exv10w8



 





Exhibit 10.8




CONVERTIBLE PROMISSORY NOTE




			
	 	 	 
	$10,000,000
	 	June 25, 2007






     FOR VALUE RECEIVED, Approach Oil & Gas Inc., a Delaware corporation (the “Company”), hereby
promises to pay to the order of LUBAR EQUITY FUND, LLC, a Wisconsin limited liability company (the
“Lender”), the principal sum of Ten Million and no/100 Dollars ($10,000,000), together with
interest thereon from the date of this Convertible Promissory Note (this “Note”) on the unpaid
principal balance. Interest shall accrue at a rate of seven percent (7%) per annum based on a
three hundred sixty-five (365) – day year and compounded annually. Principal and accrued interest
shall be due and payable on the third anniversary of the date of this Note; provided, that the
Company shall have the right to prepay the principal in whole or in part from time to time without
premium or penalty provided that the Company gives the Lender at least fifteen (15) days prior
notice of such prepayment. Lender shall have the right to exercise its conversion rights in whole
or in part prior to such prepayment.



     All payments shall be made in lawful money of the United States of America at the principal
office of the Lender, or at such other place as the holder hereof may from time to time designate
in writing to the Company. All payments shall be credited first to the accrued interest then due
and payable and the remainder applied to principal.



     At any time commencing December 31, 2007 or earlier in connection with the Company’s
prepayment hereof or the occurrence of a “Sales Event” as defined below, the Lender shall have the
right, in its sole and absolute discretion, to convert all or any portion of the unpaid principal
of and interest on this Note into shares of the equity securities of the Company or any successor
to the Company of any class or classes issued by the Company or its successor prior to the date of
the Lender’s election. Except as provided below with respect to an automatic conversion upon the
occurrence of an IPO (defined below), the number of shares of such equity securities to be issued
upon such conversion shall be equal to the quotient obtained by dividing (a) by (b), where (a) is
the outstanding principal and accrued interest of this Note (or such portion as will be converted),
and (b) is (i) the lowest price per share that equity securities in any such class have been issued
by the Company, or (ii) if no such shares have been issued, then at One Hundred and no/100 Dollars
($100) per share. The conversion price will be subject to adjustment to provide the Lender with
full antidilution protection in the case of any stock splits, recapitalizations or changes in
capital structure of the Company or the issuance of options, warrants, or other rights to acquire
or convertible into equity securities of the Company excluding only options, warrants, rights or
other equity-based awards issued as part of reasonable compensation plans approved by the Company’s
Board of Directors. Shares issued for consideration other than cash shall be deemed to be issued at
the fair market value of the consideration given for them.



     The first day on which both of the following transactions shall have been consummated shall be
referred to herein as the “IPO Conversion Date”: (a) the initial sale by Approach Resources Inc., a
Delaware corporation, of shares of its common stock, par value $0.01 per share



 









 




(the “Approach Common Stock”), to the public pursuant to a registration statement under the
Securities Act of 1933, as amended (“IPO”), and (b) the exchange of all outstanding shares of
Company Common Stock for shares of Approach Common Stock and the consummation of the other
transactions contemplated by the terms of a contribution agreement by and among Approach, the
Company and certain other parties thereto (the “Contribution Agreement”). Notwithstanding anything
to the contrary contained herein, this Note shall, on the IPO Conversion Date, automatically and
without further action required by any person, convert into shares of Approach Common Stock. The
number of shares of Approach Common Stock to be issued upon such automatic conversion shall be
equal to the quotient obtained by dividing (a) by (b), where (a) is the outstanding principal and
accrued interest of this Note, and (b) is the initial public offering price per share, less any
underwriting discount per share for the shares of Approach Common Stock that are issued in the IPO.
The shares of Approach Common Stock issued to Lender upon any automatic conversion of this Note
shall be entitled to the same registration rights as those provided to holders of shares of Company
Common Stock whose shares are exchanged into shares of Approach Common Stock pursuant to the
Contribution Agreement. Approach shall execute an agreement with the Lender reflecting those rights
on or prior to the IPO Conversion Date.




