Exhibit 10.10

 

CANO PETROLEUM INC.

NONQUALIFIED STOCK OPTION AGREEMENT

 

1.                                      Grant of Option.  Cano Petroleum Inc., a
Delaware corporation (the “Company”), hereby grants to James K. Teringo, Jr.
(“Individual”) an option to purchase shares of common stock, par value $0.0001
per share, of the Company (“Common Stock”), subject to the terms and conditions
of this Cano Petroleum Inc. Nonqualified Stock Option Agreement (this
“Agreement”), as follows:

 

On the date hereof, the Company grants to Individual an option (the “Option”) to
purchase fifty thousand (50,000) full shares (the “Optioned Shares”) of Common
Stock at an option price equal to $3.98 per share (the “Option Price”), which
equals or exceeds the Fair Market Value of a share of the Company’s Common Stock
on the Date of Grant.  The date of grant of this Option is September 16, 2005,
2005 (“Date of Grant”).

 

The “Option Period” shall commence on the Date of Grant and shall expire on the
date immediately preceding the tenth (10th) anniversary of the Date of Grant. 
The Option is a nonqualified stock option.  This Option is intended to comply
with the provisions governing nonqualified stock options under Internal Revenue
Service Notice 2005-1 in order to exempt this Option from application of
Section 409A of the Code.

 

2.                                      Definitions.  Capitalized terms used
herein shall have the meanings assigned to such terms in this Section 2.

 

a.                                       “Board” means the Board of Directors of
the Company.

 

b.                                      “Change in Control” means any of the
following, except as otherwise provided herein:  (i) any consolidation, merger
or share exchange of the Company in which the Company is not the continuing or
surviving corporation or pursuant to which shares of the Company’s Common Stock
would be converted into cash, securities or other property, other than a
consolidation, merger or share exchange of the Company in which the holders of
the Company’s Common Stock immediately prior to such transaction have the same
proportionate ownership of Common Stock of the surviving corporation immediately
after such transaction; (ii) any sale, lease, exchange or other transfer
(excluding transfer by way of pledge or hypothecation) in one transaction or a
series of related transactions, of all or substantially all of the assets of the
Company; (iii) the stockholders of the Company approve any plan or proposal for
the liquidation or dissolution of the Company; (iv) the cessation of control (by
virtue of their not constituting a majority of directors) of the Board by the
individuals (the “Continuing Directors”) who (x) at the date of this Agreement
were directors or (y) become directors after the date of this Agreement and
whose election or nomination for election by the Company’s stockholders was
approved by a vote of at least two-thirds of the directors then in office who
were directors at the date of this Agreement or whose election or nomination for
election was previously so approved; (v) the acquisition of beneficial ownership
(within the meaning of Rule 13d-3 under the 1934 Act) of an aggregate of 50% or
more of the voting power of the Company’s outstanding voting securities by any
person or group (as such term is used in Rule 13d-5 under the 1934 Act) who
beneficially owned less than 50% of the voting power of the Company’s
outstanding voting securities on the date of this Agreement; provided, however,
that notwithstanding the foregoing, an acquisition shall not constitute a Change
in Control hereunder if the acquirer is (x) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company and acting in such
capacity, (y) a Subsidiary 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 voting

 

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securities of the Company or (z) any other person whose acquisition of shares of
voting securities is approved in advance by a majority of the Continuing
Directors; or (vi) in a Title 11 bankruptcy proceeding, the appointment of a
trustee or the conversion of a case involving the Company to a case under
Chapter 7.

 

Notwithstanding the foregoing provisions of this Section 2.b., in the event this
Option is subject to Section 409A of the Code, then, in lieu of the foregoing
definition and to the extent necessary to comply with the requirements of
Section 409A of the Code, the definition of “Change in Control” for purposes of
this Option shall be the definition provided for under Section 409A of the Code
and the regulations or other guidance issued thereunder.

 

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

 

d.                                      “Consultant” means any person, who is
not an Employee, performing advisory or consulting services for the Company,
with or without compensation, provided that bona fide services must be rendered
by such person and such services shall not be rendered in connection with the
offer or sale of securities in a capital raising transaction.

 

e.                                       “Employee” means common law employee
(as defined in accordance with the Regulations and Revenue Rulings then
applicable under Section 3401(c) of the Code) of the Company.

