# Target Hospitality Corp.: Form 10-Q for the period ended Sep 30, 2022

- Company: [Target Hospitality Corp.](/companies/th.md) (CIK 1712189)
- Form: 10-Q
- Filed: 2022-11-09
- Accepted by EDGAR: Nov 9, 2022, 14:26 ET
- Period: 2022-09-30
- Accession: 0001558370-22-017098
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1712189/000155837022017098/th-20220930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1712189/000155837022017098/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $103.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2022-01-01 to 2022-09-30 | $236.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Gross profit | 3 months, 2022-07-01 to 2022-09-30 | $82.8m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-01-01 to 2022-09-30 | $163.2m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-07-01 to 2022-09-30 | $19.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-01-01 to 2022-09-30 | $42.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-07-01 to 2022-09-30 | $59.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-01-01 to 2022-09-30 | $110.2m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $12.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-09-30 | $19.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | $19.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | $42.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.20 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | $0.44 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $0.20 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | $0.44 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 97,242,170 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 97,086,415 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | $257.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-07-01 to 2022-09-30 | $22.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2022-09-30 | $177.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-09-30 | $227.8m | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $729.7m | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $201.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-09-30 | $584.1m | us-gaap:Liabilities |
| Long-term debt | at 2022-09-30 | $341.5m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2022-09-30 | $145.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 71,569 characters.

### TARGET HOSPITALITY CORP. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and capital resources of Target Hospitality Corp. and is intended to help the reader understand Target Hospitality Corp., our operations and our present business environment. This discussion should be read in conjunction with the Company’s unaudited consolidated financial statements and notes to those statements included elsewhere in this Quarterly Report on Form 10-Q.

### Executive Summary

Target Hospitality Corp. is one of North America’s largest providers of vertically integrated specialty rental and value-added hospitality services including: catering and food services, maintenance, housekeeping, grounds-keeping, security, health and recreation facilities, overall workforce community management, concierge services and laundry service. As of September 30, 2022, our network includes 29 communities, including 2 communities we operate that are not owned or leased, to better serve our customers across the US.

#### Economic Update

During the three months ended September 30, 2022, the Company continued to experience significant growth in the Government segment due to the origination of a significantly expanded lease and services agreement in the second quarter of 2022 with an existing Government segment customer to provide enhanced infrastructure and comprehensive facility services that support the critical hospitality solutions the Company provides. This growth generated cash flows from operations for the nine months ended September 30, 2022 of approximately $257.8 million compared to approximately $99.4 million for the nine months ended September 30, 2021, representing an increase in cash flows from operations of approximately $158.4 million or 159%.

The financial results for the third quarter of 2022 also reflect continued improving customer demand and increasing activity in the HFS – South and Midwest segments as compared to the third quarter of 2021 as global activity and economic demand continue to strengthen from lows experienced during the height of the COVID-19 pandemic.

#### For the three months ended September 30, 2022, other key drivers of financial performance included:

- Increased revenue of $70.4 million, or 79% compared to the same period in 2021, driven by an increase in services income revenue of approximately $45.8 million primarily due to additional revenue generated from growth in the Government segment as well as an increase in customer demand in the HFS – South and HFS – Midwest segments.
- Generated net income of approximately $19.0 million for the three months ended September 30, 2022, as compared to a net income of approximately $6.7 million for the three months ended September 30, 2021, which is primarily attributable to the increase in revenue and gross profit, partially offset by an increase in the estimated fair value of warrant liabilities, an increase in selling, general and administrative expenses driven by an increase in stock compensation expense, and an increase in income tax expense due to improved results.
- Generated consolidated Adjusted EBITDA of $84.4 million representing an increase of $46.8 million, or 125% as compared to the same period in 2021, driven primarily by the increase in revenue, partially offset by a 46% increase in operating expenses that factor into the determination of Adjusted EBITDA.

Adjusted EBITDA is a non-GAAP measure. The GAAP measure most comparable to Adjusted EBITDA is Net Income (loss). Please see “Non-GAAP Financial Measures” for a definition and reconciliation to the most comparable GAAP measure.

Our proximity to customer activities influences occupancy and demand. We have built, own and operate the two largest specialty rental and hospitality services networks available to customers operating in the HFS – South and HFS – Midwest regions. Our broad network often results in us having communities that are the closest to our customers’ job sites, which reduces commute times and costs, and improves the overall safety of our customers’ workforce. Our communities provide customers with cost efficiencies, as they are able to jointly use our communities and related infrastructure (i.e., power, water, sewer and IT) services alongside other customers operating in the same vicinity. Demand for our services is dependent upon activity levels, particularly our customers’ capital spending on natural resource development and government housing programs.

### Factors Affecting Results of Operations

We expect our business to continue to be affected by the key factors discussed below, as well as factors discussed in the section titled “*Risk Factors”* included in our 2021 Form 10-K. Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about, or interpretations of, available information prove to be incorrect, our actual results may vary materially from our expected results.

*Public health threats or outbreaks of communicable diseases, including COVID-19, could have a material adverse effect on the Company’s operations and financial results.*

The Company may face risks related to public health threats or outbreaks of communicable diseases, including COVID-19. A widespread healthcare crisis, such as an outbreak of a communicable disease, like COVID-19, could adversely affect the economy and the Company’s ability to conduct business for an indefinite period of time. This situation combined with the commodity price volatility discussed below has had, and could continue to have, a material adverse effect on the Company’s results of operations.

