination of any such methods of sale;
or
·
any
other method permitted pursuant to applicable
law.
The
Selling Stockholders may also sell shares under Rule 144 under the Securities
Act of 1933, as amended (the “Securities
Act”),
if
available, rather than under this prospectus.
Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the Selling Stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated, but,
except as set forth in a supplement to this Prospectus, in the case of an agency
transaction not in excess of a customary brokerage commission in compliance
with
NASDR Rule 2440; and in the case of a principal transaction a markup or markdown
in compliance with NASDR IM-2440.
In
connection with the sale of the common stock or interests therein, the Selling
Stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the Common
Stock in the course of hedging the positions they assume. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
3
The
Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Stockholder has informed the
Company that it does not have any written or oral agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock. In
no
event shall any broker-dealer receive fees, commissions and markups which,
in
the aggregate, would exceed eight percent (8%).
The
Company is required to pay certain fees and expenses incurred by the Company
incident to the registration of the shares. The Company has agreed to indemnify
the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
Because
Selling Stockholders may be deemed to be “underwriters” within the meaning of
the Securities Act, they will be subject to the prospectus delivery requirements
of the Securities Act including Rule 172 thereunder. In addition, any securities
covered by this prospectus which qualify for sale pursuant to Rule 144 under
the
Securities Act may be sold under Rule 144 rather than under this prospectus.
There is no underwriter or coordinating broker acting in connection with the
proposed sale of the resale shares by the Selling Stockholders.
We
agreed
to keep this prospectus effective until the earlier of (i) the date on which
the
shares may be resold by the Selling Stockholders without registration and
without regard to any volume limitations by reason of Rule 144(k) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to this prospectus or Rule 144 under the Securities
Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not
be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged
in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to the common stock for the applicable restricted
period, as defined in Regulation M, prior to the commencement of the
distribution. In addition, the Selling Stockholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of purchases
and
sales of shares of the common stock by the Selling Stockholders or any other
person. We will make copies of this prospectus available to the Selling
Stockholders and have informed them of the need to deliver a copy of this
prospectus to each purchaser at or prior to the time of the sale (including
by
compliance with Rule 172 under the Securities Act).
4
EXHIBIT
B
OTHER
DISCLOSURES
See
attachment provided separately.
5
EXHIBIT
C
FORM
OF NOTICE OF EFFECTIVENESS
OF
REGISTRATION STATEMENT
Attention:
Re:
FALCON
NATURAL GAS
CORPORATION
Ladies
and Gentlemen:
We
are
counsel to Falcon Natural Gas Corporation, a Nevada corporation (the
“Company”),
and
have represented the Company in connection with that certain Securities Purchase
Agreement (the “Securities
Purchase Agreement”)
entered into by and among the Company and the Buyers named therein
(collectively, the “Buyers”)
pursuant to which the Company issued to the Buyers shares of its Common Stock,
par value $0.001 per share (the “Common
Stock”).
Pursuant to the Purchase Agreement, the Company also has entered into a
Registration Rights Agreement with the Buyers (the “Registration
Rights Agreement”)
pursuant to which the Company agreed, among other things, to register the
Registrable Securities (as defined in the Registration Rights Agreement) under
the Securities Act of 1933, as amended (the “Securities
Act”).
In
connection with the Company’s obligations under the Registration Rights
Agreement, on ____________ ____, the Company filed a Registration Statement
on
Form ________ (File No. 333-_____________) (the “Registration
Statement”)
with
the Securities and Exchange SEC (the “SEC”)
relating to the Registrable Securities which names each of the Buyers as a
selling stockholder there under.
In
connection with the foregoing, we advise you that a member of the SEC’s staff
has advised us by telephone that the SEC has entered an order declaring the
Registration Statement effective under the Securities Act at [ENTER
TIME OF EFFECTIVENESS]
on
[ENTER
DATE OF EFFECTIVENESS]
and we
have no knowledge, after telephonic inquiry of a member of the SEC’s staff, that
any stop order suspending its effectiveness has been issued or that any
proceedings for that purpose are pending before, or threatened by, the SEC
and
the Registrable Securities are available for resale under the Securities Act
pursuant to the Registration Statement.
Very
truly yours,
[Law
Firm]
By: ________________________________________
cc:[LIST
NAMES OF BUYERS]
6
Exhibit
15
AMENDED
AND RESTATED SECURITY AGREEMENT
THIS
SECURITY AGREEMENT
(the
“Agreement”),is
entered into and made effective as of September 28, 2007, by and between
FALCON
NATURAL GAS CORPORATION, a
Nevada
corporation with its principal place of business located at 2500 City West
Boulevard, Westchase Center, Suite 300, Houston, Texas77042 (the “Parent”),
and
the each subsidiary of the Parent listed on Schedule I attached hereto (each
a
“Subsidiary,”
and
collectively and together with the Parent, the “Company”),
in
favor of YA
GLOBAL INVESMENTS, L.P.
(the
“Secured
Party”
or
“Buyer”).
WHEREAS,
the
Company issued to the Secured Party convertible debentures (the “Existing
Convertible Debentures”)
under
the Securities Purchase Agreements dated April 19, 2005; October 17, 2005;
and
January 30, 2007, between the Company and the Secured Party “Existing
SPAs”).
This
Agreement shall amend and restate the Security Agreements between the Company
and the Secured Party dated April 19, 2005, and February 27, 2007 (the
“Existing
Security Agreements”);
WHEREAS,
the
Company has requested the Secured Party to make additional financing available
to the Company;
WHEREAS,
the
parties hereto desire for this Agreement to amend and restate the Existing
Security Agreements;
WHEREAS,
the
Secured Party is willing to provide such additional financing on the condition
that such additional financing is secured hereunder and under various UCC-1
Financing Statements filed in connection with the Existing SPAs and Existing
Security Agreements, and the convertible debentures issued pursuant to the
Existing SPAs, and as shall be filed pursuant to this Agreement;
WHEREAS,
The
Parent shall issue and sell to the Secured Party, as provided in the Securities
Purchase Agreement, and the Secured Party shall purchase, up to Five Million
Five Hundred Forty-Five Thousand Nine Hundred Sixty-Nine Dollars ($5,545,869)
of
secured convertible debentures (the “New
Convertible Debentures,”
and
together with the Existing Convertible Debentures, the “Convertible
Debentures”),
which
shall be convertible into shares of the Parent’s common stock, par value
$0.00001, as set forth in the Securities Purchase Agreement of even date
herewith (the “Securities
Purchase Agreement”);
WHEREAS,
to
induce
the Secured Party to enter into the transaction contemplated by the Securities
Purchase Agreement, the New Convertible Debentures, the Investor Registration
Rights Agreement of even date herewith between, among others, the Parent and
the
Secured Party (the “Investor
Registration Rights Agreement”),
and
the Irrevocable Transfer Agent Instructions between, among others, the Parent,
the Secured Party, the Parent’s transfer agent, and David Gonzalez, Esq. (the
“Transfer
Agent Instructions”)
(collectively referred to as the “Transaction
Documents”),
each
Company hereby grants to the Secured Party a security interest in and to the
pledged property of each Company identified on Exhibit
A
hereto
(collectively referred to as the “Pledged
Property”)
to
secure all of the Obligations (as defined below).
NOW,
THEREFORE, in
consideration of the promises and the mutual covenants herein contained, and
for
other good and valuable consideration, the adequacy and receipt of which are
hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE
1.
DEFINITIONS
AND INTERPRETATIONS
Section
1.1.Recitals.
The
above
recitals are true and correct and are incorporated herein, in their entirety,
by
this reference.
Section
1.2.Interpretations.
Nothing
herein expressed or implied is intended or shall be construed to confer upon
any
person other than the Secured Party any right, remedy or claim under or by
reason hereof.
Section
1.3.Obligations
Secured.
The
security interest created hereby in the Pledged Property constitutes continuing
collateral security for all of the obligations of the Parent now existing or
hereinafter incurred to the Buyers, whether oral or written and whether arising
before, on or after the date hereof including, without limitation following
obligations (collectively, the “Obligations”):
(a)
for
so long as the Convertible Debentures are outstanding, the payment by the
Parent, as and when due and payable (by scheduled maturity, acceleration, demand
or otherwise), of all amounts from time to time owing by it in respect of the
Securities Purchase Agreement, the Convertible Debentures and the other
Transaction Documents; and
(b)
for
so long as the Convertible Debentures are outstanding, the due performance
and
observance by the Parent of all of its other obligations from time to time
existing in respect of any of the Transaction Documents, including without
limitation, the Parent’s obligations with respect to any conversion or
redemption rights of the Secured Party under the Convertible
Debentures.
ARTICLE
2.
PLEDGED
PROPERTY; EVENT OF DEFAULT
Section
2.1.Pledged
Property.
(a) As
collateral security for all of the Obligations, the Company hereby pledges
to
the Secured Party, and creates in the Secured Party for its benefit, a
continuing security interest in and to all of the Pledged Property whether
now
owned or hereafter acquired.
2
(b) Simultaneously
with the execution and delivery of this Agreement, the Company shall make,
execute, acknowledge, file, record and deliver to the Secured Party any
documents reasonably requested by the Secured Party to perfect its security
interest in the Pledged Property. Simultaneously with the execution and delivery
of this Agreement, the Company shall make, execute, acknowledge and deliver
to
the Secured Party such documents and instruments, including, without limitation,
financing statements, certificates, affidavits and forms as may, in the Secured
Party’s reasonable judgment, be necessary to effectuate, complete or perfect, or
to continue and preserve, the security interest of the Secured Party in the
Pledged Property, and the Secured Party shall hold such documents and
instruments as secured party, subject to the terms and conditions contained
herein.
(c)
Establishment
of a Lockbox Account, Dominion Account.
As of the date hereof the Parent, each Subsidiary and the Secured shall have
establish or designated all of the Company’s and each Subsidiaries bank accounts
as (i) a depository account, dominion account or such other “blocked account”
established at a bank or banks (each such bank, a “Blocked
Account Bank”)
pursuant to an arrangement with such Blocked Account Bank as well as a (ii)
lock
box account (collectively the a depository account, dominion account and the
lock box account shall be referred to as “Blocked
Accounts”)
or
such other account as may be selected by the parties hereto for the deposit
of
all cash and all collections and proceeds from the Accounts to be deposited
into
the deposit Account and/or lock Box, as applicable, together with the proceeds
thereof, all goods represented by such Accounts and all such goods that may
be
returned by the Company’s and each Subsidiaries customers, and all proceeds of
any insurance thereon, and all guarantees, securities and liens which the
Company and each Subsidiary may hold for the payment of any such Accounts
including, without limitation, all rights of stoppage in transit, replevin
and
reclamation and as an unpaid vendor and/or lienor, all of which the Company
and
each Subsidiary represents and warrants will be bona fide and existing
obligations of its respective customers, arising out of the sale of goods by
the
Company in the ordinary course of business into any accounts other than the
Deposit and/or the Lockbox Accounts, as applicable The parties hereto and each
Blocked Account Bank shall enter into a deposit account control agreement in
form and substance satisfactory to Secured Party directing such Blocked Account
Bank, upon notification by the Secured Party of an Event of Default as defined
herein, to transfer such funds so deposited into the Blocked Accounts, either
to
any account maintained by the Secured Party at said Blocked Account Bank or
by
wire transfer to appropriate account(s) the Secured Party directs and providing
the Secured Party such control over the Blocked Accounts until the earlier
of
the Event of Default being cured or repayment of the Obligations. Upon an Event
of Default all funds deposited in such Blocked Accounts shall immediately become
the property of the Secured Party and the parties hereto shall obtain the
agreement by such Blocked Account Bank to waive any offset rights against the
funds so deposited.
