Stock Options

9 Months Ended

Jun. 30, 2013

12. Stock Options

On November 28, 2005, the Board of Deep Well adopted the Deep Well Oil & Gas, Inc. Stock Option Plan (the “Plan’). The Plan was approved by the majority of shareholders at the February 24, 2010 general meeting of shareholders. The Plan, is administered by the Board, permits options to acquire shares of the Company’s common stock (the “Common Shares”) to be granted to directors, senior officers and employees of the Company and its subsidiaries, as well as certain consultants and other persons providing services to the Company or its subsidiaries.

The maximum number of shares, which may be reserved for issuance under the Plan, may not exceed 10% of the Company’s issued and outstanding Common Shares, subject to adjustment as contemplated by the Plan. The aggregate number of Common Shares with respect to which options may be vested to any one person (together with their associates) in any one year, together with all other incentive plans of the Company, may not exceed 500,000 Common Shares per year, and in total may not exceed 2% of the total number of Common Shares outstanding.

On November 28, 2010, all of the stock options previously granted to five directors and three consultants , expired unexercised. In total 2,727,500 options granted to directors and former directors and their controlled companies expired.

On March 23, 2011, the Board approved to decrease the exercise price of the stock options to purchase 36,000 shares of common stock of Deep Well previously granted to an employee of the Company on September 20, 2007. The exercise price of the stock option is reduced from $0.47 per Common Share to $0.14 per Common Share, effective immediately. All other terms and conditions of the option agreement will remain unchanged. The options expired on September 20, 2012.

On March 23, 2011, the Company granted six of its directors options to purchase 450,000 shares each of common stock at an exercise price of $0.14 per Common Share, 150,000 vesting immediately and the remaining vesting one-third on March 23, 2012, and one-third on March 23, 2013, with a five-year life.

On October 25, 2011, 375,000 stock options previously granted on October 25, 2006 to a director expired unexercised.

On September 20, 2012, 240,000 and 36,000 stock options previously granted on September 20, 2007 to R.N. Dell Energy Ltd. and an employee of the Company, respectively, expired unexercised.

On June 20, 2013, the Company granted six of its directors options to purchase 450,000 shares each of common stock at an exercise price of $0.05 per Common Share, 150,000 vesting immediately and the remaining vesting one-third on June 20, 2014, and one-third on June 20, 2015, with a five-year life.

On June 20, 2013, the Company granted two consultants an option to purchase each 1,000,000 shares each of common stock at an exercise price of $0.05 per Common Share, 500,000 vesting immediately and remaining vesting on June 20, 2014.

On June 20, 2013, the Company granted one employee an option to purchase 150,000 shares each of common stock at an exercise price of $0.05 per Common Share, 50,000 vesting immediately and the remaining vesting one-third on June 20, 2014, and one-third on June 20, 2015, with a five-year life.

For the period ended June 30, 2013, the Company recorded share based compensation expense related to stock options in the amount of $102,036 (September 30, 2012 – $108,664) on the 4,850,000 stock options issued June 20, 2013. No options were exercised during the period ended June 30, 2013, therefore, the intrinsic value of the options exercised during the period ended June 30, 2013 is $nil. As of June 30, 2013, there was remaining unrecognized compensation cost of $106,916 related to the non-vested portion of these unit option awards. Compensation expense is based upon straight-line depreciation of the grant-date fair value over the vesting period of the underlying unit option.

	Shares Underlying Options Outstanding						Shares Underlying Options Exercisable
Range of Exercise Prices	Shares Underlying Options Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Shares Underlying Options Exercisable		Weighted Average Exercise Price

$0.14 at March 31, 2013		2,700,000		2.73	$	0.14		2,700,000	$	0.14
$0.05 at June 30, 2013		4,850,000		4.98		0.05		1,950,000		0.05
		7,550,000		4.17	$	0.08		4,650,000	$	0.10

The aggregate intrinsic value of exercisable options as of June 30, 2013, was $nil (September 30, 2012 - $nil).

The following is a summary of stock option activity as at June 30, 2013:

	Number of Underlying Shares		Weighted Average Exercise Price		Weighted Average Fair Market Value

Balance, September 30, 2012		2,700,000	$	0.14	$	0.12

Balance, June 30, 2013		7,550,000	$	0.08	$	0.07

Exercisable, June 30, 2013		4,650,000	$	0.10	$	0.09

A summary of the options granted at June 30, 2013 and September 30, 2012 and changes during the periods then ended is presented below:

	June 30, 2013				September 30, 2012
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price

Outstanding balance at beginning of period		2,700,000	$	0.14		1,800,000	$	0.14
Granted at June 20, 2013		4,850,000		0.05		–		–
Vested at June 20,2013		1,950,000		0.05		–		–
Exercised		–				–		–
Expired or canceled		–				–		–

Outstanding at end of period		7,550,000	$	0.08		1,800,000	$	0.14

Exercisable		4,650,000	$	0.10		1,800,000	$	0.14

There were 2,900,000 unvested stock options outstanding as of June 30, 2013 (September 30, 2012 – 900,000).

Measurement Uncertainty

The Company used the Black-Scholes option pricing model (“Black-Scholes”) to value the options and warrants. This model was developed for use in estimating the fair value of traded “European” options which are liquid and that have no vesting restrictions and are fully transferable. Stock options and the warrants attached to the units issued by the Company are non-transferable and vest over time, and are “American” options. Option pricing models require the input of subjective assumptions including expected share price volatility. The fair value estimate can vary materially as a result of changes in the assumptions. The following assumptions are used in the Black-Scholes option-pricing model:

Expected Term – Expected term of 5 years represents the period that the Company’s stock-based awards are expected to be outstanding.

Expected Volatility – Expected volatilities are based on historical volatility of the Company’s stock, adjusted where determined by management for unusual and non-representative stock price activity not expected to recur. The expected volatility used ranged from 96% to 116%.

Expected Dividend – The Black-Scholes valuation model calls for a single expected dividend yield as an input. The Company currently pays no dividends and does not expect to pay dividends in the foreseeable future.

Risk-Free Interest rate – The Company bases the risk-free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term. The risk-free rate used ranged from 0.62% to 1.31%.