Stock-Based Compensation

3 Months Ended

Mar. 31, 2021

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 March 31, 2021, 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 three months ended March 31, 2021:


	Shares	Weighted-Average Grant Date Fair Value
Unvested RSUs at December 31, 2020	1,050,908	$	5.55
Granted	546,600	$	5.33

Vested	(266,259)	$	5.99
Unvested RSUs at March 31, 2021	1,331,249	$	5.38

As of March 31, 2021, there was $7.1 million of unrecognized compensation expense related to the RSU awards which will be recognized over a weighted average period of 0.99 years.

For the three months ended March 31, 2021 and 2020, Stock-based compensation related to RSUs was $1.5 million and $1.7 million, respectively.

Performance Units

The table below summarizes performance unit (“PSU”) activity for the three months ended March 31, 2021:


	Shares	Weighted-Average Grant Date Fair Value
Unvested PSUs at December 31, 2020	1,879,425	$	7.65
Granted	1,099,800	$	10.85

Vested	(455,000)	$	13.75
Unvested PSUs at March 31, 2021	2,524,225	$	7.94

On January 27, 2021, the Board of Directors of Earthstone (the “Board”) granted 1,099,800 PSUs (the “2021 PSUs”) to certain officers pursuant to the 2014 Plan (the “2021 Grant”). The 2021 PSUs are payable in cash based upon the achievement by the Company over a period commencing on January 1, 2021 and ending on December 31, 2023 (the “Performance Period”) of certain performance criteria established by the Board. The Company classifies these awards that will be settled in cash as liability awards. All previous PSU grants will be settled in shares and are classified as equity awards.

The 2021 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, 2021. 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
20.5% or greater						2
14.5%						1
7.7%						0.5
Less than 7.7%						0

The Company accounts for these awards as market-based awards which are valued quarterly 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 2021 PSUs, assuming a risk-free rate of 0.3% and volatility of 86.0%, the Company calculated the weighted average grant date fair value per PSU to be $10.85. Based on the fair value of the 2021 PSUs, the Company recorded stock-based compensation expense of $0.7 million during the three months ended March 31, 2021. A corresponding liability of $0.7 million related to the 2021 PSUs is included in Other noncurrent liabilities in the Condensed Consolidated Balance Sheet as of March 31, 2021.

As of March 31, 2021, there was $16.2 million of unrecognized compensation expense related to all PSU awards which will be amortized over a weighted average period of 1.23 years.

For the three months ended March 31, 2021 and 2020, Stock-based compensation related to all PSUs was approximately $1.8 million and $1.0 million, respectively.