12.

STOCK OPTIONS

On November 28, 2005, and as amended on December 4, 2013, 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) under the plan, together with all other incentive plans of the Company in any one year shall not exceed 2% of the total number of Common Shares outstanding, and in total may not exceed 6% of the total number of Common Shares outstanding.

Prior to October 1, 2013, the Company had a total of 4,350,000 options outstanding, that were previously granted to directors, consultants and an employee of the Company on March 23, 2011 and June 20, 2013, to purchase up to 3,450,000 and 900,000 shares, respectively, each of common stock at exercise prices ranging from $0.14 to $0.05, respectively, of which a total of 950,000 options granted on June 20, 2013 remain unvested.

On October 28, 2013, the Company granted a contractor an option to purchase 250,000 shares of common stock at an exercise price of $0.30 per Common Share, all vesting immediately, with a five-year life, for his services in connection with the Farmout Agreement dated July 31, 2013.

On December 4, 2013, the Company appointed a new director to its Board and in connection with the appointment the Company granted the new director an option to purchase 450,000 shares each of common stock at an exercise price of $0.34 per Common Share, 150,000 vesting immediately and the remaining vesting one-third on December 4, 2014, and one-third on December 4, 2015, with a five-year life.

On September 19, 2014, the Company granted seven of its directors options to purchase 600,000 shares each of common stock at an exercise price of $0.38 per Common Share, 200,000 vesting immediately and the remaining vesting one-third on September 19, 2015, and one-third on September 19, 2016, with a five-year life.

On September 19, 2014, the Company granted two consultants an option to purchase each 1,200,000 shares each of common stock at an exercise price of $0.38 per Common Share, 600,000 vesting immediately and remaining vesting on September 19, 2015.

On September 19, 2014, the Company granted one employee an option to purchase 180,000 shares each of common stock at an exercise price of $0.38 per Common Share, 60,000 vesting immediately and the remaining vesting one-third on September 19, 2015, and one-third on September 19, 2016, with a five-year life.

On November 17, 2014, the Company appointed a new director to its Board and in connection with the appointment the Company granted the new director an option to purchase 600,000 shares each of common stock at an exercise price of $0.23 per Common Share, 200,000 vesting immediately and the remaining vesting one-third on November 17, 2015, and one-third on November 17, 2016, with a five-year life.

On March 23, 2016, 900,000 stock options previously granted on March 23, 2011 to two directors, expired unexercised.

For the year ended September 30, 2016, the Company recorded share-based compensation expense related to stock options in the amount of $237,971 (September 30, 2015 – $ 1,116,544) on the stock options that were previously granted. As of September 30, 2016, there was remaining unrecognized compensation cost of $2,314 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

$0.05 at September 30, 2016		3,450,000		1.72		0.05		3,450,000		–
$0.30 at September 30, 2016		250,000		2.08		0.30		250,000		–
$0.34 at September 30, 2016		450,000		2.18		0.34		450,000		–
$0.38 at September 30, 2016		6,780,000		2.97		0.38		6,780,000		–
$0.23 at September 30, 2016		600,000		3.13		0.23		400,000		–
		11,530,000		2.55	$	0.27		11,330,000	$	–

The aggregate intrinsic value of exercisable options as of September 30, 2016, was $Nil (September 30, 2015 - $Nil).

The following is a summary of stock option activity as at September 30, 2016:

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

Balance, September 30, 2015		12,430,000	$	0.26	$	0.20

Balance, September 30, 2016		11,530,000	$	0.27	$	0.22

Exercisable, September 30, 2016		11,330,000	$	0.27	$	0.22

A summary of the options granted at September 30, 2016 and 2015 and changes during the periods then ended is presented below:

	September 30, 2016					September 30, 2015
	Shares			Weighted Average Exercise Price		Shares		Weighted Average Exercise Price

Outstanding balance at beginning of period		12,430,000		$	0.26		11,830,000	$	0.26

Granted - November 17, 2014							600,000		0.23
Vested - November 17, 2014							200,000		0.23
Vested - December 4, 2014							150,000		0.34
Vested - June 20, 2015							950,000		0.05
Vested - September 19, 2015							2,660,000		0.38
Vested - November 17, 2015		200,000			0.23
Vested - December 4, 2015		150,000			0.34
Vested - September 19, 2016		1,460,000			0.38
Expired – March 23, 2016		(900,000	)		0.14
Outstanding at end of period		11,530,000		$	0.27		12,430,000	$	0.26

Exercisable		11,330,000			0.27		10,420,000		0.24

There were 200,000 unvested stock options outstanding as of September 30, 2016 (September 30, 2015 – 2,010,000).

Measurement Uncertainty for Stock Options

The Company used the Black-Scholes pricing model (“Black-Scholes”) to value the stock options. This pricing model was developed for use in estimating the fair value of traded “European” options. The stock options that are granted to employees, directors and consultants are non-transferable and some vest over time, and are “American” options. This pricing model requires 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, and therefore can materially affect the calculated fair value of the stock options. The following assumptions were used in the Black-Scholes pricing model to value the stock options:

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 102% to 122%.

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 1.31% to 2.07%.