#### Supply and Demand for Natural Resources

As a provider of vertically integrated specialty rental and hospitality services, we are not directly impacted by commodity price fluctuations. However, these price fluctuations indirectly influence our activities and results of operations because the natural resource development workforce is directly affected by price fluctuations and the industry’s expansion or contraction as a result of these fluctuations. Our occupancy volume depends on the size of the workforce within the natural resources industry and the demand for labor. Commodity prices are volatile and influenced by numerous factors beyond our control, including the domestic and global supply of and demand for natural resources, the commodities trading markets, as well as other supply and demand factors that may influence commodity prices.

#### Availability and Cost of Capital

Capital markets conditions could affect our ability to access the debt and equity capital markets to the extent necessary to fund our future growth. Interest rates on future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly, and could limit our ability to raise funds, or increase the price of raising funds, in the capital markets and may limit our ability to expand.

#### Regulatory Compliance

We are subject to extensive federal, state, local, and foreign environmental, health and safety laws and regulations concerning matters such as air emissions, wastewater discharges, solid, and hazardous waste handling and disposal and the investigation and remediation of contamination. In addition, we may be subject, indirectly, to various statutes and regulations applicable to doing business with the U.S. government as a result of our contracts with U.S. government contractor clients. The risks of substantial costs, liabilities, and limitations on our operations related to compliance with these laws and regulations are an inherent part of our business, and future conditions may develop, arise, or be discovered that create substantial environmental compliance or remediation liabilities and costs.

Public Policy

We derive a significant portion of our revenues from our subcontracts with government contractors. The U.S. government and, by extension, our U.S. government contractor customers, may from time to time adopt, implement or modify certain policies or directives that may adversely affect our business. Changes in government policy, presidential administration or other changes in the political landscape relating to immigration policies may similarly result in a decline in our revenues in the Government segment.

#### Natural Disasters or Other Significant Disruption

An operational disruption in any of our facilities could negatively impact our financial results. The occurrence of a natural disaster, such as earthquake, tornado, severe weather, including hail storms, flood, fire, or other unanticipated problems such as labor difficulties, equipment failure, capacity expansion difficulties or unscheduled maintenance could cause operational disruptions of varied duration. These types of disruptions could materially adversely affect our financial condition and results of operations to varying degrees dependent upon the facility, the duration of the disruption, our ability to shift business to another facility or find alternative solutions.

### Overview of Our Revenue and Operations

We derive the majority of our revenue from specialty rental accommodations and vertically integrated hospitality services. Approximately 67.5% of our revenue was earned from specialty rental with vertically integrated hospitality services, specifically lodging and related ancillary services, whereas the remaining 32.5% of revenues were earned through leasing of lodging facilities for the nine months ended September 30, 2022. Revenue is recognized in the period in which lodging, and services are provided pursuant to the terms of contractual relationships with our customers. In certain of our contracts, rates may vary over the contract term, in these cases, revenue is generally recognized on a straight-line basis over the contract term. We enter into arrangements with multiple deliverables for which arrangement consideration is allocated between lodging and services based on the relative estimated standalone selling price of each deliverable. The estimated price of lodging and services deliverables is based on the prices of lodging and services when sold separately or based upon the best estimate of selling price.

### Key Indicators of Financial Performance

Our management uses a variety of financial and operating metrics to analyze our performance. We view these metrics as significant factors in assessing our operating results and profitability and tend to review these measurements frequently for consistency and trend analysis. We primarily review the following profit and loss information when assessing our performance:

#### Revenue

We analyze our revenues by comparing actual revenues to our internal budgets and projections for a given period and to prior periods to assess our performance. We believe that revenues are a meaningful indicator of the demand and pricing for our services. Key drivers to change in revenues may include average utilization of existing beds, levels of development activity in the HFS – South and HFS – Midwest segments, and the consumer price index impacting government contracts.

#### Adjusted Gross Profit

We analyze our adjusted gross profit, which is a Non-GAAP measure that we define as revenues less cost of sales, excluding impairment and depreciation of specialty rental assets to measure our financial performance. Please see “Non-GAAP Financial Measures” for a definition and reconciliation to the most comparable GAAP measure. We believe adjusted gross profit is a meaningful metric because it provides insight on financial performance of our revenue streams without consideration of our overhead. Additionally, using adjusted gross profit gives us insight on factors impacting cost of sales, such as efficiencies of our direct labor and material costs. When analyzing adjusted gross profit, we compare actual adjusted gross profit to our internal projections and to prior period results for a given period in order to assess our performance.

We also use Non-GAAP measures such as EBITDA, Adjusted EBITDA, and Discretionary cash flows to evaluate the operating performance of our business. For a more in-depth discussion of the Non-GAAP measures, please refer to the "Non-GAAP Financial Measures" section.

### Segments

We have identified four reportable business segments: Hospitality & Facilities Services – South, Hospitality & Facilities Services – Midwest, Government, and TCPL Keystone:

#### HFS – South

The HFS – South segment reflects our facilities and operations in the HFS – South region and includes our 14 communities located across Texas and New Mexico.

#### HFS – Midwest

The HFS – Midwest segment reflects our facilities and operations in the HFS – Midwest region and includes our 4 communities in North Dakota.

#### Government

The government segment includes the facilities and operations of the family residential center and the related support communities in Dilley, Texas (the “South Texas Family Residential Center”) provided under a lease and services agreement with a national provider of migrant programming (the “FRCC Partner”). Additionally, this segment also includes facilities and operations provided under a lease and services agreement with a leading national nonprofit organization, backed by a committed United States Government contract, to provide a suite of comprehensive service offerings in support of their humanitarian aid efforts.

