Stock-Based Compensation

Restricted Stock Units

The 2014 Plan, allows, among other things, for the grant of restricted stock units ("RSUs"). On June 6, 2018, at the annual meeting of stockholders, Earthstone's stockholders approved an amendment and restatement of the 2014 Plan, including increasing the shares of Class A Common Stock that may be issued under the Plan by 600,000 shares, to a total of 6.4 million shares.

On May 9, 2017, and in connection with the completion of the Bold Contribution Agreement, and upon approval by the stockholders of Earthstone, the 2014 Plan was amended to increase the number of shares of Class A Common Stock authorized to be issued under the 2014 Plan by 4.3 million shares, to a total of 5.8 million shares. Each RSU represents the contingent right to receive one share of Class A Common Stock. The holders of outstanding RSUs do not receive dividends or have voting rights prior to vesting and settlement. Prior to May 9, 2017, the Company determined the fair value of granted RSUs based on the market price of the Common Stock on the date of the grant. Beginning on May 9, 2017, the Company began determining the fair value of granted RSUs based on the market price of the Class A Common Stock on the date of the grant. Compensation expense for granted RSUs is recognized on a straight-line basis over the vesting and is net of forfeitures, as incurred. Stock-based compensation is included in General and administrative expense in the Condensed Consolidated Statements of Operations and is recorded with a corresponding increase in Additional paid-in capital within the Condensed Consolidated Balance Sheet.

The table below summarizes unvested RSU award activity for the nine months ended September 30, 2018:



	Shares		Weighted-Average Grant Date Fair Value
Unvested RSUs at December 31, 2017	969,245		$	9.89
Granted	359,500		$	9.33
Forfeited	(44,165	)	$	10.87
Vested	(569,585	)	$	9.89
Unvested RSUs at September 30, 2018	714,995		$	9.55

For the three and nine months ended September 30, 2018, Stock-based compensation related to RSUs was $1.2 million and $4.9 million, respectively. The unrecognized compensation expense related to the RSU awards at September 30, 2018 was $6.4 million which will be amortized over the remaining vesting period. The weighted average remaining vesting period of the unrecognized compensation expense is 0.93 years.

The table below summarizes unvested RSU award activity for the nine months ended September 30, 2017:



	Shares		Weighted-Average Grant Date Fair Value
Unvested RSUs at December 31, 2016	781,500		$	12.53
Granted	254,500		$	11.67
Forfeited	(36,000	)	$	13.30
Vested	(594,380	)	$	12.45
Unvested RSUs at September 30, 2017	405,620		$	12.03

For the three and nine months ended September 30, 2017, Stock-based compensation related to RSUs was $1.7 million and $4.6 million, respectively.

Performance Units

On February 28, 2018, the Board granted 252,500 performance units (“PSUs”) to certain named executive officers pursuant to the 2014 Plan. The PSUs are payable in shares of Class A Common Stock based upon the achievement by the Company over a period commencing on February 28, 2018 and ending on February 28, 2021 (the “Performance Period”) of performance criteria established by the Board.

The number of shares of Class A Common Stock that may be issued will be determined by multiplying the number of PSUs granted by the Relative Total Shareholder Return ("TSR") Percentage (0% to 200%). The “Relative TSR Percentage” is the percentage, if any, achieved by attainment of a certain predetermined range of targets for the Performance Period. Accordingly, the potential aggregate number of shares of Class A Common Stock issuable under the outstanding PSU awards range from zero to 505,000.

TSR for the Company and each of the peer companies is generally determined by dividing (A) the volume weighted average price of a share of stock for the trading days during the thirty calendar days ending on and including the last calendar day of the Performance Period minus the volume weighted average price of a share of stock for the trading days during the thirty calendar days ending on and including the first day of the Performance Period plus cash dividends paid over the Performance Period by (B) the volume weighted average price of a share of stock for the trading days during the thirty calendar days ending on and including the first day of the Performance Period.

As of September 30, 2018, there were 252,500 PSUs outstanding. There were no PSUs outstanding as of December 31, 2017. The unrecognized compensation expense related to the PSU awards at September 30, 2018 was $2.8 million which will be amortized over the remaining vesting period. The weighted average remaining vesting period of the unrecognized compensation expense is 1.25 years.

The Company is accounting for this award as a market-based award which was valued utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes fair value based on the most likely outcome. Under the Monte Carlo Simulation pricing model, the Company calculated the weighted average fair value per PSU to be $13.75. For the three and nine months ended September 30, 2018, Stock-based compensation related to the PSUs was approximately $0.3 million and $0.7 million, respectively. There was no Stock-based compensation related to the PSUs for the three and nine months ended September 30, 2017.