$40,000,000.00

January 11, 2017

Subject to Borrower’s strict compliance with the Extension Conditions set forth below, Borrower shall have the right to extend the Maturity Date to the First Extension Date or the Second Extension Date, as applicable. For purposes hereof:

(1) the “Extension Conditions” means (x) both at the time of the delivery of the applicable extension notice and as of the applicable Maturity Date, no Event of Default shall exist under this Note or any Collateral Document, (y) Borrower shall deliver to Lender irrevocable written notice of the election to the extend the Maturity Date no later than (i) April 1, 2017, with respect to the First Extension Date; and (ii) May 1, 2017 with respect to the Second Extension Date, and (z) with respect to Borrower’s right to extend the Maturity Date to the Second Extension Date, the Borrower shall provide Lender with reasonable written evidence of the Securities Exchange Commission’s extension of the time period for Borrower’s current equity raise beyond April 30, 2017;

(2) the “First Extension Date” means July 31, 2017; and

(3) the “Second Extension Date” means the earlier of (i) October 31, 2017 or (ii) the actual date fixed by the Securities Exchange Commission for the extension of Borrower’s equity raising campaign beyond the original end date.

In the event any of the above Extension Conditions shall not be satisfied as and when required, the Borrower’s right to extend the Maturity Date as provided above shall terminate and be null and void and of no further force and effect.  In the event Borrower exercises its right to extend the Maturity Date to the First Extension Date or the Second Extension Date, as applicable, from and after the effective date of such right, the “Maturity Date” shall mean and include the First Extension Date or the Second Extension Date, as applicable.

The Agent shall maintain and, upon Borrower’s request or at the option of Agent send, a register which sets forth the amounts outstanding under this Note and such register shall be conclusive and binding on Borrower absent manifest error, provided, any failure of the Agent to maintain such register shall not affect, modify, reduce or waive any of the Borrower’s obligations under this Note or any other Collateral Document.

The entire outstanding principal amount of this Note (as the same may be increased as expressly provided herein) shall bear interest at the fixed rate of five percent per annum (5.0%); provided, however that in no event shall the rate of interest to be paid on the unpaid principal balance of this Note be more than the maximum legal rate allowed by applicable law. After the occurrence of an Event of Default (as defined herein), principal shall bear interest from and including the date of such default until paid in full at a rate per annum equal to the Default Rate, such interest to be payable on demand.

Borrower shall make payments of interest beginning January 31, 2017, and continuing on the last day of each calendar month thereafter until the Maturity Date. In addition to interest payments on the outstanding principal balance of this Note, (x) Borrower shall make mandatory principal payments to the Agent (for the benefit of the Secured Persons) in the amount of the Net Equity Proceeds Amount (as hereinafter defined) on each of (i) January 27, 2017, (ii) February 24, 2017, (iii) March 31, 2017,  (iv) April 28, 2017, and (v) on the last Friday of each calendar month thereafter until the Maturity Date (each such date a “Mandatory Repayment Date”); and (y) in the event Borrower exercises its right to extend the Maturity Date to the Second Extension Date, Borrower shall make mandatory principal payments to the Agent (for the benefit of the Secured Persons) in an amount equal to the greater of (1) the Net Equity Proceeds Amount as determined and payable in accordance with clause (x) above and (2) $5,000,000.00 per calendar month, which amount shall be due and payable on the last Friday of each calendar month commencing with May 2017 and continuing thereafter until the Maturity Date.  Concurrently with the payment of each Net Equity Proceeds Amount, Borrower shall deliver to Agent a certificate of the chief financial officer or other financial officer of Borrower in substantially the form of Exhibit A attached hereto (i) certifying as to whether an Event of Default has occurred and, if an Event of Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, and (ii) setting forth the gross amount of the Net Equity Proceeds received by Borrower during such measurement period in reasonable detail as well as a reasonably detailed calculation of the Net Equity Proceeds Amount for such period.

For purposes of this Note, the following terms shall have the meanings set forth below:

“Asset Sale” means any sale, transfer, assignment, conveyance or other disposition by Borrower to any Person (as defined in the Mortgage), including by way of redemption by such Person, of any oil and gas leases, wells, properties and interests owned by Borrower (including, without limitation, the Mortgaged Property) including, without limitation, any capital stock or other securities of, or equity interests in, another Person.