#### TCPL Keystone

The TCPL Keystone segment reflects initial preparatory work and plans for facilities and services provided in connection with the TC Energy Keystone pipeline project. In January 2021, the TCPL project was suspended due to the Keystone XL Presidential Permit being revoked. Then on July 23, 2021, the Company executed the Termination and Settlement Agreement, which effectively terminated the Company’s contract with TC Energy that was originated in 2013. As a result of the Termination and Settlement Agreement, no further activity is expected in this segment.

#### All Other

Our other facilities and operations which do not meet the criteria to be a separate reportable segment are consolidated and reported as “All Other” which represents the facilities and operations of one community in Oklahoma, one community in Canada, and the catering and other services provided to communities and other workforce accommodation facilities for the energy and natural resources industries not owned by us.

### Key Factors Impacting the Comparability of Results

The historical results of operations for the periods presented may not be comparable, either to each other or to our future results of operations, for the reasons described below:

#### COVID-19 and Commodity Price Volatility

The COVID-19 pandemic and the disruption in the natural resource development industry has had a material adverse effect on our business and results of operations. The financial results, primarily for the third quarter of 2021, reflect the reduced activity in the HFS – South and HFS – Midwest segments resulting from the negative effects of the commodity price volatility compounded by the effects of COVID-19 as these disruptions created significant challenges for our natural resource development end-market customers. While we have experienced steady increases in customer demand through 2021 and into the third quarter of 2022, operating results have not yet reached pre-pandemic levels experienced during the first quarter of 2020 specifically for the HFS – South and HFS – Midwest segments. Total company consolidated results during the three months ended September 30, 2022 have exceeded pre-pandemic levels experienced during the first quarter of 2020 driven primarily by Government segment growth and expansion.

#### Termination of the TCPL Keystone Contract

In January 2021, the TCPL project was suspended due to the Keystone XL Presidential Permit being revoked. Then on July 23, 2021, the Company executed the Termination and Settlement Agreement, which effectively terminated the Company’s contract with TC Energy that was originated in 2013. As a result of the Termination and Settlement Agreement, no further activity is expected in the TCPL Keystone segment.

#### Government Segment Growth

A significant new contract was originated in the Government segment in March of 2021 with a leading national nonprofit organization (“NP Partner”), backed by a committed United States Government contract, to provide a suite of comprehensive service offerings in support of their humanitarian aid efforts. During the nine months ended September 30, 2022, the Company executed a new contract with our NP Partner that became effective on May 16, 2022, which represented a significantly expanded lease and services agreement (“Expanded Humanitarian Contract”) to provide enhanced infrastructure and comprehensive facility services that support the critical hospitality solutions the Company provides to the NP Partner and the U.S. Government in their humanitarian aid missions. The Expanded Humanitarian Contract provides for significant scope expansion and term extension for the continuation of services provided under the agreement that originated in March 2021. The Expanded Humanitarian Contract operates with similar structure to the Company’s existing government services contracts, which are centered around minimum revenue commitments supported by the United States Government. Additionally, the Expanded Humanitarian Contract includes variable services revenue that will align with monthly community population. The minimum revenue commitments, which consist of annual recurring lease revenue and nonrecurring infrastructure enhancement revenue, provide for a minimum annual revenue contribution of approximately $390 million and is fully committed over its initial contract term. The services revenue component provides for a maximum initial annual total contract value of approximately $575 million.

### Results of Operations

The period-to-period comparisons of our results of operations have been prepared using the historical periods included in our unaudited consolidated financial statements. The following discussion should be read in conjunction with the unaudited consolidated financial statements and related notes included elsewhere in this document.

### Consolidated Results of Operations for the three months ended September 30, 2022 and 2021

| ​ ​ ​ ​ Revenue: | ​ ​ ​ ​ | ​ ​ For the Three Months Ended September 30, 2022 ​ ​ | ​ ​ | ​ ​ 2021 ​ ​ | ​ ​ ​ ​ | ​ ​ Amount of Increase (Decrease) ​ ​ | ​ ​ ​ ​ | ​ Percentage Change Increase (Decrease) ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Services income | ​ | $102,996 | ​ | $57,221 | ​ | $45,775 |  | 80% |
| Specialty rental income | ​ | 56,569 | ​ | 22,099 | ​ | 34,470 |  | 156% |
| Construction fee income | ​ | ​ — | ​ | 9,849 | ​ | (9,849) |  | (100)% |
| Total revenue | ​ | 159,565 | ​ | 89,169 | ​ | 70,396 |  | 79% |
| Costs: | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Services | ​ | 56,899 | ​ | 37,064 | ​ | 19,835 |  | 54% |
| Specialty rental | ​ | 8,031 | ​ | 4,203 | ​ | 3,828 |  | 91% |
| Depreciation of specialty rental assets | ​ | 11,864 | ​ | 14,294 | ​ | (2,430) |  | (17)% |
| Gross Profit | ​ | 82,771 | ​ | 33,608 | ​ | 49,163 |  | 146% |
| Selling, general and administrative | ​ | 19,153 | ​ | 12,827 | ​ | 6,326 |  | 49% |
| Other depreciation and amortization | ​ | 3,556 | ​ | 4,008 | ​ | (452) |  | (11)% |
| Other expense, net | ​ | 121 | ​ | 91 | ​ | 30 |  | 33% |
| Operating income | ​ | 59,941 | ​ | 16,682 | ​ | 43,259 |  | 259% |
| Interest expense, net | ​ | 8,888 | ​ | 9,465 | ​ | (577) |  | (6)% |
| Change in fair value of warrant liabilities | ​ | ​ 20,000 | ​ | ​ (1,120) | ​ | ​ 21,120 | ​ | (1,886)% |
| Income before income tax | ​ | 31,053 | ​ | 8,337 | ​ | 22,716 |  | 272% |
| Income tax expense | ​ | 12,031 | ​ | 1,662 | ​ | 10,369 |  | 624% |
| Net Income | ​ | $19,022 | ​ | $6,675 | ​ | $12,347 |  | 185% |

#### For the three months ended September 30, 2022 compared to the three months ended September 30, 2021

***Total Revenue.*** Total revenue was $159.6 million for the three months ended September 30, 2022 and consisted of $103.0 million of services income and $56.6 million of specialty rental income. Total revenues for the three months ended September 30, 2021 was $89.2 million, which consisted of $57.2 million of services income, $22.1 million of specialty rental income and $9.9 million of construction fee income.

