Document:

exv10w3

Exhibit 10.3

BASIC EARTH SCIENCE SYSTEMS, INC.

PERFORMANCE BONUS PLAN

The chief executive officer’s potential cash bonus shall be equal to 100% of his or her annual
salary. The bonus shall be determined based on four (4) criteria, each contributing up to a
maximum of 25% of his or her bonus. The four criteria are (i) increase in annual production; (ii)
increase in reserves; (iii) return on investment; and (iv) performance of the Company’s stock price
relative to the stock prices of its peer companies. The percentage awards from each criterion are
added to determine the total percentage of the award. This Bonus Plan shall be effective for
fiscal years beginning with the fiscal year ended March 31, 2009.

Annual Production Bonus Award Percentage

The Compensation Committee believes that increasing production is a critical measure of
performance. Oil and gas reserves are a finite resource and, if unaddressed, declines in
production from previous levels are expected. Any increase in production from previous levels is
not only an indication of arresting this natural decline but a strong indicator of growth.

The Annual Production Bonus Award Percentage shall be based on the annual percentage increase in
production. The annual increase in production shall be determined by dividing the annual
production in barrels of oil equivalent (BOE) for the most recent fiscal year by the annual
production in BOE for the prior fiscal year and then subtracting 100%. For each percentage
increase in annual production, the annual production bonus award shall be equal to 2% of the chief
executive officer’s salary as of the end of the fiscal year to which the bonus relates. In each
case the percentage award shall be a maximum of 25% and a minimum of 0%.

Reserves Bonus Award Percentage

The Compensation Committee believes that increasing the Company’s reserve base is critical to the
Company’s future growth. If the Company does not replace the reserves it produces, the Company’s
production would decline year after year. In order to grow, it is necessary for the Company to
replace these reserves by discovering new reserves or acquiring producing properties. The
estimation of reserves involves a number of variables, including commodity prices. Commodity
prices are beyond the control of the chief executive officer. The Compensation Committee believes
this limitation is acceptable, because in those years when commodity prices are up and have a
positive effect on bonus determination, the Company is more likely to have the funds to pay
bonuses. Likewise, in years that commodity prices are down and have a negative effect on bonus
determination, the Company is less likely to have the funds to pay bonuses.

The Reserves Bonus Award Percentage shall be based on the annual percentage increase in reserves
measured in BOE. The annual increase in reserves shall be determined by dividing the reserves in
BOE at the end of the most recent fiscal year by the reserves in BOE at the end of the prior fiscal
year and then subtracting 100%. For each percentage increase in annual reserves, the bonus award
shall be 2% of the chief executive officer’s salary as of the end of the fiscal year to which the
bonus relates. In each case the percentage award shall be a maximum of 25% and a minimum of 0%.

Return on Investment Bonus Award Percentage

The Compensation Committee believes that it is important to balance the incentive to increase
production and reserves with a metric that rewards the effectiveness of those increases. This
Return on Investment metric is intended to evaluate capital expenditures in a given year (or
multiple years in the case of multi-year projects or those projects that overlap a year end) versus
the anticipated cash flow, if any, that those projects, on an aggregate basis, are expected to
generate.

 

 

The Return on Investment Bonus Percentage shall be calculated first using a recognized petroleum
engineering cash flow model (such as Aries, PowerTools, etc.) to determine the Internal Rate of
Return (IRR) of anticipated cash flows for the current and future years less capital expenditures.
While calculated on a cash flow model, the metric conceptually is as follows:

	 	 	 	 	 	 	 	 	 	 	 
	Return on Investment	 	 	 	æ	 	 	 	 	 	ö
	Bonus Award Percentage
	 	= 2 X
	 	ç	 	After Tax IRR
	 	– 8.0%	 	÷
	 	 	 	 	è	 	 	 	 	 	ø

“After Tax Internal Rate of Return” (IRR) is the discount rate, expressed as a percentage, at
which the summation of all discounted, after-tax cash flows (including Discounted Future Cash Flow,
Discounted Current Year Cash Flow and Discounted Capital Expenditures) is equal to zero ($0).

