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Stock-Based Compensation | 9 Months Ended
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Sep. 30, 2022
Stock-Based Compensation |
Stock-Based Compensation | 16. Stock-Based Compensation On February 24, 2022, the Compensation Committee (the “Compensation Committee”) of the Company’s Board of Directors adopted a new form Executive Restricted Stock Unit Agreement (the “RSU Agreement”) and a new form Executive Performance Stock Unit Agreement (the “PSU Agreement” and together with the RSU Agreement, the “Award Agreements”) with respect to the granting of restricted stock units (“RSUs”) and performance restricted stock units (“PSUs”), respectively, under the Target Hospitality Corp. 2019 Incentive Plan (the “Plan”). The new Award Agreements will be used for all awards to executive officers made on or after February 24, 2022. The RSU Agreement has material terms that are substantially similar to those in the form Executive Restricted Stock Unit Agreement last approved by the Compensation Committee and previously disclosed by the Company, except for the following: (x) the RSUs will vest in four equal installments on each of the first four anniversaries of the grant date and (y) if approval by the Company’s shareholders of the proposed increase in the number of shares available for issuance under the Plan at the 2022 annual meeting of the Company’s shareholders is not received, then all payments under the RSU Agreement will be made in cash. Each PSU awarded under the PSU Agreement represents the right to receive one share of the Company’s common stock, par value $0.0001 per share, or, at the Compensation Committee’s sole discretion, cash or part cash and part common stock with the cash amount equal to the fair market value of the common stock as of the date on which the restricted period ends. PSUs vest and become unrestricted on the third anniversary of the grant date. The number of PSUs that vest range from 0% to 150% of the Target Level (as defined in the PSU Agreement) depending upon the achievement of specified three-year cumulative operating cash flow amounts as determined based on the net cash flow from operations disclosed in the Company’s Annual Reports on Form 10-K for the period from January 1, 2022 through December 31, 2024. Vesting of PSUs is contingent upon the executive’s continued employment through the vesting date, unless the executive’s employment is terminated by reason of death, without Cause, for Good Reason, or in the event of a Change in Control (each term as defined in the Plan). On May 19, 2022, the Company’s stockholders approved an amendment to the Plan to increase the number of shares authorized under the plan by 4,000,000 shares. As a result of this, the Company reclassified all of the outstanding liability-based RSUs and PSUs from accrued liabilities and other non-current liabilities to additional paid-in capital based on the change in the ability to settle these awards in shares upon vesting as a result of the additional shares added to the Plan. The reclassified amount of these awards at the date of this change was approximately $2.4 million and is included in the accompanying unaudited consolidated statements of changes in stockholders’ equity for the nine months ended September 30, 2022. Restricted Stock Units On January 3, 2022, the Compensation Committee awarded 10,861 time-based RSUs to one of the Company’s non-employee directors, which vested in full during the six months ended June 30, 2022. On February 24, 2022, the Compensation Committee awarded an aggregate of 1,085,548 time-based RSUs to certain of the Company’s executive officers and other employees, which vest ratably over a four-year period. On May 19, 2022, the Compensation Committee awarded an aggregate of 159,766 time-based RSUs to the Company’s non-employee directors, which vest in full on May 19, 2023 or, if earlier, the date of the first Annual Meeting of the Stockholders of the Company following the Grant Date. On September 6, 2022, the Compensation Committee awarded 4,969 time-based RSUs to an employee of the Company, which vests ratably over a four-year period. During the three months ended March 31, 2022, as approved by the Compensation Committee, 116,837 of the employee related vested RSUs shown in the below table were paid in cash in the amount of approximately $0.4 million based on the closing stock price on the vesting date. The table below represents the changes in RSUs: ​
​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ | Number of Shares |  | ​ | Weighted Average Grant Date Fair Value per Share
Balance at December 31, 2021 | ​ | ​ | 1,862,590 | ​ | $ | 3.00
Granted | ​ | ​ | 1,261,144 | ​ | ​ | 3.42
Vested | ​ | ​ | (433,653) | ​ | ​ | 4.09
Balance at September 30, 2022 | ​ | ​ | 2,690,081 | ​ | $ | 3.02
​ Stock-based compensation expense for these RSUs recognized in selling, general and administrative expense in the consolidated statement of comprehensive income (loss) for the nine months ended September 30, 2022 and 2021, was approximately $4.3 million and $2.1 million, respectively, with an associated tax benefit of approximately $1.7 million and $0.5 million, respectively. For the three months ended September 30, 2022 and 2021, stock-based compensation expense for RSUs was approximately $1.3 million and $0.8 million, respectively, with an associated tax benefit of $1.1 million and $0.2 million, respectively. At September 30, 2022, unrecognized compensation expense related to RSUs totaled approximately $8.4 million and is expected to be recognized over a remaining term of approximately 2.66 years. Under the authoritative guidance for stock-based compensation, a portion of the RSUs outstanding at December 31, 2021 were considered liability-based awards due to an insufficient number of shares available under the plan to service these awards upon vesting. As such, the Company recognized a liability associated with these RSUs of approximately $0.8 million as of December 31, 2021, of which approximately $0.5 million was included in accrued liabilities and approximately $0.3 million was included in other non-current liabilities in the accompanying consolidated balance sheet as of December 31, 2021. The estimated fair value of these liability-based awards was $3.56/RSU as of December 31, 2021. As noted above, all such liability-based RSUs were reclassified to additional paid-in-capital, a component of total stockholders’ equity, during the nine months ended September 30, 2022, and are no longer included in liabilities as of September 30, 2022. Performance Stock Units On February 24, 2022, the Company awarded an aggregate of 245,017 time and performance-based PSUs to certain of the Company’s executive officers and management, which vest upon satisfaction of continued service with the Company until the third anniversary of the Grant Date and attainment of Company cash flow performance criteria. On May 24, 2022, the Company and the Company’s President and Chief Executive Officer, James B. Archer, entered into the Executive Performance Stock Unit Agreement (the “Archer PSU Agreement”) in connection with Mr. Archer’s previously disclosed intention to continue to serve as President and Chief Executive Officer of the Company and as a member of the Company’s Board of Directors. Each PSU awarded under the Agreement represents the right to receive one share of the Company’s common stock. The PSUs awarded pursuant to the Archer PSU Agreement vest and become unrestricted on June 30, 2025. The number of PSUs that vest are determined based upon the achievement of specified share prices over the period between the grant date and June 30, 2025 (the “Performance Period”). Mr. Archer will earn a corresponding number of PSUs upon the achievement of specified share price thresholds, the first of which is $12.50 per share. If all Performance Goals (as defined in the Archer PSU Agreement) are met during the Performance Period, Mr. Archer will be entitled to receive a maximum of 500,000 PSUs. Vesting is contingent upon Mr. Archer’s continued employment through the vesting date, unless Mr. Archer’s employment is terminated by reason of death or Disability, without Cause, for Good Reason, or in the event of a Qualifying Termination in connection with a Change in Control (each term as defined in the Plan, as amended, or Mr. Archer’s employment agreement with the Company, as amended). These PSUs were valued using a Monte Carlo simulation with the following assumptions on the grant date: the expected volatility was approximately 53.82%, the term was 3.10 years, the dividend rate was 0.0% and the risk-free interest rate was approximately 2.65%, which resulted in a calculated fair value of approximately $2.21 per PSU as of the grant date. On July 12, 2022, the Compensation Committee granted 750,000 PSUs aimed at retaining, motivating and incentivizing certain of the Company’s executive officers, including its named executive officers (“NEOs”), under and pursuant to the Plan. The form of agreement with respect to the granting of the PSUs has material terms that are substantially similar to those in the Archer PSU Agreement. Such PSU represents the right to receive one share of the Company’s common stock, par value $0.0001 per share. PSUs vest and become unrestricted on June 30, 2025. The number of PSUs that vest is determined based upon the achievement of specified share prices over the Performance Period. The executives will each earn a corresponding number of PSUs upon the achievement of specified