7. Stock-based Compensation, Option Plans and Warrants

Stock Options

The Company currently utilizes a standard option pricing model (i.e., Black-Scholes) to measure the fair value of stock options granted to employees and directors. The fair value for these options was estimated at the date of grant using the following weighted average assumptions for 2009, 2010 and 2011:

	2009			2010			2011
Weighted average value per option granted during the period	$	1.41		$	1.61		$	3.11
Assumptions: (1)(2)
Expected dividend yield		0	%		0	%		0	%
Volatility		83.0	%		84.0	%		80.0	%
Risk free interest rate		2.48	%		2.87	%		2.21	%
Expected life (years)	6.1 years			9.0 years			6.4 years
Fair value of options granted (in thousands)	$	2,195		$	1,553		$	2,506

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(1)		The estimated future forfeiture rate is based on the Company's historical forfeiture rate.

(2)	The Company does not pay dividends on its common stock.

The Company grants options to its officers, directors, and other employees under various stock option and incentive plans.

The Company's 2005 Employee Long-Term Equity Incentive Plan has authorized the grant of up to 5.2 million awards to management and employees, including options. Options have a term not to exceed 10 years. Options issued under this plan vest according to a vesting schedule as determined by the compensation committee of the Company's board of directors. Vesting may occur upon (1) the attainment of one or more performance goals or targets established by the committee, (2) the optionee's continued employment or service for a specified period of time, (3) the occurrence of any event or the satisfaction of any other condition specified by the committee, or (4) a combination of any of the foregoing.

The following table is a summary of the Company's stock option activity for the three years ended December 31, 2011:

	Options (000s)		Weighted average exercise price		Weighted average remaining life	Fair value per share
Options outstanding December 31, 2008	2,390		$	2.81

Granted	2,175			1.41
Exercised	(250	)		0.93
Forfeited/Expired	(225	)		2.73
Options outstanding December 31, 2009	4,090		$	2.18

Granted	964			2.12
Exercised	(213	)		0.89
Forfeited/Expired	(21	)		2.93
Options outstanding December 31, 2010	4,820		$	2.23

Granted	807			4.37
Exercised	(530	)		1.54
Forfeited/Expired	(341	)		3.01
Options outstanding December 31, 2011	4,756		$	2.61	6.9 years	$	2.61

Exercisable at end of year	2,512				5.7 years	$	2.71

Other information pertaining to the Company's stock option activity for the three years ended December 31, 2011:

	2009		2010		2011
Weighted average grant date fair value of stock options granted (per share)	$	1.01	$	1.61	$	3.11
Total fair value of options vested (000's)	$	801	$	949	$	1,230
Total intrinsic value of options exercised (000's)	$	155	$	373	$	1,584

As of December 31, 2011, the total compensation cost related to non-vested awards not yet recognized was approximately $3.1 million, which will be recognized in 2012 through 2015. For the year ended December 31, 2011, we recognized $1.5 million in stock-based compensation expense relating to options.

The following table represents the range of stock option prices and the weighted average remaining life of outstanding options as of December 31, 2011:

		Options outstanding						Exercisable
		Number outstanding		Weighted average remaining life		Weighted average exercise price		Number exercisable		Weighted average remaining life		Weighted average exercise price
$	0.50 – 0.99		983,000		5.75	$	0.91		567,000		4.68	$	0.86
$	1.00 – 1.99		1,154,129		7.52	$	1.68		596,972		7.29	$	1.62
$	2.00 – 2.99		875,225		7.90	$	2.17		289,292		7.27	$	2.31
$	3.00 – 3.99		441,401		7.51	$	3.59		232,526		5.68	$	3.60
$	4.00 – 4.99		1,223,500		6.49	$	4.59		747,000		4.75	$	4.51
$	5.00 – 6.05		79,000		4.15	$	6.05		79,000		4.15	$	6.05
			4,756,255						2,511,790

Restricted Stock Awards

Restricted stock awards are awards of common stock that are subject to restrictions on transfer and to a risk of forfeiture if the awardee terminates employment with the Company prior to the lapse of the restrictions. The value of such stock is determined using the market price on the grant date. Compensation expense is recorded over the applicable restricted stock vesting periods. For the year ended December 31, 2011, we recognized $482,000 in stock-based compensation expense related to restricted stock awards.

