Stock-Based Compensation

6 Months Ended

Jun. 30, 2020

Share-based Payment Arrangement [Abstract]

Restricted Stock Units

The 2014 Plan, allows, among other things, for the grant of restricted stock units (“RSUs”). As of June 30, 2020, the maximum number of shares of Class A Common Stock that may be issued under the 2014 Plan was 9.4 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 six months ended June 30, 2020:



	Shares		Weighted-Average Grant Date Fair Value
Unvested RSUs at December 31, 2019	1,107,796		$	6.60
Granted	568,900		$	5.15
Vested	(530,738	)	$	6.53
Unvested RSUs at June 30, 2020	1,145,958		$	5.91

As of June 30, 2020, there was $6.7 million of unrecognized compensation expense related to the RSU awards which will be recognized over a weighted average period of 0.94 years.

For the three and six months ended June 30, 2020, Stock-based compensation related to RSUs was $1.3 million and $3.0 million, respectively. For the three and six months ended June 30, 2019, Stock-based compensation related to RSUs was $1.5 million and $3.0 million, respectively.

Performance Units

The table below summarizes performance unit (“PSU”) activity for the six months ended June 30, 2020:



	Shares	Weighted-Average Grant Date Fair Value
Unvested PSUs at December 31, 2019	835,625	$	10.51
Granted	1,043,800	$	5.36
Unvested PSUs at June 30, 2020	1,879,425	$	7.65

On January 30, 2020, the Board of Directors of Earthstone (the “Board”) granted 1,043,800 PSUs to certain officers pursuant to the 2014 Plan (the “2020 Grant). The 2020 Grant was subject to the approval of an amendment to the 2014 Plan to increase the number of available shares available thereunder (the “2014 Plan Amendment”). The 2014 Plan Amendment was approved at the 2020 annual meeting of stockholders held on June 3, 2020. 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, 2020 and ending on January 31, 2023 (the “Performance Period”) of certain performance criteria established by the Board.

The PSUs are eligible to be earned based on the annualized Total Shareholder Return (“TSR”) of the Class A Common Stock during a three-year period beginning on February 1, 2020. Between 0x to 2.0x of the Performance Units are eligible to be earned based on Earthstone achieving an annualized TSR based on the following pre-established goals:



Earthstone’s Annualized TSR	TSR Multiplier
23.9% or greater	2.0
14.5%	1.0
8.4%	0.5
Less than 8.4%	0.0

In the event that greater than 1.0x of the PSUs are earned, such additional PSUs may be paid in cash rather than the issuance of shares of Class A Common Stock. Based on the COVID-19 pandemic and the recent commodity price crash, the Company believes that the target annualized TSR of 14.5% included in the 2020 PSU awards will be difficult to achieve.

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 30, 2020, assuming a risk-free rate of 1.4% and volatility of 62.0%, the Company calculated the weighted average grant date fair value per PSU to be $5.36.

As of June 30, 2020, there was $8.5 million of unrecognized compensation expense related to the PSU awards which will be amortized over a weighted average period of 1.08 years.

For the three and six months ended June 30, 2020, Stock-based compensation related to the PSUs was approximately $1.3 million and $2.3 million, respectively. For the three and six months ended June 30, 2019, Stock-based compensation related to the PSUs was approximately $0.8 million and $1.4 million, respectively.