Note 11 - BWI Stock Compensation

12 Months Ended

Dec. 31, 2012

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

(11)           BWI STOCK COMPENSATION

In April 2012, our wholly-owned subsidiary, BWI, adopted a 2012 Equity Compensation Plan (the “BWI Plan”), which is administered by the Compensation Committee (the “Committee”) of the HKN Board of Directors.  The Committee has complete and absolute authority to make any and all decisions regarding the administration of the BWI Plan, and all employees of BWI, employees of HKN and its subsidiaries and nonemployee directors of BWI, are eligible to receive awards under the BWI Plan.  An aggregate of 100,000 shares of common stock of BWI (10% of BWI’s currently outstanding shares of common stock) have been reserved for potential award issuance under the BWI Plan. 

Awards under the BWI Plan will be in the form of nonqualified stock options.  The Committee also has complete and absolute authority to set the terms, conditions and provisions of each award, including the size of the award, the exercise or base price, the vesting and exercisability schedule (including provisions regarding acceleration of vesting and exercisability) and termination, cancellation and forfeiture provisions, subject to limitations on the exercise price and term under the BWI Plan.  In particular, the exercise price for a stock option granted under the BWI Plan may not be less than 100% of the fair market value of the stock on the award date, and no stock option granted under the BWI Plan may expire more than ten years after the award date.

In April 2012, 40 thousand options were granted to BWI officers and directors with an exercise price of $14.50 and a vesting period of three years, with one third of the options vesting on the first, second and third anniversaries of the grant date. No options were exercisable at December 31, 2012. If these options are exercised, the Company will record noncontrolling interest as we will no longer own 100% of BWI. The grant date fair value of the stock of $14.50 was based on an independent third-party valuation. This valuation used the income approach method based on a discounted forecasted cash flow analysis.

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is the vesting period, using the straight-line method. The fair value of each stock option of $8.56 at the grant date was estimated by using the Black-Scholes option-pricing model using the following weighted average assumptions:

	2012
Expected dividend yield		0.00	%
Expected volatility		65.00	%
Expected life (in years)		6.00
Risk free interest rate		1.29	%

We estimate the expected dividend yield to be zero because we do not anticipate paying dividends out of BWI.  Because BWI is not publicly traded, the expected volatility is based on an average historical and implied volatility for comparable public reporting companies over a period similar to the expected life of the options.  Expected life is based on the simplified method of computing an average of the vesting periods and the contractual term, and the risk-free interest rate represents the published interest rate for a comparable term US Treasury Bond on the grant date.

We are also required to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from its estimates as a cumulative adjustment in the period of revision. Stock compensation is recorded only for those awards that are expected to vest. No forfeiture rate was applied during the year ended December 31, 2012, as no forfeitures were expected.  However, in the fourth quarter of 2012, two thousand shares were forfeited and an immaterial amount of stock compensation expense was reversed.

The following table summarizes stock option activity during the year ended December 31, 2012:

	Shares			Weighted  Average Exercise Price		Weighted  Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at January 1, 2012		-		$	-
Granted		40,000			14.50
Exercised		-			-
Forfeited or Expired		(2,000	)		14.50
Oustanding at December 31, 2012		38,000		$	14.50		9.27	$	-
Exercisable at December 31, 2012		-		$	-		-	$	-

At December 31, 2012, there was approximately $244 thousand of total unrecognized stock compensation expense. This compensation expense is expected to be recognized over the weighted-average vesting term remaining of 2.26 years.

Total stock-based compensation recognized within selling, general and administrative expenses in the Company’s consolidated statements of operations for the year ended December 31, 2012 was $81 thousand.