Document:

exv10w6

 

Exhibit 10.6

APPROACH RESOURCES INC.

2007 STOCK INCENTIVE PLAN

ARTICLE I. ESTABLISHMENT AND PURPOSE

     1.1 Establishment. Approach Resources Inc. (“Approach”) hereby establishes the Approach
Resources Inc. 2007 Stock Incentive Plan, as set forth in this document, as an amendment and
restatement of the Approach Resources Inc. 2003 Stock Option Plan. Awards granted pursuant to the
Approach Resources Inc. 2003 Stock Option Plan shall continue to be governed by the terms of such
plan as in effect at the time of the award and the terms of the related award agreement.

     1.2 Purpose. The purposes of this Plan are to attract and retain highly qualified individuals
to perform services for the Company, to further align the interests of those individuals with those
of the stockholders of Approach, and to more closely link compensation with Company performance.
Approach is committed to creating long-term stockholder value. Approach’s compensation philosophy
is based on the belief that Approach can best create stockholder value if key employees, officers,
directors and others performing services for Approach and its Affiliates act and are rewarded as
business owners. Approach believes that an equity stake through equity compensation programs
effectively aligns service provider and stockholder interests by motivating and rewarding
performance that will enhance stockholder value.

     1.3 Effectiveness and Term. This Plan shall become effective on June 28, 2007 (the “Effective
Date”), the date of its approval by the holders of at least a majority of the shares of Common
Stock either (a) present or represented and entitled to vote at a special meeting of the
stockholders of Approach duly held in accordance with applicable law or (b) by written action in
lieu of a meeting in accordance with applicable law. Unless terminated earlier by the Board
pursuant to Section 14.1, this Plan shall terminate on the day prior to the tenth anniversary of
the Effective Date.

ARTICLE II. DEFINITIONS

     2.1 “Affiliate” means any corporation, partnership, limited liability company or
partnership, association, trust or other organization which, directly or indirectly, controls, is
controlled by, or is under common control with, Approach. For purposes of the preceding sentence,
“control” (including, with correlative meanings, the terms “controlled by” and “under common
control with”), as used with respect to any entity or organization, shall mean the possession,
directly or indirectly, of the power (a) to vote more than 50% of the securities having ordinary
voting power for the election of directors of the controlled entity or organization, or (b) to
direct or cause the direction of the management and policies of the controlled entity or
organization, whether through the ownership of voting securities or by contract or otherwise.

     2.2 “Approach” means Approach Resources Inc., a Delaware corporation, or any successor
thereto.

 

 

     2.3 “Award” means an award granted to a Participant in the form of Options, SARs, Restricted
Stock, Restricted Stock Units, Performance Awards, Stock Awards or Other Incentive Awards, whether
granted singly or in combination.

     2.4 “Award Agreement” means a written agreement between Approach and a Participant that sets
forth the terms, conditions, restrictions and limitations applicable to an Award.

     2.5 “Board” means the Board of Directors of Approach.

     2.6 “Cash Dividend Right” means a contingent right, granted in tandem with a specific
Restricted Stock Unit Award, to receive an amount in cash equal to the cash distributions made by
Approach with respect to a share of Common Stock during the period such Award is outstanding.

     2.7 “Cause” means any of the following: (a) a Participant’s conviction of, or plea of nolo
contendere to, any felony or to any crime or offense causing substantial harm to Approach or its
Affiliates or involving acts of theft, fraud, embezzlement, moral turpitude or similar conduct; (b)
a Participant’s repeated intoxication by alcohol or drugs during the performance of his duties in a
manner that materially and adversely affects the Participant’s performance of such duties; (c)
malfeasance in the conduct of the Participant’s duties, including, but not limited to (i) willful
and intentional misuse or diversion of funds of Approach or its Affiliates, (ii) embezzlement or
(iii) fraudulent or willful and material misrepresentations or concealments on any written reports
submitted to Approach or its Affiliates; (d) a Participant’s material violation of any provision of
any employment, nonsolicitation, noncompetition or other agreement with Approach or any of its
Affiliates; or (e) a Participant’s material failure to perform the duties of the Participant’s
employment or material failure to follow or comply with the reasonable and lawful written
directives of the Board or senior officers of Approach, in any case under clause (d) or (e) only
after the Participant shall have been informed in writing of such material failure and given a
period of not more than 30 days to remedy same.

     2.8 “Change of Control” means (a) any consolidation or merger of Approach in which Approach is
not the continuing or surviving corporation or pursuant to which shares of Approach’s Common Stock
would be converted into cash, securities or other property, other than a merger of Approach in
which the holders of Approach’s Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately after the merger,
(b) any sale, lease, exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all, of the assets of Approach and its subsidiaries to any
other person or entity (other than an Affiliate of Approach), (c) the stockholders of Approach
approve any plan or proposal for liquidation or dissolution of Approach, (d) any person or entity
(other than Yorktown Energy Partners V, L.P., or any of its affiliated funds), including a “group”
as contemplated by section 13(d)(3) of the Exchange Act acquires or gains ownership or control
(including, without limitation, power to vote) of more than 50% of the outstanding shares of
Approach’s voting stock (based upon voting power) or (e) as a result of or in connection with a
contested election of Directors, the persons who were Directors of Approach before such election
shall cease to constitute a majority of the Board.

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Notwithstanding the foregoing, a Change of Control shall not include the initial public
offering of the Common Stock.

     2.9 “Code” means the Internal Revenue Code of 1986, as amended from time to time, including
regulations thereunder and successor provisions and regulations.

     2.10 “Committee” means the Compensation Committee of the Board or such other committee of the
Board as may be designated by the Board to administer the Plan, which committee shall consist of
two or more members of the Board; provided, however, that with respect to the application of the
Plan to Awards made to Outside Directors, the “Committee” shall be the Board. During such time as
the Common Stock is registered under Section 12 of the Exchange Act, each member of the Committee
shall be an Outside Director. To the extent that no Committee exists that has the authority to
administer the Plan, the functions of the Committee shall be exercised by the Board. If for any
reason the appointed Committee does not meet the requirements of Rule 16b-3 or Section 162(m) of
the Code, such noncompliance with such requirements shall not affect the validity of Awards,
grants, interpretations or other actions of the Committee.

     2.11 “Common Stock” means the common stock of Approach, $0.01 par value per share, or any
stock or other securities hereafter issued or issuable in substitution or exchange for the Common
Stock.

     2.12 “Company” means Approach and any Affiliate.

     2.13 “Disability” means (a) the Participant is unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment that can be expected
to result in death or can be expected to last for a continuous period of not less than 12 months or
(b) the Participant is, by reason of any medically determinable physical or mental impairment that
can be expected to result in death or can be expected to last for a continuous period of not less
than 12 months, receiving income replacement benefits for a period of not less than three months
under an accident or health plan covering employees of Approach or an Affiliate.

     2.14 “Dividend Unit Right” means a contingent right, granted in tandem with a specific
Restricted Stock Unit Award, to have an additional number of Restricted Stock Units credited to a
Participant in respect of the Award equal to the number of shares of Common Stock that could be
purchased at Fair Market Value with the amount of each cash distribution made by Approach with
respect to a share of Common Stock during the period such Award is outstanding.

     2.15 “Effective Date” means the date this Plan becomes effective as provided in Section 1.3.

     2.16 “Employee” means an employee of the Company; provided, however, that the term “Employee”
does not include an Outside Director or an individual performing services for the Company who is
treated for tax purposes as an independent contractor at the time of performance of services.

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

     2.18 “Fair Market Value” means (a) if the Common Stock is listed on any established stock
exchange or a national market system, including without limitation Nasdaq Global Select Market,
Nasdaq Global Market, Nasdaq Capital Market and the New York Stock Exchange, the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or
system for the date of the determination (or if there was no quoted price for such date, then for
the last preceding business day on which there was a quoted price), as reported in The Wall Street
Journal or such other source as the Committee deems reliable, (b) if the Common Stock is regularly
quoted by a recognized securities dealer but selling prices are not reported, the mean between the
high bid and low asked prices for the Common stock for the date of the determination, as reported
in The Wall Street Journal or such other source as the Committee deems reliable or (c) if the
Common Stock is not reported or quoted by any such organization, (i) with respect to Incentive
Stock Options, the fair market value of the Common Stock as determined in good faith by the
Committee within the meaning of Section 422 of the Code or (ii) with respect to other Awards, fair
market value of the Common Stock as determined in good faith by the Committee using a “reasonable
application of a reasonable valuation method” within the meaning of Section 409A of the Code and
the regulations and other guidance thereunder.