Section
2.2.Event
of Default
An
“Event
of Default”
shall
be deemed to have occurred under this Agreement upon an Event of Default under
and as defined in the Convertible Debentures.
3
ARTICLE
3.
ATTORNEY-IN-FACT;
PERFORMANCE
Section
3.1.Secured
Party Appointed Attorney-In-Fact.
Upon
the
occurrence and during the continuance of an Event of Default: (a) the Company
hereby appoints the Secured Party as its attorney-in-fact, with full authority
in the place and stead of the Company and in the name of the Company or
otherwise, from time to time in the Secured Party’s discretion to take any
action and to execute any instrument which the Secured Party may reasonably
deem
necessary to accomplish the purposes of this Agreement, including, without
limitation, to receive and collect all instruments made payable to the Company
representing any payments in respect of the Pledged Property or any part thereof
and to give full discharge for the same; (b) the Secured Party may demand,
collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize
on the Pledged Property as and when the Secured Party may determine, and (c)
to
facilitate collection, the Secured Party may notify account debtors and obligors
on any Pledged Property to make payments directly to the Secured
Party.
Section
3.2.Secured
Party May Perform.
If
the
Company fails to perform any agreement contained herein, the Secured Party,
at
its option, may itself perform, or cause performance of, such agreement, and
the
expenses of the Secured Party incurred in connection therewith shall be included
in the Obligations secured hereby and payable by the Company under
Section 8.3.
ARTICLE
4.
REPRESENTATIONS
AND WARRANTIES
Section
4.1.Authorization;
Enforceability.
Each
of
the parties hereto represents and warrants that it has taken all action
necessary to authorize the execution, delivery and performance of this Agreement
and the transactions contemplated hereby; and upon execution and delivery,
this
Agreement shall constitute a valid and binding obligation of the respective
party, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors’ rights or by the principles governing the
availability of equitable remedies.
4
Section
4.2.Ownership
of Pledged Property.
The
Company represents and warrants that it is the legal and beneficial owner of
the
Pledged Property free and clear of any lien, security interest, option or other
charge or encumbrance (each, a “Lien”) except for the security interest created
by this Agreement and other Permitted Liens. For purposes of this Agreement,
“Permitted Liens” means: (1) the security interest created by this Agreement,
(2) existing Liens disclosed by the Company to the Secured Party; (3) inchoate
Liens for taxes, assessments or governmental charges or levies not yet due,
as
to which the grace period, if any, related thereto has not yet expired, or
being
contested in good faith and by appropriate proceedings for which adequate
reserves have been established in accordance with GAAP; (4) Liens of carriers,
materialmen, warehousemen, mechanics and landlords and other similar Liens
which
secure amounts which are not yet overdue by more than 60 days or which are
being
contested in good faith by appropriate proceedings; (5) licenses, sublicenses,
leases or subleases granted to other Persons not materially interfering with
the
conduct of the business of the Company; (6) Liens securing capitalized lease
obligations and purchase money indebtedness incurred solely for the purpose
of
financing an acquisition or lease; (7) easements, rights-of-way, restrictions,
encroachments, municipal zoning ordinances and other similar charges or
encumbrances, and minor title deficiencies, in each case not securing debt
and
not materially interfering with the conduct of the business of the Company
and
not materially detracting from the value of the property subject thereto; (8)
Liens arising out of the existence of judgments or awards which judgments or
awards do not constitute an Event of Default; (9) Liens incurred in the ordinary
course of business in connection with workers compensation claims, unemployment
insurance, pension liabilities and social security benefits and Liens securing
the performance of bids, tenders, leases and contracts in the ordinary course
of
business, statutory obligations, surety bonds, performance bonds and other
obligations of a like nature (other than appeal bonds) incurred in the ordinary
course of business (exclusive of obligations in respect of the payment for
borrowed money); (10) Liens in favor of a banking institution arising by
operation of law encumbering deposits (including the right of set-off) and
contractual set-off rights held by such banking institution and which are within
the general parameters customary in the banking industry and only burdening
deposit accounts or other funds maintained with a creditor depository
institution; (11) usual and customary set-off rights in leases and other
contracts; and (12) escrows in connection with acquisitions and
dispositions.
Section
4.3.Name
Change.
The
Company and each Subsidiary have only effectuated changes their respective
corporate names as designated in Schedule 4.3 herein.
ARTICLE
5.
DEFAULT;
REMEDIES; SUBSTITUTE COLLATERAL
Section
5.1Method
of Realizing Upon the Pledged Property: Other Remedies.
If
any
Event of Default shall have occurred and be continuing:
5
(a) The
Secured Party may exercise in respect of the Pledged Property, in addition
to
any other rights and remedies provided for herein or otherwise available to
it,
all of the rights and remedies of a secured party upon default under the Uniform
Commercial Code (whether or not the Uniform Commercial Code applies to the
affected Pledged Property), and also may (i) take absolute control of the
Pledged Property, including, without limitation, transfer into the Secured
Party's name or into the name of its nominee or nominees (to the extent the
Secured Party has not theretofore done so) and thereafter receive, for the
benefit of the Secured Party, all payments made thereon, give all consents,
waivers and ratifications in respect thereof and otherwise act with respect
thereto as though it were the outright owner thereof, (ii) require the
Company to assemble all or part of the Pledged Property as directed by the
Secured Party and make it available to the Secured Party at a place or places
to
be designated by the Secured Party that is reasonably convenient to both
parties, and the Secured Party may enter into and occupy any premises owned
or
leased by the Company where the Pledged Property or any part thereof is located
or assembled for a reasonable period in order to effectuate the Secured Party's
rights and remedies hereunder or under law, without obligation to the Company
in
respect of such occupation, and (iii) without notice except as specified
below and without any obligation to prepare or process the Pledged Property
for
sale, (A) sell the Pledged Property or any part thereof in one or more
parcels at public or private sale, at any of the Secured Party's offices or
elsewhere, for cash, on credit or for future delivery, and at such price or
prices and upon such other terms as the Secured Party may deem commercially
reasonable and/or (B) lease, license or dispose of the Pledged Property or
any part thereof upon such terms as the Secured Party may deem commercially
reasonable. The Company agrees that, to the extent notice of sale or any other
disposition of the Pledged Property shall be required by law, at least ten
(10)
days' notice to the Company of the time and place of any public sale or the
time
after which any private sale or other disposition of the Pledged Property is
to
be made shall constitute reasonable notification. The Secured Party shall not
be
obligated to make any sale or other disposition of any Pledged Property
regardless of notice of sale having been given. The Secured Party may adjourn
any public or private sale from time to time by announcement at the time and
place fixed therefor, and such sale may, without further notice, be made at
the
time and place to which it was so adjourned. The Company hereby waives any
claims against the Secured Party arising by reason of the fact that the price
at
which the Pledged Property may have been sold at a private sale was less than
the price which might have been obtained at a public sale or was less than
the
aggregate amount of the Obligations, even if the Secured Party accepts the
first
offer received and does not offer such Pledged Property to more than one
offeree, and waives all rights that the Company may have to require that all
or
any part of such Pledged Property be marshaled upon any sale (public or private)
thereof. The Company hereby acknowledges that (i) any such sale of the
Pledged Property by the Secured Party may be made without warranty,
(ii) the Secured Party may specifically disclaim any warranties of title,
possession, quiet enjoyment or the like, and (iii) such actions set forth
in clauses (i) and (ii) above shall not adversely affect the commercial
reasonableness of any such sale of Pledged Property.
(b) Upon
an
Event of Default all funds deposited in such Blocked Accounts shall immediately
become the property of the Buyer. The Secured Party shall direct such Blocked
Account Bank, to transfer such funds so deposited into the Blocked Accounts,
either to any account maintained by the Secured Party at said Blocked Account
Bank or by wire transfer to appropriate account(s) the Secured Party directs
and
providing the Secured Party such control over the Blocked Accounts until the
earlier of the Event of Default being cured or repayment of the Obligations.
(c) Any
cash
held by the Secured Party as Pledged Property and all cash proceeds received
by
the Secured Party in respect of any sale of or collection from, or other
realization upon, all or any part of the Pledged Property shall be applied
(after payment of any amounts payable to the Secured Party pursuant to Section
8.3 hereof) by the Secured Party against, all or any part of the Obligations
in
such order as the Secured Party shall elect, consistent with the provisions
of
the Securities Purchase Agreement. Any surplus of such cash or cash proceeds
held by the Secured Party and remaining after the indefeasible payment in full
in cash of all of the Obligations shall be paid over to whomsoever shall be
lawfully entitled to receive the same or as a court of competent jurisdiction
shall direct.
6
(d) In
the
event that the proceeds of any such sale, collection or realization are
insufficient to pay all amounts to which the Secured Party is legally entitled,
the Company shall be liable for the deficiency, together with interest thereon
at the rate specified in the Convertible Debentures for interest on overdue
principal thereof or such other rate as shall be fixed by applicable law,
together with the costs of collection and the reasonable fees, costs, expenses
and other client charges of any attorneys employed by the Secured Party to
collect such deficiency.
(e) The
Company hereby acknowledges that if the Secured Party complies with any
applicable state, provincial, or federal law requirements in connection with
a
disposition of the Pledged Property, such compliance will not adversely affect
the commercial reasonableness of any sale or other disposition of the Pledged
Property.
(f) The
Secured Party shall not be required to marshal any present or future collateral
security (including, but not limited to, this Agreement and the Pledged
Property) for, or other assurances of payment of, the Obligations or any of
them
or to resort to such collateral security or other assurances of payment in
any
particular order, and all of the Secured Party's rights hereunder and in respect
of such collateral security and other assurances of payment shall be cumulative
and in addition to all other rights, however existing or arising. To the extent
that the Company lawfully may, the Company hereby agrees that it will not invoke
any law relating to the marshaling of collateral which might cause delay in
or
impede the enforcement of the Secured Party's rights under this Agreement or
under any other instrument creating or evidencing any of the Obligations or
under which any of the Obligations is outstanding or by which any of the
Obligations is secured or payment thereof is otherwise assured, and, to the
extent that it lawfully may, the Company hereby irrevocably waives the benefits
of all such laws.
Section
5.2Duties
Regarding Pledged Property.
The
Secured Party shall have no duty as to the collection or protection of the
Pledged Property or any income thereon or as to the preservation of any rights
pertaining thereto, beyond the safe custody and reasonable care of any of the
Pledged Property actually in the Secured Party’s possession.
ARTICLE
6.
AFFIRMATIVE
COVENANTS
The
Company covenants and agrees that, from the date hereof and until the
Obligations have been fully paid and satisfied or the Convertible Debentures
have been fully converted, unless the Secured Party shall consent otherwise
in
writing (as provided in Section 8.4 hereof):
7
Section
6.1.Existence,
Properties, Etc.
