Stock-based compensation

9 Months Ended

Sep. 30, 2024

Stock-based compensation

Stock-based compensation

Note 14. Stock-based compensation

The Company adopted the Rollover Option Plan in connection with the Business Combination, which is a plan that governs replacement stock options that replaced previously outstanding USBTC stock options prior to the Business Combination. The Rollover Option Plan is identical to USBTC’s 2021 Equity Incentive Plan (the “2021 Plan”) except for conforming to changes to take into account the Business Combination, namely the exchange ratio of USBTC stock options exchanged for 0.6716 stock options of the Company. Fractional stock options, if any, were rounded down to the nearest whole stock option at an award level. The exercise price of any USBTC stock option exchanged was equal to the exercise price of the replaced USBTC stock option immediately before the Business Combination divided by 0.6716, rounded up to the nearest whole cent, if applicable. On November 30, 2023, in connection with the Business Combination, USBTC stock options outstanding immediately before the Business Combination were exchanged as noted (“USBTC Replacement Options”). In addition, 4,490,400 shares of common stock have been authorized and registered to be issued under the Rollover Option Plan, and no further awards are available for grant under the Rollover Option Plan.

On March 16, 2021, USBTC established the 2021 Plan. The 2021 Plan allowed USBTC to award stock options, stock appreciation rights, restricted awards and performance awards to employees, consultants, and directors of USBTC and its affiliates. Cancelled and forfeited awards were returned to the 2021 Plan for future awards.

In connection with the Business Combination, equity awards outstanding under Legacy Hut’s, the accounting acquiree, Omnibus Long-Term Incentive Plan established on February 15, 2018, as amended, (the “2018 Plan”) were amended to settle in shares of the Company’s common stock, for restricted share units and deferred share units, or were cancelled and reissued under the Company’s 2023 Omnibus Incentive Plan (the “2023 Plan”), for stock options, all at an exchange ratio of 0.2000 effective November 30, 2023. The exercise price of stock options under the 2018 Plan immediately before the Business Combination was divided by the exchange ratio of 0.2000 rounded up to the nearest whole cent, if applicable, to obtain the exercise price of the reissued stock options. Fractional awards, if any, were rounded down to the nearest whole award unit at an award level. The replaced stock options are governed by the Company’s 2023 Plan and the amended restricted stock units and deferred stock units are governed by the 2018 Plan with all replaced or amended awards having the same terms and conditions except otherwise noted. The 2018 Plan allowed Legacy Hut to award stock options and restricted share units to employees, consultants, service providers, and directors of Legacy Hut and its affiliates, and deferred share units to employees and directors of Legacy Hut. 1,553,254 shares of common stock have been authorized and registered to be issued under the 2018 Plan.

Effective November 27, 2023, the Company established the 2023 Plan. Under the 2023 Plan, stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock units, deferred stock units, other stock-based awards, and stock bonuses can be granted to employees, consultants, and directors of the Company and its affiliates. Cancelled and forfeited awards are returned to the 2023 Plan for future awards. 6,065,682 shares of common stock have been authorized and registered to be issued under the 2023 Plan. As of September 30, 2024, only restricted stock units, deferred stock units, performance stock units, and stock options as replacements of Legacy Hut stock options have been granted under the 2023 Plan.

The Company’s stock-based compensation expense recognized during the nine months ended September 30, 2024 and September 30, 2023 and the three months ended September 30, 2024 and September 30, 2023 is included in general and administrative expenses in the Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and is as follows:

	Three Months Ended				Nine Months Ended
(in USD thousands)	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
Restricted stock awards	$	—	$	—	$	—	$	687
Stock options		1,043		303		2,668		964
Restricted stock units		1,632		—		9,201		—
Deferred stock units		—		—		—		—
Performance stock units		2,282		—		4,572		—
Total stock-based compensation	$	4,957	$	303	$	16,441	$	1,651

Time-based restricted stock awards

On October 10, 2021, USBTC awarded 395,908 time-based restricted stock awards, with an estimated fair value of $3.38 per share. USBTC estimated the fair value as of September 30, 2021, utilizing the market approach and other fair value measurement techniques such as the backsolve method, which derives the equity value for USBTC from a transaction involving USBTC’s own securities, in this case, USBTC’s Series B preferred stock offering on September 30, 2021. 263,939 of these awards were cancelled in February 2023 as noted below.

On January 5, 2023, USBTC awarded 704,449 time-based restricted stock awards with an estimated fair value of $0.39 per share. USBTC estimated the fair value of $0.39 as of December 31, 2022 utilizing a market approach and the Guideline Public Company Method to derive an estimated equity value from publicly traded companies deemed comparable to USBTC. Once the equity value was determined, USBTC used the option pricing method to allocate fair value to USBTC’s individual securities outstanding at the time.

In February 2023, USBTC cancelled 704,449 restricted stock awards which it had awarded on January 5, 2023 and also cancelled 263,939 restricted stock awards from other previously issued restricted stock grants, and accordingly recognized compensation expense at that time in the amount of the remaining unrecognized compensation expense for all of these awards of $0.6 million.

The assumptions used in the option pricing method and the backsolve method as of December 31, 2022 and September 30, 2021 were as follows:

	December 31,		September 30,
	2022		2021
Dividend yield	—	%	—	%
Expected price volatility	120	%	100	%
Risk-free interest rate	4.41	%	0.28	%
Expected term	2.0 years		2.0 years

There was no time-based restricted stock award activity during the nine months ended September 30, 2024. A summary of USBTC’s unvested time-based restricted stock awards for the nine months ended September 30, 2023 is as follows:

		Weighted average
	Number of	grant-date		Aggregate
(in USD thousands, except share and per share amounts)	shares	fair value		intrinsic value
Unvested as of December 31, 2022	263,939	$	3.38	$	102
Granted	704,449		0.39
Vested	—		—		—
Cancelled	(968,388)		1.20
Unvested as of September 30, 2023	—	$	—	$	—

There was no remaining unrecognized compensation expense related to time-based restricted stock awards as of September 30, 2023.

Stock options

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. Prior to the Business Combination, USBTC had been a private company and lacked publicly observable company-specific historical and implied volatility information. Therefore, expected stock volatility was estimated based on the historical volatility of a publicly traded set of peer companies. Also, due to the lack of historical exercise history, the expected term of USBTC’s stock options was determined using the “simplified” method for awards, which uses a mid-point between the vesting period and contractual term for each grant and for each vesting-tranche for awards with graded vesting. The risk-free interest rate was determined by referencing the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. An expected dividend yield of 0% was based on not having paid cash dividends historically and not expecting to pay cash dividends in the foreseeable future.

The majority of USBTC’s stock options vest based on service provided by the grantee to USBTC over time; however, certain stock options were also subject to a performance-based vesting condition whereby vesting would be accelerated upon the completion of an initial public offering or merger event (the “IPO Options”).

On November 30, 2023, due to the consummation of the Business Combination, USBTC accelerated a total of 763,609 unvested performance-based stocks options, which was comprised of the IPO Options and the January 2023 and February 2023 modified performance-based stock options described below.

Immediately prior to the closing of the Business Combination, 6,686,123 USBTC stock options were converted into 4,490,375 USBTC Replacement Options, based on an exchange ratio of 0.6716, rounded down to the nearest whole stock option at an award level. The exercise price of the USBTC Replacement Options is equal to the exercise price of the replaced USBTC stock option immediately before the Business Combination divided by 0.6716, rounded up to the nearest whole cent if applicable. USBTC treated the exchange as a Type I modification (probable-to-probable).

As previously described in this note, in connection with the consummation of the Business Combination, Legacy Hut stock options under the 2018 Plan were cancelled and reissued under the Company’s 2023 Plan at a 0.2000 ratio, rounded down if applicable at a grant level. The exercise price of stock options under the 2018 Plan immediately before the Business Combination were divided by the exchange ratio of 0.2000 rounded up to the nearest whole cent, if applicable, to obtain the exercise price of the replacement stock options. 115,000 Legacy Hut stock options were cancelled under the 2018 Plan and 23,000 replacement stock options were issued under the 2023 Plan with a weighted-average exercise price of $18.41 per share. The weighted-average fair value of these replacement stock options of $7.02 per share was estimated as described in this note with the exception of expected stock volatility where the assumption of the replacement stock options converged with the acquiree awards’ (Legacy Hut stock options) as of the Business Combination consummation; all other assumptions also converged with the acquiree awards’ as of the Business Combination consummation. These 23,000 replacement stock options were fully vested on the Business Combination date. As such, there is no further unrecognized compensation expense related to these replacement stock options.

In January 2023, USBTC repriced 2,122,760 outstanding stock options to an exercise price of $0.39 per share. The incremental expense of vested stock options of approximately $0.03 million was recognized upon the modification date and the incremental expense of unvested stock options of $0.1 million will be recognized over the remaining vesting period of the awards.

In January 2023, USBTC entered into change in control agreements with two senior executives that amended the vesting requirement of certain of their service-based stock options. Under the terms of the amended agreements, an acceleration provision was added for all unvested service-based stock options whereby immediate vesting would occur upon the consummation of the Business Combination. USBTC determined the performance condition was probable of being achieved both prior to and subsequent to the modification and accounted for these changes as a Type I modification (probable-to-probable). As the modification only resulted in the acceleration of service-based vesting and did not involve any other changes, there was no incremental fair value to recognize as additional compensation expense as of the modification date and accordingly no incremental compensation expense required to be recognized.

In February 2023, USBTC entered into a change in control agreement with a senior executive, which modified the performance condition in 27,367 of their stock option awards. Under the modified terms, the stock options did not vest upon achievement of certain internal non-financial metrics and instead vested upon the completion of an initial public offering or merger event. USBTC determined the performance condition was not probable of being achieved both prior to and subsequent to the modification (a Type IV modification). Under GAAP, stock compensation expense for equity awards that are conditional upon a liquidity event such as an initial public offering or merger event is not recognizable prior to the achievement of the liquidity event. As such, USBTC did not recognize any stock compensation expense for these stock options until the occurrence of an initial public offering or merger event.

In August 2024, the Company accelerated the vesting of 380,658 stock options held by three non-employee directors and 425,604 stock options held by its Chief Executive Officer to immediately vest. As the modifications only resulted in the acceleration of service-based vesting and did not involve any other changes, there was no incremental fair value to recognize as additional compensation expense as of the modification date and accordingly no incremental compensation expense was required to be recognized.

No stock options were granted by the Company during the nine months ended September 30, 2024. The following assumptions were used in determining the fair value of USBTC’s stock options during the nine months ended September 30, 2023:

	Nine Months Ended
	September 30,
	2023
Dividend yield	—	%
Expected price volatility	100	%
Risk-free interest rate	3.82% – 3.90	%
Expected term (in years)	5.5 – 8.0

As of September 30, 2024 there were 1,011,998 unvested service-based options.

A summary of stock options is below for the nine months ended September 30, 2024 and the nine months ended September 30, 2023:

						Weighted
		Weighted average				average remaining
	Number of	exercise price		Aggregate		contractual life
(in USD thousands, except share and per share amounts)	shares	(per share)		intrinsic value		(in years)
Outstanding as of December 31, 2023	4,513,375	$	0.48	$	58,150	8.8
Granted	—		—
Exercised	(1,235,239)		0.39		11,155
Forfeited or canceled	(70,828)		0.39
Outstanding as of September 30, 2024	3,207,308	$	0.52	$	37,798	7.9
Vested and exercisable as of September 30, 2024	2,195,310	$	0.58	$	25,785	7.9

						Weighted
		Weighted average				average remaining
	Number of	exercise price		Aggregate		contractual life
(in USD thousands, except share and per share amounts)	shares	(per share)		intrinsic value		(in years)
Outstanding as of December 31, 2022	2,122,742	$	2.89	$	—	9.0
Granted	2,469,134		0.39
Exercised	(5,172)		0.39		2
Forfeited or canceled	(56,815)		0.39
Outstanding as of September 30, 2023	4,529,889	$	0.39	$	34,791	8.8
Vested and exercisable as of September 30, 2023	740,020	$	0.39	$	5,684	8.1

The Company had approximately $0.9 million of total unrecognized compensation expense related to stock options granted under the Rollover Option Plan as of September 30, 2024, which is expected to be recognized over a weighted-average remaining vesting period of approximately 1.3 years.

The weighted average grant-date fair value of stock options was $0.31 per share during the nine months ended September 30, 2023.

Restricted stock units

Restricted stock units granted under the 2023 Plan, and those governed under the 2018 Plan that are settleable in shares of common stock of the Company, entitle recipients to receive a number of shares of the Company’s common stock over a vesting period, as per each respective restricted stock unit agreement. At the Company’s discretion, restricted stock units may be settled in shares of common stock or cash in lieu of settling in shares or a combination of shares of common stock and cash, and the Company currently does not intend to settle any restricted stock units in cash or in a combination of shares of common stock and cash.

Stock-based compensation expense related to share-settled restricted stock units is based on the fair value of the Company’s common stock on the date of grant for restricted stock units under the 2023 Plan. For restricted stock units under the 2018 Plan, the stock-based compensation expense is based on the fair value of the Company’s common stock on the date of the Business Combination’s consummation. The Company recognizes stock-based compensation expense associated with such share-settled restricted stock unit awards on a graded basis over the awards’ service-based vesting tranches. Share-settled restricted stock unit awards granted up to September 30, 2024 vest in equal annual installments over a three-year period or for non-employee directors, fully vest by a certain date (unless accelerated in connection with a change in control event under specified conditions as set forth in the applicable restricted stock unit agreement or otherwise in accordance with provisions of the award’s governing plan or applicable agreement).

In February 2023, the Company accelerated the vesting of 66,666 restricted stock units held by its former Chief Financial Officer governed by the 2018 Plan to dates earlier than the original vest dates. As the modification only resulted in the acceleration of service-based vesting and did not involve any other changes, there was no incremental fair value to recognize as additional compensation expense as of the modification date and accordingly no incremental compensation expense required to be recognized.

The following table presents a summary of the activity of the service-based restricted stock units:

		Weighted average
	Number of	grant-date		Aggregate
(in USD thousands, except share and per share amounts)	units	fair value		intrinsic value
Unvested as of December 31, 2023	1,554,347	$	10.36	$	20,735
Granted	871,002		9.19
Vested	(987,504)		9.67		9,243
Forfeited	(140,130)		10.66
Unvested as of September 30, 2024	1,297,715	$	10.07	$	15,910

The Company had approximately $7.2 million of total unrecognized compensation expense related to restricted stock units granted under the 2023 Plan and 2018 Plan that are settleable in shares of common stock of the Company as of September 30, 2024, which is expected to be recognized over a weighted-average remaining vesting period of approximately 1.2 years. The Company had no restricted stock unit activity during the nine months ended September 30, 2023.

Deferred stock units

Deferred stock units granted under the 2023 Plan, and those governed under the 2018 Plan that are settleable in shares of common stock of the Company, entitled recipients to receive a number of shares of the Company’s common stock over a vesting period if applicable, as per each respective deferred stock unit agreement. At the Company’s discretion, deferred stock units may be settled in shares of common stock or cash in lieu of settling in shares or a combination of shares of common stock and cash, and the Company currently does not intend to settle any deferred stock units in cash or in a combination of shares of common stock and cash.

Stock-based compensation expense related to share-settled deferred stock units is based on the fair value of the Company’s common stock on the date of grant for deferred stock units under the 2023 Plan. For deferred stock units under the 2018 Plan, the stock-based compensation expense is based on the fair value of the Company’s common stock on the date of the Business Combination’s consummation. The Company recognizes stock-based compensation expense associated with such share-settled deferred stock unit awards on a graded basis over the awards’ vesting tranches. Share-settled deferred stock unit awards granted to date are granted in vested state and can only be settled for shares of common stock of the Company upon the participant’s departure from the Company.

The following table presents a summary of the activity of the deferred stock units:

		Weighted average
	Number of	grant-date		Aggregate
(in USD thousands, except share and per share amounts)	units	fair value		intrinsic value
Vested and outstanding as of December 31, 2023	91,804	$	9.73	$	1,225
Redeemed	(17,850)		9.78		224
Vested and outstanding as of September 30, 2024	73,954	$	9.72	$	907

There was no remaining unrecognized compensation expense related to deferred stock units as of September 30, 2024. The Company had no deferred stock unit activity during the nine months ended September 30, 2023.

Performance stock units

Performance stock units granted under the 2023 Plan entitle recipients to receive a number of shares of the Company’s common stock based on market and service conditions as per each respective performance stock unit agreement. At the Company’s discretion, performance stock units may be settled in shares of common stock or cash in lieu of settling in shares or a combination of shares of common stock and cash. The Company currently does not intend to settle any performance stock units in cash or in a combination of shares of common stock and cash. During the nine months ended September 30, 2024, the Company awarded 1,589,497 market-based performance stock units to certain employees, including to its Chief Executive Officer, Chief Strategy Officer, Chief Legal Officer, and Chief Financial Officer.

The performance stock units granted as of September 30, 2024 have market-based and service-based vest conditions. These performance stock units vest approximately three years from grant date and, as set forth in each applicable performance stock unit grant agreement, if the Company’s stock price, on a basis of the highest volume-weighted average stock price of the Company over a 20 consecutive trading day period during a certain measurement period within the vest period, exceeds the Company’s 20 consecutive trading day volume-weighted average stock price as of a certain date by at least 50% or at least 100% (“VWAP Goal”), then the percentage of performance stock units eligible to vest is 100% or 200% of the number of performance stock units granted, respectively. Any performance stock units that become eligible to vest as per their respective agreements will vest as of the end of the measurement period. These performance stock units do not have interpolation conditions on the percentage of units that are eligible to vest.

The VWAP Goal is considered a “market condition” under FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), and as such, the Company used a Monte Carlo simulation model to determine the grant-date fair value of performance stock units with a market condition. The Monte Carlo simulation takes into account the probability that the market condition will be achieved based on predicted stock price paths compared to a publicly traded set of peer companies in addition to the below assumptions:

	Nine Months Ended
	September 30,
	2024
Dividend yield	—	%
Expected price volatility	113.8% – 115	%
Risk-free interest rate	3.74% – 4.84	%
Expected term (in years)	2.9 – 3.0

The Company recognizes stock-based compensation expense associated with performance stock unit awards on a graded basis over the awards’ derived service period. Stock-based compensation expense associated with performance stock units is not adjusted in future periods for the success or failure to achieve the specified market conditions. The weighted-average derived service period of performance stock units granted during the nine months ended September 30, 2024 was 3.0 years.

The following table presents a summary of the activity of the performance stock units:

		Weighted average
	Number of	grant-date		Aggregate
(in USD thousands, except share and per share amounts)	units	fair value		intrinsic value
Unvested as of December 31, 2023	—	$	—	$	—
Granted	1,589,497		17.32
Unvested as of September 30, 2024	1,589,497	$	17.32	$	38,974

As of September 30, 2024, unrecognized stock-based compensation expense related to the Company’s performance stock units was $23.0 million, which is expected to be recognized over a remaining weighted-average period of approximately 2.5 years.

Subsequent awards

In November 2024, the Company awarded 61,498 service-based restricted stock units under its 2023 Plan to certain employees and a consultant with a grant-date fair value of $24.59 per unit. These restricted stock units generally vest in equal annual installments over a three-year period. In November 2024, the Company awarded 13,112 performance stock units under its 2023 Plan to a certain employee with market-based and service-based vest conditions consistent with the performance stock units disclosed in this note.