     2.19 “Grant Date” means the date an Award is determined to be effective by the Committee upon
the grant of such Award.

     2.20 “Inability to Perform” means and shall be deemed to have occurred if the Participant has
been determined under the Company’s or any co-employer’s long-term disability plan to be eligible
for long-term disability benefits. In the absence of the Participant’s participation in,
application for benefits under, or existence of such a plan, “Inability to Perform” means a finding
by the Committee in its sole judgment that the Participant is, despite any reasonable accommodation
required by law, unable to perform the essential functions of his position because of an illness or
injury for (a) 60% or more of the normal working days during six consecutive calendar months or (b)
40% or more of the normal working days during twelve consecutive calendar months.

     2.21 “Incentive Stock Option” means an Option that is intended to meet the requirements of
Section 422(b) of the Code.

     2.22 “NASDAQ” means The NASDAQ Stock Market, Inc.

     2.23 “Nonqualified Stock Option” means an Option that is not an Incentive Stock Option.

     2.24 “Option” means an option to purchase shares of Common Stock granted to a Participant
pursuant to Article VII. An Option may be either an Incentive Stock Option or a Nonqualified Stock
Option, as determined by the Committee.

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     2.25 “Other Incentive Award” means an incentive award granted to a Participant pursuant to
Article XII.

     2.26 “Outside Director” means a member of the Board who (a) meets the independence
requirements of the principal exchange or quotation system upon which the shares of Common Stock
are listed or quoted, (b) from and after the date on which the remuneration paid (or Awards made)
pursuant to the Plan becomes subject to the deduction limitation under Section 162(m) of the Code,
qualifies as an “outside director” under Section 162(m) of the Code, (c) qualifies as a
“non-employee director” of Approach under Rule 16b-3 and (d) satisfies independence criteria under
any other applicable laws or regulations relating to the issuance of shares of Common Stock to
Employees.

     2.27 “Participant” means an Employee, Outside Director or other individual or entity
performing services for the Company that has been granted an Award; provided, however, that no
Award that may be settled in Common Stock may be issued to a Participant that is not a natural
person.

     2.28 “Performance Award” means an Award granted to a Participant pursuant to Article XI to
receive cash or Common Stock conditioned in whole or in part upon the satisfaction of specified
performance criteria.

     2.29 “Permitted Transferee” shall have the meaning given such term in Section 15.4.

     2.30 “Plan” means the Approach Resources Inc. 2007 Stock Incentive Plan, as in effect from
time to time.

     2.31 “Prior Plan” means the Approach Resources Inc. 2003 Stock Option Plan, as in effect prior
to the Effective Date.

     2.32 “Restricted Period” means the period established by the Committee with respect to an
Award of Restricted Stock or Restricted Stock Units during which the Award remains subject to
forfeiture.

     2.33 “Restricted Stock” means a share of Common Stock granted to a Participant pursuant to
Article IX that is subject to such terms, conditions and restrictions as may be determined by the
Committee.

     2.34 “Restricted Stock Unit” means a fictional share of Common Stock granted to a Participant
pursuant to Article X that is subject to such terms, conditions and restrictions as may be
determined by the Committee.

     2.35 “Rule 16b-3” means Rule 16b-3 promulgated by the SEC under the Exchange Act, or any
successor rule or regulation that may be in effect from time to time.

     2.36 “SEC” means the United States Securities and Exchange Commission, or any successor agency
or organization.

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     2.37 “Securities Act” means the Securities Act of 1933, as amended.

     2.38 “Stock Appreciation Right” or “SAR” means a right granted to a Participant pursuant to
Article VIII with respect to a share of Common Stock to receive upon exercise cash, Common Stock or
a combination of cash and Common Stock, equal to the appreciation in value of a share of Common
Stock.

ARTICLE III. PLAN ADMINISTRATION

     3.1 Plan Administrator and Discretionary Authority. The Plan shall be administered by the
Committee. The Committee shall have total and exclusive responsibility to control, operate, manage
and administer the Plan in accordance with its terms. The Committee shall have all the authority
that may be necessary or helpful to enable it to discharge its responsibilities with respect to the
Plan. Without limiting the generality of the preceding sentence, the Committee shall have the
exclusive right to (a) interpret the Plan and the Award Agreements executed hereunder, (b) decide
all questions concerning eligibility for, and the amount of, Awards granted under the Plan, (c)
construe any ambiguous provision of the Plan or any Award Agreement, (d) prescribe the form of
Award Agreements, (e) correct any defect, supply any omission or reconcile any inconsistency in the
Plan or any Award Agreement, (f) issue administrative guidelines as an aid to administering the
Plan and make changes in such guidelines as the Committee from time to time deems proper, (g) make
regulations for carrying out the Plan and make changes in such regulations as the Committee from
time to time deems proper, (h) determine whether Awards should be granted singly or in combination,
(i) to the extent permitted under the Plan, grant waivers of Plan terms, conditions, restrictions
and limitations, (j) accelerate the exercise, vesting or payment of an Award when such action or
actions would be in the best interests of the Company, (k) require Participants to hold a stated
number or percentage of shares of Common Stock acquired pursuant to an Award for a stated period
and (l) take any and all other actions the Committee deems necessary or advisable for the proper
operation or administration of the Plan. The Committee shall have authority in its sole discretion
with respect to all matters related to the discharge of its responsibilities and the exercise of
its authority under the Plan, including without limitation its construction of the terms of the
Plan and its determination of eligibility for participation in, and the terms of Awards granted
under, the Plan. The decisions of the Committee and its actions with respect to the Plan shall be
final, conclusive and binding on all persons having or claiming to have any right or interest in or
under the Plan, including without limitation Participants and their respective Permitted
Transferees, estates, beneficiaries and legal representatives. In the case of an Award intended to
be eligible for the performance-based compensation exemption under section 162(m) of the Code, the
Committee shall exercise its discretion consistent with qualifying the Award for such exemption.

     3.2 Liability; Indemnification. No member of the Committee, nor any person to whom it has
delegated authority, shall be personally liable for any action, interpretation or determination
made in good faith with respect to the Plan or Awards granted hereunder, and each member of the
Committee (or delegatee of the Committee) shall be fully indemnified and protected by Approach with
respect to any liability he may incur with respect to any such action, interpretation or
determination, to the maximum extent permitted by applicable law.

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ARTICLE IV. SHARES SUBJECT TO THE PLAN

     4.1 Available Shares.

     (a) Subject to adjustment as provided in Sections 4.2, the maximum number of shares of
Common Stock that shall be available for grant of Awards under the Plan shall be (i) ten
percent of the outstanding shares of Common Stock, as adjusted on the first business day
after the closing of the initial public offering of the Common Stock and thereafter on the
first business day of each calendar year, plus (ii) all shares of Common Stock that, as of
the Effective Date, remain available for grant of awards under the Prior Plan, plus (iii)
            shares of Common Stock subject to outstanding awards under the Prior Plan on the Effective
Date, that later cease to be subject to such awards for any reason other than such awards
having been exercised. In addition, subject to adjustment as provided in Section 4.2,
115,385 shares of Common Stock covered by awards granted under the Prior Plan and
outstanding as of the Effective Date, shall be available for issuance under this Plan, but
shall available for grant of Awards under this Plan only as provided in (iii) above. If an
Award granted under this Plan expires, is forfeited or becomes unexercisable for any reason
without having been exercised in full, the undelivered shares of Common Stock which were
subject to the Award shall, unless the Plan shall have been terminated, become available for
future Awards under the Plan.

     (b) The maximum number of shares of Common Stock that may be subject to Incentive Stock
Options granted under the Plan is 1,100,000. The maximum number of shares of Common Stock
that may be subject to all Awards granted under the Plan to any one Participant each fiscal
year is 330,000 shares. The maximum number of shares of Common Stock that may be subject to
Nonqualified Stock Options and SARs granted under the Plan to any one Participant during a
fiscal year is 330,000. The limitations provided in this Section 4.1(b) shall be subject to
adjustment as provided in Section 4.2.