“Discounted Capital Expenditures” shall mean the capital expenditures that were incurred in the
most recent fiscal year and were associated with GAAP proved properties, including geological and
geophysical costs, land, drilling (including dry holes), completions, recompletions and
acquisitions. Capital Expenditures that were incurred during the year (or over a fiscal year end),
and for which no reserves have been determined, shall be deferred and not included in the
determination for that fiscal year. Likewise, Capital Expenditures associated with a GAAP unproved
property shall be deferred and not included in the determination for that fiscal year. Once a
deferred property for which these Capital Expenditures were incurred has been transferred from
unproven to proven, or a year-end reserve determination has been made and recorded, such property,
and all deferred capital expenditures associated with that property, shall be included in the
determination for that fiscal year. Capital expenditures shall be input into the model at the
beginning of the fiscal year or as near the month that they were incurred as possible.

“Discounted Future Cash Flow” from the properties that are to be evaluated in a particular year
(whether newly added or previously deferred) shall be initially based on the most recent
GAAP-based, third party engineering reserve report. However, the report shall be modified to begin
the report on the first day of the fiscal year, but future cash flow shall not start until first
day after the end of the fiscal year. The report shall be further modified to use oil and gas
prices based on the average annual NYMEX futures strip price and then remain fixed once futures
prices are relatively unchanged or unavailable. Lease operating expenses shall escalate at 3% per
year until commodity prices remain unchanged.

“Discounted Current Year Cash Flow” is the cash flow generated during the fiscal year from the
evaluated properties and is added to the model at the end of the fiscal year or as near the
midpoint of the cash flow as possible.

The Return on Investment Bonus Award Percentage shall be determined by subtracting an 8% hurdle
rate from the ROI and multiplying by 2. The 8% hurdle rate approximates the company’s cost of
funds. In each case the percentage award shall be a maximum of 25% and a minimum of 0%. The
return on investment bonus award shall equal the Return on Investment Bonus Award Percentage
multiplied by the chief executive officer’s salary as of the end of the fiscal year to which the
bonus relates.

Share Price Bonus Award Percentage

The Compensation Committee believes that, in addition to the above, the chief executive officer
should focus on the fundamentals of the business, net income and EBITDA. Furthermore, the
Compensation Committee believes that the market will reward solid, consistent growth in these
areas. For this reason, the Compensation Committee has chosen Share Price as the metric most
suitable for rewarding consistent improvement in the fundamentals of the business. The
Compensation Committee is aware that market forces, or even more superficial forces, can have a
positive or negative influence on stock price. Furthermore, that incenting stock price growth
could cause management to take unjustified risk or artificially influence stock prices. The
Compensation Committee has determined, however, that by balancing this metric against the other
three, by limiting this award component to 25% and by creating the need to follow this year’s
performance with a similar performance next year, the incentive to take

 

 

unnecessary risk and the incentive to use superficial and artificial means to promote stock price
will not be justified.

The percentage increase or decrease in the Company’s stock price will be evaluated relative to the
Company’s peers on a quartile basis. Peer companies will be selected by the Compensation Committee
based on a number of factors, including but not limited to, market capitalization, stock exchange,
similarity of business model (producer, operator), availability of compensation data, location of
producing assets, number of employees, location of headquarters and director/officer ownership.
The Compensation Committee shall determine the group of peer companies by October 15th of the
fiscal year being evaluated. The average closing price per share for the ten trading days
preceding April 1st following the end of the fiscal year (beginning of new fiscal year)
will be divided by the average closing price per share for the ten trading days preceding April
1st of the fiscal year to be evaluated. One hundred percent (100%) will be subtracted
from this number to determine the percentage increase or percentage decrease in the Company’s stock
price. A similar computation will be made for peer companies. The Company’s stock performance
shall be ranked relative to its peers. The Share Price Bonus Award Percentage shall be based on
quartile standing as follows:

	 	 	 	 	 	 	 	 	 
	Company Standing	 	Calculation	 	 	Bonus Award	 
	First Quartile
	 	100.0% of 25%	 	 	25.000	%
	Second Average Quartile
	 	62.5% of 25%	 	 	15.625	%
	Third Average Quartile
	 	37.5% of 25%	 	 	9.375	%
	Fourth Quartile
	 	0.0% of 25%	 	 	0.000	%

The share price bonus award shall equal the Share Price Bonus Award Percentage multiplied by the
chief executive officer’s salary as of the end of the fiscal year to which the bonus relates.

