(3) Share-Based Compensation

Emergence from Voluntary Reorganization

Upon the Company's emergence from bankruptcy on April 22, 2016, as discussed in Note 1A, the Company’s common stock was canceled and new common stock was issued. The Company's previous share-based compensation awards were either vested or canceled upon the Company's emergence from bankruptcy.

Share-Based Compensation Plans

Upon the Company's emergence from bankruptcy on April 22, 2016, as discussed in Note 1A, the Company's previous share-based compensation plans were canceled and the new Swift Energy Company 2016 Equity Incentive Plan was approved in accordance with the joint plan of reorganization. Under the previous share-based compensation plan the outstanding restricted stock awards and restricted stock unit awards for most employees vested under on an accelerated basis while awards issued to certain officers of the Company and the Board of Directors were canceled.

For awards granted after emergence from bankruptcy, the Company does not estimate the forfeiture rate during the initial calculation of compensation cost but rather has elected to account for forfeitures in compensation cost when they occur. For the predecessor periods the Company had estimated the forfeiture rate for share-based compensation during the initial calculation of compensation cost.

The Company computes a deferred tax benefit for restricted stock awards, unit awards and stock options expected to generate future tax deductions by applying its effective tax rate to the expense recorded. For restricted stock units the Company's actual tax deduction is based on the value of the units at the time of vesting. For the period of April 23, 2016 through September 30, 2016 (successor) no units vested. For the period of January 1, 2016 through April 22, 2016 (predecessor) the tax deduction realized was significantly less than the associated deferred tax asset, however the tax asset had been fully offset with a valuation allowance in prior periods so no incremental tax expense was realized. For the nine months ended September 30, 2015 (predecessor), we did recognize an income tax shortfall in earnings of $1.4 million, primarily related to restricted stock awards that vested at a price lower than the grant date fair value.

Share-based compensation for the predecessor and successor periods are not comparable. The expense for awards issued to both employees and non-employees, which was recorded in “General and administrative, net” in the accompanying condensed consolidated statements of operations was $2.9 million and $1.1 million for the three months ended September 30, 2016 (successor) and the three months ended September 30, 2015 (predecessor). For the period of January 1, 2016 through April 22, 2016 (predecessor) and the period of April 23, 2016 through September 30, 2016 (successor) the expense was $0.9 million and $3.1 million, respectively, while during the nine months ended September 30, 2015 (predecessor) the expense was $3.1 million.

We have not capitalized any share-based compensation for the three months ended September 30, 2016 (successor) and the period of April 23, 2016 through September 30, 2016 (successor). We capitalized $0.4 million and $1.0 million of share-based compensation for three and nine months ended September 30, 2015 (predecessor), respectively, and capitalized $0.2 million of share-based compensation for the period of January 1, 2016 through April 22, 2016 (predecessor). We view stock option awards and restricted stock unit awards with graded vesting as single awards with an expected life equal to the average expected life of component awards, and we amortize the awards on a straight-line basis over the life of the awards.

Stock Option Awards

On June 8, 2016, 105,811 stock option awards were granted to various officers and directors with an exercise price of $23.25. The compensation cost related to these awards is based on the grant date fair value and is typically expensed over the vesting period (generally one to three years). We use the Black-Scholes-Merton option pricing model to estimate the fair value of stock option awards with the following assumptions for stock option awards issued during the period of April 23, 2016 through September 30, 2016 (successor):



	Stock Option Valuation Assumptions
Expected Dividend	—
Expected volatility	69.3		%
Risk-free interest rate	1.42		%
Expected life of stock option awards (in years)	4
Weighted average grant-date fair value	$	12.64

To estimate expected volatility of our 2016 stock option grants we used the historical volatility of stock prices based on a group of our peer companies.

Restricted Stock Unit Awards

The 2016 equity incentive compensation plan allows for the issuance of restricted stock unit awards that generally may not be sold or otherwise transferred until certain restrictions have lapsed. The compensation cost related to these awards is based on the grant date fair value and is typically expensed over the requisite service period (generally one to three years).

On June 8, 2016, 254,905 restricted stock unit awards were granted to various officers and directors with a grant-date fair value of $23.25. These grants generally vest over a period of one to three years.

The following table represents restricted stock unit award activity for the period of April 23, 2016 through September 30, 2016 (successor):



	Shares	Grant Date Price
Restricted stock units outstanding, beginning of period (successor)	—	$	—
Restricted stock units granted	254,905	$	23.25
Restricted stock units canceled	—	$	—
Restricted stock units vested	—	—
Restricted stock units outstanding, end of period (successor)	254,905	$	23.25

In accordance with their employment agreements, the Chief Executive Officer and Chief Financial Officer will vest in all of their share-based compensation awards in conjunction with their retirements. As such, all expense for their stock option awards and restricted stock unit awards was accelerated and is included in the share-based compensation expense for the three months ended September 30, 2016 (successor). The total expense included in the period for such awards was $1.6 million for 76,058 restricted stock unit awards and $0.7 million for 60,847 stock option awards. No shares were canceled or vested during the three months ended September 30, 2016 (successor).