 

f.                                         “Exchange Act” means the Securities
Exchange Act of 1934, as amended.

 

g.                                      “Fair Market Value”  means, with respect
to the Optioned Shares, such fair market value as shall be determined in good
faith by the Board, giving due consideration to such factors as it deems
appropriate, including, without limitation, the earnings and certain other
financial and operating information of the Company in recent periods, the
potential value of the Company as a whole, the future prospects of the Company
and the industries in which it competes, the history and management of the
Company, the general condition of the securities markets, and the estimated fair
market value of securities of companies engaged in businesses similar to those
of the Company.  The determination of Fair Market Value will not give effect to
any restrictions on transfer of the Optioned Shares or the fact that such
Optioned Shares would represent a minority interest in the Company.

 

h.                                      “Retirement” means any Termination of
Service solely due to retirement upon or after attainment of age sixty-two and a
half (62 ½), or permitted early retirement as determined by the Board.

 

i.                                          “Subsidiary” means a “subsidiary
corporation” whether now or hereafter existing, as defined in Section 424(f) of
the Code.

 

j.                                          “Termination of Service” occurs when
Individual ceases to be employed by the Company, for any reason (or, if
Individual is a Consultant of the Company, ceases to serve as a Consultant of
the Company for any reason).  Except as may be necessary or desirable to comply
with applicable federal or state law, a “Termination of Service” shall not be
deemed to have occurred when an Individual who is an employee becomes a
Consultant or vice versa.  Notwithstanding the foregoing provisions of this
Section 2.j., in the event this Agreement is subject to Section 409A of the
Code, then, in lieu of the foregoing definition and to the extent necessary to
comply with the requirements of Section 409A of the Code, the definition of
“Termination of Service” for purposes of this Agreement

 

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shall be the definition of “separation from service” provided for under
Section 409A of the Code and the regulations or other guidance issued
thereunder.

 

k.                                       “Total and Permanent Disability” means
Individual is qualified for long-term disability benefits under the Company’s
(or any of the Company’s subsidiaries’) disability plan or insurance policy; or,
if no such plan or policy is then in existence or if Individual is not eligible
to participate in such plan or policy, that Individual, because of a physical or
mental condition resulting from bodily injury, disease, or mental disorder is
unable to perform his duties of employment for a period of six (6) continuous
months, as determined in good faith by the Board, based upon medical reports or
other evidence satisfactory to the Board.  Notwithstanding the foregoing
provisions of this Section 2.k., in the event this Option is subject to
Section 409A of the Code, then, in lieu of the foregoing definition and to the
extent necessary to comply with the requirements of Section 409A of the Code,
the definition of “Total and Permanent Disability” for purposes of this Option
shall be the definition of “disability” provided for under Section 409A of the
Code and the regulations or other guidance issued thereunder.

 

3.                                      Vesting; Time of Exercise.   Except as
otherwise specifically provided in this Agreement, 100% of the Optioned Shares
shall vest and become exercisable on July 11, 2006, provided Individual is
employed by the Company on that date.

 

In the event that a Change of Control occurs, then immediately prior to the
effective date of such Change of Control the total Optioned Shares not
previously vested shall thereupon immediately become fully vested and this
Option shall become fully exercisable, if not previously so exercisable.  In the
event that (i) a Change of Control occurs, (ii) this Agreement is assumed by the
surviving corporation or its parent, and (iii) the surviving corporation or its
parent substitutes its own option (the “Substituted Option”) for this Option,
then upon the effective date of such substitution of this Option, all shares or
other interests subject to such Substituted Option shall be (or remain, as the
case may be) fully vested and fully exercisable.

 

4.                                      Term; Forfeiture.

 

a.                                       Except as otherwise provided in this
Agreement, to the extent the unexercised portion of this Option relates to
Optioned Shares that are not vested on the date of Individual’s Termination of
Service, this Option will be terminated on that date.  The unexercised portion
of this Option that relates to Optioned Shares that are vested will terminate at
the first of the following to occur:

 

i.                                          5 p.m. on the date the Option Period
terminates;

 

ii.                                       5 p.m. on the date which is twelve
(12) months following the date of Individual’s Termination of Service due to
death, Total and Permanent Disability, or Retirement;

 

iii.                                    5 p.m. on the date of Individual’s
Termination of Service by the Company for cause (as defined herein);

 

iv.                                   5 p.m. on the date which is ninety (90)
days following the date of Individual’s Termination of Service for any reason
not otherwise specified in this Section 4.a.;

 

v.                                      5 p.m. on the date the Company causes
any portion of the Option to be forfeited pursuant to Section 7 hereof.

