8. Equity and Share-Based Compensation

Common and Preferred Shares

On April 24, 2012, in connection with the Company’s initial public offering, a corporate reorganization occurred and each common unit of Holdings LLC was converted into approximately 185.5 common shares of the Company and as a result, the Company issued 47,634,353 shares of its common stock to the unitholders of Holdings LLC.

On April 25, 2012, the Company completed its initial public offering of common stock pursuant to a registration statement on Form S-1 (File 333-177966), as amended and declared effective by the SEC on April 19, 2012. Pursuant to the registration statement, the Company registered the offer and sale of 27,600,000 shares of $0.01 par value common stock, which included 6,000,000 shares of stock sold by the selling shareholders and 3,600,000 shares of common stock sold by the selling shareholders pursuant to an option granted to the underwriters to cover over-allotments.

After the corporate reorganization and the completion of its initial public offering discussed above, the Company is authorized to issue up to a total of 300,000,000 shares of its common stock with a par value of $0.01 per share, and 50,000,000 shares of its preferred stock with a par value of $0.01 per share. Holders of the Company’s common shares are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders and to receive ratably in proportion to the shares of common stock held by them any dividends declared from time to time by the board of directors. The common shares have no preferences or rights of conversion, exchange, pre-exemption or other subscription rights.

With respect to preferred shares, the Company is authorized, without further stockholder approval, to establish and issue from time to time one or more classes or series of preferred stock with such powers, preferences, rights, qualifications, limitations and restrictions as determined by its board of directors.

Series A Preferred Stock

On March 30, 2013, the Company elected to pay the $13 million semi-annual dividend due on that date through an increase in the Series A Preferred Stock liquidation preference to $1,040. As a result, the Company will be obligated to issue between 962,963 and 1,181,818 additional shares of common stock upon conversion of the Series A Preferred Stock, with the ultimate number of shares dependent upon the conversion price then in effect or, if conversion were to occur at the mandatory conversion date, the Company’s average share price during the 15 days preceding such mandatory conversion date, subject to the limits described above.

For the three months ended March 31, 2013, the $4.1 million Series A Preferred Stock dividend (paid through the adjustment to the liquidation preference discussed above) was based upon the estimated fair value of 481,481 common shares that would have been issued had the Series A Preferred Stock dividend for the three months been converted into common shares using a conversion price of $13.50 per share.

The Company did not declare any dividends on the Series A Preferred Stock for the three months ended June 30, 2013; however, if they had, Series A Preferred Stockholders would have been entitled to $6.5 million of cash dividends or, if paid through an adjustment to the Series A Preferred Share liquidation preference, a number of additional common shares issuable upon conversion of the Series A Preferred Shares of between 500,741 and 614,545, the ultimate number of common shares dependent upon the then in effect conversion price. It is the Company’s intention for the foreseeable future to pay Series A Preferred Share dividends through an adjustment to the liquidation preference. Therefore, for the three months ended June 30, 2013, the $2.7 million Series A Preferred Stock dividend which the Company intends to pay through the adjustment to the liquidation preference is based upon the estimated fair value of 500,741 common shares that would have been issued had the Series A Preferred Stock dividend for the three months been converted into common shares at a conversion price of $13.50 per share.

The following table summarizes changes in the number of outstanding shares since December 31, 2012:

	Number of Shares
	Preferred Stock	Common Stock		Treasury Stock
Balance as of December 31, 2012	325,000	66,619,711		—
Grants of restricted stock	—	2,053,754		—
Forfeitures of restricted stock	—	(20,482	)	—
Acquisition of treasury stock	—	—		(107,058	)
Balance as of June 30, 2013	325,000	68,652,983		(107,058	)

The Company’s 2012 LTIP (discussed below) allows for the recipients of restricted stock to surrender a portion of their shares upon vesting to satisfy Federal Income Tax (“FIT”) withholding requirements. The Company then remits to the IRS the cash equivalent of the FIT withholding liability. Shares surrendered to the Company in this fashion have been treated as treasury shares acquired at a cost equivalent to the related tax liability. These shares are available for future issuance by the Company.

Incentive Units.

