Exhibit 10.10
LOAN AGREEMENT
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This Loan Agreement (the "Agreement") is
entered into as of September 14,
2009, by and between HAPPY STATE BANK, a state banking association
("Bank"), the
Borrower and Guarantors described below.
In consideration of the Loan described
below and the mutual covenants and
agreements contained herein, and intending to be legally bound
hereby, Bank,
Borrower and Guarantor agree as follows:
1. DEFINITIONS AND REFERENCE TERMS. In addition to any
other terms defined
herein, the following terms shall have the
meaning set forth with respect
thereto:
A. Borrower: EXTERRA ENERGY,
INC., a Nevada corporation
B. Borrower's Address: 701 S.
Taylor, Suite 440, Amarillo, Texas 79101
C. Guarantors: TODD ROYAL and
ROBERT ROYAL, TRUSTEE OF THE ROYAL TRUST
D. Guarantors' Addresses: 701
S. Taylor, Suite 440
Amarillo, Texas 79101
E. Hazardous Materials.
Hazardous Materials include all materials defined
as hazardous
materials or substances under any local, state or federal
environmental laws, rules or regulations, and petroleum products,
oil
and
asbestos.
F. Loan. Any loan described in
Section 2 hereof and any subsequent loan
which states
that it is subject to this Loan Agreement.
G. Property. The oil and gas
properties and lands (and all improvements
situated
thereon) more fully described in the Loan Documents and on
Exhibit "A"
attached hereto and made a part hereof for all purposes.
H. Loan Documents. Loan
Documents means this Loan Agreement and any and
all
promissory notes executed by Borrower in favor of Bank and all
other
documents, instruments, guarantees, certificates and agreements
executed
and/or delivered by Borrower, any guarantor or third party in
connection
with any Loan, including but not limited to (i) the Note
(as
hereinafter defined), (ii) Commercial Guaranty Agreements of
even
date
herewith from Guarantors to Bank and (iii) Deed of Trust,
Security
Agreement, Assignment of Production and Financing Statement
(the "Deed
of Trust") of even date herewith from Borrower to Gary
Wells,
Trustee for the benefit of Bank, securing the Note and covering
the
Property.
I. Accounting Terms. All
accounting terms not specifically defined or
specified
herein shall have the meanings generally attributed to such
terms under
generally accepted accounting principles ("GAAP"), as in
effect from
time to time, consistently applied, with respect to the
financial
statements referenced in Section 3.H. hereof.
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2. LOAN.
A. Loan. Bank hereby agrees to
make (or has made) the following loan to
Borrower:
Reducing
Revolving Line of Credit Promissory Note dated September 14,
2009, in the
original principal amount of up to $10,000,000.00,
executed by
Borrower, payable to the order of Bank, and having the
maturity
date, repayment terms and interest rate as set forth therein,
and being
secured by the Deed of Trust. This Reducing Revolving Line
of Credit
Promissory Note, together with any and all renewals,
extensions,
rearrangements or other modifications thereof, is
hereinafter
referred to as the "Note."
B. Use of Loan Proceeds.
Borrower agrees that monies extended or advanced
under the
Loan will be used solely by the Borrower for oil and gas
investments,
development of oil and gas properties and working capital
associated
with operating oil and gas properties.
C. Prepayments. Borrower may
prepay the Note in any amount at any time
prior to
maturity without premium or penalty. Any payments made on the
Note while
accrued interest is not yet due and payable shall be
applied
first to outstanding principal and then to accrued interest.
Any payments
made on the Note while accrued interest is due and
payable
shall be applied first to accrued interest and then to
outstanding
principal. The records of Bank shall be prima facie
evidence of
all amounts owing on the Note.
D. Conditions Precedent to the
Loan. The obligation of Bank to make the
Loan to
Borrower is subject to the condition precedent that Bank shall
have
received on or before the date of the Loan, each of the
following,
in form and substance satisfactory to Bank and its counsel:
i. The Note duly executed by Borrower;
ii.
