Download Pacific Asia Petroleum Inc (Form: 10SB12G

Table of Contents
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
General Form For Registration of Securities of
Small Business Issuers
Under Section 12(b) or (g) of the
Securities Exchange Act of 1934
PACIFIC ASIA PETROLEUM, INC.
(Name of small business issuer in its charter)
Delaware
(State of Incorporation)
30-0349798
(I.R.S. Employer Identification No.)
250 East Hartsdale Ave., Hartsdale, New York
(Address of principal executive offices)
10530
(zip code)
Issuer’s telephone number, including area code: (914) 472-6070
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001
(Title of Class)
TABLE OF CONTENTS
PART I
ITEM 1. Description of Business
ITEM 2. Plan of Operation
ITEM 3. Description of Properties
ITEM 4. Security Ownership of Certain Beneficial Owners and Management
ITEM 5. Directors, Executive Officers, Promoters and Control Persons
ITEM 6. Executive Compensation
ITEM 7. Certain Relationships and Related Transactions
ITEM 8. Description of Securities
PART II
ITEM 1. Market Price of and Dividends on the Company’s Common Equity and Other Stockholder Matters
Item 2. Legal Proceedings
Item 3. Changes In and Disagreement With Accountants
Item 4. Recent Sales of Unregistered Securities
ITEM 5. Indemnification of Directors and Officers
PART F/S
EXHIBIT 3.1
EXHIBIT 3.2
EXHIBIT 4.1
EXHIBIT 4.2
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 10.6
EXHIBIT 10.7
EXHIBIT 10.8
EXHIBIT 10.9
EXHIBIT 10.10
EXHIBIT 10.11
EXHIBIT 10.12
EXHIBIT 10.13
EXHIBIT 10.14
EXHIBIT 10.15
EXHIBIT 10.16
EXHIBIT 10.17
EXHIBIT 10.18
EXHIBIT 10.19
EXHIBIT 10.20
EXHIBIT 21
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All statements, other than statements of historical fact, included in this Form 10-SB , including without limitation the statements under
“Plan of Operations” and “Description of Business,” are, or may be deemed to be, forward-looking statements. Such forward-looking
statements involve assumptions, known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or
achievements of Pacific Asia Petroleum, Inc. and its subsidiaries, Inner Mongolia Production Company LLC (“IMPCO”), Advanced Drilling
Services, LLC (“ADS”), Sunrise Energy Asia LLC, Inner Mongolia Production Co (HK) Limited and Inner Mongolia Sunrise Petroleum JV
Company (collectively, the “Company”), to be materially different from any future results, performance or achievements expressed or implied
by such forward-looking statements contained in this Form 10-SB . Such potential risks and uncertainties include, without limitation, the
Company’s lack of operating history, operating revenue or earnings history, its ability to enter into definitive agreements to formalize foreign
energy ventures and secure necessary exploitation rights, its ability to raise capital to fund its operations, its ability to successfully integrate
and operate acquired or newly formed entities and multiple foreign energy ventures and subsidiaries, competition from large petroleum and
other energy interests, changes in laws and regulations that affect the Company’s operations and the energy industry in general, risks and
uncertainties associated with exploration, development and production of oil and gas, drilling and production risks, expropriation and other
risks associated with foreign operations, anticipated and ongoing pipeline construction and transportation of oil and gas, the lack of
availability of oil and gas field goods and services, environmental risks, economic conditions, and other risk factors detailed herein and in
other of the Company’s reports hereafter filed with the Securities and Exchange Commission. The forward-looking statements are made as of
the date of this Form 10-SB and the Company assumes no obligation to update the forward-looking statements. Therefore, readers are
cautioned not to place undue reliance on these forward-looking statements.
PART I
ITEM 1. Description of Business
General
The Company is a development stage company formed to develop new energy ventures through its subsidiaries and through joint ventures
and other partnerships in which its subsidiaries will participate. The members of the Company’s senior management team have extensive
experience in the fields of petroleum engineering, geology, field development and production, operations, international business development,
and finance. Several members of the Company’s management team have held management and executive positions with Texaco Inc. and have
managed energy projects in the People’s Republic of China (the “PRC” or “China”) and elsewhere in Asia and other parts of the world. The
Company’s management team also has experience in oil drilling, operations, geological, engineering and sales in China’s energy sector. The
Company’s current operations consist of the drilling of oil wells in recently discovered fields in Inner Mongolia, China. The Company also is a
party to several agreements and letters of intent relating to additional projects, including an Agreement for Joint Cooperation which the
Company signed with China United Coalbed Methane Co., Ltd. (the Chinese Government-designated company holding exclusive rights to
negotiate with foreign companies with respect to coal bed methane (“CBM”) production in China). This agreement grants the Company the
exclusive rights to a large prospective contract area for CBM production located in the Shanxi Province of China, with an option to convert
such arrangement into a production sharing contract. The Company plans to exercise this option and, as of July 2007, was negotiating the terms
of a production sharing contract as well as preliminary documentation regarding the acquisition of several other prospective CBM and other gas
opportunities in the Shanxi Province on which significant reserves of gas have been discovered. CBM is a high-profile focus area of the
Chinese Government and an area in which China encourages foreign investment. To assist in its efforts, the Company has retained several
CBM experts who successfully assisted in the development and operation of the first CBM ventures in China with the international energy
industry. Although the Company hopes to finalize one or more of these CBM production sharing contracts, there can be no assurance that any
of such agreements will be entered into on terms satisfactory to the Company, in a timely manner, or at all. The Company has several other
energy ventures, which it is pursuing and which are described further in this report.
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To date, although the Company has not yet generated any meaningful revenue, it has raised approximately $21.6 million in equity
financings to fund its ongoing working capital requirements as well as possible acquisition and development activities. In order to fully
implement its business strategy, however, the Company will need to raise significant additional capital, of which there can be no assurance.
Organization
Pacific Asia Petroleum, Inc. (“PAP”) was incorporated in the State of Delaware in 1979 under the name “Gemini Marketing Associates,
Inc.” In 1994, PAP changed its name from “Gemini Marketing Associates, Inc.” to “Big Smith Brands, Inc.,” in 2006 it again changed its name
to “Pacific East Advisors, Inc.,” and in 2007 it again changed its name to “Pacific Asia Petroleum, Inc.”. As Big Smith Brands, Inc., PAP
operated as an apparel company engaged primarily in the manufacture and sale of work apparel, and was listed on the Nasdaq Stock Market’s
Small-Cap Market from 1995 until December 4, 1997, and the Pacific Stock Exchange from 1995 until April 1, 1999. In 1999, PAP sold all of
its assets related to its workwear business to Walls Industries, Inc., and in 1999 filed for voluntary bankruptcy under Chapter 11 of the United
States Bankruptcy Code. The final bankruptcy decree was entered on August 8, 2001, and thereafter PAP existed as a “shell company,” but not
a “blank check” company, under regulations promulgated by the Securities and Exchange Commission (the “SEC”) and had no business
operations and only nominal assets until May 2007, when it consummated the mergers of Inner Mongolia Production Company LLC
(“IMPCO”) and Advanced Drilling Services, LLC (“ADS”) into wholly-owned subsidiaries of PAP (the “Mergers”). See “The Mergers”
below. Unless the context otherwise requires, the term “Company” as used herein collectively refers to PAP and its wholly-owned subsidiaries
and joint ventures, IMPCO, ADS, Sunrise Energy Asia LLC, Inner Mongolia Production Co (HK) Limited and Inner Mongolia Sunrise
Petroleum JV Company.
The Common Stock of PAP is quoted on the Pink Sheets under the symbol “PFAP.PK.” See, “Part II Item 1. Market Price of and Dividends
on the Company’s Common Equity and Other Stockholder Matters.”
The Company’s executive offices are located at 250 East Hartsdale Ave., Hartsdale, New York 10530. The Company also has an office
located in Beijing, China. PAP may be contacted by telephone at (914) 472-6070, and its website is www.papetroleum.com.
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Subsidiaries and Joint Ventures
The diagram below illustrates the current corporate structure of PAP and its subsidiaries (“we,” “our,” “us,” or the “Company”):
Advanced Drilling Services, LLC and Sunrise Energy Asia LLC
ADS was formed in the State of Delaware in March 2005, and prior to the Mergers was a development stage company with few tangible
assets and no operating history. In November 2006, ADS acquired all of the outstanding membership interests in Sunrise Energy Asia LLC
(“ADS Sunrise”), a limited liability company formed in Delaware in October 2006 that also had no operating history but is a party to a number
of agreements, including (i) an agreement providing ADS Sunrise with certain rights related to China’s Mudanjiang Energy Development
Project, and (ii) an agreement granting ADS Sunrise with an economic interest in a joint venture for bus manufacturing in Tianjin, involving
the import of advanced hydraulic hybrid energy technology for the production of buses in Tianjin, China.
Inner Mongolia Production Company LLC, Inner Mongolia Production Co (HK) Limited and Inner Mongolia Sunrise Petroleum JV
Company
IMPCO is a development stage company that was formed in the State of New York in August 2005 as a holding company for new energy
ventures in the Far East. In December 2005, IMPCO formed a Hong Kong corporation, Inner Mongolia Production Co (HK) Limited, which is
a wholly-owned subsidiary of IMPCO (“IMPCO HK”). In March 2006, a Chinese joint venture company named Inner Mongolia Sunrise
Petroleum JV Company (“IMPCO Sunrise”), which is owned 97% by IMPCO HK and 3% by Beijing Jinrun Hongda Technology Co., Ltd. (an
unaffiliated Chinese corporation) was also formed as an indirect subsidiary of IMPCO to engage in Chinese energy ventures. In the third
calendar quarter of 2006, IMPCO closed a private equity financing that raised approximately $4.6 million from qualified investors. Using a
portion of the proceeds raised in that offering, IMPCO commenced operational activities in China and successfully drilled its first well in a
prospective area in Inner Mongolia. This well is currently producing under an exploration and development license issued by the relevant
Chinese authorities; however, the Company has not recognized any
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revenue and related depletion expense to date due to uncertainty of realization of the revenue until a permanent production license is obtained.
The Mergers
On December 11, 2006 PAP entered into (i) an Agreement and Plan of Merger and Reorganization (the “ADS Merger Agreement”) with
DrillCo Acquisition, LLC (“ADS Merger Sub”), a Delaware limited liability company and a wholly-owned subsidiary of PAP, and ADS, and
(ii) an Agreement and Plan of Merger and Reorganization (the “IMPCO Merger Agreement,” and together with the ADS Merger Agreement,
the “Merger Agreements”) with IMPCO Acquisition, LLC (“IMPCO Merger Sub”), a New York limited liability company and a wholly-owned
subsidiary of PAP, and IMPCO. Immediately prior to the closing of the Mergers, ADS closed a private equity financing (the “ADS Offering”)
pursuant to which ADS raised $17 million in exchange for the issuance of 13,600,000 ADS Class B Interests to qualified investors. Pursuant to
the Merger Agreements, as amended and restated on February 12, 2007, effective upon the May 7, 2007 closing, (i) ADS merged with and into
ADS Merger Sub, and ADS Merger Sub as the surviving entity changed its name to “Advanced Drilling Services, LLC” and continued to carry
on the business of ADS, (ii) IMPCO merged with and into IMPCO Merger Sub, and IMPCO Merger Sub as the surviving entity changed its
name to “Inner Mongolia Production Company LLC” and continued to carry on the business of IMPCO, (iii) each of the 9,850,000 ADS
Class A Interests which were issued and outstanding automatically converted on a 1:1 basis into the right to receive an aggregate of 9,850,000
shares of PAP Common Stock, (iv) each of the 13,600,000 ADS Class B Interests issued in the ADS Offering which were issued and
outstanding automatically converted on a 1:1 basis into the right to receive an aggregate of 13,600,000 shares of PAP Series A Convertible
Preferred Stock, (v) each of the 347,296 IMPCO Class A Units which were issued and outstanding automatically converted on a 1:17 basis into
the right to receive an aggregate of 5,904,032 shares of PAP Common Stock, and (vi) each of the 594,644 IMPCO Class B Units which were
issued and outstanding automatically converted on a 1:17 basis into the right to receive an aggregate of 10,108,952 shares of PAP Series A
Convertible Preferred Stock. Upon closing of the Mergers, PAP also assumed warrants to purchase 1,860,001 ADS Class B Interests issued to
certain ADS placement agents in connection with the ADS Offering, which warrants became exercisable for 1,860,001 shares of PAP Series A
Convertible Preferred Stock as a result of the Mergers.
The Mergers were structured so as to constitute part of a single transaction pursuant to an integrated plan and to qualify as a tax-free
transaction. Under the terms of the Merger Agreements, PAP changed its name to “Pacific Asia Petroleum, Inc.,” all of the persons serving as
directors and officers of PAP resigned, the number of directors of PAP was set at three, and the following persons were appointed as the
officers and directors of PAP following the Mergers: (i) Frank C. Ingriselli, Chief Executive Officer, President, Secretary and Director;
(ii) Laird Q. Cagan, Director; (iii) Elizabeth P. Smith, Director; (iv) Stephen F. Groth, Vice President and Chief Financial Officer; and
(v) Jamie Tseng, Executive Vice President.
Automatic Conversion
Pursuant to the Amended and Restated Certificate of Incorporation of PAP, dated May 2, 2007, as a result of the average closing sales price
of PAP’s Common Stock exceeding $3.125 per share for twenty consecutive trading days, upon the close of trading on June 5, 2007, all of
PAP’s 23,708,952 shares of issued and outstanding Series A Convertible Preferred Stock were automatically converted on a 1:1 basis into a
total of 23,708,952 shares of Common Stock of PAP (the “Autoconversion”).
Market Overview
We believe that the recent economic growth in China will continue at a fast pace as will its consumption of increasing amounts of energy.
Because China’s economy is still less energy-efficient than the U.S. economy, requiring an estimated four times as many BTUs per $ of GDP,
this growth is expected to
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continue to amplify the country’s increasing energy demand for some time (U.S. Department of Energy: International Energy Annual &
International Petroleum Monthly) . According to the most recently available information from the CIA World Fact Book, China’s Gross
Domestic Product quadrupled from 1978 to 2000 and now stands as the second-largest economy in the world as measured by purchasing power
parity. China surpassed Japan in late 2003 to become the world’s second largest petroleum consumer. According to data from the
U.S. Department of Energy, between 2000 and 2006, oil use in China grew by an average of 7% per year, fueled by rapid industrialization. In
2006, Chinese demand reached 7.3 million barrels per day, more than one-third the level in the United States. At the same time, domestic crude
oil output in China has grown very slowly over the past five years, forcing imports to expand rapidly to meet demand. Since 2000 China’s oil
imports have more than doubled, growing from 1.4 million barrels per day to 3.4 million barrels per day in 2006, when they accounted for
nearly half of Chinese oil demand.
According to testimony by Jeffrey Logan, Senior Energy Analyst and China Program Manager at the International Energy Agency, to the
U.S. Senate Committee on Energy and Natural Resources on February 3, 2005, China has become an economic superpower with ever
increasing needs for oil and gas. Mr. Logan testified that China now plays a key role in the supply and demand of many global commodity
markets, including oil. If sustained at the present rate, Mr. Logan stated that China’s development will likely create the world’s largest
economy, as measured in purchasing power parity, in about two or three decades. He indicated that while China’s historical growth was not
dependent on energy, its growth was now very dependant on the development and growth of oil and gas, with every one percent increase in
GDP causing energy demand to grow by over 1.5 percent.
Natural gas represents a particularly under-utilized energy source in China, supplying less than 3% of the country’s energy needs, compared
with 22% for the U.S. and 23% globally. We believe that its low emissions, combined with the low cost and high efficiency of gas turbines,
make gas an attractive fuel for meeting China’s rapidly growing electric power demand. The Chinese government would like to expand gas use
significantly, and the National Development and Reform Commission has set a goal of increasing gas’s share of the market to 8%.
(U.S. Department of Energy: International Energy Annual & International Petroleum Monthly) .
The government of the People’s Republic of China has taken a number of steps to encourage the exploitation of oil and gas within its own
borders to meet the growing demand for oil and to try to reduce its dependency on foreign oil. Most importantly, the government has reduced
complicated restrictions on foreign ownership of oil exploitation projects and has passed legislation encouraging foreign investment and
exploitation of oil and gas.
According to various articles recently published in China Daily, during the “Tenth Five-Year” (2001-2005) period, China planned to
undertake a strategic reorganization in the oil industry by means of market liberalization, internalization, cost-effectiveness, scientific and
technological breakthrough and sustainable development. Changes were made in the structures of oil reservation and exploration such as
permitting more oil imports into the domestic market and allocating a greater percentage of oil and gas in non-renewable energy consumption.
The reorganization was aimed at ensuring a smooth and sustainable oil supply, at low cost and meeting a goal for sound economic growth. The
guiding principles of reform focused on developing the domestic market by expanding exploration efforts while practicing conservation and
building oil reserves. These efforts focused on building key infrastructure for oil and gas transportation and storage by targeting the
development of oil and gas pipelines to a target of 14,500 km in total length, building storage facilities for up to eight million cubic meters of
oil (50 million barrels), and 1.14 billon cubic meters of gas (40 billion cubic feet). The share of oil and gas in non-renewable energy
consumption was targeted for a 3 percentage increase by the end of 2005. In order to further technical development and innovation, substantial
resources were devoted to oil and gas exploration.
Chinese policymakers and state-owned oil companies have embarked on a multi-pronged approach to improve oil security by diversifying
suppliers, building strategic oil reserves, purchasing equity oil stakes
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abroad, and enacting new policies to lower demand. When it became a net oil importer in 1993, almost all of China’s crude imports came from
Indonesia, Oman, and Yemen. After diversifying global oil purchases over the past decade, Chinese crude imports now come from a much
wider range of suppliers. By 2004, Saudi Arabia was China’s largest supplier, accounting for 14 percent of imports, with Oman, Angola, Iran,
Russia, Vietnam, and Yemen together supplying another 60%, and the remainder coming from a long list of other suppliers (U.S. Department
of Energy).
The three major government-owned oil companies in China are (i) China Petroleum & Chemical Company, or “Sinopec,” (ii) China
National Offshore Oil Corporation, or “CNOOC,” and (iii) PetroChina Company Limited, or “PetroChina” (also sometimes referred to as
“China National Petroleum Corporation” or “CNPC,” which is the government company owning the majority of PetroChina). PetroChina is
China’s largest producer of crude oil and natural gas. Sinopec is China’s largest refining, storage and transmission company. CNOOC is
China’s largest offshore oil and gas exploration and development company. Each of these companies has been granted a charter by the Chinese
government to engage in various stages of oil and gas procurement, transportation and production in China. Substantially all oil and gas
exploration, storage and transportation by foreign entities in China must be conducted via joint ventures with one of these companies, or with
another Chinese company that has entered into an arrangement with one of these companies and been authorized by the appropriate
government authorities to engage in such activities in China.
Unlike the developed petroleum markets of the member countries of the Organisation for Economic Co-operation and Development
(“OECD”), the oil market in China still includes important elements of central planning. Each year, the National Development and Reform
Commission publishes the projected target for the production and sale of crude oil by the three state oil companies, based on the domestic
consumption estimates submitted by domestic producers, including PetroChina, Sinopec and CNOOC, the production capacity of these
companies, and the forecast of international crude oil prices. The actual production levels are determined by the producers themselves and may
vary from the submitted estimates. PetroChina and Sinopec set their crude oil median prices each month based on the average Singapore
market FOB prices for crude oil of different grades in the previous month. In addition, PetroChina and Sinopec negotiate a premium or
discount to reflect transportation costs, the differences in oil quality, and market supply and demand. The National Development and Reform
Commission will mediate if PetroChina and Sinopec cannot agree on the amount of premium or discount. Thus, while prices at the wellhead for
oil and gas are generally set below world levels, we believe the process is sufficiently transparent and results in pricing that can be profitable
for the Company.
Market Opportunity
While the barriers to entry for foreign entities to engage in the development of oil and gas resources in China have recently eased, we
believe that many other small companies still face significant hurdles due to their lack of experience in the Chinese petroleum industry.
Development requires specialized grants and permits, experience with obtaining scarce drilling and exploration equipment in remote regions
and the ability to manage projects efficiently during times of resource shortages. We believe that our management team is uniquely equipped to
take advantage of the opportunities that exist in China today. Through their prior exploration experiences in China, we believe that the
Company’s management team has developed relationships with oil industry executives and government officials in China that should help
facilitate the navigation of complex relationships inherent in structuring transactions with large government-owned oil companies and
government agencies. In addition, we believe that the Company’s production team has the hands-on experience with projects in Asia that is
essential to any successful petroleum project in China.
By focusing on oil and gas exploration and production in China, we will be able to participate in one of the world’s fastest growing
economies, and in a sector that holds an important key to that growth. China’s entry into the World Trade Organization (“WTO”) has also had
the effect of moving the country’s economy and legal system toward greater transparency. Accordingly, the Company’s confidence in China
continues to
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grow and is consistent with other major companies that continue to fuel the explosive growth in direct foreign investment into the country.
A study released on January 17, 2006 by the Hong Kong Shanghai Banking Corporation (“HSBC”) concluded that:
•
China’s real Gross Domestic Product growth is estimated at 9.3% for 2005, 8.9% for 2006 and 7.5% for 2007;
•
China’s foreign exchange reserves are expected to hit U.S.$950 billion by the end of 2006 and U.S.$1.05 trillion in 2007;
•
The Renminbi will continue to appreciate against the dollar, rising to 7.9 to 1 by the end of 2006 and 7.6 by the end of 2007. The
Renminbi traded at about 7.882 to the dollar on November 20, 2006; and
•
China’s consumer price index, or CPI, is expected to rise 1.8 percent in 2006 and one percent in 2007. HSBC estimated that the CPI
had risen 1.6 percent in 2005.
We believe that China’s huge population has increasing aspirations for “the good life,” and that China will need to rapidly increase its
supplies of energy from both internal and external resources as China’s workforce of 800 million moves into the middle class. We forecast
increasing demand and gradually increasing prices for oil in China for at least the next decade, providing an excellent environment for the
Company’s planned activities.
Principal Business Ventures
Through its existing subsidiaries and additional subsidiaries, joint venture companies and partnerships that may be established in the future,
the Company is engaged, and plans to engage, in the business of oil and gas exploration, development, production and trading in Asia and the
Pacific Rim countries, with a specific focus on the Chinese energy market. The Company has recently commenced operations in China, and has
entered into letters of intent and other agreements through its subsidiaries covering several energy ventures in China. The Company was
formed to act as a holding company for current and new energy ventures to be developed either through its subsidiaries, or through joint
ventures and other partnerships in which its subsidiaries will participate, in order to reduce risk in these ventures. This business strategy was
designed to help the Company maximize returns, reduce exposure and spread risk appropriately among several ventures. The Company can
make no assurances, however, that it will be able to successfully implement this strategy.
While we believe that the Company has a good opportunity to secure one or more of the prospective ventures described herein, there can be
no assurance that the Company will be able to consummate any of them, or if the Company does consummate any of them, that any of them
will be profitable. Even if we are able to enter into definitive agreements, we cannot assure you that we will be able to raise the significant
additional capital necessary to develop and operate such projects. We may also establish additional joint ventures and partnerships with other
oil and gas companies to reduce the Company’s overall risk and exposure. These arrangements are common in the energy industry, and are
expected to be utilized where management believes that it will maximize the Company’s returns.
Chifeng Zhongtong Oil and Natural Gas Co.
Inner Mongolia, China’s northern border autonomous region, features a long, narrow strip of land sloping from northeast to southwest. It
stretches 2,400 km from west to east and 1,700 km from north to south. Inner Mongolia traverses between northeast, north, and northwest
China. The third largest among China’s provinces, municipalities, and autonomous regions, the region covers an area of 1.18 million square
km, or 12.3 percent of the country’s territory. It neighbors eight provinces and regions in its south, east and west and Mongolia and Russia in
the north, with a borderline of 4,200 km. In 2005 the People’s Republic of China and the Inner Mongolia Municipality awarded to the Chifeng
Zhongtong Oil and Natural Gas Co. the exclusive
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authority to develop and exploit oil resources in the ShaoGen Contract Area, an area of approximately 353 square kilometers located in
Chifeng, China. In 2005 and 2006, Chifeng Zhongtong Oil and Natural Gas Co. drilled several wells throughout their Contract Area and
discovered oil.
In July 2006, the Company’s management began discussions with the Chifeng Zhongtong Oil and Natural Gas Co and hired an independent
Chinese oil consultant to conduct a feasibility study on the Company’s behalf. This feasibility study concluded that based on “investigation and
research in-depth for oil resources, exploitative environment and international markets, it is feasible for exploitation of oil and gas . . .” The
report contained the following conclusions:
•
There is a very high potential for oil resources. The consultant estimates there is a total oil generating potential accumulation of
15.6 million tons with excellent geological conditions for petroleum.
•
A very significant oil field (part of the Liahoe oilfield, known as the Kerqing oilfield) was discovered in the area, which makes
drilling in the ShaoGen Contract Area favorable.
•
The petroleum system has been proved as there are existing wells in the area with tested transmission infrastructure in place.
•
The domestic and international demand for oil is good and a favorable price for oil now exists.
•
The government has fostered a favorable exploitation environment for oil and gas.
•
Exploitation of oil resources in the high potential ShaoGen Contract Area represents an excellent opportunity for us, especially after
analysis of the petroleum geological condition economic analysis, investment environment and risk analysis.
After several negotiating sessions, in August 2006, the Company entered into a Contract for Cooperation and Joint Development with the
Chifeng Zhongtong Oil and Natural Gas Co. pursuant to which the Company was awarded the exclusive rights to drill several oil development
wells. Pursuant to such agreement, drilling operations commenced, and the first well drilled discovered oil in commercial quantities, and has
been completed as a producing well. This well is currently producing under an exploration and development license issued by the relevant
Chinese authorities; however, the Company has not recognized any revenue and related depletion expense to date due to uncertainty of
realization of the revenue until a permanent production license is obtained. A comprehensive long-term production license has been applied for
by Chifeng Zhongtong Oil and Natural Gas Co., and the Company expects the license to be issued in year 2007. If this license is not issued, the
opportunities to drill additional long-term production wells under the contract may be at risk.
Coal Bed Methane and Tight Gas Sand Ventures
The Company signed an agreement in November 2006 with the China United Coalbed Methane Co (the Chinese Government-designated
company holding exclusive rights to negotiate with foreign companies with respect to CBM production) which grants the Company the
exclusive rights to a large prospective contract area for CBM production located in the Shanxi Province of China, with an option to convert
such arrangement into a production sharing contract. This area is referred to as the “Zijinshan Block” and is approximately 175,000 acres. The
Company conducted a Feasibility Study over this contract area and assessed its ability to produce CBM, and concluded that it has significant
prospectivity and has exercised its option to convert its interest into a Production Sharing Contract (“PSC”). It is anticipated that the PSC will
have a term of approximately 30 years, and, if finalized, will be approved by the Chinese Ministry of Commerce. The Company has submitted
its corporate qualification documents, and has received back from the government company approval as being technologically and financially
capable of developing this contract area. While no
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reserves have been confirmed in our contract area, it is adjacent to areas that have significant gas discoveries. It is also in proximity to the
major West-East gas pipeline, which links the gas reserves in China’s western provinces to the markets of the Yangtze River Delta, including
Shanghai. The Company believes this opportunity has high potential.
The Company is also negotiating, and has signed preliminary documentation, for the acquisition of several additional production sharing
contract opportunities to develop and produce CBM and tight gas sand prospects in China. These projects, if acquired, could offer to the
Company the opportunity to exploit significant discovered gas reserves and resources, estimated by the Chinese government’s national CBM
company to be in excess of 1 trillion cubic feet of gas. However, significant additional capital will be required to make these acquisitions.
Because of its energy contribution and environmental benefits, CBM is a high profile focus area of the Chinese Government and an area where
China encourages foreign investment. Recent foreign ventures have been rewarded with significant market value related to such investments.
The Company has on its team some of the world’s premier CBM experts who successfully assisted in the development and operation of the
first such CBM ventures in China for the international energy industry. Although the Company hopes to acquire significant interests in one or
more of these production sharing contracts and initiate early production plans that could add hydrocarbon production and reserves to the
Company’s assets, there can be no assurance that any such agreements will be entered into on terms satisfactory to the Company, on a timely
basis, or at all.
“Downstream” Opportunities
The Company has signed a non-binding letter of intent with one of the largest steel and auto companies in China, Shougang Holdings, to
potentially acquire a 45% interest in the Mudanjiang Energy Development Project. As currently contemplated, this project would include a
small operating refinery, a small petrochemical plant, a service station complex, a crude producing component, a heavy oil trading operation
and ownership of significant property along the border of Russia and along the sea with nearby access to Vladivostok. If consummated, this
venture is expected to generate immediate revenue. The Company is currently conducting financial and operational due diligence related to this
venture, and plans to identify and engage strategic partners to participate with the Company going forward, provided that any such participation
by the Company does not require any significant cash contribution by the Company.
Geophysical Services and Development Opportunities
The Company has also signed an agreement with Sino Geophysical Co., Ltd (“SINOGEO”), the largest private geophysical services
company in China. This agreement provides to the Company access to the services of SINOGEO at competitive market rates. In addition, we
have been granted the exclusive right of first refusal to partner with SINOGEO on any new development acreage it acquires in China and
throughout Asia. The Company is also discussing with SINOGEO the possibility of acquiring a small equity interest in SINOGEO. SINOGEO
is in the process of going public on the Shenzhen Exchange in China.
Crude Trading
The Company has signed preliminary non-binding agreements and is working to obtain exclusive crude oil import and trading rights for up
to 1,000,000 barrels of crude oil in 2007/2008. This trading venture is anticipated to move forward in partnership with the City of Erlian, China
and other private trading venture partners in China. If the Company obtains these rights, such crude trading has the potential of providing
significant revenue to the Company.
Other Energy Ventures
The Company is currently negotiating an onshore oil production venture with MI Energy, a private oil and gas company in China that is
currently producing more than $300 million in onshore China production.
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The Company has signed preliminary documentation to consider the acquisition of an interest in the Jilin oilfield where there are over 30
currently producing wells and a plan to drill an additional 40 wells over the next 18 months. In addition, the Company is also discussing with
PetroChina, the publicly-traded arm of China National Petroleum Company and one of the national oil companies in China, enhanced oil
recovery ventures and natural gas producing ventures. If completed, these projects would complement our strategy of including early
production, low risk opportunities in a balanced portfolio. The Company is also considering another onshore production opportunity
acquisition, which currently generates over $10 million in net income.
Competitive Business Conditions and the Company’s Competitive Position
The Company will be competing with large international oil companies and smaller oil companies that target opportunities in markets
similar to the Company’s. Many of these companies have far greater economic, political and material resources at their disposal to engage in
activities competitive with the Company’s activities. The Company’s executive team is aware of this competitive environment, and has
endeavored to position the Company to take advantage of its strengths, which the Company believes include its ability to move quickly, its
knowledge and access to significant energy executives and energy project deal-flow in the Asian marketplace, its ability to capitalize on
relatively small opportunities which are bypassed by its large competitors, its ability to focus on economically efficient operations that may
yield the best returns, and its experience in developing enhanced oil recovery projects — a problem that is plaguing the China energy industry.
See “RISK RELATED TO OUR INDUSTRY – The market in which we plan to operate is highly competitive and the Company may not be
able to compete successfully against its current and future competitors.”
Regulation
China’s oil and gas industry is subject to extensive regulation by the People’s Republic of China government with respect to a number of
aspects of exploration, production, transmission and marketing of crude oil and natural gas as well as production, transportation and marketing
of refined products and chemical products. The following is a list of the primary Chinese central government authorities that exercise control
over various aspects of China’s oil and gas industry:
•
The Ministry of Land and Resources has the authority for granting, examining and approving oil and gas exploration and production
licenses, the administration of registration and the transfer of exploration and production licenses.
•
The Ministry of Commerce, which was established in March 2003 to consolidate the authorities and functions of the former State
Economic and Trade Commission and the former Ministry of Foreign Trade and Economic Cooperation. Its responsibilities include:
•
o
setting the import and export volume quotas for crude oil and refined products according to the overall supply and demand for
crude oil and refined products in China as well as the WTO requirements for China;
o
issuing import and export licenses for crude oil and refined products to oil and gas companies that have obtained import and
export quotas; and
o
examining and approving production sharing contracts and Sino-foreign equity and cooperative joint venture contracts.
The National Development and Reform Commission, which was established in March 2003 to consolidate the authorities and
functions of the former State Development Planning Commission and the former State Economic and Trade Commission. Its
responsibilities include:
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o
wielding industry administration and policy coordination authority over China’s oil and gas industry;
o
determining mandatory minimum volumes and applicable prices of natural gas to be supplied to certain fertilizer producers;
o
publishing guidance prices for natural gas and retail median guidance prices for certain refined products, including gasoline and
diesel;
o
approving significant petroleum, natural gas, oil refinery and chemical projects set forth under the Catalogues of Investment
Projects Approved by the Central Government; and
o
approving Sino-foreign equity and cooperative projects exceeding certain capital amounts.
Environmental Matters
China has adopted extensive environmental laws and regulations that affect the operation of its oil and gas industry. There are national and
local standards applicable to emissions control, discharges to surface and subsurface water, and the generation, handling, storage,
transportation, treatment and disposal of waste materials.
The environmental regulations require a company to register or file an environmental impact report with the relevant environmental bureau
for approval before it undertakes any construction of a new production facility or any major expansion or renovation of an existing production
facility. A new, expanded or renovated facility will not be permitted to operate unless the relevant environmental bureau has inspected it and is
satisfied that all necessary equipment has been installed as required by applicable environmental protection requirements. A company that
wishes to discharge pollutants, whether it is in the form of emission, water or materials, must submit a pollutant discharge declaration statement
detailing the amount, type, location and method of treatment. After reviewing the pollutant discharge declaration, the relevant environmental
bureau will determine the amount of discharge allowable under the law and will issue a pollutant discharge license for that amount of discharge
subject to the payment of discharge fees. If a company discharges more than is permitted in the pollutant discharge license, the relevant
environmental bureau can fine the company up to several times the discharge fees payable by the offending company for its allowable
discharge, or require that the offending company cease operations until the problem is remediated.
See “RISK RELATED TO INTERNATIONAL OPERATIONS – Compliance and enforcement of environmental laws and regulations may
cause the Company to incur significant expenditures and require resources which it may not have.”
Employees and Contractors
The Company currently has 9 full-time employees and 8 part-time contractors/employees employed as follows:
Employees
Administration
Research and Development/Technical Support
Marketing and Sales
8
1
0
12
Part-Time
Contractors/
Employees
1
6
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Risk Factors
The Company’s operations and its securities are subject to a number of risks, including those described below. If any of the following risks
actually occur, the business, financial condition or operating results of the Company and the trading price or value of its securities could be
materially adversely affected.
Risk Related to Our Business
Our limited operating history makes it difficult to predict future results.
The Company’s limited operating history makes it difficult to evaluate its current business and prospects or to accurately predict its future
revenue or results of operations. The Company’s revenue and income potential are unproven, and its business model is constantly evolving.
Because the energy industry is constantly changing, the Company may need to modify its business model to adapt to these changes. Companies
in early stages of development, particularly companies in new and rapidly evolving energy industry segments, are generally more vulnerable to
risks, uncertainties, expenses and difficulties than more established companies.
The Company’s ability to diversify risks depends upon its ability to raise capital and the availability of suitable prospects.
The Company’s business strategy includes spreading the risk of oil and natural gas exploration, development and drilling, and ownership of
interests in oil and natural gas properties, by participating in multiple projects and joint ventures, in particular with major Chinese
government-owned oil and gas companies as joint venture partners. If the Company is unable to secure sufficient attractive projects as a result
of its inability to raise sufficient capital or otherwise, the average quality of the projects and joint venture opportunities may decline and the risk
of the Company’s overall operations could increase.
The loss of key employees could adversely affect the Company’s ability to operate.
The Company believes that its success depends on the continued service of its key employees, as well as the Company’s ability to hire
additional key employees, when and as needed. Although the Company is a party to employment agreements with Frank C. Ingriselli, its
President and Chief Executive Officer, and Stephen F. Groth, its Vice President and Chief Financial Officer, both executives have the right to
terminate their respective employment at any time without penalty. The Company does have a $3 million key-man life insurance policy
covering its President and Chief Executive Officer, but does not have key-man life insurance policies covering any of its other executive
officers or key employees, and does not plan to obtain such coverage in the near future.
The unexpected loss of the services of one or more of these executives, and the ability to find suitable replacements within a reasonable
period of time thereafter, could have a material adverse effect on the economic condition and results of operations of the Company.
The Company will require substantial funds and will need to raise additional capital in the future.
Although the Company intends to finance a portion of its working capital and capital expenditure requirements with cash it expects to
generate from operations, the Company will nonetheless need to raise substantial additional funds to fully fund its existing operations and for
development, production, trading and expansion of its business. On June 30, 2007, the Company had positive working capital of approximately
$17.6 million (including $2.5 million in cash and cash equivalents) (unaudited). The Company has no current arrangements with respect to
sources of additional financing and any needed additional financing may not be available on commercially reasonable terms, or at all. The
inability to obtain additional financing, when
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needed, would have a negative effect on the Company, including possibly requiring it to curtail or cease operations. If any future financing
involves the sale of the Company’s equity securities, the shares of Common and Preferred Stock held by its stockholders could be substantially
diluted. If the Company borrows money or issues debt securities, it will be subject to the risks associated with indebtedness, including the risk
that interest rates may fluctuate and the possibility that it may not be able to pay principal and interest on the indebtedness when due.
Insufficient funds will prevent the Company from implementing its business plan and will require it to delay, scale back, or eliminate certain
of its programs or to license to third parties rights to commercialize rights in fields that it would otherwise seek to develop itself.
The Company’s ability to finance its business activities will require it to generate substantial cash flow from operations.
The Company’s business activities require substantial capital. It is the Company’s expectation that once its initial business ventures begin to
generate revenues, it will be able to finance a portion of its working capital and capital expenditure requirements with cash flow from
operations. Future cash flows will be subject to a number of variables, such as:
•
the level of production of existing wells;
•
prices of oil and natural gas;
•
the success and timing of development of proved undeveloped reserves;
•
cost overruns;
•
remedial work to improve a well’s producing capability;
•
direct costs and general and administrative expenses of operations;
•
reserves, including a reserve for the estimated costs of eventually plugging and abandoning the wells;
•
indemnification obligations of the Company for losses or liabilities incurred in connection with the Company’s activities; and
•
general economic, financial, competitive, legislative, regulatory and other factors beyond the Company’s control.
The Company cannot be sure that its business will ever generate or continue to generate cash flow at sufficient levels. If the Company’s
revenues were to decrease due to lower oil and natural gas prices, decreased production or other factors, and if it cannot obtain capital through
reasonable financing arrangements, such as a credit line, or otherwise, its ability to execute its business plan could be limited.
The Company has only two definitive contracts in place, both of which are for the exploration, development and drilling of oil wells in
Inner Mongolia.
While the Company’s management team has engaged in various negotiations relating to potential energy ventures in Asia and the Pacific
Rim countries, the only definitive contracts that have been secured, to date, are the Contract for Cooperation and Joint Development with
Chifeng Zhongtong Oil and Natural Gas Co. covering an oil field in Inner Mongolia and an Agreement for Joint Cooperation dated
November 30, 2006 with China United Coalbed Methane Co., Ltd. related to coal bed methane production. The Company has not
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entered into definitive agreements with respect to any other ventures that it is currently pursuing, and the Company’s ability to secure one or
more of these additional ventures is subject to, among other things, (i) the amount of capital the Company raises in the future; (ii) the
availability of land for exploration and development in the geographical regions in which the Company’s business is focused; (iii) the nature
and number of competitive offers for the same projects on which the Company is bidding; and (iv) approval by government and industry
officials. No assurance can be given that the Company will be successful in executing definitive agreements in connection with these or any
other ventures, or otherwise be able to secure any additional ventures it pursues in the future. Failure of the Company to secure one or more of
these additional business opportunities would have a material adverse effect on the Company’s business and results of operations, and would,
in all likelihood, result in the cessation of the Company’s business operations.
The Company’s business will involve many operating risks that can cause substantial losses.
The Company expects to produce, transport and market potentially toxic materials, and purchase, handle and dispose of other potentially
toxic materials in the course of its business. The Company’s operations will produce byproducts, which may be considered pollutants. Any of
these activities could result in liability, either as a result of an accidental, unlawful discharge or as a result of new findings on the effects the
Company’s operations on human health or the environment. Additionally, the Company’s oil and gas operations may also involve one or more
of the following risks:
•
fires;
•
explosions;
•
blow-outs;
•
uncontrollable flows of oil, gas, formation water or drilling fluids;
•
natural disasters;
•
pipe or cement failures;
•
casing collapses;
•
embedded oilfield drilling and service tools;
•
abnormally pressured formations;
•
damages caused by vandalism and terrorist acts; and
•
environmental hazards such as oil spills, natural gas leaks, pipeline ruptures and discharges of toxic gases.
In the event that any of the foregoing events occur, the Company could incur substantial losses as a result of (i) injury or loss of life;
(ii) severe damage or destruction of property, natural resources or equipment; (iii) pollution and other environmental damage; (iv) investigatory
and clean-up responsibilities; (v) regulatory investigation and penalties; (vi) suspension of its operations; or (vii) repairs to resume operations.
If the Company experiences any of these problems, its ability to conduct operations could be adversely affected. Additionally, offshore
operations are subject to a variety of operating risks, such as capsizing, collisions and damage or loss from hurricanes or other adverse weather
conditions. These conditions can cause substantial damage to facilities and interrupt production.
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The Company’s primary operating subsidiaries are development stage companies with little or no operating history and the Company
expects to continue to incur losses for a significant period of time.
The Company’s primary operating subsidiaries, IMPCO and ADS, are recently formed development-stage companies with minimal
revenues to date. As of June 30, 2007, the Company had an accumulated deficit of approximately $2,457,966 (unaudited). The Company
expects to continue to incur significant expenses relating to its identification of new ventures and investment costs relating to these ventures.
Additionally, fixed commitments, including salaries and fees for employees and consultants, rent and other contractual commitments may be
substantial and are likely to increase as additional ventures are entered into and personnel are retained. Energy ventures, such as oil well
drilling projects, generally require significant periods of time before they produce resources and in turn generate profits. Assuming that the
Company is able to execute its plan for several contemplated acquisitions, it anticipates having positive net income in 2009. It expects to have
significant requirements for capital expenditures through at least 2011, and expects to be cash flow positive in relation to these projects in 2012
for the first time, at the earliest. There can be no assurance that the Company will ever achieve profitability or, if it does achieve profitability,
that it will be able to sustain or increase profitability on a quarterly or annual basis in the future.
The Company will be dependent upon others for the storage and transportation of oil and gas which could significantly reduce its
profitability.
The Company does not own storage or transportation facilities and, therefore, will depend upon third parties to store and transport all of its
oil and gas resources. The Company will be subject to price changes and termination provisions in any contracts it may enter into with these
third-party service providers. We cannot assure you that we will be able to identify such third parties for any particular project. Even if such
sources are initially identified, we cannot assure you that we will be able to identify alternative storage and transportation providers in the event
of contract price increases or termination. In the event the Company is unable to find acceptable third-party service providers, it would be
required to contract for its own storage facilities and employees to transport the Company’s resources. The Company may not have sufficient
capital available to assume these obligations, and its inability to do so could result in the cessation of its business.
We may not be able to manage our anticipated growth.
The Company expects to significantly expand operations to accommodate additional development projects and other opportunities. This
expansion will likely strain our management, operations, systems and financial resources. To manage its recent growth and any future growth
of its operations and personnel, the Company must improve and effectively utilize its existing operational, management and financial systems
and successfully recruit, hire, train and manage personnel and maintain close coordination among its technical, finance, development and
production staffs. The Company will need to hire additional personnel in all areas during the remainder of 2007. In addition, the Company may
also need to increase the capacity of its software, hardware and telecommunications systems on short notice, and will need to manage an
increasing number of complex relationships with strategic partners and other third parties. The failure to manage this growth could disrupt the
Company’s operations and ultimately prevent the Company from generating meaningful revenue.
An interruption in the supply of materials, resources and services we plan to obtain from third party sources could cause a decline in
revenue.
Once it has identified and acquired projects, the Company will need to obtain other materials, resources and services, including, but not
limited to, specialized chemicals and specialty muds and drilling fluids, pipe, drill-string, geological and geophysical mapping and interruption
services. There may be only a limited number of manufacturers and suppliers of these materials, resources and services. These manufacturers
and suppliers may experience difficulty in supplying such materials, resources and services to the Company sufficient to meet its needs or may
terminate or fail to renew contracts for supplying these
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materials, resources or services on terms the Company finds acceptable including, without limitation, acceptable pricing terms. Any significant
interruption in the supply of any of these materials, resources or services, or significant increases in the amounts the Company is required to
pay for these materials, resources or services, could result in a reduction in the Company’s profitability, or the cessation of its operations, if it is
unable to replace any material sources in a reasonable period of time.
The Company does not plan to carry insurance policies in China and will be at risk of incurring personal injury claims for its employees
and subcontractors, and incurring loss of business due to theft, accidents or natural disasters.
The Company does not carry, and does not plan to carry, any policies of insurance to cover any type of risk to its business in China,
including, without limitation, the risks discussed above. The Company anticipates that in some ventures, it will be able to share a portion of
these uninsured risks with its partners and co-venturers, to the extent that such partners have sufficient financial resources to assume their pro
rata portion of any such liabilities; provided, however , that such portioning of liabilities does not assure that the Company will still not be
subject to significant risk. In the event that the Company were to incur substantial liabilities with respect to one or more incidents, this could
adversely affect its operations and it may not have the necessary capital to pay its portion of such costs and maintain business operations.
The Company intends to manage its business on a decentralized basis, which may restrict implementation of adequate business controls,
and may limit its ability to manage its business effectively.
The Company intends to manage its business on a decentralized basis, allowing its subsidiaries and their management to retain significant
responsibility for their day-to-day operations, profitability and growth. As the Company grows, its management may not be able to maintain
adequate controls on inter-company disbursements. In addition, the Company’s subsidiaries may be operating with management, sales and
support personnel that may be insufficient to support growth in their respective operation without significant central oversight and
coordination. If proper overall business controls have not been and are not implemented, a decentralized operating strategy could result in
inconsistent operating and financial practices, which could materially and adversely affect the Company’s profitability.
Because the Company is a holding company, it will be financially dependent on receiving distributions from its subsidiaries and this could
prove harmful if such distributions are not made. The ability of the Company’s subsidiaries to pay such distributions is subject to all applicable
laws and other restrictions including, but not limited to, commitments in financing arrangements and applicable tax laws. Such laws and
restrictions could limit the receipt of distributions, the payment of dividends and restrict the Company’s ability to continue operations.
The Company will incur increased costs as a result of the Mergers, and the acquisition of ADS’s and IMPCO’s businesses, which will
affect the profitability and, as a result, the results of operations of the combined entity.
Prior to the closing of the Mergers, the Company was a “shell company” with nominal operations. As a “shell company,” its SEC reporting
requirements were minimal. Following the Mergers, we now expect that full compliance with these SEC rules and regulations will significantly
increase the Company’s legal and financial compliance costs and make some activities more time-consuming and costly. The cost to the
Company of such compliance could be substantial and could have a material adverse effect on the results of operations of the combined entity.
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We may not be able to implement Section 404 of the Sarbanes-Oxley Act on a timely basis.
The SEC, as directed by Section 404 of the Sarbanes-Oxley Act, adopted rules generally requiring each public company to include a report
of management on the company’s internal controls over financial reporting in its annual report on Form 10-KSB that contains an assessment by
management of the effectiveness of the company’s internal controls over financial reporting. This requirement will first apply to our annual
report on Form 10-KSB for the fiscal year ending December 31, 2007. In addition, commencing with our annual report for the fiscal year
ending December 31, 2008 our independent registered accounting firm must attest to and report on management’s assessment of the
effectiveness of our internal controls over financial reporting.
We have not yet developed a Section 404 implementation plan. We have in the past discovered, and may in the future discover, areas of our
internal controls that need improvement. How companies should be implementing these new requirements including internal control reforms to
comply with Section 404’s requirements and how independent auditors will apply these requirements and test companies’ internal controls, is
still reasonably uncertain.
We expect that we will need to hire and/or engage additional personnel and incur incremental costs in order to complete the work required
by Section 404. We can not assure you that we will be able to complete a Section 404 plan on a timely basis. Additionally, upon completion of
a Section 404 plan, we may not be able to conclude that our internal controls are effective, or in the event that we conclude that our internal
controls are effective, our independent accountants may disagree with our assessment and may issue a report that is qualified. Any failure to
implement required new or improved controls, or difficulties encountered in their implementation, could negatively affect our operating results
or cause us to fail to meet our reporting obligations
Risks Related to Our Industry
Oil and natural gas investments are highly risky.
The selection of prospects, projects and joint venture opportunities for oil and natural gas exploration, development and drilling is highly
speculative. The Company cannot predict whether any prospect, project or joint venture opportunity will produce oil or natural gas in
commercial quantities, or at all, nor can the Company predict the amount of time it will take to recover any oil or natural gas it does produce.
Drilling activities may be unprofitable, not only as a result of non-productive wells, but from wells that do not produce oil or natural gas in
sufficient quantities or quality to return a profit. Delays and added expenses may also be caused by poor weather conditions affecting, among
other things, the ability to lay pipelines. In addition, ground water, various clays, lack of porosity and permeability may hinder, restrict or even
make production impracticable or impossible.
There can be no assurances that the Company will be successful in finding petroleum sources or developing resources.
The Company will be operating primarily in the petroleum extractive business; therefore, if it is not successful in finding crude oil and
natural gas sources with good prospects for future production, and exploiting such sources, its business will not be profitable and it may be
forced to terminate its operations. Exploring and exploiting oil and gas or other sources of energy is a risky business, which risk can only be
partially mitigated by technology and experienced personnel. There can be no assurances that the Company or any ventures it acquires or
participates in will be successful in finding petroleum or other energy sources; or, if it is successful in doing so, that the Company will be
successful in developing such resources and producing quantities that will be sufficient to permit the Company to conduct profitable operations.
The Company’s future success will depend in large part on the success of its drilling programs and creating and maintaining an inventory of
projects. Creating and maintaining an inventory of projects depends on many factors, including,
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among other things, obtaining rights to explore, develop and produce hydrocarbons in promising areas, drilling success, ability to bring long
lead-time, capital intensive projects to completion on budget and schedule, and efficient and profitable operation of mature properties. The
Company’s inability to successfully identify and exploit crude oil and natural gas sources would have a material adverse effect on its business
and results of operations and would, in all likelihood, result in the cessation of its business operations.
In addition to the numerous operating risks described in more detail in this report, exploring and exploitation of energy sources involve the
risk that no commercially productive oil or gas reservoirs will be discovered or, if discovered, that the cost or timing of drilling, completing and
producing wells will not result in profitable operations. The Company’s drilling operations may be curtailed, delayed or abandoned as a result
of a variety of factors, including:
•
adverse weather conditions;
•
unexpected drilling conditions;
•
pressure or irregularities in formations;
•
equipment failures or accidents;
•
inability to comply with governmental requirements;
•
shortages or delays in the availability of drilling rigs and the delivery of equipment; and
•
shortages or unavailability of qualified labor to complete the drilling programs according to the business plan schedule.
The market in which we plan to operate is highly competitive and the Company may not be able to compete successfully against its
current and future competitors.
Competition in the oil and gas industry is intense, particularly with respect to access to drilling rigs and other services, the acquisition of
properties and the hiring and retention of technical personnel. The Company expects competition in the market to remain intense because of the
increasing global demand for energy, and that competition will increase significantly as new companies enter the market and current
competitors continue to seek new sources of energy and leverage existing sources. Recently, higher commodity prices and stiff competition for
acquisitions has significantly increased the cost of available properties. Many of the Company’s competitors, including large oil companies,
have an established presence in Asia and the Pacific Rim countries and have longer operating histories, significantly greater financial,
technical, marketing, development, extraction and other resources and greater name recognition than the Company does. As a result, they may
be able to respond more quickly to new or emerging technologies, changes in regulations affecting the industry, newly discovered resources
and exploration opportunities, as well as to large swings in oil and natural gas prices. In addition, increased competition could result in lower
energy prices, and reduced margins and loss of market share, any of which could harm the Company’s business. Furthermore, increased
competition may harm the Company’s ability to secure ventures on terms favorable to it and may lead to higher costs and reduced profitability,
which may seriously harm its business.
The Company will be exposed to the effects of fluctuations in prices.
Investing and trading in oil and natural gas resources will cause the Company to be subject to all of the normal risks involved in investments
in commodities including, without limitation, price volatility, which is historically common in the commodities markets. Within the past
12 months, light crude oil futures have ranged from approximately $50 per barrel to approximately $80 per barrel. The Company believes that
these
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large fluctuations in prices will continue for the foreseeable future. Among the factors that can cause fluctuations are:
•
the domestic and foreign supply of oil and natural gas;
•
the price and availability of alternative fuels;
•
weather conditions;
•
the level of consumer demand;
•
global economic conditions;
•
political conditions in oil and gas producing regions; and
•
government regulations.
With respect to ventures in the People’s Republic of China, the prices the Company will receive for oil and gas, in connection with any of its
production ventures, will likely be regulated and set by the government. As a result, these prices may be well below the market price
established in world markets. Therefore, the Company may be subject to arbitrary changes in prices that may adversely affect its ability to
operate profitably.
If the Company does not hedge its exposure to reductions in oil and gas prices, it may be subject to significant reductions in prices;
alternatively, even if the company uses oil and gas price hedging contracts, which involve credit risk and may limit future revenues from
price increases, it still may have significant fluctuations in its net income and cash flows to the extent that there is not 100% correlation
between the changes in value of the hedging contract and the changes in value of the hedged volumes.
In the event that the Company chooses not to hedge its exposure to reductions in oil and gas prices by purchasing futures and by using other
hedging strategies, it may be subject to significant reduction in prices which could have a material negative impact on its profitability.
Alternatively, the Company may elect to use hedging transactions with respect to a portion of its oil and gas production to achieve more
predictable cash flow and to reduce its exposure to price fluctuations. While the use of hedging transactions limits the downside risk of price
declines, their use also may limit future revenues from price increases. They may also expose the Company to adverse changes in basis risk, the
relationship between the price of the specific oil or gas being hedged and the price of the commodity underlying the futures contracts or other
instruments used in the hedging transaction. Hedging transactions also involve the risk that the counterparty may be unable to satisfy its
obligations.
The Company may be required to take non-cash asset write-downs if oil and natural gas prices decline.
Under accounting rules, the Company may be required to write down the carrying value of oil and natural gas properties if oil and natural
gas prices decline or if there are substantial downward adjustments to its estimated proved reserves, increases in its estimates of development
costs or deterioration in its exploration results. Accounting standard FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets”, requires the Company to review its long-lived assets for possible impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable over time. In such cases, if the asset’s estimated undiscounted future cash flows are
less than its carrying amount, impairment exists. The impairment write-down, which would equal the excess of the carrying amount off the
assets being written down over their fair value, could have a negative impact on the Company’s earnings.
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Risks Related to International Operations
The Company’s international operations will subject it to certain risks inherent in conducting business operations in foreign countries,
including political instability and foreign government regulation.
The Company’s international operations are subject to risks generally associated with conducting businesses in foreign countries, such as:
•
foreign laws and regulations that may be materially different from those of the United States;
•
changes in applicable laws and regulations;
•
challenges to or failure of title;
•
labor and political unrest;
•
foreign currency fluctuations;
•
changes in foreign economic and political conditions;
•
export and import restrictions;
•
tariffs, customs, duties and other trade barriers;
•
difficulties in staffing and managing foreign operations;
•
longer time periods in collecting revenues;
•
difficulties in collecting accounts receivable and enforcing agreements;
•
possible loss of properties due to nationalization or expropriation; and
•
limitations on repatriation of income or capital.
Specifically, foreign governments may enact and enforce laws and regulations requiring increased ownership by businesses and/or state
agencies in energy producing businesses and the facilities used by these businesses, which could adversely affect the Company’s ownership
interests in then existing ventures. The Company believes that its ownership structure is in substantial compliance with Chinese ownership
requirements and is sufficient to enable the Company to obtain necessary government approvals. There can be no assurance, however, that such
structure will be adequate to accomplish the Company’s business objectives in China or in any other foreign jurisdiction where the Company
may operate. Foreign governments also may impose additional taxes and/or royalties on our business, which would adversely affect the
Company’s profitability. In certain locations, governments have imposed restrictions, controls and taxes, and in others, political conditions
have existed that may threaten the safety of employees and the Company’s continued presence in those countries. Internal unrest, acts of
violence or strained relations between a foreign government and the Company or other governments may adversely affect its operations. These
developments may, at times, significantly affect the Company’s results of operations, and must be carefully considered by its management
when evaluating the level of current and future activity in such countries.
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Compliance and enforcement of environmental laws and regulations may cause the Company to incur significant expenditures and
require resources, which it may not have.
Extensive national, regional and local environmental laws and regulations in China and other Pacific Rim countries are expected to have a
significant impact on the Company’s operations. These laws and regulations set various standards regulating certain aspects of health and
environmental quality, which provide for user fees, penalties and other liabilities for the violation of these standards. As new environmental
laws and regulations are enacted and existing laws are repealed, interpretation, application and enforcement of the laws may become
inconsistent. Compliance with applicable local laws in the future could require significant expenditures, which may adversely effect the
Company’s operations. The enactment of any such laws, rules or regulations in the future may have a negative impact on the Company’s
projected growth, which could in turn decrease its projected revenues or increase its cost of doing business.
The political uncertainty in China makes it difficult to develop any long range business planning.
China has just recently opened its doors to foreign businesses and private ownership of companies and businesses within China. There is no
guarantee that China will continue these progressive reforms or that they will maintain the ones they have currently. Any change in the political
climate in this region may make it more difficult for the Company to enter into new ventures, and possibly to maintain their existing ventures,
in that region.
A foreign government could change its policies toward private enterprise or even nationalize or expropriate private enterprises, which
could result in the total loss of the Company’s investment in that country.
The Company’s business is subject to significant political and economic uncertainties and may be adversely affected by political, economic
and social developments in China or in any other foreign jurisdiction in which it operates. Over the past several years, the Chinese government
has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. The
Chinese government may not continue to pursue these policies or may significantly alter them to the Company’s detriment from time to time
with little, if any, prior notice.
Changes in policies, laws and regulations or in their interpretation or the imposition of confiscatory taxation, restrictions on currency
conversion, restrictions or prohibitions on dividend payments to stockholders, devaluations of currency or the nationalization or other
expropriation of private enterprises could have a material adverse effect on the Company’s business. Nationalization or expropriation could
even result in the total loss of the Company’s investment and in the total loss of your investment in the Company.
Fluctuations in exchange rates could adversely affect the Company’s results of operations and financial condition.
Although the Company uses the United States Dollar for financial reporting purposes, many of the transactions that will be affected by its
subsidiaries will be denominated in the Chinese currency Renminbi, or “RMB.” As described above, until recently China did not allow its
currency to float in the open market. This policy change resulted in an immediate increase in the exchange ratios of the Renminbi against the
U.S. Dollar.
The Company expects that its subsidiaries will conduct substantially all of their business in China, and their financial performance and
condition will be measured in terms of RMB. It is difficult to assess whether a devaluation or revaluation (upwards valuation) of the RMB
against the U.S. Dollar would have an adverse effect on the Company’s financial performance and asset values when measured in terms of U.S.
Dollars. An increase in the RMB would raise the Company’s costs incurred in RMB; however, it is not clear whether the
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underlying cause of the revaluation would also cause an increase in the Company’s price received for oil or gas which would have the opposite
effect of increasing our margins and improving our financial performance.
Under current policies, dividends payable in RMB, as well as trade and service-related foreign exchange transactions, can be readily
converted to U.S. Dollars and other foreign currencies. However, payments related to transaction of capital, such as direct capital investments
in Chinese companies by foreign investors, are still subject to further government approval before they can be converted into RMB.
Currently, there are few means and/or financial tools available in the open market for the Company to hedge its exchange risk against any
possible revaluation or devaluation of RMB. Because the Company does not currently intend to engage in hedging activities to protect against
foreign currency risks, future movements in the exchange rate of the RMB could have an adverse effect on its results of operations and
financial condition.
If relations between the United States and China were to deteriorate, investors might be unwilling to hold or buy the Company’s stock
and its stock price may decrease.
At various times during recent years, the United States and China have had significant disagreements over political, economic and security
issues. Controversies may arise in the future between these two countries. Any political or trade controversies between these two countries,
whether or not directly related to our business, could adversely effect the market price of the Company’s Common Stock.
If the United States imposes trade sanctions on China due to its current currency policies, the Company’s operations could be materially
and adversely affected.
Over the past few years, China has “pegged” its currency to the United States Dollar. This means that each unit of Chinese currency has had
a set ratio for which it may be exchanged for United States currency, as opposed to having a floating value like many other countries’
currencies. This policy has been under review by policy makers in the United States. Trade groups in the United States have blamed the cheap
value of the Chinese currency for causing job losses in American factories, giving exporters an unfair advantage and making its imports
expensive. Congress has been considering the enactment of legislation, with the view of imposing new tariffs on Chinese imports. Following
increasing pressure for China to change its currency policies, in 2005, the People’s Bank of China announced its decision to strengthen the
exchange rate of the Chinese currency to the U.S. Dollar, revaluing the Chinese currency by 2.1% and to introduce a “managed floating
exchange rate regime.” Since that time, the exchange rate of the Chinese currency has been allowed to float against a basket of currencies,
although the daily trading price of the U.S. Dollar against the Chinese currency in the interbank foreign exchange market can float only within
a small range.
It is difficult to anticipate the reaction of the United States Congress to this reform. If Congress deems that China is still gaining a trade
advantage from its exchange currency policy, and an additional tariff is imposed, it is possible that China-based companies will no longer
maintain significant price advantages over U.S. and other foreign companies on their goods and services, and that the rapid growth of China’s
economy could slow as a result. If the United States or other countries enact laws to penalize China for its currency policies, the Company’s
business could be materially and adversely affected.
A lack of adequate remedies and impartiality under the Chinese legal system may adversely impact the Company’s ability to do business
and to enforce the agreements to which it is a party.
The Company anticipates that it will be entering into numerous agreements governed by Chinese law. The Company’s business would be
materially and adversely affected if these agreements are not enforced. In the event of a dispute, enforcement of these agreements in China
could be extremely difficult. Unlike the United States, China has a civil law system based on written statutes in which judicial decisions have
little
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precedential value. The Chinese government has enacted some laws and regulations dealing with matters such as corporate organization and
governance, foreign investment, commerce, taxation and trade. However, the government’s experience in implementing, interpreting and
enforcing these recently enacted laws and regulations is limited, and the Company’s ability to enforce commercial claims or to resolve
commercial disputes is uncertain. Furthermore, enforcement of the laws and regulations may be subject to the exercise of considerable
discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their
determination. These uncertainties could limit the protections that are available to the Company.
The Company’s stockholders may not be able to enforce United States civil liabilities claims.
Many of the Company’s assets are expected to be located outside the United States and held through one or more wholly-owned subsidiaries
incorporated under the laws of foreign jurisdictions, including Hong Kong and China. The Company’s operations are expected to be conducted
in China and other Pacific Rim countries. In addition, some of the Company’s directors and officers, including directors and officers of its
subsidiaries, may be residents of countries other than the United States. All or a substantial portion of the assets of these persons may be
located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these
persons. In addition, there is uncertainty as to whether the courts of China and other Pacific Rim countries would recognize or enforce
judgments of United States courts obtained against the Company or such persons predicated upon the civil liability provisions of the securities
laws of the United States or any state thereof, or be competent to hear original actions brought in these countries against the Company or such
persons predicated upon the securities laws of the United States or any state thereof.
Risks Related to Our Stock
The market price of our stock may be adversely affected by market volatility.
The market prices of securities of energy companies are extremely volatile and sometimes reach unsustainable levels that bear no
relationship to the past or present operating performance of such companies.
Factors that may contribute to the volatility of the trading price of our Common Stock include, among others:
•
the Company’s quarterly results of operations;
•
the variance between the Company’s actual quarterly results of operations and predictions by stock analysts;
•
financial predictions and recommendations by stock analysts concerning energy companies and companies competing in the
Company’s market in general, and concerning the Company in particular;
•
public announcements of regulatory changes or new ventures relating to the Company’s business, new products or services by the
Company or its competitors, or acquisitions, joint ventures or strategic alliances by the Company or its competitors;
•
public reports concerning the Company’s services or those of its competitors;
•
the operating and stock price performance of other companies that investors or stock analysts may deem comparable to the Company;
•
large purchases or sales of the Company’s Common Stock;
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•
investor perception of the Company’s business prospects or the oil and gas industry in general; and
•
general economic and financial conditions.
In addition to the foregoing factors, the trading prices for equity securities in the stock market in general, and of energy-related companies in
particular, have been subject to wide fluctuations that may be unrelated to the operating performance of the particular company affected by
such fluctuations. Consequently, broad market fluctuations may have an adverse effect on the trading price of the Common Stock, regardless of
the Company’s results of operations.
The limited market for our Common Stock may adversely affect trading prices or the ability of a shareholder to sell our shares in the
public market.
Although our Common Stock is quoted on the Pink Sheets, there is only a limited market for the Common Stock, and there can be no
assurance that this market will be maintained or broadened. The market price for shares of Common Stock is likely to be very volatile, and
numerous factors beyond the Company’s control may have a significant effect.
It may be more difficult to effect transactions in the Company’s Common Stock if the Company’s Common Stock is not traded on the
Over-the-Counter Bulletin Board or a securities exchange such as the AMEX and it would be difficult to effect transactions in the
Company’s Common Stock if it continues trading exclusively on the so-called “Pink Sheets.”
Although the Company intends to list its shares of Common Stock for trading on a securities exchange such as the OTC or the AMEX as
soon as reasonably possible in order to provide for a more significant trading market for the Company’s Common Stock, there are certain
minimum stockholder, financial and other requirements that the Company must meet in order to be eligible for such listing. The Company
cannot assure you that the Company’s Common Stock will become eligible for listing on an exchange such as the AMEX or the OTC, in the
near future, or ever. Failure to have the Company’s Common Stock listed on an exchange such as the AMEX would result in a limited trading
market for the Company’s Common Stock.
Substantial sales of our Common Stock could cause our stock price to fall.
As of June 30, 2007, the Company had outstanding 39,931,106 shares of Common Stock of which 39,462,984 shares were “restricted
securities” (as that term is defined under Rule 144 promulgated under the Securities Act of 1933 (“Rule 144”)). Substantially all of these
restricted securities are eligible for sale under Rule 144 as currently in effect at various times commencing on or about May 7, 2008 (or sooner,
if certain revisions to Rule 144 proposed by the SEC are adopted). The Company has entered into registration rights agreement with
shareholders covering 23,708,952 of such restricted securities. These registration rights agreements provide that if the Company either
(x) becomes a publicly reporting company under the Exchange Act (for avoidance of doubt, a Pink Sheet listed company does not qualify as a
publicly reporting company under the Exchange Act) and successfully lists its shares for trading on a national securities exchange (the “Listing
Date”), or (y) completes an initial public offering of its securities pursuant to a registration statement under the Securities Act prior to May 7,
2008 (the “IPO Date”), then the Company shall be required to use commercially reasonable efforts to prepare and file a registration statement
under the Securities Act covering the resale of all the Registrable Securities (as defined in the registration rights agreements) within 60 days
following the Listing Date or the IPO Date, as applicable, and to use commercially reasonable efforts to cause such registration statement to be
declared effective by the SEC within 210 days after the Listing Date or the IPO Date, as applicable. In addition, the registration rights
agreements entitle the holders to demand two registrations of their securities after the Company has effected a registered public offering of its
Common Stock and unlimited number of piggy-back registrations (subject to the right of any underwriters in the public offering to reduce the
number of such shares that can be included in the registrations). No prediction can be
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made as to the effect, if any, that sales of shares of Common Stock or the availability of such shares for sale will have on the market prices
prevailing from time to time. Nevertheless, the possibility that substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and could impair the Company’s ability to raise capital through the sale of its
equity securities.
The Company’s issuance of Preferred Stock could adversely affect the value of the Company’s Common Stock.
The Company’s Amended and Restated Certificate of Incorporation authorizes the issuance of up to 50,000,000 shares of Preferred Stock,
par value $0.001 per share (the “Preferred Stock”). Of this amount, 23,708,952 shares have been issued and subsequently converted into
Common Stock. These shares may not be reissued. The authorized but unissued Preferred Stock constitutes what is commonly referred to as
“blank check” Preferred Stock. This type of Preferred Stock may be issued by the Board of Directors from time to time on any number of
occasions, without stockholder approval, as one or more separate series of shares comprised of any number of the authorized but unissued
shares of Preferred Stock, designated by resolution of the Board of Directors, stating the name and number of shares of each series and setting
forth separately for such series the relative rights, privileges and preferences thereof, including, if any, the: (i) rate of dividends payable
thereon; (ii) price, terms and conditions of redemption; (iii) voluntary and involuntary liquidation preferences; (iv) provisions of a sinking fund
for redemption or repurchase; (v) terms of conversion to common stock, including conversion price; and (vi) voting rights. The designation of
such shares could be dilutive of the interest of the holders of our common stock. The ability to issue such Preferred Stock could also give the
Company’s Board of Directors the ability to hinder or discourage any attempt to gain control of the Company by a merger, tender offer at a
control premium price, proxy contest or otherwise.
The Common Stock may be deemed “penny stock” and therefore subject to special requirements.
The Company’s Common Stock may be deemed to be a “penny stock” as that term is defined in Rule 3a51-1 promulgated under the
Securities Exchange Act of 1934. Penny stocks are stocks (i) with a price of less than five dollars per share; (ii) that are not traded on a
“recognized” national exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must
still meet requirement (i) above); or (iv) in issuers with net tangible assets of less than $2,000,000 (if the issuer has been in continuous
operation for at least three years) or $5,000,000 (if in continuous operation for less than three years), or with average revenues of less than
$6,000,000 for the last three years.
Section 15(g) of the Securities Exchange Act of 1934, and Rule 15g-2 promulgated under the Securities Exchange Act of 1934, require
broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a
manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor’s account.
Moreover, Rule 15g-9 promulgated under the Securities Exchange Act of 1934 requires broker-dealers in penny stocks to approve the account
of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to
(i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives;
(ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has
sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor
with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and
dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more difficult for investors in the Common Stock to resell their
shares to third parties or to otherwise dispose of them.
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Our executive officers, directors and major stockholders hold a substantial amount of our Common Stock and may be able to prevent
other stockholders from influencing significant corporate decisions.
As of June 30, 2007, the executive officers, directors and holders of 5% or more of the outstanding Common Stock together beneficially
owned approximately 45.06% of the outstanding Common Stock. These stockholders, if they were to act together, would likely be able to
significantly influence all matters requiring approval by stockholders, including the election of Directors and the approval of significant
corporate transactions. This concentration of ownership may also have the effect of delaying, deterring or preventing a change in control and
may make some transactions more difficult or impossible to complete without the support of these stockholders.
ITEM 2. Plan of Operation
The following plan of operation should be read in conjunction with our financial statements, included herewith. This discussion should not
be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will
necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment by our
management.
As explained in Item 1. – Description of Business – Organization, the present PAP, the Company, resulted from mergers which included the
merger of IMPCO into PAP. Under applicable accounting standards, IMPCO was defined as the acquiring company. Accordingly, the
reportable results of operations for the Company through the merger date of May 7, 2007 are comprised only of the historical results of the
former IMPCO. Therefore, for purposes of financial reporting, the inception of the Company is reflected as August 25, 2005, the inception date
of IMPCO. The cumulative net losses of the Company from inception through June 30, 2007 are $2,457,966. Our losses have resulted
primarily from general and administrative expenditures associated with developing a new enterprise, consulting, legal and accounting expenses.
From inception through June 30, 2007, we have not generated any significant revenues from operations.
The following describes in general terms the Company’s plan of operation and development strategy for the twelve-month period ending
June 30, 2008 (the “Next Year”). During the Next Year, the primary focus of the Company will be to (i) continue its drilling activities under its
agreement with Chifeng Zhongtong Oil and Natural Gas Co., (ii) begin operations on its highly prospective Zijinshan CBM contract area, and
(iii) successfully acquire additional CBM and natural gas sand opportunities. In addition, the Company plans to develop additional onshore
producing and enhanced oil production opportunities in China with its potential partners MI Energy and PetroChina. The Company also plans
to assess joint development opportunities with its alliance partner, SINOGEO.
During the Next Year, the Company plans to focus its efforts on drilling activities under its agreement with the Chifeng Zhongtong Oil and
Natural Gas Co. and commencing operations on its highly prospective Zijinshan CBM contract area, as well as developing additional enhanced
oil production opportunities in China with its potential partners MI Energy and PetroChina. In addition to these opportunities, the Company
plans to continue to aggressively identify other high-growth value opportunities in the energy sectors in China and the Pacific Rim, particularly
with respect to oil and gas exploration, development, production, refining and trading. Since we are a development stage company, we are
limited in our ability to grow by the availability of capital for our businesses and each project. The Company’s ability to successfully
consummate any of its projects, including the projects described above, is contingent upon the making any required deposits, obtaining the
necessary governmental approvals and executing binding agreements to obtain the rights we desire within limited timeframes. Some potential
acquisitions (as described in ”Liquidity and Capital Resources” below) would require us to raise additional capital. As a result, we are not able
at this time to assure stockholders that any project, including those identified in this report, will ultimately be entered into or
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be successful. However, if the Company fails to enter into any planned project, it plans to continue to seek to identify other opportunities to
deploy its capital appropriately.
The Company plans to re-invest the proceeds from its successful ventures into new opportunities and to further exploit existing
opportunities, and the Company does not intend to distribute its profits, if any, for the foreseeable future.
The Company has assembled a management team with many years of global experience in the fields of international business development,
petroleum engineering, geology, petroleum field development and production, petroleum operations and finance. Several members of the team
developed and ran what we believe were some of the most successful energy ventures that were commercialized at Texaco. The Company
believes that its management team is uniquely qualified to identify, acquire and exploit energy resources throughout Asia and the Pacific Rim
countries.
Members of the Company’s management team previously held responsibilities in similar oil and gas development and screening roles at
Texaco and will seek to utilize their global contacts in Asia to provide us with access to a variety of energy projects which we plan to
effectively and efficiently screen to select opportunities which we believe will offer us high potential returns. Among the strategies that we plan
to use are:
•
Focusing on profitable investments that play to the Company’s expertise;
•
Leveraging our productive asset base and capabilities to develop value;
•
Actively managing our assets and on-going operations while attempting to limit capital exposure;
•
Enlisting external resources and talent as necessary to operate/manage our properties during peak operations; and
•
Implementing an exit strategy with respect to each investment and project with a view to maximizing asset values and returns.
Product Research and Development
The Company has not engaged in any product research or development and does not anticipate engaging in product research or development
during the next twelve months.
Liquidity and Capital Resources
The Company has sufficient funds to fund all of its current efforts for the next 12 months. As of June 30, 2007 the Company had net
working capital of $17,585,607. It had cash, cash equivalents and short-term investments totaling $17,718,462. For the six months ended
June 30, 2007 it incurred a net loss of $1,320,235. As a result of our operating losses from our inception through June 30, 2007, we generated a
cash flow deficit of $1,781,895 from operating activities during this period. Cash flows used in investing activities was $15,443,426 during the
period August 25, 2005 through June 30, 2007, comprised of the purchase of $15,225,000 of marketable securities and the acquisition of
$218,426 of property and equipment. We met our cash requirements during this period through net proceeds of $19,701,605 from the private
placement of restricted equity securities.
Our available working capital and capital requirements will depend upon numerous factors, including progress of our exploration and
development programs, market developments and the status of our competitors. Our continued operations will depend on whether we are able
to raise additional funds through various potential sources, such as equity and debt financing and strategic alliances. Such additional funds may
not become available on acceptable terms, if at all, and there can be no assurance that any additional funding
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that we do obtain will be sufficient to meet our needs in the long term. Through June 30, 2007, virtually all of our financing has been through
private placements of equity instruments.
We intend to continue to fund operations from cash on-hand and through the similar sources of capital previously described for the
foreseeable future. We can give no assurances that any additional capital that we are able to obtain will be sufficient to meet our needs. We
believe that we will continue to incur net losses and negative cash flows from operating activities for the next 1-2 years. Based on the resources
available to us on June 30, 2007, we can sustain at the present burn rate for more than one year. We may need additional equity or debt
financing to expand our operations through 2008 and we may need additional financing thereafter.
By adjusting our operations and development to the level of capitalization, we believe we have sufficient capital resources to meet projected
cash flow deficits. However, if during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in
raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations
liquidity and financial condition.
To the extent the Company acquires additional CBM, tight gas sand and other energy-related rights consistent with its business plan, the
Company may need to raise additional funds for such projects. The CBM and tight gas sand acquisition opportunities that the Company is
pursuing would require significant additional capital. The Company is actively pursuing financing for these acquisitions.
Employees
We currently have 9 full time employees and 8 part-time employees/contractors. In order for us to attract and retain quality personnel, we
anticipate we will have to offer competitive salaries to future employees. During the next year, the Company plans to hire additional senior
management employees in the areas of corporate development, petroleum engineering, geological and geophysical sciences and accounting, as
well as additional technical, operations, and administrative staff as required to expand its expansion efforts, and to maintain focus on its then
existing and new projects. The number and skill sets of individual employees will be primarily dependent on the relative rates of growth of the
Company’s different projects, and the extent to which operations and development are executed internally or contracted to outside parties.
Subject to the availability of sufficient working capital and assuming initiation of additional projects, the Company currently plans to increase
staffing to over twenty (20) people during the Next Year, although there can be no assurance that such hiring will take place or will be adequate
to execute the Company’s growth plans. As we continue to expand, we will incur additional cost for personnel.
Acquisition of Plant and Equipment and Other Assets
We do not anticipate the sale of any material property, plant or equipment during the next 12 months. We anticipate the acquisition of
material property, plant and equipment during the next 12 months, but are unable to state with any precision the capital requirements.
We believe that, based on the information currently available to us, the following opportunities can be funded with our existing working
capital for the next 12 months:
•
drilling activities under our agreement with the Chifeng Zhongtong Oil and Natural Gas Co., (estimated cost of $2.5 million)
•
obligatory operations under the Zijinshan CBM contract area (estimated cost of $1.3 million)
•
drilling operations with MI Energy regarding an oilfield in Jilin (estimated cost of $4 million)
We believe that, based on the information currently available to us, the following opportunities can be funded with our existing working
capital for the next 24 months:
•
drilling activities under our agreement with the Chifeng Zhongtong Oil and Natural Gas Co., (estimated cost of $5 million)
•
obligatory operations under the Zijinshan CBM contract area (estimated cost of $2.5 million)
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•
drilling operations with MI Energy regarding an oilfield in Jilin (estimated cost of $7 million)
Results of Operations
The Company is in the development stage and to date has not generated any significant revenues. The risks specifically discussed are not the
only factors that could affect future performance and results. This report contains forward-looking statements concerning us, our business and
our operations. Such forward-looking statements are necessarily speculative and there are certain risks and uncertainties that could cause actual
events or results to differ materially from those referred to in such forward-looking statements. We do not have a policy of updating or revising
forward-looking statements and thus it should not be assumed that silence by our management over time means that actual events or results are
occurring as estimated in the forward-looking statements herein.
In the six months ended June 30, 2007, the Company generated $12,289 in miscellaneous revenues from services. These revenues have been
recorded as “Other Income”, were from a single consulting engagement and are not at this point expected to be repeated as the Company is not
in the consulting business and has increasing demands placed on its staff in developing its own business enterprise. Even though the Company
has earned these nominal revenues, it still considers itself a development stage enterprise as it has been since IMPCO’s inception on August 25,
2005. Accordingly, period to period comparisons are either not applicable or not comparable.
As a development stage company, we have yet to earn significant revenues from operations. We may experience fluctuations in operating
results in future periods due to a variety of factors, including our ability to obtain additional financing in a timely manner and on terms
favorable to us, our ability to successfully develop our business model, the amount and timing of operating costs and capital expenditures
relating to the expansion of our business, operations and infrastructure and the implementation of marketing programs, key agreements, and
strategic alliances, and general economic conditions specific to our industry.
As a result of limited capital resources and no revenues from operations from the date of IMPCO’s inception on August 25, 2005, the
Company has relied on the issuance of equity securities to employees and non-employees in exchange for services. The Company’s
management enters into equity compensation agreements with non-employees if it is in the best interest of the Company under terms and
conditions consistent with the requirements of Financial Accounting Standard No. 123(R), “Share-Based Compensation.” In order to conserve
its limited operating capital resources, the Company anticipates continuing to compensate non-employees with equity compensation for
services during the next twelve months. This policy may have a material effect on the Company’s results of operations during the next twelve
months.
Revenues
We have generated no significant revenues from operations since IMPCO’s inception on August 25, 2005. We believe we will begin
generating revenues from operations in 2008 from actual operation as the Company transitions from a development stage company to that of an
active growth stage company.
Costs and Expenses
From our inception through June 30, 2007 the Company has not generated any significant revenues and has incurred cumulative losses of
$2,457,966. The major components of expenses and their amounts over this period are: consulting fees paid in cash — $883,083; consulting
fees paid in equity compensation — $532,917; salaries-$380,711; travel-$255,169; acquisition cost of the merger-$127,706; legal and
professional fees-$82,405; and amortization of stock options at fair value-$80,119.
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Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Inflation
It is the opinion of the Company that inflation has not had a material effect on its operations.
Critical Accounting Policies and Estimates
The discussion and analysis of our plan of operations is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial
statements requires us to make estimates and assumptions that affect our reported results of operations and the amount of reported assets,
liabilities and proved oil and gas reserves. Some accounting policies involve judgments and uncertainties to such an extent that there is
reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had
been used. Actual results may differ from the estimates and assumptions used in the preparation of our consolidated financial statements.
Described below are the most significant policies we apply, or intend to apply , in preparing our consolidated financial statements, some of
which are subject to alternative treatments under accounting principles generally accepted in the United States of America. We also describe
the most significant estimates and assumptions we make in applying these policies.
Oil and Gas Activities
Accounting for oil and gas activities is subject to special, unique rules. Two generally accepted methods of accounting for oil and gas
activities are available — successful efforts and full cost. The most significant differences between these two methods are the treatment of
exploration costs and the manner in which the carrying value of oil and gas properties are amortized and evaluated for impairment. The
successful efforts method requires exploration costs to be expensed as they are incurred while the full cost method provides for the
capitalization of these costs. Both methods generally provide for the periodic amortization of capitalized costs based on proved reserve
quantities. Impairment of oil and gas properties under the successful efforts method is based on an evaluation of the carrying value of
individual oil and gas properties against their estimated fair value, while impairment under the full cost method requires an evaluation of the
carrying value of oil and gas properties included in a cost center against the net present value of future cash flows from the related proved
reserves, using period-end prices and costs and a 10% discount rate.
Successful Efforts Method
We use the successful efforts method of accounting for our oil and gas activities. Under this method, costs of drilling successful wells are
capitalized. Costs of drilling exploratory wells not placed into production are charged to expense. Geological and geophysical costs are charged
to expense as incurred.
Depreciation, Depletion and Amortization
The quantities of estimated proved oil and gas reserves will be a significant component of our calculation of depletion expense, and
revisions in such estimates may alter the rate of future expense. Holding all other factors constant, if reserves are revised upward, earnings
would increase due to lower depletion expense. Likewise, if reserves are revised downward, earnings would decrease due to higher depletion
expense.
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Future Development and Abandonment Costs
Future development costs include costs incurred to obtain access to proved reserves such as drilling costs and the installation of production
equipment. Future abandonment costs include costs to dismantle and relocate or dispose of our production platforms, gathering systems and
related structures and restoration costs of land and seabed. Our operators develop estimates of these costs for each of our properties based upon
their geographic location, type of production structure, well depth, currently available procedures and ongoing consultations with construction
and engineering consultants. Because these costs typically extend many years into the future, estimating these future costs is difficult and
requires management to make judgments that are subject to future revisions based upon numerous factors, including changing technology and
the political and regulatory environment. We review our assumptions and estimates of future development and future abandonment costs on an
annual basis.
The accounting for future abandonment costs is based upon SFAS No. 143, “Accounting for Asset Retirement Obligations.” This standard
requires that a liability for the discounted fair value of an asset retirement obligation be recorded in the period in which it is incurred and the
corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value
each period, and the capitalized cost is depreciated over the useful life of the related asset. Holding all other factors constant, if our estimate of
future abandonment and development costs is revised upward, earnings would decrease due to higher depreciation, depletion and amortization
(DD&A) expense. Likewise, if these estimates are revised downward, earnings would increase due to lower DD&A expense.
Allocation of Purchase Price in Business Combinations
As part of our business strategy, we actively pursue the acquisition of oil and gas properties. The purchase price in an acquisition is
allocated to the assets acquired and liabilities assumed based on their relative fair values as of the acquisition date, which may occur many
months after the announcement date. Therefore, while the consideration to be paid may be fixed, the fair value of the assets acquired and
liabilities assumed is subject to change during the period between the announcement date and the acquisition date. Our most significant
estimates in our allocation typically relate to the value assigned to future recoverable oil and gas reserves and unproved properties. As the
allocation of the purchase price is subject to significant estimates and subjective judgments, the accuracy of this assessment is inherently
uncertain.
Revenue Recognition
We will recognize revenue when crude oil and natural gas quantities are delivered to or collected by the respective purchaser. As of June 30,
2007, we did not have significant sales. Title to the produced quantities transfers to the purchaser at the time the purchaser collects or receives
the quantities. Prices for such production will be defined in sales contracts and are readily determinable based on certain publicly available
indices. All transportation costs will be accounted for as a reduction of oil and natural gas sales revenue.
Recently Issued Accounting Standards Not Yet Adopted
Fair Value Measurements. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair
value measurements. Prior to this Statement, there were different definitions of fair value and limited guidance for applying those definitions in
GAAP. This Statement provides the definition to increase consistency and comparability in fair value measurements and for expanded
disclosures about fair value measurements. The Statement emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. The Statement clarifies that market participant assumptions include assumptions about risk, i.e. the risk inherent in a particular
valuation technique used to measure fair value and/or the risk inherent in the inputs to the valuation technique. The Statement expands
disclosures about the use of fair vale to measure assets and liabilities in interim and annual periods subsequent to initial recognition. The
disclosures focus on the inputs used to measure fair value and for recurring fair value measurements using significant unobservable inputs, the
effect of the measurements on earnings for the
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period. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that
fiscal year, including the financial statements for an interim period within that fiscal year. The Company does not expect adoption of this
standard will have a material impact on its financial position, operations or cash flows.
The Fair Value Option for Financial Assets and Financial Liabilities. In February 2007, the FASB issued SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115”, permitting entities to choose to
measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to
apply complex hedge accounting measurement. The statement applies to all entities, including not-for profit organizations. Most of the
provisions of this Statement apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities”, applies to all entities with available-for-sale and trading securities. The Company does not
expect adoption of this standard will have a material impact on its financial position, operations or cash flows.
ITEM 3. Description of Properties.
Principal Business Facilities
The Company has two primary facilities, one located in Hartsdale, New York (the “Hartsdale Facility”), and the other located in Beijing,
China (the “Beijing Facility”). The Hartsdale Facility is 1,378 rentable square feet and consists of office space. The Hartsdale Facility is
occupied under a lease that commenced on December 1, 2006 and ends on November 30, 2008. Our rental expense for this facility is $3,215.33
per month for the first year and $3,343.92 per month for the second year, in addition to a 5.5% proportionate share of operating expenses of the
property. The Beijing Facility is approximately 1,900 square feet and consists of office space. The Beijing Facility is occupied under a lease
that commences on August 16, 2007 and ends on August 15, 2009. Our combined rental and management expense for this facility is currently
$4,597 per month. The Company believes that its facilities have the capacity to meet its needs for the foreseeable future.
Investment Policies
The Board of Directors of the Company has approved cash management investment guidelines but does not currently have any policies
regarding the acquisition or sale of assets primarily for possible capital gain or for income. The Company does not presently hold any
investments or interests in real estate mortgages or securities of or interests in persons primarily engaged in real estate activities.
ITEM 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial ownership of the Company’s Common Stock as of June 30, 2007,
by each person who is a director or executive officer of the Company or is known by the Company to own beneficially more than 5% of the
Company’s outstanding voting securities:
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(2)
Name and Address of
(1)
Title of Class
Beneficial Owner
(3)
Amount and
Nature of
Beneficial
Ownership 1
(4)
Percent of
Class
Common Stock
Larid Q. Cagan
10600 N. De Anza Blvd., Suite 250
Cupertino, CA 95014
4,331,094 2
10.66 %
Common Stock
Frank C. Ingriselli
250 East Hartsdale Ave.
Hartsdale, NY 10530
4,032,529 3
10.06 %
Common Stock
Eric A. McAfee
10600 N. De Anza Blvd., Suite 250
Cupertino, CA 95014
3,235,000 4
8.10 %
Common Stock
Linden Growth Partners Master Fund, LP
718 South State Street, Suite 101
Clarks Summit, PA 18411
Common Stock
John Liviakis
655 Redwood Road, Suite 395
Mill Valley, CA 94941
Common Stock
3,200,000 5
8.01 %
2,250,000 6
5.63 %
Jamie Tseng
250 East Hartsdale Ave.
Hartsdale, NY 10530
881,495 7
2.20 %
Common Stock
Stephen F. Groth
250 East Hartsdale Ave.
Hartsdale, NY 10530
322,560 8
*
Common Stock
Elizabeth Patience Smith
250 East Hartsdale Ave.
Hartsdale, NY 10530
Common Stock
Dale Walter
10600 N. De Anza Blvd., Suite 250
Cupertino, CA 95014
9,600 9
*
Common Stock
Brian Sherer
10600 N. De Anza Blvd., Suite 250
Cupertino, CA 95014
9,800 10
*
Common Stock
All Directors and Executive Officers as a Group (7 persons)
178,947
9,766,075 11
*
23.87 %
*
Less than 1%
1
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission
and generally includes voting or investment power with respect to securities. Shares of Common Stock
subject to options, warrants or convertible securities that are currently exercisable, or exercisable within
60 days of June 30, 2007, are deemed outstanding for computing the percentage of the person holding such
options, warrants or convertible securities but are not deemed outstanding for computing the percentage of
any other person. Except as indicated by footnote and subject to community property laws where applicable,
the persons named in the table have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them.
2
Includes (i) 3,200,000 shares of Company Common Stock owned by Cagan Capital, LLC, a fund owned by
Mr. Laird Cagan, a member of the Company’s Board of Directors; (ii) 100,000 shares of Company Common
Stock owned by KRC Trust and 100,000 shares of Company Common Stock owned by KQC Trust, trusts
for Mr. Cagan’s daughters for which Mr.
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Cagan is trustee; (iii) 235,000 of the 470,000 shares of Company Common Stock owned by Cagan McAfee
Capital Partners, LLC, of which Mr. Cagan is a 50% owner; and (iv) 696,094 shares of Company Common
Stock issuable upon exercise of immediately exercisable warrants issued to Mr. Cagan. Does not include
(i) 50% of the Company Common Stock owned by Cagan McAfee Capital Partners, LLC, (ii) 83,354 shares of
Company Common Stock issuable upon exercise of immediately exercisable warrants issued to Chadbourn
Securities, Inc., a broker-dealer for which Mr. Cagan serves as Managing Director, and (iii) 200,000 shares of
Company Common Stock owned by Fifth Avenue Capital, G.P., a general partnership whose partners include
certain of Mr. Cagan’s friends and family members. Mr. Cagan disclaims beneficial ownership over such shares.
3
Includes (i) 3,896,529 shares of Company Common Stock and (ii) options exercisable on September 29, 2007
for 136,000 shares of Company Common Stock pursuant to an option grant exercisable for an aggregate of
340,000 shares of Common Stock of the Company that vests 40% on September 29, 2007, and 20% on
September 29 of each year thereafter. Does not include 50,000 shares of Company Common Stock owned by
Brightening Lives Foundation Inc., a charitable foundation run by Mr. Ingriselli. Mr. Ingriselli disclaims
beneficial ownership over such shares.
4
Includes (i) 2,600,000 shares of Company Common Stock owned by McAfee Capital, LLC, a fund owned by
Mr. Eric McAfee and his wife; (ii) 400,000 shares of Company Common Stock owned by P2 Capital, LLC, a
fund owned by Mr. McAfee’s wife and children, and (iii) 235,000 of the 470,000 shares of Common Stock
owned by Cagan McAfee Capital Partners, LLC, of which Mr. McAfee is a 50% owner. Does not include
(i) 50% of the Company Common Stock owned by Cagan McAfee Capital Partners, LLC, and (ii) 200,000
shares of Company Common Stock owned by Park Capital VII, LP, a limited partnership administered by
Mr. McAfee’s brother, Adam McAfee, whose limited partners include Mr. McAfee’s friends and family.
Mr. McAfee disclaims beneficial ownership over such shares.
5
Linden Growth Partners Master Fund, LP, is a Cayman Islands exempted limited partnership whose general
partner is Linden Capital Management IV, LLC, a Delaware limited liability company whose President and
controlling member is Paul J. Coviello.
6
Includes 1,170,000 shares of Common Stock held by Liviakis Financial Communications, Inc. and 1,080,000
shares of Common Stock held by Mr. Liviakis individually. Liviakis Financial Communications, Inc. is the
Company’s public relations firm, and John Liviakis is its sole shareholder, President and Chief Executive
Officer.
7
Includes (i) 799,895 shares of Company Common Stock and (ii) options exercisable on September 29, 2007 for
81,600 shares of Company Common Stock pursuant to an option grant exercisable for an aggregate of 204,000
shares of Common Stock of the Company that vests 40% on September 29, 2007, and 20% on September 29 of
each year thereafter.
8
Includes (i) 260,000 shares of Company Common Stock and (ii) options exercisable on September 29, 2007 for
62,560 shares of Company Common Stock pursuant to an option grant exercisable for an aggregate of 156,400
shares of Common Stock of the Company that vests 40% on September 29, 2007, and 20% on September 29 of
each year thereafter. Excludes (i) 44,737 shares of Company Common Stock owned by Mr. Groth’s adult son,
(ii) 44,736 shares of Company Common Stock owned by Mr. Groth’s adult daughter, (iii) 238,947 shares of
Company Common Stock owned by Mr. Groth’s brother, and (iv) 413,000 shares of Company Common Stock
owned by Mr. Groth’s spouse. Mr. Groth disclaims beneficial ownership over such shares.
9
Mr. Walter is a the former Director, Chairman, President and Chief Executive Officer of the Company who
resigned from all positions with the Company upon consummation of the Mergers on May 7, 2007.
10
Mr. Sherer is a former Director, Secretary and Treasurer of the Company who resigned from all positions with
the Company upon consummation of the Mergers on May 7, 2007.
11
Includes all shares of Company Common Stock, immediately exercisable warrants to purchase Company
Common Stock, and options to purchase Company Common Stock exercisable on September 29, 2007
beneficially owned or held by Messrs. Cagan, Ingriselli, Tseng, Groth, Walter and Sherer and Ms. Elizabeth P.
Smith, who are all of the executive officers and directors of the Company.
Changes in Control
There are no arrangements of which the Company is aware that could result in a change of control of the Company.
ITEM 5. Directors, Executive Officers, Promoters and Control Persons
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
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Name
Frank C. Ingriselli
Stephen F. Groth
Jamie Tseng
Laird Q. Cagan
Elizabeth P. Smith
Age
53
54
53
49
58
Position
Chief Executive Officer, President, Secretary and Director
Vice President and Chief Financial Officer
Executive Vice President
Director
Director
Frank C. Ingriselli. Mr. Ingriselli, age 53, has over 28 years experience in the energy industry. Mr. Ingriselli began his career at Texaco in
1979 and held management positions in Texaco’s Producing-Eastern Hemisphere Department, Middle East/Far East Division, and Texaco’s
International Exploration Company. While at Texaco, Mr. Ingriselli negotiated the first successful foreign oil development investment contract
in China in 1983. In 1992, Mr. Ingriselli was named President of Texaco International Operations Inc. and over the next several years directed
Texaco’s global initiatives in exploration and development. In 1996, he was appointed President and CEO of the Timan Pechora Company, a
Houston, Texas headquartered company owned by affiliates of Texaco, Exxon, Amoco and Norsk Hydro, which was developing the largest
international investment in Russia at that time. In 1998, Mr. Ingriselli returned to Texaco’s Executive Department with responsibilities for
Texaco’s power and gas operations, merger and acquisition activities, pipeline operations and corporate development. In August 2000,
Mr. Ingriselli was appointed President of Texaco Technology Ventures, which was responsible for all of Texaco’s multi-billion dollar global
technology initiatives and investments. In 2001, Mr. Ingriselli retired from Texaco after its merger with Chevron, and founded Global Venture
Investments LLC (“GVI”), an energy consulting firm owned by Mr. Ingriselli, for which Mr. Ingriselli served as the President and Chief
Executive Officer. Mr. Ingriselli is no longer active with GVI. In 2005 Mr. Ingriselli founded IMPCO, and served as the President, Chief
Executive Officer and a Manager of IMPCO prior to the Mergers, and has served as the President, Chief Executive Officer, Secretary and a
member of the Board of Directors of the Company since May 2007.
Since 1996, Mr. Ingriselli has sat on the Board of the Electric Drive Transportation Association (where he was also Treasurer), the Angelino
Group, and was an officer of several subsidiaries of Energy Conversion Devices Inc., a U.S. public corporation. From 2001 to 2006, he was a
Director and Officer of General Energy Technologies Inc., a “technology facilitator” to Chinese industry serving the critical need for advanced
energy technology and the growing demand for low cost high quality components, and Eletra Ltd, a Brazilian hybrid electric bus developer.
