form10q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 31, 2014

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______.

 

Commission file number: 000-49760

 

PETRO RIVER OIL CORP.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   98-0611188
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)

 

1980 Post Oak Blvd., Suite 2020, Houston, TX 77056

(Address of Principal Executive Offices, Zip Code)

 

(469) 828-3900

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class   Outstanding at September 22, 2014
Common Stock, $.00001 par value per share   818,567,746 shares

 

 

 

 
 

 

TABLE OF CONTENTS

 

      Page
PART I - FINANCIAL INFORMATION    
Item 1. Financial Statements   F-1
  Condensed Consolidated Balance Sheets   F-1
  Condensed Consolidated Statements of Operations   F-2
  Condensed Consolidated Statements of Cash Flows   F-3
  Notes to Condensed Consolidated Financial Statements   F-4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation   3
Item 3. Quantitative and Qualitative Disclosures about Market Risk   9
Item 4. Controls and Procedures   9
       
PART II - OTHER INFORMATION    
Item 1. Legal Proceedings   10
Item 1A. Risk Factors   10
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   10
Item 3. Default Upon Senior Securities   10
Item 4. Mine Safety Disclosures   10
Item 5. Other Information   10
Item 6. Exhibits   11
       
SIGNATURES   12

 

2
 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Petro River Oil Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

 

   As of
   July 31, 2014  April 30, 2014
   (unaudited)   
Assets          
Current Assets:          
Cash and cash equivalents  $3,407,129   $8,352,949 
Accounts receivable   818,984    51,979 
Prepaid expenses and other current assets   32,977    40,297 
Total Current Assets   4,259,090    8,445,225 
           
Oil and gas assets, net   17,155,285    8,941,592 
Property, plant and equipment, net of accumulated depreciation of $315,238 and $314,308   3,796    930 
Other assets   6,000    6,000 
Total Other Assets   17,165,081    8,948,522 
Total Assets  $21,424,171   $17,393,747 
           
Liabilities and Stockholders’ Equity          
Current Liabilities:          
Accounts payable and accrued expenses  $950,677   $480,637 
Current portion of asset retirement obligations   484,939    481,658 
Total Current Liabilities   1,435,616    962,295 
           
Long-term liabilities:          
Asset retirement obligations, net of current portion   422,254    336,352 
Total Liabilities   1,857,870    1,298,647 
           
Commitments and contingencies          
           
Stockholders’ Equity:          
           
Preferred Shares - 5,000,000 authorized; par value $0.00001 per share   -    - 
Preferred B shares - 29,500 authorized; 0 issued with a $100 stated value, par value $0.00001 per share   -    - 
Common shares - 2,250,000,000 authorized; par value $0.00001 per share; issued and outstanding; 818,567,746 and 818,567,746, respectively   8,186    8,186 
Additional paid-in capital   27,937,289    27,748,045 
Accumulated deficit   (12,976,463)   (11,661,131)
Total Stockholders’ Equity   14,969,012    16,095,100 
Non-controlling interests   4,597,289    - 
Total Stockholders’ Equity   19,566,301    16,095,100 
Total Liabilities and Stockholders’ Equity  $21,424,171   $17,393,747 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-1
 

 

Petro River Oil Corp. and Subsidiaries

Condensed Consolidated Statements of Operations

(unaudited)

 

   For the Three Months  For the Three Months
   Ended  Ended
  July 31, 2014  July 31, 2013
Operations      
Revenues          
Oil and natural gas sales  $666,276   $104,840 
Total Revenues   666,276    104,840 
           
Operating Expenses          
Operating   340,668    64,079 
General and administrative   1,861,532    2,219,028 
Depreciation, depletion and accretion   182,152    26,354 
Total Expenses   2,384,352    2,309,461 
           
Operating loss   (1,718,076)   (2,204,621)
           
Other income (expense)   33    (5)
           
Net Loss   (1,718,043)   (2,204,626)
           
Net Loss attributable to non-controlling interest   (402,711)   - 
           
Net Loss attributable to Petro River Oil Corp. and Subsidiaries  $(1,315,332)  $(2,204,626)
          
Net Loss per Common Share Basic and Diluted  $(0.00)  $(0.00)
           
Weighted Average Number of Common Shares Outstanding - Basic and Diluted   818,567,746    737,311,224

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-2
 

 

Petro River Oil Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

   For the Three Months  For the Three Months
   Ended  Ended
   July 31, 2014  July 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(1,718,043)  $(2,204,626)
Adjustments to reconcile net loss to net cash used in operating activities          
Stock-based compensation   189,244    1,539,500 
Depreciation, depletion and amortization   169,510    13,098 
Accretion of asset retirement obligation   12,642    13,256 
Changes in operating assets and liabilities:          
Accounts receivable   (767,005)   (13,736)
Prepaid expenses and other assets   7,320    9,001 
Accounts payable and accrued expenses   470,040    274,761 
Net Cash Used in Operating Activities   (1,636,292)   (368,746)
           
Cash Flows From Investing Activities:          
Capitalized expenditures on oil and gas assets   (8,305,732)   (295,965)
Purchase of office equipment   (3,796)   - 
Net Cash Used in Investing Activities   (8,309,528)   (295,965)
           
Cash Flows From Financing Activities:          
Cash received from non-controlling interest contribution   5,000,000    - 
Net Cash Provided by Financing Activities   5,000,000    - 
           
Change in cash and cash equivalents   (4,945,820)   (664,711)
           
Cash and cash equivalents, beginning of period   8,352,949    5,703,082 
Cash and cash equivalents, end of period  $3,407,129   $5,038,371 
           
SUPPLEMENTARY CASH FLOW INFORMATION:          
Cash paid during the period for:          
Income taxes  $-   $- 
Interest paid  $-   $- 
           
Non-cash investing and financing activities:          
Conversion of accrued settlement liability into common stock  $-   $80,000 
Acquisition of oil and gas assets  $76,541   $- 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-3
 

 

PETRO RIVER OIL CORP.

Notes to the Condensed Consolidated Financial Statements

For the three months ended July 31, 2014 and 2013

 

1.   Organization and Liquidity:

 

Petro River Oil Corp (the “Company”) is an enterprise engaged in the exploration and exploitation of heavy oil properties. The Company’s principal administrative office is located in Houston, Texas and its principal operations are in Oklahoma, Kansas and Western Missouri. The Company also has an office in New York, New York.

 

Petro River Oil Corp. is an independent exploration and production company with a focus on drilling, completion, recompletions, and applying modern technologies to both conventional and unconventional oil and gas assets. The Company’s core holdings are in the Mid Continent region in Oklahoma and Kansas. The Company’s operations are currently focused on the Mississippi Lime Play, capitalizing on the experience, knowledge, and drilling techniques of its team. The Company is driven to utilize our expertise both in the region and in similar formations to exploit hydrocarbon prone resources with tight and/or challenging characteristics in order to create value for the company and our shareholders.

 

Petro River Oil LLC (“Petro”) was incorporated under the laws of the State of Delaware on March 3, 2011. Through proceeds received from the issuance of various promissory notes, on February 1, 2012, Petro purchased various interests in oil and gas leases, wells, records, data and related personal property located along the Mississippi Lime play in the state of Kansas from Metro Energy Corporation (“Metro”), a Louisiana company, and other interrelated entities, which were in financial distress. These assets were purchased by Petro from Metro through a court approved order as Metro was undergoing Chapter 11 Bankruptcy proceedings as a Debtor-In-Possession of these various oil and gas assets. Petro purchased these assets for cash consideration of $2,000,000 as well as a 25% non-managing membership interest in the Company. Subsequent to the Metro purchase the Company engaged Energy Source Advisors to renew a number of the leases acquired in the Metro purchase and to lease additional acreage. As a result of the asset purchase from Metro and the completion of the additional lease renewals and additional acreage purchases, the Company obtained a total of 115,000 gross/85,000 net acres of leases, having unproven reserves at the time of acquisition, in the Mississippi Lime in Southeast Kansas for total cost of $12.2 million.

 

On April 23, 2013, the Company executed and consummated a securities purchase agreement (the “Securities Purchase Agreement”) by and among the Company, Petro, and the investors in Petro (the “Investors,”), namely, the holders of outstanding secured promissory notes of Petro (the “Notes”), and the members of Petro holding membership interests in Petro (the “Membership Interests”, and, together with the Notes, the “Acquired Securities”) sold by the Company (the “Share Exchange”).

 

In the Share Exchange, the Investors exchanged their Acquired Securities for 591,021,011 newly issued shares of common stock of the Company (“Common Stock”). As a result, upon completion of the Share Exchange, Petro became the Company’s wholly-owned subsidiary.

 

As a result of the Share Exchange, the Company acquired 100% of the member units of Petro and consequently, control of the business and operations of Petro. Under generally accepted accounting principles in the United States, (“U.S. GAAP”) because Petro’s former members and note holders held 80% of the issued and outstanding shares of the Company as a result of the Share Exchange, Petro is deemed the accounting acquirer while the Company remains the legal acquirer. Petro adopted the fiscal year of the Company. Prior to the Share Exchange, all historical financial statements presented are those of Petro. The equity of the Company is the historical equity of Petro, retrospectively restated to reflect the number of shares issued by the Company in the transaction.

 

F-4
 

 

Investment in Bandolier Energy LLC and Acquisition of Spyglass Energy Group, LLC / Pearsonia West Concession

 

On May 30, 2014, the Company entered into a Subscription Agreement, (the “Subscription Agreement”), pursuant to which the Company was issued a 50% interest in Bandolier Energy, LLC (“Bandolier”) in exchange for a capital contribution of $5,000,000. The Company has the right to appoint a majority of the board of managers of Bandolier, pursuant to the Amended and Restated Limited Liability Company Agreement of Bandolier. The Company’s Executive Chairman is a manager of, and investor in, Pearsonia West Investment Group, LLC (“PWIG”), a special purpose vehicle formed for the purpose of investing in Bandolier with the Company and Ranger Station. PWIG was issued 44% interest in Bandolier for cash consideration of $4,400,000. Ranger Station was issued 6% interest in Bandolier for cash consideration of $600,000. In connection with PWIG’s investment in Bandolier, the Company and PWIG entered into an agreement, dated May 30, 2014, granting the members of PWIG an option, exercisable at any time prior to May 30, 2017, to exchange their pro rata share of the Bandolier interests for shares of the Company’s common stock, at a price of $0.08 per share of common stock, subject to adjustment (the “Option”). The Option, if fully exercised, would result in the Company issuing 55,000,000 shares of its common stock to the members of PWIG.

 

The Company has operational control along with a 50 percent ownership interest in the newly formed Bandolier. As a result, the Company consolidates Bandolier. The remaining 50 percent non–controlling interest represents the equity investment from PWIG and Ranger Station. The Company will allocate the proportionate share of the net operating income/loss to both the Company and the non-controlling interest.

 

Subsequent the initial capitalization of Bandolier, Bandolier acquired for a purchase price of $8,712,893 less a $407,161 clawback, all of the issued and outstanding equity of Spyglass Energy Group, LLC (“Spyglass”), the owner of oil and gas leases, leaseholds, lands, and options and concessions thereto located in Osage County, Oklahoma. Spyglass controls a significant contiguous oil and gas acreage position in Northeastern Oklahoma, consisting of approximately 106,000 acres, with substantial original oil in place, stacked reservoirs, as well as exploratory and development opportunities that can be accessed through both horizontal and vertical drilling. Significant infrastructure is already in place including 32 square miles of 3D seismic, 3 phase power, a dedicated sub-station as well as multiple oil producing horizontal wells.

 

The Company recorded the purchase of Spyglass using the acquisition method of accounting as specified in ASC 805 “Business Combinations.” This method of accounting requires the acquirer to (i) record purchase consideration issued to sellers in a business combination at fair value on the date control is obtained, (ii) determine the fair value of any non-controlling interest, and (iii) allocate the purchase consideration to all tangible and intangible assets acquired and liabilities assumed based on their acquisition date fair values. Further, the Company commenced reporting the results of Spyglass on a consolidated basis with those of the Company effective upon the date of the acquisition.

 

The following tables summarizes fair values of the net liabilities assumed and the allocation of the aggregate fair value of the purchase consideration, and non-controlling interest and net liabilities to assumed identifiable and unidentifiable intangible assets. The fair value allocation is based on management’s preliminarily best estimates utilizing potential production and future cash flows:

 

Purchase consideration:     
Net cash provided  $8,305,732 
Liabilities assumed   76,541 
Aggregate fair value of enterprise   8,382,273 
      
Purchase price allocation:     

Oil and gas assets – proved developed – estimated

   2,460,632 
Oil and gas assets – proved undeveloped – estimated   5,921,641 
Asset retirement obligations – estimated   (76,541)

 

The following table summarizes, on an unaudited pro forma basis, the results of operations of the Company as though the acquisition had occurred as of May 1, 2013. The pro forma amounts presented are not necessarily indicative of either the actual operation results had the acquisition transaction occurred as of May 1, 2013.

 

    July 31, 2014    July 31, 2013 
Revenues  $

1,033,092

   $

1,911,205

 
Net loss    

(1,506,454

)   

(1,205,473

Loss per share of common share - Basic and diluted   (0.00)   (0.00)
Weighted average number of common shares Outstanding - Basic and diluted   818,567,746    737,311,224 

 

At July 31, 2014 the non–controlling interest in Bandolier was as follows:

 

Non–controlling interest at April 30, 2014  $- 
Acquisition of non–controlling interest in Bandolier   5,000,000 
Non–controlling share of net loss   (402,711)
Non–controlling interest at July 31, 2014  $4,597,289 

  

F-5
 

 

Liquidity and Management Plans

 

The Company is focused on developing its core position in the Mississippi Lime, specifically its recently acquired Pearsonia West Concession in Osage County. Management’s current plans in the Mississippi Lime play are focused on Pearsonia West, but Petro River also owns additional Mississippi Lime acreage in Kansas. Over the last 12 months the Company has continued to build out its leadership and technical team with individuals with extensive in the Mississippi Lime play. Additionally, the Company has been in discussions with industry partners to capitalize and develop acreage in the Mississippi Lime. The Company continues to seek out joint venture partners and acquisition targets.

 

Non-core projects related to the Company’s legacy heavy oil reservoirs are still in technical review but a determination has been made to continue testing pilot technologies and processes on the Missouri heavy oil assets. In Missouri, the Company has continued to analyze reservoir data and testing results to determine if any of these technologies or processes may lead to a viable and economic development plan for the understanding and test phases to develop an economic heavy oil production reserve base. The Company is leveraging executive vice president Luis Vierma’s experience in heavy oil which he acquired during his time as vice president of Exploration and Production at Petróleos de Venezuela, S.A, (“PDVSA”).

 

The ultimate goal of the management of the Company is to maximize shareholder value. Specific targets include: increasing production by developing its acreage, increasing profitability margins by evaluating and optimizing its production, and executing its business plan to increase property values, prove its reserves, and expand its asset base.

 

At July 31, 2014, the Company had working capital of approximately $2.8 million and has incurred losses since it commenced operations and utilized cash in its operating activities to date. In addition, Petro has a limited operating history. At July 31, 2014, the Company had cash and cash equivalents of approximately $3.4 million. Management believes that the current level of working capital is sufficient to maintain current operations in Kansas, Oklahoma and Missouri as well as the planned added operations for the next 12 months. Management intends to continue to raise capital through debt and equity instruments in order to achieve its business plans. Management can provide no assurances that the Company will be successful in capital raising efforts. In order to conserve capital, from time to time, management may defer certain development activity.

 

2.   Basis of Preparation:

 

The condensed consolidated financial statements and accompanying footnotes are prepared in accordance with U.S. GAAP and include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Non–controlling interest represents the minority equity investment in the Company’s subsidiaries, plus the minority investors’ share of the net operating results and other components of equity relating to the non–controlling interest.

 

These condensed consolidated financial statements include the below subsidiaries:

 

Petro River Oil LLC, Petro Spring, LLC, PO1, LLC and MegaWest Energy USA Corp. and its wholly owned subsidiaries:

 

MegaWest Energy Texas Corp.

MegaWest Energy Kentucky Corp.

MegaWest Energy Missouri Corp.

MegaWest Energy Kansas Corp.

MegaWest Energy Montana Corp.

 

Also contained in the condensed consolidated financial statements is the financial information of the Company’s 50% owned subsidiary, Bandolier Energy LLC.

 

The unaudited condensed consolidated financial information furnished herein reflects all adjustments, consisting solely of normal recurring items, which in the opinion of management are necessary to fairly state the financial position of the Company and the results of its operations for the periods presented. This report should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended April 30, 2014 filed with the Securities and Exchange Commission (the “SEC”) on August 13, 2014. The Company assumes that the users of the interim financial information herein have read or have access to the audited financial statements for the preceding fiscal year and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. Accordingly, footnote disclosure, which would substantially duplicate the disclosure contained in the Company’s Form 10-K for the year ended April 30, 2014 has been omitted. The results of operations for the interim periods presented are not necessarily indicative of results for the entire year ending April 30, 2015.

 

F-6
 

 

3.   Significant Accounting Policies:

 

(a)   Use of Estimates:

 

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include volumes of oil and natural gas reserves, abandonment obligations, impairment of oil and natural gas properties, depreciation and accretion, income taxes, fair value of financial instruments, and contingencies.

 

Oil and gas proven reserve estimates, which are the basis for unit-of-production depletion and the full cost ceiling test, have a number of inherent uncertainties. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing, and production subsequent to the date of the estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered. In addition, reserve estimates are vulnerable to changes in prices of crude oil and gas. Such prices have been volatile in the past and can be expected to be volatile in the future. As of July 31, 2014, the Company had proven reserves in Oklahoma in relation to the Bandolier transaction.

 

(b)   Cash and Cash Equivalents:

 

Cash and cash equivalents include all highly liquid monetary instruments with original maturities of three months or less when purchased to be cash equivalents. These investments are carried at cost, which approximates fair value. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash deposits. The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (“FDIC”). At times, the Company’s cash and cash equivalent balances may be uninsured or in amounts that exceed the FDIC insurance limits.

 

(c)   Oil and Gas Operations:

 

Oil and Gas Properties: The Company uses the full-cost method of accounting for its exploration and development activities. Under this method of accounting, the costs of both successful and unsuccessful exploration and development activities are capitalized as oil and gas property and equipment. Proceeds from the sale or disposition of oil and gas properties are accounted for as a reduction to capitalized costs unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas attributable to a country, in which case a gain or loss would be recognized in the condensed consolidated statements of operations. All of the Company’s oil and gas properties are located within the continental United States, its sole cost center.

 

Oil and gas properties may include costs that are excluded from costs being depleted. Oil and gas costs excluded represent investments in unproved properties and major development projects in which the Company owns a direct interest. These unproved property costs include non-producing leasehold, geological and geophysical costs associated with leasehold or drilling interests and in process exploration drilling costs. All costs excluded are reviewed at least annually to determine if impairment has occurred.

 

The Company accounts for its unproven long-lived assets in accordance with Accounting Standards Codification (“ASC”) Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. As of April 30, 2014, management engaged a third party to perform an independent study of the oil and gas assets. Management concluded that the Montana assets was impaired by $75,000 and the Kansas assets were impaired by $4,638,973. The Company recorded $4,713,973 impairment to the consolidated statement of operations for the year ended April 30, 2014.

 

F-7
 

 

Proved Oil and Gas Reserves: In accordance with Rule 4-10 of SEC Regulation S-X, proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. All of the Company’s oil and gas properties with proven reserves were impaired to the salvage value prior to the Bandolier transaction. The price used to establish economic producibility is the average price during the 12-month period preceding the end of the entity’s fiscal year and calculated as the un-weighted arithmetic average of the first-day-of-the-month price for each month within such 12-month period. Upon completion of the Bandolier transaction, the Company acquired $2,460,632 in proved developed oil and gas assets and $5,921,641 in proven undeveloped oil and gas assets.

 

Depletion, Depreciation and Amortization: Depletion, depreciation and amortization is provided using the unit-of-production method based upon estimates of proved oil and gas reserves with oil and gas production being converted to a common unit of measure based upon their relative energy content. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is deducted from the capitalized costs to be amortized. Once the assessment of unproved properties is complete and when major development projects are evaluated, the costs previously excluded from amortization are transferred to the full cost pool and amortization begins. The amortizable base includes estimated future development costs and, where significant, dismantlement, restoration and abandonment costs, net of estimated salvage value.

 

In arriving at rates under the unit-of-production method, the quantities of recoverable oil and natural gas reserves are established based on estimates made by the Company’s geologists and engineers which require significant judgment, as does the projection of future production volumes and levels of future costs, including future development costs. In addition, considerable judgment is necessary in determining when unproved properties become impaired and in determining the existence of proved reserves once a well has been drilled. All of these judgments may have significant impact on the calculation of depletion expenses. There have been no material changes in the methodology used by the Company in calculating depletion, depreciation and amortization of oil and gas properties under the full cost method during the three months ended July 31, 2014 and 2013.

 

(d)   Asset Retirement Obligations:

 

The Company recognizes a liability for the estimated fair value of site restoration and abandonment costs when the obligations are legally incurred and the fair value can be reasonably estimated. The fair value of the obligations is based on the estimated cash flow required to settle the obligations discounted using the Company’s credit adjusted risk-free interest rate. The obligation is recorded as a liability with a corresponding increase in the carrying amount of the oil and gas assets. The capitalized amount will be depleted on a unit-of-production method. The liability is increased each period, or accretes, due to the passage of time and a corresponding amount is recorded in the condensed consolidated statements of operations.

 

Revisions to the estimated fair value would result in an adjustment to the liability and the capitalized amount in oil and gas assets.

 

(e)   Oil and Gas Revenue:

 

Sales of oil and gas, net of any royalties, are recognized when oil has been delivered to a custody transfer point, persuasive evidence of a sales arrangement exists, the rights and responsibility of ownership pass to the purchaser upon delivery, collection of revenue from the sale is reasonably assured, and the sales price is fixed or determinable. The Company sells oil and gas on a monthly basis. Virtually all of its contracts’ pricing provisions are tied to a market index, with certain adjustments based on, among other factors, whether a well delivers to a gathering or transmission line, the quality of the oil and gas, and prevailing supply and demand conditions, so that the price of the oil and gas fluctuates to remain competitive with other available oil supplies.

 

F-8
 

 

(f)   Per Share Amounts:

 

Basic net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, which is the case for the three months ended July 31, 2014 and 2013 presented in these condensed consolidated financial statements, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.

 

The Company had the following common stock equivalents at July 31, 2014 and 2013:

 

As at  July 31, 2014   July 31, 2013 
Stock Options   87,938,281    290,000 
Stock Purchase Warrants   40,625,000    - 
Compensation Warrants   -    230,000 
    128,563,281    520,000 

 

(g)   Fair Value of Financial Instruments:

 

All financial instruments, including cash and cash equivalents, accounts receivable and accounts payable and accrued expenses are to be recognized on the condensed consolidated balance sheet initially at carrying value. The carrying value of these assets approximates their fair value due to their short-term maturities.

 

At each balance sheet date, the Company assesses financial assets for impairment with any impairment recorded in the condensed consolidated statement of operations. To assess loans and receivables for impairment, the Company evaluates the probability of collection of accounts receivable and records an allowance for doubtful accounts, which reduces loans and receivables to the amount management reasonably believes will be collected. In determining the amount of the allowance, the following factors are considered: the length of the time the receivable has been outstanding, specific knowledge of each customer’s financial condition and historical experience.

 

Market risk is the risk that changes in commodity prices will affect the Company’s oil sales, cash flows or the value of its financial instruments. The objective of commodity price risk management is to manage and control market risk exposures within acceptable limits while maximizing returns.

 

The Company is exposed to changes in oil prices which impact its revenues and to changes in natural gas process which impact its operating expenses.

 

The Company does not utilize financial derivatives or other contracts to manage commodity price risks.

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).

 

Fair value measurements are categorized using a valuation hierarchy for disclosure of the inputs used to measure fair value, which prioritize the inputs into three broad levels:

 

Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

 

F-9
 

 

Level 2 - Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date, and include those financial instruments that are valued using models or other valuation methodologies.

 

Level 3 - Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

(h)   Subsequent Events:

 

The Company evaluates subsequent events through the date the condensed consolidated financial statements are issued.

 

(i)   Recent Accounting Pronouncements:

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying condensed consolidated financial statements.

 

4.   Oil and Gas Assets:

 

The following table summarizes the oil and gas assets by project:

 

Cost  Oklahoma   Kansas     Missouri   Kentucky   Montana   Other   Total 
Balance May 1, 2014  $-   $7,922,601     $918,991   $-   $-   $100,000   $8,941,592 
Additions   8,382,273    -      -    -    -    -    8,382,273 
Depreciation and amortization   (139,410)   (29,170)     -    -    -    -    (168,580)
                                      
Balance July 31, 2014  $8,242,863   $7,893,431     $918,991   $-   $-   $100,000   $17,155,285 

 

Oklahoma

 

On May 30, 2014, the Company, entered into a Subscription Agreement, pursuant to which the Company purchased a 50% interest in Bandolier. Bandolier’s oil and gas assets are located in in Osage County, Oklahoma and comprise a significant contiguous oil and gas acreage position in Northeastern Oklahoma, approximately 106,000 acres, with substantial original oil in place, stacked reservoirs, as well as exploratory and development opportunities that can be accessed through both horizontal and vertical drilling. Significant infrastructure is already in place including 32 square miles of 3D seismic, 3 phase power, a dedicated sub-station as well as multiple oil producing horizontal wells. As a result of this transaction, the Company capitalized $2,460,632 in proved developed oil and gas assets and $5,921,641 in proven undeveloped oil and gas assets. No impairment was recorded on these assets during the three months ended July 31, 2014.

 

Kansas

 

Through proceeds received from the issuance of various promissory notes, on February 1, 2012 Petro purchased various interests in oil and gas leases, wells, records, data and related personal property located along the Mississippi Lime play in the state of Kansas from Metro, a Louisiana company and other interrelated entities, which were in financial distress. These assets were purchased by Petro from Metro through a court approved order as Metro was undergoing Chapter 11 Bankruptcy proceedings as a Debtor-In-Possession of these various oil and gas assets. Petro purchased these assets for cash considerations of $2,000,000 as well as a 25% non-managing membership interest in the Company. Subsequent to the Metro purchase the Company engaged Energy Source Advisors to renew a number of the leases acquired in the Metro purchase and to lease additional acreage. As a result of the asset purchase from Metro and the completion of the additional lease renewals and additional acreage purchases, the Company obtained a total of 115,000 gross/85,000 net acres of leases, having unproven reserves at the time of acquisition, in the Mississippi Lime play in Southeast Kansas for total cost of $12.2 million. The Company also acquired over 60 square miles of proprietary 3D seismic data over prospective Mississippi Lime acreage in the same area. During the year ended April 30, 2014, management engaged an independent third party to test the Kansas assets for impairment. Throughout the year, management was not aware of any impairment indicators, but during the annual impairment test, the third party specialist concluded that the Kansas assets were impaired by $4,638,973, principally due to comparable acreage values. No further impairment was recorded on these assets during the three months ended July 31, 2014.

 

F-10
 

 

Missouri

 

At July 31, 2014, the Company’s Missouri lease holdings totaled 1,272 gross acres with 98.4% working interest.

 

On separate pilot projects at Deerfield, the Company built two 500 barrel of oil per day steam drive production facilities (Marmaton River and Grassy Creek) comprised of 116 production wells, 39 steam injection wells and 14 service and observation wells. Throughout the Deerfield area, the Company has drilled 73 exploration/delineation wells with a 67% success rate.

 

As of July 31, 2014 and April 30, 2014, all Missouri assets were carried at salvage value, since the Company’s current business plans do not contemplate raising the necessary capital to develop these properties. The Company is in current discussions with third parties to use the acreage as a testing site for heavy oil solutions with contemplated profit sharing opportunities.

 

Kentucky

 

As a result of the share exchange, the Company acquired Kentucky lease holdings which include a 37.5% working interest in 27,150 unproved gross acres (10,181 net acres). At July 31, 2014 and April 30, 2014 the Kentucky lease holdings acquired as a result of the share exchange have expired.

 

Montana

 

As of July 31, 2014 and April 30, 2014, the Montana leasehold in the Devils Basin prospect have expired.

 

During the year ended April 30, 2014, management fully impaired the asset to zero due to the expiration of the leases.