Services income consists primarily of specialty rental and vertically integrated and comprehensive hospitality services, including catering and food services, maintenance, housekeeping, grounds-keeping, on-site security, overall workforce community management, health and recreation facilities, concierge services, and laundry service. The main drivers of the increase in services income revenue year over year was the growth in the Government segment combined with a continued increase in customer activity in the HFS – South as well as a slight increase in the HFS – Midwest segment as the business recovers from the decreases in demand experienced for the three months ended September 30, 2021, due to the effects of the COVID-19 pandemic. Additionally, approximately $0.3 million of this increase was attributable to an increase in customer activity at one community in Canada during the three months ended September 30, 2022, which had no activity in the prior period. These increases were partially offset by a decrease of less than $0.1 million from the TCPL Keystone segment driven by the TCPL contract termination and a decrease of approximately $0.2 million from one community in the All Other segment driven by the shutdown of that community in February 2022.

Construction fee income consists of revenue from the construction phase of the TCPL contract. As a result of the Termination and Settlement Agreement, no further activity or revenue is expected in this segment. Therefore, construction fee income is $0 for the three months ended September 30, 2022.

Specialty rental income consists primarily of revenues from renting rooms at facilities leased or owned. Specialty rental income increased primarily as a result of growth in the Government segment.

***Cost of services.*** Cost of services was $56.9 million for the three months ended September 30, 2022, as compared to $37.1 million for the three months ended September 30, 2021.

The increase in services costs is primarily due to an increase related to growth and expansion in the Government segment as mentioned above, largely driven by short-term costs incurred to mobilize existing assets to service the expansion in the Government segment associated with the Expanded Humanitarian Contract. Additionally, there was also an increase in services costs in the HFS – South and HFS – Midwest segments driven by the increase in customer activity mentioned above. These increases were partially offset by no activity on the TCPL project resulting from the suspension of the project at the end of January 2021 and subsequent cancellation in June 2021. Pursuant to the Termination and Settlement Agreement, the underlying contract with TC Energy was terminated in July 2021.

***Specialty rental costs.*** Specialty rental costs were $8.0 million for the three months ended September 30, 2022, as compared to $4.2 million for the three months ended September 30, 2021. The increase in specialty rental costs is primarily due to costs related to growth in the Government segment.

***Depreciation of specialty rental assets.*** Depreciation of specialty rental assets was $11.9 million for the three months ended September 30, 2022, as compared to $14.3 million for the three months ended September 30, 2021. The decrease in depreciation expense is primarily attributable a decrease for a location within the Government segment as a result of site work being fully depreciated as of September 30, 2021.

***Selling, general and administrative.*** Selling, general and administrative was $19.2 million for the three months ended September 30, 2022, as compared to $12.8 million for the three months ended September 30, 2021. The increase in selling, general and administrative expense of $6.4 million was primarily driven by an increase in stock compensation expense largely from the SARs awards as a result of an increase in the estimated fair value of the SARs awards driven by the increase in the Company’s stock price during the period.

***Other depreciation and amortization.*** Other depreciation and amortization expense was $3.6 million for the three months ended September 30, 2022, as compared to $4.0 million for the three months ended September 30, 2021. The decrease in other depreciation and amortization is primarily driven by a decrease in customer related intangible asset amortization associated with customer related intangible assets that became fully amortized in March 2022.

***Other expense, net.*** Other expense, net was $0.1 million for the three months ended September 30, 2022, as compared to $0.1 million for the three months ended September 30, 2021.

***Interest expense, net.*** Interest expense, net was $8.9 million for the three months ended September 30, 2022, as compared to $9.5 million for the three months ended September 30, 2021. The change in interest expense is driven by approximately $0.9 million of interest that was capitalized during the three months ended September 30, 2022 in connection with capital project activity driven by the expansion in the Government segment associated with the Expanded Humanitarian Contract. Interest was not capitalized during the three months ended September 30, 2021 as there were no such expansion activities during that period.

***Change in fair value of warrant liabilities.*** Change in fair value of warrant liabilities represents the fair value adjustments to the outstanding Private Warrant liabilities based on the change in their estimated fair value at each reporting period end. The change in fair value of the warrant liabilities was $20.0 million for the three months ended September 30, 2022, as compared to ($1.1) million for the three months ended September 30, 2021. The change in the fair value of the warrant liabilities is the result of changes in market prices deriving the value of the financial instruments. The estimated value of the Private Warrants have increased in the current period, generating a reduction to income in the current period.

***Income tax expense.*** Income tax expense was $12.0 million for the three months ended September 30, 2022, as compared to $1.7 million for the three months ended September 30, 2021. The increase in income tax expense is primarily attributable to the increase in income before taxes for the three months ended September 30, 2022 as well as an increase in state tax expense based off of gross receipts as a result of the increase in revenues.

