On May 11, 2021, the Company’s stockholders approved the Talos Energy Inc. 2021 Long Term Incentive Plan (the “2021 LTIP”), which had previously been approved by the board of directors of the Company. No further awards will be granted under the Talos Energy Inc. Long Term Incentive Plan (the “2018 LTIP”) (together with the 2021 LTIP, the “LTIP Plans”).

The 2021 LTIP provides for potential grants of: (i) incentive stock options qualified as such under U.S. federal income tax laws (“ISOs”), (ii) stock options that do not qualify as ISOs (together with ISOs, “Options”), (iii) stock appreciation rights, (iv) restricted stock awards, (v) RSUs, (vi) awards of vested stock, (vii) dividend equivalents, (viii) other share-based or cash awards and (ix) substitute awards. Employees, non-employee directors and consultants of the Company and its affiliates are eligible to receive awards under the 2021 LTIP. The 2021 LTIP authorizes the Company to grant awards of up to 8,639,415 shares of the Company’s common stock, subject to the share counting and share recycling provisions of the 2021 LTIP.

Restricted Stock Units – Employees — RSUs granted to employees under the LTIP Plans primarily vest ratably over an approximate three year period subject to such employee’s continued service through each vesting date. Upon vesting, each RSU represents a contingent right to receive one share of common stock. The total unrecognized share-based compensation expense related to these RSUs at December 31, 2022 was approximately $24.6 million, which is expected to be recognized over a weighted average period of 1.7 years.

Restricted Stock Units – Non-employee Directors — RSUs granted to non-employee directors under the LTIP Plans vested approximately one year following the date of grant, subject to such non-employee director’s continued service through the vesting date. Upon vesting, these RSUs represent a contingent right to receive one share of common stock for each RSU for 60%, and cash for the remaining 40%. The total unrecognized share-based compensation expense related to these RSUs at December 31, 2022 was approximately $0.2 million, which is expected to be recognized over a weighted average period of 0.2 years. Of the unrecognized share-based compensation expense, $0.1 million relates to liability awards and will be subsequently remeasured at each reporting period.

The following table summarizes RSU activity:


	Restricted Stock Units			Weighted Average Grant Date Fair Value
Unvested RSUs at December 31, 2019		733,777		$	25.20
Granted		1,284,797		$	10.02
Vested		(273,787	)	$	25.09
Forfeited		(91,799	)	$	19.65
Unvested RSUs at December 31, 2020		1,652,988		$	13.73
Granted		1,102,038		$	13.11
Vested		(669,832	)	$	15.01
Forfeited		(101,995	)	$	12.46
Unvested RSUs at December 31, 2021		1,983,199		$	13.02
Granted		2,297,465		$	13.23
Vested		(967,269	)	$	14.14
Forfeited		(97,891	)	$	14.34
Unvested RSUs at December 31, 2022(1)		3,215,504		$	12.79

The Company considers its intent and ability to settle awards in cash or shares in determining whether to classify the awards as equity or as a liability. Certain awards granted during the year ended December 31, 2021 were originally classified as liability awards; however, these awards became equity-classified awards upon stockholder approval of the 2021 LTIP. The aggregate amount of compensation cost related to these awards is determined by the fair value of the award on the modification date.

Performance Share Units – Employees — PSUs granted to employees under the LTIP Plans represent the contingent right to receive one share of common stock. However, the number of shares of common stock issuable upon vesting ranges from zero to 200% of the target number of PSUs granted. The total unrecognized share-based compensation expense related to these PSUs at December 31, 2022 was approximately $14.0 million, which is expected to be recognized over a weighted average period of 1.8 years.

The following table summarizes PSU activity:


	Performance Share Units			Weighted Average Grant Date Fair Value
Unvested PSUs at December 31, 2019		417,831		$	39.31
Granted		441,642		$	13.05
Forfeited		(25,301	)	$	37.67
Unvested PSUs at December 31, 2020		834,172		$	25.46
Granted		586,995		$	18.96
Vested		(391,308	)	$	39.43
Forfeited		(14,400	)	$	18.48
Unvested PSUs at December 31, 2021		1,015,459		$	16.41
Granted(1)		629,666		$	23.73
Vested(2)		(14,474	)	$	13.05
Forfeited		(16,486	)	$	17.48
Cancelled		(975,564	)	$	16.42
Unvested PSUs at December 31, 2022		638,601		$	23.66

(1)

There were 314,833 PSUs granted that are eligible to vest based on continued employment and the Company’s annualized absolute total shareholder return (“TSR”) over a three-year performance period. An additional 314,833 PSUs were granted and are eligible to vest based on continued employment and the Company’s return on the wells included in the 2022 drill program over a three-year performance period.

(2)

The performance period for the relative TSR awards ended on December 31, 2022. The payout on these awards was 0% based on actual performance over the performance period as certified by the Compensation Committee of the Company’s Board of Directors in early 2023. Since these awards were legally forfeited they will again be available for new awards under the recycling provisions of the 2021 LTIP.

Certain awards granted during the year ended December 31, 2021 were originally classified as liability awards; however, these awards became equity-classified awards upon stockholder approval of the 2021 LTIP. The following table summarizes the assumptions used in the Monte Carlo simulations to calculate the fair value of the relative or absolute TSR PSUs granted and modified at the date indicated:


	2022						2021						2020
	Grant			Grant			Modification			Grant			Grant
	September 20			March 5			May 11			March 8			March 5
Expected term (in years)		2.3			2.8			2.6			2.8			2.8
Expected volatility		74.3	%		82.2	%		80.9	%		78.3	%		48.8	%
Risk-free interest rate		3.9	%		1.6	%		0.3	%		0.3	%		0.6	%
Dividend yield		—	%		—	%		—	%		—	%		—	%
Fair value (in thousands)	$	621		$	8,668		$	9,715		$	11,129		$	5,763

Modification — During March 2022, the outstanding PSUs held by certain executive officers that were awarded in 2020 and 2021 were cancelled and, in connection with this cancellation, 1,147,352 of RSUs were granted (the “Retention RSUs”). The Retention RSUs will vest ratably each year over two years, generally contingent upon continued employment through each such date. The cancellation of the PSUs along with the concurrent grant of the Retention RSUs are accounted for as a modification. The incremental cost of $9.7 million will be recognized prospectively over the modified requisite service period. Additionally, the remaining unrecognized grant or modification date fair value of the original PSUs will be recognized over the original remaining requisite service period.

Share-based compensation costs associated with RSUs, PSUs and other awards are reflected as “General and administrative expense” on the Consolidated Statements of Operations, net amounts capitalized to “Proved Properties” on the Consolidated Balance Sheets. Because of the non-cash nature of share-based compensation, the expensed portion of share-based compensation is added back to net income in arriving at “Net cash provided by operating activities” on the Consolidated Statements of Cash Flows.

The following table presents the amount of costs expensed and capitalized (in thousands):


	Year Ended December 31,
	2022		2021		2020
Share-based compensation costs	$	28,280	$	20,560	$	16,462
Less: Amounts capitalized to oil and gas properties		12,327		9,568		7,793
Total share-based compensation expense	$	15,953	$	10,992	$	8,669