Profit Participation Agreement: Definition & Sample

A profit participation agreement, sometimes known as an exit fee agreement, is an agreement in which a lender is paid a share in the profits of an enterprise in addition to interest. A percentage of the profits the borrower earns will be required to be given to the lender under this type of agreement.

Profit participation agreements may include outlining each party's interest percentages, accounting obligations, and dispute resolution procedures. Profit participation agreements may also be used to outline profit-sharing arrangements between multiple parties working on a joint business venture together.

Common Sections in Profit Participation Agreements

Below is a list of common sections included in Profit Participation Agreements. These sections are linked to the below sample agreement for you to explore.

Profit Participation Agreement Sample

This Participation Agreement (“Agreement”) entered into and effective this 14 day of July, 2006, is between RETAMCO OPERATING, INC. , a Texas corporation, having an office at HCR Box 1010, 8601 Highway 212, Roberts, Montana 59070 (hereinafter called “Retamco”), DEJOUR ENERGY (USA) CORP. , a Nevada corporation, whose address is 3155 East Patrick Lane, Suite 1, Las Vegas, Nevada 89120 (hereinafter called “Dejour”); and BROWNSTONE VENTURES (US) INC. , a Delaware corporation, having an office at 130 King Street West, Suite 2810, Toronto, Ontario, Canada M5X 1A9, (hereinafter called “Brownstone”); Retamco, Dejour and Brownstone sometimes collectively referred to herein as the “Parties”.

Retamco holds certain Hydrocarbon rights and Contract Rights (the “Leasehold Interests”) as identified herein;

Retamco has offered and Dejour and Brownstone have agreed to participate in the exploration and development of the Leasehold Interests, subject to the terms and conditions set forth herein.

Retamco and Dejour signed a Letter of Intent with an effective date of May 4, 2006.

Retamco and Dejour also signed a Letter Agreement with an effective date of May 29, 2006, which provided for a U.S. $1,000,000 advance payment from Dejour to Retamco regarding its portion of the Leasehold Interests acquisition, which payment will be credited toward the U.S. $5,000,000.00 payment set out in Article 3.06(i) below, and which extends to July 15, 2006 the Closing previously scheduled for early June, 2006.

Brownstone and Dejour signed a Letter of Intention Agreement dated June 23, 2006.

THEREFORE, Retamco, Dejour and Brownstone, for consideration the sufficiency of which is hereby acknowledged, enter into this Agreement on the following terms and conditions:

SUPERCEDING AGREEMENT – This Agreement constitutes the entire agreement between the Parties and replaces and supersedes all prior agreements, memoranda, correspondence, communications, negotiations and representations, whether oral or written, express or implied, statutory or otherwise between the Parties with respect to the subject matter herein, including a Letter of Intent Agreement between Retamco and Dejour dated May 4, 2006, and a Letter Agreement between Retamco and Dejour dated May 29, 2006.

REGULATORY APPROVAL – This Agreement is conditioned on the Parties’ and the parent corporation of Dejour, Dejour Enterprises Ltd. (“DJE”) and the parent company of Brownstone, Brownstone Ventures, Inc. (“BWN-TSXV”), both publicly traded companies, first obtaining the consents and approvals, if required, by the Toronto Stock Venture Exchange (the “Exchange”).

EXHIBITS - The following Exhibits attached hereto are incorporated into this Agreement by reference:

List of Oil and gas leases and chart of gross and net acres therein, referenced in Article 2.02 below

Form of Assignments to Dejour and Brownstone

List of Overthrust Project Leases

List of Resource Project Leases

Dejour Promissory Note

Dejour Deed of Trust

“ Affiliate ” means any partnership, limited partnership, limited liability company, corporation, trust, trust beneficiary, entity, joint venture, association of any form or nature whatsoever, and other legal or juridical entity (i) owned or controlled by, or under the common control of any party to this Agreement, including any nominees, and/or agents of, and/or attorneys-in-fact for, any party to this Agreement, or (ii) owning or controlling any party to this Agreement, and (iii) all officers, directors, trustees, general partners and all persons owning 10% or more of the ownership interest or beneficial interest of any of the foregoing.

“ Contract Rights ” means the contracts, leases, unit agreements, mineral purchase agreements, rights-of-way, easements, surface leases, permits, licenses, pooling and unitization agreements, communitization agreements, pooling designations and declarations, pooling and unitization orders and all other contracts or agreements pertaining to or affecting the Leasehold Interests or the surface of the earth included within the surface boundaries of the Leasehold Interests.