share price thresholds, the first of which is $12.50 per share. If all Performance Goals (as defined in the applicable award agreement) are met during the Performance Period, the executives will be entitled to receive the maximum PSUs granted to them. Vesting is contingent upon the applicable executive’s continued employment through the vesting date, unless the applicable executive’s employment is terminated by reason of death or Disability, without Cause, for Good Reason, or in the event of a Qualifying Termination in connection with a Change in Control (each term as defined in the Plan, or each executive’s employment agreement, as amended, with the Company). These PSUs were valued using a Monte Carlo simulation with the following assumptions on the grant date: the expected volatility was approximately 55.76%, the term was 2.97 years, the dividend rate was 0.0% and the risk-free interest rate was approximately 3.05%, which resulted in a calculated fair value of approximately $6.96 per PSU as of the grant date. The table below represents the changes in PSUs: ​
​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ | Number of Shares |  | ​ | Weighted Average Grant Date Fair Value per Share
Balance at December 31, 2021 | ​ | ​ | — | ​ | $ | —
Granted | ​ | ​ | 1,495,017 | ​ | ​ | 5.22
Forfeited | ​ | ​ | — | ​ | ​ | —
Vested | ​ | ​ | — | ​ | ​ | —
Balance at September 30, 2022 | ​ | ​ | 1,495,017 | ​ | $ | 5.22
​ Stock-based compensation expense for these PSUs recognized in selling, general and administrative expense in the consolidated statement of comprehensive income (loss) for the nine months ended September 30, 2022 was approximately $0.8 million with an associated tax benefit of $0.2 million. For the three months ended September 30, 2022, stock-based compensation expense for PSUs was approximately $0.6 million with an associated tax benefit of $0.1 million. At September 30, 2022, unrecognized compensation expense related to PSUs totaled approximately $7.1 million and is expected to be recognized over a remaining term of approximately 2.64 years. Stock Option Awards During the nine months ended September 30, 2022, there were stock options exercised as shown in the following table. The table below represents the changes in stock options: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ | Options |  | ​ | Weighted Average Exercise Price Per Share |  | Weighted Average Contractual Life (Years) |  | ​ | Intrinsic Value
Outstanding Options at December 31, 2021 | ​ | ​ | 1,643,135 | ​ | $ | 6.11 | ​ | 7.95 | ​ | $ | -
Granted | ​ | ​ | - | ​ | ​ | - | ​ | - | ​ | ​ | -
Forfeited | ​ | ​ | - | ​ | ​ | - | ​ | - | ​ | ​ | -
Exercised | ​ | ​ | (19,842) | ​ | ​ | 4.51 | ​ | - | ​ | ​ | 177
Vested and Expired | ​ | ​ | - | ​ | ​ | - | ​ | - | ​ | ​ | -
Outstanding Options at September 30, 2022 | ​ | ​ | 1,623,293 | ​ | $ | 6.12 | ​ | 7.12 | ​ | $ | 10,413
​ 934,405 stock options were exercisable at September 30, 2022. Stock-based compensation expense for these stock option awards recognized in selling, general and administrative expense in the unaudited consolidated statement of comprehensive income (loss) for the nine months ended September 30, 2022 and 2021, was approximately $0.6 million and $0.6 million, respectively, with an associated tax benefit of approximately $0.1 million and $0.1 million, respectively. For the three months ended September 30, 2022 and 2021, stock-based compensation expense was approximately $0.2 million and $0.2 million, respectively, with an associated tax benefit of less than $0.1 million and less than $0.1 million, respectively. At September 30, 2022, unrecognized compensation expense related to stock options totaled $0.8 million and is expected to be recognized over a remaining term of approximately 1.19 years. The fair value of each option award at the grant date was estimated using the Black-Scholes option-pricing model with the following assumptions: ​
​ | ​ | ​
​ |  | Assumptions
Weighted average expected stock volatility (range) | % | 25.94 - 30.90
Expected dividend yield | % | 0.00
Expected term (years) | ​ | 6.25
Risk-free interest rate (range) | % | 0.82 - 2.26
Exercise price (range) | $ | 4.51 - 10.83
Weighted-average grant date fair value | $ | 1.42