     The Lender shall be granted no less protective rights with regards to such shares of equity
securities (including preferences and voting rights) acquired pursuant to the conversion of this
Note as are granted to any other holder of such shares of equity securities. If only a portion of
this Note is converted into equity securities, the Company shall return this Note to the Lender
with a notation thereon of the remaining outstanding principal of this Note or, at the request of
the Lender, shall issue and deliver to the Lender a replacement convertible secured promissory note
for the remaining outstanding balance hereof, such Note containing the same material terms as set
forth herein. The issuance of certificates for shares of equity securities upon conversion of this
Note will be made without charge to the Lender for any issuance tax in respect thereof or other
cost incurred by the Company in connection with such conversion and the related issuance of shares
of equity securities. Upon conversion of this Note, the Company will take all such actions as are
necessary in order to ensure that the shares issuable with respect to such conversion will be
validly issued, fully paid and nonassessable.



     The following will be deemed to constitute events of default under the Note:




	 	a)	 	The Company shall fail to make when due any payment of principal or
interest under this Note and such failure shall remain uncured for a period of five
(5) business days.
	 
	 	b)	 	The Company shall fail to perform or observe, in any material respect,
any provision of this Note or any material agreement or contract to which it is a
party or by which it or its assets are bound, and such default shall continue for
more than thirty (30) days after written notice from Lender is received by Borrower
or,




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	 	 	 	notwithstanding the foregoing, the Company fails to give a timely “Default Notice”
as defined below.
	 
	 	c)	 	Any representation or warranty made by the Company herein, or any
statement, written information or certificate furnished by the Company in
connection with the transactions contemplated hereby, proves untrue in any material
respect as of the date of the issuance or making thereof or omits any statement
necessary to make the statements contained therein, in light of the circumstances
under which they were made, not false or misleading.
	 
	 	d)	 	The Company shall default in the payment when due (whether by scheduled
maturity, required prepayment, acceleration, demand or otherwise) of any amount
owing in respect of any indebtedness in the aggregate principal amount of Two
Hundred Fifty Thousand and no/100 Dollars ($250,000) or more, or shall default in
the performance or observance of any obligation or condition with respect to any
such indebtedness or any other event shall occur or condition exist, if the effect
of such default, event or condition is to accelerate the maturity of any such
indebtedness or to permit the holder or holders thereof, or any trustee or agent
for such holders, to accelerate the maturity of any such indebtedness, or any such
indebtedness shall become or be declared to be due and payable prior to its stated
maturity and such default has not been cured within any grace period provided for
in the instrument under which the default arose.
	 
	 	e)	 	(i) The Company shall commence a voluntary case concerning itself under
the United States Bankruptcy Code; (ii) an involuntary case is commenced against
the Company and the petition is not contested within fifteen (15) days, or is not
dismissed or stayed within sixty (60) days, after commencement of the case; (iii) a
custodian (as defined in the United States Bankruptcy Code) is appointed for, or
takes charge of, all or substantially all of the property of the Company or the
Company commences any other proceedings under any reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction whether now or hereafter in effect relating to the
Company or there is commenced against the Company any such proceeding which remains
undismissed and unstayed for a period of sixty (60) days; (iv) any order of relief
or other order approving any such case or proceeding is entered; (v) the Company is
adjudicated insolvent or bankrupt; (vi) the Company suffers any appointment of any
custodian or the like for it or any substantial part of its property to continue
undischarged and unstayed for a period of fifteen (15) days; (vii) the Company
makes a general assignment for the benefit of creditors; (viii) the Company shall
fail to pay, or shall state that it is unable to pay, or shall be unable to pay,
its debts generally as they become due and such failure or inability to pay shall
not have been cured within fifteen (15) days; (ix) the Company shall call a meeting
of its creditors with a view to arranging a




