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.

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 term and is net of forfeitures, as incurred. Stock-based compensation is included in General and administrative expense in the Consolidated Statements of Operations and is recorded with a corresponding increase in Additional paid-in capital within the Consolidated Balance Sheet.

The table below summarizes unvested RSU activity for the year ended December 31, 2018:



	Shares		Weighted-Average Grant Date Fair Value
Unvested RSUs at December 31, 2017	969,245		$	9.89
Granted	567,500		$	8.41
Forfeited	(44,165	)	$	10.87
Vested	(681,585	)	$	9.86
Unvested RSUs at December 31, 2018	810,995		$	8.83

During the year ended December 31, 2018, Earthstone granted 561,000 RSUs to employees and 6,500 RSUs to certain members of the Board with vesting periods ranging from 12 to 36 months. The total grant date fair value of the RSUs granted during the years 2018 and 2017 were $4.8 million and $9.3 million, respectively, with a weighted average grant date fair value per share of $8.41 and $9.80, respectively. The total vesting date fair value of the RSUs that vested during 2018 and 2017 was $6.2 million and $8.3 million, respectively. As of December 31, 2018, there was approximately $6.6 million of total unrecognized stock-based compensation expense related to unvested RSUs, which will be amortized over the remaining vesting periods. The weighted average remaining vesting period of the unrecognized compensation expense is 0.99 years.

For the years ended December 31, 2018 and 2017, stock-based compensation related to RSUs was $6.1 million and $6.6 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 December 31, 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 December 31, 2018 was $2.5 million which will be amortized over the remaining vesting period. The weighted average remaining vesting period of the unrecognized compensation expense is 1.12 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, assuming a risk-free rate of 2.4% and volatilities ranging from 41.7% to 199.8%, the Company calculated the weighted average grant date fair value per PSU to be $13.75. For the year ended December 31, 2018, Stock-based compensation related to the PSUs was approximately $1.0 million. There was no Stock-based compensation related to the PSUs for the year ended December 31, 2017.