Note 9 Capital and Stock Based Compensation

On December 8, 2010, shareholders approved an amendment to the Company's 1998 Stock Incentive Plan to increase the authorized shares of common stock reserved for awards under the Plan to a total of 7,205,000 shares. These authorized shares can take the form of non-qualified stock options, stock appreciation rights and restricted share awards.

Options and non-vested shares

As of December 31, 2011, there were 335,000 shares available for future issuance under the Plan. Options outstanding have expiration dates ranging from November 28, 2015, through January 10, 2022.

The following is a summary of option transactions for the six months ended December 31, 2011:

Total non-cash stock based compensation included in the unaudited condensed consolidated statements of operations' general and administrative expense for the three and six months ended December 31, 2011, was $490,723 and $886,355 respectively, as discussed below.

Total non-cash stock based compensation included under general and administrative expense in the unaudited condensed consolidated statements of operations for the three and six months ended December 31, 2010, was $817,943 and $1,203,396 respectively, as discussed below.

Non-employee options

There were no non-employee options issued during the six months ended December 31, 2011. In February 2009, the Company granted 262,500 time-based options, with an exercise price of $1.20 per share to J. Thomas Wilson, our President and CEO, who was then a non-employee consultant to the Company.

Since these options were issued to a non-employee, the Company determined their fair value at the end of each reporting period. The related option expense was recognized in the unaudited condensed consolidated statements of operations using the accelerated method. Effective September 27, 2011, J. Thomas Wilson became the President and CEO of the Company. This change in status from non-employee to employee triggered a re-measurement of the fair value of these awards.

The fair value of these time-based options at September 27, 2011, was determined based on the Black-Scholes valuation model using the following assumptions:

The expected life of the time-based options is the remaining contractual term. The Company recorded non-cash charges of $0 and ($49,825) respectively during the three and six months ended December 31, 2011, related to these non-employee time-based options for the period ended December 31, 2011. The credit entry was necessary to reverse previously recorded stock compensation expense related to the shares that were unvested as of the change in status from non-employee to employee. The unvested shares were then revalued as discussed above. Unrecognized compensation expense for these options is included below within the “employee option” section.

The Company recorded non-cash charges of $195,167 and $227,997 related to these time based options for the three and six months ended December 31, 2010.

Employee and Director option and share compensation

The Company's compensation policy is designed to provide the Company's directors with a portion of their annual Board compensation in the form of equity. The number of shares for each director award is, however, subject to a maximum annual cap of 15,000 shares. The Company issued 75,000 shares in July 2011, pursuant to this policy.

During the six months ended December 31, 2011, 1,600,000 non-qualified stock options were issued to employees of which 200,000 were performance-based (“PBOs”) and 750,000 issued outside of our stock incentive plan. During the six months ended December 31, 2010, 1,500,000 stock options were issued to employees, of which 200,000 were performance-based.

The 200,000 PBO's contain three tranches of vesting criteria as follows: 1) 100,000 of these options will vest in full upon the completion of the Nautilus drilling program. As of December 31, 2011, these 100,000 options have vested in full as the drilling program referred to has been completed. 2) 50,000 of these options will vest in full upon the relocation of the Company's headquarters to Denver, CO and 3) 50,000 of these options will vest in full upon the closing of the Santos SA (See Note 6). These options have a 10 year term.

The Company also issued 100,000 restricted shares to an employee during the three months ended December 31, 2011, 50,000 of which vest September 27, 2012 and 2013 respectively. The fair value of these shares was calculated as $107,000 and was based upon the closing stock price on November 7, 2011 (the grant date).

Non-cash compensation expense of $490,772 and $936,180 was recorded for employees' and directors' options, restricted shares and non-vested shares for the three and six months ended December 31, 2011, and is included under general and administrative expense in the unaudited condensed consolidated statements of operations for the periods then ended. The fair value of the grants is being recognized over the requisite service period using the accelerated method. Unrecorded compensation expense for employee options was $1,339,883 as of December 31, 2011.

Employee and director non-cash option and unvested share expense of $622,776 and $975,399 for the three and six months ended December 31, 2010, respectively, was reflected in the unaudited condensed consolidated statements of operations for the period then ended.