 

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b.                                      Solely for purposes of this Section 4,
“Cause” shall mean (i) Individual’s gross negligence in the performance or
intentional nonperformance of any of his duties and responsibilities (which
remains uncured and continues for thirty (30) days after delivery of written
notice); (ii) Individual’s dishonesty or fraud with respect to the business,
reputation or affairs of the Company; (iii) Individual’s conviction of a felony
or crime involving moral turpitude; (iv) Individual’s debilitating drug or
alcohol abuse as determined by a qualified physician; (v) Individual’s material
breach of any provisions of an employment, consulting or service agreement
between the Company and Individual; or (vi) Individual’s material violation of
any written Company policy (which remains uncured or continues thirty (30) days
after delivery of written notice).

 

5.                                      Who May Exercise.  Subject to the terms
and conditions set forth in Sections 3 and 4 above, during the lifetime of
Individual, this Option may be exercised only by Individual, or by Individual’s
guardian or personal or legal representative.  If Individual’s Termination of
Service is due to his death prior to the date specified in Section 4.a.i.
hereof, or Individual dies prior to the termination dates specified in Sections
4.a.i., ii., iii., iv. or v. hereof, and Individual has not exercised the Option
as to the maximum number of vested Optioned Shares as set forth in Section 3
hereof as of the date of death, the following persons may exercise the
exercisable portion of the Option on behalf of Individual at any time prior to
the earliest of the dates specified in Section 4 hereof:  the personal
representative of his estate, or the person who acquired the right to exercise
the Option by bequest or inheritance or by reason of the death of Individual;
provided that the Option shall remain subject to the other terms of this
Agreement and applicable laws, rules, and regulations.  Notwithstanding the
foregoing sentence, if Individual’s Termination of Service is due to his death
prior to the date specified in Section 4.a.i. hereof, or Individual dies prior
to the termination dates specified in Sections 4.a.i., ii., iii., iv. or v.
hereof, and Individual has not exercised the Option as to the maximum number of
vested Optioned Shares as set forth in Section 3 hereof as of the date of death,
Individual, by delivering to the Company the prescribed form (see Appendix A),
may designate one or more beneficiaries and successor beneficiaries who may
exercise the exercisable portion of the Option on behalf of Individual at any
time prior to the earliest of the dates specified in Section 4 hereof; provided
that the Option shall remain subject to the other terms of this Agreement and
applicable laws, rules, and regulations.  In the event Individual does not
deliver to the Company a form designating one or more beneficiaries, or no
designated beneficiary survives Individual, the foregoing sentence shall not
apply.

 

6.                                      No Fractional Shares.  The Option may be
exercised only with respect to full shares, and no fractional share of stock
shall be issued.

 

7.                                      Manner of Exercise.   Subject to such
administrative regulations as the Board may from time to time adopt, this Option
may be exercised by the delivery of written notice to the Company setting forth
the number of shares of Common Stock with respect to which this Option is to be
exercised, the date of exercise thereof (the “Exercise Date”), which shall be at
least three (3) days after giving such notice unless an earlier time shall have
been mutually agreed upon.  On the Exercise Date, Individual shall deliver to
the Company consideration with a value equal to the total Option Price of the
shares to be purchased, payable as follows:  (a) cash, check, bank draft, or
money order payable to the order of the Company, (b) Common Stock owned by
Individual on the Exercise Date, valued at its Fair Market Value on the Exercise
Date, and which Individual has not acquired from the Company within six
(6) months prior to the Exercise Date, (c) by delivery (including by FAX) to the
Company or its designated agent of an executed irrevocable option exercise form
together with irrevocable instructions from Individual to a broker or dealer,
reasonably acceptable to the Company, to sell certain of the shares of Common
Stock purchased upon exercise of this Option or to pledge such shares to the
broker as collateral for a loan from the broker and promptly deliver to the
Company the amount of sale or loan

 

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proceeds necessary to pay such purchase price, and/or (d) in any other form of
valid consideration that is acceptable to the Board in its sole discretion.