Mr. Ingriselli has recently resigned from all of these positions in order to focus all of his time and effort on the Company. He still sits on the
Advisory Board of the Eurasia Foundation, a Washington D.C.-based non-profit that funds programs that build democratic and free market
institutions in the new independent states of the former Soviet Union. Since 2006, Mr. Ingriselli has also served on the Board of Directors and
as an executive officer of Brightening Lives Foundation Inc., a New York charitable foundation headquartered in San Ramon, California.
Mr. Ingriselli graduated from Boston University in 1975 with a Bachelor of Science degree in Business Administration. He also earned a
Master of Business Administration degree from New York University in both Finance and International Finance in 1977 and a Juris Doctor
degree from Fordham University School of Law in 1979.
Stephen F. Groth. Mr. Groth, age 54, formerly served as the Vice President, Chief Financial Officer and Manager of IMPCO since its
formation in August 2005, and has served as the Vice President and Chief Financial Officer of the Company since May 2007. Mr. Groth brings
more that 25 years experience in financial analysis, financial modeling, corporate reporting and financial reporting system expertise to the
Company. Mr. Groth joined Texaco, Inc. in 1979, and held positions in various financial groups at Texaco, and from 1999 to 2001 held a key
position in the corporate executive group at Texaco with the unique responsibility of reviewing all of its investments and divestments (capital
expenditures, acquisitions, and divestitures) greater than $10 million. From 2001 until May 2007, Mr. Groth served as Vice President of GVI.
In his roles at both Texaco and GVI, Mr. Groth reviewed billions of dollars of transactions, assuring that evaluations were done in accordance
with appropriate corporate standards and that the assumptions underlying
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the economic valuations were valid, and he regularly advised client operating departments on appropriate ways to evaluate investment
alternatives, providing support for the company’s negotiation of major acquisitions and divestitures. Mr. Groth received his Bachelor of Arts in
Philosophy in 1975 from Fordham University and his MBA in Accounting from New York University in 1977. Before joining Texaco in 1979,
he worked as an auditor for Price Waterhouse, and as an internal auditor for American Airlines.
Jamie Tseng. Mr. Tseng, age 53, formerly served as the Executive Vice President and Manager of IMPCO since its inception in
August 2005, and has served as the Company’s Executive Vice President since May 2007. Mr. Tseng brings to the Company more that
25 years of financial management and operations experience in the People’s Republic of China, the Republic of China and the United States.
From 2000 to 2006, Mr. Tseng served as Chief Financial Officer of General Energy Technologies Inc., a “technology facilitator” to Chinese
industry serving the critical need for advanced energy technology and the growing demand for low cost high quality components. From 1998 to
2000, Mr. Tseng served as Chief Financial Officer of Multa Communications Corporation, a California-based Internet service provider
focusing on China. From 1980 until 1998, he held management positions with Collins Company, Hilton International, China Airlines and
Tatung Company of America. Mr. Tseng is fluent in Chinese Mandarin. He has a BD degree in Accounting from Soochow University in
Taiwan.
Laird Q. Cagan. Mr. Cagan, age 49, was appointed as the Chief Executive Officer, President and sole Manager of ADS in
November 2006, and now serves as a Director of the Company. Mr. Cagan is a co-founder and, since 2001, has been Managing Director of
Cagan McAfee Capital Partners, LLC (“CMCP”), a merchant bank based in Cupertino, California. Since 2004, Mr. Cagan has also been a
Managing Director of Chadbourn Securities, Inc., a NASD licensed broker-dealer. He also continues to serve as President of Cagan Capital,
LLC, a merchant bank he formed in 1990, the operation of which transitioned into CMCP. Mr. Cagan has served or serves on the Board of
Directors of the following companies: Evolution Petroleum Corporation, a Houston-based public company involved in the acquisition,
exploitation, development, and production of crude oil and natural gas resources (since 2004, where Mr. Cagan is also a co-founder and
Chairman); American Ethanol Inc, an ethanol company headquartered in Chicago, Illinois (since 2006, where Mr. Cagan is also a co-founder);
Real Foundations, Inc., a real estate-focused consulting firm (from 2000 to 2004); Burstein Technologies, a development stage medical devices
company (from 2005 to 2006); WorldSage, Inc., a Cupertino, California-based publicly-traded development stage company currently with no
operations (since 2006); Fortes Financial Corporation, an Irvine, California-based development stage company creating a mortgage bank (since
2007); and TWL Corporation, a Carrollton, Texas-based publicly-traded workplace training and education company (since 2007).
Mr. Cagan has been involved over the past 25 years as a venture capitalist, investment banker and principal, in a wide variety of financings,
mergers, acquisitions and investments of high growth companies in a wide variety of industries. At Goldman, Sachs & Co. and Drexel
Burnham Lambert Mr. Cagan was involved in over $14 billion worth of transactions. Mr. Cagan attended M.I.T. and received his BS and MS
degree in engineering, and his MBA, all from Stanford University. He is a member of the Stanford University Athletic Board and Chairman of
the SF Bay Chapter of the Young Presidents’ Organization.
Elizabeth P. Smith. Ms. Smith, age 58, joined the Board of Directors of the Company in May 2007 upon consummation of the Mergers.
Ms. Smith retired from Texaco, Inc. as Vice President-Investor Relations and Stockholder Services in late 2001 following the company’s
merger with Chevron Corp. Ms. Smith was also the Corporate Compliance Officer for Texaco, Inc. and was a member of the Board of The
Texaco Foundation. Ms. Smith joined Texaco’s Legal Department in 1976. As an attorney in the Legal Department, Ms. Smith handled
administrative law matters and litigation. She served as Chairman of the American Petroleum Institute’s Subcommittee on Department of
Energy Law for the 1983-1985 term. Ms. Smith was appointed Director of Investor Relations for Texaco, Inc. in 1984, and was named Vice
President of the Corporate Communications division in 1989. In 1992, Ms. Smith was elected a Vice President of Texaco, Inc. and assumed
additional responsibilities as head of that company’s Stockholder Services Group. In 1999, Ms. Smith was named Corporate Compliance
Officer for Texaco, Inc.
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Since May 2007, Ms. Smith has served as a director of the Community Fund of Darien, Connecticut, and from 1996 through 2006,
Ms. Smith has served on the Board of Directors of INROADS/Fairfield Westchester Counties, Inc. From 2002 through 2005, she also served as
a member of the Boards of Families With Children From China—Greater New York, and from 2004 through 2005 as a member of the Board of
The Chinese Language School of Connecticut. While at Texaco, Ms. Smith was an active member in NIRI (National Investor Relations
Institute) and the NIRI Senior Roundtable. She has been a member and past President of both the Investor Relations Association and the
Petroleum Investor Relations Institute. Ms. Smith was a member of the Board of Trustees of Marymount College Tarrytown until 2001. She
was also a member of the Board of The Education and Learning Foundation of Westchester and Putnam Counties from 1993 to 2002.
Ms. Smith graduated from Bucknell University in 1971 with a Bachelor of Arts degree, cum laude, and received a Doctor of Jurisprudence
degree from Georgetown University Law Center in 1976.
Significant Employees and Consultants
In addition to its executive officers, the Company also has the following significant employees and consultants:
Dr. Y. M. Shum. Dr. Shum, age 69, has served as the Chief Technology Officer and Director of Exploration of the Company since
May 2007, and, prior to that, in the same positions with Inner Mongolia Production Company LLC. Dr. Shum has almost 40 years experience
in the international petroleum industry and is recognized as a primary expert and leader responsible for the groundbreaking achievements for
the international oil industry in China. Dr. Shum led the first successful international discovery of oil offshore China, was responsible for the
first foreign participation in the China onshore oil industry, and was responsible for the first foreign acquisition of a coal bed methane project in
China. Dr. Shum received his Masters Degree in Engineering from UC Berkeley and his Doctorate in Engineering from Brown University.
Dr. Shum joined Texaco in 1968 and held positions of greater responsibility in exploration, development and production operations around the
world, with significant responsibilities for operations in China, Indonesia, Malaysia, Pakistan, Thailand and Kuwait. He led the team that
developed the largest enhanced oil recovery operation in the history of the industry, which was located in Indonesia. While at Texaco,
Dr. Shum headed Texaco’s office in Beijing for almost a decade. Dr. Shum retired from Texaco in 1999 and joined Hong Kong University as
the Director of the R&D branch of the University and its Entrepreneurship Program. Dr. Shum retired from teaching at Hong Kong University
in June 2007, and now will be available to devote more of his time to directing the technical operations of the Company.
Christopher B. Sherwood. Mr. Sherwood, age 65, has served as the Director of Petroleum Operations of the Company since May 2007,
and, prior to that, in the same position with Inner Mongolia Production Company LLC. Mr. Sherwood has over 35 years experience in the
international petroleum industry, successfully running drilling and production operations around the world. He began his career in 1964
working as a petroleum engineer at Mobil Oil on several producing fields in Canada. He joined Texaco in 1970 and was in charge of drilling
and workover activities in 2 fields in Colombia. From 1972 until 1982, Mr. Sherwood was ultimately in charge of all drilling and producing
operations for Texaco in Quito, Ecuador (producing more than 200,000 BOPD). From 1982 until 1991, Mr. Sherwood managed all of Texaco’s
drilling and producing operations in the United Kingdom sector of the North Sea. From 1991 until 1995, Mr. Sherwood was Vice President in
charge of all producing operations for Texaco in Western Siberia. This involved a program that navigated the bureaucracy of Russia and
increased the production from a large Russian oilfield. From 1995 until 1997, Mr. Sherwood helped turn around to profitability a Trinidad oil
producing company, in which Texaco had invested. From 1997 until 2000, Mr. Sherwood was Vice President of Operations for the Timan
Pechora Company, a consortium of major western oil companies, including Texaco, Exxon, Amoco and Norsk Hydro, formed to exploit some
of the potentially huge reserves north of the Arctic Circle in the Nenetsky Okrug on the shore of the Pechora Gulf in the Barents Sea in
northern Russia, and was believed to be the largest international investment in Russia at that time. Mr. Sherwood retired from Texaco in 2000
and his only subsequent work experience has been with the Company and prior to that with
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Inner Mongolia Production Company LLC. Mr. Sherwood received his B.S. degree in Chemical Engineering from Imperial College in London.
Dr. Zhang Suian. Dr. Suian, age 50, has served as the Chief Advisor for CBM Operations for the Company since May 2007, and, prior to
that, in the same position with Inner Mongolia Production Company LLC. Dr. Suian currently serves as a professor at the China University of
Petroleum, Beijing and director of its Coalbed Methane Research Center, and serves as a key technical advisor for the Company. Dr. Suian is
also an internationally recognized expert in the CBM field, which he helped to pioneer in China. Dr. Zhang is very familiar with the coal and
gas geology of Shanxi Province from his work with several other organizations. In addition to his work for the Company and prior to that with
Inner Mongolia Production Company LLC, Dr. Suian over the last five years has worked as a professor at the China University of Petroleum,
Beijing, and as director of its Coalbed Methane Research Center, and for several other private clients in the energy field.
ITEM 6. Executive Compensation.
The following table sets forth information concerning the compensation of the Company’s Chief Executive Officer and the two next most
highly compensated executive officers (collectively, the “Named Executive Officers”) whose total compensation in 2006 exceeded $100,000.
The information provided in the table includes information for PAP’s predecessor, IMPCO, for the period January 1, 2006 through
December 31, 2006.
SUMMARY COMPENSATION TABLE
All other
Compensation
($)
Total ($)
Name and Principal Position
Year
Salary ($)
Bonus ($)
Option
Awards ($)
Frank C. Ingriselli
President and CEO (1)
Jamie Tseng
Executive Vice President (2)
Stephen F. Groth
Vice President and CFO (3)
Dale Walter
Former Chairman, President and
CEO (4)
2006
-0-
$80,000 (6)
$11,815 (8)
$208,125 (9)
$299,940
2006
-0-
-0-
$7,089 (8)
$128,000 (10)
$135,089
2006
$30,800 (5)
$10,000 (7)
$5,345 (8)
$59,450 (11)
$105,595
2006
-0-
-0-
-0-
-0-
-0-
(1)
Mr. Ingriselli was elected President and CEO, and designated a member of the Company’s Board of Directors,
on May 7, 2007 upon closing of the Mergers. Prior to that, he served as Manager, Chief Executive Officer and
President of IMPCO.
(2)
Mr. Tseng was elected Executive Vice President of the Company on May 7, 2007 upon closing of the
Mergers. Prior to that, he served as Manager and Executive Vice President of IMPCO.
(3)
Mr. Groth was elected Vice President and CFO of the Company on May 7, 2007 upon closing of the Mergers.
Prior to that, he served as Manager and CFO of IMPCO.
(4)
Mr. Walter served as the Company’s Chairman, President and CEO until he resigned from all positions with
the Company on May 7, 2007 upon closing of the Mergers.
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(5)
Represents salary paid for serving as an officer of IMPCO.
(6)
Represents $80,000 fiscal year 2006 bonus awarded to Mr. Ingriselli by the Board of Directors of the
Company and paid to Mr. Ingriselli in 2007.
(7)
Represents $10,000 fiscal year 2006 bonus awarded to Mr. Groth by the Board of Directors of the Company
and paid to Mr. Groth in 2007.
(8)
Amounts shown do not reflect compensation actually received by the Named Executive Officers. Instead the
dollar value of these awards is the compensation cost recognized for financial statement reporting purposes
for the fiscal year ended December 31, 2006 in accordance with the provisions of Statement of Financial
Accounting Standards No. 123(R), “Share Based Payment” (SFAS No. 123(R)), but excluding any estimate
of future forfeitures related to service-based vesting conditions and reflecting the effect of any actual
forfeitures. During the year ended December 31, 2006, the Company’s weighted average assumptions to
value stock option grants using the Black-Scholes option pricing model were as follows: expected life in
years (5.5 to 6.25), risk-free interest rate (4.57% to 4.58%); expected volatility (64.6%) and expected
dividend yield (0%).
(9)
Represents fees paid for providing consulting services to IMPCO.
(10)
Represents fees paid for providing consulting services to IMPCO and $3,000 rent paid by IMPCO to
Mr. Tseng for office space provided by Mr. Tseng to IMPCO in Beijing.
(11)
Represents fees paid for providing consulting services to IMPCO.
Compensation of Directors
There are no standard arrangements by which directors of the Company are compensated for their services as directors, and none of the
directors received any compensation for their services as such during the most recently completed fiscal year.
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Our Named Executive Officers held the following securities as of December 31, 2006:
Name
Frank C. Ingriselli
Jamie Tseng
Stephen F. Groth
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
0
0
0
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
340,000 (1)
204,000 (2)
156,400 (3)
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
0
0
0
Option
Exercise
Price ($)
Option
Expiration
Date
$ 0.56
$ 0.56
$ 0.56
9/29/2016
9/29/2016
9/29/2016
1
Represents an option issued by IMPCO to Mr. Ingriselli on September 29, 2006 and assumed by the Company
in connection with the Mergers, exercisable for an aggregate of 340,000 shares of Common Stock of the
Company (as adjusted to reflect the 1:17 exchange of IMPCO options for Company options as a result of the
Mergers). The option was issued outside of the Company’s 2007 Plan (as defined below), vests 40% on
September 29, 2007 and 20% on September 29 of each year thereafter subject to the holder’s continued
employment with the Company, and is subject to 100% acceleration upon termination of the holder without
cause, termination by the holder for good reason, or upon the holder’s death or disability.
2
Represents an option issued by IMPCO to Mr. Tseng on September 29, 2006 and assumed by the Company in
connection with the Mergers, exercisable for an aggregate of 204,000 shares of Common Stock of the
Company (as adjusted to reflect the 1:17 exchange of IMPCO options for Company options as a result of the
Mergers). The option was issued outside of the Company’s 2007 Plan (as defined below), vests 40% on
September 29, 2007 and 20% on September 29 of each year thereafter subject to the holder’s continued
employment with the Company, and is subject to 100% acceleration upon termination of the holder without
cause, termination by the holder for good reason, or upon the holder’s death or disability.
3
Represents an option issued by IMPCO to Mr. Groth on September 29, 2006 and assumed by the Company in
connection with the Mergers, exercisable for an aggregate of 156,400 shares of Common Stock of the
Company (as adjusted to reflect the 1:17 exchange of IMPCO options for Company options as a result of the
Mergers). The option was issued outside of the Company’s 2007 Plan (as defined below), vests 40% on
September 29, 2007 and 20% on September 29 of each year thereafter subject to the holder’s continued
employment with the Company, and is subject to 100% acceleration upon termination of the holder without
cause, termination by the holder for good reason, or upon the holder’s death or disability.
Stock Option Plan
The Company’s Board of Directors and stockholders approved and adopted a stock option plan on May 7, 2007 (the “2007 Plan”). The 2007
Plan provides for the grant of restricted stock, incentive and/or non-qualified options, and stock appreciation rights (“SARs”) to employees,
directors and consultants of the Company to purchase up to an aggregate of 4,000,000 shares of Common Stock. The purpose of the 2007 Plan
is to provide participants with incentives which will encourage them to acquire a proprietary interest in, and continue to provide services to, the
Company, and to attract new employees, directors and consultants with outstanding qualifications. The 2007 Plan is administered by the Board
of Directors, which has discretion to select optionees and to establish the terms and conditions of each option, subject to the provisions of the
2007 Plan.
Pursuant to the 2007 Plan, the Company may from time to time grant its employees, directors and consultants restricted stock and options to
purchase shares of, and SARs with respect to, the Company’s Common Stock at exercise prices determined by the Board of Directors. The
exercise price of incentive stock options may not be less than 110% of the fair market value of Common Stock as of the date of grant. The
Internal Revenue Code currently limits to $100,000 the aggregate value of Common Stock that may be acquired in any one year pursuant to
incentive stock options under the 2007 Plan or any other option plan adopted by the Company. Nonqualified options may be granted under the
2007 Plan at an exercise price of not
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less than 85% of the fair market value of the Common Stock on the date of grant. Nonqualified options may be granted without regard to any
restriction on the amount of Common Stock that may be acquired pursuant to such options in any one year. Options may not be exercised more
than ten years after the date of grant. All stock options are non-transferrable by the grantee (other than upon the grantee’s death) and may be
exercised only by the optionee during his service to the Company as an employee, director or consultant or for a specified period of time
following termination of such service. The aggregate number of shares of Common Stock issuable under the 2007 Plan, the number of shares of
stock, options and SARs outstanding, and the exercise price thereof are subject to adjustment in the case of certain transactions such as
mergers, recapitalizations, stock splits or stock dividends.
As of June 30, 2007, no options, SARs or shares had been issued under the 2007 Plan. The 2007 Plan terminates on May 7, 2017.
In general, upon the termination of service to the Company as an employee, director or consultant of an optionee or restricted stock or SAR
recipient, all options, shares of restricted stock and SARs granted to such person that have not yet vested will immediately terminate, and those
options and SARs that have vested as of the date of termination will be exercisable for 90 days after such termination date (12 months in the
case of termination by reason of death or disability).
Employment Contracts
Frank C. Ingriselli and Stephen F. Groth
IMPCO entered into an Executive Employment Agreement, dated September 29, 2006, with each of Frank C. Ingriselli, its President and
Chief Executive Officer, and Stephen F. Groth, its Vice President and Chief Financial Officer. Mr. Ingriselli now serves as President, Chief
Executive Officer and a member of the Board of Directors of the Company, and Mr. Groth now serves as Vice President and Chief Financial
Officer of the Company. As a result of the Mergers, the Company assumed IMPCO’s obligations under these agreements. These employment
agreements contain, among other things, severance payment provisions that require the Company to continue Mr. Ingriselli’s and Mr. Groth’s
salary and benefits for 36 months if employment is terminated without “cause,” as such is term defined in the employment agreements, and to
make a lump sum payment equal to 48 months salary and continue benefits for 48 months if terminated within 12 months of a “change in
control,” also as such term is defined in the employment agreements. Payment of such severance amounts, or continuation of such benefits,
could have a material adverse effect on the financial condition of the Company. Neither of the agreements contains a definitive termination
date, but Messrs. Ingriselli and Groth have the right to terminate their employment at any time without penalty. The employment agreements
also prohibit Messrs. Ingriselli and Groth from engaging in competitive activities during and following termination of their employment that
would result in disclosure of the Company’s confidential information, but do not contain a general restriction on engaging in competitive
activities.
Pursuant to Mr. Ingriselli’s employment agreement, Mr. Ingriselli’s annual base salary is $350,000, and he is entitled to an annual bonus of
between 20% and 40% of his base salary, based upon his performance as determined by the Board of Directors of the Company. On June 15,
2007, the Board of Directors of the Company unanimously approved the payment of a fiscal year 2006 bonus in the amount of $80,000 for
Mr. Ingriselli.
Pursuant to Mr. Groth’s employment agreement, Mr. Groth’s annual base salary is $150,000, and he is entitled to an annual bonus of
between 20% and 30% of his base salary, based upon his performance as determined by the Board of Directors of the Company. Mr. Groth
received a fiscal year 2006 bonus in the amount of $10,000.
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ITEM 7. Certain Relationships and Related Transactions.
Relationships Between the Company and Certain Directors and Officers
Management Contracts
As a result of the Mergers, the Company assumed an Advisory Agreement, dated December 1, 2006, by and between ADS and Cagan
McAfee Capital Partners, LLC (“CMCP”), pursuant to which CMCP agreed to provide certain financial advisory and management consulting
services to the Company. Pursuant to the Advisory Agreement, CMCP is entitled to receive a monthly advisory fee of $9,500 for management
work commencing on December 11, 2006 and continuing until May 7, 2010. Laird Q. Cagan, the Managing Director and 50% owner of
CMCP, currently serves as a member of the Company’s Board of Directors.
Private Placement of ADS Membership Units
Mr. Cagan, a member of the Company’s Board of Directors and the former sole manager of ADS and former executive officer and
controlling member of ADS, serves as a registered representative of Chadbourn Securities, Inc. (“Chadbourn Securities”). In connection with
the ADS Offering, Chadbourn Securities served as ADS’s non-exclusive lead placement agent. Pursuant to an Engagement Letter, dated
December 15, 2006, by and between Chadbourn Securities and ADS (which agreement the Company assumed in the Mergers) (the “Chadbourn
Agreement”), ADS was obligated to pay to Chadbourn Securities a cash fee equal to 8% of gross equity proceeds raised from Chadbourn
Securities-related investors and a 1% unallocated expense reimbursement for the ADS Offering as a whole. In addition, ADS was obligated to
issue to Chadbourn Securities warrants to purchase a number of units of ADS Class B Membership Units equal to 10% of the ADS Class B
Membership Units placed by Chadbourn Securities, and to indemnify Chadbourn Securities against certain liabilities in connection with the
ADS Offering, including liabilities under the Securities Act. As a result of the placement agent services Chadbourn Securities provided to ADS
in connection with the ADS Offering, and because the Company assumed ADS’s obligations under the Chadbourn Agreement as a result of the
Mergers, following the Mergers, the Company paid to Chadbourn Securities $1,195,430 and issued to Chadbourn Securities, including
Mr. Cagan, warrants to purchase an aggregate of 779,448 shares of Common Stock of the Company.
In addition, as a result of placement agent services provided to ADS by three additional broker-dealers in the ADS Offering, ADS was
obligated to issue warrants to purchase an aggregate of 400,231 shares of ADS Class B Membership Units to three other broker-dealers
engaged under the Chadbourn Agreement as placement agents and pay placement agent fees of $93,750 thereto. Following the Mergers, the
Company issued to these three broker-dealers warrants to purchase an aggregate of 400,231 shares of Common Stock of the Company and paid
these broker-dealers an aggregate of $93,750 in placement agent fees.
Transactions Involving Promoters of the Company
Since the founding of ADS, a total of 9,850,000 ADS Class A Membership Units (exchanged on a 1:1 basis for Company Common Stock in
the Mergers) was directly and indirectly purchased by various parties as founder’s units for nominal value, including: 3,235,000 units
beneficially owned by McAfee Capital, LLC, an entity owned and controlled by Eric McAfee (a significant stockholder of the Company and a
50% owner of CMCP); 3,635,000 units beneficially owned by Cagan Capital, LLC, an entity owned and controlled by Laird Q. Cagan, a
member of the Company’s Board of Directors; 1,170,000 units by Liviakis Financial Communications, Inc., the Company’s public relations
firm; and 200,000 units by Park Capital VII, LP. Mr. Cagan formerly served as sole Manager, Chairman, President and Chief Executive Officer
of ADS and is currently a Managing Director of CMCP, and is also currently a Managing Director of Chadbourn Securities, Inc., one of the
placement agents in the ADS Offering. Mr. McAfee is currently a Managing Director at CMCP. Collectively, Mr. McAfee and Mr. Cagan
beneficially own approximately 18.76% of the issued and outstanding Common Stock of the Company. See, “Part I, Item 4. Security
Ownership of Certain Beneficial
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Owners and Management.” Park Capital VII, LP is a limited partnership managed by Adam McAfee, brother of Eric McAfee, whose limited
partners include Mr. McAfee’s friends and family.
Frank C. Ingriselli is currently the Company’s President, Chief Executive Officer and a member of the Board of Directors, and is the
beneficial owner of approximately 10.06% of the issued and outstanding Common Stock of the Company. See, “Part I, Item 4. Security
Ownership of Certain Beneficial Owners and Management.” Mr. Ingriselli originally acquired his 227,000 Class A Membership Units of
IMPCO in August 2005 at nominal value (exchanged for an aggregate of 3,859,000 shares of Company Common Stock in the Mergers, 50,000
of which he subsequently transferred to Brightening Lives Foundation Inc., a charitable foundation for which Mr. Ingriselli serves as a member
of the Board of Directors and executive officer). In 2006, Mr. Ingriselli also purchased 2,211 Class B Membership Units of IMPCO for
approximately $9.50 per Unit (exchanged for an aggregate of 37,579 shares of Company Series A Preferred Stock in the Mergers).
Stephen F. Groth is currently the Company’s Vice President and Chief Financial Officer, and is the beneficial owner of less than one percent
of the issued and outstanding Common Stock of the Company. See, “Part I, Item 4. Security Ownership of Certain Beneficial Owners and
Management.” Mr. Groth originally acquired an aggregate of 39,000 Class A Membership Units of IMPCO in August 2005 at nominal value
(exchanged for an aggregate of 663,000 shares of Company Common Stock in the Mergers, 413,000 of which he subsequently transferred to
his spouse), and in May 2007 purchased 10,000 Class B Membership Units of ADS (exchanged for an aggregate of 10,000 shares of Company
Common Stock in the Mergers) at a purchase price of $1.25 per unit.
Jamie Tseng is currently the Company’s Executive Vice President, and is the beneficial owner of approximately 2.20% of the issued and
outstanding Common Stock of the Company. See, “Part I, Item 4. Security Ownership of Certain Beneficial Owners and Management.”
Mr. Tseng originally acquired his 46,000 Class A Membership Units of IMPCO in August 2005 at nominal value (exchanged for an aggregate
of 782,000 shares of Company Common Stock in the Mergers). In 2006, Mr. Tseng also purchased 1,053 Class B Membership Units of
IMPCO for approximately $9.50 per Unit (exchanged for an aggregate of 17,895 shares of Company Series A Preferred Stock in the Mergers).
Of the three members of our Board of Directors, only Elizabeth P. Smith is “independent” as defined in Rule 4200(a)(15) of the
Marketplace Rules of the NASDAQ Stock Market.
ITEM 8. Description of Securities.
The authorized capital stock of the Company consists of 300,000,000 shares of Common Stock, $0.001 par value per share, and 50,000,000
shares of Preferred Stock, $0.001 par value per share, of which 30,000,000 shares have been designated as “Series A Convertible Stock,”
6,291,048 of which remain issuable following the automatic conversion of 23,708,952 shares of the Company’s Series A Convertible Stock as
a result of the Autoconversion. See, “Part I. Item 1. Automatic Conversion.” The following is a summary of the rights of the Company’s
authorized capital stock:
Common Stock
As of June 30, 2007, 39,931,106 shares of Common Stock were outstanding. The holders of Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders. The holders of Common Stock are not entitled to cumulative voting
rights with respect to the election of directors. Accordingly, the holders of a majority of the Company’s outstanding voting stock will be able to
elect all directors, and minority stockholders will not be able to elect directors on the basis of their votes alone. Subject to preferences
applicable to any series of preferred stock that may be issued in the future, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or
winding up of the Company, holders of the Common Stock are entitled to share ratably in all assets remaining after payment of liabilities
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and liquidation preference of any then outstanding preferred stock. Holders of Common Stock have no preemptive rights and no right to
convert their Common Stock into other securities. All outstanding shares of Common Stock are fully paid and nonassessable.
The transfer agent and registrar for the Company’s Common Stock is Continental Stock Transfer, located in New York, New York.
Series A Convertible Preferred Stock
Effective June 5, 2007, as a result of the Autoconversion, each share of Series A Convertible Preferred Stock automatically converted on a
1:1 basis into Common Stock of the Company. Accordingly, no shares of Series A Convertible Preferred Stock of the Company remain issued
or outstanding.
“Blank Check” Preferred Stock
The Board of Directors has authority to issue up to 50,000,000 shares of Preferred Stock, $0.001 par value, and to fix the rights, preferences,
privileges and restrictions, including voting rights, of those shares without any future vote or action by the stockholders. The rights of holders
of the Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock could have the effect of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company, thereby delaying, deferring or preventing a change in control of the Company. Furthermore, such
Preferred Stock may have other rights, including economic rights senior to the Common Stock, and, as a result, the issuance thereof could have
a material adverse effect on the market value of the Common Stock.
Warrants
In connection with the ADS Offering that closed May 7, 2007, ADS was obligated to issue to certain private placement agents (the “ADS
Placement Agents”) warrants to purchase an aggregate of 1,860,001 Class B Membership Units of ADS at prices ranging between $1.25 and
$1.50 per unit (the “ADS Warrants”). As a result of the Mergers and the Autoconversion, PAP assumed ADS’s obligation to issue the ADS
Warrants and issued warrants to purchase an aggregate of 1,860,001 shares of Common Stock of the Company to the ADS Placement Agents.
The ADS Warrants contain provisions allowing for net exercises and will expire on May 7, 2012.
Registration Rights
Upon consummation of the Mergers on May 7, 2007, the Company assumed certain automatic, demand and piggyback registration
obligations pursuant to substantially similar registration rights agreements entered into by and among (i) ADS and purchasers of ADS Class B
Membership Interests participating in the ADS Offering and certain placement agents holding warrants exercisable for ADS Class B
Membership Interests (the “ADS Registration Rights Agreement”), and (ii) IMPCO and holders of IMPCO’s Class B Membership Interests
(the “IMPCO Registration Rights Agreement,” and together with the ADS Registration Rights Agreement, the “Registration Rights
Agreements”). Holders of 23,708,952 shares of Company Common Stock currently hold registration rights pursuant to the Registration Rights
Agreements with respect to such shares. These Registration Rights Agreements provide that if the Company either (x) becomes a publicly
reporting company under the Exchange Act (for avoidance of doubt, a Pink Sheet listed company does not qualify as a publicly reporting
company under the Exchange Act) and successfully lists its shares for trading on a national securities exchange (the “Listing Date”), or
(y) completes an initial public offering of its securities pursuant to a registration statement under the Securities Act prior to May 7, 2008 (the
“IPO Date”), then the Company shall be required to use commercially reasonable efforts to prepare and file a registration statement under the
Securities Act covering the resale of all the Registrable Securities (as defined in the Registration Rights Agreements) within 60 days following
the Listing Date or the IPO Date, as applicable, and to use
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commercially reasonable efforts to cause such registration statement to be declared effective by the SEC within 210 days after the Listing Date
or the IPO Date, as applicable. In addition, the Registration Rights Agreements entitle the holders to demand a total of [ two ] registrations of
their securities after the Company has effected a registered public offering of its Common Stock and unlimited number of piggy-back
registrations (subject to the right of the underwriters in any public offering to reduce the number of such shares that can be included in the
registrations). There are no provisions in the Registration Rights Agreement penalizing the Company for its failure to perform thereunder.
PART II
ITE
M 1.
Market Price of and Dividends on the Company’s Common Equity and Other Stockholder Matters.
Market Information
The Common Stock is currently quoted on the Pink Sheets under the symbol “PFAP.PK.” The following table sets forth the high and low
last bid prices for the Common Stock for each fiscal quarter during the past two fiscal years and for the interim periods since the last fiscal
year, as reported by Pink Sheets LLC and adjusted for the 100:1 reverse split on January 11, 2007. These prices do not reflect retail mark-ups,
markdowns or commissions and may not represent actual transactions.
Quarter Ended
High
Low
March 31, 2005
June 30, 2005
September 30, 2005
December 31, 2005
$
$
$
$
2.00
2.00
2.00
2.00
$
$
$
$
0.50
1.00
1.00
2.00
March 31, 2006
June 30, 2006
September 30, 2006
December 31, 2006 1
$
$
$
$
2.00
3.00
2.50
3.00
$
$
$
$
2.00
2.00
2.50
2.50
March 31, 2007 2
June 30, 2007 3
July 2, 2007 thru August 10, 2007
$ 3.50
$ 13.00
$ 10.75
$ 2.50
$ 2.90
$ 6.00
(1)
From 2000 until the closing of the Mergers on May 7, 2007, the Company conducted no business or
operations and was deemed a “shell company” under regulations promulgated by the SEC.
(2)
On January 12, 2007, the Company issued a press release announcing a 100 to 1 reverse stock split, the
change of its name from “Big Smith Brands, Inc.” to “Pacific East Advisors, Inc.,” the change of its stock
symbol to “PCAD.PK,” and the entry into the Merger Agreements with each of IMPCO and ADS. On
February 15, 2007, the Company issued a press release announcing the amendment and restatement of the
Merger Agreements entered into by the Company and each of IMPCO and ADS.
(3)
On May 8, 2007, the Company issued a press release announcing the closing of the $17 million ADS
Offering, the Company’s name change to “Pacific Asia Petroleum, Inc.,” and the closing of the Mergers. On
June 6, 2007, the Company issued a press release announcing the automatic conversion of its Series A
Preferred Stock into Common Stock and the change of its stock symbol to “PFAP.PK.”
The last bid price on August 10, 2007 reported by Pink Sheets LLC was $7.00 per share of Common Stock.
As of August 10, 2007, the Company had warrants outstanding to purchase (i) an aggregate of 1,460,001 shares of Common Stock at a price
per share of $1.25; (ii) an aggregate of 200,000 shares of
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Common Stock at a price per share of $1.375; and (iii) an aggregate of 200,000 shares of Common Stock at a price per share of $1.50. See
“Recent Sales of Unregistered Securities” below.
As of August 10, 2007, an aggregate of 836,400 shares of Common Stock were issuable upon exercise of outstanding stock options.
Holders
As of August 10, 2007, the Company had 161 shareholders of record of Common Stock.
Dividends
The Company has not, to date, paid any cash dividends on its Common Stock. The Company has no current plans to pay dividends on its
Common Stock and intends to retain earnings, if any, for working capital purposes. Any future determination as to the payment of dividends on
the Common Stock will depend upon the results of operations, capital requirements, the financial condition of the Company and other relevant
factors.
Equity Compensation Plan Information
The following table sets forth all compensation plans previously approved by the Company’s security holders and all compensation plans
not previously approved by the Company’s security holders for the year ended December 31, 2006:
Number of securities
remaining available for future
Number of securities
to be
issued upon exercise
of
outstanding options,
warrants
Plan Category
and rights (a)
Equity compensation plans approved by security holders 1
issuances under equity
Weighted-average
exercise
price of outstanding
options,
warrants and rights
(b)
compensation plans
(excluding securities reflected
in column (a) and (b))
0
0
4,000,000
2
836,400
$0.56
0
Total 3
836,400
$0.56
0
Equity compensation plans not approved by security holders
1
On May 7, 2007, the Company and its stockholders approved the 2007 Plan. See “Part I. Item 6. Stock Option
Plan.” Currently no shares are issuable upon exercise of outstanding options, warrants or rights under the 2007
Plan, and 4,000,000 shares of Company Common Stock remain available for future issuances thereunder.
2
Includes individual compensation arrangements entered into by and between IMPCO and the following
employees and consultants of IMPCO that were assumed by the Company in the Mergers: (i) an option to
purchase an aggregate of 340,000 shares of Common Stock of the Company at $0.56 per share issued to Frank
C. Ingriselli in September 2006; (ii) an option to purchase an aggregate of 204,000 shares of Common Stock of
the Company at $0.56 per share issued to Jamie Tseng in September 2006; (iii) an option to purchase an
aggregate of 156,400 shares of Common Stock of the Company at $0.56 per share issued to Stephen F. Groth;
(iv) an option to purchase an aggregate of 102,000 shares of Common Stock of the Company at $0.56 per share
issued to Sean Hung; and (v) an option to purchase an aggregate of 34,000 shares of Common Stock of the
Company at $0.56 per share issued to Douglas E. Hoffmann. All of these options were issued outside of the
Company’s 2007 Plan, vest 40% on September 29, 2007 and 20% on September 29 of each year thereafter
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subject to the holder’s continued employment with the Company, and are subject to 100% acceleration upon
termination of the holder without cause, termination by the holder for good reason, or upon the holder’s death or
disability.
3
Table does not include warrants exercisable for an aggregate of 1,860,001 shares of Company Common Stock at
a weighted-average exercise price of $1.29 per share, which warrants were assumed by the Company in the
Mergers and were originally issued by ADS on May 7, 2007 to placement agents representing ADS. The original
issuance of these warrants by ADS and the assumption of these warrants by the Company in the Mergers was
approved by the members of ADS and the stockholders of the Company in connection with the approval of the
Mergers and related transactions by the security holders of ADS and the Company, respectively.
Item 2. Legal Proceedings.
None.
Item 3. Changes In and Disagreement With Accountants.
None.
Item 4. Recent Sales of Unregistered Securities.
Recent Sales of Unregistered Securities of PAP:
a.
On May 7, 2007, as a result of the closing of the Mergers, (i) each of the 9,850,000 ADS Class A Interests which were issued and
outstanding automatically converted on a 1:1 basis into the right to receive an aggregate of 9,850,000 shares of Company Common
Stock, (ii) each of the 13,600,000 ADS Class B Interests issued in the ADS Offering which were issued and outstanding
automatically converted on a 1:1 basis into the right to receive an aggregate of 13,600,000 shares of Company Series A
Convertible Preferred Stock, (iii) each of the 347,296 IMPCO Class A Units which were issued and outstanding automatically
converted on a 1:17 basis into the right to receive an aggregate of 5,904,032 shares of Company Common Stock, and (iv) each of
the 594,644 IMPCO Class B Units which were issued and outstanding automatically converted on a 1:17 basis into the right to
receive an aggregate of 10,108,948 shares of Company Series A Convertible Preferred Stock. Upon closing of the Mergers, the
Company also assumed (x) warrants to purchase 1,860,001 ADS Class B Interests issued to certain ADS placement agents in
connection with the ADS Offering, which warrants became exercisable for 1,860,001 shares of Company Series A Convertible
Preferred Stock as a result of the Mergers, and (y) options to purchase 49,200 IMPCO Class A Units issued to certain employees
and consultants of IMPCO, which options became exercisable for 836,400 shares of Company Common Stock as a result of the
Mergers. The foregoing transaction was an exempt offering pursuant to Section 4(2) of the Securities Act.
b.
On August 4, 2005, PAP issued an aggregate of 125,000 shares of Common Stock (post 1:100 reverse stock split effective in
August 2005) to The Krueger Group, LLP, in exchange for future legal services to be provided to PAP valued at $20,000. No
underwriters were used in connection with the private placement, and no underwriting discounts or commissions were paid to any
party. The foregoing transaction was an exempt offering pursuant to Section 4(2) of the Securities Act.
c.
On August 3, 2005, PAP issued an aggregate of 300,000 shares of Common Stock (post 1:100 reverse stock split effective in
August 2005) to BBG, Inc., for an aggregate purchase price of $140,000, payable $33,750 in cash to PAP and the balance in the
assumption by the purchasers of obligations owed by PAP to a vendor
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of PAP and a former director of PAP. No underwriters were used in connection with the private placement, and no underwriting
discounts or commissions were paid to any party. The foregoing transaction was an exempt offering pursuant to Section 4(2) of the
Securities Act.
Recent Sales of Unregistered Securities of ADS prior to the Mergers and Autoconversion:
a.
On May 7, 2007 and immediately prior to the consummation of the Mergers, ADS sold in a private placement transaction a total of
13,600,000 Restricted Class B Membership Units at a price of $1.25 per membership unit to 65 accredited investors. Chadbourn
Securities, Inc. and Sierra Equity Group Ltd. served as ADS’s lead non-exclusive placement agents in the offering. ADS paid an
aggregate placement agent fee of $1,530,000 to all placement agents acting on behalf of ADS in the offering, and issued warrants
to purchase an aggregate of 1,860,001 Class B Membership Units of ADS, to the placement agents participating in such private
placement. These sales and warrant issuances were made in reliance upon exemptions from the registration requirements of
Section 5 of the Securities Act provided by Rule 506 of Regulation D under the Securities Act.
b.
Since the founding of ADS in March 2005, a total of 9,850,000 ADS Class A Membership Units (exchanged on a 1:1 basis for
Company Common Stock in the Mergers) were directly and indirectly purchased by various parties as founder’s units for nominal
value, including: 3,235,000 units beneficially owned by McAfee Capital, LLC, an entity owned and controlled by Eric McAfee;
3,635,000 units beneficially owned by Cagan Capital, LLC, an entity owned and controlled by Laird Q. Cagan, a member of the
Company’s Board of Directors; 1,170,000 units by Liviakis Financial Communications, Inc., the Company’s public relations firm;
and 200,000 units by Park Capital VII, LP. These sales were made in reliance upon exemptions from the registration requirements
of Section 5 of the Securities Act provided by Section 4(2) of the Securities Act.
Recent Sales of Unregistered Securities of IMPCO prior to the Mergers and Autoconversion:
a.
In February 2007, IMPCO issued an aggregate of 35,296 Class A Membership Units in exchange services valued at approximately
$9.50 per Class A Membership Unit to certain consultants and employees of the Company, including Dr. Y.M. Shum, Sean Huang,
Christopher B. Sherwood, Gregory Rozenfeld, Zhang Suian, Edward Li and JCS Consulting LLC (exchanged for an aggregate of
600,032 shares of Company Common Stock in the Mergers). These issuances were made in reliance upon exemptions from the
registration requirements of Section 5 of the Securities Act provided by Rule 506 of Regulation D and Section 4(2) under the
Securities Act with respect to the purchasers who were residents of the United States, and in reliance upon exemptions from the
registration requirements of Section 5 of the Securities Act pursuant to Regulation S with respect to purchasers who were
foreigners residing outside the United States.
b.
In September 2006, IMPCO issued options exercisable for an aggregate of 49,200 Class A Membership Units of IMPCO to Frank
C. Ingriselli, Jamie Tseng, Stephen F. Groth, Sean Huang and Douglas E. Hoffmann, each with an exercise price of $9.50 per
Class A Membership Unit (exchanged for options exercisable for an aggregate of 836,400 shares of Company Common Stock in
the Mergers at an exercise price of $0.56/share). These issuances were made in reliance upon
49
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exemptions from the registration requirements of Section 5 of the Securities Act provided by Section 4(2) of the Securities Act.
c.
Between June and September 2006, and prior to the consummation of the Mergers, IMPCO sold in a private placement transaction
a total of 587,718 Class B Membership Units in exchange for cash and services valued at $4,758,605 to 45 accredited investors
(exchanged for an aggregate of 9,991,206 shares of Company Series A Preferred Stock in the Mergers). Clark Dodge & Co., Inc.
served as IMPCO’s placement agent in the offering, and received cash compensation equal to $136,395 and warrants to purchase
an aggregate of 6,926 Class B Membership Units of IMPCO (exercised in April 2007 and exchanged for an aggregate of 117,742
shares of Company Series A Preferred Stock in the Mergers). These sales were made in reliance upon exemptions from the
registration requirements of Section 5 of the Securities Act provided by Rule 506 of Regulation D under the Securities Act, and the
warrant issuance was made in reliance upon the exemption from the registration requirements of Section 5 of the Securities Act
provided under Section 4(2) of the Securities Act.
d.
In connection with the founding of IMPCO, in November 2005, Frank C. Ingriselli, the Company’s President, Chief Executive
Officer and a member of the Board of Directors, Stephen F. Groth, the Company’s Vice President and Chief Financial Officer, and
Jamie Tseng, the Company’s Executive Vice President, acquired an aggregate of 312,000 Class A Membership Units of IMPCO
for nominal consideration (exchanged for an aggregate of 5,304,000 shares of Company Common Stock in the Mergers). These
issuances were made in reliance upon exemptions from the registration requirements of Section 5 of the Securities Act provided by
Section 4(2) of the Securities Act.
No underwriters were involved in any of the transactions described above. All of the securities issued in the foregoing transactions were
issued by us in reliance upon the exemption from registration available under Section 4(2) of the Securities Act, including Regulation D
promulgated thereunder, in that the transactions involved the issuance and sale of our securities to financially sophisticated individuals or
entities that were aware of our activities and business and financial condition and took the securities for investment purposes and understood
the ramifications of their actions. We did not engage in any form of general solicitation or general advertising in connection with any of such
transactions. Certain of the purchasers also represented that they were “accredited investors” as defined in Regulation D, and all investors that
were not accredited investors were provided with information regarding our company a reasonable time prior to their purchase of our securities.
All of the above investors represented to us that they were acquiring such securities for investment for their own account and not for
distribution. All certificates representing the securities issued have a legend imprinted on them stating that the shares have not been registered
under the Securities Act and cannot be transferred until properly registered under the Securities Act or an exemption applies.
ITEM 5. Indemnification of Directors and Officers.
Under Section 145 of the Delaware General Corporation Law (the “DGCL”), the Company has broad powers to indemnify its directors and
officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the “Securities
Act”). The Company’s Bylaws also provide that the Company has the power to indemnify its directors, officers, employees and other agents to
the maximum extent permitted by Delaware law.
The Company’s Certificate of Incorporation provides for the indemnification of, and advancement of expenses to, such agents of the
Company (and any other persons to which Delaware law permits the Company to provide indemnification) through Bylaw provisions,
agreements with such agents or other persons, vote of
50
Table of Contents
stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted under Section 145
of the DGCL, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty
to the Company, its stockholders and others. The provision does not affect directors’ responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
The Company has entered into agreements with certain of its current executive officers and directors, and intends to enter into agreements
with its future directors and executive officers, that require the Company to indemnify such persons against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred (including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by reason of the fact that such person is or was a director or
officer of the Company or any of its affiliated enterprises, provided such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the Company and, with respect to any criminal proceeding, had no reasonable cause to
believe his or her conduct was unlawful. The indemnification agreements also set forth certain procedures that will apply in the event of a claim
for indemnification thereunder.
Insurance . The Company may purchase and maintain insurance on behalf of any person who is or was a director, officer or employee of
the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another company, partnership,
joint venture, trust or other enterprise against liability asserted against him and incurred by him in any such capacity, or arising out of his status
as such, whether or not the Company would have the power to indemnify him against liability under the provisions of this section. The
Company currently maintains an Executive and Organization Liability Insurance Policy issued by Illinois National Insurance Company, a
member company of American International Group, Inc. (“AIG”).
Settlement by the Company . The right of any person to be indemnified is subject always to the right of the Company by its Board of
Directors, in lieu of such indemnity, to settle any such claim, action, suit or proceeding at the expense of the Company by the payment of the
amount of such settlement and the costs and expenses incurred in connection therewith.
PART F/S
Financial Statements
The following index lists the financial statements of Pacific Asia Petroleum, Inc. that are included in this report:
Condensed Consolidated Balance Sheet as of June 30, 2007 (unaudited) and December 31, 2006
53
Condensed Consolidated Statement of Operations (unaudited) for the six months ended June 30, 2007 and for the period
from inception (August 25, 2005) through June 30, 2007
54
Condensed Consolidated Statement of Stockholders’ Equity (Deficiency) (unaudited) for the period from inception
(August 25, 2005) through June 30, 2007
55
Condensed Consolidated Statement of Cash Flows (unaudited) for the six months ended June 30, 2007 and 2006 and for the
period from inception (August 25, 2005) through June 30, 2007
56
51
Table of Contents
Notes to Condensed Consolidated Financial Statements (unaudited)
57
The following index lists the financial statements of Inner Mongolia Production Company LLC that are included in this report:
Report of Independent Registered Certified Public Accounting Firm
65
Consolidated Balance Sheet as of December 31, 2006 and 2005
66
Consolidated Statement of Operations for the years ended December 31, 2006 and 2005 and for the period from inception
(August 25, 2005) through December 31, 2006
67
Consolidated Statement of Members’ Equity (Deficiency) for the period from inception (August 25, 2005) through
December 31, 2006
68
Consolidated Statement of Cash Flows for the years ended December 31, 2006 and 2005 and for the period from inception
(August 25, 2005) through December 31, 2006
69
Notes to Consolidated Financial Statements
70
52
Table of Contents
Pacific Asia Petroleum, Inc. and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Balance Sheets
As of
June 30,
2007
(Unaudited)
Assets
Current:
Cash and cash equivalents
Short-term investments (note 6)
Accounts receivable
Miscellaneous receivables
Prepaid expenses
Deposits
$
Total Current Assets
Non-Current Assets:
Property, plant and equipment — at cost (note 7)
(net of reserve for depreciation: 2007 - $5,715; 2006 - $1,740)
Long-term advances
Total Assets
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable
Accrued and other liabilities
2,493,462
15,225,000
12,289
991
48,785
10,418
As of
December 31,
2006
$
1,867,374
1,400,000
—
—
31,486
11,498
17,790,945
3,310,358
227,944
463,895
208,511
410,452
$
18,482,784
$
3,929,321
$
80,399
124,939
$
103,391
96,149
Total Current Liabilities
Non-Current Liabilities
Minority interest in subsidiaries
Total Liabilities
205,338
199,540
396,451
358,190
601,789
557,730
39,931
15,295
Stockholders’ Equity
Common stock:
Authorized - 300,000,000 shares at $.001 par value Issued and outstanding 39,931,106 as of June 30, 2007; 15,295,223 as of December 31, 2006
Preferred stock:
Authorized - 50,000,000 shares at $.001 par value Issued - 23,708,952 as of June 30,
2007; none as of December 31, 2006; Outstanding — none as of June 30, 2007
and as of December 31, 2006
Paid-in capital
Other comprehensive income — currency translation adj.
Deficit accumulated during the development stage
—
20,253,609
45,421
(2,457,966 )
—
4,474,799
19,228
(1,137,731 )
Total Equity
17,880,995
3,371,591
$
Total Liabilities and Stockholders’ Equity
18,482,784
The accompanying notes to unaudited condensed consolidated financial statements are an integral part of this statement.
53
$
3,929,321
Table of Contents
Pacific Asia Petroleum, Inc. and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statement of Operations
(Unaudited)
For the period
from inception
(August 25, 2005)
through
6/30/2007
For the six months
ended June 30,
2007
Operating Expenses
Depreciation
All other operating expenses
$
Total operating expenses
Operating Loss
Other Income (Expense)
Interest Income
Other Income
Other Expense
Total Other Income (Expense)
Net loss before minority interest
3,975
1,507,946
$
—
387,010
$
5,715
2,744,563
1,511,921
387,010
2,750,278
(1,511,921 )
(387,010 )
(2,750,278 )
177,680
12,289
(42 )
18,267
—
—
277,086
12,289
(42 )
189,927
18,267
289,333
(1,321,994 )
Minority interest
Net (Loss)
2006
(368,743 )
(2,460,945 )
—
1,759
2,979
$
(1,320,235 )
$
(368,743 )
$
(2,457,966 )
$
(0.06 )
$
(0.05 )
$
(0.17 )
Per Share of Common Stock:
Net Income (loss) - Basic and Diluted
Weighted Average Number of Shares Outstanding
23,059,973
7,594,365
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of this statement.
54
14,271,454
Table of Contents
Pacific Asia Petroleum, Inc. and Subsidiaries
(A Development Stage Company)
Condensed Statement of Stockholders’ Equity (Deficiency)
For the period from inception (August 25, 2005) to June 30, 2007
(Unaudited)
Original
IMPCO
Member
Interests
Balance — August 25,
2005
Issued for cash - 2005
Subscriptions - 2005
Net loss — year 2005
$
Stockholders’ Equity
(Deficiency) —
December 31, 2005
Subscriptions paid in
2006
Issued for fees and
services - 2006
Issued for cash- 2006,
net of issuance
costs
Amortization of
options fair value
Currency translation —
year 2006
Net loss — year 2006
—
12,000
28,000
—
—
—
(28,000 )
—
—
—
—
—
(28,000 )
—
$
Common
Stock
No. of
Preferred
Shares
$.001 par value
Preferred
Stock
Other
Comprehensive
Income (Loss)
Paid-in
Capital
—
—
—
—
—
—
28,000
—
—
—
—
—
—
—
28,000
197,605
—
—
—
—
—
—
—
—
197,605
4,223,424
—
—
—
—
—
—
—
—
4,223,424
29,065
—
—
—
—
—
—
—
—
29,065
—
—
—
—
—
—
—
—
—
—
—
—
—
—
19,228
—
—
(1,086,387 )
19,228
(1,086,387 )
4,490,094
—
—
—
—
—
—
19,228
(1,137,731 )
3,371,591
335,312
—
—
—
—
—
—
—
—
335,312
34,036
—
—
—
—
—
—
—
—
34,036
(56,536 )
—
—
—
—
—
—
—
—
(56,536 )
(4,802,906 )
—
5,904,032
5,904
10,108,952
10,109
4,786,893
—
—
—
—
—
468,122
468
—
—
83,323
—
—
83,791
—
—
9,850,000
9,850
13,600,000
13,600
15,453,957
—
—
15,477,407
—
—
—
—
—
—
—
—
—
—
23,708,952
23,709
—
—
—
—
—
—
—
—
—
—
17,018
—
—
17,018
—
—
—
—
—
—
—
26,193
—
26,193
—
—
—
—
—
—
—
—
—
39,931,106
$ 39,931
—
—
$
$
(23,708,952 )
$
—
$
(87,582 )
(23,709 )
$
—
—
—
—
$
20,253,609
$
—
—
—
—
45,421
—
—
—
(51,344 )
Total
Stockholders’
Equity
(Deficiency)
—
—
—
—
$
—
—
—
—
Deficit
Accumulated
During the
Development
Stage
—
—
—
—
$
40,000
Stockholders’ Equity
(Deficiency) —
December 31, 2006
Issued for services 2007 - pre-merger
Amortization of
options fair value
pre-merger
Pre-merger acquisition
costs
Shares issued to
IMPCO members
in merger - 5/7/07
Shares retained by
Pacific Asia
Petroleum original
stockholders in
merger - 5/7/07
Shares issued to ADS
members in merger
- 5/7/07
Post-merger acquisition
costs and
adjustments
Automatic Conversion
of Preferred Shares
June 5, 2007
Amortization of
options fair value
post merger
Currency translation —
six months 2007
Net loss — six months
2007
Stockholders’ Equity
(Deficiency) —
June 30, 2007
Subscriptions
Receivable
No. of
Common
Shares
$.001 par value
$
(51,344 )
$
(2,457,966 )
—
12,000
—
(51,344 )
(39,344 )
(87,582 )
(1,320,235 )
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of this statement.
55
$
(1,320,235 )
$
17,880,995
Table of Contents
Pacific Asia Petroleum, Inc. and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Six months
ended
June 30,
2007
Cash flows from operating activities
Net loss
$
Six months
ended
June 30,
2006
(1,320,235 )
$
(368,743 )
For the period
from inception
(August 25, 2005) to
June 30, 2007
$
(2,457,966 )
Adjustments to reconcile net loss to cash used in operating
activities:
Acquisition costs
Interest income on long-term advances
Options expense amortization
Minority interest in net loss
Depreciation expense
Stock compensation
Changes in current assets and current liabilities:
(Increase) in receivables
(Increase) in advances
(Increase) decrease in deposits
(Increase) in prepaid expenses
Increase in accounts payable
(Decrease) in accrued liabilities
127,706
(41,779 )
51,054
(1,759 )
3,975
335,312
—
—
—
—
—
80,631
127,706
(51,724 )
80,119
(2,979 )
5,715
532,917
(13,280 )
—
1,080
(16,819 )
36,373
(119,428 )
—
(2,144 )
—
—
—
(7,185 )
(13,280 )
—
(10,418 )
(48,305 )
79,599
(23,279 )
Net cash used in operating activities
(957,800 )
(297,441 )
(1,781,895 )
Cash flows from investing activities
Net purchases of available for sale short-term securities
Additions to property, plant and equipment
(13,825,000 )
(18,559 )
—
—
(15,225,000 )
(218,426 )
Net cash used in investing activities
(13,843,559 )
—
(15,443,426 )
Cash flows from financing activities
Increase in notes and loans payable
Increase in minority interest investment
Increase in long-term advances to minority shareholder
Decrease in subscriptions receivable
Issuance of common stock
—
40,020
—
—
15,385,982
40,000
8,127
(15,627 )
28,000
3,717,382
—
399,430
(400,507 )
—
19,701,605
Net cash provided by financing activities
15,426,002
3,777,882
19,700,528
1,445
—
18,255
626,088
1,867,374
3,480,441
101,929
2,493,462
—
Effect of exchange rate changes on cash
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
2,493,462
$
3,582,370
$
2,493,462
Supplemental disclosures of cash flow information
Interest paid
Income taxes paid
$
$
—
—
$
$
—
—
$
$
—
—
Supplemental schedule of non-cash investing and financing
activities
Common stock issued for services and fees
$
335,312
$
80,631
$
532,917
The accompanying notes to unaudited consolidated financial statements are an integral part of this statement.
56
Table of Contents
Pacific Asia Petroleum, Inc. and Subsidiaries
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited)
NOTE 1. — DESCRIPTION OF BUSINESS
Pacific Asia Petroleum, Inc. (the Company) is the successor company from a reverse merger involving the former Pacific East Advisors, Inc.
and other entities on May 7, 2007. The details of this merger are discussed in Note 2. — Merger and Recapitalization.
The Company’s activities commenced in 2005 through Inner Mongolia Production Company, LLC (IMPCO), formed as a limited liability
company under New York State law on August 25, 2005. The Company’s business plan is to engage in the business of oil and gas exploration,
development and production in Asia and the Pacific Rim countries.
In 2006, a subsidiary entered into a joint development contract with Chifeng Zhongtong Oil and Natural Gas Co., Ltd., (“Chifeng”) a company
incorporated in Inner Mongolia, China. In the fourth quarter of 2006, the first well was drilled under this contract. This well is currently
producing under an exploration and development license issued by the relevant Chinese authorities. However, no revenue or related depletion
expense have been recognized to date due to uncertainty of realization of the revenue until a permanent production license is obtained. A
comprehensive long-term production license has been applied for by Chifeng, and is expected to be issued in year 2007. If this license is not
issued, the opportunities to drill additional long-term production wells under the contract may be at risk.
In addition, the Company is evaluating exploration, development and production opportunities involving coal-bed methane and tight gas sand
areas in China. In 2006 IMPCO entered into an Agreement for Joint Cooperation with China United Coalbed Methane Co., Ltd. to engage in a
feasibility study regarding a coal bed methane acreage block. The agreement also grants the Company exclusive rights to a large prospective
contract area with the option to convert the rights into a production sharing contract. The Company plans to exercise this option. The feasibility
study was completed and submitted in the first quarter of 2007. Negotiation of a production sharing contract is in progress. The Company is
also actively considering the acquisition of other prospective coal bed methane and gas opportunities.
NOTE 2. — MERGER AND RECAPITALIZATION
On May 7, 2007, Pacific East Advisors, Inc.(PEA), a publicly traded company, was merged with Inner Mongolia Production Company LLC
(IMPCO) and Advanced Drilling Services LLC (ADS) via merger subsidiaries of PEA created for this transaction. The transaction has been
accounted for as a reverse merger, and IMPCO is the acquiring company on the basis that IMPCO’s senior management became the entire
senior management of the merged entity and there was a change of control of PEA. In accordance with SFAS No. 141, “Accounting for
Business Combinations”, IMPCO was the acquiring entity for accounting purposes. While the transaction is accounted for using the purchase
method of accounting, in substance the transaction was a recapitalization of IMPCO’s capital structure.
PEA changed its name to Pacific Asia Petroleum, Inc. (the Company) as of the merger date and will continue the business of IMPCO under the
new name. The Company did not recognize goodwill or any intangible assets in connection with the transaction. From August 8, 2001 when it
emerged from bankruptcy until the date of the transaction, PEA was an inactive corporation with no significant assets and liabilities.
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Table of Contents
Pacific Asia Petroleum, Inc. and Subsidiaries
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited)
NOTE 2. — MERGER AND RECAPITALIZATION (Continued)
In connection with the merger, PEA issued 5,904,032 common shares to holders of IMPCO Class A Units, 10,108,952 preferred shares to
holders of IMPCO Class B Units, 9,850,000 common shares to holders of ADS Class A Interests and 13,600,000 preferred shares to holders of
ADS Class B Interests in return for all the equity units of those entities. The preferred shares were automatically converted to common shares
on June 5, 2007. The common shares outstanding for the Company at June 30, 2007 were 39,931,106 including shares held by existing owners
prior to the merger. The value of the stock that was issued to IMPCO’s equity holders was the historical cost of the Company’s net tangible
assets, which did not differ materially from their fair value.
In connection with the merger, the Company assumed the obligation of ADS to pay Chadbourn Securities, Inc., a NASD licensed broker-dealer
for which Mr. Laird Cagan serves as a registered representative and Managing Director, $1,195,430 in placement fees and expense
reimbursements relative to the previous securities offering of ADS. This amount has been paid.
The cost of the acquisition was $127,706, which has been charged to expense in 2007. This was composed of par value of common stock
retained by original holders of $468, liabilities assumed of $128,334, less assets acquired of $1,096. The pro forma effects on consolidated
results of operations if the acquisition had occurred at the beginning of year 2007 or the beginning of year 2006 were not material.
NOTE 3. — BASIS OF PRESENTATION
The unaudited condensed financial statements are prepared on a consolidated basis. All significant intercompany transactions and balances
have been eliminated in consolidation. The financial statements include Pacific Asia Petroleum, Inc. (successor company to IMPCO) and its
majority owned direct and indirect subsidiaries in the respective periods. Net income for 2007 excludes the results of PEA and ADS prior to
May 7, 2007. For year 2006 prior data, the financial statements include only IMPCO and its subsidiaries Inner Mongolia Production Company
(HK) Limited (100% owned) and Inner Mongolia Sunrise Petroleum JV Company (97% owned).
The Company’s financial statements are prepared under U.S. Generally Accepted Accounting Principles as a development stage company.
Certain reclassifications have been made in prior year’s financial statements to conform to classifications used in the current year with respect
to common stock and paid-in capital.
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been
included. Accordingly, the results from operations for the six month period ended June 30, 2007, are not necessarily indicative of the results
that may be expected for the year ended December 31, 2007. These unaudited condensed consolidated financial statements should be read in
conjunction with the December 31, 2006 financial statements and footnotes thereto included elsewhere in this report.
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Table of Contents
Pacific Asia Petroleum, Inc. and Subsidiaries
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited)
NOTE 4. — LIQUIDITY AND CAPITAL RESOURCES
During the period from its inception to December 31, 2006, the Company was able to fund its expenses through member equity contributions
and member loans. In year 2006 the Company sold equity units in a private placement in the amount of $4,561,000 and received $28,000 from
collection of subscriptions on equity units subscribed in year 2005. Proceeds from the equity offering were used to repay $240,000 of notes
payable ($100,000 with an officer) outstanding from loans incurred in late 2005 and the first quarter of 2006.
In May 2007, immediately prior to the merger, ADS issued equity units for cash of $17,000,000, of which net proceeds were $15,497,491 after
offering costs. The proceeds were invested in temporary investments and were available for operations of the Company after the merger date.
To date the Company has incurred expenses and sustained losses. Consequently, its operations are subject to all risks inherent in the
establishment of a new business enterprise. The Company will require significant financing in excess of its June 30, 2007 available cash, cash
equivalents and short-term investments in order to achieve its business plan. It is not certain that this amount of financing will be successfully
obtained.
NOTE 5. — SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates — Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted
accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, disclosures of contingencies, and
reported revenues and expenses. Actual results could vary from those estimates.
Cash and Cash Equivalents — Cash and cash equivalents include cash on hand, demand deposits and short-term investments with initial
maturities of three months or less.
Short-term Investments — The Company follows the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
Securities”. The Company classifies debt and equity securities into one of three categories: held-to-maturity, available-for-sale or trading.
These security classifications may be modified after acquisition only under certain specified conditions. Securities may be classified as
held-to-maturity only if the Company has the positive intent and ability to hold them to maturity. Trading securities are defined as those bought
and held principally for the purpose of selling them in the near term. All other securities must be classified as available-for-sale. Declines in the
fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in
earnings as realized losses.
59
Table of Contents
Pacific Asia Petroleum, Inc. and Subsidiaries
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited)
NOTE 5. — SIGNIFICANT ACCOUNTING POLICIES (Continued)
The securities held as of the date of the financial statements are temporary investments of funds available for operations in marketable
securities with maturities in excess of three months but having variable interest rates, thus no principal risk due to interest rate fluctuations. The
Company invests in financial instruments having interest rate reset periods of either seven days or 28 days. If the Company decides not to
accept a reset of the rate, the bond or preferred stock investment is readily marketable for sale at original purchase cost of par value. These
investments are classified as available for sale and are carried at fair value. Fair value excluding accrued interest is equivalent to cost.
Inventories — The Company had no inventories at the balance sheet dates, and has not decided the inventory accounting method to be utilized
should inventories occur.
Property, Plant and Equipment — For oil and gas properties, the successful efforts method of accounting is used. Costs of drilling successful
wells are capitalized. Costs of drilling exploratory wells not placed into production are charged to expense. Geological and geophysical costs
are charged to expense as incurred. For depreciable tangible property, the minimum capitalization threshold is $1000.
Depreciation, depletion and amortization for oil and gas related property is recorded on a unit-of-production basis. For other depreciable
property, depreciation is recorded on a straight line basis based on depreciable lives of five years for office furniture and three years for
computer related equipment. Repairs and maintenance costs are charged to expense as incurred.
Reserves for Uncollectible Advances and Loans — The Company reviews its advances and loans receivable for possible impairment and
records reserves for possible losses on amounts believed to be uncollectible. As of June 30, 2007 and December 31, 2006 no reserves were
deemed necessary.
Impairment of Long-Lived Assets — The Company reviews its long-lived assets in property, plant and equipment for impairment in
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Review for impairment of long-lived
assets occurs whenever changes in circumstances indicate that the carrying amount of assets in property, plant and equipment may not be fully
recoverable. An impairment loss is recognized for assets to be held and used when the estimated undiscounted future cash flows expected to
result from the asset including ultimate disposition are less than its carrying amount. Impairment is measured by the excess of carrying amount
over the fair value of the assets. As of June 30, 2007 and December 31, 2006 no impairment adjustments were required.
Asset Retirement Obligations — The Company accounts for asset retirement obligations in accordance with SFAS No. 143, “Accounting for
Asset Retirement Obligations,” as amended by FIN No. 47, “Accounting for Conditional Asset Retirement Obligations.” The Company at
June 30, 2007 and December 31, 2006 had no long-lived assets subject to asset retirement obligations. The nature or amount of any asset
retirement obligations which the Company may become subject to from its future operations is not determinable at this time.
Revenues — The Company presently has no direct sales revenues from customers. The company records revenues for which it deems that
collectibility is reasonably assured and the earnings process is complete.
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Table of Contents
Pacific Asia Petroleum, Inc. and Subsidiaries
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited)
NOTE 5. — SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes — Commencing May 7, 2007, the Company is subject to taxation as a corporation but is in an operating loss position for U.S.
income tax purposes. Therefore, the Company does not accrue U.S. current income taxes. Deferred income taxes are provided using the asset
and liability method for financial reporting purposes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes”.
Under this method, deferred tax assets and liabilities are recognized for temporary differences between the tax bases of assets and liabilities and
their carrying values for financial reporting purposes and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
removed or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the
period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that the
related tax benefits will not be realized. For dates prior to May 7, 2007, the Company was an LLC pass-through entity treated as a partnership
for income tax purposes in the United States, and therefore did not accrue or pay income taxes.
Foreign Currency Translation — The functional currency of the Hong Kong subsidiary is the U.S. dollar. The functional currency of the China
subsidiary is the local currency. Balance sheet translation effects from translating local functional currency into U.S. dollars (the reporting
currency) are recorded directly to other comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive Income.”
Stock Based Compensation — The Company accounts for stock based compensation in accordance with SFAS No. 123(R), “Share-Based
Payment”, which specifies the revised accounting alternative requirements for pre-2006 stock based compensation grants existing at January 1,
2006 and the required accounting for new grants starting January 1, 2006. The Company has no stock based compensation grants made before
year 2006. Accordingly, the provisions of SFAS No. 123(R) pertaining to pre-2006 grants do not apply. The Company values its stock options
awarded on or after January 1, 2006 at the fair value at grant date using the Black-Scholes option pricing model. Compensation expense for
stock options is recorded over the vesting period on a straight line basis. Compensation paid in vested stock is valued at the fair value at the
applicable measurement date and charged to expense at that date.
Net Income (loss) Per Common Share —The Company computes earnings per share under SFAS No. 128, “Earnings Per Share”. Net loss per
common share is computed by dividing net loss by the weighted average number of shares of common stock and dilutive common stock
equivalents outstanding during the year. Dilutive common stock equivalents consist of shares issuable upon the exercise of the Company’s
stock options and warrants (calculated using the treasury stock method).
New Accounting Pronouncements — As of the balance sheet date, there were no new accounting pronouncements not yet adopted that are
expected to materially affect the Company in the foreseeable future.
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Table of Contents
Pacific Asia Petroleum, Inc. and Subsidiaries
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited)
NOTE 5. — SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS No. 157, “Fair Value Measurements " : The statement defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements. No new fair value measurements are required in
connection with existing standards. The effective date is for fiscal years beginning after November 15, 2007.
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”: The statement permits the voluntary measurement of
certain financial instruments and certain other items at fair value. The effective date is for reporting periods beginning after November 15,
2007.
NOTE 6. — FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Fair Value of Financial Instruments — The carrying amounts of the Company’s financial instruments, which include cash equivalents,
short-term investments, deposits, long-term advances, accounts payable, accrued expenses, and notes payable approximate fair value at
June 30, 2007 and December 31, 2006. The aggregate fair value of securities classified as available for sale was $15,225,000 at June 30, 2007
and $1,400,000 at December 31, 2006.
Concentration of Credit Risk — The Company is exposed to concentration of credit risk with respect to cash, cash equivalents, short-term
investments and long-term advances. As the Company chooses to maximize investment of its U.S. cash into higher yield investments rather
than keeping the amounts in bank accounts, there is a high concentration of credit risk on remaining cash balances which are located principally
in China. At June 30, 2007, 93% of the Company’s total cash was on deposit in China at the Bank of China. Also at that date, 77% of the
Company’s cash equivalents were invested in a single money market fund. Less than 15% of the Company’s U.S. short-term investments were
invested in securities of any single individual issuer. At December 31, 2006, 96% of the Company’s cash was on deposit in China at the Bank
of China. Also at that date, 50% and 25% of the Company’s short-term investments were invested in securities of two individual issuers,
respectively. At June 30, 2007 and December 31, 2006, 100% of the Company’s long-term advances were receivable from a single borrower.
No losses have occurred on the above items.
NOTE 7. — PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment by type of property was as follows at June 30, 2007 and December 31, 2006.
June 30, 2007
Accumulated
Depreciation
Gross
Oil and gas wells
Office and Computer equipment
Total
December 31, 2006
Oil and gas wells
Computer equipment
$ 196,726
36,933
$ 233,659
$
$ 191,877
18,374
$ 210,251
$
$
$
$ 196,726
31,218
$ 227,944
—
1,740
1,740
$ 191,877
16,634
$ 208,511
Depreciation for the six months ended June 30, 2007 was $3,975. There was no depreciation for the same period in 2006.
No interest expense has been capitalized through June 30, 2007.
62
Net
—
5,715
5,715
Table of Contents
Pacific Asia Petroleum, Inc. and Subsidiaries
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited)
NOTE 8. — COMMITMENTS
Consulting Agreements and Employment Agreements
In September 2006 the Company entered into a consulting agreement with Morningside Development LLC as successor contract to a prior
agreement which was terminated. The new agreement provided for payments of $12,000 per month, for which the remaining payments were
$96,000 at December 31, 2006. The contract was terminated in February 2007 for a final payment of $70,000.
Effective December 15, 2005 the Company entered into two-year consulting agreements with three key personnel who were also LLC
members. The agreements provided for the performance of specified services by the personnel in return for a fixed rate per month. The
agreements were subject to termination by either party on 90 days notice. If terminated by the Company, the consultant was entitled to receive
the balance of payments that would have been payable through the original term. The Company’s commitments under these contracts were
$33,350 per month, which increased to $34,350 per month in July 2006. In September 2006, new executive employment agreements were
entered into between the Company and two LLC members to replace two of the three existing consulting agreements. The agreements have no
expiration date, and either party may terminate at will. The minimum commitment under these contracts is a total of $500,000 per year. In the
event of termination by the Company other than for cause or disability, multi-year severance payments are required. However, the operable
effective date for the compensation rates under these agreements was delayed subject to the Company achieving certain financial benchmarks.
Therefore, payments continued under the existing consulting agreements through March 31, 2007. The new agreements became fully effective
at the contracted rates on April 1, 2007.
Management Contracts
As a result of the Mergers, the Company assumed an Advisory Agreement, dated December 1, 2006, by and between ADS and Cagan McAfee
Capital Partners, LLC (“CMCP”), pursuant to which CMCP agreed to provide certain financial advisory and management consulting services
to the Company. Pursuant to the Advisory Agreement, CMCP is entitled to receive a monthly advisory fee of $9,500 for management work
commencing on December 11, 2006 and continuing until May 7, 2010. Laird Q. Cagan, the Managing Director and 50% owner of CMCP,
currently serves as a member of the Company’s Board of Directors.
Lease Commitments
Information on lease commitments is presented in Note 6 of Inner Mongolia Production Company, LLC’s consolidated financial statements for
the year ended December 31, 2006 included elsewhere in this report. On June 29, 2007 the Company entered into an additional lease
commitment. Future minimum lease rentals under the additional commitment are:
2007 – $16,505
2008 – $55,167
2009 – $27,124
NOTE 9. — CAPITALIZATION
The Company’s equity capital prior to the merger in May 2007 was composed of equity units of IMPCO. At May 7, 2007 there were 347,296
Class A Units (“A” Units) and 594,644 Class B Units (“B” Units) outstanding immediately prior to the merger. At December 31, 2006 there
were 312,000 “A” Units and 587,719 “B” Units outstanding.
In addition, prior to the merger in May 2007, ADS issued 9,850,000 Class A interests and 13,600,000 Class B interests as equity units. The
capitalization of ADS prior to the merger is not included in the Company’s financial statements for 2006.
The authorized capital stock of the Company consists of 300,000,000 shares of Common Stock, $0.001 par value per share, and 50,000,000
shares of Preferred Stock, $0.001 par value per share, of which 30,000,000 shares have been designated as “Series A Convertible Stock,”
6,291,048 of which remain issuable following the automatic conversion of 23,708,952 shares of the Company’s Series A Convertible Stock as
a result of the Autoconversion.
The Company’s capitalization at June 30, 2007 is composed of 39,931,106 common shares issued and outstanding.
63
Table of Contents
Pacific Asia Petroleum, Inc. and Subsidiaries
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited)
NOTE 10. — WARRANTS AND OPTIONS
In year 2006 the Company (as IMPCO) issued 6,453 warrants to underwriters for purchase of “B” Units at an exercise price of 1 cent per share
with a term of 10 years. The warrants were valued at $61,239 ($9.49 per warrant). This valuation was on the basis that due to the nominal
exercise price of the warrant, the warrants were in substance equivalent to restricted equity units that vest at any time based on election of the
holder. No expense was recorded on this transaction as this was considered part of offering costs applied to paid-in capital. These warrants
were exercised in early 2007, and the units were exchanged for common shares of the Company at the merger date.
There were no equity unit options granted prior to year 2006. In September, 2006 the Company (as IMPCO) granted 49,200 equity unit options
for “B” Units to certain consultants and employees, which were all outstanding at December 31, 2006. The options vest 40% after one year and
20% per year at the end of the following three years, with expiration 10 years from date of grant. The options were exercisable at $9.50 per
unit, equal to the offering price per unit in the most recent offering of units. At the merger date of May 7, 2007, these options were exchanged
for 836,400 options on common shares of the Company. No options were eligible for exercise in 2006 or during the first six months of 2007.
The remaining contractual life of options outstanding at June 30, 2006 was nine years, three months. Compensation expense on these options
was $51,054 for six months 2007.
The fair values of unit options used in recording compensation expense were computed using the Black-Scholes option pricing model based on
the following assumptions.
Group 1 represents the portion of options vesting at the end of one year. Group 2 represents the remaining options vesting at the end of years 2,
3, and 4. The fair values and exercise prices have been adjusted to a per common share basis as a result of the merger.
Group 1
Expected price volatility (basket of comparable public companies)
Risk-free interest rate (U.S. Treasury bonds)
Expected annual dividend rate
Expected option term — weighted average
Grant date fair value per common share
Exercise price per common share
64.60 %
4.57 %
0.00 %
5.50 yrs.
$
.34
$
.56
Group 2
64.60 %
4.58 %
0.00 %
6.25 yrs.
$
.36
$
.56
Immediately prior to the merger on May 7, 2007, ADS issued to its placement agents 1,860,001 warrants to purchase Class B membership units
of ADS. Included were (i) warrants to purchase 3,825 Class B membership units of ADS issued to Michael McTeigue, an executive officer of
ADS, (ii) warrants to purchase 83,354 Class B membership units of ADS issued to Chadbourn Securities, Inc., a NASD licensed broker-dealer
for which Laird Q. Cagan serves as a registered representative and Managing Director, and (iii) warrants to purchase 696,094 Class B
membership units of ADS issued to Laird Q. Cagan, a member of the Company’s Board of Directors and beneficial owner of 10.66% of the
Company’s common stock. These warrants were exchanged in the merger for 1,860,001 options on common shares of the Company. The
Company has accounted for this as an offering cost applicable to paid-in capital and therefore will not record any compensation expense on
these warrants. The options are exercisable at a weighted average exercise price of $1.29 per common share.
NOTE 11. — 2007 STOCK OPTION PLAN
The Company adopted a stock option plan on May 7, 2007. The plan provides for grants of restricted stock, incentive and/or nonqualified stock
options, and stock appreciation rights (“SARs”) to employees, directors and consultants of the Company. The aggregate number of shares
eligible for issuance under the plan is 4,000,000. No grants have been made through June 30, 2007.
NOTE 12. — LITIGATION AND CONTINGENCIES
The Company at June 30, 2007 had no litigation, actual or potential, of which it was aware and which could have a material effect on its
financial position.
64
Table of Contents
RBSM LLP
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Inner Mongolia Production Company, LLC.
Hartsdale, NY
We have audited the accompanying balance sheets of Inner Mongolia Production Company, LLC (a development stage company) as of
December 31, 2006 and 2005, and the related statements of losses, deficiency in members’ equity and cash flows for the year ended
December 31, 2006 and the period August 25, 2005 (date of inception) through December 31, 2005 and the period August 25, 2005 (date of
inception) through December 31, 2006 . These financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We have conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States of
America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Inner Mongolia
Production Company, LLC. (a development stage company) at December 31, 2006 and 2005 and the results of its operations and its cash flows
for the year ended December 31, 2006 and the period August 25, 2005 (date of inception) through December 31, 2005 and period August 25,
2005 (date of inception) through December 31, 2006 in conformity with accounting principles generally accepted in the United States of
America.
/s/ RBSM LLP
New York, New York
July 11, 2007
65
Table of Contents
Inner Mongolia Production Company, LLC and Subsidiaries
(A Development Stage Company)
Consolidated Balance Sheet
As of December 31, 2006 and 2005
2006
Assets
Current:
Cash and cash equivalents
Short-term investments (Note 4)
Prepaid expenses
Deposits
$
Total Current Assets
Non-Current Assets:
Property, plant and equipment — at cost (Note 5) (net of reserve for depreciation in 2006 $1,740)
Long-Term Advances
2005
1,867,374
1,400,000
31,486
11,498
$ 101,929
—
—
—
3,310,358
101,929
208,511
410,452
—
—
$ 101,929
Total Assets
$
3,929,321
Liabilities and Members’ Equity
Current Liabilities:
Accounts payable
Accrued liabilities — expenses
Notes payable
$
103,391
96,149
—
Total Current Liabilities
Non-Current Liabilities
Minority interest in subsidiaries
Commitment and Contingencies (Notes 6 and 9)
Members’ Equity
Member units — Authorized unlimited (Note 7)
Class A issued - 312,000 at December 31, 2006 and 2005
Class B issued - 587,719 and none at December 31, 2006 and 2005 respectively, net of
offering costs of $337,576
Subscriptions receivable on “A” units
Paid-in capital
Other comprehensive income — currency translation adj.
Deficit accumulated during the development stage
Total Equity (Deficiency)
Total Liabilities and Members’ Equity
$
The accompanying notes to consolidated financial statements are an integral part of this statement.
66
$
—
41,273
100,000
199,540
141,273
358,190
—
—
—
40,000
40,000
4,421,029
—
29,065
19,228
(1,137,731 )
—
(28,000 )
—
—
(51,344 )
3,371,591
(39,344 )
3,929,321
$ 101,929
Table of Contents
Inner Mongolia Production Company, LLC and Subsidiaries
(A Development Stage Company)
Consolidated Statement of Operations
For the years ended December 31, 2006 and 2005
and for the period from inception (August 25, 2005) to December 31, 2006
2006
Operating Expenses
Depreciation
All other operating expenses
$
Total operating expenses
Operating Loss
Other Income (Expense)
Interest income
Total other income (expense)
Net loss before minority interest
Minority interest
1,740
1,185,273
2005
$
$
$
1,740
1,236,617
51,344
1,238,357
(1,187,013 )
(51,344 )
(1,238,357 )
99,406
—
99,406
99,406
—
99,406
(1,086,387 )
The accompanying notes to consolidated financial statements are an integral part of this statement.
67
—
51,344
1,187,013
(1,087,607 )
1,220
Net Loss
For the period
from inception
(August 25, 2005)
through
December 31,
2006
(51,344 )
—
$
(51,344 )
(1,138,951 )
1,220
$
(1,137,731 )
Table of Contents
Inner Mongolia Production Company, LLC and Subsidiaries
(A Development Stage Company)
Consolidated Statement of Members’ Equity (Deficiency)
For the period from inception (August 25, 2005) to December 31, 2006
“A” Units
Number of
units
Balance — August 25,
2005
Issued for cash - 2005
@ $.1101 per unit
Units subscribed - 2005
@ $.1379 per unit
Subscriptions
receivable at
December 31, 2005
Net loss — year 2005
Members’ Equity
(Deficiency) —
December 31, 2005
Subscriptions paid in
2006
Issued for fees and
services - 2006:
@ $.1282 per unit
@ $9.50 per unit
Issued for cash - 2006
@ $9.50 per unit
Offering costs
Amortization of equity
options fair value
Currency translation —
year 2006
Net loss — year 2006
Members’ Equity
(Deficiency) —
December 31, 2006
—
“A”
Units
Amount
$
—
“B” Units
Number of
units
Unit
Subscriptions
Receivable
$
—
—
“B” Units
Amount
$
Currency
Translation
Adjustment
Paid-in
Capital
—
$
—
$
—
Deficit
Accumulated
Total
During
Development
Stage
Members’
Equity
(Deficiency)
$
—
$
—
108,960
12,000
—
—
—
—
—
—
12,000
203,040
28,000
—
—
—
—
—
—
28,000
—
—
—
—
(28,000 )
—
—
—
—
—
—
—
—
—
(51,344 )
(28,000 )
(51,344 )
312,000
40,000
(28,000 )
—
—
—
—
(51,344 )
(39,344 )
—
—
28,000
—
—
—
—
—
28,000
—
—
—
—
—
—
88,000
19,613
11,282
186,323
—
—
—
—
—
—
11,282
186,323
—
—
—
—
—
—
480,106
—
4,561,000
(337,576 )
—
—
—
—
—
—
4,561,000
(337,576 )
—
—
—
—
—
29,065
—
—
—
—
—
—
—
—
—
—
—
—
—
—
19,228
—
312,000
$ 40,000
—
587,719
4,421,029
$ 29,065
$
$
The accompanying notes to consolidated financial statements are an integral part of this statement.
68
$
19,228
29,065
—
(1,086,387 )
$
(1,137,731 )
19,228
(1,086,387 )
$
3,371,591
Table of Contents
Inner Mongolia Production Company, LLC and Subsidiaries
(A Development Stage Company)
Consolidated Statement of Cash Flows
For the years ended December 31, 2006 and 2005
and for the period from inception (August 25, 2005) to December 31, 2006
2006
Cash flows from operating activities
Net loss
$
Adjustments to reconcile net loss to cash used in operating
activities:
Interest income on long-term advances
Options expense amortization
Minority interest in net loss
Depreciation and depletion expense
Expenses paid in member units
Changes in current assets and current liabilities:
(Increase) in deposits
(Increase) in prepaid expenses
Increase in accounts payable
Increase in accrued liabilities
Net cash used in operating activities
For the period
from inception
(August 25, 2005) to
December 31, 2006
2005
(1,086,387 )
$ (51,344 )
$
(1,137,731 )
(9,945 )
29,065
(1,220 )
1,740
197,605
—
—
—
—
—
(9,945 )
29,065
(1,220 )
1,740
197,605
(11,498 )
(31,486 )
43,226
54,876
—
—
—
41,273
(11,498 )
(31,486 )
43,226
96,149
(814,024 )
(10,071 )
(824,095 )
Cash flows from investing activities
Purchases of available for sale securities
Additions to property, plant and equipment
(1,400,000 )
(199,867 )
—
—
(1,400,000 )
(199,867 )
Net cash used in investing activities
(1,599,867 )
—
(1,599,867 )
Cash flows from financing activities
Payment and proceeds of notes payable
Increase in minority interest investment
Increase in long-term advances to minority shareholder
Decrease in subscriptions receivable
(Increase) in issuance costs on units
Increase in A and B member units issued
(100,000 )
359,410
(400,507 )
28,000
(285,377 )
4,561,000
100,000
—
—
—
—
12,000
—
359,410
(400,507 )
—
(285,377 )
4,601,000
Net cash provided by financing activities
4,162,526
112,000
4,274,526
16,810
—
16,810
1,765,445
101,929
101,929
—
1,867,374
—
$ 101,929
$
1,867,374
Effect of exchange rate changes on cash
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
1,867,374
Supplemental disclosures of cash flow information
Interest paid
Income taxes paid
$
$
—
—
$
$
—
—
$
$
—
—
Supplemental schedule of non-cash investing and financing
activities
Member units issued for fees and services
Issuance costs paid as warrants issued
Increase in fixed assets accrued in liabilities
Increase in issuance costs accrued in liabilities
$
$
$
$
197,605
61,239
7,966
52,199
$
$
$
$
—
—
—
—
$
$
$
$
197,605
61,239
7,966
52,199
The accompanying notes to consolidated financial statements are an integral part of this statement.
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Inner Mongolia Production Company, LLC and Subsidiaries
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and December 31, 2005
NOTE 1. — DESCRIPTION OF BUSINESS
Inner Mongolia Production Company, LLC, a development stage company, (the “Company”) was formed as a limited liability company under
New York State law on August 25, 2005. The Company’s business plan is to engage in the business of oil and gas exploration, development
and production in Asia and the Pacific Rim countries.
In year 2006, a subsidiary of the Company entered into a joint development contract with Chifeng Zhongtong Oil and Natural Gas Co., Ltd.,
(“Chifeng”) a company incorporated in Inner Mongolia, China. In the fourth quarter of 2006, the first well was drilled under this contract. This
well is currently producing under an exploration and development license issued by the relevant Chinese authorities. However, the Company
has not recognized any revenue and related depletion expense to date due to uncertainty of realization of the revenue until a permanent
production license is obtained. A comprehensive long-term production license has been applied for by Chifeng, and is expected to be issued in
year 2007. If this license is not issued, the opportunities to drill additional long-term production wells under the contract may be at risk.
In addition, the Company is evaluating exploration, development and production opportunities involving coal-bed methane and tight gas sand
areas in China. In 2006 the Company entered into an Agreement for Joint Cooperation with China United Coalbed Methane Co., Ltd. to engage
in a feasibility study regarding a coal bed methane acreage block. The feasibility study was completed and submitted in the first quarter of
2007. Negotiation of a production sharing agreement is in progress.
NOTE 2. — BASIS OF PRESENTATION
The financial statements are prepared on a consolidated basis. All significant intercompany transactions and balances have been eliminated in
consolidation. At December 31, 2006, the financial statements include Inner Mongolia Production Company, LLC (the parent company), and
two subsidiaries—Inner Mongolia Production Company (HK) Limited (“HK”), a Hong Kong registered company, and Inner Mongolia Sunrise
Petroleum JV Company (“Sunrise”), a China registered company. HK is 100% owned by the parent company; Sunrise is 97% owned by HK.
At December 31, 2005, the financial statements include only the parent company. The Company’s financial statements are prepared under U.S.
Generally Accepted Accounting Principles.
The Company’s financial statements are presented on the basis that it is a development stage company. During the period from its inception to
December 31, 2005, the Company was able to fund its expenses through member equity contributions and member loans. In year 2006 the
Company sold equity units in a private placement in the amount of $4,561,000 and received $28,000 from collection of subscriptions on equity
units subscribed in year 2005. The Company’s equity units are not registered with the Securities and Exchange Commission and therefore are
not traded in the public market. Proceeds from the equity offering were used to repay $240,000 of notes payable ($100,000 with an officer)
outstanding from loans incurred in late 2005 and the first quarter of 2006.
At December 31, 2006 the Company had no debt outstanding. At December 31, 2005 the Company had a $100,000 note payable to an officer,
which was paid in May 2006 without interest (interest waived). Accordingly, no interest expense was recorded on this note for 2005 and 2006.
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To date the Company has incurred expenses and sustained losses. Consequently, its operations are subject to all risks inherent in the
establishment of a new business enterprise. For the period from inception through December 31, 2006, the Company has accumulated losses of
$1,137,731.
NOTE 3. — SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates – Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted
accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, disclosures of contingencies, and
reported revenues and expenses. Actual results could vary from those estimates.
Cash and Cash Equivalents – Cash and cash equivalents includes cash on hand, demand deposits and short-term investments with initial
maturities of three months or less.
Short-term Investments – These are temporary investments of funds available for operations in marketable securities with maturities in excess
of three months but having variable interest rates, thus no principal risk due to interest rate fluctuations. The Company invests in financial
instruments having interest rate reset periods of either seven days or 28 days. If the Company decides not to accept a reset of the rate, the bond
or preferred stock investment is readily marketable for sale at original purchase cost of par value. These investments are classified as available
for sale and are carried at fair value. Fair value excluding accrued interest is equivalent to cost.
Inventories – The Company had no inventories at the balance sheet dates, and has not decided the inventory accounting method to be utilized
should inventories occur.
Property, Plant and Equipment – For oil and gas properties, the successful efforts method of accounting is used. Costs of drilling successful
wells are capitalized. Costs of drilling exploratory wells not placed into production are charged to expense. Geological and geophysical costs
are charged to expense as incurred. For depreciable tangible property, the minimum capitalization threshold is $1000.
Depreciation, depletion and amortization for oil and gas related property is recorded on a unit-of-production basis. For other depreciable
property, depreciation is recorded on a straight line basis based on depreciable lives of five years for office furniture and three years for
computer related equipment. Repairs and maintenance costs are charged to expense as incurred.
Reserves for Uncollectible Advances and Loans – The Company reviews its advances and loans receivable for possible impairment and records
reserves for possible losses on amounts believed to be uncollectible. As of December 31, 2006 no reserves were deemed necessary.
Impairment of Long-Lived Assets – The Company reviews its long-lived assets in property, plant and equipment for impairment in accordance
with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Review for impairment of long-lived assets occurs
whenever changes in circumstances indicate that the carrying amount of assets in property, plant and equipment may not be fully recoverable.
An impairment loss is recognized for assets to be held and used when the estimated undiscounted future cash flows expected to result from the
asset including ultimate disposition are less than its carrying amount. Impairment is measured by the excess of carrying amount over the fair
value of the assets. As of December 31, 2006 and 2005 no impairment adjustments were required.
Asset Retirement Obligations – The Company accounts for asset retirement obligations in accordance with SFAS No. 143, “Accounting for
Asset Retirement Obligations,” as amended by FIN No. 47, “Accounting for Conditional Asset Retirement Obligations.” The Company at
December 31, 2006 and 2005 had no long-lived
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assets subject to asset retirement obligations. The nature or amount of any asset retirement obligations which the Company may become subject
to from its future operations is not determinable at this time.
Revenues – The Company presently has no direct sales revenues from customers, nor any other revenues for which it deemed that collectibility
was reasonably assured at December 31, 2006.
Income Taxes – The Company as an LLC is a pass-through entity treated similar to a partnership for income tax purposes in the United States,
and therefore does not accrue or pay income taxes. The Company’s subsidiaries are currently in a non-taxable status due to permanent
differences between book basis and tax basis income.
Foreign Currency Translation – The functional currency of the Hong Kong subsidiary is the U.S. dollar. The functional currency of the China
subsidiary is the local currency. Balance sheet translation effects from translating local functional currency into U.S. dollars (the reporting
currency) are recorded directly to other comprehensive income in accordance with SFAS No. 130, “Reporting Comprehensive Income.”
Equity Unit Based Compensation – The Company accounts for unit based compensation in accordance with SFAS No.123(R), “Share-Based
Payment”, which specifies the revised accounting alternative requirements for pre-2006 stock-based compensation grants existing at January 1,
2006 and the required accounting for new grants starting January 1, 2006. The Company has no unit based compensation grants made before
year 2006. Accordingly, the provisions of SFAS No.123(R) pertaining to pre-2006 grants do not apply. The Company values its equity unit
options awarded on or after January 1, 2006 at the fair value at grant date using the Black-Scholes option pricing model. Compensation expense
for unit options is recorded over the vesting period on a straight line basis. Compensation paid in vested units is valued at the fair value at the
applicable measurement date and charged to expense at that date.
Segment Reporting — The Company considers its business to be a single operating segment and operates in a single geographic area
(Asia-Pacific).
New Accounting Pronouncements – As of the balance sheet date, there were no new accounting pronouncements not yet adopted that are
expected to materially affect the Company in the foreseeable future.
FIN 48, “Accounting for Uncertainty in Income Taxes”: This prescribes the recognition criteria for recognizing, measuring, presenting and
disclosing uncertain tax positions for liabilities and receivables. The statement is effective for fiscal years beginning after December 15, 2006.
SFAS No. 157, “Fair Value Measurements”: The statement defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements. No new fair value measurements are required in
connection with existing standards. The effective date is for fiscal years beginning after November 15, 2007.
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”:
The statement permits the voluntary measurement of certain financial instruments and certain other items at fair value. The effective date is for
reporting periods beginning after November 15, 2007.
NOTE 4. — FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Fair Value of Financial Instruments – The carrying amounts of the Company’s financial instruments, which include cash equivalents,
short-term investments, deposits, long-term advances, accounts payable, accrued expenses, and notes payable approximate fair value at
December 31, 2006 and 2005. The aggregate fair value of securities classified as available for sale was $1,400,000 at December 31, 2006 and
zero at December 31, 2005.
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Concentration of Credit Risk – The Company is exposed to concentration of credit risk with respect to cash, cash equivalents, short-term
investments and long-term advances. At December 31, 2006, 95.7% of the Company’s cash was on deposit in China at the Bank of China. Also
at that date, 50% of the Company’s short-term investments were invested in securities of a single issuer, and another 25% was invested in
securities of another single issuer. At December 31, 2006, 100% of the Company’s long-term advances were receivable from a single borrower.
At December 31, 2005, 100% of the Company’s cash was held by a single bank. No losses have occurred on the above items.
NOTE 5. — PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment by type of property was as follows at December 31, 2006.
Gross
Oil and gas wells
Computer equipment
Reserve
Net
$ 191,877
18,374
$
—
1,740
$ 191,877
16,634
$ 210,251
$ 1,740
$ 208,511
There was no property, plant and equipment at December 31, 2005.
Depreciation for year 2006 was $1,740.
No interest expense has been capitalized through December 31, 2006..
NOTE 6. — COMMITMENTS
Consulting Agreements and Employment Agreements
On December 31, 2005, the Company entered into a consulting agreement with Morningside Development LLC for certain consulting services.
The contract provided for cash payments of $10,000 per month for a one year term. The unpaid balance on this contract was $110,000 at
December 31, 2005. The contract was terminated in September 2006 upon payment of the remaining balance due. At that time, the Company
entered into a new contract at $12,000 per month, for which the remaining cash payments were $96,000 at December 31, 2006. This contract
was terminated in February 2007 for a final payment of $70,000.
Effective December 15, 2005 the Company entered into two year consulting agreements with three key personnel who are also LLC members.
The agreements provided for the performance of specified services by the personnel in return for a fixed rate per month. The agreements were
subject to termination by either party on 90 days notice. If terminated by the Company, the consultant was entitled to receive the balance of
payments that would have been payable through the original term. The company’s commitments under these contracts were $33,350 per month,
which increased to $34,350 per month in July 2006. The total amount committed over the two year term (as amended) was $818,400 at
December 31, 2005 if no contracts were terminated early.