“Net Equity Proceeds Amount” shall mean 80% of all Net Equity Proceeds received by or on behalf of Borrower during the period from the first day of each such calendar month until the day immediately preceding such Mandatory Repayment Date.  For purposes of illustration only, with respect to the mandatory principal payment due on April 28, 2017, all Net Equity Proceeds received from April 1, 2017 through April 27, 2016 shall be included in the calculation of Net Equity Proceeds Amount for the month of April, 2017.

“Net Equity Proceeds” means for any issuance of equity interests of or capital or other equity contribution or commitment to Borrower, the gross cash proceeds from such issuance of equity interests or capital or equity contribution or commitment, net of customary brokerage fees actually paid by Borrower in connection therewith but in no event shall such brokerage fees exceed the commissions paid to such brokers as of the date of this Note.  For purposes of clarification, if such gross cash proceeds are $0.00, Net Equity Proceeds shall be $0.00.

“Net Sale Proceeds” means for any sale or other disposition of any oil and gas leases, wells, properties and interests owned by Borrower (including, without limitation, the Mortgaged Property) (as defined in the Mortgage) pursuant to an Asset Sale, the gross cash proceeds (including any cash received by way of deferred payment pursuant to a promissory note, receivable or otherwise, but only as and when received) received from such Asset Sale, net of (a) reasonable transaction costs (including, without limitation, customary selling commissions, reasonable legal, advisory and other fees and expenses (including title and recording expenses), and transfer taxes arising therefrom), and (b) the amount of all reserves required to be maintained by Borrower in accordance with GAAP and all purchase price hold-backs for any potential indemnity obligations that may be required to be made by Borrower of as a result of such Asset Sale; provided, however, (i) that such gross proceeds shall not include any portion of such gross cash proceeds which Borrower determines in good faith should be reserved for post-closing adjustments (which shall be certified by Borrower to the Agent upon its request), it being understood and agreed that on the day that all such post-closing adjustments have been determined, the amount (if any) by which the reserved amount in respect of such Asset Sale exceeds the actual post-closing adjustments payable by Borrower shall constitute Net Sale Proceeds on such date received by Borrower from such Asset Sale, and (ii) at such time as the Borrower is no longer required to maintain any indemnity reserves in accordance with GAAP or any purchase price hold-back as a result of any Asset Sale, the amount (if any) by which such reserved amount in respect of such Asset Sale exceeds the actual amount of indemnity payments made by Borrower for which such reserves were required to be maintained in respect of such Asset Sale shall constitute Net Sale Proceeds at such time.

If the Borrower receives any cash proceeds from any Asset Sale, no later than three (3) business days following receipt an amount equal to 100% of the Net Sale Proceeds therefrom shall be paid by Borrower to the Agent (for the benefit of the Secured Persons) and applied on such date (as and when received), but with respect to Net Sale Proceeds finally determined to be an excess reserved amount with respect to post-closing adjustments payable by Borrower no later than three (3) business days following such determination, as a mandatory repayment against the outstanding principal balance of this Note.

On the Maturity Date, Borrower shall pay to Agent for the benefit of all Secured Persons: (a) all accrued and unpaid interest and accrued and unpaid fees and (b) a lump sum principal payment in the amount of (y) $40,000,000.00, less (z) any prepayments of principal prior to the Maturity Date actually made by Borrower in good funds. All payments hereunder shall be made in lawful money of the United States and in immediately available funds.

The payment of this Note is secured by a Mortgage, Fixture Filing, Assignment of As-Extracted Collateral, Security Agreement and Financing Statement dated the date hereof between Borrower and Agent (the “Mortgage”) and a UCC Financing Statement against the Mortgaged Property, as defined in the Mortgage (the “UCC Financing Statement”). “Collateral Documents” means, collectively, (a) the Mortgage, (b) the UCC Financing Statement and (c) the Loan Documents, as defined in the Mortgage. “Secured Persons” has the meaning set forth in the Mortgage.  Each capitalized term used in this Note and not defined in this Note shall have the meaning assigned such term in the Mortgage.

All payments shall be made to Agent, for the benefit of the Secured Persons, by wire transfer of readily available funds to the following account:

ACCOUNT NAME:	Kaiser-Francis Management Company
F/B/O:	Kaiser-Francis Management Company
ACCOUNT NUMBER:	xxxxxxxxx
ABA NUMBER:	xxxxxxxxxxxx
BANK NAME:	xxxxxxxxxxxxxxxxxx

Upon written notice by Agent to Borrower, Borrower shall thereafter make all payments due under this Note to such alternate (singular) account as specified by Agent in such written notice.