 

Upon payment of all amounts due from Individual, the Company shall cause
certificates for the Optioned Shares then being purchased to be delivered to
Individual (or the person exercising Individual’s Option in the event of his
death) at its principal business office within ten (10) business days after the
Exercise Date. The obligation of the Company to deliver shares of Common Stock
shall, however, be subject to the condition that if at any time the Company
shall determine in its discretion that the listing, registration, or
qualification of this Option or the Optioned Shares upon any securities exchange
or under any state or federal law, or the consent or approval of any
governmental regulatory body, is necessary as a condition of, or in connection
with, this Option or the issuance or purchase of shares of Common Stock
thereunder, then this Option may not be exercised in whole or in part unless
such listing, registration, qualification, consent, or approval shall have been
effected or obtained free of any conditions not reasonably acceptable to the
Board.

 

If Individual fails to pay for any of the Optioned Shares specified in such
notice or fails to accept delivery thereof, then this Option, and right to
purchase such Optioned Shares may be forfeited at the election, and in the sole
discretion, of the Company.

 

8.                                      Nonassignability. Neither this Option
nor the rights under this Agreement may be transferred, assigned, pledged,
hypothecated or otherwise conveyed or encumbered by Individual, except by will,
by the laws of descent and distribution, or by designation of a beneficiary in
the event of Individual’s death, in accordance with Section 5 hereof.

 

9.                                      Rights as Stockholder.  Individual will
have no rights as a stockholder with respect to any shares covered by this
Option until the issuance of a certificate or certificates to Individual for the
Optioned Shares.  The Optioned Shares shall be subject to the terms and
conditions of this Agreement.  Individual, by his execution of this Agreement,
agrees to execute any documents requested by the Company in connection with the
issuance of a certificate or certificates for the Optioned Shares.  Except as
otherwise provided in Section 10 hereof, no adjustment shall be made for
dividends or other rights for which the record date is prior to the issuance of
such certificate or certificates.

 

10.                               Adjustment of Number of Optioned Shares and
Related Matters.  The number of shares of Common Stock covered by this Option,
and the Option Price thereof, shall be subject to adjustment as follows:

 

a.                                       Capital Adjustments.  In the event that
the Board shall determine that any dividend or other distribution (whether in
the form of cash, common stock, other securities, or other property),
recapitalization, stock split, reverse stock split, rights offering,
reorganization, merger, consolidation, split-up, spin-off, split-off,
combination, subdivision, repurchase, or exchange of the Company’s common stock
or other securities of the Company, issuance of warrants or other rights to
purchase the Company’s common stock or other securities of the Company, or other
similar corporate transaction or event affects the Common Stock such that an
adjustment is determined by the Board to be appropriate to prevent the dilution
or enlargement of the benefits or potential benefits intended to be made
available under this Agreement, then the Board shall, in such manner as it may
deem equitable, adjust (i) the number of shares and type of Common Stock (or
other securities or property) subject to this Option and (ii) the Option Price,
to the end that the same proportion of the Company’s issued and outstanding
shares of Common Stock in each instance shall remain subject to exercise at the
same aggregate Option Price; provided, however, that the number of shares of
Common Stock (or other securities or property) subject to this Option shall
always be a whole number. In lieu of the foregoing,

 

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if deemed appropriate, the Board may make provision for a cash payment to the
holder of an outstanding Option.  Such adjustments shall be made in accordance
with the rules of any securities exchange, stock market, or stock quotation
system to which the Company is subject.  Upon the occurrence of any such
adjustment or cash payment, the Company shall provide notice to each affected
Individual of its computation of such adjustment or cash payment which shall be
conclusive and shall be binding upon each such Individual.

 

b.                                      Recapitalization, Merger, and
Consolidation.

 

(i)                                     No Effect on Company’s Authority.  The
existence of this Agreement shall not affect in any way the right or power of
the Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations, or other changes in the Company’s capital
structure and its business, or any merger or consolidation of the Company, or
any issuance of bonds, debentures, preferred or preference stocks ranking prior
to or otherwise affecting the Common Stock or the rights thereof (or any rights,
options, or warrants to purchase same), or the dissolution or liquidation of the
Company, or any sale or transfer of all or any part of its assets or business,
or any other corporate act or proceeding, whether of a similar character or
otherwise.