 

Other

 

Other property consists primarily of four used steam generators and related equipment that will be assigned to future projects. As of July 31, 2014, management concluded that impairment was not necessary as all other assets were carried at salvage value.

 

5.   Asset Retirement Obligations:

 

The total future asset retirement obligation was estimated based on the Company’s ownership interest in all wells and facilities, the estimated legal obligations required to retire, dismantle, abandon and reclaim the wells and facilities and the estimated timing of such payments. The Company estimated the present value of its asset retirement obligations at both July 31, 2014 and April 30, 2014, based on a future undiscounted liability of $1,183,292 and $1,087,292, respectively. These costs are expected to be incurred within one to 24 years. A credit-adjusted risk-free discount rate of 10% and an inflation rate of 2% were used to calculate the present value.

 

F-11
 

 

Changes to the asset retirement obligation were as follows:

 

   July 31, 2014   April 30, 2014 
Balance, beginning of period  $818,010   $763,036 
Additions   76,541    - 
Disposition   -    - 
Revisions   -    - 
Accretion   12,642    54,974 
    907,193    818,010 
Less: Current portion for cash flows expected to be incurred within one year   (484,939)   (481,658)

Long-term portion, end of period

  $422,254   $336,352 

 

Expected timing of asset retirement obligations:

 

Year Ending April 30,     
2015    460,778 
2016    81,181 
2017    212,000 
2018    96,000 
2019    - 
Thereafter    333,334 
     1,183,293 
Effect of discount    (276,100)
Total   $907,193 

 

As of July 31, 2014 and April 30, 2014, the Company has $0 of reclamation deposits with authorities to secure certain abandonment liabilities.

 

6.   Related Party Transactions:

 

During the three months ended July 31, 2014 and 2013, the Company expensed an aggregate $189,244 and $1,539,500, respectively, to general and administrative expenses for stock based compensation pursuant to employment agreements with certain employees.

 

7.   Stockholders’ Equity:

 

As of July 31, 2014 and April 30, 2014, the Company had 5,000,000 shares of blank check preferred stock authorized with a par value of $0.00001 per share. None of the blank check preferred shares were issued or outstanding.

 

As of July 31, 2014 and April 30, 2014, the Company had 29,500 shares of preferred B shares authorized with a par value of $0.00001 per share. No preferred B shares were issued or outstanding.

 

8.   Stock Options:

 

As of July 31, 2014, the Company has one equity incentive plan. The number of shares reserved for issuance in aggregate under the plan is limited to 120 million shares. The exercise price, term and vesting schedule of stock options granted are set by the Board of Directors at the time of grant. Stock options granted under the plan may be exercised on a cashless basis, if such exercise is approved by the Board. In a cashless exercise, the employee receives a lesser amount of shares in lieu of paying the exercise price based on the quoted market price of the shares on the trading day immediately preceding the exercise date.

 

As of April 30, 2014, the Company had a total of 88,038,281 options outstanding and 24,204,947 exercisable with a weighted average exercise price of $0.06. As of July 31, 2014, the Company had a total of 87,938,281 options outstanding and 24,104,947 exercisable with a weighted average exercise price of $0.06.

 

F-12
 

 

The following table summarizes information about the options outstanding and exercisable at July 31, 2014:

 

   Options   Weighted Average
Exercise Prices
 
         
Outstanding – April 30, 2014   88,038,281   $0.06 
Exercisable – April 30, 2014   24,204,947   $0.06 
Granted   -   $- 
Exercised   -   $- 
Forfeited/Cancelled   (100,000)  $- 
Outstanding July 31, 2014   87,938,281   $0.06 
Exercisable – July 31, 2014   24,104,947   $0.06 
           
Outstanding - Aggregate Intrinsic Value       $1,137,151 
           
Exercisable - Aggregate Intrinsic Value       $307,317 

 

The following table summarizes information about the options outstanding and exercisable at July 31, 2014:

 

     Options Outstanding   Options Exercisable 
  Exercise Price  Options   Weighted Avg.
Life Remaining
   Weighted Avg.
Exercise Price
   Options   Weighted Avg.
Exercise Price
 
$ 0.22   465,116    0.01 years   $0.22    465,116   $0.22 
$ 0.06   87,473,165    9.19 years   $0.06    23,639,831   $0.06 
      

87,938,281 

              

24,104,947 

      
Aggregate Intrinsic Value            $1,137,151        $307,317 

 

For the three months ended July 31, 2014 and 2013, the Company recorded stock-based compensation of $189,244 and $1,539,500, respectively, which is included in general and administrative expenses.

 

Intrinsic value is the Company’s current per share fair value as quoted on the Over the Counter Bulletin Board on the balance sheet date ($0.064) less the current exercise price.

 

Other than the issuances disclosed in Note 6 and below, during the three months ended July 31, 2014, the Company had no other stock based compensation expense.

 

As of July 31, 2014, the Company has $2,437,477 in unrecognized stock based compensation expense which will be amortized over a weighted average exercise period of 3.31 years.

 

Advisor Grants:

 

On November 20, 2013, the Board of Directors authorized the grant of fair value options to two consultants. The option grants have an exercise price equal to the closing price of shares of the Company’s common stock as of the date of the grant. One consultant was granted 2,333,333 fair value options and the second consultant was granted 1,833,333 fair value options. All options granted vested immediately upon grant and mature in ten years.

 

Warrants:

 

    Number of
Warrants
    Weighted
Average
Exercise Price
    Weighted
Average Life
Remaining
 
Outstanding and exercisable – April 30, 2014     40,625,000       0.14       1.62  
Forfeited     -       -       -  
Granted     -       -       -  
Outstanding and exercisable – July 31, 2014     40,625,000       0.14       1.37  

 

The aggregate intrinsic value of the warrants was $0. Intrinsic value is the Company’s current per share fair value as quoted on the Over the Counter Bulletin Board on the balance sheet date ($0.064) less the current exercise price.

 

F-13
 

 

9.   Contingency and Contractual Obligations:

 

As a result of the Share Exchange, the Company inherited the following contingencies:

 

(a) In January 2010, the Company experienced a flood in its Calgary office premises as a result of a broken water pipe. There was significant damage to the premises rendering them unusable until remediation was completed by the landlord. Pursuant to the lease contract, the Company asserted that rent should be abated during the remediation process and accordingly, the Company ceased making rent payments in December 2009. During the remediation process, the Company engaged an independent environmental testing company to test for air quality and for the existence of other potentially hazardous conditions. The testing revealed the existence of potentially hazardous mold and the consultant provided specific written instructions for the effective remediation of the premises. During the remediation process, the landlord did not follow the consultant’s instructions to correct the potentially hazardous mold situation, and subsequently in June 2010, gave notice and declared the premises to be ready for occupancy. The Company re-engaged the consultant to re-test the premises and the testing results again revealed the presence of potentially hazardous mold. The Company determined that the premises were not fit for re-occupancy, considered the landlord to be in default of the lease, and considered the lease to be terminated.

 

The landlord disputed the Company’s position and gave notice that it considers the Company to be in default of the lease for failure to re-occupy the premises.

 

The landlord has previously claimed that the Company owed monthly rent for the premises from January 2010 to June 30, 2010 in the amount of $247,348 and as a result of the alleged default, pursuant to the terms of the lease, the Company owed three months accelerated rent in the amount of $114,837. The landlord previously also asserted that the Company would be liable for an amount up to the full lease obligation of $1,596,329 which otherwise would have been due as follows:

 

Year Ended April 30     
2011   $473,055 
2012    473,055 
2013    473,055 
2014    177,164 
Total   $1,596,329 

 

On January 30, 2014, the landlord filed a Statement of Claim with the Court of Queen’s Bench of Alberta against the Company in the approximate amount of $759,000. On March 26, 2014, the Company filed a Statement of Defence in which it challenged the allegations made by the landlord. The Company claims that the two year limitation period as defined under the “Limitations Act”, as established in Alberta, Canada, has been exceeded and therefore the Statement of Claim filed by the landlord should be barred in its entirety.

 

(b) In September 2013, the Company was notified by the Railroad Commission of Texas (the “Commission”) that the Company was not in compliance with regulations promulgated by the Commission. The Company was therefore deemed to have lost its corporate privileges within the State of Texas and as a result, all wells within the state would have to be plugged. The Commission therefore collected $25,000 from the Company, which was originally deposited with the Commission, to cover a portion of the estimated costs of $88,960 to plug the wells. In addition to the above, the Commission also reserved its right to separately seek any remedies against the Company resulting from its noncompliance.

 

(c) On July 3, 2014, the Company entered into a memorandum of understanding with Sichuan Renzhi Oilfield Technology Services Co. Ltd., a corporation incorporated under the laws of the People’s Republic of China and traded on the Shenzhen Stock Exchange (“Renzhi”), which is memorialized in a Framework Agreement for Acquisition and Cooperation (the “MOU”). The MOU sets forth a framework for (i) the sale by the Company, and the purchase by Renzhi, of PO1, LLC (“PO1”), a wholly-owned subsidiary of the Company, which owns 51% of the issued and outstanding membership interests of Spyglass, the owner of oil and gas leases, leaseholds, lands, and options and concessions thereto, located in Osage County, Oklahoma; and (ii) the joint development by the Company and Renzhi of oil and gas technology and properties (collectively, the “Transactions”), with an aggregate investment by Renzhi to the Company in the amount of $87,500,000.

 

The Company and Renzhi intend to enter into one or more definitive agreements to effectuate the terms of the MOU. The execution of definitive documentation with respect to the Transactions remains subject to additional negotiations between the parties, further due diligence, Renzhi obtaining financing in order to comply with its obligations, and applicable Chinese regulatory approvals. There can be no assurance that definitive documentation for the Transactions will be entered into by the parties or that the Transactions will close.

 

(d) The Company is from time to time involved in legal proceedings in the ordinary course of business. It does not believe that any of these claims and proceedings against it is likely to have, individually or in the aggregate, a material adverse effect on its financial condition or results of operations.

 

F-14
 

  

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Except as otherwise indicated by the context, references in this Quarterly Report to “we”, “us”, “our” or the “Company” are to the consolidated businesses of Petro River Oil Corp. and its wholly-owned direct and indirect subsidiaries and majority-owned subsidiaries, except that references to “our common stock” or “our capital stock” or similar terms refer to the common stock, par value $0.00001 per share, of Petro River Oil Corp., a Delaware corporation (the “Company” or the “Registrant”).

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide information that is supplemental to, and should be read together with, the Company’s condensed consolidated financial statements and the accompanying notes contained in this Quarterly Report. Information in this Item 2 is intended to assist the reader in obtaining an understanding of the condensed consolidated financial statements, the changes in certain key items in those financial statements from quarter to quarter, the primary factors that accounted for those changes, and any known trends or uncertainties that the Company is aware of that may have a material effect on the Company’s future performance, as well as how certain accounting principles affect the condensed consolidated financial statements. This includes discussion of (i) Liquidity, (ii) Capital Resources, (iii) Results of Operations, and (iv) Off-Balance Sheet Arrangements, and any other information that would be necessary to an understanding of the company’s financial condition, changes in financial condition and results of operations.

 

Forward Looking Statements

 

The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying condensed consolidated financial statements, as well as information relating to the plans of our current management and should be read in conjunction with the accompanying financial statements and their related notes included in this Report. References in this section to “we,” “us,” “our,” or the “Company” are to the consolidated business of Petro River Oil Corp. and its wholly owned and majority owned subsidiaries.

 

This Report contains forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expects,” “intends,” “estimates,” “continues,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Report or other reports or documents we file with the Securities and Exchange Commission (“SEC”) from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

 

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our condensed consolidated financial statements and their related notes included in this Quarterly Report and our Annual Report on Form 10-K filed with the SEC on August 13, 2014 for the year ended April 30, 2014.

 

Business Overview

 

Petro River Oil Corp. is an independent exploration and production company with a focus on drilling, recompletions, and applying modern technologies to both conventional and unconventional oil and gas assets. Specific targets include: increasing production by developing our acreage, increasing profitability margins by evaluating and optimizing our production, and executing our business plan to increase property values, reserves, and expanding our asset base.

 

We benefit from having an experienced management team with proven acquisition, operating and financing capabilities. Mr. Scot Cohen, our Executive Chairman, has over 20 years of financial management experience including five years as managing partner of Iroquois Capital Opportunity Fund, a private equity fund focused on oil and gas. He has raised equity and debt for a number of small and microcap public companies.

 

3
 

 

Mr. Cohen is joined by Luis Vierma, Daniel Smith and Ruben Alba who make up the Company’s technical leadership. Mr. Vierma has 35 years of experience in oil and gas including Vice President of Exploration and Production at Petróleos de Venezuela, S.A, (“PDVSA”) the fourth largest oil company in the world. Mr. Vierma has a BS in Chemistry and MS in Geology and leads the Company’s Geological and Geophysical team. Mr. Smith is a registered petroleum engineer with over 15 years’ experience. Mr. Smith spent his career at XTO Energy where he served as an operations engineer responsible for managing fields producing in excess of 100 million cubic feet of natural gas per day. Mr. Alba has been active in the oil and gas industry since 1997. Previously he was with Halliburton Energy Services and Superior Well Services overseeing regional technical staff and operations. Mr. Alba manages the Company’s heavy oil projects in Missouri and Kentucky.

 

The Company is focused on developing its Mississippi Lime acreage. Over the last 12 months the Company has continued to build out its leadership and technical team. Additionally, the Company has been in discussions with industry partners to capitalize and develop acreage in the Mississippi Lime. The Company continues to seek out joint venture partners and acquisition targets.

 

Projects related to the heavy oil reservoirs are in technical review. The Company has an extensive amount of technical and reservoir information on the Missouri, Oklahoma and Kentucky positions. The data is being utilized in the understanding and test phases to develop an economic heavy oil production reserve base.

 

The Company continues to explore various opportunities to raise capital to support the growth of the Company. These opportunities include, without limitation, potential joint ventures with various on and off-shore entities and potential private issuances of equity, debt or a combination thereof. There can be no assurance that the Company will enter into any of these transactions. Mr. Cohen and Mr. Vierma have extensive experience in capital markets and oil and gas joint ventures. During his time as VP of Exploration and Production at PDVSA, Mr. Vierma negotiated billions of dollars of joint ventures with foreign oil and gas companies.

 

On December 12, 2013, the Company signed a Securities Purchase Agreement (the “Agreement”) with Petrol Lakes Holding Limited (“Petrol Lakes”). Pursuant to the terms of the Agreement, Petrol Lakes agreed to purchase: (i) 81,250,000 shares of the Company’s common stock, at a per share price of $0.08, for an aggregate purchase price of $6,500,000; and (ii) a warrant to purchase shares of the Company’s common stock. Under the terms of the warrant, Petrol Lakes may purchase up to 40,625,000 shares of the Company’s common stock at a per share price of $0.1356, for an aggregate purchase price of $6,500,000. The warrant, which is exercisable in whole or in part, will expire on December 12, 2015. The Company paid issuances costs of $650,000.

 

Under the Agreement, Petrol Lakes also has the right to appoint one director to the Company’s Board of Directors, which director shall remain on the Board at least through the first annual meeting of the Company after the one year anniversary of the Agreement. As of the date hereof, Petrol Lakes has not exercised this right.

 

On May 30, 2014, the Company entered into a Subscription Agreement, (the “Subscription Agreement”), pursuant to which the Company was issued a 50% interest in Bandolier Energy, LLC (“Bandolier”) in exchange for a capital contribution of $5,000,000. The Company has the right to appoint a majority of the board of managers of Bandolier, pursuant to the Amended and Restated Limited Liability Company Agreement of Bandolier. Thereafter, Bandolier, pursuant to that certain Securities Purchase Agreement, effective January 1, 2014, acquired from Nadel and Gussman, LLC, Charles W. Wickstrom, and Shane E. Matson, for a purchase price of $8,712,893 less a $407,161 clawback, all of the issued and outstanding equity of Spyglass Energy Group, LLC (“Spyglass”), the owner of oil and gas leases, leaseholds, lands, and options and concessions thereto located in Osage County, Oklahoma. Spyglass comprises the largest contiguous oil and gas acreage position in Northeastern Oklahoma, approximately 106,000 acres, with substantial original oil in place, stacked reservoirs, as well as exploratory and development opportunities that can be accessed through both horizontal and vertical drilling. Significant infrastructure is already in place including 32 square miles of 3D seismic, 3 phase power, a dedicated sub-station as well as multiple oil producing horizontal wells.

 

As a result of the investment in Bandolier and the Acquisition of Spyglass, the Company has both proven developed and proven undeveloped oil and gas assets.

 

4
 

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements. These condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”), which requires us to make estimates and assumptions that affect the reported amounts of our assets and liabilities and revenues and expenses, to disclose contingent assets and liabilities on the date of the condensed consolidated financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. The most significant estimates and assumptions include the valuation of accounts receivable, and the useful lives and impairment of property and equipment, goodwill and intangible assets, the valuation of deferred tax assets and inventories and the provision for income taxes. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed in this Form 10-Q reflect the more significant judgments and estimates used in preparation of our condensed consolidated financial statements. We believe there have been no material changes to our critical accounting policies and estimates.

 

The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our consolidated financial statements:

 

Oil and Gas Operations

 

The Company follows the full cost method of accounting for oil and gas operations whereby all costs related to exploration and development of oil and gas reserves are capitalized. Under this method, the Company capitalizes all acquisition, exploration and development costs incurred for the purpose of finding oil and natural gas reserves, including salaries, benefits and other internal costs directly attributable to these activities. Costs associated with production and general corporate activities, however, are expensed in the period incurred. Costs are capitalized on a country-by-country basis. To date, there has only been one cost center, the United States.

 

The present value of estimated future net cash flows is computed by applying the average first-day-of-the-month prices during the previous twelve-month period of oil and natural gas to estimated future production of proved oil and natural gas reserves as of year-end less estimated future expenditures to be incurred in developing and producing the proved reserves and assuming continuation of existing economic conditions. Prior to December 31, 2009, prices and costs used to calculate future net cash flows were those as of the end of the appropriate quarterly period.

 

Following the discovery of reserves and the commencement of production, the Company will compute depletion of oil and natural gas properties using the unit-of-production method based upon production and estimates of proved reserve quantities. Costs associated with unproved properties are excluded from the depletion calculation until it is determined whether or not proved reserves can be assigned to such properties. Unproved properties are assessed for impairment annually. Significant properties are assessed individually.

 

The Company assesses all items classified as unproved property on an annual basis for possible impairment. The Company assesses properties on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration of the following factors, among others: land relinquishment; intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate impairment, the related exploration costs incurred are transferred to the full cost pool and are then subject to depletion and the ceiling limitations on development oil and natural gas expenditures.

 

Proceeds from the sale of oil and gas assets are applied against capitalized costs, with no gain or loss recognized, unless a sale would alter the rate of depletion and depreciation by 25 percent or more.

 

Significant changes in these factors could reduce our estimates of future net proceeds and accordingly could result in an impairment of our oil and gas assets. Management will perform annual assessments of the carrying amounts of its oil and gas assets as additional data from ongoing exploration activities becomes available.

 

5
 

 

As of April 30, 2014, management engaged a third party to perform an independent study of the oil and gas assets. Management concluded that the Montana assets was impaired by $75,000 and the Kansas assets were impaired by $4,638,973. The Company recorded $4,713,973 impairment to the condensed consolidated statements of operations during the year ended April 30, 2014. For the three months ended July 31, 2014, the Company did not record impairment on its oil and gas assets.

 

NEW ACCOUNTING STANDARDS

 

Recently Adopted Accounting Standards

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying condensed consolidated financial statements.

 

Results of Operations

 

As a result of the April 23, 2013 acquisition and share exchange transaction, Petro River Oil, LLC was deemed the accounting acquirer. All historical financial information is that of Petro River Oil, LLC.

 

Results of Operations for the Three Months Ended July 31, 2014 compared to Three Months Ended July 31, 2013

 

   Three Months   Three Months 
   Ended   Ended 
   July 31, 2014   July 31, 2013 
Operations          
Revenues          
Oil and natural gas sales  $666,276   $104,840 
Total Revenues   666,276    104,840 
           
Operating Expenses          
Operating   340,668    64,079 
General and administrative   1,861,532    2,219,028 
Depreciation, depletion and accretion   182,152    26,354 
Total Expenses   2,384,352    2,309,461 
           
Operating loss   (1,718,076)   (2,204,621)
           
Other income (expense)   33    (5)
           
Net Loss before non-controlling interest   (1,718,043)   (2,204,626)
           
Net loss attributable to non-controlling interest   (402,711)   - 
           
Net loss attributable to Petro River Oil Corp. and Subsidiaries  $(1,315,332)  $2,204,626 
          
Net Loss per Common Share Basic and Diluted  $(0.00)  $(0.00)

 

6
 

 

Oil Sales

 

During the three months ended July 31, 2014, the Company recognized $666,276 in oil and gas sales, compared to sales of $104,840 for the three months ended July 31, 2013. The overall increase in sales of $561,436 is primarily due to the acquisition of Bandolier during the three months ended July 31, 2014 which incurred $575,544 of sales during the period, which was offset by a minimal decrease in sales for the remaining subsidiaries. .

 

Other Income (Expense)

 

During the three months ended July 31, 2014, other income (expense) of $33 consisted mainly of interest on cash balances.

 

Operating Expenses

 

During the three months ended July 31, 2014, operating expenses were $340,668, as compared to operating expenses of $64,079 for the three months ended July 31, 2013. The overall increase in operating expenses of $276,589 is primarily attributable to the operating expenses of Bandolier of $295,256 during the three months ended July 31, 2014 which were offset by a minimal decrease in the operating expenses of the remaining subsidiaries.

 

General and Administrative Expenses

 

General and administrative expenses for the three months ended July 31, 2014 were $1,861,532, as compared to $2,219,028 for the three months ended July 31, 2013. The decreases are primarily attributable to the significant decrease in stock based compensation. The decreases were offset by the addition of the Bandolier expenses of $950,551 and the increases in professional fees and office and administrative expenses. These changes are outlined below:

 

   For the Three Months Ended   For the Three Months Ended 
   July 31, 2014   July 31, 2013 
Salaries and benefits  $261,165   $1,577,872 
Professional fees   1,297,486    534,837 
Office and administrative   292,698    104,312 
Information technology   10,183    2,007 
           
   $1,861,532   $2,219,028 

 

The increases in general and administrative expenses are primarily attributable to the Company ramping up operations and the completion of the Bandolier acquisition. This consists primarily of increases in professional fees and office and administrative expenses. The increases were offset by the reduction in salary and benefits in comparison to the prior year. Salary and benefits include non-cash stock-based compensation of $189,244 for the three months ended July 31, 2014 compared to $1,539,500 for the three months ended July 31, 2013. This decrease was due to the significant expense recorded during the three months ended July 31, 2013 for options that were issued to Scot Cohen in April 2013 as discussed in the Company’s Annual Report on the Form 10-K for the year ended April 30, 2014.

 

Liquidity and Capital Resources

 

At July 31, 2014, the Company had working capital of approximately $2.8 million and has incurred losses since it commenced operations and utilized cash in its operating activities to date. In addition, Petro has a limited operating history prior to acquisition of Bandolier during the three months ended July 31, 2014. At July 31, 2014, the Company had cash and cash equivalents of approximately $3.4 million. Management believes that the current level of working capital is sufficient to maintain operations for at least the next 12 months. Management intends to continue to raise capital through debt and equity instruments in order to achieve its business plans.

 

7
 

 

Our current capital and our other existing resources are sufficient to provide working capital for the balance of fiscal year 2015. We will require additional capital to continue to operate our business and to further expand our exploration and development programs. We may be unable to obtain additional capital required. Furthermore, inability to maintain capital may damage our reputation and credibility with industry participants. Our inability to raise additional funds when required may have a negative impact on our consolidated results of operations and financial condition.

 

The Company is focused on developing its Mississippi Lime acreage. Over the last 12 months the Company has continued to build out its leadership and technical team. Additionally, the Company has been in discussions with industry partners to capitalize and develop acreage in the Mississippi Lime. The Company continues to seek out joint venture partners and acquisition targets.

 

Projects related to our legacy heavy oil reservoirs are still in technical review, but a determination has been made to continue to testing pilot technologies and processes on the Missouri heavy oil assets as the Company has an extensive amount of technical and reservoir information on the Missouri positions. The Company is also continuing to analyze reservoir data and testing results in Missouri and this data is being utilized in the understanding and test phases to develop an economic heavy oil production reserve base.

 

As discussed in the Business Overview section, above, on May 30, 2014, the Company obtained a 50% interest in Bandolier for a capital contribution of $5,000,000. Bandolier subsequently acquired all of the issued and outstanding equity of Spyglass for $8,712,893 less a $407,161 clawback.

 

Operating Activities

 

The Company used $1,636,292 in operating activities during the three months ended July 31, 2014, as compared to $368,746 used in operating activities during the three months ended July 31, 2013. The Company incurred a net loss during the three months ended July 31, 2014 of $1,718,043 as compared to a net loss of $2,204,626 for three months ended July 31, 2013.

 

Investing Activities

 

During the three months ended July 31, 2014, the Company incurred $8,305,732 of expenditures on oil and gas assets as part of the Bandolier acquisition compared to $295,965 during the three months ended July 31, 2013. In addition, the Company purchased $3,796 of office equipment.

 

Financing Activities

 

During the three months ended July 31, 2014 and 2013, the Company had $5,000,000 in cash provided by financing activities. The $5,000,000 was contributed from the non-controlling interest holder of Bandolier.

 

Capitalization

 

The number of outstanding shares and the number of shares that could be issued if all convertible instruments are converted to shares is as follows:

 

As of  July 31, 2014   July 31, 2013 
Common shares   818,567,746    737,117,746 
Stock Options   87,938,281    290,000 
Stock Purchase Warrants   40,625,000    - 
Compensation Warrants   -    230,000 
    947,131,027    737,637,746 

 

8
 

 

Off-Balance Sheet Arrangements

 

None.

 

Recent Accounting Pronouncements

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

 

ITEM 3. QUANTITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable

 

ITEM 4. CONTROLS AND PROCEDURES

 

A. Material Weaknesses

 

As discussed in Item 9A of our Annual Report on Form 10-K for the fiscal year ended April 30, 2014, we identified material weaknesses in the design and operation of our internal controls. The material weaknesses are related to: the Company having a small number of employees, and therefore, limited internal review; and the Company relying on external accounting personnel to prepare financial statements.

 

To remediate the material weakness identified in internal control over financial reporting of the Company, the Company engaged Brio Financial Group and appointed its Managing Member, David Briones, to act as the Company’s Chief Financial Officer on August 15, 2013, and intends to hire additional accounting staff, and operations and administrative executives.

 

We will continue to monitor and assess our remediation initiatives to ensure that the aforementioned material weaknesses are remediated.

 

B. Evaluation of Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in the Company’s filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Company’s management, with the participation of its principal executive and principal financial officers, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation and solely due to the unremediated material weaknesses described above, the Company’s principal executive and financial officers have concluded that such disclosure controls and procedures were not effective for the purpose for which they were designed as of the end of such period. As a result of this conclusion, the financial statements for the period covered by this report were prepared with particular attention to the unremediated material weaknesses previously disclosed. Accordingly, management believes that the condensed consolidated financial statements included in this report fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows as of and for the periods presented, in accordance with US GAAP, notwithstanding the unremediated weaknesses.

 

C. Changes in Internal Control over Financial Reporting

 

There was no change in the Company’s internal control over financial reporting that was identified in connection with such evaluation that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

9
 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

In January 2010, the Company experienced a flood in its Calgary office premises as a result of a broken water pipe. There was significant damage to the premises rendering them unusable until remediation had been completed by the landlord. Pursuant to the lease contract, the Company has asserted that rent should be abated during the remediation process and accordingly, the Company has not paid rent since December 2009. During the remediation process, the Company engaged an independent environmental testing company to test for air quality and for the existence of other potentially hazardous conditions. The testing revealed the existence of potentially hazardous mold and the consultant provided specific written instructions for the effective remediation of the premises. During the remediation process, the landlord did not follow the consultant’s instructions and correct the potentially hazardous mold situation and subsequently in June 2010 gave notice and declared the premises to be ready for occupancy. The Company re-engaged the consultant to re-test the premises and the testing results again revealed the presence of potentially hazardous mold. The Company has determined that the premises are not fit for re-occupancy and considers the landlord to be in default of the lease and the lease terminated.