“ Hydrocarbon ” means oil, gas, condensate, casinghead gas, natural gas, liquefied natural gas, coalbed methane gas, natural gasoline, methanol, drip gasoline, liquids separated from gas, and any and all products or by-products therefrom regardless of how obtained, manufactured or produced.

“Net Revenue Interest (“NRI”) ” means, as to the Leasehold Interests, the right to production of Hydrocarbons in or under or that may be produced, saved and sold from, such Leasehold Interests after giving effect to Leasehold Interests burdens granted, reserved and/or carved out of the Leasehold interests.

“ Overthrust Project ” means those leases and approximate acreages identified on Exhibit "C" .

“ Resource Project ” means those leases and approximate acreages identified on Exhibit “D” .

“ Title Defect ” shall mean the existence of any adverse claim to title to, or the use or possession of all or any portion of, the Leasehold Interests, or other defect in the title to all or any portion of the Leasehold Interests, including, but not limited to, the failure of Retamco to convey or the ability, capacity or authorization to convey all of the Leasehold Interests listed on Exhibit "A" to this Agreement or that the Net Revenue Interest assignable by Retamco hereunder is less than 80%, with the exception of one oil and gas lease identified on Exhibit “A” as USA-UTU-UTU72067/UT-01-51 in which the assignable NRI is 78%.

CONDITION PRECEDENT This Agreement is conditioned on and not binding upon the Parties until and unless (i) the affirmative vote and approval of the Parties’ respective Boards of Directors as to the transaction set forth in this Agreement, which shall be within their discretion and must occur on or before July 14, 2006, and (ii) the pre Closing acceptance of the Exchange to the transaction and the issuance of securities and, should the Exchange treat any part of this transaction as a reviewable transaction or expedited acquisition, the successful completion of such process.

ARTICLE II.
RETAMCO PROJECT

LEASEHOLD INTERESTS - By virtue of the instruments described on Exhibit “A” hereto, Retamco has acquired certain Contract Rights and interests in the Hydrocarbons within the Leasehold Interests, comprising all horizons unless otherwise noted (the “Leasehold Interests”). The Leasehold Interests constitute approximately 266,580.56 gross acres and 254,068.44 net acres in the States of Colorado and Utah.

RETAMCO PROJECT – The Leasehold Interests are described by Retamco and comprised of (a) “Resource Projects” consisting of 198,561.20 gross and 188,422.47 net acres; and (b) “Overthrust Project” consisting of 68,019.36 gross and 65,645.97 net acres.

ARTICLE III.
PARTICIPATION

RETAMCO’S INTEREST - Retamco shall participate by retaining a twenty-five percent (25%) (or more) working interest and paying twenty-five percent (25%) (or more) of all exploration costs in the Resource Projects Leasehold Interests and by retaining a fifty-seven and one half percent (57.5%) (or more) working interest and paying fifty-seven and one half percent (57.5%) (or more) of all exploration costs in the Overthrust Project; provided, exploration costs here and in Articles 3.02 and 3.03 below include but are not limited to geologic, seismic and drilling, abandonment or completion and equipping of wells. In addition, Retamco has conveyed an overriding royalty interest equal to the difference between the existing lease burdens and 80% on all leases (except for the lease identified on Exhibit “A” as USA-UTU-UTU72067/UT-01-51 where 80% shall be changed to 78%) so that the Net Revenue interest to Dejour and Brownstone shall be not less than their share of 80% (78% in the case of USA-UTU-UTU72067/UT-01-51).

DEJOUR’S INTEREST – Dejour shall purchase and participate with Retamco as follows:

In the Resource Projects:

A twenty-five percent (25%) working interest in the Leasehold Interests and thereafter pay twenty-five percent (25%) of all exploration costs.

In the Overthrust Project:

A twelve and one half percent (12.5%) working interest in the Leasehold Interests and thereafter pay twelve and one-half percent (12.5%) of all exploration costs.

Retamco and Dejour have, working together, identified additional parties to participate in the Leasehold Interests, including Llano Royalty Ltd. ("Llano") for a forty percent (40%) working in the Resource Project and a twenty percent (20%) working interest in the Overthrust Project. Llano has tentatively agreed to pay Retamco US $412.50 for each net acre acquired by Llano. The Parties agree that all future participants shall execute and operate under the same operating agreement(s) as Retamco, Dejour and Brownstone, and shall become a party and subject to the same AMI.