In September 2006, new executive employment agreements were entered into between the Company and two LLC members to replace two of
the three existing consulting agreements. The agreements have no expiration date, and either party may terminate at will. The minimum
commitment under these contracts is a total of $500,000 per year. In the event of termination by the Company other than for cause or disability,
multi-year severance payments are required. However, the operable effective date for the compensation rates under these agreements was
delayed subject to the Company achieving certain financial benchmarks. Therefore, payments continued under the existing consulting
agreements through December 31, 2006. At December 31, 2006, the commitment under the remaining consulting agreement was $120,000.
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The total cash payments made to LLC members under consulting agreements who were members of LLC management were $303,800 in year
2006. The total year 2006 consulting expense for amounts payable to LLC members who were members of LLC management was $330,425.
Lease Commitments
At December 31, 2006 the Company had non-cancelable lease commitments for an operating lease on office facilities. Future minimum lease
rentals by year are as follows:
2007- $38,713
2008- $36,783
NOTE 7. — CAPITALIZATION
The Company’s equity capital is composed of equity units. At December 31, 2005 there were 312,000 Class A Units (“A” Units) and zero
Class B Units (“B” Units) outstanding. At December 31, 2006 there were 312,000 “A” Units and 587,719 “B” Units outstanding.
The “A” Units have the sole voting power to elect the Board of Managers, who have the authority to make decisions concerning the day to day
operations of the Company. Voting rights of “B” Units are limited to matters involving dissolution or merger of the Company, sale of all or
substantially all the Company’s assets, or certain types of amendments to the operating agreement having the effect of adversely affecting the
“B” Units holders’ economic interest.
NOTE 8. — EQUITY UNIT WARRANTS AND OPTIONS
In year 2006 the Company issued 6,453 warrants to underwriters for purchase of “B” Units at an exercise price of 1 cent per share with a term
of 10 years. The warrants were valued at $61,239 ($9.49 per warrant). This valuation was on the basis that due to the nominal exercise price of
the warrant, the warrants were in substance equivalent to restricted equity units that vest at any time based on election of the holder. No
expense was recorded on this transaction as this was considered part of offering costs applied to paid-in capital. These warrants were exercised
in early 2007.
There were no equity unit options granted prior to year 2006. In September, 2006 the Company granted 49,200 equity unit options for “B”
Units to certain consultants and employees, which were all outstanding at December 31, 2006. The options vest 40% after one year and 20%
per year at the end of the following three years, with expiration 10 years from date of grant. The options are exercisable at $9.50 per unit, equal
to the offering price per unit in the most recent offering of units. No options were eligible for exercise in 2006. The remaining contractual life
of options outstanding at December 31, 2006 was nine years, nine months.
In year 2006, compensation expense of $29,065 was recorded on these options. There was no intrinsic value for these options at December 31,
2006 as there was no public market for the Company’s equity units, and the Company is a development stage company.
The fair values of unit options used in recording compensation expense for year 2006 were computed using the Black-Scholes option pricing
model based on the following assumptions. Group 1 represents the portion of options vesting at the end of one year.
Group 2 represents the remaining options vesting at the end of years 2, 3, and 4.
Group 1
Expected price volatility (basket of comparable public companies)
Risk-free interest rate (U.S. Treasury bonds)
Expected annual dividend rate
Expected option term – weighted average
Grant date fair value per unit option
Exercise price per unit option
64.60 %
4.57 %
0.00 %
5.50 yrs.
$ 5.75
$ 9.50
74
Group 2
64.60 %
4.58 %
0.00 %
6.25 yrs.
$ 6.06
$ 9.50
Table of Contents
NOTE 9. — LITIGATION AND CONTINGENCIES
The Company at December 31, 2006 had no litigation, actual or potential, of which it was aware and which could have a material effect on its
financial position.
NOTE 10. — SUBSEQUENT EVENTS
The Company was the acquirer in a merger with a public company on May 7, 2007 as a means of increasing access to markets to raise
additional capital. After the merger, the Company is now known as Pacific Asia Petroleum, Inc. The merged company at date of closing
included $17 million of private equity financing in cash in addition to the existing equity capital of Inner Mongolia Production, LLC.
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Table of Contents
PART III
ITEM 1. Index to Exhibits.
Exhibit
Number
Description
3.1
Amended and Restated Certificate of Incorporation of the Company.
3.2
Bylaws of the Company.
4.1
Specimen Common Stock Certificate.
4.2
Form of Common Stock Warrant.
10.1
Company 2007 Stock Plan.
10.2
Company 2007 Stock Plan form of Stock Option Agreement.
10.3
Company 2007 Stock Plan form of Restricted Stock Agreement.
10.4
Company Form of Indemnification Agreement.
10.5
ADS Registration Rights Agreement, dated May 7, 2007.
10.6
IMPCO Registration Rights Agreement, date May 7, 2007.
10.7
Engagement Letter, dated December 15, 2006, by and between Chadbourn Securities, Inc. and ADS.
10.8
Engagement Letter, dated February 26, 2007, by and between Sierra Equity Group, Inc. and ADS.
10.9
Consulting Agreement, dated February 28, 2007, by and between Christopher B. Sherwood and IMPCO.
10.10
Consulting Agreement, dated February 28, 2007, by and between Dr. Y.M. Shum and IMPCO.
10.11
Executive Employment Agreement, dated September 29, 2006, by and between Frank C. Ingriselli and the
Company.
10.12
Executive Employment Agreement, dated September 29, 2006, by and between Stephen F. Groth and the
Company.
10.13
Lease, dated December 1, 2006, by and between Station Plaza Associates, and IMPCO.
10.14
Tenancy Agreement, dated June 29, 2007, by and between Jing Hui Tong Real Estate Management
Company and Inner Mongolia Sunrise Petroleum Limited.*
10.15
Amended and Restated Agreement and Plan of Merger and Reorganization, dated February 12, 2007, as
amended on April 20, 2007, by and among the Company, ADS and ADS Merger Sub.
10.16
Amended and Restated Agreement and Plan of Merger and Reorganization, dated February 12, 2007, as
amended on April 20, 2007, by and among the Company, IMPCO and IMPCO Merger Sub.
76
Sequential
Page
Number
Table of Contents
Exhibit
Number
Description
10.17
Engagement Letter, dated December 1, 2006, by and between ADS and CMCP.
10.18
Contract for Cooperation and Joint Development, dated August 23, 2006, by and between Chifeng
Zhongtong Oil and Natural Gas Co., Ltd. and Inner Mongolia Production Company (HK) Ltd.
10.19
Agreement for Joint Cooperation, dated November 30, 2006, by and between China United Coalbed
Methane Co., Ltd. and the Company.
10.20
Agreement on Joint Cooperation, dated May 31, 2007, by and between Sino Geophysical Co., Ltd. and the
Company.
21
Subsidiaries of the Company
*
Sequential
Page
Number
English translation of executed Chinese original document included.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
Pacific Asia Petroleum, Inc.
August 16, 2007
By:
/s/ Frank C. Ingriselli
President and Chief Executive Officer
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EXHIBIT INDEX
Exhibit
Number
Description
3.1
Amended and Restated Certificate of Incorporation of the Company.
3.2
Bylaws of the Company.
4.1
Specimen Common Stock Certificate.
4.2
Form of Common Stock Warrant.
10.1
Company 2007 Stock Plan.
10.2
Company 2007 Stock Plan form of Stock Option Agreement.
10.3
Company 2007 Stock Plan form of Restricted Stock Agreement.
10.4
Company Form of Indemnification Agreement.
10.5
ADS Registration Rights Agreement, dated May 7, 2007.
10.6
IMPCO Registration Rights Agreement, date May 7, 2007.
10.7
Engagement Letter, dated December 15, 2006, by and between Chadbourn Securities, Inc. and ADS.
10.8
Engagement Letter, dated February 26, 2007, by and between Sierra Equity Group, Inc. and ADS.
10.9
Consulting Agreement, dated February 28, 2007, by and between Christopher B. Sherwood and
IMPCO.
10.10
Consulting Agreement, dated February 28, 2007, by and between Dr. Y.M. Shum and IMPCO.
10.11
Executive Employment Agreement, dated September 29, 2006, by and between Frank C. Ingriselli
and the Company.
10.12
Executive Employment Agreement, dated September 29, 2006, by and between Stephen F. Groth and
the Company.
10.13
Lease, dated December 1, 2006, by and between Station Plaza Associates, and IMPCO.
10.14
Tenancy Agreement, dated June 29, 2007, by and between Jing Hui Tong Real Estate Management
Company and Inner Mongolia Sunrise Petroleum Limited. *
10.15
Amended and Restated Agreement and Plan of Merger and Reorganization, dated February 12, 2007,
as amended on April 20, 2007, by and among the Company, ADS and ADS Merger Sub.
10.16
Amended and Restated Agreement and Plan of Merger and Reorganization, dated February 12, 2007,
as amended on April 20, 2007, by and among the Company, IMPCO and IMPCO Merger Sub.
10.17
Engagement Letter, dated December 1, 2006, by and between ADS and CMCP.
10.18
Contract for Cooperation and Joint Development, dated August 23, 2006, by and between Chifeng
Zhongtong Oil and Natural Gas Co., Ltd. and Inner Mongolia Production Company (HK) Ltd.
78
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Page
Number
Table of Contents
Exhibit
Number
Description
10.19
Agreement for Joint Cooperation, dated November 30, 2006, by and between China United Coalbed
Methane Co., Ltd. and the Company.
10.20
Agreement on Joint Cooperation, dated May 31, 2007, by and between Sino Geophysical Co., Ltd.
and the Company.
21
Subsidiaries of the Company
*
English translation of executed Chinese original document included.
79
Sequential
Page
Number
Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PACIFIC EAST ADVISORS, INC.
Pacific East Advisors, Inc., a Delaware corporation, hereby certifies that:
1. The present name of the corporation is Pacific East Advisors, Inc. The original certificate of incorporation of the corporation under the
name Gemini Marketing Associates, Inc. was filed with the Secretary of State of the State of Delaware on December 12, 1979.
2. The name was changed to Big Smith Brands, Inc. on August 10, 1994.
3. The name was changed to the current name Pacific East Advisors, Inc. on January 18, 2006.
4. Article “I” of the Certificate of Incorporation of the Corporation is hereby amended to read in its entirety as follows:
“Article I: The name of this corporation is Pacific Asia Petroleum, Inc.”
5. The Amended and Restated Certificate of Incorporation of the corporation attached hereto as Exhibit “1” , which is incorporated herein
by this reference, and which restates, integrates and further amends the provisions of the Certificate of Incorporation of this corporation as
previously amended or supplemented, has been duly adopted by the corporation’s Board of Directors and a majority of the stockholders in
accordance with Sections 242 and 245 of the Delaware General Corporation Law, with the approval of the corporation’s stockholders having
been given by written consent without a meeting in accordance with Section 228 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, said corporation has caused this Amended and Restated Certificate of Incorporation to be signed by its duly
authorized officer and the foregoing facts stated herein are true and correct.
Dated: May 3, 2007
PACIFIC EAST ADVISORS, INC.
By:
/s/ Dale Walter
Dale Walter
Chief Executive Officer
Exhibit “1”
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PACIFIC ASIA PETROLEUM, INC.
ARTICLE I
The name of this corporation is Pacific Asia Petroleum, Inc.
ARTICLE II
The address of the registered office of the corporation in the State of Delaware is 3500 South Dupont Highway, Dover, DE 19901. The
name of its registered agent at that address is Corporation Service Company.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General
Corporation Law of the State of Delaware.
ARTICLE IV
This Corporation is authorized to issue two (2) classes of shares, designated “Common Stock” and “Preferred Stock.” The total number of
shares of Common Stock authorized to be issued is three hundred million (300,000,000) shares, $0.001 par value per share. The total number of
shares of Preferred Stock authorized to be issued is fifty million (50,000,000) shares, $0.001 par value per share, of which thirty million
(30,000,000) shares have been designated “Series A Convertible Preferred Stock.”
The undesignated Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized,
subject to Article IV, Section 6 of this Amended and Restated Certificate of Incorporation, to fix or alter the rights, preferences, privileges and
restrictions of any wholly unissued series of Preferred Stock, and the number of shares constituting any such series or the designation thereof
and to increase or decrease the number of shares of any such series subsequent to the issuance of shares of that series, but not below the number
of shares of such series then outstanding. In case the number of shares of any series shall so be decreased, the shares constituting such decrease
shall resume the status that they had prior to the adoption of the resolution originally fixing the number of such series.
1
ARTICLE V
The rights, preferences, privileges, restrictions and other matters relating to the Common Stock and the Series A Convertible Preferred
Stock are as follows.
1. Definitions . For purposes of this ARTICLE V, the following definitions shall apply:
1.1 “ Closing Sales Price ” means, for any security as of any date, the last sales price of such security on the principal trading market where
such security is listed or traded as reported by Bloomberg Financial Markets (or a comparable reporting service of national reputation selected
by the Corporation if Bloomberg Financial Markets is not then reporting closing sales prices of such security) (collectively, “ Bloomber g”), or
if the foregoing does not apply, the last reported sales price of such security on a national exchange or in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no such price is reported for such security by Bloomberg, the
average of the bid prices of all market makers for such security as reported in the “pink sheets” by the National Quotation Bureau, Inc., in each
case for such date or, if such date was not a trading day for such security, on the next preceding date that was a trading day. If the Closing Sales
Price cannot be calculated for such security on any of the foregoing bases, the Closing Sales Price of such security on such date shall be the fair
market value as reasonably determined by an investment banking firm selected by the Corporation, with the costs of such appraisal to be borne
by the Corporation.
1.2 “ Convertible Securities ” shall mean any evidences of indebtedness, Series A Convertible Preferred Stock, or other securities
convertible into or exchangeable for Common Stock.
1.3 “ Distribution ” shall mean the transfer of cash or other property without consideration whether by way of dividend or otherwise (other
than dividends on Common Stock payable in Common Stock), or the purchase or redemption of shares of the Corporation for cash or property
other than: (i) repurchases of Common Stock issued to or held by employees, officers, directors or consultants of the Corporation or its
subsidiaries upon termination of their employment or services pursuant to agreements providing for the right of said repurchase,
(ii) repurchases of Common Stock issued to or held by employees, officers, directors or consultants of the Corporation or its subsidiaries
pursuant to rights of first refusal contained in agreements providing for such right, (iii) repurchase of capital stock of the Corporation in
connection with the settlement of disputes with any stockholder, (iv) any other repurchase or redemption of capital stock of the Corporation
approved by the holders of (a) a majority of the Common Stock and (b) a majority of the Series A Convertible Preferred Stock of the
Corporation voting as separate classes.
2
1.4 “ Dividend Rate ” shall mean an annual rate of 8% of the Original Issue Price per share for the Series A Convertible Preferred Stock (as
appropriately adjusted for any Recapitalizations).
1.5 “ Liquidation Preference ” shall mean equal the Original Issue Price per share for the Series A Convertible Preferred Stock (as
appropriately adjusted for any Recapitalizations).
1.6 “ Options ” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible
Securities.
1.7 “ Original Issue Date ” shall mean the date upon which the first shares of Series A Convertible Preferred Stock are issued.
1.8 “ Original Issue Price ” shall mean $1.25 per share for the Series A Convertible Preferred Stock (as appropriately adjusted for any
Recapitalizations).
1.9 “ Recapitalization ” shall mean any stock dividend, stock split, combination of shares, reorganization, recapitalization, reclassification or
other similar event.
2. Dividends .
2.1 Series A Convertible Preferred Stock . In any calendar year, the holders of outstanding shares of Series A Convertible Preferred Stock
shall be entitled to receive dividends, when, as and if declared by the Board of Directors, out of any assets at the time legally available therefor,
at the Dividend Rate payable in preference and priority to any declaration or payment of any Distribution on Common Stock of the Corporation
in such calendar year. No Distributions shall be made with respect to the Common Stock until all declared dividends on the Series A
Convertible Preferred Stock have been paid or set aside for payment to the Series A Convertible Preferred Stock holders. The right to receive
dividends on shares of Series A Convertible Preferred Stock shall not be cumulative, and no right to such dividends shall accrue to holders of
Series A Convertible Preferred Stock by reason of the fact that dividends on said shares are not declared or paid in any calendar year.
2.2 Common Stock . Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors of the Corporation, out of any
assets of the Corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors.
2.3 Non-Cash Distributions . Whenever a Distribution provided for in this Section 2 shall be payable in property other than cash, the value
of such Distribution shall
3
be deemed to be the fair market value of such property as determined in good faith by the Board of Directors.
3. Liquidation Rights .
3.1 Liquidation Preference . In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary,
the holders of the Series A Convertible Preferred Stock shall be entitled to receive, prior and in preference to any Distribution of any of the
assets of the Corporation to the holders of the Common Stock by reason of their ownership of such stock, an amount per share for each share of
Series A Convertible Preferred Stock held by them equal to the sum of (i) the Liquidation Preference specified for such share of Series A
Convertible Preferred Stock, and (ii) all declared but unpaid dividends (if any) on such share of Series A Convertible Preferred Stock. If upon
the liquidation, dissolution or winding up of the Corporation, the assets of the Corporation legally available for distribution to the holders of the
Series A Convertible Preferred Stock are insufficient to permit the payment to such holders of the full amounts specified in this Section 3.1,
then the entire assets of the Corporation legally available for distribution shall be distributed with equal priority and pro rata among the holders
of the Series A Convertible Preferred Stock in proportion to the full amounts they would otherwise be entitled to receive pursuant to this
Section 3.1.
3.2 Remaining Assets . After the payment to the holders of Series A Convertible Preferred Stock of the full preferential amounts specified
above, the entire remaining assets of the Corporation legally available for distribution by the Corporation shall be distributed with equal
priority and pro rata among the holders of the Common Stock in proportion to the number of shares of Common Stock held by them.
3.3 Reorganization . For purposes of this Section 3, a liquidation, dissolution or winding up of the Corporation shall be deemed to occur
upon (a) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions to which the
Corporation is party (including, without limitation, any stock acquisition, reorganization, merger or consolidation but excluding any sale of
stock for capital raising purposes) that results in the voting securities of the Corporation outstanding immediately prior thereto failing to
represent immediately after such transaction or series of transactions (either by remaining outstanding or by being converted into voting
securities of the surviving entity or the entity that controls such surviving entity) a majority of the total voting power represented by the
outstanding voting securities of the Corporation, such surviving entity or the entity that controls such surviving entity, or (b) a sale, lease or
other conveyance of all or substantially all of the assets of the Corporation.
3.4 Valuation of Non-Cash Consideration . If any assets of the Corporation distributed to stockholders in connection with any liquidation,
dissolution, or winding up of the Corporation are other than cash, then the value of such assets shall be their fair market value as determined in
good faith by the Board of Directors. In the event of a
4
merger or other acquisition of the Corporation by another entity, the Distribution date shall be deemed to be the date such transaction closes.
4. Conversion . The holders of the Series A Convertible Preferred Stock shall have conversion rights as follows (the “ Conversion Rights ”):
4.1 Right to Convert . Each share of Series A Convertible Preferred Stock shall be convertible, at the option of the holder thereof (“ Optional
Conversion ”), at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for the Series A
Convertible Preferred Stock, into that number of fully-paid, nonassessable shares of Common Stock determined by dividing the Original Issue
Price for the Series A Convertible Preferred Stock by the Conversion Price. In order to effectuate the Optional Conversion under this Paragraph
4.1, the holder must provide the Corporation a written notice of conversion (“ Notice of Conversion ”). The initial Conversion Price per share
of Series A Convertible Preferred Stock shall be the Original Issue Price and shall be subject to adjustment as provided herein. The number of
shares of Common Stock into which each share of Series A Convertible Preferred Stock may be converted is hereinafter referred to as the “
Conversion Rate ” for each such series. Upon any decrease or increase in the Conversion Price for the Series A Convertible Preferred Stock, as
described in this Section 4, the Conversion Rate shall be appropriately increased or decreased.
4.2 Automatic Conversion . Each share of Series A Convertible Preferred Stock (but not less than all) shall be automatically converted into a
number of fully paid and nonassessable shares of Common Stock determined in accordance with the formula set forth in Paragraph 4.1 of this
Article V (an “ Automatic Conversion ”), unless otherwise prohibited by any law, rule or regulation applicable to the Corporation, upon the
occurrence of the earlier of either of the following events:
(a) the twenty consecutive trading day average Closing Sales Price of the Corporation’s Common Stock is greater or equal to (x) the
Conversion Price (as adjusted to reflect any stock dividends, distributions, combinations, reclassifications and other similar transactions
effected by the Corporation in respect to its Common Stock) multiplied by (y) 2.5; or
(b) the holders of a majority of the then outstanding shares of Series A Convertible Preferred Stock elect to consummate an Automatic
Conversion of all the outstanding shares of Series A Convertible Preferred Stock.
Thereafter, the Corporation and the holders shall follow the applicable conversion procedures set forth in this Paragraph 4 (including the
requirement that the holder deliver the Series A Convertible Preferred Stock Certificates representing the Series A Convertible Preferred Stock
being converted to the Corporation); provided, however, the holders of Series A Convertible Preferred Stock subject to Automatic Conversion
shall not be required to deliver a Notice of Conversion to the Corporation. Nothing set forth in
5
this Paragraph 4.2 shall prevent any holder of Series A Convertible Preferred Stock from exercising its right to convert pursuant to
Paragraph 4.1. In the event of the occurrence of an Automatic Conversion as set forth herein, all securities convertible into or exchangeable for
Series A Convertible Preferred Stock shall automatically become convertible into or exchangeable for Common Stock of the Corporation
following the applicable conversion procedures set forth in Paragraph 4.
4.3 Mechanics of Conversion . In order to effect an Optional Conversion, a holder shall: (i) fax (or otherwise deliver) a copy of the fully
executed Notice of Conversion to the Corporation (Attention: Secretary) and (ii) surrender or cause to be surrendered the original certificates
representing the Series A Convertible Preferred Stock being converted (the “ Preferred Stock Certificates ”), duly endorsed, along with a copy
of the Notice of Conversion as soon as practicable thereafter to the Corporation. Upon receipt by the Corporation of a facsimile copy of a
Notice of Conversion from a holder, the Corporation shall promptly send, via facsimile, a confirmation to such holder stating that the Notice of
Conversion has been received, the date upon which the Corporation expects to deliver the Common Stock issuable upon such conversion and
the name and telephone number of a contact person at the Corporation regarding the conversion. The Corporation shall not be obligated to issue
shares of Common Stock upon a conversion unless either the Preferred Stock Certificates are delivered to the Corporation as provided above,
or the holder notifies the Corporation that such Preferred Stock Certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates.
4.4 Delivery of Common Stock Upon Conversion . Upon the surrender of Preferred Stock Certificates accompanied by a Notice of
Conversion, the Corporation (itself, or through its transfer agent) shall, no later than the tenth business day following the date of such surrender
(or, in the case of lost, stolen or destroyed certificates, after provision of indemnity pursuant to Paragraph 4.3 above) (the “ Delivery Period ”),
issue and deliver (i.e., deposit with a nationally recognized overnight courier service postage prepaid) to the holder or its nominee (x) that
number of shares of Common Stock issuable upon conversion of such shares of Series A Convertible Preferred Stock being converted and (y) a
certificate representing the number of shares of Series A Convertible Preferred Stock not being converted, if any. Notwithstanding the
foregoing, if the Corporation’s transfer agent is participating in the Depository Trust Corporation (“ DTC ”) Fast Automated Securities Transfer
program, and so long as the certificates therefor do not bear a legend and the holder thereof is not then required to return such certificate for the
placement of a legend thereon, the Corporation shall cause its transfer agent to promptly electronically transmit the Common Stock issuable
upon conversion to the holder by crediting the account of the holder or its nominee with DTC through its Deposit Withdrawal Agent
Commission system (“ DTC Transfer ”). If the aforementioned conditions to a DTC Transfer are not satisfied, the Corporation shall deliver as
provided above to the holder physical certificates representing the Common Stock issuable upon
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conversion. Further, a holder may instruct the Corporation to deliver to the holder physical certificates representing the Common Stock issuable
upon conversion in lieu of delivering such shares by way of DTC Transfer.
4.5 Taxes . The Corporation shall pay any and all taxes that may be imposed upon it with respect to the issuance and delivery of the shares
of Common Stock upon the conversion of the Series A Convertible Preferred Stock.
4.6 Fractional Shares . If any conversion of Series A Convertible Preferred Stock would result in the issuance of a fractional share of
Common Stock (aggregating all shares of Series A Convertible Preferred Stock being converted pursuant to a given Notice of Conversion),
such fractional share shall be payable in cash based upon the twenty consecutive trading day average Closing Sales Price of the Common Stock
prior to the date of conversion, and the number of shares of Common Stock issuable upon conversion of the Series A Convertible Preferred
Stock shall be the next lower whole number of shares. If the Corporation elects not to, or is unable to, make such a cash payment, the holder
shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock.
4.7 Adjustments for Subdivisions or Combinations of Common Stock . In the event the outstanding shares of Common Stock shall be
subdivided (by stock split, by payment of a stock dividend or otherwise), into a greater number of shares of Common Stock, without a
corresponding subdivision of the Series A Convertible Preferred Stock, the Conversion Price in effect immediately prior to such subdivision
shall, concurrently with the effectiveness of such subdivision, be proportionately decreased. In the event the outstanding shares of Common
Stock shall be combined (by reclassification or otherwise) into a lesser number of shares of Common Stock, without a corresponding
combination of the Series A Convertible Preferred Stock, the Conversion Price in effect immediately prior to such combination shall,
concurrently with the effectiveness of such combination, be proportionately increased.
4.8 Adjustments for Subdivisions or Combinations of Series A Convertible Preferred Stock . In the event the outstanding shares of Series A
Convertible Preferred Stock shall be subdivided (by stock split, by payment of a stock dividend or otherwise), into a greater number of shares
of Series A Convertible Preferred Stock, the Dividend Rate, Original Issue Price and Liquidation Preference of the Series A Convertible
Preferred Stock in effect immediately prior to such subdivision shall, concurrently with the effectiveness of such subdivision, be
proportionately decreased. In the event the outstanding shares of Series A Convertible Preferred Stock shall be combined (by reclassification or
otherwise) into a lesser number of shares of Series A Convertible Preferred Stock, the Dividend Rate, Original Issue Price and Liquidation
Preference of the Series A Convertible Preferred Stock in effect immediately prior to such combination shall, concurrently with the
effectiveness of such combination, be proportionately increased.
7
4.9 Adjustments for Reclassification, Exchange and Substitution . Subject to Section 3 above (“ Liquidation Rights ”), if the Common Stock
issuable upon conversion of the Series A Convertible Preferred Stock shall be changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of
shares provided for above), then, in any such event, in lieu of the number of shares of Common Stock which the holders would otherwise have
been entitled to receive each holder of such Series A Convertible Preferred Stock shall have the right thereafter to convert such shares of
Series A Convertible Preferred Stock into a number of shares of such other class or classes of stock which a holder of the number of shares of
Common Stock deliverable upon conversion of such Series A Convertible Preferred Stock immediately before that change would have been
entitled to receive in such reorganization or reclassification, all subject to further adjustment as provided herein with respect to such other
shares.
4.10 No Impairment . The Corporation will not through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities
or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder
by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such
action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Series A Convertible Preferred Stock
against impairment. Notwithstanding the foregoing, nothing in this Section 4.10 shall prohibit the Corporation from amending its Articles of
Incorporation with the requisite consent of its stockholders and the Board of Directors.
4.11 Certificate as to Adjustments . Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this
Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and
furnish to each holder of Series A Convertible Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of
Series A Convertible Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of Series A Convertible Preferred Stock.
4.12 Waiver of Adjustment of Conversion Price . Notwithstanding anything herein to the contrary, any downward adjustment of the
Conversion Price may be waived, either prospectively or retroactively and either generally or in a particular instance, by the consent or vote of
the holders of a majority of the outstanding shares of the Series A Convertible Preferred Stock. Any such waiver shall bind all future holders of
shares of such series of Series A Convertible Preferred Stock.
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4.13 Notices of Record Date . In the event that this Corporation shall propose at any time:
(a) to declare any Distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash
dividend and whether or not out of earnings or earned surplus;
(b) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or
(c) to voluntarily liquidate or dissolve or to enter into any transaction deemed to be a liquidation, dissolution or winding up of the
Corporation pursuant to Section 3.3;
then, in connection with each such event, this Corporation shall send to the holders of the Series A Convertible Preferred Stock at least
ten business days’ prior written notice of the date on which a record shall be taken for such Distribution (and specifying the date on which the
holders of Common Stock shall be entitled thereto and, if applicable, the amount and character of such Distribution) or for determining rights to
vote in respect of the matters referred to in (b) and (c) above.
Such written notice shall be given by first class mail (or express courier), postage prepaid, addressed to the holders of Series A
Convertible Preferred Stock at the address for each such holder as shown on the books of the Corporation and shall be deemed given on the
date such notice is mailed.
The notice provisions set forth in this section may be shortened or waived prospectively or retrospectively by the vote or written consent
of the holders of a majority of the Series A Convertible Preferred Stock, voting together as a single class.
(d) Reservation of Stock Issuable Upon Conversion . The Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of the Series A Convertible Preferred
Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all then outstanding
shares of the Series A Convertible Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the Series A Convertible Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose.
9
5. Voting .
5.1 Restricted Class Voting. Except as otherwise expressly provided herein or as required by law, the holders of Series A Convertible
Preferred Stock and the holders of Common Stock shall vote together and not as separate classes.
5.2 No Series Voting . Other than as provided herein or required by law, there shall be no series voting.
5.3 Common Stock . Each holder of shares of Common Stock shall be entitled to one vote for each share thereof held.
5.4 Series A Convertible Preferred Stock . Each holder of Series A Convertible Preferred Stock shall be entitled to the number of votes
equal to the number of shares of Common Stock into which the shares of Series A Convertible Preferred Stock held by such holder could be
converted as of the record date. The holders of shares of the Series A Convertible Preferred Stock shall be entitled to vote on all matters on
which the Common Stock shall be entitled to vote. Holders of Series A Convertible Preferred Stock shall be entitled to notice of any
stockholders’ meeting in accordance with the Bylaws of the Corporation. Fractional votes shall not, however, be permitted and any fractional
voting rights resulting from the above formula (after aggregating all shares into which shares of Series A Convertible Preferred Stock held by
each holder could be converted), shall be disregarded.
5.5 Adjustment in Authorized Common Stock . The number of authorized shares of Common Stock may be increased or decreased (but not
below the number of shares of Common Stock then outstanding) by an affirmative vote of the holders of a majority of the outstanding Common
Stock and Series A Convertible Preferred Stock of the Corporation voting together as a single class.
6. Protective Provisions .
6.1 Subject to the rights of series of Preferred Stock which may from time to time come into existence, so long as any shares of Series A
Convertible Preferred Stock are outstanding, this Corporation shall not without first obtaining the approval (by written consent, as provided by
law) of the holders of at least a majority of the then outstanding shares of Series A Convertible Preferred Stock, voting together as a class:
(a) Increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series A Convertible Preferred
Stock;
(b) Effect an exchange, reclassification, or cancellation of all or a part of the Series A Convertible Preferred Stock, including a reverse
stock split, but excluding a stock forward split;
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(c) Effect an exchange, or create a right of exchange, of all or part of the shares of another class of shares into shares of Series A
Convertible Preferred Stock;
(d) Alter or change the rights, preferences or privileges of the shares of Series A Convertible Preferred Stock so as to affect adversely the
shares of such series;
(e) Authorize or issue, or obligate itself to issue, any other equity security, including any other security convertible into or exercisable for
any equity security having a preference over, or being on parity with, the Series A Convertible Preferred Stock with respect to voting,
dividends or upon liquidation; or
(f) Amend or waive any provision of the Corporation’s Amended and Restated Articles of Incorporation or Bylaws relative to the
Series A Convertible Preferred Stock so as to affect adversely the shares of Series A Convertible Preferred Stock.
For clarification, issuances of additional authorized shares of Series A Preferred, under the terms herein, shall not require the
authorization or approval of the existing stockholders of Series A Convertible Preferred Stock.
7. Redemption . The Corporation shall have no obligation to redeem the Common Stock or Series A Convertible Preferred Stock.
8. Notices . Any notice required by the provisions of this Article V to be given to the holders of Series A Convertible Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at such holder’s address appearing
on the books of the Corporation.
9. Preemptive Rights . No stockholder of the Corporation shall have the right to repurchase shares of capital stock of the Corporation sold or
issued by the Corporation except to the extent that such right may from time to time be set forth in a written agreement between the
Corporation and such stockholder.
ARTICLE VI
Subject to the limitations contained in this Amended Certificate, the Board of Directors of the Corporation shall have the power to adopt,
amend or repeal the Bylaws of the Corporation.
ARTICLE VII
Election of the members of the Board of Directors need not be by written ballot unless the Bylaws of the Corporation shall so provide.
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ARTICLE VIII
A director of the Corporation shall, to the fullest extent permitted by the Delaware General Corporation Law as it now exists or as it may
hereafter be amended, not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exception from liability is not permitted under the Delaware General Corporation Law as the same exists or
may hereafter be amended.
Any amendment, repeal or modification of the foregoing provisions of this Article VIII, or the adoption of any provision in an amended or
restated Certificate of Incorporation inconsistent with this Article VIII, by the stockholders of the Corporation shall not apply to, or adversely
affect, any right or protection of a director of the Corporation existing at the time of such amendment, repeal, modification or adoption.
ARTICLE IX
To the fullest extent permitted by applicable law, the Corporation is authorized to provide indemnification of, and advancement of expenses
to, such agents of the Corporation (and any other persons to which Delaware law permits the Corporation to provide indemnification) through
Bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the
indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created
by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to the Corporation, its stockholders and
others.
Any amendment, repeal or modification of any of the foregoing provisions of this Article IX shall not adversely affect any right or
protection of a director, officer, agent or other person existing at the time of, or increase the liability of any director of the Corporation with
respect to any acts or omissions of such director, officer or agent occurring prior to such amendment, repeal or modification.
ARTICLE X
Except as otherwise provided in this Amended and Restated Certificate of Incorporation, whenever the vote of stockholders at a meeting
thereof is required or permitted to be taken for or in connection with any corporate action, the meeting and vote of stockholders may be
dispensed with and such action may be taken with the written consent of stockholders having not less than the minimum percentage of the vote
required by the General Corporation Law of Delaware for the proposed corporate action, provided that prompt notice shall be given to all
stockholders of the taking of corporate action without a meeting and by less than unanimous consent.
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ARTICLE XI
In addition to any vote of the holders of any class or series of the stock of this Corporation required by law or by this Amended and Restated
Certificate of Incorporation, the affirmative vote of the holders of a majority of the voting power of all of the then outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend or
repeal the provisions of this Amended and Restated Certificate of Incorporation, except to the extent a greater vote is required by this Amended
and Restated Certificate of Incorporation or any provision of law. Notwithstanding any other provisions of this Amended and Restated
Certificate of Incorporation or any provision of law that might otherwise permit a lesser or no vote, but in addition to any affirmative vote of
the holders of any particular class or series of the capital stock of the Corporation required by law or by this Amended and Restated Certificate
of Incorporation, the affirmative vote of the holders of not less than seventy-five percent of the outstanding shares of capital stock of the
Corporation then entitled to vote upon the election of directors, voting together as a single class, shall be required to amend or repeal, or to
adopt any provision inconsistent with, Article VI, Article X, or this Article XI of this Amended and Restated Certificate of Incorporation.
ARTICLE XII
This Corporation shall not be governed by Section 203 of the General Corporation Law of the State of Delaware.
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Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
PACIFIC ASIA PETROLEUM, INC.
ARTICLE I
CORPORATE OFFICES
1.1 Registered Office . The registered office of Pacific Asia Petroleum, Inc. (the “Corporation”) shall be located in the City of Dover,
County of Kent, and State of Delaware.
1.2 Other Offices . The Corporation may also have offices at such other places both within and without the State of Delaware as the Board
of Directors may from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 Place of Meetings . All meetings of the stockholders for the election of Directors or for any other purpose shall be held at such place,
within or without the State of Delaware, as shall be designated from time to time by the Board of Directors and stated in the notice of the
meeting, or if authorized by the Board of Directors may be held by means of remote communication in accordance with applicable law.
2.2 Annual Meeting . The annual meeting of stockholders for the election of Directors and for such other business as may properly be
conducted at such meeting shall be held at such time and date as shall be designated from time to time by the Board of Directors and stated in
the notice of the meeting. The Board of Directors shall have the authority to postpone to a later date and/or time the annual meeting of
stockholders.
2.3 Special Meetings . Special meetings of stockholders of the Corporation may be called by the Chairman of the Board, the Board of
Directors acting pursuant to a resolution adopted by a majority of the Whole Board of Directors or upon written notice to the Board of
Directors by holders of 25% or more of the outstanding shares of voting capital stock of the Corporation, held individually or in the aggregate.
For purposes of these Bylaws, the term “Whole Board of Directors” shall mean the total number of authorized Directors whether or not there
exist any vacancies in previously authorized directorships. Business transacted at special meetings shall be confined to the purpose or purposes
stated in the notice of meeting. Nothing in this Section 2.3 shall be deemed to affect any rights of the holders of any series of Preferred Stock to
call special meeting pursuant to
any applicable provisions of the Amended and Restated Certificate of Incorporation of the Corporation as the same may be amended from time
to time (the “Certificate of Incorporation”).
2.4 Notice of Meetings . Unless otherwise required by law or the Certificate of Incorporation, written notice of the date, time and place, if
any, of the annual and of any special meeting of the stockholders shall be given to each stockholder entitled to vote at such meeting not less
than ten (10) nor more than sixty (60) days before the date of the meeting. Such written notice of any meeting of stockholders shall state the
place, if any, date and hour of the meeting, the means of remote communications, if any, by which stockholders and proxy holders may be
deemed to be present in person and vote at such meeting, and, in the case of a special meeting, the purposes of the meeting.
2.5 Manner of Giving Notice . Except as otherwise required by the Certificate of Incorporation or as otherwise provided herein, notices to
Directors and stockholders shall be in writing and delivered personally or mailed to the Directors or stockholders at their address appearing on
the books of the Corporation. Notice to Directors may be given by telegram, telecopier, telephone, facsimile or any other means of electronic
transmission.
2.6 Waiver of Notice . A written waiver of any notice, signed by a stockholder, Director, officer, employee or agent, whether before or after
the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, Director,
officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. Attendance at any meeting
shall constitute waiver of notice except attendance for the sole purpose of objecting to the timeliness of notice at the beginning of the meeting.
2.7 Chairman and Secretary . The Chairman of the Board, or in the Chairman’s absence the Chief Executive Officer, or in the Chief
Executive Officer’s absence the President, or in the President’s absence the Chief Operating Officer, or in the Chief Operating Officer’s
absence a Vice President, or in the absence of a Vice President a chairman designated by the Board of Directors, shall preside over and act as
chairman of the meeting of the stockholders. The Corporate Secretary, or an Assistant Corporate Secretary, of the Corporation shall act as
secretary at all meetings of the stockholders, but in their absence, a secretary designated by the chairman of the meeting shall act as secretary of
the meeting of the stockholders.
2.8 Record Date . In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and which record date, unless otherwise required by law, shall not be
more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the
meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided , however , that the Board of Directors may fix a new record date for the adjourned meeting.
-2-
2.9 Persons Entitled to Vote . A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order
and showing the address of each such stockholder and the number of shares of capital stock registered in his or her name, shall be prepared and
made by the officer who has charge of the stock ledger of the Corporation, at least ten (10) days before every meeting of stockholders, and shall
be open to the examination of any such stockholder in the manner provided by law. The stockholder list shall also be kept at the place of the
meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. The stock ledger shall be
the only evidence as to who are the stockholders entitled to examine the list required by this Section 2.9 or to vote in person or by proxy at any
meeting of stockholders.
2.10 Quorum . Unless otherwise required by law or the Certificate of Incorporation, the holders of a majority in voting power of all of the
then outstanding shares of the capital stock of the Corporation entitled to be voted at a meeting of the stockholders represented in person or by
proxy, shall constitute a quorum for the transaction of business at such meeting. In the absence of a quorum, the stockholders so present may,
by a majority in voting power thereof, adjourn the meeting from time to time in the manner provided by Section 2.11 of these Bylaws until a
quorum shall attend. The stockholders present at a duly called or held meeting of the stockholders at which a quorum is present may continue
to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum; provided that any action
taken (other than adjournment) is approved by the vote required by Section 2.12 of these Bylaws. In the absence of a quorum, no business other
than adjournment may be transacted, except as described in this Section 2.10.
2.11 Adjournment . Any meeting of the stockholders may be adjourned from time to time either by the Chairman of the meeting or by a
majority in voting power represented by the stockholders entitled to vote at the meeting, present in person or represented by proxy. At any such
adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted by a quorum of the
stockholders at the meeting as originally convened. Notice need not be given of any adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment action is taken, unless the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, in which case a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
2.12 Voting and Proxies . Unless otherwise required by law or the Certificate of Incorporation, each stockholder shall at every meeting of
the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder.
Each stockholder of record entitled to vote at a meeting of stockholders may vote or express such consent or dissent in person or may authorize
another person or persons to vote or act for him or her by proxy. No such proxy shall be voted or acted upon after three (3) years from its date,
unless the proxy provides for a longer period. A proxy shall be irrevocable if it states that it is irrevocable and if, and only so long as, it is
coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by
attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by delivering a proxy in accordance with
applicable law bearing a later date to the Corporate Secretary of the Corporation.
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Voting at meetings of stockholders need not be by written ballot. At all meetings of stockholders for the election of Directors, a plurality of the
votes cast by the shares of capital stock present in person and represented by proxy at the meeting at which the election of Directors is
considered and entitled to vote in the election of Directors shall be sufficient to elect. All other elections and questions shall, unless otherwise
required by law, the Certificate of Incorporation, or the rules or regulations of any stock exchange applicable to the Corporation, be decided by
the affirmative vote of the holders of a majority in voting power of the shares of stock of the Corporation which are present in person or by
proxy and entitled to vote thereon.
2.13 Action at Meetings . The Corporation may, and to the extent required by law, shall, in advance of any meeting of stockholders, appoint
one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more alternate inspectors
to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the
meeting may, and to the extent required by law, shall, appoint one or more inspectors to act at the meeting. Each inspector, before entering
upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and
according to the best of his or her ability. Every vote taken by ballots shall be counted by a duly appointed inspector or inspectors.
2.14 Action in Lieu of Meetings . Subject to rights, if any, of any series of Preferred Stock then outstanding, except as otherwise provided in
the Certificate of Incorporation, whenever the vote of stockholders at a meeting thereof is required or permitted to be taken for or in connection
with any corporate action, the meeting and vote of stockholders may be dispensed with and such action may be taken with the written consent
of stockholders having not less than the minimum percentage of the vote required by law for the proposed corporate action, provided that
prompt notice shall be given to all stockholders of the taking of corporate action without a meeting and by less than unanimous consent.
2.15 Remote Communications . If authorized by the Board of Directors, and subject to such guidelines and procedures as the Board of
Directors may adopt, stockholders and proxyholders not physically present at a meeting of stockholders, by means of remote communications:
(a) may participate in a meeting of stockholders; and
(b) shall be deemed present in person and may vote at a meeting of stockholders; provided that (i) reasonable procedures have been
implemented to verify that each person deemed present and permitted to vote at the meeting by means of remote communications is a
stockholder or proxyholder, (ii) reasonable procedures are implemented to provide stockholders and proxyholders participating in the meeting
by means of remote communications with a reasonable opportunity to participate in the meeting and to vote on matters submitted to
stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with the proceedings, and
(iii) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communications, a record of such vote or
other action shall be maintained by the Corporation.
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2.16 Nominations and Proposals .
(a) Nominations and Proposals at Annual Meetings . Nominations of persons for election to the Board of Directors and the proposal of
business to be considered by the stockholders may be made at any annual meeting of stockholders only (i) pursuant to the Corporation’s notice
of meeting (or any supplement thereto), (ii) by or at the direction of the Board of Directors, or (iii) by any stockholder of the Corporation
(A) who is a stockholder of record on the date the stockholder’s notice provided for in this Section 2.16 is delivered to the Corporate Secretary
and on the record date for the determination of stockholders entitled to vote at such annual meeting, and (B) who complies with the applicable
notice procedures set forth in this Section 2.16.
(b) Stockholder Notice for Annual Meetings . For nominations or other business to be properly made by a stockholder at an annual
meeting in accordance with this Section 2.16, such stockholder must have given timely notice thereof in proper written form to the Corporate
Secretary and any such proposed business other than the nomination of persons for election to the Board of Directors must constitute a proper
matter for stockholder action. To be timely, a stockholder’s notice must be delivered to the Corporate Secretary at the principal executive
offices of the Corporation not later than ninety (90) days nor earlier than one hundred twenty (120) days prior to the first anniversary date of
the preceding year’s annual meeting; provided , however , that in the event that the date of the annual meeting is more than thirty (30) days
before or more than seventy (70) days after such anniversary date, a stockholder’s notice shall also be considered timely if it is so delivered not
earlier than one hundred twenty (120) days prior to such annual meeting, nor later than the later of ninety (90) days prior to such annual
meeting or ten (10) days after the day on which public announcement of the date of such meeting was first made; provided, further, that in the
event that the number of Directors to be elected to the Board of Directors of the Corporation at an annual meeting is increased and there is no
public announcement by the Corporation naming the nominees for the additional directorships at least one hundred (100) days prior to the first
anniversary of the preceding year’s annual meeting, a stockholder’s notice shall also be considered timely, but only with respect to nominees
for the additional directorships, if it is so delivered not later than ten (10) days after the day on which such public announcement is first made
by the Corporation. All notices shall be received by the Corporate Secretary by the close of business on the specified date to be deemed to have
been delivered on that date. In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a
new time period or extend the foregoing time period.
(c) Nominations and Proposals at Special Meetings . Only such business shall be conducted at a special meeting of stockholders as shall
have been brought before the meeting pursuant to the Corporation’s notice of meeting. Nominations of persons for election to the Board of
Directors may be made at a special meeting of stockholders at which Directors are to be elected pursuant to the Corporation’s notice of meeting
(i) by or at the direction of the Board of Directors, or (ii) provided that the Board of Directors has determined that Directors shall be elected at
such meeting, by any stockholder of the Corporation (A) who is a stockholder of record on the date the stockholders notice provided for in this
Section 2.16 is delivered to the Corporate Secretary and on the record date for the determination of stockholders entitled to vote at such special
meeting, and (B) who complies with the applicable notice procedures set forth in this Section 2.16.
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(d) Stockholder Notice for Special Meetings . For nominations to be properly made by a stockholder at a special meeting of stockholders
called by the Corporation for the purpose of electing one or more Directors to the Board of Directors, such stockholder must have given timely
notice thereof in proper written form to the Corporate Secretary. To be timely, a stockholder’s notice must be delivered to the Corporate
Secretary at the principal executive offices of the Corporation not earlier than one hundred twenty (120) days prior to such special meeting, nor
later than the later of ninety (90) days prior to such special meeting or ten (10) days after the day on which public announcement of the date of
such meeting and the proposed nominees to be elected at such meeting was first made. All notices shall be received by the Corporate Secretary
by the close of business on the specified date to be deemed to have been delivered on that date. In no event shall the public announcement of an
adjournment or postponement of a special meeting commence a new time period or extend the foregoing time period.
(e) Form of Stockholders Notice . To be in proper written form, a stockholder’s notice for both annual and special meetings must set
forth:
(i) as to each person whom the stockholder proposes to nominate for election as a Director, (A) the name, age, business address and
residence address of the person, (B) the principal occupation or employment of the person, (C) the class or series and number of shares of
capital stock of the Corporation that are owned beneficially or of record by the person, (D) any other information relating to the person that
would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for
election of Directors pursuant to Section 14 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and
regulations promulgated thereunder, and (E) such notice must be accompanied by a written consent of each proposed nominee to being named
as a nominee and to serve as a Director if elected;
(ii) as to any other business that the stockholder proposes to bring before the meeting, (A) a brief description of the business desired to
be brought before the meeting, (B) the text of the proposal or business (including the text of any resolutions proposed for consideration, and, in
the event that such business includes a proposal to amend the Bylaws of the Corporation, the language of the proposed amendment), (C) the
reasons for conducting such business at the meeting, and (D) any material interest of such stockholder in the business being proposed and the
beneficial owner, if any, on whose behalf the proposal is being made; and
(iii) as to the stockholder giving this notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made,
(A) the name and record address of such stockholder and any such beneficial owner, (B) the class or series and number of shares of capital
stock of the Corporation that are owned beneficially or of record by such stockholder and beneficial owner, (C) a description of all
arrangements or understandings between such stockholder and any such beneficial owner and each proposed nominee and any other persons
(including their names) pursuant to which the nomination(s) are to be made by such stockholder, (D) a representation that such stockholder is a
stockholder of record entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the persons and/or
conduct the business being proposed as described in the notice, and (E) a representation of whether such stockholder or any
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such beneficial owner intends or is part of a group which intends (1) to deliver a proxy statement and/or form of proxy to holders of at least the
percentage of the Corporation’s outstanding capital stock required to approve or adopt the proposal or elect the nominee, and/or (2) otherwise
to solicit proxies from stockholders in support of such proposal or nomination. The foregoing notice requirements shall be deemed satisfied by
a stockholder with respect to an annual meeting if the stockholder has notified the Corporation of his or her intention to present a proposal at
such annual meeting in compliance with Regulation 14A (or any successor thereof) promulgated under the Exchange Act and such
stockholder’s proposal has been included in a proxy statement that has been prepared by the Corporation to solicit proxies for such annual
meeting. The Corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the
eligibility of such proposed nominee to serve as a Director of the Corporation.
(f) General . Only such persons who are nominated in accordance with the procedures set forth in this Section 2.16 shall be eligible to be
elected at an annual or special meeting of stockholders of the Corporation to serve as Directors and only such business shall be conducted at a
meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.16. Except
as otherwise provided by law, the chairman of the meeting shall have the power and duty (i) to determine whether a nomination or any business
proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this
Section 2.16 (including whether the stockholder or beneficial owner, if any, on whose behalf the nomination or proposal is made solicited (or is
part of a group which solicited) or did not so solicit, as the case may be, proxies in support of such stockholder’s nominee or proposal in
compliance with such stockholder’s representation as required by Section 2.16(e)), and (b) if a proposed nomination or business was not made
or proposed in compliance with this Section 2.16, to declare that such nomination shall be disregarded or that such proposed business shall not
be transacted. Notwithstanding the foregoing provisions of this Section 2.16, if the stockholder (or a qualified representative of the stockholder)
does not appear at the annual or special meeting of stockholders of the Corporation to present a nomination or business, such nomination shall
be disregarded and such proposed business shall not be transacted, notwithstanding that proxies in respect of such vote may have been received
by the Corporation. Notwithstanding the foregoing provisions of this Section 2.16, a stockholder shall also comply with all applicable
requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 2.16. Nothing in
this Section 2.16 shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation’s proxy statement
pursuant to Regulation 14A under the Exchange Act, or (ii) of the holders of any series of Preferred Stock to elect Directors pursuant to any
applicable provisions of the Certificate of Incorporation.
ARTICLE III
BOARD OF DIRECTORS
3.1 General Powers . The business of the Corporation shall be managed by or under the direction of its Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or by the Certificate of Incorporation or by
these Bylaws directed or required to be exercised or done by the stockholders.
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3.2 Number of Directors . Subject to the rights, if any, of any series of Preferred Stock then outstanding, the Board of Directors shall consist
of not less than three (3) nor more than seven (7) Directors, with such number to be established, from time to time, by resolution of the Board.
The initial number of Directors shall be three (3).
3.3 Term of Office . The Board of Directors elected at or as of the Effective Date shall hold office until the first annual meeting of
stockholders held after the Effective Date and until their successors have been duly elected and qualified or until there is a decrease in the
number of Directors. Thereinafter, Directors will be elected at the annual meeting of stockholders and shall hold office until the annual meeting
of the stockholders next succeeding his election, or until his or her successor shall have been duly elected and qualified or until such Director’s
death, resignation or removal. Any Director who is also an executive officer of the Corporation shall, immediately upon ceasing to be an
executive officer of the Corporation for any reason whatsoever, be disqualified from continuing to serve as a Director and such Director’s term
of office as a Director shall thereupon automatically expire.
3.4 Election . Within the limits specified herein and in the Corporation’s Certificate of Incorporation, the election of Directors shall be
determined by the stockholders of the Corporation by a plurality of the votes cast by the shares of capital stock present in person or represented
by proxy at the meeting in which the election of Directors is considered and entitled to vote in the election of Directors. The Directors need not
be stockholders of the Corporation.
3.5 Resignation . Any Director may resign by delivering a written resignation to the Corporation at its principal office or to the Chairman of
the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Corporate Secretary or the Board of Directors. Such
resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. If
the resignation specifies effectiveness at a future time, a successor may be elected pursuant to Section 3.7 of these Bylaws to take office on the
date that the resignation becomes effective.
3.6 Removal . Except for such additional directors, if any, elected by a series of Preferred Stock then outstanding, any Director or the entire
Board of Directors may be removed, but only for cause, and only by the affirmative vote of the holders of at least a majority in interest of the
voting power of all of the then outstanding shares of the capital stock of the Corporation then entitled to vote at an election of Directors, voting
together as a single class. Nothing in this Section 3.6 shall be deemed to affect any rights of the holders of any series of Preferred Stock to
remove Directors pursuant to any applicable provisions of the Certificate of Incorporation.
3.7 Vacancies . Subject to the rights, if any, of any series of Preferred Stock then outstanding, and except as otherwise provided in the
Certificate of Incorporation, any vacancy, whether arising through death, resignation, retirement, removal or disqualification of a Director, and
any newly created directorship resulting from an increase in the number of Directors, shall be filled solely by a majority vote of the remaining
Directors even though less than a quorum of the Board of Directors. A Director so elected to fill a vacancy or newly created directorship shall
serve until the next annual meeting of the stockholders, or until his or her successor shall have been duly elected
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and qualified or until such Director’s death, resignation or removal. No decrease in the number of Directors shall shorten the term of any
incumbent director.
3.8 Place of Meetings . Any meetings of the Board of Directors may be held either within or without the State of Delaware.
3.9 Regular Meetings . Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from
time to time be determined by the Board of Directors, provided that any Director who is absent when such determination is made shall be given
notice of the determination.
3.10 Special Meetings and Notice . Special meetings of the Board of Directors may be called by the Chairman of the Board, the Chief
Executive Officer, or any two Directors, and shall be held at such time and place as may be specified by the officer or Directors calling the
meeting. Unless otherwise required by law or the Certificate of Incorporation, notice stating the date, time and place of the meeting shall be
given to each Director either by prepaid mail to such Director’s address appearing on the books of the Corporation not less than forty-eight
(48) hours before the date of the meeting, or personally or by telegram, facsimile, electronic transmission or similar means of communication
not less than twenty-four (24) hours before the date of the special meeting.
3.11 Meetings by Telephone Conference Call . Unless otherwise required by law or the Certificate of Incorporation, members of the Board
of Directors may participate in a meeting of the Board of Directors by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.12 Quorum and Adjournment . Unless otherwise required by law or the Certificate of Incorporation, at all meetings of the Board of
Directors, the presence of majority of the Whole Board of Directors shall constitute a quorum for the transaction of business (except for the
filling of vacancies, which shall be governed by the provisions of Section 3.7). Any meeting of the Board of Directors, or a committee thereof,
whether or not a quorum is present, may be adjourned to another time and place by the affirmative vote of a majority of the Directors present. If
the meeting is adjourned for more than 24 hours, notice of such adjournment to another time or place shall be given prior to the time of the
adjourned meeting to the Directors who were not present at the time of the adjournment.
3.13 Action at Meetings . Unless otherwise required by law or the Certificate of Incorporation, if a quorum is present at any meeting of the
Board of Directors, the vote of a majority of the Directors present shall be sufficient to take any action. A meeting at which a quorum is
initially present may continue, and Directors may transact business, notwithstanding withdrawal of Directors, if any action taken is approved by
at least a majority of the number of Directors constituting a quorum for such meeting.
3.14 Action in Lieu of Meetings . Unless otherwise required by law or the Certificate of Incorporation, any action required or permitted to
be taken at any meeting of the Board of Directors may be taken without a meeting, if all Directors consent thereto in writing or by electronic
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transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board of
Directors. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are
maintained in electronic form.
3.15 Committees . The Board of Directors may, by resolution passed by a majority of the Whole Board of Directors, designate one or more
committees, each committee to consist of one or more of the Directors of the Corporation. The Board of Directors may designate one or more
Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee.
In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate
member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting,
whether or not such member or members constitute a quorum, may (subject to the committee charter, if any) unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any committee, to the extent
permitted by law and to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it. Each committee shall keep regular minutes and report to the Board of Directors
when required.
3.16 Meetings and Action of Committees . Meetings and action of committees shall be governed by and held and taken in accordance with
the provisions of Sections 3.8 to 3.14, with such changes in the context thereof as are necessary to substitute the committee and its members for
the Board of Directors and its members.
3.17 Compensation . Unless otherwise required by law or the Certificate of Incorporation, Directors shall be entitled to receive such fees and
expenses, if any, for attendance at meetings of the Board of Directors, and/or such fixed salaries for services as Directors, as may be fixed from
time to time by resolution of the Board of Directors. Nothing herein contained shall be construed to preclude any Director from serving the
Corporation in any other capacity as an officer, committee member, agent or otherwise, and receiving compensation therefor. Members of
special or standing committees may be allowed like compensation for attending committee meetings.
3.18 Chairman of the Board and Vice Chairman of the Board; Secretary . The Board of Directors shall appoint a Chairman of the Board and
may appoint a Vice Chairman of the Board, in its discretion, from among its members. The Chairman of the Board shall preside at all meetings
of stockholders and of the Board of Directors. If the Board of Directors appoints a Vice Chairman of the Board, in the absence or disability of
the Chairman of the Board, the Vice Chairman of the Board shall preside at all meetings of stockholders and of the Board of Directors. The
Corporate Secretary or an Assistant Corporate Secretary of the Corporation shall act as secretary at all meetings of the Board of Directors, but
in their absence, a secretary designated by the Chairman of the meeting shall act as secretary of the meeting of the Board.
ARTICLE IV
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OFFICERS
4.1 Designation , Term and Vacancies. The officers of the Corporation shall be a Chief Executive Officer, a President, a Chief Operating
Officer, one or more Vice Presidents, a Corporate Secretary and a Chief Financial Officer and/or Treasurer, all of whom shall be elected by the
Board of Directors. The Board of Directors may elect one or more Executive Vice Presidents, Senior Vice Presidents, or Assistant Vice
Presidents, who shall have such authority and shall perform such duties as may from time to time be prescribed by the Board of Directors. The
Board of Directors may appoint one or more Assistant Corporate Secretaries and one or more Assistant Treasurers, and such other officers as
may be deemed necessary, who shall have such authority and shall perform such duties as may from time to time be prescribed by the Board of
Directors. Vacancies occurring among the officers of the Corporation shall be filled by the Board of Directors. Subject to Section 4.2 of this
Article 4, officers elected by the Board of Directors shall hold office until the next annual election of such officers by the Directors and until
their successors are elected and qualified or until such officer’s death, resignation or removal. All other officers, agents and employees shall
hold office during the pleasure of the Board of Directors or the officer appointing them. Any two or more offices may be held by the same
person, with the exception that the Chief Executive Officer and President shall not also hold the office of Corporate Secretary or the office of
Chief Financial Officer and/or Treasurer.
4.2 Resignation and Removal of Officers . Any officer may resign at any time upon written notice to the Corporation, without prejudice to
the rights, if any, of the Corporation under any contract to which such officer is a party. Such resignation shall be effective upon its receipt by
the Chairman of the Board, the Chief Executive Officer, the President, the Corporate Secretary or the Board of Directors, unless a different
time is specified in the notice for effectiveness of such resignation. The acceptance of any such resignation shall not be necessary to make it
effective unless otherwise specified in such notice. Any officer may be removed from office at any time, with or without cause, but subject to
the rights, if any, of such officer under any contract of employment, by the Board of Directors or by any committee to whom such power of
removal has been duly delegated, or, with regard to any officer who has been appointed by the Chief Executive Officer pursuant to Section 4.3
below, by the Chief Executive Officer or any other officer upon whom such power of removal may be conferred by the Board of Directors. A
vacancy occurring in any office for any cause may be filled by the Board of Directors, in the manner prescribed by this Article 4 of the Bylaws
for initial appointment to such office.
4.3 Chief Executive Officer . The Chief Executive Officer shall be chosen from among the members of the Board of Directors and, subject
to the control and direction of the Board of Directors, shall have general charge of the affairs and business of the Corporation and general
charge and supervision of all the officers, agents, and employees of the Corporation. He or she shall exercise all powers and perform all duties
incident to the principal executive office of the Corporation, subject to the control and direction of the Board of Directors, and such other
powers and duties as may from time to time be assigned to him by the Board of Directors or be prescribed by these Bylaws. Also in the absence
or inability of the Chairman to act, he or she shall preside at all meetings of stockholders. He or she may sign and execute in the name of the
Corporation all deeds, mortgages, bonds, contracts, powers of attorney, or other instruments authorized by the Board of
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Directors, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to
some other officer or agent of the Corporation, and he or she may, without previous authority of the Board of Directors, make, in the name of
the Corporation, such contracts, leases, and other agreements as the ordinary conduct of the Corporation’s business requires. He or she may
sign and endorse notes, drafts, and checks. He or she shall have power to select and appoint all necessary officers and servants, except those
elected or appointed or required to be elected or appointed by the Board of Directors, and he or she shall also have power to remove all such
officers and servants and to make appointments to fill the vacancies. He or she may delegate any of his powers to the President or the Chief
Operating Officer of the Corporation.
4.4 President . The President shall perform all acts incident to the office of President, subject to the control and direction of the Board of
Directors, and such other powers and duties as may from time to time be assigned to him by the Board of Directors or be prescribed by these
Bylaws. In the absence or inability of the Chief Executive Officer to act, he or she shall be the Chief Executive Officer of the Corporation.
4.5 Chief Operating Officer . The Chief Operating Officer of the Corporation shall have general and active management of and exercise
general supervision over the business and property of the Corporation, subject to the control and direction of the Board of Directors, and such
other powers and duties as may from time to time be assigned to him by the Board of Directors or be prescribed by these Bylaws. He or she
may delegate any of his powers to any Vice President of the Corporation. In the absence or disability of the President, the Chief Operating
Officer shall exercise the powers and perform the duties of the President.
4.6 Vice Presidents . Each Vice President shall exercise such powers and perform such duties as may from time to time be assigned to him
by the Board of Directors, the Chief Executive Officer, the President or the Chief Operating Officer.
4.7 Chief Financial Officer or Treasurer . The Chief Financial Officer or Treasurer shall perform all acts incident to the office of Chief
Financial Officer or Treasurer, subject to the control and direction of the Board of Directors, and such other powers and duties as may from
time to time be assigned to him by the Board of Directors or be prescribed by these Bylaws. He or she shall have custody of such funds and
securities of the Corporation as may come to his hands or be committed to his care by the Board of Directors. When necessary or proper, he or
she shall endorse on behalf of the Corporation, for collection, checks, notes, or other obligations, and shall deposit the same to the credit of the
Corporation, in such bank or banks or depositories as the Board of Directors, the Chief Executive Officer, the President, or the Chief Operating
Officer may designate. He or she may sign receipts or vouchers for payments made to the Corporation, and the Board of Directors may require
that such receipts or vouchers shall also be signed by some other officer to be designated by them. Whenever required by the Board of
Directors, he or she shall render a statement of his cash accounts and such other statements respecting the affairs of the Corporation as may be
requested. He or she shall keep proper and accurate accounts of receipts and disbursements and other matters pertaining to his office. In the
discretion of the Board of Directors, he or she may be required to give a bond in such amount and containing such conditions as the Board of
Directors may approve, and such bond
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may be the undertaking of a surety company, and the premium therefor may be paid by the Corporation.
4.8 Corporate Secretary . The Corporate Secretary shall perform all acts incident to the office of Secretary, subject to the control and
direction of the Board of Directors, and such other powers and duties as may from time to time be assigned to him by the Board of Directors or
be prescribed by these Bylaws. He or she shall record the votes and proceedings of the stockholders and of the Board of Directors in a book or
books kept for that purpose, and shall attend all meetings of the Directors and stockholders. He or she shall keep in safe custody the seal of the
Corporation, and, when required by the Board of Directors, or when any instrument shall have been signed by the Chief Executive Officer, the
President, the Chief Operating Officer, or any other officer duly authorized to sign the same, or when necessary to attest any proceedings of the
stockholders or Directors, shall affix it to any instrument requiring the same, and shall attest the same with his signature. Except as otherwise
required by the Certificate of Incorporation or these Bylaws, he or she shall attend to the giving and serving of notices of meetings. He or she
shall have charge of such books and papers as properly belong to his office or as may be committed to his care by the Board of Directors.
Except as otherwise required by the Certificate of Incorporation or these Bylaws, in the absence of the Corporate Secretary, or an Assistant
Corporate Secretary, from any meeting of the Board of Directors, the proceedings of such meeting shall be recorded by such other person as
may be appointed at the meeting for that purpose.
4.9 Assistant Vice President . Each Assistant Vice President shall exercise such powers and perform such duties as may be assigned to him
by the Board of Directors.
4.10 Assistant Corporate Secretary . Each Assistant Corporate Secretary shall be vested with the same powers and duties as the Corporate
Secretary, and any act may be done or duty performed by an Assistant Corporate Secretary with like effect as though done or performed by the
Corporate Secretary. He or she shall have such other powers and perform such other duties as may be assigned to him by the Board of
Directors.
4.11 Other Officers . Such other officers as the Board of Directors may appoint shall perform such duties and have such powers as may from
time to time be assigned by the Board of Directors. The Board of Directors may delegate to the Chief Executive Officer the power to choose
such other officers and to prescribe their respective duties and powers.
ARTICLE V
INDEMNIFICATION
5.1 Right to Indemnification . To the fullest extent permitted by law, the Corporation shall indemnify and hold harmless any person who
was or is made or is threatened to be made a party or is otherwise involved in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (a “proceeding”) by reason of the fact that such person, or the person for whom he is the
legally representative, is or was a Director or officer of the Corporation or is or was serving at the request of the Corporation as a director or
officer of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service
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with respect to employee benefit plans (any such person, a “Section 5.1 Indemnitee”), against all liabilities, losses, expenses (including
attorney’s fees), judgments, fines and amounts paid in settlement (“expenses”) actually and reasonably incurred by such person in connection
with such proceeding; provided , however , that except as otherwise provided in Section 5.4, the Corporation shall only be required to
indemnify a person in connection with a proceeding (or part thereof) initiated by such person if the commencement of such proceeding (or part
thereof) was authorized by the Board of Directors.
5.2 Prepayment of Expenses . The Corporation shall pay the expenses incurred by a Section 5.1 Indemnitee in defending any proceeding in
advance of its final disposition, provided that, to the extent required by law, the payment of expenses in advance of the final disposition of the
proceeding shall be made only upon receipt of an undertaking by such person to repay all amounts advanced if it should be ultimately
determined that such person is not entitled to be indemnified under this Article or otherwise. The Corporation may pay the expenses incurred
by any other person in defending any proceeding in advance of its final disposition upon such terms and conditions as the Board of Directors
deems appropriate.
5.3 Claims . If a claim for indemnification or advancement of expenses under Section 5.1 or Section 5.2 is not paid in full within sixty
(60) days after a written claim therefor by a Section 5.1 Indemnitee has been received by the Corporation, such Section 5.1 Indemnitee may file
suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting
such claim. In any such action, the Corporation shall have the burden of proving that such Section 5.1 Indemnitee is not entitled to the
requested indemnification or advancement of expenses under applicable law.
5.4 Repeal or Modification . Any repeal or modification of the provisions of this Article or applicable law shall not adversely affect any
right or protection hereunder of any person in respect of any act or omission occurring before the time of such repeal or modification regardless
of whether the proceeding is brought or threatened before or after the time of such repeal or modification.
5.5 Non-Exclusivity of Rights . The right to indemnification and advancement of expenses conferred on any person by this Article shall not
be exclusive of any other rights such person may have or acquire under any other provision hereof, the Bylaws or by law, agreement, vote of
stockholders or disinterested Directors or otherwise.
5.6 Survival of Rights . The right to indemnification and prepayment of expenses conferred on any person by this Article shall continue as to
a person who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of
such person.
5.7 Insurance . The Corporation may purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee
or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans,
against any liability or expenses incurred by such person in connection with
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a proceeding, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this
Article or by law.
5.8 Other Sources . The Corporation’s obligation, if any, to indemnify or advance expenses to any Section 5.1 Indemnitee who was or is
serving at the Corporation’s request as a director or officer of another corporation or a partnership, joint venture, trust, enterprise or nonprofit
entity, including service with respect to employee benefit plans, shall be reduced by any amount such Section 5.1 Indemnitee may collect as
indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust, enterprise or nonprofit entity.
5.9 Other Indemnification and Advancement of Expenses . This Article 5 shall not limit the right of the Corporation, to the extent and in the
manner permitted by law, to indemnify and to advance expenses to persons other than Section 5.1 Indemnitees when and as authorized by
appropriate corporate action.
ARTICLE VI
STOCK
6.1 Stock Certificates . Every holder of capital stock shall be entitled to have a certificate representing such stock in such form as shall be
approved by the Board of Directors, signed by or in the name of the Corporation by (a) the President or a Vice President, and (b) the Corporate
Secretary or an Assistant Corporate Secretary or Treasurer or Assistant Treasurer. Any or all the signatures on the certificate may be a
facsimile. In case any officer, transfer agent, transfer clerk or registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, transfer clerk or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if such person were such officer, transfer agent, transfer clerk or registrar at the date of issue.
6.2 Lost, Stolen or Destroyed Certificates . The Board of Directors may direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate or certificates or such person’s legal representative to give the Corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of any such
Certificate or the issuance of such new Certificate.
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ARTICLE VII
MISCELLANEOUS
7.1 Fiscal Year . The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors.
7.2 Seal . The corporate seal shall have the name of the Corporation inscribed thereon and shall be in such form as may be approved from
time to time by the Board of Directors.
7.3 Execution of Checks, etc . The funds of the Corporation shall be deposited in such banks or trust companies as the Board of Directors
from time to time shall designate and shall be withdrawn only on checks or drafts of the Corporation for the purposes of the Corporation. All
checks, drafts, notes, acceptances and endorsements of the Corporation shall be signed in such manner and by such officer or officers or such
individual or individuals as the Board of Directors from time to time by resolution shall determine. If and to the extent so authorized by the
Board of Directors, such signature or signatures may be facsimile. Only checks, drafts, notes, acceptances and endorsements signed in
accordance with such resolution or resolutions shall be the valid checks, drafts, notes, acceptances or endorsements of the Corporation.
7.4 Evidence of Authority . A certificate by the Corporate Secretary or an Assistant Corporate Secretary as to any action taken by the
stockholders, the Board of Directors, a committee or any officer or representative of the Corporation shall as to all persons who rely on the
certificate in good faith be conclusive evidence of such action.
7.5 Severability . Any determination that any provision of these Bylaws is for any reason inapplicable, illegal or ineffective shall not affect
or invalidate any other provision of these Bylaws.
ARTICLE VIII
AMENDMENTS
8.1 Creation, Amendment and Repeal of Bylaws . In furtherance and not in limitation of the powers conferred upon it by the laws of the
State of Delaware, the Board of Directors shall have the power to adopt, alter, amend or repeal the Bylaws of the Corporation.
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CERTIFICATE OF ADOPTION OF AMENDED AND RESTATED BYLAWS
OF
PACIFIC ASIA PETROLEUM, INC.
Certificate by Secretary of Adoption by Board of Directors
The undersigned hereby certifies that she is the duly elected, qualified, and acting Secretary of Pacific Asia Petroleum, Inc. and that the
foregoing Bylaws, comprising sixteen (16) pages, were adopted as the Bylaws of the corporation on May 7, 2007, by the Board of Directors.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand and affixed the corporate seal this 7th day of May, 2007.
/s/ Frank C. Ingriselli
Frank C. Ingriselli
Pesident, Chief Executive Officer and Secretary
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Exhibit 4.1
Exhibit 4.2
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE OR
EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN
EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR APPLICABLE STATE
SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.
PACIFIC ASIA PETROLEUM, INC.
WARRANT TO PURCHASE COMMON STOCK
Warrant Holder:
or its assigns
Warrant Shares:
Shares of the Company’s Common Stock
Number of Shares:
___ Thousand (___,000), subject to adjustment as provided herein
Warrant Exercise Price:
___ Dollars ($___.00) per share of Common Stock, subject to adjustment as provided herein
Issue Date:
May 7, 2007
Expiration Date:
May 7, 2012
THIS WARRANT CERTIFIES THAT, for value received, the receipt and adequacy of which is hereby
acknowledged,
or its assignees (the “Holder”), is entitled to subscribe for and purchase, subject to the provisions
and upon the terms and conditions hereinafter set forth, the number of fully paid and nonassessable shares of Common Stock, $0.001 par value
(subject to adjustments from time to time as specified in Section 4 hereof, the “Warrant Stock”) of Pacific Asia Petroleum, Inc., a Delaware
corporation (the “Company”), at the initial exercise price per share of Warrant Stock (subject to adjustments from time to time, as specified in
Section 4 hereof) (the “Warrant Exercise Price”) all as set forth above.
1. Term and Expiration . The purchase right represented by this Warrant is exercisable, in whole or in part, at any time and from time to
time from the Issue Date through the Expiration Date.
2. Method of Exercise; Cash Payment; Issuance of New Warrant . Subject to Section 1, the purchase right represented by this Warrant may
be exercised by the Holder hereof, in whole or in part and from time to time, at the election of the Holder hereof, by:
(a) the surrender of this Warrant (with the notice of exercise substantially in the form attached hereto as Exhibit A (the “Notice of
Exercise”) duly completed and executed) at the principal executive offices of the Company and accompanied by payment to the Company, by
(i) certified or bank check acceptable to the Company, or (ii) by wire transfer to an account designated by the Company, or any
combination of (i) and (ii), of an amount equal to the then applicable Warrant Exercise Price multiplied by the number of shares of Warrant
Stock then being purchased,
(b) or exercise of the right provided for in Section 10 hereof, together with the surrender of this Warrant (with the Notice of Exercise
duly completed and executed) at the principal executive offices of the Company.
(c) The Warrant Stock so purchased shall be deemed to be issued to the Holder as of the close of business on the date on which this
Warrant shall have been surrendered (or evidence of loss, theft or destruction thereof and security or indemnity satisfactory to the Company),
the Warrant Exercise Price shall have been paid and the completed Notice of Exercise shall have been delivered. At such time the person or
persons in whose name or names any certificate for Warrant Stock shall be issuable upon such exercise shall be deemed to have become the
Holder or holders or record thereof. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of Warrant
Stock so purchased shall be delivered to the Holder hereof (or as such Holder (upon payment by such Holder of any applicable transfer taxes)
may direct) as soon as possible and in any event within ten (10) business days after such exercise and, unless this Warrant has been fully
exercised or expired, a new warrant having the same terms as this Warrant and representing the remaining portion of such shares, if any, with
respect to which this Warrant shall not then have been exercised shall also be issued to the Holder hereof (or as such Holder (upon payment by
such Holder of any applicable transfer taxes) may direct) as soon as possible and in any event within such 10-day period.
(d) Each share of Warrant Stock issuable upon exercise of this Warrant shall, upon payment of the Warrant Exercise Price therefor, be
duly authorized, validly issued, fully paid and nonassessable and free from all liens and charges with respect to the issuance thereof.
(e) The Company shall not close its books against the transfer of this Warrant or of any share of Warrant Stock issued or issuable upon
the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant.
(f) The Company shall take all such actions as may be reasonably necessary to insure that all such shares of Warrant Stock may be so
issued without violation of any applicable law or governmental regulation.
3. Reservation of Shares . During the period within which the rights represented by this Warrant may be exercised, the Company will at all
times have authorized, and reserved for the purpose of the issuance upon exercise of the purchase rights evidenced by this Warrant a sufficient
number of shares of its capital stock to provide for the exercise of the rights represented by this Warrant. If the shares of Warrant Stock issuable
by reason of exercise of this Warrant are convertible into or exchangeable for any other stock or securities of the Company, the Company shall,
at the Holder’s option and upon surrender of this Warrant by such holder as provided above, together with any notice, statement or payment
required to effect such conversion or exchange of Warrant Stock, deliver to such holder (or such other Person specified by such holder) a
certificate or certificates representing the stock or securities into which the shares of Warrant Stock issuable by reason of such conversion are
convertible or exchangeable, registered in such name or names and in such denomination or denominations as such holder has specified.
4. Adjustment of Warrant Exercise Price and Warrant Stock . The number and kind of securities purchasable upon the exercise of this
Warrant and the Warrant Exercise Price shall be subject to adjustment to
2
the nearest whole share (one-half and greater being rounded upward) and nearest cent (one-half cent and greater being rounded upward) from
time to time upon the occurrence of certain events, as follows. Each of the adjustments provided by the subsections below shall be deemed
separate adjustments and any adjustment of this Warrant pursuant to one subsection of this Section 4 shall preclude additional adjustments for
the same event or transaction by the remaining subsections.
(a) Reorganization, Consolidation, Merger, Etc. In case at any time or from time to time, the Company shall (a) effect a reorganization,
(b) consolidate with or merge into any other person or (c) transfer all or substantially all of its properties or assets to any other person under any
plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a
transaction, proper and adequate provision shall be made by the Company whereby the Holder of this Warrant, on the exercise hereof, at any
time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall
receive, in lieu of the Warrant Stock issuable on such exercise prior to such consummation or such effective date, the stock and other securities
and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution,
as the case may be, if such Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as
provided in this Section 4.
(b) Reclassification . In case of any reclassification or change of securities of the class issuable upon exercise of this Warrant (other than
a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination) into
the same or a different number or class of securities, the Company shall duly execute and deliver to the holder of this Warrant a new warrant
(in form and substance reasonably satisfactory to the Holder of this Warrant), so that the Holder of this Warrant shall thereafter be entitled to
receive upon exercise of this Warrant, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this
Warrant, and in lieu of the shares of Warrant Stock theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock,
other securities, money and property receivable upon such reclassification or change by a holder of the number of shares then purchasable
under this Warrant. The Company or the surviving entity shall deliver such new warrant as soon as possible and in any event within ten
(10) business days after such reclassification or change. Such new warrant shall provide for adjustments that shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 4. The provisions of this subparagraph (a) shall similarly apply to successive
reclassifications or changes.
(c) Stock Splits or Combination of Shares . If the Company at any time while this Warrant remains outstanding and unexpired shall
subdivide (by stock split) or combine (by reverse stock split) its outstanding shares of capital stock into which this Warrant is then exercisable,
the Warrant Exercise Price shall be proportionately adjusted in the case of a subdivision or a combination, effective at the close of business on
the date the subdivision or combination becomes effective and the number of shares of Warrant Stock issuable upon exercise of this Warrant
shall be proportionately adjusted in the case of a subdivision or a combination, and in each case to the nearest whole share, effective at the
close of business on the date the subdivision or combination becomes effective. The provisions of this subparagraph (b) shall similarly apply to
successive subdivisions or combinations of outstanding shares of capital stock into which this Warrant is exercisable.
(d) Stock Dividends and Other Distributions . If the Company at any time while this Warrant is outstanding and unexpired shall (i) pay a
dividend with respect to Warrant Stock payable in Warrant Stock, then (A) the Warrant Exercise Price shall be adjusted, from and after the date
of determination of stockholders
3
entitled to receive such dividend or distribution (the “Record Date”), to that price determined by multiplying the Warrant Exercise Price in
effect immediately prior to such date of determination by a fraction (1) the numerator of which shall be the total number of shares of Warrant
Stock outstanding immediately prior to such dividend or distribution, and (2) the denominator of which shall be the total number of shares of
Warrant Stock outstanding immediately after such dividend or distribution and (B) the number of shares of Warrant Stock issuable upon
exercise of this Warrant shall be proportionately adjusted, to the nearest whole share, from and after the Record Date by multiplying the
number of shares of Warrant Stock purchasable hereunder immediately prior to such Record Date by a fraction (1) the numerator of which shall
be the total number of shares of Warrant Stock outstanding immediately after such dividend or distribution, and (2) the denominator of which
shall be the total number of shares of Warrant Stock outstanding immediately prior to such dividend or distribution; or (ii) make any other
dividend or distribution with respect to Warrant Stock (except any distribution specifically provided for in Sections 4(a) and 4(b) above), then,
in each such case, provision shall to this Warrant be made by the Company such that the Holder of this Warrant shall receive upon exercise of
this Warrant (in addition to the number of shares of stock receivable upon exercise of this Warrant) a proportionate share of any such dividend
or distribution (without payment of any additional consideration therefor) as though it were the holder of all share of Warrant Stock remaining
issuable upon exercise of this Warrant as of the Record Date fixed for the determination of the stockholders of the Company entitled to receive
such dividend or distribution. The provisions of this subparagraph (c) shall similarly apply to successive stock dividends and other distributions
by the Company. If the Company shall take a record of the holders of its Warrant Stock for the purpose of entitling them to receive a dividend
or other distribution (which results in an adjustment to the shares of Warrant Stock under the terms of this Warrant) and shall, thereafter, and
before such dividend or distribution is paid or delivered to shareholders entitled thereto, legally abandon its plan to pay or deliver such dividend
or distribution, then any adjustment made to the shares of Warrant Stock by reason of the taking of such record shall be reversed, and any
subsequent adjustments, based thereon, shall be recomputed.
(e) Sale of Property, Liquidation, Etc. If the Company at any time while this Warrant remains outstanding and unexpired shall sell all or
substantially all of its property or dissolve, liquidate, or wind up its affairs, lawful provision shall be made as part of the terms of any such sale,
dissolution, liquidation or winding up, so that the holder of this Warrant may thereafter receive upon exercise hereof in lieu of each Warrant
Share that it would have been entitled to receive, the same kind and amount of any securities or assets as may be issuable, distributable or
payable upon any such sale, dissolution, liquidation or winding up with respect to each share of Common Stock of the Company.
(f) Number of Warrant Shares . Simultaneously with any adjustment to the Warrant Price pursuant to this Section 4, the number of
Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that after such
adjustment the aggregate Warrant Price payable hereunder for the adjusted number of Warrant Shares shall be the same as the aggregate
Warrant Price in effect immediately prior to such adjustment.
5. No Impairment . The Company will not, by amendment of its articles of incorporation or through any consolidation, merger,
reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking
of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment. Without limiting the
generality of the foregoing, the Company (a) shall not permit the par value of any shares of stock receivable upon the exercise of this Warrant
to exceed the amount payable therefor upon such
4
exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and
nonassessable shares of stock, free from all taxes, liens, security interests, encumbrances, preemptive rights and charges on the exercise of the
Warrants from time to time outstanding, other than any restrictions on transfer contained in this Warrant and under applicable state and federal
securities laws, (c) will not take any action which results in any adjustment of the number of Warrant Shares if the total number of shares of
Warrant Stock or other securities issuable after the action upon the exercise of all of the Warrants would exceed the total number of shares of
Warrant Stock or other securities then authorized by the Company’s articles of incorporation and available for the purpose of issue upon such
exercise and (d) will at all times in good faith assist in the carrying out of all the provisions herein and in the taking of all such action as may be
necessary or appropriate in order to protect the adjustment rights of the Holder against impairment.
6. Notice of Adjustments . Whenever the Warrant Exercise Price or the number of shares of Warrant Stock purchasable hereunder shall be
adjusted pursuant to Section 4 above, the Company shall issue a certificate signed by its Chief Financial Officer, setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant
Exercise Price and the number and kind of shares of Warrant Stock purchasable hereunder after giving effect to such adjustment, and shall
cause copies of such certificate to be delivered to the Holder of this Warrant within five (5) business days after the occurrence of the event
resulting in such adjustment at such Holder’s last known address in accordance with Section 12 hereof.
7. Fractional Shares . No fractional shares will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the
Company shall pay the Holder in cash or by check the amount determined by multiplying such fractional share by the fair market value of one
share of Warrant Stock as determined in accordance with Section 10(c) below.
8. Ownership; Transfer of Warrant or Warrant Stock .
(a) Register; Registered Holder . The Company shall maintain at its principal executive offices (or such other office or agency of the
Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and
address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee. The Company may treat
the person in whose name any Warrant is registered on the register as the owner and holder thereof for all purposes, notwithstanding any notice
to the contrary, but in all events recognizing any transfers made in accordance with the terms of this Warrant.
(b) Compliance with Securities Act of 1933 . The Holder of this Warrant, by acceptance hereof, agrees that this Warrant, and the shares
of Warrant Stock to be issued upon exercise hereof are being acquired for investment and that such holder will not offer, sell, transfer or
otherwise dispose of this Warrant, or any such shares except under circumstances which will not result in a violation of the Securities Act and
any applicable state securities laws. Upon exercise of this Warrant, unless the shares being acquired are registered under the Securities Act and
any applicable state securities laws or an exemption from such registration is available, the Holder hereof shall confirm in writing that the
shares so purchased are being acquired for investment and not with a view toward distribution or resale in violation of the Securities Act and
shall confirm such other matters related thereto as may be reasonably requested by the Company. The shares of Warrant Stock issued upon
exercise of this Warrant (unless registered under the Securities Act and any
5
applicable state securities laws) shall be stamped or imprinted with a legend in substantially the following form:
“NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE OR
EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN
EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR APPLICABLE STATE SECURITIES LAWS
OR UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.”
Said legend shall be removed by the Company, upon the request of a Holder, at such time as the restrictions on the transfer of the applicable
security shall have terminated.
(c) Transferability of the Warrant . Subject to compliance with applicable federal and states securities laws, this Warrant and the shares
of Warrant Stock issuable upon exercise of this Warrant may be transferred by the Holder hereof to accredited investors only (as defined under
Rule 501 of Regulation D of the Securities Act”), in whole or in part and from time to time.
(d) Method of Transfer . With respect to any offer, sale, transfer or other disposition of this Warrant or any shares of Warrant Stock
acquired pursuant to the exercise of this Warrant prior to registration of such Warrant or shares, the Holder hereof shall prior to such offer, sale,
transfer or other disposition:
(i) surrender this Warrant at the principal executive offices of the Company or provide evidence reasonably satisfactory to the
Company of the loss, theft or destruction of this Warrant and an indemnity agreement reasonable satisfactory to the Company,
(ii) pay any applicable transfer taxes or establishing to the satisfaction of the Company that such taxes have been paid,
(iii) deliver a written assignment to the Company in substantially the form attached hereto as Exhibit B duly completed and executed
prior to transfer, describing briefly the manner thereof, and
(iv) deliver a written opinion of such Holder’s legal counsel, and/or other evidence, each in a form satisfactory to the Company, to the
effect that such offer, sale, transfer or other disposition may be effected without registration or qualification to an accredited investor (under the
Securities Act as then in effect and any applicable state securities law then in effect) of this Warrant or the shares of Warrant Stock.
Promptly as practicable and no later than five (5) days after receiving the items set forth above, the Company shall notify the Holder
that it may sell, transfer or otherwise dispose of this Warrant or such shares, all in accordance with the terms of the notice delivered to the
Company. Notwithstanding the foregoing, this Warrant or such shares may, as to such federal laws, be offered, sold or
6
otherwise disposed of in accordance with Rule 144 under the Securities Act, provided that the Holder shall furnish such information as the
Company may reasonably request to provide a reasonable assurance that the provisions of Rule 144 have been satisfied. Each certificate
representing this Warrant or such shares thus transferred (except a transfer pursuant to Rule 144 or an effective registration statement) shall
bear a legend as to the applicable restrictions on transferability in order to ensure compliance with applicable federal and state securities laws,
unless in the aforesaid opinion of counsel for the Holder, such legend is not required in order to ensure compliance with such laws. Upon any
partial transfer of this Warrant, the Company will issue and deliver to such new holder a new warrant (in form and substance similar to this
Warrant) with respect to the portion transferred and will issue and deliver to the Holder a new warrant (in form and substance similar to this
Warrant) with respect to the portion not transferred as soon as possible and in any event within ten (10) business days after such transfer.
9. No Rights as Shareholders; Information . No holder of this Warrant, as such, prior to exercise hereof shall be entitled to vote or receive
dividends or be deemed the holder of shares, nor shall anything contained herein be construed to confer upon the Holder of this Warrant, as
such, any of the rights of a shareholder of the Company or any right to vote, give or withhold consent for any corporate action. for the election
of directors or upon any matter submitted to shareholders at any meeting thereof, or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until this Warrant shall have been exercised and the shares of Warrant Stock purchasable upon the exercise
hereof shall have become deliverable, as provided herein. In addition, nothing contained in this Warrant shall be construed as imposing any
liabilities on such holder to purchase any securities or as a stockholder of the Company, whether such liabilities are asserted by the Company or
by creditors of the Company.
10. Right to Convert Warrant into Stock; Non-Cash Net Exercise .
(a) Right to Convert . In addition to and without limiting the rights of the Holder under the terms of this Warrant, the Holder shall have
the right to convert this Warrant or any portion thereof, (the “Net Exercise Right”) into shares of Warrant Stock as provided in this Section 10
at any time or from time to time during the term of this Warrant. Upon exercise of the Net Exercise Right with respect to a particular number of
shares of Warrant Stock subject to this Warrant (the “Converted Warrant Shares”), the Company shall deliver to the Holder (without payment
by the Holder of any exercise price or any cash or other consideration) (X) that number of fully paid and nonassessable shares of Warrant Stock
equal to the (Y) Converted Warrant Shares multiplied by the quotient obtained by dividing the result of (B) fair market value of one share of
Warrant Stock less (A) the Warrant Exercise Price per share by (B) the fair market value of one share of Warrant Stock all on the Conversion
Date (as herein defined).
Expressed as a formula such conversion shall be computed as follows:
X
( B- )
A
=
Y
B
Where: X
=
the number of shares of Warrant Stock that may be issued to holder
7
Y
=
the number of shares of Warrant Stock that are being surrendered pursuant to this Net
Exercise Right (i.e., the Converted Warrant Shares)
A
=
the Warrant Exercise Price per share
B
=
the fair market value of one share of Warrant Stock
No fractional shares shall be issuable upon exercise of the Net Exercise Right, and, if the number of shares of Warrant Stock issued or to be
issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the Holder an amount in
cash equal to the fair market value of the resulting fractional share on the Conversion Date (as hereinafter defined). For purposes of this
Section 10, shares issued pursuant to the Net Exercise Right shall be treated as if they were issued upon the exercise of this Warrant.
(b) Method of Exercise . The Net Exercise Right may be exercised by the Holder by the surrender of this Warrant at the principal office
of the Company together with the notice of exercise substantially in the form attached hereto as Exhibit A duly completed and executed,
specifying that the Holder thereby intends to exercise the Net Exercise Right and indicating the number of shares subject to this Warrant which
are being surrendered (referred to in Section 10(a) hereof as the Converted Warrant Shares) in exercise of the Net Exercise Right. Such
conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid written statement, or on such later date
as is specified therein (the “Conversion Date”).
(c) Determination of Fair Market Value . For purposes of this Section 10, “fair market value” of one share of Warrant Stock shall be:
(i) if the Common Stock is then listed on a national stock exchange, the closing sale price of one share of Common Stock on such exchange on
the last trading day prior to the Conversion Date; (ii) if the Common Stock is then quoted on The Nasdaq Stock Market, Inc. (“Nasdaq”), the
National Association of Securities Dealers, Inc. OTC Bulletin Board (the “Bulletin Board”) or such similar exchange or association, the closing
sale price of one share of Common Stock on Nasdaq, the Bulletin Board or such other exchange or association on the last trading day prior to
the Conversion Date or, if no such closing sale price is available, the average of the high bid and the low asked price quoted thereon on the last
trading day prior to the Conversion Date; or (c) if the Common Stock is not then listed on a national stock exchange or quoted on Nasdaq, the
Bulletin Board or such other exchange or association, the fair market value of one share of Common Stock as of the Conversion Date, shall be
determined in good faith by the Board of Directors of the Company and the Holder. If the Common Stock is not then listed on a national
securities exchange, the Bulletin Board or such other exchange or association, the Board of Directors of the Company shall respond promptly,
in writing, to an inquiry by the Holder prior to the exercise hereunder as to the fair market value of a share of Common Stock as determined by
the Board of Directors of the Company. In the event that the Board of Directors of the Company and the Holder are unable to agree upon the
fair market value in respect of subpart (c) hereof, the Company and the Holder shall jointly select an appraiser, who is experienced in such
matters. The decision of such appraiser shall be final and conclusive, and the cost of such appraiser shall be borne by the Company.
11. Modification and Waiver; Effect of Amendment or Waiver . This Warrant and any provision hereof may be modified, amended, waived,
discharged or terminated only by an instrument in writing, designated as an amendment to this Warrant and executed by a duly authorized
officer of the Company and
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the Holder of this Warrant. Any waiver or amendment effected in accordance with this Section 11 shall be binding upon the Holder, each future
holder of this Warrant or of any shares purchased under this Warrant (including securities into which such shares have been converted) and the
Company.
12. Notices . Any notice, request, communication or other document required or permitted to be given or delivered to the Holder hereof or
the Company shall be delivered by personal delivery, or shall be sent by certified United States mail, first-class postage prepaid or by overnight
delivery using a nationally recognized courier service, to each such holder at its address as shown on the books of the Company or to the
Company at the address indicated on the signature page of this Warrant. All such notices, request, communications or other documents shall be
deemed to have been received by the recipient (i) in the case of personal delivery, on the date of such delivery, (ii) in the case of delivery by a
nationally recognized courier service, on the next business day subsequent to deposit with the courier and (iii) in the case of mailing, on the
fourth business day following the date of deposit in the United States mails, first-class postage prepaid.
13. Successors . The obligations of the Company relating to the shares of Warrant Stock issuable upon the exercise of this Warrant shall
inure to the benefit of the successors and assigns of the Holder hereof and shall be binding upon any successor entity whether upon a Change of
Control or sale of all or substantially all of the assets of the Company. Upon such event, the successor entity shall assume the obligations of this
Warrant, and this Warrant (or any substitute warrant as provided hereinbefore) shall be exercisable for the securities, cash and property of the
successor entity on the terms provided herein. As used in this Warrant, “Change of Control” shall mean a merger or consolidation of the
Company with or into any other corporation or business entity, other than in the case of a merger or consolidation, where the holders of the
Company’s voting securities as constituted immediately prior thereto continue to hold after such merger or consolidation at least fifty percent
(50%) of the voting securities of the Company or surviving entity, as applicable, immediately after such merger or consolidation, including the
public company merger.
14. Lost Warrants or Stock Certificates . Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of a security or an
indemnity agreement satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such mutilated
Warrant or stock certificate, the Company will issue and deliver a new warrant (containing the same terms as this Warrant) or stock certificate,
in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate.
15. Descriptive Headings . The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant. The language in this Warrant shall be construed as to its fair meaning without regard to which party drafted
this Warrant.
16. Governing Law . This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by,
the laws of the State of California, without reference to principles governing choice or conflicts of laws.
17. Severability . In the event that any one or more of the provisions contained in this Warrant shall for any reason be held to be invalid,
illegal or unenforceable in any respect, such provision(s) shall be ineffective only to the extent of such invalidity, illegality or unenforceability,
without invalidating the remainder of such provision or the remaining provisions of this Warrant and such invalidity, illegality or
unenforceability shall not affect any other provision of this Warrant, which shall remain in full force and effect.
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18. Counterparts . This Warrant may be executed in two or more counterparts, each of which shall be an original, and all of which together
shall constitute one instrument.
19. Attorney’s Fees . If any action at law or in equity is necessary to enforce or interpret the terms of this Warrant, the prevailing party in
such dispute shall be entitled to collect its reasonable attorneys’ fees, costs and disbursements in addition to any other relief to which it may be
entitled.
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IN WITNESS WHEREOF, the parties hereto have caused this Warrant to be duly executed as of the issue date of this Warrant by its duly
authorized officers.
PACIFIC ASIA PETROLEUM, INC.
A Delaware corporation
By:
Name:
Title:
Address:
Accepted and Agreed:
[INVESTOR]
By:
Name:
Title:
Address:
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EXHIBIT A
NOTICE OF EXERCISE
To: Pacific Asia Petroleum, Inc. (the “Company”)
1. The undersigned hereby:

elects to purchase _________ shares of Warrant Stock (as defined in the Warrant) of the Company pursuant to the terms of
the attached Warrant, and tenders herewith payment of the purchase price of such shares in full; or

elects to exercise its net issuance rights pursuant to Section 11 of the attached Warrant with respect to _________ shares
Warrant Stock.
2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or names as are
specified below:
(Name)
(Name)
(City, State)
3. The undersigned represents that the aforesaid shares being acquired for the account of the undersigned for investment and not with a
view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling
such shares, all except as in compliance with applicable securities laws.
(Date)
(Signature)
Signature must be guaranteed by a commercial bank or trust company or a
member firm of a major stock exchange if shares of Warrant Stock are to be
issued, or securities are to be delivered, other than to or in the name of the
registered holder of this Warrant.
NOTICE: Signature must correspond in all respects with the name as written upon the face of the Warrant in every particular without alteration
or any change whatever.
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EXHIBIT B
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned holder of the attached Warrant hereby sells, assigns and transfers unto __________________
whose address is ______________________________ and whose taxpayer identification number is __________________ the undersigned’s
right, title and interest in and to the Warrant issued by Pacific Asia Petroleum, Inc., a Delaware corporation (the “Company”) to purchase
____________ shares of the Company’s stock, and does hereby irrevocably constitute and appoint _________________________________
attorney to transfer said Warrant on the books of the Company with full power of substitution in the premises.
