On October 7, 2016, the stockholders of the Company approved the Centennial Resource Development, Inc. 2016 Long Term Incentive Plan (the “LTIP”), which authorized an aggregate of 16,500,000 shares of Class A Common Stock for issuance. On April 29, 2020, the stockholders of the Company approved the amended and restated LTIP, which, among other things, increased the number of shares of Class A Common Stock authorized for issuance by 8,250,000 shares. As of September 30, 2020, the Company had 7,063,352 shares of Class A Common Stock available for future grants. The LTIP provides for grants of restricted stock, stock options (including incentive stock options and nonqualified stock options), restricted stock units, stock appreciation rights and other stock or cash-based awards.

As a result of the decline in crude oil and natural gas prices, ongoing uncertainty regarding the oil supply-demand macro environment and the related temporary suspension of the Company’s drilling and completion activities, the Company implemented a reduction to its workforce in the second quarter of 2020. In connection with this reduction, the Compensation Committee of the Company’s Board of Directors approved an accelerated partial vesting of certain unvested stock options and restricted stock awards held by 36 of the terminated employees. The acceleration changed the terms of the vesting conditions and

are therefore treated as modifications in accordance with ASC Topic 718, Compensation-Stock Compensation (“ASC 718”). The modification resulted in a decrease to total stock-based compensation expense of $2.6 million associated with the decrease in the fair value of the modified awards compared to the original awards’ fair value. The shares and options that were accelerated are included within the vested line item in the below tables.

Stock-based compensation expense is recognized within both General and administrative expenses and Exploration and other expenses in the consolidated statements of operations. The Company accounts for forfeitures of awards granted under the LTIP as they occur in determining compensation expense.

The following table summarizes stock-based compensation expense recognized for the periods presented:



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Equity Awards
Restricted stock awards	$	3,864	$	4,569	$	11,605	$	11,159
Stock option awards	399		2,557		1,674		7,766
Performance stock units	653		918		2,659		2,360
Other stock-based compensation expense⁽¹⁾	112		66		226		66
Total stock-based compensation - equity awards	5,028		8,110		16,164		21,351
Liability Awards
Restricted stock units	290		—		290		—
Performance stock units	197		—		197		—
Total stock-based compensation - liability awards	487		—		487		—
Total stock-based compensation expense	$	5,515	$	8,110	$	16,651	$	21,351

The Company has restricted stock awards, stock options and performance stock units (“PSUs”) outstanding that were granted under the LTIP as discussed below. Each award has service-based and, in the case of the PSUs, market-based vesting requirements, and are expected to be settled in shares of the Company’s Class A Common Stock upon vesting. As a result, these awards are classified as equity-based awards in accordance with ASC 718.

The following table provides information about restricted stock activity during the nine months ended September 30, 2020:



	Awards		Weighted Average Grant-Date Fair Value
Unvested balance as of December 31, 2019	4,838,996		$	8.51
Granted	9,657,211		1.10
Vested	(1,847,059	)	8.69
Forfeited	(861,992	)	5.79
Unvested balance as of September 30, 2020	11,787,156		2.45

The Company grants service-based restricted stock awards to executive officers and employees, which vest ratably over a three-year service period, and to directors, which vest over a one-year service period. Compensation cost for the service-based restricted stock awards is based on the closing market price of the Company’s Class A common stock on the grant date, and such costs are recognized ratably over the applicable vesting period. The weighted average grant-date fair value for restricted stock awards granted during the period was $1.10 and $6.70 per share for the nine months ended September 30, 2020 and 2019, respectively. The total fair value of restricted stock awards that vested during the nine months ended September 30, 2020 and 2019 was $16.1 million and $9.1 million, respectively, and includes awards with vesting terms that were accelerated as discussed above. Unrecognized compensation cost related to restricted shares that were unvested as of September 30, 2020 was $24.2 million, which the Company expects to recognize over a weighted average period of 2.1 years.

Stock options that have been granted under the LTIP expire ten years from the grant date and vest ratably over a three-year service period. The exercise price for an option granted under the LTIP is the closing market price of the Company’s Class A Common Stock on the grant date.

Compensation cost for stock options is based on the grant-date fair value of the award which is then recognized ratably over the vesting period of three years. The Company estimates the fair value using the Black-Scholes option-pricing model. Expected volatilities are based on the weighted average asset volatility of the Company and an identified set of comparable companies. Expected term is based on the simplified method and is estimated as the mid-point between the weighted average vesting term and the time to expiration as of the grant date. The Company uses U.S. Treasury bond rates in effect at the grant date for its risk-free interest rates.



