Stock-Based Compensation

Restricted Stock Units

The 2014 Plan, allows, among other things, for the grant of restricted stock units ("RSUs"). As of March 31, 2019, the maximum number of shares of Class A Common Stock that may be issued under the 2014 Plan was 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. The Company determines 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 Sheets.

The table below summarizes RSU award activity for the three months ended March 31, 2019:



	Shares		Weighted-Average Grant Date Fair Value
Unvested RSUs at December 31, 2018	810,995		$	8.83
Granted	743,350		$	6.40
Forfeited	(13,750	)	$	7.70
Vested	(225,401	)	$	8.56
Unvested RSUs at March 31, 2019	1,315,194		$	7.51

As of March 31, 2019, there was $9.7 million of unrecognized compensation expense related to the RSU awards which will be recognized over a weighted average period of 1.10 years.

For the three months ended March 31, 2019 and 2018, Stock-based compensation related to RSUs was $1.6 million and $1.8 million, respectively.

Performance Units

The table below summarizes performance unit (“PSU”) activity for the three months ended March 31, 2019:



	Shares	Weighted-Average Grant Date Fair Value
Unvested PSUs at December 31, 2018	252,500	$	13.75
Granted	669,550	$	9.30
Unvested PSUs at March 31, 2019	922,050	$	10.52

On January 28, 2019, the Board of Directors of Earthstone (the "Board") granted 669,550 PSUs to certain 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 1, 2019 and ending on January 31, 2022 (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.

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.

The Company accounts for these awards as market-based awards which are valued utilizing the Monte Carlo Simulation pricing model, which calculates multiple potential outcomes for an award and establishes grant date fair value based on the most likely outcome. For the PSUs granted on January 28, 2019, assuming a risk-free rate of 2.6% and volatilities ranging from 40.1% to 114.1%, the Company calculated the weighted average grant date fair value per PSU to be $9.30.

As of March 31, 2019, there was $8.1 million of unrecognized compensation expense related to the PSU awards which will be amortized over a weighted average period of 1.3 years.

For the three months ended March 31, 2019 and 2018, Stock-based compensation related to the PSUs was approximately $0.6 million and $0.1 million, respectively.