10. Stock-based Compensation

Management Unit Awards

Effective January 1, 2010, JEH implemented a management incentive plan that provided indirect awards of membership interests in JEH to members of senior management (“Management Units”). These awards had various vesting schedules, and a portion of the Management Units vested in a lump sum at the IPO date. In connection with the IPO, both the vested and unvested Management Units were converted into the right to receive JEH Units and shares of Class B common stock. The JEH Units (together with a corresponding number of shares of Class B common stock) will become exchangeable under this plan into a like number of shares of Class A common stock upon vesting or forfeiture. No new Management Units have been awarded since the IPO and no new JEH Units or shares of Class B common stock are created upon a vesting event. Grants listed below reflect the transfer of JEH Units that occurred upon forfeiture.

The following table summarizes information related to the vesting of Management Units as of September 30, 2017:


		Weighted Average
		Grant Date Fair Value
	JEH Units	per Share
Unvested at December 31, 2016	90,762	$	15.00
Granted	—		—
Forfeited	—		—
Vested	(45,381)		15.00
Unvested at September 30, 2017	45,381	$	15.00

Stock compensation expense associated with the Management Units was $0.1 million and $0.5 million for the three and nine months ended September 30, 2017, respectively, and $0.2 million and $1.0 million for the three and nine months ended September 30, 2016, respectively, and is included in general and administrative expenses on the Company’s Consolidated Statement of Operations.

2013 Omnibus Incentive Plan

Under the Amended and Restated Jones Energy, Inc. 2013 Omnibus Incentive Plan (the “LTIP”), established in conjunction with the Company’s IPO and restated on May 4, 2016 following approval by the Company’s stockholders, the Company has reserved a total of 8,185,771 shares of Class A common stock for non-employee director, consultant, and employee stock-based compensation awards, as adjusted for the effects of the Special Stock Dividend and the preferred stock dividends paid in shares, as described in Note 12 “Stockholders’ and Mezzanine equity”.

The Company granted (i) performance share unit and restricted stock unit awards to certain officers and employees and (ii) restricted shares of Class A common stock to the Company’s non-employee directors under the LTIP during 2014, 2015, 2016 and 2017. During 2016 and 2017, the Company also granted performance unit awards to certain members of the senior management team under the LTIP.

All share and earnings per share information presented for awards made under the LTIP has been recast to retrospectively adjust for the effects of the 0.087423 per share Special Stock Dividend, as defined in Note 12, “Stockholders’ and Mezzanine equity”, distributed on March 31, 2017.

Restricted Stock Unit Awards

The Company has outstanding restricted stock unit awards granted to certain officers and employees of the Company under the LTIP. The fair value of the restricted stock unit awards is based on the value of the Company’s Class A common stock on the date of grant and is expensed on a straight-line basis over the applicable vesting period, which is typically three years.

The following table summarizes information related to the total number of units awarded to officers and employees as of September 30, 2017:


	Restricted	Weighted Average
	Stock Unit	Grant Date Fair Value
	Awards	per Share
Unvested at December 31, 2016	1,359,142	$	5.60
Adjustment (1)	72,871		—
Granted	2,394,290		2.32
Forfeited	(174,703)		3.22
Vested	(577,729)		6.68
Unvested at September 30, 2017	3,073,871	$	2.93

(1)

Increase of 0.002195 units for each unvested restricted stock unit awards at the time of the Company’s May 15, 2017 preferred stock dividend for the portion of such dividend paid in shares of the Company’s Class A common stock and of 0.021931 units for each unvested restricted stock unit award at the time of the Company’s August 15, 2017 preferred stock dividend paid entirely in shares of the Company’s Class A common stock, as described in Note 12 “Stockholders’ and Mezzanine equity,” in accordance with the terms of the original awards. This increase is in addition to the adjustment for the effects of the Special Stock Dividend previously disclosed in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.

Stock compensation expense associated with the employee restricted stock unit awards was $1.1 million and $3.1 million for the three and nine months ended September 30, 2017, respectively, and $1.0 million and $2.0 million for the three and nine months ended September 30, 2016, respectively, and is included in general and administrative expenses on the Company’s Consolidated Statement of Operations.

Performance Share Unit Awards

The Company has outstanding performance share unit awards granted to certain members of the senior management team of the Company under the LTIP. Prior to the second quarter of 2016, the performance share unit awards were described in the Company’s filings as performance unit awards. During the second quarter of 2016, the Company created a new class of equity award, described below as a performance unit award, that is settled in cash rather than shares of the Company’s Class A common stock. As a result, references to performance unit awards in the Company’s filings prior to the second quarter of 2016 refer to this description of performance share unit awards.

Upon the completion of the applicable three-year performance period, each recipient may vest in a number of performance share units. The percent of awarded performance share units in which each recipient vests at such time, if any, will range from 0% to 200% based on the Company’s total shareholder return relative to an industry peer group over the applicable three-year performance period. Each vested performance share unit is exchangeable for one share of the Company’s Class A common stock. The grant date fair value of the performance share units was determined using a Monte Carlo simulation model, which results in an estimated percentage of performance share units earned. The fair value of the performance share units is expensed on a straight-line basis over the applicable three-year performance period.