 

The landlord disputes the Company’s position and has given notice that it considers the Company to be in default of the lease for failure to re-occupy the premises.

 

In addition, the landlord has previously claimed that the Company owes monthly rent for the premises from January 2010 to June 30, 2010 in the amount of $247,348 and has claimed that, as a result of the alleged default, pursuant to the terms of the lease, the Company owes three months accelerated rent in the amount of $114,837. The landlord has previously also asserted that the Company would be liable for an amount up to the full lease obligation of $1,596,329 which otherwise would have been due as follows:

 

Year Ended April 30    
2011  $473,055 
2012   473,055 
2013   473,055 
2014   177,164 
Total  $1,596,329 

 

On January 30, 2014, the landlord filed a Statement of Claim against the Company in the amount aggregating approximately $759,000. The Company is currently assessing the current revised claim and has until March 31, 2014 to respond. At which time it plans to aggressively challenge such claims.

 

There have been no material developments in any legal proceedings since the disclosures contained in the Registrant’s Form 10-K for the year ended April 30, 2014.

 

ITEM 1A. RISK FACTORS.

 

Not applicable.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

(a) There is no information required to be disclosed on Form 8-K during the period covered by this Form 10-Q that was not so reported.

 

(b) There were no material changes to the procedures by which security holders may recommend nominees to the registrant’s board of directors during the quarter ended July 31, 2014.

 

10
 

 

ITEM 6. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a) Financial Statements.

 

Our financial statements as set forth in the Index to Financial Statements attached hereto commencing on page F-1 are hereby incorporated by reference.

 

(b) Exhibits.

 

The following exhibits, which are numbered in accordance with Item 601 of Regulation S-K, are filed herewith or, as noted, incorporated by reference herein:

 

Exhibit
Number
  Exhibit Description
     
2.1(1)   Subscription Agreement, dated as of May 30, 2014, by and among Bandolier Energy LLC and the purchasers set forth therein
     
2.2(1)   Securities Purchase Agreement, effective as of January 1, 2014, by and among Nadel and Gussman, LLC, Charles W. Wickstrom, Shane E. Matson and Bandolier Energy, LLC
     
3.1 (2)   Certificate of Incorporation of the Company
     
3.2 (2)   Bylaws of the Company
     
10.1(3)   Securities Purchase Agreement of Petro River Oil LLC, dated as of April 23, 2013, by and among Petro River Oil Corp., Petro River Oil, LLC, the holders of outstanding secured promissory notes of Petro River Oil, LLC, the members of Petro River Oil, LLC and Mega Partners 1 LLC
     
10.2(4)   Amended and Restated 2012 Equity Compensation Plan
     
10.3(5)   Assignment and Assumption Agreement, dated as of May 30, 2014, by and between Bandolier Energy, LLC and PO1, LLC
     
10.4(5)   Agreement, dated as of May 30, 2014, by and between Petro River Oil Corp. and Pearsonia West Investment Group, LLC
     
31.1*   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2*   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1*   Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS*   XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema Document
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB*   XBRL Taxonomy Extension Labels Linkbase Document
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Attached hereto.
   
(1)

Attached hereto. The disclosure schedules delivered in connection with the Securities Purchase Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K and the Company agrees to furnish supplementally a copy of any disclosure schedules omitted from the Securities Purchase Agreement to the Securities and Exchange Commission upon request.

   
(2) Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on September 13, 2012.
   
(3) Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on April 29, 2013.
   
(4) Incorporated by reference to our Form 10-K filed with the Securities and Exchange Commission on August 13, 2014.
   
(5) Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on June 5, 2014.

 

11
 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  PETRO RIVER OIL CORP.
     
  By: /s/ Scot Cohen
  Name: Scot Cohen
  Title: Executive Chairman
     
  By: /s/ David Briones
  Name: David Briones
  Title Chief Financial Officer
     
Date: September 22, 2014    

 

12
 

 

Index to Exhibits

 

Exhibit
Number
  Exhibit Description
     
2.1*   Subscription Agreement, dated as of May 30, 2014, by and among Bandolier Energy LLC and the purchasers set forth therein
     
2.2(1)   Securities Purchase Agreement, effective as of January 1, 2014, by and among Nadel and Gussman, LLC, Charles W. Wickstrom, Shane E. Matson and Bandolier Energy, LLC
     
3.1 (2)   Certificate of Incorporation of the Company
     
3.2 (2)   Bylaws of the Company
     
10.1(3)   Securities Purchase Agreement of Petro River Oil LLC, dated as of April 23, 2013, by and among Petro River Oil Corp., Petro River Oil, LLC, the holders of outstanding secured promissory notes of Petro River Oil, LLC, the members of Petro River Oil, LLC and Mega Partners 1 LLC
     
10.2(4)   Amended and Restated 2012 Equity Compensation Plan
     
10.3(5)   Assignment and Assumption Agreement, dated as of May 30, 2014, by and between Bandolier Energy, LLC and PO1, LLC
     
10.4(5)   Agreement, dated as of May 30, 2014, by and between Petro River Oil Corp. and Pearsonia West Investment Group, LLC
     
31.1*   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2*   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1*   Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS*   XBRL Instance Document
     
101.SCH*   XBRL Taxonomy Extension Schema Document
     
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB*   XBRL Taxonomy Extension Labels Linkbase Document
     
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

*   Attached hereto.
     
(1)   Attached hereto. The disclosure schedules delivered in connection with the Securities Purchase Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K and the Company agrees to furnish supplementally a copy of any disclosure schedules omitted from the Securities Purchase Agreement to the Securities and Exchange Commission upon request.
     
(2)   Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on September 13, 2012.
     
(3)   Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on April 29, 2013.
     
(4)   Incorporated by reference to our Form 10-K filed with the Securities and Exchange Commission on August 13, 2014.
     
(5)   Incorporated by reference to our Form 8-K filed with the Securities and Exchange Commission on June 5, 2014.

 

13
 

 

BANDOLIER ENERGY LLC

 

SUBSCRIPTION AGREEMENT

 

To the Undersigned Purchasers:

 

Bandolier Energy LLC, a Delaware limited liability company (the “Company”), hereby agrees with each of you, as an undersigned purchaser identified in this Subscription Agreement (this “Agreement”), as follows, it being understood and agreed that the representations, warranties and agreements set forth herein by each of you are several in nature:

 

1.Sale and Purchase of Limited Liability Company Interest.

 

The Company has been formed under the laws of the State of Delaware and has proposed to enter into an Amended and Restated Limited Liability Company Agreement with each of you, in substantially the form attached hereto as Exhibit A with such modifications as may be mutually agreed upon prior to execution thereof and as the same may be modified in accordance with the terms of any subsequent amendment thereto (the “Company Agreement”). Capitalized terms used herein without definition have the meanings set forth in the Company Agreement.

 

Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of the respective parties contained herein:

 

(a) the Company agrees to sell to you, and you irrevocably subscribe for and agree to purchase from the Company, the number of Series A Units set forth on your signature page attached hereto (represented, collectively, by the “Interests”); and

 

(b) the Company agrees that you shall be admitted as a Member, upon the terms and conditions, and in consideration of your agreement to be bound by the terms and provisions of the Company Agreement and this Agreement, with a Capital Commitment in the amount set forth on your signature page attached hereto (your “Line of Equity”), a portion of which (the “Initial Capital Contribution”) in the amount set forth on your signature page attached hereto shall be due at Closing (as defined below).

 

Subject to the terms and conditions hereof and of the Company Agreement, your obligation to subscribe and pay for your Interests at the time contemplated therein shall be complete and binding upon the execution and delivery of this Agreement.

 

2.Execution of Company Agreement.

 

You hereby agree to become a party to, to be bound by, and to comply with the provisions of the Company Agreement. To that end, prior to Closing (as defined below), you shall execute and deliver to the Company an executed signature page, in counterpart, to the Company Agreement, which shall be deemed an original and, together with all other counterparts, shall constitute one and the same instrument.

 

3.Payment of Line of Equity.

 

You hereby agree that, subsequent to your funding of your Initial Capital Contribution, the remainder of your Line of Equity, or any portion thereof, shall be due upon any duly issued Capital Calls in accordance with the terms of Section 6.2 of the Company Agreement.

 

 
 

 

4.Acquisition of Spyglass Energy Group, LLC.

 

You hereby acknowledge and agree that, upon consummation of the transactions contemplated hereby, the Company shall utilize your and the other purchasers’ Initial Capital Contributions to acquire all of the issued and outstanding membership interests of Spyglass Energy Group, LLC, in exchange for the payment of an agreed-upon purchase price and related closing costs (the “Spyglass Transaction”), and for other business purposes as determined by the Board (as that term is defined in the Company Agreement) of the Company and consistent with the Company Agreement.

 

5.Closing.

 

5.1 The closing and effectiveness (the “Closing”) of the sale to you, and the subscription for and purchase by you, of the Interests, and your admission as a Member, shall take place on such date and at such time as the Company shall designate following your full execution of this Agreement and the satisfaction of the conditions set forth in Sections 5.2 and 5.3 (the “Closing Date”).

 

5.2 Your obligation to consummate the transactions described herein is subject to the satisfaction of the following conditions:

 

(a) the Company Agreement shall have been duly authorized, executed and delivered by all parties thereto (other than you) and shall be in full force and effect;

 

(b) the Company’s representations and warranties being accurate and true in all material respects as of the Closing Date (unless as of a specific date therein in which case they shall be accurate and true as of such date);

 

(c) the performance in all material respects of all obligations, covenants and agreements of Company that are required to be performed at or prior to the Closing Date; and

 

(d) the satisfaction of all conditions to the closing of the Spyglass Transaction other than the payment of the purchase price thereunder.

 

5.3 The Company’s obligation to consummate the transactions described herein is subject to the satisfaction of the following conditions:

 

(a) your representations and warranties being accurate and true in all material respects as of the Closing Date (unless as of a specific date therein in which case they shall be accurate and true as of such date);

 

(b) your performance in all material respects of all obligations, covenants and agreements that are required to be performed by you at or prior to the Closing Date;

 

(c) you shall have delivered, or caused to be delivered, your Initial Capital Contribution to the Company, by wire transfer of immediately available funds, to an account designated by the Company in writing to you; and

 

(d) the satisfaction of all conditions to the closing of the Spyglass Transaction other than the payment of the purchase price thereunder.

 

 
 

 

6.Termination.  

 

6.1 Termination. Subject to the provisions of Section 6.2, this Agreement may be terminated at any time prior to the Closing Date by any of the following:

 

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

 

(b) by the Company, by written notice to you, if there has been a material violation or breach of any of your covenants or agreements made herein, or if any representation or warranty of yours contained herein is materially inaccurate or misleading or, following the use of reasonable efforts by the Company, the Closing is not effected by [__], 2014; or

 

(c) by you, by written notice to the Company, if there has been a material violation or breach of any of the Company’s covenants or agreements made herein, or if any representation or warranty of the Company contained herein is materially inaccurate or misleading or, following the use of reasonable efforts by the Company, the Closing is not effected by [__], 2014.

 

6.2 Effect of Termination. If this Agreement shall be terminated as provided in Section 6.1, then this Agreement shall forthwith become void and there shall be no continuing obligation on the part of the parties; provided, that no party shall be relieved of any liability as a result of a breach of any of such party’s representations, warranties, covenants or agreements contained herein.

 

7.Representations and Warranties of the Company.

 

7.1 The Representations and Warranties. The Company represents and warrants that each of the following statements shall be true and correct as of the Closing Date:

 

(a) Formation and Standing. The Company is duly formed and validly existing as a limited liability company under the laws of the State of Delaware and, subject to applicable law, has all requisite limited liability company power and authority to carry on its business as proposed to be conducted in the Company Agreement.

 

(b) Authorization of Agreement, etc. The execution and delivery of this Agreement and the Company Agreement have been authorized by all necessary action on behalf of the Company and this Agreement and the Company Agreement, when executed and delivered by the Company, are legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms.

 

(c) Compliance with Laws and Other Instruments. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not conflict with or result in any violation of or default under any provision of the Company Agreement, or any agreement or other instrument to which the Company is a party or by which it or any of its properties is bound, or any permit, franchise, judgment, decree, statute, order, rule or regulation applicable to the Company or its business or properties.

 

(d) Offer of Interests. Neither the Company nor anyone acting on its behalf has taken or will take any action that would subject the issuance and sale of the Interests to the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”).

 

7.2 Survival of Representations and Warranties. All representations and warranties made by the Company in Section 7.1 shall survive the execution and delivery of this Agreement, any investigation at any time made by you or on your behalf and the issue and sale of Interests.

 

 
 

 

8.Representations and Warranties of the Purchaser.

 

8.1 The Representations and Warranties. As to yourself only, you represent and warrant to the Company and each other Person who is, or in the future becomes, a Member, that each of the following statements shall be true and correct as of the Closing Date:

 

(a) Representation of Investment Experience and Ability to Bear Risk. You (i) are knowledgeable and experienced with respect to the financial, tax and business aspects of the ownership of the Interests and of the business contemplated by the Company and are capable of evaluating the risks and merits of purchasing the Interests and, in making a decision to proceed with this investment, have not relied upon any representations, warranties or agreements, other than those set forth in this Agreement and the Company Agreement, if any, and (ii) can bear the economic risk of an investment in the Company for an indefinite period of time, and can afford to suffer the complete loss thereof.

 

(b) Accredited Investor. You are an accredited investor within the meaning of Rule 501(a) of Regulation D promulgated under the Securities Act.

 

(c) The Interests have not been and will not be registered under the Securities Act, and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with the registration requirements of the Securities Act or pursuant to an exemption from such registration requirements. You hereby agree that any disposition of the Interests, including the transactions contemplated hereunder, and irrespective of whether the Interests are certificated, shall include the following legend:

 

“THE LIMITED LIABILITY COMPANY INTERESTS OF THE COMPANY (THE “INTERESTS”) HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”) OR ANY STATE SECURITIES LAWS OR THE LAWS OF ANY OTHER NATION OR JURISDICTION AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED UNLESS THE SAME HAVE BEEN INCLUDED IN AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY HAS BEEN RENDERED TO THE COMPANY THAT AN EXEMPTION FROM REGISTRATION UNDER APPLICABLE SECURITIES LAWS IS AVAILABLE.

 

IN ADDITION, TRANSFER OR OTHER DISPOSITION OF THE INTERESTS IS RESTRICTED AS PROVIDED IN THE LIMITED LIABILITY COMPANY AGREEMENT OF THE COMPANY.”

 

(d) Transfers and Transferability. You understand and acknowledge that the Interests have not been registered under the Securities Act or any state securities laws and are being offered and sold in reliance upon exemptions provided in the Securities Act and state securities laws for transactions not involving any public offering and, therefore, cannot be resold or transferred unless they are subsequently registered under the Securities Act and such applicable state securities laws or unless an exemption from such registration is available. You also understand that the Company does not have any obligation or intention to register the Interests for sale under the Securities Act, any state securities laws or of supplying the information which may be necessary to enable you to sell Interests; and that you have no right to require the registration of the Interests under the Securities Act, any state securities laws or other applicable securities regulations. You also understand that sales or transfers of Interests are further restricted by the provisions of the Company Agreement.

 

 
 

 

You represent and warrant further that you have no contract, understanding, agreement or arrangement with any person to sell or transfer or pledge to such person or anyone else any of the Interests for which you hereby subscribe (in whole or in part); and you represent and warrant that you have no present plans to enter into any such contract, undertaking, agreement or arrangement.

 

You understand that, subject to Section 12.1(a) of the Company Agreement, the Interests cannot be sold or transferred without Board Approval and Requisite Investor Approval, which approval may be withheld in their sole and absolute discretion and which approval will be withheld if any such transfer could cause the Company to become subject to regulation under federal law as an investment company or would subject the Company to adverse tax consequences or adverse consequences under ERISA.

 

You understand that there is no public market for the Interests; any disposition of the Interests may result in unfavorable tax consequences to you.

 

You are aware and acknowledge that, because of the substantial restrictions on the transferability of the Interests, it may not be possible for you to liquidate your investment in the Company readily, even in the case of an emergency.

 

(e) Residence. You maintain your domicile or principal place of business at the address shown in the signature page of this Agreement and you are not merely transient or temporarily resident there.

 

(f) Awareness of Risks; Taxes. You represent and warrant that you are aware (i) that the Company has no operating history; (ii) that the Interests involve a substantial degree of risk of loss of your entire investment and that there is no assurance of any income from your investment; (iii) that any federal, state, or foreign income tax benefits which may be available to you may be lost through the adoption of new laws or regulations, to changes to existing laws and regulations and to changes in the interpretation of existing laws and regulations; and (iv) any disposition of Interests may result in unfavorable tax consequences to you. You further represent that you are relying solely on your own conclusions or the advice of your own counsel or investment representative with respect to tax aspects of any investment in the Company.

 

(g) Power, Authority; Valid Agreement. (i) You have all requisite power and authority to execute, deliver and perform your obligations under this Agreement and the Company Agreement and to subscribe for and purchase or otherwise acquire your Interests; (ii) your execution of this Agreement and the Company Agreement has been authorized by all necessary corporate or other action on your behalf; and (iii) this Agreement and the Company Agreement are each valid, binding and enforceable against you in accordance with their respective terms.

 

(h) No Conflict; No Violation. The execution and delivery of this Agreement and the Company Agreement by you and the performance of your duties and obligations hereunder and thereunder (i) do not and will not result in a breach of any of the terms, conditions or provisions of, or constitute a default under (A) any charter, bylaws, trust agreement, partnership agreement or other governing instrument applicable to you, (B) (1) any indenture, mortgage, deed of trust, credit agreement, note or other evidence of indebtedness, or any lease or other agreement or understanding, or (2) any license, permit, franchise or certificate, in either case to which you or any of your Affiliates is a party or by which you or any of them is bound or to which your or any of their properties are subject; (ii) do not require any authorization or approval under or pursuant to any of the foregoing; and (iii) do not violate any statute, regulation, law, order, writ, injunction or decree to which you or any of your Affiliates is subject.

 

 
 

 

8.2 Survival of Representations and Warranties. All representations and warranties made by you in Section 8.1 of this Agreement shall survive the execution and delivery of this Agreement, as well as any investigation at any time made by or on behalf of the Company and the issue and sale of Interests.

 

8.3 Reliance. You acknowledge that your representations, warranties, acknowledgments and agreements in this Agreement will be relied upon by the Company in determining your suitability as a purchaser of Interests.

 

8.4 Further Assurances. You agree to provide, if requested, any additional information that may be requested or required to determine your eligibility to purchase the Interests.

 

9.General Contractual Matters.

 

9.1 Amendments and Waivers. This Agreement may be amended and the observance of any provision hereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of you and the Company.

 

9.2 Assignment. You agree that neither this Agreement nor any rights which may accrue to you hereunder may be transferred or assigned.

 

9.3 Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given to any party when delivered by hand, when mailed, first-class postage prepaid, or when emailed, (a) if to you, to you at the physical or email address set forth below your signature, or to such other address as you shall have furnished to the Company in writing, and (b) if to the Company, to Bandolier Energy LLC, 100 West 5th Street, Suite 900, Tulsa, Oklahoma 74103, Attn: Shane E. Matson, , or to such other address or addresses, as the Company shall have furnished to you in writing, provided that any notice to the Company (a) shall be effective only if and when received by the Company and (b) shall not be delivered by email.

 

9.4 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS (EXCEPT INSOFAR AS AFFECTED BY THE SECURITIES OR “BLUE SKY” LAWS OF THE STATE OR SIMILAR JURISDICTION IN WHICH THE OFFERING DESCRIBED HEREIN HAS BEEN MADE TO YOU).

 

9.5 Submission to Jurisdiction. Each party irrevocably consents and agrees that any legal action or proceeding with respect to this Agreement and any action for enforcement of any judgment in respect thereof may be brought in the courts of the State of Delaware or the United States federal courts for the State of Delaware, and, by execution and delivery of this Agreement, each party hereby submits to and accepts for itself and in respect of its property, generally and unconditionally, the exclusive jurisdiction of the aforesaid courts and appellate courts from any appeal thereof. Each party hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement brought in the courts referred to above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. Nothing in this section shall be deemed to constitute a submission to jurisdiction, consent or waiver with respect to any matter not specifically referred to herein.

 

 
 

 

9.6 Waiver of Trial by Jury. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY MATTER ARISING HEREUNDER.

 

9.7 Descriptive Headings. The descriptive headings in this Agreement are for convenience of reference only and shall not be deemed to alter or affect the meaning or interpretation of any provision of this Agreement.

 

9.8 Entire Agreement. This Agreement contains the entire agreement of the parties with respect to the subject matter of this Agreement, and there are no representations, covenants or other agreements except as stated or referred to herein.

 

9.9 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same instrument.

 

9.10 Circular 230 Notice. To ensure compliance with Treasury Department Circular 230, you are hereby notified that:

 

(a) any discussion of Federal tax issues in this Agreement is not intended or written to be used, and cannot be used, by a Member for the purpose of avoiding penalties that may be imposed on such Member under the Code;

 

(b) any such discussion is written to support the promotion or marketing of the transactions or matters addressed in this Agreement; and

 

(c) each Member should seek advice based on its particular circumstances from and independent advisor.

 

[signature page follows]

 

 
 

 

If you are in agreement with the foregoing, please sign the enclosed counterpart of this Agreement and return such counterpart of this Agreement to the Company.

 

  BANDOLIER ENERGY LLC
     
  By: /s/ Shane Matson
  Name: Shane Matson
  Title: President

 

 
 

 

The foregoing Subscription Agreement is hereby agreed to by the undersigned on this 30th day of May, 2014.

 

Petro River Oil Corp.  
     
By: /s/ Scot Cohen  
Name: Scot Cohen  
Title: Executive Chairman  
     
1980 Post Oak Blvd., Suite 2020  
Houston, TX 77056  
Attn: Scot Cohen  
Email address: scohen@icofund.com  

 

     
      
LINE OF EQUITY:  $10,000,000 
      
INITIAL CAPITAL CONTRIBUTION:  $5,000,000 
      
TOTAL SERIES A UNITS:   500 

 

 
 

 

Exhibit A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

Exhibit A

 

Bandolier Energy LLC

 

Amended and Restated
Limited Liability Company Agreement

 

May 30, 2014

 

 
 

 

TABLE OF CONTENTS

 

  Page
ARTICLE I FORMATION AND TERM 1
Section 1.1 Formation 1
Section 1.2 Name 2
Section 1.3 Principal Business Office 2
Section 1.4 Term 2
Section 1.5 Registered Agent and Office 2
Section 1.6 Qualification in Other Jurisdictions 2
     
ARTICLE II PURPOSE AND POWERS OF THE COMPANY 2
Section 2.1 Purpose 2
Section 2.2 Powers 3
     
Article III UNITS 3
Section 3.1 Series of Units. 3
Section 3.2 Series A Units 4
Section 3.3 Series B Units. 4
     
ARTICLE IV MEMBERS 6
Section 4.1 Members 6
Section 4.2 Powers of Members 6
Section 4.3 Member Interests 7
Section 4.4 Partition 7
Section 4.5 Resignation 7
Section 4.6 Member Meetings 7
Section 4.7 Voting 7
Section 4.8 Quorum 7
Section 4.9 Notice of Meetings 8
Section 4.10 Action Without a Meeting 8
Section 4.11 Telephonic Meetings 8
Section 4.12 Minutes 8
     
ARTICLE V MANAGEMENT 8
Section 5.1 Board of Managers 8
Section 5.2 Duties of Managers 12
Section 5.3 Officers; Designation 12
Section 5.4 Conversion to Corporation 14
Section 5.5 IPO Conversion 14
     
ARTICLE VI COMPANY CAPITAL 14
Section 6.1 Capital Commitments and Initial Capital Contributions 14
Section 6.2 Capital Calls 15
Section 6.3 Failures to Fund Capital Calls. 15
Section 6.4 Additional Capital Calls 16

 

i
 

 

Section 6.5 Status of Capital Contributions 16
Section 6.6 Use of Proceeds 16
Section 6.7 Additional Equity Interests; Preemptive Rights 16
     
ARTICLE VII CAPITAL ACCOUNTS; ALLOCATIONS 17
Section 7.1 Capital Accounts 17
Section 7.2 Profits and Losses 17
Section 7.3 Special Allocation Provisions 18
Section 7.4 Allocation Rules 19
     
ARTICLE VIII DISTRIBUTIONS 20
Section 8.1 Distributions of Available Cash 20
Section 8.2 Mandatory Tax Distribution 21
Section 8.3 Incorrect Distributions 21
Section 8.4 Limitation on Distributions 21
Section 8.5 Offset 21
Section 8.6 Withholding Taxes 21
Section 8.7 Distributions in Kind 22
     
ARTICLE IX RECORDS AND REPORTS 22
Section 9.1 Books and Records 22
Section 9.2 Fiscal Year, Fiscal Quarter 22
Section 9.3 Minutes 22
Section 9.4 Reports to Members 23
     
ARTICLE X TAX MATTERS 23
Section 10.1 Tax Matters 23
Section 10.2 Tax Elections 24
Section 10.3 Taxation as Partnership 24
     
ARTICLE XI LIMITED LIABILITY AND INDEMNIFICATION 24
Section 11.1 Limited Liability 24
Section 11.2 Indemnification 24
Section 11.3 Expenses 25
Section 11.4 Insurance 25
     
ARTICLE XII RESTRICTIONS ON TRANSFERS; PURCHASE RIGHTS 25
Section 12.1 Transfers Generally; Reasonableness of Restrictions 25
Section 12.2 Effect of Transfer; Admission as a Member 27
Section 12.3 Other Voluntary Transfers; Right of First Refusal 27
Section 12.4 Drag-Along Transaction 28
Section 12.5 Tag-Along Transaction 28
     
ARTICLE XIII REPRESENTATIONS AND WARRANTIES 28
Section 13.1 Representations and Warranties of the Members 28
Section 13.2 Representations and Warranties of the Company 29

 

ii
 

 

ARTICLE XIV TERMINATION AND LIQUIDATION OF THE COMPANY 29
Section 14.1 Events of Termination 29
Section 14.2 Winding-Up 29
     
ARTICLE XV COVENANTS   30
Section 15.1 Confidentiality 30
Section 15.2 Other Petro River Interests. 31
     
ARTICLE XVI REGISTRATION RIGHTS 31
Section 16.1 Demand Registration. 31
Section 16.2 Company Registration 33
Section 16.3 Underwriting Requirements. 33
Section 16.4 Obligations of the Company 34
Section 16.5 Expenses of Registration 36
Section 16.6 Indemnification 36
     
ARTICLE XVII MISCELLANEOUS 38
Section 17.1 Notices 38
Section 17.2 Failure to Pursue Remedies 38
Section 17.3 Binding Effect; Specific Performances 38
Section 17.4 Interpretation 38
Section 17.5 Severability 39
Section 17.6 Counterparts 39
Section 17.7 Governing Law 39
Section 17.8 Jurisdiction and Venue 39
Section 17.9 Waiver of Jury Trial 39
Section 17.10 Amendments 40
Section 17.11 Entire Agreement 40
Section 17.12 No Third-Party Beneficiaries 40

 

Schedules  
   
Schedule A Members
Schedule B Definitions
Schedule C Board of Managers
Schedule D Key Officers
Schedule E Model Section 83(b) Election

 

iii
 

 

AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
BANDOLIER ENERGY LLC

 

This Amended and Restated Limited Liability Company Agreement (this “Agreement”) of Bandolier Energy LLC, a Delaware limited liability company (the “Company”), is entered into as of May 30, 2014 (the “Effective Date”), by the Company, on the one hand, and Petro River Oil Corp., a Delaware corporation (“Petro River”), Pearsonia West Investment Group, LLC (“Pearsonia West LLC”), a Delaware limited liability company, Ranger Station LLC (“Ranger Station LLC”), an Oklahoma limited liability company, and Shane E. Matson (“Matson”), an individual, on the other, as the Persons listed on Schedule A as Members. Capitalized terms used herein and not otherwise defined have the meanings set forth on Schedule B.