In connection with such sale, assignment, transfer or other disposition of this Warrant, the undersigned hereby confirms that:

such sale, transfer or other disposition may be effected without registration or qualification (under the Securities Act of 1933
as then in effect and any applicable state securities law then in effect) of this Warrant or the securities issuable thereunder and
has attached hereto a written opinion of such Holder’s counsel to that effect; or

such sale, transfer or other disposition has been registered under the Securities Act of 1933, as amended, and registered
and/or qualified under all applicable state securities laws.
(Date)
(Signature)
Signature must correspond in all respects with the name as written upon the
face of the Warrant in every particular without alteration or any change
whatever.
Exhibit 10.1
PACIFIC ASIA PETROLEUM, INC.
2007 STOCK PLAN
1. PURPOSE
The Plan is intended to provide incentives to key Employees, Directors and Consultants of the Corporation and its Subsidiaries, to
encourage them to acquire a proprietary interest in the Corporation and remain in the service of the Corporation and its Subsidiaries, and to
attract new Employees, Directors and Consultants with outstanding qualifications. The Plan provides both for the direct award or sale of Shares
and for the grant of options to purchase Shares, as well as for the grant of SARs.
2. DEFINITIONS
Unless otherwise defined herein or the context otherwise requires, the capitalized terms used herein shall have the following meanings:
(a) “ Acquisition Price ” shall mean the price per Share of Common Stock, determined by the Administrator, at which a Share may be
acquired under the Plan (other than upon exercise of an Option).
(b) “ Act ” shall mean the Securities Act of 1933, as amended.
(c) “ Administrator ” shall mean the Board or the Committee, whichever shall be administering the Plan from time to time in the
discretion of the Board, as described in Section 4 of the Plan.
(d) “ Board ” shall mean the Board of Directors of the Corporation.
(e) “ Code ” shall mean the Internal Revenue Code of 1986, as amended.
(f) “ Committee ” shall mean the committee appointed by the Board in accordance with Section 4 of the Plan.
(g) “ Common Stock ” shall mean the $0.001 par value Common Stock of the Corporation and any class of shares into which such
Common Stock hereafter may be converted or reclassified.
(h) “ Consultant ” shall mean a person who performs bona fide services for the Corporation, a Parent or a Subsidiary as a consultant or
advisor, excluding Employees and outside Directors.
(i) “ Corporation ” shall mean PACIFIC ASIA PETROLEUM, INC., a Delaware corporation.
(j) “ Director ” shall mean a member of the Board of the Corporation or a member of the board of directors of a Subsidiary.
(k) “ Disability ” shall mean a medically determinable physical or mental impairment which has made an individual incapable of
engaging in any substantial gainful activity. A condition shall be considered a Disability only if (i) it can be expected to result in death or has
lasted or it can be expected to last for a continuous period of not less than twelve (12) months, and (ii) the Administrator, based upon medical
evidence, has expressly determined that Disability exists.
(l) “ Employee ” shall mean an individual who is employed (within the meaning of Section 3401 of the Code and the regulations
thereunder) by the Corporation or a Subsidiary.
(m) “ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended.
(n) “ Exercise Price ” shall mean the price per Share of Common Stock, determined by the Administrator, at which an Option may be
exercised.
(o) “ Fair Market Value ” shall mean the value of one (1) Share of Common Stock, determined as follows:
(i) If the Shares are traded on an exchange or over-the-counter on the National Market System (the “ NMS ”) of the National
Association of Securities Dealers, Inc. Automated Quotation System (“ NASDAQ ”), (A) if listed on an exchange, the closing price as reported
for composite transactions on the business day immediately prior to the date of valuation or, if no sale occurred on that date, then the mean
between the closing bid and asked prices on such exchange on such date, and (B) if traded on the NMS, the last sales price on the business day
immediately prior to the date of valuation or, if no sale occurred on such date, then the mean between the highest bid and the lowest asked
prices as of the close of business on the business day immediately prior to the date of valuation, as reported in the NASDAQ system;
(ii) If the Shares are not traded on an exchange or the NMS but are otherwise traded over-the-counter, the mean between the highest
bid and lowest asked prices quoted in the NASDAQ system as of the close of business on the business day immediately prior to the date of
valuation or, if on such day such security is not quoted in the NASDAQ system, the mean between the representative bid and asked prices on
such date in the domestic over-the-counter market as reported by the National Quotation Bureau, Inc., or any similar successor organization;
and
(iii) If neither clause (i) nor (ii) above applies, the fair market value as determined by the Administrator in good faith. Such
determination shall be conclusive and binding on all persons.
(p) “ Immediate Family ” shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law and shall include adoptive relationships.
(q) “ Incentive Stock Option ” shall mean an option described in Section 422(b) of the Code.
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(r) “ Nonstatutory Stock Option ” shall mean an option not described in Section 422(b) of the Code.
(s) “ Option ” shall mean any stock option granted pursuant to the Plan. An Option shall be granted on the date the Administrator takes
the necessary action to approve the grant. However, if the minutes or appropriate resolutions of the Administrator provide that an Option is to
be granted as of a date in the future, the date of grant shall be that future date.
(t) “ Option Agreement ” shall mean a written stock option agreement evidencing a particular Option between an Optionee and the
Corporation.
(u) “ Optionee ” shall mean a Participant who has received an Option.
(v) “ Option Purchase Price ” shall mean the Exercise Price multiplied by the number of Shares with respect to which an Option is
exercised.
(w) “ Parent ” shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation,
if each of the corporations other than the Corporation owns stock possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan
shall be considered a Parent commencing as of such date.
(x) “ Participant ” shall have the meaning assigned to it in Section 5(a) hereof.
(y) “ Plan ” shall mean this PACIFIC ASIA PETROLEUM, INC. 2007 Stock Plan, as it may be amended from time to time.
(z) “ Purchaser ” shall mean a person to whom the Board has offered the right to acquire Shares under the Plan (other than upon exercise
of an Option).
(aa) “ Retirement ” shall mean (i) with respect to an Employee, the voluntary cessation of employment upon either (x) the attainment of
age sixty-five (65) and the completion of not less than ten (10) years of service with the Corporation or a Subsidiary or (y) the completion of
not less than twenty (20) years of service with the Corporation or a Subsidiary and (ii) with respect to a Director, the voluntary election not to
stand for re-election as Director upon the attainment of age sixty-five (65) and the completion of not less than five (5) years of service as a
Director.
(bb) “ SAR ” shall mean any stock appreciation right granted pursuant to the Plan. An SAR shall be granted on the date the
Administrator takes the necessary action to approve the grant. However, if the minutes or appropriate resolutions of the Administrator provide
that an SAR is to be granted as of a date in the future, the date of grant shall be that future date.
(cc) “ SAR Recipient ” shall mean a Participant who has been granted an SAR.
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(dd) “ Share ” shall mean one share of Common Stock, adjusted in accordance with Section 14 of the Plan (if applicable).
(ee) “ Share Acquisition Price ” shall mean the Acquisition Price multiplied by the number of Shares which are acquired pursuant to a
Stock Purchase Agreement.
(ff) “ Stock Purchase Agreement ” shall mean a written agreement between the Corporation and a Purchaser who acquires Shares under
the Plan.
(gg) “ Subsidiary ” shall mean any subsidiary corporation of the Corporation as defined in Section 424(f) of the Code.
3. EFFECTIVE DATE
The Plan was adopted by the Board effective May 7, 2007, subject to the approval of the Corporation’s stockholders pursuant to Section 20
hereof.
4. ADMINISTRATION
The Plan shall be administered, in the discretion of the Board from time to time, by the Board or by a Committee which shall be appointed
by the Board. The Board may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee,
however caused, shall be filed by the Board. The Committee shall be composed of disinterested Directors, i.e., Directors who have not, during
the one year prior to service as an administrator of the Plan, been granted or awarded equity securities pursuant to the Plan or any other plan of
the Corporation or any of its affiliates, other than a plan which would not negate such director’s status as “disinterested” pursuant to Rule 16b-3
promulgated under the Exchange Act. There shall be at least two Directors serving on the Committee at any time. The Board shall appoint one
of the members of the Committee as Chairman. The Administrator shall hold meetings at such times and places as it may determine. Acts of a
majority of the Administrator at which a quorum is present, or acts reduced to or approved in writing by the unanimous consent of the members
of the Administrator, shall be the valid acts of the Administrator.
The Administrator shall from time to time at its discretion select the Employees, Consultants and Directors who are to be granted Options,
direct awards or sales of Shares and SARs, determine the number of Shares to be subject to Options and to be issued to Purchasers and the
other rights to be granted to each Optionee, Purchaser and SAR Recipient, and, with respect to Options, designate such Options as Incentive
Stock Options or Nonstatutory Stock Options, except that no Incentive Stock Option may be granted to a non-Employee director or Consultant.
A Committee or Board member shall in no event participate in any determination relating to Options, SARs or any other rights held by or to be
granted to such Committee or Board member. The interpretation and construction by the Administrator of any provision of the Plan or of any
Option, SAR, or other right, Option Agreement or Stock Purchase Agreement shall be final. No member of the Administrator shall be liable for
any action or determination made in good faith with respect to the Plan or any Option, SAR, or other right granted hereunder.
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5. PARTICIPATION
(a) Eligibility
Optionees, Purchasers and SAR Recipients shall be such persons (collectively, “Participants”; individually a “Participant”) as the
Administrator may select from among the following classes of persons, subject to the terms and conditions of Section 5(b) below:
(i) Employees (who may be officers, whether or not they are Directors);
(ii) Directors; and
(iii) Consultants.
Notwithstanding provisions of the first paragraph of this Section 5(a), the Administrator may at any time or from time to time designate one
or more Directors as being ineligible for selection as Participants in the Plan for any period or periods of time.
(b) Ten-Percent Stockholders
A Participant who owns more than ten percent (10%) of the total combined voting power of all classes of outstanding stock of the
Corporation, its Parent or any of its Subsidiaries shall not be eligible to receive an Incentive Stock Option unless (i) the Exercise Price of the
Shares subject to such Incentive Stock Option is at least one hundred ten percent (110%) of the Fair Market Value of such Shares on the date of
grant and (ii) such Incentive Stock Option by its terms is not exercisable after the expiration of five (5) years from the date of grant.
(c) Stock Ownership
For purposes of Section 5(b) above, in determining stock ownership, a Participant shall be considered as owning the stock owned, directly
or indirectly, by or for his or her brothers and sisters, spouse, ancestors and lineal descendants. Stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be considered as being owned proportionately by or for its shareholders, partners or beneficiaries.
Stock with respect to which such Participant holds an Option shall not be counted.
(d) “ Outstanding stock ”
For purposes of Section 5(b) above, “outstanding stock” shall include all stock actually issued and outstanding immediately after the grant
of the Option to the Optionee. “Outstanding stock” shall not include shares authorized for issuance under outstanding Options held by the
Optionee or by any other person.
6. STOCK
The stock issued to Purchasers or subject to Options granted under the Plan shall be shares of the Corporation’s authorized but unissued or
reacquired Common Stock. The
5
aggregate number of Shares which may be issued under the Plan shall not exceed 4,000,000 Shares. The number of Shares subject to Options
or other rights outstanding at any time shall not exceed the number of Shares remaining available for issuance under the Plan. In the event that
any outstanding Option or other right for any reason expires or is terminated, the Shares allocable to the unexercised portion of such Option or
other right may again be made subject to an Option or other right. No eligible person shall be granted Options or other rights during any
12-month period covering more than 500,000 Shares. The limitations established by this Section 6 shall be subject to adjustment in the manner
provided in Section 14 hereof upon the occurrence of an event specified in that Section.
7. TERMS AND CONDITIONS OF OPTIONS
(a) Option Agreement
Each grant of an Option under the Plan shall be evidenced by an Option Agreement in such form as the Administrator shall from time to
time determine. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and
conditions which are not inconsistent with the Plan and which the Administrator deems appropriate for inclusion in an Option Agreement. The
provisions of the various Option Agreements entered into under the Plan need not be identical.
(b) Nature of Option
Each Option shall state whether it is an Incentive Stock Option or a Nonstatutory Stock Option.
(c) Number of Shares
Each Option shall state the number of Shares to which it pertains and shall provide for the adjustment thereof in accordance with the
provisions of Section 14 hereof.
(d) Exercise Price
Each Option shall state the Exercise Price. The Exercise Price in the case of any Incentive Stock Option shall not be less than the Fair
Market Value on the date of grant and, in the case of an Incentive Stock Option granted to an Optionee described in Section 5(b) hereof, shall
not be less than one hundred ten percent (110%) of the Fair Market Value on the date of grant. The Exercise Price in the case of any
Nonstatutory Stock Option shall not be less than eighty-five percent (85%) of the Fair Market Value on the date of grant. Subject to the
preceding two sentences, the Exercise Price under an Option shall be determined by the Administrator in its sole discretion.
(e) Term and Non-Transferability of Options
Each Option shall state the time or times when all or part thereof becomes exercisable. No Option shall be exercisable after the expiration of
ten (10) years from the date it was granted, and in the case of Incentive Stock Options a shorter term may be required by Section 5(b). Subject
to the preceding sentence, the Administrator in its sole discretion shall determine when
6
an Option is to expire. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee or the Optionee’s guardian or
legal representative and shall not be assignable or transferable, except as provided in the next sentence. If the applicable Option Agreement so
provides, a Nonstatutory Stock Option shall also be transferable by the Optionee by (i) a gift to a member of the Optionee’s Immediate Family
or (ii) a gift to an inter vivos or testamentary trust in which members of the Optionee’s Immediate Family have a beneficial interest of more
than 50% and which provides that such Nonstatutory Stock Option is to be transferred to the beneficiaries upon the Optionee’s death. In the
event of the Optionee’s death, the Option shall not be transferable other than by will or the laws of descent and distribution. Any other
attempted alienation, assignment, pledge, hypothecation, attachment, execution or similar process, whether voluntary or involuntary, with
respect to all or any part of any Option or right thereunder, shall be null and void and, at the Corporation’s option shall cause all of the
Optionee’s rights under the Option to terminate.
(f) No Rights as a Stockholder
No one shall have rights as a stockholder with respect to any Shares covered by an Option until the date of the issuance of a stock certificate
for such Shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property),
distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as expressly provided in
Section 14 hereof.
(g) Modification, Extension and Renewal of Options
Within the limitations of the Plan, the Administrator may modify an Option, accelerate the rate at which an Option may be exercised
(including, without limitation, permitting an Option to be exercised in full without regard to the installment or vesting provisions of the
applicable Option Agreement or whether the Option is at the time exercisable, to the extent it has not previously been exercised), extend or
renew outstanding Options or accept the cancellation of outstanding Options (to the extent not previously exercised) for the granting of new
Options in substitution therefor. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter
or impair any rights or obligations under any Option previously granted.
(h) Notice of Sale
Until the later of the second anniversary of the grant of any Incentive Stock Option and the first anniversary of the issuance of any stock
(“incentive stock”) pursuant to the exercise of an Incentive Stock Option, the stock transfer records of the Corporation (whether maintained by
it or by a transfer agent of the Common Stock) shall reflect that any certificates issued or to be issued representing incentive stock in
connection with such exercise must be registered in the name of the beneficial holder (and not in any “street name”) until transferred to a third
party, and that the transfer agent shall notify the Corporation in a case of any requested transfer of such incentive stock during that period. In
addition, the certificate or certificates registered in the name of the beneficial holder representing the incentive stock issued upon such exercise
will bear the following legend during such period:
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“Solely to assist the issuer of the shares represented by this certificate, until the later of the second anniversary of the date of grant of the
Option under which this certificate was originally issued or one year from the date of original issuance of the shares represented by this
certificate, the Transfer Agent will notify the issuer of the shares represented hereby of any requested transfer by the original registered
holder.”
(i) Withholding Taxes
As a condition to the exercise of an Option, the Optionee shall make such arrangements as the Administrator may require for the satisfaction
of any federal, state, local or foreign withholding tax obligations that may arise in connection with such exercise. The Optionee shall also make
such arrangements as the Administrator may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that
may arise in connection with the disposition of Shares acquired by exercising an Option.
(j) Other Provisions
An Option Agreement authorized under the Plan may contain such other provisions not inconsistent with the terms of the Plan (including,
without limitation, restrictions upon the exercise of the Option) as the Administrator shall deem advisable.
(k) Substitution of Options
Notwithstanding any inconsistent provisions or limits under the Plan, in the event the Corporation acquires (whether by purchase, merger or
otherwise) all or substantially all of the outstanding capital stock or assets of another corporation or in the event of any reorganization or other
transaction qualifying under Section 424 of the Code the Administrator may, in accordance with the provisions of that Section, substitute
Options under the Plan for options of the acquired company provided (i) the excess of the aggregate fair market value of the shares subject to
an option immediately after the substitution over the aggregate option price of such shares is not more than the similar excess immediately
before such substitution and (ii) the new option does not give persons additional benefits, including any extension of the exercise period.
8. TERMS AND CONDITIONS OF AWARDS OR SALES
(a) Stock Purchase Agreement
Each award or sale of Shares under the Plan (other than upon exercise of an Option) shall be evidenced by a Stock Purchase Agreement in
such form as the Administrator shall from time to time determine. Such award or sale shall be subject to all applicable terms and conditions of
the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Administrator deems
appropriate for inclusion in a Stock Purchase Agreement. The provisions of the various Stock Purchase Agreements entered into under the Plan
need not be identical.
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(b) Duration of Offers and Nontransferability of Rights
Any right to acquire Shares under the Plan (other than an Option) shall automatically expire if not exercised by the Purchaser within 30 days
after the grant of such right was communicated to the Purchaser by the Corporation. Such right shall not be transferable and shall be exercisable
only by the Purchaser to whom such right was granted.
(c) Purchase Price
The Purchase Price of Shares to be offered under the Plan, if newly issued, shall not be less than the par value of such Shares. Subject to the
preceding sentence, the Administrator shall determine the Purchase Price in its sole discretion. The Purchase Price shall be payable in a form
described in Section 10.
(d) Withholding Taxes
As a condition to the purchase of Shares, the Purchaser shall make such arrangements as the Administrator may require for the satisfaction
of any federal, state, local or foreign withholding tax obligations that may arise in connection with such purchase.
(e) Restrictions on Transfer of Shares
Any Shares awarded or sold under the Plan shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal
and other transfer restrictions as the Administrator may determine. Such restrictions shall be set forth in the applicable Stock Purchase
Agreement and shall apply in addition to any restrictions that may apply to holders of Shares generally. A Stock Purchase Agreement may
provide for accelerated vesting in the event of the Purchaser’s death, disability or retirement or other events.
(f) Other Provisions
A Stock Purchase Agreement authorized under the Plan may contain such other provisions not inconsistent with the terms of the Plan as the
Administrator shall deem advisable.
9. STOCK APPRECIATION RIGHTS
(a) Grant
SARs may be granted under the Plan by the Administrator, subject to such rules, terms, and conditions as the Administrator prescribes. Each
SAR shall be evidenced by a written agreement between the Corporation and the SAR Recipient in such form as the Administrator shall from
time to time determine. Such SAR shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and
conditions which are not inconsistent with the Plan and which the Administrator deems appropriate for inclusion in an SAR agreement. The
provisions of the various SAR agreements entered into under the Plan need not be identical.
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(b) Exercise
(i) Each SAR shall entitle the holder, upon exercise, to receive from the Corporation in exchange therefor an amount equal to the
value of the excess of the Fair Market Value on the date of exercise of one Share over its Fair Market Value on the date of grant (or, in the case
of an SAR granted in connection with an Option, the excess of the Fair Market Value of one Share over the Option price per share under the
Option to which the SAR relates), multiplied by the number of Shares covered by the SAR or the Option, or portion thereof, that is surrendered.
No SAR shall be exercisable at a time that the amount determined under this subparagraph is negative. Payment by the Corporation upon
exercise of an SAR may be made in shares of Common Stock valued at Fair Market Value, in cash, or partly in shares of Common Stock and
partly in cash, all as determined by the Administrator.
(ii) An SAR shall be exercisable only at the time or times established by the Administrator. If an SAR is granted in connection with an
Option, the following rules shall apply: (1) the SAR shall be exercisable only to the extent and on the same conditions that the related Option
could be exercised; (2) upon exercise of the SAR, the Option or portion thereof to which the SAR relates terminates; and (3) upon exercise of
the Option, the related SAR or portion thereof terminates.
(iii) The Administrator may withdraw any SAR granted under the Plan at any time and may impose any conditions upon the exercise
of an SAR or adopt rules and regulations from time to time affecting the rights of SAR Recipients. Such rules and regulations may govern the
right to exercise SARs granted prior to adoption or amendment of such rules and regulations as well as SARs granted thereafter.
(iv) For purposes of this Section 9, Fair Market Value shall be determined as of the date the SAR is exercised.
(v) Upon the exercise of an SAR for shares of Common Stock, the number of shares reserved for issuance under the Plan shall be
reduced by the number of shares issued. Cash payments made upon the exercise of SARs shall not reduce the number of Shares reserved for
issuance under the Plan.
(c) Withholding
As a condition to the exercise of an SAR, the SAR Recipient shall make such arrangements as the Administrator may require for the
satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with such exercise.
10. PAYMENT FOR SHARES
(a) General Rule . The entire Share Acquisition Price or Option Purchase Price of Shares issued under the Plan shall be payable in cash
or cash equivalents at the time when such Shares are purchased, except as otherwise provided in this Section 10.
(b) Surrender of Stock . To the extent that an Option Agreement so provides, all or any part of the Option Purchase Price may be paid by
surrendering, or attesting to the
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ownership of, Shares that are already owned by the Optionee. Such Shares shall be surrendered to the Corporation in good form for transfer and
shall be valued at their Fair Market Value on the date when the Option is exercised.
(c) Services Rendered . At the discretion of the Administrator, Shares may be awarded under the Plan in consideration of services
rendered prior to the award to the Corporation, a Parent or a Subsidiary.
(d) Promissory Note . To the extent that an Option Agreement or Stock Purchase Agreement so provides, all or a portion of the Option
Purchase Price or Share Acquisition Price (as the case may be) of Shares issued under the Plan may be paid with a full-recourse promissory
note. However, the par value of the Shares, if newly issued, shall be paid in cash or cash equivalents. The Shares shall be pledged as security
for payment of the principal amount of the promissory note and interest thereon. The interest rate payable under the terms of the promissory
note shall not be less than the minimum rate (if any) required to avoid the imputation of additional interest under the Code. Subject to the
foregoing, the Administrator (in its sole discretion) shall specify the term, interest rate, amortization requirements (if any) and other provisions
of such note.
(e) Exercise/Sale . To the extent that an Option Agreement so provides, and if Common Stock is publicly traded, payment of the Option
Purchase Price with respect to an Option may be made all or in part by the delivery (on a form prescribed by the Corporation) of an irrevocable
direction to a securities broker approved by the Corporation to sell Shares and to deliver all or part of the sales proceeds to the Corporation in
payment of all or part of the Option Purchase Price and any withholding taxes.
(f) Exercise/Pledge . To the extent that an Option Agreement so provides, and if Common Stock is publicly traded, payment of the
Option Purchase Price with respect to an Option may be made all or in part by the delivery (on a form prescribed by the Corporation) of an
irrevocable direction to pledge Shares to a securities broker or lender approved by the Corporation, as security for a loan, and to deliver all or
part of the loan proceeds to the Corporation in payment of all or part of the Option Purchase Price and any withholding taxes.
11. CESSATION OF EMPLOYMENT
(a) Cessation for Any Reason (other than Death, Disability or Retirement)
If an Optionee or SAR Recipient ceases to be an Employee or to serve as a Director or Consultant of the Corporation for any reason other
than his or her death, or, with respect to an Employee or Director, his or her Disability or Retirement, such Optionee or SAR Recipient shall
have the right, subject to the restrictions referred to elsewhere in the Plan, to exercise his Option or SAR, as applicable, at any time within
ninety (90) days after cessation of employment or the date he ceases serving as a Director or Consultant (or such other date as determined by
the Administrator), provided that the foregoing shall not extend any Option or SAR beyond its term, but, except as otherwise provided in the
applicable Option Agreement or SAR agreement, only to the extent that, at the date of cessation of employment or serving as a Director or
Consultant, the Optionee’s or SAR Recipient’s right to exercise such Option or SAR, as applicable, had accrued
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pursuant to the terms of the applicable Option Agreement or SAR agreement and had not previously been exercised. Notwithstanding the
foregoing, each Option or SAR shall cease to be exercisable on the date of such cessation if such cessation arises by reason of the Optionee’s or
SAR Recipient’s misconduct. An Optionee or SAR Recipient shall be considered to have been terminated for misconduct if (i) he resigns or is
discharged or otherwise terminated on account of conviction of a felony or any crime of moral turpitude, misappropriation of the assets of the
Corporation or any Subsidiaries or any Affiliate, continued or repeated insobriety or illegal drug use, continued or repeated absence from
service during the usual working hours of the Optionee’s or SAR Recipient’s position for reasons other than Disability or sickness, or refusal to
carry out a reasonable direction of the Board or of the Chief Executive Officer of the Corporation or of any other person designated by such
Chief Executive Officer or (ii) he is discharged for cause as defined in any employment agreement to which he is a party.
For purposes of this Section 11(a), the employment relationship shall be treated as continuing intact while the Optionee or SAR Recipient is
on military leave, sick leave or other bona fide leave of absence (to be determined in the sole discretion of the Administrator). The foregoing
notwithstanding, in the case of an Incentive Stock Option, employment shall not be deemed to continue beyond the thirtieth (30th) day after the
Optionee ceased active employment, unless the Optionee’s reemployment rights are guaranteed by statute or by contract.
(b) Death of Optionee or SAR Recipient
If an Optionee or SAR Recipient dies while a Participant, or after ceasing to be a Participant but during the period in which he or she could
have exercised his Option or SAR, and has not fully exercised his Option or SAR, then his Option or SAR may be exercised in full, subject to
the restrictions referred to elsewhere in the Plan, at any time within twelve (12) months after the Optionee’s or SAR Recipient’s death (or such
other date as determined by the Administrator) (provided that the foregoing shall not extend any Option or SAR beyond its term), by the
executor or administrator of his estate or by any person or persons who have acquired the Option or SAR directly from the Optionee or SAR
Recipient by bequest or inheritance, but, except as otherwise provided in the applicable Option Agreement or SAR agreement, only to the
extent that, at the date of death, the Optionee’s or SAR Recipient’s right to exercise such Option or SAR had accrued and had not been
forfeited pursuant to the terms of the applicable Option Agreement or SAR agreement and had not previously been exercised.
(c) Disability of Optionee or SAR Recipient
If an Optionee or SAR Recipient ceases to be an Employee or Director by reason of Disability, such Optionee shall have the right, subject to
the restrictions referred to elsewhere in the Plan, to exercise his Option or SAR at any time within twelve (12) months after such cessation of
employment (or such other date as determined by the Administrator) (provided that the foregoing shall not extend any Option or SAR beyond
its term), but, except as provided in the applicable Option Agreement or SAR agreement, only to the extent that, at the date of such cessation of
employment or service as a Director, the Optionee’s or SAR Recipient’s right to exercise such Option or SAR had accrued pursuant to the
terms of the applicable Option Agreement or SAR agreement and had not previously been exercised.
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(d) Retirement of Optionee or SAR Recipient
If an Optionee or SAR Recipient ceases to be an Employee or Director by reason of Retirement (and not on account of misconduct as
determined in Section 11(a)), such Optionee or SAR Recipient shall have the right, subject to the restrictions referred to elsewhere in the Plan,
to exercise his Option or SAR at any time within twelve (12) months after cessation of employment (or such other date as determined by the
Administrator) (provided that the foregoing shall not extend any Option or SAR beyond its term), but only to the extent that, at the date of
cessation of employment or service as a Director, the Optionee’s or SAR Recipient’s right to exercise such Option or SAR had accrued
pursuant to the terms of the applicable Option Agreement or SAR agreement and had not previously been exercised.
12. LIMITATION OF ANNUAL AWARDS
The aggregate Fair Market Value (determined as of the date an Option is granted) of the Shares with respect to which Incentive Stock
Options are exercisable for the first time by any Optionee during any calendar year under the Plan and all other plans maintained by the
Corporation, its Parent or its Subsidiaries, shall not exceed $100,000.
13. TERM OF PLAN
Subject to the limitations in Section 6, Options, SARs and other awards or sales of Shares may be granted pursuant to the Plan until the date
ten years after the effective date referred to in Section 3.
14. EFFECT OF CERTAIN EVENTS
(a) Stock Splits and Dividends
Subject to any required action by stockholders, the number of Shares covered by the Plan as provided in Section 6 hereof, and the number of
Shares covered by each outstanding Option and SAR and the exercise prices thereof shall be proportionately adjusted for any increase or
decrease in the number of issued Shares resulting from a subdivision or consolidation of Shares or the payment of a stock dividend (but only if
paid in Common Stock) or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the
Corporation.
(b) Merger, Sale of Assets, Liquidation
Subject to any required action by stockholders, if the Corporation shall merge with another corporation and the Corporation is the surviving
corporation in such merger and under the terms of such merger the shares of Common Stock outstanding immediately prior to the merger
remain outstanding and unchanged, each outstanding Option and SAR shall continue to apply to the Shares subject thereto and shall also
pertain and apply to any additional securities and other property, if any, to which a holder of the number of Shares subject to the Option or SAR
would have been entitled as a result of the merger. If the Corporation sells all, or substantially all, of its assets or the Corporation merges (other
than a merger of the type described in the immediately preceding sentence) or consolidates with another corporation, this
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Plan and each Option and SAR shall terminate, but only after each Optionee and SAR Recipient (or the successor in interest) has been given
the right to exercise the vested portion of any unexpired Option or SAR in full or in part. This right shall be exercisable for the period of twenty
(20) days ending five (5) days before the effective date of the sale, merger, or consolidation (or such longer period as the Administrator may
specify), provided that the foregoing shall not extend any Option or SAR beyond its term. Alternatively, in its sole and absolute discretion, the
surviving or acquiring corporation (or the parent company of the surviving or acquiring corporation) may tender to any Optionee or SAR
Recipient (or successor in interest) a substitute option or options or stock appreciation right to purchase shares of, or with respect to the shares
of, the surviving or acquiring corporation (or the parent corporation of the surviving or acquiring corporation). The substitute option or stock
appreciation right shall contain all terms and provisions required substantially to preserve the rights and benefits of all Options and SARs then
held by the Optionee or SAR Recipient (or successor in interest) receiving the substitute option or stock appreciation right. Any other
dissolution or liquidation of the Corporation shall cause each Option or SAR to terminate.
At the discretion of the Administrator, an Option or SAR exercised in contemplation of the consummation of the sale of all or substantially
all of the assets of the Corporation or a merger (other than a merger of the type described in the first sentence of the immediately preceding
paragraph) or consolidation of the Corporation with another corporation, may be conditioned upon such sale, merger or consolidation becoming
effective.
(c) Adjustment Determination
To the extent that the foregoing adjustments relate to securities of the Corporation, such adjustments shall be made by the Administrator,
whose determination shall be conclusive and binding on all persons.
(d) Limitation on Rights
Except as expressly provided in this Section 14, an Optionee or SAR Recipient shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of
stock of any class or by reason of any dissolution, liquidation, merger or consolidation or spin-off of assets or stock of another corporation, and
any issue by the Corporation of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or exercise price of Shares subject to an Option or SAR. The grant of an
Option or SAR pursuant to the Plan shall not affect in any way the right or power of the Corporation to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of
its business or assets.
(e) Change in Control
In the event of a pending or threatened takeover bid, tender offer or exchange offer for twenty percent (20%) or more of the outstanding
Common Stock or any other class of stock or securities of the Corporation (other than a tender offer or exchange offer made by the
14
Corporation or any Subsidiary), whether or not deemed a tender offer under applicable Federal or state law, or in the event that any person
makes any filing under Section 13(d) or 14(d) of the Exchange Act with respect to the Corporation, other than a filing on Form 13G or
Form 13D, the Administrator may in its sole discretion, without obtaining stockholder approval, take one or more of the following actions to
the extent not inconsistent with other provisions of the Plan:
(a) Accelerate the exercise dates of any outstanding Option or SAR, or make the Option or SAR fully vested and exercisable;
(b) Pay cash to any or all holders of Options or SARs in exchange for the cancellation of their outstanding Options or SARs; or
(c) Make any other adjustments or amendments to the Plan and outstanding Options or SARs and substitute new Options or SARs for
outstanding Options or SARs.
15. SECURITIES LAW REQUIREMENTS
(a) Legality of Issuance
No Shares shall be issued under the Plan unless and until the Corporation has determined that:
(i) it and the Optionee or Purchaser have taken all actions required to register the offer and sale of the Shares under the Act, or to
perfect an exemption from the registration requirements thereof;
(ii) any applicable listing requirement of any stock exchange on which the Common Stock is listed has been satisfied; and
(iii) any other applicable provision of state or Federal law has been satisfied.
(b) Restrictions on Transfer; Representations of Optionee and Purchaser; Legends
Regardless of whether the offering and sale of Shares under the Plan has been registered under the Act or has been registered or qualified
under the securities laws of any state, the Corporation may impose restrictions upon the sale, pledge or other transfer of such Shares (including
the placement of appropriate legends on stock certificates) if, in the judgment of the Corporation and its counsel, such restrictions are necessary
or desirable in order to achieve compliance with the provisions of the Act, the securities laws of any state or any other law. In the event that the
sale of Shares under the Plan is not registered under the Act but an exemption is available which requires an investment representation or other
representation, each Optionee and Purchaser shall be required to represent that such Shares are being acquired for investment, and not with a
view to the sale or distribution thereof, and to make such other representations as are deemed necessary or appropriate by the Corporation and
its counsel. Stock certificates evidencing Shares acquired under the Plan pursuant to an unregistered transaction shall bear the
15
following restrictive legend and such other restrictive legends as are required or deemed advisable under the provisions of any applicable law:
“THE SALE OF THE SECURITIES REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 (THE “ACT”). ANY TRANSFER OR PLEDGE OF SUCH SECURITIES WILL BE INVALID UNLESS A REGISTRATION
STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH TRANSFER OR IN THE OPINION OF COUNSEL FOR THE
ISSUER SUCH REGISTRATION IS UNNECESSARY IN ORDER FOR SUCH TRANSFER OR PLEDGE TO COMPLY WITH THE
ACT.”
Any determination by the Corporation and its counsel in connection with any of the matters set forth in this Section 15 shall be conclusive
and binding on all persons.
(c) Registration or Qualification of Securities .
The Corporation may, but shall not be obligated to, register or qualify the sale of Shares under the Act or any other applicable law. The
Corporation shall not be obligated to take any affirmative action in order to cause the sale of Shares under the Plan to comply with any law.
(d) Exchange of Certificates
If, in the opinion of the Corporation and its counsel, any legend placed on a stock certificate representing Shares sold under the Plan is no
longer required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of
Shares but without such legend.
16. AMENDMENT OF THE PLAN
The Board may from time to time, with respect to any Shares at the time not subject to Options, suspend or discontinue the Plan or revise or
amend it in any respect whatsoever except that, without the approval of the Corporation’s stockholders, no such revision or amendment shall:
(a) Materially increase the benefits accruing to Participants under the Plan;
(b) Increase the number of Shares which may be issued under the Plan;
(c) Change the designation in Section 5 hereof with respect to the classes of persons eligible to receive Incentive Stock Options; or
(d) Amend this Section 16 to defeat its purpose.
17. EXCHANGE ACT
If the Common Stock is registered under the Exchange Act, the Plan shall be amended by the Board from time to time to the extent
necessary or advisable, in the judgment of the Board
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after having consulted with Corporation’s counsel, to enable Participants who are officers or Directors of the Corporation and who are
generally subject to the duties established by Section 16(a) or 16(b) of the Exchange Act (“ Section 16 Requirements ”) with respect to
purchases and sales of equity securities of the Corporation, to obtain the benefits of such exclusions or exemptions from the Section 16
Requirements as may be established by the Securities and Exchange Commission from time to time by rule, regulation, administrative order or
interpretation (whether such interpretation is made by such Commission or staff) with respect to (i) the receipt of Options, (ii) the exercise,
modification, extension, cancellation, exchange, termination or expiration of Options, (iii) the purchase of Common Stock upon the exercise of
Options or otherwise pursuant to the Plan, and (iv) the sale of Common Stock received upon the exercise of Options or otherwise pursuant to
the Plan. Anything in the Plan to the contrary notwithstanding, such amendments may be made without approval of the Corporation’s
stockholders unless and to the extent that, in the judgment of the Board after consulting with the Corporation’s counsel, stockholder approval of
such an amendment is a prerequisite to effectuating a desired exclusion or exemption from the Section 16 Requirements.
18. APPLICATION OF FUNDS
The proceeds received by the Corporation from the sale of Common Stock pursuant to the Plan will be used for general corporate purposes.
19. NO RETENTION OF RIGHTS
Nothing in the Plan or in any Option, SAR or other right granted under the Plan shall confer upon the Optionee, SAR Recipient or Purchaser
any right to continue in service with the Corporation for any period of specific duration or interfere with or otherwise restrict in any way the
rights of the Corporation (or any Parent or Subsidiary employing or retaining the Optionee, SAR Recipient or Purchaser) or of the Optionee,
SAR Recipient or Purchaser, which rights are hereby expressly reserved by each, to terminate his service with the Corporation at any time and
for any reason, with or without cause.
20. APPROVAL OF STOCKHOLDERS
The Plan shall be subject to approval by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at
which a quorum is present or by an action by written consent no later than May 7, 2007. Prior to such approval, Options and SARs may be
granted but shall not be exercisable.
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21. EXECUTION
To record the adoption of the Plan by the Board on May 7, 2007 the Corporation has caused an authorized officer to affix the Corporate
name hereto.
PACIFIC ASIA PETROLEUM, INC.
By:
/s/ Frank C. Ingrisellil
Name: Frank C. Ingriselli, CEO and President
18
Exhibit 10.2
PACIFIC ASIA PETROLEUM, INC.
2007 STOCK PLAN
STOCK OPTION AGREEMENT
Name of Optionee :
Shares Subject to Option :
Common Stock
INCENTIVE STOCK OPTION
_____ shares of Common Stock, $0.001 par value, of Pacific Asia
Petroleum, Inc. (the “Optioned Shares”)
Purchase Price Per Share :
$_____
Option Grant Date :
Date Incentive Stock Option
Becomes Exercisable :
This Option may be exercised with respect to _____ of the total Shares
subject to this option when the Optionee completes each three months
of continuous employment starting from the date of Option grant. This
option may become exercisable on an accelerated basis under Section 8
of this Stock Option Agreement.
Termination Date of Option:
[10 years from date of grant]
This Stock Option Agreement (this “Agreement”) is executed and delivered as of
by and between Pacific Asia Petroleum, Inc.,
a Delaware corporation (the “Company”) and the
. The Optionee and the Company hereby agree as follows:
1.
The Company, pursuant to the Pacific Asia Petroleum, Inc. 2007 Stock Plan (the “Plan”), which is incorporated herein by reference, and
subject to the terms and conditions thereof, hereby grants to the Optionee an option to purchase the Optioned Shares at the Purchase Price
Per Share.
2.
The option granted hereby (“Option”) shall be treated as an incentive stock option under the Internal Revenue Code.
3.
The Option granted hereby shall terminate, subject to the provisions of the Plan, no later than at the close of business on the Termination
Date.
4.
The Optionee shall comply with and be bound by all the terms and conditions contained in the Plan, as incorporated by reference herein.
5.
Options granted hereby shall not be transferable except by will or the laws of descent and distribution. During the lifetime of the Optionee,
the Option may be exercised only by the Optionee, the guardian or legal representative of the Optionee.
6.
The obligation of the Company to sell and deliver any stock under this Option is specifically subject to all provisions of the Plan and all
applicable laws, rules, regulations and governmental and stockholder approvals.
7.
Any notice by the Optionee to the Company hereunder shall be in writing and shall be deemed duly given only upon receipt thereof by the
Company at its principal offices. Any notice by the Company to the Optionee shall be in writing and shall be deemed duly given if mailed
to the Optionee at the address last specified to the Company by the Optionee.
8.
In addition to the change of control provisions specified under Section 14(e) of the Plan and the other conditions set forth in this
Agreement, the Company hereby agrees that all or part of this Option may be exercised prior to its expiration at the time or times set forth
below:
(a) If the Company is subject to a Change in Control (as defined in below in this Agreement and not as defined in the Plan) before the
Optionee’s employment terminates, this Option shall become exercisable in full if and only if (i) this Option does not remain outstanding
following the Change in Control; (ii) this Option is not assumed by the surviving corporation or its parent; (iii) the surviving corporation or
its parent does not substitute an option with substantially the same terms for this Option; OR (iv) the full value of the vested shares under
this Option is not settled in cash or cash equivalents.
(b) If Paragraph (a) above does not apply, AND if the Optionee is subject to an Involuntary Termination (defined below) within
12 months after the Change in Control, then this Option shall become exercisable in full. However, in the case of an
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employee incentive stock option described in Section 422(b) of the Code, the acceleration of exercisability shall not occur without the
Optionee’s written consent.
(c) If Paragraph (a) above does not apply, and if the Company is subject to a Change of Control, then fifty percent (50%) of the
remaining options shall become exercisable in full, and the remaining options shall become exercisable at the rate set forth herein, reduced
by the accelerated Shares. All other terms and conditions shall remain unchanged.
(d) Definitions
(i) “ Change in Control ” shall mean:
(1) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization,
if persons who were not controlling stockholders of the Company immediately prior to such merger, consolidation or other reorganization own
immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of
(A) the continuing or surviving entity and (B) any direct or indirect parent corporation of such continuing or surviving entity; or (2) The sale,
transfer or other disposition of all or substantially all of the Company’s assets.
A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company’s incorporation or to create a
holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately
before such transaction.
(ii) “ Involuntary Termination ” shall mean the termination of the Optionee’s Service by reason of: (1) The involuntary discharge of
the Optionee by the Company (or the Parent or Subsidiary employing him or her) for reasons other than Cause; or (2) The voluntary resignation
of the Optionee following a reduction in the Optionee’s base salary or receipt of notice that the Optionee’s principal workplace will be
relocated more than 30 miles.
9.
The validity and construction of this Agreement shall be governed by the laws of the State of California.
This Agreement is made under and subject to the provisions of the Plan, and all of the provisions of the Plan are also provisions of this
Agreement. If there is a difference or conflict between the provisions of this Agreement and the provisions of the Plan, the provisions of
the Plan will govern. By signing this Agreement, the Optionee accepts and agrees to all of the foregoing terms and provisions and to all
of the terms and provisions of the Plan incorporated herein by reference and confirms that he or she has received a copy of the Plan.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized representative and the Optionee
has hereunto set his hand as of the date here above first written.
Pacific Asia Petroleum, Inc.:
By:
Name:
Title:
Optionee:
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Frank C. Ingriselli
CEO and President
Exhibit 10.3
PACIFIC ASIA PETROLEUM, INC.
2007 STOCK PLAN
RESTRICTED STOCK AGREEMENT
Name of Recipient:
__________________
Total Number of Shares Granted :
__________________shares of common stock,
$0.001 par value, of Pacific Asia Petroleum, Inc.
Fair Market Value Per Share :
$__________________
Total Fair Market Value of Award
Grant Date :
Vesting Commencement Date
Vesting Schedule :
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This Restricted Stock Purchase Agreement (this “Agreement”) is executed and delivered as of _____________________, 200___by and
between Pacific Asia Petroleum, Inc., a Delaware corporation (the “Company”) and ________________________ (“Recipient”). Recipient and
the Company hereby agree as follows:
1.
The Company, pursuant to the Pacific Asia Petroleum, Inc. 2007 Stock Plan (the “Plan”), attached hereto as Exhibit A , which is
incorporated herein by reference, and subject to the terms and conditions thereof, hereby grants to the Recipient the Shares at the Fair
Market Value Per Share. The Recipient shall comply with and be bound by all the terms and conditions contained in the Plan, as
incorporated by reference herein.
2.
Recipient further agrees that the Company may deliver by email all documents relating to the Plan or this award (including, without
limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to
deliver to its security holders (including, without limitation, annual reports and proxy statements). Any notice by the Company to the
Recipient shall be in writing and shall be deemed duly given if mailed to the Recipient at the address last specified to the Company by the
Recipient. Recipient also agrees that the Company may deliver these documents by posting them on a web site maintained by the
Company or by a third party under contract with the Company. If the Company posts these documents on a web site, it will notify you by
email.
3.
The obligation of the Company to sell and deliver the Shares is specifically subject to all provisions of the Plan and all applicable laws,
rules, and regulations.
4.
Recipient makes the following representations and covenants to the Company:
(a)
Recipient is an “accredited investor” as defined under Exhibit B attached hereto.
(b)
Recipient shall not assign, encumber or dispose of any interest in such Shares except in compliance with the applicable state and
federal securities laws. All transferees of Shares or any interest therein will receive and hold such Shares or interest subject to the
provisions of this Agreement. Any sale or transfer of the Shares shall be void unless the provisions of this Agreement are satisfied.
(c)
Recipient is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the
Company to reach an informed and knowledgeable decision to acquire the Shares. Recipient is acquiring the Shares for investment for
his or her own account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of
the Securities Act of 1933, as amended (the “Securities Act”).
(d)
Recipient understands that the Shares have not been registered under the Securities Act by reason of a specific exemption therefrom,
which exemption depends upon, among other things, the bona fide nature of Recipient’s investment intent as expressed herein.
(e)
Recipient understands that the Shares are “restricted securities” under applicable U.S. federal and state securities laws and that,
pursuant to these laws, Recipient
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must hold the Shares indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state
authorities, or an exemption from such registration and qualification requirements is available. Recipient acknowledges that the
Company has no obligation to register or qualify the Shares for resale. Recipient further acknowledges that if an exemption from
registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and
manner of sale, the holding period for the Shares, and requirements relating to the Company which are outside of the Recipient’s control,
and which the Company is under no obligation and may not be able to satisfy.
(f)
Recipient understands that Recipient may suffer adverse tax consequences as a result of Recipient’s acquisition or disposition of the
Shares. Recipient represents that Recipient has consulted any tax consultants Recipient deems advisable in connection with the
acquisition or disposition of the Shares and that Recipient is not relying on the Company or Seller for any legal or tax advice.
(g)
Recipient agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop
transfer” instructions to its transfer agent, if any.
5.
The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any
of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
6.
The validity and construction of this Agreement shall be governed by the laws of the State of California. The parties herein waive trial by
jury and agree to submit to the personal jurisdiction and venue of a court of subject matter jurisdiction located in San Francisco,
California. In the event that litigation results from or arises out of this Agreement or the performance thereof, the parties agree to
reimburse the prevailing party’s reasonable attorney’s fees, court costs, and all other expenses, whether or not taxable by the court as
costs, in addition to any other relief to which the prevailing party may be entitled.
7.
The rights and benefits of this Agreement shall inure to the benefit of, and be enforceable by the Company’s successors and assigns. The
rights and obligations of Recipient under this Agreement may only be assigned with the prior written consent of the Company.
8.
This Agreement is made under and subject to the provisions of the Plan, and all of the provisions of the Plan are also provisions of this
Agreement. If there is a difference or conflict between the provisions of this Agreement and the provisions of the Plan, the provisions of
the Plan will govern. By signing this Agreement, the Recipient accepts and agrees to all of the foregoing terms and provisions and to all of
the terms and provisions of the Plan incorporated herein by reference and confirms that he or she has received a copy of the Plan.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized representative and the Recipient
has hereunto set his hand as of the date here above first written.
Pacific Asia Petroleum, Inc.:
By:
Name:
Title:
Recipient:
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Frank C. Ingriselli
CEO and President
EXHIBIT A
2007 STOCK PLAN
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EXHIBIT B
CERTIFICATE OF ACCREDITED INVESTOR STATUS
Except as may be indicated by the undersigned below, the undersigned is an “accredited investor,” as that term is defined in Regulation D
under the Securities Act of 1933, as amended (the “ Securities Act ”). The undersigned has checked the box below indicating the basis on
which he is representing his status as an “accredited investor”:
 a bank as defined in Section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in
Section 3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary capacity; a broker or dealer registered pursuant to
Section 15 of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”); an insurance company as defined in
Section 2(13) of the Securities Act; an investment company registered under the Investment Company Act of 1940 or a business
development company as defined in Section 2(a)(48) of that Act; a small business investment company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; a plan established and maintained by a
state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, and
such plan has total assets in excess of $5,000,000; an employee benefit plan within the meaning of the Employee Retirement Income
Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a
bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in
excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are “accredited investors”;
 a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940;
 an organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
 a natural person whose individual net worth, or joint net worth with the undersigned’s spouse, at the time of this purchase exceeds
$1,000,000;
 a natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with the
undersigned’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in
the current year;
 a trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is
directed by a person who has such
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knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective
investment; or
 an entity in which all of the equity holders are “accredited investors” by virtue of their meeting one or more of the above standards.
 an individual who is a director or executive officer of Pacific Asia Petroleum, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of Accredited Investor Status effective as of
________________________, 200___.
Name of Recipient
By:
Name:
Title:
[Signature Page to Certificate of Accredited Investor Status]
-7s
Exhibit 10.4
PACIFIC ASIA PETROLEUM, INC.
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this Agreement ) is entered into as of __________________ ____, 2007, by and among Pacific
Asia Petroleum, Inc., a Delaware corporation, on behalf of itself and all present and future subsidiaries (the “ Company ”), and each indemnitee
(“ Indemnitee ”) executing this Agreement.
RECITALS
A. The Company recognizes that it is essential to the Company to retain and attract as directors and officers the most capable persons
available.
B. Indemnitee is a director and/or officer of the Company.
C. Both the Company and Indemnitee recognize the increased risk of litigation and other claims currently being asserted against directors
and officers of corporations.
D. The Certificate of Incorporation and Bylaws of the Company require the Company to indemnify and advance expenses to its directors
and officers to the fullest extent permitted under Delaware law, and the Indemnitee has been serving and continues to serve as a director and/or
officer of the Company in part in reliance on the Company’s Certificate of Incorporation and Bylaws.
E. In recognition of Indemnitee’s need for (i) substantial protection against personal liability based on Indemnitee’s reliance on the
aforesaid Certificate of Incorporation and Bylaws, (ii) specific contractual assurance that the protection promised by the Certificate of
Incorporation and Bylaws will be available to Indemnitee (regardless of, among other things, any amendment to or revocation of the Certificate
of Incorporation and Bylaws or any change in the composition of the Company’s Board of Directors or acquisition transaction relating to the
Company), and (iii) an inducement to provide effective services to the Company as a director and/or officer, the Company wishes to provide in
this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the fullest extent (whether partial or complete)
permitted under Delaware law and as set forth in this Agreement, and, to the extent insurance is maintained, to provide for the continued
coverage of Indemnitee under the Company’s directors’ and officers’ liability insurance policies.
NOW THEREFORE , in consideration of the above premises and of Indemnitee continuing to serve the Company directly or, at its request,
with another enterprise, and intending to be legally bound hereby, the parties agree as follows:
1. Certain Definitions .
(a) Board : the Board of Directors of the Company.
(b) Affiliate : any corporation or other person or entity that directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the person specified.
(c) Change in Control : shall be deemed to have occurred if (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company, and other than any person holding shares of the Company on the date that the
Company first registers under the Act or any transferee of such individual if such transferee is a spouse or lineal descendant of the transferee or
a trust for the benefit of the individual, his spouse or lineal descendants), is or becomes the “beneficial owner” (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the total voting power represented by the
Company’s then outstanding Voting Securities, or (ii) during any period of two consecutive years, individuals who at the beginning of such
period constitute the Board and any new director whose election by the Board or nomination for election by the Company’s stockholders was
approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or
whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board, or (iii) the
stockholders of the Company approve a merger or consolidation of the Company with any other entity, other than a merger or consolidation
that would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the stockholders
of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company (in one
transaction or a series of transactions) of all or substantially all of the Company’s assets.
(d) Expenses : any expense, liability, or loss, including attorneys’ fees, judgments, fines, ERISA excise taxes and penalties, amounts paid
or to be paid in settlement, any interest, assessments, or other charges imposed thereon, any federal, state, local, or foreign taxes imposed as a
result of the actual or deemed receipt of any payments under this Agreement, and all other costs and obligations, paid or incurred in connection
with investigating, defending, being a witness in, participating in (including on appeal), or preparing for any of the foregoing in, any
Proceeding relating to any Indemnifiable Event.
(e) Indemnifiable Event : any event or occurrence that takes place either prior to or after the execution of this Agreement, related to the
fact that Indemnitee is or was a director or officer of the Company, or while a director or officer is or was serving at the request of the
Company as a director, officer, employee, trustee, agent, or fiduciary of another foreign or domestic corporation, partnership, joint venture,
employee benefit plan, trust, or other enterprise, or was a director, officer, employee, or agent of a foreign or domestic corporation that was a
predecessor corporation of the Company or of another enterprise at the request of such predecessor corporation, or related to anything done or
not done by Indemnitee in any such capacity, whether or not the basis
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of the Proceeding is alleged action in an official capacity as a director, officer, employee, or agent or in any other capacity while serving as a
director, officer, employee, or agent of the Company, as described above.
(f) Independent Counsel : the person or body appointed in connection with Section 3.
(g) Proceeding : any threatened, pending, or completed action, suit, or proceeding or any alternative dispute resolution mechanism
(including an action by or in the right of the Company), or any inquiry, hearing, or investigation, whether conducted by the Company or any
other party, that Indemnitee in good faith believes might lead to the institution of any such action, suit, or proceeding, whether civil, criminal,
administrative, investigative, or other.
(h) Reviewing Party : the person or body appointed in accordance with Section 3.
(i) Voting Securities : any securities of the Company that vote generally in the election of directors.
2. Agreement to Indemnify .
(a) General Agreement . In the event Indemnitee was, is, or becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, a Proceeding by reason of (or arising in part out of) an Indemnifiable Event, the Company
shall indemnify Indemnitee from and against any and all Expenses to the fullest extent permitted by law, as the same exists or may hereafter be
amended or interpreted (but in the case of any such amendment or interpretation, only to the extent that such amendment or interpretation
permits the Company to provide broader indemnification rights than were permitted prior thereto). The parties hereto intend that this
Agreement shall provide for indemnification in excess of that expressly permitted by statute, including, without limitation, any indemnification
provided by the Company’s Certificate of Incorporation, its Bylaws, vote of its shareholders or disinterested directors, or applicable law.
(b) Initiation of Proceeding . Notwithstanding anything in this Agreement to the contrary, Indemnitee shall not be entitled to
indemnification pursuant to this Agreement in connection with any Proceeding initiated by Indemnitee against the Company or any director or
officer of the Company unless (i) the Company has joined in or the Board has consented to the initiation of such Proceeding; (ii) the Proceeding
is one to enforce indemnification rights under Section 5; or (iii) the Proceeding is instituted after a Change in Control (other than a Change in
Control approved by a majority of the directors on the Board who were directors immediately prior to such Change in Control) and
Independent Counsel has approved its initiation.
(c) Expense Advances . If so requested by Indemnitee, the Company shall advance (within ten business days of such request) any and all
Expenses to Indemnitee (an “Expense Advance”). The Indemnitee shall qualify for such Expense Advances upon the execution and delivery to
the Company of this Agreement which shall constitute an undertaking providing that the Indemnitee undertakes to repay such Expense
Advances if and to the extent that it is ultimately
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determined by a court of competent jurisdiction in a final judgment, not subject to appeal, that Indemnitee is not entitled to be indemnified by
the Company. Indemnitee’s obligation to reimburse the Company for Expense Advances shall be unsecured and no interest shall be charged
thereon.
(d) Mandatory Indemnification . Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been
successful on the merits or otherwise in defense of any Proceeding relating in whole or in part to an Indemnifiable Event or in defense of any
issue or matter therein, Indemnitee shall be indemnified against all Expenses incurred in connection therewith.
(e) Partial Indemnification . If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some
or a portion of Expenses, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion
thereof to which Indemnitee is entitled.
(f) Prohibited Indemnification . No indemnification pursuant to this Agreement shall be paid by the Company on account of any
Proceeding in which judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of
securities of the Company pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar
provisions of any federal, state, or local laws.
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3. Reviewing Party . Prior to any Change in Control, the Reviewing Party shall be any appropriate person or body consisting of a member
or members of the Board or any other person or body appointed by the Board who is not a party to the particular Proceeding with respect to
which Indemnitee is seeking indemnification; after a Change in Control, the Independent Counsel referred to below shall become the
Reviewing Party. With respect to all matters arising after a Change in Control (other than a Change in Control approved by a majority of the
directors on the Board who were directors immediately prior to such Change in Control) concerning the rights of Indemnitee to indemnity
payments and Expense Advances under this Agreement or any other agreement or under applicable law or the Company’s Certificate of
Incorporation or Bylaws now or hereafter in effect relating to indemnification for Indemnifiable Events, the Company shall seek legal advice
only from Independent Counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld),
and who has not otherwise performed services for the Company or the Indemnitee (other than in connection with indemnification matters)
within the last five years. The Independent Counsel shall not include any person who, under the applicable standards of professional conduct
then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s
rights under this Agreement. Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether
and to what extent the Indemnitee should be permitted to be indemnified under applicable law. The Company agrees to pay the reasonable fees
of the Independent Counsel and to indemnify fully such counsel against any and all expenses (including attorneys’ fees), claims, liabilities,
loss, and damages arising out of or relating to this Agreement or the engagement of Independent Counsel pursuant hereto.
4. Indemnification Process and Appeal .
(a) Indemnification Payment . Indemnitee shall be entitled to indemnification of Expenses, and shall receive payment thereof, from the
Company in accordance with this Agreement as soon as practicable after Indemnitee has made written demand on the Company for
indemnification, unless the Reviewing Party has given a written opinion to the Company that Indemnitee is not entitled to indemnification
under applicable law.
(b) Suit to Enforce Rights . Regardless of any action by the Reviewing Party, if Indemnitee has not received full indemnification within
thirty days after making a demand in accordance with Section 4(a), Indemnitee shall have the right to enforce its indemnification rights under
this Agreement by commencing litigation in any court in the State of California or the State of Delaware having subject matter jurisdiction
thereof seeking an initial determination by the court or challenging any determination by the Reviewing Party or any aspect thereof. The
Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party not
challenged by the Indemnitee shall be binding on the Company and Indemnitee. The remedy provided for in this Section 4 shall be in addition
to any other remedies available to Indemnitee at law or in equity.
(c) Defense to Indemnification, Burden of Proof, and Presumptions . It shall be a defense to any action brought by Indemnitee against the
Company to enforce this Agreement (other than an action brought to enforce a claim for Expenses incurred in defending a Proceeding in
advance of its final disposition) that it is not permissible under applicable law for the Company to
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indemnify Indemnitee for the amount claimed. In connection with any such action or any determination by the Reviewing Party or otherwise as
to whether Indemnitee is entitled to be indemnified hereunder, the burden of proving such a defense or determination shall be on the Company.
Neither the failure of the Reviewing Party or the Company (including its Board, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action by Indemnitee that indemnification of the claimant is proper under the circumstances
because Indemnitee has met the standard of conduct set forth in applicable law, nor an actual determination by the Reviewing Party or
Company (including its Board, independent legal counsel, or its stockholders) that the Indemnitee had not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. For
purposes of this Agreement, the termination of any claim, action, suit, or proceeding, by judgment, order, settlement (whether with or without
court approval), conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet
any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by
applicable law.
5. Indemnification for Expenses Incurred in Enforcing Rights . The Company shall indemnify Indemnitee against any and all Expenses that
are incurred by Indemnitee in connection with any action brought by Indemnitee for(i) indemnification or advance payment of Expenses by the
Company under this Agreement or any other agreement or under applicable law or the Company’s Certificate of Incorporation or Bylaws now
or hereafter in effect relating to indemnification for Indemnifiable Events, and/or (ii) recovery under directors’ and officers’ liability insurance
policies maintained by the Company, but only in the event that Indemnitee ultimately is determined to be entitled to such indemnification or
insurance recovery, as the case may be. In addition, the Company shall, if so requested by Indemnitee, advance the foregoing Expenses to
Indemnitee, subject to and in accordance with Section 2(c).
6. Notification and Defense of Proceeding .
(a) Notice . Promptly after receipt by Indemnitee of notice of the commencement of any Proceeding, Indemnitee shall, if a claim in
respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof; but the omission
so to notify the Company will not relieve the Company from any liability that it may have to Indemnitee, except as provided in Section 6(c).
(b) Defense . With respect to any Proceeding as to which Indemnitee notifies the Company of the commencement thereof, the Company
will be entitled to participate in the Proceeding at its own expense and except as otherwise provided below, to the extent the Company so
wishes, it may assume the defense thereof with counsel reasonably satisfactory to Indemnitee. After notice from the Company to Indemnitee of
its election to assume the defense of any Proceeding, the Company shall not be liable to Indemnitee under this Agreement or otherwise for any
Expenses subsequently incurred by Indemnitee in connection with the defense of such Proceeding other than reasonable costs of investigation
or as otherwise provided below. Indemnitee shall have the right to employ legal counsel in such Proceeding, but all Expenses related thereto
incurred after notice from the Company of its assumption of the defense shall be at Indemnitee’s expense unless: (i) the employment of legal
counsel by Indemnitee has been authorized by the
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Company, (ii) Indemnitee has reasonably determined that there may be a conflict of interest between Indemnitee and the Company in the
defense of the Proceeding, (iii) after a Change in Control (other than a Change in Control approved by a majority of the directors on the Board
who were directors immediately prior to such Change in Control), the employment of counsel by Indemnitee has been approved by the
Independent Counsel, or (iv) the Company shall not in fact have employed counsel to assume the defense of such Proceeding, in each of which
cases all Expenses of the Proceeding shall be borne by the Company. The Company shall not be entitled to assume the defense of any
Proceeding brought by or on behalf of the Company or as to which Indemnitee shall have made the determination provided for in (ii), (iii) and
(iv) above.
(c) Settlement of Claims . The Company shall not be liable to indemnify Indemnitee under this Agreement or otherwise for any amounts
paid in settlement of any Proceeding effected without the Company’s written consent, such consent not to be unreasonably withheld; provided,
however, that if a Change in Control has occurred (other than a Change in Control approved by a majority of the directors on the Board who
were directors immediately prior to such Change in Control), the Company shall be liable for indemnification of Indemnitee for amounts paid
in settlement if the Independent Counsel has approved the settlement. The Company shall not settle any Proceeding in any manner that would
impose any penalty or limitation on Indemnitee without Indemnitee’s written consent. The Company shall not be liable to indemnify the
Indemnitee under this Agreement with regard to any judicial award if the Company was not given a reasonable and timely opportunity, at its
expense, to participate in the defense of such action; the Company’s liability hereunder shall not be excused if participation in the Proceeding
by the Company was barred by this Agreement.
7. Establishment of Trust . In the event of a Change in Control (other than a Change in Control approved by a majority of the directors on
the Board who were directors immediately prior to such Change in Control) the Company shall, upon written request by Indemnitee, create a
Trust for the benefit of the Indemnitee and from time to time upon written request of Indemnitee shall fund the Trust in an amount sufficient to
satisfy any and all Expenses reasonably anticipated at the time of each such request to be incurred in connection with investigating, preparing
for, participating in, and/or defending any Proceeding relating to an Indemnifiable Event. The amount or amounts to be deposited in the Trust
pursuant to the foregoing funding obligation shall be determined by the Independent Counsel. The terms of the Trust shall provide that (i) the
Trust shall not be revoked or the principal thereof invaded without the written consent of the Indemnitee, (ii) the Trustee shall advance, within
ten business days of a request by the Indemnitee, any and all Expenses to the Indemnitee (and the Indemnitee hereby agrees to reimburse the
Trust under the same circumstances for which the Indemnitee would be required to reimburse the Company under Section 2(c) of this
Agreement), (iii) the Trust shall continue to be funded by the Company in accordance with the funding obligation set forth above, (iv) the
Trustee shall promptly pay to the Indemnitee all amounts for which the Indemnitee shall be entitled to indemnification pursuant to this
Agreement or otherwise, and (v) all unexpended funds in the Trust shall revert to the Company upon a final determination by the Independent
Counsel or a court of competent jurisdiction, as the case may be, that the Indemnitee has been fully indemnified under the terms of this
Agreement. The Trustee shall be chosen by the Indemnitee. Nothing in this Section 7 shall relieve the Company of any of its obligations under
this Agreement. All income earned on the assets held in the Trust shall be reported as income by the Company for federal, state, local, and
foreign tax purposes. The Company shall pay
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all costs of establishing and maintaining the Trust and shall indemnify the Trustee against any and all expenses (including attorneys’ fees),
claims, liabilities, loss, and damages arising out of or relating to this Agreement or the establishment and maintenance of the Trust.
8. Non-Exclusivity . The rights of Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Company’s
Certificate of Incorporation, Bylaws, applicable law, or otherwise; provided, however, that this Agreement shall supersede any prior
indemnification agreement between the Company and the Indemnitee. To the extent that a change in applicable law (whether by statute or
judicial decision) permits greater indemnification than would be afforded currently under the Company’s Certificate of Incorporation, Bylaws,
applicable law, or this Agreement, it is the intent of the parties that Indemnitee enjoy by this Agreement the greater benefits so afforded by such
change.
9. Liability Insurance . To the extent the Company maintains an insurance policy or policies providing general and/or directors’ and
officers’ liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum
extent of the coverage available for any Company director or officer.
10. Period of Limitations . No legal action shall be brought and no cause of action shall be asserted by or on behalf of the Company or any
Affiliate of the Company against Indemnitee, Indemnitee’s spouse, heirs, executors, or personal or legal representatives after the expiration of
two years from the date of accrual of such cause of action, or such longer period as may be required by state law under the circumstances. Any
claim or cause of action of the Company or its Affiliate shall be extinguished and deemed released unless asserted by the timely filing and
notice of a legal action within such period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause
of action, the shorter period shall govern.
11. Amendment of this Agreement . No supplement, modification, or amendment of this Agreement shall be binding unless executed in
writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be binding unless in the form of a writing
signed by the party against whom enforcement of the waiver is sought, and no such waiver shall operate as a waiver of any other provisions
hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. Except as specifically provided herein, no failure to
exercise or any delay in exercising any right or remedy hereunder shall constitute a waiver thereof.
12. Subrogation . In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of
the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights,
including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights.
13. No Duplication of Payments . The Company shall not be liable under this Agreement to make any payment in connection with any
claim made against Indemnitee to the extent Indemnitee has otherwise received payment (under any insurance policy, Bylaw, or otherwise) of
the amounts otherwise indemnifiable hereunder.
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14. Binding Effect . This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their
respective successors (including any direct or indirect successor by purchase, merger, consolidation, or otherwise to all or substantially all of
the business and/or assets of the Company), assigns, spouses, heirs, and personal and legal representatives. The Company shall require and
cause any successor (whether direct or indirect by purchase, merger, consolidation, or otherwise) to all, substantially all, or a substantial part, of
the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and
agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such
succession had taken place. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not
taken while serving in an indemnified capacity pertaining to an Indemnifiable Event even though he may have ceased to serve in such capacity
at the time of any Proceeding.
15. Severability . If any provision (or portion thereof) of this Agreement shall be held by a court of competent jurisdiction to be invalid,
void, or otherwise unenforceable, the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the
fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of this Agreement containing any provision
held to be invalid, void, or otherwise unenforceable, that is not itself invalid, void, or unenforceable) shall be construed so as to give effect to
the intent manifested by the provision held invalid, void, or unenforceable.
16. Governing Law . This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of
Delaware applicable to contracts made and to be performed in such State without giving effect to its principles of conflicts of laws.
17. Notices . All notices, demands, and other communications required or permitted hereunder shall be made in writing and shall be
deemed to have been duly given if delivered by hand, against receipt, or mailed, postage prepaid, certified or registered mail, return receipt
requested, and addressed to the Company at:
Pacific Asia Petroleum, Inc.
250 East Hartsdale Ave.
Hartsdale, New York 10530
Attention: General Counsel
and to Indemnitee at:
_____________________________
_____________________________
_____________________________
Attention: _____________________
Notice of change of address shall be effective only when given in accordance with this Section. All notices complying with this Section
shall be deemed to have been received on the date of hand delivery or on the third business day after mailing.
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18. Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
[SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF , the parties hereto have executed this Indemnification Agreement on and as of the day and year first above
written.
“Company”
Pacific Asia Petroleum, Inc., a Delaware corporation
By: ______________________________________
Name: Frank C. Ingriselli
Title: President and Chief Executive Officer
AGREED TO AND ACCEPTED:
“Indemnitee”
___________________________________
By: ________________________________
Name: ___________________________
Title: ___________________________
SIGNATURE PAGE TO INDEMNIFICATION AGREEMENT
PACIFIC ASIA PETROLEUM, INC.
Exhibit 10.5
ADVANCED DRILLING SERVICES, LLC
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this “ Agreement ”) is made as of May 7, 2007 by and among ADVANCED
DRILLING SERVICES, LLC., Delaware limited liability company (the “ Company ”) and each INVESTOR executing a copy hereof (“
Investor ”).
WHEREAS, The Investors are parties to Subscription Agreements for the purchase of Class B Membership Units of the Company, all in
substantially similar form and collectively referred to herein as the “ Purchase Agreement ”, and it is a condition to the closing of the sale of the
Class B Membership Interests to each Investor that each Investor and the Company execute and deliver this Agreement.
WHEREAS, the Company intends to consummate a merger with a corporation (a “ Merger Successor ”), and/or a subsidiary thereof,
whose shares may become registered under the Exchange Act, pursuant to which the Class B Membership Interests of the Company shall be
exchanged for preferred stock (“ Preferred Stock ”) of the Merger Successor, and the Company has agreed to undertake to use its commercially
reasonable efforts to cause such Merger Successor to register the Common Stock issuable upon conversion of the Preferred Stock issuable to
the Investors holding Class B Membership Interests under the terms set forth herein, which Agreement shall be assumed by the Merger
Successor in connection with the merger (such merger, the “ Qualified Merger ”).
WHEREAS, the closing of the Qualified Merger shall be contingent upon the simultaneous closing of a merger (“ IMPCO Merger ”) of
the Merger Successor and/or a subsidiary thereof and Inner Mongolia Production Company LLC (“ IMPCO ”), pursuant to which, among other
things, Class B Membership Interests of IMPCO shall be exchanged for Preferred Stock of Merger Successor and the holders thereof shall enter
into a registration rights agreement with Merger Successor with substantially similar registration rights with respect to their Merger Successor
Preferred Stock as provided to the Investors hereunder.
NOW, THEREFORE, the parties hereto hereby covenant and agree as follows:
1. Certain Definitions . As used in this Agreement, the following terms shall have the following respective meanings:
“ Class B Membership Interests ” shall mean the shares of Class B Membership Interests issued pursuant to the Purchase Agreement.
“ Commission ” shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities
Act.
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“ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and
regulations of the Commission thereunder, all as the same shall be in effect at the time.
“ Final Closing Date ” shall mean the final closing date of the sale of Class B Membership Interests in the offering to Investors pursuant
to the Purchase Agreement.
“ Holdback Period ” shall mean the period commencing on the day on which the IPO shall be consummated and ending on (i) the date
which is 180 days thereafter or (ii) such earlier date as shall have been agreed between the underwriter of the IPO, if any, the Merger Successor
and the placement agent, acting on behalf of the Investors pursuant to Section 5(c) hereof. For clarification and without limitation, an IPO for
purposes of the Holdback Period shall not include any Qualified Merger, any IPO by a Merger Successor prior to a Qualified Merger, or any
subsequent private investment in the Company (a “ P.I.P.E. Offering ”) of the Merger Successor’s securities following a Qualified Merger.
“ Holder ” or “ Holders ” shall mean any Person or Persons to whom Registrable Securities were originally issued or qualifying
transferees under this Agreement who hold Registrable Securities.
“ IPO ” shall mean the initial public offering of the Merger Successor’s securities pursuant to a registration statement under the Securities
Act. For clarification and without limitation, IPO shall not include securities issued pursuant to (i) a registration statement relating solely to
employee stock option or purchase plans; (ii) a registration statement on Form S-4 relating solely to an SEC Rule 145 transaction; (iii) a
registration statement filed in connection with (A) the issuance of securities pursuant to a merger, or (B) any P.I.P.E. Offering of the Merger
Successor’s securities.
“ Liquidity Event ” shall mean (i) the effectiveness of the IPO, (ii) any merger, consolidation or business combination of the Merger
Successor with any other entity other than an affiliate of the Merger Successor and pursuant to which the Merger Successor is not the surviving
entity, (iii) any sale of all or substantially all of the assets of the Merger Successor, excluding a P.I.P.E. Offering, or (iv) any bona fide offer by
the Merger Successor or a third party, approved by the Merger Successor’s Board of Directors, to purchase, at a price not less than fair market
value, all or substantially all of the securities of the Merger Successor.
“ Co-Placement Agents ” shall mean Chadbourn Securities, Inc. and Sierra Equity Group, Ltd.
“ Public Sale ” shall mean any sale of securities to the public pursuant to (i) an offering registered under the Securities Act or (ii) the
provisions of Rule 144 (or any similar rule or rules then in effect) under the Securities Act.
“ Register ,” “ registered ” and “ registration ” shall mean a registration effected by preparing and filing a registration statement or
statements or similar documents in compliance with the Securities Act and the declaration or ordering of effectiveness of such registration
statement or document by the Commission.
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“ Registrable Securities ” shall mean (i) shares of Common Stock issued upon conversion of shares of Preferred Stock of a Merger
Successor issued to Investors purchasing Class B Membership Interests pursuant to the Purchase Agreement upon exchange in connection with
a Qualified Merger, (ii) shares of Common Stock of a Merger Successor issued upon conversion of shares of Preferred Stock of a Merger
Successor issued to Sierra Equity Group, Ltd. as a Co-Placement Agent upon exercise of Company warrants exercisable for Class B
Membership Interests, if, and to the extent, the Company agrees in writing to register such securities, (iii) and shares of Common Stock issued
upon conversion of shares of Preferred Stock of a Merger Successor issued to holders of IMPCO Class B Membership Interests pursuant to the
IMPCO Merger, (iv) Common Stock issued with respect to or in any exchange for or in replacement of Common Stock referred to in (i),
(ii) and (iii) hereof. For avoidance of doubt, Sierra Equity Group Ltd. shall be the sole Co-Placement Agent entitled to receive Registrable
Securities upon exercise of the warrants issued to them as a Co-Placement Agent, if, and to the extent, the Company agrees in writing to
register such securities. As to any particular shares of Common Stock constituting Registrable Securities, such shares shall cease to be
Registrable Securities when they have been transferred in a Public Sale in a transaction such that all transfer restrictions and restrictive legends
under the Securities Act with respect thereto are or may be removed upon consummation of such sale, or shares which have been sold in a
private transaction in which the transferor’s rights under this Agreement are not validly assigned in accordance with this Agreement.
“ Requisite Period ” shall mean, (i) with respect to a firm commitment underwritten public offering, the period commencing on the
effective date of the registration statement and ending on the date each underwriter has completed the distribution of all securities purchased by
it, and, (ii) with respect to any other registration, the period commencing on the effective date of the registration statement and ending on the
earlier of the date on which the sale of all Registrable Securities covered thereby is completed or 180 days after such effective date.
“ Securities Act ” shall mean the Securities Act of 1933, as amended, or any similar federal statue, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the applicable time.
“ Shareholders ” shall mean the Investors.
2. Automatic Registration.
(a) If the Company shall complete a Qualified Merger with a Merger Successor, and the Merger Successor either (x) becomes a
publicly reporting company under the Exchange Act (for avoidance of doubt, a Pink Sheet listed company does not qualify as a publicly
reporting company under the Exchange Act) and successfully lists its shares for trading on a national securities exchange (the “ Listing Date ”),
or (y) completes an IPO prior to the first anniversary of the Final Closing Date (the “ IPO Date ”), then Merger Successor shall use
commercially reasonable efforts to prepare and file a registration under the Securities Act of all the Registrable Securities within 60 days
following the closing of Listing Date or the IPO Date, as applicable, and shall use
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commercially reasonable efforts to cause such registration to be declared effective by the SEC within 210 days after the closing of the Listing
Date or the IPO Date, as applicable, and Merger Successor will be required to maintain the effectiveness of the registration statement until the
earlier of (a) the date that all of the Registrable Securities registered have been sold, or (b) the date the Registrable Securities may be freely
traded without registration under the Securities Act, under Rule 144 promulgated under the Securities Act or otherwise; provided, however, that
the Merger Successor shall not be obligated to effect a registration pursuant to this Section 2(a):
(i) in any particular jurisdiction in which the Merger Successor would be required to execute a general consent to service of
process unless it is already subject to service in such jurisdiction and except as required by the Securities Act;
(ii) if the Merger Successor furnishes to such Holders a certificate signed by the Merger Successor’s Chief Executive Officer
stating that in the good faith judgment of the Merger Successor’s Board of Directors, it would be seriously detrimental to the Merger Successor
and its shareholders for such registration statement to be filed on or before the date filing would be required and it is therefore essential to defer
the filing of such registration statement, in which case the Merger Successor shall have the right to defer such filing for a period of not more
than one hundred eighty (180) days after the furnishing of such a certificate of deferral; provided, however, that this right may be exercised
only once in any twelve (12) month period.
(b) The right of the holders of Registrable Securities to have their securities registered pursuant to this Section 2 shall terminate at the
earlier of: (i) three (3) years following the consummation of the offering detailed in the Purchase Agreement; provided , however , that if the
Merger Successor exercises its right to delay registration hereunder, the termination date of this registration right referenced above shall be
extended by an additional 120 days; or (ii) as to any Investor, such earlier time at which all Registrable Securities held by such Investor
(together with any affiliate of the Investor with whom such Investor must aggregate its sales under Rule 144) can be sold in any three
(3)-month period without registration in compliance with Rule 144 of the Securities Act.
3. Piggyback Registration.
(a) If the Merger Successor at any time (other than pursuant to Sections 2 or 4 hereof) proposes to register any of its securities under
the Securities Act for sale to the public, whether for its own account or for the account of other security holders or both (except with respect to
the IPO, a Qualified Merger and/or registration statements on Forms S-4 or S-8 and any similar successor forms) (a “ Piggyback Registration
”), each such time it will give prompt written notice to such effect to all Holders at least thirty (30) days prior to such filing. Upon the written
request of any such Holder, received by the Merger Successor within twenty (20) days after the giving of any such notice by the Merger
Successor, to register any of its Registrable Securities, the Merger Successor will, subject to Section 3(b) below, cause all Registrable
Securities as to which registration shall have been so requested to be included in the securities to be covered by the registration
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statement proposed to be filed by the Merger Successor, all to the extent requisite to permit the sale or other disposition by the Holder of such
Registrable Securities so registered. Notwithstanding the foregoing provisions, the Merger Successor may withdraw any registration statement
referred to in this Section 3 without thereby incurring any liability to the Holders.
(b) In the event that any Piggyback Registration shall be, in whole or in part, an underwritten public offering of Registrable Securities
and the managing underwriters advise the Merger Successor in writing that in their opinion the number of Registrable Securities and/or other
securities requested to be included in such offering exceeds the number of shares which can be sold in an orderly manner in such offering
within a price range acceptable to the Merger Successor without adversely affecting the marketability of the offering, then the Merger
Successor will include in such registration (i) first, the securities the Merger Successor proposes to sell; (ii) second, the Registrable Securities
and/or other securities requested to be included in such registration, pro rata from among the Holders according to the number of Registrable
Securities held by such Holders; and (iii) third to other shareholders requesting registration pro rata. Notwithstanding the foregoing, however,
the number of Registrable Securities to be included in such registration and underwriting under this Section 3(b) shall not be reduced to less
than thirty percent (30%) of the aggregate securities requested to be included by the Holders in such registration without prior consent of at
least a majority of the Holders who have requested their shares to be included in such registration and underwriting.
(c) The right of the holders of Registrable Securities to have their securities registered in a Piggyback Registration shall terminate at
the earlier of (i) three (3) years following the consummation of the offering detailed in the Purchase Agreement, or (ii) as to any Investor, such
earlier time at which all Registrable Securities held by such Investor (together with any affiliate of the Investor with whom such Investor must
aggregate its sales under Rule 144) can be sold in any three (3)-month period without registration in compliance with Rule 144 of the Securities
Act.
4. Registration on Form S-3.
(a) In addition to the rights under Section 2 and 3 hereof, if at any time (i) a Holder or Holders of at least 20% of the total Registrable
Securities then outstanding request(s) that the Merger Successor file a registration statement on Form S-3 or any successor thereto for a public
offering of all or any portion of the Registrable Securities held by such requesting holder or holders, where the reasonably anticipated aggregate
price to the public of this public offering would exceed $1,000,000 and (ii) the Merger Successor is a registrant entitled to use Form S-3 or any
successor thereto to register such Registrable Securities, then the Merger Successor shall use commercially reasonable efforts to register under
the Securities Act on Form S-3 or any successor thereto, the number of Registrable Securities specified in such notice; provided, however, that
the Merger Successor shall not be required to effect a registration pursuant to this Section 4:
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(i) at any time prior to six months following the effective date of a registration statement for the offering of its securities effected
under Sections 2 or 3;
(ii) in any particular jurisdiction in which the Merger Successor would be required to execute a general consent to service of
process unless it is already subject to service in such jurisdiction and except as required by the Securities Act;
(iii) if the Merger Successor, within ten (10) days of the receipt of the request of such Holders, gives notice of its bona fide
intention to effect the filing of a registration statement with the Commission within thirty (30) days of receipt of such request (other than with
respect to a registration statement relating to a Rule 145 transaction, an offering solely to employees or any other registration which is not
appropriate for the registration of Registrable Securities);
(iv) if the Merger Successor furnishes to such Holders a certificate signed by the Merger Successor’s Chief Executive Officer
stating that in the good faith judgment of the Merger Successor’s Board of Directors, as the case may be, it would be seriously detrimental to
the Merger Successor and its shareholders for such registration statement to be filed on or before the date filing would be required and it is
therefore essential to defer the filing of such registration statement, in which case the Merger Successor shall have the right to defer such filing
for a period of not more than one hundred eighty (180) days after the furnishing of such a certificate of deferral; provided, however, that this
right may be exercised only once in any twelve (12) month period; or
(v) after the Merger Successor has effected two (2) such registration statements pursuant to this Section 4.
(b) The right of the holders of Registrable Securities to have their securities registered on Form S-3 under this Section 4 shall
terminate at the earlier of (i) three (3) years following the consummation of the offering detailed in the Purchase Agreement, or (ii) as to any
Investor, such earlier time at which all Registrable Securities held by such Investor (together with any affiliate of the Investor with whom such
Investor must aggregate its sales under Rule 144) can be sold in any three (3)-month period without registration in compliance with Rule 144 of
the Securities Act.
5. Holdback Agreement; Power of Attorney.
(a) In connection with the IPO or any registration of Registrable Securities in connection with an underwritten public offering, the
holders of Registrable Securities agree, if so requested by the underwriter or underwriters, not to effect any Public Sale or distribution
(including any sale pursuant to Rule 144 under the Securities Act) of any Registrable Securities, and not to effect any such Public Sale or
distribution of any other equity security of the Merger Successor or of any security convertible into or exchangeable or exercisable for any
equity security of the Merger Successor (in each case, other than as part of such underwritten public offering) during (i) the 10 days prior to the
commencement of and during the Holdback Period with respect to the IPO and (ii) the
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seven days prior to and the 120 days following the effective date of the registration statement (other than a registration statement on Form S-4
or S-8) with respect to such other underwritten public offering if the holders of Registrable Securities were afforded the opportunity to include
all of their Registrable Securities therein pursuant to Section 3.
(b) Each Investor hereby irrevocably appoints the Co-Placement Agents (and all officers designated by the Co-Placement Agents) (“
Attorney ”) to act as his or its true and lawful agents and attorneys-in-fact, with full power of substitution, (i) to negotiate with the Merger
Successor and the managing underwriter(s) for the IPO the terms and conditions of the holdback agreements of the Investors and any other
restrictions on the right of such Investor to sell his or its shares of Registrable Securities which shall be imposed by the managing
underwriter(s) for such offering (including, without limitation, the length of the Holdback Period, and the other rights of such Investor to sell
his or its Registrable Securities), (ii) to negotiate with the Merger Successor and any third party the terms and conditions of any agreements
affecting the rights of such Investor under this Agreement in connection with any other Liquidity Event and (iii) to execute and deliver any and
all documents, agreements and instruments and to take any and all actions, in the name of and on behalf of such Investor, as may be necessary
or appropriate to effectuate the foregoing on such terms and conditions as the Attorney approves in his sole judgment. No person to whom this
Power of Attorney is presented, as authority for Attorney to take any action or actions contemplated hereby, shall be required to inquire into or
seek confirmation from the holder of Registrable Securities as to the authority of Attorney to take any action or actions described above, or as
to the existence of or fulfillment of any condition to this Power of Attorney, which is intended to grant to Attorney unconditionally the
authority to take and perform the actions contemplated herein, and each Investor irrevocably waives any right to commence any suit or action,
in law or equity, against any person or entity which acts in reliance upon or acknowledges the authority granted under this Power of Attorney.
The Power of Attorney granted hereby is coupled with an interest, and may not be revoked or canceled by an Investor without Attorney’s
written consent. The Investor hereby ratifies, to the extent permitted by law, all that said Attorney shall lawfully do or cause to be done by
virtue hereof.
6. Registration Procedures. If and whenever the Merger Successor is required by the provisions hereof to use commercially reasonable
efforts to effect the registration of any Registrable Securities under the Securities Act, the Merger Successor will, subject to the foregoing, as
expeditiously as possible:
(a) subject to Sections 4 and 5(a), prepare and file with the Commission a registration statement with respect to such securities within
90 days after delivery of a Demand Notice under Section 4 hereof, and use commercially reasonable efforts to cause any registration statement
subject to this Agreement to become effective not later than 90 days from the date of its filing and to remain effective for the Requisite Period;
(b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement effective for the Requisite Period
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and comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration
statement in accordance with the intended method of disposition set forth in such registration statement for such period;
(c) furnish to each seller of Registrable Securities and to each underwriter such number of copies of the registration statement and the
prospectus included therein (including each preliminary prospectus) as such persons reasonably may request in order to facilitate the intended
disposition of the Registrable Securities covered by such registration statement;
(d) use commercially reasonable efforts (i) to register or qualify the Registrable Securities covered by such registration statement
under the securities or “blue sky” laws of such jurisdictions as the sellers of Registrable Securities or, in the case of an underwritten public
offering, the managing underwriter reasonably shall request, (ii) to prepare and file in those jurisdictions such amendments (including post
effective amendments) and supplements, and take such other actions, as may be necessary to maintain such registration and qualification in
effect at all times for the period of distribution contemplated thereby and (iii) to take such further action as may be necessary or advisable to
enable the disposition of the Registrable Securities in such jurisdictions, provided, that the Merger Successor shall not for any such purpose be
required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general
service of process in any such jurisdiction;
(e) use commercially reasonable efforts to list the Registrable Securities covered by such registration statement with any securities
exchange on which the Common Stock of the Merger Successor is then listed;
(f) immediately notify each seller of Registrable Securities and each underwriter under such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event of which the Merger Successor
has knowledge as a result of which the prospectus contained in such registration statement, as then in effect, includes any untrue statement of a
material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of
the circumstances then existing and promptly amend or supplement such registration statement to correct any such untrue statement or
omission;
(g) notify each seller of Registrable Securities of the issuance by the Commission of any stop order suspending the effectiveness of
the registration statement or the initiation of any proceedings for that purpose and make every reasonable effort to prevent the issuance of any
stop order and, if any stop order is issued, obtain the lifting thereof at the earliest possible time;
(h) permit a single firm of counsel designated as selling shareholders’ counsel by the holders of a majority in interest of the
Registrable Securities and all other securities being registered (“ Shareholders Counsel ”) to review the registration statement and all
amendments and supplements thereto for a reasonable period of time
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prior to their filing ( provided , however , that in no event shall the Merger Successor be required to reimburse legal fees in excess of $20,000
per registration statement pursuant to this Section 6(h)) and the Merger Successor shall not file any document in a form to which Merger
Successor counsel reasonably objects;
(i) make generally available to its security holders as soon as practicable, but not later than 90 days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the Securities Act) covering a 12-month
period beginning not later than the first day of the Merger Successor ‘s next fiscal quarter following the effective date of the registration
statement;
(j) if the offering is an underwritten offering, the Merger Successor will enter into a written agreement with the managing underwriter
selected in the manner herein provided in such form and containing such provisions as are usual and customary in the securities business for
such an arrangement between such underwriter and companies of the Merger Successor ‘s size and investment stature, including, without
limitation, customary holdback, indemnification and contribution provisions;
(k) if the offering is an underwritten offering, at the request of any seller of Registrable Securities, use its best efforts to furnish to
such seller on the date that Registrable Securities are delivered to the underwriters for sale pursuant to such registration: (i) a copy of an
opinion dated such date of counsel representing the Merger Successor for the purposes of such registration, addressed to the underwriters,
stating that such registration statement has become effective under the Securities Act and (A) that to the knowledge of such counsel, no stop
order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or
contemplated under the Securities Act, (B) that the registration statement, the related prospectus and each amendment or supplement thereof
comply as to form in all material respects with the requirements of the Securities Act (except that such counsel need not express any opinion as
to financial statements or other financial or statistical information contained therein) and (C) to such other effects as are customarily the subject
of opinions of issuer’s counsel provided to underwriters in underwritten public offerings and are reasonably requested by counsel for the
underwriters and (ii) to the extent available without unreasonable expense from the Merger Successor’s accounting firm, a copy of a letter
dated such date from the independent public accountants retained by the Merger Successor, addressed to the underwriters, stating that they are
independent public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements
of the Merger Successor included in the registration statement or the prospectus, or any amendment or supplement thereof, comply as to form
in all material respects with the applicable accounting requirements of the Securities Act, and such letter shall additionally cover such other
financial matters (including information as to the period ending no more than five business days prior to the date of such letter) with respect to
such registration as such underwriters reasonably may request;
(l) make available for inspection by each seller of Registrable Securities, any underwriter participating in any distribution pursuant to
such registration statement, and any attorney, accountant or other agent retained by such seller or
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underwriter, all financial and other records, pertinent corporate documents and properties of the Merger Successor, and cause the Merger
Successor ‘s officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement;
(m) provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date
of the Registration Statement;
(n) take all actions reasonably necessary to facilitate the timely preparation and delivery of certificates (not bearing any legend
restricting the sale or transfer of such securities) representing the Registrable Securities to be sold pursuant to the Registration Statement and to
enable such certificates to be in such denominations and registered in such names as the Investors or any underwriters may reasonably request;
and
(o) It shall be a condition precedent to the obligations of the Merger Successor to take any action in connection with each registration
subject to this Agreement, that the sellers of Registrable Securities furnish to the Merger Successor in a timely manner in writing such
information with respect to themselves and the proposed distribution by them as reasonably shall be necessary in order to assure compliance
with federal and applicable state securities laws.
7. Expenses. All expenses incurred by the Merger Successor in complying with Sections 2, 3 and 4, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Merger Successor,
fees and expenses (including counsel fees) incurred in connection with complying with state securities or “blue sky” laws, fees of the National
Association of Securities Dealers, Inc., fees of transfer agents and registrars, costs of insurance and fees and disbursements of one counsel for
the sellers of Registrable Securities and all other securities being registered, but excluding any Selling Expenses, are called “ Registration
Expenses .” All underwriting discounts and selling commissions applicable to the sale of Registrable Securities are called “ Selling Expenses .”
The Merger Successor will pay all Registration Expenses in connection with each registration statement filed hereunder. All Selling
Expenses in connection with each registration statement shall be borne by the participating sellers in proportion to the number of Registrable
Securities sold by each or as they may otherwise agree.
8. Indemnification and Contribution.
(a) In the event of a registration of any of the Registrable Securities under the Securities Act pursuant to the terms of this Agreement,
the Merger Successor will indemnify and hold harmless and pay and reimburse each seller of such Registrable Securities thereunder, each
underwriter of Registrable Securities thereunder and each other person, if any, who controls such seller or underwriter within the meaning of
the Securities Act, from and against, and pay or reimburse them for, any losses, claims, expenses, damages or liabilities, joint or several, to
which such seller, underwriter or controlling
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person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration
statement under which such Registrable Securities were registered under the Securities Act pursuant hereto, any preliminary prospectus (unless
superseded by a final prospectus) or final prospectus contained therein, or any amendment or supplement thereof, or (ii) the omission or alleged
omission to state in any such registration statement a material fact required to be stated therein or necessary to make the statements therein not
misleading or, with respect to any prospectus, necessary to make the statements therein, in light of the circumstances under which they were
made, not misleading, or (iii) any violation or alleged violation of the Securities Act or any state securities or blue sky laws applicable to the
Merger Successor and relating to action or inaction required by the Merger Successor in connection with the offering of Registrable Securities
and specifically will reimburse each such seller, each underwriter and each such controlling person for any legal or other expenses reasonably
incurred by it in connection with investigating or defending any such loss, claim, damage or liability (or action in respect thereof); provided ,
that the Merger Successor will not be liable in any such case if and to the extent that any such loss, claim, damage or liability (or action in
respect thereof) arises out of or is based upon the Merger Successor ‘s reliance on an untrue statement or alleged untrue statement or omission
or alleged omission so made in conformity with information furnished by any such seller, any such underwriter or any such controlling person
in writing specifically for use in such registration statement or prospectus; and provided , further , that the Merger Successor shall not be liable
in any such case to the extent that any such loss, claim, damage or liability (or action in respect thereof) arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission in such registration statement or prospectus, which untrue statement or
alleged untrue statement or omission or alleged omission is completely corrected in an amendment or supplement to the registration statement
or prospectus and such seller or such controlling person thereafter fails to deliver or cause to be delivered such registration statement or
prospectus as so amended or supplemented prior to or concurrently with the Registrable Securities to the person asserting such loss, claim,
damage or liability (or action in respect thereof) or expense after the Merger Successor has furnished such seller or such controlling person with
the same.
(b) In the event of a registration of any of the Registrable Securities under the Securities Act pursuant hereto, each seller of such
Registrable Securities thereunder, severally and not jointly, will indemnify and hold harmless the Merger Successor, each person, if any, who
controls the Merger Successor within the meaning of the Securities Act, each officer of the Merger Successor who signs the registration
statement, each director of the Merger Successor and each underwriter and each person who controls any underwriter within the meaning of the
Securities Act from and against all losses, claims, expenses, damages or liabilities, joint or several, to which the Merger Successor or such
officer, director, or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based on any untrue statement or alleged untrue statement of any material fact
contained in the registration statement under which such Registrable Securities were registered under the Securities Act pursuant hereto, any
preliminary prospectus or final prospectus contained therein, or any amendment or
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supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will reimburse the Merger Successor and each such officer, director,
manager, underwriter and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage or liability (or action in respect thereof); provided , that such seller will be liable hereunder in any such
case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to such seller furnished in
writing to the Merger Successor by such seller specifically for use in such registration statement or prospectus; and provided, further , that the
liability of each seller hereunder shall be limited to the proportion of any such loss, claim, damage, liability or expense which is equal to the
proportion that the public offering price of the Registrable Securities sold by such seller under such registration statement bears to the total
public offering price of all securities sold thereunder, but not in any event to exceed the proceeds received by such seller from the sale of
Registrable Securities covered by such registration statement. Notwithstanding the foregoing, the indemnity provided in this Section 8(b) shall
not apply to amounts paid in settlement of any such loss, claim, damage, liability or expense if such settlement is effected without the consent
of such indemnified party, which shall not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action or claim, such indemnified
party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing
thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party
other than under this Section 8 and shall only relieve it from any liability which it may have to such indemnified party under this Section 8 if
and to the extent the indemnifying party is materially prejudiced by such omission. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to
participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such indemnified party,
and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the
indemnifying party shall not be liable to such indemnified party under this Section 8 for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected;
provided , that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available
to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the
indemnifying party, the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to
participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to
be reimbursed by the indemnifying party as incurred.
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(d) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any
holder of Registrable Securities exercising rights under this Agreement, or any controlling person of any such holder, makes a claim for
indemnification pursuant to this Section 8 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 8 provides for indemnification in such case, or (ii) contribution under the Securities Act may be
required on the part of any such selling holder or any such controlling person in circumstances for which indemnification is provided under this
Section 8, then, and in each such case, the Merger Successor and such holder will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others) in such proportion so that such holder is responsible for the portion
represented by the percentage that the public offering price of its Registrable Securities offered by the registration statement bears to the public
offering price of all securities offered by such registration statement, and the Merger Successor is responsible for the remaining portion;
provided , that, in any such case, (A) no such holder will be required to contribute any amount in excess of the public offering price of all such
Registrable Securities offered by it pursuant to such registration statement and (B) no person or entity guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person or entity who was not guilty of such
fraudulent misrepresentation.
9. Changes in Capital Stock. If, and as often as, there is any change in the capital stock of the Merger Successor by way of a stock
split, stock dividend, combination or reclassification, or through a merger, consolidation, reorganization or recapitalization, or by any other
means, appropriate adjustment shall be made in the provisions hereof so that the rights and privileges granted hereby shall continue with
respect to the capital stock as so changed.
10. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may at
any time permit the sale of the Registrable Securities to the public without registration, at all times after 90 days after any registration statement
covering a public offering of securities of the Merger Successor under the Securities Act shall have become effective, the Merger Successor
agrees to:
(a) make and keep public information available, as those terms are understood and defined in Rule 144(c) under the Securities Act;
(b) file with the Commission in a timely manner all reports and other documents required of the Merger Successor under the
Securities Act and the Exchange Act; and
(c) furnish to each holder of Registrable Securities forthwith upon request a written statement by the Merger Successor as to its
compliance with the reporting requirements of such Rule 144 and of the Securities Act and the Exchange Act, a
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copy of the most recent annual or quarterly report of the Merger Successor, and such other reports and documents so filed by the Merger
Successor as such holder may reasonably request in availing itself of any rule or regulation of the Commission allowing such holder to sell any
Registrable Securities without registration.
