Note and Warrant Purchase Agreement dated November 9, 2007

This NOTE AND WARRANT PURCHASE AGREEMENT, dated as of November 9, 2007 (this “Agreement”) is entered into by and among Petrosearch Energy Corporation, a Nevada corporation (the “Company”), and those individuals and entities listed on Schedule “A” (each a “Purchaser” and collectively, the “Purchasers”).

WHEREAS, the Company desires to raise an aggregate of $8,100,000 through the sale of a series of 8% Senior Secured Convertible Promissory Notes and three-year Warrants to purchase an aggregate of 1,928,575 shares of Common Stock (the “Financing”) to the Purchasers in the amounts listed on Schedule “A”; and

WHEREAS, it is a condition to the Purchasers’ purchase of the Note and Warrant (as hereinafter defined) that the Purchasers be provided with certain registration rights with respect to the shares of Common Stock into which the Note is convertible and the shares of Common Stock underlying the Warrant.

NOW THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Purchasers hereby agree as follows:

Section 1.01    Definitions.  As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated:

“Action” against a Person means any lawsuit, action, proceeding or complaint before any Governmental Authority, mediator or arbitrator.

“Acts” means the Securities Act and the Exchange Act.

“Affiliate” means, with respect to a specified Person, any other Person, whether now in existence or hereafter created, directly or indirectly controlling, controlled by or under direct or indirect common control with such specified Person.  For purposes of this definition, “control” (including, with correlative meanings, “controlling,” “controlled by,” and “under common control with”) means the power to direct or cause the direction of the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise.

“Agreement” shall have the meaning specified in the introductory paragraph.

“Business Day” means any day other than a Saturday, Sunday, or a legal holiday for commercial banks in New York, New York.

“Closing” shall have the meaning specified in Section 2.03.

“Closing Date” shall have the meaning specified in Section 2.03.

“Code” means the Internal Revenue Code of 1986, as amended.

“Collateral Agent” means Ironman PI Fund (QP), LP.

“Commission” means the United States Securities and Exchange Commission.

“Common Stock” means the Company’s common stock, par value $0.001.

“Company Material Adverse Effect” means a material and adverse effect on (i) the assets, liabilities, financial condition, business, or affairs of the Company or (ii) the ability of the Company to consummate the transactions under any Transaction Document.

“Company Related Parties” shall have the meaning specified in Section 7.02.

“Company SEC Documents” shall have the meaning specified in Section 3.06.

“Conversion Price” shall have the meaning specified in the Notes.

“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations of the Commission promulgated thereunder.

“GAAP” means generally accepted accounting principles in the United States of America in effect from time to time.

“Governmental Authority” shall include the country, state, county, city and political subdivisions in which any Person or such Person’s Property is located or which exercises valid jurisdiction over any such Person or such Person’s Property, and any court, agency, department, commission, board, bureau or instrumentality of any of them and any monetary authorities that exercise valid jurisdiction over any such Person or such Person’s Property. Unless otherwise specified, all references to Governmental Authority herein shall mean a Governmental Authority having jurisdiction over, where applicable, the Company or any of its Property or the Purchasers.

“Holders” means the record holders of the Notes, Warrants, Note Shares or Warrant Shares.

“Indemnified Party” shall have the meaning specified in Section 7.03.

“Indemnifying Party” shall have the meaning specified in Section 7.03.

“Interest Shares” means the number of shares of Common Stock that could be paid as interest pursuant to Section 2(a) of the Notes at a rate of 8.5% under the Notes during the term of the Notes.

“Law” means any federal, state, local or foreign order, writ, injunction, judgment, settlement, award, decree, statute, law, rule or regulation.

“Lien” means any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and whether such obligation or claim is fixed or contingent, and including but not limited to the lien or security interest arising from a mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes.  For the purpose of this Agreement, a Person shall be deemed to be the owner of any Property that it has acquired or holds subject to a conditional sale agreement, or leases under a financing lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person in a transaction intended to create a financing.

“Notes” shall have the meaning specified in Section 2.01.

“Note Shares” means (i) the shares of Common Stock to which the Holders are entitled upon conversion of the Notes and (ii) the Interest Shares.

“Offering Notice” shall have the meaning specified in Section 5.04.

“OTC BB” shall mean the OTC Bulletin Board, on which the Company’s Common Stock is traded.

“Party” or “Parties” means the Company and the Purchasers party to this Agreement, individually or collectively, as the case may be.

“Person” means any individual, corporation, company, voluntary association, partnership, joint venture, trust, limited liability company, unincorporated organization or government or any agency, instrumentality or political subdivision thereof, or any other form of entity.

“Pledge and Security Agreement” means the pledge and security agreement between the Company, the Purchasers and Collateral Agent in substantially the form attached hereto as Exhibit C pursuant to which the Company agrees to pledge as collateral securing the Notes 5.00% of the membership interests in Exploration Holding Co., L.L.C. which owns 100% of Barnett Petrosearch, L.L.C.

“Preferred Stock” means, collectively, the Series A 8% convertible preferred stock and the Series B convertible preferred stock of the Company.

“Property” means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible.

“Proposed Financing” shall have the meaning specified in Section 5.04.

“Purchase Price” means an aggregate of $8,100,000 as paid by the Purchasers in their respective pro rata portions as described on Schedule “A”.

“Purchased Securities” means, collectively, the Notes and the Warrants.

“Purchaser” shall have the meaning specified in the introductory paragraph.

“Purchasers” shall mean all of the purchasers listed on Schedule “A”.

“Purchaser Material Adverse Effect” means any material and adverse effect on (i) the ability of a Purchaser to meet its obligations under the Transaction Documents on a timely basis or (ii) the ability of a Purchaser to consummate the transactions under any Transaction Document.

“Purchaser Related Parties” shall have the meaning specified in Section 7.01.

