NOTE 4 – SHARE-BASED COMPENSATION EXPENSE

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, 2015 is presented below:

	Options			Weighted-Average Exercise Price		Aggregate Intrinsic Value

Outstanding at January 1, 2015		3,392,832		$	3.21
Granted		1,108,333			0.21
Exercised		-			-
Forfeited		(40,000	)		2.00
Outstanding at September 30, 2015		4,461,165		$	2.47	$	-
Exercisable at September 30, 2015		2,794,499		$	3.78	$	-

In April 2015, options to purchase an aggregate of 8,333 shares were granted to a new non-employee director and options to purchase an aggregate of 900,000 shares were granted to a new officer. In June 2015, options to purchase an aggregate of 200,000 shares were granted to non-employee directors.

The 8,333 options granted to a 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 $0.2158 per share. The option grant to the non-employee director was valued on the date of grant at $799 using the Black-Scholes option-pricing model with the following parameters: (1) risk-free interest rate of 1.36%, (2) expected life in years of 4.98, and (3) expected stock volatility of 105%. The Company determined the option qualifies as ‘plain vanilla’ under the provisions of SAB 107 and the simplified method was used to estimate the expected option life.

The 900,000 options granted to an employee have a ten year life and an exercise price of $0.2158 per share and 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 (i) the receipt of $10 million or more in aggregate gross proceeds from the sale of equity securities or securities convertible into equity securities, or (ii) the acquisition by the Company of $10 million or more in aggregate purchase price of oil and gas properties. The option grant to the employee was valued on the date of grant at $80,075 using the Black-Scholes option-pricing model with the following parameters: (1) risk-free interest rate of1.36%, (2) expected life in years of 4.98, and (3) expected stock volatility of 105%. The Company determined the option qualifies as ‘plain vanilla’ under the provisions of SAB 107 and the simplified method was used to estimate the expected option life.

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 $0.2028 per share. The option grants to non-employee directors were valued on the date of grant at $17,082 using the Black-Scholes option-pricing model with the following parameters: (1) risk-free interest rate of 1.73% (2) expected life in years of 5.01, and (3) expected stock volatility of 105%. 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, 2015, the Company recognized $28,676 and $68,434, respectively, of share-based compensation expense attributable to the amortization of unrecognized share-based compensation.

As of September 30, 2015, total unrecognized share-based compensation expense related to non-vested stock options was $149,502. The unrecognized expense is expected to be recognized over a weighted average period of 1.57 years and the weighted average remaining contractual term of the outstanding options and exercisable options at September 30, 2015 is 6.98 years and 5.61 years, respectively.

Shares available for grant through stock options under the Plans as of September 30, 2015 totaled 1,538,835 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. As of September 30, 2014, the compensation cost related to restricted stock had been fully recognized. Accordingly, no expense associated with amortization of the cost of restricted stock during the three and nine months ended September 30, 2015.

Share-Based Compensation Expense

The following table reflects share-based compensation recorded by the Company for the three months ended September 30, 2015 and 2014:

	Three Months Ended September 30,
	2015				2014

Share-based compensation expense included in general and administrative expense		$	28,676			$	21,499
Earnings per share effect of share-based compensation expense – basic and diluted		$	(0.00	)		$	(0.00	)

The following table reflects share-based compensation recorded by the Company for the nine months ended September 30, 2015 and 2014:

	Nine Months Ended September 30,
	2015				2014

Share-based compensation expense included in general and administrative expense		$	68,434			$	433,776
Earnings per share effect of share-based compensation expense – basic and diluted		$	(0.00	)		$	(0.01	)