### Consolidated Results of Operations for the nine months ended September 30, 2022 and 2021

| ​ ​ ​ ​ Revenue: | ​ ​ ​ ​ | ​ ​ For the Nine Months Ended September 30, 2022 ​ ​ | ​ ​ | ​ ​ 2021 ​ ​ | ​ ​ ​ ​ | ​ ​ Amount of Increase (Decrease) ​ ​ | ​ ​ ​ ​ | ​ Percentage Change Increase (Decrease) ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Services income | ​ | $236,041 | ​ | $143,806 | ​ | $92,235 |  | 64% |
| Specialty rental income | ​ | 113,506 | ​ | 54,547 | ​ | 58,959 |  | 108% |
| Construction fee income | ​ | ​ — | ​ | 11,294 | ​ | (11,294) |  | (100)% |
| Total revenue | ​ | 349,547 | ​ | 209,647 | ​ | 139,900 |  | 67% |
| Costs: | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Services | ​ | 131,605 | ​ | 85,835 | ​ | 45,770 |  | 53% |
| Specialty rental | ​ | 18,187 | ​ | 11,032 | ​ | 7,155 |  | 65% |
| Depreciation of specialty rental assets | ​ | 36,525 | ​ | 40,642 | ​ | (4,117) |  | (10)% |
| Gross Profit | ​ | 163,230 | ​ | 72,138 | ​ | 91,092 |  | 126% |
| Selling, general and administrative | ​ | 42,014 | ​ | 35,835 | ​ | 6,179 |  | 17% |
| Other depreciation and amortization | ​ | 11,136 | ​ | 12,100 | ​ | (964) |  | (8)% |
| Other expense (income), net | ​ | (74) | ​ | 781 | ​ | (855) |  | (109)% |
| Operating income | ​ | 110,154 | ​ | 23,422 | ​ | 86,732 |  | 370% |
| Interest expense, net | ​ | 28,126 | ​ | 29,058 | ​ | (932) |  | (3)% |
| Change in fair value of warrant liabilities | ​ | ​ 20,374 | ​ | ​ 1,600 | ​ | ​ 18,774 | ​ | 1173% |
| Income (loss) before income tax | ​ | 61,654 | ​ | (7,236) | ​ | 68,890 |  | (952)% |
| Income tax expense | ​ | 19,287 | ​ | 139 | ​ | 19,148 |  | 13776% |
| Net Income (loss) | ​ | $42,367 | ​ | $(7,375) | ​ | $49,742 |  | (674)% |

#### For the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021

***Total Revenue.*** Total revenue was $349.5 million for the nine months ended September 30, 2022 and consisted of $236.0 million of services income and $113.5 million of specialty rental income. Total revenues for the nine months ended September 30, 2021 was $209.6 million, which consisted of $143.8 million of services income, $54.5 million of specialty rental income and $11.3 million of construction fee income.

Services income consists primarily of specialty rental and vertically integrated and comprehensive hospitality services, including catering and food services, maintenance, housekeeping, grounds-keeping, on-site security, overall workforce community management, health and recreation facilities, concierge services, and laundry service. The main drivers of the increase in services income revenue year over year was the growth in the Government segment combined with a continued increase in customer activity in the HFS – South as well as a slight increase in the HFS – Midwest segment as the business recovers from the decreases in demand experienced for the nine months ended September 30, 2021, due to the effects of the COVID-19 pandemic. Additionally, approximately $1.3 million of this increase was attributable to an increase in customer activity at one community in Canada during for the nine months ended September 30, 2022, which had no activity in the prior period. These increases were partially offset by a decrease of approximately $1.0 million from the TCPL Keystone segment driven by the TCPL contract termination and a decrease of approximately $0.5 million from one community in the All Other segment driven by the shutdown of that community in February 2022.

Construction fee income consists of revenue from the construction phase of the TCPL contract. As a result of the Termination and Settlement Agreement, no further activity or revenue is expected in this segment. Therefore, construction fee income is $0 for the nine months ended September 30, 2022.

Specialty rental income consists primarily of revenues from renting rooms at facilities leased or owned. Specialty rental income increased primarily as a result of growth in the Government segment.

***Cost of services.*** Cost of services was $131.6 million for the nine months ended September 30, 2022, as compared to $85.8 million for the nine months ended September 30, 2021. The increase in services costs is primarily due to an increase related to growth in the Government segment as mentioned above. Additionally, there was also an increase in services costs in the HFS – South and HFS – Midwest segments driven by the increase in customer activity mentioned above. These increases were partially offset by lower activity on the TCPL project resulting from the suspension of the project at the end of January 2021 and subsequent cancellation in June 2021. Pursuant to the Termination and Settlement Agreement, the underlying contract with TC Energy was terminated in July 2021.

***Specialty rental costs.*** Specialty rental costs were $18.2 million for the nine months ended September 30, 2022, as compared to $11.0 million for the nine months ended September 30, 2021. The increase in specialty rental costs is primarily due to costs related to growth in the Government segment.

***Depreciation of specialty rental assets.*** Depreciation of specialty rental assets was $36.5 million for the nine months ended September 30, 2022, as compared to $40.6 million for the nine months ended September 30, 2021. The decrease in depreciation expense is primarily attributable to a decrease for a location within the Government segment as a result of site work being fully depreciated as of September 30, 2021. This decrease was partially offset by an increase in depreciation expense driven by growth in the Government segment related to the contract that originated in March of 2021 and the new subcontract that originated in May of 2022 with the NP Partner.