(a) The
Company shall do, or cause to be done, all things, or proceed with due diligence
with any actions or courses of action, that may be reasonably necessary
(i) to maintain Company’s due organization, valid existence and good
standing under the laws of its state of incorporation, and (ii) to preserve
and keep in full force and effect all qualifications, licenses and registrations
in those jurisdictions in which the failure to do so could have a Material
Adverse Effect (as defined below); and (b) the Company shall not do, or
cause to be done, any act impairing the Company’s corporate power or authority
(i) to carry on the Company’s business as now conducted, and (ii) to
execute or deliver this Agreement or any other document delivered in connection
herewith, including, without limitation, any UCC-1 Financing Statements required
by the Secured Party (which other loan instruments collectively shall be
referred to as the “Loan
Instruments”) to
which it is or will be a party, or perform any of its obligations hereunder
or
thereunder. For purpose of this Agreement, the term “Material
Adverse Effect”
shall
mean any material and adverse affect as determined by Secured Party in its
reasonable discretion, whether individually or in the aggregate, upon
(a) the Company’s assets, business, operations, properties or condition,
financial or otherwise; (b) the Company’s ability to make payment as and
when due of all or any part of the Obligations; or (c) the Pledged
Property.
Section
6.2.Financial
Statements and Reports.
The
Company shall furnish to the Secured Party within a reasonable time such
financial data as the Secured Party may reasonably request.
Section
6.3.Accounts
and Reports.
The
Company shall maintain a standard system of accounting in accordance with
generally accepted accounting principles consistently applied (“GAAP”) and
provide, at its sole expense, to the Secured Party the following:
(a) as
soon
as available, a copy of any notice or other communication alleging any
nonpayment or other material breach or default, or any foreclosure or other
action respecting any material portion of its assets and properties, received
respecting any of the indebtedness of the Company in excess of $500,000 (other
than the Obligations), or any demand or other request for payment under any
guaranty, assumption, purchase agreement or similar agreement or arrangement
respecting the indebtedness or obligations of others in excess of $500,000;
and
(b) within
fifteen (15) days after the making of each submission or filing, a copy of
any report, financial statement, notice or other document, whether periodic
or
otherwise, submitted to the shareholders of the Company, or submitted to or
filed by the Company with any governmental authority involving or affecting
(i)
the Company that could reasonably be expected to have a Material Adverse Effect;
(ii) the Obligations; (iii) any part of the Pledged Property; or
(iv) any of the transactions contemplated in this Agreement or the Loan
Instruments (except, in each case, to the extent any such submission, filing,
report, financial statement, notice or other document is posted on EDGAR
Online).
Section
6.4.Maintenance
of Books and Records; Inspection.
The
Company shall maintain its books, accounts and records in accordance with GAAP,
and permit the Secured Party, its officers and employees and any professionals
designated by the Secured Party in writing, at any time during normal business
hours and upon reasonable notice to visit and inspect any of its properties
(including but not limited to the collateral security described in the
Transaction Documents and/or the Loan Instruments), corporate books and
financial records, and to discuss its accounts, affairs and finances with any
employee, officer or director thereof (it being agreed that, unless an Event
of
Default shall have occurred and be continuing, there shall be no more than
two
(2) such visits and inspections in any Fiscal Year).
8
Section
6.5.Maintenance
and Insurance.
(a) The
Company shall maintain or cause to be maintained, at its own expense, all of
its
material assets and properties in good working order and condition, ordinary
wear and tear excepted, making all necessary repairs thereto and renewals and
replacements thereof.
(b) The
Company shall maintain or cause to be maintained, at its own expense, insurance
in form, substance and amounts (including deductibles), which the Company deems
reasonably necessary to the Company’s business, (i) adequate to insure all
assets and properties of the Company of a character usually insured by persons
engaged in the same or similar business against loss or damage resulting from
fire or other risks included in an extended coverage policy; (ii) against
public liability and other tort claims that may be incurred by the Company;
(iii) as may be required by the Transaction Documents and/or applicable law
and (iv) as may be reasonably requested by Secured Party, all with financially
sound and reputable insurers.
Section
6.6.Contracts
and Other Collateral.
The
Company shall perform all of its obligations under or with respect to each
instrument, receivable, contract and other intangible included in the Pledged
Property to which the Company is now or hereafter will be party on a timely
basis and in the manner therein required, including, without limitation, this
Agreement, except to the extent the failure to so perform such obligations
would
not reasonably be expected to have a Material Adverse Effect.
Section
6.7.Defense
of Collateral, Etc.
The
Company shall defend and enforce its right, title and interest in and to any
part of: (a) the Pledged Property; and (b) if not included within the
Pledged Property, those assets and properties whose loss would reasonably be
expected to have a Material Adverse Effect, each against all manner of claims
and demands on a timely basis to the full extent permitted by applicable law
(other than any such claims and demands by holders of Permitted
Liens).
Section
6.8.Taxes
and Assessments.
The
Company shall (a) file all material tax returns and appropriate schedules
thereto that are required to be filed under applicable law, prior to the date
of
delinquency (taking into account any extensions of the original due date),
(b) pay and discharge all material taxes, assessments and governmental
charges or levies imposed upon the Company, upon its income and profits or
upon
any properties belonging to it, prior to the date on which penalties attach
thereto, and (c) pay all material taxes, assessments and governmental
charges or levies that, if unpaid, might become a lien or charge upon any of
its
properties; provided,
however,
that
the Company in good faith may contest any such tax, assessment, governmental
charge or levy described in the foregoing clauses (b) and (c) so long as
appropriate reserves are maintained with respect thereto if and to the extent
required by GAAP.
9
Section
6.9.Compliance
with Law and Other Agreements.
The
Company shall maintain its business operations and property owned or used in
connection therewith in compliance with (a) all applicable federal, state
and local laws, regulations and ordinances governing such business operations
and the use and ownership of such property, and (b) all agreements,
licenses, franchises, indentures and mortgages to which the Company is a party
or by which the Company or any of its properties is bound, except where the
failure to so comply would not reasonably be expected to have a Material Adverse
Effect.
Section
6.10.Notice
of Default.
The
Company shall give written notice to the Secured Party of the occurrence of
any
Event of Default.
Section
6.11.Notice
of Litigation.
The
Company shall give notice, in writing, to the Secured Party of (a) any
actions, suits or proceedings wherein the amount at issue is in excess of
$250,000, instituted by any persons against the Company, or affecting any of
the
assets of the Company, and (b) any dispute, not resolved within fifteen
(15) days of the commencement thereof, between the Company on the one hand
and
any governmental or regulatory body on the other hand, which might reasonably
be
expected to have a Material Adverse Effect on the business operations or
financial condition of the Company.
Section
6.13.Future
Subsidiaries.
If
the
Company shall hereafter create or acquire any subsidiary, simultaneously with
the creation or acquisition of such subsidiary, the Company shall cause such
subsidiary to grant to the Secured Party a security interest of the same tenor
as created under this Agreement.
Section
6.14.Deposit/Lock
Box Accounts. The
Company and each Subsidiary shall cause all cash and all collections and
proceeds from the Accounts to be deposited into the Deposit Account and/or
Lock
Box, as applicable, together with the proceeds thereof, all goods represented
by
such Accounts and all such goods that may be returned by the Company’s and each
Subsidiaries customers, and all proceeds of any insurance thereon, and all
guarantees, securities and liens which the Company and each Subsidiary may
hold
for the payment of any such Accounts including, without limitation, all rights
of stoppage in transit, replevin and reclamation and as an unpaid vendor and/or
lienor, all of which the Company and the each Subsidiary represents and warrants
will be bona fide and existing obligations of its respective customers, arising
out of the sale of goods by the Company and each Subsidiary in the ordinary
course of business into any accounts other than the Deposit and/or the Lockbox
Accounts, as applicable.
10
ARTICLE
7.
NEGATIVE
COVENANTS
The
Company covenants and agrees that, from the date hereof until the Obligations
have been fully paid and satisfied, the Company shall not, unless the Secured
Party shall consent otherwise in writing:
Section
7.1.Liens
and Encumbrances.
Directly
or indirectly make, create, incur, assume or permit to exist any Lien in, to
or
against any part of the Pledged Property other than Permitted
Liens.
Section
7.2.Restriction
on Redemption and Cash Dividends
Directly
or indirectly, redeem, repurchase or declare or pay any cash dividend or
distribution on its capital stock without the prior express written consent
of
the Secured Party.
Section
7.3.Incurrence
of Indebtedness.
Directly
or indirectly, incur or guarantee, assume or suffer to exist any indebtedness,
other than the indebtedness evidenced by the Convertible Debentures and other
Permitted Indebtedness. “Permitted
Indebtedness”
means:
(i) indebtedness evidenced by Convertible Debentures; (ii) indebtedness
described on the Disclosure Schedule to the Securities Purchase Agreement;
(iii)
indebtedness incurred solely for the purpose of financing the acquisition or
lease of any equipment by the Company, including capital lease obligations
with
no recourse other than to such equipment; (iv) indebtedness (A) the repayment
of
which has been subordinated to the payment of the Convertible Debentures on
terms and conditions acceptable to the Secured Party, including with regard
to
interest payments and repayment of principal, (B) which does not mature or
otherwise require or permit redemption or repayment prior to or on the
91st
day
after the maturity date of any Convertible Debentures then outstanding; and
(C)
which is not secured by any assets of the Company; (v) indebtedness solely
between the Company and/or one of its domestic subsidiaries, on the one hand,
and the Company and/or one of its domestic subsidiaries, on the other which
indebtedness is not secured by any assets of the Company or any of its
subsidiaries, provided that (x) in each case a majority of the equity of any
such domestic subsidiary is directly or indirectly owned by the Company, such
domestic subsidiary is controlled by the Company and such domestic subsidiary
has executed a security agreement in the form of this Agreement and (y) any
such
loan shall be evidenced by an intercompany note that is pledged by the Company
or its subsidiary, as applicable, as collateral pursuant to this Agreement;
(vi)
reimbursement obligations in respect of letters of credit issued for the account
of the Company or any of its subsidiaries for the purpose of securing
performance obligations of the Company or its subsidiaries incurred in the
ordinary course of business so long as the aggregate face amount of all such
letters of credit does not exceed $500,000 at any one time; and (vii) renewals,
extensions and refinancing of any indebtedness described in clauses (i) or
(iii)
of this subsection.
11
Section
7.4.Places
of Business.
Change
the location of its chief place of business, chief executive office or any
place
of business disclosed to the Secured Party, unless such change in location
is to
a different location within the United States and the Company provides notice
to
the Secured Party of new location within 10 days’ of such change in
location.
Section
7.5.Company
Name. The
Company and each Subsidiary shall not change their respective names without
providing the Secured Party thirty (30) calendar days prior written
notice.
Section
7.6.Bank
Accounts. The
Company and each Subsidiary shall not open, create, assume, establish or
maintain any bank account with out having it designated as a “Deposit Account”
and complying with the term hereunder.
Section
7.7.Deposit/Lockbox
Accounts. The
Company and each Subsidiary shall not direct, instruct, cause to be deposited
or
otherwise deposit any cash and or any collections and proceeds from the
Accounts, together with the proceeds thereof, all goods represented by such
Accounts and all such goods that may be returned by the Company’s and each
Subsidiaries customers, and all proceeds of any insurance thereon, and all
guarantees, securities and liens which the Company and each Subsidiary may
hold
for the payment of any such Accounts including, without limitation, all rights
of stoppage in transit, replevin and reclamation and as an unpaid vendor and/or
lienor, all of which the Company represents and warrants will be bona fide
and
existing obligations of its respective customers, arising out of the sale of
goods by the Company and each Subsidiary in the ordinary course of business
into
any accounts other than the Deposit and/or the Lockbox Accounts, as
applicable.
ARTICLE
8.
MISCELLANEOUS
Section
8.1.Notices.