​ The volatility assumption used in the Black-Scholes option-pricing model is based on peer group volatility as the Company does not have a sufficient trading history as a stand-alone public company to calculate volatility. Additionally, due to an insufficient history with respect to stock option activity and post vesting cancellations, the expected term assumption is based on the simplified method permitted under SEC rules, whereby, the simple average of the vesting period for each tranche of award and its contractual term is aggregated to arrive at a weighted average expected term for the award. The risk-free interest rate used in the Black-Scholes model is based on the implied US Treasury bill yield curve at the date of grant with a remaining term equal to the Company’s expected term assumption. The Company has never declared or paid a dividend on its shares of common stock. Stock-based payments are subject to service-based vesting requirements and expense is recognized on a straight-line basis over the vesting period. Forfeitures are accounted for as they occur. No stock options were forfeited during the nine months ended September 30, 2022. Stock Appreciation Right Awards On February 25, 2021 and August 5, 2021, the Compensation Committee granted Stock Appreciation Rights (“SARs”) to certain of the Company’s executive officers and other employees. Each SAR represents a contingent right to receive, upon vesting, payment in cash or the Company’s Common Stock, as determined by the Compensation Committee, in an amount equal to the difference between (a) the fair market value of a Common Share on the date of exercise, over (b) the grant date price. The number of SARs granted to certain named executive officers and certain other employees totaled 1,578,537. During the nine months ended September 30, 2022, there were no new grants or changes in the SARs outstanding. ​ Under the authoritative guidance for stock-based compensation, these SARs are considered liability-based awards. The Company recognized a liability, associated with its SARs of approximately $9.0 million as of September 30, 2022, of which approximately $4.5 million is included in accrued liabilities and approximately $4.5 million is included in other non-current liabilities in the accompanying consolidated balance sheet as of September 30, 2022. The liability associated with these SAR awards recognized as of December 31, 2021, was approximately $1.2 million, all of which was included in other non-current liabilities in the accompanying consolidated balance sheet as of December 31, 2021. These SARs were valued using the Black-Scholes option pricing model with the following assumptions on the grant date: the expected volatility was approximately 43.5%, the term was 6.25 years, the dividend rate was 0.0% and the risk-free interest rate was approximately 1.07%, which resulted in a calculated fair value of approximately $0.78 per SAR as of the grant date. The estimated weighted-average fair value of each SAR as of December 31, 2021 and September 30, 2022 was $2.69 and $10.87, respectively. The fair value of these liability awards will be remeasured at each reporting period until the date of settlement. Increases and decreases in stock-based compensation expense are recognized over the vesting period, or immediately for vested awards. For the nine months ended September 30, 2022 and 2021, the Company recognized compensation expense related to these awards of approximately $7.9 million and $0.9 million, respectively, in selling, general and administrative expense in the unaudited consolidated statements of comprehensive income (loss). For the three months ended September 30, 2022 and 2021, the Company recognized compensation expense related to these awards of approximately $6.3 million and $0.4 million, respectively. At September 30, 2022, unrecognized compensation expense related to SARs totaled approximately $7.9 million and is expected to be recognized over a remaining weighted-average term of approximately 1.41 years. At September 30, 2022, the intrinsic value of the SARs was $16.6 million. The volatility assumption used in the Black-Scholes option-pricing model is based on peer group volatility as the Company does not have a sufficient trading history as a stand-alone public company to calculate volatility. Additionally, due to an insufficient history with respect to stock appreciation right activity and post vesting cancellations, the expected term assumption is based on the simplified method permitted under SEC rules, whereby, the simple average of the vesting period for each tranche of award and its contractual term is aggregated to arrive at a weighted average expected term for the award. The risk-free interest rate used in the Black-Scholes model is based on the implied US Treasury bill yield curve at the date of grant with a remaining term equal to the Company’s expected term assumption. The Company has never declared or paid a dividend on its shares of common stock. Stock-based payments are subject to service-based vesting requirements and expense is recognized on a straight-line basis over the vesting period. Forfeitures are accounted for as they occur. No SARs were forfeited during the nine months ended September 30, 2022.

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