     (c) Shares of Common Stock issued pursuant to the Plan may be original issue or
treasury shares or a combination of the foregoing, as the Committee, in its sole discretion,
shall from time to time determine. During the term of this Plan, Approach will at all times
reserve and keep available such number of shares of Common Stock as shall be sufficient to
satisfy the requirements of the Plan.

     (d) Notwithstanding any provision of this Plan to the contrary, the Board or the
Committee shall have the right to substitute or assume awards in connection with mergers,
reorganizations, separations or other transactions to which Section 424(a) of the Code
applies, provided such substitutions or assumptions are permitted by Section 424 of the Code
(or, if applicable, Section 409A of the Code) and the regulations promulgated thereunder.

     4.2 Adjustments for Recapitalizations and Reorganizations. Subject to Article XIII, if there
is any change in the number or kind of shares of Common Stock outstanding (a) by reason of a stock
dividend, spin-off, recapitalization, stock split or combination or exchange of shares, (b) by
reason of a merger, reorganization or consolidation, (c) by reason of a reclassification or change
in par value or (d) by reason of any other extraordinary or unusual

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event affecting the outstanding Common Stock as a class without Approach’s receipt of
consideration, or if the value of outstanding shares of Common Stock is reduced as a result of a
spin-off or Approach’s payment of an extraordinary cash dividend, or distribution or dividend or
distribution consisting of any assets of Approach other than cash, the maximum number and kind of
shares of Common Stock available for issuance under the Plan, the maximum number and kind of shares
of Common Stock for which any individual may receive Awards in any fiscal year or under the Plan,
the number and kind of shares of Common Stock covered by outstanding Awards, and the price per
share or the applicable market value or performance target of such Awards will be appropriately
adjusted by the Committee to reflect any increase or decrease in the number of, or change in the
kind or value of, issued shares of Common Stock to preclude, to the extent practicable, the
enlargement or dilution of rights under such Awards; provided, however, that any fractional shares
resulting from such adjustment shall be eliminated; provided, further, that the number and kind of
shares of Common Stock available for issuance as Incentive Stock Options under the Plan shall be
adjusted only in accordance with Sections 422 and 424 of the Code and the regulations thereunder.

     4.3 Adjustments for Awards. The Committee shall have sole discretion to determine the manner
in which shares of Common Stock available for grant of Awards under the Plan are counted. Without
limiting the discretion of the Committee under this Section 4.3, unless otherwise determined by the
Committee, the following rules shall apply for the purpose of determining the number of shares of
Common Stock available for grant of Awards under the Plan:

     (a) Options, Restricted Stock and Stock Awards. The grant of Options, Restricted Stock
or Stock Awards shall reduce the number of shares of Common Stock available for grant of
Awards under the Plan by the number of shares of Common Stock subject to such an Award.

     (b) SARs. The grant of SARs that may be paid or settled (i) only in Common Stock or
(ii) in either cash or Common Stock shall reduce the number of shares available for grant of
Awards under the Plan by the number of shares subject to such an Award; provided, however,
that upon the exercise of SARs, the excess of the number of shares of Common Stock with
respect to which the Award is exercised over the number of shares of Common Stock issued
upon exercise of the Award shall again be available for grant of Awards under the Plan. The
grant of SARs that may be paid or settled only for cash shall not affect the number of
 shares available for grant of Awards under the Plan.

     (c) Restricted Stock Units. The grant of Restricted Stock Units (including those
credited to a Participant in respect of a Dividend Unit Right) that may be paid or settled
(i) only in Common Stock or (ii) in either cash or Common Stock shall reduce the number of
 shares available for grant of Awards under the Plan by the number of shares subject to such
an Award; provided, however, that upon settlement of the Award, the excess, if any, of the
number of shares of Common Stock that had been subject to such Award over the number of
shares of Common Stock issued upon its settlement shall again be available for grant of
Awards under the Plan. The grant of Restricted Stock Units that may be paid or settled only
for cash shall not affect the number of shares available for grant of Awards under the Plan.

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     (d) Performance Awards and Other Incentive Awards. The grant of a Performance Award or
Other Incentive Award in the form of Common Stock or that may be paid or settled (i) only in
Common Stock or (ii) in either Common Stock or cash shall reduce the number of shares
available for grant of Awards under the Plan by the number of shares subject to such an
Award; provided, however, that upon settlement of the Award, the excess, if any, of the
number of shares of Common Stock that had been subject to such Award over the number of
shares of Common Stock issued upon its settlement shall again be available for grant of
Awards under the Plan. The grant of a Performance Award or Other Incentive Award that may
be paid or settled only for cash shall not affect the number of shares available for grant
of Awards under the Plan.

     (e) Cancellation, Forfeiture and Termination. If any Award referred to in Sections
4.3(a), (b), (c) or (d) (other than an Award that may be paid or settled only for cash) is
canceled or forfeited, or terminates, expires or lapses, for any reason, the shares then
subject to such Award shall again be available for grant of Awards under the Plan.

     (f) Payment of Exercise Price and Withholding Taxes. If shares of Common Stock are
used to pay the exercise price of an Award, the number of shares available for grant of
Awards under the Plan shall be increased by the number of shares delivered as payment of
such exercise price. If shares of Common Stock are used to pay withholding taxes payable
upon exercise, vesting or payment of an Award, or shares of Common Stock that would be
acquired upon exercise, vesting or payment of an Award are withheld to pay withholding taxes
payable upon exercise, vesting or payment of such Award, the number of shares available for
grant of Awards under the Plan shall be increased by the number of shares delivered or
withheld as payment of such withholding taxes.

ARTICLE V. ELIGIBILITY

     The Committee shall select Participants from those Employees, Outside Directors and other
individuals or entities providing services to the Company that, in the opinion of the Committee,
are in a position to make a significant contribution to the success of the Company. Once a
Participant has been selected for an Award by the Committee, the Committee shall determine the type
and size of Award to be granted to the Participant and shall establish in the related Award
Agreement the terms, conditions, restrictions and limitations applicable to the Award, in addition
to those set forth in the Plan and the administrative guidelines and regulations, if any,
established by the Committee.

ARTICLE VI. FORM OF AWARDS

     6.1 Form of Awards. Awards may be granted under the Plan, in the Committee’s sole discretion,
in the form of Options pursuant to Article VII, SARs pursuant to Article VIII, Restricted Stock
pursuant to Article IX, Restricted Stock Units pursuant to Article X, Performance Awards pursuant
to Article XI and Stock Awards and Other Incentive Awards pursuant to Article XII, or a combination
thereof. All Awards shall be subject to the terms, conditions, restrictions and limitations of the
Plan. The Committee may, in its sole discretion,

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subject any Award to such other terms, conditions, restrictions and/or limitations (including
without limitation the time and conditions of exercise, vesting or payment of an Award and
restrictions on transferability of any shares of Common Stock issued or delivered pursuant to an
Award), provided they are not inconsistent with the terms of the Plan. The Committee may, but is
not required to, subject an Award to such conditions as it determines are necessary or appropriate
to ensure than an Award constitutes “qualified performance based compensation” within the meaning
of Section 162(m) of the Code and the regulations thereunder. Awards under a particular Article of
the Plan need not be uniform, and Awards under more than one Article of the Plan may be combined in
a single Award Agreement. Any combination of Awards may be granted at one time and on more than
one occasion to the same Participant. Subject to compliance with applicable tax law, an Award
Agreement may provide that a Participant may elect to defer receipt of income attributable to the
exercise or vesting of an Award.

     6.2 No Repricing or Reload Rights. Except for adjustments made pursuant to Section 4.2, no
Award may be repriced, replaced, regranted through cancellation or otherwise modified without
stockholder approval, if the effect would be to reduce the exercise price for the shares underlying
such Award. The Committee may not cancel an outstanding Option that is under water for the purpose
of granting a replacement Award of a different type.

     6.3 Loans. The Committee may, in its sole discretion, approve the extension of a loan by the
Company to a Participant who is an Employee to assist the Participant in paying the exercise price
or purchase price of an Award; provided, however, that no loan shall be permitted if the extension
of such loan would violate any provision of applicable law. Any loan will be made upon such terms
and conditions as the Committee shall determine.