“Registration Rights Agreement” means the Registration Rights Agreement, substantially in the form attached to this Agreement as Exhibit D, to be entered into at the Closing, between the Company and the Purchasers.

“Representatives” of any Person means the Affiliates, control persons, officers, directors, employees, agents, counsel, investment bankers and other representatives of such Person.

“Securities Act” means the Securities Act of 1933, as amended from time to time, and the rules and regulations of the Commission promulgated thereunder.

“Terminating Breach” shall have the meaning specified in Section 8.09(a)(ii).

“Transaction Documents” means, collectively, this Agreement, the Registration Rights Agreement, the Pledge and Security Agreement, the Notes and the Warrants and any and all other agreements or instruments executed and delivered by the Parties on even date herewith or at Closing, or any amendments, supplements, continuations or modifications thereto.

“Transfer” shall have the meaning specified in Section 5.08(b).

“Warrants” shall have the meaning specified in Section 2.02.

“Warrant Shares” means the shares of Common Stock underlying the Warrants.

Section 1.02    Accounting Procedures and Interpretation.  Unless otherwise specified in this Agreement, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters under this Agreement shall be made, and all financial statements and certificates and reports as to financial matters required to be furnished to the Purchasers under this Agreement shall be prepared, in accordance with GAAP applied on a consistent basis during the periods involved (except, in the case of unaudited statements, as permitted by Form 10-QSB promulgated by the Commission) and in compliance as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the Commission with respect thereto.

Section 2.01    Sale and Issuance of the Notes.  Subject to the terms and conditions of this Agreement, the Purchasers agree to purchase and the Company agrees to sell to the Purchasers the series of 8% Senior Secured Convertible Promissory Notes in an aggregate original principal amount of $8,100,000 substantially the form attached hereto as Exhibit A (collectively, the “Notes”) and in the respective amounts listed on Schedule “A” for the Purchase Price.

Section 2.02    Issuance of Warrants.  As additional consideration for the Purchasers’ agreement to the terms and conditions of this Agreement and other valuable consideration, the Company shall issue to the Purchasers three-year warrants to purchase an aggregate of 1,928,572 shares of Common Stock in the amounts listed on Schedule “A”, with the exercise price and other additional terms and conditions set forth in the form of Warrant attached hereto as Exhibit B (collectively, the “Warrants”).

Section 2.03    Closing.  The execution and delivery of the Transaction Documents (other than this Agreement) and execution and delivery of all other instruments, agreements, and other documents required by this Agreement (the “Closing”) shall take place on or before November 9, 2007 (the “Closing Date”).   The Closing shall take place at the offices of Axelrod, Smith & Kirshbaum, 5300 Memorial Drive, Houston, Texas  77007.

The Company represents and warrants to the Purchasers, on and as of the date of this Agreement and on and as of the Closing Date, as follows:

Section 3.01    Valid Existence.  Each of the Company and its subsidiaries is duly organized, validly existing and in good standing under the laws of its state of incorporation or formation, and is duly qualified to do business in all jurisdictions in which the failure to be so qualified would result in a Company Material Adverse Effect. Each of the Company and its subsidiaries has all requisite power and authority (i) to own and lease the properties and assets it currently owns and leases and it contemplates owning and leasing and (ii) to conduct its activities as such activities are currently conducted and as currently contemplated to be conducted.

Section 3.02    Ownership of Exploration Holding Co. L.L.C.  The Company owns 100% of the issued and outstanding membership interests in Exploration Holding Co. L.L.C., a Texas limited liability company (“Exploration Holding”); such membership interests are duly authorized and validly issued in accordance with the Company Agreement of Exploration Holding (the Exploration Holding LLC Agreement) and fully paid (to the extent required under the Exploration Holding LLC Agreement) and non-assessable (except as such nonassessability may be affected by the Texas Business Organizations Code (the “TBOC”)); and, except as set forth in Exhibit 3.02, the Company owns such membership interests free and clear of all Liens.

Section 3.03    Ownership of Barnett Petrosearch, L.L.C.  Exploration Holding owns 100% of the issued and outstanding membership interests in Barnett Petrosearch, L.L.C., a Texas limited liability company (“Barnett”); such membership interests are duly authorized and validly issued in accordance with Barnett’s limited liability company agreement (the “Barnett LLC Agreement”) and fully paid (to the extent required under the Barnett LLC Agreement) and non-assessable (except as such nonassessability may be affected by the TBOC); and Exploration Holding owns such membership interests free and clear of all Liens.

Section 3.04    Ownership of DDJET.  Barnett owns a 5.54455% limited partnership interest in DDJET Limited, LLP, a Texas limited liability limited partnership (“DDJET”); such partnership interest is duly authorized and validly issued in accordance with DDJET’s partnership agreement (the “DDJET Partnership Agreement”) and fully paid (to the extent required under the DDJET Partnership Agreement ) and non-assessable (except as such nonassessability may be affected by the TBOC); and Barnett owns such partnership interest free and clear of all Liens.

Section 3.05    Capitalization and Valid Issuance.

 

(a)           As of the date of this Agreement, the issued and outstanding equity of the Company consists of 39,742,653 shares of Common Stock, 483,416 shares of  Series A 8% convertible preferred stock and 43,000 shares of Series B convertible preferred stock. All of the outstanding Common Stock and Preferred Stock have been duly authorized and validly issued and are fully paid and nonassessable. The rights, privileges and preferences of the Preferred Stock are as stated in the Company’s Articles of Incorporation (the “Articles”).