 

(ii)                                  Conversion of Option Where Company
Survives.  Subject to any required action by the stockholders and except as
otherwise provided by Section 10.b.(iv)  hereof or as may be required to comply
with Section 409A of the Code and the regulations or other guidance issued
thereunder, if the Company shall be the surviving or resulting corporation in
any merger, consolidation or share exchange, this Option shall pertain to and
apply to the securities or rights (including cash, property, or assets) to which
a holder of the number of shares of Common Stock subject to this Option would
have been entitled.

 

(iii)                               Exchange or Cancellation of Option Where
Company Does Not Survive.  Except as otherwise provided by
Section 10.b.(iv) hereof or as may be required to comply with Section 409A of
the Code and the regulations or other guidance issued thereunder, in the event
of any merger, consolidation or share exchange pursuant to which the Company is
not the surviving or resulting corporation, there shall be substituted for each
share of Common Stock subject to the unexercised portions of outstanding
Optioned Shares, that number of shares of each class of stock or other
securities or that amount of cash, property, or assets of the surviving,
resulting or consolidated company which were distributed or distributable to the
stockholders of the Company in respect to each share of Common Stock held by
them, such outstanding Optioned Shares to be thereafter exercisable for such
stock, securities, cash, or property in accordance with their terms.

 

(iv)                              Cancellation of Options.  Notwithstanding the
provisions of Sections 10.b.(ii) and 10.b.(iii) hereof, and except as may be
required to comply with Section 409A of the Code and the regulations or other
guidance issued thereunder, all Optioned Shares granted hereunder may be
canceled by the Board, in its sole discretion, as of the effective date of any
Change in Control, merger, consolidation or share exchange, or any issuance of
bonds, debentures, preferred or preference stocks ranking prior to or otherwise
affecting the Common Stock or the rights thereof (or any rights, options, or
warrants to purchase same), or of any proposed sale of all or substantially all
of the assets of the Company, or of any dissolution or liquidation of the
Company, by either:

 

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(1)                                  giving notice to Individual (or his
personal representative) of its intention to cancel those Optioned Shares for
which the issuance of shares of Common Stock involved payment by Individual for
such shares and, permitting the purchase during the 30 day period next preceding
such effective date of any or all of the shares of Common Stock subject to this
Option, including in the Board’s discretion some or all of the shares as to
which this Option would not otherwise be vested and exercisable; or

 

(2)                                  paying Individual an amount equal to a
reasonable estimate of the difference between the net amount per share payable
in such transaction or as a result of such transaction, and the Option Price per
share of the Optioned Shares (hereinafter the “Spread”), multiplied by the
number of Optioned Shares.  In estimating the Spread, appropriate adjustments to
give effect to the existence of all outstanding stock options of the Company
(the “Outstanding Options”) shall be made, such as deeming the Outstanding
Options to have been exercised, with the Company receiving the exercise price
payable thereunder, and treating the shares receivable upon exercise of the
Outstanding Options as being outstanding in determining the net amount per
share.  In cases where the proposed transaction consists of the acquisition of
assets of the Company, the net amount per share shall be calculated on the basis
of the net amount receivable with respect to shares of Common Stock upon a
distribution and liquidation by the Company after giving effect to expenses and
charges, including but not limited to taxes, payable by the Company before such
liquidation could be completed.

 

Any Optioned Shares that by would be fully vested or exercisable upon a Change
in Control will be considered vested or exercisable for purposes of
Section 10.b.(iv)(1) hereof.

 

c.                                       Liquidation or Dissolution.  Subject to
Section 10.b.(iv) hereof, in case the Company shall, at any time while this
Agreement shall be in force and remain unexpired, (i) sell all or substantially
all of its property, or (ii) dissolve, liquidate, or wind up its affairs, then
Individual shall be entitled to receive, in lieu of each share of Common Stock
which Individual would have been entitled to receive under this Option, 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.  If the Company shall, at any time prior
to the expiration of the Option Period, make any partial distribution of its
assets, in the nature of a partial liquidation, whether payable in cash or in
kind (but excluding the distribution of a cash dividend payable out of earned
surplus and designated as such) then in such event the Option Price shall be
reduced, on the payment date of such distribution, in proportion to the
percentage reduction in the tangible book value of the shares of Common Stock
(determined in accordance with generally accepted accounting principles)
resulting by reason of such distribution.