The following assumptions were used for the Monte Carlo model to determine the grant date fair value and associated stock-based compensation expense of the performance share unit awards granted during the nine months ended September 30, 2017:


	2017
	Performance
	Share
	Unit Awards
Forecast period (years)	2.71
Risk-free interest rate	1.34	%
Jones stock price volatility	78.93	%

For the performance share units granted during the nine months ended September 30, 2017, the Monte Carlo simulation model resulted in approximately 29% of performance share units expected to be earned.

The following table summarizes information related to the total number of performance share units awarded to the senior management team as of September 30, 2017:


	Performance	Weighted Average
	Share Unit	Grant Date Fair Value
	Awards	per Share
Unvested at December 31, 2016	942,073	$	6.25
Adjustment (1)	35,912		—
Granted	519,562		2.24
Forfeited	(23,552)		9.42
Vested	—		—
Unvested at September 30, 2017	1,473,995	$	4.64

(1)

Increase of 0.002195 units for each unvested performance share unit award at the time of the Company’s May 15, 2017 preferred stock dividend for the portion of such dividend paid in shares of the Company’s Class A common stock and of 0.021931 units for each unvested performance share unit award at the time of the Company’s August 15, 2017 preferred stock dividend paid entirely in shares of the Company’s Class A common stock, as described in Note 12 “Stockholders’ and Mezzanine equity,” in accordance with the terms of the original awards. This increase is in addition to the adjustment for the effects of the Special Stock Dividend previously disclosed in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.

Stock compensation expense associated with the performance share unit awards was $0.7 million and $1.7 million for the three and nine months ended September 30, 2017, respectively, and $0.8 million and $1.9 million for the three and nine months ended September 30, 2016, respectively, and is included in general and administrative expenses on the Company’s Consolidated Statement of Operations.

Performance Unit Awards

The value of awarded performance units in which each recipient vests at such time, if any, will range from $0.00 to $200.00 per performance unit based on the Company’s total shareholder return relative to an industry peer group over the applicable three-year performance period. For accounting purposes, the performance units are treated as a liability award with the liability being re-measured at the end of each reporting period. Therefore, the expense associated with these awards is subject to volatility until the payout is finally determined at the end of the performance period. The value of the performance units was determined using a Monte Carlo simulation model, as of the grant date, which resulted in an estimated final value upon vesting of $0.4 and $1.3 million for awards made during 2017 and 2016, respectively. The fair value measured as of September 30, 2017 was $0.8 million.

The following assumptions were used for the Monte Carlo model to determine the grant date fair value and associated stock-based compensation expense of the performance unit awards granted during the nine months ended September 30, 2017:


	2017
	Performance
	Unit Awards
Forecast period (years)	2.71
Risk-free interest rate	1.34	%
Jones stock price volatility	78.93	%

For the performance units granted during the nine months ended September 30, 2017, the Monte Carlo simulation

model resulted in an expected payout of $28.25 per performance unit as of the grant date.

Stock compensation expense associated with the performance unit awards was an expense of less than $0.1 million for the three and nine months ended September 30, 2017, respectively and $0.1 million and $0.2 million for the three and nine months ended September 30, 2016, respectively, and is included in general and administrative expenses on the Company’s Consolidated Statement of Operations. As of September 30, 2017, unrecognized compensation expense of $0.5 million related to the performance unit awards, subject to re-measurement and adjustment for the change in estimated final value as of the end of each reporting period, and is expected to be recognized over the remaining weighted average service period of 1.7 years.

Restricted Stock Awards

The Company has outstanding restricted stock awards granted to the non-employee members of the Board of Directors of the Company under the LTIP. The restricted stock will vest upon the director serving as a director of the Company for a one-year service period in accordance with the terms of the award. The fair value of the awards was based on the price of the Company’s Class A common stock on the date of grant.

The following table summarizes information related to the total value of the awards to the Board of Directors as of September 30, 2017:


		Weighted Average
	Restricted	Grant Date Fair Value
	Stock Awards	per Share
Unvested at December 31, 2016	152,050	$	3.68
Adjustment (1)	3,948		—
Granted	180,000		2.25
Forfeited	—		—
Vested	(152,050)		3.68
Unvested at September 30, 2017	183,948	$	2.20

(1)

Increase of 0.021931 units for each unvested performance share unit award at the time of the Company’s August 15, 2017 preferred stock dividend paid entirely in shares of the Company’s Class A common stock, as described in Note 12 “Stockholders’ and Mezzanine equity,” in accordance with the terms of the original awards. This increase is in addition to the adjustment for the effects of the Special Stock Dividend previously disclosed in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.

Stock compensation expense associated with awards to the members of the Board of Directors was $0.1 million and $0.4 million for the three and nine months ended September 30, 2017, respectively, and $0.1 million and $0.4 million for the three and nine months ended September 30, 2016, respectively, and is included in general and administrative expenses on the Company’s Consolidated Statement of Operations.