The Deed of Trust, duly executed by Borrower, together with
copies of financing statements duly filed under the Uniform
Commercial Code of all jurisdictions necessary, or in the
opinion
of Bank, desirable to perfect the security interests created by
the Deed of Trust;
iii. Copies
of the Borrower's most recent balance sheet and profit and
loss statement, all in reasonable detail and certified by each
entity as
correct. Copies of the Guarantors' most recent
financial statements, all in reasonable detail and certified by
Guarantor as correct;
iv. A
Guaranty duly executed by each of the Guarantors;
v. Payment to Bank of a
loan origination fee equal to $14,750; and
vi.
Any other documents, instruments and certificates as Bank may
reasonably require.
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3. REPRESENTATIONS AND WARRANTIES. Borrower and
Guarantors hereby represent
and warrant to Bank as follows:
A. Good Standing. Borrower is
a corporation, duly organized, validly
existing and
in good standing under the laws of the State of Nevada
and has the
power and authority to own its property and to carry on
its business
in each jurisdiction in which it does business.
B. Authority and Compliance.
Borrower has the full power and authority to
execute and
deliver the Loan Documents and to incur and perform the
obligations
provided for therein, all of which have been duly
authorized
by all proper and necessary action of the appropriate
governing
body of Borrower. No consent or approval of any public
authority or
other third party is required as a condition to the
validity of
any Loan Document, and Borrower and Guarantors are in
compliance
with all laws and regulatory requirements to which they are
subject.
C. Binding Agreement. This
Agreement and the other Loan Documents
executed by
Borrower and Guarantors constitute valid and legally
binding
obligations of Borrower and Guarantors, enforceable in
accordance
with their terms.
D. Litigation. There is no
proceeding involving Borrower or Guarantors
pending or,
to the knowledge of Borrower or Guarantors, threatened
before any
court or governmental authority, agency or arbitration
authority,
except as disclosed to Bank in writing and acknowledged by
Bank prior
to the date of this Agreement.
E. No Conflicting Agreements.
There is no charter, bylaw, stock
provision,
partnership agreement or other document pertaining to the
organization, power or authority of Borrower or Guarantors and
no
provision of
any existing agreement, mortgage, indenture or contract
binding on
Borrower or Guarantors or affecting their property, which
would
conflict with or in any way prevent the execution, delivery or
carrying out
of the terms of this Agreement and the other Loan
Documents.
F. Ownership of Assets.
Borrower has good title to the Property and all
assets owned
or used in connection therewith, and the Property and
such assets
are free and clear of liens, except those granted to Bank
and as
disclosed to Bank in writing prior to the date of this
Agreement.
G. Taxes. All taxes and
assessments due and payable by Borrower and
Guarantors
have been paid or are being contested in good faith by
appropriate
proceedings and the Borrower and Guarantors have filed all
tax returns
which they are required to file.
H. Financial Statements. The
financial statements of Borrower and
Guarantors
heretofore delivered to Bank have been prepared in
accordance
with GAAP applied on a consistent basis throughout the
period
involved and fairly present Borrower's and Guarantors'
financial
condition as of the date or dates thereof, and there has
been no
material adverse change in Borrower's or Guarantors' financial
condition or
operations since the date or dates thereof. All factual
information
furnished by Borrower and Guarantors to Bank in connection
with this
Agreement and the other Loan Documents is and will be
accurate and
complete on the date as of which such information is
delivered to
Bank and is not and will not be incomplete by the
omissions of
any material fact necessary to make such information not
misleading.
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I. Place of Business.
Borrower's principal office is located at 701 S.
Taylor,
Suite 440, Amarillo, Texas 79101.
J. Environmental. The conduct
of Borrower's and Guarantors' business
operations
and the condition of Borrower's and Guarantors' property
does not and
will not violate any federal laws, rules or ordinances
for
environmental protection, regulations of the Environmental
Protection
Agency, any applicable local or state law, rule, regulation
or rule of
common law or any judicial interpretation thereof relating
primarily to
the environment or Hazardous Materials.