 

d.                                      Fractional Shares.  In the event that
any event or transaction described in this Section 10 would result in Individual
being entitled to a fractional share (whether or not the Company permits the
issuance of certificates for fractional shares), the number of shares to which
Individual would be entitled on exercise of this Option shall be rounded up to
the next whole number.

 

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11.                               Nonqualified Option.  The Options shall not be
treated as incentive stock options under Section 422 of the Code.

 

12.                               Community Property.  Each spouse individually
is bound by, and such spouse’s interest, if any, in any Optioned Shares is
subject to, the terms of this Agreement.  Nothing in this Agreement shall create
a community property interest where none otherwise exists.

 

13.                               Dispute Resolution.

 

a.                                      
Arbitration.                                  All disputes and controversies of
every kind and nature between any parties hereto arising out of or in connection
with this Agreement or the transactions described herein as to the construction,
validity, interpretation or meaning, performance, non-performance, enforcement,
operation or breach, shall be submitted to binding arbitration pursuant to the
following procedures:

 

i.                                          After a dispute or controversy
arises, any party may, in a written notice delivered to the other parties to the
dispute, demand such arbitration.  Such notice shall designate the name of the
arbitrator (who shall be an impartial person) appointed by such party demanding
arbitration, together with a statement of the matter in controversy.

 

ii.                                       Within 30 days after receipt of such
demand, the other parties shall, in a written notice delivered to the first
party, name such parties’ arbitrator (who shall be an impartial person).  If
such parties fail to name an arbitrator, then the second arbitrator shall be
named by the American Arbitration Association (the “AAA”).  The two arbitrators
so selected shall name a third arbitrator (who shall be an impartial person)
within 30 days, or in lieu of such agreement on a third arbitrator by the two
arbitrators so appointed, the third arbitrator shall be appointed by the AAA. 
If any arbitrator appointed hereunder shall die, resign, refuse or become unable
to act before an arbitration decision is rendered, then the vacancy shall be
filled by the method set forth in this Section for the original appointment of
such arbitrator.

 

iii.                                    Each party shall bear its own
arbitration costs and expenses.  The arbitration hearing shall be held in
Tarrant County, Texas at a location designated by a majority of the
arbitrators.  The Commercial Arbitration Rules of the American Arbitration
Association shall be incorporated by reference at such hearing and the
substantive laws of the State of Texas (excluding conflict of laws provisions)
shall apply.  Discovery shall not be permitted in the arbitration.

 

iv.                                   The arbitration hearing shall be concluded
within 10 days of its commencement unless otherwise ordered by the arbitrators
and the written award thereon shall be made within 15 days after the close of
submission of evidence.  An award rendered by a majority of the arbitrators
appointed pursuant to this Agreement shall be final and binding on all parties
to the proceeding, shall resolve the question of costs of the arbitrators and
all related matters, and judgment on such award may be entered and enforced by
either party in any court of competent jurisdiction.

 

v.                                      Except as set forth in Section 13.b.,
the parties stipulate that the provisions of this Section shall be a complete
defense to any suit, action or proceeding instituted in any federal, state or
local court or before any administrative tribunal with respect to any
controversy or dispute arising out of this Agreement or the transactions
described herein.  The

 

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arbitration provisions hereof shall, with respect to such controversy or
dispute, survive the termination or expiration of this Agreement.

 

No party to an arbitration may disclose the existence or results of any
arbitration hereunder without the prior written consent of the other parties
except to accountants, attorneys, directors, officers, employees and agents as
necessary or as required by law; nor will any party to an arbitration disclose
to any third party any confidential information disclosed by any other party to
an arbitration in the course of an arbitration hereunder without the prior
written consent of such other party.

 

b.                                      Emergency Relief.  Notwithstanding
anything in this Section 13 to the contrary, any party may seek from a court any
provisional remedy that may be necessary to protect any rights or property of
such party pending the establishment of the arbitral tribunal or its
determination of the merits of the controversy or to enforce a party’s rights
under Section 13.

