Target Hospitality Corp. Stock Compensation Disclosure

17. Stock-Based Compensation

On March 15, 2019, the Company’s board of directors approved the Plan, under which 4,000,000 of the Company’s shares of Common Stock were reserved for issuance pursuant to future grants of share awards, and 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. The expiration date of the Plan, on and after which date no awards may be granted, is March 15, 2029.  

On March 4, 2020, the Compensation Committee adopted a form of Executive Nonqualified Stock Option Award Agreement (the “2020 Stock Option Agreement”) and a new form of Executive Restricted Stock Unit Agreement (the “2020 RSU Agreement” and together with the 2020 Stock Option Agreement, the “2020 Award Agreements”) with respect to the granting of nonqualified stock options and restricted stock units, respectively, granted under the Plan. The 2020 Award Agreements were used for all awards to executive officers made in 2020.

The 2020 Award Agreements have material terms that are substantially similar to those in the forms of award agreements last approved by the Compensation Committee and disclosed by the Company, except for the following: under the new Award Agreements, if the participant’s employment or service terminates due to Retirement (as defined in the Plan), and the participant has been continuously employed by the Company for at least twelve months following the grant date, then any portion of the participant’s awarded securities scheduled to become vested within twelve months after the participant’s termination date shall be vested on his or her termination date.

On February 25, 2021, the Compensation Committee adopted a new form Executive Restricted Stock Unit Agreement (the “2021 RSU Agreement”) and a form Executive Stock Appreciation Rights Award Agreement (the “2021 SAR Agreement” and together with the 2021 RSU Agreement, the “2021 Award Agreements”) with respect to the granting of restricted stock units and stock appreciation rights, respectively, under the Plan. The 2021 Award Agreements were used for all awards to executive officers made in 2021.

The 2021 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) 50% of the restricted stock units (each an “RSU”) will vest on the second grant date anniversary and 50% of the RSUs will vest on the third grant date anniversary and (y) if the participant’s employment or service terminates due to Retirement (as defined in the Plan), and the participant has been continuously employed by the Company for at least twelve months following the grant date, then a pro-rata portion of the participant’s RSUs scheduled to vest on the next following vesting date shall vest on his or her termination date based on completed calendar months since either (a) the grant date or (b) the initial vesting date, as applicable.

The 2021 SAR Agreement has material terms that are substantially similar to those in the form Executive Nonqualified Stock Option Award Agreement last approved by the Compensation Committee and previously disclosed by the Company, except for the following: (x) the change in the equity instrument to a stock appreciation right (“SAR”), which may be settled in shares or cash, (y) 50% of the SARs will vest on the second grant date anniversary and 50% of the SARs will vest on the third grant date anniversary, and (z) if the participant’s employment or service terminates due to Retirement (as defined in the Plan), then (a) if the participant has been continuously employed by the Company for at least twelve months following the grant date, then a pro-rata portion of the SARs scheduled to become vested on the next vesting date shall be vested on the participant’s termination date based on completed calendar months since either (i) the grant date or (ii) the initial vesting date, as applicable; (b) following the application of clause (a), the unvested portion of the SARs shall expire upon such termination of employment or service and (c) the participant may exercise the vested portion of the

SARs, but only within such period of time ending on the earlier of (i) two years following such termination of employment or service, or (ii) the Expiration Date (as defined in the 2021 SAR Agreement).

On February 24, 2022, the Compensation Committee adopted a new form Executive Restricted Stock Unit Agreement (the “2022 RSU Agreement”) and a new form Executive Performance Stock Unit Agreement (the “2022 PSU Agreement” and together with the 2022 RSU Agreement, the “2022 Award Agreements”) with respect to the granting of RSUs and PSUs, respectively, under the Plan. The 2022 Award Agreements were used for all awards to executive officers made in 2022.

The 2022 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 was not received, then all payments under the RSU Agreement would have been made in cash. However, as noted above, such approval to increase the number of shares available for issuance under the Plan was received at the 2022 annual meeting.

Each PSU awarded under the 2022 PSU Agreement represents the right to receive one share of the Company’s Common Stock, 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 2022 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).

As mentioned above, 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 consolidated statements of changes in stockholders’ equity for the year ended December 31, 2022.

On May 24, 2022 and July 12, 2022,  the Compensation Committee adopted another form of PSU Award Agreement with respect to awarding PSUs (the “May 2022 PSU Agreement”). The May 2022 PSU Agreement is substantially similar to the 2022 PSU Agreement, except for 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. Participants 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 May 2022 PSU Agreement) are met during the performance period then the participant will be entitled to receive a maximum number of PSUs awarded.