K. Permits and Consents. Each
permit, consent, approval, or authorization
of, or
filing, registration, or qualification with, any governmental
authority
required to be obtained or effected by Borrower or any
Guarantor in
connection with the operation of Borrower's business or
the
execution and delivery of this Agreement and the Loan
Documents,
or the
undertaking or performance of any obligation hereunder or
thereunder
has been duly obtained or effected.
L. Continuation of
Representations and Warranties. All representations
and
warranties made under this Agreement shall be deemed to be made
at
and as of
the date hereof and at and as of the date of any advance
under the
Loan.
4. CONDITIONS PRECEDENT TO ADVANCES. The Bank's
obligation to make advances to
Borrower under the Note is expressly
conditioned upon and subject to the
following requirements and limits:
A. Borrowing Base Limitation
on Advances. This Loan is subject to a
Borrowing
Base limitation equal to the amount of the loan value Bank
assigns to
the collateral pledged by Borrower to Bank under the Deed
of Trust.
The amount of the initial Borrowing Base is $1,475,000.00,
but the
Borrowing Base shall automatically be reduced monthly be a
principal
amount equal to one-thirtieth (1/30) of the then-outstanding
Borrowing
Base beginning April 1, 2010, and continuing on the 1st day
of each
month thereafter until and including August 1, 2012 and shall
be reduced
by the face amount of any letters of credit, if any, issued
by Lender.
The Borrowing Base shall be redetermined by Bank on or
before March
1, 2010, and semi-annually thereafter on the 1st day of
March and
September of each succeeding year of the loan term and any
renewals and
extensions thereof. Between the dates of the scheduled
Borrowing
Base redeterminations, Bank shall always have the right to
redetermine
the Borrowing Base in the event that it appears to Bank,
in its sole
discretion, that there has been a material change in the
value of the
collateral securing the Loan. In the event that the
unpaid
principal balance of the Note shall, at any time, be in excess
of the
Borrowing Base, Borrower shall in the Bank's sole discretion,
either (a)
within thirty (30) days thereafter, by instruments
satisfactory
in form and substance to Bank, provide Bank with
additional
collateral with value in amounts satisfactory to Bank in
order to
increase the Borrowing Base by an amount at least equal to
such excess,
or (b) within thirty (30) days thereafter, prepay the
principal of
the Note in an amount at last equal to such excess, or
(c) prepay
the Note (together with accrued interest on the principal
amount so
prepaid) in six (6) equal monthly installments (beginning on
the first
business day of the month following Bank's notification to
Borrower of
the redetermined Borrowing Base and continuing on the
first
business day of each month thereafter) in such amounts such
that
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<PAGE>
the
outstanding principal balance of the Note and the face amount
of
letters of
credit do not exceed the Borrowing Base at the end of such
six (6)
month period (which prepayments shall be in addition to the
scheduled
principal and interest payments on the Note). All Borrowing
Base
redeterminations shall be made by Bank in the exercise of its
sole
discretion in accordance with its customary practices and
standards
for loans in similar amounts to borrowers similarly situated
at the time
and under the circumstances then prevailing. If, at any
time, the
Borrowing Base is increased, then Borrower shall pay to Bank
a "Borrowing
Base Increase Fee" in an amount equal to one-quarter
percent
(0.25%) of the amount by which the Borrowing Base is
increased.
B. Loan Document Requirements.
Borrower must satisfy all requirements
pertaining
to advances as set forth in this Agreement and the other
Loan
Documents.
C. No Defaults. No default
under this Agreement or the other Loan
Documents by
Borrower or either Guarantor shall have occurred and be
continuing.