Borrower may prepay the principal of this Note in whole or in part at any time, without premium or penalty.

Interest under this Note is compounded annually and calculated on a 365-day factor applied on a 365-day year or a 366-day year, in the event that the year is a leap year, on the unpaid principal to the date of the payment; provided, however, that in the event the interest rate reaches the maximum rate allowed by applicable law, said maximum legal rate shall be computed on a full calendar year 365/365 days basis or on a 366/366 days basis, in the event that the year is a leap year. The interest charged and herein contracted for will not exceed the maximum rate allowed by law.

Matured unpaid amounts shall bear interest computed on a full calendar year 365/365 days basis, or on a 366/366 days basis in the event that the year is a leap year, at a rate of interest equal to the lesser of ten percent per annum (10.0%) or the highest legal rate of interest allowed by Oklahoma law (the “Default Rate”).

Any notice required or delivered to the parties shall be deemed delivered when personally delivered, or if mailed, three (3) business days after deposit in the United States mail, certified or registered mail, return receipt requested, or if sent by national overnight courier, on the next business day after deposit with such courier, and addressed to the applicable party at the address set forth opposite such party’s name in the first paragraph of this Note, which address such Party may at any time change by delivering written notice to the other party in the manner set forth above. For purposes of this Note, “business days” means any day that is not a Saturday, Sunday or other day on which commercial banks in Tulsa, Oklahoma are authorized or required by law to remain closed.  With respect to any notice sent to Borrower, such notice shall be sent to the attention of Anthony F. Keating, III, Co-Chief Operating Officer, and shall be copied to Zachary M. Garsek, Barlow Garsek & Simon, LLP, 920 Foch Street, Fort Worth, Texas 76107.

Borrower shall pay all outstanding unpaid principal and all accrued and unpaid interest that remain due and owing, on the Maturity Date.

If all or a part of the indebtedness represented by this Note is collected at law or in equity or in bankruptcy, receivership or other court proceedings or if this Note is placed in the hands of attorneys for collection after default, the Borrower and any endorser or guarantor hereof shall pay to the holder hereof, in addition to the principal and interest due and payable hereon, all attorneys’ fees, court costs and other collection fees and expenses reasonably incurred by the Agent.

Borrower and any endorser or guarantor hereof hereby waive presentment for payment, demand, notice of nonpayment, protest and notice of protest with respect to any payment hereunder.  No delay on the part of the holder hereof in exercising any rights hereunder shall operate as a waiver of such rights.

This Note and the indebtedness evidenced hereby shall be construed and enforced in accordance with and governed by the laws of the State of Oklahoma. To the maximum extent not prohibited by applicable law, each of Agent (on behalf of itself and the Secured Persons, and by acceptance of this Note) and Borrower hereby irrevocably: (i) submits to the jurisdiction of any Oklahoma state or United States federal court sitting in or serving Tulsa, Oklahoma over any action or proceeding arising out of this Note; (ii) agrees that all claims in respect of such action or proceeding may be held and determined in such Oklahoma state or federal court; (iii) agrees that any action or proceeding brought against the Agent or Borrower may be brought only in an Oklahoma state or United States federal court sitting in or serving Tulsa, Oklahoma; (iv) consents to the service of process in any such action or proceeding in either of said courts by mailing thereof by Agent or Borrower by registered or certified mail, postage prepaid, to the Borrower or Agent, respectively, at its address specified for notices to be given under this Note; and (v) waives any defense on the basis of an inconvenient forum. Agent (on behalf of itself and the Secured Persons, and by acceptance of this Note) and Borrower agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in any other jurisdiction by suit or proceeding in such state and hereby waive any defense on the basis of an inconvenient forum.  BORROWER AND AGENT EACH WAIVE THE RIGHT TO A JURY TRIAL.

This Note is non-assumable by any successor to or assignee of Borrower without the prior approval in writing of the Agent.  In the event Agent shall so approve such assumption, the terms of this Note shall be binding upon Borrower’s successors and assigns.  The terms of this Note shall inure to the benefit of Agent and its successors and assigns.

