NOTE 10 – 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 shares. The Company's shareholders approved the Plan at the Company's annual meeting of shareholders on September 8, 2016.

During the year ended December 31, 2017, the Board of Directors granted non-qualified options to employees, directors and consultants of the Company under the Plan to acquire 422,000 shares of common stock.

A summary of activity under the Plan for the years ended December 31, 2017 and 2016 is as follows:


			Weighted	Remaining
			Average	Contractual
	Number of		Exercise	Term
	Shares	Price		(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	422,000	$	1.86	5.69
Exercised	—		—	—
Forfeited	(100,000)		—	—
Outstanding, December 31, 2017	4,997,000	$	0.85	4.44
Exercisable, December 31, 2017	4,347,500	$	0.74	4.48

The fair value of each stock-based award was estimated on the date of the grant using the Black-Scholes pricing model that incorporates key assumptions including volatility of the Company’s stock, 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 December 31, 2017, the Company expects no additional forfeitures.

The table below summarizes assumptions utilized in the Black-Scholes pricing model for the years ended 2017 and 2016:


	December 31,	December 31,
	2017	2016
Expected option term—years	2.5 - 3.25	1.5 - 2.5
Risk-free interest rate	1.75% - 1.93%	0.94% - 1.31%
Expected dividend yield	—	—
Volatility	162% - 169%	142% - 214%
Forfeited	—	—

During the years ended December 31, 2017 and 2016, the Company recorded stock-based compensation related to options of $1.4 million, and $1.1 million, respectively. Unvested stock-based option compensation at December 31, 2017 amounted to $0.6 million.