ARTICLE VII. OPTIONS

     7.1 General. Awards may be granted in the form of Options that may be Incentive Stock Options
or Nonqualified Stock Options, or a combination of both; provided, however, that Incentive Stock
Options may be granted only to employees of Approach or a “parent corporation” or a “subsidiary
corporation” of Approach, as those terms are defined in Sections 424(e) and (f) of the Code,
respectively. Nonqualified Stock Options may be granted only to Employees, Outside Directors or
other individuals or entities performing services for a corporation or other type of entity in a
chain of corporations or other entities, starting with Approach, in which each corporation or other
entity has a “controlling interest” in another corporation or entity in the chain, but not
corporations or other entities in the chain below the corporation or other entity for which the
Employees, Outside Directors or other individuals or entities are providing services on the date of
grant of the Nonqualified Stock Options. For purposes of this Section, “controlling interest”
means (i) in the case of a corporation, ownership of stock possessing at least 50% of total
combined voting power of all classes of stock entitled to vote of such corporation or at least 50%
of the total value of shares of all classes of stock of such corporation; (ii) in the case of a
partnership, ownership of at least 50% of the profits interest or capital interest of such
partnership; (iii) in the case of a sole proprietorship, ownership of the sole proprietorship; or
(iv) in the case of a trust or estate, ownership of an actuarial interest (as defined in Treasury
Regulation Section 1.414(c)-2(b)(2)(ii)) of at least 50% of such trust or estate.

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     7.2 Terms and Conditions of Options. An Option shall be exercisable in whole or in such
installments and at such times as may be determined by the Committee. The price at which a share
of Common Stock may be purchased upon exercise of an Option shall be determined by the Committee,
but such exercise price shall not be less than 100% of the Fair Market Value per share of Common
Stock on the Grant Date unless the Option is granted through the assumption of, or in substitution
for, outstanding awards previously granted to individuals who became Employees (or other service
providers) as a result of a merger, consolidation, acquisition or other corporate transaction
involving the Company and complies with Section 409A of the Code. Except as otherwise provided
in Section 7.3, the term of each Option shall be as specified by the Committee; provided, however,
that no Options shall be exercisable later than 10 years after the Grant Date. Options may be
granted with respect to Restricted Stock or shares of Common Stock that are not Restricted Stock,
as determined by the Committee in its sole discretion.

     7.3 Restrictions Relating to Incentive Stock Options.

     (a) Options granted in the form of Incentive Stock Options shall, in addition to being
subject to the terms and conditions of Section 7.2, comply with Section 422(b) of the Code.
To the extent the aggregate Fair Market Value (determined as of the dates the respective
Incentive Stock Options are granted) of Common Stock with respect to which Incentive Stock
Options are exercisable for the first time by an individual during any calendar year under
all incentive stock option plans of Approach and its parent and subsidiary corporations
exceeds $100,000, such excess Incentive Stock Options shall be treated as options that do
not constitute Incentive Stock Options. The Committee shall determine, in accordance with
the applicable provisions of the Code, which of a Participant’s Incentive Stock Options will
not constitute Incentive Stock Options because of such limitation and shall notify the
Participant of such determination as soon as practicable after such determination. The
price at which a share of Common Stock may be purchased upon exercise of an Incentive Stock
Option shall be determined by the Committee, but such exercise price shall not be less than
100% of the Fair Market Value of a share of Common Stock on the Grant Date. No Incentive
Stock Option shall be granted to an Employee under the Plan if, at the time such Option is
granted, such Employee owns stock possessing more than 10% of the total combined voting
power of all classes of stock of Approach or of its parent or subsidiary corporations,
within the meaning of Section 422(b)(6) of the Code, unless (i) on the Grant Date of such
Option, the exercise price of such Option is at least 110% of the Fair Market Value of the
Common Stock subject to the Option and (ii) such Option by its terms is not exercisable
after the expiration of five years from the Grant Date of the Option.

     (b) Each Participant awarded an Incentive Stock Option shall notify Approach in writing
immediately after the date he or she makes a disqualifying disposition of any shares of
Common Stock acquired pursuant to the exercise of such Incentive Stock Option. A
disqualifying disposition is any disposition (including any sale) of such Common Stock
before the later of (i) two years after the Grant Date of the Incentive Stock Option or (ii)
one year after the date of exercise of the Incentive Stock Option.

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     7.4 Exercise of Options.

     (a) Subject to the terms and conditions of the Plan, Options shall be exercised by the
delivery of a written notice of exercise to Approach, setting forth the number of whole
shares of Common Stock with respect to which the Option is to be exercised, accompanied by
full payment for such shares.

     (b) Upon exercise of an Option, the exercise price of the Option shall be payable to
Approach in full either (i) in cash or an equivalent acceptable to the Committee, (ii) in
the sole discretion of the Committee and in accordance with any applicable administrative
guidelines established by the Committee, (A) by tendering one or more previously acquired
nonforfeitable, unrestricted shares of Common Stock having an aggregate Fair Market Value at
the time of exercise equal to the total exercise price or (B) by surrendering a sufficient
portion of the shares with respect to which the Option is exercised having an aggregate Fair
Market Value at the time of exercise equal to the total exercise price or (iii) in a
combination of the forms specified in (i) or (ii) of this subsection; provided, however,
that payment of the exercise price by means of tendering or surrendering shares of Common
Stock shall not be permitted when the same may, in the reasonable opinion of the Committee,
cause Approach to record a loss or expense as a result thereof.

     (c) During such time as the Common Stock is registered under Section 12 of the Exchange
Act, to the extent permissible under applicable law, payment of the exercise price of an
Option may also be made, in the absolute discretion of the Committee, by delivery to
Approach or its designated agent of an executed irrevocable option exercise form together
with irrevocable instructions to a broker-dealer to sell or margin a sufficient portion of
the shares with respect to which the Option is exercised and deliver the sale or margin loan
proceeds directly to Approach to pay the exercise price and any required withholding taxes.

     (d) As soon as reasonably practicable after receipt of written notification of exercise
of an Option and full payment of the exercise price and any required withholding taxes,
Approach shall (i) deliver to the Participant, in the Participant’s name or the name of the
Participant’s designee, a stock certificate or certificates in an appropriate aggregate
amount based upon the number of shares of Common Stock purchased under the Option or (ii)
cause to be issued in the Participant’s name or the name of the Participant’s designee, in
book-entry form, an appropriate number of shares of Common Stock based upon the number of
 shares purchased under the Option.

     7.5 Termination of Employment or Service. Each Award Agreement embodying the Award of an
Option shall set forth the extent to which the Participant shall have the right to exercise the
Option following termination of the Participant’s employment or service with the Company. Such
provisions shall be determined by the Committee in its absolute discretion, need not be uniform
among all Options granted under the Plan and may reflect distinctions based on the reasons for
termination of employment or service. In the event a Participant’s Award Agreement embodying the
award of an Option does not set forth such termination provisions, the following termination
provisions shall apply with respect to such Award:

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     (a) Termination For Cause. If the employment or service of a Participant shall
terminate for Cause, each outstanding Option held by the Participant shall automatically
terminate as of the date of such termination of employment or service, and the right to
exercise the Option shall immediately terminate.

     (c) Termination By Reason of Death or Disability. In the event of a Participant’s
death or Disability while employed by or in the service of Approach or an Affiliate, each
outstanding Option shall remain outstanding and may be exercised by the person who acquires
the Option by will or the laws of descent and distribution, or by the Participant, as the
case may be, but only (i) within the one year period following the date of death or
Disability (if otherwise prior to the date of expiration of the Option), and not thereafter,
and (ii) to purchase the number of shares of Common Stock that were subject to purchase upon
exercise of the Option at the time of such death or Disability, plus the number of shares of
Common Stock that would have become purchasable upon the next vesting date.

     (c) Termination For Reasons Other Than Cause, Death or Disability. If a Participant’s
employment or service with Approach and its Affiliates is terminated voluntarily by the
Participant or by action of Approach or an Affiliate for reasons other than for Cause, an
Option may be exercised, but only (i) within three months after such termination (if
otherwise prior to the date of expiration of the Option), and not thereafter, and (ii) to
purchase the number of shares of Common Stock, if any, that could be purchased upon exercise
of the Option at the date of termination of the Participant’s employment or service.

Notwithstanding the foregoing, an Option will not be treated as an Incentive Stock Option unless at
all times beginning on the Grant Date and ending on the day three months (one year in the case of a
Participant who is “disabled” within the meaning of Section 22(e)(3) of the Code) before the date
of exercise of the Option, the Participant is an employee of Approach or a “parent corporation” or
a “subsidiary corporation” of Approach, as those terms are defined in Sections 424(e) and (f) of
the Code, respectively (or a corporation or a parent or subsidiary corporation of such corporation
issuing or assuming an option in a transaction to which Section 424(a) of the Code applies).