(b)           Except for (i) the conversion privileges of the Preferred Stock, (ii) the conversion privileges of the Notes to be issued under this Agreement, (iii) the Warrants being issued in connection with this Agreement, (iv) the conversion privileges provided in the 8% Senior Secured Convertible Note dated February 7, 2007, by and between the Company and RCH Petro Investors, LP (the “RCH Note”), (v) the exercise privileges provided in the Warrant to Purchase Common Stock dated February 7, 2007 issued by the Company to RCH Petro Investors, LP (the “RCH Warrant”), (vi) stock which may be issued pursuant to an Asset Purchase Agreement dated November 15, 2005, for the purchase of Quinduno Water Flood Project (vii) warrants issued in February 2006 to certain investors, (viii) the shares of Common Stock issuable upon exercise of warrants granted pursuant to the Company’s incentive plan, and (ix) all warrants disclosed in the Company’s SEC Documents, there are no outstanding options, warrants, rights (including conversion, preemptive rights or similar rights) or agreements for the purchase or acquisition from the Company of any shares of its capital stock.  The Company is not a party or subject to any agreement or understanding, and, to the Company’s knowledge, there is no agreement or understanding between any persons and/or entities, which affects or relates to the voting or giving of written consents with respect to any security or by a director of the Company, except as provided for in the Articles.

(c)           The issuance, offer and sale of the Notes and the issuance of the Warrants have been duly authorized by the Company and, when issued and delivered to the Purchasers against payment therefor in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable and will be free of any and all Liens and restrictions on transfer, other than under applicable state and federal securities Laws and other than such Liens as are created by the Purchasers.

(d)           The Company’s currently outstanding Common Stock is quoted on the OTC BB.

(e)           The Company has reserved the Note Shares and the Warrant Shares for issuance and has adequate authorized capital under its Articles to issue such shares when the Notes are converted or the Warrants are exercised.

Section 3.06    Company SEC Documents.  The Company has timely filed with the Commission all  reports, schedules and statements required to be filed by it under the Exchange Act since the filing of its Form 8-A12G on August 10, 2005 (all such documents filed on or prior to the date of this Agreement, collectively, the “the Company SEC Documents”).  The Company SEC Documents, including any audited or unaudited financial statements and any notes thereto or schedules included therein, at the time filed  (except to the extent corrected by a subsequently filed the Company SEC Document filed prior to the date of this Agreement) (i) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, (ii) complied in all material respects with the applicable requirements of the Exchange Act, (iii) complied as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the Commission with respect thereto, (iv) were prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of unaudited statements, as permitted by Form 10-QSB of the Commission) and (v) fairly present (subject in the case of unaudited statements to normal, recurring and year-end audit adjustments) in all material respects the consolidated financial position and the consolidated results of its operations and cash flows for the periods then ended.  Ham, Langston & Brezina, L.L.P. is an independent registered public accounting firm with respect to the Company and has not resigned or been dismissed as independent registered public accountants of the Company as a result of or in connection with any disagreement with the Company on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures.

Section 3.07    No Material Adverse Change.  Except as set forth in or contemplated by the Company SEC Documents, since June 30, 2007, the Company has conducted its business in the ordinary course, consistent with past practice, and there has been no (i) change that has had or would reasonably be expected to have a Company Material Adverse Effect, (ii) acquisition or disposition of any material asset by the Company or any contract or arrangement therefor, otherwise than for fair value in the ordinary course of business, (iii) material change in the Company’s accounting principles, practices or methods or (iv) incurrence of material indebtedness.

Section 3.08    Litigation.  Except as set forth in the Company SEC Documents, there is no Action pending or, to the knowledge of the Company, contemplated or threatened against the Company or any of its officers (in their capacity as such), directors (in their capacity as such), Properties, which (individually or in the aggregate) reasonably would be expected to have a Company Material Adverse Effect or which challenges the validity of this Agreement or which would reasonably be expected to adversely affect or restrict the Company’s ability to consummate the transactions contemplated by the Transaction Documents.

Section 3.09    No Conflict.  Except as set forth in Exhibit 3.09, the execution, delivery and performance by the Company of the Transaction Documents to which it is a party and all other agreements and instruments to be executed and delivered by the Company pursuant hereto or thereto or in connection herewith and therewith, and compliance by the Company with the terms and provisions hereof and thereof, do not and will not (a) violate any provision of any Law, governmental permit, determination or award having applicability to the Company or any of its Properties, (b) conflict with or result in a violation of any provision of the articles of incorporation or bylaws of the Company (c) require any consent, approval or notice under or result in a violation or breach of or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under (i) any note, bond, mortgage, license, or loan or credit agreement to which the Company is a party or by which the Company or any of its Properties may be bound or (ii) any other agreement, instrument or obligation, or (d) result in or require the creation or imposition of any Lien upon or with respect to any of the Properties now owned or hereafter acquired by the Company, except in the cases of clauses (a), (c) and (d) where such violation, default, breach, termination, cancellation, failure to receive consent or approval, or acceleration with respect to the foregoing provisions of this Section 3.09 would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.

Section 3.10    Authority.  The execution and delivery of, and the performance by the Company of its obligations under the Transaction Documents have been duly and validly authorized by the Company, and the Transaction Documents have been duly executed and delivered by the Company and constitute the valid and legally binding agreements of the Company, enforceable against the Company in accordance with their terms, except as rights to indemnity and contribution hereunder and thereunder may be limited by federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of the Company’s obligations hereunder and thereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights generally and by general equitable principles, regardless whether enforcement is considered in a proceeding in equity or at law.

Section 3.11    Compliance with Laws.  The Company is not in violation of any judgment, decree or order or any Law applicable to the Company, except as would not, individually or in the aggregate, have a Company Material Adverse Effect.  The Company possess all certificates, authorizations and permits issued by the appropriate regulatory authorities necessary to conduct its business, except where the failure to possess such certificates, authorizations or permits would not have, individually or in the aggregate, a Company Material Adverse Effect, and the Company has not received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit, except where such potential revocation or modification would not have, individually in the aggregate, a Company Material Adverse Effect.