On February 28, 2023, the Compensation Committee adopted a new form Executive RSU Agreement (the “2023 RSU Agreement”) and a new form Executive PSU Agreement (the “2023 PSU Agreement”) with respect to the granting of RSUs and PSUs, respectively, under the Plan. The new Award Agreements were used for all awards to executive officers made in 2023.

The 2023 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 2023 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 2023 PSU Agreement is based on the Company’s Total Shareholder Return (the

“2023 TSR Based Award”) performance and the Company’s Diversification EBITDA (as defined in the 2023 PSU Agreement) (the “2023 Diversification EBITDA Based Award”), each measured based on the applicable Performance Period specified in the 2023 PSU Agreement. The number of PSUs that vest pursuant to the 2023 TSR Based Award range from 0% to 200% of the Target Level (as defined in the 2023 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 2023 Diversification EBITDA Based Award range from 0% to 200% of the Target Level (as defined in the 2023 PSU Agreement) depending upon the Company’s Qualifying EBITDA (as defined in the 2023 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).

On February 29, 2024, the Compensation Committee of the Board of Directors of the Company adopted a new form  Executive RSU Agreement (the “2024 RSU Agreement”) and a new form Executive PSU Agreement (the “2024 PSU Agreement”) with respect to the granting of RSUs and PSUs, respectively, under the Plan. The new Award Agreements were used for all awards to executive officers made in 2024.

The 2024 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 2024 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 2024 PSU Agreement is based on the Company’s Total Shareholder Return (the “2024 TSR Based Award”) performance and the Company’s Diversification EBITDA (as defined in the 2024 PSU Agreement) (the “2024 Diversification EBITDA Based Award”), each measured based on the applicable Performance Period specified in the 2024 PSU Agreement. The number of PSUs that vest pursuant to the 2024 TSR Based Award range from 0% to 200% of the Target Level (as defined in the 2024 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 2024 PSU Agreement) depending upon the Company’s Diversification EBITDA (as defined in the 2024 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).

As of December 31, 2024, of the 8,000,000 shares authorized under the plan as previously discussed, assuming all PSUs granted are achieved at the maximum payout, we had 953,569 shares remaining for future issuance under the Plan,

Restricted Stock Units

Beginning on May 21, 2019, the Compensation Committee began granting time-based RSUs to the Company’s executive officers, certain other employees, and non-employee directors.  Each RSU represents a contingent right to receive, upon vesting, one share of the Company’s Common Stock or its cash equivalent, as determined by the Compensation Committee. These RSU awards granted to executive officers and other employees generally vest in four equal installments on each of the first four anniversaries of the grant date, except for 1,134,524 of RSUs granted on February 25, 2021, whereby 50% vest on the second grant date anniversary and 50% vest on the third grant date anniversary. The RSU awards granted to non-employee directors of the board, except as noted below, generally vest over one year on the anniversary of the date of grant or the date of the first annual meeting of the stockholders following the grant date, whichever is sooner.   However, with respect to RSU awards granted to non-employee directors that resign prior to vesting, the Board may approve acceleration of vesting of RSUs granted as permitted by the Plan.

For the years ended December 31, 2022, 2023, and 2024, respectively, certain of the Company's employees surrendered RSUs owned by them to satisfy their statutory minimum federal and state tax obligations associated with the vesting of RSUs issued under the Plan.

The table below represents the changes in RSUs for the years indicated below:

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The total fair value of RSUs vested during the years ended December 31, 2024, 2023 and 2022 was $9.5 million, $17.7 million, and $2.0 million, respectively.

Stock-based compensation expense for these RSUs recognized in selling, general and administrative expense in the consolidated statement of comprehensive income for the year ended December 31, 2024 was approximately $3.8 million, with an associated tax benefit of approximately $0.9 million. Stock-based compensation expense for these RSUs recognized in selling, general and administrative expense in the consolidated statement of comprehensive income for the year ended December 31, 2023 was approximately $5.2 million, with an associated tax benefit of approximately $1.3 million. Stock-based compensation expense for these RSUs recognized in selling, general and administrative expense in the consolidated statement of comprehensive income for the year ended December 31, 2022 was approximately $5.4 million, with an associated tax benefit of approximately $1.4 million. At December 31, 2024, unrecognized compensation expense related to RSUs totaled approximately $6.0 million and is expected to be recognized over a remaining term of approximately 2.25 years.

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 as previously defined.  As of December 31, 2024, 174,419 of these awards were outstanding and are expected to vest at 150% of the Target Level.

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 “Archer 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 Archer 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.  As of December 31, 2024, 500,000 of these awards were outstanding and had achieved 50% of the vesting Target Level.

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 PSUs represent 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. As of December 31, 2024, 450,000 of these awards were outstanding and had achieved 50% of the vesting Target Level.

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 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 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.  With respect to the performance criteria, half of these awards are subject to attainment of the Company Diversification EBITDA criteria and the other half are subject to attainment of the TSR criteria. As of December 31, 2024, 73,931of these awards were outstanding and none of the awards had met the Diversification EBITDA and TSR criteria.

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.  With respect to the performance criteria, half of these awards are subject to attainment of the Company Diversification EBITDA criteria and the other half are subject to attainment of the TSR criteria.  As of December 31, 2024, 203,057 of these awards were outstanding and a portion of the TSR criteria was achieved that would result in 68,582 of these awards meeting the TSR criteria as of December 31, 2024, subject to continued satisfaction of the continued service criteria discussed above.

The following table represents changes in PSUs for the years indicated below:

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Stock-based compensation expense for these PSUs recognized in selling, general and administrative expense in the consolidated statement of comprehensive income for the year ended December 31, 2024 was approximately $2.5 million with an associated tax benefit of $0.7 million. Stock-based compensation expense for these PSUs recognized in selling, general and administrative expense in the consolidated statement of comprehensive income for the year ended December 31, 2023 was approximately $2.6 million with an associated tax benefit of $0.8 million. Stock-based compensation expense for these PSUs recognized in selling, general and administrative expense in the consolidated statement of comprehensive income for the year ended December 31, 2022 was approximately $1.5 million with an associated tax benefit of $0.3 million. At December 31, 2024, unrecognized compensation expense related to PSUs totaled approximately $2.8 million and is expected to be recognized over a remaining term of approximately 1.60 years.

Stock Option Awards

Beginning on May 21, 2019, the Compensation Committee began granting time-based stock option awards to the Company’s executive officers and certain other employees.  The last date such stock option awards were granted was March 4, 2020.  Each option represents the right upon vesting, to buy one share of the Company’s common stock, par value $0.0001 per share, for $4.51 to $10.83 per share. The stock options vest in four equal installments on each of the first four anniversaries of the grant date and expire ten years from the grant date.  

The following table represents changes in stock options for the years indicated below:

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362,109 shares were exercisable at December 31, 2024 with a weighted average exercise price per share of $7.38 and an intrinsic value of $1.02 million. The total fair value of stock option awards vested during the years ended December 31, 2024, 2023 and 2022 was $0.4 million, $0.8 million, and $0.8 million, respectively.

Stock-based compensation expense for these stock option awards recognized in selling, general and administrative expense in the consolidated statement of comprehensive income for the year ended December 31, 2024 was approximately $0.1 million with an associated tax benefit of less than $0.1 million. Stock-based compensation expense for these stock option awards recognized in selling, general and administrative expense in the consolidated statement of comprehensive income for the year ended December 31, 2023 was approximately $0.5 million with an associated tax benefit of approximately $0.1 million. Stock-based compensation expense for these stock option awards recognized in selling, general and administrative expense in the consolidated statement of comprehensive income for the year ended December 31, 2022 was approximately $0.8 million with an associated tax benefit of approximately $0.2 million. As of December 31, 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: 

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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 grant date.  Additionally, due to an insufficient history with respect to stock option activity and post vesting cancellations, the expected term assumption 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.

Stock Appreciation Right Awards

On February 25, 2021, the Compensation Committee granted 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 (including 26,906 granted on August 5, 2021).

As approved by the Compensation Committee, all exercised SARs shown in the table below were paid in cash in the amount of $6.2 million and $10.0 million during the years ended December 31, 2024 and 2023, respectively.  As of December 31, 2024, no SARs remained outstanding.

The following table represents changes in SARs for the years indicated below:

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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 December 31, 2024 as there were no SARs outstanding and unexercised as of December 31, 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 yield was 0.0% and the risk-free 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. 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 December 31, 2024 and December 31, 2023 was $0 and $7.96, respectively. Increases and decreases in stock-based compensation expense were recognized over the vesting period, or immediately for vested awards. For the years ended December 31, 2024, 2023 and 2022, the Company recognized compensation expense related to these awards in selling, general and administrative expense in the accompanying consolidated statements of comprehensive income of approximately $0.9 million, $2.9 million, and $11.4 million, respectively. As of December 31, 2024,  there was no unrecognized compensation expense related to SARs as there are no SARs outstanding as of December 31, 2024. At December 31, 2024 and December 31, 2023, the intrinsic value of the SARs was $0 and $5.6 million, respectively.

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, was 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.