 

14.                               Individual’s Representations.  Notwithstanding
any of the provisions hereof, Individual hereby agrees that he will not exercise
this Option granted hereby, and that the Company will not be obligated to issue
any shares to Individual hereunder, if the exercise thereof or the issuance of
such shares shall constitute a violation by Individual or the Company of any
provision of any law or regulation of any governmental authority.  Any
determination in this connection by the Company shall be final, binding, and
conclusive.  The obligations of the Company and the rights of Individual are
subject to all applicable laws, rules, and regulations.

 

15.                               Investment Representation.  Unless the Common
Stock is issued to him in a transaction registered under applicable federal and
state securities laws, by his execution hereof, Individual represents and
warrants to the Company that all Common Stock which may be purchased hereunder
will be acquired by Individual for investment purposes for his own account and
not with any intent for resale or distribution in violation of federal or state
securities laws.  Unless the Common Stock is issued to him in a transaction
registered under the applicable federal and state securities laws, all
certificates issued with respect to the Common Stock shall bear an appropriate
restrictive investment legend and shall be held indefinitely, unless they are
subsequently registered under the applicable federal and state securities laws
or Individual obtains an opinion of counsel, in form and substance satisfactory
to the Company and its counsel, that such registration is not required.

 

16.                               Individual’s Acknowledgments.  Individual
hereby accepts this Option subject to all the terms and provisions hereof. 
Individual hereby agrees to accept as binding, conclusive, and final all
decisions or interpretations of the Board or the Board, as appropriate, upon any
questions arising under this Agreement.

 

17.                               Law Governing.  This Agreement shall be
governed by, construed, and enforced in accordance with the laws of the State of
Texas (excluding any conflict of laws rule or principle of Texas law that might
refer the governance, construction, or interpretation of this agreement to the
laws of another state).

 

18.                               No Right to Continue Service or Employment. 
Nothing herein shall be construed to confer upon Individual the right to
continue in the employ or to provide services to the Company, whether as an
employee, or interfere with or restrict in any way the right of the Company to
discharge Individual as an employee at any time.

 

19.                               Legal Construction.  In the event that any one
or more of the terms, provisions, or agreements that are contained in this
Agreement shall be held by any arbitrator to be invalid, illegal, or
unenforceable in any respect for any reason, the invalid, illegal, or
unenforceable term, provision, or agreement

 

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shall not affect any other term, provision, or agreement that is contained in
this Agreement and this Agreement shall be construed in all respects as if the
invalid, illegal, or unenforceable term, provision, or agreement had never been
contained herein.

 

20.                               Covenants and Agreements as Independent
Agreements. Each of the covenants and agreements that is set forth in this
Agreement shall be construed as a covenant and agreement independent of any
other provision of this Agreement.  The existence of any claim or cause of
action of Individual against the Company, whether predicated on this Agreement
or otherwise, shall not constitute a defense to the enforcement by the Company
of the covenants and agreements that are set forth in this Agreement.

 

21.                               Entire Agreement.  This Agreement supersedes
any and all other prior understandings and agreements, either oral or in
writing, between the parties with respect to the subject matter hereof and
constitute the sole and only agreements between the parties with respect to the
said subject matter.  All prior negotiations and agreements between the parties
with respect to the subject matter hereof are merged into this Agreement.  Each
party to this Agreement acknowledges that no representations, inducements,
promises, or agreements, orally or otherwise, have been made by any party or by
anyone acting on behalf of any party, which are not embodied in this Agreement
and that any agreement, statement or promise that is not contained in this
Agreement shall not be valid or binding or of any force or effect.

 

22.                               Parties Bound.  The terms, provisions, and
agreements that are contained in this Agreement shall apply to, be binding upon,
and inure to the benefit of the parties and their respective heirs, executors,
administrators, legal representatives, and permitted successors and assigns,
subject to the limitation on assignment expressly set forth herein.

 

23.                               Modification.  No change or modification of
this Agreement shall be valid or binding upon the parties unless the change or
modification is in writing and signed by the parties; provided, however, that
the Company may change or modify this Agreement without Individual’s consent or
signature if the Company determines, in its sole discretion, that such change or
modification is necessary for purposes of compliance with or exemption from the
requirements of Section 409A of the Code or any regulations or other guidance
issued thereunder.

 

24.                               Headings.  The headings that are used in this
Agreement are used for reference and convenience purposes only and do not
constitute substantive matters to be considered in construing the terms and
provisions of this Agreement.