Section 3.12    Preemptive Rights or Registration Rights.  Except for as set forth on Exhibit 3.12, there are no preemptive rights or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any capital stock of the Company pursuant to any agreement or instrument to which the Company is a party and is bound. Neither the execution of this Agreement nor the issuance of the Notes and Warrants as contemplated by this Agreement gives rise to any rights for or relating to the registration of any Common Stock, other than as set forth on Exhibit 3.12.

Section 3.13    Approvals.  Except as set forth in Exhibit 3.13 and as required by the Commission in connection with the Company’s obligations under the Registration Rights Agreement, no authorization, consent, approval, waiver, license, qualification or written exemption from, nor any filing, declaration, qualification or registration with, any Governmental Authority or any other Person is required in connection with the execution, delivery or performance by the Company of any of the Transaction Documents to which it is a party, except (i) as may be required under the state securities or “Blue Sky” Laws, (or (ii) where the failure to receive such authorization, consent, approval, waiver, license, qualification or written exemption or to make such filing, declaration, qualification or registration would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect.

Section 3.14    Offering.  Assuming the accuracy of the representations and warranties of the Purchasers contained in this Agreement, the sale and issuance of the Purchased Securities pursuant to this Agreement is exempt from the registration requirements of the Securities Act, and neither the Company nor, to the Company’s knowledge, any authorized Representative acting on its behalf has taken or will take any action hereafter that would cause the loss of such exemption.

Section 3.15    Certain Fees.  Except for fees payable to Scarsdale Equities, LLC in its capacity as placement agent, no fees or commissions will be payable by the Company to brokers, finders, or investment bankers with respect to the sale of any of the Purchased Securities or the consummation of the transactions contemplated by this Agreement.  The Company agrees that it will indemnify and hold harmless the Purchasers from and against any and all claims, demands, or liabilities for broker’s, finder’s, placement, or other similar fees or commissions incurred by the Company or alleged to have been incurred by the Company in connection with the sale of Purchased Securities or the consummation of the transactions contemplated by this Agreement.

Section 3.16    No Side Agreements.  There are no other agreements by, among or between the Company or its Affiliates, on the one hand, and the Purchasers, on the other hand, with respect to the transactions contemplated hereby nor promises or inducements for future transactions between or among any of such parties.

Section 3.17    Investment Company Status.  The Company is not an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

Each Purchaser represents and warrants to the Company, on and as of the date of this Agreement and on and as of the Closing Date, as follows:

Section 4.01    Valid Existence.  The Purchaser: (i) is either (x) duly organized, validly existing and in good standing under the Laws of its jurisdiction of organization or (y) an individual of full age of majority, with full power, capacity, and authority to enter into this Agreement and perform the obligations contemplated hereby by and for himself/herself and his/her spouse; and (ii) has all requisite power, and has all material governmental licenses, authorizations, consents and approvals necessary to own its Properties and carry on its business as its business is now being conducted, except where the failure to obtain such licenses, authorizations, consents and approvals would not reasonably be expected to have a Purchaser Material Adverse Effect.

Section 4.02    No Conflicts.  The execution, delivery and performance by the Purchaser of the Transaction Documents to which it is a party and all other agreements and instruments to be executed and delivered by the Purchaser pursuant hereto or thereto or in connection herewith or therewith, compliance by the Purchaser with the terms and provisions hereof and thereof, and the purchase of the Purchased Securities by the Purchaser do not and will not (a) violate any provision of any Law, governmental permit, determination or award having applicability to the Purchaser or any of its Properties, (b) conflict with or result in a violation of any provision of the organizational documents of the Purchaser, or (c) require any consent (other than standard internal consents), approval or notice under or result in a violation or breach of or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under (i) any note, bond, mortgage, license, or loan or credit agreement to which the Purchaser is a party or by which the Purchaser or any of its Properties may be bound or (ii) any other such agreement, instrument or obligation, except in the case of clauses (a) and (c), where such violation, default, breach, termination, cancellation, failure to receive consent or approval, or acceleration with respect to the foregoing provisions of this Section 4.02 would not, individually or in the aggregate, reasonably be expected to have a Purchaser Material Adverse Effect.

Section 4.03    Authority.  The execution and delivery of, and the performance by the Purchaser of its obligations under the Transaction Documents have been duly and validly authorized by the Purchaser, and the Transaction Documents have been duly executed and delivered by the Purchaser and constitute the valid and legally binding agreements of the Purchaser, enforceable against the Purchaser in accordance with their terms, except as rights to indemnity and contribution hereunder and thereunder may be limited by federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of the Purchaser’s obligations hereunder and thereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and other laws relating to or affecting creditors’ rights generally and by general equitable principles, regardless whether enforcement is considered in a proceeding in equity or at law.

Section 4.04    Investment.  The Purchased Securities are being acquired for the Purchaser’s own account, or the accounts of clients for whom the Purchaser exercises discretionary investment authority, not as a nominee or agent, and with no present intention of distributing the Purchased Securities or any part thereof, and that the Purchaser has no present intention of selling or granting any participation in or otherwise distributing the same in any transaction in violation of the securities Laws of the United States of America or any state, without prejudice, however, to the Purchaser’s right at all times (subject to the Purchaser’s agreement contained in Section 4.07) to sell or otherwise dispose of all or any part of the Purchased Securities under a registration statement under the Acts and applicable state securities Laws or under an exemption from such registration available thereunder (including, without limitation, if available, Rule 144 promulgated thereunder). If the Purchaser should in the future decide to dispose of any of the Purchased Securities, the Purchaser understands and agrees (a) that it may do so only (i) in compliance with the Acts and applicable state securities law, as then in effect, or (ii) in the manner contemplated by any registration statement pursuant to which such securities are being offered, and (b) that stop-transfer instructions to that effect will be in effect with respect to such securities.

