NOTE 13. EQUITY BASED COMPENSATION AND PROFIT INTEREST AWARDS

Long-term Incentive Plan

On August 10, 2017, the Board adopted the Ranger Energy Services, Inc. 2017 Long-Term Incentive Plan (“LTIP”) for the employees, consultants and the directors of the Company and its affiliates who perform services for the Company. The LTIP provides for potential grants of: (i) incentive stock options qualified as such under U.S. federal income tax laws; (ii) non-statutory stock options that do not qualify as incentive stock options; (iii) stock appreciation rights; (iv) restricted stock awards; (v) restricted stock units; (vi) bonus stock; (vii) performance awards; (viii) dividend equivalents; (ix) other stock-based awards; (x) cash awards; and (xi) substitute awards. Subject to adjustment in accordance with the terms of the LTIP, 1,250,000 shares of Class A Common Stock have been reserved for issuance pursuant to awards under the LTIP. Class A Common Stock withheld to satisfy exercise prices or tax withholding obligations will be available for delivery pursuant to other awards. The LTIP will be administered by the Board or an alternative committee appointed by the Board.

During the year ended December 31, 2017 there were 10,000 restricted shares issued. The total value at grant date was $0.1 million, of which less than ten thousand was amortized during the year ended December 31, 2017. As of December 31, 2017, there was $ 0.1 million of unrecognized expense.

The following table summarizes the changes in the restricted shares outstanding for the year ended December 31, 2017 and 2016:


		Weighted Average		Weighted Average
		Grant Date		Remaining
	Shares	Fair Value		Vesting Period
Outstanding at January 1, 2016	—	$	—	—
Granted	—		—	—
Forfeited	—		—	—
Outstanding at December 31, 2016	—		—	—
Granted	10,000		9.43	2.9 years
Forfeited	—		—	—
Outstanding at December 31, 2017	10,000	$	9.43	2.9 years

Well Services

The Well Services segment was 100% owned by Ranger Holdings, and Ranger Services’ equity was represented by a single share class. Ranger Holdings has issued Class C and Class D units to certain key employees of Ranger Services as remuneration for employee services that were originally intended, at grant, to be “profit interests” with no voting rights. Certain of the units vest 33% per year over a three-year service period and may be forfeited or repurchased by Ranger Holdings under certain circumstances as set forth in the Ranger Holdings limited liability company agreement and the individual Class C and Class D unit grant agreements. The “vesting units” are deemed equity and are measured at fair value using an option pricing model at each grant date with compensation expense recognized on a straight‑line basis over the requisite service period.

Certain of the Class C and Class D units that were granted are liability‑classified awards as they do not fully vest until a defined change of control event occurs. The Company has not recognized a liability or recognized any compensation expense for these liability‑classified awards in the accompanying consolidated financial statements since the change of control event is not probable and estimable. These units will trigger no compensation expense until amounts payable under such awards become probable and estimable.

On October 3, 2016, the Class C and Class D units were modified, whereby new units were issued to replace the existing Class C and Class D units that had been issued prior to October 3, 2016. As part of the issuance of the new Class C and Class D units, the existing Class C and Class D units were cancelled. The terms of the new and existing Class C and Class D awards were materially similar.

The grant date fair value for the Class C and Class D units prior to modification were de minimis while the grant date fair value for the Class C and Class D units at modification was $2.5 million. There were additional grants to specific employees during the year ended December 31, 2017 of approximately $1.6 million. The weighted average unit price for all grants after the modification were $3.76 per unit and $1.38 per unit for Class C and Class D units, respectively. During the year ended December 31, 2017, 2016 and 2015, we recognized compensation expense of $1.1 million, $0.4 million and $0.0 million, respectively. The total unrecognized compensation cost related to unvested awards at December 31, 2017 is $1.3 million and is expected to be recognized over the next two years.

The following table summarizes the Class C and Class D unit activity for the years ended December 31, 2017, 2016 and 2015 (in millions):


	Class C units		Class D units
	Equity-based		Equity-based
	Compensation	Liability	Compensation	Liability
	Awards	Awards	Awards	Awards
Outstanding at January 1, 2015	1.0	0.3	0.2	-
Granted	1.0	0.4	0.1	0.1
Forfeited	—	—	—	—
Outstanding at December 31, 2015	2.0	0.7	0.3	0.1
Granted (1)	0.5	0.2	0.4	0.2
Forfeited	—	—	—	—
Outstanding at December 31, 2016	0.5	0.2	0.4	0.2
Granted	0.3	—	0.3	—
Forfeited	(0.2)	—	(0.3)	—
Outstanding at December 31, 2017	0.6	0.2	0.4	0.2

(1) At October 3, 2016 the existing Class C and Class D awards were cancelled and new Class C and Class D awards were issued.

We utilized an option pricing model to estimate grant date fair value of the equity‑based compensation awards, which included probability of various outcomes. Expected volatilities are based on historical volatilities of the stock of comparable companies in our industry. The risk‑free rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. Actual results may vary depending on the assumptions applied within the model. The following table presents the assumptions used in the valuation and resulting grant date fair value:


			2016
	2017		Pre-Modification		At Modification		2015
Period	5 years		5 years		5 years		5 years
Dividend Yield	—	%	—	%	—	%	—	%
Volatility	40	%	35 - 60	%	40	%	35 - 60	%
Risk Free Rate	1.2	%	1.0 - 1.6	%	1.2	%	1.0 - 1.6	%

Processing Solutions

The Processing Solutions segment was 100% owned by Torrent Holdings, and Torrent Services’ equity was represented by a single share class. Torrent Holdings has issued Class B and Class C units to certain key employees of Torrent as remuneration for employee services that were originally intended, at grant, to be “profit interests” with no voting rights. Class B units have a three-year vesting period at 25% per year, with the remaining 25% vesting upon certain events occurring. Torrent Holdings also issued Class C awards, which were fully vested at grant date when issued in 2014. Class B and Class C units are deemed to be equity‑classified.

The grant date fair value for the Class B and Class C unit awards were $0.3 million and $0.1 million, respectively. The weighted average unit price for all grants after the modification were $0.27 per unit and $39.70 per unit for Class B and Class C units, respectively. Compensation expense is recognized on a straight‑line basis over the requisite service period. During the year ended December 31, 2017, 2016 and 2015, we recognized compensation expense of $0.1 million, $0.1 million and $0.1 million, respectively. The total unrecognized compensation cost related to unvested awards at December 31, 2017 is less than $0.1 million and is expected to be recognized in 2018.

The following table summarizes the Class B and Class C unit activity for the years ended December 31, 2017, 2016 and 2015 (in millions):


	Class B	Class C(1)
Outstanding at January 1, 2015	1.0	—
Granted	—	—
Forfeited	—	—
Outstanding at December 31, 2015	1.0	—
Granted	—	—
Forfeited	(0.3)	—
Outstanding at December 31, 2016	0.7	—
Granted	0.3	—
Forfeited	—	—
Outstanding at December 31, 2017	1.0	—

(1)There were 2,000 Class C units outstanding at each date.


	Assumptions
Period	2.8	years
Dividend Yield	—	%
Volatility	28.1	%
Risk Free Rate	0.9	%