***Selling, general and administrative.*** Selling, general and administrative was $42.0 million for the nine months ended September 30, 2022, as compared to $35.8 million for the nine months ended September 30, 2021. The increase in selling, general and administrative expense of $6.2 million was primarily driven by an increase in stock compensation expense of approximately $10.0 million largely from RSUs and SARs driven by an increase in the Company’s stock price during the current period. Marketing and advertising, office costs, and other corporate costs (including public company costs) increased by approximately $0.6 million, $0.6 million, and $0.3 million, respectively. These increases were partially offset by a decrease in labor costs of approximately $1.8 million, exclusive of stock compensation expense, primarily driven by a decrease in bonus and commissions expense, as there has been no material changes in corporate headcount from the prior period. There was also a decrease in legal and other advisory fees incurred during the nine months ended September 30, 2021 of approximately $1.1 million related to the previously announced non-binding proposal made by Arrow Holdings S.à r.l. (“Arrow”), an affiliate of TDR Capital LLP (“TDR”), to acquire all of the outstanding shares of common stock of Target Hospitality not owned by Arrow or its affiliates for cash consideration of $1.50 per share (the “Proposal”). On March 29, 2021, this Proposal was withdrawn and the Company did not incur any further costs related to this Proposal. In addition to this decrease, there were also decreases experienced in other legal and professional fees of approximately $1.0 million primarily associated with corporate development activity experienced during the nine months ended September 30, 2021 that did not recur during the nine months ended September 30, 2022. Bad debt expense also decreased by approximately $1.1 million, which was driven in part by net recoveries of previously reserved bad debt amounts combined with lower bad debt reserves in the current period. The remaining items comprising selling, general and administrative expenses accounted for a decrease of approximately $0.3 million.

***Other depreciation and amortization.*** Other depreciation and amortization expense was $11.1 million for the nine months ended September 30, 2022, as compared to $12.1 million for the nine months ended September 30, 2021. The decrease in other depreciation and amortization is primarily driven by a decrease in customer related intangible asset amortization associated with customer related intangible assets that became fully amortized in March 2022.

***Other expense (income), net.*** Other expense (income), net was ($0.1) for the nine months ended September 30, 2022, as compared to $0.8 million for the nine months ended September 30, 2021. The decrease in other expense is primarily driven by an increase in gains generated from the sale of assets and the reduction of COVID-19 procedure related expenses in the current period.

***Interest expense, net.*** Interest expense, net was $28.1 million for the nine months ended September 30, 2022, as compared to $29.1 million for the nine months ended September 30, 2021. The change in interest expense is driven primarily by approximately $0.9 million of interest that was capitalized during the nine months ended September 30, 2022 in connection with capital project activity driven by the expansion in the Government segment associated with the Expanded Humanitarian Contract. Interest was not capitalized during the nine months ended September 30, 2021 as there were no such expansion activities during that period.

***Change in fair value of warrant liabilities.*** Change in fair value of warrant liabilities represents the fair value adjustments to the outstanding Private Warrant liabilities based on the change in their estimated fair value at each reporting period end. The change in fair value of the warrant liabilities was $20.4 million for the nine months ended September 30, 2022, as compared to $1.6 million for the nine months ended September 30, 2021. The change in the fair value of the warrant liabilities is the result of changes in market prices deriving the value of the financial instruments. The estimated value of the Private Warrants have increased in both the prior and current year, generating a reduction to income in both periods.

***Income tax expense.*** Income tax expense was $19.3 million for the nine months ended September 30, 2022, as compared to $0.1 million for the nine months ended September 30, 2021. The increase in income tax expense is primarily attributable to the increase in income before taxes for the nine months ended September 30, 2022 as well as an increase in state tax expense based off of gross receipts as a result of the increase in revenues.

### Segment Results

The following table sets forth our selected results of operations for each of our reportable segments for the three months ended September 30, 2022 and 2021.

| ​ ​ ​ ​ Revenue: | ​ ​ ​ ​ | ​ ​ ​ ​ For the Three Months Ended September 30, 2022 ​ ​ | ​ ​ ​ | ​ ​ ​ ​ 2021 ​ ​ | ​ ​ ​ ​ | ​ ​ ​ Amount of Increase (Decrease) ​ ​ | ​ ​ ​ ​ | ​ Percentage Change Increase (Decrease) ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Government | ​ | $123,308 | ​ | $46,428 | ​ | $76,880 |  | 166% |
| Hospitality & Facilities Services - South | ​ | 33,632 | ​ | 31,066 | ​ | 2,566 |  | 8% |
| Hospitality & Facilities Services - Midwest | ​ | 1,860 | ​ | 1,266 | ​ | 594 |  | 47% |
| TCPL Keystone | ​ | ​ — | ​ | ​ 9,880 | ​ | ​ (9,880) | ​ | (100)% |
| All Other | ​ | 765 | ​ | 529 | ​ | 236 |  | 45% |
| Total Revenues | ​ | $159,565 | ​ | $89,169 | ​ | $70,396 |  | 79% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Adjusted Gross Profit | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Government | ​ | $80,948 | ​ | $25,823 | ​ | $55,125 |  | 213% |
| Hospitality & Facilities Services - South | ​ | 13,878 | ​ | 13,945 | ​ | (67) |  | 0% |
| Hospitality & Facilities Services - Midwest | ​ | 77 | ​ | (56) | ​ | 133 |  | (238)% |
| TCPL Keystone | ​ | ​ — | ​ | ​ 8,329 | ​ | ​ (8,329) | ​ | (100)% |
| All Other | ​ | (268) | ​ | (139) | ​ | (129) |  | 93% |
| Total Adjusted Gross Profit | ​ | $94,635 | ​ | $47,902 | ​ | $46,733 |  | 98% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Average Daily Rate | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Hospitality & Facilities Services - South | ​ | $72.73 | ​ | $75.39 | ​ | $(2.66) | ​ | ​ |
| Hospitality & Facilities Services - Midwest | ​ | $57.88 | ​ | $68.43 | ​ | $(10.55) | ​ | ​ |

*Note: Adjusted gross profit for the chief operating decision maker’s (“CODM”) analysis includes the services and rental costs recognized in the financial statements and excludes depreciation on specialty rental assets, certain severance costs, and loss on impairment. Average daily rate is calculated based on specialty rental income and services income received over the period indicated, divided by utilized bed nights.*

### Government

Revenue for the Government segment was $123.3 million for the three months ended September 30, 2022, as compared to $46.4 million for the three months ended September 30, 2021.

