Exhibit 10.7
CONVERTIBLE PROMISSORY NOTE
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| $10,000,000 |
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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
