STOCK BASED COMPENSATION

9 Months Ended

Sep. 30, 2011

STOCK BASED COMPENSATION

STOCK BASED COMPENSATION

5. STOCK BASED COMPENSATION

Our stock based compensation programs consist of stock options and restricted stock granted to employees and directors.

Stock Compensation Expense

Stock compensation expense for the nine months ended September 30, 2011 and 2010 was $737,000 and $796,000, respectively. Stock compensation expense is recorded as a component of general and administrative expenses for each period. The Company did not recognize a tax benefit from the stock compensation expense because the Company considers it is more likely than not that the related deferred tax assets, which have been reduced by a full valuation allowance, will not be realized.

The Black-Scholes option pricing model was used to estimate the stock option fair values. The option pricing model requires a number of assumptions, of which the most significant are, expected stock price volatility, the expected pre-vesting forfeiture rate and the expected option term (the amount of time from the grant date until the option or restricted shares are exercised, vest or expire). Expected volatility was calculated based upon actual historical stock price movements through the measurement date of the stock option grant. Expected pre-vesting forfeitures were estimated based on actual historical pre-vesting forfeitures over the most recent periods ending September 30, 2011 for the expected term. The expected term was estimated based on historical averages over the most recent quarter ending September 30, 2011.  Restricted stock grants are valued using the fair market value of the stock on the date of grant.

At the June 2011 annual meeting of the stockholders, each of the three non-employee directors of the Company were granted 33,333 shares of restricted common stock of the Company and an option to purchase 16,667 shares of common stock under the Amended and Restated 2004 Directors Stock Option and Restricted Stock Plan (the “Amended 2004 Directors’ Plan”) in lieu of the annual stock option grants made in connection with the annual meeting.  Both the restricted shares and the stock option grant shares vest at the rate of 25% per year on the anniversary date of their grant date.  At September 30, 2011, 1,356,250 shares were available for future stock option and restricted share grants under the Amended 2004 Directors’ Plan.  The Company recognized stock compensation expense for the restricted share and stock option grants of $18,200 in 2011 in connection with these grants.

On June 7, 2011 the Company’s Executive Chairman was granted 33,333 shares of restricted common stock of the Company and an option to purchase 16,667 shares of common stock under the Company’s 2004 Stock Incentive Plan.  Both the restricted shares and the stock option grant shares vest at the rate of 25% per year on the anniversary date of their grant date.  The Company recognized stock compensation expense for the restricted share and stock option grants of $5,800 in 2011 in connection with these grants.

A total of 42,553 shares of restricted stock were issued on January 3, 2011 to the President/CEO.  This grant was made in connection with 2010 performance criteria in accordance with his employment agreement.  The Company recognized stock compensation expense for the restricted share grants of $140,000 in the first quarter of 2011 in connection with this issuance.

At the June 2010 annual meeting of the stockholders, each of the non-employee directors of the Company were granted 50,000 shares of restricted common stock of the Company under the Amended 2004 Directors Plan in lieu of the annual stock option grants made in connection with the annual meeting.  Such shares vest 25% per year on the anniversary date of their grant date.  In the first quarter of 2010, 50,000 stock options were granted to a newly appointed director at an exercise price of $0.76 per share and fair value of $0.73 per option under the 2004 Directors’ Stock Option Plan.  The non-employee directors held options covering 781,250 shares and 200,000 shares for restricted stock under the Amended 2004 Directors’ Plan at September 30, 2010.

A total of 85,000 stock options were granted to employees of the Company at an exercise price of $0.73 per share and fair value of $0.70 per option in the second quarter of 2010 under the Company’s 2004 Stock Incentive Plan.  These options vest ratably over four years.

A total of 65,820 and 73,751 shares of restricted stock were granted in the first and second quarters of 2010, respectively, to four executive officers on January 4 and April 1, 2010 in connection with a cash conservation plan initiated in 2009.  All of these shares vest one year from the date of grant.  The Company recognized stock compensation expense for the restricted share grants of approximately $66,400 during the first nine months of 2010.

Effective September 30, 2010, Robert M. Gallagher resigned as a member of the Board of Directors and, as of October 1, 2010 was engaged as a consultant to assist the Company in its efforts to advance toward production in New Mexico. Mr. Gallagher is engaged through the entity RMG Consulting, LLC, a government and community relations firm in which he is the principal.  In connection with this change, the terms of the equity awards granted to Mr. Gallagher were modified whereby the vesting attributable to 25% of the 50,000 share stock option grant made on January 20, 2010 was accelerated to the date of his resignation and the exercise period was extended to September 30, 2012. In addition, the vesting attributable to 25% of the 50,000 share restricted stock grant made on June 3, 2010 was accelerated to the date of his resignation. The Company recognized stock compensation expense for the modifications of approximately $12,000 during the first nine months of 2010. All remaining unvested equity awards were forfeited upon his resignation.

The total estimated unrecognized compensation cost from all unvested stock options and restricted stock grants at September 30, 2011 was approximately $665,000, which is expected to be recognized over the weighted average vesting period of the individual grants which range from 1-3 years.

Stock Options for the Nine months Ended September 30, 2011

The following table summarizes stock options outstanding and changes during the nine month period ended September 30, 2011:

	Outstanding Options
	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term —in years	Aggregate Intrinsic Value
Options outstanding at January 1, 2011	3,819,838		$	2.70
Granted	66,668		1.73
Exercised	(37,150	)	0.76
Canceled or forfeited	(864,125	)	3.10
Options outstanding at September 30, 2011	2,985,231		$	2.59	4.0	$	—
Options exercisable at September 30, 2011	2,654,397		$	2.63	3.7	$	—

Shares available for grant under the Stock Option Plans as of September 30, 2011 were 2,564,291.

Stock options outstanding and currently exercisable at September 30, 2011 are as follows:

	Options Outstanding				Options Exercisable
Stock Option Plan	Number of Options Outstanding	Weighted Average Remaining Contractual Life(in years)	Weighted Average Exercise price		Number of Options Exercisable	Weighted Average Exercise Price
1995 Stock Incentive Plan	1,834,062	2.9	$	1.31	1,834,062	$	1.31
2004 Stock Incentive Plan	407,418	4.7	3.45		239,085	4.28
2004 Directors’ Plan	743,751	6.4	5.26		581,250	6.12
	2,985,231	4.0	$	2.59	2,654,397	$	2.63