	Nine Months Ended September 30,
	2020			2019
Weighted average grant-date fair value per share	$	1.16		$	4.47
Expected term (in years)	6			6
Expected stock volatility	86		%	46		%
Dividend yield	—		%	—		%
Risk-free interest rate	1.0		%	2.3		%



	Options		Weighted Average Exercise Price		Weighted Average Remaining Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 2019	4,764,167		$	15.99
Granted	124,000		2.13
Exercised	(366	)	0.25			$	—
Forfeited	(129,757	)	13.15
Expired	(2,325,391	)	16.37
Outstanding as of September 30, 2020	2,432,653		15.07		6.6	$	22
Exercisable as of September 30, 2020	1,955,295		15.78		6.2	$	—

The total fair value of stock options that vested during the nine months ended September 30, 2020 and 2019 was $4.7 million and $4.4 million, respectively, and includes awards with vesting terms that were accelerated as discussed above. The intrinsic value of the stock options exercised was minimal for the nine months ended September 30, 2020 and there were no stock options exercised during the nine months ended September 30, 2019. As of September 30, 2020, there was $1.2 million of unrecognized compensation cost related to unvested stock options, which the Company expects to recognize on a pro-rata basis over a weighted-average period of 1.3 years.

The Company grants performance stock units to certain executive officers that are subject to market-based vesting criteria as well as a three-year service period. Vesting at the end of the three-year service period is subject to the condition that the Company’s stock price increases by a greater percentage, or decreases by a lesser percentage, than the average percentage increase or decrease, respectively, of the stock prices of a peer group of companies. The market-based conditions must be met in order for the stock awards to vest, and it is, therefore, possible that no shares could ultimately vest. However, the Company recognizes compensation expense for the performance stock units subject to market conditions regardless of whether it becomes probable that these conditions will be achieved or not, and compensation expense is not reversed if vesting does not actually occur.



	Awards		Weighted Average Grant-Date Fair Value
Unvested balance as of December 31, 2019	872,672		$	13.44
Vested	—		—
Granted	—		—
Canceled	(193,391	)	21.53
Forfeited	—		—
Unvested balance as of September 30, 2020	679,281		11.13

As of September 30, 2020, there was $3.1 million of unrecognized compensation cost related to performance stock units that were unvested, which the Company expects to recognize on a pro-rata basis over a weighted average period of 1.4 years.

The Company has restricted stock units and performance stock units that were granted under the LTIP, which will be settled in cash and are classified as liability awards in accordance with ASC 718. Compensation cost for the liability awards is based on the fair value of the units as of the balance sheet date as further discussed below, and such costs are recognized ratably over the period in which the liability is expected to be paid. As the fair value of liability awards is required to be re-measured each period end, amounts recognized in future periods will vary. The estimated future cash payments of these awards are presented as liabilities within the consolidated balances sheets within Other current liabilities and Other long-term liabilities.

During the three months ended September 30, 2020, the Company granted 5.5 million restricted stock units to certain officers and employees that will be settled in cash. The restricted stock units vest annually in one-third increments over a three-year service period, with the first portion vesting on September 1, 2021. After one year from the grant date, however, the restricted stock units can vest immediately on an accelerated basis if they meet certain market-based vesting criteria (equal to the maximum return percentage discussed below for at least 20 out of any 30 consecutive trading days). Additionally, the restricted stock units include maximum and minimum return amounts equal to 400% and 25%, respectively, of the closing market price of the Company’s common stock on the grant date. As of September 30, 2020, there was $2.5 million of unrecognized compensation cost, which represents the unvested portion of the fair value of the restricted stock units and will be recognized over a weighted average period of 2.9 years.

During the three months ended September 30, 2020, the Company granted 5.5 million performance stock units to certain executive officers that will be settled in cash and are subject to market-based vesting criteria as well as a three-year service condition. Vesting at the end of the three-year service period is subject to the condition that the Company’s stock price increases by a greater percentage, or decreases by a lessor percentage, than the average percentage increase or decrease, respectively, of the stock price of a peer group of companies. The market-based conditions must be met in order for the awards to vest, and it is therefore possible that no units could ultimately vest. As of September 30, 2020, there was $3.1 million of unrecognized compensation cost that represents the unvested portion of the fair value of the performance stock units and will be recognized over a weighted average period of 2.75 years.

The fair value of the restricted stock units and performance stock units was estimated using a Monte Carlo valuation model as of the balance sheet date. The Monte Carlo valuation model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. Expected volatility was calculated based on the historical volatility of the Company’s common stock as well as the peer companies that are specified in the award agreement for the performance stock units, and the risk-free rate is based on U.S. Treasury yield curve rates with maturities consistent with the remaining vesting or performance period.