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ARTICLE VIII. STOCK APPRECIATION RIGHTS

     8.1 General.

     (a) The Committee may grant Awards in the form of SARs in such numbers and at such
times as it shall determine. SARs shall vest and be exercisable in whole or in such
installments and at such times as may be determined by the Committee. The price at which
SARs may be exercised shall be determined by the Committee but shall not be less than 100%
of the Fair Market Value per share of Common Stock on the Grant Date unless the SARs are
granted through the assumption of, or in substitution for, outstanding awards previously
granted to individuals who became Employees (or other service providers) as a result of a
merger, consolidation, acquisition or other corporate transaction involving the Company and
comply with Section 409A of the Code. The term of each SAR shall be as specified by the
Committee; provided, however, that no SARs shall be exercisable later than 10 years after
the Grant Date. At the time of an Award of SARs, the Committee may, in its sole discretion,
prescribe additional terms, conditions, restrictions and limitations applicable to the SARs,
including without limitation rules pertaining to the termination of employment or service
(by reason of death, permanent and total disability, or otherwise) of a Participant prior to
exercise of the SARs, as it determines are necessary or appropriate, provided they are not
inconsistent with the Plan.

     (b) SARs may be granted only to an Employee, Outside Director or other individual or
entity performing services for a corporation or other type of entity in a chain of
corporations or other entities, starting with Approach, in which each corporation or other
entity has a “controlling interest” in another corporation or entity in the chain, but not
corporations or other entities in the chain below the corporation or other entity for which
the Employee, Outside Director or other individual or entity is providing services on the
date of grant of the SARs. For purposes of this subsection, “controlling interest” means
(i) in the case of a corporation, ownership of stock possessing at least 50% of total
combined voting power of all classes of stock entitled to vote of such corporation or at
least 50% of the total value of shares of all classes of stock of such corporation; (ii) in
the case of a partnership, ownership of at least 50% of the profits interest or capital
interest of such partnership; (iii) in the case of a sole proprietorship, ownership of the
sole proprietorship; or (iv) in the case of a trust or estate, ownership of an actuarial
interest (as defined in Treasury Regulation Section 1.414(c)-2(b)(2)(ii)) of at least 50% of
such trust or estate.

     8.2 Exercise of SARs. SARs shall be exercised by the delivery of a written notice of exercise
to Approach, setting forth the number of whole shares of Common Stock with respect to which the
Award is being exercised. Upon the exercise of SARs, the Participant shall be entitled to receive
an amount equal to the excess of the aggregate Fair Market Value of the shares of Common Stock with
respect to which the Award is exercised (determined as of the date of such exercise) over the
aggregate exercise price of such shares. Such amount shall be payable to the Participant in cash
or in shares of Common Stock, as provided in the Award Agreement.

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ARTICLE IX. RESTRICTED STOCK

     9.1 General. Awards may be granted in the form of Restricted Stock in such numbers and at
such times as the Committee shall determine. The Committee shall impose such terms, conditions and
restrictions on Restricted Stock as it may deem advisable, including without limitation providing
for vesting upon the achievement of specified performance goals pursuant to a Performance Award and
restrictions under applicable Federal or state securities laws. A Participant shall not be
required to make any payment for Restricted Stock unless required by the Committee pursuant to
Section 9.2.

     9.2 Purchased Restricted Stock. The Committee may in its sole discretion require a
Participant to pay a stipulated purchase price for each share of Restricted Stock.

     9.3 Restricted Period. At the time an Award of Restricted Stock is granted, the Committee
shall establish a Restricted Period applicable to such Restricted Stock. Each Award of Restricted
Stock may have a different Restricted Period in the sole discretion of the Committee.

     9.4 Other Terms and Conditions. Restricted Stock shall constitute issued and outstanding
shares of Common Stock for all corporate purposes. Restricted Stock awarded to a Participant under
the Plan shall be registered in the name of the Participant or, at the option of Approach, in the
name of a nominee of Approach, and shall be issued in book-entry form or represented by a stock
certificate. Subject to the terms and conditions of the Award Agreement, a Participant to whom
Restricted Stock has been awarded shall have the right to receive dividends thereon during the
Restricted Period, to vote the Restricted Stock and to enjoy all other stockholder rights with
respect thereto, except that (a) Approach shall retain custody of any certificates evidencing the
Restricted Stock during the Restricted Period and (b) the Participant may not sell, transfer,
pledge, exchange, hypothecate or otherwise dispose of the Restricted Stock during the Restricted
Period. A breach of the terms and conditions established by the Committee pursuant to the Award of
the Restricted Stock may result in a forfeiture of the Restricted Stock. At the time of an Award
of Restricted Stock, the Committee may, in its sole discretion, prescribe additional terms,
conditions, restrictions and limitations applicable to the Restricted Stock, including without
limitation rules pertaining to the termination of employment or service (by reason of death,
permanent and total disability, retirement, cause or otherwise) of a Participant prior to
expiration of the Restricted Period.

     9.5 Miscellaneous. Nothing in this Article shall prohibit the exchange of shares of
Restricted Stock pursuant to a plan of merger or reorganization for stock or other securities of
Approach or another corporation that is a party to the reorganization, provided that the stock or
securities so received in exchange for shares of Restricted Stock shall, except as provided in
Article XIII, become subject to the restrictions applicable to such Restricted Stock. Any shares
of Common Stock received as a result of a stock split or stock dividend with respect to shares of
Restricted Stock shall also become subject to the restrictions applicable to such Restricted Stock.

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ARTICLE X. RESTRICTED STOCK UNITS

     10.1 General. Awards may be granted in the form of Restricted Stock Units in such numbers and
at such times as the Committee shall determine. The Committee shall impose such terms, conditions
and restrictions on Restricted Stock Units as it may deem advisable, including without limitation
prescribing the period over which and the conditions upon which a Restricted Stock Unit may become
vested or be forfeited, and providing for vesting upon the achievement of specified performance
goals pursuant to a Performance Award. Upon the lapse of restrictions with respect to each
Restricted Stock Unit, the Participant shall be entitled to receive one share of Common Stock or an
amount of cash equal to the Fair Market Value of one share of Common Stock, as provided in the
Award Agreement. A Participant shall not be required to make any payment for Restricted Stock
Units.

     10.2 Restricted Period. At the time an Award of Restricted Stock Units is granted, the
Committee shall establish a Restricted Period applicable to such Restricted Stock Units. Each
Award of Restricted Stock Units may have a different Restricted Period in the sole discretion of
the Committee.

     10.3 Cash Dividend Rights and Dividend Unit Rights. To the extent provided by the Committee
in its sole discretion, a grant of Restricted Stock Units may include a tandem Cash Dividend Right
or Dividend Unit Right grant. A grant of Cash Dividend Rights may provide that such Cash Dividend
Rights shall be paid directly to the Participant at the time of payment of related dividend, be
credited to a bookkeeping account subject to the same vesting and payment provisions as the tandem
Award (with or without interest in the sole discretion of the Committee), or be subject to such
other provisions or restrictions as determined by the Committee in its sole discretion. A grant of
Dividend Unit Rights may provide that such Dividend Unit Rights shall be subject to the same
vesting and payment provisions as the tandem Award or be subject to such other provisions and
restrictions as determined by the Committee in its sole discretion.

     10.4 Other Terms and Conditions. At the time of an Award of Restricted Stock Units, the
Committee may, in its sole discretion, prescribe additional terms, conditions, restrictions and
limitations applicable to the Restricted Stock Units, including without limitation rules pertaining
to the termination of employment or service (by reason of death, Disability, retirement, Cause or
otherwise) of a Participant prior to expiration of the Restricted Period.

ARTICLE XI. PERFORMANCE AWARDS

     11.1 General. Awards may be granted in the form of Performance Awards that may be payable in
the form of cash, shares of Common Stock or a combination of both, in such amounts and at such
times as the Committee shall determine. Performance Awards shall be conditioned upon the level of
achievement of one or more stated performance goals over a specified performance period that shall
not be shorter than one year. Performance Awards may be combined with other Awards to impose
performance criteria as part of the terms of such other Awards.