Adjusted gross profit for the Government segment was $80.9 million for the three months ended September 30, 2022, as compared to $25.8 million for the three months ended September 30, 2021.

Revenue and adjusted gross profit increased as a result of the new contract originated in the Government segment in May 2022 as previously mentioned.

### HFS – South

Revenue for the HFS – South segment was $33.6 million for the three months ended September 30, 2022, as compared to $31.1 million for the three months ended September 30, 2021.

Adjusted gross profit for the HFS – South segment was $13.9 million for the three months ended September 30, 2022, as compared to $13.9 million for the three months ended September 30, 2021.

The increase in revenue of $2.5 million was primarily attributable to an increase in utilization driven by a significant increase in customer demand.

### HFS – Midwest

Revenue for the HFS – Midwest segment was $1.9 million for the three months ended September 30, 2022, as compared to $1.3 million for the three months ended September 30, 2021.

Adjusted gross profit for the HFS – Midwest segment was $0.1 million for the three months ended September 30, 2022, as compared to ($0.1) million for the three months ended September 30, 2021.

The increase in revenue of $0.6 million and increase in adjusted gross profit of $0.1 million was primarily attributable to an increase in utilization driven by an increase in customer demand.

### TCPL Keystone

Revenue for the TCPL Keystone segment was $0 for the three months ended September 30, 2022, as compared to $9.9 million for the three months ended September 30, 2021.

Adjusted gross profit for the TCPL Keystone segment was $0 for the three months ended September 30, 2022, as compared to $8.3 million for the three months ended September 30, 2021.

The decrease in revenue and adjusted gross profit was due to the TCPL project being suspended at the end of January 2021, subsequently cancelled in June 2021, and finally resulting in the TCPL contract being terminated in July 2021. As a result of the Termination and Settlement Agreement, no further activity or revenue is expected in this segment.

### Segment Results

The following table sets forth our selected results of operations for each of our reportable segments for the nine months ended September 30, 2022 and 2021.

| ​ ​ ​ ​ Revenue: | ​ ​ ​ ​ | ​ ​ ​ ​ ​ For the Nine Months Ended September 30, 2022 ​ ​ | ​ ​ ​ | ​ ​ ​ ​ 2021 ​ ​ | ​ ​ ​ ​ | ​ ​ ​ Amount of Increase (Decrease) ​ ​ | ​ ​ ​ ​ | ​ ​ Percentage Change Increase (Decrease) ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Government | ​ | $245,013 | ​ | $109,255 | ​ | $135,758 |  | 124% |
| Hospitality & Facilities Services - South | ​ | 97,828 | ​ | 84,350 | ​ | 13,478 |  | 16% |
| Hospitality & Facilities Services - Midwest | ​ | 4,270 | ​ | 2,593 | ​ | 1,677 |  | 65% |
| TCPL Keystone | ​ | ​ — | ​ | ​ 12,283 | ​ | ​ (12,283) | ​ | (100)% |
| All Other | ​ | 2,436 | ​ | 1,166 | ​ | 1,270 |  | 109% |
| Total Revenues | ​ | $349,547 | ​ | $209,647 | ​ | $139,900 |  | 67% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Adjusted Gross Profit | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Government | ​ | $159,523 | ​ | $66,649 | ​ | $92,874 |  | 139% |
| Hospitality & Facilities Services - South | ​ | 41,162 | ​ | 38,219 | ​ | 2,943 |  | 8% |
| Hospitality & Facilities Services - Midwest | ​ | (315) | ​ | (854) | ​ | 539 |  | (63)% |
| TCPL Keystone | ​ | ​ — | ​ | ​ 9,140 | ​ | ​ (9,140) | ​ | (100)% |
| All Other | ​ | (615) | ​ | (374) | ​ | (241) |  | 64% |
| Total Adjusted Gross Profit | ​ | $199,755 | ​ | $112,780 | ​ | $86,975 |  | 77% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Average Daily Rate | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Hospitality & Facilities Services - South | ​ | $73.57 | ​ | $74.50 | ​ | $(0.93) | ​ | ​ |
| Hospitality & Facilities Services - Midwest | ​ | $61.38 | ​ | $67.14 | ​ | $(5.76) | ​ | ​ |

*Note: Adjusted gross profit for the chief operating decision maker’s (“CODM”) analysis includes the services and rental costs recognized in the financial statements and excludes depreciation on specialty rental assets, certain severance costs, and loss on impairment. Average daily rate is calculated based on specialty rental income and services income received over the period indicated, divided by utilized bed nights.*

### Government

Revenue for the Government segment was $245.0 million for the nine months ended September 30, 2022, as compared to $109.3 million for the nine months ended September 30, 2021.

Adjusted gross profit for the Government segment was $159.5 million for the nine months ended September 30, 2022, as compared to $66.6 million for the nine months ended September 30, 2021.

Revenue and adjusted gross profit increased as a result of the new contracts originated in the Government segment in March of 2021 and May of 2022 as previously mentioned.

