NOTE 8—STOCK-BASED COMPENSATION

On August 12, 2005, the Company's Board of Directors adopted the Houston American Energy Corp. 2005 Stock Option Plan (the "2005 Plan"). The terms of the 2005 Plan allow for the issuance of up to 500,000 options to purchase 500,000 shares of the Company's common stock.

In 2008, the Company's Board of Directors adopted the Houston American Energy Corp. 2008 Equity Incentive Plan (the "2008 Plan" and, together with the 2005 Plan, the "Plans"). The terms of the 2008 Plan allow for the issuance of up to 2,200,000 shares of the Company's common stock pursuant to the grant of stock options and restricted stock. Persons eligible to participate in the Plans are key employees, consultants and directors of the Company.

During 2012 and 2013, the Company's board of directors adopted amendments to the Company's 2008 Equity Incentive Plan to increase the shares reserved to 6,000,000 shares. The amendment to the 2008 Equity Incentive Plan is subject to approval by the Company's shareholders. See Note 12 – Subsequent Events.

Stock Option Activity

During 2011, the Company granted 106,250 options to members of the Board of Directors, including 25,000 options granted to a newly appointed director and 81,250 options granted pursuant to annual grants to independent directors. 86,666 options were exercised on a cashless basis by former directors, resulting in the issuance of 39,458 shares of common stock.

The 25,000 options granted to the newly appointed director vested immediately, had a ten-year life, an exercise price of $14.06 per share and were valued on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions: risk-free interest rate 2.095%, expected life of 5.685 years, (3) expected stock volatility 87.549%, and expected future dividend yield of 0.142%. The Company determined the options qualify as 'plain vanilla' under the provisions of SAB 107 and the simplified method was used to estimate the expected option life. Using this model yielded a value of $250,915 which was charged to expense in 2011. These options had a grant date fair value of $10.04 per share.

The 81,250 options granted under the annual director grants vest 20% on the grant date and 80% on March 13, 2012. These options had a ten-year life, an exercise price of $16.07 per share and were valued on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: risk-free interest rate 1.689%, expected life of 5.30 years, expected stock volatility 87.25%, and expected dividend yield of 0.124%. The Company determined the options qualify as 'plain vanilla" under the provisions of SAB 107 and the simplified method was used to estimate the expected option life. Using this model yielded a value of $905,125, of which $714,636 was expensed during 2011. These options had a grant date fair value of $11.14 per share.

During 2012, the Company granted 325,000 options to non-employee directors and 1,200,000 options to employees.

300,000 of the options granted to non-employee directors vested 20% on the grant date and vest as to the remaining 80% nine months from the grant date, have a ten year life and have an exercise price of $1.65 per share. Of those options, 155,475 are exercisable commencing 6 months from the date of grant and 144,525 are exercisable on and after shareholder approval of the amendment to the Company's 2008 Equity Incentive Plan to increase the shares reserved under the plan to facilitate exercise. The option grants to non-employee directors, excluding grants that are subject to shareholder approval of amendment to the 2008 Equity Incentive Plan, were valued on the date of grant at $128,328 using the Black-Scholes option-pricing model with the following parameters: (1) risk-free interest rate of 0.35%, (2) expected life in years of 2.83, (3) expected stock volatility of 84.6%, and (4) expected dividend yield of 1.21%.

25,000 of the options granted to non-employee directors were granted to a new non-employee director, vested 20% on the grant date and vest as to the remaining 80% nine months from the grant date, have a ten year life and have an exercise price of $1.18 per share. Those options have a fair value of $19,375 using the Black-Scholes option-pricing model with the following parameters: (1) risk-free interest rate of 0.82%, (2) expected life in years of 5.835, (3) expected stock volatility of 91.70%, and (4) expected dividend yield of 1.70%.

The 1,200,000 options granted to employees vested on the grant date, have a ten-year life and have an exercise price of $1.65 per share. Of those options, 429,000 are exercisable commencing 6 months from the date of grant and 771,000 are exercisable on and after shareholder approval of the amendment to the Company's 2008 Equity Incentive Plan to increase the shares reserved under the plan to facilitate exercise. The option grants to employees, excluding grants that are subject to shareholder approval of amendment to the 2008 Equity Incentive Plan, were valued on the date of grant at $354,098 using the Black-Scholes option-pricing model with the following parameters: (1) risk-free interest rate of 0.35%, (2) expected life in years of 2.83, (3) expected stock volatility of 84.6%, and (4) expected dividend yield of 1.21%.

Option activity during 2012 and 2011 was as follows:

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value

Outstanding at December 31, 2010		1,813,998		$	6.57
Granted		106,250		$	15.60
Exercised		(39,458	)	$	4.60
Forfeited		(47,208	)	$	10.97

Outstanding at December 31, 2011		1,833,582		$	7.02
Granted (1)		609,475		$	1.63
Exercised		—		$	—
Forfeited		—		$	—

Outstanding at December 31, 2012		2,443,057		$	5.68		6.58	$	—

(1)	Does not include 915,525 options subject to shareholder approval, which were granted in 2012.

During 2012 and 2011, the Company recognized $1,775,753 and $2,207,217, respectively, of stock compensation expense attributable to outstanding stock option grants, including current period grants and unamortized expense associated with prior period grants but excluding grants that remain subject to shareholder approval of amendment to the 2008 Equity Incentive Plan.

As of December 31, 2012, non-vested options totaled 494,380 and total unrecognized stock-based compensation expense related to non-vested stock options, excluding grants that remain subject to shareholder approval of amendment to the 2008 Equity Incentive Plan, was $1,300,747. The unrecognized expense is expected to be recognized over a weighted average period of 1.27 years. The weighted average remaining contractual term of the outstanding options and exercisable options at December 31, 2012 is 6.58 years and 6.51 years, respectively.

Option grants that remain subject to shareholder approval of amendment to the 2008 Equity Incentive Plan will be valued and accounted for at the time of shareholder approval of the amendment.

As of December 31, 2012, there were 125,277 shares of common stock available for issuance pursuant to future stock or option grants under the Plans, excluding shares to be added under the 2008 Equity Incentive Plan subject to shareholder approval.

Restricted Stock Activity

During 2011, the Company granted to officers an aggregate of 45,000 shares of restricted stock, which shares vest over a period of three years. The fair value of $743,400 was determined based on the fair market value of the shares on the date of grant. This value is being amortized over the vesting period, and during 2012 and 2011, $247,422 and $135,675 was amortized to expense respectively. As of December 31, 2012, there was $422,574 of unrecognized compensation cost related to unvested restricted stock. The cost is expected to be recognized over a weighted average period of approximately 1.45 years.

Share-Based Compensation Expense

The following table reflects share-based compensation recorded by the Company for 2012 and 2011:

	2012			2011
Share-based compensation expense included in general and administrative expense	$	2,023,175		$	2,342,892
Earnings per share effect of share-based compensation expense	$	(0.05	)	$	(0.08	)