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Stock-Based Compensation

3 Months Ended

Mar. 31, 2023

Stock-Based Compensation

Stock-Based Compensation

15. Stock-Based Compensation

On February 28, 2023, 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 (as amended, the “Plan”). The new Award Agreements will be used for all awards to executive officers made on or after March 1, 2023.

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.

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. PSUs vest and become unrestricted on the third anniversary of the grant date. The number of PSUs that vest pursuant to the PSU Agreement is based on the Company’s Total Shareholder Return (the “TSR Based Award”) performance and the Company’s Diversification EBITDA (as defined in the PSU Agreement) (the “Diversification EBITDA Based Award”), each measured based on the applicable Performance Period specified in the PSU Agreement. The number of PSUs that vest pursuant to the TSR Based Award range from 0% to 200% of the Target Level (as defined in the PSU Agreement) depending upon the achievement of a specified percentile rank during the applicable Performance Period. The number of PSUs that vest pursuant to the Diversification EBITDA Based Award range from 0% to 200% of the Target Level (as defined in the PSU Agreement) depending upon the Company’s Qualifying EBITDA (as defined in the PSU Agreement) during the applicable Performance Period. 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).

Restricted Stock Units

During the three months ended March 31, 2023, the Compensation Committee awarded an aggregate of 214,901 time-based RSUs to certain of the Company’s executive officers and other employees, which vest ratably over a four-year period.

The table below represents the changes in RSUs:


			Number of Shares			Weighted Average Grant Date Fair Value per Share
Balance at December 31, 2022			2,658,581		$	2.98
Granted			214,901			15.01
Vested			(933,064)			2.49
Balance at March 31, 2023			1,940,418		$	4.55

Stock-based compensation expense for these RSUs recognized in selling, general and administrative expense in the consolidated statements of comprehensive income for the three months ended March 31, 2023 and 2022, was approximately $1.3 million and $1.6 million, respectively, with an associated tax benefit of approximately $0.3 million and $0.4 million, respectively. At March 31, 2023, unrecognized compensation expense related to RSUs totaled approximately $9.9 million and is expected to be recognized over a remaining term of approximately 2.85 years.

Performance Stock Units

On March 1, 2023, the Company awarded an aggregate of 91,025 time and performance-based PSUs to certain of the Company’s employees, which vest upon satisfaction of continued service with the Company until the third anniversary of the Grant Date and attainment of Company performance criteria. These PSUs were valued using a Monte Carlo simulation with the following assumptions on the grant date: the expected volatility was approximately 45.86%, the term was 2.84 years, the correlation coefficient was 0.6210, the dividend rate was 0.0% and the risk-free interest rate was approximately 4.60%, which resulted in a calculated fair value of approximately $20.66 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, 2022			1,495,017		$	4.72
Granted			91,025			14.98
Balance at March 31, 2023			1,586,042		$	5.31

Stock-based compensation expense for these PSUs recognized in selling, general and administrative expense in the consolidated statement of comprehensive income for the three months ended March 31, 2023 and 2022 was approximately $0.7 million and $0.1 million, respectively, with an associated tax benefit of $0.2 million and $0, respectively. At March 31, 2023, unrecognized compensation expense related to PSUs totaled approximately $7.1 million and is expected to be recognized over a remaining term of approximately 2.32 years.

Stock Option Awards

During the three months ended March 31, 2023, 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, 2022			1,510,661		$	6.13		6.86		$	13,615
Exercised			(671,392)			5.81		-			7,423
Outstanding Options at March 31, 2023			839,269		$	6.38		6.64		$	5,671

438,733 stock options were exercisable at March 31, 2023.

Stock-based compensation expense for these stock option awards recognized in selling, general and administrative expense in the consolidated statements of comprehensive income for the three months ended March 31, 2023 and 2022 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 March 31, 2023, unrecognized compensation expense related to stock options totaled $0.4 million and is expected to be recognized over a remaining term of approximately 0.81 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 three months ended March 31, 2023.

Stock Appreciation Right Awards

During the three months ended March 31, 2023, as approved by the Compensation Committee, the employee related exercised SARs shown in the table below were paid in cash in the amount of $10.0 million based on the difference between (a) the fair market value of a Common Share on the date of exercise, over (b) the grant date price.

The table below represents the changes in SARs:


		Number of Units			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)
Outstanding SARs at December 31, 2022		1,537,776		$	1.82		8.17
Exercised		(755,436)			1.79		-
Outstanding SARs at March 31, 2023		782,340		$	1.85		7.93

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 $6.2 million as of March 31, 2023, all of which is included in accrued liabilities in the accompanying consolidated balance sheet as of March 31, 2023. The liability associated with these SAR awards recognized as of December 31, 2022, was approximately $12.6 million, of which approximately $6.3 million is included in accrued liabilities and approximately $6.3 million is included in other non-current liabilities in the accompanying consolidated balance sheet as of December 31, 2022. 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 fair value of these liability awards will be remeasured at each reporting period until the date of settlement. At March 31, 2023, these SARs were valued using the Black-Scholes option pricing model with the following assumptions for awards granted on February 25, 2021 and August 5, 2021, respectively: the expected volatility was approximately 38.65% and 43.42%, the term was 0.45 years and 0.85 years, the dividend rate was 0.0% and 0.0%, the risk-free interest rate was approximately 4.89% and 4.68%, and the exercise price was $1.79 and $3.54, which resulted in a calculated fair value of approximately $11.39 and $9.74 per SAR, respectively, as of March 31, 2023. At December 31, 2022, these SARs were valued using the Black-Scholes option pricing model with the following assumptions for awards granted on February 25, 2021 and August 5, 2021, respectively: the expected volatility was approximately 46.86% and 47.27%, the term was 0.65 years and 1.10 years, the dividend rate was 0.0% and 0.0%, the risk-free interest rate was approximately 4.70% and 4.65%, and the exercise price was $1.79 and $3.54, which resulted in a calculated fair value of approximately $13.40 and $11.78 per SAR, respectively, as of December 31, 2022.

The estimated weighted-average fair value of each SAR as of March 31, 2023 and December 31, 2022 was $11.56 and $13.61, respectively. Increases and decreases in stock-based compensation expense are recognized over the vesting period, or immediately for vested awards. For three months ended March 31, 2023 and 2022, the Company recognized compensation expense related to these awards of approximately $3.5 million and $1.5 million, respectively, in selling, general and administrative expense in the consolidated statements of comprehensive income. At March 31, 2023, unrecognized compensation expense related to SARs totaled approximately $5.7 million and is expected to be recognized over a remaining weighted-average term of approximately 0.92 years. At March 31, 2023, the intrinsic value of the SARs was $8.8 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 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.

SARs 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 three months ended March 31, 2023.