All
notices or other communications required or permitted to be given pursuant
to
this Agreement shall be in writing and shall be considered as duly given on:
(a) the date of delivery, if delivered in person or by nationally
recognized overnight delivery service or (b) five (5) days after
mailing if mailed from within the continental United States by certified mail,
return receipt requested to the party entitled to receive the same:
Any
party
may change its address by giving notice to the other party stating its new
address. Commencing on the tenth (10th) day
after the giving of such notice, such newly designated address shall be such
party’s address for the purpose of all notices or other communications required
or permitted to be given pursuant to this Agreement.
Section
8.2.Severability.
If
any
provision of this Agreement shall be held invalid or unenforceable, such
invalidity or unenforceability shall attach only to such provision and shall
not
in any manner affect or render invalid or unenforceable any other severable
provision of this Agreement, and this Agreement shall be carried out as if
any
such invalid or unenforceable provision were not contained herein.
Section
8.3.Expenses.
In
the
event of an Event of Default, the Company will pay to the Secured Party the
amount of any and all reasonable out-of-pocket expenses, including the
reasonable fees and expenses of its counsel, which the Secured Party may incur
in connection with: (i) the custody or preservation of, or the sale,
collection from, or other realization upon, any of the Pledged Property;
(ii) the exercise or enforcement of any of the rights of the Secured Party
hereunder or (iii) the failure by the Company to perform or observe any of
the provisions hereof.
13
Section
8.4.Waivers,
Amendments, Etc.
The
Secured Party’s delay or failure at any time or times hereafter to require
strict performance by Company of any undertakings, agreements or covenants
shall
not waive, affect, or diminish any right of the Secured Party under this
Agreement to demand strict compliance and performance herewith. Any waiver
by
the Secured Party of any Event of Default shall not waive or affect any other
Event of Default, whether such Event of Default is prior or subsequent thereto
and whether of the same or a different type. None of the undertakings,
agreements and covenants of the Company contained in this Agreement, and no
Event of Default, shall be deemed to have been waived by the Secured Party,
nor
may this Agreement be amended, changed or modified, unless such waiver,
amendment, change or modification is evidenced by an instrument in writing
specifying such waiver, amendment, change or modification and signed by the
Secured Party in the case of any such waiver, and signed by the Secured Party
and the Company in the case of any such amendment, change or
modification.
(a)
This
Agreement shall create a continuing security interest in the Pledged Property
and shall: (i) remain in full force and effect until payment or conversion
in full of the Convertible Debentures; (ii) be binding upon the Company and
its successors and assigns; and (iii) inure to the benefit of the Secured
Party and its successors and assigns. Upon the payment or satisfaction in full
or conversion in full of the Convertible Debentures, this Agreement and the
security interest created hereby shall terminate, and, in connection therewith,
the Company shall be entitled to the return, at its expense, of such of the
Pledged Property as shall not have been sold in accordance with Section 5.2
hereof or otherwise applied pursuant to the terms hereof and the Secured Party
shall deliver to the Company such documents as the Company shall reasonably
request to evidence such termination.
(b) Effective
upon the closing of a disposition of any Pledged Property, provided the Secured
Party consents in writing prior to such disposition or such disposition is
made
in the ordinary course of business, the security interest granted hereunder
in
the Pledged Property so disposed of shall terminate and the Secured Party shall
deliver such documents as the Company shall reasonably request to evidence
such
termination; provided, however, the security interest granted hereunder in
all
remaining Pledged Property shall remain in full force and effect.
Section
8.6.Independent
Representation.
Each
party hereto acknowledges and agrees that it has received or has had the
opportunity to receive independent legal counsel of its own choice and that
it
has been sufficiently apprised of its rights and responsibilities with regard
to
the substance of this Agreement.
Section
8.7.Applicable
Law: Jurisdiction.
This
Agreement shall be governed by and interpreted in accordance with the laws
of
the State of New Jersey without regard to the principles of conflict of laws.
The parties further agree that any action between them shall be heard in Hudson
County, New Jersey, and expressly consent to the jurisdiction and venue of
the
Superior Court of New Jersey, sitting in Hudson County and the United States
District Court for the District of New Jersey sitting in Newark, New Jersey
for
the adjudication of any civil action asserted pursuant to this
Paragraph.
14
Section
8.8.Waiver
of Jury Trial.
AS
A
FURTHER INDUCEMENT FOR THE SECURED PARTY TO ENTER INTO THIS AGREEMENT AND TO
MAKE THE FINANCIAL ACCOMMODATIONS TO THE COMPANY, THE COMPANY HEREBY WAIVES
ANY
RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATED IN ANY WAY TO THIS
AGREEMENT AND/OR ANY AND ALL OTHER DOCUMENTS RELATED TO THIS TRANSACTION.
Section
8.9.Entire
Agreement.
This
Agreement constitutes the entire agreement among the parties and supersedes
any
prior agreement or understanding among them with respect to the subject matter
hereof.
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]
15
IN
WITNESS WHEREOF, the
parties hereto have executed this Security Agreement as of the date first above
written.
COMPANY:
FALCON
NATURAL GAS CORP.
By:
Name: Saul
S. Deutsch
Title: Chief
Financial Officer
16
IN
WITNESS WHEREOF, the
parties hereto have executed this Security Agreement as of the date first above
written.
SECURED
PARTY:
YA
GLOBAL INVESTMENTS, LP
By:
Yorkville
Advisors, LLC
Its:
General
Partner
By:
Name: Mark
Angelo
Title:
Portfolio
Manager
17
SCHEDULE
I
LEGAL
NAMES; ORGANIZATIONAL IDENTIFICATION NUMBERS; STATES OF
ORGANIZATION
Company’s
Name
State of
Organization
Employer
ID
Organizational
ID
Subsidiary
1.
Delaware
Subsidiary
2.
Delaware
Subsidiary
3
Subsidiary
4
18
EXHIBIT
A
DEFINITION
OF PLEDGED PROPERTY
For
the
purpose of securing prompt and complete payment and performance by the Company
of all of the Obligations, the Company unconditionally and irrevocably hereby
grants to the Secured Party a continuing security interest in and to, and lien
upon, the following Pledged Property of the Company:
(a) all
goods
of the Company, including, without limitation, machinery, equipment, furniture,
furnishings, fixtures, signs, lights, tools, parts, supplies and motor vehicles
of every kind and description, now or hereafter owned by the Company or in
which
the Company may have or may hereafter acquire any interest, and all
replacements, additions, accessions, substitutions and proceeds thereof, arising
from the sale or disposition thereof, and where applicable, the proceeds of
insurance and of any tort claims involving any of the foregoing;
(b) all
inventory of the Company, including, but not limited to, all goods, wares,
merchandise, parts, supplies, finished products, other tangible personal
property, including such inventory as is temporarily out of Company’s custody or
possession and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of
the foregoing;
(c) all
contract rights and general intangibles of the Company, including, without
limitation, goodwill, trademarks, trade styles, trade names, leasehold
interests, partnership or joint venture interests, patents and patent
applications, copyrights, deposit accounts whether now owned or hereafter
created;
(d) all
documents, warehouse receipts, instruments and chattel paper of the Company
whether now owned or hereafter created;
(e) all
accounts and other receivables, instruments or other forms of obligations and
rights to payment of the Company (herein collectively referred to as
“Accounts”),
together with the proceeds thereof, all goods represented by such Accounts
and
all such goods that may be returned by the Company’s customers, and all proceeds
of any insurance thereon, and all guarantees, securities and liens which the
Company may hold for the payment of any such Accounts including, without
limitation, all rights of stoppage in transit, replevin and reclamation and
as
an unpaid vendor and/or lienor;
(f) to
the
extent assignable, all of the Company’s rights under all present and future
authorizations, permits, licenses and franchises issued or granted in connection
with the operations of any of its facilities;
(g) all
equity interests, securities or other instruments in other companies, including,
without limitation, any subsidiaries, investments or other entities (whether
or
not controlled); whether no existing or later acquired or created
and
19
(h) all
products and proceeds (including, without limitation, insurance proceeds) from
the above-described Pledged Property.
This
agreement is made in connection with the provision of funds by YA Global
Investments, L.P. (f/k/a Cornell Capital Partners, L.P.) (“YA”)
pursuant to the Securities Purchase Agreement (“SPA”)
of
even date herewith, and will confirm our understanding regarding Falcon Natural
Gas Corp.’s (“Falcon”,
or the
“Company”)
obligations owed to YA. Falcon hereby acknowledges, confirms and agrees that
as
of the close of business on September 28, 2007, Falcon is indebted
(collectively, the “Existing
Debentures”)
to YA
in the amounts set forth below:
All
amounts owed, as set forth above, together with any fees, costs, expenses and
other charges now or hereafter payable by Falcon to YA (including, without
limitation, the amounts referenced in the table above) under the Existing
Debentures are unconditionally owing by Falcon to YA, without offset, setoff,
defense or counterclaim of any kind, nature or description whatsoever. Falcon
further acknowledges, confirms and agrees that (a) all agreements between
Falcon and YA (the “Existing
Agreements”)
have
been duly executed and delivered by Falcon to YA, and each is in full force
and
effect as of the date hereof; (b) the agreements and obligations of Falcon
contained in the Existing Agreements constitute the legal, valid and binding
obligations of Falcon, enforceable against it in accordance with their
respective terms, and Falcon has no valid defense to the enforcement of such
obligations; and (c) YA is and shall be entitled to the rights, remedies
and benefits provided for in the Existing Agreements and applicable law, without
offset, setoff, defense or counterclaim of any kind, nature or descriptions
whatsoever.
In
exchange for YA entering into the SPA, and for other consideration and
accommodation, Falcon does hereby RELEASE AND FOREVER DISCHARGE YA and its
subsidiaries and its respective affiliates, parents, joint ventures, officers,
directors, shareholders, interest holders, members, managers, employees,
consultants, representatives, successors and assigns, heirs, executors and
administrators (collectively, “Buyer
Parties”)
from
all causes of action, suits, debts, claims and demands whatsoever known or
unknown, at law, in equity or otherwise, which Falcon had, now has, or hereafter
may have, arising from or relating in any way to the Company’s status as a
debtor of YA on or prior to the date hereof, any agreement between Falcon and
YA
entered into prior to the date hereof, any claims for reasonable attorneys’ fees
and costs, and including, without limitation, any claims relating to fees,
penalties, liquidated damages, and indemnification for losses, liabilities
and
expenses. This release is effective without regard to the legal nature of
the claims raised and without regard to whether any such claims are based upon
tort, equity, or implied or express contract. It is expressly understood
and agreed that this release shall operate as a clear and unequivocal waiver
by
Falcon of any such claim whatsoever.
This
letter may be executed in any number of counterparts, each of which shall be
deemed an original, and all of which shall constitute one and the same
instrument. This letter shall be accepted, effective and binding, for all
purposes, when the parties shall have signed and transmitted to each other,
by
telecopier or otherwise, copies of this letter. The terms of this letter
supersede the terms of any other verbal or written agreement existing prior
to
the date hereof. In the event of any litigation arising hereunder, the
prevailing party or parties shall be entitled to recover its or their reasonable
attorneys’ fees and court costs from the other party or parties, including the
costs of bringing such litigation and collecting upon any judgments. This letter
shall be binding upon and shall inure to the benefit of the parties hereto
and
their respective heirs, executors, legal representatives, trustees, successors
and assigns. Except for the amounts expressly set forth herein, none of the
parties hereto shall be liable to any other party for any amounts
whatsoever.
If
the
foregoing correctly sets forth the terms of our agreement, please sign this
letter on the line provided below, whereupon it will constitute a binding
agreement among us.