Section 4.05    Nature of Purchaser.  The Purchaser represents and warrants to, and covenants and agrees with, the Company that, (a) it is an “accredited investor” within the meaning of Rule 501 of Regulation D promulgated by the Commission pursuant to the Securities Act and (b) by reason of its business and financial experience it has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Purchased Securities, is able to bear the economic risk of such investment and, at the present time, would be able to afford a complete loss of such investment.

Section 4.06    Receipt of Information; Authorization.  The Purchaser acknowledges that it (a) has access to the Company SEC Documents and (b) has been provided a reasonable opportunity to ask questions of and receive answers from Representatives of the Company regarding such matters.

Section 4.07    Restricted Securities.  The Purchaser understands that the Purchased Securities it is purchasing are characterized as “restricted securities” under the federal securities Laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such Laws and applicable regulations such securities may be resold without registration under the Securities Act only in certain limited circumstances. In this connection, Purchaser represents that it is knowledgeable with respect to Rule 144 of the Commission promulgated under the Securities Act. Purchaser further understands that a restrictive legend will be placed on the Purchased Securities, the Note Shares and the Warrant Shares.  To assist in implementing the above provisions, the Purchaser hereby consents to the placement of the legend, or a substantially similar legend, set forth below, on all certificates representing ownership of the Purchased Securities, the Note Shares and the Warrant Shares acquired hereby until such securities have been sold, transferred, or otherwise disposed of, pursuant to the requirements hereof.  The legend shall read substantially as follows:

“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES ACTS.  THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT, ARE RESTRICTED AS TO TRANSFERABILITY, AND MAY NOT BE SOLD, HYPOTHECATED, OR OTHERWISE TRANSFERRED WITHOUT COMPLIANCE WITH THE REGISTRATION AND QUALIFICATION PROVISIONS OF APPLICABLE FEDERAL AND STATE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.”

 

Section 4.08    Certain Fees.  No fees or commissions will be payable by the Purchaser to brokers, finders, or investment bankers with respect to the sale of any of the Purchased Securities or the consummation of the transactions contemplated by this Agreement.  The Purchaser agrees that it will indemnify and hold harmless the Company from and against any and all claims, demands, or liabilities for broker’s, finder’s, placement, or other similar fees or commissions incurred by the Purchaser or alleged to have been incurred by the Purchaser in connection with the purchase of Purchased Securities or the consummation of the transactions contemplated by this Agreement.

Section 4.09    Short Sales.  The Purchaser has not engaged in short sales of the Company’s Common Stock during the three months preceding the Closing Date.

Section 5.01    Notice of Default.  So long as any amounts remain outstanding under the Notes, the Company covenants that it shall give the Holders written notice of the occurrence of any Event of Default (as defined in Section 8 of the Notes) promptly upon the occurrence thereof.

Section 5.02    Observation and Information Rights.  So long as any amounts remain outstanding under the Notes, the Company covenants that, in the event that the Company has not timely filed the necessary Company SEC Documents, it shall notify each Holder when quarterly financial information becomes available and shall, upon subsequent request from any Holder, provide such Holder quarterly financial information, quarterly updates regarding the Company’s business, and other information which would have otherwise been filed with the Commission.

Section 5.03    Price Protection. Without limiting any Holder’s right set forth in Section 5.04, if the Company issues and sells capital in the Company any time during the six months following the Closing Date with an equity price less than the Conversion Price, each Holder will have the option to: (i) participate up to the amount invested in this offering; (ii) demand that the Company redeem 100% of the par value of the then outstanding balance plus any accrued unpaid interest; or (iii) choose to take no action.  The Company agrees that in the event any Holder acts pursuant to (i) or (ii), the Company shall take or cause to take all necessary action to effect such Holder’s participation in such a transaction or the redemption of the Notes. In the event the Notes are redeemed, the Company agrees that payment will be due to each Holder making such election in immediately available cash within 45 days of receipt of the Holder’s demand for redemption.

Section 5.04    Integration.  The Company shall not sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Purchased Securities in a manner that would require the registration under the Securities Act of the sale of the Purchased Securities.

Section 5.05    Short Sales.  Each Holder agrees that it will not engage in short sales of the Company’s Common Stock while any amount is outstanding under the Notes.

Section 5.06    Taking of Necessary Action.  Each of the Parties hereto shall use its commercially reasonable efforts promptly to take or cause to be taken all action and promptly to do or cause to be done all things necessary, proper or advisable under applicable Law and regulations to consummate and make effective the transactions contemplated by this Agreement.  Without limiting the foregoing, the Company and each Holder will use its commercially reasonable efforts to make all filings and obtain all consents of Governmental Authorities that may be necessary or, in the reasonable opinion of each Holder or the Company, as the case may be, advisable for the consummation of the transactions contemplated by the Transaction Documents.

Section 5.07    Publicity.   Except for such disclosure as the Company is advised by counsel is required by law, the Company shall not use the name of, or make reference to, any Purchaser or any of its affiliates or any investment adviser of any Purchaser in any press release or in any public manner, including, without limitation, on the Company’s website, without the prior written consent of each affected party.

Section 5.08    Disclosure of Transaction.  Within one (1) business day following the completion of all funding requirements for the Financing, the Company will issue a press release describing the terms of the transactions contemplated by this Agreement, but shall not include the names of the Purchasers or any investment adviser or affiliate of any Purchaser, or the individual amounts of Purchased Securities purchased hereby without each affected party’s consent.

Section 5.09    Collateral Agent.   Each of the Purchasers hereby agrees to appoint Ironman PI Fund (QP), LP as the Collateral Agent for purposes of the Pledge and Security Agreement.  The Collateral Agent may employ agents and attorneys-in-fact in connection herewith and shall not be responsible for the gross negligence or willful misconduct of any such agents or attorneys-in-fact selected by it in good faith.

Section 6.01    Conditions to the Closing.