Borrower represents and warrants to the Agent, as of the date hereof, that:

(a)  this Note and the Collateral Documents constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their terms, except as the enforcement hereof and thereof may be limited by bankruptcy, insolvency, or other similar laws affecting the enforcement of creditors’ rights generally and subject to the applicability of general principles of equity;

Until such time as the Secured Obligations have been paid in full in cash to Agent (for the ratable benefit of the Secured Persons), Borrower shall not, and shall not permit any other Person, directly or indirectly, to (i) create or permit any mortgage, Lien, encumbrance, charge, or security interest of any kind (other than a Permitted Lien) to exist on any of Borrower’s assets or properties owned now or in the future including, without limitation, any oil and gas leases, wells, properties and interests owned by Borrower (including, without limitation, the Mortgaged Property), (ii) incur any indebtedness for funded debt (other than trade payables incurred in the ordinary course which are not more than sixty (60) days outstanding),  (iii) enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts, or imposes any condition upon the ability of the Borrower to create, incur or permit to exist any mortgage, Lien or security interest upon the Mortgaged property, or (iv) transfer, sell, assign or in any manner dispose of all or any part of any oil and gas leases, wells, properties and interests owned by Borrower (including, without limitation, the Mortgaged Property) (collectively, the “Negative Covenant”).  The Negative Covenant shall terminate, without further action on the part of Agent or any other Person, at such time that the outstanding principal balance owing hereunder is equal to or less than $30,000,000.00 (the “Negative Covenant Termination”).  As of the Negative Covenant Termination, this Note shall be read as though the Negative Covenant were not set forth herein and, at the request of Borrower, Agent shall provide a written and signed affirmation that the Negative Covenant no longer applies.

If any one or more of the following events shall occur (each an “Event of Default”):

THEN, the Agent may, by written notice to the Borrower, declare the unpaid principal amount of this Note, accrued interest thereon and all other amounts payable under this Note due and payable whereupon the same shall become and be forthwith due and payable without presentment, demand, protest, notice of acceleration or intention to accelerate or further notice of any kind, all of which are hereby expressly waived by the Borrower, provided that in the case of an Event of Default described in clause (e) above, the unpaid principal amount of this Note, accrued interest and other amounts payable under this Note shall be immediately due and payable. Failure of Agent to exercise any such right or remedy shall not constitute a waiver of Agent’s right to exercise any right or remedy Agent may have under this Note, the other Collateral Document, at law or in equity.

If any payment of principal or interest on this Note becomes due on a day that is not a business day (other than with respect to the Maturity Date), such payment will be made on the next succeeding business day and such extension of time will in such case be included in computing interest in connection with such payment.

RIGHT OF SET OFF / RIGHT OF OFFSET: Notwithstanding any provision in this Note to the contrary, Borrower may, at any time and from time to time at its sole discretion with notice to Agent, to the fullest extent permitted by law, set off and apply any amounts for indemnity or other payments from the Sellers, subject to the terms, provisions and restrictions set forth in Section 2.10 of the Purchase Agreement, to or for the credit of the account of Borrower or any Buyer Indemnitee (as defined in that certain Interest Purchase Agreement dated January 4, 2017 by and among Borrower, Kaiser-Whiting, LLC and various named selling parties thereto (such agreement as has been and may from time to time be amended, modified or supplemented, the “Purchase Agreement”)), against any principal, interest or other amounts then outstanding under this Note or any other amount that may become due and payable hereunder.  The terms of Section 2.10 of the Purchase Agreement are hereby incorporated by reference into this Note.

The rights of the Agent and Secured Persons under this Note shall be freely assignable by Agent (on behalf of itself and the Secured Persons) whether for collateral or security purposes or otherwise.

BORROWER ACKNOWLEDGES EXECUTION OF THIS NOTE AND HAVING READ ALL OF ITS PROVISIONS AND BORROWER AGREES TO ITS TERMS.

THIS NOTE REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[Signature Page Attached]

THIS SECURED PROMISSORY NOTE is dated and executed as of the date indicated on the first page.

BORROWER:

ENERGY 11 OPERATING COMPANY, LLC

COMPLIANCE CERTIFICATE

The undersigned certifies that he/she is a financial officer of the Borrower named below (the Borrower is referred to herein as the “Company”), and DOES HEREBY FURTHER CERTIFY on behalf of the Company that:

Described below are the exceptions, if any, to paragraph 2 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Company has taken, is taking, or proposes to take with respect to each such condition or event:

 

 

 

                                                                                                                                                                                                                     

The foregoing certifications, together with the computations set forth in Schedule I attached hereto, are made and delivered this ___ day of __________, 20__.

BORROWER:

ENERGY 11 OPERATING COMPANY, LLC

By:      ______________________________
Name: ______________________________
Title:   ______________________________