NOTICE
OF CONFIDENTIALITY RIGHTS: IF YOU ARE A NATURAL PERSON, YOU MAY REMOVE OR STRIKE
ANY OR ALL OF THE FOLLOWING INFORMATION FROM THIS INSTRUMENT THAT TRANSFERS
AN
INTEREST IN REAL PROPERTY BEFORE IT IS FILED FOR RECORD IN THE PUBLIC RECORDS:
YOUR SOCIAL SECURITY NUMBER OR YOUR DRIVER'S LICENSE NUMBER.
CONVEYANCE
OF OVERRIDING ROYALTY INTEREST
THIS
CONVEYANCE OF OVERRIDING ROYALTY INTEREST (as from time to time supplemented
or
amended, this “Conveyance”), dated as of the date set out at the end hereof, is
made from and by Falcon Natural Gas Corp., a Nevada corporation (herein called
“WI
Owner”),
to
and in favor of YA Global Investments, L.P., a Cayman Islands exempt limited
partnership (herein called “Royalty
Owner”).
ARTICLE
I
Defined
Terms
Section
1.1. Defined
Terms.
When
used in this Conveyance or in any exhibit or schedule hereto (unless otherwise
defined in any such exhibit or schedule), the following terms have the
respective meanings assigned to them in this section or in the sections,
subsections, exhibits and schedules referred to below:
“Affiliate”
means,
as to any Person, each other Person that directly or indirectly (through one
or
more intermediaries or otherwise) controls, is controlled by, or is under common
control with, such Person. A Person shall be deemed to be “controlled by” any
other Person if such other Person possesses, directly or indirectly,
power
(a) to
vote
20% or more of the securities or other equity interests (on a fully diluted
basis) having ordinary voting power for the election of directors, the managing
general partner or partners or the managing member or members; or
(b) to
direct
or cause the direction of the management and policies of such Person whether
by
contract or otherwise;
“Effective
Time”
means
7:00 a.m. local time at the locations of the Subject Interests, respectively,
on
August 1, 2007.
“Environmental
Laws”
means
any and all Laws relating to the environment or to emissions, discharges,
releases or threatened releases of pollutants, contaminants, chemicals, or
industrial, toxic or hazardous substances or wastes into the environment
including ambient air, surface water, ground water, or land, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants, chemicals, or
industrial, toxic or hazardous substances or wastes.
[Conveyance
of Overriding Royalty Interest]
“Fixed
Rate”
means,
for any day, the rate that is the lesser of (a) twelve percent (12.00%) per
annum, based on actual days elapsed and a year of 360 days or (b) the maximum
of
interest allowed by applicable Law.
“Hazardous
Materials”
means
any substances regulated under any Environmental Law, whether as pollutants,
contaminants, or chemicals, or as industrial, toxic or hazardous substances
or
wastes, or otherwise.
“Hydrocarbons”
means
oil, gas (including coal bed gas, casinghead gas, condensate,).
“Internal
Revenue Code”
means
the United States Internal Revenue Code of 1986, as amended from time to time
and any successor statute or statutes, together with all rules and regulations
promulgated with respect thereto.
“Law”
means
any statute, law, regulation, ordinance, rule, treaty, judgment, order, decree,
permit, concession, franchise, license, agreement or other governmental
restriction of the United States or any state or political subdivision thereof
or of any foreign country or any department, province or other political
subdivision thereof. Any reference to a Law includes any amendment or
modification to such Law, and all regulations, rulings, and other Laws
promulgated under such Law.
“Marketing
Terms and Conditions”
has
the
meaning assigned to such term in Section 3.1.
“Month”
means
the period between 7:00 a.m. Houston, Texas time on the first day of each
calendar month and 7:00 a.m. Houston, Texas time on the first day of the next
succeeding calendar month.
“ORRI”
has
the
meaning assigned to such term in Section 2.1.
“ORRI
Hydrocarbons”
means
the Hydrocarbons attributable to the ORRI.
“Permitted
Encumbrances”
means:
(a)
the
contracts, agreements, burdens, encumbrances and other matters set forth as
being applicable to certain of the Subject Interests in the descriptions of
such
Subject Interests on Exhibit A hereto;
(b)
liens
for taxes, assessments or other governmental charges or levies which are not
due
or which are being contested in good faith by appropriate action promptly
initiated and diligently conducted and for the payment of which WI Owner has
reserved adequate funds;
(c)
liens
of vendors, contractors, subcontractors, carriers, warehousemen, mechanics,
laborers or materialman or other like liens arising by law or contract in the
ordinary course of business for sums which are not due or which are being
contested in good faith by appropriate action promptly initiated and diligently
conducted and for the payment of which WI Owner has reserved adequate
funds;
Conveyance
of Overriding Royalty Interest
2
(d)
covenants, restrictions, easements, servitudes, permits, conditions, exceptions,
reservations, minor rights, minor encumbrances, minor irregularities in title
or
conventional rights of reassignment prior to abandonment which do not materially
interfere with the occupation, use and enjoyment by WI Owner or Royalty Owner
of
their respective interests in the Subject Interests in the normal course of
business as presently conducted or to be conducted, materially impair the value
thereof for the purpose of such business, or impair the value of the
ORRI;
(e)
liens
of operators under joint operating agreements or similar contractual
arrangements with respect to WI Owner’s proportionate share of the expense of
exploration, development and operation of oil, gas and mineral leasehold or
fee
interests owned jointly with others, to the extent that such liens secure sums
which are not due or which are being contested in good faith by appropriate
action promptly initiated and diligently conducted and for the payment of which
WI Owner has reserved adequate funds; and
(f)
liens
and security interests in favor of Royalty Owner or its Affiliates, provided
that the same are subject and subordinate to this Conveyance.
“Person”
means
an individual, corporation, general partnership, limited partnership, limited
liability company, association, joint stock company, trust or trustee thereof,
estate or executor thereof, court or governmental unit or any agency or
authority thereof, or any other legally recognizable entity.
“Reimbursable
Expenses”
means
all costs and expenses paid or incurred by or on behalf of Royalty Owner or
its
Affiliates which are related to: (a) the negotiation, acquisition, ownership,
enforcement, or termination of the ORRI, this Conveyance, or any waivers or
amendments hereto or thereto, or (b) any litigation, contest, release or
discharge of any adverse claim or demand made or proceeding instituted by any
Person affecting in any manner whatsoever the ORRI, any ORRI Hydrocarbons,
this
Conveyance, the enforcement or defense hereof or thereof, or the defense of
Royalty Owner’s and its Affiliates’ exercise of their rights hereunder or
thereunder. Included among the Reimbursable Expenses are (i) all recording
and
filing fees, (ii) all actual and reasonable fees and expenses of counsel,
engineers, accountants and other consultants, experts and advisors for Royalty
Owner and its Affiliates and mortgagees, and (iii) all amounts which Royalty
Owner is entitled to receive hereunder and all costs of Royalty Owner in
exercising any of its remedies hereunder.
“Release”
means
the disposition or release of Hazardous Materials, other than dispositions
and
releases done in material compliance with all applicable Laws and for which
WI
Owner otherwise has no material remedial obligations.
“Royalty
Owner Indemnitees”
has
the
meaning assigned to such term in Section 6.6.
“Specified
Costs”
means
Specified Taxes, Specified Marketing Costs, and Specified Transportation
Costs.
Conveyance
of Overriding Royalty Interest
3
“Specified
Marketing Costs”
means
a
charge for marketing the ORRI Hydrocarbons consisting of natural gas that is
equal to the fair and reasonable costs for the area which would have been
charged at the time in arm’s-length dealings with parties other than Affiliates
of WI Owner.
“Specified
Taxes”
means
all ad valorem or property taxes assessed against the ORRI and all severance
taxes or similar taxes assessed against or measured by production and severance
of ORRI Hydrocarbons or the value thereof. To the extent that any jurisdiction
in which the Subject Lands are located also requires WI Owner to withhold income
taxes or similar taxes payable by Royalty Owner, the taxes so withheld shall
also be “Specified Taxes”.
“Specified
Transportation Costs”
means
all
costs
paid by WI Owner (or any other operator of Subject Interests on behalf of WI
Owner) to gatherers, processors or transporters for transporting ORRI
Hydrocarbons from the lease to the point of sale or for processing ORRI
Hydrocarbons off of the lease to meet pipeline or transporter specifications
and
qualifications, provided however, that no such costs shall exceed fair
and
reasonable costs for the area which would have been charged at the time in
arm’s-length dealings with parties other than Affiliates of WI
Owner.
“Subject
Hydrocarbons”
means
that portion of the Hydrocarbons in and under and that may be produced from
(or,
to the extent pooled or unitized, allocated to) the Subject
Interests.
“Subject
Interests”
means:
(a)
All
of the leases, leasehold interests, units and other property interests described
in Exhibit A attached hereto; and
(b)
Without limitation of the foregoing, all other right, title and interest (of
whatever kind or character, whether legal or equitable and whether vested or
contingent) of WI Owner in and to the oil, gas and other minerals in and under
or that may be produced from any Subject Lands (including interests in oil,
gas
or mineral leases to the extent the same cover such lands, overriding royalties,
production payments and net profits interests in such lands or such leases,
and
fee mineral interests, fee royalty interests and other interests in such oil,
gas and other minerals) even though WI Owner’s interest in such oil, gas and
other minerals may be incorrectly described in, or omitted from, Exhibit A;
and
(c)
All
rights, titles and interests of WI Owner in and to, or otherwise derived from,
all presently existing and valid oil, gas or mineral unitization, pooling,
or
communitization agreements, declarations or orders and in and to the properties
covered and the units created thereby (including all units formed under orders,
rules, regulations, or other official acts of any federal, state, or other
authority having jurisdiction, voluntary unitization agreements, designations
or
declarations, and so-called “working interest units” created under operating
agreements or otherwise) relating to the properties described in subsections
(a)
or (b) above in this definition.
“Subject
Lands”
means
the lands described or referred to in Exhibit A or in the leases and other
instruments described in Exhibit A.
Conveyance
of Overriding Royalty Interest
4
“Subject
Wells”
means
all wells now located on the Subject Lands (whether fully drilled and completed
or not) or hereafter drilled on the Subject Lands, and (unless production
therefrom is expressly excluded by the terms of the descriptions on Exhibit
A)
any other wells now or hereafter located on lands or leases pooled, communitized
or unitized with the Subject Interests.
Section
1.2. Rules
of Construction.
All
references in this Conveyance to articles, sections, subsections and other
subdivisions refer to corresponding articles, sections, subsections and other
subdivisions of this Conveyance unless expressly provided otherwise. Titles
appearing at the beginning of any of such subdivisions are for convenience
only
and shall not constitute part of such subdivisions and shall be disregarded
in
construing the language contained in such subdivisions. The words “this
Conveyance”, “this instrument”, “herein”, “hereof”, “hereunder”‘ and words of
similar import refer to this Conveyance as a whole and not to any particular
subdivision unless expressly so limited. Unless the context otherwise requires:
“including” and its grammatical variations mean “including without limitation”;
“or” is not exclusive; words in the singular form shall be construed to include
the plural and vice versa; words in any gender include all other genders;
references herein to any instrument or agreement refer to such instrument or
agreement as it may be from time to time amended or supplemented; and references
herein to any Person include such Person’s successors and assigns. All
references in this Conveyance to exhibits and schedules refer to exhibits and
schedules to this Conveyance unless expressly provided otherwise, and all such
exhibits and schedules are hereby incorporated herein by reference and made
a
part hereof for all purposes.