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	 	 	 	composition or adjustment of its debts; (x) the Company shall by any act or failure
to act consent to, approve of or acquiesce in any of the foregoing; (xi) any
corporate action is taken by the Company for the purpose of effecting any of the
foregoing.
	 
	 	f)	 	Any judgment, writ or warrant of attachment or of any similar
post-judgment process in an amount in excess of Two Hundred Fifty Thousand and
no/100 Dollars ($250,000) shall be entered or filed against the Company or against
any of its properties or assets and remain unsatisfied and unstayed for a period
of sixty (60) days; provided, that if any such judgment, writ or warrant is not
satisfied or stayed within such sixty (60) – day period, an event of default shall
not exist if prior to the end of such sixty (60) – day period the Company provides
to Lender a statement from Lender’s insurance carrier that the entire amount of
such judgment, writ or warrant is a covered loss under the insurance policies that
the Company maintains with such carrier and that such carrier does not dispute such
coverage and will provide the Company with such proceeds of insurance required to
satisfy such judgment, writ or warrant;
	 
	 	g)	 	The Company dissolves, liquidates or otherwise ceases to actively
conduct business.
	 
	 	h)	 	The Company shall fail in any material respect to comply with any law,
rule, regulation or order to which it or its assets are subject and such failure to
comply remains uncured for more than thirty (30) days after written notice from
Lender is received by the Company.





     Upon the occurrence of any condition, event or act described above, the Company shall give
written notice thereof (a “Default Notice”) to the Lender within five (5) business days of
receiving knowledge of such condition, event or act.



     Upon the occurrence of any event of default described in section (a)-(d), or (f)-(h) above the
Lender may, at its option upon written notice to the Company, declare the Note to be immediately
due and payable in full. Upon the occurrence of any Event of Default described in section (e) the
Note shall become immediately due and payable without any action on the part of the Lender.



     The Company represents and warrants to the Lender that it has all power and authority to enter
into this Note.



     This Note shall be governed by and construed in accordance with the laws of the State of New
York.



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     The Company hereby agrees, subject only to any limitation imposed by applicable law, to pay
all expenses, including reasonable attorneys’ fees and legal expenses, incurred by the Lender in
endeavoring to collect any amounts payable hereunder that are not paid when due, whether by
declaration or otherwise.



     Notwithstanding anything to the contrary contained in this Note, in no event shall the
interest payable hereon, whether before or after maturity, exceed the maximum interest which, under
applicable law, may be charged on this Note.



     The Company hereby expressly waives presentment, demand for payment, dishonor, notice of
dishonor, protest, notice of protest and any other formality.



     The Company will give the Lender written notice of any contemplated “Sales Event,” at least
ten (10) business days prior to the record date for determining which holders of equity securities
may vote with respect to or participate in such Sales Event. Except as set forth below in this
paragraph, “Sales Event” shall mean the sale or distribution of substantially all of the assets of
the Company or a merger or consolidation of the Company with or into another entity or the sale of
a majority of the Company’s stock by its shareholders. If the Lender does not elect to convert this
Note prior to the occurrence of a Sales Event, it may declare the Note due and payable at any time
up to the next business day after consummation of the Sales Event. Notwithstanding the above,
neither the consummation of the Contribution Agreement nor the IPO shall constitute a Sales Event
for purposes of this Note. Upon the consummation of the Contribution Agreement and the IPO, the
conversion of this Note shall be governed by the terms of the fourth full paragraph herein.



     So long as this Note is outstanding, the Company will deliver quarterly financial statements
to the Lender within forty-five (45) days after the end of each calendar quarter and audited
financial statements within one hundred twenty (120) days after the end of each calendar year and
the Lender may inspect the books and records of the Company upon reasonable notice.



     IN WITNESS WHEREOF, the undersigned, by its duly authorized and acting executive officer, has
executed this Note as of the date first set forth above.



	 	 	 	 	 
	 	APPROACH OIL & GAS INC.

 	 
	 	By:  	/s/ J. Ross Craft
 	 
	 	 	J. Ross Craft, 	 
	 	 	President and Chief Executive Officer 	 
	 




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