At June 30, 2013, 1,609 incentive units were issued and outstanding. These incentive units were issued prior to the Company’s initial public offering. In connection with the corporate reorganization that occurred immediately prior to our initial public offering, these incentive units held in the Company were contributed to FR Midstates Interholding, LP (“FRMI”) in exchange for incentive units in FRMI. Holders of FRMI incentive units will receive, out of proceeds otherwise distributable to FRMI, a percentage interest in the amounts distributed to FRMI in excess of certain multiples of FRMI’s aggregate capital contributions and investment expenses (“FRMI Profits”). Although any future payments to the incentive unit holders will be made out of the proceeds otherwise distributable to FRMI and not by the Company, the Company will be required to record a non-cash compensation charge in the period any payment is made related to the FRMI incentive units. To date, no compensation expense related to the incentive units has been recognized by the Company, as any payout under the incentive units is not considered probable, and thus, the amount of FRMI Profits, if any, cannot be determined.

Share-based Compensation, Post-Initial Public Offering

2012 Long Term Incentive Plan

On April 20, 2012, the Company established the 2012 Long Term Incentive Plan (the “2012 LTIP”) and filed a Form S-8 with the SEC, registering 6,563,435 shares of common stock for future issuance under the terms of the 2012 LTIP. The 2012 LTIP provides a means for the Company to attract and retain employees, directors and consultants, and a method whereby employees, directors and consultants of the Company who contribute to its success can acquire and maintain stock ownership or awards, the value of which is tied to the performance of the Company, thereby strengthening their concern for the welfare of the Company and their desire to remain employed.

The 2012 LTIP provides for the granting of Options (Incentive and other), Restricted Stock Awards, Restricted Stock Units, Stock Appreciation Rights, Dividend Equivalents, Bonus Stock, Other Stock-Based Awards, Annual Incentive Awards, Performance Awards, or any combination of the foregoing (the “Awards”). Subject to certain limitations as defined in the 2012 LTIP, the terms of each Award are as determined by the Compensation Committee of the Board of Directors. A total of 6,563,435 common share Awards are authorized for issuance under the 2012 LTIP and shares of stock subject to an Award that expire, or are canceled, forfeited, exchanged, settled in cash or otherwise terminated, will again be available for future Awards under the 2012 LTIP.

Non-vested Stock Awards

Subsequent to the completion of the Company’s initial public offering and pursuant to the 2012 LTIP, through June 30, 2013 the Company had 2,725,142 non-vested shares of restricted common stock to directors, management and employees outstanding. Shares granted under the LTIP generally vest ratably over a period of three years (one-third on each anniversary of the grant); however, shares granted under the LTIP to directors on or after April 1, 2013 are subject to one-year cliff vesting.

The fair value of restricted stock grants is based on the value of the Company’s common stock on the date of grant. Compensation expense is recognized ratably over the requisite service period.

The following table summarizes the Company’s non-vested share award activity for the six months ended June 30, 2013:

	Shares		Weighted Average Grant Date Fair Value
Non-vested shares outstanding at December 31, 2012	985,358		$	12.61
Granted	2,053,754		$	7.29
Vested	(293,488	)	$	13.10
Forfeited	(20,482	)	$	8.06
Non-vested shares outstanding at June 30, 2013	2,725,142		$	8.58

Unrecognized expense as of June 30, 2013 for all outstanding restricted stock awards was $20.9 million and will be recognized over a weighted average period of 2.4 years.

At June 30, 2013, 3,945,351 shares remain available for issuance under the terms of the 2012 LTIP.

The following table summarizes share-based compensation costs (after amounts capitalized to oil and gas properties) recognized as expense by the Company for the periods presented (in thousands):

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2013		2012		2013		2012
Incentive units	$	—	$	—	$	—	$	—
2012 LTIP restricted shares	1,770		682		3,014		682
Total share-based compensation expense, net of amounts capitalized to oil and gas properties	$	1,770	$	682	$	3,014	$	682

For the three and six months ended June 30, 2013, the Company capitalized $0.4 million and $0.6 million of qualifying share-based compensation costs to oil and gas properties. For the three and six months ended June 30, 2012, the Company did not capitalize any share-based compensation costs to oil and gas properties.