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     11.2 Terms and Conditions. Each Award Agreement embodying a Performance Award shall set forth
(a) the amount, including a target and maximum amount if applicable, a Participant may earn in the
form of cash or shares of Common Stock or a formula for determining such amount, (b) the
performance criteria and level of achievement versus such criteria that shall determine the amount
payable or number of shares of Common Stock to be granted, issued, retained and/or vested, (c) the
performance period over which performance is to be measured, (d) the timing of any payments to be
made, (e) restrictions on the transferability of the Award and (f) such other terms and conditions
as the Committee may determine that are not inconsistent with the Plan.

     11.3 Code Section 162(m) Requirements. From and after the date on which remuneration paid (or
Awards granted) pursuant to the Plan becomes subject to the deduction limitation of Section 162(m)
of the Code, the Committee shall determine in its sole discretion whether all or any portion of a
Performance Award shall be intended to satisfy the requirements for “performance-based
compensation” under Section 162(m) of the Code (the “162(m) Requirements”). The performance
criteria for any Performance Award that is intended to satisfy the 162(m) Requirements shall be
established in writing by the Committee based on one or more performance goals as set forth in
Section 11.4 not later than 90 days after commencement of the performance period with respect to
such Award, provided that the outcome of the performance in respect of the goals remains
substantially uncertain as of such time. The maximum amount that may be paid in cash pursuant to
Performance Awards granted to a Participant with respect to a Approach’s fiscal year that are
intended to satisfy the 162(m) Requirements is $5,000,000; provided, however, that such maximum
amount with respect to a Performance Award that provides for a performance period longer than one
fiscal year shall be the foregoing limit multiplied by the number of full fiscal years in the
performance period. At the time of the grant of a Performance Award and to the extent permitted
under Code Section 162(m) and regulations thereunder for a Performance Award intended to satisfy
the 162(m) Requirements, the Committee may provide for the manner in which the performance goals
will be measured in light of specified corporate transactions, extraordinary events, accounting
changes and other similar occurrences.

     11.4 Performance Goals. The performance measure(s) to be used for purposes of Performance
Awards may be described in terms of objectives that are related to the individual Participant or
objectives that are Company-wide or related to a subsidiary, division, department, region, function
or business unit of the Company in which the Participant is employed or with respect to which the
Participant performs services, and may consist of one or more or any combination of the following
criteria: (a) earnings or earnings per share (whether on a pre-tax, after-tax, operational or
other basis), (b) return on equity, (c) return on assets or net assets, (d) return on capital or
invested capital and other related financial measures, (e) cash flow or EBITDA or EBITDAX, (f)
revenues, (g) income or operating income, (h) expenses or costs or expense levels or cost levels
(absolute or per unit), (i) one or more operating ratios, (j) stock price, (k) total stockholder
return, (l) operating profit, (m) profit margin, (n) capital expenditures, (o) net borrowing, debt
leverage levels, credit quality or debt ratings, (p) the accomplishment of mergers, acquisitions,
dispositions, public offerings or similar extraordinary business transactions, (q) net asset value
per share, (r) economic value added, (s) individual business objectives, (t) growth in production,
(u) growth in reserves, (v) reserve replacement ratio and/or

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(w) finding and development cost per unit. The performance goals based on these performance
measures may be made relative to the performance of other business entities.

     11.5 Certification and Negative Discretion. Prior to the payment of any compensation pursuant
to a Performance Award that is intended to satisfy the 162(m) Requirements, the Committee shall
certify the extent to which the performance goals and other material terms of the Award have been
achieved or satisfied. The Committee in its sole discretion shall have the authority to reduce,
but not to increase, the amount payable and the number of shares to be granted, issued, retained or
vested pursuant to a Performance Award.

ARTICLE XII. STOCK AWARDS AND OTHER INCENTIVE AWARDS

     12.1 Stock Awards. Stock Awards may be granted to Participants upon such terms and conditions
as the Committee may determine. Shares of Common Stock issued pursuant to Stock Awards may be
issued for cash consideration or for no cash consideration. The Committee shall determine the
number of shares of Common Stock to be issued pursuant to a Stock Award.

     12.2 Other Incentive Awards. Other Incentive Awards may be granted in such amounts, upon such
terms and at such times as the Committee shall determine. Other Incentive Awards may be granted
based upon, payable in or otherwise related to, in whole or in part, shares of Common Stock if the
Committee, in its sole discretion, determines that such Other Incentive Awards are consistent with
the purposes of the Plan. Each grant of an Other Incentive Award shall be evidenced by an Award
Agreement that shall specify the amount of the Other Incentive Award and the terms, conditions,
restrictions and limitations applicable to such Award. Payment of Other Incentive Awards shall be
made at such times and in such form, which may be cash, shares of Common Stock or other property
(or a combination thereof), as established by the Committee, subject to the terms of the Plan.

ARTICLE XIII. CHANGE OF CONTROL

     13.1 Vesting of Awards. Except as provided otherwise in an Award Agreement at the time an
Award is granted, notwithstanding any provision of this Plan to the contrary, in the event of a
Change of Control, any time periods, conditions or contingencies relating to the exercise or
realization of, or lapse of restrictions under, an Award granted hereunder shall be accelerated or
waived (assuming with respect to any Performance Awards, all performance criteria and other
conditions are achieved or fulfilled to the maximum extent possible) so that:

     (a) if no exercise of the Award is required, the Award may be realized in full at the
time of the occurrence of the Change of Control (the “Change Effective Time”) or

     (b) if exercise of the Award is required, the Award may be exercised in full at the
Change Effective Time;

provided, however, that with respect to any Award that consists of deferred compensation within the
meaning of Section 409A of the Code, in the event of a Change of Control that does not satisfy the
requirements for a change in the ownership or effective control of Approach or a

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change in the ownership of a substantial portion of the assets of Approach within the meaning of
Section 409A of the Code and Treasury guidance and regulations thereunder, then delivery of payment
with respect to such Award as provided herein shall be made upon the earliest of (i) the
Participant’s “separation from service” (within the meaning of Code Section 409A and the
regulations thereunder), (ii) the Participant’s becoming disabled (within the meaning of Code
Section 409A(a)(2)(C)), (iii) the Participant’s death or (iv) a Change of Control that does satisfy
the requirements for a change in the ownership or effective control of Approach or a change in the
ownership of a substantial portion of the assets of Approach within the meaning of Section 409A of
the Code and Treasury guidance and regulations thereunder; provided, however, that delivery of
payment upon separation from service to a Participant who is a “specified employee” (as defined in
Code Section 409A and the regulations thereunder) as of the date of his or her separation from
service shall be delayed for a period of six months after the Participant’s separation from service
(or, if earlier than the end of the six-month period, the date of death of the Participant).

     13.2 Assumption of Awards. Upon a Change of Control where Approach is not the surviving
corporation (or survives only as a subsidiary of another corporation), unless the Committee
determines otherwise, all outstanding Options that are not exercised before the Change of Control
will be assumed by or replaced with comparable options or rights in the surviving corporation (or a
parent of the surviving corporation) in accordance with Section 424(a) of the Code and the
regulations thereunder, and other outstanding Awards will be converted into similar awards of the
surviving corporation (or a parent of the surviving corporation).

