11.  STOCK-BASED COMPENSATION



Our stock-based compensation has been granted under several stock incentive and long-term incentive plans. The plans authorize the Compensation Committee of our Board of Directors to issue various types of incentive compensation. Currently, we have issued stock options, restricted shares and stock appreciation rights from the 2014 Long-Term Incentive Plan (“2014 Plan”). At September 30, 2018,  1,112,527 shares were authorized for future grants under the 2014 plan.

For each stock option granted, the number of authorized shares under the 2014 Plan will be reduced on a one-for-one basis. For each restricted share granted, the number of shares authorized under the 2014 Plan will be reduced by twice the number of restricted shares. We have no set policy for sourcing shares for option grants. Historically the shares issued under option grants have been new shares.

We record compensation expense related to stock-based compensation as general and administrative expense.  For the three months ended September 30, 2018 and 2017, stock-based compensation was $1.1 million and $0.2 million, respectively, related to the issuance of stock options, restricted stock and SARs.  For the nine months ended September 30, 2018 and 2017, stock-based compensation was $3.8 million and $0.9 million, respectively, related to the issuance of stock options, restricted stock and SARs. Because we do not pay significant United States federal income taxes, no amounts were recorded for future tax benefits.

Stock options

Stock options have an exercise price that may not be less than the fair market value of the underlying shares on the date of grant. In general, stock options granted to participants will become exercisable over a period determined by the Compensation Committee of our Board of Directors, which in the past has been a five-year life, with the options vesting over a service period of up to five years. In addition, stock options will become exercisable upon a change in control, unless provided otherwise by the Compensation Committee. There were $0.5 million and $38 thousand in cash proceeds from the exercise of stock options in the nine months ended September 30, 2018 and 2017, respectively.  During the nine months ended September 30, 2018, options for 494,941 shares were granted to employees; these options vest over a three-year period, vesting in three equal parts on the first, second and third anniversaries after the date of grant and have an exercise price of $0.86 per share.  During the nine months ended September 30, 2018, options for 175,644 shares were granted to directors; these options vested immediately on the date of grant and have an exercise price of $1.60 per share.

Stock option activity for the nine months ended September 30, 2018 is provided below:



Restricted shares

Restricted stock granted to employees will vest over a period determined by the Compensation Committee which is generally a three-year period, vesting in three equal parts on the first three anniversaries following the date of the grant. Share grants to directors vest immediately and are not restricted.   During the nine months ended September 30, 2018, the Company issued 323,474 shares of service based restricted stock to employees with a grant date fair value of $0.86 per share.  The vesting of these shares is dependent upon the employee’s continued service with the Company.  The shares will vest in three equal parts over three years from the date of the grant. The following is a summary of activity in unvested restricted stock in the nine months ended September 30, 2018.  During the nine months ended September 30, 2018, restricted stock for 75,000 shares were granted to directors; these shares vested immediately on the date of grant and had a grant date fair value of $1.60 per share.

During the three and nine months ended September 30, 2018,  8,117 shares were added to treasury as a result of tax withholding on vestings of restricted shares.  During the three and nine months ended September 30, 2017,  9,117 shares were added to treasury as a result of tax withholding on vestings of restricted shares.

Stock appreciation rights

SARs are granted under the VAALCO Energy, Inc. 2016 Stock Appreciation Rights Plan. A SAR is the right to receive a cash amount equal to the spread with respect to a share of common stock upon the exercise of the SAR. The spread is the difference between the SAR price per share specified in a SAR award on the date of grant (which may not be less than the fair market value of our common stock on the date of grant) and the fair market value per share on the date of exercise of the SAR. SARs granted to participants will become exercisable over a period determined by the Compensation Committee of our Board of Directors. In addition, SARs will become exercisable upon a change in control, unless provided otherwise by the Compensation Committee of our Board of Directors.

During the nine months ended September 30, 2018,  2,373,411 SARs were granted to employees which vest over a three-year period with a life of 5 years and have a $0.86 SAR price per share specified in a SAR award on the date of grant.  With respect to SARs granted in 2017, one-third of the SARs are to vest on or after the first anniversary of the grant date at such time when the market price per share of our common stock exceeds $1.30; one-third of the SARs are to vest on or after the second anniversary of the grant date at such time when the share price exceeds $1.50; and one-third of the SARs are to vest on or after the third anniversary of the grant date at such time when the share price exceeds $1.75.   The vesting requirements for two-thirds of the SARs granted in 2017 have been met. 

SAR activity for the nine months ended September 30, 2018 is provided below: