Note 17 - Stock-based Compensation and Other Benefit Plans

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Share-Based Payment Arrangement [Text Block]

17. STOCK-BASED COMPENSATION AND OTHER BENEFIT PLANS

The Company’s stock-based compensation has been granted under several stock incentive and long-term incentive plans. The plans authorize the Compensation Committee of the Company’s Board of Directors to issue various types of incentive compensation. The Company had previously issued stock options and restricted shares under the 2014 Long-Term Incentive Plan (“2014 Plan”) and stock appreciation rights under the 2016 Stock Appreciation Rights Plan. On June 25, 2020, the Company’s stockholders approved the 2020 Long-Term Incentive Plan (as amended, the “2020 Plan”) under which 5,500,000 shares are authorized for grants. In June 2021, the Company’s stockholders approved an amendment to the 2020 Plan pursuant to which an additional 3,750,000 shares were authorized for issuance pursuant to awards under the 2020 Plan. At December 31, 2022, 3,870,496 shares were available for future grants.

For each stock option granted, the number of authorized shares under the 2020 Plan will be reduced on a one-for-one basis. For each restricted share granted, the number of shares authorized under the 2020 Plan will be reduced by twice the number of restricted shares. The Company has no set policy for sourcing shares for option grants. Historically the shares issued under option grants have been new shares.

As referenced in the table below, the Company records compensation expense related to stock-based compensation as general and administrative expense and production expense associated with the issuance of stock options, restricted stock and stock appreciation rights. During the years ended December 31, 2022, 2021 and 2020, the Company settled in cash $0.8 million, $3.3 million and $0.3 million, respectively, for SARs. During the years ended December 31, 2022, 2021 and 2020, the Company received in cash $0.3 million, $1.4 million and $0.1 million, respectively from stock option exercises. Because the Company does not pay significant U.S. federal income taxes, no amounts were recorded for future tax benefits.

	Year Ended December 31,
	2022		2021		2020
	(in thousands)
Stock-based compensation - equity awards	$	2,045	$	1,060	$	848
Stock-based compensation - liability awards		155		1,399		(734	)
Total stock-based compensation	$	2,200	$	2,459	$	114

Stock options and performance shares

Stock options have an exercise price that may not be less than the fair market value of the underlying shares on the date of grant. In general, stock options granted to participants will become exercisable over a period determined by the Compensation Committee of the Company’s Board of Directors that is generally a three-year period, vesting in three equal parts on the anniversaries from the date of grant, and may contain performance hurdles.

In March 2022, the Company granted options to certain employees of the Company that are considered performance stock options to purchase an aggregate of 241,358 shares at an exercise price of $6.41 per share and a life of ten years. For each performance stock option award, one-third of the underlying shares vest on the later of the first anniversary of the grant date and the date on which the Company’s stock price, determined using a 30-day average, exceeds $7.37 per share; performance stock options with respect to one-third of the underlying shares vest on the later of the second anniversary of the grant date and the date on which the Company’s stock price, determined using a 30-day average, exceeds $8.48 per share; and performance stock options with respect to the remaining one-third of the underlying shares vest on the later of the third anniversary of the grant date and the date on which the Company’s stock price, determined using a 30-day average, exceeds $9.75 per share. These awards are option awards that contain a market condition. Compensation cost for such awards is recognized ratably over the derived service period and compensation cost related to awards with a market condition will not be reversed if the Company does not believe it is probable that such performance criteria will be met or if the service provider (employee or otherwise) fails to meet such performance criteria.

The Company used the Monte Carlo simulation to calculate the grant date fair value of performance stock option awards. The fair value of these awards will be amortized to expense over the derived service period of the option.

For options that do not contain a market or performance condition, the Company uses the Black-Scholes model to calculate the grant date fair value of stock option awards. This fair value is then amortized to expense over the service period of the option.

During the year ended December 31, 2022, 2021 and 2020 the weighted average assumptions shown below were used to calculate the weighted average grant date fair value of option grants under the Monte Carlo model in 2022 and 2021 and Black-Scholes models.

	Year Ended December 31,
	2022			2021			2020
Weighted average exercise price - ($/share)	$	6.41		$	3.14		$	1.23
Expected life in years		6.0			6.0			6.0
Average expected volatility		72	%		75	%		74
Risk-free interest rate		1.98	%		0.95	%		0.42
Expected dividend yield		2.30	%		—			—
Weighted average grant date fair value - ($/share)	$	2.84		$	2.07		$	0.79

Stock option activity associated with the Monte Carlo model for the year ended December 31, 2022 is provided below:

	Number of Shares Underlying Options			Weighted Average Exercise Price Per Share			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
	(in thousands)						(in years)		(in thousands)
Outstanding at January 1, 2022		359		$	1.96
Granted		241			6.41
Exercised		(47	)		(1.23	)
Unvested shares forfeited		(109	)		(4.03	)
Vested shares expired		—			—
Outstanding at December 31, 2022		444		$	3.95			7.15	$	632
Exercisable at December 31, 2022		147		$	1.83			3.92	$	400

The intrinsic value of a performance stock option awards is the amount that the current market value of the underlying stock exceeds the exercise price of the award. The intrinsic performance stock option awards exercised in 2022 was $0.2 million.

As of December 31, 2022, unrecognized compensation cost related to outstanding performance stock option awards was $0.4 million, which is expected to be recognized over a weighted average period of 2.0 years.

During the year ended December 31, 2022, no shares were added to treasury as a result of tax withholding on performance stock option awards exercised.

Stock option activity associated with the Black-Scholes model for the year ended December 31, 2022 is provided below:

	Number of Shares Underlying Options			Weighted Average Exercise Price Per Share			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
	(in thousands)						(in years)		(in thousands)
Outstanding at January 1, 2022		615		$	1.58
Granted		—			—
Exercised		(228	)		(1.12	)
Unvested shares forfeited		—			—
Vested shares expired		—			—
Outstanding at December 31, 2022		387		$	1.86			0.83	$	1,045
Exercisable at December 31, 2022		387		$	1.86			0.83	$	1,045

The intrinsic value of a stock option is the amount that the current market value of the underlying stock exceeds the exercise price of the option. The intrinsic value of stock options exercised in 2022, 2021 and 2020 was $1.2 million, $1.6 million, and $43 thousand, respectively.

As of December 31, 2022, unrecognized compensation cost related to outstanding stock options was none.

During the year ended December 31, 2022, 49,063 shares were added to treasury as a result of tax withholding on options exercised. During the year ended December 31, 2021, 464,671 shares were added to treasury as a result of tax withholding on options exercised.

Restricted shares

Restricted stock granted to employees will vest over a period determined by the Compensation Committee that is generally a three-year period, vesting in three equal parts on the anniversaries following the date of the grant. Restricted stock granted to directors will vest on the earlier of (i) the first anniversary of the date of grant and (ii) the first annual meeting of stockholders following the date of grant (but not less than fifty (50) weeks following the date of grant). In March 2022, the Company issued 353,424 shares of service-based restricted stock to employees, with a grant date fair value of $6.41 per share. In addition, in June 2022, the Company issued 30,687 shares of service-based restricted stock to directors, with a grant date fair value of $8.31 per share. The vesting of the foregoing shares is dependent upon, among other things, the employees’ and directors’ continued service with the Company.

The following is the activity for the Company's restricted stock for the year ended December 31, 2022:

	Restricted Stock			Weighted Average Grant Date Fair Value
	(in thousands)
Non-vested shares outstanding at January 1, 2022		741		$	2.36
Awards granted		384			6.56
Awards vested		(334	)		2.25
Awards forfeited		(126	)		3.68
Non-vested shares outstanding at December 31, 2022		665		$	4.59

The total fair value of vested restricted stock awards during 2022, 2021 and 2020 was $2.4 million, $1.8 million, and $0.2 million, respectively. The weighted average grant date fair value per share of restricted stock awards, which vested during 2022, 2021 and 2020, was $2.25, $1.28 and $1.35, respectively.

As of December 31, 2022, unrecognized compensation cost related to restricted stock totaled $1.3 million and is expected to be recognized over a weighted average period of 1.4 year.

During the year ended December 31, 2022, 69,135 shares were added to treasury as a result of tax withholding on the vesting of restricted shares. During the year ended December 31, 2021, 68,134 shares were added to treasury as a result of tax withholding on the vesting of restricted shares.

In connection with the Arrangement with TransGlobe and pursuant to the Arrangement Agreement, at the effective time of the Arrangement, certain awards previously issued to TransGlobe’s key employees and board members who continued their relationship as employees or board members of VAALCO following the Arrangement, will continue to be governed by the applicable TransGlobe plan, provided that each such applicable plan has been amended to provide that VAALCO common stock shall be issuable in lieu of cash or TransGlobe common stock with respect to TransGlobe’s deferred share units (“DSU”s), performance share units (“PSU”s) and restricted stock units (“RSU”s), in each case, based on the exchange ratio in the Arrangement. For the PSUs that will remain outstanding following the effective time of the Arrangement as described in the immediately preceding sentence, the applicable vesting percentage was determined by the TransGlobe board of directors to be 200% for PSUs granted in 2020 and 2021; and 64.4% for PSUs granted in 2022. 

On the effective date of the Arrangement, October 13, 2022, the combined fair value of the DSUs, PSU's and RSU's liability from TransGlobe was $6.0 million. On December 16, 2022, the Compensation Committee determined that the awards would be settled in shares from the 2020 Plan, thereby converting all the awards from cash-settled liability awards to equity awards. On the date of this conversion, the awards were revalued based on VAALCO’s share price, and the Company recognized a gain of $0.6 million in its consolidated statements of operations and comprehensive income (loss). 

RSUs were issued to directors, officers and employees of TransGlobe in the ordinary course of business prior to the Arrangement. Each RSU vests annually over a three-year period. On December 16, 2022, Compensation Committee determined that the awards would be settled in shares from the 2020 Plan, thereby converting all the awards to equity awards instead of cash-settled liability awards. RSU activity for the period December 16, 2022 through December 31, 2022 is presented in the table below:

	Restricted Stock			Weighted Average Conversion Date Fair Value
	(in thousands)
Non-vested shares outstanding at December 16, 2022		—		$	—
Awards converted		386			4.27
Awards vested		(3	)		4.27
Awards forfeited		—			—
Non-vested shares outstanding at December 31, 2022		383		$	4.27

The total fair value of vested RSU awards during 2022 was $14 thousand. The weighted average grant date fair value per share of RSU, which vested during 2022, was $4.27.

As of December 31, 2022, unrecognized compensation cost related to RSU’s totaled $0.5 million and is expected to be recognized over a weighted average period of 1.7 years.

During the year ended December 31, 2022, 1,381 shares were added to treasury as a result of tax withholding on the vesting of RSU’s.

PSUs are similar to RSUs except that they originally contained a performance factor affecting the vesting percentage. For the PSUs that remained outstanding following the effective time of the Arrangement, the applicable vesting percentage was determined by the TransGlobe board of directors to be 200% for PSUs granted in 2020 and 2021; and 64.4% for PSUs granted in 2022. All PSUs granted vest on the third anniversary of their grant date. On December 16, 2022, the Compensation Committee determined that the awards would be settled in shares from the 2020 Plan, thereby converting all the awards to equity awards instead of cash-settled liability awards. PSU activity for the period December 16, 2022 through December 31, 2022 is presented in the table below:

	Restricted Stock		Weighted Average Conversion Date Fair Value
	(in thousands)
Non-vested shares outstanding at December 16, 2022		—	$	—
Awards converted		690		4.27
Awards vested		—		—
Awards forfeited		—		—
Non-vested shares outstanding at December 31, 2022		690	$	4.27

No PSU awards vested from October 14, 2022 through December 31, 2022.

As of December 31, 2022, unrecognized compensation cost related to PSU’s totaled $0.7 million and is expected to be recognized over a weighted average period of 1.1 years.

DSUs are similar to RSUs, except that they become fully vested on the date of grant and are only issued to directors of the Company. Distributions under the DSU plan do not occur until the retirement of the DSU holder from the Company's Board of Directors. On December 16, 2022, the Compensation Committee determined that the awards would be settled in shares from the 2020 Plan, thereby converting all the awards to equity awards instead of cash-settled liability awards. DSU activity for the period December 16, 2022 through December 31, 2022 is presented in the table below:

	Restricted Stock			Weighted Average Conversion Date Fair Value
	(in thousands)
Non-vested shares outstanding at December 16, 2022		—		$	—
Awards converted		460			4.27
Awards vested		(460	)		4.27
Awards forfeited		—			—
Non-vested shares outstanding at December 31, 2022		—		$	—

Stock appreciation rights (“SARs”)

SARs may be granted under the VAALCO Energy, Inc. 2016 Stock Appreciation Rights Plan and the 2020 Plan. A SAR is the right to receive a cash amount equal to the spread with respect to a share of common stock upon the exercise of the SAR. The spread is the difference between the SAR exercise price per share specified in the SAR award (that may not be less than the fair market value of the Company’s common stock on the date of grant) and the fair market value per share of the Company’s common stock on the date of exercise of the SAR. SARs granted to participants will become exercisable over a period determined by the Compensation Committee of the Company’s Board of Directors. In addition, SARs will become exercisable upon a change in control, unless provided otherwise by the Compensation Committee of the Company’s Board of Directors.

During the years ended December 31, 2022 and 2021, the Company did not grant SARs to employees or directors. SAR activity for the year ended December 31, 2022 is provided below:

	Number of Shares Underlying SARs			Weighted Average Exercise Price Per Share		Term		Aggregate Intrinsic Value
	(in thousands)					(in years)		(in thousands)
Outstanding at January 1, 2022		362		$	1.81
Granted		—			—
Exercised		(160	)		1.74
Unvested SARs forfeited		—			—
Vested SARs expired		—			—
Outstanding at December 31, 2022		202		$	1.87		0.85	$	542
Exercisable at December 31, 2022		202		$	1.87		0.85	$	542

The intrinsic value of a SAR is the amount that the current market value of the underlying stock exceeds the exercise price of the award. The intrinsic value of SARs exercised in 2022, 2021 and 2020 was $0.8 million.

SARs considered liabilities under US GAAP and the awards are measured at fair value on the grant date and remeasured at fair value until the award is settled.

Other Benefit Plans

The Company has adopted forms of change in control agreements for its named executive officers and certain other officers of the Company as well as a severance plan for its Houston-based non-executive employees in order to provide severance benefits in connection with a change in control. Upon a termination of a participant’s employment by the Company without cause or a resignation by the participant for good reason three months prior to a change in control or six months following a change in control, executives and officers with change in control agreements and participants in the severance plan will be entitled to receive 100% and 50%, respectively, of the participant’s base salary and continued participation in the Company’s group health plans for the participant and his or her eligible spouse and other dependents for six months. In addition, certain named executive officers will receive 75% of their target bonus. Some of the named executive officers are also entitled to severance payments under their employment agreements.

The Company sponsors a 401(k) plan, with a company match feature, for the employees. Costs of $0.4 million for the year ended December 31, 2022, $0.3 million for the year ended December 31, 2021, and $0.4 million for the year ended December 31, 2020, respectively, were incurred for the Company’s matching contribution and for administering the plan.