     13.3 Cancellation of Awards. Notwithstanding the foregoing, in the event of a Change of
Control of Approach, then the Committee, in its discretion, may, no later than the effective time
of such Change of Control, require any Participant holding an Award to surrender such Award in
exchange for (a) with respect to each share of Common Stock subject to an Option or SAR (whether or
not vested), payment by the Company (or a successor), in cash, of an amount equivalent to the
excess of the value of the consideration received for each share of Common Stock by holders of
Common Stock in connection with such Change of Control (the “Change of Control Consideration”) over
the exercise price or grant price per share, (b) with respect to each share of Common Stock subject
to an Award of Restricted Stock Units or Other Incentive Awards, and related Cash Dividend Rights
and Dividend Unit Rights (if applicable), payment by the Company (or a successor), in cash, of an
amount equivalent to the value of any such Cash Dividend Rights and Dividend Unit Rights plus the
value of the Change of Control Consideration for each share covered by the Award, assuming all
restrictions or limitations (including risks of forfeiture) have lapsed and (c) with respect to a
Performance Award, payment by the Company (or a successor), in cash, of an amount equivalent to the
value of such Award, as determined by the Committee, taking into account, to the extent applicable,
the Change of Control Consideration, and assuming all performance criteria and other conditions to
payment of such Awards are achieved or fulfilled to the maximum extent possible. Payments made
upon a Change of Control pursuant to this Section shall be made no later than the date on which the
Change of Control occurs. Notwithstanding the foregoing, with respect to any Award that consists
of deferred compensation within the meaning of Section 409A of the Code, in the event of a Change
of Control that does not satisfy the requirements for a change in the ownership or effective
control of Approach or a change in the ownership of a substantial portion of the assets

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of Approach within the meaning of Section 409A of the Code and Treasury guidance and regulations
thereunder, then delivery of payment with respect to such Award as provided herein shall be made
upon the earliest of (i) the Participant’s “separation from service” (within the meaning of Code
Section 409A and the regulations thereunder), (ii) the Participant’s becoming disabled (within the
meaning of Code Section 409A(a)(2)(C)), (iii) the Participant’s death or (iv) a Change of Control
that does satisfy the requirements for a change in the ownership or effective control of Approach
or a change in the ownership of a substantial portion of the assets of Approach within the meaning
of Section 409A of the Code and Treasury guidance and regulations thereunder; provided, however,
that delivery of payment upon separation from service to a Participant who is a “specified
employee” (as defined in Code Section 409A and the regulations thereunder) as of the date of his or
her separation from service shall be delayed for a period of six months after the Participant’s
separation from service (or, if earlier than the end of the six-month period, the date of death of
the Participant).

ARTICLE XIV. AMENDMENT AND TERMINATION

     14.1 Plan Amendment and Termination. The Board may at any time suspend, terminate, amend or
modify the Plan, in whole or in part; provided, however, that no amendment or modification of the
Plan shall become effective without the approval of such amendment or modification by the holders
of at least a majority of the shares of Common Stock if (a) such amendment or modification
increases the maximum number of shares subject to the Plan (except as provided in Article IV) or
changes the designation or class of persons eligible to receive Awards under the Plan or (b)
counsel for Approach determines that such approval is otherwise required by or necessary to comply
with applicable law or the listing requirements of NASDAQ or such other exchange or association on
which the Common Stock is then listed or quoted. An amendment to the Plan shall not require
stockholder approval if it curtails rather than expands the scope of the Plan, nor if it is made to
conform the Plan to statutory or regulatory requirements, such as, without limitation, Code Section
409A, or regulations issued thereunder. Upon termination of the Plan, the terms and provisions of
the Plan shall, notwithstanding such termination, continue to apply to Awards granted prior to such
termination. Except as otherwise provided herein, no suspension, termination, amendment or
modification of the Plan shall adversely affect in any material way any Award previously granted
under the Plan, without the consent of the Participant (or the Permitted Transferee) holding such
Award. Notwithstanding the foregoing, Approach may amend any Award Agreement to be exempt from
Code Section 409A or to comply with the requirements of Code Section 409A or to modify any
provision that causes an Award that is intended to be classified as an “equity instrument” under
FAS 123R to be classified as a liability on Approach’s financial statements.

     14.2 Award Amendment and Cancellation. The Committee may amend the terms of any outstanding
Award granted pursuant to the Plan, but except as otherwise provided herein, no such amendment
shall adversely affect in any material way the Participant’s (or a Permitted Transferee’s) rights
under an outstanding Award without the consent of the Participant (or the Permitted Transferee)
holding such Award.

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ARTICLE XV. MISCELLANEOUS

     15.1 Award Agreements. After the Committee grants an Award under the Plan to a Participant,
Approach and the Participant shall enter into an Award Agreement setting forth the terms,
conditions, restrictions and limitations applicable to the Award and such other matters as the
Committee may determine to be appropriate. The Committee may permit or require a Participant to
defer receipt of the payment of cash or the delivery of shares of Common Stock that would otherwise
be due to the Participant in connection with any Award. Awards that are not paid currently shall
be recorded as payable on Approach’s records for the Plan. The terms and provisions of the
respective Award Agreements need not be identical. All Award Agreements shall be subject to the
provisions of the Plan, and in the event of any conflict between an Award Agreement and the Plan,
the terms of the Plan shall govern.

     15.2 Listing; Suspension.

     (a) As long as the Common Stock is listed on a national securities exchange or system
sponsored by a national securities association, the issuance of any shares of Common Stock
pursuant to an Award shall be conditioned upon such shares being listed on such exchange or
system. Approach shall have no obligation to issue such shares unless and until such shares
are so listed, and the right to exercise any Option or other Award with respect to such
shares shall be suspended until such listing has been effected.

     (b) If at any time counsel to Approach or its Affiliates shall be of the opinion that
any sale or delivery of shares of Common Stock pursuant to an Award is or may in the
circumstances be unlawful or result in the imposition of excise taxes on Approach or its
Affiliates under the laws of any applicable jurisdiction, Approach or its Affiliates shall
have no obligation to make such sale or delivery, or to make any application or to effect or
to maintain any qualification or registration under the Securities Act, or otherwise, with
respect to shares of Common Stock or Awards, and the right to exercise any Option or other
Award shall be suspended until, in the opinion of such counsel, such sale or delivery shall
be lawful or will not result in the imposition of excise taxes on Approach or its
Affiliates.

     (c) Upon termination of any period of suspension under this Section, any Award affected
by such suspension that shall not then have expired or terminated shall be reinstated as to
all shares available before such suspension and as to shares that would otherwise have
become available during the period of such suspension, but no such suspension shall extend
the term of any Award unless otherwise determined by the Committee in its sole discretion.

     15.3 Additional Conditions. Notwithstanding anything in the Plan to the contrary (a) the
Committee may, if it shall determine it necessary or desirable in its sole discretion, at the time
of grant of any Award or the issuance of any shares of Common Stock pursuant to any Award, require
the recipient of the Award or such shares of Common Stock, as a condition to the receipt thereof,
to deliver to Approach a written representation of present intention to acquire the Award or such
shares of Common Stock for his own account for investment and not for distribution, (b) the
certificate for shares of Common Stock issued to a Participant may include

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any legend that the Committee deems appropriate to reflect any restrictions on transfer and
(c) all certificates for shares of Common Stock delivered under the Plan shall be subject to such
stop transfer orders and other restrictions as the Committee may deem advisable under the rules,
regulations and other requirements of the SEC, any stock exchange or association upon which the
Common Stock is then listed or quoted, any applicable federal or state securities law, and any
applicable corporate law, and the Committee may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions.

     15.4 Transferability.

     (a) All Awards granted to a Participant shall be exercisable during his lifetime only
by such Participant, or if applicable, a Permitted Transferee as provided in subsection (c)
of this Section; provided, however, that in the event of a Participant’s legal incapacity,
an Award may be exercised by his guardian or legal representative. When a Participant dies,
the personal representative, beneficiary, or other person entitled to succeed to the rights
of the Participant may acquire the rights under an Award. Any such successor must furnish
proof satisfactory to Approach of the successor’s entitlement to receive the rights under an
Award under the Participant’s will or under the applicable laws of descent and distribution.

     (b) Except as otherwise provided in this Section, no Award shall be subject to
execution, attachment or similar process, and no Award may be sold, transferred, pledged,
exchanged, hypothecated or otherwise disposed of, other than by will or pursuant to the
applicable laws of descent and distribution. Any attempted sale, transfer, pledge,
exchange, hypothecation or other disposition of an Award not specifically permitted by the
Plan or the Award Agreement shall be null and void and without effect.

     (c) If provided in the Award Agreement, Nonqualified Stock Options may be transferred
by a Participant to a Permitted Transferee. For purposes of the Plan, “Permitted
Transferee” means (i) a member of a Participant’s immediate family, (ii) any person sharing
the Participant’s household (other than a tenant or employee of the Participant), (iii)
trusts in which a person listed in (i) or (ii) above has more than 50% of the beneficial
interest, (iv) a foundation in which the Participant or a person listed in (i) or (ii) above
controls the management of assets, (v) any other entity in which the Participant or a person
listed in (i) or (ii) above owns more than 50% of the voting interests, provided that in the
case of the preceding clauses (i) through (v), no consideration is provided for the transfer
and (vi) any transferee permitted under applicable securities and tax laws as determined by
counsel to Approach. In determining whether a person is a “Permitted Transferee,” immediate
family members shall include a Participant’s child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, including
adoptive relationships.

