The Company has adopted the provisions of ASC 718 – Compensation which requires companies to measure the cost of employee services received in exchange for equity instruments based on the grant date fair value of those awards and to recognize the compensation expense over the requisite service period during which the awards are expected to vest.

On December 29, 2008, the Company adopted the Pacific Entertainment Corporation 2008 Stock  Option Plan (the “Plan”), which provides for the issuance of qualified and non-qualified stock options to officers, directors, employees and other qualified persons. The Plan is administered by the Board of Directors of the Company or a committee appointed by the Board of Directors. The number of shares of the Company’s common stock initially reserved for issuance under the Plan was 11 million. On September 2, 2011, the shareholders holding a majority of the Company’s outstanding common stock adopted an amendment to the Company’s 2008 Stock Option Plan to increase the number of shares of common stock issuable under the plan to 50 million.  

On January 1, 2011, the Company issued a Stock Option Grant to the Vice President of Sales for the purchase of up to 25,000 shares of common stock, fully vesting as of March 31, 2011. The exercise price of $0.336 was determined using an average of the closing price of the five days immediately preceding the Date of Grant.  The Company’s calculation of the fair market value of the stock-based award that was granted was $0.14 per option, or $3,426 for the option granted.  The full value of the options was expensed in 2011.

On April 1, 2011, pursuant to employment agreements between the Company and Messrs. Moeller, Meader, Larry Balaban and Howard Balaban each executive has been granted a non-qualified stock option to purchase up to 1,000,000 shares of the Company’s common stock at an exercise price of $0.44 per share, vesting as to 250,000 shares on April 1, 2011 and 250,000 shares per year on the anniversary date of the agreements. The options have a 10 year life from the date of grant.  The exercise price was determined using 110% of the average of the closing price of the five days immediately preceding the Date of Grant.  The Company’s calculation of the fair market value of the stock-based award that was granted was $0.19 per option, or $756,304 for all of the options granted.  Expense was recorded in 2012 and 2011 in the amount of $189,076 and $330,883, respectively, representing 1,000,000 options vested on April 1, 2011 and the amortized expense for the remaining 3,000,000 options recognized on a straight line basis over the remaining three years of the vesting schedule.

On April 1, 2011, the Company issued a stock option grant to the Vice President of Sales for the purchase of up to 25,000 shares of common stock, fully vesting as of June 30, 2011. The Company’s calculation of the fair market value of the stock-based award that was granted was $0.15 per option, or $3,448 for the option granted.  The full value of the option was expensed in 2011.

On June 1, 2011, as a result of a consulting agreement to provide certain management and advisory services, the Company issued a stock option grant notice to purchase up to 1,000,000 shares of the Company’s common stock, vesting as to 500,000 shares each on May 31, 2012 and 2013. The exercise price is $0.44 per share. The Company’s calculation of the fair market value of the stock-based award that was granted was $0.05 per option, or $49,257 for the option granted.  The expense was amortized over the vesting schedule on a straight line basis. A total expense of $24,629 and $14,367 was recognized in 2012 and 2011, respectively.

On July 1, 2011, the Company issued a stock option grant to the Vice President of Sales for the purchase of up to 25,000 shares of common stock, fully vesting as of September 30, 2011. The Company’s calculation of the fair market value of the stock-based award that was granted was $0.04 per option, or $1,122 for the option granted.  The full value of the options was expensed in 2011.

On October 1, 2011, the Company issued a stock option grant to the Vice President of Sales for the purchase of up to 25,000 shares of common stock, fully vesting as of December 31, 2011. The Company’s calculation of the fair market value of the stock-based award that was granted was $0.05 per option, or $1,250 for the option granted.  The full value of the options was expensed in 2011.

On December 31, 2011 the Company issued Stock Option Grant notices to eighteen employees and service providers under the 2008 Stock Option Plan, as amended.  Options to purchase 715,000 shares of common stock at an average exercise price of $0.21 per share were granted with a 5 year life, fully vesting on December 31, 2011.  The exercise price was determined using an average of the closing price of the five days immediately preceding the Date of Grant.  The Company’s calculation of the fair market value of the stock-based award that was granted was $0.09 per option, or $65,890 for all of the options granted.  The full value of the options was expensed in 2011.

On December 31, 2011, the Company issued a Stock Option Grant notice in conjunction with the employment of a Marketing Director under the 2008 Stock Option Plan, as amended.  An option to purchase up to 250,000 shares of common stock at an exercise price of $0.44 per share was granted fully vesting on September 30, 2012. The Company’s calculation of the fair market value of the stock-based award that was granted was $0.06 per option, or $14,007 for all of the option granted.  Expense was recorded in 2012 and 2011 in the amounts of $10,505 and $3,502, respectively.

The Company used the Black-Scholes valuation model to estimate the grant date fair value of the options granted in 2011.  The Company used the following assumptions for the 2011 valuations:

On January 1, 2012 and April 1, 2012, the Company issued two Stock Option Grants to the Vice President of Sales for the purchase of up to 25,000 shares of common stock each, which were fully vested as of March 31, 2012 and June 30, 2012, respectively, with a life of five years and an exercise price of $0.50. The Company’s calculation of the fair market value of the stock-based award that was granted was $0.025 per option, or $1,265 for all of the options granted.  The full value of the options was expensed in 2012.

On May 2, 2012, pursuant to an employment agreement with the Chief Financial Officer, the Company issued an option to purchase up to 200,000 shares of common stock. The option fully vests on December 31, 2014, has a five year term and an exercise price of $0.44. The Company’s calculation of the fair market value of the stock-based award that was granted was $0.05 per option, or $11,588 for all of the options granted.  The amount expensed in 2012 was $2,897.

On July 6, 2012, the Company issued an option to purchase 100,000 shares of common stock pursuant to a services agreement with a consultant. The option is fully vested as of July 6, 2012, has a five year term and an exercise price of $0.44. The Company’s calculation of the fair market value of the stock-based award that was granted was $0.07 per option, or $6,889 for all of the options granted.  The full value of the options was expensed in 2012.

On December 31, 2012 the Company issued Stock Option Grant notices to nineteen employees and service providers under the 2008 Stock Option Plan, as amended.  Options to purchase 755,000 shares of common stock at an average exercise price of $0.15 per share were granted with a 5 year life, fully vesting on December 31, 2012.   The Company’s calculation of the average fair market value of the stock-based award that was granted was $0.02 per option, or $13,794 for all of the options granted.  The full value of the options was expensed in 2012.

The Company used the Black-Scholes valuation model to estimate the grant date fair value of the options granted in 2012.  The Company used the following assumptions for the 2012 valuations:

As of December 31, 2012, options to purchase up to 255,000 shares of the Company’s common stock previously issued in 2009 through 2012 expired due to the termination of employees.

The following schedule summarizes the changes in the Company’s stock option plan during 2012 and 2011: