Workhorse Group, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

12 Months Ended

Dec. 31, 2022

Share-Based Payment Arrangement [Abstract]

The Company maintains, as approved by the board of directors, the 2017 Incentive Stock Plan and the 2019 Stock Incentive Plan (the “Plans”) providing for the issuance of stock-based awards to employees, officers, directors or consultants of the Company. Non-qualified stock options may only be granted with an exercise price equal to the market value of the Company’s common stock on the grant date. The Company may issue various types of awards under the Plans, including options, restricted stock and performance units. The Plans have authorized 13.0 million shares for issuance of stock-based awards. As of December 31, 2022 there were approximately 2.0 million shares available for issuance of future stock awards under the Plans.

Stock-based compensation expense

The following table summarizes stock-based compensation expense:


	Years Ended December 31,
	2022		2021		2020
Stock options	$	978,696	$	526,125	$	792,055
Restricted stock awards	7,767,114		4,227,252		3,228,750
Performance-based restricted stock	2,714,401		190,003		—
Total stock-based compensation expense	$	11,460,211	$	4,943,380	$	4,020,805

Stock options

A summary of stock option activity for the year ended December 31, 2022 is as follows:


	Number of Options	Weighted Average Exercise Price		Weighted Average Grant Date Fair Value per Option	Weighted Average Remaining Contractual Life (Years)





Options outstanding as of December 31, 2021	495,836	$	6.8	—	6.5
Granted	—	—		—	—
Exercised	—	—		—	—
Forfeited	(69,710)	1.5		—	—
Expired	(2,500)	22.3		—	—
Options outstanding as of December 31, 2022	423,626	7.6		—	6.7
Options exercisable as of December 31, 2022	218,006	$	5.5	—	4.6

As of December 31, 2022, unrecognized compensation expense was $1.6 million for unvested options, which is expected to be recognized over the next 1.7 years.

The fair value for the stock option issued in 2021 was estimated on the grant date using a Black-Scholes valuation model that uses the assumptions of expected volatility, expected term, and the expected risk-free rate of return. The expected volatility was estimated by management as 135% based on our historical results adjusted for any expected future changes. The Company uses the simplified method in determining the expected term of the stock option grant awarded in 2021. The simplified method was used because the Company does not believe its historical data provides a reasonable basis for the expected term of the 2021 grant, due primarily to the limited number of grants of stock options awarded to date. The risk-free rate of return was based on market yields in effect on the date of each grant for United States Treasury debt securities with a maturity equal to the expected term of the award.

Restricted stock awards

Restricted stock awards generally vest in equal installment periods of six months to three years. Restricted stock awards are valued based on the closing price of the Company's common stock on the date prior of grant, and compensation cost is recorded on a straight-line basis over the share vesting period net of actual forfeitures in the period.

A summary of restricted stock activity for the year ended December 31, 2022 is as follows:


	Number of Unvested Shares	Weighted Average Grant Date Fair Value per Share




Unvested restricted stock as of December 31, 2021	1,617,192	$	9.3
Granted	2,959,966	3.1
Vested	(883,908)	6.8
Forfeited	(167,919)	6.3
Unvested restricted stock as of December 31, 2022	3,525,331	$	4.9

As of December 31, 2022, unrecognized compensation expense was $13.7 million for unvested restricted stock, which is expected to be recognized over the next 1.9 years.

Performance-based restricted stock awards

On February 23, 2022 the Company issued 0.9 million PSUs in addition to the 0.3 million PSUs issued on November 5, 2021 to certain executives. The vesting of the PSUs is conditioned upon achievement of certain performance objectives over a performance period ending December 31, 2024 as defined in each award agreement. Fifty percent of the PSUs vest based upon

the Company’s total shareholder return as compared to a group of peer companies (“TSR PSUs”), and fifty percent of the PSUs vest based upon the Company’s performance on certain measures including a cumulative adjusted EBITDA target (“EBITDA PSUs”). Depending on the actual achievement on the performance objectives, the grantee may earn between 0% and 200% of the target PSUs.

A summary of the activity for PSU awards with total shareholder return performance objectives for the year ended December 31, 2022 is as follows:


	Number of Unvested Shares	Weighted Average Grant Date Fair Value per Share
Balance, December 31, 2021	306,197	$	11.79
Granted	454,832	11.79
Forfeited	(22,278)	11.79
Balance, December 31, 2022	738,751	$	11.79

The grant date fair value of $11.79 per TSR PSU was estimated using a Monte-Carlo simulation model using a volatility assumption of 117% and risk-free interest rate of 0.69%.

As of December 31, 2022, unrecognized compensation expense was $5.9 million, which is expected to be recognized over the next 2.0 years.

A summary of the PSU awards with cumulative adjusted EBITDA targets for the year ended December 31, 2022 is as follows:


			Number of Unvested Shares
Balance, December 31, 2021			—
Granted			454,822
Forfeited			(22,276)
Balance, December 31, 2022			432,546

The fair value of performance share units is calculated based on the stock price on the date of grant. The stock-based compensation expense recognized each period is dependent upon our estimate of the number of shares that will ultimately vest based on the achievement of EBITDA-based performance conditions. Future stock-based compensation expense for unvested EBITDA PSUs will be based on the fair value of the awards as of the grant date, which has not yet occurred, as the cumulative adjusted EBITDA target condition is not yet defined.