 

Background

 

WHEREAS, the Company was formed as a limited liability company pursuant to Section 18-201 of the Delaware Limited Liability Company Act (as amended from time to time, the “LLC Act”) on June 27, 2013;

 

WHEREAS, the Company and Matson, as the then sole member of the Company, entered into that certain Company Agreement, dated as of June 27, 2013 (the “Initial Agreement”);

 

WHEREAS, Petro River, Pearsonia West LLC, and Ranger Station LLC have entered into Subscription Agreements, each dated as of May 30, 2014, to subscribe for Series A Units of the Company; and

 

WHEREAS, the parties hereto are entering into this Agreement, which amends, restates and replaces the Initial Agreement in its entirety, to provide for their respective rights and obligations as Members of the Company.

 

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

 

ARTICLE I
FORMATION AND TERM

 

Section 1.1 Formation.

 

(a) The Company was formed as a limited liability company pursuant to Section 18-201 of the LLC Act on June 27, 2013.

 

(b) Each Person identified on Schedule A as a Member is admitted as a Member of the Company with the Profit Percentage set forth opposite such Person’s name on Schedule A.

 

1
 

 

(c) The name and mailing address of each Member are listed on Schedule A.

 

(d) Limited liability company interests, as defined by Section 18-101(8) of the Act, shall be represented by, and shall be referred to in this Agreement as, “Units.” Units may be certificated if designated by the Board of Managers of the Company (the “Board”). The number and type of Units held by each Member are listed on Schedule A.

 

(e) The Chief Executive Officer or President of the Company is hereby designated as an authorized Person, within the meaning of the LLC Act, to execute, deliver and file, or cause the execution, delivery and filing of, all certificates, notices or other instruments (and any amendments and/or restatements thereof) required or permitted by the LLC Act to be filed in the office of the Secretary of State of the State of Delaware and any other certificates, notices or other instruments (and any amendments and/or restatements thereof) necessary for the Company to qualify to do business in a jurisdiction in which the Company may wish to so qualify.

 

Section 1.2 Name. The name of the Company is Bandolier Energy LLC.

 

Section 1.3 Principal Business Office. The principal place of business of the Company shall be located in Tulsa, Oklahoma, at such location as designated by the Board of Managers.

 

Section 1.4 Term. The term of the Company commenced on the date of its formation and shall continue perpetually unless the Company is dissolved pursuant to Article XIV, which dissolution shall be carried out pursuant to the LLC Act and the provisions of this Agreement. The existence of the Company as a separate legal entity shall continue until the cancellation of the Company’s Certificate of Formation as provided in the LLC Act.

 

Section 1.5 Registered Agent and Office. The Company’s registered agent and office in Delaware is The Corporation Trust Company, 2711 Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801.

 

Section 1.6 Qualification in Other Jurisdictions. The Chief Executive Officer or President shall cause the Company to be qualified, formed or registered under assumed or fictitious name statutes or similar laws in any jurisdiction in which the Company transacts business and such qualification, formation or registration is necessary or appropriate for the transaction of such business.

 

Article II
PURPOSE AND POWERS OF THE COMPANY

 

Section 2.1 Purpose. The purpose of the Company is to engage in any lawful act or activity for which limited liability companies may be formed under the LLC Act, including the acquisition of, exploration for and exploitation and development of, oil and natural gas and to engage in such other activities incidental or ancillary thereto as the Board deems necessary or advisable, all upon the terms and conditions set forth in this Agreement.

 

2
 

 

Section 2.2 Powers. Subject to all of the provisions of this Agreement, the Company shall have the power and is hereby authorized to take any and all actions necessary, convenient, or incidental to the purpose of the Company, including the following:

 

(a) acquire by purchase, lease, contribution of property or otherwise, own, hold, sell, convey, transfer or dispose of any real or personal property which may be necessary, convenient or incidental to the accomplishment of the purpose of the Company;

 

(b) operate, purchase, maintain, finance, improve, own, sell, convey, assign, mortgage, lease or demolish or otherwise dispose of any real or personal property which may be necessary, convenient or incidental to the accomplishment of the purposes of the Company;

 

(c) borrow money and issue evidences of indebtedness in furtherance of any or all of the purposes of the Company, and secure the same by mortgage, pledge or other lien on the assets of the Company;

 

(d) invest any funds of the Company pending distribution or payment of the same pursuant to the provisions of this Agreement;

 

(e) prepay in whole or in part, refinance, recast, increase, modify or extend any indebtedness of the Company and, in connection therewith, execute any extensions, renewals or modifications of any mortgage or security agreement securing such indebtedness;

 

(f) enter into, perform and carry out contracts of any kind, including, without limitation, contracts with any Person affiliated with a Member, necessary to, in connection with, convenient to, or incidental to the accomplishment of the purposes of the Company;

 

(g) employ or otherwise engage employees, managers, contractors, advisors, attorneys and consultants and pay reasonable compensation for such services;

 

(h) enter into partnerships, limited liability companies, trusts, associations, corporations or other ventures with other Persons in furtherance of the purposes of the Company; and

 

(i) do such other things and engage in such other activities as may be necessary, convenient or incidental to the conduct of the business of the Company, and have and exercise all of the powers and rights conferred upon limited liability companies formed pursuant to the LLC Act.

 

Article III
UNITS

 

Section 3.1 Series of Units. The ownership of the Company shall be divided into Series A Units and Series B Units, each having the preferences, limitations, and rights as set forth herein. Any Units issued and outstanding prior to the Effective Date are hereby cancelled for all purposes.

 

3
 

 

Section 3.2 Series A Units. Each Series A Member’s ownership interest in the Company shall be represented by the Series A Units held by such Series A Member. The name, present mailing address, initial Capital Account balance, Line of Equity, total number of Series A Units held and the Series A Percentage Interest of each Series A Member shall be set forth on Schedule A attached hereto, as amended from time to time.

 

(a) Except as otherwise required by law, the Series A Units shall have voting rights equal to one vote per Series A Unit.

 

(b) On and as of the Effective Date, a total of (i) 500 Series A Units have been issued by the Company to Petro River, (ii) 440 Series A Units have been issued to Pearsonia West LLC and (iii) 60 Series A Units have been issued by the Company to Ranger Station LLC, all of which Series A Units are fully vested as of the Effective Date.

 

Section 3.3 Series B Units. Each Series B Member’s ownership interest in the Company shall be represented by the Series B Units held by such Series B Member. The name, present mailing address, initial Capital Account balance, number of Series B Units held and the Series B Percentage of each Series B Member shall be set forth on Schedule A attached hereto, as amended from time to time.

 

(a) Except as otherwise required by law, the Series B Units shall have no voting rights. The Series B Units issued hereunder are intended to be “profits interests” for United States federal income tax purposes under Revenue Procedures 93-27 and 2001-43 and will be issued to the Series B Members in exchange for services to be provided by the Series B Members to the Company. Initially, the capital account associated with each Series B Unit at the time of issuance shall be equal to zero dollars ($0.00).

 

(b) The Series B Units issued to the Series B Members shall vest in 20% increments on the date of issuance and each of the first four anniversaries of the date of issuance of such Series B Units. The vesting schedule of each issuance of Series B Units with respect to each Series B Member shall be set forth on Schedule A attached hereto, as amended from time to time. In each case, unvested Series B Units shall be subject to the forfeiture and repurchase provisions set forth in Section 3.3(c). As of the Effective Date, a total of 100 Series B Units have been issued by the Company to Matson, all of which shall vest as set forth above.

 

(c) Forfeiture.

 

(i) In the event that any Series B Member is removed for Cause as a Manager, officer, or employee of the Company, all Series B Units, whether vested or unvested, issued to such Series B Member (including any Series B Units that have been transferred to a Permitted Transferee by such Series B Member) shall automatically be forfeited and thereby become null and void.

 

(ii) In the event that any Series B Member is removed other than for Cause as a Manager officer, or employee of the Company prior to the vesting of 100% of the Series B Units issued to such Series B Member, or if a Series B Member voluntarily resigns as an officer or Manager of the Company prior to the vesting of 100% of the Series B Units issued to such Series B Member, all Series B Units issued to such Series B Member that have not vested as of the date of such removal (including any unvested Series B Units that have been transferred to a Permitted Transferee by such Series B Member) shall automatically be forfeited and thereby become null and void.

 

4
 

 

(iii) Upon a forfeiture event as described in Sections 3.3(c)(i) and 3.3(c)(ii), (1) the forfeiting Series B Member (or, if applicable, his, her, or its Permitted Transferee) shall be deemed to have, by his/her/its signature to this Agreement, immediately forfeited, transferred, and assigned such forfeited Series B Units to the Company for no consideration; and (2) such person or entity shall have no further rights in respect of the Company or Units represented by such forfeited Series B Units and shall not be entitled to any compensation or consideration in connection with the forfeiture of such Series B Units.

 

(iv) If a Series B Member is removed (unless such Series B Member is removed for Cause) or is required to resign pursuant to or by reason of a Final Exit Event, all unvested Series B Units issued to such Series B Member (including any unvested Series B Units that have been transferred to a Permitted Transferee by such Series B Member) shall not be forfeited but shall instead immediately vest in accordance with Section 3.3(d).

 

(d) Notwithstanding anything to the contrary in Section 3.3(b), upon the occurrence of an Final Exit Event, all unvested Series B Units shall vest as of the close of business of the day immediately preceding the closing date of such Final Exit Event (or, if determined by the Board to be necessary for the Series B Member to fully participate in the Final Exit Event, such earlier date as may be therefore necessary in order to fully participate in such Final Exit Event).

 

(e) If any Series B Units are forfeited pursuant to Section 3.3(c), then the Series B Percentage Interests of each of the Series B Members, including, for the avoidance of doubt, the forfeiting Series B Member, shall automatically be adjusted to reflect the forfeiture as of the close of business of the day immediately preceding the effective date of such forfeiture.

 

(f) Allocations of Profits and Losses (and items thereof) to be made to Series B Members pursuant to Article VII shall be made with respect to Series B Units, whether vested or unvested.

 

(i) Notwithstanding anything to the contrary in Article VIII, no distributions shall be made with respect to vested or unvested Series B Units (other than mandatory tax distributions pursuant to Section 8.2) prior to the time when the total distributions to the Series A Members equal the sum of (A) the aggregate Series A Preference Amounts, and (B) the aggregate remaining unfunded Lines of Equity, if any (collectively, the “Overall Preference”). To the extent amounts otherwise distributable to Series B Members (“Retained Amounts”) are retained by the Company as a result of the preceding sentence, the Series A Members will be entitled to a “true-up” distribution out of the Retained Amounts in connection with a Final Exit Event so that the Series A Members receive the Overall Preference prior to the Series B Members receiving any distributions (other than tax distributions) to the extent the Series A Members do not receive in the aggregate the amount they would have received had no interim distributions been made and all amounts distributed at the time of the Final Exit Event plus all interim distributions had instead been distributed at the time of the Final Exit Event. All remaining Retained Amounts shall be distributed to the holders of the Series B Units pro rata according to their respective Series B Percentage Interests.

 

5
 

 

(ii) Notwithstanding anything to the contrary in Article VIII, any distributions pursuant to Article VIII with respect to unvested Series B Units (other than mandatory tax distributions pursuant to Section 8.2) shall be held by the Company until such Units vest, at which time any such retained distributions shall promptly be distributed (without interest) to the holder of such then-vested Series B Units. Any retained distributions pursuant to the foregoing sentence that are forfeited shall thereafter be available to be distributed to the other Members, on a pro rata basis based on their relative Profit Percentages at the time of such forfeiture.

 

(g) The parties acknowledge that if any Series B Units are forfeited, allocations of Profits and Losses (or items thereof) like those described in Proposed Treasury Regulation Section 1.704-1(b)(4)(xii)(c) (“Forfeiture Allocations”) may be required to reverse the effect of distributions and of allocations of Profits and Losses made with respect to such unvested Series B Units prior to forfeiture. For the avoidance of doubt, the Board is authorized to cause the Company to make Forfeiture Allocations and, once required by applicable final or temporary Treasury Regulations or other published guidance upon which taxpayers can rely, allocations of Profits and Losses (or items thereof) will be made, to the extent required, in accordance with Proposed Treasury Regulation Section 1.704-1(b)(4)(xii)(c) or any successor final or temporary Treasury Regulation or other published guidance.

 

(h) Each person receiving a grant of Series B Units hereby agrees to timely elect pursuant to Code Section 83(b) and in a form substantially similar to that provided in Schedule E to include in income the value (if any) of the Series B Units over the amount paid (if any) by such person for such Series B Units in the year of the grant. Each holder of a Series B Unit acknowledges that it is the sole responsibility of such holder, and not the Company, to file a timely election under Code Section 83(b) even if such holder requests the Company or its representatives to make such filing on behalf of such holder. Each person receiving a grant of Series B Units shall also execute a written agreement to join and be bound by the terms of this Agreement.

 

Article IV
MEMBERS

 

Section 4.1 Members. Each Member’s name, mailing address, number of Units owned and Percentage Interest as in effect from time to time shall be listed on Schedule A. The Chief Executive Officer, President, or other designated Officer shall be required to update Schedule A from time to time as necessary to accurately reflect changes in address, Units owned and/or Percentage Interests. Any amendment to Schedule A made to reflect an action taken in accordance with this Agreement shall not be deemed an amendment to this Agreement. Any reference in this Agreement to Schedule A shall be deemed a reference to Schedule A as amended and in effect from time to time.

 

Section 4.2 Powers of Members. The Members shall have the power to exercise only those rights and powers granted to the Members pursuant to the express terms of this Agreement. Members shall not have the authority to bind the Company by virtue of their status as Members.

 

6
 

 

Section 4.3 Member Interests. Units and the limited liability company interests represented thereby shall for all purposes be personal property. Except as set forth herein, no Member shall have any interest in specific Company assets or property.

 

Section 4.4 Partition. Each Member waives any and all rights that it may have to maintain an action for partition of the Company or its property.

 

Section 4.5 Resignation. A Member shall cease to be a Member at the time such Member ceases to own any Units.

 

Section 4.6 Member Meetings.

 

(a) Meetings of Series A Members, for such business as may be stated in the notice of the meeting, may be held at such date, time and place as may be determined by the Board. The Chairman of the Board (the “Chairman”) shall preside over all meetings of the Series A Members; provided, that if the Chairman is not available, the members of the Board present may designate one of the Series A Members present to preside over the meeting. Series A Members holding at least five percent (5%) of the then outstanding Series A Units may request a meeting of the Series A Members by delivering a written request therefor to the Chairman, the Chief Executive Officer, or the President setting forth the purpose for which such meeting is requested to be called. The Person receiving such request shall schedule a meeting of the Series A Members within thirty (30) days after the receipt of such request by notice delivered in accordance with Section 4.9.

 

(b) There will be no regular or special meetings of the Series B Members.

 

Section 4.7 Voting.

 

(a) Each Member entitled to vote in accordance with the terms of this Agreement may vote in person or by proxy. The Members shall be entitled to vote only on the matters specifically set forth in this Agreement, on such other matters, if any, as may be determined by the Board, and as provided by the LLC Act or other applicable law. Unless otherwise provided for by this Agreement, all matters to be decided by the Members shall be decided by a Majority Member Vote.

 

(b) The Series B Units shall not confer any voting, consent, or approval rights to the Series B Members, except as set forth in Section 17.10 or as required by law. For the avoidance of doubt, the Series B Units shall be non-voting Units.

 

Section 4.8 Quorum. Except as otherwise provided by law, the presence, in person or by proxy, of Series A Members representing a majority of the then outstanding Series A Units shall constitute a quorum at all meetings of the Series A Members. In case a quorum shall not be present at any meeting, Series A Members holding a majority of the Series A Units represented thereat, in person or by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until the requisite amount of Series A Members shall be present. At any such adjourned meeting at which a quorum shall be represented, any business may be transacted that might have been transacted at the meeting as originally noticed.

 

Section 4.9 Notice of Meetings. Written notice, stating the place, date, time and purpose of the meeting, shall be given to each Series A Member, at such Series A Member’s address as it appears on the records of the Company, not less than ten (10) calendar days prior to the date of the meeting (except that notice to any Series A Member may be waived in writing by such Series A Member).

 

7
 

 

Section 4.10 Action Without a Meeting. Any action required or permitted to be taken at any meeting of Series A Members may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by Series A Members holding not less than the aggregate number of outstanding Series A Units necessary to authorize or take such action at a meeting at which all Series A Members entitled to vote thereon were present and voted.

 

Section 4.11 Telephonic Meetings. The Series A Members may hold meetings by means of conference telephone or similar communications equipment by means of which all Series A Members participating in the meeting can hear and speak to one another.

 

Section 4.12 Minutes. All decisions and resolutions of the Series A Members shall be reported in the minutes of its meetings, which shall state the date, time and place of the meeting (or the date of the written consent in lieu of a meeting), the Series A Members present at the meeting, the resolutions put to a vote (or the subject of a written consent), and the results of such voting (or written consent). The minutes of all meetings of the Series A Members shall be kept at the principal office of the Company.

 

Article V
MANAGEMENT

 

Section 5.1 Board of Managers.

 

(a) Powers. The business and affairs of the Company shall be managed by or under the direction of a Board comprised of up to seven Managers to be elected, designated or appointed by the Members. Except as otherwise set forth in this Agreement, the Board shall have the power to do any and all acts necessary, convenient or incidental to or for the furtherance of the purposes described herein, including all powers, statutory or otherwise.

 

(b) Number; Appointment. The initial Managers shall consist of the following:

 

(i) Petro River shall have the right to appoint (A) one Institutional Investor Manager with four votes; (B) two Institutional Investor Managers each with two votes; or (C) four Institutional Investor Managers each with one vote. The initial Institutional Investor Managers shall be Scot Cohen and Jonathan Rudney, each with two votes;

 

8
 

 

(ii) The Board shall have the right to appoint two Management Managers, each having one vote; provided, however, that so long as Ranger Station LLC remains a Series A Member, one such Management Manager shall be a person designated by Ranger Station LLC and the second Management Manager shall be a person reasonably acceptable to Ranger Station LLC. The initial Management Managers shall be Matson, as the Manager designated by Ranger Station LLC, and Charles W. Wickstrom; and

 

(iii) Petro River shall have the right to appoint one Independent Manager, who shall have relevant industry experience and qualify as an “independent director” under the listing rules of the Nasdaq Stock Market or the New York Stock Exchange. The initial Independent Manager shall be Ganesh H. Betanabhatla.

 

(iv) Each Manager elected, designated or appointed shall hold office until his or her successor is elected or until such Manager’s earlier death, resignation or removal. Managers need not be Members.

 

(c) Removal and Resignation of Managers. Any Institutional Investor Manager may be removed only by Petro River. Any Management Manager may be removed only by Board Approval and Requisite Investor Approval. Any Manager may resign from the Board by submitting his or her resignation in writing to the Chairman, the Chief Executive Officer, or the President. Such resignation shall become effective upon its submission or at any later time specified in such resignation.

 

(d) Vacancies. If a vacancy is created in the Board by the death, disability, retirement, resignation or removal of any Manager, the vacancy may be filled only by the person or persons entitled to appoint such Manager.

 

(e) Chairman. The Chairman shall be a Manager designated by the Board. The Chairman shall preside at all meetings of the Board. In the event of the absence or disability of the Chairman, any other Manager of the Company designated by the Board shall preside at all meetings of the Board and shall exercise all other powers and authority of the Chairman. The Chairman shall have no general executive powers, and he or she shall only have and exercise such further powers and duties as may be conferred upon, or assigned to, him or her by the Board.

 

(f) Meetings of the Board. The Board may hold meetings, both regular and special, within or outside the State of Delaware. Except as provided in this paragraph, regularly scheduled meetings of the Board may be held without additional notice at such time and at such place as shall from time to time be determined by the Board. Special meetings of the Board may be called by the Chairman, the Chief Executive Officer, the President, or any Manager at any time. A special meeting shall be held at such time and place as may be designated by the person or persons calling the meeting. The person or persons calling such special meeting shall cause such notice of the meeting and of its purpose to be given to each Manager, and such notice shall be given in writing by facsimile, mail, electronic mail or personal delivery.

 

9
 

 

(g) Quorum; Acts of the Board. At all meetings of the Board, the presence of Managers, including at least one Institutional Investor Manager, holding a majority of the voting power of all Managers then in office shall constitute a quorum for the transaction of business. For all Board voting purposes, each Management Manager and the Independent Manager will have one vote, while the Institutional Investor Manager(s) shall have a total of four votes regardless of how many Institutional Investor Managers are designated by Petro River. Except as otherwise provided in this Agreement, actions of the Board shall require the affirmative vote of Managers, including at least one Institutional Investor Manager, having a majority of the votes present at a meeting at which there is a quorum. If a quorum shall not be present at any meeting of the Board, the Managers present at such meeting may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum shall be present. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting and without prior notice if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee.

 

(h) Committees. The Board may establish a compensation committee, an audit committee and such other committees as it may determine from time to time. Petro River shall be entitled to have at least one Institutional Investor Manager serve on each committee.

 

(i) Budget and AFEs.

 

(i) Not less than annually, the Board will approve a budget for the Company, which will include operating, capital and general and administrative (“G&A”) budgets and such other components as are determined by the Board.

 

(ii) The Board shall approve each AFE, for operations to be conducted pursuant to the annual budget.

 

(j) Actions Requiring Board Approval and Requisite Investor Approval. Notwithstanding anything in this Agreement to the contrary, the Company shall not take any of the actions set forth below without both Board Approval and Requisite Investor Approval:

 

(i) subject to the restrictions set forth under Section 17.10, amending this Agreement;

 

(ii) effecting an initial public offering of securities of the Company or its subsidiaries or registering any securities with the SEC;

 

(iii) making any distributions (other than mandatory tax distributions pursuant to Section 8.2);

 

(iv) repurchasing, authorizing or issuing any equity interests (including equity-linked securities) in the Company, other than Series A Units and Series B Units pursuant to this Agreement;

 

(v) making or modifying any Capital Call or Additional Capital Call;

 

10
 

 

(vi) incurring or guarantying any indebtedness or other capital (excluding trade debt incurred in the ordinary course of business);

 

(vii) acquiring or selling assets outside of the normal course of business;

 

(viii) entering into or amending any Material Contract, if such action is not already reflected in either an approved budget or an AFE;

 

(ix) performing hedging activities;

 

(x) loaning money;

 

(xi) commencing or settling any material litigation;

 

(xii) removing any of the officers of the Company;

 

(xiii) entering into or amending employment agreements or adopting or amending any employee benefit, compensation or welfare plans;

 

(xiv) entering into transactions with Affiliates;

 

(xv) approving any individual expenditure or series of related expenditures that exceed by more than $50,000.00 (or such greater amount approved by the Board with Requisite Investor Approval) the amount approved in the applicable annual budget, as may be amended by the Board from time to time;

 

(xvi) adopting or materially modifying any Company budget;

 

(xvii) approving or entering into any Final Exit Event, except pursuant to a Drag-Along Transaction or a Qualified IPO;

 

(xviii) changing the Company’s principal line of business or engaging in activities not consistent with such principal line of business;

 

(xix) forming any subsidiary of the Company or entering into any partnership or joint venture (excluding entering into standard form joint operating agreements in the ordinary course of business);

 

(xx) effecting any voluntary change in tax classification;

 

(xxi) changing the Company’s independent public accountants; and

 

(xxii) changing the Company’s third party reserve engineers.

 

11
 

 

(k) Acquisitions and Dispositions of Real Property. Notwithstanding anything in this Agreement to the contrary, the Company shall not acquire or sell any oil and gas properties of a material nature without (i) Requisite Investor Approval and (ii) the approval of the Independent Manager, such approval by the Independent Manager not to be unreasonably withheld.

 

(l) Telephonic Meetings. Members of the Board may participate in meetings of the Board by means of telephone conference or similar communications equipment that allows all persons participating in the meeting to hear and speak to each other, and such participation in a meeting shall constitute presence in person at the meeting. If all the participants are participating by telephone conference or similar communications equipment, the meeting shall be deemed to be held at the principal place of business of the Company.

 

(m) Compensation of Managers; Expenses. Each Manager shall be entitled to such reasonable compensation as the Board shall determine for his or her service on the Board, for his or her attendance at meetings of the Board and any of its committees, for his or her expenses incident thereto, and for his or her service to the Company. No such payment shall preclude any Manager from serving the Company or any Affiliate thereof in any other capacity and receiving compensation therefor.

 

(n) Managers as Agents. To the extent of their powers set forth in this Agreement, the Managers are agents of the Company for the purpose of the Company’s business, and the actions of the Managers taken in accordance with such powers set forth in this Agreement shall bind the Company.

 

Section 5.2 Duties of Managers. Except as provided in this Agreement, and subject to Section 15.2(b), in exercising their rights and performing their duties under this Agreement, the Managers shall have fiduciary duties limited to good faith and fair dealing.

 

Section 5.3 Officers; Designation. The officers of the Company shall be chosen by the Board. Any number of offices may be held by the same person. The initial officers of the Company are listed on Schedule D. Each officer shall hold office until his or her successor is elected and qualified or until such officer’s earlier death, resignation or removal. Any officer may resign at any time by submitting his or her resignation in writing to the Chief Executive Officer, the Chairman or the President. The Board may fix the compensation of those officers appointed pursuant to subsections (a) through (d) of this Section 5.3 as the Board may reasonably deem appropriate, and it may award additional compensation to any officer, agent or employee of the Company for any year or years based upon the performance of that person during any such period, the success of the operations of the Company during any such period or any other reason deemed appropriate. Unless the Board shall otherwise direct, the Chief Executive Officer or his delegate shall fix the compensation of all other officers, agents or employees of the Company. Any officer, agent or employee elected or appointed by the Board may be removed at any time, with or without cause, by the affirmative vote of a majority of the Board without prejudice to the rights, if any, under separate agreements between the Company and such person; provided that the initial officers set forth on Schedule D may be removed only with Board Approval (excluding each Management Manager due to conflicts of interest) and Requisite Investor Approval. All other officers, agents and employees shall hold office at the pleasure of the appropriate appointing authority and may be removed at any time, with or without cause, by the authority that appointed such officer, agent or employee or by the Board. Any vacancy occurring in any office of the Company shall be filled by the appropriate appointing authority for such office provided in this Section 5.3.

 

12
 

 

(a) Chief Executive Officer. The Board may appoint a Chief Executive Officer. He or she shall be the chief executive officer of the Company and shall have general executive powers concerning all the operations and business of the Company. The Chief Executive Officer shall have and exercise such further powers and duties as may be conferred upon, or assigned to, him or her by the Board, and he or she may delegate to any other officer such executive and other powers and duties as he or she deems advisable. In the event of the absence or disability of the Chief Executive Officer, the President or any other officer of the Company designated by the Board shall exercise all other powers and authority of the Chief Executive Officer.

 

(b) President. The Board may appoint a President. The President shall have general executive powers, and he or she shall have and exercise such further powers and duties as may be conferred upon, or assigned to, him or her by the Board or the Chief Executive Officer, if any.

 

(c) Senior Officers. The Board may appoint one or more senior officers of the Company, any of whom may be designated as executive, senior, group or administrative vice presidents or given any other descriptive titles. Each senior officer shall have and exercise such powers and duties as may be conferred upon, or assigned to, him or her by the Board or the Chief Executive Officer, if any.

 

(d) Secretary; Assistant Secretaries. The Board shall appoint a Secretary. The Secretary shall act as secretary of all meetings of the Board, and he or she shall keep minutes of all such meetings. He or she shall give such notice of the meetings as is required by this Agreement. He or she shall be the custodian of the minute book and all other general company records. He or she shall be the custodian of the Company seal, if any, and shall have the power to affix and attest the same, and he or she may delegate such power to one or more officers, employees or agents of the Company. He or she shall have and exercise such further powers and duties as may be conferred upon, or assigned to, him or her by the Board or the Chief Executive Officer. The Board or the Chief Executive Officer may appoint one or more Assistant Secretaries who shall assist the Secretary in the performance of his or her duties. At the direction of the Secretary or in the event of his or her absence or disability, an Assistant Secretary shall perform the duties of the Secretary. Each Assistant Secretary shall have and exercise such further powers and duties as may be conferred upon, or assigned to, him or her by the Board, the Chief Executive Officer or the Secretary.

