8. Share-Based Compensation

The Compensation Committee of the Board has approved the grant of non-qualified stock options, restricted stock units (“RSUs”), and shares to certain employees, non-employees and members of the Board under the ARKO Corp. 2020 Incentive Compensation Plan (the “Plan”). Stock options granted under the Plan expire no later than ten years from the date of grant and the exercise price may not be less than the fair market value of the shares on the date of grant. Vesting periods are assigned to stock options and restricted share units on a grant-by-grant basis at the discretion of the Board. The Company issues new shares of common stock upon exercise of stock options and vesting of RSUs.

Additionally, a non-employee director may receive RSUs in lieu of up to 100% of his or her cash fees, which RSUs will be settled in common stock upon the director’s departure from the Board or an earlier change in control of the Company.

Stock Options

The aggregate intrinsic value is the difference between the exercise price and the closing price of the Company’s common stock on March 31, 2023 and December 31, 2022.

In the three months ended March 31, 2023, 352 thousand stock options vested.

As of March 31, 2023, total unrecognized compensation cost related to unvested stock options was approximately $2.6 million, which is expected to be recognized over a weighted average period of approximately 2.2 years.

The fair value of each stock option award is estimated by management on the date of the grant using the Black-Scholes option pricing model. The following table summarizes the assumptions utilized in the valuation of the stock option awards granted in the three months ended March 31, 2023:

The expected stock price volatility is based on the historical volatility of the Company’s stock price plus the Company’s peer group’s stock price for the period prior to the Company’s listing on Nasdaq. The volatilities are estimated for a period of time equal to the expected term of the related option. The risk-free interest rate is based on the implied yield of U.S. Treasury zero-coupon issues with an equivalent remaining term. The expected term of the options represents the estimated period of time until exercise and is determined by considering the contractual terms, vesting schedule and expectations of future employee behavior.

Restricted Stock Units

In the three months ended March 31, 2023, 77,147 RSUs were issued to non-employee directors. These awards are included in the table above under restricted stock units. There were 275,317 and 198,170 RSUs issued to non-employee directors outstanding as of March 31, 2023 and December 31, 2022, respectively.

The fair value of RSUs released during the three months ended March 31, 2023 was $5.0 million.

In the three months ended March 31, 2023, the Company granted a target of 1,097,740 performance-based RSUs (“PSUs”). The PSUs were awarded to certain members of senior management and provide for cliff vesting, generally at the end of a three-year period, subject to the achievement of specific key financial metrics measured over such period. The number of PSUs that will ultimately vest is contingent upon the achievement of these key financial metrics at the end of the relevant performance period. The Company assesses the probability of achieving these metrics on a quarterly basis.

Given the Company’s strong performance in 2022, in the first quarter of 2023, the Compensation Committee of the Board approved the adjustment of the performance criteria for 2022 such that the percentage of PSUs that vest with respect to the target amount for 2022 would be 125% instead of 100% and would be applied to all PSUs granted as part of the 2021 and 2022 long-term incentives. As a result, the number of PSUs was adjusted for the probability of achieving these metrics, resulting in additional expense of $0.1 million being recorded in three months ended March 31, 2023, based on the fair value at the adjustment approval date. For PSUs with market conditions, the Company recognizes the fair value expense ratably over the performance and vesting period.

As of March 31, 2023, total unrecognized compensation cost related to RSUs and PSUs was approximately $27.2 million, which is expected to be recognized over a weighted average period of approximately 2.1 years.

Compensation Cost

Total compensation cost recorded for employees, non-employees and members of the Board for the three months ended March 31, 2023 and 2022 was $4.1 million and $2.8 million, respectively, and included in general and administrative expenses on the condensed consolidated statements of operations.