NOTE 4 – COMPENSATION PLANS

Production-Based Compensation

In August 2013, the Company’s compensation committee adopted a Production Incentive Compensation Plan. The purpose of the plan is to encourage employees and consultants participating in the plan to identify and secure for the Company participation in attractive oil and gas opportunities.

Under that plan, the committee may establish one or more pools and designate employees and consultants to participate in those pools and designate prospects and wells, and a defined percentage of the Company’s revenues from those wells, to fund those pools. Only prospects acquired on or after establishment of the plan, and excluding all prospects in Colombia, may be designated to fund a pool. The maximum percentage of the Company’s share of revenues from a well that may be designated to fund a pool is 2% (the “Pool Cap”); provided, however, that with respect to wells with a net revenue interest to the 8/8^th of less than 73%, the Pool Cap with respect to such wells shall be reduced on a 1-for-1 basis such that no portion of the Company’s revenues from a well may be designated to fund a pool if the NRI is 71% or less.

Designated participants in a pool will be assigned a specific percentage out of the Company’s revenues assigned to the pool and will be paid that percentage of such revenues from all wells designated to such pool and spud during that participant’s employment or services with the Company. In no event may the percentage assigned to the Company’s chief executive officer relative to any well within a pool exceed one-half of the applicable Pool Cap for that well. Payouts of revenues funded into pools shall be made to participants not later than 60 days following year end, subject to the committee’s right to make partial interim payouts. Participants will continue to receive their percentage share of revenues from wells included in a pool and spud during the term of their employment or service so long as revenues continue to be derived by the Company from those wells even after termination of employment or services of the participant; provided, however, that a participant’s interest in all pools shall terminate on the date of termination of employment or services where such termination is for cause. The committee may, at its sole discretion, cause the Company to assign to some or all of the participants overriding royalty interests in individual wells in settlement of some or all of the obligations of the Company to make payments from any one or more pools.

During the nine months ended September 30, 2014, the Company made grants under the plan in 13 pools relating to 13 prospects. All of such grants were made to the Company’s principal officer with grants ranging from ½% to 1% of revenues associated with the prospects included in such pools.

The Company records amounts payable under the plan as a reduction to revenue as revenues are recognized from prospects included in pools covered by the plan based on the participants’ interest in such prospect revenues and records the same as accounts payable until such time as such amounts are paid out. The obligation associated with the plan totaled $207 and $369, respectively, for the three and nine months ended September 30, 2014 and is recorded in accounts payable at September 30, 2014.

Stock-Based Compensation

The Company periodically grants options to employees, directors and consultants under the Company’s 2005 Stock Option Plan and the Company’s 2008 Equity Incentive Plan (together, the “Plans”). The Company is required to make estimates of the fair value of the related instruments and recognize expense over the period benefited, usually the vesting period.

Stock Option Activity

A summary of stock option activity and related information for the nine months ended September 30, 2014 is presented below:

	Options		Weighted-Average Exercise Price		Aggregate Intrinsic Value

Outstanding at January 1, 2014		2,592,832	$	4.07
Granted		800,000		0.42
Exercised		—		—
Forfeited		—		—
Outstanding at September 30, 2014		3,392,832	$	3.21	$	1,750
Exercisable at September 30, 2014		2,532,832	$	4.17	$	1,750

In June 2014, options to purchase an aggregate of 200,000 shares were granted to non-employee directors and options to purchase an aggregate of 600,000 shares were granted to an employee.

The 200,000 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 $0.415 per share. The option grants to non-employee directors were valued on the date of grant at $46,191 using the Black-Scholes option-pricing model with the following parameters: (1) risk-free interest rate of 1.57%, (2) expected life in years of 4.65, (3) expected stock volatility of 103.6%, and (4) expected dividend yield of 0%. 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.

The 600,000 options granted to an employee vest 1/3 on each of the first three anniversaries of the grant date, subject to acceleration of vesting in the event of certain changes in control or the realization of revenues from oil and gas production on the Serrania prospect or receipt of proceeds from the sale of the Serrania prospect, have a ten year life and have an exercise price of $0.415 per share. The option grants to the employee were valued on the date of grant at $126,360 using the Black-Scholes option-pricing model with the following parameters: (1) risk-free interest rate of 1.57%, (2) expected life in years of 4.65, (3) expected stock volatility of 103.6%, and (4) expected dividend yield of 0%. 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.

During the three and nine months ended September 30, 2014, the Company recognized $21,499 and $396,955, respectively, of stock compensation expense attributable to the amortization of unrecognized stock-based compensation.

As of September 30, 2014, total unrecognized stock-based compensation expense related to non-vested stock options was $131,602. The unrecognized expense is expected to be recognized over a weighted average period of 2.39 years and the weighted average remaining contractual term of the outstanding options and exercisable options at September 30, 2014 is 7.04 years and 6.26 years, respectively.

Shares available for issuance under the Plans as of September 30, 2014 totaled 2,607,168 shares.

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 was amortized over the vesting period and, during the three and nine months ended September 30, 2014, $-0- and $36,821 was amortized to expense. 10,000 of the shares were forfeited and cancelled during 2013 as a result of the termination of two officers. As of September 30, 2014, the compensation cost related to restricted stock had been fully recognized.

Share-Based Compensation Expense

The following table reflects share-based compensation recorded by the Company for the three months ended September 30, 2014 and 2013:

	Three Months Ended September 30,
	2014				2013

Share-based compensation expense included in general and administrative expense		$	21,499			$	262,705
Earnings per share effect of share-based compensation expense – basic and diluted		$	(0.004	)		$	(0.005	)

The following table reflects share-based compensation recorded by the Company for the nine months ended September 30, 2014 and 2013:

	Nine Months Ended September 30,
	2014				2013

Share-based compensation expense included in general and administrative expense		$	433,776			$	1,277,239
Earnings per share effect of share-based compensation expense – basic and diluted		$	(0.008	)		$	(0.024	)