ARTICLE
II
Granting
Provisions
Section
2.1.Granting
Clause.
For a
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, WI Owner does hereby GRANT, BARGAIN, SELL, TRANSFER, ASSIGN,
CONVEY, WARRANT and DELIVER to Royalty Owner an overriding royalty interest
in
and to each of the Subject Interests equal to twenty percent of eight-eighths
(20% of 8/8ths) of the Hydrocarbons produced and saved from or allocable to
the
Subject Interests, or used off the Subject Interests (the “ORRI”).
If a
Subject Interest covers less than one hundred percent (100%) of the mineral
interest in the land covered by such Subject Interest, the ORRI assigned to
Royalty Owner as to that Subject Interest shall be reduced in the proportion
that the mineral interest held by WI Owner bears to one hundred percent (100%)
of the mineral interest in the lands covered thereby.
TO
HAVE
AND TO HOLD the ORRI unto Royalty Owner, its successors and assigns, forever.
This Conveyance is made with full substitution and subrogation of Royalty Owner
in and to all covenants and warranties by others heretofore given or
made.
Conveyance
of Overriding Royalty Interest
5
Section
2.2. Non-Cost-Bearing
Interest.
Except
for Specified Costs, the ORRI and the ORRI Hydrocarbons shall be free and clear
of, and shall bear no burden or part of, any and all costs, including: (a)
all
taxes of any kind, (b) all costs and expenses associated with acquiring,
exploring, developing, maintaining, producing, operating, reworking,
recompleting, and remediating the Subject Interests, (c) all royalties,
overriding royalties, production payments, other charges burdening the Subject
Interests, and (d) all costs for separating, gathering, compressing, treating,
processing or marketing ORRI Hydrocarbons or of transporting ORRI Hydrocarbons
to the point of sale in a condition to meet pipeline or transporter
specifications and qualifications.
Such
items of cost shall neither be deducted in determining the quantity of ORRI
Hydrocarbons nor in calculating the ORRI. WI Owner shall promptly pay, or cause
to be promptly paid, all taxes, costs and expenses, royalties, overriding
royalties, production payments, and similar charges, on or before the dates
the
same become delinquent (unless being disputed in good faith by appropriate
proceedings being diligently pursued and for which adequate reserves have been
established). In addition, WI Owner will promptly (and in any event within
30
days after receiving any notice or statement for the same) pay all Reimbursable
Expenses which have been incurred and are unpaid and reimburse Royalty Owner
for
any Reimbursable Expenses which have been paid by or on behalf of Royalty Owner.
Each amount which is to be paid by WI Owner pursuant to this Section 2.2 which
is instead paid by or on behalf of Royalty Owner shall bear interest at the
Fixed Rate on each day from and including the date of such payment until but
not
including the date repaid by WI Owner.
Section
2.3. Measurement:
Hydrocarbons Lost or Used.
The
ORRI shall not apply to any oil, gas or other minerals that are unavoidably
lost
in the production thereof or in the compression or transportation of Subject
Hydrocarbons prior to the applicable point of sale or which are used by WI
Owner
or the operator of any Subject Well for the production of Subject Hydrocarbons
or for the compression or transportation thereof prior to the applicable point
of sale, in each case only to the extent the same are lost or used in the course
of operations which are being conducted prudently and in a good and workmanlike
manner. WI Owner hereby represents, warrants and covenants to Royalty Owner
that
production from each Subject Well is and will continue to be measured at a
point
prior to any point where gas or oil from such Subject Well is commingled with
gas or oil from any other well or wells that are not Subject Wells.
Section
2.4Renewals
and Extensions.
This
Conveyance and the ORRI shall apply to WI Owner’s and any Affiliate’s,
successor’s, assign’s, agent’s or representative’s of WI Owner interests in all
renewals, extensions and other similar arrangements of each of the Subject
Interests (or other determinable interest), whether such renewals, extensions
or
arrangements have heretofore been obtained or are hereafter obtained and whether
or not the same are described in Exhibit A. For the purposes of the preceding
sentence, a new lease that covers the same interest (or any part thereof)
covered by a prior lease, and which is acquired within one year after the
expiration, termination, or release of such prior lease, shall be treated as
a
renewal or extension of such prior lease. If WI Owner or any of its Affiliates,
successors, assigns, agents or representatives acquires or owns all or a portion
of the mineral fee interest associated with any of the Subject Interests (the
“WI
Owner Mineral Fee”)
and,
as a result, the ORRI would otherwise terminate in whole or in part due to
the
operation of applicable Law, it is the express intent of the parties that the
ORRI not so terminate but instead continue in full force and effect as if the
acquisition of the mineral fee had not occurred. If, notwithstanding the
preceding sentence, a court of competent jurisdiction determines that, due
to
the acquisition or ownership by WI Owner or any of its Affiliates, successors,
assigns, agents or representatives of the WI Owner Mineral Fee, the ORRI in
respect of a Subject Interest has terminated in whole or in part, then WI Owner
or any of its Affiliates, successors, assigns, agents or representatives, as
the
case may be, shall immediately convey to Royalty Owner a non-participating
royalty interest (the “NPRI”)
in the
WI Owner Mineral Fee equal to twenty percent of eight-eighths (20% of 8/8ths)
with respect to the WI Owner Mineral Fee. The NPRI shall be reduced on a
property-by-property basis in the proportion which the percentage of the mineral
estate covered by the WI Owner Mineral Fee in that property bears to one hundred
percent (100%) of the mineral estate in that property. To the fullest extent
allowed by applicable Law, the NPRI shall be conveyed by WI Owner to Royalty
Owner with the same provisions, representations, warranties and covenants that
are in this Conveyance.
Conveyance
of Overriding Royalty Interest
6
ARTICLE
III
Marketing
of ORRI Hydrocarbons and Distribution of Proceeds
Section
3.1 Nature
of Marketing Arrangements.
WI
Owner shall have the obligation to prudently market, or cause to be prudently
marketed, the ORRI Hydrocarbons on behalf of and for the account of Royalty
Owner in transactions with reputable purchasers, with each such marketing
arrangement, including those arrangements relating to sales, treating,
transportation, compression and processing, to be made upon terms and conditions
(the “Marketing
Terms and Conditions”)
that,
in the case of an arms-length sale to a third party, are the same terms and
conditions under which WI Owner sells its share of produced Hydrocarbons (with
Royalty Owner receiving the same consideration as WI Owner and WI Owner’s
Affiliates receive), or in the case of any other sale (a) are the best
reasonably obtainable in the general field or area, (b) are at least as
favorable as WI Owner or any Affiliate of WI Owner obtains for WI Owner’s share
of the Hydrocarbons attributable to the Subject Interests or attributable to
any
other properties in the same field or general area, (c) take into account and
give due regard to the best interests of Royalty Owner, and (d) unless otherwise
agreed by Royalty Owner from time to time, provide for floating prices generally
based on daily spot-market prices plus or minus an appropriate basis
differential. No ORRI Hydrocarbons are or will become subject to any sales
arrangement whereby (y) payment for ORRI Hydrocarbons is or can be deferred
for
a substantial period after the Month in which the ORRI Hydrocarbons are
delivered (i.e., in the case of oil, in excess of 30 days, and in the case
of
gas in excess of 60 days), or (z) payments may be made other than by checks,
drafts, wire transfer or similar communications for the immediate payment of
money. WI Owner shall duly and prudently perform all obligations performable
by
it under any arrangements by which ORRI Hydrocarbons are sold or otherwise
marketed, and shall take all appropriate measures to enforce the performance
under each such arrangement of the obligations of the other parties thereto.
As
to any third parties, all acts of WI Owner in marketing the ORRI Hydrocarbons
and all sales or other marketing agreements executed by WI Owner in accordance
herewith shall be binding on Royalty Owner and the ORRI; it being understood
that the right and obligation to market the ORRI Hydrocarbons is at all times
vested in WI Owner, and Royalty Owner does not have any such right or
obligation. Accordingly, it shall not be necessary for Royalty Owner to join
in
any production sales or marketing agreements or any amendments to existing
production sales or marketing agreements. Notwithstanding any provision hereof
to the contrary, any acts of WI Owner in marketing the ORRI Hydrocarbons or
in
entering production sales or marketing agreements which are not in compliance
with the provisions of this Conveyance shall be null and void as to the ORRI
Hydrocarbons.
Conveyance
of Overriding Royalty Interest
7
Section
3.2 Distribution
of Funds.
Until
notified by Royalty Owner to the contrary, WI Owner shall receive all payments
for (or on account of) ORRI Hydrocarbons and shall, on or before noon on the
last business day of each Month, distribute any such payments received during
the previous Month, net only of Specified Costs, to Royalty Owner by wire
transfer (or, if consented to by Royalty Owner, by check) to such accounts
(or
locations) as Royalty Owner may direct from time to time in writing. Any moneys
received by WI Owner for or on account of ORRI Hydrocarbons shall constitute
trust funds in WI Owner’s hands. Royalty Owner shall have the right at all
times, upon written notice sent to WI Owner, to begin receiving payment for
(or
on account of) all ORRI Hydrocarbons directly from the purchasers thereof or
from any other parties obligated to make payment therefor. In the event Royalty
Owner exercises its right to receive payment for (or on account of) ORRI
Hydrocarbons directly, WI Owner shall immediately cause to be prepared and
executed such division orders, transfer orders, or instructions in lieu thereof,
as Royalty Owner (or any third party) may require from time to time to cause
payments to be made directly to Royalty Owner; in the event that, for any
reason, Royalty Owner cannot (or does not) receive such payments directly,
the
same shall be collected by WI Owner and shall constitute trust funds in WI
Owner’s hands, to be immediately paid over to Royalty Owner by wire transfer or
check to such account or location as Royalty Owner may direct from time to
time
in writing (or by such other form of transfer reasonably specified by Royalty
Owner). To the extent that Royalty Owner receives any such payments on account
of ORRI Hydrocarbons pursuant to the two immediately preceding sentences
(whether from third parties or from WI Owner’s payment over of trust funds to
Royalty Owner), Royalty Owner shall thereafter promptly pay directly to WI
Owner, or promptly reimburse WI Owner for, all Specified Costs relating to
such
ORRI Hydrocarbons that have been paid by WI Owner and that are not recoverable
by WI Owner from other ORRI Hydrocarbons not yet paid over to Royalty
Owner.
Section
3.3 Production
Records, Statements and Payments.
WI
Owner shall keep full, true, and correct records of: (a) the Hydrocarbons
produced from or attributable to the Subject Interests, and the portion
attributable to the ORRI, (b) all costs associated with producing, processing,
transporting, and marketing the Hydrocarbons produced from or attributable
to
the Subject Interests, and (c) any other records necessary to keep proper
accounts in accordance with the provisions of this Conveyance. Such records
may
be inspected by Royalty Owner or its authorized representatives and copies
made
thereof at all reasonable times. On or before noon on the last business day
of
each Month, WI Owner shall send to Royalty Owner a statement setting forth
(w)
the production from the Subject Interests for the preceding Month, (x) the
portion of such production attributable to the ORRI, (y) to the extent Royalty
Owner does not receive direct payment of proceeds from sale of ORRI Hydrocarbons
pursuant to Section 3.2 above, the gross proceeds attributable to the sale
of
ORRI Hydrocarbons and the Specified Costs allocable thereto, and (z) such other
data as Royalty Owner may reasonably request, in such form as Royalty Owner
may
reasonably request.
