NOTE 11—STOCK BASED COMPENSATION

On August 18, 2016, the Company's Board of Directors adopted the Amended and Restated PetroShare Corp. Equity Incentive Plan (the "Plan"), which replaced and restated the Company's original equity incentive plan. The Plan terminates by its terms on August 17, 2026. Among other things, the Plan increased the number of shares of common stock reserved for issuance thereunder from 5,000,000 to 10,000,000. The Company's shareholders approved the Plan at the Company's annual meeting of shareholders on September 8, 2016.

There was no activity for the three months ended March 31, 2017.

Subsequent to March 31, 2017, the Company issued 200,000 options exercisable at $1.83 in connection with the execution of an employment agreement (Note 13).

Activity for the three months ended March 31, 2016 included the following:

On January 1, 2016, the Company issued 250,000 options to purchase its common stock in connection with the appointment of its Chief Financial Officer. The options are exercisable at a price of $1.00 per share and expire on November 23, 2018. The options vested one-half on January 1, 2016 and the remainder on January 1, 2017. The options are subject to the terms and conditions of the Plan and a stock option agreement.

On January 28, 2016, the Company issued 875,000 options to purchase its common stock in connection with the appointment of its Chief Operating Officer. The options are exercisable at a price of $1.00 per share and expire on December 31, 2022. The options vested as follows: (i) 125,000 on January 28, 2016, the date of grant, and (ii) 750,000 on January 1, 2017. The options are subject to the terms and conditions of the Plan and a stock option agreement.

A summary of activity under the Plan for the three months ended March 31, 2017 and the year ended December 31, 2016 is as follows:

	Number of Shares		Weighted Average Exercise Price		Remaining Contractual Term (Years)
Outstanding, December 31, 2015		2,275,000	$	0.33		6.50

Exercisable, December 31, 2015		2,200,000	$	0.30		6.72

Granted		2,400,000	$	1.16		5.34
Exercised		—		—		—
Forfeited		—		—		—

Outstanding, December 31, 2016		4,675,000	$	0.76		5.39

Exercisable, December 31, 2016		3,010,000	$	0.54		5.97

Granted		—		—		—
Exercised		—		—		—
Forfeited		—		—		—

Outstanding, March 31, 2017		4,675,000	$	0.76		5.15

Exercisable, March 31, 2017		3,660,000	$	0.61		5.11

The fair value of each share-based award was estimated on the date of the grant using the Black-Scholes pricing model that incorporates key assumptions including volatility, dividend yield and risk-free interest rates. As the Company's common stock has limited historical trading data, the expected stock price volatility is based primarily on the historical volatility of a group of publicly-traded companies that share similar operating metrics and histories. The expected term of the awards represents the period of time that management anticipates awards will be outstanding. As there was insufficient historical data available to ascertain a forfeiture rate, the plain vanilla method was applied in calculating the expected term of the options. The risk-free rates for the periods within the contractual life of the options are based on the US Treasury bond rate in effect at the time of the grant for bonds with maturity dates at the expected term of the options. The Company has never paid dividends on its common stock and currently does not intend to do so, and as such, the expected dividend yield is zero. Compensation expense related to stock options was recorded net of estimated forfeitures, which for options remaining at March 31, 2017, was $nil.

The table below summarizes assumptions utilized in the Black-Scholes pricing model for the three months ended March 31, 2017 and the year ended 2016:

	March 31, 2017	December 31, 2016
Expected option term—years	1.0 - 1.5	1.5 - 2.5
Weighted-average risk-free interest rate	1.48 - 2.0%	0.94 - 1.31%
Expected dividend yield	0	0
Weighted-average volatility	160 - 175%	142 - 214%
Forfeiture rate	0	0

During the three months ended March 31, 2017, the Company recorded share-based compensation of $67,347. During the three months ended March 31, 2016, the Company recorded share-based compensation of $344,465. Unvested share-based compensation at March 31, 2017 and December 31, 2016 amounted to $958,044 and $1,025,391 respectively.