(a)           Mutual Conditions.  The respective obligation of each Party to consummate the purchase and issuance and sale of the Purchased Securities shall be subject to the satisfaction on or prior to the Closing Date of each of the following conditions (any or all of which may be waived by a particular Party on behalf of itself in writing, in whole or in part, to the extent permitted by applicable Law):

(i)           no Law shall have been enacted or promulgated, and no action shall have been taken, by any Governmental Authority of competent jurisdiction which temporarily, preliminarily or permanently restrains, precludes, enjoins or otherwise prohibits the consummation of the transactions contemplated by this Agreement or makes the transactions contemplated by this Agreement  illegal; and

(ii)           there shall not be pending any Action by any Governmental Authority seeking to restrain, preclude, enjoin or prohibit the transactions contemplated by this Agreement.

(b)           Purchasers’ Conditions.  The obligation of the Purchasers to consummate the purchase of the Purchased Securities shall be subject to the satisfaction on or prior to the Closing Date of each of the following conditions (any or all of which may be waived by a particular Purchaser on behalf of itself in writing, in whole or in part, to the extent permitted by applicable Law):

(i)           The Company shall have performed and complied in all material respects with the covenants and agreements contained in this Agreement that are required to be performed and complied with by the Company on or prior to the Closing Date;

(ii)           the representations and warranties of the Company contained in this Agreement shall be true and correct when made and as of the Closing Date;

(iii)          since the date of this Agreement, no Company Material Adverse Effect shall have occurred and be continuing;

(iv)          the Company shall have delivered, or caused to be delivered, to the Purchasers at the Closing, the Company’s closing deliveries described in Section 6.02.

(c)           The Company’s Conditions.   The obligation of the Company to consummate the sale of the Purchased Securities to each the Purchaser shall be subject to the satisfaction on or prior to the Closing Date of each of the following conditions (any or all of which may be waived by the Company in writing, in whole or in part, to the extent permitted by applicable Law):

(i)           each Purchaser shall have performed and complied with in all material respects the covenants and agreements contained in this Agreement that are required to be performed and complied with by that Purchaser on or prior to the Closing Date;

(ii)           the representations and warranties of each Purchaser contained in this Agreement shall be true and correct when made and as of the Closing Date;

(iii)          since the date of this Agreement, no Purchaser Material Adverse Effect shall have occurred and be continuing;

(iv)         all necessary consents and approvals of lenders or other third parties shall have been obtained; and

(v)          each Purchaser shall have delivered, or caused to be delivered, to the Company at the Closing, the Purchaser’s closing deliveries described in Section 6.03, except that funding shall occur immediately upon delivery of such Purchaser’s Note and Warrant.

Section 6.02    Company Deliveries.  At the Closing, subject to the terms and conditions of this Agreement, the Company will deliver, or cause to be delivered, to the Purchasers:

(a)           the Purchased Securities, free and clear of any Liens, encumbrances or interests of any other party other than restrictions on transfer imposed by federal and state securities Laws and those imposed by Purchasers;

(b)           the Registration Rights Agreement in substantially the form attached to this Agreement as Exhibit D, which shall have been duly executed by the Company;

(c)           the Pledge and Security Agreement in substantially the form attached to this Agreement as Exhibit C, which shall have been duly executed by the Company;

(d)           the original certificate representing a 5.00% interest in Exploration Holding Co., L.L.C. along with a unit power executed in blank;

(e)           copies of the UCC-1s evidencing that the same has been filed as required by the Pledge and Security Agreement;

(f)           the consent required pursuant to Section 3.03 of the Company Agreement of Exploration Holding Co, L.L.C. permitting the pledge of the interests under the Pledge and Security Agreement;

(g)           waiver of Fortuna Energy LP’s right to participate in this offering;

(h)           waiver of RCH Petro Investor LP’s rights to participate in this offering and RCH Petro Investor LP’s consent to this transaction;

(i)           a cross-receipt, dated the Closing Date, executed by the Company and delivered to the Purchasers certifying that it has received the Purchase Price with respect to the Purchased Securities issued and sold to the Purchasers;

(j)           an officer’s certificate of the Company substantially in the form attached to this Agreement as Exhibit E; and

(k)           a legal opinion substantially in the form attached to this Agreement as Exhibit “F”.

Section 6.03    Purchasers’ Deliveries.  At the Closing, subject to the terms and conditions of this Agreement, the Purchasers will deliver, or cause to be delivered to the Company:

(a)           Payment to the Company of the Purchase Price by wire transfer(s) of immediately available funds to an account designated by the Company in writing immediately upon receipt by Purchasers of the Notes and Warrants;

(b)           the Registration Rights Agreement in substantially the form attached to this Agreement as Exhibit D, which shall have been duly executed by each of the Purchasers;

(c)           the Pledge and Security Agreement in substantially the form attached to this Agreement as Exhibit C which shall have been duly executed by each of the Purchasers;

(d)           a cross-receipt, dated the Closing Date, executed by each of the Purchasers, and delivered to the Company certifying that each of the Purchasers has received the Purchased Securities; and

(e)           an Officer’s Certificate substantially in the form attached to this Agreement as Exhibit G.

Section 7.01    Indemnification by the Company.  The Company agrees to indemnify the Purchasers and their Representatives (collectively, “Purchaser Related Parties”) from, and hold each of them harmless against any and all actions, suits, proceedings (including any investigations, litigation or inquiries), demands and causes of action, and, in connection therewith, and promptly on demand, pay and reimburse each of them costs, losses, liabilities,  damages, or expenses of any kind or nature whatsoever, including the reasonable fees and disbursements of counsel and all other reasonable expenses incurred in connection with investigating, defending or preparing to defend any such matter that may be incurred by them or asserted against or involve any of them as a result of, arising out of, or in any way related to the breach of any of the representations, warranties or covenants of the Company contained herein; provided that such claim for indemnification relating to a breach of a representation or warranty is made prior to the expiration of such representation or warranty.