Payment of Bonus

The bonus shall be paid to the chief executive officer following determination of the amount by the
Compensation Committee, provided that payment must be made before March 15th of the year
following the end of the fiscal year earned (for fiscal years ended March 31st). For
example, the bonus for the fiscal year ended March 31, 2010, shall be paid by March 15, 2011. No
chief executive officer shall be entitled to a bonus if such chief executive officer was not
employed at the end of the fiscal year to which the bonus relates or was employed for less than the
full fiscal year to which the bonus relates. If a chief executive officer was not employed by the
Company as of the end of the fiscal year, the Compensation Committee may, in its sole discretion,
prorate the bonus for that portion of the fiscal year that the chief executive officer was employed
or decide not to pay a bonus. Likewise, if a chief executive officer is employed at the end of the
fiscal year but not for the full fiscal year, the Compensation Committee may, in its discretion,
prorate the bonus for that portion of the fiscal year that the chief executive officer was employed
or decide not to pay a bonus.

Miscellaneous Provisions

The Compensation Committee of the Board of Directors shall have the complete and exclusive
authority to terminate this Bonus Plan. Nothing in this Bonus Plan shall limit or be deemed to
limit the authority of the Board of Directors or the Compensation Committee to authorize
compensation under this Bonus Plan.

The Compensation Committee may correct any defect, supply any omission or reconcile any
inconsistency in this Bonus Plan in the manner and to the extent it shall deem proper and in the
best interest of the Company. No member of the Compensation Committee shall be liable for any
action or determination made in good faith, and all members of the Compensation Committee shall, in
addition to their rights as Directors, be fully indemnified by the Company with respect to any such
action, determination or interpretation in respect of this Bonus Plan.

The Board of Directors intends that, except as may be otherwise determined by the Compensation
Committee, any award, award agreement, payment, distribution, deferral election, transaction or any
other

 

 

action or arrangement contemplated by the provisions of this Bonus Plan (an “Award”) is either
exempt from or satisfies the requirements of Section 409A of the Internal Revenue Code of 1986, as
amended, and related regulations and Treasury pronouncements (“Section 409A”) to avoid the
imposition of any taxes, including additional income or penalty taxes, thereunder. If the
Compensation Committee determines, in its sole discretion, that an Award is or would be subject to
any taxes, including additional income or penalty taxes, under Section 409A, unless the
Compensation Committee expressly determines otherwise, such Award shall not be undertaken and the
related provisions of this Bonus Plan and/or award agreement will be deemed modified or, if
necessary, rescinded in order to render the Award not subject to any taxes, including additional
income or penalty taxes, under Section 409A to the extent determined by the Compensation Committee
without the consent of, or notice to, the participant.

This Bonus Plan shall be governed by and subject to the laws of the State of Delaware.exv10w4

Exhibit 10.4

BASIC EARTH SCIENCE SYSTEMS, INC.

DIRECTOR COMPENSATION PLAN

Effective April 1, 2007

I. GENERAL PROVISIONS

     1.1 Purpose The purpose of this Basic Earth Science Systems, Inc. Director Compensation Plan
(this “Plan”) is to attract and retain qualified individuals who are not employed by Basic Earth
Science Systems, Inc., or its subsidiaries, (the “Company”) to serve as directors on the Company’s
Board of Directors (each a “Director” and collectively, the “Directors”). Each Director is
expected to remain as a member of the Company’s Board of Directors for his or her entire term and
carry out, to the best of his or her abilities, the duties of his or her position along with any
committee chairmanship and/or committee member assignments. This Plan is intended to align the
interests of such Directors with those of the Company’s stockholders by providing that a
significant portion of such Directors’ compensation is directly linked to increases in the value of
the Company’s common stock, par value $0.001 per share (the “Common Stock”).

     1.2 Eligible Participants Each Director that is not an employee of the Company and is
“independent” as that term is defined in the rules and regulations of the NYSE Amex LLC (formerly
known as the American Stock Exchange) shall be eligible for compensation under this Plan.

     1.3 Plan Administration, Amendment and Interpretation This Plan shall be administered by the
Compensation Committee of the Board of Directors, which shall have the power to interpret this Plan
and amend it from time to time as it deems proper. The determination, interpretations and other
actions of the Compensation Committee pursuant to the provisions of this Plan shall be binding and
conclusive for all purposes and on all persons.

II. ANNUAL RETAINER AND MEETING FEES

     2.1 Annual Retainer Each Director shall be entitled to receive an annual retainer consisting
of (a) $16,000 payable in cash and (b) restricted stock having a value as of the date of grant of
approximately $36,000 (together, the “Annual Retainer”). The cash portion of the retainer shall be
paid to each Director no later than the first March 15th following the end of the year
to which such Annual Retainer relates.

