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Stock-Based Compensation

9 Months Ended

Sep. 30, 2024

Stock-Based Compensation

Stock-Based Compensation

15. Stock-Based Compensation

On February 29, 2024, the Compensation Committee (the “Compensation Committee”) of the Board of Directors of the Company adopted a new form 2024 Executive Restricted Stock Unit Agreement (the “RSU Agreement”) and a new form 2024 Executive Performance Stock Unit Agreement (the “PSU Agreement” together with the RSU Agreement, the “Award Agreements”) with respect to the granting of restricted stock units (“RSUs”) and performance 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 February 29, 2024.

The RSU Agreement has material terms that are substantially similar to those in the form 2023 Executive Restricted Stock Unit Agreement last approved by the Compensation Committee and previously disclosed by the Company in the 2023 Form 10-K.

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 Diversification 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

On February 29, 2024, the Compensation Committee awarded an aggregate of 350,128 time-based RSUs to certain of the Company’s executive officers and other employees, which vest ratably over a four-year period.

On May 23, 2024, the Compensation Committee awarded an aggregate of 62,823 time-based RSUs to certain of the Company’s non-employee directors, which vest in full on the first anniversary of the grant date or, if earlier, the date of the first annual meeting of the stockholders of the Company following the grant date.

The table below represents the changes in RSUs:


			Number of Shares			Weighted Average Grant Date Fair Value per Share
Balance at December 31, 2023			1,682,206		$	4.65
Granted			412,951			9.92
Vested			(1,001,998)			3.86
Forfeited			(125,792)			5.66
Balance at September 30, 2024			967,367		$	7.59

Stock-based compensation expense for these RSUs recognized in selling, general and administrative expense in the consolidated statements of comprehensive income for the nine months ended September 30, 2024 and 2023, was approximately $2.9 million and $4.1 million, respectively, with an associated tax benefit of approximately $0.7 million and $1.0 million, respectively. For the three months ended September 30, 2024 and 2023, stock-based compensation

expense for RSUs was approximately $0.9 million and $1.3 million, respectively, with an associated tax benefit of $0.2 million and $0.3 million, respectively. At September 30, 2024, unrecognized compensation expense related to RSUs totaled approximately $6.7 million and is expected to be recognized over a remaining term of approximately 2.45 years.

Performance Stock Units

On February 29, 2024, the Company awarded an aggregate of 203,057 PSUs to certain of the Company’s executive officers and employees, which vest upon satisfaction of continued service with the Company until the third anniversary of the Grant Date and attainment of the Company’s Diversification EBITDA and TSR criteria. These PSUs were valued using a Monte Carlo simulation with the following assumptions on the grant date: the expected volatility was approximately 36.30%, the term was 2.84 years, the correlation coefficient was 0.5832, the dividend rate was 0.0% and the risk-free interest rate was approximately 4.41%, which resulted in a calculated fair value of approximately $13.50 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, 2023			1,358,868		$	5.23
Granted			203,057			11.59
Forfeited			(160,518)			6.36
Balance at September 30, 2024			1,401,407		$	6.02

Stock-based compensation expense for these PSUs recognized in selling, general and administrative expense in the consolidated statement of comprehensive income for the nine months ended September 30, 2024 and 2023, was approximately $1.8 million and $2.6 million, respectively, with an associated tax benefit of approximately $0.5 million and $0.6 million, respectively. For the three months ended September 30, 2024 and 2023, stock-based compensation expense was approximately $0.7 million and $1.1 million, respectively, with an associated tax benefit of $0.2 million and $0.3 million, respectively. At September 30, 2024, unrecognized compensation expense related to PSUs totaled approximately $3.6 million and is expected to be recognized over a remaining term of approximately 1.72 years.

Stock Option Awards

During the nine months ended September 30, 2024, there were changes in stock options as shown in the following table.


			Options			Weighted Average Exercise Price Per Share		Weighted Average Contractual Life (Years)			Intrinsic Value ($ in thousands)
Outstanding Options at December 31, 2023			740,439		$	6.55		5.17		$	2,570
Exercised			(348,389)			5.31		-			1,620
Vested and expired			(29,941)			10.83		-			-
Outstanding Options at September 30, 2024			362,109		$	7.38		5.07		$	646

362,109 stock options were exercisable at September 30, 2024.

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 nine months ended September 30, 2024 and 2023, was approximately $0.1 million and $0.4 million, respectively, with an associated tax benefit of approximately less than $0.1 million and $0.1 million, respectively. For the three months ended September 30, 2024 and 2023, stock-based compensation expense was $0 and approximately $0.1 million, respectively, with an associated tax benefit of $0 and less

than $0.1 million, respectively. As of September 30, 2024, there was no unrecognized compensation expense related to stock options.

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

The volatility assumption used in the Black-Scholes option-pricing model is based on peer group volatility as the Company did not have a sufficient trading history as a stand-alone public company to calculate volatility at the time of estimating the fair value of each option at the grant date. 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, 2024 and 2023.

Stock Appreciation Right Awards

As approved by the Compensation Committee, 755,436 of 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 share of Common Stock on the date of exercise, over (b) the grant date price; during the first quarter of 2023.

As approved by the Compensation Committee, 13,453 of the employee related exercised SARs shown in the table below were paid in cash in the amount of $0.1 million based on the difference between (a) the fair market value of the share of Common Stock on the date of exercise, over (b) the grant price; during the third quarter of 2023.

During the nine months ended September 30, 2024, as approved by the Compensation Committee, 714,539 of the employee related exercised SARs shown in the table below were paid in cash in the amount of $6.2 million based on the difference between (a) the fair market value of a share of Common Stock 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, 2023		714,539		$	1.82		7.17
Exercised		(714,539)			1.82		-
Outstanding SARs at September 30, 2024		-		$	-		-

There were no SARs outstanding and exercisable at September 30, 2024.

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 $0 as of September 30, 2024 as there were no SARs

outstanding and unexercised as of September 30, 2024. The liability associated with these SAR awards recognized as of December 31, 2023 was approximately $5.4 million, all of which is included in accrued liabilities in the accompanying consolidated balance sheet as of December 31, 2023. 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 was remeasured at each reporting period until the date of settlement. As of September 30, 2024, there were no remaining outstanding SARs. At December 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 35.78% and 53.39%, the term was 0.08 years and 0.30 years, the dividend yield was 0.0% and 0.0%, the risk-free rate was approximately 5.52% and 5.33%, and the exercise price was $1.79 and $3.54, which resulted in a calculated fair value of approximately $7.95 and $6.25 per SAR, respectively, as of December 31, 2023.

The estimated weighted-average fair value of each SAR as of September 30, 2024 and December 31, 2023 was $0 and $7.96, respectively. 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, 2024 and 2023, the Company recognized compensation expense related to these awards of approximately $0.9 million and $6.9 million, respectively, in selling, general and administrative expense in the consolidated statements of comprehensive income. For the three months ended September 30, 2024 and 2023, the Company recognized compensation expense related to these awards of $0 and $2.2 million, respectively. At September 30, 2024, unrecognized compensation expense related to SARs totaled $0 as there are no SARs outstanding as of September 30, 2024.

The volatility assumption used in the Black-Scholes option-pricing model for purposes of estimating the fair value as of December 31, 2023 and the grant date, is based on peer group volatility as the Company did not have a sufficient trading history as a stand-alone public company to calculate volatility as of December 31, 2023 and as of the grant date. Additionally, due to an insufficient history with respect to stock appreciation right activity and post vesting cancellations, the expected term assumption on the grant date was 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, 2024.