Section 7.02    Indemnification by Purchasers.  The Purchasers, severally and not jointly, agree to indemnify the Company and its Representatives (collectively, “the Company Related Parties”) from, and hold each of them harmless against, any and all actions, suits, proceedings (including any investigations, litigation, or inquiries), demands and causes of action and, in connection therewith, and promptly upon demand, pay and reimburse each of them costs, losses, liabilities,  damages, or expenses of any kind or nature whatsoever, including, without limitation, the reasonable fees and disbursements of counsel and all other reasonable expenses incurred in connection with investigating, defending or preparing to defend any such matter that may be incurred by them or asserted against or involve any of them as a result of, arising out of, or in any way related to the breach of any of the representations, warranties or covenants of the Purchaser contained herein; provided that such claim for indemnification relating to a breach of a representation or warranty is made prior to the expiration of such representation or warranty.

Section 7.03    Indemnification Procedure.  Promptly after any of the Company Related Party or Purchaser Related Party (hereinafter, the “Indemnified Party”) has received notice of any indemnifiable claim hereunder, or the commencement of any action or proceeding by a third party, which the Indemnified Party believes in good faith is an indemnifiable claim under this Agreement, the Indemnified Party shall give the indemnitor hereunder (the “Indemnifying Party”) written notice of such claim or the commencement of such action or proceeding, but failure to so notify the Indemnifying Party will not relieve the Indemnifying Party from any liability it may have to such Indemnified Party hereunder except to the extent that the Indemnifying Party is materially prejudiced by such failure. Such notice shall state the nature and the basis of such claim to the extent then known.  The Indemnifying Party shall have the right to defend and settle, at its own expense and by its own counsel who shall be reasonably acceptable to the Indemnified Party, any such matter as long as the Indemnifying Party pursues the same diligently and in good faith. If the Indemnifying Party undertakes to defend or settle, it shall promptly notify the Indemnified Party of its intention to do so, and the Indemnified Party shall cooperate with the Indemnifying Party and its counsel in all commercially reasonable respects in the defense thereof and the settlement thereof. Such cooperation shall include furnishing the Indemnifying Party with any books, records and other information reasonably requested by the Indemnifying Party and in the Indemnified Party’s possession or control.  Such cooperation of the Indemnified Party shall be at the cost of the Indemnifying Party.  After the Indemnifying Party has notified the Indemnified Party of its intention to undertake to defend or settle any such asserted liability, and for so long as the Indemnifying Party diligently pursues such defense, the Indemnifying Party shall not be liable for any additional legal expenses incurred by the Indemnified Party in connection with any defense or settlement of such asserted liability; provided, however, that the Indemnified Party shall be entitled (i) at its expense, to participate in the defense of such asserted liability and the negotiations of the settlement thereof and (ii) if (A) the Indemnifying Party has failed to assume the defense or employ counsel reasonably acceptable to the Indemnified Party or (B) if the defendants in any such action include both the Indemnified Party and the Indemnifying Party and counsel to the Indemnified Party shall have concluded that there may be reasonable defenses available to the Indemnified Party that are different from or in addition to those available to the Indemnifying Party or if the interests of the Indemnified Party reasonably may be deemed to conflict with the interests of the Indemnifying Party, then the Indemnified Party shall have the right to select a separate counsel and to assume such legal defense and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the Indemnifying Party as incurred.  Notwithstanding any other provision of this Agreement, the Indemnifying Party shall not settle any indemnified claim without the consent of the Indemnified Party, unless the settlement thereof imposes no liability or obligation on, involves no admission of wrongdoing or malfeasance by, and includes a complete release from liability of, the Indemnified Party.

Section 8.01    Interpretation.  Article, Section, Schedule, and Exhibit references are to this Agreement, unless otherwise specified. All references to instruments, documents, contracts, and agreements are references to such instruments, documents, contracts, and agreements as the same may be amended, supplemented, and otherwise modified from time to time, unless otherwise specified. The word “including” shall mean “including but not limited to.”  Whenever any determination, consent or approval is to be made or given by the Company under the Transaction Documents, such action shall be in the Company’s sole discretion unless otherwise specified therein.  Whenever the Company has an obligation under the Transaction Documents, the expense of complying with such obligation shall be an expense of the Company, as applicable, unless otherwise specified therein.  Whenever any determination, consent or approval is to be made or given by the Purchasers under the Transaction Documents, such action shall be in the Purchasers’ sole discretion unless otherwise specified therein.  If any provision in the Transaction Documents is held to be illegal, invalid, not binding, or unenforceable, such provision shall be fully severable and the Transaction Documents shall be construed and enforced as if such illegal, invalid, not binding, or unenforceable provision had never comprised a part of the Transaction Documents, and the remaining provisions shall remain in full force and effect. The Transaction Documents have been reviewed and negotiated by sophisticated parties with access to legal counsel and shall not be construed against the drafter.

Section 8.02    Survival of Provisions.  The representations and warranties set forth in Sections3.01, 3.02, 3.03, 3.04, 3.05, 3.10, 3.11, 3.13, 4.01, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08 and 4.09 of this Agreement shall survive the execution and delivery of this Agreement for the maximum amount of time allowed by law, and the other representations and warranties set forth in this Agreement shall survive for a period of twelve (12) months following the Closing Date regardless of any investigation made by or on behalf of the Company, or the Purchasers.  The covenants made in this Agreement or any other Transaction Document shall survive the closing of the transactions described herein and remain operative and in full force and effect regardless of acceptance of any of the Purchased Securities and payment therefor and repayment, conversion or repurchase thereof. All indemnification obligations of the Company, and the Purchasers pursuant to this Agreement shall remain operative and in full force and effect unless such obligations are expressly terminated in a writing by the Parties, regardless of any purported general termination of this Agreement.

Section 8.03    No Waiver; Modifications in Writing.