5. AFFIRMATIVE COVENANTS. Until full payment and
performance of all
obligations of Borrower and Guarantors
under the Loan Documents, Borrower
and Guarantors will, unless Bank consents
otherwise in writing (and without
limiting any requirement of any other Loan
Document):
A. Financial Condition.
Maintain Borrower's financial condition as
follows,
determined in accordance with GAAP applied on a consistent
basis
throughout the period involved except to the extent modified by
the
following definitions, if any:
i. Borrower will maintain a debt service coverage ratio
of 1.1 to
1.0 or better. The debt service coverage ratio shall be
calculated by dividing (i) the sum of Borrower's net income,
depreciation and amortization expense, interest expense and
income taxes, by (ii) Borrower's total debt service for the
preceding calendar quarter. Within twenty (20) days after each
calendar quarter during the term of the Note, Borrower shall
provide to Bank a certificate, certified by the President of
Borrower in writing, to evidence Borrower's compliance with the
financial covenants for the preceding calendar quarter.
ii.
Borrower will maintain a minimum current ratio (current assets
divided by current liabilities) of 1.1 to 1.0 or better, which
will be tested quarterly.
B. Financial Statements and
Other Information. Maintain a system of
accounting
satisfactory to Bank and in accordance with GAAP applied on
a consistent
basis throughout the period involved, permit Bank's
officers or
authorized representatives to visit and inspect Borrower's
and
Guarantors' books of account and other records at such
reasonable
times and as
often as Bank may desire, and pay the reasonable fees and
disbursements of any accountants or other agents of Bank selected
by
Bank for the
foregoing purposes. Unless written notice of another
location is
given to Bank, Borrower's and Guarantors' books and
records will
be located at Borrower's and Guarantors' chief executive
offices set
forth above. All financial statements called for below
shall be
prepared in form and content acceptable to Bank.
In addition,
Borrower and Guarantors shall cause to be furnished to
Bank:
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i. Within ninety (90) days following the end of
Borrower's fiscal
year, a copy of all the statements resulting from the closing
of
Borrower's books as of the end of such fiscal year. Such annual
statements shall be prepared, audited, and certified by a
certified
public accountant and shall include a balance sheet as
of the last day of the fiscal year, statements of income, and a
statement of changes in financial position. Such annual
statements must be in reasonable detail and be prepared in
accordance with GAAP. In addition, within thirty (30) days
after
the filing of the Borrower's tax return each year, the Borrower
shall furnish a copy of its tax return to Bank; and
ii.
Within thirty (30) days following the end of each quarter,
financial statements of the Borrower. Such quarterly statements
shall include a balance sheet as of the last day of the
preceding
quarter and
statements of income reflecting the most recent
operating period and year-to-date period for the Borrower. Such
quarterly statements must be in reasonable detail and be
prepared
in accordance with GAAP; and
iii. Current
financial statements on each Guarantor within ninety (90)
days following December 31 of each year or at other times
requested by Bank. In addition, within thirty (30) days after
the
filing
of each Guarantor's tax return each year, Borrower shall
cause to be furnished a copy of each Guarantor's tax return to
Bank; and
iv.
Such additional information, reports and statements respecting
the business operations and financial condition of Borrower and
Guarantors, respectively, from time to time, as Bank may
reasonably request.
C. Insurance. Borrower shall
maintain insurance covering the Property
with
financially sound and reputable insurance companies or
associations
in such amounts and covering the full replacement value
thereof (as
applicable) and such risks as are usually carried by
companies
engaged in the same or similar business and similarly
situated,
including, without limitation, fire and extended coverage
insurance
covering the Property, workers compensation insurance and
liability
insurance. Policies evidencing such insurance (i) shall
contain a
standard mortgagees endorsement; (ii) shall provide for
payment of
any loss to Bank (except for losses that are unrelated to
the
Property); (iii) shall provide that there shall be no recourse
against Bank
for payment of premiums or other amounts with respect
thereto; and
(iv) shall provide for a minimum of ten (10) days prior
written
notice to Bank of any cancellation. Satisfactory evidence of
such
i