Within ten (10) days of the funding of Llano's acquisition of interests in the Resource Project and the Overthrust Project, Retamco shall pay to Dejour fifty percent (50%) of the per acre price in excess of US $400 per acre, in cash, represented by Retamco to be $6.25 per net acre acquired by Llano and calculated to be US $553,013.69. The formula for the payment to Dejour is based upon the following calculations, which may be adjusted if the net acres and/or the percentage working interest acquired by Llano should change:

Resource Project = 188,422.49 net acres x forty percent (40%) working interest (75,368.996 net acres) x US $6.25 = US $471,056.23

Overthrust Project = 65,565.97 net acres x twenty percent (20%) working interest (13,113.194 net acres) x US $6.25 = US $81,957.46

Retamco may identify an additional party or parties to participate in the Retamco project to acquire working interest not acquired by Dejour or third parties not otherwise described in paragraphs 3.02 or 3.03 of this Agreement.

BROWNSTONE’S INTEREST – Brownstone shall purchase and participate with Retamco as follows:

In the Resource Projects:

A ten percent (10%) working interest in the Leasehold Interests and thereafter pay ten percent (10%) of all exploration costs.

In the Overthrust Project:

A ten percent (10%) working interest in the Leasehold Interests and thereafter pay ten percent (10%) of all exploration costs.

DEJOUR’S AND BROWNSTONE’S SHARE OF ACQUISITION COSTS – Dejour’s undivided share of the acquisition costs constituting the Purchase Price is:

based on a twenty-five percent (25%) working interest is U.S. $18,842,247.

based on a twelve and one-half percent (12.5%) working interest is U.S. $3,282,298.50.

Brownstone’s undivided share of the Acquisition Costs constituting the Purchase Price is:

based on a ten percent (10%) working interest is U.S. $7,536,898.80.

based on a ten percent (10%) working interest is U.S. $2,625,838.80.

Purchase Price . Subject to the adjustments, reductions, and increments stated in this Agreement and the other covenants, conditions and limitations of this Agreement, and in consideration for Retamco's obligations herein and the delivery by Retamco to Dejour of the assignments of Leasehold Interests described in Article 4.08 below, Dejour agrees to deliver to Retamco the following (“ Dejour Purchase Price” ):

At Closing, U.S. $5,000,000, less U.S. $1,000,000 which has already been advanced to Retamco on June 2, 2006, for a total cash payment at Closing of U.S. $4,000,000;

At Closing, a non-interest bearing Promissory Note in the amount of U.S. $5,000,000, maturing December 31, 2006 in the form attached as Exhibit “E”; secured by Deed of Trust in the form attached as Exhibit “F”.

At Closing, 5,500,000 common shares of DJE (which shares will be restricted from trading for twelve (12) months from date of Closing).

At Closing, eight (8) Convertible Debentures in the cumulative amount of U.S. $1,397,845.50, maturing July 15, 2008, bearing interest at the rate of eight percent (8%) per annum, convertible by Retamco into units of shares of DJE at the rate of U.S. $1.35 per common share and U.S. $1.50 warrant, in the forms attached as Exhibit “F”.

Provided, however, if Retamco has been notified of any Title Defects by Dejour or Brownstone and such Title Defects are not cured or removed by Retamco, as determined by Dejour and Brownstone in the exercise of reasonable discretion, prior to December 31, 2006, the amount of the Dejour Promissory Note due and payable on December 31, 2006 shall be reduced by an amount equal to U.S. $400 multiplied by the number of acres of land affected by the Title Defects, multiplied by the failed percentage working interest to have been assigned Dejour. Should said reduction exceed the amount due under the Promissory Note, then Retamco shall refund the balance owing to Dejour by January 30, 2007. Provided, further, should any required consents to assign a Leasehold Interest from Retamco to Dejour as contemplated in Article 6.10 below not be obtainable following Retamco's good faith efforts to procure same, then Retamco shall refund to Dejour its consideration paid as if a Title Defect had occurred.