(a)           Delay.  No failure or delay on the part of any Party in exercising any right, power, or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power, or remedy preclude any other or further exercise thereof or the exercise of any right, power, or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to a Party at Law or in equity or otherwise.

(b)           Specific Waiver. Except as otherwise provided herein, no amendment, waiver, consent, modification, or termination of any provision of this Agreement or any other Transaction Document shall be effective unless signed by each of Parties or each of the original signatories thereto affected by such amendment, waiver, consent, modification, or termination. Any amendment, supplement or modification of or to any provision of this Agreement or any other Transaction Document, any waiver of any provision of this Agreement or any other Transaction Document, and any consent to any departure by the Company from the terms of any provision of this Agreement or any other Transaction Document shall be effective only in the specific instance and for the specific purpose for which made or given.  Except where notice is specifically required by this Agreement, no notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances.

Section 8.04    Binding Effect; Assignment.

(a)           Binding Effect. This Agreement shall be binding upon the Company, the Purchasers, and their respective successors and permitted assigns. Except as expressly provided in this Agreement, this Agreement shall not be construed so as to confer any right or benefit upon any Person other than the Parties to this Agreement and as provided in Article VII, and their respective successors and permitted assigns.

(b)           Assignment of Purchased Securities. All or any portion of the Purchased Securities purchased pursuant to this Agreement may be sold, assigned or pledged by the Purchasers, subject to compliance with applicable securities Laws.

(c)           Assignment of Rights. The Purchasers may assign all or any portion of their rights hereunder; provided the assignee shall be deemed to be a Purchaser hereunder with respect to such assigned rights and shall agree to be bound by the provisions of this Agreement.

Section 8.05    Communications.  All notices and demands provided for hereunder shall be in writing and shall be given by registered or certified mail, return receipt requested, telecopy, air courier guaranteeing overnight delivery, electronic mail or personal delivery to the addresses listed on the signature pages hereto or to such other address as the Company or any of the Purchasers may designate in writing. All notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; at the time of transmittal, if sent via electronic mail; upon actual receipt if sent by registered or certified mail, return receipt requested, or regular mail, if mailed; when receipt acknowledged, if sent via telecopy; and upon actual receipt when delivered to an air courier guaranteeing overnight delivery.

Section 8.06    Entire Agreement.  This Agreement and the other Transaction Documents are intended by the Parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the Parties hereto and thereto in respect of the subject matter contained herein and therein.  There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein with respect to the rights granted by the Company or any of the Purchasers set forth herein and therein.  This Agreement and the other Transaction Documents supersede all prior agreements and understandings between the Parties with respect to such subject matter.

Section 8.07    Governing Law.  This Agreement will be construed in accordance with and governed by the Laws of the State of Texas without regard to principles of conflicts of Laws.

Section 8.08    Execution in Counterparts.  This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart.  In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original thereof.

Section 8.09    Termination.

(a)           Notwithstanding anything herein to the contrary, this Agreement may be terminated with respect to a Purchaser at any time at or prior to the Closing:

(i)           by the mutual written consent of any Purchaser and the Company;

(ii)           by the written consent of any Purchaser or by the Company, (A) if any representation or warranty of the other party set forth in this Agreement shall be untrue in any material respect when made, or (B) upon a breach in any material respect of any covenant or agreement on the part of the other party set forth in this Agreement (either clause (A) or (B) above being a “Terminating Breach”); provided, that, each Terminating Breach would cause the conditions to the non-terminating party’s obligations not to be satisfied and such Terminating Breach is not cured within 30 days after written notice from the non-breaching party; or

(b)           Notwithstanding anything herein to the contrary, this Agreement shall automatically terminate at any time at or prior to the Closing:

(i)           if a statute, rule, order, decree or regulation shall have been enacted or promulgated, or if any action shall have been taken by any Governmental Authority of competent jurisdiction which permanently restrains, precludes, enjoins or otherwise prohibits the consummation of the transactions contemplated by this Agreement or makes the transactions contemplated by this Agreement illegal; or

(ii)           if the Closing shall not have occurred on or before November 9, 2007.

(c)           In the event of the termination of this Agreement as provided in Section 8.09(a) or Section 8.09(b), this Agreement shall forthwith become null and void.  In the event of such termination, there shall be no liability on the part of any party hereto, except with respect to the requirement to comply with any confidentiality agreement in favor of the Company; provided that nothing herein shall relieve any party from any liability or obligation with respect to any willful breach of this Agreement.

Section 8.10    Expenses.  If any action at law or equity is necessary to enforce or interpret the terms of the Transaction Documents, the prevailing party shall be entitled to reasonable attorney’s fees, out-of-pocket costs and necessary disbursements in addition to any other relief to which such party may be entitled.

IN WITNESS WHEREOF, the Parties hereto execute this Note and Warrant Purchase Agreement, effective as of the date first above written.

 

 

 

 

Purchaser/ Address		Purchase Price for Convertible Note				Number of Warrants Purchased				Percentage of Security Interest in Collateral
Ironman PI Fund (QP), LP		$	3,000,000				714,286				1.86	%
Wellington Trust Company— Client ID 9537			295,000				70,238				0.18	%
Wellington Trust Company— Client ID 0611			2,205,000				525,000				1.36	%
CrossCap Partners, LP			98,947				23,559				0.06	%
CrossCap Partners Enhanced, LP			901,053				214,536				0.56	%
William C. O’Malley			1,000,000				238,096				0.62	%
J. Burke O’Malley			100,000				23,810				0.06	%
Leo E. Stec			100,000				23,810				0.06	%
Van G. Bohn			100,000				23,810				0.06	%
John W. and Katrina P. Koons			100,000				23,810				0.06	%
Gutierrez Holdings, LP			100,000				23,810				0.06	%
Jerry C. Dearing			100,000				23,810				0.06	%
		$	8,100,000.00				1,928,575				5.00	%

 

Schedule A

 

 

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