11. Event of Election. In the event that the Merger Successor fails to fulfill its registration responsibilities pursuant to Sections 2, 3 or 4
of this Agreement, the Holders shall have all rights and remedies available to them at law or equity.
12. Representations and Warranties of the Company. The Company represents and warrants to the Shareholders as follows:
(a) The execution, delivery and performance of this Agreement by the Company have been duly authorized by all requisite corporate
action and will not violate any provision of law, any order of any court or other agency of government, the certificate of formation or operating
agreement of the Company or any provision of any indenture, agreement or other instrument to which it or any or its properties or assets is
bound, conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement
or other instrument or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the
properties or assets of the Company or its subsidiaries.
(b) This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of
the Company, enforceable in accordance with its terms.
13. Assignment of Registration Rights. The rights to cause or have the Merger Successor register Registrable Securities pursuant to
this Agreement may be assigned by the Shareholders to transferees or assignees of such securities; provided , that: (a) there is transferred to
such transferee not less than forty thousand (40,000) shares of Registrable Securities, appropriately adjusted for any stock splits, stock
dividends, reverse splits and similar events; (b) the Merger Successor is, within reasonable time after such transfer, furnished with written
notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being
assigned, and such transferee shall agree to be subject to all the restrictions set forth in this Agreement; and (c) an opinion of counsel is
provided by the Shareholder, satisfactory to the Merger Successor, to the effect that such disposition will not require registration of such
Securities or Registrable Securities under the Securities Act. The term “ Investors ” as used in this Agreement shall include such transferees or
permitted assignees.
15. Miscellaneous.
(a) All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the
benefit of the respective successors and assigns of the parties hereto (including without limitation transferees of any Registrable Securities),
whether so expressed or not.
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(b) All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered in person, mailed by
certified or registered mail, return receipt requested, or sent by telecopier or telex, addressed (i) if to the Company, at Advanced Drilling
Services, LLC, 10600 N. De Anza Blvd., Suite 250, Cupertino, CA 95104, Attention: President.; (ii) if to Investors, at the address of such party
as set forth beneath such party’s signature hereto or as set forth in the records of the Company (in the case of existing holders of Company
securities); (iii) if to the Co-Placement Agents, at Chadbourn Securities, Inc., 10600 N. De Anza Blvd., Suite 250, Cupertino, CA 95104,
facsimile: (408) 873-0550, Attention: Laird Q. Cagan; (iv) if to any subsequent holder of Registrable Securities, to it at such address as may
have been furnished to the Company in writing by such holder; or, in any case, at such other address or addresses as shall have been furnished
in writing to the Company (in the case of a holder of Registrable Securities) or to the holders of Registrable Securities (in the case of the
Company) in accordance with the provisions of this paragraph; and (v) if the the Merger Successor, at such address as may be furnished by the
Merger Successor in writing to the holders of Registrable Securities.
(c) This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts
entered into and to be performed wholly within said State.
(d) Any judicial proceeding brought against any of the parties to this Agreement on any dispute arising out of this Agreement or any
matter related hereto shall be brought in the courts of the State of California and County of San Francisco or in the United States District Court
for the Northern District of California and, by execution and delivery of this Agreement, each of the parties hereto accepts for itself and himself
the process in any such action or proceeding by the mailing of copies of such process to it or him, at its or his address as set forth in paragraph
15(b) and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. Each party hereto irrevocably
waives to the fullest extent permitted by law any objection that it or he may now or hereafter have to the laying of the venue of any judicial
proceeding brought in such courts and any claim that any such judicial proceeding has been brought in an inconvenient forum. The foregoing
consent to jurisdiction shall not constitute general consent to service of process in the State of California for any purpose except as provided
about and shall not be deemed to confer rights on any person other than the respective parties to this Agreement.
(e) Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument referencing this Agreement and signed by the Company or Merger Successor, if following a
Qualified Merger, and the holders holding not less than a majority of the Registrable Securities; provided , however , that Investors purchasing
shares of Class B Membership Interests in a closing after the Closing Date (as defined in the Purchase Agreement) may become parties to this
Agreement, by executing a counterpart of this Agreement without any amendment of this Agreement pursuant to this paragraph or any consent
or approval of any other holder. Any such amendment, waiver,
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discharge or termination effected in accordance with this paragraph shall be binding upon each holder and each future holder of all such
securities of holder. Each holder acknowledges that by the operation of this paragraph, the holders of not less than a majority of the Registrable
Securities (together with the Company) will have the right and power to diminish or eliminate all rights of such holder under this Agreement.
(f) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right
or remedy, shall not operate as a waiver thereof. No waiver shall be effective unless and until it is in writing and signed by the party granting
the waiver.
(g) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(h) The Company or Merger Successor, if following a Qualified Merger, shall not grant to any third party any registration rights more
favorable than or inconsistent with any of those contained herein, so long as any of the registration rights under this Agreement remains in
effect.
(i) If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner affect or render illegal, invalid or unenforceable any other
provision of this Agreement, and this Agreement shall be carried out as if any such illegal, invalid or unenforceable provision were not
contained herein.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above.
ADVANCED DRILLING SERVICES, LLC.
By:
/s/ Laird Q. Cagan
Laird Q. Cagan
Chief Executive Officer, Manager
INVESTOR:
Signature
Name:
Address:
Fax:
Tax ID
No.:
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
ADVANCED DRILLING SERVICES, LLC
Exhibit 10.6
INNER MONGOLIA PRODUCTION COMPANY, LLC
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this “ Agreement ”) is made as of May 7, 2007 by and among INNER MONGOLIA
PRODUCTION COMPANY, LLC., New York limited liability company (the “ Company ”) and each holder of Company Class B Membership
Interests executing a copy hereof (“ Investor ”).
WHEREAS, the Company intends to consummate a merger with a corporation (a “ Merger Successor ”), and/or a subsidiary thereof,
whose shares may become registered under the Exchange Act, pursuant to which the Class B Membership Interests of the Company shall be
exchanged for preferred stock (“ Preferred Stock ”) of the Merger Successor, and the Company has agreed to undertake to use its commercially
reasonable efforts to cause such Merger Successor to register the Common Stock issuable upon conversion of the Preferred Stock issuable to
the Investors holding Class B Membership Interests under the terms set forth herein, which Agreement shall be assumed by the Merger
Successor in connection with the merger (such merger, the “ Qualified Merger ”).
WHEREAS, the closing of the Qualified Merger shall be contingent upon the simultaneous closing of a merger (“ DrillCo Merger ”) of
the Merger Successor and/or a subsidiary thereof and Advanced Drilling Services, LLC (“ DrillCo ”), pursuant to which, among other things,
Class B Membership Units of DrillCo shall be exchanged for Preferred Stock of Merger Successor and the holders thereof shall enter into a
registration rights agreement with Merger Successor with substantially similar registration rights with respect to their Merger Successor
Preferred Stock as provided to the Investors hereunder.
NOW, THEREFORE, the parties hereto hereby covenant and agree as follows:
1. Certain Definitions . As used in this Agreement, the following terms shall have the following respective meanings:
“ Class B Membership Interests ” shall mean the shares of Class B Membership Interests held by the Investors.
“ Commission ” shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities
Act.
“ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and
regulations of the Commission thereunder, all as the same shall be in effect at the time.
“ Final Closing Date ” shall mean the final closing date of the sale of Class B Membership Units to the members of DrillCo.
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“ Holdback Period ” shall mean the period commencing on the day on which the IPO shall be consummated and ending on (i) the date
which is 180 days thereafter or (ii) such earlier date as shall have been agreed between the underwriter of the IPO, if any, the Merger Successor
and the placement agent, acting on behalf of the Investors pursuant to Section 5(b) hereof. For clarification and without limitation, an IPO for
purposes of the Holdback Period shall not include any Qualified Merger, any IPO by a Merger Successor prior to a Qualified Merger, or any
subsequent private investment in the Company (a “ P.I.P.E. Offering ”) of the Merger Successor’s securities following a Qualified Merger.
“ Holder ” or “ Holders ” shall mean any Person or Persons to whom Registrable Securities were originally issued or qualifying
transferees under this Agreement who hold Registrable Securities.
“ IPO ” shall mean the initial public offering of the Merger Successor’s securities pursuant to a registration statement under the Securities
Act. For clarification and without limitation, IPO shall not include securities issued pursuant to (i) a registration statement relating solely to
employee stock option or purchase plans; (ii) a registration statement on Form S-4 relating solely to an SEC Rule 145 transaction; (iii) a
registration statement filed in connection with (A) the issuance of securities pursuant to a merger, or (B) any P.I.P.E. Offering of the Merger
Successor’s securities.
“ Liquidity Event ” shall mean (i) the effectiveness of the IPO, (ii) any merger, consolidation or business combination of the Merger
Successor with any other entity other than an affiliate of the Merger Successor and pursuant to which the Merger Successor is not the surviving
entity, (iii) any sale of all or substantially all of the assets of the Merger Successor, excluding a P.I.P.E. Offering, or (iv) any bona fide offer by
the Merger Successor or a third party, approved by the Merger Successor’s Board of Directors, to purchase, at a price not less than fair market
value, all or substantially all of the securities of the Merger Successor.
“ Co-Placement Agents ” shall mean Chadbourn Securities, Inc. and Sierra Equity Group, Ltd., which are entities engaged by DrillCo to
raise funds on behalf of DrillCo in connection with DrillCo’s offering of Class B Membership Units to qualified investors.
“ Public Sale ” shall mean any sale of securities to the public pursuant to (i) an offering registered under the Securities Act or (ii) the
provisions of Rule 144 (or any similar rule or rules then in effect) under the Securities Act.
“ Register ,” “ registered ” and “ registration ” shall mean a registration effected by preparing and filing a registration statement or
statements or similar documents in compliance with the Securities Act and the declaration or ordering of effectiveness of such registration
statement or document by the Commission.
“ Registrable Securities ” shall mean (i) shares of Common Stock issued upon conversion of shares of Preferred Stock of a Merger
Successor issued to Investors holding Class B Membership Interests upon exchange in connection with a Qualified
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Merger, (ii) shares of Common Stock of a Merger Successor issued upon conversion of shares of Preferred Stock of a Merger Successor issued
to Sierra Equity Group Ltd. as a Co-Placement Agent upon exercise of warrants exercisable for DrillCo Class B Membership Units, if, and to
the extent, the Company agrees in writing to register such securities, (iii) and shares of Common Stock issued upon conversion of shares of
Preferred Stock of a Merger Successor issued to holders of DrillCo Class B Membership Units pursuant to the DrillCo Merger, (iv) Common
Stock issued with respect to or in any exchange for or in replacement of Common Stock referred to in (i), (ii) and (iii) hereof. For avoidance of
doubt, Sierra Equity Group Ltd. shall be the sole Co-Placement Agent entitled to receive Registrable Securities upon exercise of the warrants
issued to them as a Co-Placement Agent, if, and to the extent, the Company agrees in writing to register such securities. As to any particular
shares of Common Stock constituting Registrable Securities, such shares shall cease to be Registrable Securities when they have been
transferred in a Public Sale in a transaction such that all transfer restrictions and restrictive legends under the Securities Act with respect thereto
are or may be removed upon consummation of such sale, or shares which have been sold in a private transaction in which the transferor’s rights
under this Agreement are not validly assigned in accordance with this Agreement.
“ Requisite Period ” shall mean, (i) with respect to a firm commitment underwritten public offering, the period commencing on the
effective date of the registration statement and ending on the date each underwriter has completed the distribution of all securities purchased by
it, and, (ii) with respect to any other registration, the period commencing on the effective date of the registration statement and ending on the
earlier of the date on which the sale of all Registrable Securities covered thereby is completed or 180 days after such effective date.
“ Securities Act ” shall mean the Securities Act of 1933, as amended, or any similar federal statue, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the applicable time.
“ Shareholders ” shall mean the Investors.
2. Automatic Registration.
(a) If the Company shall complete a Qualified Merger with a Merger Successor, and the Merger Successor either (x) becomes a
publicly reporting company under the Exchange Act (for avoidance of doubt, a Pink Sheet listed company does not qualify as a publicly
reporting company under the Exchange Act) and successfully lists its shares for trading on a national securities exchange (the “ Listing Date ”),
or (y) completes an IPO prior to the first anniversary of the Final Closing Date (the “ IPO Date ”), then Merger Successor shall use
commercially reasonable efforts to prepare and file a registration under the Securities Act of all the Registrable Securities within 60 days
following the closing of Listing Date or the IPO Date, as applicable, and shall use commercially reasonable efforts to cause such registration to
be declared effective by the SEC within 210 days after the closing of the Listing Date or the IPO Date, as applicable, and Merger Successor
will be required to maintain the effectiveness of the registration
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statement until the earlier of (a) the date that all of the Registrable Securities registered have been sold, or (b) the date the Registrable Securities
may be freely traded without registration under the Securities Act, under Rule 144 promulgated under the Securities Act or otherwise;
provided, however, that the Merger Successor shall not be obligated to effect a registration pursuant to this Section 2(a):
(i) in any particular jurisdiction in which the Merger Successor would be required to execute a general consent to service of
process unless it is already subject to service in such jurisdiction and except as required by the Securities Act;
(ii) if the Merger Successor furnishes to such Holders a certificate signed by the Merger Successor’s Chief Executive Officer
stating that in the good faith judgment of the Merger Successor’s Board of Directors, it would be seriously detrimental to the Merger Successor
and its shareholders for such registration statement to be filed on or before the date filing would be required and it is therefore essential to defer
the filing of such registration statement, in which case the Merger Successor shall have the right to defer such filing for a period of not more
than one hundred eighty (180) days after the furnishing of such a certificate of deferral; provided, however, that this right may be exercised
only once in any twelve (12) month period.
(b) The right of the holders of Registrable Securities to have their securities registered pursuant to this Section 2 shall terminate at the
earlier of: (i) three (3) years following the consummation of the offering detailed in the Purchase Agreement; provided , however , that if the
Merger Successor exercises its right to delay registration hereunder, the termination date of this registration right referenced above shall be
extended by an additional 120 days; or (ii) as to any Investor, such earlier time at which all Registrable Securities held by such Investor
(together with any affiliate of the Investor with whom such Investor must aggregate its sales under Rule 144) can be sold in any three
(3)-month period without registration in compliance with Rule 144 of the Securities Act.
3. Piggyback Registration.
(a) If the Merger Successor at any time (other than pursuant to Sections 2 or 4 hereof) proposes to register any of its securities under
the Securities Act for sale to the public, whether for its own account or for the account of other security holders or both (except with respect to
the IPO, a Qualified Merger and/or registration statements on Forms S-4 or S-8 and any similar successor forms) (a “ Piggyback Registration
”), each such time it will give prompt written notice to such effect to all Holders at least thirty (30) days prior to such filing. Upon the written
request of any such Holder, received by the Merger Successor within twenty (20) days after the giving of any such notice by the Merger
Successor, to register any of its Registrable Securities, the Merger Successor will, subject to Section 3(b) below, cause all Registrable
Securities as to which registration shall have been so requested to be included in the securities to be covered by the registration statement
proposed to be filed by the Merger Successor, all to the extent requisite to permit the sale or other disposition by the Holder of such Registrable
Securities so registered. Notwithstanding the foregoing provisions, the Merger Successor may withdraw any
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registration statement referred to in this Section 3 without thereby incurring any liability to the Holders.
(b) In the event that any Piggyback Registration shall be, in whole or in part, an underwritten public offering of Registrable Securities
and the managing underwriters advise the Merger Successor in writing that in their opinion the number of Registrable Securities and/or other
securities requested to be included in such offering exceeds the number of shares which can be sold in an orderly manner in such offering
within a price range acceptable to the Merger Successor without adversely affecting the marketability of the offering, then the Merger
Successor will include in such registration (i) first, the securities the Merger Successor proposes to sell; (ii) second, the Registrable Securities
and/or other securities requested to be included in such registration, pro rata from among the Holders according to the number of Registrable
Securities held by such Holders; and (iii) third to other shareholders requesting registration pro rata. Notwithstanding the foregoing, however,
the number of Registrable Securities to be included in such registration and underwriting under this Section 3(b) shall not be reduced to less
than thirty percent (30%) of the aggregate securities requested to be included by the Holders in such registration without prior consent of at
least a majority of the Holders who have requested their shares to be included in such registration and underwriting.
(c) The right of the holders of Registrable Securities to have their securities registered in a Piggyback Registration shall terminate at
the earlier of (i) three (3) years following the consummation of the offering detailed in the Purchase Agreement, or (ii) as to any Investor, such
earlier time at which all Registrable Securities held by such Investor (together with any affiliate of the Investor with whom such Investor must
aggregate its sales under Rule 144) can be sold in any three (3)-month period without registration in compliance with Rule 144 of the Securities
Act.
4. Registration on Form S-3.
(a) In addition to the rights under Section 2 and 3 hereof, if at any time (i) a Holder or Holders of at least 20% of the total Registrable
Securities then outstanding request(s) that the Merger Successor file a registration statement on Form S-3 or any successor thereto for a public
offering of all or any portion of the Registrable Securities held by such requesting holder or holders, where the reasonably anticipated aggregate
price to the public of this public offering would exceed $1,000,000 and (ii) the Merger Successor is a registrant entitled to use Form S-3 or any
successor thereto to register such Registrable Securities, then the Merger Successor shall use commercially reasonable efforts to register under
the Securities Act on Form S-3 or any successor thereto, the number of Registrable Securities specified in such notice; provided, however, that
the Merger Successor shall not be required to effect a registration pursuant to this Section 4:
(i) at any time prior to six months following the effective date of a registration statement for the offering of its securities effected
under Sections 2 or 3;
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(ii) in any particular jurisdiction in which the Merger Successor would be required to execute a general consent to service of
process unless it is already subject to service in such jurisdiction and except as required by the Securities Act;
(iii) if the Merger Successor, within ten (10) days of the receipt of the request of such Holders, gives notice of its bona fide
intention to effect the filing of a registration statement with the Commission within thirty (30) days of receipt of such request (other than with
respect to a registration statement relating to a Rule 145 transaction, an offering solely to employees or any other registration which is not
appropriate for the registration of Registrable Securities);
(iv) if the Merger Successor furnishes to such Holders a certificate signed by the Merger Successor’s Chief Executive Officer
stating that in the good faith judgment of the Merger Successor’s Board of Directors, as the case may be, it would be seriously detrimental to
the Merger Successor and its shareholders for such registration statement to be filed on or before the date filing would be required and it is
therefore essential to defer the filing of such registration statement, in which case the Merger Successor shall have the right to defer such filing
for a period of not more than one hundred eighty (180) days after the furnishing of such a certificate of deferral; provided, however, that this
right may be exercised only once in any twelve (12) month period; or
(v) after the Merger Successor has effected two (2) such registration statements pursuant to this Section 4.
(b) The right of the holders of Registrable Securities to have their securities registered on Form S-3 under this Section 4 shall
terminate at the earlier of (i) three (3) years following the consummation of the offering detailed in the Purchase Agreement, or (ii) as to any
Investor, such earlier time at which all Registrable Securities held by such Investor (together with any affiliate of the Investor with whom such
Investor must aggregate its sales under Rule 144) can be sold in any three (3)-month period without registration in compliance with Rule 144 of
the Securities Act.
5. Holdback Agreement; Power of Attorney.
(a) In connection with the IPO or any registration of Registrable Securities in connection with an underwritten public offering, the
holders of Registrable Securities agree, if so requested by the underwriter or underwriters, not to effect any Public Sale or distribution
(including any sale pursuant to Rule 144 under the Securities Act) of any Registrable Securities, and not to effect any such Public Sale or
distribution of any other equity security of the Merger Successor or of any security convertible into or exchangeable or exercisable for any
equity security of the Merger Successor (in each case, other than as part of such underwritten public offering) during (i) the 10 days prior to the
commencement of and during the Holdback Period with respect to the IPO and (ii) the seven days prior to and the 120 days following the
effective date of the registration statement (other than a registration statement on Form S-4 or S-8) with respect to such other underwritten
public offering if the holders of Registrable Securities were afforded the opportunity to include all of their Registrable Securities therein
pursuant to Section 3.
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(b) Each Investor hereby irrevocably appoints the Co-Placement Agents (and all officers designated by the Co-Placement Agents) (“
Attorney ”) to act as his or its true and lawful agents and attorneys-in-fact, with full power of substitution, (i) to negotiate with the Merger
Successor and the managing underwriter(s) for the IPO the terms and conditions of the holdback agreements of the Investors and any other
restrictions on the right of such Investor to sell his or its shares of Registrable Securities which shall be imposed by the managing
underwriter(s) for such offering (including, without limitation, the length of the Holdback Period, and the other rights of such Investor to sell
his or its Registrable Securities), (ii) to negotiate with the Merger Successor and any third party the terms and conditions of any agreements
affecting the rights of such Investor under this Agreement in connection with any other Liquidity Event and (iii) to execute and deliver any and
all documents, agreements and instruments and to take any and all actions, in the name of and on behalf of such Investor, as may be necessary
or appropriate to effectuate the foregoing on such terms and conditions as the Attorney approves in his sole judgment. No person to whom this
Power of Attorney is presented, as authority for Attorney to take any action or actions contemplated hereby, shall be required to inquire into or
seek confirmation from the holder of Registrable Securities as to the authority of Attorney to take any action or actions described above, or as
to the existence of or fulfillment of any condition to this Power of Attorney, which is intended to grant to Attorney unconditionally the
authority to take and perform the actions contemplated herein, and each Investor irrevocably waives any right to commence any suit or action,
in law or equity, against any person or entity which acts in reliance upon or acknowledges the authority granted under this Power of Attorney.
The Power of Attorney granted hereby is coupled with an interest, and may not be revoked or canceled by an Investor without Attorney’s
written consent. The Investor hereby ratifies, to the extent permitted by law, all that said Attorney shall lawfully do or cause to be done by
virtue hereof.
6. Registration Procedures. If and whenever the Merger Successor is required by the provisions hereof to use commercially reasonable
efforts to effect the registration of any Registrable Securities under the Securities Act, the Merger Successor will, subject to the foregoing, as
expeditiously as possible:
(a) subject to Sections 4 and 5(a), prepare and file with the Commission a registration statement with respect to such securities within
90 days after delivery of a Demand Notice under Section 4 hereof, and use commercially reasonable efforts to cause any registration statement
subject to this Agreement to become effective not later than 90 days from the date of its filing and to remain effective for the Requisite Period;
(b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement effective for the Requisite Period and comply with the provisions
of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement in accordance with the
intended method of disposition set forth in such registration statement for such period;
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(c) furnish to each seller of Registrable Securities and to each underwriter such number of copies of the registration statement and the
prospectus included therein (including each preliminary prospectus) as such persons reasonably may request in order to facilitate the intended
disposition of the Registrable Securities covered by such registration statement;
(d) use commercially reasonable efforts (i) to register or qualify the Registrable Securities covered by such registration statement
under the securities or “blue sky” laws of such jurisdictions as the sellers of Registrable Securities or, in the case of an underwritten public
offering, the managing underwriter reasonably shall request, (ii) to prepare and file in those jurisdictions such amendments (including post
effective amendments) and supplements, and take such other actions, as may be necessary to maintain such registration and qualification in
effect at all times for the period of distribution contemplated thereby and (iii) to take such further action as may be necessary or advisable to
enable the disposition of the Registrable Securities in such jurisdictions, provided, that the Merger Successor shall not for any such purpose be
required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general
service of process in any such jurisdiction;
(e) use commercially reasonable efforts to list the Registrable Securities covered by such registration statement with any securities
exchange on which the Common Stock of the Merger Successor is then listed;
(f) immediately notify each seller of Registrable Securities and each underwriter under such registration statement, at any time when a
prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event of which the Merger Successor
has knowledge as a result of which the prospectus contained in such registration statement, as then in effect, includes any untrue statement of a
material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of
the circumstances then existing and promptly amend or supplement such registration statement to correct any such untrue statement or
omission;
(g) notify each seller of Registrable Securities of the issuance by the Commission of any stop order suspending the effectiveness of
the registration statement or the initiation of any proceedings for that purpose and make every reasonable effort to prevent the issuance of any
stop order and, if any stop order is issued, obtain the lifting thereof at the earliest possible time;
(h) permit a single firm of counsel designated as selling shareholders’ counsel by the holders of a majority in interest of the
Registrable Securities and all other securities being registered (“ Shareholders Counsel ”) to review the registration statement and all
amendments and supplements thereto for a reasonable period of time prior to their filing ( provided , however , that in no event shall the
Merger Successor be required to reimburse legal fees in excess of $20,000 per registration statement pursuant to this Section 6(h)) and the
Merger Successor shall not file any document in a form to which Merger Successor counsel reasonably objects;
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(i) make generally available to its security holders as soon as practicable, but not later than 90 days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the Securities Act) covering a 12-month
period beginning not later than the first day of the Merger Successor ‘s next fiscal quarter following the effective date of the registration
statement;
(j) if the offering is an underwritten offering, the Merger Successor will enter into a written agreement with the managing underwriter
selected in the manner herein provided in such form and containing such provisions as are usual and customary in the securities business for
such an arrangement between such underwriter and companies of the Merger Successor ‘s size and investment stature, including, without
limitation, customary holdback, indemnification and contribution provisions;
(k) if the offering is an underwritten offering, at the request of any seller of Registrable Securities, use its best efforts to furnish to
such seller on the date that Registrable Securities are delivered to the underwriters for sale pursuant to such registration: (i) a copy of an
opinion dated such date of counsel representing the Merger Successor for the purposes of such registration, addressed to the underwriters,
stating that such registration statement has become effective under the Securities Act and (A) that to the knowledge of such counsel, no stop
order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or
contemplated under the Securities Act, (B) that the registration statement, the related prospectus and each amendment or supplement thereof
comply as to form in all material respects with the requirements of the Securities Act (except that such counsel need not express any opinion as
to financial statements or other financial or statistical information contained therein) and (C) to such other effects as are customarily the subject
of opinions of issuer’s counsel provided to underwriters in underwritten public offerings and are reasonably requested by counsel for the
underwriters and (ii) to the extent available without unreasonable expense from the Merger Successor’s accounting firm, a copy of a letter
dated such date from the independent public accountants retained by the Merger Successor, addressed to the underwriters, stating that they are
independent public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements
of the Merger Successor included in the registration statement or the prospectus, or any amendment or supplement thereof, comply as to form
in all material respects with the applicable accounting requirements of the Securities Act, and such letter shall additionally cover such other
financial matters (including information as to the period ending no more than five business days prior to the date of such letter) with respect to
such registration as such underwriters reasonably may request;
(l) make available for inspection by each seller of Registrable Securities, any underwriter participating in any distribution pursuant to
such registration statement, and any attorney, accountant or other agent retained by such seller or underwriter, all financial and other records,
pertinent corporate documents and properties of the Merger Successor, and cause the Merger Successor ‘s officers, directors and employees to
supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration
statement;
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(m) provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date
of the Registration Statement;
(n) take all actions reasonably necessary to facilitate the timely preparation and delivery of certificates (not bearing any legend
restricting the sale or transfer of such securities) representing the Registrable Securities to be sold pursuant to the Registration Statement and to
enable such certificates to be in such denominations and registered in such names as the Investors or any underwriters may reasonably request;
and
(o) It shall be a condition precedent to the obligations of the Merger Successor to take any action in connection with each registration
subject to this Agreement, that the sellers of Registrable Securities furnish to the Merger Successor in a timely manner in writing such
information with respect to themselves and the proposed distribution by them as reasonably shall be necessary in order to assure compliance
with federal and applicable state securities laws.
7. Expenses. All expenses incurred by the Merger Successor in complying with Sections 2, 3 and 4, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Merger Successor,
fees and expenses (including counsel fees) incurred in connection with complying with state securities or “blue sky” laws, fees of the National
Association of Securities Dealers, Inc., fees of transfer agents and registrars, costs of insurance and fees and disbursements of one counsel for
the sellers of Registrable Securities and all other securities being registered, but excluding any Selling Expenses, are called “ Registration
Expenses .” All underwriting discounts and selling commissions applicable to the sale of Registrable Securities are called “ Selling Expenses .”
The Merger Successor will pay all Registration Expenses in connection with each registration statement filed hereunder. All Selling
Expenses in connection with each registration statement shall be borne by the participating sellers in proportion to the number of Registrable
Securities sold by each or as they may otherwise agree.
8. Indemnification and Contribution.
(a) In the event of a registration of any of the Registrable Securities under the Securities Act pursuant to the terms of this Agreement,
the Merger Successor will indemnify and hold harmless and pay and reimburse each seller of such Registrable Securities thereunder, each
underwriter of Registrable Securities thereunder and each other person, if any, who controls such seller or underwriter within the meaning of
the Securities Act, from and against, and pay or reimburse them for, any losses, claims, expenses, damages or liabilities, joint or several, to
which such seller, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such Registrable Securities were registered under the Securities Act pursuant
hereto, any preliminary prospectus (unless superseded by a final
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prospectus) or final prospectus contained therein, or any amendment or supplement thereof, or (ii) the omission or alleged omission to state in
any such registration statement a material fact required to be stated therein or necessary to make the statements therein not misleading or, with
respect to any prospectus, necessary to make the statements therein, in light of the circumstances under which they were made, not misleading,
or (iii) any violation or alleged violation of the Securities Act or any state securities or blue sky laws applicable to the Merger Successor and
relating to action or inaction required by the Merger Successor in connection with the offering of Registrable Securities and specifically will
reimburse each such seller, each underwriter and each such controlling person for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage or liability (or action in respect thereof); provided , that the Merger
Successor will not be liable in any such case if and to the extent that any such loss, claim, damage or liability (or action in respect thereof)
arises out of or is based upon the Merger Successor ‘s reliance on an untrue statement or alleged untrue statement or omission or alleged
omission so made in conformity with information furnished by any such seller, any such underwriter or any such controlling person in writing
specifically for use in such registration statement or prospectus; and provided , further , that the Merger Successor shall not be liable in any
such case to the extent that any such loss, claim, damage or liability (or action in respect thereof) arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission in such registration statement or prospectus, which untrue statement or
alleged untrue statement or omission or alleged omission is completely corrected in an amendment or supplement to the registration statement
or prospectus and such seller or such controlling person thereafter fails to deliver or cause to be delivered such registration statement or
prospectus as so amended or supplemented prior to or concurrently with the Registrable Securities to the person asserting such loss, claim,
damage or liability (or action in respect thereof) or expense after the Merger Successor has furnished such seller or such controlling person with
the same.
(b) In the event of a registration of any of the Registrable Securities under the Securities Act pursuant hereto, each seller of such
Registrable Securities thereunder, severally and not jointly, will indemnify and hold harmless the Merger Successor, each person, if any, who
controls the Merger Successor within the meaning of the Securities Act, each officer of the Merger Successor who signs the registration
statement, each director of the Merger Successor and each underwriter and each person who controls any underwriter within the meaning of the
Securities Act from and against all losses, claims, expenses, damages or liabilities, joint or several, to which the Merger Successor or such
officer, director, or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based on any untrue statement or alleged untrue statement of any material fact
contained in the registration statement under which such Registrable Securities were registered under the Securities Act pursuant hereto, any
preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Merger Successor and each such officer, director, manager, underwriter and controlling person for any legal
or other expenses reasonably incurred by them in connection with investigating or defending any
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such loss, claim, damage or liability (or action in respect thereof); provided , that such seller will be liable hereunder in any such case if and
only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in reliance upon and in conformity with information pertaining to such seller furnished in writing to the
Merger Successor by such seller specifically for use in such registration statement or prospectus; and provided, further , that the liability of
each seller hereunder shall be limited to the proportion of any such loss, claim, damage, liability or expense which is equal to the proportion
that the public offering price of the Registrable Securities sold by such seller under such registration statement bears to the total public offering
price of all securities sold thereunder, but not in any event to exceed the proceeds received by such seller from the sale of Registrable Securities
covered by such registration statement. Notwithstanding the foregoing, the indemnity provided in this Section 8(b) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or expense if such settlement is effected without the consent of such indemnified
party, which shall not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action or claim, such indemnified
party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing
thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party
other than under this Section 8 and shall only relieve it from any liability which it may have to such indemnified party under this Section 8 if
and to the extent the indemnifying party is materially prejudiced by such omission. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to
participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such indemnified party,
and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the
indemnifying party shall not be liable to such indemnified party under this Section 8 for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected;
provided , that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available
to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the
indemnifying party, the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to
participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to
be reimbursed by the indemnifying party as incurred.
(d) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any
holder of Registrable Securities exercising rights under this Agreement, or any controlling person of any such holder, makes a claim for
indemnification pursuant to this Section 8 but it is judicially
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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 8 provides for
indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any such selling holder or any such
controlling person in circumstances for which indemnification is provided under this Section 8, then, and in each such case, the Merger
Successor and such holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after
contribution from others) in such proportion so that such holder is responsible for the portion represented by the percentage that the public
offering price of its Registrable Securities offered by the registration statement bears to the public offering price of all securities offered by
such registration statement, and the Merger Successor is responsible for the remaining portion; provided , that, in any such case, (A) no such
holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered by it pursuant
to such registration statement and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation.
9. Changes in Capital Stock. If, and as often as, there is any change in the capital stock of the Merger Successor by way of a stock
split, stock dividend, combination or reclassification, or through a merger, consolidation, reorganization or recapitalization, or by any other
means, appropriate adjustment shall be made in the provisions hereof so that the rights and privileges granted hereby shall continue with
respect to the capital stock as so changed.
10. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may at
any time permit the sale of the Registrable Securities to the public without registration, at all times after 90 days after any registration statement
covering a public offering of securities of the Merger Successor under the Securities Act shall have become effective, the Merger Successor
agrees to:
(a) make and keep public information available, as those terms are understood and defined in Rule 144(c) under the Securities Act;
(b) file with the Commission in a timely manner all reports and other documents required of the Merger Successor under the
Securities Act and the Exchange Act; and
(c) furnish to each holder of Registrable Securities forthwith upon request a written statement by the Merger Successor as to its
compliance with the reporting requirements of such Rule 144 and of the Securities Act and the Exchange Act, a copy of the most recent annual
or quarterly report of the Merger Successor, and such other reports and documents so filed by the Merger Successor as such holder may
reasonably request in availing itself of any rule or regulation of the Commission allowing such holder to sell any Registrable Securities without
registration.
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11. Event of Election. In the event that the Merger Successor fails to fulfill its registration responsibilities pursuant to Sections 2, 3 or 4
of this Agreement, the Holders shall have all rights and remedies available to them at law or equity.
12. Representations and Warranties of the Company. The Company represents and warrants to the Shareholders as follows:
(a) The execution, delivery and performance of this Agreement by the Company have been duly authorized by all requisite corporate
action and will not violate any provision of law, any order of any court or other agency of government, the certificate of formation or operating
agreement of the Company or any provision of any indenture, agreement or other instrument to which it or any or its properties or assets is
bound, conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement
or other instrument or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the
properties or assets of the Company or its subsidiaries.
(b) This Agreement has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of
the Company, enforceable in accordance with its terms.
13. Assignment of Registration Rights. The rights to cause or have the Merger Successor register Registrable Securities pursuant to
this Agreement may be assigned by the Shareholders to transferees or assignees of such securities; provided , that: (a) there is transferred to
such transferee not less than forty thousand (40,000) shares of Registrable Securities, appropriately adjusted for any stock splits, stock
dividends, reverse splits and similar events; (b) the Merger Successor is, within reasonable time after such transfer, furnished with written
notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being
assigned, and such transferee shall agree to be subject to all the restrictions set forth in this Agreement; and (c) an opinion of counsel is
provided by the Shareholder, satisfactory to the Merger Successor, to the effect that such disposition will not require registration of such
Securities or Registrable Securities under the Securities Act. The term “ Investors ” as used in this Agreement shall include such transferees or
permitted assignees.
14. Miscellaneous.
(a) All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the
benefit of the respective successors and assigns of the parties hereto (including without limitation transferees of any Registrable Securities),
whether so expressed or not.
(b) All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered in person, mailed by
certified or registered mail, return receipt requested, or sent by telecopier or telex, addressed (i) if to the Company, at Inner Mongolia
Production Company, LLC, 75 South Broadway, White Plains, New York, NY 10601, Attention: President.; (ii) if to Investors, at the address
of
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such party as set forth beneath such party’s signature hereto or as set forth in the records of the Company (in the case of existing holders of
Company securities); (iii) if to the Co-Placement Agents, at Chadbourn Securities, Inc., 10600 N. De Anza Blvd., Suite 250, Cupertino, CA
95104, facsimile: (408) 873-0550, Attention: Laird Q. Cagan; (iv) if to any subsequent holder of Registrable Securities, to it at such address as
may have been furnished to the Company in writing by such holder; or, in any case, at such other address or addresses as shall have been
furnished in writing to the Company (in the case of a holder of Registrable Securities) or to the holders of Registrable Securities (in the case of
the Company) in accordance with the provisions of this paragraph; and (v) if the the Merger Successor, at such address as may be furnished by
the Merger Successor in writing to the holders of Registrable Securities.
(c) This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts
entered into and to be performed wholly within said State.
(d) Any judicial proceeding brought against any of the parties to this Agreement on any dispute arising out of this Agreement or any
matter related hereto shall be brought in the courts of the State of California and County of San Francisco or in the United States District Court
for the Northern District of California and, by execution and delivery of this Agreement, each of the parties hereto accepts for itself and himself
the process in any such action or proceeding by the mailing of copies of such process to it or him, at its or his address as set forth in paragraph
14(b) and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. Each party hereto irrevocably
waives to the fullest extent permitted by law any objection that it or he may now or hereafter have to the laying of the venue of any judicial
proceeding brought in such courts and any claim that any such judicial proceeding has been brought in an inconvenient forum. The foregoing
consent to jurisdiction shall not constitute general consent to service of process in the State of California for any purpose except as provided
about and shall not be deemed to confer rights on any person other than the respective parties to this Agreement.
(e) Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument referencing this Agreement and signed by the Company or Merger Successor, if following a
Qualified Merger, and the holders holding not less than a majority of the Registrable Securities. Any such amendment, waiver, discharge or
termination effected in accordance with this paragraph shall be binding upon each holder and each future holder of all such securities of holder.
Each holder acknowledges that by the operation of this paragraph, the holders of not less than a majority of the Registrable Securities (together
with the Company) will have the right and power to diminish or eliminate all rights of such holder under this Agreement.
(f) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right
or remedy, shall not operate as a waiver thereof. No waiver shall be effective unless and until it is in writing and signed by the party granting
the waiver.
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(g) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(h) The Company or Merger Successor, if following a Qualified Merger, shall not grant to any third party other than the Co-Placement
Agents any registration rights more favorable than or inconsistent with any of those contained herein, so long as any of the registration rights
under this Agreement remains in effect.
(i) If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner affect or render illegal, invalid or unenforceable any other
provision of this Agreement, and this Agreement shall be carried out as if any such illegal, invalid or unenforceable provision were not
contained herein.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above.
INNER MONGOLIA PRODUCTION COMPANY, LLC.
By:
/s/ Frank C. Ingriselli
Frank C. Ingriselli
Chief Executive Officer, President and
Manager
INVESTOR:
Signature
Name:
Address:
Fax:
Tax ID No.:
SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT
INNER MONGOLIA PRODUCTION COMPANY, LLC
Exhibit 10.7
[CHADBOURN SECURITIES LETTERHEAD]
ORIGINAL
December 15, 2006
Mr. Michael McTeigue
Chief Financial Officer
ADVANCED DRILLING SERVICES, LLC
10600 N. De Anza Blvd., Suite 250
Cupertino, CA 95014
Re:
Engagement Agreement
Dear Mr. McTeigue,
We are pleased that Advance Drilling Services, LLC, a Delaware limited liability company (the “Company”), desires to engage Chadbourn
Securities, Inc, an NASD broker/dealer (“Chadbourn”) as its exclusive financial advisor with respect to mergers, acquisitions and capital
raising of the Company (the “Advisory Services”). We look forward to working with you and your management team, and have set forth below
the agreed upon terms of our involvement.
1.
Scope of Engagement
As discussed, Chadbourn will undertake certain Advisory Services on behalf of the Company, including:
2.
(a)
Advising the Company regarding debt and equity financial market conditions, including presentations to management and the board
of directors, as needed. Any information prepared by Chadbourn under this paragraph shall be reviewed and approved by the
Company in advance of its dissemination to any party outside of the Company;
(b)
Identifying and assisting in the negotiation and placement of preferred and common equity and/or subordinated and convertible debt
(the “Equity Financing”) for the Company, in one or more closings;
(c)
Identifying and assisting in the negotiation and placement of debt and/or lease financing (the “Debt Financing”) for the Company, in
one or more closings; and
(d)
Merger and acquisition advisory services.
Fees and Expenses.
For services provided hereunder, the Company will pay to Chadbourn the following:
(a)
An advisory fee equal to: (1) eight percent (8.0%) of any Equity Financing received by the Company, plus an unallocated expense
reimbursement of an additional one percent (1.0%) of Equity Financing received by the Company during the term hereof; and (2)
warrants equal to ten percent (10%) of the number and type of shares sold or issuable in an Equity Financing, such warrants to have a
five year maturity, a net exercise provision and an exercise price equal to the offering price or conversion price. Chadbourn’s cash and
warrant fee shall be reduced by fees paid by the Company to any other Chadbourn approved selling agents or finders acting on behalf
of or in connection
10600 North De Anza Blvd, Suite 250 • Cupertino, CA 95014 • (408) 873-0400
with Chadbourn. The Company acknowledges that Chadbourn may engage other broker-dealers to assist in the placement of an
Equity Financing. The Company will pay all fees within 10 days of each closing.
3.
4.
(b)
Chadbourn’s actual and reasonable expenses, including legal fees, shall be reimbursed by the Company up to $20,000 for the first
financing transaction.
(c)
An advisory fee subject to future negotiation at industry standard rates for Debt Financings and any merger and acquisition advisory
services.
Use of Information; Financing Matters.
(a)
The Company recognizes and confirms that Chadbourn, in acting pursuant to this engagement, will be using publicly available
information and information in reports and other materials provided by others, including, without limitation, information provided by
or on behalf of the Company, and that Chadbourn does not assume responsibility for and may rely, without independent verification,
on the accuracy and completeness of any such information. The Company warrants to Chadbourn that to the best if its knowledge all
information concerning the Company furnished to Chadbourn in connection with the Advisory Services will be true and accurate in
all material respects and will not contain any untrue statement of material fact or omit to state a material fact necessary in order to
make statements therein not misleading in the light of the circumstances under which such statements are made. The Company agrees
to furnish or cause to be furnished to Chadbourn all necessary or appropriate information for use in their engagement and the
Company agrees that any information or advice rendered by Chadbourn or any of our representatives in connection with this
engagement is for the confidential use of the Company only in its evaluation of a transaction and the Company will not, and will not
permit any third party to, use it for any other purpose or disclose or otherwise refer to such advice or information, or to Chadbourn, in
any manner without Chadbourn’s prior written consent.
(b)
The Company and Chadbourn each agree to conduct any offering and sale of securities in any private placement transaction in
accordance with applicable federal and state securities laws, and neither the Company nor Chadbourn nor any person acting on behalf
of either of them, will offer or sell any securities in a transaction by any form of general solicitation, general advertising, or by any
other means that would be deemed a public offering under applicable law. Chadbourn has no obligation, express or implied, to
purchase or underwrite any transaction or to itself provide any type of financing to the Company or be a party to any funding
transaction, or to solicit investors outside the United States.
Certain Acknowledgements.
The Company acknowledges that Chadbourn has been retained by the Company, and that the Company’s engagement of Chadbourn is as an
independent contractor. Neither this engagement, nor the delivery of any advice in connection with this engagement, is intended to confer
rights upon any persons not a party hereto (including security holders, employees or creditors of the Company) as against Chadbourn or our
affiliates or their respective directors, officers, agents and employees. Upon prior written consent of the Company (which consent will not be
unreasonably withheld) and approval by the Company of the text, proof and format thereof, Chadbourn may, at its own expense, place
announcements or advertisements
2
in financial newspapers and journals describing its services hereunder (provided such announcement or advertisement is made in a manner
and contains only such information as would not violate federal or state securities laws).
The Company also acknowledges that Chadbourn, or its affiliates, may also be a significant shareholder or retained advisor to entities that
merge with the Company, and Chadbourn may make investments in or act as advisor to companies that later become strategic partners or
customers of the Company. Chadbourn shall disclose to the Company in advance of any potential or actual conflicts of interest Chadbourn
has or may have in connection with a merger or acquisition transaction, any Equity Financing, Debt Financing or any other transaction
contemplated by this agreement. Chadbourn shall ensure that any such advertising, investments and related party transactions contemplated
by this paragraph shall comply with federal and applicable state securities laws. With respect to this paragraph, Chadbourn shall include its
employees and representatives.
The Company acknowledges that Chadbourn is an investment banking firm and as such may, from time to time, effect transactions for its
own account or the account of its clients; and we hold positions in securities of other companies, which may become a lender or investor for
the purpose of this agreement. Chadbourn shall not by this agreement be prevented or barred from rendering services of the same or similar
nature as herein described, or services of any nature whatsoever for, or on behalf of, other persons, firms, or corporations unless said
proposed client is a direct competitor to the Company.
The Company also acknowledges Chadbourn’s services do not include the rendering of any legal services or opinions or the performance of
any work that is in the ordinary purview of a Certified Public Accountant. All final decisions with respect to consulting, advice, and services
rendered by Chadbourn to the Company shall rest with the Company, and Chadbourn shall not have the authority to bind the Company to
any obligation or commitment other than those enumerated herein.
5.
Indemnity .
Chadbourn and the Company have entered into a separate indemnification letter (Exhibit A) dated the date hereof, providing for the
indemnification of Chadbourn by the Company in connection with Chadbourn’s engagement hereunder, the terms of which are incorporated
into this agreement in their entirety.
6.
Term of Engagement .
Chadbourn’s engagement shall commence on the date hereof and shall continue until December 31, 2008 (the “Term”). It is expressly
agreed that following the expiration or termination of this agreement, Chadbourn shall be entitled to receive any fees as described above that
have accrued prior to such expiration or termination but are unpaid, as well as reimbursement for expenses as set forth herein.
It is also expressly agreed that if during a period of 12 months following termination of this agreement, a transaction with an investor,
bondholder, bank, financing entity, strategic partner, public company, or other entity introduced to the Company by Chadbourn hereunder or
based upon services provided by Chadbourn hereunder is consummated by the Company, or a successor entity to the Company, or a
shareholder, advisor or related party to the Company, or if a definitive agreement that results in a transaction is entered into during such
12 month period with any Chadbourn Investor, the Company will pay Chadbourn the fees and
3
expense reimbursements equal to the fees and expenses which would have been payable to Chadbourn as if the transaction had occurred
during the term of this agreement. In the event a Chadbourn Investor does invest during the 12 months following the termination of this
Agreement, then Chadbourn will work with the Company and its new broker-dealer to agree to an appropriate fee sharing arrangement in
which the total fees shall not exceed the amounts described in Section 2 this Agreement.
7.
Miscellaneous . For purposes of this Agreement, the term “Company” as used herein shall, in the event that a merger or acquisition
transaction is consummated, mean and include the surviving entity with respect to any periods after consummation of the merger or
acquisition transaction. This Agreement is governed by the laws of the State of California, without regard to conflicts of law principles,
and will be binding upon and inure to the benefit of the Company, Chadbourn and their respective successors and assigns. Neither this
Agreement nor any duties or obligations under this Agreement may be assigned by Chadbourn without the prior written consent of the
Company.
The Company and Chadbourn agree to submit all disputes, actions, proceedings or counterclaims brought by or on behalf of either party
with respect to any matter whatsoever relating to or arising out of any actual or proposed transaction or the engagement of or performance
by Chadbourn hereunder to binding arbitration in accordance with the rules of procedure according to the Judicial Arbitration and Mediation
Service (JAMS). The Parties will select an arbiter and shall divide the cost of arbitration between them, and each party shall pay its own
attorney’s fees. The Company and Chadbourn also hereby submit to the jurisdiction of the courts of the State of California, Santa Clara
County in any proceeding arising out of an arbitration proceeding or judgment relating to this Agreement. This Agreement may be executed
in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same Agreement.
The provisions of this Agreement relating to the payment of fees and expenses, confidentiality and accuracy of information, indemnification
and Chadbourn’s status as an independent contractor shall survive any termination of this Agreement. In the event that any provision of this
Agreement shall be held to be invalid, illegal, or unenforceable in any circumstances, the remaining provisions shall nevertheless remain in
full force and effect and shall be construed as if the unenforceable provisions were deleted.
[the remainder of this page is intentionally left blank]
4
We are pleased to accept this engagement and look forward to working with you. Please confirm that the foregoing is in accordance with
your understanding of our agreement by signing and returning to us a copy of this letter.
CHADBOURN SECURITIES, INC.
By:
/s/ Laird Q. Cagan
Laird Q. Cagan, Managing Director
Date: 12-15-06
Accepted and agreed.
ADVANCED DRILLING SERVICES, LLC
By:
/s/ Michael McTeigue
Michael McTeigue, CFO
Date: 12-15-06
5
EXHIBIT A
The Company agrees to indemnify and hold harmless Chadbourn Securities Inc. ( “Chadbourn” ), together with its affiliates and their
respective control persons, directors, officers, employees and agents, ( “Indemnified Persons” ), to the full extent lawful against any and all
claims, losses, damages, liabilities, costs and expenses as incurred (including all reasonable fees and disbursements of counsel and all
reasonable travel and other out-of-pocket expenses reasonably incurred in connection with the investigation of, preparation for and defense of
any pending or threatened third-party claim, action, proceeding or investigation and any litigation or other proceeding arising therefrom, to
which an Indemnified Person may become subject) (collectively, “Damages” ) arising out of or related to any actual or proposed private
placement or Chadbourn’s engagement hereunder; provided , however , that there shall be excluded from such indemnification any such
portion of such Damages as are found in a final judgment by a court of competent jurisdiction to have resulted from the willful misconduct or
gross negligence or breach of the engagement agreement (of even date herewith and incorporated herein by reference) on the part of the
Indemnified Person, other than any action undertaken at the request or with the consent of the Company. The foregoing indemnification
obligation is in addition to, and not in limitation of, any other rights Chadbourn may have, including but not limited to any right of
contribution. In the event that the foregoing indemnity is unavailable or insufficient to hold harmless an Indemnified Person, then the Company
shall contribute to amounts paid or payable by an Indemnified Person in respect of such Damages in such proportion as appropriately reflects
the relative benefits received by it on the one hand and Chadbourn on the other. If applicable law does not permit allocation solely on the basis
of benefits, then such contribution shall be made in such proportion as appropriately reflects both the relative benefits and relative fault of the
parties and other relevant equitable considerations. The foregoing is subject to the limitation that in no event shall Chadbourn’s aggregate
contributions in respect of Damages exceed the amount of fees actually received by Chadbourn pursuant to this Agreement. For purposes
hereof, relative benefits to the Company and Chadbourn of the private placement or other similar transaction shall be deemed to be in the same
proportion that the total value paid or received or contemplated to be paid or received by the Company and/or its security holders in connection
with the private placement or other similar transaction bears to the fees paid to Chadbourn pursuant to its engagement in respect of such private
placement. Chadbourn shall promptly notify the Company of any claim or threatened claim being asserted against Chadbourn which would
give rise to an indemnification hereunder, and agrees that the Company shall have the right to participate in the defense of any such claim and,
to the extent that the Company shall wish, to assume and control the defense thereof and shall pay as incurred the fees and disbursements of
such counsel related to such proceeding. In any such proceeding, Chadbourn shall have the right to retain its own counsel reasonably
satisfactory to the Company at the Company’s expense, it being understood that the Company shall not, in connection with any one such claim
or action or separate but, substantially similar or related claims or actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys for all the Indemnified Persons. The
Company will not enter into any waiver, release or settlement with respect to any threatened or pending claim, action, proceeding or
investigation or settle any litigation arising therefrom in respect of which indemnification hereunder may be sought (whether or not
Indemnified Persons are a formal party thereto) without the prior written consent of Chadbourn (which consent shall not be unreasonably
withheld or delayed), unless such waiver, release or settlement includes an unconditional release of Chadbourn from any and all liability arising
out of such threatened or pending claim, action, proceeding, investigation or litigation.
6
Exhibit 10.8
Advanced Drilling Services, LLC
10600 N De Anza Blvd Suite 250
Cupertino, Ca 95014
Mr. Alan David Goddard
SIERRA EQUITY GROUP, INC
7700 Congress Avenue Suite 3207
Boca Raton, FL 33487
Re: Selling Agreement (the “Agreement”)
Dear Mr. Goddard:
Advanced Drilling Services, LLC., a Delaware limited liability company (the “ Seller ” or the “ Company ”), proposes to offer and sell (the
“ Offering ”),(i) a minimum of 6,400,000 Class B Membership Units ( the “ Units ” or “ Offered Securities ”) and (ii) a maximum of
11,200,000 Units to selected investors, upon the terms set forth in the Subscription Agreement and the Confidential Private Placement
Memorandum (which collectively, together with the attachments and exhibits thereto, is referred to as the “ Offering Document ”), a copy of
which has been delivered to you. The minimum investment per subscriber is 40,000 Units ($50,000.00) unless waived by the Company. All of
the Units offered hereby are being sold by the Company in an offering with a price of $1.25 per Unit.
Sierra Equity Group, Inc. (the “ Selling Agent ”) agrees to offer and sell, on a non exclusive “best efforts” basis, the Offered Securities
during the offering period described in the Offering Document (the “ Offering Period ”). Capitalized terms used and not otherwise defined
herein shall have the respective meanings set forth in the Offering Document. In connection with all offers and sales of the Units in the
Offering: It is understood that the offer and sale of the securities in the Offering will be exempt from the registration requirements of the
Securities Act of 1933, as amended (the “ Securities Act ”), pursuant to Section 506 of Regulation D thereof. Selling Agent will not directly or
indirectly, make any offer or effect any sale of the Shares or of securities of the same or a similar class as the securities in the Offering if as a
result the offer and sale of the securities in the Offering contemplated hereby would fail to be entitled to the exemption from the registration
requirements of the Securities Act provided for in Section 506 of Regulation D of the Securities Act. As used herein, the terms “offer” and
“sale” have the meanings specified in section 2(3) of the Securities Act.
The Seller hereby confirms its agreement with Selling Agent as follows:
1. Offer and Sale of Offered Securities by Selling Agent; Compensation; Closing .
1.1 On the basis of Selling Agent’s representations, covenants and warranties, the Seller appoints Selling Agent as a non-exclusive
co-placement agent of the Seller as of February 26, 2007 and ending on May 26, 2007, unless extended by the Seller for a period not to exceed
an additional ninety (90) days (“ Offering Termination Date ”), to use Selling Agent’s best efforts to offer and sell, on the terms and conditions
set forth in this
Agreement and in the Offering Document, subject to Selling Agent’s right to engage and supervise participating broker-dealers pursuant to
Section 2 hereof. The Selling Agent hereby accepts such appointment and agrees pursuant to the terms and conditions set forth herein and in
the Offering Document to use its best efforts to offer and sell the Offered Securities as agent for the Seller during the period specified above,
and to attempt to find suitable accredited purchasers for the Offered Securities acceptable to the Seller.
1.2 The Company reserves the right, in its sole discretion to reject any subscription by any investor and to hold multiple closings (each, a
“ Closing ”). At each Closing, the Company will cause to be issued to each investor whose Subscription Agreement, funds and other required
deliverables as described in the Offering Document have been accepted by the Company, the number of Units purchased by the investor.
1.3 As compensation for the Selling Agent’s services hereunder, the Seller shall pay to Selling Agent selling commissions (“
Commission ”), from the Offered Securities sold by the Selling Agent, consisting of a cash payment equal to 8% of aggregate gross proceeds
from said Offered Securities sold directly by the Selling Agent and received by the Company, and the issuance of warrants (“ Warrants ”) to
Selling Agent for the purchase of up to 10% of the total number of Units issued to investors that are sold directly by Selling Agent in the
Offering or its authorized Participating Broker-Dealer approved by Seller. Such Warrants shall have an exercise price equal to $1.25, a cashless
exercise provision and a five year term, and the Warrants shall otherwise be in the same form and shall contain the same provisions set forth in
Offering Document including the same registration rights as Investors. Said Commission and Warrants shall be paid at each Closing.
1.4 In addition, the Selling Agent will perform financial advisory services to the Seller with respect to matters, including but not limited
to, a potential merger transaction. The Selling Agent shall receive the following compensation with respect to its financial advisory services: At
the Closing of the Offering where the Company closes on Offering proceeds which, collectively with all prior Closing, equal an aggregate of at
$3,000,000 sold by the Selling Agent, Selling Agent shall receive a total of 500,000 warrants exercisable for Units with a three year term (the “
Advisory Warrants ”), issued as follows: 100,000 warrants at $1.25 per Unit, 200,000 warrants at $1,375 per Unit, and 200,000 warrants at
$1,50 per Unit, and the Advisory Warrants shall have a cashless exercise provision, a five year term, and shall otherwise be in the same form
and shall contain the same provisions set forth in Offering Document including the same registration rights as Investors.
1.5 At each Closing of the Offering, the Seller shall pay the Selling Agent its Commission relating to the sale of the Offered Securities
that are subject of the Closing provided that the Seller or counsel for the Seller has received all funds and documents, including but not limited
to, an executed Subscription Agreement for each investor and other required deliverables as described in the Offering Document (the “
Subscription Documents ”) previously furnished to Selling Agent which the Selling Agent is required to deliver to the Seller or counsel for the
Seller prior to Closing. All or any portion of such Commission may be re-allowed to Participating Broker-Dealers (as hereinafter defined),
subject to applicable securities laws. No Offered Securities shall be considered to have been sold by Selling Agent or any Participating
Broker-Dealer selected by Selling Agent unless the purchaser is acceptable to the Seller, and no compensation will be payable with respect to
any agreement for the
purchase of Offered Securities if the Subscription Documents therefore are not actually accepted by the Seller. Anything in this Agreement to
the contrary notwithstanding, the Seller shall not be required to pay a Commission to Selling Agent and Selling Agent shall not be entitled to a
Commission or additional Warrants, pursuant to this Section 1.5 or any other provision, if to do so would cause the Seller to violate federal or
state securities laws, regulations or rules or any other law applicable to the Offering. For purposes of clarity, the Selling Agent shall not be
entitled to any Commission (or Warrants) upon the future exercise of the Warrants or Advisory Warrants to the Selling Agent or any selling
agent, or warrants, if any, sold as part of the Units or in the Offering.
1.6 The Seller will pay all of its costs relating to the Offering contemplated hereby, including, without limitation, audit expenses,
issuance costs and taxes, counsel fees for the preparation of the Offering Documents, filing fees and disbursements of counsel relating to the
qualification of the Offered Securities under federal securities laws, and legal fees and expenses of counsel in connection with qualifying the
Offered Securities under the state blue sky laws. To the extent required by law, the Seller shall qualify the Offered Securities for offer and sale
in those jurisdictions designated by the Selling Agent and reasonably acceptable to the Seller. The Seller’s counsel shall be responsible for state
blue sky securities laws compliance by the Seller.
1.7 Once the Offered Securities are sold, or the Offering Period terminates, the agency between the Seller and the Selling Agent shall
terminate. The Selling Agent, on the basis of the representations and warranties herein contained, but subject to the terms and conditions herein
set forth, accepts such appointment as the limited agent of the Seller and agrees to use its best efforts to find purchasers for the Offered
Securities.
1.8 Each Closing shall be held at the place of the Seller’s choice in such time and date as Seller deems appropriate.
1.9 Each investor shall receive registration rights as set forth in the Registration Rights Agreement attached as Exhibit C to the Offering.
2. Participating Broker-Dealers . Subject in each case to the Company’s prior written approval, which shall not be unreasonably withheld,
the Seller hereby authorizes Selling Agent to engage and supervise other qualified broker-dealers (the “ Participating Broker-Dealers ”) to
assist the Selling Agent in the placement of the Offered Securities; provided that (i) during all times that each such Participating Broker-Dealer
shall offer and sell the Offered Securities, and (ii) each such Participating Broker-Dealer shall be registered as a broker-dealer under the
Securities Exchange Act of 1934 (the “1934 Act”), shall be a member in good standing of the National Association of Securities Dealers, Inc.
(“NASD”), and shall be authorized to offer and sell the Offered Securities under the laws of the jurisdictions in which the Offered Securities
will be offered and sold by such Participating Broker-Dealer. Any commissions, fees, or expenses payable to such Participating Broker-Dealers
will be paid by the Selling Agent and not by the Seller.
3. Representations, Warranties and Covenants .
3.1 The Seller represents, warrants and covenants to Selling Agent that, except as set forth in the Offering Document:
(a) The Seller and each subsidiary is a limited liability company duly formed and validly existing and in good standing under the laws
of the jurisdiction of its formation as in effect on the date of this Agreement, with adequate power and authority to enter into and perform this
Agreement and to own its property and to conduct its business as described in the Offering Document; and the Seller and each subsidiary is
duly qualified as a foreign entity to transact business and is in good standing in each jurisdiction in which it owns or leases substantial
properties or in which the conduct of its business requires such qualification except for such jurisdictions in which the failure to qualify in the
aggregate would not have material and adverse effect on the assets, liabilities, earnings, affairs, business or prospects of the Seller or any such
subsidiary (a “ Material Adverse Effect ”) and in which jurisdictions such failure may be cured without such Material Adverse Effects; the
execution and delivery of this Agreement, Warrant, Registration Rights, Subscription Agreement and other transaction documents (collectively
the “ Transaction Documents ”) by the Seller has been duly and validly authorized and will not result in a breach of its Certificate of Formation
or Operating Agreement, as amended; and when executed and delivered by both parties hereto, this Agreement will be a valid and binding
obligation of the Seller, assuming the due execution by the Selling Agent, enforceable in accordance with its terms (except to the extent that
enforceability of the indemnification provisions may be limited under applicable securities laws and except as enforcement may be limited by
bankruptcy, moratorium or other laws affecting creditors’ rights or general principles of equity); and the execution and delivery of this
Agreement, the consummation of the transactions herein contemplated and compliance with the terms of this Agreement by the Seller do not
and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any agreement or any
applicable law, rule, regulation, judgment, order or decree of any government, government instrumentality or court, domestic or foreign, having
jurisdiction over the Seller, to which the Seller is a party or by which it is bound; and does not otherwise conflict with any permit, license,
authorization, franchise, commitment or with any agreement, loan, note indenture, mortgage, license, lease or other agreement;
(b) The Offering Document does not contain and will not contain, at any time between the date hereof and to and including the date of
each Closing, any untrue statement of a material fact and does not omit nor during such period will omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;
(c) Except as is otherwise disclosed, there is no litigation or governmental proceeding pending or, to the best of its knowledge,
threatened against or involving the property or business of the Seller or any subsidiary of the Seller that would result in a Material Adverse
Effect or would otherwise adversely affects the validity or enforceability of this Agreement or Transaction Documents or Company’s ability to
consummate the Offering;
(d) Except as is otherwise disclosed, the Company is not in violation of any permit, the Certificate of Formation or Operating
Agreement, as amended, no material defaults exist in the due performance and observance of any material obligation, term,
covenant or condition of any agreement or instrument, license, note, indenture, loan agreement, mortgage, or other agreement to which the
Seller or any subsidiary is a party or by which they are bound that would result in a Material Adverse Effect;
(e) The offer, offer for sale, and sale of the Offered Securities are not registered with the Securities and Exchange Commission (the “
SEC ”) except as contemplated in the Offering Document. The Company’s actions with respect to the offer, offer for sale and sale of the
Offered Securities will be pursuant to the exemptions from the registration requirements of Section 5 of the 1933 Act provided by Section 506
of Regulation D thereunder;
(f) To the best of its knowledge and belief, assuming the offer, offer for sale and sale of the Offered Securities is made in compliance
with the terms of the Offering Document, the applicable filings with the SEC and any applicable Blue Sky laws, and subject to the performance
of the Selling Agent’s obligations hereunder, the Seller will have complied in all material respects with the Securities Act and with all state
securities laws and regulations applicable to it in connection with the offer, offer for sale, and sale of the Offered Securities. The Seller has not
taken and will not take any action in conflict with the Securities Act or applicable state or foreign securities or blue sky laws, or which would
make the exemption, qualification or registration pursuant to applicable federal or state securities or blue sky laws unavailable with respect to
the offer, offer for sale and sale of the Offered Securities. The Seller and its officers and directors are not subject to any disqualification,
including but not limited to any judgment, decree, order or decision issued by the SEC, any state or foreign securities regulatory authority, any
court of competent jurisdiction or the United States Postal Service. In offering the Offered Securities, the Seller will comply with all applicable
federal, state or foreign securities laws, including the rules covering exemptions from registration;
(g) Subject to the performance of the Selling Agent’s obligations hereunder, the Offered Securities, upon the payment therefor and
issuance thereof, will conform to all statements and descriptions in relation thereto contained in the Offering Document and will have the rights
set forth in the Seller’s Operating Agreement, as amended;
(h) To the best of the Seller’s knowledge, the Seller has neither been engaged in, nor been the subject of, any of the actions or
proceedings specified in subsection (a) of Rule 262 promulgated under Section 3(b) of the Securities Act, or any substantially similar
provisions under the securities laws of any state in which the Offered Securities are to be sold, such that no exemption from registration would
be available for the offering of the Offered Securities by the Seller under applicable federal or state securities laws;
(i) The Seller will notify the Selling Agent immediately and confirm the notice in writing (i) of the issuance by the SEC or by any
state attorney general or securities administrator of any order enjoining the sale of the Offered Securities or suspending the effectiveness of any
qualification of the Offered Securities for sale or (ii) of the initiation of any proceedings for that purpose.
(j) The audited and unaudited financial statements of the Seller (including the related notes) present fairly the financial position of the
Seller and its subsidiaries at the dates indicated; said financial statements have been prepared in conformity
with United States generally accepted accounting principles applied on a consistent basis, except as expressly qualified therein, and the audited
financials are in conformity with Regulation S-X promulgated under the Act. The Seller has engaged independent auditors to audit the financial
statements of Seller and the auditors are a registered public accounting firm;
(k) Except as set forth in the Offering Documents, the Seller does not have any subsidiaries and does not own any interest in any other
corporation, partnership, joint venture or other entity;
(l) The Seller and its subsidiaries have not, directly or indirectly, at any time during their existence (i) made any unlawful contribution
to any candidate for political office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal,
state or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any jurisdiction thereof;
(m) To the best of Seller’s knowledge, the Seller and its subsidiaries have filed all necessary federal, state, local, foreign and other tax
returns required to be filed by them and have paid all taxes shown as due thereon; the Seller and its subsidiaries have not been notified, either
orally or in writing, that any state, local, federal or foreign taxing authority is conducting or intends to conduct an audit of any tax return or
report filed by the Seller and its subsidiaries or concerning their business or properties; and the Seller has no knowledge of any tax deficiency
which has been asserted or threatened against the Seller and any subsidiary which would materially and adversely affect the business,
properties, financial condition, results of operations, liabilities or working capital of the Seller;
(n) There are no pre-emptive rights applicable to any of the Seller’s outstanding securities, or granted by the Seller to any person or
party;
(o) The capitalization of the Seller is as described in the Offering Documents, and all presently outstanding shares of the Seller’s
Class A Membership Units are duly and validly authorized and issued, fully paid and non-assessable.
(p) The Seller agrees that, for a period of twenty four months (24) months from the date hereof, it shall not solicit any offer to buy
from or offer to sell to any person introduced to the Seller by the Selling Agent in connection with the Offering (the “ Selling Agent Investors
”), without compliance with this Section, any securities of the Seller or provide the name of any such person to any other securities broker or
dealer or selling agent. For purposes of this subsection, a person shall be considered to have been “introduced to the Seller” by the Selling
Agent only so long as Seller delivers an investment presentation to such person as part of the “road show” for the Offering as arranged by the
Selling Agent, each of whose name(s) shall be thereafter listed and set forth on a schedule to this Agreement, which shall be updated from time
to time. In the event that the Seller or any of its affiliates, directly or indirectly, solicits, offers to buy from or offers to sell to any such person
any such Company securities, and such person purchases such Company securities, the Seller shall pay to the Selling Agent an amount equal to
eight percent (8.0%) of the aggregate purchase price of the Company securities so purchased by such person and provide Selling Agent with
Warrants as set forth in this Agreement.
(q) All securities to be issued in the Offering, including but not limited to the Units and the Warrants and the Advisory Warrants, and
any other securities to be delivered pursuant to the Offering, shall be validly issued, fully paid, and non-assessable upon issuance and shall not
trigger any pre-emptive rights, participation rights or other rights to receive additional securities, except as described herein.
3.2 The Selling Agent represents and warrants and covenants to the Seller as follows:
(a) The Selling Agent is, has been and will be at all times during the Offering Period, a Delaware corporation duly organized and
validly existing under the laws of the state of its incorporation, with all requisite power and authority to enter into and perform this Agreement;
the execution and delivery of this Agreement by the Selling Agent has been duly and validly authorized; and when executed and delivered by
the Seller, this Agreement will be a valid and binding obligation of the Selling Agent enforceable in accordance with its terms subject to:
(i) due authorization, execution and delivery hereof by the Seller; (ii) the enforcement of remedies under applicable bankruptcy, insolvency and
other laws affecting creditors’ rights generally and moratorium laws from time to time in effect; (iii) general equitable principles which may
limit the right to obtain the remedy of specific performance; and (iv) the public policy limitation on indemnification under the federal securities
laws;
(b) The Selling Agent shall not offer or sell the Offered Securities in any state or states without the approval of the Seller and
completion by the Seller of all, or any, blue sky filings for such states and shall not offer or sell the Offered Securities in any state or states in
which it is not qualified or registered as a broker-dealer or authorized to engage in the brokerage business;
(c) The Selling Agent (and Participating Broker-Dealers) is (i) a broker-dealer registered with the SEC pursuant to the 1934 Act, and
no proceeding has been initiated to revoke such registration; (ii) a member in good standing of the NASD; and (iii) a broker-dealer registered
with the securities authorities of each jurisdiction in which it is required to be registered in connection with the offers or sales of the Offered
Securities, and all such offers or sales will be made only by individuals licensed as required by all applicable federal and state securities laws.
The Selling Agent agrees to maintain each of the foregoing memberships and registrations in good standing throughout the Offering Period and
agrees to comply with all applicable laws and regulations of federal and state governmental and regulatory agencies (both foreign and
domestic), including, but not limited to, the Rules of Fair Practices of the NASD.
(d) Selling Agent has all rights, powers, authorities and licenses in order to enter into this agreement and doing so shall in no manner
violate any law or the rights of third parties.
(e) Selling Agent will not offer or affect the sale of the securities in the Offering by means of any form of general solicitation or
general advertising. Selling Agent will not at any time during the term of this Agreement, or for a period of six months following the Offering
Termination Date contemplated hereby, make any reference publicly to the transactions contemplated hereby, by way of the issuance of a press
release, the placement of
an advertisement or otherwise, without the prior consent of the Company, which consent will not be unreasonably withheld. Selling Agent will
require each person to or with whom it may offer or effect the sale of the securities in the Offering to represent that such person is an
“accredited investor” under the Securities Act. Selling Agent will not furnish to any potential investor in the Offering any information other
than the Offering Documents, which have been approved by the Company and a letter of transmittal approved by the Company which discloses
to each investor the commission to be paid to Selling Agent. Selling Agent will require each investor to execute and deliver the Company’s
subscription documents in order to ensure that the purchasers of the securities in the Offering are not underwriters within the meaning of
section 2(11) of the Securities Act and, without limiting the foregoing, that such purchases will comply with Rule 502(d) under the Securities
Act.
(f) Selling Agent further acknowledges that by the very nature of its relationship with the Company it may, from time to time, have
knowledge of or access to material non-public information (as such term is defined by the Securities Exchange Act of 1934, as amended).
Selling Agent hereby agrees and covenants that: 1) Selling Agent will not make any purchases or sales in the stock of the Company’s public
merger target, Pacific East Advisors, Inc (currently trading under “BSBI.PK”). based on such information; 2) Selling Agent will utilize its
commercially reasonable efforts to safeguard and prevent the dissemination of such information to third parties unless authorized in writing by
the Company to do so as may be necessary in the performance of its services under this Agreement; and 3) Selling Agent will not, in any way,
utilize or otherwise include such information, in actual form or in substantive content, in its analysis for, preparation of or release of any Selling
Agent literature or other communication(s) relating to the Company, including, but not limited to: Research Reports, Press Releases,
Publications on Selling Agent’s website, letters to investors and telephone or other personal communication(s) with potential or current
investors, including Selling Agent Investors.
(g) Selling Agent is financially able to bear the economic risk of an investment in the Warrants and Advisory Warrants, including the
total loss thereof.
(h) Selling Agent acknowledges that the Warrants and Advisory Warrants and securities issuable thereunder have not been registered
under the Securities Act, or qualified under the California Corporate Securities Law of 1968, as amended, or any other applicable state
securities laws in reliance, in part, on his or her representations, warranties, and agreements herein. Selling Agent understands that the Warrants
and Advisory Warrants and securities issuable thereunder are “ restricted securities” under the Securities Act in that the Warrants and Advisory
Warrants and securities issuable thereunder will be acquired from the Company in a transaction not involving a public offering, and that the
Warrants and Advisory Warrants and securities issuable thereunder may not be resold without registration under the Securities Act except in
certain limited circumstances and that otherwise the Warrants and Advisory Warrants and securities issuable thereunder must be held
indefinitely.
(i) Without limiting the representations set forth above, Selling Agent will not make any disposition of all or any part of the Warrants
and Advisory Warrants and securities issuable thereunder which will result in the violation by the Selling Agent or by the Company of the
Securities Act, the California Corporate Securities Law of 1968, or any other applicable securities laws. Without limiting the foregoing, Selling
Agent agrees not to
make any disposition of all or any part of the Warrants and Advisory Warrants and securities issuable thereunder unless and until: (1) There is
then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance
with such registration statement and any applicable requirements of state securities laws; or Selling Agent has notified the Company of the
proposed disposition and has furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition; and
(2) if reasonably requested by the Company, Selling Agent has furnished the Company with a written opinion of counsel, reasonably
satisfactory to the Company, that such disposition will not require registration of any securities under the Securities Act or the consent of or a
permit from appropriate authorities under any applicable state securities law.
(j) Selling Agent understands that the certificates (if any) evidencing the Warrants and Advisory Warrants and securities issuable
thereunder shall bear restrictive legends. Selling Agent acknowledges that the investment in the Warrants and Advisory Warrants and securities
issuable thereunder is a speculative investment which involves a substantial degree of risk of loss by Selling Agent of his or her entire
investment in the Company, that Selling Agent understands and takes full cognizance of the risk factors related to the purchase of the Warrants
and Advisory, and that the Company is newly organized and has no financial or operating history. Selling Agent is an “accredited investor”
under the Regulation D of the Securities Act. Selling Agent has received and reviewed all information Selling Agent considers necessary or
appropriate for deciding whether to purchase the Warrants and Advisory Warrants. Selling Agent has had an opportunity to ask questions and
receive answers from the Company and its officers, managers and employees regarding the terms and conditions of purchase of the Warrants
and Advisory Warrants and regarding the business, financial affairs, and other aspects of the Company and has further had the opportunity to
obtain all information (to the extent the Company possesses or can acquire such information without unreasonable effort or expense) which
Selling Agent deems necessary to evaluate the investment and to verify the accuracy of information otherwise provided to it. Neither any
manager, any agent or employee of the Company or of any manager, or any other Person has at any time expressly or implicitly represented,
guaranteed, or warranted to him or her that Selling Agent may freely transfer the Warrants and Advisory Warrants and securities issuable
thereunder, that a percentage of profit and/or amount or type of consideration will be realized as a result of an investment in the Warrants and
Advisory Warrants and securities issuable thereunder, that past performance or experience on the part of the managers or their affiliates or any
other person in any way indicates the predictable results of the ownership of the Warrants and Advisory Warrants and securities issuable
thereunder or of the overall Company business, that any cash distributions from Company operations or otherwise will be made to the members
by any specific date or will be made at all, or that any specific tax benefits will accrue as a result of an investment in the Company. Selling
Agent acknowledges that the tax consequences to his or her of investing in the Company will depend on his or her particular circumstances,
and neither the Company, the managers, the other members, nor the partners, shareholders, managers, agents, officers, directors, employees,
affiliates, or consultants of any of them will be responsible or liable for the tax consequences to him or her of an investment in the Company.
Selling Agent will look solely to, and rely upon, his or her own advisers with respect to the tax consequences of this investment.
4. Sale and Delivery of Offered Securities .
4.1 No sale of Offered Securities shall take place or be regarded as effective unless and until accepted by the Seller, such acceptance to
occur at Closing, and the Seller reserves the right in its sole and absolute discretion to refuse to sell Offered Securities to any or all persons at
any time. Selling Agent shall send to the Seller, with copies to counsel for the Seller, all acceptable executed Subscription Documents,
promptly upon receipt of the same, subject to any reasonable delay occasioned by further inquiry as to a prospective purchaser’s qualification
or requests by the Seller or Selling Agent for further information from a prospective purchaser. The Seller shall notify Selling Agent as to
whom to send the originals of such executed Subscription Documents and to whom to send copies. Selling Agent shall promptly send each
such prospective purchaser’s payment for his Offered Securities to the Seller. For every prospective purchaser of Offered Securities whose
subscription is rejected, the Seller will promptly return all of such prospective purchaser’s executed Subscription Documents to Selling Agent
for return to the prospective purchaser, and will return the funds received to such prospective purchaser without interest and without deduction.
5. Conditions of the Obligations of the Selling Agent .
The obligations of the Selling Agent to act as agent hereunder, to find purchasers for the Offered Securities, and to attend and to deliver
documents at Closing shall be subject to the following conditions:
(a) Between the date hereof and Closing, the Seller and its subsidiaries shall not have sustained any loss on account of fire, explosion,
flood, accident, calamity or other cause, of such character as results in a Material Adverse Effect, whether or not such loss is covered by
insurance.
(b) Between the date hereof and Closing, there shall be no material litigation instituted or threatened against the Seller or any subsidiary
(other than as set forth in the Offering Document) and there shall be no material proceeding instituted or threatened before or by any federal or
state commission, regulatory body or administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling,
decision or finding would materially adversely affect the business, franchises, licenses, permits, operations or financial condition or income of
the Seller.
(c) Except as contemplated herein or as set forth in the Offering Document, during the period subsequent to the date hereof, and prior to
Closing, the Seller and each subsidiary: (i) shall have conducted its business in the usual and ordinary manner as the same was being conducted
on the date hereof, and (ii) except in the ordinary course of its business or transactions contemplated or disclosed to Selling Agent (e.g.,
entering into agreements for follow-on financing, which may include debt, security and a change in capital structure, the Seller and each
subsidiary shall not have incurred any liabilities or obligations (direct or contingent), or disposed of any assets, or entered into any material
transaction or suffered or experienced any substantially adverse change in its condition, financial or otherwise, or in its working capital
position. At Closing, the capitalization of the Seller shall be substantially the same as set forth in the Offering Document.
(d) The authorization for the issuance and delivery of the Offered Securities and the Offering Document and related materials, and for the
execution and delivery of this Agreement, and all other legal matters incident thereto, shall be reasonably satisfactory in all respects to counsel
for Selling Agent.
(e) The representations and warranties of the Seller made in this Agreement or in any document or certificate delivered to the Selling
Agent pursuant hereto shall be true and correct on and as of the Closing with the same force and effect as though such representations and
warranties have been made on and as of the Closing, and the Selling Agent shall have received a certificate, dated the Closing Date, to such
effect executed by the Chairman of the Board or President of the Seller. This certificate shall be deemed reasonably acceptable if it is in
substantially similar form to the document attached hereto as Exhibit B.
(f) The Seller shall have performed and complied in all material respects with all covenants, terms and agreements to be performed and
complied with by the Seller on or before the Closing.
(g) The Seller shall have provided Certificates as the Selling Agent shall reasonably request.
(h) The Seller and its President shall provide certificates to the Selling Agent certifying that the proceeds of the Offering will be used in
accordance with the uses designated in “Use of Proceeds” in the Offering Document.
6. Indemnification .
6.1 The Seller agrees to indemnify and hold harmless Selling Agent and each person, if any, who controls Selling Agent within the
meaning of the 1933 Act or the 1934 Act (together, the “ Acts ”), the Selling Agent’s affiliated entities, partners, employees, legal counsel and
agents (the “ SA Indemnified Parties ”) against any losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs,
expenses and disbursements (and any and all actions, suits, proceedings and investigations in respect thereof and any and all legal and other
costs, expenses and disbursements in giving testimony or furnishing documents in response to a subpoena or otherwise), joint or several, to
which Selling Agent or such person may be subject, under the Acts or otherwise, including, without limitation, the costs, expenses and
disbursements, as and when incurred, of investigating, preparing or defending any such action, suit, proceeding or investigation (whether or not
in connection with litigation in which the Selling Agent is a party), directly or indirectly, caused by, relating to, based upon, arising out of, or in
connection with (i) the violation or breach of any representation, warranty or covenant or agreement of the Seller set forth in this Agreement or
in any instrument, document, agreement or certificate delivered by the Seller in connection herewith; (ii) any material untrue statement or
omission in the Offering Document or selling material, excluding any statement or omission relating to information contained in or omitted
from the Offering Document or selling material in reliance upon, and in conformity with, information furnished to the Seller by Selling Agent
or any Participating Broker-Dealer specifically for use in preparation of the Offering Document or selling material, as the case may be; (iii) any
material statement or omission relating to information provided by or on behalf of Seller in order to qualify or exempt the Offered Securities
for sale in any jurisdiction; or (iv) the failure
of the Seller to comply with the provisions of the Acts and the regulations thereunder, including Regulation D; and will reimburse the SA
Indemnified Parties for any legal or other expenses reasonably incurred by the SA Indemnified Parties in connection with investigation of or
defending against any such loss, claim, expense, damage, liability, (or actions in respect thereof); provided, however, that the Seller shall not be
required to indemnify the SA Indemnified Parties for any payment made to any claimant in settlement of any suit or claim unless such payment
is agreed to by the Seller (which agreement shall not be unreasonably withheld) or by a court having jurisdiction of the controversy. This
indemnity agreement shall remain in full force and effect and shall survive consummation of the sale of the Offered Securities hereunder and
shall be in addition to any liability which the Seller may otherwise have. Notwithstanding the foregoing, in no event shall the amount that the
Seller is required to indemnify the Selling Agent’s Indemnified Parties, exceed in the aggregate the monies received by the Selling Agent
hereunder, except in the case of fraud on the part of the Seller.
6.2 Selling Agent agrees to indemnify and hold harmless the Seller and each person, if any, who controls the Seller within the meaning of
the Acts, Seller’s affiliated entities, partners, employees, legal counsel and agents (the “Seller Indemnified Parties”) against any losses, claims,
damages, obligations, penalties, judgments, awards, liabilities, costs, expenses and disbursements (and any and all actions, suits, proceedings
and investigations in respect thereof and any and all legal and other costs, expenses and disbursements in giving testimony or furnishing
documents in response to a subpoena or otherwise), joint or several (including, without limitation, the costs, expenses and disbursements, as
and when incurred, of investigating, preparing or defending any such action, suit, proceeding or investigation (whether or not in connection
with litigation in which the Seller is a party)), to which the Seller or any such person may be subject, under the Acts or otherwise, insofar as
such losses, claims, expenses, damages or liabilities (or actions in respect thereof) which (i) arise out of or are based upon any material untrue
statement or omission contained in the Offering Document in reliance upon, and in conformity with, information furnished to the Seller by
Selling Agent or any Participating Broker-Dealer or either of them specifically for use in preparation of the Offering Document or selling
material, as the case may be or (ii) are directly, caused by, relating to, based upon, arising out of, or in connection with the violation or breach
of any representation, warranty or covenant or agreement of the Selling Agent set forth in this Agreement or in any instrument, document,
agreement or certificate delivered by the Selling Agent in connection herewith); and will reimburse the Seller Indemnified Parties for any legal
or other expenses reasonably incurred by them in connection with investigating or defending against any such loss, claim, expense, damage,
liability, (or actions in respect thereof); provided, however, that Selling Agent shall not be required to indemnify the Seller Indemnified Parties
for any payment made to any claimant in settlement of any suit or claim unless such payment is approved by a court having jurisdiction over
the controversy or Selling Agent agrees to such settlement (which agreement shall not be unreasonably withheld); and provided further that
Selling Agent shall not be liable under this Section 6.2 for any losses, claims, expenses, damages or liabilities arising out of any act or failure to
act on the part of any other person except Selling Agent, its partners, employees and agents (including registered representatives) or any
Participating Broker-Dealer. This indemnity agreement shall remain in full force and effect notwithstanding any investigation made by or on
behalf of the Seller and shall survive consummation of the sale of the Offered Securities hereunder and the termination of this Agreement, and
shall be in addition to any
liability which Selling Agent may otherwise have. Notwithstanding the foregoing, in no event shall the amount that the Selling Agent is
required to indemnify the Seller Indemnified Parties, exceed in the aggregate the compensation received by the Selling Agent hereunder, except
in the case of fraud on the part of the Selling Agent.
6.3 The indemnified party shall notify the indemnifying party in writing promptly after the summons or other first legal process giving
information of the nature of any and all claims which have been served upon the indemnified party. In case any action is brought against any
indemnified party upon any such claim, the indemnifying party shall be entitled to participate at its own expense in the defense, or if it so
elects, in accordance with arrangements satisfactory to any other indemnifying party or parties similarly notified, to assume the defense thereof,
with counsel who shall be satisfactory to such indemnified party and other indemnified parties who are defendants in such action; and after
notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and the retaining of such counsel
by the indemnifying party, the indemnifying party shall not be liable to such indemnified party under this Section 6 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the defense thereof, other than the reasonable costs of
investigation, unless the indemnified party shall have reasonably concluded that there are or may be defenses available to it which are different
from or in addition to those available to the indemnifying party (in which case the indemnifying party shall not have the right to direct the
defense of such action on behalf of the indemnified party), in any of which circumstances such expenses shall be borne by the indemnifying
party. Notwithstanding anything to the contrary herein, the indemnified party shall not enter into any settlement unless the indemnifying party
is provided with a full release, reasonably satisfactory to the indemnifying party, and the indemnifying party is not required to make any
admission of wrongdoing.
7. Termination of Agreement .
7.1 This Agreement shall terminate (i) If at any time after commencement of the Offering, any material condition of Seller’s obligations
hereunder shall not have been met or shall cease to be met and Selling Agent shall have given to the Seller notice of Selling Agent’s desire to
terminate this Agreement on account of the nonfulfillment of such condition (at which point Selling Agent shall have no further liability or
obligation to Seller); or (ii) at such time as all of the Offered Securities shall have been sold and the subscriptions therefor have been accepted
or the Offering Termination Date has been reached, whichever shall first occur.
Notwithstanding the termination of this Agreement in accordance with the foregoing provisions of this Section 7, the respective
indemnities, covenants, agreements, representations, warranties and other statements of the Seller and Selling Agent set forth in or made
pursuant to this Agreement will remain operative and in full force and effect.
8. Miscellaneous .
8.1 The Selling Agent, on the one hand, and the Seller, on the other, shall each pay their respective expenses incident to this Agreement
and the transactions
contemplated hereby (including, without limitation, the fees and disbursements of their respective counsel), and no party to the Agreement shall
have any liability for such expenses incurred by any other party.
8.2 It is understood and agreed that Selling Agent’s relationship to the Seller is that of an independent contractor and that nothing herein
shall be construed to create a relationship of partners, affiliates, joint venturers or employer and employee between Selling Agent or either of
them and the Seller.
8.3 No rights or interests arising hereunder may be assigned except with the prior written consent of both the Seller and the Selling
Agent. Subject to this limitation, this Agreement shall inure to the benefit and be binding upon Selling Agent and the Seller and their respective
successors and assigns. This Agreement is intended to be and is for the sole and exclusive benefit of the parties hereto, and their respective
successors and assigns and for the benefit of no other person. Except as provided in this Agreement, nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person, other than the parties to it and their respective successors and assigns, any legal
or equitable right, remedy or claim under or with respect to this Agreement or any of its provisions. No purchaser of Offered Securities shall be
construed as a successor or assign merely by reason of such purchase.
8.4 If any portion of this Agreement shall be held invalid or inoperative, then so far as is reasonable and possible:
(a) the remainder of this Agreement shall be considered valid and operative; and
(b) to the extent possible under applicable law, effect shall be given to the intent manifest by the portion held invalid or inoperative.
8.5 This Agreement may be executed in a number of identical counterparts and by facsimile, each of which shall be deemed to be an
original, but all of which constitute, collectively, one and the same Agreement; but, in making proof of this Agreement, it shall not be necessary
to produce or account for more than one counterpart.
8.6 This Agreement may not be modified or amended except by written agreement executed by each of the parties to this Agreement.
8.7 Whenever the context so requires, the masculine shall include the feminine and neuter, and the singular shall include the plural, and
conversely. The words “shall” and “will” and “agrees” are mandatory, “may” is permissive.
8.8 The parties to this Agreement covenant and agree that they will execute any other and further instruments and documents which
reasonably are or may become necessary or convenient to effectuate and carry out this Agreement.
8.9 This Agreement (and the other documents and agreements referenced herein) contains the entire understanding between the parties
and supersedes prior
understandings or written or oral agreements between the parties with respect to the subject matter of this Agreement.
8.10 This Agreement shall be construed and governed by the laws of the State of California. Any dispute or controversy arising out of or
relating to any interpretation, construction, performance or breach of this Agreement shall be settled by arbitration to be held in Santa Clara
County, California, in accordance with the rules then in effect of the American Arbitration Association. The arbitrator may grant injunctions or
other equitable relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the
arbitration. Judgment may be entered on the arbitrator’s decision in any court having jurisdiction; provided, however, that the arbitrator shall
not have the power to alter or amend this Agreement.
8.11 All notices or communications, except as otherwise specifically provided, shall be in writing, and, if sent to any party, shall be
mailed, delivered or telegraphed and confirmed to that party at the address set forth below:
If to the Seller:
Advanced Drilling Services, LLC
10600 N De Anza Blvd Suite 250
Cupertino, Ca 95014
Attention: General Counsel
If to Selling Agent, to:
Sierra Equity Group, Inc.
7700 Congress Avenue
Suite 3207
Boca Raton, FL 33487
Attention: Alan Goddard
With a copy
contemporaneously
by like means:
Blank Rome LLP
1200 North Federal Highway, Suite 417
Boca Raton, FL 33432
Attention: Bruce C. Rosetto, Esq.
8.12 Section titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference. Those titles in
no way define, limit, extend or describe the scope of this Agreement, or the intent of any provision of this Agreement.
If the foregoing correctly sets forth the understanding between us, please indicate acceptance by signing in the space provided below for that
purpose and return to us a counterpart hereof so signed, whereupon this letter and Selling Agent’s acceptance shall constitute a binding
agreement between us.
Very truly yours,
ADVANCED DRILLING SERVICES, LLC
By:
/s/ Michael McTeigue
Michael McTeigue, CFO
The foregoing Selling Agreement for Seller is hereby accepted and agreed to as of the date first above written.
SIERRA EQUITY GROUP, INC.
As Selling Agent
By:
/s/ Alan David Goddard
Alan David Goddard
CEO
2/26/07
Exhibit 10.9
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT is made and effective as of February 28, 2007, by and between Inner Mongolia Production
Company, LLC , a New York limited liability company (the “Company”), and Christopher B. Sherwood ( “Consultant” ).
RECITALS
A.
The Company is a development stage company engaged in developing new energy ventures in the Far East (including East Asia,
South Asia, Southeast Asia and Russia).
B.
The Company has a need for general business consulting services, including consulting services in the areas of, without limitation,
(i) sourcing and developing energy ventures, (ii) conducting energy business operations in the Far East, including energy ventures and
(iii) public company business operations in the United States (collectively and individually, the “Specialty Areas” ).
C.
Consultant has expertise and knowledge in one or more of the Specialty Areas and provides consulting in one or more of the Specialty
Areas.
D.
Consultant desires to provide consulting services to the Company in one or more of the Specialty Areas on the terms and conditions
contained herein.
NOW, THEREFORE, in consideration of the foregoing and the terms and conditions hereinafter set forth, the parties mutually agree as
follows.
1. Engagement as Consultant; Services .
1.1 The Company agrees to engage Consultant to provide, and Consultant agrees to provide, consulting services in one or more of the
Specialty Areas (the “Services” ) on the terms and conditions set forth herein. Consultant’s primary contact at the Company will be Frank
Ingriselli, or such other person the Manager of the Company may designate in writing.
1.2 In agreeing to perform work hereunder, Consultant represents, warrants and covenants that (a) Consultant has the capability,
experience, and means necessary to perform the Services; (b) Consultant will perform the Services at such times and in accordance with the
priorities and instructions mutually agreed by the Company and Consultant; (c) Consultant will perform the Services in a workmanlike manner
with reasonable skill and care ordinarily exercised by members of the profession practicing under similar conditions and in accordance with
accepted industry practices and professional guidelines; (d) Consultant will perform the Services in accordance with all applicable U.S. federal,
state and local laws, rules, regulations, code, ordinances, and orders and all relevant and applicable foreign legislation (including but not
limited to directives, statutes, laws, regulations and codes of practice); (e) Consultant will not, in performing the Services, disclose, violate,
infringe or misappropriate any trade secrets, proprietary information, trademark, copyright, or patent rights of third-parties; (f) while on the
Company’s premises, Consultant will abide by all safety and other instructions generally
1
applicable to the Company employees and representatives; and (g) neither this Agreement nor Consultant’s Services hereunder will violate any
policy, rule or regulation of, or any written agreement, Consultant or any employee of Consultant has with any other employer, former
employer or any other third party.
1.3 Consultant recognizes that the Company may utilize the consulting services of third parties. Nothing contained in this Agreement
requires the Company to solely utilize Consultant to provide consulting services in any of the Specialty Areas.
1.4 Neither Consultant, nor any of its directors, managers, officers, agents or employees, or any Affiliate of any of the foregoing, has or
will during the course of or in connection with the provision of Services to the Company under this Agreement: (a) made any unlawful
contributions, gifts, entertainment or other unlawful expenses relating to political activity for or on behalf of the Company; (b) made any
payment in violation of applicable Law to foreign or domestic government officials or employees or to foreign or domestic political parties or
campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977, as amended, for or on behalf of the Company; or (c) made
any other payment in violation of applicable law for or on behalf of the Company.
2. Term; Termination
2.1 The term of this Agreement will commence as of the date set forth on page 1 and terminate, subject to earlier termination in
accordance with this Agreement, on the first anniversary of the date hereof (the “Initial Term” ). This Agreement will automatically renew
after the Initial Term for consecutive twelve (12) month periods (the “Renewal Period” ) unless terminated in writing by either party within
60 days of expiration of either the Initial Term or any Renewal Period.
2.2 This Agreement is subject to the following rights of early termination:
a. Either party may immediately terminate this Agreement by giving written notice to the other party, in the event of (i) the other
party’s bankruptcy, insolvency, or the filing of a petition therefore or (ii) the other party materially defaults in the performance of its
obligations hereunder.
b. Either party may terminate this Agreement by giving the other party thirty (30) days prior written notice of its intent to terminate
this Agreement, except that each party will be obligated to perform its outstanding obligations hereunder.
3. Compensation
3.1 In consideration for the Services, the Company agrees to compensate Consultant at the rate of $1,200 a day for work done on behalf
of and as requested by the Company. All international airline travel shall be in business class.
3.2 In addition to the foregoing, the Company agrees to reimburse Consultant for reasonable travel expenses incurred at the Company’s
request in connection with the Services and in accordance with the Company’s travel and reimbursement policy.
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3.3 Consultant will submit to the Company an invoice for reimbursable expenses owed by the Company, accompanied by original
receipts supporting the request for reimbursement. The Company will pay Consultant’s reimbursable expenses within thirty (30) days of receipt
of invoice and supporting documentation.
3.4 It is understood and agreed that Consultant (and Consultant’s employees) will not be eligible for, and will not receive, on account of
this Agreement, any employee benefits or special compensation under any plans promulgated by the Company.