     2.2 Annual Restricted Stock Award As part of the Annual Retainer, each Director will receive
an award of shares of restricted stock on April 1st of each year. The number of shares
of restricted stock so granted each year will be determined by dividing $36,000 by the fair market
value of the Common Stock. Fair market value of the Common Stock shall be the average of the
closing price of the Common Stock (on the primary exchange on which the Common Stock is then
traded) during the ten trading days immediately preceding each anniversary date of the restricted
stock grant. A fractional share resulting from such calculation will be rounded to the nearest
whole share. All grants of restricted stock shall also be subject to the terms and conditions set
forth in Article III below.

     2.3 Retainer Fee for Committee Chairs Committee chairpersons of the Audit, Compensation and
Nominating Committees shall be paid additional compensation of $5,500, $4,500 and $3,500 per year,
respectively. Such payment shall be made on October 1st of each year to which the
payment relates, payable in cash.

     2.4 Meeting Fees Each Director shall receive a fee of $2,000, payable in cash, for each
quarterly regular meeting of the Board of Directors that he or she attends and each all-day special
meeting of the Board of Directors that he or she attends. In addition, each Director shall receive
a fee of $500,

 

 

payable in cash, for each meeting of a committee of the Board of Directors and each half-day
special meeting of the Board of Directors that he or she attends. No committee meeting fees are
payable with respect to attendance by a Director at a committee meeting held in conjunction with a
regular quarterly or all-day special meeting of the Board of Directors. Meeting fees shall be paid
to each Director no later than the first March 15th following the end of the year in
which the meeting to which the payment relates was held.

     2.5 Expense Reimbursement Each Director shall be reimbursed for his or her reasonable
expenses incurred, if any, when attending meetings of the Board of Directors and committee
meetings. Such reimbursements shall be paid to the Director no later than the first March
15th following the end of the year in which the meeting to which the reimbursement
relates was held.

III. RESTRICTED STOCK AWARDS

     3.1 Annual Retainer Grants of Restricted Stock Awards As part of the Annual Retainer, at the
close of business on April 1st of each year, each Director shall receive $36,000 payable
in shares of restricted stock. The number of shares of restricted stock to be granted shall be
determined in the manner provided in Section 2.2 of this Plan. In making yearly grants of
restricted stock, the Board of Directors expects each Director, within three years of the date he
or she becomes a member of the Board of Directors, to own an amount of common stock equal to one
year of his or her average total board compensation. Common stock received from grants made
hereunder may be used to meet this requirement.

     3.2 Restrictions, Terms and Conditions All shares of restricted stock granted under this
Plan may not be sold, traded, assigned, transferred or otherwise encumbered unless and until the
applicable restrictions are removed. Each Director granted restricted stock shall, notwithstanding
the applicable restrictions on transfer, have the right to vote such shares and receive dividends
and other distributions. The Company shall issue restricted stock to Directors receiving such
annual grants in the form of three (3) stock certificates in amounts as nearly equal as is
practicable to reflect the vesting schedule discussed below. Each certificate representing
restricted stock granted to him or her shall bear two (2) legends; a) a restriction substantially
similar to the statement immediately below:

          THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED HEREBY SHALL NOT
VEST UNTIL APRIL 1, _________. IN ADDITION, THIS CERTIFICATE AND THE SHARES
OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE PROVISIONS OF A RESTRICTED
STOCK AGREEMENT DATED _________ WHEREBY VESTING OF OWNERSHIP OF THE SHARES
EVIDENCED BY THIS CERTIFICATE ARE SET FORTH AND A CORRESPONDING RISK OF
FORFEITURE IS SET FORTH. A COPY OF SAID RESTRICTED STOCK AGREEMENT IS ON
FILE AT THE REGISTERED OFFICE OF THE COMPANY WHERE IT MAY BE INSPECTED
WITH PROPER AUTHORIZATION.

and b) a statement that the restricted stock is subject to resale restrictions by
virtue of the fact that the shares have not been registered under the Securities
Act of 1933, as amended, as substantially similar to the statement immediately
below:

          THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”), AND ARE
“RESTRICTED SECURITIES” AS THAT TERM IS DEFINED IN RULE 144 UNDER THE ACT.
THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT, THE

 

 

AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE COMPANY.