Purchase Price . Subject to the adjustments, reductions, and increments stated in this Agreement and the other covenants, conditions and limitations of this Agreement, and in consideration for Retamco's obligations herein and the delivery by Retamco to Brownstone of the assignments of Leasehold Interests described in Article 4.08 below, Brownstone agrees to deliver to Retamco the following (" Brownstone Purchase Price "):

At Closing, U.S. $6,770,923.88;

At Closing, 2,606,767 common shares of BWN-TSXV (which shares will be restricted from trading for twelve (12) months from date of Closing).

Provided, if Retamco has been notified of any Title Defects by Dejour and Brownstone and such Title Defects are not cured or removed by Retamco, as determined by Dejour and Brownstone in the exercise of reasonable discretion, prior to December 31, 2006, the amount of the Brownstone Purchase Price shall be reduced by an amount equal to U.S. $400 multiplied by the number of acres of land affected by the Title Defects, multiplied by the failed percentage working interest to have been assigned Brownstone. Retamco shall refund said amount to Brownstone by January 30, 2007. Provided, further, should any required consents to assign a Leasehold Interest from Retamco to Brownstone as contemplated in Article 6.10 below not be obtainable following Retamco's good faith efforts to procure same, then Retamco shall refund to Brownstone its consideration paid as if a Title Defect had occurred.

Brownstone acknowledges that, it will grant to Dejour and Retamco overriding royalty interests as follows:

To Dejour, its successors and assigns, an after Payout overriding royalty interest equal to 1.25% of 8/8 ths proportionately reduced to the ratio that the NRI initially assigned to Brownstone, its successors and assigns, in each Lease bears to 100% of the mineral interest covered by that Lease, to be calculated on a well-by-well basis, including that portion of each Lease included in the acreage attributed to that well for production regulatory purposes and as to all depths, and to commence at Payout of each well.

To Retamco, its successors and assigns, an after Payout overriding royalty interest equal to 1.25% of 8/8 ths proportionately reduced to the ratio that the NRI initially assigned to Brownstone, its successors and assigns, in each Lease bears to 100% of the mineral interest covered by that Lease, to be calculated on a well-by-well basis, including that portion of each Lease included in the acreage attributed to that well for production regulatory purposes and as to all depths, and to commence at Payout of each well.

“Payout” means the first day of the calendar month following the month in which the Proceeds equal the Expenses, both as defined below:

“Expenses” means the following actual costs incurred on or after the date operations commenced on the well and paid by Brownstone, its successors and assigns with respect to Brownstone's pro rata share of the well for which Payout is being calculated (“Well”): (a) recording fees, allocable overhead, consultant fees, third party contractor fees, telephone, mail, delay rentals, shut-in royalties, and any and all other costs related to the maintenance and operation of said Well; (b) costs for drilling, completion, abandonment, fracing, completing, twinning, deepening, sidetracking, plugging, equipping, operating and abandoning of the Well, but excluding the costs of any and all "subsequent operations" with respect to the Well that are commenced after the Well attains Payout, as such "subsequent operations" may be defined in any applicable joint operating agreement; (c) all geological, seismic, seismographic, mud logging, engineering, data processing, filing, and any and all other costs in any way related or incidental to the activities mentioned in subparagraphs (a) and (b) above; (d) Brownstone’s overhead attributable to the Well (such overhead shall be determined solely by the overhead billed by the Operator of the Well and paid by Brownstone; (e) Brownstone's proportionate share of all severance and ad valorem taxes, and including any and all state, federal and/or municipal taxes based on production (but only if such taxes are paid by Brownstone and not deducted before "Proceeds" are calculated); (f) operating expenses incurred under any applicable joint operating agreement; and (g) transportation, dehydration, compression, and processing charges attributable to Brownstone's pro rata share of any of the oil, gas and/or other minerals produced and sold from said Well.

“Proceeds” means the following cash receipts actually received by or credited to Brownstone, its successors and assigns, with respect to the Well: (a) the proceeds of the sale of all of the oil, gas, other hydrocarbons, and other minerals produced from the Well and including proceeds derived from the sale of liquids extracted from such production in a gas processing plant or at the wellhead; (b) the proceeds of all insurance collected by Brownstone (or received by or for Brownstone under any operating agreement) with respect to its ownership of the Well as a consequence of the loss or damage to the Well or its related equipment or production; and (c) the amounts received by Brownstone from the sale or license of seismic or other geological or geophysical or like data covering the Well.