 

(e) Other Officers. The Board, the Chief Executive Officer or the delegate of either of them may appoint or hire such additional officers of the Company, who may be designated as vice presidents, assistant vice presidents, officers, assistant officers, or given any other descriptive titles, and may hire such additional employees as it, he or she may deem necessary or desirable to transact the business of the Company, and the Board, the Chief Executive Officer or such delegate may establish the conditions of employment of any of the persons mentioned above and may fix their compensation and dismiss them. Such persons shall, respectively, have and exercise such powers and duties as pertain to their several offices or as may be conferred upon, or assigned to, them by the appropriate appointing authority.

 

13
 

 

(f) Officers as Agents. The officers, to the extent of their powers set forth in this Agreement or otherwise vested in them by action of the Board not inconsistent with this Agreement, are agents of the Company for the purpose of the Company’s business and the actions of the officers taken in accordance with such powers shall bind the Company.

 

(g) Duties of Officers. Each officer shall have fiduciary duties of loyalty and care analogous to that of officers of business corporations organized under the General Corporation Law of the State of Delaware.

 

Section 5.4 Conversion to Corporation. Notwithstanding anything to the contrary in this Agreement, upon the occurrence of a Conversion Event, the Board shall have the right to direct the Company to become a state law corporation. The Members agree that if the Board directs the Company to become a state law corporation they will take all actions necessary to incorporate the Company under such state law and by such transactions as the Board may determine. The Board agrees to use commercially reasonable efforts to accomplish such conversion in a manner which results in a tax-free event to the Members, or if a tax-free characterization cannot be so accomplished, to accomplish such conversion in a manner which minimizes adverse tax consequences to the Members. In addition, the conversion will be accomplished so as to result in the issuance to the Members of capital stock of the resulting corporation of respective classes and amounts that will replicate the respective economic rights and priorities of the Members, and have terms and conditions not less favorable to the Members as the exchanged Interests.

 

Section 5.5 IPO Conversion. Notwithstanding anything to the contrary in this Agreement, the Series A Members acting with Board Approval and Requisite Investor Approval will have the right to cause the conversion or other reorganization of the Company into a successor entity or the creation, conversion or reorganization of any subsidiary of the Company (in each case, the “IPO Issuer”) and to take other internal restructuring steps as may be necessary to effect an initial public offering that results in common equity securities of the IPO Issuer being listed on the New York Stock Exchange, the Nasdaq Stock Market or another stock market or exchange approved by Board Approval and Requisite Investor Approval (a “Qualified IPO”). If the Company becomes the IPO Issuer in such a restructuring, the Series A Units and Series B Units will be converted into common equity of the IPO Issuer (“IPO Securities”) based on the pre-money initial public offering value of the Company. The allocation of the IPO Securities between the classes of Series A Units and Series B Units will be made as if such IPO Securities were distributed consistent with the provisions of Section 8.1. The value of such IPO Securities will be determined based on the net price received by the Company in the initial public offering.

 

14
 

 

Article VI
COMPANY CAPITAL

 

Section 6.1 Capital Commitments and Initial Capital Contributions.

 

(a) Prior to the date of this Agreement, or in connection with the execution and delivery hereof, the Members have committed to make certain Capital Contributions to the Company (each, such Member’s “Line of Equity”) in the amounts indicated on Schedule A.

 

(b) Prior to the date of this Agreement, or in connection with the execution and delivery hereof, the Members have made or will make certain Capital Contributions to the Company (each, such Member’s “Initial Capital Contribution”) in the amounts indicated on Schedule A.

 

(c) In no event shall any Member’s Line of Equity be increased without the prior written consent of such Member.

 

Section 6.2 Capital Calls.

 

(a) Each Series A Member is obligated to fund capital, pro rata to its respective Line of Equity, pursuant to duly issued Capital Calls until the earlier of: (i) two years from the date hereof (unless the Board, with Requisite Investor Approval and the approval of the Chief Executive Officer (or the President if no Chief Executive Officer has been appointed), sets a later date); (ii) a Qualified IPO; (iii) a Final Exit Event; and (iv) consummation of a Drag-Along Transaction (the “LOE Period”). Subject to Sections 5.1(j), 6.2(b) and 6.2(c), capital will be callable (“Capital Calls”) from the Series A Members from time to time during the LOE Period. Each Member shall fund its pro rata share of the Capital Call within 20 business days from the issuance of a Capital Call.

 

(b) Capital Calls will be recommended by the Chief Executive Officer or, if there is no Chief Executive Officer, the President on an as-needed basis, but such officer shall use good faith efforts to limit Capital Call recommendations to once per quarter. Capital Call recommendations shall be subject to Board Approval and Requisite Investor Approval.

 

(c) Notwithstanding Section 5.1(j), in addition, at any time during the LOE Period the holders of a majority of the Series A Units then outstanding, acting with Requisite Investor Approval, may cause the Company to make a Capital Call without Board Approval.

 

Section 6.3 Failures to Fund Capital Calls.

 

(a) The failure to fund a duly issued Capital Call, which remains uncured after fifteen (15) days’ written notice, shall be considered a default, and any Investor who so fails to fund a Capital Call shall become a “Defaulting Investor.”

 

(b) If a Defaulting Investor fails to fund a Capital Call which would have resulted in such Defaulting Investor’s aggregate Capital Contributions to be less than or equal to such Defaulting Investor’s Line of Equity, then such Defaulting Investor shall be considered in default of its obligations under this Agreement and the Company shall, in addition to any and all remedies available at law or equity, be entitled to reallocate the Defaulting Investor’s Series A Units to the non-defaulting Series A Members in a percentage proportional to the Capital Call not funded by the Defaulting Investor to the total Capital Contributions made to that date by all Series A Members for their Series A Units.

 

15
 

 

Section 6.4 Additional Capital Calls. Subject to Section 5.1(j), the Board may make non-mandatory capital calls (the “Additional Capital Calls”) on the Series A Members anytime during or after the LOE Period in amounts which would result in their aggregate Capital Contributions being greater than their Line of Equity, with such request being made pro rata based upon their respective ownership of Series A Units. In such event, if a Series A Member chooses not to fund such an Additional Capital Call (the “Non-Participating Investor”) then, subject to Board Approval, the participating Series A Members shall be issued additional Series A Units pro rata to their respective Series A Percentage Interests and such Non-Participating Investor shall be subject to a dilution of its Series A Percentage Interest. Such additional issuance and dilution shall be based on a fair market value determination of the Series A Units, determined by the Board with the consent of the Independent Manager. A Non-Participating Investor shall have no obligation to make any requested Additional Capital Calls and, other than dilution as described herein, a Non-Participating Investor will suffer no penalty for electing not to participate in an Additional Capital Call.

 

Section 6.5 Status of Capital Contributions. No Member shall receive any interest, salary or drawing with respect to such Member’s Capital Contributions or Capital Account or otherwise in such Person’s capacity as a Member and no Member shall be entitled to the return of any part of its Capital Contributions, except as otherwise specifically provided in this Agreement with respect to allocations and distributions.

 

Section 6.6 Use of Proceeds. Capital Contributions made and to be made by the Series A Members have been or will be used primarily for (a) G&A (i.e. salaries, benefits, office, telecommunications, organization and set up costs and expenses, travel, accounting, legal); (b) G&G (i.e. seismic acquisition and processing as well as geological analysis and consulting); (c) acquisitions of oil and gas real property interests; (d) oil and gas exploration and other pre-development activity; and (e) oil and gas development.

 

Section 6.7 Additional Equity Interests; Preemptive Rights.

 

(a) Subject to Section 5.1(j), the Company may from time to time issue additional Units having such terms and in exchange for such consideration as the Board determines to be appropriate and in the best interests of the Company. The rights, privileges and obligations of such Units may be set forth in an amendment to this Agreement, as necessary, which amendment shall be effective when Board Approval and Requisite Investor Approval are obtained, notwithstanding Section 17.10.

 

(b) Except for Permitted Issuances, if the Company proposes to issue any Units or other equity interest of the Company, each Series A Member who is an “accredited investor” (as defined in Regulation D of the Securities Act) and not a Defaulting Investor shall have the right to purchase, upon the same terms, such Member’s pro rata share of such additional Units or other equity interest (but not less than that number) based on such Member’s Fully-Funded Percentage Interest. The Company shall give notice (the “Preemptive Rights Offering Notice”) to the Series A Members setting forth the identity of the Person to whom it proposes to issue and the time, which shall not be fewer than twenty (20) days, after which, and the terms and conditions upon which, the Person to whom the proposed issuance is to be made may purchase the remaining Units or other equity interests. Within ten (10) days after the giving of the Preemptive Rights Offering Notice, if any Series A Member wishes to purchase Units or other equity interest, it shall give irrevocable notice of its decision to exercise the option under this Section 6.7(b). If all the Units referred to in the Preemptive Rights Offering Notice are not elected to be purchased or acquired, the Company shall, during the ten (10) day period following the expiration of the period provided in the immediately preceding sentence, offer and sell the remaining unsubscribed portion of such Units to any Series A Member who elected to purchase its entire pro rata share of the Units being offered upon the same terms and at the same price specified in the Preemptive Rights Offering Notice. The closing(s) of any sale under this Section 6.7(b) shall be within sixty (60) days after the expiration of the second ten (10) day period, and the consideration paid for and the other terms upon which the Units or equity interests are sold shall not be more favorable to the prospective transferee(s) than those specified in the Preemptive Rights Offering Notice. If the Company does not enter into an agreement for the sale of the Units or other equity interests within such period, or if such agreement is not consummated within sixty (60) days of the execution thereof, the right provided hereunder shall be deemed to be revived and such Units or other equity interests shall not be offered unless first reoffered to the Series A Members in accordance with this Section 6.7(b).

 

16
 

 

Article VII
CAPITAL ACCOUNTS; ALLOCATIONS

 

Section 7.1 Capital Accounts. An individual capital account shall be established and maintained for each Member (each, a “Capital Account”).

 

(a) The Capital Account of each Member shall be maintained in accordance with the following provisions:

 

(i) To such Member’s Capital Account there shall be credited the amount of Capital Contributions made by such Member to the Company, the amount of liabilities of the Company assumed by such Member or to which property distributed to such Member pursuant to any provision of this Agreement was subject, and Profits allocated to such Member under Section 7.2.

 

(ii) From such Member’s Capital Account there shall be debited the amount of cash and the Gross Asset Value of any Company assets transferred to such Member in a distribution pursuant to any provision of this Agreement, the amount of liabilities of the Member assumed by the Company or to which property contributed by the Member to the Company was subject, and Losses allocated to such Member under Section 7.2.

 

(b) The Capital Accounts of all Members shall be determined and maintained in accordance with the principles of Treasury Regulations Section 1.704-1(b)(2)(iv) at all times throughout the full term of the Company and shall be interpreted in a manner consistent with such Treasury Regulations. Accordingly, the Board is authorized to make any other adjustments to the Capital Accounts so that the Capital Accounts and allocations thereto comply with said Section of the Treasury Regulations; provided that such adjustments do not have a material adverse effect on any Member.

 

17
 

 

Section 7.2 Profits and Losses. Except as provided in Section 7.3 below, the Profits and Losses of the Company for any Fiscal Year (or other period for which Profits and Losses must be computed) shall be allocated to the Members in such manner that the allocations to the Members hereunder are consistent with the economic arrangement regarding distributions set forth in Section 8.1 hereof. Except as otherwise provided in this Agreement, Profits and Losses for any taxable year, or portion thereof, shall be allocated among the Members in a manner such that the Capital Account of each Member, immediately after making such allocation, and after taking into account actual distributions made during such taxable year, or portion thereof, is, as nearly as possible, equal (proportionately) to (i) the distributions that would be made to the Members pursuant to Section 14.2(c)(iii) after taking into account the agreement related to Retained Amounts and the Overall Preference set forth in Section 3.3(f)(i) if the Company were dissolved, its affairs wound up and its assets sold for cash equal to their Gross Asset Value, all Company liabilities were satisfied and the net assets of the Company were distributed to the Members in accordance with Section 14.2(c)(iii) after taking into account the agreement related to Retained Amounts and the Overall Preference set forth in Section 3.3(f)(i) immediately after making such allocation, minus (ii) such Member’s share of “partnership minimum gain” (as defined in Treasury Regulations Sections 1.704-2(b)(2) and 1.704-2(d)) and “partner nonrecourse debt minimum gain” (as defined in Treasury Regulation Section 1.704-2(i)(2)), computed immediately prior to the hypothetical sale of assets.

 

Section 7.3 Special Allocation Provisions.

 

(a) Regulatory Allocations.

 

(i) Notwithstanding any other provision hereof, no loss or deduction shall be allocated to a Member’s Capital Account if and to the extent allocation thereof would create or increase a deficit balance in such account (reduced for adjustments, allocations, and distributions described in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5), and (6)), and any such loss or deduction shall be allocated instead to the other Members’ Capital Accounts to the extent of and in proportion to the respective positive balances in such accounts. If any Member unexpectedly receives any adjustment, allocation, or distribution referred to above that creates or increases a deficit balance in such Member’s Capital Account or such account otherwise has a deficit balance, items of income and gain will be allocated to such Member in an amount and manner sufficient to eliminate such deficit balance as quickly as possible. This paragraph is intended to constitute a “qualified income offset” as defined in Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistent with that section.

 

(ii) The Treasury Regulations promulgated under Code Section 704(b) relating to the minimum gain chargeback, minimum gain chargeback with respect to partner nonrecourse debt, allocation of nonrecourse deductions and the allocation of items of deduction, loss or expenditure relating to partner nonrecourse debt are hereby incorporated herein by this reference and shall be applied to the allocation of Company items of income, gain, loss or deduction in the manner provided in such Treasury Regulations. However, the Members do not intend that the “obligation to restore deficit” described in Treasury Regulations Section 1.704-1(b)(2)(ii)(c) or any successor provision thereto be incorporated into this Agreement.

 

18
 

 

(b) Curative Allocations. If Profits or Losses or any items thereof are allocated to one or more Members pursuant to Section 7.3, subsequent allocations thereof will first be made to the Members (subject to Section 7.3) in a manner designed to result in each Member having a Capital Account balance equal to what it would have been had the original allocation pursuant to Section 7.3 not occurred.

 

(c) Tax Allocations; Section 704(c) Allocation.

 

(i) Except as otherwise provided in this Section 7.3(c), each item of income, gain, loss, deduction and credit shall be allocated among the Members in the same manner for U.S. federal income tax purposes as the correlative item of book income, gain, loss, deduction and credit is allocated pursuant to Section 7.2 and Section 7.3(a) and (b) above.

 

(ii) Any item of Company income gain, loss, deduction or credit attributable to property contributed to the Company, solely for tax purposes, shall be allocated among the Members in accordance with the principles set forth in Code Section 704(c) and the Treasury Regulations promulgated thereunder so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its fair market value at the time such property was contributed to the Company.

 

(iii) In the event the Gross Asset Value of any Company asset is adjusted (pursuant to the definition of Gross Asset Value hereof), subsequent allocations of income, gain, loss, deduction and credit with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Treasury Regulations promulgated thereunder as in effect at that time such Gross Asset Value is adjusted.

 

(iv) Any elections or other decisions relating to allocations pursuant to this Section 7.3 shall be made by the Board in any manner that reasonably reflects the purpose and intention of this Agreement.

 

Section 7.4 Allocation Rules.

 

(a) In the event there is a change in the respective Percentage Interests of Members during the year, the Profits (or Losses) allocated to the Members for each Fiscal Year during which there is a change in the respective Percentage Interests of Members during the year shall be allocated among the Members in proportion to the Percentage Interests during such Fiscal Year in accordance with Code Section 706, using any convention permitted by law and selected by the Board.

 

(b) For purposes of determining the Profits, Losses or any other items allocable to any period, Profits, Losses and any such other items shall be determined on a daily, monthly or other basis, as determined by the Board using any method that is permissible under Code Section 706 and the Treasury Regulations thereunder.

 

(c) Except as otherwise provided in this Agreement, all items of Company income, gain, loss, deduction, credit and any other allocations not otherwise provided for shall be divided among the Members in the same proportions as they share Profits and Losses for the Fiscal Year in question.

 

19
 

 

(d) The Members are aware of the income tax consequences of the allocations made by this Article VII and hereby agree to be bound by the provisions of this Article VII in reporting their shares of Company income, gain, loss, deduction and credit for income tax purposes.

 

Article VIII
DISTRIBUTIONS

 

Section 8.1 Distributions of Available Cash.

 

(a) Prior to dissolution and liquidation of the Company in accordance with Article XIV and subject to applicable law and any limitations contained elsewhere in this Agreement, the Board shall cause the Company to distribute Available Cash at such times and in such amounts as it may determine. The amounts available for distribution will be distributed to the Members as set forth below; provided that any such distribution shall take into account any amount distributed to a Member pursuant to Section 8.2 during the same taxable year.

 

(i) first, to the Series A Members, pro rata according to their Series A Percentage Interests, until each Series A Member’s Preference Amount is reduced to zero pursuant to this Section 8.1(a)(i) ;

 

(ii) second, until such time as the Tier I Threshold has been achieved, 85% to the Series A Members, pro rata according to their Series A Percentage Interests, and 15% the Series B Members, pro rata according to their Series B Percentage Interests; and

 

(iii) third, after the Tier I Threshold has been achieved, 80% to the Series A Members, pro rata according to their Series A Percentage Interests, and 20% the Series B Members, pro rata according to their Series B Percentage Interests.

 

(b) The percentage allocable to Series B Members in Section 8.1(a)(ii) and (iii) shall be appropriately reduced (and the percentage allocable to holders of Series A Units increased) to reflect any repurchases by the Company of Series B Units (based on dollar amounts paid to Series B Members to repurchase Series B Units).

 

(c) All amounts required to be withheld pursuant to the Code or any other provision of federal, state, or local tax law shall be treated as amounts actually distributed to the affected Members for all purposes under this Agreement.

 

Section 8.2 Mandatory Tax Distribution. The Company shall make quarterly distributions of Available Cash in amounts such that, prior to April 15 of each calendar year, each Member has received distributions in aggregate amounts (for the current Fiscal Year and all prior Fiscal Years) which equal not less than the sum for the immediately preceding Fiscal Year and for all prior Fiscal Years of (a) the amount of Profits allocated to such Member for such Fiscal Years, reduced by the amount of Losses allocated to such Member for such Fiscal Years, multiplied by (b) 40%. The Company shall use its commercially reasonable efforts to cause such distributions to be made in a manner which permits such Member to use the proceeds of such distributions to make on a timely basis all required estimated payments of income taxes in respect of the Profits so allocated to such Member.

 

20
 

 

Section 8.3 Incorrect Distributions. To the extent distributions pursuant to this Article VIII were incorrectly made, as determined by the financial records of the Company, the recipients shall promptly repay all incorrect payments and, to the extent the recipients do not repay all incorrect payments, the Company shall have the right to set off any current or future sums owing to such recipients against any such incorrectly paid amount.

 

Section 8.4 Limitation on Distributions.

 

(a) No distribution shall be made to a Member pursuant to this Article VIII to the extent that such distribution would: (i) cause the Company to be insolvent, or (ii) render the Member liable for a return of such distribution under applicable law.

 

(b) All such distributions shall be made only to the Persons who, according to the books and records of the Company, are Members on the actual date of distribution. Neither the Company nor any Manager shall incur any liability for making distributions in accordance with this Article VIII.

 

Section 8.5 Offset. Any distribution otherwise payable to a Member may be withheld and offset against any amounts owed by such Member to the Company and applied or paid against the amounts so owed. Any such offset amounts will be deemed to have been distributed to such Member.

 

Section 8.6 Withholding Taxes. If the Company is required to withhold any portion of distributions or allocations to a Member by applicable U.S. federal, state, local and foreign tax laws, the Company may withhold such amounts and make such payments to taxing authorities as are necessary to ensure compliance with such tax laws. If the Company makes any payment to a taxing authority in respect of a Member hereunder that is not withheld from actual distributions to the Member, then the Board may, at its option, (a) require the Member to reimburse the Company for such withholding; or (b) reduce any subsequent distributions to such Member by the amount of such withholding. The obligation of a Member to reimburse the Company for taxes that were required to be withheld shall continue after such Member Transfers its Units. Each Member agrees to furnish the Company with any representations and forms as shall reasonably be requested by the Company to assist it in determining the extent of, and in fulfilling, any withholding obligations it may have.

 

Section 8.7 Distributions in Kind. A Member shall have no right to demand and receive any distribution from the Company in any form other than money. Except as otherwise provided in this Agreement, each Member actually receiving amounts pursuant to a specific distribution by the Company shall receive a pro rata share of each item of cash or property of which such distribution is constituted (based upon such Member’s share under this Agreement of the total amount to be included in such distribution); provided, however, that the Board may vary the apportionment among the Members of an in-kind distribution as necessary to avoid the distribution of fractional interests in securities or other property. Securities or other property distributed pursuant to this Section 8.7 shall be subject to such conditions and restrictions as shall be determined by the Board to be required or appropriate under applicable law or contractual obligations to which the Company is subject. The Company shall not, under any provision of this Agreement, distribute notes or other securities in violation of any securities or other law. The sale of the Identified Spyglass Assets to Petro River pursuant to Section 8.1(b) shall not be treated as distributions in kind pursuant to this Section 8.7 or under any other provision of this Agreement.

 

21
 

 

Article IX
RECORDS AND REPORTS

 

Section 9.1 Books and Records. The Company shall keep or cause to be kept complete and accurate books of account and records with respect to the Company’s business. Each Member and its duly authorized representatives shall have the right to examine the Company books, records and documents during normal business hours in a manner determined by the Chief Executive Officer not to unreasonably interfere with the business of the Company or the work of its employees; provided, that the Company, at the discretion of the Board or the Chief Executive Officer, may keep confidential from the Members, for such period of time as the Board or the Chief Executive Officer deems reasonable, any information which the Board or the Chief Executive Officer reasonably believes to be in the nature of trade secrets or which the Company is required by law or agreement with a third party to keep confidential.

 

Section 9.2 Fiscal Year, Fiscal Quarter. The “Fiscal Year” of the Company shall be the calendar year, and each calendar quarter shall be a fiscal quarter, unless otherwise determined by the Board.

 

Section 9.3 Minutes. The proceedings of all meetings of the Members, the Board and any committee of the Board shall be recorded in the appropriate minute books provided for this purpose. The minutes of each meeting shall be signed by the Secretary or other person acting as secretary of the meeting.

 

Section 9.4 Reports to Members.

 

(a) The Company shall provide to Petro River, Pearsonia West LLC, Ranger Station LLC, and each holder of at least 5% of the then outstanding Series A Units, excluding any Defaulting Investors:

 

(i) consolidated annual financial statements (including an income statement, balance sheet, cash flow statement and statement of members’ equity, with comparisons to the Company’s budget) prepared in accordance with GAAP by an accounting firm acceptable to the Board within 90 days of year-end or such later date agreed to by Requisite Investor Approval;

 

(ii) consolidated quarterly financial statements (including an income statement, balance sheet, cash flow statement and statement of members’ equity, with comparisons to the Company’s budget) prepared in accordance with GAAP within 45 days of quarter-end;

 

22
 

 

(iii) upon request by the Board, consolidated monthly financial statements (including an income statement, balance sheet, cash flow statement and statement of members’ equity, with comparisons to the Company’s budget) prepared in accordance with GAAP within 30 days of month-end;

 

(iv) consolidated annual monthly budget no later than 30 days prior to the beginning of the Company’s fiscal year; and

 

(v) customary notices of any material Company events (e.g., litigation).

 

(b) Concurrently with the preparation of tax returns, the Company shall deliver to each Member and, to the extent necessary, each former Member, a report setting forth in sufficient detail and in a form prescribed by applicable tax laws such information relating to the Company and its activities as shall enable such Member or former Member to prepare its federal, state, and local income tax returns in accordance with the laws, rules, and regulations then prevailing.

 

(c) Except as required by applicable law, Members shall not be entitled to receive any information about the Company other as set forth in this Section 9.4.

 

Article X
TAX MATTERS

 

Section 10.1 Tax Matters.

 

(a) The “Tax Matters Partner” of the Company for purposes of Section 6231(a)(7) of the Code shall have the power to manage and control, on behalf of the Company, any administrative proceeding at the Company level with the IRS or any other taxing authority relating to the determination of any item of Company income, gain, loss, deduction or credit for United States federal, state, local or foreign income or franchise tax purposes. The Tax Matters Partner shall take such action as may be reasonably necessary to constitute each other Member a “notice partner” within the meaning of Section 6231(a)(8) of the Code. The Tax Matters Partner shall cause to be prepared for each taxable year of the Company the federal, state and local tax returns and information returns, if any, which the Company is required to file. Where the Members are required to file federal, state or local income tax returns by reason of their interest in the Company, the Tax Matters Partner shall cause them to be furnished with the relevant returns filed by the Company. The Tax Matters Partner shall notify each other Member of all material tax matters related to the Company that come to its attention in its capacity as Tax Matters Partner. The Tax Matters Partner shall be designated by the Board and such person shall serve for so long as he/she qualifies to serve as such under the Code or until such time that the Board decides to terminate the existing Tax Matters Partner from such role and appoint another Tax Matters Partner. If a Tax Matters Partner ever ceases to so qualify, the Board shall appoint a Member that does so qualify to serve as the Tax Matters Partner. The Tax Matters Partner shall not have the authority to bind any of the Members, including with respect to any extension of any statute of limitations.

 

23
 

 

(b) The Tax Matters Partner shall, within ten (10) days of the receipt of any notice from the IRS or any state, local or foreign tax authority in any administrative proceeding at the Company level relating to the determination of any Company item of income, gain, loss, deduction or credit, mail a copy of such notice to each Member.

 

(c) The initial Tax Matters Partner shall be Petro River.

 

Section 10.2 Tax Elections. The Tax Matters Partner shall cause the Company to make any election required or permitted to be made for income tax purposes (including a timely election under § 754 of the Code to adjust the basis of the Company property as described in §§ 734 and 743 of the Code) if the Board determines in its judgment, that such election is in the best interests of the Company and directs the Tax Matters Partner to make such election.

 

Section 10.3 Taxation as Partnership. Except upon the occurrence of a Conversion Event, the Company shall be treated as a partnership for United States federal, state, local and foreign tax purposes and will make any necessary elections to achieve such status.

 

Article XI
LIMITED LIABILITY AND INDEMNIFICATION

 

Section 11.1 Limited Liability. Except as otherwise provided by the LLC Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Covered Person or Member shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Covered Person or Member.

 

Section 11.2 Indemnification. To the fullest extent permitted by applicable law, the Company shall indemnify and hold harmless any Covered Person, and shall have authority to indemnify and hold harmless any other Person, or the estate of any such Covered Person or other Person, from and against any and all claims and demands whatsoever arising in the course of such Covered Person’s or other Person’s actions on behalf of the Company, or such Covered Person or other Person’s status in relation to the Company; provided, however, that no indemnification may be made to or on behalf of any Covered Person or other Person if a judgment or other final adjudication adverse to such Covered Person or other Person establishes: (a) that his or her acts were committed in bad faith or were the result of deliberate dishonesty and were material to the cause of action so adjudicated, or (b) that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled. Neither the amendment nor repeal of this Section 11.2 shall eliminate or reduce the effect of this Section 11.2 in respect to any matter occurring, or any cause of action suit or claim accruing or arising, prior to such amendment or repeal. This Section 11.2 shall also be applicable to any Covered Person or other Person that is not a natural person. Any indemnity under this Section 11.2 shall be provided out of and to the extent of Company assets only, and no Member shall have any personal liability on account hereof.

 

Section 11.3 Expenses. To the fullest extent permitted by applicable law, the Company shall reimburse reasonable expenses (including reasonable legal fees) incurred by a Covered Person (and shall be authorized to reimburse such expenses of any other Person entitled to indemnification under Section 11.2) in defending any claim, demand, action, suit or proceeding prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of the Covered Person to repay such amount if it shall be determined that the Covered Person is not entitled to be indemnified as authorized in Section 11.2.

 

Section 11.4 Insurance. The Company may purchase and maintain insurance, to the extent and in such amounts as the Board shall deem reasonable or appropriate, on behalf of Covered Persons and such other Persons as the Board shall determine, against any liability that may be asserted against or expenses that may be incurred by any such Person in connection with the activities of the Company or such indemnities, regardless of whether the Company would have the power to indemnify such Person against such liability under the provisions of this Agreement.

 

24
 

 

Article XII
RESTRICTIONS ON TRANSFERS; PURCHASE RIGHTS

 

Section 12.1 Transfers Generally; Reasonableness of Restrictions.