     3.3 Vesting and Risk of Forfeiture Each annual grant of restricted stock shall vest in
installments as nearly equal as is practicable over a three (3) year period. Except as provided
herein, if a Director’s participation as a member of the Board of Directors ceases or is terminated
for any reason prior to the date the shares of restricted stock are fully vested, the unvested
portion of the restricted stock shall be automatically forfeited and revert back to the Company and
again shall become available for grant under this Plan. Forfeiture of shares will also result with
respect to a Director who, without the Company’s written consent, becomes employed by, or provides
services to, including, without limitation, serving on the board of directors of, a company
substantially engaged in a business which is competitive to a principal business conducted by the
Company.

     3.4 Removal of Restrictions All shares of restricted stock will become free of vesting
restrictions and non-forfeitable on the date noted in each Director’s Restricted Stock Agreement.
In addition, all shares of restricted stock granted to any Director will become vested and shall
become non-forfeitable, upon the occurrence of any of the following:

	 	(a)	 	the Director’s death or permanent disability,
	 
	 	(b)	 	the occurrence of a “Change of Control” as defined below.

A “Change of Control” is defined as: (i) the closing of any merger, combination,
consolidation or similar business combination transaction involving the Company in
which the holders of the Common Stock immediately prior to such transaction are
not the holders of a majority of the ordinary voting securities of the surviving
corporation in such transaction; (ii) the closing of any sale by the Company of
all or substantially all of its assets to an acquiring corporation in which the
holders of the Common Stock immediately prior to such closing are not the holders
of a majority of the ordinary voting securities of the acquiring entity; or (iii)
the closing of any sale by the holders of the Common Stock to someone other than a
current holder of the Common Stock of an amount of the Common Stock that equals or
exceeds a majority of the Common Stock outstanding immediately prior to such
closing.

     3.5 Shares Subject to the Plan 207,276 shares of the Common Stock (the “Shares”) are
authorized for issuance under this Plan in accordance with the provisions hereof and subject to
such restrictions or other provisions as the Compensation Committee may from time to time deem
necessary.

     3.6 Adjustments for Stock Split, Stock Dividend, Etc. If the Company shall at any time
increase or decrease the number of its outstanding shares of the Common Stock or change in any way
the rights and privileges of the Common Stock by means of the payment of a stock dividend or any
other distribution payable in shares of the Common Stock, or through a stock split, subdivision,
consolidation, combination, reclassification or recapitalization involving the Common Stock, then
in relation to the Shares that are affected by one or more of the above events, the numbers, rights
and privileges of the Shares shall be increased, decreased or changed in like manner as if they had
been issued and outstanding, fully paid and nonassessable at the time of such occurrence.

     3.7 Withholding The Company’s obligations to deliver shares of the Common Stock upon the
vesting of any restricted stock award shall be subject to the Director recipient’s satisfaction of
all applicable federal, state and local income and other tax withholding requirements.

IV. ADDITIONAL PROVISIONS

     4.1 The Compensation Committee shall have the complete and exclusive authority to terminate
this Plan. Nothing in this Plan shall limit or be deemed to limit the authority of the Board of
Directors or

 

 

the Compensation Committee to grant awards or authorize any other compensation, with
or without reference to the Common Stock, under any other plan or authority.

     4.2 The Compensation Committee may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or in any agreement entered into hereunder in the manner and to the
extent it shall deem proper and in the best interest of the Company. No member of the Compensation
Committee shall be liable for any action or determination made in good faith, and all members of
the Compensation Committee shall, in addition to their rights as Directors, be fully indemnified by
the Company with respect to any such action, determination or interpretation in respect of this
Plan.

     4.3 The Board of Directors intends that, except as may be otherwise determined by the
Compensation Committee, any payment to be made pursuant to this Plan is either exempt from or
satisfies the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, and
related regulations and Treasury pronouncements (“Section 409A”) to avoid the imposition of any
taxes, including additional income or penalty taxes, thereunder. If the Compensation Committee
determines, in its sole discretion, that any payment to be made pursuant to this Plan is or would
be subject to any taxes, including additional income or penalty taxes, under Section 409A, unless
the Compensation Committee expressly determines otherwise, such payment shall not be made and the
related provisions of this Plan will be deemed modified or, if necessary, rescinded in order to
render the payment not subject to any taxes, including additional income or penalty taxes, under
Section 409A to the extent determined by the Compensation Committee without the consent of, or
notice to, the recipient of such payment.

     4.4 This Plan shall be governed by and subject to the laws of the State of Delaware and
applicable federal laws.

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