3.5 In consideration for the Services, the Company agrees to issue to Consultant Eight Hundred Eighty Three (883) of the Company’s
Class A Membership Interests (as such term is defined in the Company’s Amended and Restated Operating Agreement (the “Operating
Agreement” )) (the “Interests” ). Such interests shall be fully vested as of the date hereof. In consideration of the Company’s issuance of the
Interests hereby, Consultant makes the following representations and warranties to the Company and to its principals, jointly and severally:
a. Consultant has received a copy of the Operating Agreement. Consultant has reviewed the Operating Agreement. Consultant agrees to
the terms and conditions of the Operating Agreement to the same extent as though it were a signatory thereof. If requested by the Manager,
Consultant will promptly execute and deliver a copy of the Operating Agreement.
b. Consultant acknowledges that Consultant has not seen, received, been presented with, or been solicited by any leaflet, public
promotional meeting, newspaper or magazine article or advertisement, radio or television advertisement, or any other form of advertising or
general solicitation with respect to the Interests.
c. The Interests are being purchased for Consultant’s own account for long-term investment and not with a view to immediately re-sell
the Interests. No other person or entity will have any direct or indirect beneficial interest in, or right to, the Interests.
d. Consultant acknowledges that the Interests have not been registered under the Securities Act of 1933, as amended (the “Securities
Act” ), or qualified under the California Securities Law, or any other applicable blue sky laws, in reliance, in part, on Consultant’s
representations, warranties and agreements made herein.
e. No person has made to Consultant any written or oral representations:
(i) that any person will resell or repurchase any of the Interests;
(ii) that any person will refund the purchase price of any of the Interests;
(iii) as to the future price or value of any of the Interests; or
(iv) that any of the Interests will be listed and posted for trading on any stock exchange or automated dealer quotation system or that
application has been made to list
3
and post any of the Interests of the Company on any stock exchange or automated dealer quotation system.
f. Other than the rights specifically set forth in the Amended Operating Agreement, Consultant represents, warrants and agrees that the
Company and the officers of the Company (the “Company’s Officers” ) are under no obligation to register or qualify the Interests under the
Securities Act or under any state securities law, or to assist the undersigned in complying with any exemption from registration and
qualification.
g. Consultant represents that Consultant meets the criteria for participation because: (i) Consultant has a preexisting personal or business
relationship with the Company or one or more of its partners, officers, managers or controlling persons; or (ii) by reason of Consultant’s
business or financial experience, or by reason of the business or financial experience of its financial advisors who are unaffiliated with, and are
not compensated, directly or indirectly, by the Company or any affiliate or selling agent of the Company, Consultant is capable of evaluating
the risk and merits of an investment in the Interests and of protecting its own interests.
h. Consultant represents that Consultant is an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities
Act and Consultant has executed the Certificate of Accredited Investor Status, attached hereto as Annex A .
i. Consultant understands that the Interests are illiquid, and until registered with the Securities Exchange Commission, or an exemption
from registration becomes available, cannot be readily sold as there will not be a public market for them, and that Consultant may not be able to
sell or dispose of the Interests, or to utilize the Interests as collateral for a loan. Consultant must not purchase the Interests unless Consultant
has liquid assets sufficient to assure Consultant that such purchase will cause it no undue financial difficulties, and that Consultant can still
provide for current and possible personal contingencies, and that the commitment herein for the Interests, combined with other investments of
Consultant, is reasonable in relation to its net worth.
j. Consultant understands that the right to transfer the Interests will be restricted unless the transfer is not in violation of the Securities
Act, the California Securities Law, and any other applicable state securities laws (including investment suitability standards), that the Company
will not consent to a transfer of the Interests unless the transferee represents that such transferee meets the financial suitability standards
required of an initial participant, and that the Company has the right, in its absolute discretion, to refuse to consent to such transfer.
k. Consultant has been advised to consult Consultant’s own legal, tax and other advisors with respect to the merits and risks of an
investment in the Interests and with respect to applicable resale restrictions, and it is solely responsible (and the Company is not in any way
responsible) for compliance with:
(i) any applicable laws of the jurisdiction in which Consultant is resident in connection with the distribution of the Interests hereunder,
and
(ii) applicable resale restrictions; and
4
(iii) this Agreement is not enforceable by Consultant unless it has been accepted by the Company, and Consultant acknowledges and
agrees that the Company reserves the right to reject any subscription for any reason.
1. Consultant acknowledges that the tax consequences of investing in the Company will depend on particular circumstances, and neither
the Company, the Company’s officers, any other investors, nor the partners, members, managers, agents, officers, managers, employees,
affiliates or consultants of any of them, will be responsible or liable for the tax consequences to Consultant of an investment in the Company.
Consultant will look solely to and rely upon its own advisers with respect to the tax consequences of this investment.
m. All information which Consultant has provided to the Company concerning Consultant, its financial position and its knowledge of
financial and business matters, and any information found in the Certificate of Accredited Investor Status, is truthful, accurate, correct, and
complete as of the date set forth herein.
n. Each certificate or instrument representing securities issuable pursuant to this Agreement will be endorsed with the following legend:
“THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE TRANSFER IS MADE IN
COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT OR THE COMPANY RECEIVES AN OPINION OF COUNSEL
FOR THE HOLDER OF THESE SECURITIES WHICH IS REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT
SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF SUCH ACT.
THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND
CONDITIONS OF THE COMPANY’S AMENDED AND RESTATED OPERATING AGREEMENT. COPIES OF SUCH AGREEMENT
MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY.”
4. Confidentiality
4.1 Consultant understands and agrees that in the course of providing the Services hereunder, Consultant may receive or otherwise learn
certain items of business, technical, financial or other information owned by or otherwise in the possession of the Company (“Confidential
Information”). Confidential Information may include, by way of example but without limitation, products, specifications, formulae,
equipment, business strategies, customer lists, know-how, drawings, pricing information, inventions, ideas, and their potential uses. Consultant
agrees to take and maintain proper and appropriate steps to protect Confidential Information. Consultant agrees to disclose the Confidential
Information only to employees or agents of Consultant who are directly involved with the Services contemplated by
5
this Agreement, and even then only to such extent as is reasonably necessary to perform the Services. Consultant agrees to inform such
employees and agents of the confidential nature of the information disclosed hereunder and to cause all such employees and agents to abide by
the terms of this Agreement. Consultant agrees not to disclose Confidential Information to any unauthorized party without prior express written
consent of the Company or unless required by law or court order. If Consultant is required by law or court order to disclose Confidential
Information, to the extent permitted by law, Consultant agrees to provide the Company prompt written notice of such requirement so that an
appropriate protective order or other relief may be sought.
4.2 Consultant agrees to use Confidential Information only in connection with the Services contemplated by this Agreement. Consultant
agrees to make no other use of Confidential Information, it being recognized that the Company has reserved all rights to Confidential
Information not expressly granted herein. All documents containing Confidential Information shall remain the property of the Company. Upon
the request of the Company, Consultant agrees to destroy any documents prepared by Consultant using Confidential Information or derived
therefrom and Consultant agrees to provide confirmation of such destruction in writing. Consultant may, however, keep one archival copy of
any such document in its files for record purposes only.
4.3 The obligations of confidentiality and non-use set forth in this section will not apply to any information which:
a. is in the public domain prior to disclosure by the Company to Consultant;
b. becomes part of the public domain, by publication or otherwise, through no unauthorized act or omission on the part of Consultant; or
c. is lawfully in Consultant’s possession prior to disclosure by the Company.
4.4 The obligations imposed by this section, including but not limited to nondisclosure and non-use, however, shall endure so long as the
Confidential Information does not become part of the public domain.
5. Independent Contractor
Nothing in this Agreement is to be construed to deem the relationship between the parties to be one of master/servant, principal/agent, or
employer/employee. To the contrary, the relationship of Consultant to the Company is that of independent contractor, and Consultant will have
no authority to (i) make any binding decision for, or on behalf of, the Company or (ii) commit the Company to any contract, obligation, debt, or
other liability. None of Consultant’s employees will be deemed to be employees of the Company.
6. Indemnification; Remedies
6.1 The Company agrees to indemnify and hold harmless Consultant, its directors, officers, employees, agents and representatives from
and against any and all claims, damages, liabilities, fines, penalties, costs and expenses (including reasonable attorneys’ fees) to
6
which Consultant may be subjected to the extent caused by the Company’s, its employee’s or agent’s (i) business operations, including, without
limitation, the Company employee claims, (ii) performance hereunder in a manner that is negligent, grossly negligent, reckless, or willfully
improper or (iii) breach of this Agreement.
6.2 Not withstanding anything herein to the contrary, UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE ENTITLED
TO INCIDENTAL, INDIRECT, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES ARISING IN CONNECTION WITH
THE DEFAULT OR BREACH OF ANY OBLIGATION OF THE OTHER PARTY UNDER THIS AGREEMENT, ANY ORDER OR
ANY DOCUMENTS OR APPENDICES RELATED THERETO.
6.3 Consultant recognizes that the Company will be irreparably harmed by a violation of Consultant’s confidentiality, non-use or other
obligations hereunder. Therefore, in addition to any other available remedies, the Company is entitled to an injunction or other decree of
specific performance with respect to any violation thereof by Consultant.
7. Assignment
This Agreement may not be assigned by either party without the express written consent of the other party.
8. Non-Transferability
Consultant will not have any right to anticipate, encumber, or dispose of any payment or other rights hereunder, which payments and
rights are non-assignable and non-transferable.
9. Governing Law and Language and Jurisdiction
9.1 This Agreement is to be construed, performed, and enforced in accordance with the laws of the State of New York, United States of
America, disregarding its conflicts of law rules.
9.2 With respect to any claim, suit, action, or proceeding with respect to which the Company is entitled to access the courts, Consultant
expressly agrees and irrevocably submits to the non-exclusive jurisdiction of the state and federal courts of New York over any such claim,
suit, action, or proceeding.
10. Notice
All notices to be provided hereunder must be in writing and delivered by courier, overnight deliver, confirmed facsimile or mailed by
registered or certified mail, return-receipt requested, to the parties at the following addresses:
If to the Company:
7
Inner Mongolia Production Company, LLC
250 East Hartsdale Ave
Suite: 47
Hartsdale, New York 10530
Facsimile: 914-574-8283
If to Consultant, to the address set forth on the signature page hereof.
or such other address as either party may hereafter designate in writing by notice to the other party. Notice served by mail will be deemed
received three (3) days after the date in which notice is deposited in the United States and/or Canadian mail.
11. Severability
All provisions contained herein are severable, and in the event any of them is held to be invalid by any competent court or arbitrator, this
Agreement is to be interpreted as if such invalid provision were not contained herein.
12. Waiver
The failure of either party to insist in anyone or more instances upon performance of any terms or conditions of this Agreement, is not to
be construed as a waiver of future performance of any such term, covenant, or condition, but the obligations of either party with respect thereto
will continue in full force and effect. No waiver will be effective unless in writing and signed by the waiving party.
13. Survivability
The covenants and promises herein contained in Sections 4, 6, 7, 10, and 14 will survive the expiration or earlier termination of this
Agreement.
14. Entire Agreement
This Agreement and Exhibit(s) supersede all previous understandings between Consultant and the Company, and contain the entire
agreement between the parties with respect to the subject matter hereof, and may not be amended, modified, or supplemented except in writing
signed by both parties, which specifically refers to this Agreement.
[Remainder of Page Intentionally Blank]
8
IN WITNESS WHEREOF , the parties have executed this Agreement as of the date first above written.
CONSULTANT:
/s/ Christopher B. Sherwood
Christopher B. Sherwood
Address:
13706 MARINE DRIVE
WHITE ROCK
BRITISH COLUMBIA, CANADA V4B 1A4
Phone:
604 531 4930
E.mail:
[email protected]
THE COMPANY:
INNER MONGOLIA PRODUCTION COMPANY, LLC
By:
/s/ Frank C. Ingriselli
Name:
Frank C. Ingriselli
Title:
Manager
Annex A
CERTIFICATE OF ACCREDITED INVESTOR STATUS
Except as may be indicated by the undersigned below, the undersigned is an “accredited investor,” as that term is defined in Regulation D
under the Securities Act of 1933, as amended (the “Securities Act” ). The undersigned has initialed the space below indicating the basis on
which he is representing his status as an “accredited investor”:
a bank as defined in Section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in
Section 3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary capacity; a broker or dealer registered pursuant
to Section 15 of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”); an insurance company as
defined in Section 2(13) of the Securities Act; an investment company registered under the Investment Company Act of 1940 or a
business development company as defined in Section 2(a)(48) of that Act; a small business investment company licensed by the
U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; a plan established
and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the
benefit of its employees, and such plan has total assets in excess of $5,000,000; an employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in
Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment
adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions
made solely by persons that are “accredited investors”;
a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940;
an organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust,
or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
CBS
a natural person whose individual net worth, or joint net worth with the undersigned’s spouse, at the time of this purchase exceeds
$1,000,000;
a natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with the
undersigned’s spouse in excess of $300,000 in each, of those years and has a reasonable expectation of reaching the same income
level in the current year;
a trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose
purchase is directed by a person who has such knowledge and experience in financial and business matters that he is capable of
evaluating the merits and risks of the prospective investment;
an entity in which all of the equity holders are “accredited investors” by virtue of their meeting one or more of the above standards;
or
an individual who is a director or executive officer of Inner Mongolia Production Company, LLC.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of Accredited Consultant Status effective as of February___,
2007.
CONSULTANT:
/s/ Christopher B. Sherwood
Christopher B. Sherwood
Exhibit 10.10
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT is made and effective as of February___, 2007, by and between Inner Mongolia Production
Company, LLC , a New York limited liability company (the “Company” ), and Dr. Y. M. Shum ( “Consultant” ).
RECITALS
A.
The Company is a development stage company engaged in developing new energy ventures in the Far East (including East Asia,
South Asia, Southeast Asia and Russia).
B.
The Company has a need for general business consulting services, including consulting services in the areas of, without limitation,
(i) sourcing and developing energy ventures, (ii) conducting energy business operations in the Far East, including energy ventures and
(iii) public company business operations in the United States (collectively and individually, the “Specialty Areas” ).
C.
Consultant has expertise and knowledge in one or more of the Specialty Areas and provides consulting in one or more of the Specialty
Areas.
D.
Consultant desires to provide consulting services to the Company in one or more of the Specialty Areas on the terms and conditions
contained herein.
NOW, THEREFORE, in consideration of the foregoing and the terms and conditions hereinafter set forth, the parties mutually agree as
follows.
1. Engagement as Consultant; Services .
1.1 The Company agrees to engage Consultant to provide, and Consultant agrees to provide, consulting services in one or more of the
Specialty Areas (the “Services” ) on the terms and conditions set forth herein. Consultant’s primary contact at the Company will be Frank
Ingriselli, or such other person the Manager of the Company may designate in writing.
1.2 In agreeing to perform work hereunder, Consultant represents, warrants and covenants that (a) Consultant has the capability,
experience, and means necessary to perform the Services; (b) Consultant will perform the Services at such times and in accordance with the
priorities and instructions mutually agreed by the Company and Consultant; (c) Consultant will perform the Services in a workmanlike manner
with reasonable skill and care ordinarily exercised by members of the profession practicing under similar conditions and in accordance with
accepted industry practices and professional guidelines; (d) Consultant will perform the Services in accordance with all applicable U.S. federal,
state and local laws, rules, regulations, code, ordinances, and orders and all relevant and applicable foreign legislation (including but not
limited to directives, statutes, laws, regulations and codes of practice); (e) Consultant will not, in performing the Services, disclose, violate,
infringe or misappropriate any trade secrets, proprietary information, trademark, copyright, or patent rights of third-parties; (f) while on the
Company’s premises, Consultant will abide by all safety and other instructions generally
1
applicable to the Company employees and representatives; and (g) neither this Agreement nor Consultant’s Services hereunder will violate any
policy, rule or regulation of, or any written agreement, Consultant or any employee of Consultant has with any other employer, former
employer or any other third party.
1.3 Consultant recognizes that the Company may utilize the consulting services of third parties. Nothing contained in this Agreement
requires the Company to solely utilize Consultant to provide consulting services in any of the Specialty Areas.
1.4 Neither Consultant, nor any of its directors, managers, officers, agents or employees, or any Affiliate of any of the foregoing, has or
will during the course of or in connection with the provision of Services to the Company under this Agreement: (a) made any unlawful
contributions, gifts, entertainment or other unlawful expenses relating to political activity for or on behalf of the Company; (b) made any
payment in violation of applicable Law to foreign or domestic government officials or employees or to foreign or domestic political parties or
campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977, as amended, for or on behalf of the Company; or (c) made
any other payment in violation of applicable law for or on behalf of the Company.
2. Term; Termination
2.1 The term of this Agreement will commence as of the date set forth on page 1 and terminate, subject to earlier termination in
accordance with this Agreement, on the first anniversary of the date hereof (the “Initial Term” ). This Agreement will automatically renew
after the Initial Term for consecutive twelve (12) month periods (the “Renewal Period” ) unless terminated in writing by either party within
60 days of expiration of either the Initial Term or any Renewal Period.
2.2 This Agreement is subject to the following rights of early termination:
a. Either party may immediately terminate this Agreement by giving written notice to the other party, in the event of (i) the other
party’s bankruptcy, insolvency, or the filing of a petition therefore or (ii) the other party materially defaults in the performance of its
obligations hereunder.
b. Either party may terminate this Agreement by giving the other party thirty (30) days prior written notice of its intent to terminate
this Agreement, except that each party will be obligated to perform its outstanding obligations hereunder.
3. Compensation
3.1 In consideration for the Services, the Company agrees to compensate Consultant at the rate of $1,000 a day for work done on behalf
of and as requested by the Company. Company guarantees Consultant at least 5 days of work per month, notwithstanding actual work done.
Additional days will be compensated at the rate of $1,000 a day.
2
3.2 In addition to the foregoing, the Company agrees to reimburse Consultant for reasonable travel expenses incurred at the Company’s
request in connection with the Services and in accordance with the Company’s travel and reimbursement policy.
3.3 Consultant will submit to the Company an invoice for reimbursable expenses owed by the Company, accompanied by original
receipts supporting the request for reimbursement. The Company will pay Consultant’s reimbursable expenses within thirty (30) days of receipt
of invoice and supporting documentation.
3.4 It is understood and agreed that Consultant (and Consultant’s employees) will not be eligible for, and will not receive, on account of
this Agreement, any employee benefits or special compensation under any plans promulgated by the Company.
3.5 In consideration for the Services, the Company agrees to issue to Consultant the One Thousand Four Hundred Seventy One (1,471)
of the Company’s Class A Membership Interests (as such term is defined in the Company’s Amended and Restated Operating Agreement (the
“Operating Agreement” )) (the “Interests” ). Such interests shall be fully vested as of the date hereof. In consideration of the Company’s
issuance of the Interests hereby, Consultant makes the following representations and warranties to the Company and to its principals, jointly
and severally:
a. Consultant has received a copy of the Operating Agreement. Consultant has reviewed the Operating Agreement. Consultant agrees to
the terms and conditions of the Operating Agreement to the same extent as though it were a signatory thereof. If requested by the Manager,
Consultant will promptly execute and deliver a copy of the Operating Agreement.
b. Consultant acknowledges that Consultant has not seen, received, been presented with, or been solicited by any leaflet, public
promotional meeting, newspaper or magazine article or advertisement, radio or television advertisement, or any other form of advertising or
general solicitation with respect to the Interests.
c. The Interests are being purchased for Consultant’s own account for long-term investment and not with a view to immediately re-sell
the Interests. No other person or entity will have any direct or indirect beneficial interest in, or right to, the Interests.
d. Consultant acknowledges that the Interests have not been registered under the Securities Act of 1933, as amended (the “Securities
Act” ), or qualified under the California Securities Law, or any other applicable blue sky laws, in reliance, in part, on Consultant’s
representations, warranties and agreements made herein.
e. No person has made to Consultant any written or oral representations:
(i) that any person will resell or repurchase any of the Interests;
(ii) that any person will refund the purchase price of any of the Interests;
(iii) as to the future price or value of any of the Interests; or
3
(iv) that any of the Interests will be listed and posted for trading on any stock exchange or automated dealer quotation system or that
application has been made to list and post any of the Interests of the Company on any stock exchange or automated dealer quotation system.
f. Other than the rights specifically set forth in the Amended Operating Agreement, Consultant represents, warrants and agrees that the
Company and the officers of the Company (the “Company’s Officers”) are under no obligation to register or qualify the Interests under the
Securities Act or under any state securities law, or to assist the undersigned in complying with any exemption from registration and
qualification.
g. Consultant represents that Consultant meets the criteria for participation because: (i) Consultant has a preexisting personal or business
relationship with the Company or one or more of its partners, officers, managers or controlling persons; or (ii) by reason of Consultant’s
business or financial experience, or by reason of the business or financial experience of its financial advisors who are unaffiliated with, and are
not compensated, directly or indirectly, by the Company or any affiliate or selling agent of the Company, Consultant is capable of evaluating
the risk and merits of an investment in the Interests and of protecting its own interests.
h. Consultant represents that Consultant is an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities
Act and Consultant has executed the Certificate of Accredited Investor Status, attached hereto as Annex A .
i. Consultant understands that the Interests are illiquid, and until registered with the Securities Exchange Commission, or an exemption
from registration becomes available, cannot be readily sold as there will not be a public market for them, and that Consultant may not be able to
sell or dispose of the Interests, or to utilize the Interests as collateral for a loan. Consultant must not purchase the Interests unless Consultant
has liquid assets sufficient to assure Consultant that such purchase will cause it no undue financial difficulties, and that Consultant can still
provide for current and possible personal contingencies, and that the commitment herein for the Interests, combined with other investments of
Consultant, is reasonable in relation to its net worth.
j. Consultant understands that the right to transfer the Interests will be restricted unless the transfer is not in violation of the Securities
Act, the California Securities Law, and any other applicable state securities laws (including investment suitability standards), that the Company
will not consent to a transfer of the Interests unless the transferee represents that such transferee meets the financial suitability standards
required of an initial participant, and that the Company has the right, in its absolute discretion, to refuse to consent to such transfer.
k. Consultant has been advised to consult Consultant’s own legal, tax and other advisors with respect to the merits and risks of an
investment in the Interests and with respect to applicable resale restrictions, and it is solely responsible (and the Company is not in any way
responsible) for compliance with:
4
(i) any applicable laws of the jurisdiction in which Consultant is resident in connection with the distribution of the Interests hereunder,
and
(ii) applicable resale restrictions; and
(iii) this Agreement is not enforceable by Consultant unless it has been accepted by the Company, and Consultant acknowledges and
agrees that the Company reserves the right to reject any subscription for any reason.
l. Consultant acknowledges that the tax consequences of investing in the Company will depend on particular circumstances, and neither
the Company, the Company’s officers, any other investors, nor the partners, members, managers, agents, officers, managers, employees,
affiliates or consultants of any of them, will be responsible or liable for the tax consequences to Consultant of an investment in the Company.
Consultant will look solely to and rely upon its own advisers with respect to the tax consequences of this investment.
m. All information which Consultant has provided to the Company concerning Consultant, its financial position and its knowledge of
financial and business matters, and any information found in the Certificate of Accredited Investor Status, is truthful, accurate, correct, and
complete as of the date set forth herein.
n. Each certificate or instrument representing securities issuable pursuant to this Agreement will be endorsed with the following legend:
“THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE TRANSFER IS MADE IN
COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT OR THE COMPANY RECEIVES AN OPINION OF COUNSEL
FOR THE HOLDER OF THESE SECURITIES WHICH IS REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT
SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF SUCH ACT.
THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND
CONDITONS OF THE COMPANY’S AMENDED AND RESTATED OPERATING AGREEMENT. COPIES OF SUCH AGREEMENT
MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY.”
4. Confidentiality
4.1 Consultant understands and agrees that in the course of providing the Services hereunder, Consultant may receive or otherwise learn
certain items of business, technical, financial or other information owned by or otherwise in the possession of the Company (“Confidential
Information”). Confidential Information may include, by way of example but without limitation, products, specifications, formulae,
equipment, business
5
strategies, customer lists, know-how, drawings, pricing information, inventions, ideas, and their potential uses. Consultant agrees to take and
maintain proper and appropriate steps to protect Confidential Information. Consultant agrees to disclose the Confidential Information only to
employees or agents of Consultant who are directly involved with the Services contemplated by this Agreement, and even then only to such
extent as is reasonably necessary to perform the Services. Consultant agrees to inform such employees and agents of the confidential nature of
the information disclosed hereunder and to cause all such employees and agents to abide by the terms of this Agreement. Consultant agrees not
to disclose Confidential Information to any unauthorized party without prior express written consent of the Company or unless required by law
or court order. If Consultant is required by law or court order to disclose Confidential Information, to the extent permitted by law, Consultant
agrees to provide the Company prompt written notice of such requirement so that an appropriate protective order or other relief may be sought.
4.2 Consultant agrees to use Confidential Information only in connection with the Services contemplated by this Agreement. Consultant
agrees to make no other use of Confidential Information, it being recognized that the Company has reserved all rights to Confidential
Information not expressly granted herein. All documents containing Confidential Information shall remain the property of the Company. Upon
the request of the Company, Consultant agrees to destroy any documents prepared by Consultant using Confidential Information or derived
there from and Consultant agrees to provide confirmation of such destruction in writing. Consultant may, however, keep one archival copy of
any such document in its files for record purposes only.
4.3 The obligations of confidentiality and non-use set forth in this section will not apply to any information which:
a. is in the public domain prior to disclosure by the Company to Consultant;
b. becomes part of the public domain, by publication or otherwise, through no unauthorized act or omission on the part of Consultant; or
c. is lawfully in Consultant’s possession prior to disclosure by the Company.
4.4 The obligations imposed by this section, including but not limited to nondisclosure and non-use, however, shall endure so long as the
Confidential Information does not become part of the public domain.
5. Independent Contractor
Nothing in this Agreement is to be construed to deem the relationship between the parties to be one of master/servant, principal/agent, or
employer/employee. To the contrary, the relationship of Consultant to the Company is that of independent contractor, and Consultant will have
no authority to (i) make any binding decision for, or on behalf of, the Company or (ii) commit the Company to any contract, obligation, debt, or
other liability. None of Consultant’s employees will be deemed to be employees of the Company.
6
6. Liability for Breach; Indemnification; Remedies
6.1 Consultant agrees to indemnify and hold harmless the Company, its directors, officers, employees, agents and representatives from
and against any and all claims, damages, liabilities, fines, penalties, costs and expenses (including reasonable attorneys’ fees) to which the
Company may be subjected as a result of Consultant’s, its employee’s or agent’s performance hereunder in a manner that is negligent, grossly
negligent, reckless, or willfully improper.
6.2 The Company agrees to indemnify and hold harmless Consultant, its directors, officers, employees, agents and representatives from
and against any and all claims, damages, liabilities, fines, penalties, costs and expenses (including reasonable attorneys’ fees) to which
Consultant may be subjected to the extent caused by the Company’s, its employee’s or agent’s (i) business operations, including, without
limitation, the Company employee claims, (ii) performance hereunder in a manner that is negligent, grossly negligent, reckless, or willfully
improper or (iii) breach of this Agreement.
6.3 Not withstanding anything herein to the contrary, UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE ENTITLED
TO INCIDENTAL, INDIRECT, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES ARISING IN CONNECTION WITH
THE DEFAULT OR BREACH OF ANY OBLIGATION OF THE OTHER PARTY UNDER THIS AGREEMENT, ANY ORDER OR
ANY DOCUMENTS OR APPENDICES RELATED THERETO.
6.4 Consultant recognizes that the Company will be irreparably harmed by a violation of Consultant’s confidentiality, non-use or other
obligations hereunder. Therefore, in addition to any other available remedies, the Company is entitled to an injunction or other decree of
specific performance with respect to any violation thereof by Consultant.
7. Assignment
This Agreement may not be assigned by either party without the express written consent of the other party.
8. Non-Transferability
Consultant will not have any right to anticipate, encumber, or dispose of any payment or other rights hereunder, which payments and
rights are non-assignable and nontransferable.
9. Governing Law and Language and Jurisdiction
9.1 This Agreement is to be construed, performed, and enforced in accordance with the laws of the State of New York, United States of
America, disregarding its conflicts of law rules.
9.2 With respect to any claim, suit, action, or proceeding with respect to which the Company is entitled to access the courts under
Section 11.5, Consultant expressly
7
agrees and irrevocably submits to the non-exclusive jurisdiction of the state and federal courts of New York over any such claim, suit, action,
or proceeding.
10. Dispute Resolution
10.1 The parties agree that, except as provided below, all disputes arising out of or relating to this Agreement or the breach thereof will
be promptly submitted to and settled by arbitration in accordance with the Commercial Arbitration Rules, then in effect, of the American
Arbitration Association (“AAA”) , except to the extent modified herein. Judgment on the award rendered may be entered in any court having
jurisdiction thereof.
10.2 Each party will within thirty (30) days of receipt of notice that the matter has been referred to arbitration, appoint one arbitrator and,
within thirty (30) days of the appointment of the last of such two arbitrators the two arbitrators will appoint a third arbitrator. If either party or
the two arbitrators fail to timely appoint an arbitrator, AAA will appoint the last arbitrator. The arbitrators will not be empowered to award
punitive or exemplary damages.
10.3 Unless otherwise determined by the arbitration panel, the parties will bear their respective costs incurred in connection with the
procedures described in this Section 11, except that the parties will share equally the fees and expenses of any arbitration.
10.4 During the pendency of any dispute resolution procedure pursuant to this Section 11, the effectiveness of any notice of termination
given pursuant to Section 3(a) will be suspended.
10.5 Notwithstanding any other provision of this Agreement, each party will still be entitled to access the courts to (a) toll any statute of
limitation or (b) seek appropriate injunctive relief or other equitable remedy if, in such party’s sole discretion, such action is deemed necessary
to avoid irreparable damage or preserve the status quo.
11. Notice
All notices to be provided hereunder must be in writing and delivered by courier, overnight deliver, confirmed facsimile or mailed by
registered or certified mail, return-receipt requested, to the parties at the following addresses:
If to the Company:
Inner Mongolia Production Company, LLC
250 East Hartsdale Ave
Suite: 47
Hartsdale, New York 10530
Facsimile: 914-574-8283
If to Consultant, to the address set forth on the signature page hereof.
or such other address as either party may hereafter designate in writing by notice to the other
8
party. Notice served by mail will be deemed received three (3) days after the date in which notice is deposited in the United States mail.
12. Severability
All provisions contained herein are severable, and in the event any of them is held to be invalid by any competent court or arbitrator, this
Agreement is to be interpreted as if such invalid provision were not contained herein.
13. Waiver
The failure of either party to insist in any one or more instances upon performance of any terms or conditions of this Agreement, is not to
be construed as a waiver of future performance of any such term, covenant, or condition, but the obligations of either party with respect thereto
will continue in full force and effect. No waiver will be effective unless in writing and signed by the waiving party.
14. Survivability
The covenants and promises herein contained in Sections 4, 6, 7, 10, 11, and 15 will survive the expiration or earlier termination of this
Agreement.
15. Entire Agreement
This Agreement and Exhibit(s) supersede all previous understandings between Consultant and the Company, and contain the entire
agreement between the parties with respect to the subject matter hereof, and may not be amended, modified, or supplemented except in writing
signed by both parties, which specifically refers to this Agreement.
[Remainder of Page Intentionally Blank]
9
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
CONSULTANT:
/s/ Y. M. Shum
Dr. Y. M. Shum
Social Security or Taxpayer I. D. Number: 554-64-9120
Address:
7703 De Moss Dr., Houston, TX 77036
(when I am away from Houston, my mailing address is 8502 Greenbush St., Houston, TX 77025)
Phone:
713-774-6505
E-mail:
[email protected]
THE COMPANY:
INNER MONGOLIA PRODUCTION COMPANY,
LLC
By:
Name:
Title:
Frank C. Ingriselli
Manager
10
Annex A
CERTIFICATE OF ACCREDITED INVESTOR STATUS
Except as may be indicated by the undersigned below, the undersigned is an “accredited investor,” as that term is defined in Regulation D
under the Securities Act of 1933, as amended (the “ Securities Act ”). The undersigned has initialed the space below indicating the basis on
which he is representing his status as an “accredited investor”:
______
a bank as defined in Section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in
Section 3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary capacity; a broker or dealer registered pursuant
to Section 15 of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”); an insurance company as
defined in Section 2(13) of the Securities Act; an investment company registered under the Investment Company Act of 1940 or a
business development company as defined in Section 2(a)(48) of that Act; a small business investment company licensed by the
U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; a plan established
and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the
benefit of its employees, and such plan has total assets in excess of $5,000,000; an employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in
Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment
adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions
made solely by persons that are “accredited investors”;
_____
a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940;
_____
an organization described in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust,
or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
_____
a natural person whose individual net worth, or joint net worth with the undersigned’s spouse, at the time of this purchase exceeds
$1,000,000;
_____
a natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with the
undersigned’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income
level in the current year;
_____
a trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose
purchase is directed by a person who has such knowledge and experience in financial and business matters that he is capable of
1
evaluating the merits and risks of the prospective investment;
_____
an entity in which all of the equity holders are “accredited investors” by virtue of their meeting one or more of the above standards;
or
_____
an individual who is a director or executive officer of Inner Mongolia Production Company, LLC.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of Accredited Consultant Status effective as of February
2007.
CONSULTANT:
/s/ Dr. Y. M. Shum
Dr. Y. M. Shum
2
,
Exhibit 10.11
EXECUTIVE EMPLOYMENT AGREEMENT
I, Frank C. Ingriselli, agree to the terms and conditions of employment with Inner Mongolia Production Company LLC (“Company”) set
forth in this Employment Agreement (“Agreement”). This Agreement supercedes all previous agreements, promises, representations,
understandings and negotiations between the parties, whether written or oral, with respect to the subject matter hereof.
1. Nature of Employment Relationship . My employment under this Agreement commenced on September 29, 2006, and shall continue
for an indefinite period until terminated by either the Company or me as provided in Section 5 of this Agreement, in which case I will be
entitled to the compensation specified in that Section.
2. Nature of Duties . I shall be the Company’s Manager, President and Chief Executive Officer. As such, I shall work exclusively for the
Company and shall have all of the customary powers and duties associated with this position, including day-to-day operational control of the
Company. I shall devote my full business time and effort to the performance of my duties for the Company, which I shall perform faithfully
and to the best of my ability. I shall be subject to the Company’s policies, procedures and approval practices, as generally in effect from
time-to-time. Notwithstanding the foregoing, it shall not be a violation of this Agreement for me (A) at any time to (i) serve as an officer or
director of the entities set forth on Schedule A hereto, (ii) serve on corporate, civic or charitable boards or committees, (iii) deliver lectures,
fulfill speaking engagements or teach at educational institutions and (iv) manage personal investments, so long as such activities do not
significantly interfere with the performance of my responsibilities as an officer of the Company in accordance with this Agreement and
(B) until a Change of Control, to provide services to other entities, including the entities set forth on Schedule A, with respect to energy related
ventures and, in particular, the Company acknowledges that I may participate in the energy related businesses currently conducted or to be
conducted by GVEST Inc. and Sunrise Energy Asia Inc., including, without limitation, presenting or introducing opportunities and transactions
to such entities, as well as working on, managing or consummating such opportunities and transactions, that may be appropriate business
opportunities for the Company or may be competitive in nature with the Company or its operations. Promptly following execution hereof, the
Board shall ratify and approve the Company’s waiver of any current or future obligations I may have to the Company to present corporate
opportunities to solely the Company rather than to GVEST Inc. or Sunrise Energy Asia Inc.
3. Place of Performance . I shall be based in either California or New York, at my option, except for required travel on the Company’s
business.
4. Compensation and Related Matters .
(a) Base Salary . The Company shall pay me a base salary at an annual rate of three hundred fifty thousand dollars ($350,000). My base
salary shall be paid in conformity with the Company’s salary payment practices generally applicable to Company executives. I will be eligible
for pay increases as determined by the Company’s Board of Managers (the “Board”). Any increase to the abovementioned base salary will be
considered the new base salary. The salary as specified above shall
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commence on the first day of the month following the date the minimum subscription condition as outlined and defined in the private
placement memorandum being considered by the Company and Advanced Drilling Services LLC is satisfied. Until the commencement of such
new salary, my base salary shall be as specified in the consulting Agreement dated November 8, 2005 (as amended) and signed between myself
and the Company.
(b) Bonuses and Long Term Incentive Compensation . I will be eligible for bonus compensation in an amount to be determined by
the Board based on the Company’s achievement of financial performance and other objectives established by the Board each year. In addition,
I will be eligible for long-term incentive compensation, such as additional options to purchase shares of the Company’s membership Units (as
defined in the Company’s Operating Agreement), on such terms as established by the Board. Notwithstanding the foregoing, the Company will
pay me an annual bonus of between twenty percent (20%) and forty percent (40%) of my base salary (the “Annual Target Bonus”) based upon
my performance as determined by the Board, which bonus shall be payable within 30 days of the end of each fiscal year, commencing for the
2007 fiscal year. Any bonus payable for 2006, shall be at the discretion of the Board. Notwithstanding the foregoing, the Annual Target Bonus
paid may be less, as approved by the Board, based on my performance and the performance of the Company.
(c) Equity Options . Upon the commencement of my employment under this Agreement, I will be granted an option (“Option”) to
purchase 20,000 Class A Units, as such term is defined in the Company’s Operating Agreement, at $9.50 per Class A Unit; I shall become
vested in the right to exercise this Option with respect to 40% of the Class A Units on the first anniversary of the Option grant and an additional
20% of the Class A Units on each subsequent anniversary of the Option grant for the next three years of employment; provided, that additional
vesting shall terminate upon the date of any termination of my employment under this Agreement for Cause or with Good Reason and all
vesting shall be accelerated upon any termination of my employment under this Agreement without Cause, without Good Reason or upon my
Death or Disability (each as defined below). The Option shall expire on the tenth anniversary of the Option grant date. The Option shall be
subject to all additional terms of the option agreement between me and the Company evidencing the Option, if any. I shall also be eligible to
receive such additional option or Unit awards as may be approved by the Board from time to time.
(d) Standard Benefits . During my employment, I (and my family) shall be entitled to participate in all employee benefit plans and
programs, including, without limitation, savings and retirement plans, medical, prescription, dental, disability, salary continuance, employee
life insurance, group life insurance, accidental death and travel accident insurance, to the same extent generally available to Company
executives and their families, in accordance with the terms of those plans and programs. The Company shall have the right to terminate or
change any such plan or program at any time.
(e) Vacation . I shall be entitled to paid vacation to the same extent generally available to Company executives in accordance with
Company policy, but not less than four weeks vacation per annum.
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(f) Fringe Benefits . I shall be entitled to participate in all fringe benefits and perquisites available to Company executives in
accordance with Company policy.
(g) Expense Reimbursement . I shall be entitled to receive prompt reimbursement for all reasonable and customary travel and business
expenses I incur in connection with my employment, but I must incur and account for those expenses in accordance with the policies and
procedures established by the Company. Notwithstanding the foregoing, I shall be entitled to travel in business class, or first class if business
class is not available, on all flights taken within a 48 hour period with a scheduled aggregate duration of over 5 hours.
(h) Sarbanes-Oxley Act Loan Prohibition . To the extent that any Company benefit, program, practice, arrangement or this
Agreement would or might otherwise result in my receipt of an illegal loan (“Loan”), the Company shall use reasonable efforts to provide me
with a substitute for the Loan that is lawful and of at least equal value to me. If this cannot be done, or if doing so would be significantly more
expensive to the Company than making the Loan, the Company need not make the Loan to me or provide me a substitute for it.
5. Termination.
(a) Rights and Duties . If my employment is terminated, I shall be entitled to the amounts or benefits shown in the applicable row in
the following table, subject to the balance of this Section 5. The Company and I shall have no further obligations to each other, except the
Company’s ongoing indemnification obligation under Section 14, my confidentiality and other obligations to the Company, and our mutual
arbitration obligations under Section 8, or as set forth in any agreement I subsequently enter into with the Company.
DISCHARGE FOR CAUSE
Payment or provision when due of (1) any unpaid base salary, expense reimbursements, and vacation days
accrued but not used prior to termination of employment, and (2) other unpaid vested amounts or benefits
under Company compensation, incentive and benefit plans.
DISABILITY
Same as for “Discharge for Cause,” EXCEPT that I also shall be potentially eligible for disability benefits
under any Company-provided disability plan in which I then participate, and if no such plan is then
provided, in exchange for my execution of a general release document in a form provided by and
reasonably acceptable to the Company, my base salary payments at my annual salary rate at the time, but
not my employment, shall continue for 12 months. In addition, I shall be entitled to accelerated vesting of
all equity options I have been granted that, as of the date of such disability, remain unexercised and
unvested, to the extent permissible by law.
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DISCHARGE OTHER
THAN FOR CAUSE OR
DISABILITY
Same as for “Discharge for Cause,” EXCEPT that, in exchange for my execution of a general release
document in a form provided by and reasonably acceptable to the Company;
(1) the Company shall pay me, within 30 days after the date of discharge, an amount equal to the
product of (A) my Annual Target Bonus established by the Board for the year of such discharge, or if no
such target annual bonus has been established, the Annual Target Bonus for the preceding year or thirty
percent (30%) of my base salary, whichever is greater, and (B) a fraction, the numerator of which is the
number of days in the current calendar year through the date of discharge and the denominator of which is
365;
(2) (A) my base salary payments at my annual salary rate at the time, but not my employment, shall,
where there has been no Change In Control (as defined below), continue for 36 months, or (B) where there
has been a Change in Control in the preceding one (1) year, the Company shall pay me, within 30 days
after the date of discharge, an amount equal to the sum of my base salary for 48 months;
(3) I will be entitled to accelerated vesting of all equity options I have been granted that, as of the date
of such discharge Other Than for Cause, remain unexercised and unvested, to the extent permissible by
law; and
(4) for 36 months, or where there has been a Change in Control in the preceding one (1) year, for
48 months, following such discharge the Company shall continue to me and/or my family all benefits
described in Section 4(d) above at least equal to those then provided to peer executives or, if more
favorable, as in effect at any time thereafter with respect to peer executives; provided that if I become
reemployed with another employer and am eligible for any of such benefits under such new employer’s
plan or plans, the benefits described herein shall be secondary to those provided to my new employer.
RESIGNATION
WITHOUT
GOOD REASON
Same as for “Discharge for Cause.”
RESIGNATION WITH
GOOD REASON
Same as for “Discharge Other Than for Cause or Disability.”
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DEATH
Same as for “Disability,” EXCEPT that payments shall be made to the person or entity prescribed by me or
Company policies.
(b) Change in Control . “Change in Control” means (i) the acquisition of more than 50% of the outstanding voting securities of the
Company by an individual person or an entity or a group of individuals or entities acting in concert, directly or indirectly, through one
transaction or a series of related transactions; (ii) a merger or consolidation of the Company with or into another entity after which the
Members of the Company immediately prior to such transaction hold less than 50% of the voting securities of the surviving entities; or (iii) a
sale of all or substantially all of the assets of the Company.
(c) Discharge for Cause . The Company may terminate my employment at any time if it believes in good faith that it has Cause to
terminate me. “Cause” shall include, but not be limited to:
(i) my refusal to follow lawful directions or my material failure to perform my duties (other than by reason of physical or mental
illness, injury, or condition), in either case, after I have been given notice of my default and a reasonable opportunity to cure it;
(ii) my willful and continued failure to substantially comply with any material Company policy ;
(iii) conviction of a felony or the entering of a plea of nolo contender to a felony, in either case having significant adverse effect on
the business and affairs of the Company; or
(iv) my accepting a position with another business enterprise or venture without the Company’s written consent at any time before I
have resigned from the Company or been discharged.
No act or failure to act on my part will be considered “willful” unless it is done, or omitted to be done, by me in bad faith or without reasonable
belief that such action or omission was in the best interests of the Company. Any act or failure to act that is based on authority given pursuant
to a resolution duly passed by the Board, or the advice of counsel to the Company, shall be conclusively presumed to be done, or omitted to be
done, in good faith and in the best interests of the Company. If I am discharged for Cause, I will only receive the benefits to which I am entitled
under Section 5(a).
(d) Termination for Disability . The Company may terminate my employment on account of Disability, or may transfer me to inactive
employment status, which shall have the same effect under this Agreement as a termination for Disability. “Disability” means a physical or
mental illness, injury, or condition that prevents me from performing substantially all of my duties under this Agreement for at least 90
consecutive calendar days or for at least 120 calendar days, whether or not consecutive,
-5-
in any 365 calendar day period, or is likely to do so, as certified by a physician selected by the Company or the Board.
(e) Discharge Other Than for Cause or Disability. The Company may terminate my employment at any time for any reason, and
without advance written notice, and I will receive the same benefits as specified for “Discharge for Cause” in Section 5(a), above. If I am
terminated by the Company other than for Cause or for Disability, I will receive the payments described for a no Cause discharge in the chart in
Section 5(a) only if I sign a general release form furnished to me by the Company within 60 days after my employment ends, and I do not
thereafter properly revoke the release, if it provides for revocation.
(f) Resignation . I may resign my employment with or without “Good Reason” at any time. If I provide notice, the Company may
advance the effective date of my resignation if it does not need the amount of notice I provide. If I resign without Good Reason, I will receive
the same payments as a “Discharge for Cause,” as described in the chart in Section 5(a). If I resign with Good Reason, I will receive the same
payments as a “Discharge Other Than for Cause or Disability,” described in the chart in Section 5(a), if I sign a general release form furnished
to me by the Company and I do not thereafter properly revoke the release, if it provides for revocation. Following a Change of Control, my
determination that an act or failure to act constitutes Good Reason shall be conclusively presumed to be valid unless such determination is
decided to be unreasonable by an arbitrator pursuant to Section 5 hereof. “Good Reason” means that, without my express written consent, one
or more of the following events occurred after I sign this Agreement:
(i) Demotion . My duties or responsibilities are substantially and adversely diminished from those in effect immediately before the
change in my position, other than merely as a result of the Company ceasing to be a public company, a change in my title, or my transfer to an
affiliated company that assumes this Agreement.
(ii) Salary Reduction . My annual base salary is reduced, other than as part of across-the-board salary reductions affecting all
executives of similar status employed by the Company or any entity in control of the Company.
(iii) Discontinuance of Compensation Plan Participation . The Company fails to continue, or continue my participation in, any
compensation plan in which I participated immediately before the event causing my resignation, which discontinuance is material to my total
compensation, unless an equitable substitute arrangement has been adopted or made available on a basis not materially less favorable to me
than the plan in effect immediately before the event causing my resignation, both as to the benefits I receive and my level of participation
relative to other participants.
(iv) Successors to the Company . Any failure of the Company to comply with Section 12 of this Agreement.
(v) Breach of this Agreement . Any other material breach of this Agreement by the Company that is either not taken in good faith
or, even if taken in
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good faith, is not remedied by the Company promptly after receipt of notice thereof from me.
However, an event that is or would constitute Good Reason shall cease to be Good Reason if: (i) I do not terminate employment within 45 days
after the event occurs; (ii) before I terminate employment, the Company reverses the action or cures the default that constitutes Good Reason
within 10 days after I notify it in writing that Good Reason exists; or (iii) I was a primary instigator of the Good Reason event and the
circumstances make it inappropriate for me to receive Good Reason resignation benefits under this Agreement (e.g., I agree temporarily to
relinquish my position on the occurrence of a merger transaction I negotiate).
(g) Death . If I die while employed under this Agreement, the payments required by Section 5(a) in the event of my death shall be
made.
(h) Transfers to Affiliates or Successors . My transfer to an affiliate or successor of the Company shall not be deemed a termination of
my employment under this Agreement, unless the affiliate or successor refuses to assume this Agreement, in which case I will receive the
continued salary payments described in Section 5(a) for “Discharge Other Than for Cause or Disability,” if I sign a general release form
provided to me by the Company and I do not thereafter properly revoke the release, if it provides for revocation.
(i) Offset . Any amounts payable to me under this Section 5 shall first be offset against any amounts I owe the Company at the time of
termination.
6. Confidentiality . I acknowledge that I currently possess or will acquire secret, confidential, or proprietary information or trade secrets
concerning the operations, future plans and business methods of the Company (“Confidential Information”).
(a) Promise Not to Disclose . I promise never to use or disclose any Confidential Information before it has become generally known
within the industry through no fault of my own. I agree that this promise shall never expire.
(b) Promise Not to Solicit . To prevent me from inevitably breaking this promise, I further agree that, while this Agreement is in effect
and for 24 months after its termination: (i) as to any customer or supplier of the Company with whom I had dealings or about whom I acquired
Confidential Information during my employment, I will not solicit or attempt to solicit (or assist others to solicit) the customer or supplier to do
business with any person or entity other than the Company; and (ii) I will not solicit or attempt to solicit (or assist others to solicit) for
employment any person who is, or within the preceding 6 months was, an officer, manager, employee or consultant of the Company.
(c) Promise Not to Engage in Certain Employment . I agree that, while this Agreement is in effect and for 24 months after its
termination, I will not accept any employment or engage in any activity, without the written consent of the Board, if the loyal and complete
fulfillment of my duties in such employment would inevitably
-7-
require me to reveal or utilize Confidential Information, as reasonably determined by the Board.
(d) Return of Information . When my employment with the Company ends, I will promptly deliver to the Company, or, at its written
instruction, will destroy, all documents, data, drawings, manuals, letters, notes, reports, electronic mail, recordings, and copies of such
materials, of or pertaining to the Company or any of its affiliated entities which are in my possession or control. In addition, during my
employment with the Company, and thereafter, I agree to meet with Company personnel as reasonably requested by the Board, and, based on
knowledge or insights I gained during my employment with the Company, answer any question they may have related to the Company’s
business and operations.
(e) Intellectual Property . Intellectual property (including such things as all ideas, concepts, inventions, plans, developments, software,
data, configurations, materials (whether written or machine-readable), designs, drawings, illustrations and photographs that may be protectable,
in whole or in part, under any patent, copyright, trademark, trade secret, or other intellectual property law), developed, created, conceived,
made or reduced to writing or practice during my employment with the Company, except intellectual property that has no relation to the
Company or any of its customers that I developed purely on my own time and at my own expense, shall be the sole and exclusive property of
the Company, and I hereby assign all my rights, title and interest in any such intellectual property to the Company.
(f) Enforcement of this Section . This Section shall survive the termination of this Agreement for any reason. I acknowledge that
(i) my services are of a special, unique and extraordinary character and it would be very difficult and impossible to replace them, (ii) this
Section’s terms are reasonable and necessary to protect the Company’s legitimate interest, (iii) this Section’s restrictions will not prevent me
from earning or seeking a livelihood, (iv) this Section’s restrictions shall apply wherever permitted by law, and (v) my violation of any of this
Section’s terms would irreparably harm the Company. Accordingly, I agree that, if I violate any of the provisions of this Section the Company
or any of its affiliated entities shall be entitled to, in addition to other remedies available to it, an injunction to be issued by any court of
competent jurisdiction restraining me from committing or continuing any such violation, without the need to prove the inadequacy of money
damages or post any bond or for any other undertaking.
7. Notice.
(a) To the Company . I will send all communications to the Company in writing, addressed as follows (or in any other manner the
Company notifies me to use):
If Mailed:
Inner Mongolia Production Company LLC
Attn: President
75 South Broadway
White Plains, New York 10601
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If Faxed:
Inner Mongolia Production Company LLC
Attn: President
Fax: 914-304-4077
Tel.: 914-304-4076
(b) To Me . All communications from the Company to me relating to this Agreement must be sent to me in writing at my Company
office or in any other manner I notify the Company to use.
(c) Time Notice Deemed Given . Notice shall be deemed to have been given when delivered or, if earlier (1) when mailed by United
States certified or registered mail, return receipt requested, postage prepaid, or (2) faxed with confirmation of delivery, in either case, addressed
as required in this Section.
8. Arbitration of Disputes . If any legally actionable dispute arises which cannot be resolved by mutual discussion between the Company
and me, we each agree to resolve that dispute by binding arbitration before an arbitrator experienced in employment law. Said arbitration will
be conducted in accordance with the rules applicable to employment disputes of Judicial Arbitration and Mediation Services or such other
arbitration service as we agree upon, and the law of the State of California. The Company will be responsible for paying any filing fee and the
fees and costs of the arbitrator, unless I initiate the claim, in which case I will contribute an amount equal to the filing fee for a claim initiated
in a court of general jurisdiction in the State of California. The Company and I agree that this promise to arbitrate covers any disputes that the
Company may have against me, or that I may have against the Company and/or its related entities and/or their owners, directors, officers and
employees, arising out of or relating to this Agreement, the employment relationship or termination of employment, including any claims
concerning the validity, interpretation, effect or violation of this Agreement; discrimination, harassment or retaliation in violation of any
federal, state or local law; and any other aspect of my compensation, training, or employment. The Company and I further agree that arbitration
as provided in this Section shall be the exclusive and binding remedy for any such dispute and will be used instead of any court action, which is
hereby expressly waived, except for any request by either of us for temporary or preliminary injunctive relief pending arbitration in accordance
with applicable law, or an administrative claim with an administrative agency. The Company and I also agree that any such arbitration shall be
conducted in San Francisco, California, unless otherwise mutually agreed.
9. Amendment . No provisions of this Agreement may be modified, waived, or discharged except by a written document signed by me and
a duly authorized Company officer. Thus, for example, promotions, commendations, and/or bonuses shall not, by themselves, modify, amend,
or extend this Agreement. A waiver of any conditions or provisions of this Agreement in a given instance shall not be deemed a waiver of such
conditions or provisions at any other time.
10. Interpretation and Exclusive Forum . The validity, interpretation, construction, and performance of this Agreement shall be governed
by the laws of the State of California (excluding any that mandate the use of another jurisdiction’s laws). Any arbitration (unless otherwise
mutually agreed), litigation or similar proceeding with
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respect to such matters only may be brought within California, and all parties to this Agreement consent to California’s jurisdiction.
11. Department of Homeland Security Verification Requirement . I agree to timely file all documents required by the Department of
Homeland Security to verify my identity and lawful employment in the United States. Notwithstanding any other provision of this Agreement,
if I fail to meet any such requirements promptly after receiving a written request from the Company to do so, I agree that my employment shall
terminate immediately and that I shall not be entitled to any compensation from the Company of any type.
12. Successors . This Agreement shall be binding upon, and shall inure to the benefit of, me and my estate, but I may not assign or pledge
this Agreement or any rights arising under it, except to the extent permitted under the terms of the benefit plans in which I participate. This
Agreement shall be binding upon, and shall inure to the benefit of, the Company and its successors and assigns. The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of
the Company (a “Successor”) to assume expressly and agree to perform this Agreement and the Indemnification Agreement (defined below) in
the same manner and to the same extent that the Company would be required to perform if no such succession had taken place, after which any
reference to the “Company” in this Agreement shall be deemed to be a reference to the successor and any reference to the “Board” in this
Agreement shall be deemed to be a reference to the board of directors or managers of the successor. The Company will also require any
Successor to either (i) assume each outstanding equity option granted to me pursuant to Section 4(c) or the Company’s equity incentive plan,
with appropriate adjustment of (a) the amount of equity securities of the Successor available for purchase under the Option as assumed and
(b) the exercise price thereof, in each case to reflect the price per Class A Unit or rate of conversion of the Successor’s equity for Class A Units
in any such succession, as the case may be, or (ii) grant to me substantially similar awards/options to purchase equity securities of the
Successor.
13. Validity . The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force and effect.
14. Indemnification/Insurance . The Company shall obtain and maintain Directors and Officers Insurance in order to hold me harmless
from any criminal or civil litigation arising from the performance of my duties and responsibilities on behalf of the Company; provided, that if I
am terminated for Cause, such insurance coverage shall not apply to the action or actions that materially supported the termination for Cause.
The duration of such insurance shall include my term of employment and a period consistent with standard industry practice for
similarly-situated development stage companies following the termination of my employment pursuant to Section 5 above. In addition, the
Company shall provide corporate indemnification to me pursuant to the terms of the Indemnification Agreement by and between me and the
Company, dated September 29, 2006, as amended (the “Indemnification Agreement”).
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15. Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all
of which together shall constitute the same instrument.
16. Entire Agreement . All oral or written agreements or representations, express or implied, with respect to the subject matter of this
Agreement are set forth in this Agreement.
I ACKNOWLEDGE THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY AND ME RELATING TO
THE SUBJECTS COVERED IN THIS AGREEMENT ARE CONTAINED IN IT AND THAT I HAVE ENTERED INTO THIS
AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON ANY PROMISES OR REPRESENTATIONS BY THE COMPANY
OTHER THAN THOSE CONTAINED IN THIS AGREEMENT ITSELF.
I FURTHER ACKNOWLEDGE THAT I HAVE CAREFULLY READ THIS AGREEMENT, THAT I UNDERSTAND ALL OF IT, AND
THAT I HAVE BEEN GIVEN THE OPPORTUNITY TO DISCUSS THIS AGREEMENT WITH MY PRIVATE LEGAL COUNSEL
AND HAVE AVAILED MYSELF OF THAT OPPORTUNITY TO THE EXTENT I WISHED TO DO SO. I UNDERSTAND THAT BY
SIGNING THIS AGREEMENT I AM GIVING UP MY RIGHT TO A JURY TRIAL.
Date: September 29, 2006
/s/ Frank C. Ingriselli
Frank C. Ingriselli
INNER MONGOLIA PRODUCTION COMPANY LLC
Date: September 29, 2006
By:
/s/ Stephen F. Groth
Its: VP and CFO
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Schedule A
Eurasia Foundation
Electric Drive Transportation Association
General Energy Technologies Inc.
Electra Industrial Ltda.
The Angelino Group
GVEST Inc.
Sunrise Energy Asia Inc.
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Exhibit 10.12
EXECUTIVE EMPLOYMENT AGREEMENT
I, Stephen F. Groth, agree to the terms and conditions of employment with Inner Mongolia Production Company LLC (“Company”) set
forth in this Employment Agreement (“Agreement”). This Agreement supercedes all previous agreements, promises, representations,
understandings and negotiations between the parties, whether written or oral, with respect to the subject matter hereof.
1. Nature of Employment Relationship . My employment under this Agreement commenced on September 29, 2006, and shall continue
for an indefinite period until terminated by either the Company or me as provided in Section 5 of this Agreement, in which case I will be
entitled to the compensation specified in that Section.
2. Nature of Duties . I shall be the Company’s Vice President and Chief Financial Officer. As such, I shall work exclusively for the
Company and shall have all of the customary powers and duties associated with this position, including day-to-day operational control of the
Company. I shall devote my full business time and effort to the performance of my duties for the Company, which I shall perform faithfully
and to the best of my ability. I shall be subject to the Company’s policies, procedures and approval practices, as generally in effect from
time-to-time. Notwithstanding the foregoing, it shall not be a violation of this Agreement for me (A) at any time to (i) serve on corporate, civic
or charitable boards or committees, (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions and (iii) manage
personal investments, so long as such activities do not significantly interfere with the performance of my responsibilities as an officer of the
Company in accordance with this Agreement.
3. Place of Performance . I shall be based in either California or New York, at my option, except for required travel on the Company’s
business.
4. Compensation and Related Matters .
(a) Base Salary . The Company shall pay me a base salary at an annual rate of one hundred fifty thousand dollars ($150,000). My base
salary shall be paid in conformity with the Company’s salary payment practices generally applicable to Company executives. I will be eligible
for pay increases as determined by the Company’s Board of Managers (the “Board”). Any increase to the abovementioned base salary will be
considered the new base salary. The salary as specified above shall commence on the first day of the month following the date the minimum
subscription condition as outlined and defined in the private placement memorandum being considered by the Company and Advanced Drilling
Services LLC is satisfied. Until the commencement of such new salary, my base salary shall be as specified in the consulting Agreement dated
November 8, 2005 (as amended) and signed between myself and the Company.
(b) Bonuses and Long Term Incentive Compensation . I will be eligible for bonus compensation in an amount to be determined by
the Board based on the Company’s achievement of financial performance and other objectives established by the Board each year. In addition,
I will be eligible for long-term incentive compensation, such as additional options to purchase shares of the Company’s membership Units (as
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defined in the Company’s Operating Agreement), on such terms as established by the Board. Notwithstanding the foregoing, the Company will
pay me an annual bonus of between twenty percent (20%) and thirty percent (30%) of my base salary (the “Annual Target Bonus”) based upon
my performance as determined by the Board, which bonus shall be payable within 30 days of the end of each fiscal year, commencing for the
2007 fiscal year. Any bonus payable for 2006, shall be at the discretion of the Board. Notwithstanding the foregoing, the Annual Target Bonus
paid may be less, as approved by the Board, based on my performance and the performance of the Company.
(c) Equity Options . Upon the commencement of my employment under this Agreement, I will be granted an option (“Option”) to
purchase 9,200 Class A Units, as such term is defined in the Company’s Operating Agreement, at $9.50 per Class A Unit; I shall become
vested in the right to exercise this Option with respect to 40% of the Class A Units on the first anniversary of the Option grant and an additional
20% of the Class A Units on each subsequent anniversary of the Option grant for the next three years of employment; provided, that additional
vesting shall terminate upon the date of any termination of my employment under this Agreement for Cause or with Good Reason and all
vesting shall be accelerated upon any termination of my employment under this Agreement without Cause, without Good Reason or upon
Death or Disability. The Option shall expire on the tenth anniversary of the Option grant date. The Option shall be subject to all additional
terms of the option agreement between me and the Company evidencing the Option, if any. I shall also be eligible to receive such additional
option or Unit awards as may be approved by the Board from time to time.
(d) Standard Benefits . During my employment, I (and my family) shall be entitled to participate in all employee benefit plans and
programs, including, without limitation, savings and retirement plans, medical, prescription, dental, disability, salary continuance, employee
life insurance, group life insurance, accidental death and travel accident insurance, to the same extent generally available to Company
executives and their families, in accordance with the terms of those plans and programs. The Company shall have the right to terminate or
change any such plan or program at any time.
(e) Vacation . I shall be entitled to paid vacation to the same extent generally available to Company executives in accordance with
Company policy, but not less than four weeks vacation per annum.
(f) Fringe Benefits . I shall be entitled to participate in all fringe benefits and perquisites available to Company executives in
accordance with Company policy.
(g) Expense Reimbursement . I shall be entitled to receive prompt reimbursement for all reasonable and customary travel and business
expenses I incur in connection with my employment, but I must incur and account for those expenses in accordance with the policies and
procedures established by the Company.
(h) Sarbanes-Oxley Act Loan Prohibition . To the extent that any Company benefit, program, practice, arrangement or this
Agreement would or might otherwise result in my receipt of an illegal loan (“Loan”), the Company shall use
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reasonable efforts to provide me with a substitute for the Loan that is lawful and of at least equal value to me. If this cannot be done, or if doing
so would be significantly more expensive to the Company than making the Loan, the Company need not make the Loan to me or provide me a
substitute for it.
5. Termination.
(a) Rights and Duties . If my employment is terminated, I shall be entitled to the amounts or benefits shown in the applicable row in
the following table, subject to the balance of this Section 5. The Company and I shall have no further obligations to each other, except the
Company’s ongoing indemnification obligation under Section 14, my confidentiality and other obligations to the Company, and our mutual
arbitration obligations under Section 8, or as set forth in any agreement I subsequently enter into with the Company.
DISCHARGE FOR CAUSE
Payment or provision when due of (1) any unpaid base salary, expense reimbursements, and vacation days
accrued but not used prior to termination of employment, and (2) other unpaid vested amounts or benefits
under Company compensation, incentive and benefit plans.
DISABILITY
Same as for “Discharge for Cause,” EXCEPT that I also shall be potentially eligible for disability benefits
under any Company-provided disability plan in which I then participate, and if no such plan is then
provided, in exchange for my execution of a general release document in a form provided by and
reasonably acceptable to the Company, my base salary payments at my annual salary rate at the time, but
not my employment, shall continue for 12 months. In addition, I shall be entitled to accelerated vesting of
all equity options I have been granted that, as of the date of such disability, remain unexercised and
unvested, to the extent permissible by law.
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DISCHARGE OTHER
THAN FOR CAUSE OR
DISABILITY
Same as for “Discharge for Cause,” EXCEPT that, in exchange for my execution of a general release
document in a form provided by and reasonably acceptable to the Company;
(1) the Company shall pay me, within 30 days after the date of discharge, an amount equal to the
product of (A) my Annual Target Bonus established by the Board for the year of such discharge, or if no
such target annual bonus has been established, the Annual Target Bonus for the preceding year or thirty
percent (30%) of my base salary, whichever is greater, and (B) a fraction, the numerator of which is the
number of days in the current calendar year through the date of discharge and the denominator of which is
365;
(2) (A) my base salary payments at my annual salary rate at the time, but not my employment, shall,
where there has been no Change In Control (as defined below), continue for 36 months, or (B) where there
has been a Change in Control in the preceding one (1) year, the Company shall pay me, within 30 days
after the date of discharge, an amount equal to the sum of my base salary for 48 months;
(3) I will be entitled to accelerated vesting of all equity options I have been granted that, as of the date
of such discharge Other Than for Cause, remain unexercised and unvested, to the extent permissible by
law; and
(4) for 24 months, or where there has been a Change in Control in the preceding one (1) year, for
36 months, following such discharge the Company shall continue to me and/or my family all benefits
described in Section 4(d) above at least equal to those then provided to peer executives or, if more
favorable, as in effect at any time thereafter with respect to peer executives; provided that if I become
reemployed with another employer and am eligible for any of such benefits under such new employer’s
plan or plans, the benefits described herein shall be secondary to those provided to my new employer.
RESIGNATION
WITHOUT
GOOD REASON
Same as for “Discharge for Cause.”
RESIGNATION WITH
GOOD REASON
Same as for “Discharge Other Than for Cause or Disability.”
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DEATH
Same as for “Disability,” EXCEPT that payments shall be made to the person or entity prescribed by me or
Company policies.
(b) Change in Control . “Change in Control” means (i) the acquisition of more than 50% of the outstanding voting securities of the
Company by an individual person or an entity or a group of individuals or entities acting in concert, directly or indirectly, through one
transaction or a series of related transactions; (ii) a merger or consolidation of the Company with or into another entity after which the
Members of the Company immediately prior to such transaction hold less than 50% of the voting securities of the surviving entities; or (iii) a
sale of all or substantially all of the assets of the Company.
(c) Discharge for Cause . The Company may terminate my employment at any time if it believes in good faith that it has Cause to
terminate me. “Cause” shall include, but not be limited to:
(i) my refusal to follow lawful directions or my material failure to perform my duties (other than by reason of physical or mental
illness, injury, or condition), in either case, after I have been given notice of my default and a reasonable opportunity to cure it;
(ii) my willful and continued failure to substantially comply with any material Company policy ;
(iii) conviction of a felony or the entering of a plea of nolo contender to a felony, in either case having significant adverse effect on
the business and affairs of the Company; or
(iv) my accepting a position with another business enterprise or venture without the Company’s written consent at any time before I
have resigned from the Company or been discharged.
No act or failure to act on my part will be considered “willful” unless it is done, or omitted to be done, by me in bad faith or without reasonable
belief that such action or omission was in the best interests of the Company. Any act or failure to act that is based on authority given pursuant
to a resolution duly passed by the Board, or the advice of counsel to the Company, shall be conclusively presumed to be done, or omitted to be
done, in good faith and in the best interests of the Company. If I am discharged for Cause, I will only receive the benefits to which I am entitled
under Section 5(a).
(d) Termination for Disability . The Company may terminate my employment on account of Disability, or may transfer me to inactive
employment status, which shall have the same effect under this Agreement as a termination for Disability. “Disability” means a physical or
mental illness, injury, or condition that prevents me from performing substantially all of my duties under this Agreement for at least 90
consecutive calendar days or for at least 120 calendar days, whether or not consecutive,
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in any 365 calendar day period, or is likely to do so, as certified by a physician selected by the Company or the Board.
(e) Discharge Other Than for Cause or Disability. The Company may terminate my employment at any time for any reason, and
without advance written notice, and I will receive the same benefits as specified for “Discharge for Cause” in Section 5(a), above. If I am
terminated by the Company other than for Cause or for Disability, I will receive the payments described for a no Cause discharge in the chart in
Section 5(a) only if I sign a general release form furnished to me by the Company within 60 days after my employment ends, and I do not
thereafter properly revoke the release, if it provides for revocation.
(f) Resignation . I may resign my employment with or without “Good Reason” at any time. If I provide notice, the Company may
advance the effective date of my resignation if it does not need the amount of notice I provide. If I resign without Good Reason, I will receive
the same payments as a “Discharge for Cause,” as described in the chart in Section 5(a). If I resign with Good Reason, I will receive the same
payments as a “Discharge Other Than for Cause or Disability,” described in the chart in Section 5(a), if I sign a general release form furnished
to me by the Company and I do not thereafter properly revoke the release, if it provides for revocation. Following a Change of Control, my
determination that an act or failure to act constitutes Good Reason shall be conclusively presumed to be valid unless such determination is
decided to be unreasonable by an arbitrator pursuant to Section 5 hereof. “Good Reason” means that, without my express written consent, one
or more of the following events occurred after I sign this Agreement:
(i) Demotion . My duties or responsibilities are substantially and adversely diminished from those in effect immediately before the
change in my position, other than merely as a result of the Company ceasing to be a public company, a change in my title, or my transfer to an
affiliated company that assumes this Agreement.
(ii) Salary Reduction . My annual base salary is reduced, other than as part of across-the-board salary reductions affecting all
executives of similar status employed by the Company or any entity in control of the Company.
(iii) Discontinuance of Compensation Plan Participation . The Company fails to continue, or continue my participation in, any
compensation plan in which I participated immediately before the event causing my resignation, which discontinuance is material to my total
compensation, unless an equitable substitute arrangement has been adopted or made available on a basis not materially less favorable to me
than the plan in effect immediately before the event causing my resignation, both as to the benefits I receive and my level of participation
relative to other participants.
(iv) Successors to the Company . Any failure of the Company to comply with Section 12 of this Agreement.
(v) Breach of this Agreement . Any other material breach of this Agreement by the Company that is either not taken in good faith
or, even if taken in
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good faith, is not remedied by the Company promptly after receipt of notice thereof from me.
However, an event that is or would constitute Good Reason shall cease to be Good Reason if: (i) I do not terminate employment within 45 days
after the event occurs; (ii) before I terminate employment, the Company reverses the action or cures the default that constitutes Good Reason
within 10 days after I notify it in writing that Good Reason exists; or (iii) I was a primary instigator of the Good Reason event and the
circumstances make it inappropriate for me to receive Good Reason resignation benefits under this Agreement (e.g., I agree temporarily to
relinquish my position on the occurrence of a merger transaction I negotiate).
(g) Death . If I die while employed under this Agreement, the payments required by Section 5(a) in the event of my death shall be
made.
(h) Transfers to Affiliates or Successors . My transfer to an affiliate or successor of the Company shall not be deemed a termination of
my employment under this Agreement, unless the affiliate or successor refuses to assume this Agreement, in which case I will receive the
continued salary payments described in Section 5(a) for “Discharge Other Than for Cause or Disability,” if I sign a general release form
provided to me by the Company and I do not thereafter properly revoke the release, if it provides for revocation.
(i) Offset . Any amounts payable to me under this Section 5 shall first be offset against any amounts I owe the Company at the time of
termination.
6. Confidentiality . I acknowledge that I currently possess or will acquire secret, confidential, or proprietary information or trade secrets
concerning the operations, future plans and business methods of the Company (“Confidential Information”).
(a) Promise Not to Disclose . I promise never to use or disclose any Confidential Information before it has become generally known
within the industry through no fault of my own. I agree that this promise shall never expire.
(b) Promise Not to Solicit . To prevent me from inevitably breaking this promise, I further agree that, while this Agreement is in effect
and for 24 months after its termination: (i) as to any customer or supplier of the Company with whom I had dealings or about whom I acquired
Confidential Information during my employment, I will not solicit or attempt to solicit (or assist others to solicit) the customer or supplier to do
business with any person or entity other than the Company; and (ii) I will not solicit or attempt to solicit (or assist others to solicit) for
employment any person who is, or within the preceding 6 months was, an officer, manager, employee or consultant of the Company.
(c) Promise Not to Engage in Certain Employment . I agree that, while this Agreement is in effect and for 24 months after its
termination, I will not accept any employment or engage in any activity, without the written consent of the Board, if the loyal and complete
fulfillment of my duties in such employment would inevitably
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require me to reveal or utilize Confidential Information, as reasonably determined by the Board.
(d) Return of Information . When my employment with the Company ends, I will promptly deliver to the Company, or, at its written
instruction, will destroy, all documents, data, drawings, manuals, letters, notes, reports, electronic mail, recordings, and copies of such
materials, of or pertaining to the Company or any of its affiliated entities which are in my possession or control. In addition, during my
employment with the Company, and thereafter, I agree to meet with Company personnel as reasonably requested by the Board, and, based on
knowledge or insights I gained during my employment with the Company, answer any question they may have related to the Company’s
business and operations.
(e) Intellectual Property . Intellectual property (including such things as all ideas, concepts, inventions, plans, developments, software,
data, configurations, materials (whether written or machine-readable), designs, drawings, illustrations and photographs that may be protectable,
in whole or in part, under any patent, copyright, trademark, trade secret, or other intellectual property law), developed, created, conceived,
made or reduced to writing or practice during my employment with the Company, except intellectual property that has no relation to the
Company or any of its customers that I developed purely on my own time and at my own expense, shall be the sole and exclusive property of
the Company, and I hereby assign all my rights, title and interest in any such intellectual property to the Company.
(f) Enforcement of this Section . This Section shall survive the termination of this Agreement for any reason. I acknowledge that
(i) my services are of a special, unique and extraordinary character and it would be very difficult and impossible to replace them, (ii) this
Section’s terms are reasonable and necessary to protect the Company’s legitimate interest, (iii) this Section’s restrictions will not prevent me
from earning or seeking a livelihood, (iv) this Section’s restrictions shall apply wherever permitted by law, and (v) my violation of any of this
Section’s terms would irreparably harm the Company. Accordingly, I agree that, if I violate any of the provisions of this Section the Company
or any of its affiliated entities shall be entitled to, in addition to other remedies available to it, an injunction to be issued by any court of
competent jurisdiction restraining me from committing or continuing any such violation, without the need to prove the inadequacy of money
damages or post any bond or for any other undertaking.
7. Notice.
(a) To the Company . I will send all communications to the Company in writing, addressed as follows (or in any other manner the
Company notifies me to use):
If Mailed:
Inner Mongolia Production Company LLC
Attn: President
75 South Broadway
White Plains, New York 10601
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If Faxed:
Inner Mongolia Production Company LLC
Attn: President
Fax: 914-304-4077
Tel.: 914-304-4076
(b) To Me . All communications from the Company to me relating to this Agreement must be sent to me in writing at my Company
office or in any other manner I notify the Company to use.
(c) Time Notice Deemed Given . Notice shall be deemed to have been given when delivered or, if earlier (1) when mailed by United
States certified or registered mail, return receipt requested, postage prepaid, or (2) faxed with confirmation of delivery, in either case, addressed
as required in this Section.
8. Arbitration of Disputes . If any legally actionable dispute arises which cannot be resolved by mutual discussion between the Company
and me, we each agree to resolve that dispute by binding arbitration before an arbitrator experienced in employment law. Said arbitration will
be conducted in accordance with the rules applicable to employment disputes of Judicial Arbitration and Mediation Services or such other
arbitration service as we agree upon, and the law of the State of California. The Company will be responsible for paying any filing fee and the
fees and costs of the arbitrator, unless I initiate the claim, in which case I will contribute an amount equal to the filing fee for a claim initiated
in a court of general jurisdiction in the State of California. The Company and I agree that this promise to arbitrate covers any disputes that the
Company may have against me, or that I may have against the Company and/or its related entities and/or their owners, directors, officers and
employees, arising out of or relating to this Agreement, the employment relationship or termination of employment, including any claims
concerning the validity, interpretation, effect or violation of this Agreement; discrimination, harassment or retaliation in violation of any
federal, state or local law; and any other aspect of my compensation, training, or employment. The Company and I further agree that arbitration
as provided in this Section shall be the exclusive and binding remedy for any such dispute and will be used instead of any court action, which is
hereby expressly waived, except for any request by either of us for temporary or preliminary injunctive relief pending arbitration in accordance
with applicable law, or an administrative claim with an administrative agency. The Company and I also agree that any such arbitration shall be
conducted in San Francisco, California, unless otherwise mutually agreed.
9. Amendment . No provisions of this Agreement may be modified, waived, or discharged except by a written document signed by me and
a duly authorized Company officer. Thus, for example, promotions, commendations, and/or bonuses shall not, by themselves, modify, amend,
or extend this Agreement. A waiver of any conditions or provisions of this Agreement in a given instance shall not be deemed a waiver of such
conditions or provisions at any other time.
10. Interpretation and Exclusive Forum . The validity, interpretation, construction, and performance of this Agreement shall be governed
by the laws of the State of California (excluding any that mandate the use of another jurisdiction’s laws). Any arbitration (unless otherwise
mutually agreed), litigation or similar proceeding with
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respect to such matters only may be brought within California, and all parties to this Agreement consent to California’s jurisdiction.
11. Department of Homeland Security Verification Requirement . I agree to timely file all documents required by the Department of
Homeland Security to verify my identity and lawful employment in the United States. Notwithstanding any other provision of this Agreement,
if I fail to meet any such requirements promptly after receiving a written request from the Company to do so, I agree that my employment shall
terminate immediately and that I shall not be entitled to any compensation from the Company of any type.
12. Successors . This Agreement shall be binding upon, and shall inure to the benefit of, me and my estate, but I may not assign or pledge
this Agreement or any rights arising under it, except to the extent permitted under the terms of the benefit plans in which I participate. This
Agreement shall be binding upon, and shall inure to the benefit of, the Company and its successors and assigns. The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of
the Company (a “Successor”) to assume expressly and agree to perform this Agreement and the Indemnification Agreement (defined below) in
the same manner and to the same extent that the Company would be required to perform if no such succession had taken place, after which any
reference to the “Company” in this Agreement shall be deemed to be a reference to the successor and any reference to the “Board” in this
Agreement shall be deemed to be a reference to the board of directors or managers of the successor. The Company will also require any
Successor to either (i) assume each outstanding equity option granted to me pursuant to Section 4(c) or the Company’s equity incentive plan,
with appropriate adjustment of (a) the amount of equity securities of the Successor available for purchase under the Option as assumed and
(b) the exercise price thereof, in each case to reflect the price per Class A Unit or rate of conversion of the Successor’s equity for Class A Units
in any such succession, as the case may be, or (ii) grant to me substantially similar awards/options to purchase equity securities of the
Successor.
13. Validity . The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force and effect.
14. Indemnification/Insurance . The Company shall obtain and maintain Directors and Officers Insurance in order to hold me harmless
from any criminal or civil litigation arising from the performance of my duties and responsibilities on behalf of the Company; provided, that if I
am terminated for Cause, such insurance coverage shall not apply to the action or actions that materially supported the termination for Cause.
The duration of such insurance shall include my term of employment and a period consistent with standard industry practice for
similarly-situated development stage companies following the termination of my employment pursuant to Section 5 above. In addition, the
Company shall provide corporate indemnification to me pursuant to the terms of the Indemnification Agreement by and between me and the
Company, dated September 29, 2006, as amended (the “Indemnification Agreement”).
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15. Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all
of which together shall constitute the same instrument.
16. Entire Agreement . All oral or written agreements or representations, express or implied, with respect to the subject matter of this
Agreement are set forth in this Agreement.
I ACKNOWLEDGE THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY AND ME RELATING TO
THE SUBJECTS COVERED IN THIS AGREEMENT ARE CONTAINED IN IT AND THAT I HAVE ENTERED INTO THIS
AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON ANY PROMISES OR REPRESENTATIONS BY THE COMPANY
OTHER THAN THOSE CONTAINED IN THIS AGREEMENT ITSELF.
I FURTHER ACKNOWLEDGE THAT I HAVE CAREFULLY READ THIS AGREEMENT, THAT I UNDERSTAND ALL OF IT, AND
THAT I HAVE BEEN GIVEN THE OPPORTUNITY TO DISCUSS THIS AGREEMENT WITH MY PRIVATE LEGAL COUNSEL
AND HAVE AVAILED MYSELF OF THAT OPPORTUNITY TO THE EXTENT I WISHED TO DO SO. I UNDERSTAND THAT BY
SIGNING THIS AGREEMENT I AM GIVING UP MY RIGHT TO A JURY TRIAL.
Date: September 29, 2006
/s/ Stephen F. Groth
Stephen F. Groth
INNER MONGOLIA PRODUCTION COMPANY LLC
Date: September 29, 2006
By:
/s/ Frank C. Ingriselli
Its: President and CEO
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Exhibit 10.13
LEASE
STATION PLAZA ASSOCIATES
Landlord
and
INNER MONGOLIA PRODUCTION COMPANY
Dated: December 1 st , 2006
Suite # 47/48/49
Building:
Station Plaza
250 East Hartsdale Avenue
Hartsdale, New York
TABLE OF CONTENTS
PAG
E
SECTION
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
PREMISES
DEFINITIONS
TERM
USE OF PREMISES
RENT
INCREASES IN OPERATING EXPENSES
INCREASE IN REAL ESTATE TAXES
REPAIRS
PARKING
UTILITIES AND SERVICES
(a)
HVAC
(b)
Water
(c)
Electricity
(d)
Cleaning
(e)
Security
(f)
Interruption of Services
INSURANCE
SUBORDINATION
DESTRUCTION, FIRE OR OTHER CAUSES
EMINENT DOMAIN
ASSIGNMENT AND SUBLEASING, MORTGAGE, ETC.
FEES AND EXPENSES
NO REPRESENTATIONS BY LANDLORD; INDEMNITY
QUIET ENJOYMENT; HOLDING OVER
DEFAULT
REMEDIES OF LANDLORD
RIGHT TO EXHIBIT PREMISES AND ACCESS TO PREMISES
BROKERAGE
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SECTION
23.
SECURITY DEPOSIT
24.
LEASE STATUS AND NOTICE
25.
ASSIGNS
26.
SURRENDER OF REMISES
27.
MISCELLANEOUS
28.
ENTIRE AREEMENT
EXHIBIT A — OPERATING EXPENSES
EXHIBIT B — CLEANING SPECIFICATIONS
EXHIBIT C — SUITE RENOVATIONS
PAG
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LEASE dated the 1st day of December, 2006, between STATION PLAZA ASSOCIATES, a partnership organized and existing under the
laws of the State of New York with an office at 595 Summer Street, Stamford, CT acting herein by Leslie M. Klein, partner duly authorized ( “
Landlord ” ); and, Inner Mongolia Production Company, with offices located at 250 East Hartsdale Avenue, Hartsdale, New York 10530 ( “
Tenant ” ).
WITNESSETH:
1.
PREMISES .
Landlord hereby leases to Tenant, for the term and upon the conditions hereinafter specified, the following premises: approximately 1378
rentable square feet of (the “ Premises ”) on the fourth (4th) floor in the building (the “ Building ”) known as Station Plaza, 250 East
Hartsdale Avenue, located in Hartsdale (the “ City ”).
2.
DEFINITIONS .
Terms used in this Lease shall have the following meanings:
(a)
3.
Base Rent:
(i)
Lease Year 1 — $38,584.00.00 per annum payable at the monthly rate of $3,215.33;
(ii)
Lease Year 2 — $40,127,00.00 per annum payable at the monthly rate of 3,343.92;
(iii)
Electric included
(b)
Tax Base Year: Calendar Year 2007
Base Operating Expense Year: Calendar Year 2007
(c)
Tenant’s Proportionate Share: 5.5%
(d)
Parking: Four (4) spaces reserved
(e)
Lease Year: Consecutive 12-month periods during the Term, with the first Lease Year commencing on the 1 st day of December,
2006.
TERM.
To have and to hold the premises for a term of two (2) years (the “term”), commencing on December 1, 2006 (the “ Commencement Date”
), and ending on November 30, 2008 (the “ Expiration Date” ).
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4.
USE OF PREMISES .
(a) Tenant shall use the Premises only for general office use, and for no other purpose. Tenant will not interfere with the conduct of business
by other tenants or occupants of the Building or create any private nuisance, including, without limitation, the occupation by Tenant or its
employees, agents, contractors, subtenants or invitees (collectively, “ Tenant’s representatives ”) of more than the number of parking places
allocated to Tenant.
(b) Tenant, at its expense, shall comply with all laws, orders and regulations of Federal, State and municipal authorities and with any
direction of any public officer or officers, pursuant to law, which shall impose any violation, order or duty upon Landlord or Tenant with
respect to the Premises or the use or occupancy thereof, including without limitation the Americans With Disabilities Act (as amended from
time to time and as may be superceded from time to time, the “ Act ” ) and any Environmental Laws (collectively, the “ Legal Requirements
” ) . Anything in the preceding sentence to the contrary notwithstanding, if alterations to the Premises are required under the Act because of
alterations to the common areas of the Building (the “ Common Areas ” ) made by Landlord, then Landlord shall, at its expense, make the
alterations to the Premises required under the Act. If alterations to the Common Areas are required under the Act because of the nature of
Tenant’s business or alterations made by or on behalf of Tenant within the Premises, then Landlord may make same and Tenant shall, within
20 days after receipt of a bill from time to time, reimburse Landlord for the reasonable cost of such alterations.
(c) Tenant, at its expense, shall comply with all rules, orders, regulations and requirements of the Board of Fire Underwriters or other
similar body or authority having jurisdiction and all insurance policies affecting the Premises (collectively, the “ Insurance Requirements ” )
and shall not do or permit anything to be done, in or upon the Premises, or bring or keep anything therein, which is prohibited by any Insurance
Requirements, or which would increase the rate of fire insurance applicable to the Building over that in effect on the date hereof. Tenant shall
comply with the Legal Requirements and the Insurance Requirements, whether or not such compliance shall require extraordinary or
unforeseen repairs, replacements or additions, and whether or not the Premises currently comply with same.
(d) Tenant shall, at Tenant’s expense, keep and maintain the Premises in compliance with all local, state and Federal environmental laws,
ordinances and regulations, including without limitation, 42 U.S.C. §9601 et seq ., 42 U.S.C. §6901 et seq ., 49 U.S.C. §1801 et seq ., 15
U.S.C. §2601 et seq ., and the regulations promulgated thereunder, (all of the foregoing being referred to collectively as the “ Environmental
Laws ” ). During the Lease term, Tenant shall permit no spills, discharges, or releases of any hazardous, radioactive or polluting substances,
including without limitation any oil or petroleum products or any chemical liquids or solids (all of the foregoing being referred to collectively
as “ Hazardous Materials ” ). Tenant shall indemnify, defend and hold harmless Landlord, its successors and assigns from and against any
claim, liability, cost, damage, expense, response or remedial action costs (including without limitation attorneys’ fees, and costs of
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investigation or audit) relating to: (i) the presence, use, or storage on or under the Premises, or any spill, discharge or release from the Premises,
of any Hazardous Material during the Lease term; (ii) any failure of the Premises to comply with any applicable Environmental Law, unless
such non-compliance results from the conduct of Landlord and/or a prior occupant of the Premises; or (iii) any loss of value of the Premises,
including without limitation any loss of value arising from the imposition of any lien against the Premises, unless such loss of value results
from the conduct of Landlord and/or a prior occupant. In addition, Tenant, at its sole cost and expense, shall be responsible to contain and
remove any and all medical waste, and shall indemnify and hold Landlord harmless with regard to said medical waste and disposal thereof.
These foregoing indemnities shall survive the expiration or termination of this Lease.
5.
RENT .
Commencing on the Commencement Date, Tenant shall pay to Landlord the Base Rent specified below, without demand and without setoff
or deductions of any kind, in equal monthly installments, in advance, on the first day of each calendar month of the Term at the address of
Landlord stated above or such other place as Landlord may designate in writing from time to time, with payment in advance of appropriate
fractions of a monthly payment for any portion of a month at the expiration or prior termination of the Term. Every amount payable by Tenant
hereunder in addition to Base Rent shall be deemed “ Additional Rent .” Base Rent and Additional Rent are herein collectively referred to as
the “ Rent .” Any Rent not paid by Tenant on or before the due date thereof shall be payable on or before the first day of the succeeding month
with a late charge equal to 5% of the unpaid installment, payable as Additional Rent. Anything herein to the contrary notwithstanding, the first
monthly installment of Base Rent, which shall be payable on the execution hereof.
6.
INCREASES IN OPERATING EXPENSES .
(a) After the expiration of the Base Operating Expense Year and of each succeeding calendar year ( “ Operating Year ” ), Landlord shall
furnish Tenant a written statement prepared by Landlord of the Operating Expenses of the Property, as defined in Exhibit A attached hereto,
incurred for such year. During the period of 60 days after receipt of Landlord’s statement, Tenant’s independent certified public accountant
may inspect the records of the material reflected in said Landlord’s statement at a reasonable time mutually agreeable to Landlord and Tenant.
Failure of Tenant to challenge any item in such statement within 60 days after receipt shall be a waiver of Tenant’s right to challenge such item
for such year. Within 30 days after receipt of such statement for any Operating Year setting forth any increase of Operating Expenses during
such Operating Year over the Operating Expenses in the Base Operating Expense Year (said increase being referred to herein as the “ Cost
Increase ” ), Tenant shall pay Tenant’s Proportionate Share of the Cost Increase (less the amount of Tenant’s projected share paid by Tenant
on account thereof) to Landlord as Additional Rent. Operating Expenses shall be determined as if the Building were 95% occupied during the
Base Operating Expense Year and each Operating Year in which actual occupancy shall be less than 95%.
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(b) Commencing with the first Month After the Base Operating Expense Year, Tenant shall pay to Landlord, as Additional Rent, Tenant’s
projected share. Such projected share shall be equal to Landlord’s written estimate of Tenant’s Proportionate Share of the Cost Increase for the
Operating Year. On the first day of each month of each Operating Year during the Term, and within 30 days after Tenant’s receipt of
Landlord’s written estimate, Tenant shall pay to Landlord one-twelfth of its projected share of the estimated Cost Increase for such Operating
Year. If Landlord’s statement after the end of an Operating Year shall indicate that Tenant’s projected share exceeded Tenant’s Proportionate
Share of Cost Increase, Landlord shall forthwith, at Landlord’s option, either (i) pay the amount of excess directly to Tenant concurrently with
the notice or (ii) permit Tenant to credit the amount of such excess against the subsequent payments of Additional Rent due hereunder. If
Landlord’s statement shall indicate that Tenant’s Proportionate Share of Cost Increase exceeded Tenant’s projected share for the completed
Operating Year, Tenant shall, subject to the provisions of subsection 6(a) herein, forthwith pay the amount of such excess to Landlord. If said
Landlord’s statement is furnished to Tenant after the commencement of a subsequent Operating Year, there shall be promptly paid by Tenant to
Landlord or vice versa, as the case may be, an amount equal to the portion of such payment or credit allocable to the part of such Operating
Year which shall have elapsed prior to the first day of the calendar month next succeeding the calendar month in which said Landlord’s
statement is furnished to Tenant.
(c) Landlord’s failure to render Landlord’s statement with respect to any Operating Year or Tax Year, or Landlord’s delay in rendering said
statement beyond a date specified herein, shall not prejudice Landlord’s right to render a Landlord’s statement with respect to that or any
subsequent Operating Year or Tax Year. The obligations of Landlord and Tenant under the provisions of this Section with respect to any
Additional Rent, which obligations have accrued prior to the expiration or sooner termination of the Term, shall survive the expiration or any
sooner termination of the Term.
7. INCREASE IN REAL ESTATE TAXES .
If Real Estate Taxes with respect to the Property are increased, during any year subsequent to the Tax Base Year, over Real Estate Taxes
paid by Landlord during the Tax Base Year, then Tenant shall pay to Landlord, without setoff or deductions of any kind, as Additional Rent
After the Tax Base Year an amount equal to Tenant’s Proportionate Share of such increase. Payment of such increase shall be made in the
installments provided by the taxing authority within 30 days after Tenant receives from Landlord notice of such tax increase and a bill for
Tenant’s Proportionate Share thereof, together with a copy of the applicable bill received by Landlord from the taxing authority. “ Real Estate
Taxes ” shall mean all taxes, assessments and governmental charges, whether Federal, State or municipal, which are levied or charged against
real estate, personal property or rents, or on the right or privilege of leasing real estate or collecting rents thereon and any other taxes and
assessments attributable to the Property or its operation, excluding, however, Federal, State or other general income taxes not limited to real
property. If Landlord shall be required under a mortgage or other creditor arrangement to make real estate tax deposits monthly or otherwise,
Tenant shall make the same
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installment payments to Landlord of its share of same. If Landlord receives a refund of any portion of Real Estate Taxes that were included in
the Real Estate Taxes paid by Tenant, then Landlord shall reimburse Tenant its pro rata share of the net refunded taxes, less any expenses that
Landlord reasonably incurred to obtain the refund. If, as a result of any application or proceeding brought by or on behalf of Landlord for
review of the assessed valuation of the Property for the Tax Base Year, there shall be a decrease in the Real Estate Taxes payable by Landlord
for such year, the reduced amount shall be used for future calculations under this Section.
8. REPAIRS .
(a) Except as provided in (b) below, the roof, exterior walls (excluding windows) and foundation of the Building and all parts of the heating,
plumbing, electrical and air conditioning systems in the Building shall be maintained and repaired by Landlord at its expense, except if
necessitated by the excess use (i.e., greater than normal office use) by, or the negligence or willful act of Tenant or any of Tenant’s
Representative, in which event Tenant shall promptly reimburse Landlord for the costs incurred in effecting such repair or replacement as
necessary. The fact that any such repairs are Landlord’s responsibility does not preclude the cost of same being included as Operating
Expenses.
(b) Tenant, at its expense, shall repair, maintain in good order and condition and replace, if necessary, the interior of the Premises and shall
keep the Premises clean and orderly in accordance with Landlord’s standards for the Building.
9. PARKING .
Tenant shall have the right to use the number of parking spaces specified in Section 2 hereof. Landlord shall have the right, at any time and
from time to time during the Term, to designate or re-designate the parking spaces to be used by Tenant, in which event Tenant shall limit its
employee and invitee parking to its assigned spaces and will post markings designating its spaces. Landlord shall have no liability to Tenant if
others park in Tenant’s assigned spaces.
10. UTILITIES AND SERVICES .
(a) HVAC. Mondays through Fridays (except the days observed by the Federal or the New York state governments as legal holidays) from
8:00 a.m. to 6:00 p.m., and Saturdays (except the days observed by the Federal or the New York state governments as legal holidays) from 8:00
a.m. to 1:00 p.m., Landlord shall furnish and distribute heat to the Premises reasonable air conditioning on business days from May 15 th to
September 30 th . If Tenant shall require air conditioning or heat at any other time, Landlord shall furnish after-hours air conditioning and heat
upon reasonable advance notice from Tenant, and Tenant shall pay Landlord’s then-established charges therefor on Landlord’s demand.
Landlord’s current charge to Tenant for such after-hours service is $75.00 per hour.
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(b) WATER. Landlord shall supply reasonably adequate quantities of hot and cold water to the Premises for ordinary lavatory and drinking
purposes.
(c) ELECTRICITY. Tenant shall pay to Landlord, for all electricity consumed in the Premises, utilizing the Electrical Factor set forth in
Section 2 (if so specified), payable in installments on the first day of each month during the Term.
(d) CLEANING. Landlord, at its expense, shall cause the Premises to be cleaned Mondays through Fridays (except the days observed by the
Federal or the New York state governments as legal holidays), including annually the exterior and the interior of the windows thereof (subject
to Tenant maintaining unrestricted access to such windows), but excluding any portions of the Premises used for the storage, preparation,
service or consumption of food or beverages. Tenant shall pay to Landlord on demand Landlord’s reasonable charges for any special or unusual
cleaning work in the Premises, including without limitation, the cleaning of private baths, interior glass, pantries, kitchens, lounge areas,
paneled and fabric walls, and wood floors. Exhibit B describes the cleaning services to be provided by Landlord under this Section.
(e) SECURITY. In no event shall Landlord be required to provide any security services to the Building. Tenant shall supply such security
services to the Premises as Tenant requires, subject to Landlord’s prior approval of plans. If Landlord shall, at its discretion, supply any
security services to the Building, same shall not guarantee the safety of Tenant’s employees, invitees or property.
(f) INTERRUPTION OF SERVICES. Landlord does not warrant that any of the services referred to above, or any other services which
Landlord may supply, will be free from interruption, and Tenant acknowledges that any one (1) or more such services may be suspended by
reason of accident, repairs, inspections, alterations or improvements necessary to be made, or by Unavoidable Delay (as hereinafter defined).
Any such interruption or discontinuance of service shall not be deemed an eviction or disturbance of Tenant’s use and possession of the
Premises, or any part thereof, nor render Landlord liable to Tenant for damages by abatement of the Rent or otherwise, nor relieve Tenant from
performance of Tenant’s obligations under this Lease. Landlord shall, however, exercise reasonable diligence to restore any service so
interrupted.
11. INSURANCE .
(a) Tenant shall, at its expense, secure and maintain general liability insurance written on a so-called “comprehensive” general liability form
with combined single limit coverage (for personal injury, property damage or death arising out of any one (1) occurrence) of at least
$1,000,000, with no deductible, naming Landlord and Landlord’s designees as additional insureds under the policy. Tenant shall, at its expense,
secure and maintain excess liability insurance written on a umbrella form with combined and single limit coverage (for personal injury,
property damage or death arising out of any one (1) occurrence) of at least $1,000,000, with no deductible, naming Landlord and Landlord’s
designees as additional insureds under the policy. Tenant shall deliver to Landlord
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duplicate certificates of such insurance prior to taking occupancy of the Premises and shall deliver new certificates at least 30 days prior to the
expiration of the existing coverage. Such certificates shall provide that in the event of termination or material change in coverage, Landlord
shall be given 30 days’ advance notice in writing sent by certified mail to the address of Landlord. Such insurance shall insure Tenant’s
contractual liability hereunder and shall contain a waiver of the insurer’s right of subrogation against Landlord. Said coverage limit shall be
increased if, in Landlord’s reasonable judgment, increased limits are required to protect Landlord and Tenant against claims covered thereby. If
Tenant shall voluntarily carry any liability insurance in an amount greater than required hereunder, such insurance shall comply with the
requirements of this Section.
(b) Tenant shall maintain all-risk casualty insurance covering Tenant’s furniture, fixtures, equipment and other personality within the
Premises, with replacement value coverage.
(c) Landlord and Tenant hereby waive all rights to recover against each other for any loss or damage covered by any casualty insurance
required under this Lease, or otherwise actually carried by each of them. Landlord and Tenant will diligently attempt to cause their respective
insurers to issue appropriate waiver of subrogation endorsements to all policies and insurance carried in connection with the Premises or the
contents of either of them. Anything in this Lease to the contrary notwithstanding, Landlord and Tenant shall look first to the proceeds of their
respective insurance policies before proceeding against each other in connection with any claim relating to any matter covered by this Lease.
12. SUBORDINATION .
(a) This Lease is and shall be subject and subordinate to (i) any and all mortgages now or hereafter affecting the fee title of the Building, and
to any and all present and future extensions, modifications, renewals, replacements and amendments thereof; and (ii) any and all ground leases
now or hereafter affecting the Building or any part thereof and to any and all extensions, modifications, renewals, replacements and
amendments thereof. Tenant will execute and deliver promptly to Landlord any reasonable certificate or instrument which Landlord, from time
to time, may request for confirmation of the provisions of this Section.
(b) Neither the foreclosure of a superior mortgage nor the termination of a superior ground lease, nor the institution of any suit, action,
summary or other proceedings by Landlord or any successor landlord under such ground lease or by the holder of any such mortgage, shall, by
operation of law, result in the cancellation or termination of the obligations of Tenant hereunder, and Tenant agrees to attorn to and recognize
Landlord and any successor landlord under such ground lease or the holder of any such mortgage, or the purchaser of the Building in
foreclosure or any subsequent owner of the fee, as the case may be, as Tenant’s landlord hereunder in the event that any of them shall succeed
to Landlord’s interest in the Premises.
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13. DESTRUCTION, FIRE OR OTHER CAUSES .
(a) If the Building shall be partially damaged by fire or other casualty so that the damage can reasonably be repaired by Landlord within
180 days from the date of the damage (90 days in the case of damage within the last year of the Term), then the damage shall be diligently
repaired by and at the expense of Landlord (to the extent of net insurance proceeds received by Landlord for restoration), subject to applicable
Legal Requirements and Insurance Requirements, and the Rent until such repairs shall be made shall be apportioned according to the part of the
Premises which is tenantable.
(b) If the Building is destroyed or rendered wholly untenantable by fire or other cause, or if the Building shall be so damaged that it cannot
reasonably be repaired by Landlord within 180 days (90 days in the case of damage within the last year of the Term) from the date of the
damage, or if Landlord shall elect not to restore the same but to demolish it or rebuild it, then in any of such events Landlord may, within
60 days after such casualty, give Tenant a notice in writing of intention to terminate this Lease, and thereupon the Term shall expire, effective
the date of the casualty, and Tenant shall vacate the Premises and surrender the same to Landlord within ten (10) days after receipt of
Landlord’s notice. If Landlord does not elect to terminate this Lease, the provisions of subsection (a) shall govern.
(c) Landlord shall not be liable for any damage to, or be required (under any provision of this Lease or otherwise) to repair, restore or
replace, any property in the Premises or be liable to Tenant for damage arising from rain or snow or from the bursting, overflowing or leakage
of water, steam or gas pipes or defect in the plumbing, HVAC, mechanical or electrical systems of the Building or from any act or neglect of
any other tenant or occupant in the Building.
14. EMINENT DOMAIN .
(a) If the whole or any substantial part of the Land and/or the Building shall be acquired or condemned by eminent domain for any public or
quasi-public use or purpose, or if Landlord elects not to restore the Building but to demolish or rebuild it, then and in that event, the Term shall
cease and terminate from the date of taking, and Rent shall be adjusted and paid to the date of such termination.
(b) In the event of any other condemnation of a part of the Building, this Lease shall remain in effect, but the Rent shall be prorated based on
that portion of the Premises which remains tenantable, and Landlord shall diligently repair the damage to the Building (to the extent of net
condemnation proceeds received by Landlord for restoration), subject to applicable Legal Requirements and Insurance Requirements.
(c) In any event Tenant shall have no claim against Landlord or the condemning authority for the value of the unexpired Term or to any part
of the award in such proceeding; provided
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however that Tenant may assert a claim against the condemning authority for any of its personal property so taken and for its moving expenses.
15. ASSIGNMENT AND SUBLEASING, MORTGAGE, ETC .
(a) Neither Tenant nor any party claiming under or through Tenant shall assign, mortgage or encumber this Lease, or sublease all or any part
of the Premises, or suffer or permit the Premises or any part thereof to be subleased to or used by others, without the prior written consent of
Landlord in each instance. As provided in subsection (c) below, Landlord shall not unreasonably withhold its consent to a proposed subletting
or assignment. The transfer (or transfers in the aggregate) of more than a 50% interest in Tenant, shall be deemed an assignment of this Lease
for the purposes of this Section. If this Lease be assigned, or if the Premises or any part thereof be sublet to or occupied by anybody other than
Tenant, Landlord may, at Landlord’s option, collect rent from the assignee, subtenant or occupant, and apply the net amount collected to the
Rent herein reserved (and any sublease shall confirm such option by Landlord), but no such assignment, subletting, occupancy or collection
shall be deemed a waiver of this covenant, or the acceptance of the assignee, subtenant or occupants, or a release of Tenant from the further
performance by Tenant of covenants on the part of Tenant herein contained. The consent by Landlord to an assignment or subletting shall not
be construed to relieve Tenant from obtaining the express consent in writing of Landlord to any further assignment or subletting.
(b) If Tenant desires to assign this Lease or to sublease all or substantially all of the Premises in the aggregate, Tenant shall first give notice
to Landlord of the proposed transaction and the term thereof, and Landlord shall have the right, by notice to Tenant within 30 days after receipt
of Tenant’s notice, to terminate this Lease. If Tenant desires to sublease less than substantially all of the Premises in the aggregate, Tenant shall
first give notice to Landlord as aforesaid, and Landlord shall have the right to terminate this Lease with respect to the portion of the Premises
proposed to be subleased, as of the intended effective date of the proposed sublease. If Landlord exercises its right to terminate this Lease with
respect to such portion of the Premises, then (i) the Base Rent and Tenant’s Proportionate Share shall be proportionally reduced, and an
adjustment shall be made for amounts, if any, paid in advance and applicable to the portion of the Premises no longer leased by Tenant; and
(ii) the number of parking spaces available for Tenant’s use pursuant to Section 9 hereof shall be proportionally reduced, as reasonably
designated by Landlord.
(c) If Landlord elects not to so terminate this Lease, then Landlord shall not unreasonably withhold its consent to the proposed subletting or
assignment. Tenant shall pay to Landlord as Additional Rent, within ten (10) days after receipt of payments from a subtenant or assignee, 75%
of any “profit” on a subletting or assignment, i.e., the excess of consideration of any type received by Tenant from the subtenant or assignee,
over (in the case of a sublease only) a pro rata portion of the Rent payable by Tenant hereunder, reduced by Tenant’s reasonable third-party
brokerage fees and attorneys’ fees for the transaction.
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(d) Notwithstanding the foregoing, without Landlord’s consent and without being subject to Landlord’s rights under subsections 15(b) and
(c) above but upon 60 days’ prior notice to Landlord, this Lease may be assigned, or the Premises may be sublet, to any entity which is an
Affiliate of Tenant. Within ten (10) days after the execution of any such assignment or sublease, Tenant shall deliver a complete copy of the
documentation to Landlord. For the purposes of this Section, an “ Affiliate ” means any entity controlling, controlled by or under common
control with Tenant. If thereafter the transferee shall no longer be an Affiliate of Tenant, that shall be deemed a new assignment or sublease, as
the case may be, subject to this Section.
(e) Landlord shall not be required to consider, act upon or accept any request to assign or sublet the Premises, unless Tenant accompanies
such request with payment of the sum of $1,500.00 for anticipated administrative costs in reviewing and evaluating such request.
16. FEES AND EXPENSES .
If Tenant shall default in the observance or performance of any term or covenant of this Lease, Landlord may, after ten (10) days’ notice to
Tenant to cure the default and failure of Tenant to cure the same within such period, or at any time thereafter without notice in event of
emergency, perform the same for the account of Tenant. If Landlord makes any expenditures or incurs any obligations in connection with a
default by Tenant, including, but not limited to, reasonable attorneys’ fees in instituting, prosecuting or defending any action or proceeding
against Tenant, such sums paid or obligations incurred, with interest (as provided below) and costs, shall be deemed to be Additional Rent
hereunder and shall be paid by Tenant to Landlord within ten (10) days of rendition of any bill or statement to Tenant hereunder.
17. NO REPRESENTATIONS BY LANDLORD; INDEMNITY .
(a) Landlord and Landlord’s agents have made no representations or promises with respect to the Building or the Premises, including the
uses permitted under applicable law, except for representations herein expressly set forth.
(b) Except as otherwise herein specified, neither Landlord, nor any employee, agent or contractor of Landlord, shall be liable to Tenant or
any of Tenant’s Representatives (i) for any damage to or loss of any property of Tenant or such other person, irrespective of the cause of such
damage or loss; or (ii) for any personal injury to Tenant or such other person from any cause.
(c) Subject to subsection 11(c) herein, Tenant shall defend, indemnify and hold harmless Landlord, its employees, agents and contractors
against and from all liabilities, including reasonable attorneys’ fees, which may be imposed upon or incurred by or asserted against Landlord or
such other persons by reason of any of the following occurring during the Term or prior thereto when Tenant has been given access to the
Premises: (i) any work or thing done in the Premises by or at the request of Tenant or any of Tenant’s Representatives; (ii) any negligence or
wrongful act or omission of Tenant or any of Tenant’s Representatives; (iii) any accident, injury, loss or damage to
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any person or property occurring in the Premises; and (iv) any failure on the part of Tenant or any of Tenant’s Representatives to comply with
any of the terms of this Lease.
18. QUIET ENJOYMENT; HOLDING OVER .
(a) Upon Tenant paying the Rent and observing and performing all the terms, covenants and conditions on Tenant’s part to be observed and
performed, Tenant may peaceably and quietly enjoy the Premises hereby demised, free from any interference, molestation or acts of Landlord
or of anyone claiming by, through or under Landlord, subject, nevertheless, to the terms and conditions of this Lease and to any ground lease
and mortgages as hereinbefore provided.
(b) If Tenant retains possession of the Premises or any part thereof after the Expiration Date or earlier termination date without the written
consent of Landlord, Tenant’s occupancy shall be under all of the terms and conditions of this Lease, except that (i) the tenancy shall be at will,
terminable by either party on ten (10) days’ written notice; (ii) the Base Rent per month shall be the greater of (x) 150% of the then monthly
fair market fixed rent for the Premises, and (y) 150% of the Base Rent specified herein for the month preceding the termination; and
(iii) Tenant shall indemnify and hold Landlord harmless for all damages sustained and liabilities incurred by Landlord as a result of Tenant’s
continued occupancy beyond ten (10) days after Landlord’s notice to Tenant under this subsection. Anything in this Lease to the contrary
notwithstanding, if Tenant shall retain possession of part or all of the Premises after the Expiration Date or earlier termination date hereof,
extension or renewal rights, first offer and first refusal rights, and expansion rights, if any, herein shall terminate.
19. DEFAULT .
(a) If (i) Tenant defaults in the payment, when due, of any installment of Rent and Tenant fails to remedy such default within five
(5) business days after notice from Landlord; or (ii) Tenant defaults in fulfilling any other covenant of this Lease and Tenant fails to remedy
such default within 20 days after notice by Landlord to Tenant specifying the nature of such default (or if the said default cannot be completely
cured or remedied within said 20-day period and Tenant shall not have diligently commenced curing such default within such 20-day period
and shall not thereafter diligently remedy or cure such default within 60 days after notice from Landlord), then Landlord may, by notice to
Tenant, cancel this Lease, and this Lease and the Term hereunder shall end and expire as fully and completely as if the date of cancellation
were the day herein definitely fixed for the end and expiration of this Lease and the Term hereof. Tenant shall then quit and surrender the
Premises to Landlord, but Tenant shall remain liable as hereinafter provided.
(b) If (i) a notice provided for in subsection (a) above shall have been given and the Term shall expire as aforesaid, or (ii) any execution
shall be issued against Tenant or any of Tenant’s property, whereupon the Premises shall be taken or occupied or attempted to be taken or
occupied by someone other than Tenant, then and in any of such events, Landlord may, without notice, re-enter
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the Premises, and dispossess Tenant, and the legal representative of Tenant or other occupant of the Premises, by summary proceedings or
otherwise, and remove their effects and hold the Premises as if this Lease had not been made. Tenant hereby waives the service of notice of
intention to re-enter or to institute legal proceedings to that end, but Tenant shall remain liable for damages as hereinafter provided.
20. REMEDIES OF LANDLORD .
In case of any such default, re-entry, expiration and/or dispossess by summary proceedings or otherwise: (a) the Rent shall become due
thereupon and be paid up to the time of such re-entry, dispossess and/or expiration, together with such expenses as Landlord may incur for
counsel fees, brokerage and/or putting the Premises in good order, or for preparing the same for re-rental; (b) Landlord may re-let the Premises
or any part or parts thereof, either in the name of Landlord or otherwise, for a term or terms, which may at Landlord’s option be less than or
exceed the period which would otherwise have constituted the balance of the Term, and may grant concessions of free rent; and/or (c) Tenant
or the legal representatives of Tenant shall also pay Landlord any deficiency between (i) the Rent hereby reserved and/or covenanted to be
paid, and (ii) the net amount, if any, of the rents collected on account of the lease or leases of the Premises for each month of the period which
would otherwise have constituted the balance of the Term. There shall be added to such deficiency such expenses as Landlord may incur in
connection with re-letting the Premises, including without limitation, counsel fees, brokerage commissions and expenses incurred in
maintaining the Premises in good order and in connection with renovating and preparing the same for re- letting. Any such rent deficiency shall
be paid in monthly installments by Tenant on the rent day specified in this Lease, and any suit brought to collect the amount of the deficiency
for any month shall not prejudice in any way the rights of Landlord to collect the deficiency for any subsequent month or months by a similar
proceeding. In addition, Landlord shall have the alternative of commencing suit against Tenant at any time for an amount equal to the Rent
reserved for the balance of the Term less the fair market rent of the Premises for the same period. Any Rent not paid by Tenant within 20 days
after the due date thereof, shall thereafter be payable with interest at the rate of 3% per annum in excess of the prime or base rate of Citibank
(or its successor) in effect from time to time, from the due date to the date of payment. Landlord, at its option, may make such alterations,
repairs, replacements and/or decorations in the Premises as Landlord considers advisable for the purpose of re-letting the Premises; and the
making of such alterations and/or decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. The
failure of Landlord to re-let the Premises or any part thereof shall not release or affect Tenant’s liability for continued rent or damages
hereunder nor shall Landlord in any event be liable in any way whatsoever for failure to re-let the Premises. In the event of a breach by Tenant
of any of the covenants or provisions hereof, Landlord shall have the right of injunction and the right to invoke any remedy allowed at law or in
equity, as if re-entry, summary proceedings and other remedies were not herein provided for. Mention in this Lease of any particular remedy
shall not preclude Landlord from any other remedy, in law or in equity.
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21. RIGHT TO EXHIBIT PREMISES AND ACCESS TO PREMISES .
(a) Landlord reserves the right to enter the Premises and exhibit same at any reasonable time (i) to prospective mortgagees, purchasers and
ground lessees and (ii) to prospective tenants at any time within 180 days prior to the expiration of the Term.
(b) Subject to reasonable security requirements, Tenant shall have access to the Building 24 hours per day, seven (7) days per week. A
keypad or similar security access system will be provided.
(c) Landlord reserves the right to have its employees and agents enter the Premises at any reasonable time (and at any time in case of
emergency) in order to gain access to any utility area, which utility area contains equipment and systems for the Building, and in order to effect
necessary repairs and replacements. Such agents may bring necessary tools and equipment with them and may store same within the Premises.
(d) Landlord shall exercise all access rights to the Premises available under this Lease, in each instance, upon reasonable advance notice to
Tenant, in a manner consistent with Tenant’s reasonable security requirements and in a manner which does not unreasonably interfere with
Tenant’s business operations, except in any event in cases of emergency.
22. BROKERAGE .
Tenant represents that it has not had or dealt with any realtor, broker or agent in connection with the negotiation of this Lease and Tenant
shall pay and hold Landlord harmless from any cost, expense or liability (including costs of suit and attorneys’ fees) for any compensation,
commission or charges claimed by any realtor, broker or agent with respect to this Lease and the negotiation thereof.
23. SECURITY DEPOSIT .
Tenant has deposited with Landlord the sum of $6,430.66 (the “ Security Deposit ” ) as security for the performance by Tenant of the
provisions of this Lease. If Tenant defaults with respect to any provision of this Lease, including payment of the Rent, Landlord may use,
apply, draw upon or retain all or any part of the Security Deposit to the extent necessary for the payment of any Rent, or to compensate
Landlord for any other loss, cost or damage which Landlord may suffer by reason of Tenant’s default. If any portion of the Security Deposit is
so used, applied, or drawn upon, Tenant shall, within ten (10) days after notice thereof, deposit cash with Landlord in an
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amount sufficient to restore the Security Deposit to its original amount. Tenant’s failure to do so shall be a breach of this Lease. Landlord shall
not, unless otherwise required by law, be required to keep the Security Deposit separate from its general funds, nor pay interest to Tenant. If
Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the Security Deposit or any balance thereof shall
be returned to Tenant (or to the last transferee of Tenant’s interest hereunder) within 30 days after the expiration of the Term (or sooner
termination of this Lease) and upon Tenant’s vacation of the Premises in accordance with this Lease. If the Building is sold, the Security
Deposit shall be transferred to the new owner, and thereupon Landlord shall be discharged from further liability with respect thereto.
24. LEASE STATUS AND NOTICE .
(a) From time to time, within ten (10) days after notice from Landlord, Tenant shall execute, acknowledge and deliver to Landlord and/or to
any other entity specified by Landlord, a certification concerning the status of this Lease and Tenant’s occupancy of the Premises, including
without limitation that this Lease is unmodified in full force and effect (or, if there have been modifications, that the same is in full force and
effect as modified and stating the modifications), stating the dates to which the Rent has been paid, and stating whether or not there exists any
default by Landlord under this Lease, and, if so, specifying each such default. Any notice, demand, consent, approval, direction, agreement or
other communication required or permitted hereunder or under any other documents in connection herewith shall be in writing and shall be
directed as follows:
If to
Landlord:
If to
Tenant:
Station Plaza Associates
Attn: Mr. Leslie M. Klein
595 Summer Street
Stamford, CT 06901
Inner Mongolia Production Company
Attn.: Mr. Frank Ingriselli
75 South Broadway — suite 400
White Plains, NY 10601
or to such changed address as a party hereto shall designate to the other parties hereto from time to time in writing. Notices shall be
(i) personally delivered (including delivery by Federal Express, United Parcel Service or other comparable nation-wide overnight courier
service) to the offices set forth above, in which case they shall be deemed delivered on the date of delivery (or first business day thereafter if
delivered other than on a business day or after 5:00 p.m. New York City time to said offices); or (ii) sent by certified mail, return receipt
requested, in which case they shall be deemed
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delivered on the date shown on the receipt unless delivery is refused or delayed by the addressee in which event they shall be deemed delivered
on the third day after the date of deposit in the U.S. Mail.
25 ASSIGNS .
(a) The covenants, conditions and agreements contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and their
respective heirs, distributees, executors, administrators, successors and, except as otherwise provided in this Lease, their assigns.
(b) The word Landlord as used in this Lease means only the owner for the time being of Landlord’s interest in this Lease. In the event of any
assignment of Landlord’s interest in this Lease, the assignor in each case shall no longer be liable for the performance or observance of any
agreements or conditions on the part of the Landlord to be performed or observed.
26 SURRENDER OF PREMISES .
At the expiration of the Term, Tenant will peacefully yield up to Landlord the Premises, broom clean, in as good order and repair as when
delivered to Tenant, damage by fire, casualty and ordinary wear and tear excepted. Any property left by Tenant in the Premises shall be deemed
abandoned by Tenant.
27 MISCELLANEOUS .
(a) Each covenant and agreement in this Lease shall be construed to be a separate and independent covenant and agreement, and the breach
of any such covenant or agreement by Landlord shall not discharge or relieve Tenant from Tenant’s obligations to perform every covenant and
agreement of this Lease to be performed by Tenant. If any term or provision of this Lease or any application thereof shall be invalid or
unenforceable, the remainder of this Lease and any other application of such term shall not be affected thereby. The use of the term “herein”
shall mean “in this Lease” unless the context clearly indicates otherwise.
(b) This Lease shall be governed in all respects by the laws of the State of New York.
(c) Any provision of this Lease which requires Landlord not to unreasonably withhold its consent shall never be the basis for an award of
damages or give rise to a right of setoff or termination to Tenant, but may be the basis for a declaratory judgment or specific injunction with
respect to the matter in question.
(d) Tenant shall look solely to the estate and interest of Landlord, its successors and assigns, in the Property for the collection of a judgment
in the event of a default by Landlord hereunder, and no other property or assets of Landlord or any officer, director or partner of Landlord
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shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant’s remedies.
(e) The failure of Landlord to insist in any one (1) or more instances upon the strict performance of any one (1) or more of the agreements,
terms, covenants, conditions or obligations of this Lease, or to exercise any right, remedy or election herein contained, shall not be construed as
a waiver or relinquishment for the future of the performance of such one (1) or more obligations of this Lease or of the right to exercise such
election, but the same shall continue and remain in full force and effect with respect to any subsequent breach, act or omission, whether of a
similar nature or otherwise.
(f) Obligations under this Lease which accrue during the Term shall survive the Expiration Date or sooner termination of the Term, as same
may be extended hereunder.
(g) The Building may be designated and known by any name Landlord may choose, and such name or designation may be changed from
time to time in Landlord’s sole discretion.
28 ENTIRE AGREEMENT .
This is the entire agreement between the parties on the subject matter hereof. No prior oral or written agreements are a part hereof.
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IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals the year and day first above written.
LANDLORD: STATION PLAZA ASSOCIATES
By:
/s/ Leslie M. Klein
Leslie M. Klein
Its Partner, duly authorized
TENANT:
By:
/s/ Frank Ingriselli
Frank Ingriselli
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EXHIBIT A
Operating Expenses
A. The term “ Operating Expenses ” shall mean actual expenses paid or incurred by Landlord for the operation, repair (as used herein,
including replacement of equipment and materials when necessary) and maintenance of the Property, including the parking areas, which
include without limitation the following:
1. Reasonable wages, salaries and benefits of all necessary building employees engaged in the physical operation, cleaning, security,
repair and maintenance of the Property, including Employer’s Social Security Taxes and any other taxes which may be levied on such wages
and salaries, and including a managing agent’s fee in an amount reasonable in the City.
2. All supplies and materials used in the operation, cleaning, security, repair and maintenance of the Property, and the fees paid to
independent contractors for such services.
3. The cost of supplying water, power, heating, lighting, ventilating, air-conditioning and other utilities to the Property.
4. The current year’s amortized amount of any capital expenses incurred with respect to the Property, amortized over the minimum
period allowed for federal income tax purposes, together with interest at the rate of 10% per annum.
5. The cost of all maintenance and service agreements, including common area maintenance and upkeep.
6. Insurance premiums.
7. The cost of general operation, repair, cleaning and maintenance of the Property (including garbage and refuse removal), exclusive of
expenses for alterations of premises for the accommodation of a specific tenant or tenants.
B. The foregoing costs and expenses shall exclude or have deducted from them, any and all of the following items:
1. leasing, financing and/or sales commissions;
2. executives’ salaries above the grade of building manager;
3. advertising and promotional expenditures;
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4. legal and accounting fees, other than legal and accounting fees reasonably incurred in connection with the maintenance and operation
of the Property or in connection with the preparation of statements required pursuant to additional rent or lease escalation provisions;
5. costs incurred in performing work or furnishing services for individual tenants (including this Tenant) to the extent that such work or
service is in excess of any work or service Landlord at its expense is generally furnishing to tenants;
6. debt service and financing costs on any mortgage affecting the Property;
7. the cost of leasehold improvements made to spaces leased to other tenants in the Building;
8. the cost of repairs and/or restoration necessitated by condemnation or casualty;
9. any cost for which Landlord is reimbursed in full by insurance, other tenants of the Building, or otherwise fully compensated; and
10. rent under any ground lease.
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EXHIBIT B
Cleaning
The Landlord agrees to provide cleaning of the Tenant’s offices and building premises as follows:
1. DAILY: All public areas, public hallways, public lobbies, public vestibules and Tenant’s office spaces shall be swept; waste baskets
will be emptied, cleaned and contents removed to designated areas for removal from building; all tables, file cabinets, window sills, and ledges
will be hand dusted daily; lavatories throughout the building will be cleaned; and the elevator cab will be swept; carpeting shall be carpet
swept.
2. WEEKLY: Clean tile walls and metal partitions in lavatories; stairways swept; sanitary napkin disposal cans sanitized; carpeting
vacuumed.
3. MONTHLY: Doors cleaned; lighting fixtures in public areas will be dusted.
4. ANNUALLY: Windows will be cleaned inside and out; Tenant shall, on one week’s notice clear all sill in the premises.
5. EXTERIOR PREMISES: Lawn areas shall be mowed and landscaped areas shall be kept in a neat and orderly appearance as the
season of the year dictates and as required by Landlord; all paved areas, walkways, steps, etc., shall be maintained and be kept free of snow and
ice, in a reasonable way, as the season of the year dictates and as required by the Landlord; the Landlord shall spread sand, as it deems
necessary, on all paved surfaces, and remove same when necessary.
6. GENERALLY: Cleaning services shall be provided only on business days; any and all trash, debris, crates, boxes, cartons, etc., which
do no fit easily into waste paper baskets will be removed for Tenant upon receipt of Tenant’s timely request, at Tenant’s cost and expense,
which shall be treated as additional rent; the Tenant shall commit no violations of building’s Rules and/or Regulations, or of the codes, rules or
regulations of fire departments or local authorities. Violations of any and all laws governing the operation or occupancy of this building by
Tenant placing any one or more items of trash, debris, crates, boxes, cartons, etc., in halls, stairwells or in any location except where
specifically designed by the Landlord and the cost of removing any such items, or of removing the violations, including any damages the
Landlord may suffer as a result of the Tenant’s acts, shall be borne solely by the Tenant, and such costs, expenses, losses, and damages which
the Landlord incurs or will incur, will be billed to Tenant as additional rent in accordance with the terms and conditions of this Lease. The
Tenant’s use and/or occupancy, whether for emergency purposes or not, of the demised premises, after normal business hours (from 9:00 a.m.
to 5:00 p.m. on business days only) shall cause no interference, delay, conflict, etc., with the normal routines of the building such as,
maintenance, cleaning, and other services scheduled to be performed.
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Except as otherwise provided herein scheduling, method, code of operation and general performance of cleaning services shall be at the sole
option and discretion of the Landlord. The Tenant shall cooperate in maintaining the neat and orderly appearance of the premises. If requested
in writing by Landlord, Tenant will separate its garbage and trash according to recycling guidelines or requirements. All food and wet garbage
shall be put in plastic bags by Tenant and such bags will be closed and tied or sealed.
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EXHIBIT C
Suite Renovations- Tenant Fitup:
The Landlord agrees to provide the following improvements to the Tenant’s office as follows:
1.
Suite modifications according to the attached floor layout;
2.
Repainting of all wall surfaces in tenant selected color;
3.
Installation of new carpeting in tenant selected color, not to exceed $22.00 per sq/yd. Any additional cost will be the responsibility of
tenant. Movement of any and all furniture is the responsibility of tenant;
4.
Replacement of all current ceiling tiles with new ceiling.
Exhibit 10.14
Jing Hui Tong Real Estate Management Company
and
Inner Mongolia Sunrise Petroleum Limited
NO.118 Jian Guo Lu Yi, Beijing 100022 P.C,
The Exchange-Beijing
Room 09 Floor 18
Tenancy Agreement
1
TENANCY AGREEMENT
Clause 1 DEFINITIONS
Clause 2 STATUS OF THE PREMISES
Clause 3 PURPOSE OF THE TENANCY
Clause 4 DELIVERY DATE AND LEASE TERM
Clause 5 RENT, PAYMENT METHOD AND TIME LIMIT
Clause 6 DEPOSIT AND OTHER FEES
Clause 7 USE OF THE PREMISES AND RESPONSIBILITY FOR REPAIR AND MAINTENANCE
Clause 8 REMODELLING
Clause 9 CONDITIONS OF THE PREMISES AT SURRENDER
Clause 10 SUBLET, TRANSFER AND EXCHANGE
Clause 11 TERMINATION OF THIS AGREEMENT
Clause 12 DEFAULT LIABLITIES
Clause 13 RENEWAL
Clause 14 RIGHT OF ACCESS
Clause 15 OBLIGATIONS OF THE LANDLORD
Clause 16 OBLIGATIONS OF THE TENANT
Clause 17 FORCE MAJEURE
Clause 18 GOVERNING LAW
Clause19 PROPERTY MANAGER
Clause 20 CHANGE OF OWNERSHIP OF THE PREMISES
Clause 21 NOTICE
Clause 22 INSURANCE
Clause 23 WAIVER, PARTIAL EFFECTIVENESS
Clause 24 LEGAL COSTS, TAXES AND FEES AND OTHER EXPENSES
Clause25 MISCELLANEOUS
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4
5
5
6
7
9
10
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12
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18
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TENANCY AGREEMENT
(Serial No.
)
THIS AGREEMENT IS ENTERED INTO BETWEEN:
LANDLORD: Jing Hui Tong Real Estate Management Company ;
and
TENANT: Inner Mongolia Sunrise Petroleum Limited
In accordance with the P.R.C Contract Law and the Urban Premises Leasing Administration Regulation (hereinafter called the “ Regulations
”), the Landlord and the Tenant (hereinafter collectively known as the “ Parties ”), on the basis of equality, voluntariness, fairness and integrity
and through friendly consultations, have reached unanimity and entered into this agreement in respect of the Tenant’s leasing of the premises
which the Landlord is legally entitled to lease.
Clause 1 DEFINITIONS
1.1
Unless the context requires otherwise, the following expressions shall have the following meanings:
1.1.1
“ Agreement ” means this Tenancy Agreement, including any further amendment and/or supplement thereto, as agreed upon by
the Parties hereto in writing.
1.1.2
“ Building ” means the building situated at 118 Jian Guo Lu Yi, Chaoyang District, Beijing and known as “ Exchange Beijing
” or such other name as the Landlord may use at its own discretion.
1.1.3
“ Building Occupant Handbook ” means the “Exchange Beijing Building Occupant Handbook” as formulated by the Landlord
or the property manager of the Building (the “ Property Manager ”) and notified to the Tenant from time to time.
1.1.4
“ Business Hours ” means the hours from 8:00-20:00 on weekdays (Monday to Friday) and 8:00-13:00 on Saturdays, and other
holidays as confirmed by the Landlord or the management company (including
3
the continuous holidays which are recommended by the government to enterprises and institutions).
1.1.5
“ Commencement Date ” means 8-16-2007.
1.1.6
“ Fit-out Period ” means the period stipulated in Clause 4.4 herein below.
1.1.7
“ Fit-out Works Manual ” means the “Exchange Beijing Fit-out Works Manual” as formulated by the Landlord or the
Property Manager and notified to the Tenant from time to time.
1.1.8
“Premises” means the premises located at Unit 09, Floor 18 of the Building, which shall not include the facilities,
installations, wiring, ducting, piping and/or other things or parts that are for public use.
1.1.9
“ Property Management Fee ” means the property management fee as stipulated in Clause 5 of this Agreement.
1.1.10
“ Rent ” means the rent for the Premises as stipulated in Clause 5.1 of this Agreement.
1.1.11
“ Rent-Free Period ” means the rent-free period stipulated in Clause 4.5 hereinbelow.
1.1.12
“ Security Deposit ” means the deposit as stipulated in Clause 6.1 of this Agreement.
Clause 2 STATUS OF THE PREMISES
2.1
The Landlord hereby leases to the Tenant the Premises, which cover an area of 175.22 square meters (hereinafter called the” Leased
Area ”). The Landlord and the Tenant hereby agree and confirm that, even if there is any discrepancy between the Leased Area of the
Premises stipulated herein and such construction area, leased area or the area(s) calculated in any other ways as measured or registered
by any person, organization or authority, both parties hereto shall make no adjustment to the Rent, Property Management Fee or other
amounts which are calculated on the basis of the Leased Area of the Premises. The floor plan of the Premises is attached in Appendix 1
to this Agreement.
4
2.2
The standard conditions and facilities of the Premises are set out in Appendix 2. The Parties agree that Appendix 2 shall form the basis
for inspection of the Premises when the Landlord delivers the Premises to the Tenant, and when, upon expiration or early termination of
this Agreement, the Tenant returns the Premises to the Landlord.
Clause 3 PURPOSE OF THE TENANCY
3.1
The Tenant hereby undertakes to the Landlord that the Premises shall be used as office, and the Tenant shall observe the national and
municipal regulations in respect of property use and property management. The Tenant may, subject to the Landlord’s permission, allow
watchmen to stay in the Premises overnight for security reasons but the names of the watchmen shall first be registered with the Landlord
prior to its giving such permission.
3.2
The Tenant hereby warrants that the aforesaid purpose of the Premises shall not change within the lease term without the prior written
consent of the Landlord and the approval from relevant authority (if such approval is required pursuant to relevant regulations).
Clause 4 DELIVERY DATE AND LEASE TERM
4.1
The lease term of the Premises shall be from 8-16-2007 to 8-15-2009 (hereinafter called the “ Lease Term ” ).
4.2
On the day of the receipt of the first month’s Rent, Property Management Fee and Security Deposit, or on the Commencement Date
(whichever is later), the Tenant shall carry out, at the place designated by the Landlord, all formalities necessary for the delivery of the
Premises. The Tenant shall furbish and decorate the Premises only after the completion of the abovementioned formalities in accordance
with the Building Occupant Handbook and Fit-out Works Manual. If the Tenant fails to enter the Premises on the Commencement Date,
the Landlord reserves the right to collect from the Tenant, on the Commencement Date, the Rent, the Property Management Fee and
other fees and charges as set out in this Agreement. If the Tenant, through fault of its own, fails to complete such formalities within
fifteen (15) days from the Commencement Date, the Landlord has the right to terminate this Agreement by giving a written notice to the
Tenant, and to forfeit the Security Deposit and any Rent and/or Property Management Fee paid by the Tenant in advance (if any). For the
avoidance of doubt, before the commencement of the fit-out works on the Premises, the Tenant shall pay to the Landlord a deposit for
fit-out works in the amount specified in the Fit-out Works Manual. Such deposit for fit-out works is separate to and is not included in the
Security
5
Deposit, and the refund and deduction of such deposit for fit-out works shall be subject to relevant provisions of the Fit-out Works
Manual.
4.3
Save where the Tenant is in breach of this Agreement, should the Landlord be unable to deliver the Premises to the Tenant within thirty
(30) days from the Commencement Date, the Tenant reserves the right to terminate this Agreement by giving a prior written notice to the
Landlord. In such case, the Landlord shall refund to the Tenant the Security Deposit and the Rent already paid by the Tenant without any
interest accrued thereon.
4.4
Unless otherwise provided in this Agreement and subject to no breach of this Agreement by the Tenant during the Lease Term, the
Landlord agrees to give the Tenant a 1.5 -month Fit-out Period commencing from the Commencement Date. During the Fit-out Period,
the Tenant is not obliged to pay the Rent stipulated in Clause 5.1 hereinbelow, but is obliged to pay the Property Management Fees and
other fees. The Fit-out Period is the period hereinbelow:
period commencing from 7-1-2007 and ending on 8-15-2007.
4.5
If the actual period during which the Tenant leases the Premises is shorter than the Lease Term for whatever reasons, and/or if the Tenant
breaches any of the stipulations of this Agreement, the Landlord shall be entitled to claim the Tenant for all of the Rent exempted during
the Fit-out Period and the Rent-Free Period.
Clause 5 RENT, PAYMENT METHOD AND TIME LIMIT
5.1
The Parties agree that the daily Rent per square meter of the Premises shall be RMB170.00; and the total monthly Rent ( calculated as
30.5 days equal 1 month ) shall be RMB(29,787.40). The Rent payable hereunder is exclusive of the charges for the Premises’ utilities
(including but not limited to electricity, heating, air-conditioning and telecommunications), the Property Management Fee and other
expenses incurred by the Tenant during the Lease Term.
5.2
The Rent of the Premises shall not be adjusted within the Lease Term.
5.3
The Tenant shall pay the first month’s Rent on the date of the execution of this Agreement, and shall, on or before the 5 th day of each
calendar month, pay to the Landlord the Rent for such month. The Rent for the first month and the last month of the Lease Term shall be
paid pro rata based on the number of days of actual occupation by the Tenant. The Rent shall be paid without any deduction,
counterclaim or set off by the Tenant.
6
5.4
All amounts (including without limitation to the Rent, the Property Management Fee and other fees and expenses) payable by the Tenant
to the Landlord hereunder shall be wired to the bank account below or other designated by the Landlord, or by other method as may be
designated by the Landlord from time to time:
Receiver:
Jing Hui Tong Real Estate Management Company
Opening bank:
Charter Bank of England, Beijing Branch
Account: 3528490943
Any handling charge of bank incurred in such payment made by the Tenant and in any payment made by the Landlord / Property
Manager to the Tenant (such as to return the Deposit, the rent and/or the Property Management Fee over paid by the Tenant) shall be
borne by the Tenant. The Landlord shall be entitled to deduct beforehand such charge of bank from the amount to be returned to the
Tenant.
Clause 6 DEPOSIT AND OTHER FEES
6.1
The Landlord and the Tenant agree that, on the date of the execution of this Agreement, the Tenant shall pay to the Landlord a security
deposit (the “Security Deposit”). The Security Deposit shall be the sum of three (3) months’ Rent and three (3) months’ Property
Management Fee of the Premises amounting to RMB [104,285.69] . The Landlord shall have the right to hold the Security Deposit,
throughout the Lease Term as security for due performance by the Tenant of its obligations under this Agreement. Upon the payment of
the Security Deposit, the Landlord shall issue a receipt to the Tenant.
6.2
The Tenant may not apply the Security Deposit toward any payment due under this Agreement, or performance of any other contractual
or non-contractual obligation of the Tenant. The Tenant may not assign the right of refund of the Security Deposit nor offer it as a pledge
or collateral to any third party for any purpose.
6.3
The Landlord shall, at any time during the Lease Term, have the right to (in addition to any other right or remedy) deduct from the
Security Deposit any payment due from the Tenant under this Agreement and/or any loss sustained by the Landlord as a direct or indirect
result of any breach of this Agreement by the Tenant. In such case, the Landlord shall notify the Tenant in writing after making such
deduction. If the Landlord makes any deduction from the Security Deposit in accordance herewith, the Tenant shall, within seven
(7) days of demand by the Landlord, pay to the Landlord a further deposit equal to the amount so deducted. Failure by the Tenant to pay
such additional deposit
7
shall entitle the Landlord to forthwith re-enter the Premises and to terminate this Agreement as herein provided.
6.4
Subject to the other provisions of this Clause 6, the Security Deposit and any further deposits paid (or any balance thereof subject to the
Landlord’s right of deduction hereunder) shall be refunded by the Landlord to the Tenant without interest within thirty (30) days after the
fulfillment of all the following conditions: (i) the Tenant has completed the formalities in respect of canceling or changing the
registration of the Premises as its registered address or business address with relevant industry and commerce administration authority;
and (ii) the Premises the Tenant returned to the Landlord and its fitments, equipments, and facilities have been restored to the standard
state and condition in accordance with Clause 9 herein and that the Premises are suitable for lease; and (iii) the full settlement of the
outstanding claim by the Landlord against the Tenant in respect of any breach, non-observance or non-performance of any of this
Agreement’s stipulations or conditions herein contained and on the part of the Tenant to be observed and performed; (iv) the full
payment of the relevant charges for the Premises’ utilities payable by the Tenant; and (v) the relevant telephone and telecommunication
authorities have cleared the Tenant’s telephone and telecommunication accounts.
6.5
Notwithstanding anything contained herein, the Tenant hereby expressly agrees that if the Landlord assigns or transfers the ownership of
the Premises to any person (the “ New Landlord ”) prior to the termination of the Lease Term subject to and with the benefit of this
Agreement, the Landlord is entitled to transfer the Security Deposit paid by the Tenant hereunder (less any deduction which the Landlord
is entitled to make according to the terms of this Agreement) to the New Landlord. In that event, the Tenant shall waive all claims
against the Landlord for the refund of the Security Deposit and may only make its claim for such refund against the New Landlord. A
written notice sent by the Landlord to the Tenant, by ordinary post to the address stated herein, notifying the change of the ownership of
the Premises shall be conclusive evidence that the Security Deposit has been transferred to the New Landlord unless such notice
expresses a contrary intention.
6.6
During the Lease Term, the charges for electricity, telecommunications, appliances, property maintenance and management, and the
supply of air-conditioning during non-Business Hours and other related fees and expenses, shall be borne by the Tenant.
6.7
The Tenant shall pay the utilities charges arising out of its occupancy or usage of the Premises (including but not limited to the costs for
electricity, heating, air-conditioning during non-Business Hours and telecommunications), and shall reimburse the Landlord for any such
expenses, as may be paid by the Landlord on behalf of the Tenant, within seven (7) days of demand by the Landlord.
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6.8
The current daily Property Management Fee of the Premises is RMB 28.39 per square meter, i.e. the total monthly (calculated as
30.5 days equal 1 month) Property Management Fee of the Premises is RMB4,974.50. The Tenant agrees that, during the Lease Term,
the Landlord shall be entitle to revise the Property Management Fee periodically due to the increase of operation cost and any
readjustment of the Property Management Fee, if any, shall be notified in writing to the tenant and shall take effect from the month
following the date specified in such notice.
6.9
The Tenant shall pay the Property Management Fee and other charges to the Property Manager at the time and in the manner as provided
in the Building Occupant Handbook and the Fit-out Works Manual as well as other relevant management rules and regulations.
Clause 7 USE OF THE PREMISES AND RESPONSIBILITY FOR REPAIR AND MAINTENANCE
7.1
The Tenant shall at its sole expense keep all the interior parts of the Premises in good and clean condition, and shall conduct proper
repairs unless such repairs are made necessary due to the Landlord’s gross negligence or willful default, in which case the expenses shall
be borne by the Landlord.
7.2
During the Lease Term, the Tenant shall promptly inform the Landlord of any necessary repair to the Premises and the facilities provided
by the Landlord thereof (exclusive of the repairs of the interior parts of the Premises which shall be conducted by the Tenant in
accordance with the terms and conditions of the Fit-out Works Manual) upon its discovery of any damage and/or malfunction.
7.3
During the Lease Term, the Tenant shall use properly and take care of the Premises and the facilities provided by the Landlord thereof. If
the Premises or the facilities thereof are damaged or malfunction due to the improper or unreasonable use by the Tenant, the Tenant shall
bear the expenses incurred thereof.
7.4
The Tenant shall immediately notify the Landlord of any repair work that may be needed and shall not carry out the same by itself unless
such repair work shall be conducted by the Tenant as other stipulated in this Agreement. Any work conducted by the Tenant shall be
subject to the requirements under and in accordance with the terms and conditions of the Fit-out Works Manual. The Tenant shall be
liable for any damage, personal injury and property loss resulting from or relating to the repair work carried out by the Tenant, its
employees, contractors or agents.
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7.5
Where the inspection and maintenance of the Premises is to be conducted, the Landlord shall give a reasonable prior notice to the Tenant.
During such inspection and maintenance, the Tenant shall co-operate with the Landlord, and the Landlord shall use its endeavors to
reduce any effect such inspection and maintenance may have on the Tenant in respect of the use of the Premises.
7.6
In addition to the stipulations set forth in Appendix 2 of this Agreement, if the Tenant wishes to refurbish or add further facilities and
equipments to the Premises, such refurbishment or additions may only be carried out subject to the requirements under and in accordance
with the terms and conditions of the Fit-out Works Manual and with the prior written consent of the Landlord, and if the approval from
an authority is required pursuant to relevant regulations, the Tenant shall make an application with the relevant authority in order to
obtain such approval. The ownership of the additional facilities and equipments and the responsibility for their maintenance shall be
agreed between the Parties in writing.
7.7
Neither party hereto shall be liable to each other for any damage to the Premises or loss incurred by either party due to an event of force
majeure (the “ Event of Force Majeure ”).
Clause 8 REMODELLING
8.1
Upon receiving the written approval from relevant competent government authorities and the written consent from the Landlord, the
Tenant may within the scope of the Landlord’s consent, make alterations or additions to, or partition or renovate the Premises and /or any
equipment and facilities thereof. Any such alteration, addition, partition or renovation shall be first discussed between the Parties hereto
and shall be carried out by qualified construction workers or contractors approved by the Landlord (except for works concerning fire,
electricity facilities, air conditioning, pipes, etc. which shall only be carried out by a contractor appointed by the Landlord). All works
mentioned in this clause (including but not limited to the works concerning fire, electricity facilities, air conditioning, pipes, etc.) shall be
subject to the requirements under and in accordance with the terms and conditions of the Fit-out Works Manual and at the Tenant’s
expense.
8.2
The Tenant hereby agrees it neither has any right to demand repayment of expenses for improvements and/or expenses for repair and
maintenance of the Premises or the facilities and equipment thereon borne by the Tenant, nor has any right to demand purchase by the
Landlord of the items installed on the Premises.
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Clause 9 CONDITIONS OF THE PREMISES AT SURRENDER
9.1
Upon the expiration or termination of this Agreement, the Tenant shall remove its belongings and properties, reinstate the Premises to its
standard state and condition as stipulated in Appendix 2 (whether the conditions of the Premises at the time of handover is in accordance
with the standard state and condition as stipulated in Appendix 2 shall be exclusively subject to the reasonable review and written
approval of the Property Manager at the time of handover of the Premises), return the keys and the Landlord’s properties, and hand over
the whole Premises which is in good, clean, tenantable condition (fair wear and tear excepted) upon the expiration of the Lease Term, or
in the event of early termination, no later than the date designated by the Landlord, except where the Landlord has agreed to extend the
Tenant’s lease of the Premises.
9.2
Provided being given prior written consent by the Landlord, at the request of the Tenant, the Landlord may perform on the Tenant’s
behalf any obligation of the Tenant under Clause 9.1 above, at the Tenant’s expense and subject to the Tenant indemnifying the Landlord
against all costs, claims and liabilities which may be suffered or incurred by the Landlord in carrying out such obligations on behalf of
the Tenant.
9.3
In the event that the Tenant fails to reinstate the Premises to its standard state and condition, the Landlord shall have the right to reinstate
the Premises in place of the Tenant provided that the Tenant shall pay to the Landlord double the normal monthly Rent and the Property
Management Fee calculated on a daily basis for the period from the expiration date (or, in the event of early termination of this
Agreement, from the termination date) to the date that the Premises have been so reinstated. The Tenant shall also reimburse the
Landlord for all costs and expenses incurred for such reinstatement.
9.4
If the Premises cannot be fully reinstated to its standard state and condition due to reasons attributable to the Tenant, the Tenant shall
compensate the Landlord for such irreparable damage in addition to the payments provided under other provisions of this Agreement.
9.5
In the event that the Tenant fails to surrender the Premises by the time provided in Clause 9.1, the Landlord may choose to charge the
Tenant an occupation fee calculated on the basis of double the daily Rent for each day of delay or to take possession of the Premises and
move the Tenant’s belongings to a suitable place for storage. The Landlord shall not be liable for any loss or damage to the Tenant due to
such forced surrender provided that the forced surrender is conducted in accordance with the provisions of this Agreement. All the
expenses incurred by the Landlord (including but not limited to removal and storage expenses) as a result of the forced surrender shall be
borne by the Tenant.
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9.6
The Landlord shall have the right to dispose of the belongings of the Tenant according to the provisions of Clause 9 hereof.
9.7
In the case of forced surrender, the Tenant shall be deemed to have failed to reinstate the Premises to its standard state and condition, and
Clauses 9.3, 9.4 and 9.5 shall apply.
9.8
If this Agreement is terminated during the absence of the Tenant and the Tenant cannot be located by the Landlord’s reasonable efforts,
the Landlord shall have the right to repossess and recover the Premises and remove the Tenant’s properties and belongings to a
warehouse where they will be stored. In this event, the storage expense shall be borne by the Tenant.
9.9
Under the Clause 9.5 and Clause 9.8, in the event that the Tenant fails to make any written request, satisfactory to the Landlord,
concerning the disposition and treatment of its belongings in the aforesaid situations within one (1) month from the expiration or early
termination of this Agreement, the Landlord may sell the properties and belongings of the Tenant by auction sale at the time and in the
manner as determined by the Landlord at its absolute discretion. Any expense (including but not limited to transportation fees, storage
fees, and auction fees) arising out of the above-mentioned removal or auction shall be borne by the Tenant. The Landlord shall not be
liable for any loss or damage to the Tenant provided that the auction sale is conducted in accordance with the provisions of this
Agreement.
9.10
The Landlord shall be entitled to apply the proceeds from such auction sale to any outstanding amount due from the Tenant under this
Agreement. The Landlord shall return any excess thereafter to the Tenant.
Clause 10 SUBLET, TRANSFER AND EXCHANGE
10.1
The Tenant shall not transfer, assign, sublet, mortgage, share or otherwise part with the possession or occupation of the Premises or any
part thereof by any means, whereby any person not a party to this Agreement obtains the use or possession of the Premises or any part
thereof, irrespective of whether any rental or other consideration is given for such use or possession. In the event of a breach of this
Clause, the Landlord shall have the right to terminate this Agreement with immediate effect by notice in writing to the Tenant, and
upon the receipt of such notice the Tenant shall forthwith return the Premises according to Clause 9.1.
10.2
During the Lease Term, unless otherwise agreed by the Landlord in this Agreement, the Tenant shall not sublet all or part of the
Premises to a third
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party. However in no event may the Tenant sublet any portion or portions of the Premises as one residential unit.
10.3
If the Tenant sublets the Premises with the approval of the Landlord, the Tenant shall enter into a written sublease contract with the
sub-tenant and, in accordance with relevant regulations, shall carry out the registration and filing procedures with the relevant
competent authority.
10.4
During the Lease Term, if the Tenant wishes to assign the lease of the Premises to a third party or to exchange the Premises for other
premises leased by a third party, it shall obtain the prior written consent from the Landlord. After such assignment or exchange, such
third party being assigned or exchanged the Premises shall execute a change of tenancy agreement with the Landlord, and shall
continue the performance of this Agreement.
Clause 11 TERMINATION OF THIS AGREEMENT
11.1
11.2
Both Parties hereto agree that if during the Lease Term any of the following events occurs, this Agreement shall be terminated, and
neither Party hereto shall be held liable to each other:
(1)
The land use right of the land on which the Premises are situated is prematurely withdrawn in accordance with relevant laws;
(2)
The Premises are expropriated on the grounds of public interest in accordance with relevant laws;
(3)
The Premises are dismantled or removed for urban construction purposes in accordance with relevant laws;
(4)
The Premises are destroyed, lost, or declared dangerous.
In any of the following cases, the Tenant may immediately terminate this Agreement by giving a written notice to the Landlord:
(1)
The Landlord fails to deliver the Premises in accordance with the terms and conditions of this Agreement and further fails to
deliver the Premises within thirty (30) days of the Tenant’s demand;
(2)
The purpose of the tenancy cannot take effect because the Premises delivered by the Landlord do not comply with the terms and
conditions
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of this Agreement, and make material adverse effect to the Tenant; or the Premises delivered by the Landlord are endanger the
safety of the Tenant.
11.3
11.4
In any of the following cases, the Landlord may immediately terminate this Agreement by giving a written notice to the Landlord:
(1)
The Tenant alters the purpose of the Premises without the Landlord’s prior written consent;
(2)
The main structure of the Premises is damaged and such damage is attributable to the Tenant;
(3)
The Tenant, without the prior written consent of the Landlord, willfully sublets the Premises, assigns the lease of the Premises or
exchanges the Premises with other premises leased by a third party;
(4)
The Tenant defaults on its payment of the Rent and/or any other sums payable hereunder for more than fifteen (15) days;
(5)
If the Tenant breaches any of the terms of this Agreement and does not rectify such breach within the period notified by the
Landlord;
(6)
If the right of refund of the Security Deposit is given by the Tenant as a pledge or collateral to a third party, or becomes subject to
an enforcement procedure by a third party;
(7)
If the Tenant enters into bankruptcy or becomes insolvent; or the Tenant makes an assignment or settlement for transfer of all or a
substantial part of its assets to satisfy its debts; or the Tenant applies for corporate dissolution or reorganization; or the Landlord
deems it impossible to continue this Agreement due to a substantial change in the Tenant’s assets, creditworthiness or business; or
(8)
If the Tenant fails to commence occupancy of the Premises without a notice of justifiable reason given to the Landlord within
thirty (30) days from the Commencement Date; or the Tenant fails to pay the Landlord the full amount of the Security Deposit
referred to in Clause 6.1 on the date of execution of this Agreement.
Upon the occurrence of any of the events mentioned in Clause 11.3 above, the
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Landlord may at any time thereafter, without prejudice to the Landlord’s other rights and remedies, re-enter the Premises and require the
Tenant to surrender immediately the Premises to the Landlord. In this case, the Landlord shall also have the right to immediately forfeit
the Security Deposit and claim for all the Rent exempted during the Fit-out Period and the Rent-Free Period (if any) as stipulated in
Clause 4.4 of this Agreement and any loss incurred or suffered as a result of the Tenant’s breach including but not limited to the Rent of
the remaining lease term. The Landlord may take all necessary measures provided by law to ensure it recovers such payment from the
Tenant. All expenses incurred by the Landlord as a result of the Tenant’s default hereof, including but not limited to court costs and legal
fees, shall be borne by the Tenant. Retention of the Security Deposit by the Landlord shall not constitute sufficient ground for the Tenant
to refuse to surrender the Premises.
11.5
If this Agreement is terminated according to Clause 11.2 and 11.3, the defaulting Party shall pay the penalty of RMB104,285.69 to the
other Party, and if such penalty are insufficient to cover the actual loss incurred, the difference shall be paid by the defaulting Party.
11.6
Unless mutually agreed upon in writing, neither Party may terminate this Agreement with respect to all or only a portion of the
Premises.
Clause 12 DEFAULT LIABLITIES
12.1
If there is any defect in the Premises at the time of delivery, the Landlord shall rectify such defect within a reasonable period of time
from the date of delivery.
12.2
If, before the creation of this tenancy, the Landlord fails to inform the Tenant that the Premises are subject to mortgage or that transfer
of the Premises is restricted, the Landlord shall be liable for the direct loss incurred by the Tenant therefrom, however the Landlord’s
liability shall be limited to the value of the lease.
12.3
The Tenant shall pay to the Landlord on demand a default charge (the “Default Charge”) in respect of any payment under this
Agreement (including without limitation to the Rent, the Property Management Fee) which is overdue. The Default Charge shall be
calculated at the default rate of [0.5] % on the overdue amount for each day of delay from the payment due date up to but excluding the
date of actual full payment. If the Tenant delays in paying in full any Rent and/or any other sums payable hereunder for more than
fifteen (15) days after the due date, the Landlord may terminate this Agreement immediately, and/or may suspend the supply of
maintenance service, electricity, heating, air-conditioning, telecommunications or any other services or utilities provided by or through
the Landlord. Payments made by the Tenant shall be applied as follows: (i) payment of the Default Charge for any amount overdue;
15
(ii) settlement of any overdue amount; and (iii) payment of any other outstanding amount due under this Agreement.
12.4
In the case where the Tenant, without the prior written consent of the Landlord or over the scope of the Landlord’s consent, carries out
renovations on or additions to the Premises or facilities thereof, the Landlord may demand that the Tenant reinstate the Premises to its
standard state and that the Tenant pay compensation to cover any loss incurred therefrom.
12.5
If, before the expiration of the Lease Term, the Tenant, without the prior written consent of the Landlord, willfully and prematurely
terminates the lease and in an event other than those stipulated in this Agreement, the Tenant shall pay to the Landlord the penalty the
amount of which shall be the daily Rent rate payable for every day from the actual date of early termination to the expiration date of the
Lease Term herein. The Tenant shall also be liable to further compensate the Landlord should such penalty be insufficient to cover the
losses incurred by the Landlord as a result of such early termination.
12.6
If the Tenant, or any of its employees and contractors, licensees or invitees, causes damage to the Landlord’s property or personal
injury to the Landlord, other tenants in the Building, or any of their employees and contractors, the Tenant shall immediately notify the
Landlord thereof in writing. The Tenant shall be fully liable for and shall indemnify the Landlord against all costs, claims or liabilities
in connection therewith.
12.7
If the Tenant breaches any provision of this Agreement, or otherwise causes damage to the Premises and/or the Building, the Tenant
shall compensate the Landlord for all losses and/or damages which the Landlord suffered. In addition, the Tenant shall bear all civil or
criminal responsibilities therefor. For this purpose, any act of the employees and contractors of the Tenant shall be regarded as the act
of the Tenant.
12.8
The Parties, by mutual agreement, shall first attempt to determine the amount of damages according to the market value at the time of
compensation.
12.9
The Tenant may not claim against the Landlord for compensation for damages incurred by the Tenant arising out of other tenants’ or
other third parties’ acts unless such shall be directly caused by the gross negligence or willful default of the Landlord.
Clause 13 RENEWAL
13.1
This Agreement shall terminate in the event that one of the following
16
circumstances occurs:
(1)
Upon the expiration of the Lease Term of this Agreement;
(2)
If the Parties so agree in writing; or
(3)
If this Agreement is terminated in accordance with the terms and conditions hereof.
13.2
If the Tenant wishes to renew the lease of the Premises upon the expiration of the Lease Term, the Tenant shall issue a written
application for renewal (hereinafter called the “Renewal Application”) to the Landlord three (3) months prior to the expiration of the
Lease Term, and will be able to renew the Premises only upon the Landlord’s consent. If the Landlord agrees to renew the Premises, the
Landlord and the Tenant shall conclude a new written lease agreement for renewal of the lease of the Premises three months prior to the
expiration of the Lease Term. If the Parties fail to reach and execute such new lease agreement two (2) months prior to the expiration of
the Lease Term, the lease hereunder shall end upon the expiration or early termination of the Lease Term according to this Agreement.
13.3
If the Landlord has not received the Renewal Application from the Tenant three (3) months prior to the expiration of the Lease Term, or
the Landlord disagrees with such Renewal Application, or the Parties fail to conclude a written agreement regarding renewal two (2)
months prior to the expiration of the Lease Term, the lease hereunder shall end upon the expiration of the Lease Term according to this
Agreement.
13.4
If the Landlord received the Renewal Application three (3) months before the expiration of the lease and approved the Renewal, the
new lease rate will be based on the market rate and upon both parties’ negotiation.
Clause 14 RIGHT OF ACCESS
14.1
For the purposes of repair, maintenance, sanitation, safe, fire control, rescue and such other matters, the Landlord or the Property
Manager and the staff employed by them may, after informing the Tenant in advance, enter the Premises for carrying out inspection and
taking appropriate actions. However, in the event of an emergency when the Tenant cannot be contacted in advance, the Landlord or the
Property Manager and the staff employed may enter the Premises and take such action as they deem fit without the prior consent from
the Tenant, but shall inform the Tenant thereafter as soon as possible. In such case, the Premises are damaged or the Tenant suffers any
loss, none of the Landlord, the Property Manager or their employees shall take any responsibility.
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14.2
The Tenant agrees that the Landlord shall be entitled, after giving a prior notice to the Tenant, to bring potential purchaser(s) to view
the Premises at reasonable times during the Lease Term. In addition, the Landlord shall, upon giving a prior notice to the Tenant, be
entitled to bring potential tenant(s) to view the Premises at reasonable time within six (6) months prior to the expiry or early termination
of the Lease Term. When the Landlord enters into the Premise pursuant to this Clause, the Landlord shall minimize the inconvenience
brought to the Tenant’s business.
14.3
If pursuant to this Clause the Landlord or the Property Manager and the staff employed by them need to access to the Premises, the
Tenant shall give its cooperation.
Clause 15 OBLIGATIONS OF THE LANDLORD
15.1
In addition to the obligations stipulated in the other terms and conditions of this Agreement, the Landlord shall also have the following
obligations:
(1)
The Landlord shall deliver to the Tenant the Premises which are suitable for normal use in accordance with the terms and
conditions of this Agreement.
(2)
If the Landlord wants to make alternations or additions to, or renovate the Premises, the Landlord shall give prior notice to the
Tenant. the Tenant hereby confirms that, the Landlord shall be entitled to further renovate, add to, reduce, or dispose of any part of
the Building and its facilities (except for the interior facilities of the Premises belonging to the Tenant) at its discretion at any time.
(3)
Other than the taxes and charges which are payable by the Tenant under this Agreement and payable under the Building Occupant
Handbook, the Landlord shall bear all the other taxes and charges in respect of the Premises payable by the Landlord as the
landlord.
(4)
Except that the Landlord may exercise its rights under this Agreement, it shall not interfere with or obstruct the Tenant in its usual
and reasonable usage of the Premises.
(5)
Except for the mortgage, the Landlord shall not be obliged to notify the Tenant of the other restrictions on the title transfer of the
Premises made before or after the lease, and the Tenant hereby waives the right to be informed. The Landlord shall also have no
obligation to compensate the Tenant for its losses caused by being not informed as aforesaid and the
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Tenant hereby waives the right to be compensated.
Clause 16 OBLIGATIONS OF THE TENANT
16.1
The Tenant shall comply with all laws and regulations related to its business, and/or its occupation or use of the Premises and/or the
Building during the Lease Term. The Tenant, its employees and contractors shall also comply with the rules and regulations related to
the Premises and/or the Building, as prescribed by the Landlord or the Property Manager (including the Building Occupant Handbook,
the Fit-out Works Manual and other rules and regulations relating to the Premises and/or the Buildings as may be formatted by the
Landlord or the Property Manager from time to time). The Tenant shall be responsible for the acts of its employees and contractors as if
those acts are conducted by itself, and shall fully indemnify the Landlord and the Property Manager against all costs, claims or
liabilities to any third party in connection therewith. In addition to the obligations stipulated in the other clauses of this Agreement, the
Tenant shall also have the following obligations:
(1)
The Tenant shall use the Premises for the purpose as stipulated in this Agreement and shall not change the purpose of the Premises
without the prior written consent from the Landlord and the approvals from relevant authorities issued in accordance with relevant
regulations.
(2)
Without the prior written approval of the Landlord, the Tenant may not make any alteration to the Premises whatsoever, including
but not limited to the following: (i) the erection, installation or alteration of any partitioning; (ii) any alteration or addition to the
electrical wiring, air-conditioning plant, ducting or lighting fixtures; (iii) the changes of internal fitting-out work, conduit and line
layout; and (iv) permanent alterations to the fixtures or fittings of the Premises or the Building. Any work mentioned in this Clause
carried out by the Tenant shall be subject to the requirements under and in accordance with the terms and conditions of the Fit-out
Works Manual.
(3)
During the Tenant’s occupation of the Premises, the Tenant shall pay and discharge all the taxes, charges and other outgoings now
or hereafter to be imposed and charged under the relevant PRC and Beijing municipality laws and regulations of which the Tenant
is responsible;
(4)
The Tenant shall keep the Premises (including but not limited to the renovations, facilities and equipment as set out in Appendix 2
of this Agreement) clean and in good and tenantable conditions.
(5)
The Tenant shall strictly comply with the Building Occupant Handbook and Fitout Works Manual and other rules made and
modified at any time and from time to time by the Landlord and/or the Property Manager in
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respect of management of the Building. The Tenant, its employees and contractors shall not influence or interfere with the normal
management of the Building by the Landlord and/or the Property Manager.
(6)
The Tenant shall not deface or cause damage to the common areas and the equipment and facilities thereon.
(7)
The Tenant shall not place any goods, furniture or rubbish in the public walkways or other common areas, and shall not obstruct
the aforesaid common areas. The Tenant shall be responsible for the removal of garbage and refuse from the Premises and to
dispose of such garbage and refuse only in those areas in the Building as shall be designated by the Landlord from time to time.
The Tenant shall not litter in common areas.
(8)
The Tenant shall not bring to or store in the Premises any weapons, ammunition, nitre, explosives, kerosene or other dangerous
and contraband goods of inflammable and explosive nature, or other objects, the keeping of which may contravene any local
ordinance or regulation or in respect of which an increased rate of premium for any insurance is or may actually be required.
(9)
The Tenant shall not carry out, permit or consent to the carrying out of any illegal or immoral activities, or various religious
activities or other activities deemed inappropriate by the Landlord, or other activities which may cause nuisance of other users,
tenants or parties, or the activity in any way which interferes with or may interfere with the quiet and peaceful use of the common
areas of the Building and other units outside the Premises by other users, tenants and parties.
(10)
The Tenant shall not display, place, paste or hang any logos, words, marks, posters, flags, advertisement boards or notice boards
etc. on the exterior of the Premises including the public walkways, windows, external walls and copings without the prior written
consent from the Landlord. Otherwise, the Landlord shall be entitled to remove the same at the cost and expense of the Tenant.
(11)
The Tenant shall be responsible for the actions of its employees and contractors and shall ensure that they will not take any action
that will cause loss or damage to the Premises and that is not permitted to be done by the Tenant under this Agreement. The
Tenant shall bear the liabilities to compensate the Landlord for its losses resulted from purposely or faulty activities by the
Tenant’s employees and contractors to any part of the Premises or the Building.
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(12)
Without the Landlord’s prior written consent, the Tenant shall not move any large machinery, equipment, goods or renovation
materials into or out of the Premises. The Tenant shall not place such objects in excess of the load-bearing as stipulated in the
XXX on the floor or other places of the Premises without the prior written approval of the Landlord or the Property Manager.
Before moving objects into the Premises, notice shall be given to the Landlord or the Property Manager and the maximum
load-bearing capacity of the Premises shall be checked. The Landlord or the Property Manager shall have the right to stipulate
where the safe and other heavy objects shall be placed to enable the load-bearing to be evenly spread. Specialised tools and
equipment which are moved into the Premises must be placed on appropriate holders to be set up by the Tenant on its own
expenses. Such placement shall be in accordance with the requirements of the Landlord or the Property Manager and shall be
sufficient for preventing vibration or loud noises from disturbing other users. If the Tenant defaults and such default has not been
rectified, the Tenant shall not move its equipments, appliances, goods or other properties away from the Premises without the
Landlord’s written consent in advance.
(13)
The Tenant shall obey and require its guests, visitors or permitted occupiers to obey the rules and restrictions made by the
Landlord or the Property Manager in respect of parking, and shall not park its vehicles or permit or allow its guests, visitors and
permitted occupiers to park their vehicles at will and obstruct the entrance, public walkways and other common areas of the
Building.
(14)
The Tenant shall not move or allow others to move any fixture, equipment and facilities in the Premises belonging to the
Landlord unless getting the written permission from the Landlord.
(15)
Unless the prior written consent of the Landlord has been obtained, the Tenant shall not otherwise engage in or carry out the
following business or undertakings in the Premises or use the Premises as any type of breeding, industrial activities or
construction of production work areas, warehouses, funeral parlours or sale of objects for funeral use, Buddhist temples, Taoist
temples, other religious temples, sale of altars, inns, guest houses, or rental of beds etc.
(16)
The Tenant shall not let noise out of the Premises to any part of the Building.
(17)
The Tenant shall take all reasonable precautions to protect the interior of the Premises against damage by storm, heavy rainfall,
heavy snowfall or the like and in particular to ensure that all exterior doors and windows are securely closed upon the threat of
such adverse weather conditions.
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(18)
The Tenant shall keep all exterior windows and doors closed and in the event of a breach of this Clause, the Landlord shall have
the right to send a representative to close any open door or windows should the Tenant fails to forthwith comply with the
Landlord’s request to close the same.
(19)
The Tenant shall not permit any touting or soliciting for business or the distributing of any pamphlets, notice or advertising matter
outside the Premises or anywhere within or near the vicinity of the Building by any of the Tenant’s employees or agents.
(20)
The Tenant shall not hold or permit or suffer to be held in the Premises any exhibition, auction or similar sale of things or
properties of any kind.
(21)
The Tenant shall not use or permit or suffer the Premises or any part thereof to be used as sleeping quarters.
(22)
Without the prior written consent of the Landlord, the Tenant shall not use or permit to be used the name/logo or any part of the
name/logo of the Landlord or of the Building, or use or permit to be used in any picture, representation or likeness of the whole or
any part of such name/logo or of the Building or of the Premises, in connection with the business or operations of the Tenant or
for any purpose whatsoever other than to indicate the address and place of business of the Tenant only.
(23)
The Tenant shall not keep or permit or suffer to be kept any animals or pets inside the Premises.
(24)
The Tenant shall not cook or prepare or permit or suffer to be cooked or prepared any food in the Premises or cause or permit any
offensive or unusual odours to be produced upon or emanated from the Premises.
(25)
The Tenant shall not erect any antenna on the roof or walls of the Building or on the ceiling or walls of the Premises, and shall
not interfere with, remove, dismantle or alter those common aerials (if any) provided by the Landlord.
(26)
The Tenant shall abide by the relevant PRC national and Beijing municipal laws and regulations. The Tenant shall undertake all
the economic and administrative obligations when there is any loss suffered by the Landlord because of the Tenant’s breach of
the related laws, regulations and/or stipulations.
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16.2
(27)
The Tenant shall obtain all approvals, business license and permits, etc. necessary for it to legally carry on its business in the
Premises and shall timely renew the said approvals, business license and permits.
(28)
The proper safekeeping of the Tenant’s property shall be the sole responsibility of the Tenant. The Landlord and the Property
Manager shall not be liable in any way to the Tenant or to any other person for any damage which may be suffered or incurred by
the Tenant or any other person, or in respect of any property on the Premises and/or in the Building for any reason and however
caused, including but not limited to fire, flood, theft or robbery. The Tenant shall make reasonable efforts to protect the Premises
as well as the Landlord’s fixtures, fittings and chattels thereon.
(29)
Upon being requested by the Landlord, the Tenant shall endeavor to assist the Landlord in carrying out the lease registration and
filing formalities of this Agreement with relevant real estate administrative authorities, including but not limited to providing
legal and valid business licence, etc, and executing necessary documents.
(30)
The Tenant shall strictly comply with the ordinance and property management rules made and modified at any time and from
time to time by the Administration Committee and/or the Management Organization of China Merchants Group Center in respect
of management, use, insurance and security, etc. of the Building, and shall not act in incompliance with the above ordinance and
rules. Otherwise, the Tenant shall reimburse the parties for all costs and expenses incurred for such incompliance.
The Landlord and the Tenant confirm that, unless otherwise specified herein by both Parties, all the stipulations herein on the rights,
obligations and corresponding default liabilities of the Landlord and the Tenant during the Lease Term shall be applied during the
Fit-out Period. However the payment of the Rent and Property Management Fee during the Fit-out Period shall be subject to Clause 4.4
of this Agreement hereof.
Clause 17 FORCE MAJEURE
17.1
Should either of the Parties to this Agreement be prevented from performing its obligations under this Agreement by reason of an Event
of Force Majeure, such as epidemic, earthquake, storm, flood, tidal wave or other acts of nature, fire, explosion, prohibition or acts by
government or public agency, riot, war, hostility, public disturbance, strikes, other labor disputes and work stoppages,
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failure or interruption of transportation or other utilities, or other unforeseen events beyond the prevented Party’s reasonable control
(“Force Majeure”), the prevented Party shall notify the other Party in writing within fourteen (14) days after the occurrence of such Event
of Force Majeure, and shall within the same time limit provide detailed information concerning such events and documents evidencing
such events. The Parties shall use their reasonable endeavors to mitigate any damage, to the extent possible, which may be caused by such
events.
17.2
If an Event of Force Majeure occurs, neither Party shall be responsible for any damage, increased cost or loss which the other Party
may sustain by reason of such failure or delay of performance, and such failure or delay shall not be deemed a breach of this
Agreement. The Party claiming Force Majeure shall take appropriate means to minimize or remove the effects of Force Majeure and,
within the shortest time possible, attempt to resume performance of the obligations delayed or prevented by the Event of Force
Majeure.
17.3
Should an Event of Force Majeure or the effects of an Event of Force Majeure prevent one or both of the Parties hereto from
performing part or all of its or their obligations hereunder for a period of 120 days or more, then the Parties shall, through consultations,
decide whether to terminate this Agreement or to exempt the implementation of part of the obligations of this Agreement according to
the effects of the Event of Force Majeure on the performance of this Agreement.
Clause 18 GOVERNING LAW
This Agreement shall be governed by the laws of the People’s Republic of China.
Clause19 PROPERTY MANAGER
The Landlord may designate its affiliate or a third party as the property manager for the management of the Premises and the Building. The
manager shall be regarded as the Landlord’s agent with full authority to act on behalf of the Landlord with respect to the management of the
Premises and the Building.
Clause 20 CHANGE OF OWNERSHIP OF THE PREMISES
During the Lease Term, the Landlord has the right to transfer all or part of the ownership of the Premises to a third party (the “New Landlord”).
The Landlord shall notify the Tenant in writing forthwith after such transfer. The validity of this Agreement is not affected by such change of
ownership of the Premises and the rights and obligations of the Landlord under this Agreement shall be deemed to have been
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automatically assigned by the Landlord to the New Landlord. The Tenant hereby irrevocably and expressly consents to any transfer of the
Premises, the Building, or any part of the Premises or the Building and waives any preemptive rights or any other rights it has or may
have in the case of such transfer.
Clause 21 NOTICE
21.1
Any notice or communication to be given under or in connection with this Agreement by Parties hereto shall be given in writing to the
following addresses and facsimile numbers:
The Landlord
Attention
Address
:
:
:
Facsimile No.:
The Tenant
:
Attention
Address
:
:
Post Code
:
Facsimile No.:
or at such other address or facsimile number as the Party to whom such notice is to be given shall have last notified the Party giving
notice.
21.2
Any notice or communication shall be deemed to be received, in the case of a letter delivered by hand, at the time of delivery; or in the
case of facsimile, on the completion of transmission; or in the case of prepaid registered post, 5 days after posting.
21.3
In addition to the notices and communications given pursuant to Clause 21.1 and 21.2 hereinabove, the Parties hereto agree that upon
the take-over of the
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Premises by the Tenant under this Agreement, any notice to be given to the Tenant shall be sufficiently given if it is addressed to the
Tenant and left at the Premises. In such case, the notice so delivered shall be deemed to be received by the Tenant on the business day
following the date of delivery.
21.4
During the term of this Agreement, each Party has the right to change its address or facsimile number for notices, provided it gives
written notice to the other Party.
Clause 22 INSURANCE
The insurance taken out by the Landlord shall only refer to the Premises themselves and be in favor of the Landlord as the owner of the
Premises. Where any insured event occurs, all compensation paid by the relevant insurance company under such insurance policy shall belong
to the Landlord. The Tenant shall not, as to its property losses or personal injury resulting from such insured event, be entitled to claim against
or demand that the Landlord share such amount of compensation paid by the relevant insurance company and owned by the Landlord. The
Tenant shall, at its own cost, take out insurance for its employees and its own properties inside the Premises.
Clause 23 WAIVER, PARTIAL EFFECTIVENESS
23.1
The Landlord’s acceptance of the Rent after it has become aware of the Tenant’s acts of breach shall not be deemed as the Landlord’s
waiver of its rights to claim against the Tenant for breach of liabilities. When the Rent or other payments by the Tenant are not
sufficient to cover the amount stipulated hereby or the Landlord accepts such insufficient Rent or other payments, such acts shall not be
deemed as the Landlord’s consent of decreasing the Rent or other payments, nor shall it affect the Landlord’s claims for overdue
amounts hereunder or any other right under this Agreement or relevant laws. Furthermore, the failure or delay of performing the
Landlord’s rights hereunder shall not be deemed as the waiver of such rights. Any waiver of the Landlord’s rights shall only be made in
the form of a written instrument signed by the Landlord.
23.2
If any provision of this Agreement shall be deemed invalid or illegal, such provision shall not affect the validity and legality of other
provisions of this Agreement.
Clause 24 LEGAL COSTS, TAXES AND FEES AND OTHER EXPENSES
Each of the Parties shall bear its own legal fees in connection with this Agreement. The Tenant shall bear the tenancy registration and filing
fees charged by the relevant
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real estate government authority for the registration and filing of this Agreement, and the stamp duties in respect of this Agreement shall be
equally shared by both Parties.
Clause25 MISCELLANEOUS
25.1
The headings in this Agreement are for reference only and have no effect in the interpretation of this Agreement.
25.2
Any Party specified in this Agreement shall include the successors and assignees of such Party.
25.3
This Agreement shall not be amended without the written consent of both Parties hereto. The Parties may, upon mutual consultation
and agreement, execute Supplemental Clauses in respect of the matters which are not sufficiently stipulated herein. The Supplemental
Clauses and the Appendixes shall form an integral part of this Agreement and shall be equally valid.
25.4
This Agreement is written in Chinese and English. In case of any discrepancy between the Chinese and English versions, the Chinese
version shall prevail.
25.5
Any dispute between the Parties hereto arising in connection with the performance of this Agreement shall be settled through friendly
negotiations, In the event that the dispute is still unresolved, either party may submit the disputes for arbitration to the China
International Economic and Trade Arbitration Commission for arbitration in Beijing in accordance with its procedural rules then in
force. The decision of arbitration shall be final and binding on both parties. All arbitration fees (including the legal fees of both parties)
shall be borne by the losing party, unless otherwise determined by the arbitration awarded.
25.6
This Agreement shall take effect upon the signature by the authorized representatives of both Parties and upon the company seals of
both Parties.
25.7
This agreement and the annexes are written in Chinese version in 4 originals The Landlord shall hold 2 original and the Tenant shall
hold 1 original and the Beijing Construction committee (in charge of lease registration) hold one original of Chinese version.
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Execution Page
In witness whereof, the authorized representatives of both Parties have duly signed this Agreement on the date indicated below:
The Landlord:
/s/ Jason Brown
(Signature and Company Seal)
Name of Representative: Jason Brown
Title: Chairman
Date: 6/29/2007
The Tenant:
/s/ Jamie Tseng
(Signature and Company Seal)
Name of Representative: Jamie Tseng
Title:
Date: 6/29/2007
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Appendix 1 Level Plan of the Premises
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Appendix 2 Standard Conditions and Facilities of the Premises
a) Floor: Cement surface.
b) Wall (Corridors and Partition): Plasterboard painted with emulsion paint.
c) Load Bearing Wall: Reinforced concrete painted with emulsion paint and wooden skirting.
d) Ceiling: False ceiling with Armstrong ceiling system.
e) Door: Single or Double leaf glass.
f ) No pipes, lines or wires to remain in the ceiling, ground and inner-wall other than base building provision.
g) Windows are in good repair without scratches, cracks and in operable condition where appropriate
h) Sills and mullions are in good condition without damage
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Exhibit 10.15
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
by and among:
PACIFIC EAST ADVISORS, INC.
a Delaware corporation;
DRILLCO ACQUISITION, LLC.,
a Delaware limited liability company;
and
ADVANCED DRILLING SERVICES, LLC,
a Delaware limited liability company
Dated as of December 11, 2006
Amended and Restated as of February 12, 2007
AMENDED AND RESTATED AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (the “ Agreement ”) is made
and entered into as of December 11, 2006 (the “ Execution Date ”), as amended and restated on February 12, 2007, by and among: Pacific East
Advisors, Inc., a Delaware corporation (“ Parent ”); DRILLCO ACQUISITION, LLC., a Delaware limited liability company and a wholly
owned subsidiary of Parent (“ Merger Sub ”); and ADVANCED DRILLING SERVICES, LLC, a Delaware limited liability company (the “
Company ”).
RECITALS
A. The Boards of Directors of Parent, and the Manager of Merger Sub and the Company, deem it advisable and in the best interest of each
entity and its respective stockholders or interest holders, that Parent and the Company combine in order to advance the long-term business
interests of Parent and the Company.
B. The strategic combination of Parent and the Company (the “ Merger ”) shall be effected in accordance with the Delaware General
Corporation Law (the “ DGCL ”) and the terms of this Agreement through a transaction in which (i) the Company will merge with and into
Merger Sub (the “ LLC Merger ”), (ii) Merger Sub will be the surviving entity in the LLC Merger and will remain a wholly owned limited
liability company subsidiary of Parent and will continue to carry on the business of the Company, and (iii) the interest holders of the Company
will become stockholders of Parent (the Merger and the LLC Merger being herein referred to as the “ Combination ”).
C. The Manager of the Company (i) has determined that the Combination is advisable, fair to, and in the best interests of the Company and
its interest holders, (ii) has determined that this Agreement is advisable and has approved this Agreement, the Combination and the other
transactions contemplated by this Agreement, and (iii) has determined to recommend that the interest holders of the Company adopt this
Agreement.
D. The Board of Directors of Parent (i) has unanimously determined that the Combination is advisable and consistent with and in
furtherance of the long-term business strategy of Parent and is fair to, and in the best interests of, Parent and its stockholders, (ii) has
unanimously approved this Agreement, the Combination and the other transactions contemplated by this Agreement, and (iii) to the extent
required by applicable law, has unanimously determined to recommend that the stockholders of Parent adopt this Agreement and approve the
Combination and the other transactions contemplated by this Agreement.
E. Immediately prior to the closing of the Merger, the Company will issue Class B Membership Units to the accredited investors who
subscribe for Class B Membership Interests of the Company (the “ Class B Interests ”) being offered to accredited investors in a private
placement by the Company. All of the foregoing Class B Interests will be issued and will be outstanding prior
to the Merger, and will be exchanged for Parent Series A Preferred Stock in the Merger as set forth herein.
F. Concurrent with the closing of the Merger, Parent shall consummate closing of the merger of Inner Mongolia Production Company LLC
(“ IMPCO ”), a New York limited liability company, with and into IMPCO Acquisition, LLC, a New York limited liability company and
wholly owned subsidiary of Parent (the “ IMPCO Merger ”), pursuant to that certain Amended and Restated Agreement and Plan of Merger
and Reorganization, made and entered into on or about the Execution Date, as amended and restated on even date herewith, by and among
Parent, IMPCO Acquisition, LLC, a New York limited liability company and wholly owned subsidiary of Parent, and Inner Mongolia
Production Company LLC, a New York limited liability company (the “ IMPCO Merger Agreement ”).
G. Parent, Merger Sub and Company have entered into an Agreement and Plan of Merger and Reorganization on the Effective Date (the “
Existing Agreement ”), and desire to amend and restate the Existing Agreement in full as set forth herein.
NOW THEREFORE, for the mutual consideration set out herein, and other good and valuable consideration, the sufficiency of which is
hereby acknowledged, the parties agree as follows:
AGREEMENT
A. Amendment of Existing Agreement . Effective and contingent upon execution of this Agreement by Parent, Merger Sub and
Company, the Existing Agreement is hereby amended and restated in its entirety to read as set forth in this Agreement, and Parent, Merger Sub
and Company hereby agree to be bound by the provisions hereof as the sole Agreement of Parent, Merger Sub and Company with respect to
matters as set forth herein.
1. Integrated Transaction . For U.S. Federal income tax purposes, it is intended that the transactions contemplated by this Agreement
and the IMPCO Merger Agreement constitute part of a single integrated transaction and are pursuant to a single integrated plan intended to
qualify as a tax-free transaction under Section 351 of the Internal Revenue Code of 1986, as amended (the “ Code ”).
2. Terms of Merger . Immediately following the Effective Time (as defined below), without condition, Parent shall cause Merger Sub to
file with the Secretary of State of the State of Delaware a properly executed certificate of merger for the LLC Merger (the “ LLC Certificate of
Merger ”) conforming to the requirements of the DGCL, in a form mutually agreeable to the parties. The LLC Merger shall become effective at
the time the LLC Certificate of Merger is filed with the Secretary of State of the State of Delaware.
(a) Effects of the LLC Merger
(1) At the time at which the LLC Merger is filed with the Secretary of State of Delaware, as described above (the “ Effective Time ”),
(i) the separate existence of the Merger Sub shall cease and the Merger Sub shall be merged with and into the Company, with the Company as
the surviving entity in the LLC Merger (Merger Sub and the Company are
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sometimes referred to below as the “ LLC Constituent Entities ” and the Company following the LLC Merger is sometimes referred to below as
the “ Continuing LLC ”), and (ii) the Certificate of Formation and the Amended and Restated Operating Agreement of the Company as in
effect immediately prior to the Effective Time shall be unchanged by the LLC Merger.
(2) At and after the Effective Time, the Continuing LLC shall possess all the rights, privileges, powers, and franchises of a public as
well as of a private nature, and be subject to all the restrictions, disabilities, and duties of each of the LLC Constituent Entities; and all singular
rights, privileges, powers, and franchises of each of the LLC Constituent Entities, and all property, real, personal, and mixed, and all debts due
to either of the LLC Constituent Entities on whatever account, and all other things in action or belonging to each of the LLC Constituent
Entities, shall be vested in the Continuing LLC, and all property, rights, privileges, powers, and franchises, and all and every other interest shall
be thereafter as effectually the property of the Continuing LLC as they were of the LLC Constituent Entities, and the title to any real estate
vested by deed or otherwise, in either of the LLC Constituent Entities, shall not revert or be in any way impaired; but all rights of creditors and
all liens upon any property of either of the LLC Constituent Entities shall be preserved unimpaired, and all debts, liabilities, and duties of the
LLC Constituent Entities shall thereafter attach to the Continuing LLC, and may be enforced against it to the same extent as if such debts and
liabilities had been incurred by it.
(3) At the Effective Time, the Certificate of Incorporation of Parent (the “ Parent Certificate ”) shall be amended and restated in its
entirety as set forth on Exhibit A attached hereto.
(4) At the Effective Time, (i) the Amended and Restated Operating Agreement of the Company, as existing immediately prior to the
Effective Time, shall be and remain the Amended and Restated Operating Agreement of the Continuing LLC; (ii) the members of the Board of
Managers of the Company holding office immediately prior to the Effective Time shall remain as the members of the Board of Managers of the
Continuing LLC (if on or after the Effective Time a vacancy exists on the Board of Managers of the Company, such vacancy may thereafter be
filled in a manner provided by applicable law and the Amended and Restated Operating Agreement); and (iii) until the Board of Managers of
the Company shall otherwise determine, all persons who hold offices of the Company at the Effective Time shall continue to hold the same
offices of the Continuing LLC.
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(5) Upon the terms and subject to the conditions of this Agreement, the Closing (as defined below) of the Merger will take place (a) at
the offices of The Krueger Group, LLP, 5771 La Jolla Boulevard, La Jolla, California 92037, at 7:00 a.m., California time, on the date that is
the second Business Day after the satisfaction or waiver of the conditions set forth in Sections 7 and 8 hereof, other than conditions which by
their terms are to be satisfied at the Closing, or (b) such other location, date or time as the parties may mutually agree (the “ Closing Date ”).
For purposes of this Agreement, a “ Business Day ” shall mean any day that is not a Saturday, a Sunday or other day on which the office of the
California Secretary of State is closed.
(b) Events Occurring Immediately Prior to the Closing .
(1) It is currently contemplated that prior to the Merger becoming effective under Delaware law, the Company shall close a private
offering under Regulation D, Rule 506, as promulgated by the Securities and Exchange Commission (“ SEC ”) under the Securities Act,
pursuant to which it will issue up to 11,200,000 Class B Interests (excluding warrants issuable to the Company’s placement agents) (the “
Maximum Offering ”) at $1.25 per Class B Interest (the “ Private Placement ”). All of the Class B Interests issued as part of the Private
Placement shall be included in the membership interests of the Company that are outstanding at the time of the Merger and will be
converted/exchanged in the Merger in accordance with Section 2(c)(1) below.
(2) Immediately prior to the Merger becoming effective, on the day of such effectiveness, the Company shall consummate the Merger
under Section 251 of the Delaware General Corporation Law by filing a Delaware Certificate of Merger with the Delaware Secretary of State.
(c) Conversion of Securities in LLC Merger .
(1) By virtue of the LLC Merger and without any further action on the part of the Company or the Merger Sub or the holders of
interests of the Company: (i) each Class A Interest of the Company then outstanding shall be converted into one (1) fully paid share of
Common Stock of the Parent for a total aggregate of 9,850,000 fully paid and nonassessable shares of Common Stock, par value $0.001; AND
(ii) each Class B Interest of the Company then issued and outstanding in connection with the Private Placement shall be converted into one
(1) fully paid share of Series A Preferred Stock of the Parent for a maximum total aggregate of 11,200,000 fully paid and nonassessable shares
of Series A Preferred Stock, par value $0.001 (excluding warrants issuable to the Company’s placement agents) (assuming the Maximum
Offering is achieved).
(2) On or prior to the Closing Date, Parent shall make available to its transfer agent (the “ Exchange Agent ”) for the benefit of the
holders of Class A Interests and Class B Interests of the Company, a sufficient number of certificates representing Common Stock of Parent
and Series A Preferred Stock of the Parent required to effect the delivery of the aggregate consideration in Common Stock of Parent and
Series A Preferred Stock of the Parent and cash for the payment of fractional shares set forth below (collectively, the “Share Consideration”
and the certificates representing such aggregate Share Consideration being referred to hereinafter as the “ Stock Merger Exchange Fund ”). The
Exchange Agent shall,
4
pursuant to irrevocable instructions, deliver the Share Consideration out of the Stock Merger Exchange Fund. The Stock Merger Exchange
Fund shall not be used for any other purpose than as set forth herein.
(3) No fractional Parent securities shall be issued in the Merger. Each holder of Class A Interests and Class B Interests of the
Company shall be entitled to receive in lieu of any fractional Parent securities to which such holder otherwise would have been entitled
pursuant to Section 2(c)(1) a cash payment in an amount equal to the product of (i) the fractional interest of a Parent securities to which such
holder otherwise would have been entitled and (ii) the fair market value of one (1) Parent securities as determined by Parent’s Board of
Directors in good faith.
(d) Other Matters .
(1) Upon the effectiveness of the LLC Merger, each outstanding option or warrant to purchase the Company Class B Interests,
whether or not then exercisable, shall be converted into an option or warrant to purchase (in substitution for each share of the Company Class B
Interest subject to the Company option or warrant) one (1) share of Parent Series A Preferred Stock at a price equal to the exercise price in
effect immediately prior to the LLC Merger. All other terms and conditions of each the Company option or warrant shall remain the same.
(2) At the Closing, the number of directors of Parent will be set at three (3). The then existing sole director of Parent shall then
nominate and elect to the Board of Directors of Parent Frank Ingriselli, Laird Q. Cagan and Elizabeth P. Smith, or such other persons
designated by the Company, and all of the persons serving as directors and officers of Parent immediately prior to the Closing shall thereafter
resign from all of their positions with Parent, effective immediately after the Closing.
(3) Upon the effectiveness of the Merger, Parent shall assume and will be bound by the registration rights agreements previously
entered into, or hereafter entered into, between the Company and the accredited investors who purchase shares of the Company Class B
Interests in the Private Placement that is currently scheduled to close prior to the Closing. The terms of the registration rights are set forth as an
exhibit to the subscription agreements entered into by each of the foregoing purchasers of shares of the Company Class B Interests. Parent
agrees to execute any agreement or other instrument the Company deems necessary to confirm its agreement to comply with the registration
rights granted by the Company to the purchasers of its Class B Interests.
(4) All stock of the Parent issued in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Parent Stock, and there shall be no further registration of transfers on the records of the Parent of shares of
Company membership interests that were outstanding immediately prior to the Effective Time.
5
3. Representations of the Company . The Company hereby represents and warrants as follows, which warranties and representations
shall also be true as of the Execution Date:
(a) Organization, Standing and Authority of the Company . The Company is a duly organized, validly existing and in good standing
under the laws of the State of Delaware with full corporate power and authority to carry on its business as now conducted and is duly qualified
to do business in any jurisdiction where its ownership or leasing of property or the conduct of its business requires such qualification, except
where the failure to have such corporate power and authority or to so qualify would not have a Material Adverse Effect on the Company.
(b) Authorized and Effective Agreement .
(1) The Company has all requisite corporate power and authority to enter into and perform all of its obligations under this Agreement.
The execution, delivery and performance of this Agreement by the Company and the consummation of the Merger and the other transactions
contemplated hereby have been duly authorized by the Manager of the Company, which authorization constitutes all necessary corporate action
in respect thereof and which have not been rescinded, revoked or otherwise adversely modified.
(2) This Agreement constitutes the legal, valid and binding obligations of the Company, enforceable against it in accordance with its
terms subject, as to enforceability, to bankruptcy, insolvency and other legal requirements of general applicability relating to or affecting
creditors’ rights and to general equity principles.
(3) Neither the execution and delivery of this Agreement, nor consummation of the Merger and the other transactions contemplated
hereby, nor compliance by the Company with any of the provisions hereof shall (i) conflict with or result in a breach of any provision of the
Certificate of Formation or Amended and Restated Operating Agreement (the “ Operating Agreement ”) of the Company or (ii) violate any
legal requirements applicable to the Company.
(4) Other than the filing of the LLC Certificate of Merger with the Delaware Secretary of State and consent of the holders of Class A
and Class B Interests of the Company, no consent, approval or authorization of, or declaration, notice, filing or registration with, any
Government Entity, or any other Person, is required to be made or obtained by the Company on or prior to the Effective Time in connection
with the execution, delivery and performance of this Agreement and the LLC Merger or the consummation of the transactions contemplated
hereby or thereby.
(c) Capital Structure of the Company . The issued and outstanding limited liability company interests of the Company consist of
9,850,000 Class A Interests and no Class B Interests as of the Execution Date. In connection with the Private Placement, the Company may
issue up to 11,200,000 additional Class B Interests prior to the Closing (excluding warrants issuable to the Company’s placement agents). As of
the Execution Date, all the outstanding limited liability company interests of the Company are held by the members free and clear of all
6
encumbrances. As of the Execution Date and as of the Closing, other than the warrants issuable to the Company’s placement agents in
connection with the Private Placement (the “ Placement Agent Warrants ”) and as otherwise set forth herein, there are and will be no options,
warrants, convertible securities or other rights, agreements, arrangements or commitments relating to the limited liability company interests of
the Company.
(d) Material Adverse Change . Except as set forth in the Company Disclosure Documents, there has not been any change in the financial
condition, results of operations, prospects or business which would individually or in the aggregate with any other such changes, of the
Company except changes arising in the ordinary course of business, which changes would have a Material Adverse Effect with respect to the
Company.
(e) Litigation. There are no actions, suits or proceedings instituted, pending or, to its Knowledge, any governmental investigation or
proceeding, and, to its Knowledge, no material litigation, claims, assessments or any governmental proceedings are threatened against the
Company.
(f) Absence of Undisclosed Liabilities . Except as disclosed by the Company to Parent in its financial statements provided to Parent prior
to the Execution Date, the Company does not have any liability (contingent or otherwise) or Indebtedness that is material to the Company, or
that, when combined with all similar undisclosed liabilities, would be material to the Company, except for liabilities incurred in the ordinary
course of business subsequent to the Execution Date.
(g) Tax Matters . The Company has, or by the Closing will have, filed all material federal tax, governmental and/or related forms and
reports (or extensions thereof) due or required to be filed in the ordinary course of business and has (or will have) paid or made adequate
provisions for all taxes or assessments which have become due as of the Closing.
(h) Material Contracts . As part of the Company Disclosure Documents, the Company has previously given Parent copies of or access to
all material contracts, commitments and/or agreements to which the Company is a party, including all contracts covering relationships or
dealings with related parties or affiliates. The Company is not in material breach of, or material default under any material contract.
(i) Subsidiary Corporations . The Company has no Subsidiaries, other than Sunrise Energy Asia LLC (“ Sunrise ”), a Delaware limited
liability company and wholly owned subsidiary of the Company.
(j) Minute Books, Financial Records . The Company has made its corporate financial records, minute books, and other corporate
documents and records available for review to present management of Parent prior to the Closing, during reasonable business hours and on
reasonable notice.
(k) Disclosure . The Company Disclosure Documents which have been delivered by the Company to Parent for use in connection with
the Merger are true and accurate in all material respects.
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4. Representations of Parent and Merger Sub . Parent and Merger Sub hereby jointly and severally represent and warrant to the
Company as follows, each of which representations and warranties shall continue to be true as of the Effective Time:
(a) Organization, Standing and Authority of Parent . Parent is duly organized, validly existing and in good standing under the laws of the
State of Delaware, with the full corporate power to own, lease and operate its property and to carry on its business as now being conducted and
is duly qualified to do business and in good standing to do business in any jurisdiction where the ownership or leasing of the property or the
conduct of its business requires such qualification, except where the failure to so qualify would not have a Material Adverse Effect. As of the
Execution Date, Parent is not required to be qualified to do business in any state other than Delaware. Merger Sub is a limited liability company
duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all necessary limited liability company
power and authority to enter into this Agreement and to carry out its obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby.
(b) Capital Structure of Parent .
(1) As of the Execution Date, Parent’s authorized capital stock consists of (i) 100,000,000 shares of Parent Common Stock, $0.001
par value, of which approximately 468,068 shares are issued and outstanding, and (ii) and 5,000,000 authorized shares of Preferred Stock, par
value $0.001, of which no shares of Preferred Stock are issued or outstanding. The Merger Sub is a single member LLC wholly-owned by
Parent.
(2) All outstanding shares of Parent stock are, and shall be at Closing, validly issued, fully paid and nonassessable. At the Execution
Date and at the Closing, there are and there will be no existing options, convertible or exchangeable securities, calls, claims, warrants,
preemptive rights, registration rights or commitments of any character relating to the issued or unissued capital stock or other securities of
Parent, other than pursuant to the IMPCO Merger Agreement. There are no voting trusts, proxies or other agreements, commitments or
understandings of any character to which Parent is a party or by which Parent is bound with respect to the voting of any capital stock of Parent.
There are no outstanding stock appreciation, phantom stock or similar rights with respect to any capital stock of Parent. There are no
outstanding obligations to repurchase, redeem or otherwise acquire any shares of capital stock of Parent.