 

(a) Notwithstanding anything to the contrary contained herein, no Member other than Petro River may Transfer any Units pursuant to this Article XII without prior Board Approval and Requisite Investor Approval; provided that, subject to Section 12.1(b), any Member may Transfer its Units to the following without Board Approval and Requisite Investor Approval and without compliance with Section 12.3:

 

(i) such Member’s spouse, parent, siblings, descendants (including adoptive relationships and stepchildren) and the spouses of each such natural persons (collectively, “Family Members”);

 

(ii) a trust under which the distribution of Units may be made only to such Member and/or any Family Member of such Member;

 

(iii) a charitable remainder trust, the income from which will be paid to such Member during his life;

 

(iv) a corporation, partnership or limited liability company, the stockholders, partners or members of which are only such Member and/or Family Members of such Member,

 

(v) by will or by the laws of intestate succession, to such Member’s executors, administrators, testamentary trustees, legatees or beneficiaries; or

 

(vi) to any Person in connection with a Drag-Along Transaction, Final Exit Event, Tag-Along Transaction; a Qualified IPO otherwise in accordance with the provisions of this Agreement.

 

(b) To be valid, any Transfer of Units or interest therein must satisfy the following conditions:

 

25
 

 

(i) the Transfer must be in compliance with the terms of this Agreement;

 

(ii) the transferor must deliver to the Company written evidence of a valid Transfer under the terms of this Agreement and a written agreement of the transferee (other than an existing Member) to join and be bound by the terms of this Agreement;

 

(iii) the Transfer must comply with applicable federal and state securities laws; and

 

(iv) if the Transfer is the kind described in Section 12.1(a)(i) through (v), the transferring Member shall agree to remain bound by Section 15.1.

 

(c) In the event any Series A Member (the “LOE Transferor”) with a Line of Equity that has not been fully satisfied shall transfer all or any portion of its Series A Units, (i) the transferee of such Series A Units (the “LOE Transferee”) shall assume responsibility for any portion of the remaining Line of Equity attached to the transferred Units (the “LOE Units”), (ii) the LOE Transferor’s Line of Equity shall be proportionally reduced, and (iii) the LOE Transferee shall be deemed to have a Line of Equity in the amount so assumed; provided, however, that such reduction shall not be deemed a release of the LOE Transferor’s obligations relating to such Line of Equity. If an LOE Transferee then fails to fund any Capital Call relating to the LOE Units, the LOE Transferor shall be responsible for payment of the defaulted amounts (the “LOE Transfer Payment”). In such event, and only if the LOE Transferor makes the LOE Transfer Payment, the LOE Transferor shall be entitled to recapture the LOE Units from the LOE Transferee, and the LOE Transferor’s Line of Equity shall be proportionally increased. In connection therewith, the Company shall reallocate the LOE Units to the LOE Transferor in a percentage proportional to such LOE Transferee’s unfunded Capital Call and the LOE Transferor’s increased Line of Equity. In the event the LOE Transferor does not make the LOE Transfer Payment as required, the LOE Transferor shall become a Defaulting Investor for purposes of Section 6.3.

 

(d) Each Member hereby acknowledges the reasonableness of the restrictions in this Article XII in view of the purposes of the Company and the relationship of the Members. The Transfer of any Units in violation of the prohibition contained in this Article XII shall be deemed invalid, null and void, and of no force or effect. Any Person to whom Units are attempted to be Transferred in violation of this Article XII shall not be entitled to become a Member, to vote on matters coming before the Members, participate in the management of the Company, act as an agent of the Company, receive distributions from the Company, or have any other rights in or with respect to the Units.

 

Section 12.2 Effect of Transfer; Admission as a Member. Upon the Transfer of any Units in accordance with the terms of this Agreement, the transferee of the Units (the “Permitted Transferee”) shall become a Member. Any Member who shall have Transferred all of his/her/its Units shall automatically cease to be a Member.

 

26
 

 

Section 12.3 Other Voluntary Transfers; Right of First Refusal.

 

(a) If at any time a Member (an “Offering Member”) desires to voluntarily Transfer all or any portion of such Member’s Units (the “Offered Units”) to a Third Party Transferee (excluding a Transfer permitted by Section 12.1(a)(i) through (vi)), the Offering Member shall deliver to each Series A Member a written notice (the “Offer Notice”) specifying all of the material terms of the proposed sale (the “Offer”), including the purchase price (the “Unit Purchase Price”) for which the Offering Member proposes to sell the Offered Units, the identity of the proposed Third Party Transferee, and any copies of any agreement or documents to be executed or delivered in connection with the proposed sale, if available at that time.

 

(b) Each Series A Member shall have thirty (30) days from the date the Offer Notice is given in which to notify the Offering Member whether it elects to purchase all of its pro rata share of the Offered Units upon the terms and conditions contained in the Offer Notice; provided, that no Series A Member shall be required to pay consideration other than cash and if the Offer Notice provides for non-cash consideration, each Series A Member shall have the option to pay cash equal to the fair market value of the non-cash consideration set forth in the Offer Notice. If any Series A Member elects to purchase, such election shall be irrevocable and the closing, including payment in full, shall occur not later than thirty (30) days after the election notice is given at the Company’s principal office or at a place otherwise agreed upon by the parties to the transaction.

 

(c) After the completion of the procedures in Section 12.3(a) and (b), if the Series A Members do not elect to purchase, in the aggregate, all of the Offered Units within the 30-day period described in Section 12.3(b), the Offering Member shall have the right during the ensuing 60-day period to sell to a Third Party Transferee, on terms no more favorable to the Third Party Transferee than the terms set forth in the Offer Notice, the remaining Offered Units. If the proposed sale is not completed within the ensuing 60-day period prescribed in this Section 12.3(c), the Offering Member shall be required, before Transferring the Offered Units, to re-offer the Units or interests to Petro River as set forth in Section 12.3(a) and (b).

 

(d) Upon consummation of any sale by an Offering Member to a Third Party Transferee as permitted by this Section 12.3, the Offering Member shall promptly notify the Company as to the circumstances, including the date of the sale and the Unit Purchase Price, of such sale.

 

Section 12.4 Drag-Along Transaction(a) . Series A Members holding a majority of the Series A Units, acting with Requisite Investor Approval, shall have the right to effect a sale of the Company by merger, consolidation, sale of all or substantially all of the assets or Company interests without the approval of other holders of Units (such transaction, a “Drag-Along Transaction”). The Company shall send a notice to each Member setting forth the terms and conditions of any Drag-Along Transaction and each Member hereby agrees that it shall sell all of its respective Units to such transferee on the terms and conditions set forth in the notice of the Drag-Along Transaction, and such other terms as are customary for similar transactions, including representations and warranties with respect to title to the Units, free and clear of Liens, and other matters and indemnification with respect thereto. Proceeds from a Drag-Along Transaction may include proceeds that are subject to earn-outs or similar arrangements and shall be distributed consistent with Section 8.1(a), treating all unvested Series B Units as vested and distributing all retained amounts as if the Drag-Along Transaction was a Liquidation Event.

 

27
 

 

Section 12.5 Tag-Along Transaction. If any Series A Member or Series A Members holding, individually or in the aggregate, a majority of the then issued and outstanding Series A Units, desires or desire to Transfer any of its or their Series A Units to a Third Party Transferee, then the other Series A Members shall have the option exercisable by written notice given to the transferor and the transferee to include in the sale certain of its Series A Units in place of the Series A Units held by the transferor that would otherwise be sold to the transferee (such transaction, a “Tag-Along Transaction”). Any Series A Member who exercises this option shall have the right to include its Series A Units on a proportionate basis based on such Series A Member’s relative Fully-Funded Percentage Interest.

 

Article XIII
REPRESENTATIONS AND WARRANTIES

 

Section 13.1 Representations and Warranties of the Members. Each Member represents and warrants to the Company and to each other Member as follows:

 

(a) Such Member is an “accredited investor” as defined in Regulation D of the Securities Act.

 

(b) Such Member has been provided an opportunity to ask questions regarding this investment of, and receive answers from, representatives of the Company. Such Member has made its own decision to invest in the Company and has not relied on any advice regarding its decision from the Company, or any Officer or other representative of the Company. Such Member acknowledges that it has not considered any estimates, projections, or other forward-looking statements as to the future performance or results of operations of the Company that have been provided to it as facts, that it is not relying upon them as guarantees of future performance or results of operations of the Company, and that the Company’s actual results may differ materially from any such estimates, projections, and forward-looking statements.

 

(c) Such Member has such knowledge and experience in financial affairs that it is capable of evaluating the merits and risks of investing in the Company. Such Member’s financial position is such that it can afford the economic risk of holding its interest in the Company for an indefinite period of time, and it can afford to suffer the complete loss of its investment.

 

(d) Such Member is acquiring an interest in the Company for its own account and not with a view to or for distribution or resale to any other Person. Such Member acknowledges that the offer and sale of an interest in the Company to it has not been registered under the Securities Act or any state securities law, and it cannot resell its Units unless the sale is registered under the Securities Act and applicable state law or an exemption from registration is available.

 

Section 13.2 Representations and Warranties of the Company. The Company represents and warrants to each Member as follows:

 

(a) The Company is a limited liability company validly existing and in good standing under the laws of the State of Delaware.

 

(b) There is no legal proceeding pending or, to the knowledge of the Company, threatened, against or involving the Company or any of its assets, and there is no outstanding judgment, decree, injunction, or order of any governmental authority applicable to the Company.

 

28
 

 

Article XIV
TERMINATION AND LIQUIDATION OF THE COMPANY

 

Section 14.1 Events of Termination. The Company shall be dissolved and its affairs wound up pursuant to Section 14.2 upon the first to occur of any of the following (each, an “Event of Termination”):

 

(a) the unanimous vote or written consent of the Board;

 

(b) the sale or other disposition of substantially all of the assets of the Company; or

 

(c) the entry of a decree of dissolution pursuant to Section 18-802 of the LLC Act.

 

Section 14.2 Winding-Up. Upon the occurrence of an Event of Termination, the Company affairs shall be wound up as follows:

 

(a) The Board shall cause to be prepared a statement of the assets and liabilities of the Company as of the date of dissolution.

 

(b) The assets and properties of the Company shall be liquidated as promptly as possible, and receivables collected, all in an orderly and business-like manner so as not to involve undue sacrifice.

 

(c) The proceeds of liquidation and all other assets and properties of the Company shall be applied and distributed as follows in the following order of priority:

 

(i) first, to the payment of the debts and liabilities of the Company and the expenses of liquidation;

 

(ii) second, to establish any reserves as the Board, in accordance with sound business judgment, deem reasonably necessary for any contingent or unforeseen liabilities or obligations of the Company, which reserves may be paid over to an escrow agent selected by it to be held by such agent for the purpose of (A) distributing such reserves in payment of the aforementioned contingencies and (B) upon the expiration of such period as the Board may deem advisable, distributing the balance thereof in the manner provided in this Section 14.2(c); and

 

(iii) third, to the Members in accordance with Section 8.1(a).

 

(d) Nothing contained in this Section 14.2 shall be construed to limit the ability of the Members to attempt to sell the Company’s business and assets as a going concern following the occurrence of an Event of Termination; provided that the proceeds of such sale shall be applied and distributed as provided in Section 14.2(c); and provided, further, that if such a sale cannot be effected within six (6) months after the occurrence of an Event of Termination (or such longer or shorter period as the Members may agree) then the Board shall promptly proceed to wind-up the affairs of the Company as provided above in this Section 14.2.

 

29
 

 

(e) Upon the winding-up of the Company, the Members shall look solely to the assets of the Company for the return of their Capital Contributions.

 

Article XV
COVENANTS

 

Section 15.1 Confidentiality. Each Member agrees, as set forth below, with respect to any information pertaining to the Company or its business or Affiliates that is provided to such Member pursuant to this Agreement or otherwise (collectively, “Confidential Matters”), to treat as confidential all such information, together with any analyses, studies or other documents or records prepared by such Member, its Affiliates, or any representative or other Person acting on behalf of such Member (collectively, its “Authorized Representatives”), which contain or otherwise reflect or are generated from Confidential Matters, and will not, and will not permit any of its Authorized Representatives to, disclose any Confidential Matter, provided that any Member (or its Authorized Representative) may disclose any such information: (a) as has become generally available to the public; (b) as may be required or appropriate in any report, statement or testimony submitted to any governmental authority having or claiming to have jurisdiction over such Member (or its Authorized Representative) but only that portion of the data and information which, in the written opinion of counsel for such Member or Authorized Representative is required or would be required to be furnished to avoid liability for contempt or the imposition of any other material judicial or governmental penalty or censure; (c) as may be required or appropriate in response to any summons or subpoena or in connection with any litigation; or (d) as to which the Board has consented in writing. Notwithstanding the foregoing, the parties (and each employee, representative, or other agent of the parties) may disclose to any and all persons, without limitation of any kind, the tax treatment and any facts that may be relevant to the tax structure of the transaction, provided, however, that no party (and no employee, representative, or other agent thereof) shall disclose any other information that is not relevant to understanding the tax treatment and tax structure of the transaction (including the identity of any party and any information that could lead another to determine the identity of any party), or any other information to the extent that such disclosure could reasonably result in a violation of any applicable securities law.

 

Section 15.2 Other Petro River Interests.

 

(a) Other than as set forth in Section 15.2(b), Petro River may engage in other businesses, including businesses the nature of which are the same as, similar to or competitive with the business of the Company, without any duty or obligation to offer any business opportunity to the Company or any Member or to account to the Company or any of the Members regarding the business opportunity or the profits derived from the business opportunity.

 

30
 

 

(b) Petro River agrees, and shall make commercially reasonable best efforts to cause its board members, officers, and Affiliates in the Pearsonia concession in Osage County, Oklahoma (collectively, the “Business Affiliates”), to first offer any business opportunity related to the exploration and production business in Osage County, Oklahoma, to the Company; provided that, with Board Approval and the consent of the Independent Manager, Petro River and/or any Business Affiliate may subsequently pursue such opportunity without any further duty or obligation to offer any business opportunity to the Company or any Member or to account to the Company or any of the Members regarding the business opportunity or the profits derived from the business opportunity.

 

Article XVI
REGISTRATION RIGHTS

 

Section 16.1 Demand Registration.

 

(a) Form S-1 Demand. If the Company receives a request from Petro River that the Company file a Form S-1 registration statement with respect to at least twenty percent (20%) of the Series A Units, then the Company shall (x) within ten (10) days after the date such request is given, give notice thereof (the “Demand Notice”) to all Series A Members other than Petro River; and (y) as soon as practicable, and in any event within sixty (60) days after the date such request is given by Petro River, file a Form S-1 registration statement under the Securities Act covering all Series A Units that Petro River requested to be registered and any additional Series A Units requested to be included in such registration by any other Series A Members (the “Requested Securities”), as specified by notice given by each such Series A Member to the Company within twenty (20) days of the date the Demand Notice is given, and in each case, subject to the limitations of Sections 16.1(c), 16.1(d) and 16.3.

 

(b) Form S-3 Demand. If at any time when it is eligible to use a Form S-3 registration statement, the Company receives a request from Petro River that the Company file a Form S-3 registration statement with respect to outstanding Series A Units having an anticipated aggregate offering price, net of Selling Expenses, of at least $1,000,000, then the Company shall (i) within ten (10) days after the date such request is given, give a Demand Notice to all Series A Members other than Petro River; and (ii) as soon as practicable, and in any event within forty-five (45) days after the date such request is given by Petro River, file a Form S-3 registration statement under the Securities Act covering all Series A Units requested to be included in such registration by any other Series A Members, as specified by notice given by each such Series A Member to the Company within twenty (20) days of the date the Demand Notice is given, and in each case, subject to the limitations of Sections 16.1(c), 16.1(d) and 16.3.

 

(c) Notwithstanding the foregoing obligations, if the Company furnishes to Series A Members requesting a registration pursuant to this Section 16.1 a certificate signed by the Chief Executive Officer or President stating that, in the good faith judgment of the Board, it would be materially detrimental to the Company and its Members for such registration statement to either become effective or remain effective for as long as such registration statement otherwise would be required to remain effective because such action would (i) materially interfere with a significant acquisition, corporate reorganization, or other similar transaction involving the Company, (ii) require premature disclosure of material information that the Company has a bona fide business purpose for preserving as confidential, or (iii) render the Company unable to comply with requirements under the Securities Act or Exchange Act, then the Company shall have the right to defer taking action with respect to such filing for a period of not more than sixty (60) days after the request of Petro River is given; provided, however, that the Company may not invoke this right more than once in any twelve (12) month period; and provided further that the Company shall not register any securities for its own account or that of any other Member during such sixty (60) day period other than pursuant to an Excluded Registration.

 

31
 

 

(d) The Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to Section 16.1(a): (i) during the period beginning thirty (30) days before the Company’s good faith estimate of the date of filing of, and ending on a date that is ninety (90) days after the effective date of, a Company-initiated registration, provided that the Company is actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective; (ii) after the Company has effected one registration pursuant to Section 16.1(a); or (iii) if Petro River proposes to dispose of Series A Units that may be immediately registered on Form S-3 pursuant to a request made pursuant to Section 16.1(b). The Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to Section 16.1(b): (i) during the period beginning thirty (30) days before the Company’s good faith estimate of the date of filing of, and ending on a date that is ninety (90) days after the effective date of, a Company-initiated registration, provided that the Company is actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective; or (ii) if the Company has effected two registrations pursuant to Section 16.1(b) within the twelve (12) month period immediately preceding the date of such request. A registration shall not be counted as “effected” for purposes of this Section 16.1(d) until such time as the applicable registration statement has been declared effective by the SEC, unless Petro River withdraws its request for such registration and elects not to pay the registration expenses therefor, in which case such withdrawn registration statement shall be counted as “effected” for purposes of this Section 16.1(d).

 

Section 16.2 Company Registration. If the Company proposes to register (including, for this purpose, a registration effected by the Company for Members other than the Series A Members, and including any so-called “universal shelf” registration statement) any of its securities under the Securities Act in connection with the potential public offering of such securities solely for cash (other than in an Excluded Registration), the Company shall, at such time, promptly give each Series A Member notice of such registration. Upon the request of each Series A Member given within twenty (20) days after such notice is given by the Company, the Company shall, subject to the provisions of Section 16.3, cause to be registered all of the Series A Units that each such Series A Member has requested to be included in such registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 16.2 before the effective date of such registration, whether or not any Series A Member has elected to include Series A Units in such registration. The expenses (other than Selling Expenses) of such withdrawn registration shall be borne by the Company in accordance with Section 16.5.

 

32
 

 

Section 16.3 Underwriting Requirements.

 

(a) If, pursuant to Section 16.1, Petro River intends to distribute the Series A Units covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to 16.1, and the Company shall include such information in the Demand Notice. The underwriter(s) will be selected by the Company and shall be reasonably acceptable to Petro River. In such event, the right of any Series A Member to include such Series A Member’s Series A Units in such registration shall be conditioned upon such Series A Member’s participation in such underwriting and the inclusion of such Series A Member’s Series A Units in the underwriting to the extent provided herein. All Series A Members proposing to distribute their securities through such underwriting shall (together with the Company as provided in Section 16.4) enter into an underwriting agreement in customary form with the underwriter(s) selected for such underwriting. Notwithstanding any other provision of this Section 16.3, if the managing underwriters advise Petro River in writing that marketing factors require a limitation on the number of shares to be underwritten, then Petro River shall so advise all Series A Members that otherwise would be underwritten pursuant hereto, and the number of Series A Units that may be included in the underwriting shall be allocated among such Series A Members, including Petro River, in proportion (as nearly as practicable) to the number of Series A Units owned by each Series A Member or in such other proportion as shall mutually be agreed to by all such selling Series A Members; provided, however, that the number of Series A Units to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting.

 

(b) In connection with any underwritten offering pursuant to Section 16.2, the Company shall not be required to include any of the Series A Members’ Series A Units in such underwriting unless the Series A Members accept the terms of the underwriting as agreed upon between the Company and its underwriters, and then only in such quantity as the underwriters in their sole discretion determine will not jeopardize the success of the offering by the Company. If the total number of securities, including Series A Units, requested by Members to be included in such offering exceeds the number of securities to be sold (other than by the Company) that the underwriters in their reasonable discretion determine is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Series A Units, which the underwriters and the Company in their sole discretion determine will not jeopardize the success of the offering. If the underwriters determine that less than all of the Series A Units requested to be registered can be included in such offering, then the Series A Units that are included in such offering shall be allocated among the selling Series A Members in proportion (as nearly as practicable to) the number of Series A Units owned by each selling Series A Member or in such other proportions as shall mutually be agreed to by all such selling Series A Members. Notwithstanding the foregoing, in no event shall the number of Series A Units included in the offering be reduced unless all other securities (other than securities to be sold by the Company) are first entirely excluded from the offering.

 

(c) For purposes of Section 16.1, a registration shall not be counted as “effected” if, as a result of an exercise of the underwriter’s cutback provisions in Section 16.3(ii), fewer than fifty percent (50%) of the total number of Series A Units that Series A Members have requested to be included in such registration statement are actually included.

 

33
 

 

Section 16.4 Obligations of the Company. Whenever required under this Article XVI to effect the registration of any Series A Units, the Company shall, as expeditiously as reasonably possible:

 

(a) prepare and file with the SEC a registration statement with respect to such Series A Units and use its commercially reasonable efforts to cause such registration statement to become effective and, upon the request of the Series A Members holding of a majority of the Series A Units registered thereunder, keep such registration statement effective for a period of up to one hundred twenty (120) days or, if earlier, until the distribution contemplated in the registration statement has been completed; provided, however, that (i) such one hundred twenty (120) day period shall be extended for a period of time equal to the period the Series A Members refrain, at the request of an underwriter of Series A Units (or other securities) of the Company, from selling any securities included in such registration, and (ii) in the case of any registration of Series A Units on Form S-1 or Form S-3 that are intended to be offered on a continuous or delayed basis, subject to compliance with applicable SEC rules, such one hundred twenty (120) day period shall be extended until all Series A Units covered by such registration statement (x) have been sold thereunder or pursuant to Rule 144, or (y) may be sold without volume or manner-of-sale restrictions pursuant to Rule 144 and without the requirement for the Company to be in compliance with the current public information requirement under Rule 144, as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed to the Company’s transfer agent and acceptable to the affected Series A Members;

 

(b) prepare and file with the SEC such amendments and supplements to such registration statement, and the prospectus used in connection with such registration statement, as may be necessary to comply with the Securities Act in order to enable the disposition of all securities covered by such registration statement;

 

(c) furnish to the selling Series A Members such numbers of copies of a prospectus, including a preliminary prospectus, as required by the Securities Act, and such other documents as the Series A Members may reasonably request in order to facilitate their disposition of their Series A Units;

 

(d) use its commercially reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or blue-sky laws of such jurisdictions as shall be reasonably requested by the selling Series A Members; provided that the Company shall not be required to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act;

 

(e) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the underwriter(s) of such offering;

 

(f) use its commercially reasonable efforts to cause all such Series A Units covered by such registration statement to be listed on a national securities exchange or trading system and each securities exchange and trading system (if any) on which similar securities issued by the Company are then listed;

 

34
 

 

(g) provide a transfer agent and registrar for all Series A Units registered pursuant to this Agreement and provide a CUSIP number for all such Series A Units, in each case not later than the effective date of such registration;

 

(h) promptly make available for inspection by the selling Series A Members, any managing underwriter(s) participating in any disposition pursuant to such registration statement, and any attorney or accountant or other agent retained by any such underwriter or selected by the selling Series A Members, all financial and other records, pertinent limited liability company documents, and properties of the Company, and cause the Company’s officers, Managers, employees, and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant, or agent, in each case, as necessary or advisable to verify the accuracy of the information in such registration statement and to conduct appropriate due diligence in connection therewith; provided, however, that any Person entitled to receive information pursuant to this Section 16.4 must first agree to confidentiality obligations reasonably acceptable to the Company;

 

(i) notify each selling Series A Member, promptly after the Company receives notice thereof, of the time when such registration statement has been declared effective or a supplement to any prospectus forming a part of such registration statement has been filed; and

 

(j) after such registration statement becomes effective, notify each selling Series A Member of any request by the SEC that the Company amend or supplement such registration statement or prospectus.

 

(k) In addition, the Company shall ensure that, at all times after any registration statement covering a public offering of securities of the Company under the Securities Act shall have become effective, its insider trading policy shall provide that the Company’s Managers may implement a trading program under Rule 10b5-1 of the Exchange Act.

 

Section 16.5 Expenses of Registration. All expenses (other than Selling Expenses) incurred in connection with registrations, filings, or qualifications pursuant to Article XVI including (a) all registration, filing, and qualification fees, (b) printers’ and accounting fees; fees and disbursements of counsel for the Company, and (c) the reasonable fees and disbursements of one counsel for the selling Series A Members, shall be borne and paid by the Company

 

35
 

 

Section 16.6 Indemnification. If any Series A Units are included in a registration statement under this Article XVI:

 

(a) To the extent permitted by law, the Company will indemnify and hold harmless each selling Series A Member, and the partners, members, officers, directors, managers and stockholders of each such Series A Member; legal counsel and accountants for each such Series A Member; any underwriter (as defined in the Securities Act) for each such Series A Member; and each Person, if any, who controls such Series A Member or underwriter within the meaning of the Securities Act or the Exchange Act, against any Damages; provided, however, that the indemnity agreement contained in this Section 16.6 shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable for any Damages to the extent that they arise out of or are based upon actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of any such Series A Member, underwriter, controlling Person, or other aforementioned Person expressly for use in connection with such registration. For the avoidance of doubt, a Series A Member cannot settle any such claim or proceeding without the consent of the Company, which consent shall not be unreasonably withheld.

 

(b) To the extent permitted by law, each selling Series A Member, severally and not jointly, will indemnify and hold harmless the Company, and each of its Managers, each of its officers who has signed the registration statement, each Person (if any), who controls the Company within the meaning of the Securities Act, legal counsel and accountants for the Company, any underwriter (as defined in the Securities Act), any other Series A Member selling securities in such registration statement, and any controlling Person of any such underwriter or other Series A Member, against any Damages, in each case only to the extent that such Damages arise out of or are based upon (i) such selling Series A Member’s failure to comply with prospectus delivery requirements or (ii) actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of such selling Series A Member expressly for use in connection with such registration; and each such selling Series A Member will pay to the Company and each other aforementioned Person any legal or other expenses reasonably incurred thereby in connection with investigating or defending any claim or proceeding from which Damages may result, as such expenses are incurred; provided, however, that the indemnity agreement contained in this Section 16.6 shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the Series A Member, which consent shall not be unreasonably withheld; and provided further that in no event shall the aggregate amounts payable by any Series A Member by way of indemnity or contribution under Section 16.6(b) and 16.6(d) exceed the proceeds from the offering received by such Series A Member (net of any Selling Expenses paid by such Series A Member), except in the case of fraud or willful misconduct by such Series A Member.

 

(c) Promptly after receipt by an indemnified party under this Section 16.6 of notice of the commencement of any action (including any governmental action) for which a party may be entitled to indemnification hereunder, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 16.6, give the indemnifying party notice of the commencement thereof. The indemnifying party shall have the right to participate in such action and, to the extent the indemnifying party so desires, participate jointly with any other indemnifying party to which notice has been given, and to assume the defense thereof with counsel reasonably mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such action.

 

36
 

 

(d) To provide for just and equitable contribution to joint liability under the Securities Act in any case in which either: (i) any party otherwise entitled to indemnification hereunder makes a claim for indemnification pursuant to this Section 16.6 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case, notwithstanding the fact that this Section 16.6 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any party hereto for which indemnification is provided under this Section 16.6, then, and in each such case, such parties will contribute to the aggregate Damages to which they may be subject (after contribution from others) in such proportion as is appropriate to reflect the relative fault of each of the indemnifying party and the indemnified party in connection with the statements, omissions, or other actions that resulted in such loss, claim, damage, liability, or expense, as well as to reflect any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or allegedly untrue statement of a material fact, or the omission or alleged omission of a material fact, relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission; provided, however, that in any such case (x) no Series A Member will be required to contribute any amount in excess of the public offering price of all such Series A Units offered and sold by such Series A Member pursuant to such registration statement, and (y) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation; and provided further that in no event shall a Series A Member’s liability pursuant to this Section 16.6(d), when combined with the amounts paid or payable by such Series A Member pursuant to Section 16.6(b), exceed the proceeds from the offering received by such Series A Member (net of any Selling Expenses paid by such Series A Member), except in the case of willful misconduct or fraud by such Series A Member.