 

25.                               Gender and Number.  Words of any gender used
in this Agreement shall be held and construed to include any other gender, and
words in the singular number shall be held to include the plural, and vice
versa, unless the context requires otherwise.

 

26.                               Notice.  Any notice required or permitted to
be delivered hereunder shall be deemed to be delivered only when actually
received by the Company or by Individual, as the case may be, at the addresses
set forth below, or at such other addresses as they have theretofore specified
by written notice delivered in accordance herewith:

 

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a.                                       Notice to the Company shall be
addressed and delivered as follows:

 

Cano Petroleum Inc.

The Oil & Gas Commerce Building

309 West 7th Street, Suite 190

Fort Worth, Texas 76102

Attn.: Corporate Secretary

 

b.                                      Notice to Individual shall be addressed
and delivered as set forth on the signature page.

 

27.                               Tax Requirements.  The Company (for purposes
of this Section 27, the term “Company” shall be deemed to include any applicable
Subsidiary of the Company), shall have the right to deduct from all amounts
hereunder paid in cash or other form, any Federal, state, or local taxes
required by law to be withheld in connection with this Option or the issuance of
any Common Stock pursuant to this Agreement, but not with respect to the grant
of this Option.  The Company may, in its sole discretion, also require
Individual receiving shares of Common Stock to pay the Company the amount of any
taxes that the Company is required to withhold in connection with Individual’s
income arising with respect to this Agreement.  Such payments shall be required
to be made when requested by Company and may be required to be made prior to the
delivery of any certificate representing such shares of Common Stock.  Such
payment may be made (i) by the delivery of cash to the Company in an amount that
equals or exceeds (to avoid the issuance of fractional shares under (iii) below)
the required tax withholding obligation of the Company; (ii) if the Company, in
its sole discretion, so consents in writing, the actual delivery by the
exercising Individual to the Company of shares of Common Stock that Individual
has not acquired from the Company within six months prior to the date of
exercise, which shares so delivered have an aggregate Fair Market Value that
equals or exceeds (to avoid the issuance of fractional shares under (iii) below)
the required tax withholding payment; (iii) if the Company, in its sole
discretion, so consents in writing, the Company’s withholding of a number of
shares to be delivered upon the exercise of this Option, which shares so
withheld have an aggregate fair market value that equals (but does not exceed)
the required tax withholding payment; or (iv) any combination of (i), (ii), or
(iii).  The Company may, in its sole discretion, withhold any such taxes from
any other cash remuneration otherwise paid by the Company to Individual.

 

[Signature page follows]

 

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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
duly authorized officer, and Individual, to evidence his consent and approval of
all the terms hereof, has duly executed this Agreement, as of the Date of Grant
specified in Section 1 hereof.

 

 

COMPANY:

 

 

 

 

 

CANO PETROLEUM, INC.

 

 

 

 

 

 

 

 

By:

/s/ S. Jeffrey Johnson

 

 

Name: S. Jeffrey Johnson

 

 

Title: Chairman and CEO

 

 

 

 

 

 

 

 

INDIVIDUAL:

 

 

 

 

 

/s/ James K. Teringo, Jr.

 

 

Signature

 

 

 

 

 

Name:

James K. Teringo, Jr.

 

 

Address:

3304 Marquette

 

 

 

University Park, TX 75225

 

 

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APPENDIX A

 

Beneficiary Designation

 

To:                              Corporate Secretary designated in the Cano
Petroleum Inc. Nonqualified Stock Option Agreement by and between Cano Petroleum
Inc. and James K. Teringo, Jr. (the “Agreement”)

 

From:                  James K. Teringo, Jr.

 

Pursuant to Section 5 of the Agreement made as of September 16, 2005, I hereby
designate the following persons(s) as beneficiary(ies) who on my death who may
exercise the exercisable portion of the Option on my behalf pursuant to the
Agreement:

 

Primary Beneficiary Name:  Frances Shivers Teringo

 

Secondary Beneficiary Name:  Stephanie Teringo Smartt

 

In making the above designation, I reserve the right to revoke this beneficiary
designation or change the beneficiary(ies) designated at any time or times and
without the consent of any beneficiary.

 

This beneficiary designation cancels and supersedes any beneficiary designation
I previously made with respect to this Agreement.

 

Signed:

 

 

 

 

 

Individual

 

 

 

 

 

Date

 

 

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