Conveyance
of Overriding Royalty Interest
8
ARTICLE
IV
Representations,
Warranties and Covenants
WI
Owner
hereby represents, warrants and covenants for the benefit of Royalty Owner
as
follows:
Section
4.1 Operations.
The
Subject Interests and properties unitized therewith are being (and, to the
extent the same could adversely affect the ownership or operation of the Subject
Interests after the date hereof, have during WI Owner’s tenure of ownership
been) maintained, operated and developed in a good and workmanlike manner,
in
accordance with prudent industry standards and in conformity with all applicable
laws, rules, regulations and orders of all duly constituted authorities having
jurisdiction and in conformity with all oil, gas or other mineral leases, deeds
and other contracts and agreements forming a part of or pertaining to the
Subject Interests. WI Owner, directly or through appropriate agreements with
the
operator of the Subject Interests, has all governmental licenses and permits
necessary or appropriate to own and operate the Subject Interests, and WI Owner
has not received notice of any violations in respect of any such licenses or
permits. WI Owner shall develop, operate and maintain the Subject Interests
as
would a prudent operator. Decisions with regard to the conduct of operations
will be made by WI Owner without considering the effect of the ORRI as a burden
on the Subject Interests. As to any portions of the Subject Interests as to
which WI Owner is not the operator, WI Owner shall take all such action and
exercise all such rights and remedies as are legally available to it to cause
the operator to so develop, maintain and operate such portions of the Subject
Interests in accordance with this Section 4.1.
Section
4.2. Title;
Permitted Encumbrances.
WI
Owner has good and defensible title to the Subject Interests, free and clear
of
all liens, security interests, and encumbrances except for Permitted
Encumbrances. Such qualification as to Permitted Encumbrances is made for the
sole purpose of limiting the representations and warranties of WI Owner made
herein, and is not intended to restrict the description of the Subject
Interests, nor is it intended that reference herein to any Permitted Encumbrance
shall subordinate the ORRI to such Permitted Encumbrance or otherwise cause
this
Conveyance or any rights of Royalty Owner hereunder to be made subject to,
or
reduced or encumbered by, such Permitted Encumbrance. WI Owner hereby binds
itself to WARRANT and FOREVER DEFEND all and singular title to the ORRI unto
Royalty Owner, its successors and assigns, against every Person lawfully
claiming or to claim the same or any part thereof.
WI
Owner
further represents and warrants to Royalty Owner that such shares of production
which WI Owner and Royalty Owner are entitled to receive are not and will not
be
subject to change except as expressly set forth in Exhibit A. This Conveyance
is
made with full substitution and subrogation of Royalty Owner in and to all
covenants, representations and warranties by others heretofore given or made
with respect to the Subject Interests.
Section
4.3. Leases,
Deeds and Contracts; Performance of Obligations.
The
oil, gas or other mineral leases, contracts, servitudes, fees, deeds, and other
agreements forming a part of the Subject Interests, to the extent the same
cover
or otherwise relate to the Subject Interests, are in full force and effect,
and
WI Owner agrees to so maintain them, or to cause them to be so maintained,
in
full force and effect to the extent a prudent operator, without giving effect
to
the ORRI or this Conveyance, would do so.
Conveyance
of Overriding Royalty Interest
9
Section
4.4. Compliance
with Laws.
(a) The
Subject Lands, and WI Owner’s present and proposed operations thereon, are in
compliance in all material respects with all applicable Laws, including all
Environmental Laws; (b) WI Owner has taken all steps reasonably necessary to
determine and has determined that no Release of Hazardous Materials has occurred
on the Subject Lands or as a result of operations on the Subject Lands, and
the
use which WI Owner makes and intends to make of the Subject Lands will not
result in any such Release; (c) to the best of WI Owner’s knowledge, none of
such operations of WI Owner, and none of the Subject Lands, is the subject
of
any federal, state or local investigation evaluating whether any remedial action
is needed to respond to a Release of any Hazardous Materials into the
environment or to the improper storage or disposal (including storage or
disposal at offsite locations) of any Hazardous Materials; (d) neither WI Owner
nor, to the best knowledge of WI Owner, any other Person has filed any notice
under any Environmental Law indicating that WI Owner is responsible for the
Release into the environment, or the improper storage or disposal, of any
Hazardous Materials that are now located on, were removed from, or are in any
way related to any Subject Lands, or that any Hazardous Materials have been
Released, or are improperly stored or disposed of, upon any Subject Lands;
and
(e) neither WI Owner nor any of its Affiliates otherwise has any material
contingent liability in connection with operations on any Subject Lands for
the
Release into the environment, or the improper storage or disposal, of any
Hazardous Materials. WI Owner will not cause or permit the Subject Lands or
WI
Owner to be in violation of any Environmental Laws or other Laws with respect
to
the Subject Lands or do anything or permit anything to be done which will
subject WI Owner, Royalty Owner or the Subject Lands to any material remedial
obligations under any Environmental Laws, assuming in each case disclosure
to
the applicable governmental authorities of all relevant facts, conditions and
circumstances, if any, pertaining to the Subject Lands, and WI Owner will
promptly notify Royalty Owner in writing of any existing, pending or, to the
best knowledge of WI Owner, threatened investigation or inquiry of a material
nature affecting any Subject Interest by any private party or governmental
authority in connection with any Environmental Laws. WI Owner will take all
steps reasonably necessary to determine that no Hazardous Materials are disposed
of or otherwise Released on or to the Subject Lands in violation of any
Environmental Laws. WI Owner will not cause or permit the Release of any
Hazardous Materials on or to the Subject Lands in violation of any Environmental
Law and covenants and agrees to remove or remediate any Hazardous Materials
which have been Released on the Subject Lands in amounts which would violate
any
Environmental Laws.
Section
4.5 Ad
Valorem and Severance Taxes.
WI
Owner shall timely pay and discharge (or cause to be paid and discharged) (a)
all ad valorem taxes assessed against or with respect to the Subject Interests
(including the ORRI) or any part thereof, and (b) all production, severance,
excise and other taxes assessed against, or measured by, the ORRI Hydrocarbons
or the value, or proceeds, of the ORRI Hydrocarbons.
Conveyance
of Overriding Royalty Interest
10
Section
4.6. Imbalances.
(a)
Definitions.
As used
herein, “undertake”
means
that an owner of production from a Subject Well takes a lesser share of
Hydrocarbons produced from such Subject Well than the share which such owner
is
entitled to take by virtue of its ownership interest, determined without regard
to any rights under any production balancing agreement or similar arrangement
or
any rights under common law with respect to production balancing, and
“overtake”
means
that an owner of production from a Subject Well takes a greater share of
Hydrocarbons produced from such Subject Well than the share which such owner
is
entitled to take by virtue of its ownership interest, again determined without
regard to any rights under any production balancing agreement or similar
arrangement or any rights under common law with respect to production balancing.
If an owner undertakes, the amount of production not taken is “underproduction”
and
if
an owner overtakes, the extra share of production taken is “overproduction”.
(b)
No
Undertakes Without Consent.
WI
Owner will not undertake or overtake from a Subject Well (either for itself
or
on behalf of Royalty Owner) if an Affiliate of WI Owner thereby overtakes or
undertakes. WI Owner may otherwise elect to undertake or overtake in its
reasonable business judgment exercised for the benefit of itself and Royalty
Owner. If any undertake by WI Owner occurs in violation of this subsection
(b),
the quantity of ORRI Hydrocarbons for which WI Owner must account to Royalty
Owner hereunder shall be determined (to the maximum extent allowed under
applicable Law and any applicable Permitted Encumbrances) without regard
thereto.
(c)
No
Balancing From Other Properties.
WI
Owner will not allow any Subject Interest to be subject to any production
balancing arrangement under which one or more third Persons may overtake a
portion of the production attributable to such Subject Interest as a result
of
undertakes or overtakes (or other actions or inactions) with respect to
properties other than such Subject Interest. For the purposes of this subsection
(c), a production unit in which all parties have uniform interests shall be
considered to be a single Subject Interest.
Section
4.7. Royalty
Right to Join in Sales.
Whenever (after taking into account all other covenants to Royalty Owner under
any securities purchase agreement or debenture with WI Owner) WI Owner has,
and
intends to take, the opportunity to sell any part of its interest (in this
section called a “Sold
Working Interest”)
in any
properties and interests subject to this Conveyance, WI Owner shall take all
necessary action to insure that Royalty Owner has the opportunity to sell that
portion of the ORRI that relates to or burdens the properties and interests
to
be sold (in this section called a “Sold
Royalty”)
as a
part of such transaction and at a price which is as favorable as that available
to WI Owner (taking into consideration that such Sold Royalty is a cost free
interest). WI Owner shall give Royalty Owner at least thirty (30) days notice
of
any such potential sale (or of any material modification in the terms of any
sale of which such a notice was previously given). Royalty Owner shall notify
WI
Owner within twenty-one (21) days after receiving such notice whether Royalty
Owner elects to participate in such sale, and failure to so notify WI Owner
shall irrevocably be deemed to be an election not to participate in such sale.
Royalty Owner has no obligation to participate in or consent to any such
transaction or otherwise to sell all or any part of any ORRI, but if Royalty
Owner does participate in any such transaction, then regardless of any purchase
price allocations made by the purchaser in such sale to the Sold Working
Interest and the Sold Royalty, WI Owner and Royalty Owner shall divide between
themselves the aggregate purchase price received by both, net of costs of sale
and any taxes (other than income taxes, which shall be the separate obligations
of WI Owner and Royalty Owner), with WI Owner receiving A/C and Royalty Owner
receiving B/C, where:
Conveyance
of Overriding Royalty Interest
11
“A”
equals
the net present value attributable to the Sold Working Interest,
as
reasonably derived by Royalty Owner using any engineering information
then
available to Royalty Owner,
“B”
equals
the net present value attributable to the Sold Royalty, as reasonably
derived by Royalty Owner using any engineering information then available
to Royalty Owner, taking into account that the Sold Royalty is not
subject
to various costs and expenses burdening the Sold Working Interest,
and
“C”
equals
the sum of A plus B.
ARTICLE
V
Assignments
and Transfers
Section
5.1. Assignment
and Transfer by Royalty Owner.
Royalty
Owner may, and nothing herein contained shall in any way limit or restrict
the
right of Royalty Owner to, sell, convey, assign, mortgage or otherwise dispose
of the ORRI (including its rights, titles, interests, estates, remedies, powers
and privileges appurtenant or incident to the ORRI under this Conveyance),
in
whole or in part. No change of ownership of the ORRI shall be binding upon
WI
Owner, however, until WI Owner is furnished with copies of the original
documents evidencing such change. Upon receipt by WI Owner of copies of the
original documents evidencing a sale, conveyance, assignment, mortgage or other
disposition of the ORRI, and to the extent of such transfer, WI Owner shall
thereafter deal with the transferee Royalty Owner in place of the transferring
Royalty Owner and references herein to the Royalty Owner shall thereafter be
deemed to be references to such transferee Royalty Owner rather than such
transferring Royalty Owner, provided that such transferring Royalty Owner shall
continue to have, and benefit from, all rights to indemnification and
reimbursement that are provided herein.
Section
5.2. Assignment
and Transfer by WI Owner.