Brownstone acknowledges that it has agreed to participate with Dejour by sharing equally, Dejour’s costs in connection with:

Ryder Scott Company, Calgary, in the preparation of delivery of a report in compliance with National Instrument Policy NI-51-101;

Contex Energy Co., Denver, in the preparation and deliver of Title Reports in connection with the leases described on Exhibit “A” hereto; and,

Steve Perlman, Geologist, in the preparation and delivery of geologic presentations representing the prospects developed upon the leases contained in Exhibit “A” hereto.

ARTICLE IV.
OPERATING MATTERS

OPERATOR – Subject to the Operating Agreement, Llano shall be the operator of the wells. If Llano does not acquire an interest in the Leasehold Interests, as contemplated herein, Retamco shall initially be the operator of the wells. Retamco and Dejour acknowledge that depending on selection of additional participants in the Resource Projects and Overthrust Project, a new party may be designated the operator. Retamco and Dejour agree that they each shall have the right to approve any replacement operator.

OPERATING AGREEMENT – The Parties intend to include in the Operating Agreement appropriate provisions conferring authority upon the Operator to enter into gas or oil sales contracts with third parties, to pool and unitize Leasehold Interests with outside interests, to enter into contracts for the purpose of transporting gas and oil to purchasers, to provide insurance and similar matters.

SEISMIC DATA – By reason of Dejour and Brownstone paying their working interest share of the Acquisition Costs, and subject to any applicable restrictions provided by licensing agreements or other existing contracts, Retamco shall make available to Dejour and Brownstone and its representatives, Retamco's seismic data at any location the Parties agree to. Dejour and Brownstone may retain, interpret and make copies of all data as well as all maps that result from the work performed on Retamco’s work station, which shall be the property of Dejour and Brownstone. Provided, the Parties shall keep the data, maps and any interpretation thereof, confidential. The Parties may share the data, maps and interpretation with potential assignees, provided that such assignees must sign confidentiality agreements and may not have ownership or disclosure rights or rights of further assignment.

PAYMENT OF DRILLING COSTS - Dejour and Brownstone shall deliver to Operator their share of the costs pursuant to the Operating Agreement, attached hereto as Exhibit “H” , which form of Operating Agreement the Parties agree to execute and have govern the joint operations contemplated hereunder; provided, in any conflict between the Operating Agreement and this Agreement, this Agreement shall prevail.

RIG PRIVILEGE TO DEJOUR AND BROWNSTONE - At the sole risk and expense of Dejour and Brownstone, their representatives shall be entitled to “floor” privileges during drilling operations for all wells on the Leasehold Interests. Their representatives shall adhere to and comply with all regulatory and contract responsibilities concerning operations and safety rules related to the wells.

REPORTS TO DEJOUR AND BROWNSTONE - For any well on the Leasehold Interests, Retamco shall timely deliver to Dejour and Brownstone copies of all daily reports, core analysis reports, logs including mud logs, sample reports, drill stem tests and all other drilling operations related data.

INSURANCE - Prior to commencement of operations, the Operator shall obtain insurance as required under the Operating Agreement. This insurance shall be endorsed so that the non-operating working interest owners are named additional insureds and subrogation shall be waived by underwriters and insurance companies of Operator as to the non-operating working interest owners, their affiliates, co-venturers, subsidiaries and co-owners, if any, and their agents, directors and employees. Should Operator’s coverage cease, lessen or lapse in any way, the non-operating working interest owners shall be notified immediately. Successor operators shall also abide by the insurance conditions set forth herein.

At Closing, Retamco shall deliver to Dejour duly executed and acknowledged, recordable assignments (in the form of Exhibit “B”) transferring the requisite interests in the leasehold interests to Dejour.

Assignments to Brownstone:

At Closing, Retamco shall deliver to Brownstone duly executed and acknowledged, recordable assignments (in the form of Exhibit “B”) transferring the requisite interests in the leasehold interests to Brownstone.

ARTICLE V.
ACCOUNTING MATTERS

ACTUAL COSTS – As to all wells drilled on the Leasehold Interests, Dejour and Brownstone will pay their proportionate share of actual costs based upon their working interest as described in Article 1.04. Subject to Article 3.01, neither Dejour’s nor Brownstone’s Net Revenue Interest will be burdened with any carried interests, production payments, overriding royalties or like interests carved from the working interest.

CURRENCY – All amounts, unless otherwise specifically noted, are in the currency of the United States of America.

ARTICLE VI.
REPRESENTATIONS, WARRANTIES & CONDITIONS