(3) As of the Closing, the shares of Parent Common and Preferred Stock to be issued and delivered to the holders of Class A and
Class B Interests of the Company hereunder and in connection herewith will, when so issued and delivered, constitute duly authorized, validly
and legally issued, fully-paid, nonassessable shares of Parent capital stock, will not be issued in violation of any preemptive or similar rights
and will be issued free and clear of all liens and encumbrances.
(c) Authorized and Effective Agreement . Parent and Merger Sub have full corporate power and corporate authority to execute and
deliver this Agreement and, subject to receipt of the Parent Required Vote (as hereinafter defined) (to the extent such Parent Required
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Vote is required by applicable law), to consummate the transactions contemplated hereby. The Board of Directors of Parent by written consent
has (i) determined that this Agreement and the Merger are in the best interests of Parent and its stockholders and declared this Agreement and
the Merger to be advisable, (ii) approved the Merger, the execution and delivery of this Agreement and the consummation of the transactions
contemplated hereby and (iii) recommended that stockholders of Parent adopt this Agreement and, if required by applicable law, directed that
such matter be submitted for consideration and approval by Parent’s stockholders. Except for the adoption of this Agreement by the affirmative
vote of a majority of the outstanding shares of Parent Common Stock entitled to vote in accordance with applicable law, if required (the “
Parent Required Vote ”), no other corporate proceedings on the part of Parent are necessary to approve this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Parent and Merger Sub and (assuming
due authorization, execution and delivery by the Company) constitutes a valid and binding obligation of Parent and Merger Sub, enforceable
against Parent and Merger Sub in accordance with its terms, except as enforcement may be limited by general principles of equity whether
applied in a court of law or a court of equity and by bankruptcy, insolvency and similar laws affecting creditors’ rights and remedies generally
(the “ Bankruptcy and Equity Exceptions ”).
(d) Taxes . Parent has filed all federal, state, county and local income, excise, property and other tax, governmental and/or other returns,
forms, filings, or reports, which are due or required to be filed by it prior to the date hereof and have paid or made adequate provision in the
Parent financial statements for the payment of all taxes, fees, or assessments which have or may become due pursuant to such returns, filings or
reports or pursuant to any assessments received. Parent is not delinquent or obligated for any tax, penalty, interest, delinquency or charge and
there are no tax liens or encumbrances applicable to either corporation.
(e) Consents and Approvals, No Violation . Neither the execution and delivery of this Agreement nor the consummation by Parent or
Merger Sub of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of its Articles of
Incorporation (or other similar documents) or By-Laws (or other similar documents); (ii) require any consent, approval, authorization or permit
of, or registration or filing with or notification to, any governmental or regulatory authority, except (A) pursuant to the applicable requirements
of the Securities Act of 1933, and the rules and regulations promulgated thereunder, (B) the filing of appropriate documents with the relevant
authorities of other states in which Parent or Merger Sub is authorized to do business, (C) as may be required by any applicable state securities
or takeover laws, (D) such filings and consents as may be required under any environmental, health or safety law or regulation pertaining to
any notification, disclosure or required approval triggered by the Merger or the transactions contemplated by this Agreement, or (E) where the
failure to obtain such consent, approval, authorization or permit, or to make such filing or notification, would not in the aggregate have a
Material Adverse Effect or adversely affect the ability of Parent or Merger Sub to consummate the transactions contemplated hereby; (iii) result
in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any right of termination,
cancellation or acceleration or lien or other charge or encumbrance) under any of the terms, conditions or provisions of any indenture, note,
license, lease, agreement or other instrument or obligation to
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which Parent or Merger Sub or any of its assets may be bound, except for such violations, breaches and defaults (or rights of termination,
cancellation or acceleration or lien or other charge or encumbrance) as to which requisite waivers or consents have been obtained or which, in
the aggregate, would not have a Material Adverse Effect or adversely affect the ability of Parent or Merger Sub to consummate the transactions
contemplated hereby; (iv) cause the suspension or revocation of any authorizations, consents, approvals or licenses currently in effect which
would have a Material Adverse Effect; or (v) assuming the consents, approvals, authorizations or permits and filings or notifications referred to
in this Section 4(e) are duly and timely obtained or made and the approval of the Merger and the approval of this Agreement by Parent’s
stockholders has been obtained, violate any order, writ, injunction, decree, statute, rule or regulation applicable to Parent or Merger Sub or to
any of its assets, except for violations which would not in the aggregate have a Material Adverse Effect or adversely affect the ability of Parent
or Merger Sub to consummate the transactions contemplated hereby.
(f) No Subsidiaries . Other than the Merger Sub, Parent has no Subsidiaries or affiliates or has no direct or indirect equity participation or
similar interest in any corporation, partnership, limited liability company, joint venture, trust or other business.
(g) Material Adverse Change . Other than as disclosed in the Parent Disclosure Documents, there have not been any changes in the
financial condition, results of operations, or financial condition of Parent or Merger Sub which would individually or in the aggregate with any
other such changes, except changes arising in the ordinary course of business, which changes would have a Material Adverse Effect with
respect to Parent. Parent has (and at the Closing it will have) disclosed in the Parent Disclosure Documents all events, conditions, and facts
materially affecting, the business, financial condition (including liabilities, contingent or otherwise) or results of operations of Parent.
(h) Absence of Undisclosed Liabilities .
(1) Other than listed on Schedule 4(h) attached hereto, at the Closing, Parent and Merger Sub shall have no material assets and will
not have any liabilities or Indebtedness of any kind other than the costs incurred in connection with the Merger or costs incurred in connection
with Parent’s regulatory compliance.
(2) There is no basis for any assertion against Parent or Merger Sub of any material liabilities or obligations of any nature, whether
absolute, accrued, contingent or otherwise and whether due or to become due, known or unknown, including, without limitation, any liability
for taxes (including e-commerce sales or other taxes), interest, penalties and other charges payable with respect thereto. Neither the execution
and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (a) result in any payment (whether
severance pay, unemployment compensation or otherwise) becoming due from Parent or Merger Sub to any Person or entity, including without
limitation any employee, director, officer or affiliate or former employee, director, officer or affiliate of Parent or Merger Sub, (b) increase any
benefits otherwise payable to any Person or entity, including without limitation any employee, director, officer or affiliate or former employee,
director, officer or affiliate of Parent or Merger Sub, or (c) result in the acceleration of the time of payment or vesting of any such benefits.
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(i) Litigation . Neither Parent nor Merger Sub is a party to, or the subject of, any pending litigation, claims, or governmental investigation
or proceeding not reflected in the Parent financial statements, and to the Knowledge of Parent, there are no lawsuits, claims, assessments,
investigations, or similar matters, threatened or contemplated against or affecting Parent or the management or properties of Parent.
(j) Minute Books and Records . Except as otherwise indicated in the Parent Disclosure Documents, the Parent minute books and other
corporate records made available to the Company prior to the date of this Agreement, are complete and accurate in all material respects.
(k) Material Contracts .
(1) Parent has not breached, nor is there any pending, existing or threatened claim that Parent has breached, any of the material terms
or conditions of any agreements, contracts, commitments or other documents to which it is a party or by which it is, or its properties are bound.
The execution and performance of this Agreement will not violate any provisions of applicable law or any agreement to which Parent is
subject. Merger Sub has no contracts other than this Agreement.
(2) Parent hereby represents and warrants that, except for the IMPCO Merger Agreement and as otherwise provided in the Parent
Disclosure, it is not a party to any material contract or commitment other than appointment documents with Parent’s transfer agent, and that it
has disclosed to the Company all previous or existing relationships or dealings with related or controlling parties or affiliates of Parent
(3) Except for the IMPCO Merger Agreement and as otherwise provided in the Parent Disclosure Documents, Parent has no material
contracts, commitments, arrangements, or understandings relating to its business, operations, financial condition, prospects or otherwise. For
purposes of this Section 4, “material” means payment or performance of a contract, commitment, arrangement or understanding which is
expected to involve payments in excess of $20,000.
(4) Except for the IMPCO Merger Agreement, this Agreement and the transactions contemplated thereby, there are no outstanding
contracts, commitments or bids, or services, development, sales or other proposals of Parent.
(5) There are no outstanding lease commitments that cannot be terminated without penalty upon 30-days notice, or any purchase
commitments of Parent.
(l) Compliance with Securities Laws .
(1) There are no outstanding, pending or threatened stop orders or other actions or investigations relating thereto involving federal and
state Securities Laws. To Parent’s Knowledge, all issued and outstanding shares of Parent’s capital stock were offered and sold in compliance
with federal and state Securities Laws and were not offered, sold or issued in violation of any preemptive right, right of first refusal or right of
first offer and are not subject to any right of rescission.
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(2) All information regarding Parent and any entity for whose conduct Parent is legally held responsible which has been provided to
the Company in the Parent Disclosure Documents relating to any document or other communication, disseminated to any former, existing or
potential stockholders of Parent or to the public or filed with The National Association of Securities Dealers, Inc. (“ NASD ”) or the SEC or
any state securities regulators or authorities is true, complete, accurate in all material respects, not misleading, and was and is in full
compliance with all Securities Laws and regulations.
(3) Parent has timely filed all required documents, reports and schedules with the NASD and the SEC, and any applicable state or
regional securities regulators or authorities. As of their respective dates, the Parent Disclosure Documents complied in all material respects
with the requirements of the Securities Act, the Exchange Act, the NASD rules and regulations and state and regional Securities Laws and
regulations, as the case may be, and, at the respective times they were filed. None of the Parent Disclosure Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading.
(m) Governmental Authorizations: Compliance with Laws .
(1) Up to the Closing, Parent is currently in compliance with, and has complied with, and Parent has conducted any business
previously owned or operated by it in compliance with, all applicable laws, orders, rules and regulations of all Governmental Entities, including
applicable Securities Laws and regulations and environmental laws and regulations, except where such noncompliance has and will have, in the
aggregate, no Material Adverse Effect on Parent.
(2) Up to the Closing, Parent has not received notice of any noncompliance with the foregoing, nor to its Knowledge are there any
claims or threatened claims in connection therewith.
(3) Assuming all corporate consents and approvals have been obtained and assuming all applicable appropriate filings and mailings
are made by Parent under the Securities Act, the Exchange Act, with the NASD, and with the Secretary of State of Delaware, the execution and
delivery by Parent of this Agreement and the closing documents and the consummation by Parent of the transactions contemplated hereby do
not and will not (i) require the consent, approval or action of, or any filing or notice to, any corporation, firm, Person or other entity or any
public, Governmental Entity or judicial authority (except for such consents, approvals, actions, filing or notices the failure of which to make or
obtain will not in the aggregate have a Material Adverse Effect on Parent); or (ii) violate any order, writ, injunction, decree, judgment, ruling,
law, rule or regulation of any federal, state, county, municipal, or foreign court or Governmental Entity or authority applicable to Parent, or its
business or assets. Parent is not subject to, or a party to, any mortgage, lien, lease, agreement, contract, instrument, order, judgment or decree or
any other material restriction of any kind or character which would prevent, hinder, restrict or impair the continued operation of the business of
Parent (or to the Knowledge of Parent, the continued operation of the business of the Company) after the Closing.
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(n) Ongoing Business . No aspect of Parent’s past or present business, operations or assets is of such a character as would restrict or
otherwise hinder or impair Parent from carrying on the business of Parent as it is presently being conducted by Parent.
(o) Required Government Consents, Filings, etc . Except as have been or, prior to the Closing, will be obtained, no approval,
authorization, certification, consent, variance, permission, license, or permit to or from, or notice, filing, or recording to or with, any U.S.
Federal, state, or local governmental authorities is necessary for the execution and delivery of this Agreement and the other agreements and
instruments to be executed and delivered by Parent in connection with the transactions contemplated hereby, or the consummation by Parent of
the transactions contemplated hereby.
(p) Other Required Consents, Filings, etc . Except as have been or, prior to the Closing, will be obtained, no approval, authorization,
consent, permission, or waiver to or from, or notice, filing, or recording to or with, any person is necessary for the execution and delivery of
this Agreement and the other agreements and instruments to be executed and delivered in connection with the transactions contemplated hereby
by Parent, or the consummation by Parent of the transactions contemplated hereby.
(q) Title to Assets . Parent has good and marketable title to all of its assets, free and clear of any claims or Encumbrances.
“Encumbrance” means any mortgage, charge (whether fixed or floating), security interest, pledge, right of first refusal, lien (including any
unpaid vendor’s lien), option, hypothecation, title retention or conditional sale agreement, lease, option, restriction as to transfer or possession,
or subordination to any right of any other person.
(r) Intellectual Property . Parent has no Intellectual Property. The term “Intellectual Property” includes all patents and patent
applications, trademarks, service marks, and trademark or service mark registrations and applications, trade names, logos, designs, domain
names, web sites, slogans and general intangibles of like nature, together with all goodwill relating to the foregoing, copyrights, copyright
registrations, renewals and applications, software, databases, technology, trade secrets and other confidential information, know-how,
proprietary processes, formulae, algorithms, models and methodologies, drawings, specifications, plans, proposals, financing and marketing
plans, advertiser, customer and supplier lists and all other information relating to advertisers, customers and suppliers (whether or not reduced
to writing), licenses, agreements and all other proprietary rights, which relate to Parent or Merger Sub’s business.
(s) Compliance with Rules .
(1) Parent at all times has been and is currently in compliance with all Rules applicable to Parent and/or its business, except where
such failure to comply would not have a material adverse effect on Parent or its operations. “ Rule ” means any law, statute, rule, regulation,
order, court decision, judgment or decree of any U.S. Federal, state, territorial, provincial or municipal authority.
(2) Parent is in material compliance with, and have obtained all Permits and other authorizations relating to Parent or Merger Sub
which are required by any
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Rule, which has been enacted to the date of this Agreement, except as would not have a material adverse effect on Parent or Merger Sub or its
operations. No governmental proceeding is pending or threatened to cancel, amend, modify or fail to renew any such Permit. “ Permit ”
includes any approval, authorization, concession, grant, certificate of convenience and necessity, qualification, consent, franchise, license,
security clearance, easement, order or other permit issued or granted by any governmental entity.
(t) Disclosures . No representation or warranty by Parent contained in this Agreement or the Parent Disclosure Documents and no
statement contained in any certificate, schedule or other communication furnished pursuant to or in connection with the provisions hereof
contains or shall contain any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements
therein not misleading. There is no current or prior event or condition of any kind or character pertaining to Parent that may reasonably be
expected to have a Material Adverse Effect on Parent. Except as specifically indicated elsewhere in this Agreement, all documents delivered by
Parent in connection herewith have been and will be complete originals, or exact copies thereof.
(u) Employees . Parent currently has no employees, consultants or independent contractors. No amounts are due or owed to any previous
or current Parent employee, consultant or independent contractor. There are no oral employment agreements, consulting agreements or other
compensation agreements currently in effect between Parent and any person.
(v) Broker’s or Finder’s Fees . Parent has not authorized any person to act as broker or finder or in any other similar capacity in
connection with the transactions contemplated by this Agreement.
(w) Environmental Matters . Parent, including any corporation to which Parent is a successor, is in material compliance with all
Environmental Laws. Neither Parent nor, to the Knowledge of Parent, any other Person for whose conduct Parent is or may be held responsible,
has any Environmental Liabilities, or, to the Knowledge of Parent, with respect to any properties and assets (whether real, personal or mixed) in
which Parent (or any predecessor) has or had an interest, or at any property geologically or hydrologically adjoining any such property or
assets.
5. Closing . The Closing of the transactions contemplated herein shall take place on such date (the “ Closing ”) as soon as reasonably
practicable following the execution of this Agreement, subject to the conditions precedent set forth in Sections 7 and 8 hereto, unless
accelerated or extended by the affirmative agreement by all parties.
6. Actions Prior to Closing .
(a) Prior to the Closing, the Company on the one hand, and Parent and Merger Sub on the other hand, shall be entitled to make such
investigations of the assets, properties, business and operations of the other party, and to examine the books, records, tax returns, financial
statements and other materials of the other party as such investigating party deems necessary in connection with this Agreement and the
transactions contemplated hereby. Any such investigation and examination shall be conducted at reasonable times and under reasonable
circumstances, and the parties hereto shall cooperate fully therein. Until the Closing, and if the
14
Closing shall not occur, hereafter, each party shall keep confidential and shall not use in any manner inconsistent with the transactions
contemplated by this Agreement, and shall not disclose, nor use for their own benefit, any information or documents obtained from the other
party concerning the assets, properties, business and operations of such party, unless such information (i) is readily ascertainable from public or
published information, (ii) is received from a third party not under any obligation to keep such information confidential, or (iii) is required to be
disclosed by any law or order (in which case the disclosing party shall promptly provide notice thereof to the other party in order to enable the
other party to seek a protective order or to otherwise prevent such disclosure). If this transaction is not consummated for any reason, each party
shall return to the other all such confidential information, including notes and compilations thereof, promptly after the date of such termination.
The representations and warranties contained in this Agreement shall not be affected or deemed waived by reason of the fact that either party
hereto discovered or should have discovered any representation or warranty is or might be inaccurate in any respect.
(b) Prior to the Closing, the Company, Parent and Merger Sub agree not to issue any statement or communications to the public or the
press regarding the transactions contemplated by this Agreement without the prior written consent of the other parties. In the event that Parent
is required under federal Securities Law to either (i) file any document with the SEC that discloses this Agreement or the transactions
contemplated hereby, or (ii) to make a public announcement regarding this Agreement or the transactions contemplated hereby, Parent shall
provide the Company with a copy of the proposed disclosure no less than 48 hours before such disclosure is made and shall incorporate into
such disclosure any reasonable comments or changes that the Company may request. The parties hereto agree to the issuance of a press release
in a form to be agreed upon by the parties following the Execution Date.
(c) There shall be no stock dividend, stock split, recapitalization, or exchange of shares with respect to or rights, options or warrants
issued in respect of Parent’s Common or Preferred Stock after the date hereof and there shall be no dividends or other distributions paid on
Parent’s Common Stock, or shares of Parent capital stock issued, after the date hereof, in each case through and including the Effective Time.
The Company, Parent and Merger Sub shall conduct no business, prior to the Closing, other than in the ordinary course of business or as may
be necessary in order to consummate the transactions contemplated hereby.
(d) Prior to the Closing, if requested by the Managers of IMPCO and the Company, Parent shall adopt a new stock option plan or amend
its existing stock option plan in the manner requested by the Managers of IMPCO and the Company.
(e) Prior to the Closing, the Board of Directors of the Parent and the Manager of Merger Sub shall approve the Merger, this Agreement,
and the transactions contemplated hereby, and shall approve the resignations of the officers and directors of Parent and Merger Sub, effective
as of the Closing, and take such action as is necessary to appoint the Company nominees to the Parent Board of Directors and offices effective
as of the Closing.
7. Conditions Precedent to the Obligations of the Company . All obligations of the Company under this Agreement are subject to the
fulfillment, prior to or as of the Closing and/or the Effective Time, as indicated below, of each of the following conditions:
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(a) The representations and warranties by or on behalf of Parent and Merger Sub contained in this Agreement or in any certificate or
document delivered pursuant to the provisions hereof or in connection herewith shall be true and correct in all material respects at and as of the
Closing and Effective Time as though such representations and warranties were made at and as of such time.
(b) Parent and Merger Sub shall have performed and complied with all covenants, agreements, and conditions set forth or otherwise
contemplated in, and shall have executed and delivered all documents required by, this Agreement to be performed or complied with or
executed and delivered by them prior to or at the Closing.
(c) On or before the Closing, the directors of Parent and the Manager of Merger Sub, and Parent as interest holder of Merger Sub, and the
stockholders of Parent (to the extent the Parent Required Vote is required by applicable law), shall have approved in accordance with
applicable state corporation law the execution and delivery of this Agreement and the consummation of the transactions contemplated herein.
(d) On or before the Closing Date, Parent and Merger Sub shall have delivered certified copies of resolutions of the sole interest holder
and Manager of Merger Sub and of the directors of Parent approving and authorizing the execution, delivery and performance of this
Agreement and authorizing all of the necessary and proper action to enable Parent and Merger Sub to comply with the terms of this Agreement,
including the election of the Company’s nominees to the Board of Directors of Parent and all matters outlined or contemplated herein.
(e) The Merger shall be permitted by applicable state law and otherwise and Parent shall have sufficient shares of its capital stock
authorized to complete the Merger and the transactions contemplated hereby.
(f) At the Closing, the number of directors of Parent will be set at three (3), and (A) Frank Ingriselli, Laird Q. Cagan and Elizabeth P.
Smith, or such other persons designated by the Company, shall be elected to the Board of Directors of Parent, (B) Frank Ingriselli shall be
elected the President and Chief Executive Officer of Parent, (C) Jamie Tseng shall be elected as the Executive Vice President of Parent,
(D) Stephen F. Groth shall be elected Vice President, Chief Financial Officer and Secretary of Parent, and (E) all of the former directors and
officers of Parent shall resign in writing from their positions as directors and officers of Parent.
(g) At the Closing, all instruments and documents delivered by Parent or Merger Sub, including to the Company holders of Series A and
Series B Interests pursuant to the provisions hereof shall be reasonably satisfactory to legal counsel for the Company.
(h) The Company shall have received the reasonable assurance of its certified public accountants, to the extent it deems necessary, that
its financial audit shall be concluded at the proper time in order to be in full compliance will applicable SEC reporting requirements in
connection with the Merger and the Closing of this transaction.
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(i) The Company shall have raised a minimum of $8,000,000 of capital in connection with its Private Placement under terms and
conditions acceptable to the Company.
(j) The shares of restricted Parent capital stock to be issued to the holders of Company Series A and Series B Interests at Closing will be
validly issued, nonassessable and fully paid under Delaware corporation law and will be issued in a nonpublic offering in compliance with all
federal, state and applicable Securities Laws.
(k) The Company shall have received the advice of its tax advisor, to the extent it deems necessary, that this transaction is a tax free
reorganization as to the Company and all of the holders of Company Series A and Series B Interests.
(l) The Company shall have received all necessary and required approvals and consents from required parties and from its holders of
Company Series A and Series B Interests in connection with the Closing of this Agreement, including stockholder approval to change the name
of Parent to “Pacific Asia Petroleum, Inc.,” in the State of Delaware and thereafter change the trading symbol of Parent.
(m) At the Closing, Parent and Merger Sub shall have delivered to the Company an opinion of Parent’s legal counsel dated as of the
Closing to the effect that:
(1) Parent is a corporation duly organized, validly existing and in good standing under the laws of the Delaware, and Merger Sub is a
limited liability company validly existing and in good standing under the laws of Delaware;
(2) This Agreement has been duly authorized, executed and delivered by Parent and Merger Sub and is a valid and binding obligation
of Parent and Merger Sub enforceable in accordance with its terms;
(3) Parent and Merger Sub each through its Board of Directors and stockholders, and interest holders and Manager, respectively, have
taken all corporate action necessary for performance under this Agreement;
(4) The documents executed and delivered to the Company and the holders of Company Series A and Series B Interests hereunder are
valid and binding in accordance with their terms and vest in the holders of Company Series A and Series B Interests all right, title and interest
in and to the shares of Parent’s Common Stock and Preferred Stock to be issued pursuant to Section 2 hereof, and the shares of Parent capital
stock when issued will be duly and validly issued, fully paid and nonassessable; and
(5) Parent and Merger Sub each has the corporate power to execute, deliver and perform under this Agreement.
(n) The “Closing” as defined in the IMPCO Merger Agreement of that certain merger transaction contemplated by the IMPCO Merger
Agreement shall close simultaneously with the Closing of the Merger under this Agreement.
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8. Conditions Precedent to the Obligations of Parent and Merger Sub . All obligations of Parent and Merger Sub under this
Agreement are subject to the fulfillment, prior to or at the Closing and/or the Effective Time, of each of the following conditions:
(a) The representations and warranties by the Company contained in this Agreement or in any certificate or document delivered pursuant
to the provisions hereof shall be true and correct in all material respects at and as of the Closing and the Effective Time as though such
representations and warranties were made at and as of such times.
(b) The Company shall have performed and complied with, in all material respects, all covenants, agreements, and conditions required by
this Agreement to be performed or complied with by it prior to or at the Closing.
(c) The Company shall have raised a minimum of $8,000,000 of capital in connection with its Private Placement.
(d) The Company shall deliver an opinion of its legal counsel to the effect that:
(1) The Company is a limited liability company duly organized, validly existing and in good standing under the laws of the state of its
organization;
(2) This Agreement has been duly authorized, executed and delivered by the Company;
(3) The Manager and holders of Company Series A and Series B Interests have taken all corporate action necessary for performance
under this Agreement; and
(4) The Company has the corporate power to execute, deliver and perform under this Agreement.
9. Survival and Indemnification . Notwithstanding any investigation conducted by any Party hereto or any information any party may
receive, all representations, warranties, covenants and agreements contained in this Agreement (or in any schedule, certificate, document or
statement delivered pursuant hereto) shall survive only until the Closing.
10. Nature of Representations . All of the parties hereto are executing and carrying out the provisions of this Agreement in reliance
solely on the representations, warranties and covenants and agreements contained in this Agreement and the other documents delivered at the
Closing and not upon any representation, warranty, agreement, promise or information, written or oral, made by the other party or any other
Person other than as specifically set forth herein.
11. Documents at Closing . At the Closing, the following documents shall be delivered:
(a) The Company will deliver, or will cause to be delivered, to Parent the following:
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(1) a certificate executed by the President of the Company to the effect that all representations and warranties made by the Company
under this Agreement are true and correct as of the Closing and as of the Effective Time, the same as though originally given to Parent or
Merger Sub on said date;
(2) a certificate from the state of the Company’s organization dated within five business days of the Closing to the effect that the
Company is in good standing under the laws of said state;
(3) such other instruments, documents and certificates, if any, as are required to be delivered pursuant to the provisions of this
Agreement;
(4) an executed copy of the LLC Certificate of Merger for filing in Delaware;
(5) certified copies of resolutions adopted by the members and Manager of the Company authorizing the Merger;
(6) all other items, the delivery of which is a condition precedent to the obligations of Parent and Merger Sub, as set forth herein; and
(7) the legal opinion required by Section 8(d) hereof.
(b) Parent and Merger Sub will deliver or cause to be delivered to the Company:
(1) stock certificates representing those securities of Parent to be issued as a part of the Merger as described in Section 2 hereof;
(2) a certificate of the President of Parent and Merger Sub, respectively, to the effect that all representations and warranties of Parent
and Merger Sub made under this Agreement are true and correct as of the Closing, the same as though originally given to the Company on said
date;
(3) certified copies of resolutions adopted by Parent’s Board of Directors and, if applicable, stockholders, and the Manager of Merger
Sub and its members, if applicable, authorizing the Merger and all related matters;
(4) certificates from the jurisdiction of incorporation of Parent and organization of Merger Sub dated within five business days of the
Closing Date that each of said corporations is in good standing under the laws of said state;
(5) opinion of Parent’s counsel as described in Section 7(m) above;
(6) such other instruments and documents as are required to be delivered pursuant to the provisions of this Agreement;
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(7) written resignation of all of the officers and directors of Parent and Merger Sub and written appointment of the Company
nominees as directors and officers; and
(8) all other items, the delivery of which is a condition precedent to the obligations of the Company, as set forth in Section 7 hereof.
12. Consultants’ Fees . Parent and Merger Sub, jointly and severally, represent and warrant to the Company, and the Company represents
and warrants to each of the Parent and Merger Sub, that none of them, or any party acting on their behalf, has incurred any liabilities, either
express or implied, to any “consultant” “broker” or “finder” or similar Person in connection with this Agreement or any of the transactions
contemplated hereby.
13. Post-Closing Covenants .
(a) Standard and Poor’s . If required for the trading of Parent Common Stock, Parent shall use its commercially reasonable efforts to
apply for listing with Standard and Poor’s Information Service and Blue Sky filings.
(b) Stock Listing . As soon as Parent meets the company listing requirements, Parent shall use all commercially reasonable efforts to
cause Parent Common Stock to be listed for trading on the Over-The-Counter Bulletin Board.
(c) Confidentiality . Parent hereby agrees that, after the Execution Date and prior to Effective Time, it shall not publicly disclose any
confidential information of Parent or the Company, and that they shall not make any public statement or announcement regarding the Merger or
the business, financial condition, prospects or operations of Parent or the Company, without the prior written consent of the Company.
14. Miscellaneous .
(a) Further Assurances . At any time, and from time to time, after the Effective Time, each party will execute such additional instruments
and take such action as may be reasonably requested by the other party to confirm or perfect title to any property transferred hereunder or
otherwise to carry out the intent and purposes of this Agreement.
(b) Waiver . Any failure on the part of any party hereto to comply with any of its obligations, agreements or conditions hereunder may be
waived in writing by the party (in its sole discretion) to whom such compliance is owed.
(c) Termination .
(1) By Any Party . This Agreement may be terminated at the discretion of any party if the Closing has not occurred by April 30,
2007 (unless the Closing date is extended with the consent of both the Company and Parent) for any reason other than the default hereunder by
the terminating party.
(2) Termination by Mutual Consent . This Agreement may be terminated and the Merger may be abandoned at any time prior to the
Effective Time, before or
20
after gaining requisite stockholder approval, by the mutual written consent of Parent and the Company.
(3) Termination by Parent and Merger Sub . This Agreement may be terminated and the Merger may be abandoned at any time prior
to the Effective Time by action of the Board of Directors of Parent and Merger Sub if:
a. any representation or warranty of the Company contained in this Agreement shall not be true in all material respects when made or,
if a representation or warranty relates to a particular date, shall not be true in all material respects as of such date (provided such breach is
capable of being cured and has not been cured within five (5) business days following receipt by the breaching Party of notice of the breach) or
on and as of the Effective Time as if made on and as of the Effective Time; or
b. the Merger is not approved by the Company’s members contemplated by this Agreement.
(4) Termination by the Company . This Agreement may be terminated and the Merger may be abandoned at any time prior to the
Effective Time by action of the Manager of the Company if:
a. any representation or warranty of Parent or Merger Sub contained in this Agreement shall not be true in all material respects when
made or, if a representation or warranty relates to a particular date, shall not be true in all material respects as of such date (provided such
breach is capable of being cured and has not been cured within five (5) business days following receipt by the breaching Party of notice of the
breach) or on and as of the Effective Time as if made on and as of the Effective Time; or
b. the Merger is not submitted to Parent’s stockholders as contemplated by this Agreement (provided that the Company is not in
material breach of the terms of this Agreement and this Agreement has not otherwise been terminated pursuant to this Section 14(c)).
(5) Effect of Termination . Except as otherwise expressly provided herein, in the event of termination of this Agreement by a Party as
provided in this Section 14(c), this Agreement shall forthwith become void and there shall be no liability or obligation on the part of the Parties
or their respective affiliates, officers, managers, members, directors or stockholders, except (x) with respect to the payment of expenses
pursuant to Section 14(l) and (y) to the extent that such termination results from the breach of a Party of any of its representations or warranties,
or any of its covenants or agreements, in each case, as set forth in this Agreement. In addition, in the event of termination of this Agreement
any materials or documents that have been furnished by one party to the other in connection with this Agreement or the transactions
contemplated hereby shall be promptly returned by the receiving party, accompanied by all copies of such documentation, within ten (10) days
after (a) the termination of this Agreement or (b) the written request of the disclosing party.
(d) Amendment . This Agreement may be amended only in writing as agreed to by all parties hereto.
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(e) Notices . All notices, requests, demands, claims, and other communications required or permitted hereunder shall be in writing and
shall be deemed given upon receipt if delivered personally or by recognized commercial delivery service, or mailed by registered or certified
mail (return receipt requested), or sent via facsimile (with acknowledgment of complete transmission and confirmed in writing by mail
simultaneously dispatched) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):
(1)
if to Parent or Merger Sub, to:
Pacific East Advisors, Inc.
10600 N. De Anza Blvd., Suite 250
Cupertino, California 95014
Attention: Laird Q. Cagan
Telephone No.: (408) 873-0400
Facsimile No.: (408) 873-0550
with a copy (which shall not constitute notice) to:
Krueger Group, LLP
5771 La Jolla Boulevard
La Jolla, California 92037
Attention: Blair Krueger
Telephone No.: (858) 729-9997
Facsimile No.: (858) 729-9995
(2)
if to Company, to:
Advanced Drilling Services, LLC
10600 N. De Anza Blvd., Suite 250
Cupertino, California 95014
Attention: Laird Q. Cagan
Telephone No.: (408) 873-0400
Facsimile No.: (408) 873-0550
(f) Headings . The section and subsection headings in this Agreement are inserted for convenience only and shall not affect in any way
the meaning or interpretation of this Agreement.
(g) Counterparts . This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same instrument.
(h) Binding Effect . This Agreement shall be binding upon the parties hereto and inure to the benefit of the parties, their respective heirs,
administrators, executors, successors and assigns.
(i) Entire Agreement . This Agreement and the attached Exhibits, is the entire agreement of the parties covering everything agreed upon
or understood in the transaction.
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There are no oral promises, conditions, representations, understandings, interpretations or terms of any kind as conditions or inducements to the
execution hereof.
(j) Time . Time is of the essence.
(k) Severability . If any part of this Agreement is deemed to be unenforceable, the balance of the Agreement shall remain in full force
and effect.
(l) Responsibility and Costs . If the Merger is not consummated, all fees, expenses and out-of-pocket costs, including, without limitation,
fees and disbursements of counsel, financial advisors and accountants, incurred by the parties hereto (collectively the “ Transaction Expenses ”)
shall be borne solely and entirely by the party that has incurred such costs and expenses, unless the failure to consummate the Merger
constitutes a breach of the terms hereof, in which event the breaching party shall be responsible for all costs of all parties hereto. If the Merger
is consummated, the Company shall be responsible for payment of all Transaction Expenses incurred by the Company, the Parent and the
Merger Sub.
(m) Applicable Law . This Agreement shall be construed and governed by the internal laws of the State of Delaware, without reference to
principles of conflicts of law.
(n) Jurisdiction and Venue . Each party hereto irrevocably consents to the jurisdiction and venue of the state or federal courts located in
Santa Clara County, State of California, in connection with any action, suit, proceeding or claim to enforce the provisions of this Agreement, to
recover damages for breach of or default under this Agreement, or otherwise arising under or by reason of this Agreement.
(o) Definitions . As used in this Agreement, the following terms shall have the meanings set forth below:
(1) “ Company Disclosure Documents ” means that certain Confidential Private Placement Memorandum of the Company, to be
provided by the Company prior to the Closing, and other documents provided to Parent by the Company prior to the Effective Time. Any
information with respect to a matter that is disclosed by the Company to the Parent for any purpose in the Company Disclosure Documents
shall be deemed to be disclosed for all purposes hereunder provided that such information sufficiently identifies the matter in question in all
material respects.
(2) “ Parent Disclosure Documents ” means all available documents filed by Parent with the NASD, the SEC or documents otherwise
provided by Parent to the Company prior to the Effective Time.
(3) “ Encumbrance ” means, with respect to any Person, any mortgage, deed of trust, pledge, lien, security interest, charge, claim or
other security arrangement of any nature whatsoever, whether voluntarily or involuntarily given, including any conditional sale or title retention
arrangement, and any assignment, deposit arrangement or lease intended as, or having the effect of, security and any filed financing statement
or other notice of any of the foregoing (whether or not an Encumbrance is created or exists at the time of the filing).
23
(4) “ Environmental Law ” means any and all applicable Legal Requirements, and without limiting the foregoing, any regulations,
orders, decrees, judgments or injunctions promulgated or entered into by any Governmental Entity, relating to the preservation or reclamation
of natural resources, or to the management, Release (as hereinafter defined) or threatened Release of Hazardous Material (as hereinafter
defined), including but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. §§ 9601 et seq.
(“ CERCLA ”), the Federal Water Pollution Control Act, 33 U.S.C. §§ 1251 et seq., the Clean Air Act, 42 U.S.C. § 7401 et seq., the Toxic
Substances Control Act, 15 U.S.C. § 2701 et seq., the Occupational Safety and Health Act, 29 U.S.C. § 651 et seq., the Emergency Planning
and Community Right-to-Know Act of 1986, 42 U.S.C. § 11001 et. seq., the Safe Drinking Water Act, 42 U.S.C. § 300(f) et seq., the
Hazardous Materials Transportation Act, 49 U.S.C. §§ 1801 et seq., and any similar or implementing state or local law, and all amendments or
regulations promulgated thereunder.
(5) “ Environmental Liabilities ” means all claims, demands, causes of action, liabilities, investigations, judgments, damages, costs
and expenses (including, without limitation, costs of suit, reasonable attorneys’ fees, costs of negotiation, consulting fees and expert fees,
Remedial Action costs, penalties, fines and punitive damages, whether in respect of death, personal injury, property damage, cleanup and
removal expense, cost recovery contribution or compensation), under Environmental Laws in effect prior to or as of the Closing, which arise
from (i) the Release of Hazardous Materials prior to the Closing at, on, in or under any facilities of the Company, (ii) any violation by the
Company of any Environmental Law in effect at the time of the Closing Date, due to conditions existing or events occurring prior to the
Closing, or (iii) the off-site treatment, storage or disposal of Hazardous Materials from any of the facilities of the Company at any time prior to
the Closing.
(6) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.
(7) “ GAAP ” means generally accepted accounting principles in the United States.
(8) “ Governmental Authorization ” means any permit, license, franchise, approval, consent, permission, confirmation, endorsement,
waiver, certification, registration, qualification, clearance or other authorization issued, granted, given or otherwise made available by or under
the authority of any Governmental Entity or pursuant to any Legal Requirement.
(9) “ Governmental Entity ” means any nation, state, municipality and any federal, state, local, foreign, provincial or supranational
court or governmental agency, authority, instrumentality or regulatory body.
(10) “ Hazardous Material ” means all explosive or regulated radioactive materials or substances; petroleum and petroleum products
(including crude oil or any fraction thereof); asbestos or asbestos-containing materials; and any hazardous or toxic materials, wastes or
chemicals designated, defined, listed or regulated as such pursuant to any Environmental Law.
24
(11) “ Indebtedness ” means indebtedness for borrowed money or the equivalent or represented by notes, bonds or other similar
instruments or letters of credit (or reimbursement agreements in respect thereof) or representing the balance deferred and unpaid of the
purchase price of any property (other than trade payables constituting current liabilities and Personal property leases), and including without
limitation capital lease obligations, including all accrued and unpaid interest thereon, and applicable prepayment, breakage or other premiums,
fees or penalties and the costs of discharging such indebtedness, all as determined in accordance with GAAP.
(12) “ Legal Requirement ” shall mean any federal, state, local, provincial, foreign, international, multinational or other statute, law,
treaty, rule, regulation, guideline, administrative order, directives, ordinance, constitution or principle of common law (or any interpretation
thereof by a Governmental Entity).
(13) “ Material Adverse Effect ” means:
(a) with respect to the Company, an effect that would be materially adverse: (i) to the business, results of operation or financial condition
of the Company; (ii) to the Company’s ability to perform any of its material obligations under this Agreement or to consummate the Merger; or
(iii) to the ability of the Continuing LLC or Parent to conduct the business of the Company following the Effective Time or the ability of the
Company to exercise full rights of ownership of the Company or its assets or business; or
(b) with respect to Parent, an effect that would be materially adverse: (i) to the business, results of operation, or financial conditions of
Parent and its Subsidiaries, considered as a whole; or (ii) to Parent’s ability to perform any of its material obligations under this Agreement or
to consummate the Merger; or (iii) to the ability of the Continuing LLC or Parent to conduct the business of the Company following the
Effective Time or the ability of Parent to exercise full rights of ownership of the Company or its assets or business;
provided , however , that in determining whether a Material Adverse Effect has occurred there shall be excluded any action or omission of the
Company or Parent taken with the prior written consent of Parent or the Company, as applicable, in contemplation of the Merger.
(14) “ Party ” or “ Parties ” means either, or collectively, Parent, Merger Sub or the Company.
(15) “ Person ” means any individual and any corporation, partnership, limited liability company, firm, trust, or other business entity
and any Governmental Entity.
(16) “ Remedial Action ” shall mean (a) “remedial action” as such term is defined in CERCLA and (b) all other action required by
any Governmental Entity to respond to a release or threatened release of Hazardous Material.
(17) “ Securities Act ” means the Securities Act of 1933, as amended.
(18) “ Securities Laws ” means the Securities Act; the Exchange Act; the Investment Company Act of 1940, as amended; the
Investment Advisers Act of 1940, as
25
amended; the Trust Indenture Act of 1939, as amended; the rules and regulations of the Securities and Exchange Commission promulgated
thereunder; and the blue sky and other Legal Requirements of any state that are applicable to the purchase and sale of securities generally.
(19) “ Subsidiary ” or “ Subsidiaries ” means with respect to any party, any corporation, company, partnership or other organization,
whether incorporated or unincorporated, which is consolidated with such party for financial reporting purposes.
(20) In addition, the following terms shall be interpreted as set forth below:
a. The words “hereof,” “herein,” “hereby” and “hereunder” and/or words of similar import when used in this Agreement shall refer to
this Agreement as a whole and not to any particular provisions of this Agreement.
b. Terms defined in the singular shall have a comparable meaning when used in the plural, and vice-versa.
c. References to the “Knowledge” of an entity shall refer to the actual personal knowledge of the directors and officers of the entity,
and the knowledge of any fact or matter which any Person would have following inquiries of those employees and directors or former
employees and directors of the entity of whom such persons would reasonably believe would have actual knowledge of such matters presented.
d. References to an “Exhibit” or to a “Schedule” are, unless otherwise specified, to one of the Exhibits or Schedules attached to or
referenced in this Agreement. The reference to an “Article” or “Section” is, unless otherwise specified, to one of the Articles or Sections of this
Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement the day and year first above written.
PACIFIC EAST ADVISORS, INC.,
a Delaware corporation
DRILLCO ACQUISITION, LLC,
a Delaware limited liability company
By:
By:
/s/ Dale Walter
Dale Walter,
Chairman, President and Chief Executive
Officer
/s/ Dale Walter
Dale Walter,
President and Chief Executive Officer
ADVANCED DRILLING SERVICES, LLC.,
a Delaware limited liability company
By:
/s/ Laird Q. Cagan
Laird Q. Cagan,
Manager, President and Chief Executive
Officer
27
EXHIBIT A
PARENT CERTIFICATE
Intentionally Omitted
28
Amendment No 1. to the Amended and Restated Plan of Merger and Reorganization
ADVANCED DRILLING SERVICES, LLC
This Amendment No. 1 to Amended and Restated Plan of Merger and Reorganization (“Amendment”) is executed as of the 20th day of
April, 2007, by and among: Pacific East Advisors, Inc., a Delaware corporation (“Parent”), DRILLCO ACQUISITION, LLC., a Delaware
limited liability company and a wholly-owned subsidiary of Parent (“Merger Sub”) and ADVANCED DRILLING SERVICES, LLC, a
Delaware limited liability company (the “Company”).
WITNESSETH:
WHEREAS , Parent, Merger Sub and the Company entered into that certain Agreement and Plan of Merger and Reorganization (the
“Merger Agreement”) dated December 5, 2006, and as amended and restated on February 12, 2007, concerning the merger of the Company
with and into Merger Sub. (such agreement, as so amended and restated, is hereinafter referred to as the “Agreement”); and
WHEREAS , Parent, Merger Sub and the Company desire to amend and modify the Merger Agreement;
NOW, THEREFORE , Parent, Merger Sub and Company hereby agree as follows:
1.
Section 2(b)(1) of the Merger Agreement is amended and restated in its entirety, effective as of the date hereof, to provide as follows:
“(1) It is currently contemplated that prior to the Merger becoming effective under Delaware law, the Company shall close a private
offering under Regulation D, Rule 506, as promulgated by the Securities and Exchange Commission (“ SEC ”) under the Securities Act,
pursuant to which it will issue up to 13,600,000 Class B Interests (excluding warrants issuable to the Company’s placement agents) (the “
Maximum Offering ”) at $1.25 per Class B Interest (the “ Private Placement ”). All of the Class B Interests issued as part of the Private
Placement shall be included in the membership interests of the Company that are outstanding at the time of the Merger and will be
converted/exchanged in the Merger in accordance with Section 2(c)(1) below.”
2.
Section 2(c)(1) of the Merger Agreement is amended and restated in its entirety, effective as of the date hereof, to provide as follows:
“(1) By virtue of the LLC Merger and without any further action on the part of the Company or the Merger Sub or the holders of
interests of the Company: (i) each Class A Interest of the Company then outstanding shall be converted into one (1) fully paid share of
Common Stock of the Parent for a total aggregate of 9,850,000 fully paid and nonassessable shares of Common Stock, par value $0.001;
AND (ii) each Class B Interest of the Company then issued and
-1-
outstanding in connection with the Private Placement shall be converted into one (1) fully paid share of Series A Preferred Stock of the
Parent for a maximum total aggregate of 13,600,000 fully paid and nonassessable shares of Series A Preferred Stock, par value $0.001
(excluding warrants issuable to the Company’s placement agents) (assuming the Maximum Offering is achieved).”
3.
Section 3(c) of the Merger Agreement is amended and restated in its entirety, effective as of the date hereof, to provide as follows:
“(c) Capital Structure of the Company . The issued and outstanding limited liability company interests of the Company consist of
9,850,000 Class A Interests and no Class B Interests as of the Execution Date. In connection with the Private Placement, the Company
may issue up to 13,600,000 additional Class B Interests prior to the Closing (excluding warrants issuable to the Company’s placement
agents). As of the Execution Date, all the outstanding limited liability company interests of the Company are held by the members free
and clear of all encumbrances. As of the Execution Date and as of the Closing, other than the warrants issuable to the Company’s
placement agents in connection with the Private Placement (the “ Placement Agent Warrants ”) and as otherwise set forth herein, there
are and will be no options, warrants, convertible securities or other rights, agreements, arrangements or commitments relating to the
limited liability company interests of the Company.”
4.
Except to the extent modified hereby, the Merger Agreement shall remain in full force and effect.
[The remainder of this page is intentionally left blank.]
-2-
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed as of the date and year first referenced above.
PACIFIC EAST ADVISORS, INC.
a Delaware corporation
DRILLCO ACQUISITION, LLC
a New York limited liability company
By:
By:
/s/ Dale Walter
Dale Walter,
Chairman, President and Chief Executive
Officer
/s/ Dale Walter
Dale Walter,
President and Chief Executive Officer
ADVANCED DRILLING SERVICES LLC,
a Delaware limited liability company
By:
/s/ Laird Q. Cagan
Laird Q. Cagan,
Manager, President and Chief Executive
Officer
-3-
Exhibit 10.16
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
by and among:
PACIFIC EAST ADVISORS, INC.,
a Delaware corporation;
IMPCO ACQUISITION, LLC.,
a New York limited liability company;
and
INNER MONGOLIA PRODUCTION COMPANY LLC,
a New York limited liability company
Dated as of December 11, 2006
Amended and Restated as of February 12, 2007
AMENDED AND RESTATED AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (the “ Agreement ”) is made
and entered into as of December 11, 2006 (the “ Execution Date ”), as amended and restated on February 12, 2007, by and among: Pacific East
Advisors, Inc., a Delaware corporation (“ Parent ”); IMPCO ACQUISITION, LLC., a New York limited liability company and a wholly owned
subsidiary of Parent (“ Merger Sub ”); and INNER MONGOLIA PRODUCTION COMPANY LLC, a New York limited liability company
(the “ Company ”).
RECITALS
A. The Boards of Directors of Parent, and the Manager of Merger Sub and the Company, deem it advisable and in the best interest of each
entity and its respective stockholders or interest holders, that Parent and the Company combine in order to advance the long-term business
interests of Parent and the Company.
B. The strategic combination of Parent and the Company (the “ Merger ”) shall be effected in accordance with the New York Limited
Liability Company Act (the “ NYLLCA ”) and the terms of this Agreement through a transaction in which (i) the Company will merge with
and into Merger Sub (the “ LLC Merger ”), (ii) Merger Sub will be the surviving entity in the LLC Merger and will remain a wholly owned
limited liability company subsidiary of Parent and will continue to carry on the business of the Company, and (iii) the interest holders of the
Company will become stockholders of Parent (the Merger and the LLC Merger being herein referred to as the “ Combination ”).
C. The Board of Managers of the Company (i) has unanimously determined that the Combination is advisable, fair to, and in the best
interests of the Company and its interest holders, (ii) has unanimously determined that this Agreement is advisable and has approved this
Agreement, the Combination and the other transactions contemplated by this Agreement, and (iii) has unanimously determined to recommend
that the interest holders of the Company adopt this Agreement.
D. The Board of Directors of Parent (i) has unanimously determined that the Combination is advisable and consistent with and in
furtherance of the long-term business strategy of Parent and is fair to, and in the best interests of, Parent and its stockholders, (ii) has
unanimously approved this Agreement, the Combination and the other transactions contemplated by this Agreement, and (iii) to the extent
required by applicable law, has unanimously determined to recommend that the stockholders of Parent adopt this Agreement and approve the
Combination and the other transactions contemplated by this Agreement.
E. Concurrent with the closing of the Merger, Parent shall consummate closing of the merger of Advanced Drilling Services, LLC (“
Advanced Drilling ”), a Delaware limited liability company, with and into DrillCo Acquisition, LLC, a Delaware limited liability company and
wholly owned subsidiary of Parent (the “ DrillCo Merger ”), pursuant to that certain Amended and Restated
Agreement and Plan of Merger and Reorganization, made and entered into on or about the Execution Date, as amended and restated on even
date herewith, by and among Parent, DrillCo Acquisition, LLC, a Delaware limited liability company and wholly owned subsidiary of Parent,
and Advanced Drilling (the “ DrillCo Merger Agreement ”).
F. Immediately prior to the closing of the Merger, Advanced Drilling will issue Class B Membership Units to the accredited investors who
subscribe for Class B Membership Interests of Advanced Drilling (the “ DrillCo Class B Units ”) being offered to accredited investors in a
private placement by Advanced Drilling. All of the foregoing DrillCo Class B Units will be issued and will be outstanding prior to the Merger,
and will be exchanged for Parent Series A Preferred Stock in the DrillCo Merger as set forth in the DrillCo Merger Agreement.
G. Parent, Merger Sub and Company have entered into an Agreement and Plan of Merger and Reorganization on the Effective Date (the “
Existing Agreement ”), and desire to amend and restate the Existing Agreement in full as set forth herein.
NOW THEREFORE, for the mutual consideration set out herein, and other good and valuable consideration, the sufficiency of which is
hereby acknowledged, the parties agree as follows:
AGREEMENT
A. Amendment of Existing Agreement . Effective and contingent upon execution of this Agreement by Parent, Merger Sub and
Company, the Existing Agreement is hereby amended and restated in its entirety to read as set forth in this Agreement, and Parent, Merger Sub
and Company hereby agree to be bound by the provisions hereof as the sole Agreement of Parent, Merger Sub and Company with respect to
matters as set forth herein.
1. Single Integrated Transaction . For U.S. Federal income tax purposes, it is intended that the transactions contemplated by this
Agreement and the DrillCo Merger Agreement constitute part of a single integrated transaction and are pursuant to a single integrated plan
intended to qualify as a tax-free transaction under Section 351 of the Internal Revenue Code of 1986, as amended (the “ Code ”).
2. Terms of Merger . Immediately following the Effective Time (as defined below), without condition, Parent shall cause Merger Sub to
file with the Secretary of State of the State of New York a properly executed certificate of merger for the LLC Merger (the “ LLC Certificate of
Merger ”) conforming to the requirements of the NYLLCA, in a form mutually agreeable to the parties hereto. The LLC Merger shall become
effective at the time the LLC Certificate of Merger is filed with the Secretary of State of the State of New York.
(a) Effects of the LLC Merger
(1) At the time at which the LLC Merger is filed with the Secretary of State of New York, as described above (the “ Effective Time
”), (i) the separate existence of the Merger Sub shall cease and the Merger Sub shall be merged with and into the Company, with the Company
as the surviving entity in the LLC Merger (Merger Sub and the Company are sometimes referred to below as the “ LLC Constituent Entities ”
and the Company following the
2
LLC Merger is sometimes referred to below as the “ Continuing LLC ”), and (ii) the Certificate of Formation and the Amended and Restated
Operating Agreement of the Company as in effect immediately prior to the Effective Time shall be unchanged by the LLC Merger.
(2) At and after the Effective Time, the Continuing LLC shall possess all the rights, privileges, powers, and franchises of a public as
well as of a private nature, and be subject to all the restrictions, disabilities, and duties of each of the LLC Constituent Entities; and all singular
rights, privileges, powers, and franchises of each of the LLC Constituent Entities, and all property, real, personal, and mixed, and all debts due
to either of the LLC Constituent Entities on whatever account, and all other things in action or belonging to each of the LLC Constituent
Entities, shall be vested in the Continuing LLC, and all property, rights, privileges, powers, and franchises, and all and every other interest shall
be thereafter as effectually the property of the Continuing LLC as they were of the LLC Constituent Entities, and the title to any real estate
vested by deed or otherwise, in either of the LLC Constituent Entities, shall not revert or be in any way impaired; but all rights of creditors and
all liens upon any property of either of the LLC Constituent Entities shall be preserved unimpaired, and all debts, liabilities, and duties of the
LLC Constituent Entities shall thereafter attach to the Continuing LLC, and may be enforced against it to the same extent as if such debts and
liabilities had been incurred by it.
(3) At the Effective Time, the Certificate of Incorporation of Parent (the “ Parent Certificate ”) shall be amended and restated in its
entirety as set forth on Exhibit A attached hereto.
(4) At the Effective Time, (i) the Amended and Restated Operating Agreement of the Company, as existing immediately prior to the
Effective Time, shall be and remain the Amended and Restated Operating Agreement of the Continuing LLC; (ii) the members of the Board of
Managers of the Company holding office immediately prior to the Effective Time shall remain as the members of the Board of Managers of the
Continuing LLC (if on or after the Effective Time a vacancy exists on the Board of Managers of the Company, such vacancy may thereafter be
filled in a manner provided by applicable law and the Amended and Restated Operating Agreement); and (iii) until the Board of Managers of
the Company shall otherwise determine, all persons who hold offices of the Company at the Effective Time shall continue to hold the same
offices of the Continuing LLC.
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(5) Upon the terms and subject to the conditions of this Agreement, the Closing (as defined below) of the Merger will take place (a) at
the offices of The Krueger Group, LLP, 5771 La Jolla Boulevard, La Jolla, California 92037, at 7:00 a.m., California time, on the date that is
the second Business Day after the satisfaction or waiver of the conditions set forth in Sections 7 and 8 hereof, other than conditions which by
their terms are to be satisfied at the Closing, or (b) such other location, date or time as the parties may mutually agree (the “ Closing Date ”).
For purposes of this Agreement, a “ Business Day ” shall mean any day that is not a Saturday, a Sunday or other day on which the office of the
California Secretary of State is closed.
(b) Events Occurring Immediately Prior to the Closing .
(1) It is currently contemplated that prior to the Merger becoming effective under New York law, Advanced Drilling shall close a
private offering under Regulation D, Rule 506, as promulgated by the Securities and Exchange Commission (“ SEC ”) under the Securities Act,
pursuant to which it will issue up to 11,200,000 Class B Units (excluding warrants issuable to Advanced Drilling’s placement agents) (the “
Maximum Offering ”) at $1.25 per Class B Unit (the “ Private Placement ”). All of the Class B Units issued as part of the Private Placement
shall be included in the membership interests of Advanced Drilling that are outstanding at the time of the DrillCo Merger and will be
converted/exchanged in the DrillCo Merger in accordance with the terms of the DrillCo Merger Agreement.
(2) Immediately prior to the Merger becoming effective, on the day of such effectiveness, the Company shall consummate the Merger
under the NYLLCA by filing a Certificate of Merger with the New York Secretary of State.
(c) Conversion of Securities in LLC Merger .
(1) By virtue of the LLC Merger and without any further action on the part of the Company or the Merger Sub or the holders of
interests of the Company: (i) each Class A Unit of the Company then outstanding shall be converted into seventeen (17) fully paid shares of
Common Stock of the Parent for a total aggregate of approximately 5,904,032 fully paid and nonassessable shares of Common Stock, par value
$0.001; AND (ii) each Class B Unit of the Company then issued and outstanding shall be converted into seventeen (17) fully paid shares of
Series A Preferred Stock of the Parent for a total aggregate of approximately 10,108,952 fully paid and nonassessable shares of Series A
Preferred Stock, par value $0.001.
(2) On or prior to the Closing Date, Parent shall make available to its transfer agent (the “ Exchange Agent ”) for the benefit of the
holders of Class A Units and Class B Units of the Company, a sufficient number of certificates representing Common Stock of Parent and
Series A Preferred Stock of the Parent required to effect the delivery of the aggregate consideration in Common Stock of Parent and Series A
Preferred Stock of the Parent and cash for the payment of fractional shares set forth below (collectively, the “ Share Consideration ” and the
certificates representing such aggregate Share Consideration being referred to hereinafter as the “ Stock Merger Exchange Fund ”). The
Exchange Agent shall, pursuant to irrevocable instructions, deliver the Share Consideration out of the Stock Merger Exchange Fund. The Stock
Merger Exchange Fund shall not be used for any other purpose than as set forth herein.
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(3) No fractional Parent securities shall be issued in the Merger. Each holder of Class A Units and Class B Units of the Company shall
be entitled to receive in lieu of any fractional Parent securities to which such holder otherwise would have been entitled pursuant to Section
2(c)(1) a cash payment in an amount equal to the product of (i) the fractional interest of a Parent securities to which such holder otherwise
would have been entitled and (ii) the fair market value of one (1) Parent securities as determined by Parent’s Board of Directors in good faith.
(d) Other Matters .
(1) Upon the effectiveness of the LLC Merger, each outstanding option or warrant to purchase the Company Class A Units and
Class B Units, whether or not then exercisable, shall be converted into an option or warrant to purchase (in substitution for each share of the
Company Class A Unit and Class B Unit subject to the Company option or warrant, as applicable) seventeen (17) shares of Parent Common
Stock or Parent Series A Preferred Stock, as applicable, at a price equal to the exercise price in effect immediately prior to the LLC Merger. All
other terms and conditions of each the Company option or warrant shall remain the same.
(2) At the Closing, the number of directors of Parent will be set to three (3). The then existing sole director of Parent shall then
nominate and elect to the Board of Directors of Parent Frank Ingriselli, Laird Q. Cagan and Elizabeth P. Smith, or such other persons
designated by the Company, and all of the persons serving as directors and officers of Parent immediately prior to the Closing shall thereafter
resign from all of their positions with Parent, effective immediately after the Closing.
(3) Upon the effectiveness of the Merger, Parent shall assume and will be bound by the registration rights agreements previously
entered into, or hereafter entered into, between the Company and the accredited investors who purchase shares of the Company Class B Units.
The registration rights shall be substantially similar to the registration rights agreement entered into by and among Parent and the purchasers of
DrillCo Class B Interests in the Private Placement. Parent agrees to execute any agreement or other instrument the Company deems necessary
to confirm its agreement to comply with the registration rights granted by the Company to the purchasers of its Class B Units.
(4) All stock of the Parent issued in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Parent Stock, and there shall be no further registration of transfers on the records of the Parent of shares of
Company membership interests that were outstanding immediately prior to the Effective Time.
3. Representations of the Company . The Company hereby represents and warrants as follows, which warranties and representations
shall also be true as of the Execution Date:
(a) Organization, Standing and Authority of the Company . The Company is a duly organized, validly existing and in good standing
under the laws of the State of New York
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with full corporate power and authority to carry on its business as now conducted and is duly qualified to do business in any jurisdiction where
its ownership or leasing of property or the conduct of its business requires such qualification, except where the failure to have such corporate
power and authority or to so qualify would not have a Material Adverse Effect on the Company.
(b) Authorized and Effective Agreement .
(1) The Company has all requisite corporate power and authority to enter into and perform all of its obligations under this Agreement.
The execution, delivery and performance of this Agreement by the Company and the consummation of the Merger and the other transactions
contemplated hereby have been duly authorized by the Managers of the Company, which authorization constitutes all necessary corporate
action in respect thereof and which have not been rescinded, revoked or otherwise adversely modified.
(2) This Agreement constitutes the legal, valid and binding obligations of the Company, enforceable against it in accordance with its
terms subject, as to enforceability, to bankruptcy, insolvency and other legal requirements of general applicability relating to or affecting
creditors’ rights and to general equity principles.
(3) Neither the execution and delivery of this Agreement, nor consummation of the Merger and the other transactions contemplated
hereby, nor compliance by the Company with any of the provisions hereof shall (i) conflict with or result in a breach of any provision of the
Certificate of Formation or Amended and Restated Operating Agreement (the “ Operating Agreement ”) of the Company or (ii) violate any
legal requirements applicable to the Company.
(4) Other than the filing of the LLC Certificate of Merger with the New York Secretary of State and consent of the holders of Class A
and Class B Units of the Company, if required, no consent, approval or authorization of, or declaration, notice, filing or registration with, any
Government Entity, or any other Person, is required to be made or obtained by the Company on or prior to the Effective Time in connection
with the execution, delivery and performance of this Agreement and the LLC Merger or the consummation of the transactions contemplated
hereby or thereby.
(c) Capital Structure of the Company . The issued and outstanding limited liability company interests of the Company consist of
approximately 347,296 Class A Units and approximately 594,644 Class B Units as of the Execution Date. As of the Execution Date, all the
outstanding limited liability company interests of the Company are held by the members free and clear of all encumbrances. As of the
Execution Date and as of the Closing, other than outstanding options to purchase 49,200 Class A Units, there are and will be no options,
warrants, convertible securities or other rights, agreements, arrangements or commitments relating to the limited liability company interests of
the Company.
(d) Material Adverse Change . Except as set forth in the Company Disclosure Documents, there has not been any change in the financial
condition, results of operations, prospects or business which would individually or in the aggregate with any other such changes,
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of the Company except changes arising in the ordinary course of business, which changes would have a Material Adverse Effect with respect to
the Company.
(e) Litigation. There are no actions, suits or proceedings instituted, pending or, to its Knowledge, any governmental investigation or
proceeding, and, to its Knowledge, no material litigation, claims, assessments or any governmental proceedings are threatened against the
Company.
(f) Absence of Undisclosed Liabilities . Except as disclosed by the Company to Parent in its financial statements provided to Parent prior
to the Execution Date, the Company does not have any liability (contingent or otherwise) or Indebtedness that is material to the Company, or
that, when combined with all similar undisclosed liabilities, would be material to the Company, except for liabilities incurred in the ordinary
course of business subsequent to the Execution Date.
(g) Tax Matters . The Company has, or by the Closing will have, filed all material federal tax, governmental and/or related forms and
reports (or extensions thereof) due or required to be filed in the ordinary course of business and has (or will have) paid or made adequate
provisions for all taxes or assessments which have become due as of the Closing.
(h) Material Contracts . As part of the Company Disclosure Documents, the Company has previously given Parent copies of or access to
all material contracts, commitments and/or agreements to which the Company is a party, including all contracts covering relationships or
dealings with related parties or affiliates. The Company is not in material breach of, or material default under any material contract.
(i) Subsidiary Corporations . The Company has no Subsidiaries, other than as set forth in the Company Disclosure Documents.
(j) Minute Books, Financial Records . The Company has made its corporate financial records, minute books, and other corporate
documents and records available for review to present management of Parent prior to the Closing, during reasonable business hours and on
reasonable notice.
(k) Disclosure . The Company Disclosure Documents which have been delivered by the Company to Parent for use in connection with
the Merger are true and accurate in all material respects.
4. Representations of Parent and Merger Sub . Parent and Merger Sub hereby jointly and severally represent and warrant to the
Company as follows, each of which representations and warranties shall continue to be true as of the Effective Time:
(a) Organization, Standing and Authority of Parent . Parent is duly organized, validly existing and in good standing under the laws of the
State of Delaware, with the full corporate power to own, lease and operate its property and to carry on its business as now being conducted and
is duly qualified to do business and in good standing to do business in any jurisdiction where the ownership or leasing of the property or the
conduct of its business requires such qualification, except where the failure to so qualify would not have a Material Adverse
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Effect. As of the Execution Date, Parent is not required to be qualified to do business in any state other than Delaware. Merger Sub is a limited
liability company duly organized, validly existing and in good standing under the laws of the State of New York, and has all necessary limited
liability company power and authority to enter into this Agreement and to carry out its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby.
(b) Capital Structure of Parent .
(1) As of the Execution Date, Parent’s authorized capital stock consists of (i) 100,000,000 shares of Parent Common Stock, $0.001
par value, of which approximately 468,068 shares are issued and outstanding, and (ii) and 5,000,000 authorized shares of Preferred Stock, par
value $0.001, of which no shares of Preferred Stock are issued or outstanding. The Merger Sub is a single member LLC wholly-owned by
Parent.
(2) All outstanding shares of Parent stock are, and shall be at Closing, validly issued, fully paid and nonassessable. As of the
Execution Date and at the Closing, there are and there will be no existing options, convertible or exchangeable securities, calls, claims,
warrants, preemptive rights, registration rights or commitments of any character relating to the issued or unissued capital stock or other
securities of Parent, other than pursuant to the DrillCo Merger Agreement. There are no voting trusts, proxies or other agreements,
commitments or understandings of any character to which Parent is a party or by which Parent is bound with respect to the voting of any capital
stock of Parent. There are no outstanding stock appreciation, phantom stock or similar rights with respect to any capital stock of Parent. There
are no outstanding obligations to repurchase, redeem or otherwise acquire any shares of capital stock of Parent.
(3) As of the Closing, the shares of Parent Common and Preferred Stock to be issued and delivered to the holders of Class A and
Class B Units of the Company hereunder and in connection herewith will, when so issued and delivered, constitute duly authorized, validly and
legally issued, fully-paid, nonassessable shares of Parent capital stock, will not be issued in violation of any preemptive or similar rights and
will be issued free and clear of all liens and encumbrances.
(c) Authorized and Effective Agreement . Parent and Merger Sub have full corporate power and corporate authority to execute and
deliver this Agreement and, subject to receipt of the Parent Required Vote (as hereinafter defined) (to the extent such Parent Required Vote is
required by applicable law), to consummate the transactions contemplated hereby. The Board of Directors of Parent by written consent has
(i) determined that this Agreement and the Merger are in the best interests of Parent and its stockholders and declared this Agreement and the
Merger to be advisable, (ii) approved the Merger, the execution and delivery of this Agreement and the consummation of the transactions
contemplated hereby and (iii) recommended that stockholders of Parent adopt this Agreement and, if required by applicable law, directed that
such matter be submitted for consideration and approval by Parent’s stockholders. Except for the adoption of this Agreement by the affirmative
vote of a majority of the outstanding shares of Parent Common Stock entitled to vote in accordance with applicable law, if required (the “
Parent Required Vote ”), no other corporate proceedings on the part of
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Parent are necessary to approve this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and
validly executed and delivered by Parent and Merger Sub and (assuming due authorization, execution and delivery by the Company) constitutes
a valid and binding obligation of Parent and Merger Sub, enforceable against Parent and Merger Sub in accordance with its terms, except as
enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors’ rights and remedies generally (the “ Bankruptcy and Equity Exceptions ”).
(d) Taxes . Parent has filed all federal, state, county and local income, excise, property and other tax, governmental and/or other returns,
forms, filings, or reports, which are due or required to be filed by it prior to the date hereof and have paid or made adequate provision in the
Parent financial statements for the payment of all taxes, fees, or assessments which have or may become due pursuant to such returns, filings or
reports or pursuant to any assessments received. Parent is not delinquent or obligated for any tax, penalty, interest, delinquency or charge and
there are no tax liens or encumbrances applicable to either corporation.
(e) Consents and Approvals, No Violation . Neither the execution and delivery of this Agreement nor the consummation by Parent or
Merger Sub of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of its Articles of
Incorporation (or other similar documents) or By-Laws (or other similar documents); (ii) require any consent, approval, authorization or permit
of, or registration or filing with or notification to, any governmental or regulatory authority, except (A) pursuant to the applicable requirements
of the Securities Act of 1933, and the rules and regulations promulgated thereunder, (B) the filing of appropriate documents with the relevant
authorities of other states in which Parent or Merger Sub is authorized to do business, (C) as may be required by any applicable state securities
or takeover laws, (D) such filings and consents as may be required under any environmental, health or safety law or regulation pertaining to
any notification, disclosure or required approval triggered by the Merger or the transactions contemplated by this Agreement, or (E) where the
failure to obtain such consent, approval, authorization or permit, or to make such filing or notification, would not in the aggregate have a
Material Adverse Effect or adversely affect the ability of Parent or Merger Sub to consummate the transactions contemplated hereby; (iii) result
in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any right of termination,
cancellation or acceleration or lien or other charge or encumbrance) under any of the terms, conditions or provisions of any indenture, note,
license, lease, agreement or other instrument or obligation to which Parent or Merger Sub or any of its assets may be bound, except for such
violations, breaches and defaults (or rights of termination, cancellation or acceleration or lien or other charge or encumbrance) as to which
requisite waivers or consents have been obtained or which, in the aggregate, would not have a Material Adverse Effect or adversely affect the
ability of Parent or Merger Sub to consummate the transactions contemplated hereby; (iv) cause the suspension or revocation of any
authorizations, consents, approvals or licenses currently in effect which would have a Material Adverse Effect; or (v) assuming the consents,
approvals, authorizations or permits and filings or notifications referred to in this Section 4(e) are duly and timely obtained or made and the
approval of the Merger and the approval of this Agreement by Parent’s stockholders has been obtained, violate any order, writ, injunction,
decree, statute, rule
9
or regulation applicable to Parent or Merger Sub or to any of its assets, except for violations which would not in the aggregate have a Material
Adverse Effect or adversely affect the ability of Parent or Merger Sub to consummate the transactions contemplated hereby.
(f) No Subsidiaries . Other than the Merger Sub, Parent has no Subsidiaries or affiliates or has no direct or indirect equity participation or
similar interest in any corporation, partnership, limited liability company, joint venture, trust or other business.
(g) Material Adverse Change . Other than as disclosed in the Parent Disclosure Documents, there have not been any changes in the
financial condition, results of operations, or financial condition of Parent or Merger Sub which would individually or in the aggregate with any
other such changes, except changes arising in the ordinary course of business, which changes would have a Material Adverse Effect with
respect to Parent. Parent has (and at the Closing it will have) disclosed in the Parent Disclosure Documents all events, conditions, and facts
materially affecting, the business, financial condition (including liabilities, contingent or otherwise) or results of operations of Parent.
(h) Absence of Undisclosed Liabilities .
(1) Other than listed on Schedule 4(h) attached hereto, at the Closing,, Parent and Merger Sub shall have no material assets and will
not have any liabilities or Indebtedness of any kind other than the costs incurred in connection with the Merger or costs incurred in connection
with Parent’s regulatory compliance.
(2) There is no basis for any assertion against Parent or Merger Sub of any material liabilities or obligations of any nature, whether
absolute, accrued, contingent or otherwise and whether due or to become due, known or unknown, including, without limitation, any liability
for taxes (including e-commerce sales or other taxes), interest, penalties and other charges payable with respect thereto. Neither the execution
and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (a) result in any payment (whether
severance pay, unemployment compensation or otherwise) becoming due from Parent or Merger Sub to any Person or entity, including without
limitation any employee, director, officer or affiliate or former employee, director, officer or affiliate of Parent or Merger Sub, (b) increase any
benefits otherwise payable to any Person or entity, including without limitation any employee, director, officer or affiliate or former employee,
director, officer or affiliate of Parent or Merger Sub, or (c) result in the acceleration of the time of payment or vesting of any such benefits.
(i) Litigation . Neither Parent nor Merger Sub is a party to, or the subject of, any pending litigation, claims, or governmental investigation
or proceeding not reflected in the Parent financial statements, and to the Knowledge of Parent, there are no lawsuits, claims, assessments,
investigations, or similar matters, threatened or contemplated against or affecting Parent or the management or properties of Parent.
(j) Minute Books and Records . Except as otherwise indicated in the Parent Disclosure Documents, the Parent minute books and other
corporate records made available to
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the Company prior to the date of this Agreement, are complete and accurate in all material respects.
(k) Material Contracts .
(1) Parent has not breached, nor is there any pending, existing or threatened claim that Parent has breached, any of the material terms
or conditions of any agreements, contracts, commitments or other documents to which it is a party or by which it is, or its properties are bound.
The execution and performance of this Agreement will not violate any provisions of applicable law or any agreement to which Parent is
subject. Merger Sub has no contracts other than this Agreement.
(2) Parent hereby represents and warrants that, except for the DrillCo Merger Agreement and as otherwise provided in the Parent
Disclosure, it is not a party to any material contract or commitment other than appointment documents with Parent’s transfer agent, and that it
has disclosed to the Company all previous or existing relationships or dealings with related or controlling parties or affiliates of Parent
(3) Except for the DrillCo Merger Agreement and as otherwise provided in the Parent Disclosure Documents, Parent has no material
contracts, commitments, arrangements, or understandings relating to its business, operations, financial condition, prospects or otherwise. For
purposes of this Section 4, “material” means payment or performance of a contract, commitment, arrangement or understanding which is
expected to involve payments in excess of $20,000.
(4) Except for the DrillCo Merger Agreement, this Agreement and the transactions contemplated thereby, there are no outstanding
contracts, commitments or bids, or services, development, sales or other proposals of Parent.
(5) There are no outstanding lease commitments that cannot be terminated without penalty upon 30-days notice, or any purchase
commitments of Parent.
(l) Compliance with Securities Laws .
(1) There are no outstanding, pending or threatened stop orders or other actions or investigations relating thereto involving federal and
state Securities Laws. To Parent’s Knowledge, all issued and outstanding shares of Parent’s capital stock were offered and sold in compliance
with federal and state Securities Laws and were not offered, sold or issued in violation of any preemptive right, right of first refusal or right of
first offer and are not subject to any right of rescission.
(2) All information regarding Parent and any entity for whose conduct Parent is legally held responsible which has been provided to
the Company in the Parent Disclosure Documents relating to any document or other communication, disseminated to any former, existing or
potential stockholders of Parent or to the public or filed with The National Association of Securities Dealers, Inc. (“ NASD ”) or the SEC or
any state securities regulators or authorities is true, complete, accurate in all material respects, not misleading, and was and is in full
compliance with all Securities Laws and regulations.
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(3) Parent has timely filed all required documents, reports and schedules with the NASD and the SEC, and any applicable state or
regional securities regulators or authorities. As of their respective dates, the Parent Disclosure Documents complied in all material respects
with the requirements of the Securities Act, the Exchange Act, the NASD rules and regulations and state and regional Securities Laws and
regulations, as the case may be, and, at the respective times they were filed. None of the Parent Disclosure Documents contained any untrue
statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading.
(m) Governmental Authorizations: Compliance with Laws .
(1) Up to the Closing, Parent is currently in compliance with, and has complied with, and Parent has conducted any business
previously owned or operated by it in compliance with, all applicable laws, orders, rules and regulations of all Governmental Entities, including
applicable Securities Laws and regulations and environmental laws and regulations, except where such noncompliance has and will have, in the
aggregate, no Material Adverse Effect on Parent.
(2) Up to the Closing, Parent has not received notice of any noncompliance with the foregoing, nor to its Knowledge are there any
claims or threatened claims in connection therewith. Parent has never conducted any operations or engaged in any business transactions
whatsoever other than as set forth in the reports Parent has previously filed with the SEC.
(3) Assuming all corporate consents and approvals have been obtained and assuming all applicable appropriate filings and mailings
are made by Parent under the Securities Act, the Exchange Act, with the NASD, and with the Secretary of State of New York, the execution
and delivery by Parent of this Agreement and the closing documents and the consummation by Parent of the transactions contemplated hereby
do not and will not (i) require the consent, approval or action of, or any filing or notice to, any corporation, firm, Person or other entity or any
public, Governmental Entity or judicial authority (except for such consents, approvals, actions, filing or notices the failure of which to make or
obtain will not in the aggregate have a Material Adverse Effect on Parent); or (ii) violate any order, writ, injunction, decree, judgment, ruling,
law, rule or regulation of any federal, state, county, municipal, or foreign court or Governmental Entity or authority applicable to Parent, or its
business or assets. Parent is not subject to, or a party to, any mortgage, lien, lease, agreement, contract, instrument, order, judgment or decree or
any other material restriction of any kind or character which would prevent, hinder, restrict or impair the continued operation of the business of
Parent (or to the Knowledge of Parent, the continued operation of the business of the Company) after the Closing.
(n) Ongoing Business . No aspect of Parent’s past or present business, operations or assets is of such a character as would restrict or
otherwise hinder or impair Parent from carrying on the business of Parent as it is presently being conducted by Parent.
(o) Required Government Consents, Filings, etc . Except as have been or, prior to the Closing, will be obtained, no approval,
authorization, certification, consent, variance,
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permission, license, or permit to or from, or notice, filing, or recording to or with, any U.S. Federal, state, or local governmental authorities is
necessary for the execution and delivery of this Agreement and the other agreements and instruments to be executed and delivered by Parent in
connection with the transactions contemplated hereby, or the consummation by Parent of the transactions contemplated hereby.
(p) Other Required Consents, Filings, etc . Except as have been or, prior to the Closing, will be obtained, no approval, authorization,
consent, permission, or waiver to or from, or notice, filing, or recording to or with, any person is necessary for the execution and delivery of
this Agreement and the other agreements and instruments to be executed and delivered in connection with the transactions contemplated hereby
by Parent, or the consummation by Parent of the transactions contemplated hereby.
(q) Title to Assets . Parent has good and marketable title to all of its assets, free and clear of any claims or Encumbrances.
“Encumbrance” means any mortgage, charge (whether fixed or floating), security interest, pledge, right of first refusal, lien (including any
unpaid vendor’s lien), option, hypothecation, title retention or conditional sale agreement, lease, option, restriction as to transfer or possession,
or subordination to any right of any other person.
(r) Intellectual Property . Parent has no Intellectual Property. The term “Intellectual Property” includes all patents and patent
applications, trademarks, service marks, and trademark or service mark registrations and applications, trade names, logos, designs, domain
names, web sites, slogans and general intangibles of like nature, together with all goodwill relating to the foregoing, copyrights, copyright
registrations, renewals and applications, software, databases, technology, trade secrets and other confidential information, know-how,
proprietary processes, formulae, algorithms, models and methodologies, drawings, specifications, plans, proposals, financing and marketing
plans, advertiser, customer and supplier lists and all other information relating to advertisers, customers and suppliers (whether or not reduced
to writing), licenses, agreements and all other proprietary rights, which relate to Parent or Merger Sub’s business.
(s) Compliance with Rules .
(1) Parent at all times has been and is currently in compliance with all Rules applicable to Parent and/or its business, except where
such failure to comply would not have a material adverse effect on Parent or its operations. “ Rule ” means any law, statute, rule, regulation,
order, court decision, judgment or decree of any U.S. Federal, state, territorial, provincial or municipal authority.
(2) Parent is in material compliance with, and have obtained all Permits and other authorizations relating to Parent or Merger Sub
which are required by any Rule, which has been enacted to the date of this Agreement, except as would not have a material adverse effect on
Parent or Merger Sub or its operations. No governmental proceeding is pending or threatened to cancel, amend, modify or fail to renew any
such Permit. “ Permit ” includes any approval, authorization, concession, grant, certificate of convenience and necessity, qualification, consent,
franchise, license, security clearance, easement, order or other permit issued or granted by any governmental entity.
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(t) Disclosures . No representation or warranty by Parent contained in this Agreement or the Parent Disclosure Documents and no
statement contained in any certificate, schedule or other communication furnished pursuant to or in connection with the provisions hereof
contains or shall contain any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements
therein not misleading. There is no current or prior event or condition of any kind or character pertaining to Parent that may reasonably be
expected to have a Material Adverse Effect on Parent. Except as specifically indicated elsewhere in this Agreement, all documents delivered by
Parent in connection herewith have been and will be complete originals, or exact copies thereof.
(u) Employees . Parent currently has no employees, consultants or independent contractors. No amounts are due or owed to any previous
or current Parent employee, consultant or independent contractor. There are no oral employment agreements, consulting agreements or other
compensation agreements currently in effect between Parent and any person.
(v) Broker’s or Finder’s Fees . Parent has not authorized any person to act as broker or finder or in any other similar capacity in
connection with the transactions contemplated by this Agreement.
(w) Environmental Matters . Parent, including any corporation to which Parent is a successor, is in material compliance with all
Environmental Laws. Neither Parent nor, to the Knowledge of Parent, any other Person for whose conduct Parent is or may be held responsible,
has any Environmental Liabilities, or, to the Knowledge of Parent, with respect to any properties and assets (whether real, personal or mixed) in
which Parent (or any predecessor) has or had an interest, or at any property geologically or hydrologically adjoining any such property or
assets.
5. Closing . The Closing of the transactions contemplated herein shall take place on such date (the “ Closing ”) as soon as reasonably
practicable following the execution of this Agreement, subject to the conditions precedent set forth in Sections 7 and 8 hereto, unless
accelerated or extended by the affirmative agreement by all parties.
6. Actions Prior to Closing .
(a) Prior to the Closing, the Company on the one hand, and Parent and Merger Sub on the other hand, shall be entitled to make such
investigations of the assets, properties, business and operations of the other party, and to examine the books, records, tax returns, financial
statements and other materials of the other party as such investigating party deems necessary in connection with this Agreement and the
transactions contemplated hereby. Any such investigation and examination shall be conducted at reasonable times and under reasonable
circumstances, and the parties hereto shall cooperate fully therein. Until the Closing, and if the Closing shall not occur, hereafter, each party
shall keep confidential and shall not use in any manner inconsistent with the transactions contemplated by this Agreement, and shall not
disclose, nor use for their own benefit, any information or documents obtained from the other party concerning the assets, properties, business
and operations of such party, unless such information (i) is readily ascertainable from public or published information, (ii) is received from a
third party not under any obligation to keep such information confidential, or (iii) is required to be disclosed by any law or order (in which case
the disclosing party shall promptly provide
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notice thereof to the other party in order to enable the other party to seek a protective order or to otherwise prevent such disclosure). If this
transaction is not consummated for any reason, each party shall return to the other all such confidential information, including notes and
compilations thereof, promptly after the date of such termination. The representations and warranties contained in this Agreement shall not be
affected or deemed waived by reason of the fact that either party hereto discovered or should have discovered any representation or warranty is
or might be inaccurate in any respect.
(b) Prior to the Closing, the Company, Parent and Merger Sub agree not to issue any statement or communications to the public or the
press regarding the transactions contemplated by this Agreement without the prior written consent of the other parties. In the event that Parent
is required under federal Securities Law to either (i) file any document with the SEC that discloses this Agreement or the transactions
contemplated hereby, or (ii) to make a public announcement regarding this Agreement or the transactions contemplated hereby, Parent shall
provide the Company with a copy of the proposed disclosure no less than 48 hours before such disclosure is made and shall incorporate into
such disclosure any reasonable comments or changes that the Company may request. The parties hereto agree to the issuance of a press release
in a form to be agreed upon by the parties following the Execution Date.
(c) There shall be no stock dividend, stock split, recapitalization, or exchange of shares with respect to or rights, options or warrants
issued in respect of Parent’s Common or Preferred Stock after the date hereof and there shall be no dividends or other distributions paid on
Parent’s Common Stock, or shares of Parent capital stock issued, after the date hereof, in each case through and including the Effective Time.
The Company, Parent and Merger Sub shall conduct no business, prior to the Closing, other than in the ordinary course of business or as may
be necessary in order to consummate the transactions contemplated hereby.
(d) Prior to the Closing, if requested by Managers of Advanced Drilling and the Company, Parent shall adopt a new stock option plan or
amend its existing stock option plan in the manner requested by the Managers of Advanced Drilling and the Company.
(e) Prior to the Closing, the Board of Directors of the Parent and the Manager of Merger Sub shall approve the Merger, this Agreement,
and the transactions contemplated hereby, and shall approve the resignations of the officers and directors of Parent and Merger Sub, effective
as of the Closing, and take such action as is necessary to appoint the Company nominees to the Parent Board of Directors and offices effective
as of the Closing.
7. Conditions Precedent to the Obligations of the Company . All obligations of the Company under this Agreement are subject to the
fulfillment, prior to or as of the Closing and/or the Effective Time, as indicated below, of each of the following conditions:
(a) The representations and warranties by or on behalf of Parent and Merger Sub contained in this Agreement or in any certificate or
document delivered pursuant to the provisions hereof or in connection herewith shall be true and correct in all material respects at and as of the
Closing and Effective Time as though such representations and warranties were made at and as of such time.
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(b) Parent and Merger Sub shall have performed and complied with all covenants, agreements, and conditions set forth or otherwise
contemplated in, and shall have executed and delivered all documents required by, this Agreement to be performed or complied with or
executed and delivered by them prior to or at the Closing.
(c) On or before the Closing, the directors of Parent and the Manager of Merger Sub, and Parent as interest holder of Merger Sub, and the
stockholders of Parent (to the extent the Parent Required Vote is required by applicable law), shall have approved in accordance with
applicable state corporation law the execution and delivery of this Agreement and the consummation of the transactions contemplated herein.
(d) On or before the Closing Date, Parent and Merger Sub shall have delivered certified copies of resolutions of the sole interest holder
and Manager of Merger Sub and of the directors of Parent approving and authorizing the execution, delivery and performance of this
Agreement and authorizing all of the necessary and proper action to enable Parent and Merger Sub to comply with the terms of this Agreement,
including the election of the Company’s nominees to the Board of Directors of Parent and all matters outlined or contemplated herein.
(e) The Merger shall be permitted by applicable state law and otherwise and Parent shall have sufficient shares of its capital stock
authorized to complete the Merger and the transactions contemplated hereby.
(f) At the Closing, the number of directors of Parent will be set at three (3), and (A) Frank Ingriselli, Laird Q. Cagan and Elizabeth P.
Smith, or such other persons designated by the Company, shall be elected to the Board of Directors of Parent, (B) Frank Ingriselli shall be
elected the President and Chief Executive Officer of Parent, (C) Jamie Tseng shall be elected as the Executive Vice President of Parent,
(D) Stephen F. Groth shall be elected Vice President, Chief Financial Officer and Secretary of Parent, and (E) all of the former directors and
officers of Parent shall resign in writing from their positions as directors and officers of Parent.
(g) At the Closing, all instruments and documents delivered by Parent or Merger Sub, including to the Company holders of Class A and
Class B Units pursuant to the provisions hereof shall be reasonably satisfactory to legal counsel for the Company.
(h) The Company shall have received the reasonable assurance of its certified public accountants, to the extent it deems necessary, that
its financial audit shall be concluded at the proper time in order to be in full compliance will applicable SEC reporting requirements in
connection with the Merger and the Closing of this transaction.
(i) Advanced Drilling shall have raised a minimum of $8,000,000 of capital in connection with its Private Placement under terms and
conditions acceptable to the Company.
(j) The shares of restricted Parent capital stock to be issued to the holders of Company Class A and Class B Units at Closing will be
validly issued, nonassessable and fully paid under New York corporation law and will be issued in a nonpublic offering in compliance with all
federal, state and applicable Securities Laws.
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(k) The Company shall have received the advice of its tax advisor, to the extent it deems necessary, that this transaction is a tax free
reorganization as to the Company and all of the holders of Company Class A and Class B Units.
(l) The Company shall have received all necessary and required approvals and consents from required parties and from its holders of
Company Class A and Class B Units in connection with the Closing of this Agreement, including stockholder approval to change the name of
Parent to “Pacific Asia Petroleum, Inc.,” in the State of Delaware and thereafter change the trading symbol of Parent.
(m) At the Closing, Parent and Merger Sub shall have delivered to the Company an opinion of Parent’s legal counsel dated as of the
Closing to the effect that:
(1) Parent is a corporation duly organized, validly existing and in good standing under the laws of the Delaware, and Merger Sub is a
limited liability company validly existing and in good standing under the laws of New York;
(2) This Agreement has been duly authorized, executed and delivered by Parent and Merger Sub and is a valid and binding obligation
of Parent and Merger Sub enforceable in accordance with its terms;
(3) Parent and Merger Sub each through its Board of Directors and stockholders, and interest holders and Manager, respectively, have
taken all corporate action necessary for performance under this Agreement;
(4) The documents executed and delivered to the Company and the holders of Company Class A and Class B Units hereunder are
valid and binding in accordance with their terms and vest in the holders of Company Class A and Class B Units all right, title and interest in
and to the shares of Parent’s Common Stock and Preferred Stock to be issued pursuant to Section 2 hereof, and the shares of Parent capital
stock when issued will be duly and validly issued, fully paid and nonassessable; and
(5) Parent and Merger Sub each has the corporate power to execute, deliver and perform under this Agreement.
(n) The “Closing” as defined in the DrillCo Merger Agreement of that certain merger transaction contemplated by the DrillCo Merger
Agreement shall close simultaneously with the Closing of the Merger under this Agreement.
8. Conditions Precedent to the Obligations of Parent and Merger Sub . All obligations of Parent and Merger Sub under this
Agreement are subject to the fulfillment, prior to or at the Closing and/or the Effective Time, of each of the following conditions:
(a) The representations and warranties by the Company contained in this Agreement or in any certificate or document delivered pursuant
to the provisions hereof shall be true and correct in all material respects at and as of the Closing and the Effective Time as though such
representations and warranties were made at and as of such times.
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(b) The Company shall have performed and complied with, in all material respects, all covenants, agreements, and conditions required by
this Agreement to be performed or complied with by it prior to or at the Closing.
(c) The Company shall deliver an opinion of its legal counsel to the effect that:
(1) The Company is a limited liability company duly organized, validly existing and in good standing under the laws of the state of its
organization;
(2) This Agreement has been duly authorized, executed and delivered by the Company;
(3) The Manager and holders of Company Class A and Class B Units have taken all corporate action necessary for performance under
this Agreement; and
(4) The Company has the corporate power to execute, deliver and perform under this Agreement.
9. Survival and Indemnification . Notwithstanding any investigation conducted by any Party hereto or any information any party may
receive, all representations, warranties, covenants and agreements contained in this Agreement (or in any schedule, certificate, document or
statement delivered pursuant hereto) shall survive only until the Closing.
10. Nature of Representations . All of the parties hereto are executing and carrying out the provisions of this Agreement in reliance
solely on the representations, warranties and covenants and agreements contained in this Agreement and the other documents delivered at the
Closing and not upon any representation, warranty, agreement, promise or information, written or oral, made by the other party or any other
Person other than as specifically set forth herein.
11. Documents at Closing . At the Closing, the following documents shall be delivered:
(a) The Company will deliver, or will cause to be delivered, to Parent the following:
(1) a certificate executed by the President of the Company to the effect that all representations and warranties made by the Company
under this Agreement are true and correct as of the Closing and as of the Effective Time, the same as though originally given to Parent or
Merger Sub on said date;
(2) a certificate from the state of the Company’s organization dated within five business days of the Closing to the effect that the
Company is in good standing under the laws of said state;
(3) such other instruments, documents and certificates, if any, as are required to be delivered pursuant to the provisions of this
Agreement;
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(4) an executed copy of the LLC Certificate of Merger for filing in New York;
(5) certified copies of resolutions adopted by the members and Managers of the Company authorizing the Merger;
(6) all other items, the delivery of which is a condition precedent to the obligations of Parent and Merger Sub, as set forth herein; and
(7) the legal opinion required by Section 8(d) hereof.
(b) Parent and Merger Sub will deliver or cause to be delivered to the Company:
(1) stock certificates representing those securities of Parent to be issued as a part of the Merger as described in Section 2 hereof;
(2) a certificate of the President of Parent and Merger Sub, respectively, to the effect that all representations and warranties of Parent
and Merger Sub made under this Agreement are true and correct as of the Closing, the same as though originally given to the Company on said
date;
(3) certified copies of resolutions adopted by Parent’s Board of Directors and, if applicable, stockholders, and the Manager of Merger
Sub and its members, if applicable, authorizing the Merger and all related matters;
(4) certificates from the jurisdiction of incorporation of Parent and organization of Merger Sub dated within five business days of the
Closing Date that each of said corporations is in good standing under the laws of said state;
(5) opinion of Parent’s counsel as described in Section 7(m) above;
(6) such other instruments and documents as are required to be delivered pursuant to the provisions of this Agreement;
(7) written resignation of all of the officers and directors of Parent and Merger Sub and written appointment of the Company
nominees as directors and officers; and
(8) all other items, the delivery of which is a condition precedent to the obligations of the Company, as set forth in Section 7 hereof.
12. Consultants’ Fees . Parent and Merger Sub, jointly and severally, represent and warrant to the Company, and the Company represents
and warrants to each of the Parent and Merger Sub, that none of them, or any party acting on their behalf, has incurred any liabilities, either
express or implied, to any “consultant” “broker” or “finder” or similar Person in connection with this Agreement or any of the transactions
contemplated hereby.
13. Post-Closing Covenants .
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(a) Standard and Poor’s . If required for the trading of Parent Common Stock, Parent shall use its commercially reasonable efforts to
apply for listing with Standard and Poor’s Information Service and Blue Sky filings.
(b) Stock Listing . As soon as Parent meets the company listing requirements, Parent shall use all commercially reasonable efforts to
cause Parent Common Stock to be listed for trading on the Over-The-Counter Bulletin Board.
(c) Confidentiality . Parent hereby agrees that, after the Execution Date and prior to the Effective Time, it shall not publicly disclose any
confidential information of Parent or the Company, and that they shall not make any public statement or announcement regarding the Merger or
the business, financial condition, prospects or operations of Parent or the Company, without the prior written consent of the Company.
14. Miscellaneous .
(a) Further Assurances . At any time, and from time to time, after the Effective Time, each party will execute such additional
instruments and take such action as may be reasonably requested by the other party to confirm or perfect title to any property transferred
hereunder or otherwise to carry out the intent and purposes of this Agreement.
(b) Waiver . Any failure on the part of any party hereto to comply with any of its obligations, agreements or conditions hereunder may
be waived in writing by the party (in its sole discretion) to whom such compliance is owed.
(c) Termination .
(1) By Any Party . This Agreement may be terminated at the discretion of any party if the Closing has not occurred by April 30,
2007 (unless the Closing date is extended with the consent of both the Company and Parent) for any reason other than the default hereunder by
the terminating party.
(2) Termination by Mutual Consent . This Agreement may be terminated and the Merger may be abandoned at any time prior to the
Effective Time, before or after gaining requisite stockholder approval, by the mutual written consent of Parent and the Company.
(3) Termination by Parent and Merger Sub . This Agreement may be terminated and the Merger may be abandoned at any time prior
to the Effective Time, by action of the Board of Directors of Parent and Merger Sub if:
a. any representation or warranty of the Company contained in this Agreement shall not be true in all material respects when made or,
if a representation or warranty relates to a particular date, shall not be true in all material respects as of such date (provided such breach is
capable of being cured and has not been cured within five (5) business days following receipt by the breaching Party of notice of the breach) or
on and as of the Effective Time as if made on and as of the Effective Time; or
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b. the Merger is not approved by the Company’s members contemplated by this Agreement.
(4) Termination by the Company . This Agreement may be terminated and the Merger may be abandoned at any time prior to the
Effective Time by action of the Managers of the Company if:
a. any representation or warranty of Parent or Merger Sub contained in this Agreement shall not be true in all material respects when
made or, if a representation or warranty relates to a particular date, shall not be true in all material respects as of such date (provided such
breach is capable of being cured and has not been cured within five (5) business days following receipt by the breaching Party of notice of the
breach) or on and as of the Effective Time as if made on and as of the Effective Time; or
b. the Merger is not submitted to Parent’s stockholders as contemplated by this Agreement (provided that the Company is not in
material breach of the terms of this Agreement and this Agreement has not otherwise been terminated pursuant to this Section 14(c)).
(5) Effect of Termination . Except as otherwise expressly provided herein, in the event of termination of this Agreement by a Party as
provided in this Section 14(c), this Agreement shall forthwith become void and there shall be no liability or obligation on the part of the Parties
or their respective affiliates, officers, managers, members, directors or stockholders, except (x) with respect to the payment of expenses
pursuant to Section 14(l) and (y) to the extent that such termination results from the breach of a Party of any of its representations or warranties,
or any of its covenants or agreements, in each case, as set forth in this Agreement. In addition, in the event of termination of this Agreement
any materials or documents that have been furnished by one party to the other in connection with this Agreement or the transactions
contemplated hereby shall be promptly returned by the receiving party, accompanied by all copies of such documentation, within ten (10) days
after (a) the termination of this Agreement or (b) the written request of the disclosing party.
(d) Amendment . This Agreement may be amended only in writing as agreed to by all parties hereto.
(e) Notices . All notices, requests, demands, claims, and other communications required or permitted hereunder shall be in writing and
shall be deemed given upon receipt if delivered personally or by recognized commercial delivery service, or mailed by registered or certified
mail (return receipt requested), or sent via facsimile (with acknowledgment of complete transmission and confirmed in writing by mail
simultaneously dispatched) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):
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(1)
if to Parent or Merger Sub, to:
Pacific East Advisors, Inc.
10600 N. De Anza Blvd., Suite 250
Cupertino, California 95014
Attention: Laird Q. Cagan
Telephone No.: (408) 873-0400
Facsimile No.: (408) 873-0550
with a copy (which shall not constitute notice) to:
Krueger Group, LLP
5771 La Jolla Boulevard
La Jolla, California 92037
Attention: Blair Krueger
Telephone No.: (858) 729-9997
Facsimile No.: (858) 729-9995
(2)
if to Company, to:
Inner Mongolia Production Company LLC
75 South Broadway
White Plains, New York USA 10601
Attention: Frank Ingriselli
Telephone No.: (914) 304-4076
Facsimile No.: (914) 304-4077
with a copy (which shall not constitute notice) to:
Crone Rozynko, LLP
101 Montgomery Street, Suite 1950
San Francisco, California 94104
Attention: Scott Kline
Telephone No.: (415) 955-890
Facsimile No.: (415) 955-8910
(f) Headings . The section and subsection headings in this Agreement are inserted for convenience only and shall not affect in any way
the meaning or interpretation of this Agreement.
(g) Counterparts . This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same inst