The
Conveyance shall inure to the benefit of and be binding to the parties and
their
respective heirs, legal representatives, successors and assigns. Any sale,
conveyance, assignment, mortgage or other disposition of the Subject Interests,
or any part thereof or interest therein, by WI Owner shall be subject to this
Conveyance, and in the instrument effecting such transfer or other disposition
the transferee or other disposition recipient must expressly recognize and
assume all obligations, covenants and agreements of WI Owner hereunder. Any
assignment or transfer by WI Owner not in compliance with this Section 5.2
shall
be null and void.
Section
5.3. Covenants
Running With the Subject Interests.
All
covenants and agreements of WI Owner herein contained shall be deemed to be
covenants running with the Subject Interests. All of the provisions hereof
shall
inure to the benefit of Royalty Owner and its Affiliates, heirs, legal
representatives, successors and assigns.
Conveyance
of Overriding Royalty Interest
12
ARTICLE
VI
Miscellaneous
Provisions
Section
6.1. Further
Assurances.
WI
Owner agrees to execute and deliver to Royalty Owner, and, to the extent it
is
within WI Owner’s power to do so, to cause any third parties to execute and
deliver to Royalty Owner, all such other and additional instruments and to
do
all such further acts and things as may be necessary or appropriate to more
fully vest in and assure to Royalty Owner, from time to time, all of the rights,
titles, interests, remedies, powers and privileges herein granted or intended
so
to be.
Section
6.2. No
Waiver.
The
failure of Royalty Owner to insist upon strict performance of a covenant
hereunder or of any obligation hereunder, irrespective of the length of time
for
which such failure continues, shall not be a waiver of Royalty Owner’s right to
demand strict compliance in the future. No consent or waiver, express or
implied, to or of any breach or default in the performance of any obligation
hereunder shall constitute a consent or waiver to or of any other breach or
default in the performance of the same or any other obligation hereunder. No
provision of this Conveyance shall be deemed a waiver by Royalty Owner of any
rights granted to Royalty Owner under applicable Law governing overriding
royalty interests and the rights and privileges of the owners
thereof.
Section
6.3. Applicable
Law.
This
Conveyance and the rights and obligations of the parties hereunder shall,
without regard to principles of conflicts of laws, be governed by and
interpreted, construed and enforced in accordance with the laws of the State
of
Louisiana.
Section
6.4. Severability.
Every
provision in this Conveyance is intended to be severable. If any term or
provision hereof is determined to be invalid, illegal or unenforceable for
any
reason whatsoever, such invalidity, illegality or unenforceability shall not
affect the validity, legality and enforceability of the remainder of this
Conveyance.
Section
6.5. Notices.
Unless
otherwise stated herein, all notices authorized or required by the terms of
this
Conveyance shall be in writing and shall be delivered by United States Postal
Service, courier or facsimile to the party to be notified, or by delivering
such
notice in person to such party. Notice shall be deemed effective only upon
receipt by the party to whom such notice is directed. Any party may change
its
address for notice at any time by giving written notice of the new address
to
the other party in the manner set forth herein. For purposes of notice, the
addresses of WI Owner and Royalty Owner shall be as follows:
Section
6.6. No
Liability of Royalty Owner; Indemnity.
Except as expressly provided herein with respect to deduction or reimbursements
of Specified Costs,no
Royalty Owner Indemnitee shall ever be responsible for any part of the costs,
expenses or liabilities incurred in connection with:
(a)
the exploring, developing, operating, owning, maintaining, reworking or
recompleting of the Subject Interests or Subject Lands, any obligations of
WI
Owner with respect to any tax partnerships burdening the Subject Interests,
the
physical condition of the Subject Interests or the Subject Lands, or the
handling, treating or transporting of Hydrocarbons produced from the Subject
Interests (including any costs, expenses, losses or liabilities related to
compliance with or violation of an Environmental Law or otherwise related to
damage to or remediation of the environment, whether the same arise out of
Royalty Owner’s ownership of an interest in property or out of the actions of WI
Owner or Royalty Owner or of third parties or arise otherwise),
or
(b)
the failure by WI Owner to have good and defensible title to the Subject
Interests free and clear of all burdens, encumbrances, liens and title defects
(including any costs, expenses, losses or liabilities suffered by any Royalty
Owner Indemnitee as a result of any claim that such Royalty Owner Indemnitee
must deliver or pay over to any person any part of the ORRI Hydrocarbons or
any
proceeds thereof at any time previously received or thereafter to be received
by
such Royalty Owner Indemnitee),
and
WI Owner agrees to indemnify, defend and hold each Royalty Owner Indemnitee
harmless from and against all costs, expenses, losses and liabilities incurred
by any Royalty Owner Indemnitee (i) in connection with any of the foregoing
or
(ii) in connection with the ORRI, the ORRI Hydrocarbons, this Conveyance, or
the
transactions, activities and events (including the enforcement or defense
thereof or hereof) at any time associated with or contemplated in any of the
foregoing or (iii) in connection with any tax partnership burdening any of
the
Subject Interests. Such indemnity shall also cover all reasonable costs and
expenses of any Royalty Owner Indemnitee, including reasonable legal fees and
expenses, which are incurred incident to the matters indemnified against. As
used in this Article VI, “Royalty
Owner Indemnitees”
means Royalty Owner and Royalty Owner’s successors and assigns and purchasers
(including any Person who at any time purchases ORRI Hydrocarbons), all of
their
respective Affiliates, and all of the officers, directors, agents,
beneficiaries, trustees, attorneys and employees of themselves and their
Affiliates.
The
foregoing indemnity shall apply WHETHER
OR NOT ARISING OUT OF THE SOLE, JOINT OR CONCURRENT NEGLIGENCE, FAULT OR STRICT
LIABILITY
of any Royalty Owner Indemnitee and shall apply, without limitation, to any
liability imposed upon any Royalty Owner Indemnitee as a result of any theory
of
strict liability or any other doctrine of Law, provided that the foregoing
indemnity shall not apply to any costs, expenses, losses or liabilities incurred
by any Royalty Owner Indemnitee to the extent proximately caused solely by
the
gross negligence or willful misconduct of such Royalty Owner Indemnitee. The
foregoing indemnity shall survive any termination of this
Conveyance.
Conveyance
of Overriding Royalty Interest
14
Section
6.7. Counterparts.
This
Conveyance is being executed in several counterparts, all of which are
identical, except that, to facilitate recordation, in certain counterparts
hereof only that portion of Exhibit A which contains specific descriptions
of
the Subject Interests located in the recording jurisdiction in which the
counterpart is to be recorded shall be included, and all other portions of
Exhibit A shall be included by reference only. All of such counterparts together
shall constitute one and the same instrument. Complete copies of this
Conveyance, containing the entire Exhibit A, have been retained by WI Owner
and
Royalty Owner.
[Remainder
of page intentionally left blank.]
Conveyance
of Overriding Royalty Interest
15
IN
WITNESS WHEREOF, this Conveyance is executed as of the acknowledgement date
of
each of the parties hereto, but shall be effective as of the Effective
Time.
WI
OWNER:
FALCON
NATURAL GAS CORP.
By:
Name:
Title:
ROYALTY
OWNER:
YA
GLOBAL INVESTMENTS, L.P.
By:
Name:
Title:
[Conveyance
of Overriding Royalty Interest]
16
STATE
OF LOUISIANA
§
§
COUNTY
OF __________
§
This
instrument was acknowledged before me on by
__________________, ___________________ of Falcon Natural Gas Corp., a Nevada
corporation, on behalf of said company.
My
commission expires:
[SEAL]
Notary
Public, State of Louisiana
STATE
OF LOUISIANA
§
§
COUNTY
OF __________
§
This
instrument was acknowledged before me on by
__________________, ___________________ of YA Global Investments, L.P., a Cayman
Island exempt limited partnership, on behalf of said partnership.
My
commission expires:
[SEAL]
Notary
Public, State of Louisiana
Acknowledgment
page
Conveyance
of Overriding Royalty Interest
EXHIBIT
A
Subject
Interests
All
recording references are to the Official Records of St. Mary Parish,
Louisiana.
As
you
know, we are and have been a significant shareholder of Falcon Natural Gas
Company (“Falcon,” or the “Company”). We are writing to inform you of what you
probably already know - that the Company is in default on the debentures issued
to YA Global Investments, L.P. (f/k/a Cornell Capital Partners, L.P.) (“YA”)
for, among other reasons, the Company’s common stock ceasing to be quoted for
trading or listing for trading on the markets set forth in Section 2(a)(4)
of at
least debentures numbered FNGC-1, dated January 29, 2007, and FNGC-2, dated
January 29, 2007 (debentures FNGC-1 and FNGC-2 referred to from time to time
herein as the “Debentures.”)
You
should be further aware that the last sentence of Section 2(b) of the Debentures
states that “Upon an Event of Default, notwithstanding any other provision of
this Debenture or any Transaction Document, the Holder shall have no obligation
to comply with or adhere to any limitations, if any, on the conversion of this
Debenture or the sale of the Underlying Shares.” As we have informed you in our
earlier letters, we have been a shareholder in the Company since at least March
2007 and are continuing to weigh the options our shareholdings offer to us.
While we have made no final determination, it is clear that we could potentially
call a special shareholders meeting pursuant to Section I(.02) of the Company’s
by-laws, for the purpose of electing directors of the Company and we are
seriously contemplating doing so, with the aim of accomplishing the objectives
we have set forth in our recent letters to you and Mr. Tovey.
Weighing
into this determination is the plain fact that the Company, under your
leadership, has apparently failed to comply with the Company’s by-laws. Section
I(.01) of the by-laws mandates that the Company hold an annual meeting of
shareholders in the second week of April. No meeting was held in 2007 and,
as a
result, you did not offer the shareholders an opportunity to elect the directors
of their company, a fundamental right possessed by the shareholders of any
corporation. Accordingly, it is likely that any action taken on behalf of the
Company relating to the matters that have been the subject of recent letters
from us, including all matters relating to your’s and Mr. Tovey’s contracts with
the Company were ultra
vires or
otherwise unauthorized. We note further that the Company has been derelict
in
appointing the officers its by-laws mandate. To the best of our knowledge,
the
Company has no vice president and no treasurer, demonstrating our belief,
expressed to you and Mr. Tovey on several occasions, that the Company is
operating without adequate personnel for the important business tasks it faces.
In the litigation we are preparing, rest assured that we intend to fully assert
these corporate governance and other failures, absent some resolution short
of
litigation.
Sincerely,
Eric
M.
Hansen
Senior
Legal Counsel and Investment Analyst
cc:
Mr.
Joseph Tovey
EXHIBIT
21
JOINT
FILING AGREEMENT
This
will
confirm the agreement by and among the undersigned that any schedule 13G
or 13D
filed with the Securities and Exchange Commission after the date hereof with
respect to the beneficial ownership by the undersigned of the Common Stock,
par
value $0.001 per share, a Nevada corporation (the "Company"), will be filed,
and
all amendments thereto will be filed, on behalf of each of the persons and
entities named below, in accordance with Rule 13g-1 under the Securities
Exchange Act of 1934, as amended.
The
undersigned, hereby severally and individually constitute and appoint Steven
Goldstein, Chief Compliance Officer of YA Global Investments, L.P., and each
of
them, as true and lawful attorneys-in-fact for the undersigned, in any and
all
capacities, with full power of substitution, to sign any schedule 13G or
13D
with respect to the Company and all amendments thereto with the Securities
and
Exchange Commission, granting unto said attorneys-in-fact, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to
all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact, or either of them, may lawfully
do or cause to be done by virtue hereof.
This
Agreement may be executed in two or more counterparts, each of which shall
be
deemed an original, but all of which together shall constitute one and the
same
instrument.