     (d) Incident to a Participant’s divorce, the Participant may request that Approach
agree to observe the terms of a domestic relations order which may or may not be part of a
qualified domestic relations order (as defined in Code Section 414(p)) with respect to all
or a part of one or more Awards made to the Participant under the Plan.

- 22 -

 

Approach’s decision regarding such a request shall be made by the Committee, in its
sole and absolute discretion, based upon the best interests of Approach. The Committee’s
decision need not be uniform among Participants. As a condition of participation, a
Participant agrees to hold Approach harmless from any claim that may arise out of Approach’s
observance of the terms of any such domestic relations order.

     15.5 Withholding Taxes. The Company shall be entitled to deduct from any payment made under
the Plan, regardless of the form of such payment, the amount of all applicable income and
employment taxes required by law to be withheld with respect to such payment, may require the
Participant to pay to the Company such withholding taxes prior to and as a condition of the making
of any payment or the issuance or delivery of any shares of Common Stock under the Plan, and shall
be entitled to deduct from any other compensation payable to the Participant any withholding
obligations with respect to Awards. In accordance with any applicable administrative guidelines it
establishes, the Committee may allow a Participant to pay the amount of taxes required by law to be
withheld from or with respect to an Award by (a) withholding shares of Common Stock from any
payment of Common Stock due as a result of such Award, or (b) permitting the Participant to deliver
to the Company previously acquired shares of Common Stock, in each case having an aggregate Fair
Market Value equal to the amount of such required withholding taxes. No payment shall be made and
no shares of Common Stock shall be issued pursuant to any Award unless and until the applicable tax
withholding obligations have been satisfied.

     15.6 No Fractional Shares. No fractional shares of Common Stock shall be issued or delivered
pursuant to the Plan or any Award granted hereunder, provided that the Committee in its sole
discretion may round fractional shares down to the nearest whole share or settle fractional shares
in cash.

     15.7 Notices. All notices required or permitted to be given or made under the Plan or
pursuant to any Award Agreement (unless provided otherwise in such Award Agreement) shall be in
writing and shall be deemed to have been duly given or made if (a) delivered personally, (b)
transmitted by first class registered or certified United States mail, postage prepaid, return
receipt requested, (c) sent by prepaid overnight courier service or (d) sent by telecopy or
facsimile transmission, with confirmation receipt, to the person who is to receive it at the
address that such person has theretofore specified by written notice delivered in accordance
herewith. Such notices shall be effective (a) if delivered personally or sent by courier service,
upon actual receipt by the intended recipient, (b) if mailed, upon the earlier of five days after
deposit in the mail or the date of delivery as shown by the return receipt therefore or (c) if sent
by telecopy or facsimile transmission, when the answer back is received. Approach or a Participant
may change, at any time and from time to time, by written notice to the other, the address that it
or such Participant had theretofore specified for receiving notices. Until such address is changed
in accordance herewith, notices hereunder or under an Award Agreement shall be delivered or sent
(a) to a Participant at his address as set forth in the records of the Company or (b) to Approach
at the principal executive offices of Approach clearly marked “Attention: Corporate Secretary.”

     15.8 Compliance with Law and Stock Exchange or Association Requirements. In addition, it is
the intent of Approach that Options designated Incentive Stock Options comply with the applicable
provisions of Section 422 of the Code, and that Awards intended to constitute

- 23 -

 

“qualified performance-based awards” comply with the applicable provisions of Section 162(m)
of the Code and that any deferral of the receipt of the payment of cash or the delivery of shares
of Common Stock that the Committee may permit or require, and all Awards either be exempt from Code
section 409A or, if not exempt, comply with the requirements of Section 409A of the Code. To the
extent that any legal requirement of Section 16 of the Exchange Act or Sections 422, 162(m) or 409A
of the Code as set forth in the Plan ceases to be required under Section 16 of the Exchange Act or
Sections 422, 162(m) or 409A of the Code, that Plan provision shall cease to apply. Any provision
of this Plan to the contrary notwithstanding, the Committee may revoke any Award if it is contrary
to law, governmental regulation or stock exchange or association requirements or modify an Award to
bring it into compliance with any government regulation or stock exchange or association
requirements. The Committee may agree to limit its authority under this Section.

     15.9 Binding Effect. The obligations of Approach under the Plan shall be binding upon any
successor corporation or organization resulting from the merger, consolidation or other
reorganization of Approach, or upon any successor corporation or organization succeeding to all or
substantially all of the assets and business of Approach. The terms and conditions of the Plan
shall be binding upon each Participant and his Permitted Transferees, heirs, legatees, distributees
and legal representatives.

     15.10 Severability. If any provision of the Plan or any Award Agreement is held to be illegal
or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions
of the Plan or such agreement, as the case may be, but such provision shall be fully severable and
the Plan or such agreement, as the case may be, shall be construed and enforced as if the illegal
or invalid provision had never been included herein or therein.

     15.11 No Restriction of Corporate Action. Nothing contained in the Plan shall be construed to
prevent Approach or any Affiliate from taking any corporate action (including any corporate action
to suspend, terminate, amend or modify the Plan) that is deemed by Approach or such Affiliate to be
appropriate or in its best interest, whether or not such action would have an adverse effect on the
Plan or any Awards made or to be made under the Plan. No Participant or other person shall have
any claim against Approach or any Affiliate as a result of such action.

     15.12 Governing Law. The Plan shall be governed by and construed in accordance with the
internal laws (and not the principles relating to conflicts of laws) of the State of Texas except
as superseded by applicable federal law.

     15.13 No Right, Title or Interest in Company Assets. No Participant shall have any rights as
a stockholder of Approach as a result of participation in the Plan until the date of issuance of
Common Stock in his name and, in the case of Restricted Stock, unless and until such rights are
granted to the Participant pursuant to the Plan. To the extent any person acquires a right to
receive payments from the Company under the Plan, such rights shall be no greater than the rights
of an unsecured general creditor of the Company, and such person shall not have any rights in or
against any specific assets of the Company. All Awards shall be unfunded.

     15.14 Risk of Participation. Nothing contained in the Plan shall be construed either as a
guarantee by Approach or its Affiliates, or their respective stockholders, directors, officers or

- 24 -

 

employees, of the value of any assets of the Plan or as an agreement by Approach or its
Affiliates, or their respective stockholders, directors, officers or employees, to indemnify anyone
for any losses, damages, costs or expenses resulting from participation in the Plan.

     15.15 No Guarantee of Tax Consequences. No person connected with the Plan in any capacity,
including without limitation Approach and the Affiliates and their respective directors, officers,
agents and employees, makes any representation, commitment or guarantee that any tax treatment,
including without limitation federal, state and local income, estate and gift tax treatment, will
be applicable with respect to any Awards or payments thereunder made to or for the benefit of a
Participant under the Plan or that such tax treatment will apply to or be available to a
Participant on account of participation in the Plan.

     15.16 Continued Employment or Service. Nothing contained in the Plan or in any Award
Agreement shall confer upon any Participant the right to continue in the employ or service of the
Company, or interfere in any way with the rights of the Company to terminate a Participant’s
employment or service at any time, with or without cause. The loss of existing or potential profit
in Awards will not constitute an element of damages in the event of termination of employment or
service for any reason, even if the termination is in violation of an obligation of Approach or an
Affiliate to the Participant.

     15.17 Miscellaneous. Headings are given to the articles and sections of the Plan solely as a
convenience to facilitate reference. Such headings shall not be deemed in any way material or
relevant to the construction of the Plan or any provisions hereof. The use of the masculine gender
shall also include within its meaning the feminine. Wherever the context of the Plan dictates, the
use of the singular shall also include within its meaning the plural, and vice versa.

     IN WITNESS WHEREOF, this Plan has been executed as of the Effective Date.

	 	 	 	 	 	 	 
	 	 	APPROACH RESOURCES INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ J. Ross Craft	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	J. Ross Craft	 	 
	 

	 	 	 	President and Chief Executive Officer	 	 

- 25 -exv10w7

 

Exhibit 10.7

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 YORKTOWN ENERGY PARTNERS VII, L.P., a Delaware limited partnership
(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,

2

 

	 	 	 	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

3

 

	 	 	 	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.

4

 

     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 	 
	 

5

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