 

(e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.

 

(f) Unless otherwise superseded by an underwriting agreement entered into in connection with the underwritten public offering, the obligations of the Company and Series A Members under this Section 16.6 shall survive the completion of any offering of Series A Units in a registration under this Article XVI, and otherwise shall survive the termination of this Agreement.

 

Article XVII
MISCELLANEOUS

 

Section 17.1 Notices. All notices provided for in this Agreement shall be in writing, duly signed by the party giving such notice, and shall be hand delivered, faxed or mailed by registered or certified mail or overnight courier service, if given to any Member, to the person and at the address (and, if applicable, fax number) set forth opposite its name on Schedule A, or at such other address (and, if applicable, fax number) as such Member may hereafter designate by written notice to the Company. All such notices shall be deemed to have been given when received.

 

37
 

 

Section 17.2 Failure to Pursue Remedies. The failure of any party to seek redress for violation of, or to insist upon the strict performance of, any provision of this Agreement shall not prevent a subsequent act, which would have originally constituted a violation, from having the effect of an original violation.

 

Section 17.3 Binding Effect; Specific Performances.

 

(a) This Agreement constitutes a legal, valid and binding agreement of the Members and the Company and is enforceable against the Members and the Company in accordance with its terms. This Agreement shall be binding upon and inure to the benefit of all of the parties and, to the extent permitted by this Agreement, their successors, legal representatives and assigns.

 

(b) The parties recognize that irreparable injury will result from a breach of any provision of this Agreement and that money damages will be inadequate to fully remedy the injury. Accordingly, in the event of a breach or threatened breach of one or more of the provisions of this Agreement, any party who may be injured (in addition to any other remedies which may be available to that party) shall be entitled to one or more preliminary or permanent orders, without being required to post a bond or other security (i) restraining and enjoining any act which would constitute a breach or (ii) compelling the performance of any obligation which, if not performed, would constitute a breach.

 

Section 17.4 Interpretation.

 

(a) All Article, Section, paragraph, clause, Exhibit or Schedule references not attributed to a particular document shall be references to such parts of this Agreement.

 

(b) Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation.” The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement.

 

(c) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter genders of such term.

 

(d) Any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent in writing and (in the case of statutes) by succession of comparable successor statutes and references to all attachments thereto and instruments incorporated therein. References to a Person are also to its permitted successors and assigns.

 

38
 

 

Section 17.5 Severability. Every provision of this Agreement is intended to be severable. If any term or provision hereof is illegal, invalid or unenforceable for any reason whatsoever, that term or provision will be enforced to the maximum extent permissible so as to effect the intent of the parties, and such illegality, invalidity or unenforceability shall not affect the validity or legality of the remainder of this Agreement. If necessary to effect the intent of the parties, the Members will negotiate in good faith to amend this Agreement to replace the unenforceable language with enforceable language which as closely as possible reflects such intent.

 

Section 17.6 Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all parties hereto had signed the same document. All counterparts shall be construed together and shall constitute one instrument.

 

Section 17.7 Governing Law. This Agreement and the rights of the parties hereunder shall be interpreted in accordance with the laws of the State of Delaware, and all rights and remedies shall be governed by such laws without regard to principles of conflict of laws that would result in the application of the law of any other jurisdiction.

 

Section 17.8 Jurisdiction and Venue. Any suit involving any dispute or matter arising under this Agreement may only be brought in the appropriate United States District Court in Delaware or any Delaware State Court having jurisdiction over the subject matter of the dispute or matter. All Members hereby consent to the exercise of personal jurisdiction by any such court with respect to any such proceeding.

 

Section 17.9 Waiver of Jury Trial. Each party hereto waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any action, suit or proceeding arising out of or relating to this Agreement.

 

Section 17.10 Amendments. Subject to Section 6.6(a), any amendment to this Agreement shall be adopted and be effective as an amendment hereto with Board Approval and Requisite Investor Approval; provided that:

 

(a) any amendment that would change the rights or obligations of any holder in its capacity as a holder of a specific series of Units in a disproportionate and adverse manner (other than in a de minimis respect) as compared to other holders holding the same series of Units shall also require the consent of the holders of the Units so disproportionately and adversely affected;

 

(b) other than in connection with the creation or issuance of a new class or series of Units, any amendment that would change the rights or obligations of a particular series of Units in a manner that would be reasonably likely to disproportionately and adversely effect the economic rights of such series of Units as compared to the rights and obligations specific to any other series of Units shall also require the consent of the holders of at least a majority of the series of Units so disproportionately and adversely effected, or, in the alternative with regard to amendments so effecting the Series B Units, will also require the approval of a Management Manager;

 

39
 

 

(c) any amendment that would increase a Member’s Line of Equity or, unless required by applicable law, impose a material obligation on a Member shall also require the consent of such Member; and

 

(d) any amendment that would adversely affect a Member’s right to designate any Manager or the ability of any such Manager to vote in connection with such position shall require the consent of such Member.

 

Section 17.11 Entire Agreement. This Agreement is the entire Agreement among the parties hereto, or between any party hereto and the Company, with respect to the matters covered hereby and supersedes all prior or concurrent agreements regarding such matters, whether written or oral.

 

Section 17.12 No Third-Party Beneficiaries. There shall be no third-party beneficiaries of this Agreement other than as contemplated by Article XI.

 

[Signature Page Follows]

 

40
 

 

IN WITNESS WHEREOF, the undersigned, intending to be legally bound hereby, have duly executed this Limited Liability Company Agreement as of the date first set forth above.

 

  BANDOLIER ENERGY LLC
     
  By:
  Name:
  Title:
     
  PETRO RIVER OIL CORP.
     
  By:
  Name:
  Title:
     
  PEARSONIA WEST INVESTMENT GROUP, LLC
     
  By:
  Name:
  Title:
     
  RANGER STATION LLC
     
  By:
  Name: Shane E. Matson
  Title: Authorized Signatory
     
   
  Shane E. Matson

 

41
 

 

SCHEDULE A

 

(as of May 30, 2014)

 

Series A Members

 

Name  Mailing Address  Initial Capital Account Balance   Line of Equity   Number of Series A Units   Series A Percentage Interest 
                    
Petro River Oil Corp.  1980 Post Oak Blvd. Ste. 2020
Houston, TX 77056
  $5,000,000   $10,000,000    500    50%
                        
Pearsonia West Investment Group, LLC 

641 Lexington Ave., 26th

Floor

New York, NY 10022

  $4,400,000   $8,800000    440    44%
                        
Ranger Station
LLC
  1016 E. 19th St., Tulsa, OK 74120  $600,000   $1,200,000    60    6%

 

 

Series B Members

 

Name  Mailing Address  Initial Capital Account Balance   Number of Series B Units   Vesting Schedule  Series B Percentage Interest 
                   
Shane E. Matson 

1016 E. 19th St., Tulsa, OK 74120

  $0    100   20 Series B Units vested as of the date hereof and an additional 20 Series B Units shall vest on May 30 in each of 2015, 2016, 2017 and 2018   100%

 

A-1
 

 

SCHEDULE B

 

Definitions

 

A. Definitions.

 

When used in this Agreement, the following terms not otherwise defined herein have the following meanings:

 

AFE” means an authority for expenditure, approved by the Board, based on a detailed cost estimate prepared for any oil and gas operation estimated to cost $25,000 or greater.

 

Affiliate” means, with respect to any Person, any other Person directly or indirectly Controlling or Controlled by or under direct or indirect common Control with such Person.

 

Available Cash” means, with respect to any fiscal period, the excess of all cash receipts of the Company from operations, plus amounts released from reserves plus, in the discretion of the Board, proceeds of sales, financings or refinancings, and any and all other sources, over the sum of the following amounts:

 

(a) cash disbursements for other items which are customarily considered to be “operating expenses” including insurance, administration, legal expenses, utilities, equipment repairs and maintenance, accounting, statistical or bookkeeping services and any and all employee compensation and benefits, sales or brokerage commissions, leasing commissions, management fees and expenses, advertising and promotion;

 

(b) payments of interest, principal and premium under any indebtedness of the Company, including amounts due any Member;

 

(c) payments made for capital construction, acquisitions, alterations or improvements; and

 

(d) reasonable amounts set aside as reserves by the Board for working capital, contingent liabilities, or any of the expenditures described in clauses (a), (b) and (c) above.

 

Bankruptcy” with respect to any Person, means (a) making an assignment for the benefit of creditors, (b) filing a voluntary petition in bankruptcy, (c) becoming the subject of an order for relief or being declared insolvent in any federal or state bankruptcy or insolvency proceeding (unless such order is dismissed within ninety (90) days following entry), (d) filing a petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation, (e) filing an answer or other pleading admitting or failing to contest the material allegation of a petition filed against it in any proceeding similar in nature to those described in the preceding clause (d), or otherwise failing to obtain dismissal of such petition within one hundred twenty days (120) following filing or (f) seeking, consenting to, or acquiescing in, the appointment of a trustee, receiver or liquidator of all or any substantial part of its properties.

 

B-1
 

 

Board Approval” means the affirmative vote of Managers having a majority of the votes present by person at a meeting, including at least one Institutional Investor Manager.

 

Capital Contribution” means any contribution by a Member to the capital of the Company in accordance with this Agreement, which value shall be equal to the sum of the amount of any cash and the Gross Asset Value of any property so contributed.

 

Cause” means the occurrence of one or more of the following events:

 

(a) A determination by a majority vote of the Board in good faith and after reasonable investigation that (i) a Series B Member has been grossly negligent or has acted in bad faith in connection with his or her duties to or work on behalf of the Company or (ii) a Series B Member has committed an unlawful act that is likely to cause material injury to the Company or its reputation; and in each case, after (A) receipt of written notice from the Board setting forth with reasonable specificity such bad faith or unlawful act and (B) if susceptible to cure, the Series B Member’s failure to begin initiating corrective actions within five (5) business days of receipt of such notice and correct the behavior described in the notice within fifteen (15) days following the date of such notice;

 

(b) Conviction of (i) a felony offense or a plea of “guilty” or “no contest” to a felony offense under the laws of the United States or any state thereof or (ii) any act of fraud or embezzlement or a crime involving dishonesty or physical harm to any Person; or

 

(c) Commission of any act which would cause a Series B Member to become a “bad actor” within the meaning of the Securities Act.

 

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

 

Control” means the possession, directly or indirectly, or the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities or general partnership or managing member interests, by contract or otherwise. “Controlling” and “Controlled” shall have correlative meanings. Without limiting the generality of the foregoing, a Person shall be deemed to Control any other Person in which it owns, directly or indirectly, a majority of the ownership interests.

 

Conversion Event” means and includes any of the following:

 

(a) The Company enters into an agreement with a Person to effect a transaction and as a condition thereto such person requires that the Company be a state law corporation or an entity that is taxed as a corporation for federal income tax purposes; or

 

(b) a change in federal or Delaware law, regulation or rules, or in the application of those laws, regulations or rules, by a court or regulatory agency to the Company, that materially limits the ability of the Company to be taxed as a partnership for federal income tax purposes.

 

B-2
 

 

Covered Person” means any Manager or officer of the Company.

 

Damages” means all damages, losses, liabilities, costs and expenses (including reasonable attorneys’ fees and reasonable expenses of investigating and defending any action, suit or proceeding).

 

Depreciation” means, for each Fiscal Year or other period, an amount equal to the federal income tax depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount that bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that (a) if the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Board and (b) for any asset with respect to which the Company uses the “remedial allocation method” under Treasury Regulations Section 1.704-3(d), Depreciation shall be determined in accordance with Treasury Regulations Section 1.704-3(d)(2).

 

Excluded Registration” means (a) a registration relating to the sale of securities to employees of the Company or a subsidiary pursuant to a stock option, stock purchase, or similar plan; (b) a registration relating to an SEC Rule 145 transaction; or (c) a registration on Form S-4 (or equivalent form) of securities to be issued in connection with acquisitions by the Company.

 

Final Exit Event” means (a) the sale of all or substantially all of the assets of the Company on a consolidated basis to an unrelated Person; (b) a merger, reorganization or consolidation in which the holders of the Company’s outstanding voting power immediately prior to such transaction do not own a majority of the outstanding voting power of the surviving or resulting entity immediately upon completion of such transaction; (c) the sale of all or a majority of the outstanding equity interests in the Company to an unrelated Person whether by Unit exchange or otherwise; or (d) any other transaction or series of transactions in which the owners of the Company’s outstanding voting power prior to such transaction do not own at least a majority of the outstanding voting power of the successor entity immediately upon completion of the transaction.

 

Fully-Funded Percentage Interest” means, with respect to a Series A Member as of any time of determination, the percentage obtained by dividing (a) the number of Series A Units held by such holder plus the number of Series A Units, if any, that are issuable to such holder upon the full funding of such holder’s remaining unfunded Line of Equity by (b) the number of Series A Units held by all holders other than Defaulting Investors plus the number of Series A Units, if any, that are issuable to all holders upon the full funding of all Series A Members’ remaining unfunded Lines of Equity. For the avoidance of doubt, each Defaulting Investor’s remaining unfunded Line of Equity shall be deemed to be $0 for all purposes.

 

GAAP” means United States generally accepted accounting principles in effect from time to time.

 

B-3
 

 

Gross Asset Value” means, with respect to any asset, the asset’s adjusted basis for federal income tax purposes, except as follows:

 

(a) The initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset, as determined by the Board and the contributing Member.

 

(b) The Board shall cause the Gross Asset Value of Company assets and the Members’ Capital Accounts to be adjusted in accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(f) and 1.7041(b)(2)(iv)(g) at such times as provided in Treasury Regulations Section 1.704-1(b)(2)(iv)(f) or upon such other time as the Board shall reasonably determine necessary or advisable in order to comply with, or permitted by, the Treasury Regulations.

 

(c) The Gross Asset Value of any Company asset distributed to a Member shall be adjusted to equal the gross fair market value of such asset on the date of distribution as determined by the Board.

 

(d) The Gross Asset Values of Company assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset Values shall not be adjusted pursuant to this Paragraph (d) to the extent that the Board reasonably determines that an adjustment pursuant to Paragraph (b) above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph (d).

 

(e) The Gross Asset Value of an asset shall be adjusted by the Depreciation taken into account with respect to such asset, for purposes of computing Profits and Losses.

 

Lien” means any lien, pledge, security interest, charge, claim or other encumbrance of any nature whatsoever.

 

Liquidation Event” means a sale by the Company of all or substantially all of its assets or a merger or acquisition by the Company in which the Company is not the surviving entity.

 

Majority Member Vote” means the affirmative vote of the holders of a majority of the then issued and outstanding Series A Units.

 

Manager” means any manager elected to the Board from time to time.

 

Material Contract” means a contract or agreement, or a series thereof, valued at $25,000 or greater.

 

Members” means a person identified as such on Schedule A and any Person hereafter admitted as a Member pursuant to the provisions of this Agreement.

 

B-4
 

 

Permitted Issuances” means the issuance of Units or any option to acquire Units (a) pursuant to a Qualified IPO, (b) pursuant to a merger, consolidation, acquisition or similar business combination approved by the Board, (c) in connection with any Unit split or Unit dividend, (d) to a lender in connection with any loan or financing transaction, (e) in connection with strategic transactions involving the Company and other entities approved by the Board (including, without limitation, (i) joint ventures, marketing or distribution arrangements or (ii) development arrangements), (f) pursuant to a Unit option plan or profit interest plan for or other grant of a profit participation to employees, consultants, officers or Managers approved by the Board, including issuances of Series B Units, (g) in connection with fee arrangements between the Company and its service providers approved by the Board, and (h) Units issued upon conversion of any warrant, option, note, debenture or other convertible security.

 

Person” means any individual, corporation, partnership, joint venture, limited liability company, limited liability partnership, association, joint-stock company, trust, unincorporated organization or other organization, whether or not a legal entity, and any governmental authority.

 

Percentage Interest” means, with respect to each Series A Member, such Member’s Series A Percentage Interest, and with respect to each Series B Member, such Member’s Series B Percentage Interest.

 

Preference Amount” means, with respect to each Series A Member, the aggregate Capital Contributions made by such Series A Member, plus a cumulative return equal to 8% per annum on such aggregate Capital Contributions, compounded quarterly and accreted on a daily basis, less all distributions made to each Series A Member under Section 8.1(a)(i) hereof, except and excluding any distribution made to each Series A Member as a mandatory tax distribution pursuant to Section 8.2.

 

Profits” or “Losses” means, for each Fiscal Year or portion thereof, an amount equal to the Company’s taxable income or loss for such Fiscal Year or portion thereof determined in accordance with Code § 703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code § 703(a)(1) shall be included in taxable income or loss), with the following adjustments:

 

(a) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this Paragraph shall be added to such taxable income or loss;

 

(b) Any expenditure of the Company described in Code § 705(a)(2)(B) or treated as a Code § 705(a)(2)(B) expenditure pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this Paragraph, shall be subtracted from such taxable income or loss;

 

(c) Gain or loss resulting from any disposition of company assets shall be computed by reference to the Gross Asset Value of the company assets disposed of, notwithstanding that the adjusted tax basis of such company assets differs from its Gross Asset Value;

 

B-5
 

 

(d) In lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year or portion thereof;

 

(e) To the extent an adjustment to the adjusted tax basis of any asset included in company assets pursuant to Code § 734(b) or Code § 743(b) is required pursuant to Treasury Regulations § 1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Member’s interest, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for the purposes of computing Profits and Losses;

 

(f) If the Gross Asset Value of any company asset is adjusted in accordance with Paragraphs (b) or (c) of the definition of Gross Asset Value in this Agreement, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Profits or Losses.

 

Requisite Investor Approval” means approval of (i) the holder(s) of a majority of the Series A Units (acting in their capacities as Members) outstanding and entitled to vote, excluding Series A Units held by Defaulting Investors, and (ii) Petro River.

 

SEC” means the United States Securities and Exchange Commission.

 

Securities Act” means the Securities Act of 1933, as amended.

 

Selling Expenses” means all underwriting fees, discounts and selling commissions or similar fees or arrangements allocable to the sale of securities or the Series A Units, as applicable.

 

Series A Members” means those Members holding Series A Units.

 

Series A Percentage Interest” means, with respect to each Series A Member, the percentage derived by dividing the number of Series A Units held by such Member by the total number of outstanding Series A Units held by all Series A Members.

 

Series A Units” means Units of the Company designated as Series A Units of the Company, having all the rights and preferences ascribed to such Units as set forth in this Agreement.

 

Series B Members” means those Members holding Series B Units.

 

Series B Percentage Interest” means, with respect to each Series B Member, the percentage derived by dividing the number of vested Series B Units held by such Member by the total number of outstanding and vested Series B Units held by all Series B Members.

 

Series B Units” means Units of the Company designated as Series B Units of the Company, having all the rights and preferences ascribed to such Units as set forth in this Agreement.

 

B-6
 

 

Tier I Threshold” means each Series A Member has received a two and half times multiple of such holder’s total Capital Contributions and a 30.00% annualized internal rate of return (computed using the “XIRR” function in Microsoft® Excel 2002 or an equivalent function in another software package).

 

Third Party Transferee” means a transferee that is not an Affiliate of a Member proposing to Transfer its Units.

 

Transfer” means to sell, assign, make a gift of, pledge, hypothecate, grant an option with respect to, or otherwise transfer, encumber or subject to any claim or Lien, whether voluntarily or involuntarily.

 

Treasury Regulations” means temporary and final Treasury Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding Treasury Regulations).

 

Units” means the Series A Units and the Series B Units.

 

Other Terms. The following terms are defined in the body of this Agreement in the Sections indicated:

 

Term   Section
     
Additional Capital Call   6.4
Agreement   Preamble
Board   1.1(d)
Business Affiliate   15.2(b)
Capital Account   7.1
Capital Calls   6.2(a)
Chairman   4.6(a)
Company   Preamble
Demand Notice   16.1(a)
Defaulting Investor   6.3(a)
Drag-Along Transaction   12.4
Effective Date   Preamble
Event of Termination   14.1
Family Members   12.1(a)(i)
Fiscal Year   9.2
Forfeiture Allocations   3.3(g)
G&A   5.1(i)(i)
Initial Agreement   Preamble
Initial Capital Contribution   6.1(b)
IPO Issuer   5.5
IPO Securities   5.5
Line of Equity   6.1(a)
LLC Act   1.1(a)
LOE Period   6.2(a)
LOE Transfer Payment   12.1(c)
LOE Transferee   12.1(c)
LOE Transferor   12.1(c)
LOE Units   12.1(c)
Non-Participating Investor   6.4
Offer   12.3(a)
Offer Notice   12.3(a)
Offered Units   12.3(a)
Offering Member   12.3(a)
Overall Preference   3.3(f)(i)
Permitted Transferee   12.2
Preemptive Rights Offering Notice   6.7(b)

Petro River

 

Preamble

Qualified IPO   5.5
Ranger Station LLC   Preamble
Requested Securities   16.1(a)
Retained Amounts   3.3(f)(i)
Tag-Along Transaction   12.5
Unit Purchase Price   12.3(a)

 

B-7
 

 

SCHEDULE C

 

Board of Managers

 

Title   Votes   Name
         
Institutional Investor Manager   2   Scot Cohen
Institutional Investor Manager   2   Jonathan Rudney
Management Manager   1   Shane E. Matson
Management Manager   1   Charles W. Wickstrom
Independent Manager   1   Ganesh H. Betanabhatla

 

C-1
 

 

SCHEDULE D

 

Initial Officers

 

Name   Position
     
Shane E. Matson   President

 

D-1
 

 

SCHEDULE E

 

Model Section 83(b) Election

 

(Election to Include Value of Restricted Property in Gross Income

in Year of Transfer Under Section 83(b))

 

The undersigned hereby makes the election under Section 83(b) of the Code and provides the following information:

 

1. The name, address, and taxpayer identification number of the undersigned are:
   
  Name:
  Address:
  SSN:
   
2. Description of property with respect to which the election is being made:
   
  [___] Series B Units (“Incentive Interests”) of Bandolier Energy LLC (the “Company”).
   
3. The date on which property was transferred is: ___________.
   
  The taxable year to which this election relates is calendar year _____.
   
4. The nature of the restriction(s) to which the property is subject is:

 

The Incentive Interests are subject to time-based vesting and will vest in full on ______, ____________ provided that the undersigned is employed by the Company (or a subsidiary thereof), on such date and the Incentive Interests have not been otherwise forfeited in accordance with the terms of one or more agreements between the undersigned and the Company (or a subsidiary thereof).

 

5. Fair market value:

 

As determined by the Board of Managers of the Company on [DATE], the fair market value of the Incentive Interests as of [DATE] is ____________.

 

6. Amount paid for property:
   
  The amount paid by taxpayer for the property is $___.
   
7. Furnishing statement to employer:
   
  A copy of this statement has been furnished to the Company.

 

Dated:    
    Signature

 

E-1
 

 

Securities Purchase Agreement

 

Spyglass Energy Group, LLC

 

By and Between

 

Nadel and Gussman, LLC,

 

Charles W. Wickstrom,

 

Shane E. Matson,

 

As Sellers

 

And

 

Bandolier Energy, LCC,

 

As Purchaser

 

Effective as of January 1, 2014

 

 
 

 

Table of Contents

 

Section

 

  1. Agreement of Sale and Purchase of the Membership Interests 1
       
  2. Purchase Price; Closing 1
       
  3. Inspection and Acceptance of Assets; Disclaimer of Warranties 5
       
  4. Sellers’ Representations And Warranties 6
       
  5. Sellers’ Representations and Warranties Concerning the Company 7
       
  6. Purchaser’s Representations and Warranties 13
       
  7. Independent Evaluation; Access 14
       
  8. Operation of Business 15
       
  9. Other Covenants 16
       
  10. Conditions to Proceed with Closing 20
       
  11. Actions to be Taken At Closing 22
       
  12. Expiration of Representations, Warranties and Covenants 23
       
  13. Release and Indemnification 23
       
  14. Termination of Agreement 27
       
  15. General Provisions 27
       
  16. Definitions 30

 

i
 

 

Table of Contents

 

Section

 

Exhibits, Schedules and Closing Deliverables

 

  Exhibit A Sellers, Membership Interests, Distribution Amounts and Sharing Ratios
  Exhibit B Assets, Leases and Wells
  Exhibit C Form of Spousal Consent
  Exhibit D Map of Prospect Interests Area
  Exhibit E Form of Assignment of Membership Interests
  Exhibit F Company Certificate of Good Standing and Form of Incumbency Certificate
  Exhibit G Form of Disclaimers and Stipulations of Interest
  Exhibit H Form of Transition Services Agreement
  Exhibit I Form of Sellers’ Closing Tax Certificates
     
  Schedule 2(c)(iii)(C) Oil in the Tanks
  Schedule 2(c)(vii) Preliminary Settlement Statement
  Schedule 4(b) Required Authorizations and Consents
  Schedule 5(a) Company Governing Documents
  Schedule 5(e) Events Subsequent to Effective Date
  Schedule 5(h) Material Agreements
  Schedule 5(i) Litigation Proceedings
  Schedule 5(k) Insurance Policies and Bonds
  Schedule 5(p) Preferential Rights and Restrictions on Transfer
  Schedule 5(u) Additional Liabilities
  Schedule 5(v) Environmental Matters
  Schedule 5(x) Equitable and Beneficial Interests
  Schedule 8(g) Excluded Assets
  Schedule 10(b)(ii) Sellers’ Closing Certificates
  Schedule 10(c)(ii) Purchaser’s Closing Certificate
  Schedule 10(c)(iii) Purchaser’s Evidence of Insurance and Bonds

 

ii
 

 

SECURITIES PURCHASE AGREEMENT

 

This Securities Purchase Agreement (“Agreement”) is made and entered into this ___ day of May, 2014 effective as of January 1, 2014 (“Effective Date”), among the parties identified on Exhibit A (collectively, the “Sellers”, and individually a “Seller”); Spyglass Energy Group, LLC, an Oklahoma limited liability company (“Company”); and Bandolier Energy, LLC, a Delaware limited liability company (“Purchaser”). The Sellers, the Company and the Purchaser are each sometimes referred to herein as a “Party” and are sometimes collectively referred to herein as the “Parties”.

 

RECITALS

 

A. The Sellers own all of the issued and outstanding membership interests, units, warrants, options and any other rights to acquire membership interests in the Company (collectively, the “Membership Interests”), such Membership Interests being owned by the Sellers in the respective amounts set forth next to the Sellers’ names on Exhibit A.

 

B. The Purchaser desires to purchase all, and not less than all, of the Membership Interests, and the Sellers desire to sell all, and not less than all, of the Membership Interests for the Aggregate Purchase Price, subject to and in accordance with the terms and conditions of this Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing recitals, the agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

 

1. Agreement of Sale and Purchase of the Membership Interests. Subject to the terms and conditions contained in Sections 2 and 10 below, the Sellers shall sell to the Purchaser, and the Purchaser shall purchase from the Sellers, the Membership Interests as of the Effective Date.

 

2. Purchase Price; Closing.

 

(a) Purchase Price. Subject to the terms and conditions contained in this Agreement, on the Closing Date, the Purchaser shall pay to the Sellers, in the aggregate, an amount equal to Nine Million Dollars ($9,000,000) (the “Aggregate Purchase Price”), subject to adjustment as provided in Section 2(c). The Aggregate Purchase Price as adjusted pursuant to Section 2(c) is herein referred to as the “Adjusted Purchase Price”.

 

(b) Performance Deposit. On or before the date that this Agreement is fully executed by all Parties, Purchaser shall pay, by wire transfer of immediately available funds to Sellers’ designated account, the sum of Four Hundred Fifty Thousand Dollars ($450,000) (the “Performance Deposit”). If the Closing occurs, the Performance Deposit shall be applied as a credit toward the Preliminary Adjusted Purchase Price on the Preliminary Settlement Statement. If the Closing does not occur solely as a result of the breach by Purchaser of the terms of this Agreement and there has been no breach by Sellers of the terms of this Agreement, the Sellers shall have the right, as their sole remedy, to retain the Performance Deposit as liquidated damages (and not as a penalty). The Parties acknowledge and agree that the actual damages for such a breach would be difficult or impossible to ascertain with reasonable certainty, and that the Performances Deposit would be a reasonable liquidated damages amount. If the closing does not occur for any other reason (other than Purchaser’s breach), the Performance Deposit shall be immediately returned to Purchaser.