The following table is a summary of the Company's restricted stock activity for the three years ended December 31, 2011:

	Number of Shares			Weighted average grant date fair value
Unvested December 31, 2008		164,280		$	3.35
Granted		462,552			1.71
Vested/Released		(74,648	)		2.76
Forfeited		(3,276	)		2.62
Unvested December 31, 2009		548,908		$	2.05
Granted		20,000			2.45
Vested/Released		(155,268	)		2.22
Forfeited		(13,345	)		1.85
Unvested December 31, 2010		400,295		$	2.02
Granted		408,676			3.67
Vested/Released		(156,890	)		2.24
Forfeited		(22,310	)		2.27
Unvested December 31, 2011		629,771		$	3.03

Restricted Unit Awards

Restricted unit awards were awards of Partnership units that were subject to restrictions on transfer and to a risk of forfeiture if the awardee terminated employment with the Company prior to the lapse of the restrictions. The value of such unit was determined using the implied market price on the grant date. The implied market price was determined by comparing the average trading yields of comparable publicly-traded master limited partnerships to the distribution paid or declared by the Partnership prior to the grant date. Compensation expense was recorded over the applicable restricted unit vesting periods.

For the year ended December 31, 2009, the Partnership incurred equity-based compensation expense of $69,000 relating to restricted units. No equity-based compensation was incurred for the years ended December 31, 2010 or 2011. In connection with the closing of the Merger, restricted unit awards were converted into restricted stock awards of the Company. (See Note 2. “Merger”.)

Phantom Units

On January 31, 2008, in connection with the closing of an acquisition of properties, the board of directors of the general partner of the Partnership awarded phantom units with distribution equivalency rights under its long-term incentive plan to certain key employees of Abraxas Petroleum.

For the year ended December 31, 2009, the Partnership incurred equity-based compensation expense of $25,000, relating to phantom units. In connection with the closing of the Merger, outstanding phantom unit awards were converted into restricted stock awards of the Company. (See Note 2. “Merger”.)

Director Stock Awards

Shares Reserved and Awards. The 2005 Directors Plan (as amended) reserves 1.5 million shares of Abraxas common stock, subject to adjustment following certain events. The 2005 Directors Plan provides that each year, at the first regular meeting of the board of directors immediately following Abraxas' annual stockholder's meeting, each non-employee director shall be granted or issued awards of 10,500 shares of Abraxas common stock, for participation in board and committee meetings during the previous calendar year. The maximum annual award for any one person is 100,000 shares of Abraxas common stock or options for common stock. If options, as opposed to shares, are awarded, the exercise price shall be no less than 100% of the fair market value on the date of the award while the option terms and vesting schedules are at the discretion of the committee. In addition to the 10,500 shares or options and prior to April 2010, directors were compensated $20,000 per year, $12,000 of which was paid quarterly by issuance of common stock and the remaining $8,000 was paid quarterly in cash. During 2009 and 2010, there were 61,954 and 11,480 shares issued, respectively, related to this compensation. The number of shares issued was determined based on the stock price on the date of issuance. Between April 2010 and April 2011, directors were compensated for their annual retainer fee of $26,000 in cash, which increased to $27,500 in April 2011.

At December 31, 2011, the Company had approximately 6.2 million shares reserved for future issuance for conversion of its stock options, warrants, and incentive plans for the Company's directors, employees and consultants.

Warrants

On May 25, 2007, Abraxas entered into a Securities Purchase Agreement with certain accredited investors pursuant to which Abraxas issued warrants to purchase 1,174,938 shares of common stock. The warrants expire on May 25, 2012 and are exercisable at a price of $3.83 per share, subject to certain adjustments. 114,230 warrants were exercised in 2010, however, no warrants were exercised in 2009 or 2011.