 

1
 

 

(c) Adjustments to Aggregate Purchase Price. The Aggregate Purchase Price shall be adjusted to arrive at the Adjusted Purchase Price according to this Section 2(c) without duplication.

 

(i) For the purposes of this Agreement:

 

(A) “Property Costs” means all capital expenses pertaining to the Assets (including costs incurred subsequent to the Effective Date and prior to the Closing Date for drilling, developing, completing, equipping and plugging and abandoning Wells), insurance costs, other expenses, joint interest billings, lease operating expenses, lease rental and maintenance costs, royalties, overriding royalties, leasehold payments, severance Taxes, drilling expenses, workover expenses, geological, geophysical and any other exploration or development expenditures chargeable under applicable operating agreements or other agreements consistent with the standards established by the Council of Petroleum Accountants Society that are attributable to the maintenance and operation of the Assets; provided, however, that for purposes of this Agreement, the following costs shall not be included in this calculation: the Lease Bonus Payment made to the BIA for and on behalf of the Osage Tribe on January 27, 2014, in the amount of $$640,000.00.

 

(B) For purposes of allocating production (and proceeds and accounts receivable with respect thereto) to the Assets, under this Section 2(c), (1) the term “incurred” shall be interpreted in accordance with Council of Petroleum Accountants Society standards, except as otherwise specified herein, (2) liquid Hydrocarbons shall be deemed to be “from or attributable to” the Assets when they pass through the pipeline connecting into the storage facilities into which they are run; and (3) gaseous Hydrocarbons shall be deemed to be “from or attributable to” the Assets when they pass through the royalty measurement meters, delivery point sales meters or custody transfer meters on the gathering lines or pipelines through which they are transported (whichever meter is closest to the well).

 

(ii) Proration of Costs and Revenues.

 

2
 

 

(A) All proceeds from the sale of any production of Hydrocarbons from or attributable to the Assets prior to the Effective Date (net of (A) all amounts payable as royalties, overriding royalties, net profits interests and other similar burdens on or measured by production; and (B) all applicable severance Taxes) shall be the property of the Sellers, and in the event the Company receives any of those proceeds after the Closing (or before the Closing if the Aggregate Purchase Price has not been adjusted therefor), Purchaser will cause the Company to remit those proceeds to Sellers within 45 days after such receipt, or the Aggregate Purchase Price shall be increased by such amount if received prior to Closing. All proceeds from the sale of any production of Hydrocarbons from or attributable to the Assets on or subsequent to the Effective Date (net of (1) all amounts payable as royalties, overriding royalties, net profits interests and other similar burdens on or measured by production; and (2) all applicable severance Taxes shall be the property of the Company for the benefit of Purchaser, and in the event Sellers receive any of those proceeds after the Closing (or before the Closing if the Aggregate Purchase Price has not be adjusted therefor), Sellers will remit those proceeds to the Company for the benefit of the Purchaser within 45 days after such receipt, or the Aggregate Purchase Price shall be reduced by such amount if received prior to Closing.

 

(B) The Company shall be responsible for all costs and expenses that are attributable to the Assets, including without limitation Property Costs, incurred prior to the Effective Date, and the Aggregate Purchase Price shall be decreased by those costs and expenses to the extent any of those costs and expenses are not paid by the Company or the Sellers before the Closing. Purchaser shall be responsible for all costs and expenses that are attributable to the Assets, including without limitation Property Costs incurred on or after the Effective Date, and the Aggregate Purchase Price shall be increased by those costs and expenses to the extent any of those costs and expenses are paid by the Company or the Sellers before the Closing.

 

(iii) Upward Adjustments. In addition to the adjustments called for in Section 2(c)(ii) above, the Aggregate Purchase Price shall be adjusted upward by the following:

 

(A) an amount equal to (1) all direct and actual expenses attributable to the Assets, including without limitation Property Costs, incurred by or for the benefit of the Company, (2) all royalties, overriding royalties, net profit interests and similar burdens on or measured by production, and (3) all applicable severance Taxes, in each case attributable to the Assets from and after the Effective Date that were paid by the Company or the Sellers;

 

3
 

 

(B) an amount equal to all prepaid expenses (including pre-paid bonuses, rentals, cash calls and advances to operators for expenses not yet incurred, prepaid Taxes, and scheduled payments) attributable to the ownership or operation of the Assets from and after the Effective Date that were incurred and paid by the Company or the Sellers, and;

 

(C) an amount equal to the value of all oil in the storage tanks for the Wells at the Effective Date, calculated and as set forth in Schedule 2(c)(iii)(C); and

 

(D) any other amount expressly provided for in this Agreement or otherwise agreed to in writing by the Parties.

 

(iv) Downward Adjustments. In addition to the adjustments called for in Section 2(c)(ii) above, the Aggregate Purchase Price shall be adjusted downward by the following:

 

(A) an amount equal to (1) all direct and actual expenses attributable to the Assets, including without limitation Property Costs, incurred and by the Company, (2) all royalties, overriding royalties, net profit interests and similar burdens on or measured by production, and (3) all applicable severance Taxes, in each case attributable to the Assets prior to the Effective Date that were paid by the Purchaser;

 

(B) an amount equal to all prepaid expenses (including pre-paid bonuses, rentals, cash calls and advances to operators for expenses not yet incurred, prepaid Taxes, and scheduled payments) attributable to the ownership or operation of the Assets prior to the Effective Date that were incurred and paid by the Purchaser, and;

 

(C) any other amount expressly provided in this Agreement or otherwise agreed to in writing by the Parties.

 

(v) Other Adjustments. The Aggregate Purchase Price may also be adjusted by the written agreement of the Parties with respect to the costs, expenses and revenues associated with the Excluded Assets between the Effective Date and the Closing Date.

 

(vi) Performance Deposit. The Adjusted Purchase Price shall be adjusted downwards as provided in Section 2(b) to give effect to the Performance Deposit having been previously paid by Purchaser.

 

(vii) Preliminary Settlement Statement. On or before the day that is five Business Days prior to Closing, Sellers shall deliver to Purchaser a statement in the form of Schedule 2(c)(vii) (the “Preliminary Settlement Statement”) setting forth Sellers’ good faith calculations of the adjustments to the Aggregate Purchase Price set forth in Section 2(c) (the Aggregate Purchase Price, as so adjusted “Preliminary Adjusted Purchase Price”), prepared in good faith using the best information reasonably available to Sellers at the Closing Date, along with such data in Sellers’ possession as is reasonably necessary to support such calculations. The Preliminary Settlement Statement also shall set forth Sellers’ designated accounts for purposes of Purchaser’s payment of the Adjusted Purchase Price. The Parties shall attempt to agree in writing upon the Adjusted Purchase Price prior to Closing, and in the event the Parties cannot agree upon the Adjusted Purchase Price prior to Closing, Purchaser shall pay the Preliminary Adjusted Purchase Price to Sellers at Closing, and the Parties shall engage in good faith negotiations to agree on the Adjusted Purchase Price. If the Adjusted Purchase Price is not agreed to by the Parties within 30 days after the Closing Date, the dispute shall be submitted to arbitration in accordance with Section 15(f). Within 10 Business Days after final agreement or determination of the Adjusted Purchase Price, (A) the Purchaser shall pay to the Sellers, based upon their Sharing Ratios, the amount (if any) by which the Adjusted Purchase Price exceeds the Preliminary Adjusted Purchase Price paid to the Sellers at Closing, or (B) the Sellers shall pay, based upon their Sharing Ratios, the amount (if any) by which the Preliminary Adjusted Purchase Price paid to the Sellers at Closing exceeds the Adjusted Purchase Price.

 

4
 

 

(d) Closing. The closing of this transaction shall be held at 9:00 a.m. on May 22, 2014, or, if the conditions set forth in Section 10 have not been satisfied by that date, two Business Days after the date on which the last of the conditions set forth in Section 10 shall have been satisfied or waived, in the offices of the Company at 15 East 5th Street, Suite 3400, Tulsa, Oklahoma 74103, or at such other time, place or method to be mutually agreed upon by the Parties (the “Closing” or “Closing Date”).

 

3. Inspection and Acceptance of Assets; Disclaimer of Warranties. Prior to the execution of this Agreement, Purchaser has been given full access and opportunity to complete and has completed its due diligence investigation of the Company and the Assets, including physical and environmental inspections of the Wells (including without limitation a Phase I Environmental Assessment and equipment inventory) and to visit with Company personnel, including Matson, who is an executive officer of Purchaser and who is also a Seller. Matson was actively involved on behalf of the Company in the development and operation of the Assets. Matson participated in Purchaser’s due diligence investigation and also aided Sellers in preparing the Schedules to this Agreement. Except for the representations, warranties and covenants of the Sellers set forth in Section 4, and the special warranty of title set forth in Section 9(i), Purchaser acknowledges that the Assets are being sold “as is, where is” and with all faults, and Purchaser waives for all purposes all objections associated with the condition (environmental, physical, contractual or otherwise) of the Assets, and Purchaser assumes all risks of any kind whatsoever relating to the Assets including, without limitation, risks of changes in condition to the Assets, changes in law, and physical and environmental conditions. Purchaser further acknowledges, except for the representations, warranties and covenants of the Sellers set forth in Section 4, and the special warranty of title set forth in Section 9(i), as follows:

 

(a) NEITHER SELLERS, THE COMPANY NOR ANY OF THEIR RESPECTIVE REPRESENTATIVES, NOR ANY PERSON ACTING ON BEHALF OF SELLERS OR THE COMPANY, HAS MADE, AND SELLERS AND THE COMPANY HEREBY EXPRESSLY DISCLAIM AND NEGATE, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, RELATING TO THE CONDITION OF ANY OF THE ASSETS (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, PATENT OR TRADEMARK INFRINGEMENT, AND ANY AND ALL OTHER IMPLIED WARRANTIES EXISTING UNDER APPLICABLE LAW).

 

5
 

 

(b) SELLERS AND THE COMPANY HEREBY EXPRESSLY NEGATE AND DISCLAIM, AND PURCHASER HEREBY WAIVES AND ACKNOWLEDGES THAT NONE OF THE SELLERS, THE COMPANY, THEIR RESPECTIVE REPRESENTATIVES, AND NO PERSON ACTING ON BEHALF OF SELLERS OR THE COMPANY, HAS MADE, AND PURCHASER IS NOT RELYING UPON, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OR OTHER ASSURANCE RELATING TO (I) THE ACCURACY, COMPLETENESS OR MATERIALITY OF ANY INFORMATION, DATA OR OTHER MATERIALS (WRITTEN OR VERBAL), NOW, HERETOFORE, OR HEREAFTER FURNISHED TO PURCHASER BY OR ON BEHALF OF SELLERS OR THE COMPANY, OR (II) PRODUCTION RATES, RECOMPLETION OPPORTUNITIES, DECLINE RATES, GEOLOGICAL OR GEOPHYSICAL DATA OR INTERPRETATIONS, THE QUALITY, QUANTITY, RECOVERABILITY OR COST OF RECOVERY OF ANY HYDROCARBON RESERVES, ANY PRODUCT PRICING ASSUMPTIONS, OR THE ABILITY TO SELL OR MARKET ANY HYDROCARBONS AFTER THE CLOSING.

 

4. Sellers’ Representations And Warranties. Each Seller hereby severally and not jointly represents and warrants to Purchaser, with respect to itself/himself/herself, as of the date hereof and at Closing as follows:

 

(a) Organization and Standing. To the extent Seller is a corporation, partnership, limited liability company, trust or other entity formed under the laws of any state, Seller is duly organized, validly existing and in good standing under the laws of the state of its organization and in such other jurisdictions necessary for the consummation of this Agreement.

 

(b) Power. Seller has all requisite power and authority to carry on its business as presently conducted and to enter into and perform its obligations under this Agreement. The execution and delivery of this Agreement does not, and the fulfillment of and compliance with the terms and conditions hereof will not, violate, or be in conflict with, any provision of its governing documents, to the extent applicable. Except as set forth in Schedule 4(b), Seller is not required to give any notice to, make any filing with, or obtain any authorization, consent or approval of, any third party or any governmental authority in order to execute and deliver this Agreement or consummate the transactions contemplated hereby, except for such authorizations, consents or approvals as shall have been obtained or such notices or filings as shall have been accepted before the Closing Date.

 

6
 

 

(c) Authorization and Enforceability. The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly and validly authorized by all requisite actions of the Seller. This Agreement constitutes the legal, valid and binding obligation of the Seller and is enforceable in accordance with its terms, subject, however, to the effects of bankruptcy, insolvency, reorganization, moratorium and other laws for the protection of creditors generally, as well as to general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law.

 

(d) Title to Membership Interests. Seller owns the Membership Interests indicated in Exhibit A, and at Closing, will convey to Purchaser good and marketable title to the Membership Interests free and clear of any and all liens, mortgages, claims, encumbrances, pledges or security interests and all other defects of title, adverse claims or other matters whatsoever (other than those arising under federal and state securities laws).

 

(e) Brokers’ Fees. Seller has not incurred any liability, contingent or otherwise, for brokers’ or finders’ fees relating to the transactions contemplated by this Agreement for which the Purchaser or the Company shall have any responsibility.

 

5. Sellers’ Representations and Warranties Concerning the Company. Each Seller severally and not jointly represents and warrants to the Purchaser as of the date hereof and at Closing as follows:

 

(a) Organization and Standing. The Company is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Oklahoma set forth on Schedule 5(a) is a complete listing of the Certificate or Articles of Organization and the Operating Agreement of the Company, and all amendments thereto, copies of which have previously been made available to the Purchaser.

 

(b) Power. The Company has all requisite power and authority to carry on its business as presently conducted and to enter into and perform its obligations under this Agreement. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated by this Agreement will not: (i) violate or conflict with any provision of its Certificate or Articles of Organization or Operating Agreement, as amended from time to time; (ii) violate or conflict with any judgment, decree, order, statute, rule or regulation as in effect at the Closing Date to which the Company is subject; or (iii) violate, conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, cancel or receive any payment under, require any notice of consent under, or result in the imposition of any lien, claim or encumbrance upon any of the Assets under any agreement, contract, lease, license, instrument or other arrangement to which the Company is a party, by which the Company is bound or to which the Assets are subject.

 

7
 

 

(c) Capitalization. All outstanding Membership Interests have been validly issued, are fully paid and non-assessable, were not issued in violation of the terms of any contract binding upon the Company and were issued in compliance with all governing documents of the Company. There are no outstanding subscriptions, options, warrants, conversion rights, convertible securities, preemptive rights, preferential rights (contractual or otherwise), “phantom” stock rights, or agreements, understandings or arrangements of any kind relating to equity securities, obligating the Company to issue or sell any Membership Interests now or in the future. At Closing, the Purchaser will acquire all of the issued and outstanding Membership Interests of the Company.

 

(d) Financial Information. All financial information which has been provided to Purchaser with respect to the Company has been, and is, true and correct in all respects, and while not maintained or prepared in accordance with GAAP are complete and accurate. Other than the Tax Returns and associated work papers, such financial information is limited to the Assets. Except for lease operating statements reflecting operating income and expenses for the Assets (which is reported on an 8/8ths basis), such financial information (including the Tax Returns) is further limited to the Company’s 39.149128% interest in the Assets which it owned immediately prior to the Effective Date and prior to acquiring the remaining aggregate 60.850872% interests of other Persons in and to the Assets. Purchaser acknowledges that much of the financial information is comprised of raw data derived from the Company’s accounting records.

 

(e) Events Subsequent to Effective Date. Except as set forth in the financial information provided to Purchaser or on Schedule 5(e), since the Effective Date there have not been any changes in the Assets, condition, affairs (financial or otherwise) or business prospects of the Company, in each case limited to the Assets, which have had or would be reasonably likely to have, individually or in the aggregate, a Material Adverse Effect.

 

(f) Legal Compliance. The Company: (i) to the Knowledge of Sellers, is in compliance with all applicable federal, state, local, tribal or foreign laws (including statutes, rules, regulations, codes, plans, writs, injunctions, judgments, orders, decrees, rulings, and charges thereunder) in effect as of the Closing Date (collectively, “Laws”); (ii) has not received any notice, charge, claim or action of any filed, commenced or to the Knowledge of Sellers threatened action alleging any violation of Laws; and (iii) has not received any notice that any permit, license, certificate of authority, order and approval of, all federal, state, local, tribal and foreign regulatory bodies required as of the Closing Date for the Company to carry on its current operations in the Ordinary Course of Business (collectively, “Permits”) will be terminated or modified or cannot be renewed in the Ordinary Course of Business, and Sellers have no Knowledge of any reasonable basis for any such termination, modification or non-renewal.

 

(g) Tax Matters. To the Knowledge of Sellers,

 

(i) the Company has filed timely with the appropriate taxing authorities all Tax Returns required to be filed by the Company; each such Tax Return is true, correct and complete in all material respects; and all Taxes of the Company that are due and payable through and including the Effective Date, have been timely paid in full;

 

8
 

 

(ii) there is no action, suit, proceeding, investigation, audit, claim or assessment pending or threatened with respect to the Company with respect to a liability for Taxes or with respect to any Tax Return; no deficiency for any Tax has been assessed with respect to the Company which has not been paid in full; and there are no liens for Taxes upon the Assets other than liens for Taxes not yet due and payable;

 

(iii) the Company has withheld all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, member or other third party;

 

(iv) there are no outstanding waivers or comparable consents regarding the application of the statute of limitations with respect to any Taxes or Tax Returns of the Company;

 

(v) the Company is not a party to, is not bound by, and does not have any obligation under, any Tax sharing agreement, Tax indemnification agreement or similar contract or arrangement; the Company does not have any potential liabilities or obligations to any Person as a result of, or pursuant to, any such agreement, contract or arrangement; and the Company does not have any liability for Taxes of another Person by contract or otherwise;

 

(vi) the Company is, and has been since its inception, classified as a partnership for federal Tax purposes under Treasury Regulations Sections 301.7701-2 and -3, and any comparable provision of applicable law of state and local jurisdictions that permit such treatment; and

 

(vii) the Sellers shall, at Sellers’s sole cost and expense, cause all state and federal income Tax Returns for the Company for calendar year 2013 to be timely filed (as extended), and shall promptly provide copies thereof (together with all schedules thereto) to the Company. Sellers shall provide Purchaser with copies of all associated work papers, schedules and accounting records necessary to support the 2013 Tax Return.

 

(h) Material Agreements. Schedule 5(h) lists: (i) the Concession Agreement and the Leases; (ii) all agreements and contracts (whether oral or written) with Persons who are or will be Affiliates of the Company or Affiliates of the Sellers immediately prior to Closing that will be binding on the Company or the Assets after Closing; (iii) agreements for the sale or purchase of Hydrocarbons produced from or attributable to the Assets; (iv) instruments that create any area of mutual interest, or that materially restrain, limit or impede the Company’s ability to compete with or conduct its business as currently conducted, including geographic limitations on the Company’s activities, in each case limited to the Assets; (v) contracts to which the Company is a party, the performance of which will involve consideration in excess of $50,000 per year; or (vi) any other agreement not described in (i) through (v) above the existence or loss of which has had or would be reasonably likely to have a Material Adverse Effect on the Company (collectively, the “Material Agreements”). Additionally, all of the Material Agreements are still in effect and there has been no notice of termination from any third party or their affiliate. With respect to each Material Agreement, the Company is not in material breach or default of the terms and conditions of any Material Agreement.

 

9
 

 

(i) Litigation. Except as set forth on Schedule 5(i) (which are part of the Retained Liabilities), (A) there is no action, suit, proceeding, hearing, audit, citation, summons, subpoena, inquiry or investigation of any nature, civil, criminal, or regulatory, in law or in equity, by or before any court or quasi-judicial or administrative agency of any jurisdiction or arbitrator (“Proceeding”) pending, or, to the Knowledge of Sellers, threatened, against, relating to or naming as a party thereto the Company, any of the Assets or any of the Company’s members, managers or officers (in their capacities as such), (B) there is no agreement, order, judgment, decree, injunction or award of any governmental authority or arbitrator against and/or binding upon the Company, any of the Assets or any of the Company’s members, managers or officers (in their capacities as such), and (iii) there is no Proceeding that the Company has pending against other Persons.

 

(j) Brokers’ Fees. The Company has not incurred any liability, contingent or otherwise, for brokers’ or finders’ fees relating to the transactions contemplated by this Agreement for which the Purchaser or the Company shall have any responsibility.

 

(k) Insurance. Schedule 5(k) describes all contracts of insurance and bonds maintained by or for the benefit of the Company, which are in full force and effect, and all premiums due and owing in connection with such policies have been paid. To the Knowledge of Sellers, the Company has given notice or has otherwise presented every material claim known to the Company to be covered by insurance under its insurance policies or contracts in a timely fashion, except for policies directly related to the Assets and set forth on Schedule 5(k). Each of the policies will terminate as of the Closing Date, and Purchaser will be required to have replacement policies in place prior to the Closing.

 

(l) Employee Benefit Plans. The Company has no Benefit Plans, and the Company has made no agreement with any Person including, but not limited to, any employee, manager, officer or any Seller, regarding the Tax treatment of the Membership Interests.

 

(m) Hedging Transactions. The Company has no obligations in respect of any futures, hedges, swaps, collars, puts, calls, floors, caps, options, forward sales, forward purchases or other contracts or derivative securities that are intended to benefit from, relate to or reduce or eliminate the risk of fluctuations in the price of commodities (including, without limitation, Hydrocarbons), interest rates, currencies or securities with respect to the Assets or the Wells (collectively, “Hedge Transactions”).

 

(n) Imbalances. There are no aggregate production, pipeline transportation or processing imbalances or penalties existing with respect to the Wells, and the Company has not received a deficiency payment under any Hydrocarbon contracts for which any party has a right to take deficiency Hydrocarbons from the Company with respect to the Wells, nor has the Company received any payments for production which are subject to refund or recoupment out of future production from the Wells.

 

10
 

 

(o) Prepaid Obligations. The Company is not subject to any “take or pay” arrangement, production payment arrangement, or other agreement or arrangement which require it to deliver or to suffer the delivery of Hydrocarbons produced in connection with the Wells or the Assets at some future time (or make a cash payment in lieu thereof) without then or thereafter receiving full payment therefor and without deduction or credit on account of such arrangement from the price that would otherwise be received.

 

(p) Preferential Rights; Restrictions on Transfer. Except as set forth in Schedule 5(p), there are no preferential rights to purchase or other similar rights or restrictions on assignment, including requirements for consents from third parties to assignment, affecting the Assets that would be applicable to, or required for the consummation of, the transactions contemplated by this Agreement, and the transactions contemplated by this Agreement will not create in any individual or entity any option to purchase, preferential right to purchase or similar rights with respect to the Assets.

 

(q) Calls on Production. There are no calls on production (whether or not exercised) or other similar marketing restrictions affecting the Wells or the Assets, nor will the transactions contemplated by this Agreement create any such calls on production.

 

(r) Operation of Wells. Although the Company owns the Leases and the Wells, the Company does not operate any of the Wells or any other wells. To the Knowledge of Sellers, all the Wells have been drilled, operated and produced in accordance in all material respects with reasonable, prudent oil and gas field practices and in compliance in all material respects with the applicable Leases and applicable Law.

 

(s) Proceeds of Production. All of the proceeds from the sale of the Company’s interest in Hydrocarbons produced from the Wells (net of mineral owner royalty) are being received by the Company in a timely manner and are not being held in suspense for any reason.

 

(t) Title to the Leases and the Assets. The Company has Defensible Title to the Leases and the Assets free and clear of all Liens, except for Permitted Encumbrances. To the knowledge of Sellers, the Leases and the Concession Agreement are in full force and effect, the rentals, royalties and other payments due thereunder have been properly and timely paid and there is no existing default (or event that, with notice or lapse of time or both, would become a default) thereunder.

 

(u) No Undisclosed Liabilities. To the Knowledge of Sellers, except for liabilities incurred or paid (i) after the Effective Date but before the date of this Agreement; and (ii) after the date of this Agreement that do not violate Section 8 below, there are no liabilities, debts or obligations of the Company of any kind, whether accrued, absolute, contingent, inchoate or otherwise (and there is no basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against the Company giving rise to any such debt, liability or obligation) including any Taxes which are due and payable as of the date hereof or any governmental charges or penalties, interest or fines, except as reflected in the financial information provided to Purchaser or for liabilities set forth on Schedule 5(u).

 

11
 

 

(v) Environmental Matters. Except as set forth in Schedule 5(v):

 

(i) the Company has complied, and the Company is in compliance, with all applicable Environmental Laws, which compliance includes the possession of all permits required under applicable Environmental Laws and compliance with the terms and conditions thereof and the making and filing with all applicable governmental authorities of all reports, forms and documents and the maintenance of all records required to be made, filed or maintained by it under any Environmental Law;

 

(ii) there are no Environmental Claims pending or threatened against the Company or any Person whose liability for any Environmental Claim the Company has retained, assumed or indemnified, either contractually or by operation of Law;

 

(iii) the Company is not subject to any liability or obligation (accrued, contingent or otherwise) to cleanup, correct, abate or to take any response, remedial or corrective action under or pursuant to any Environmental Laws, relating to (A) environmental conditions on, under, or about any of the Wells or the Assets, including the air, soil, surface water and groundwater conditions at, on, under, from or near such properties, or (B) the use, management, handling, transport, treatment, generation, storage, disposal or Release of any Hazardous Substances, whether on-site on any of the Assets or with respect to the Assets at any off-site location; and the Company has provided or made available to Purchaser copies of all studies, assessments, reports, data, results of investigations or audits, analyses and test results, in the possession, custody or control of the Company relating to (x) the environmental conditions on, under or about any of the Assets and (y) any Hazardous Substances used, managed, handled, transported, treated, generated, stored or Released by any Person on, under, about or from, any of the Assets;

 

(iv) there are no past or present actions, activities, circumstances, conditions, events or incidents in violation of Environmental Laws related to the Assets (including the Release, emission, discharge, presence or disposal of any Hazardous Substance in violation of Environmental Laws), that would be reasonably likely to form the basis of any Environmental Claim against the Company or against any Person whose liability for such Environmental Claim the Company has retained or assumed either contractually or by operation of law.

 

(w) Employees. The Company has never had any employees and there are no Persons currently claiming to be an employee of the Company.

 

12
 

 

(x) Equitable Interests. At the Closing, there are no Persons except those listed on Schedule 5(x), that have a legal or equitable interest in the Assets including back-ins, overriding royalty interests, and net profit interests in third parties (including Sellers).

 

(y) Water Injection Wells. To the Knowledge of Sellers, all water injection wells within the Assets have been properly permitted, drilled, equipped and operated in accordance with applicable Laws.

 

6. Purchaser’s Representations and Warranties. Purchaser represents and warrants to Sellers and the Company as of the date hereof and at Closing as follows:

 

(a) Organization and Standing. Purchaser is a limited liability company, formed under the laws of the state of Delaware, and is duly organized, validly existing and in good standing under the laws of Delaware and Oklahoma.

 

(b) Power. Purchaser has all requisite power and authority to carry on its business as presently conducted and to enter into and perform its obligations under this Agreement. The execution and delivery of this Agreement does not, and the fulfillment of and compliance with the terms and conditions hereof will not, violate, or be in conflict with, any provision of its governing documents, as applicable, or any material provision of any agreement, instrument, decree or order to which it is a party or by which it is bound. The Purchaser is not required to give any notice to, make any filing with, or obtain any authorization, consent or approval of, any third party or any governmental authority in order to execute and deliver this Agreement or consummate the transactions contemplated hereby except for such authorizations, consents or approvals as shall have been obtained or such notices or filings as shall have been accepted before the Closing Date.

 

(c) Authorization and Enforceability. The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly and validly authorized by all requisite action of the Purchaser. This Agreement constitutes the legal, valid and binding obligation of the Purchaser, and is enforceable in accordance with its terms, subject, however, to the effects of bankruptcy, insolvency, reorganization, moratorium and other laws for the protection of creditors generally, as well as to general principles of equity, regardless whether such enforceability is considered in a proceeding in equity or at law.