### HFS – South

Revenue for the HFS – South segment was $97.8 million for the nine months ended September 30, 2022, as compared to $84.4 million for the nine months ended September 30, 2021.

Adjusted gross profit for the HFS – South segment was $41.2 million for the nine months ended September 30, 2022, as compared to $38.2 million for the nine months ended September 30, 2021.

The increase in revenue of $13.4 million and adjusted gross profit of $3.0 million was primarily attributable to an increase in utilization driven by a significant increase in customer demand.

### HFS – Midwest

Revenue for the HFS – Midwest segment was $4.3 million for the nine months ended September 30, 2022, as compared to $2.6 million for the nine months ended September 30, 2021.

Adjusted gross profit for the HFS – Midwest segment was ($0.3) million for the nine months ended September 30, 2022, as compared to ($0.9) million for the nine months ended September 30, 2021.

The increase in revenue of $1.7 million and increase in adjusted gross profit of $0.5 million was primarily attributable to an increase in utilization driven by an increase in customer demand.

### TCPL Keystone

Revenue for the TCPL Keystone segment was $0 for the nine months ended September 30, 2022, as compared to $12.3 million for the nine months ended September 30, 2021.

Adjusted gross profit for the TCPL Keystone segment was $0 for the nine months ended September 30, 2022, as compared to $9.1 million for the nine months ended September 30, 2021.

The decrease in revenue and adjusted gross profit was due to the TCPL project being suspended at the end of January 2021, subsequently cancelled in June 2021, and finally resulting in the TCPL contract being terminated in July 2021. As a result of the Termination and Settlement Agreement, no further activity or revenue is expected in this segment.

### Liquidity and Capital Resources

We depend on cash flow from operations, cash on hand and borrowings under our ABL Facility to finance our acquisition strategy, working capital needs, and capital expenditures. We currently believe that these sources of funds will provide sufficient liquidity to fund debt service requirements, support our growth strategy, lease obligations, contingent liabilities and working capital investments for at least the next 12 months. However, we cannot assure you that we will be able to obtain future debt or equity financings adequate for our future cash requirements on commercially reasonable terms or at all.

If our cash flows and capital resources are insufficient, we may be forced to reduce or delay additional acquisitions, future investments and capital expenditures, and seek additional capital. Significant delays in our ability to finance planned acquisitions or capital expenditures may materially and adversely affect our future revenue prospects.

We will continue to evaluate alternatives to optimize our capital structure, which could include the issuance or repurchase of additional unsecured and secured debt, equity securities and/or equity-linked securities. There can be no assurance as to the timing of any such issuance or repurchase. From time to time, we may also seek to streamline our capital structure and improve our financial position through refinancing or restructuring our existing debt or retiring certain of our securities for cash or other consideration.

#### Capital Requirements

During the nine months ended September 30, 2022, we incurred approximately $114.1 million in capital expenditures, largely driven by growth capital expenditures in the Government segment. As we pursue growth in the future, we monitor which capital resources, including equity and debt financings, are available to us to meet our future financial obligations, planned capital expenditure activities and liquidity requirements. However, future cash flows are subject to a number of variables, including the ability to maintain existing contracts, obtain new contracts and manage our operating expenses. The failure to achieve anticipated revenue and cash flows from operations could result in additional reductions in future capital spending. We cannot assure you that operations and other needed capital will be available on acceptable terms or at all. In the event we make additional acquisitions and the amount of capital required is greater than the amount we have available for acquisitions at that time, we could be required to further reduce the expected level of capital expenditures or seek additional capital. We cannot assure you that needed capital will be available on acceptable terms or at all.

The following table sets forth general information derived from our unaudited consolidated statements of cash flows:

| ​ ​ ​ ​ ​ | ​ ​ ​ | ​ ​ For the Nine Months Ended September 30, 2022 ​ ​ | ​ ​ | ​ ​ 2021 ​ ​ |
| --- | --- | ---: | --- | ---: |
| Net cash provided by operating activities | ​ | $257,823 | ​ | $99,447 |
| Net cash used in investing activities | ​ | (103,657) | ​ | (24,008) |
| Net cash used in financing activities | ​ | (563) | ​ | (51,792) |
| Effect of exchange rate changes on cash and cash equivalents | ​ | ​ (22) | ​ | ​ 15 |
| Net increase in cash and cash equivalents | ​ | $153,581 | ​ | $23,662 |

#### For the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021

*Cash flows provided by operating activities*. Net cash provided by operating activities was $257.8 million for the nine months ended September 30, 2022 compared to $99.4 million for the nine months ended September 30, 2021.

The current period is up by approximately $158.4 million when compared to 2021 driven by an increase in cash collections of approximately $251.9 million, partially offset by advance collection on approximately $24.9 million of revenue recognized for the nine months ended September 30, 2022. Such revenue was collected in cash during the year ended December 31, 2021, which partially offset the increase in cash flows from operations for the nine months ended September 30, 2022. The additional change was driven by a decrease in cash collections on TC Energy of approximately $13.3 million compared to the prior year and a decrease in cash collections related to a related party receivable of approximately $1.2 million compared to the prior year. Furthermore, the change was driven by an increase in cash paid for income taxes of approximately $4.1 million and an increase in cash payments for operating expenses and payroll of approximately $52.8 million driven by growth and recovery of business as well as an increase in bonus payout of $5 million due to higher annual bonus payments made in the first quarter of 2022. The remaining change was driven primarily by a decrease in cash paid for interest of approximately $1.5 million.

*Cash flows used in investing activities*. Net cash used in investing activities was $103.7 million for the nine months ended September 30, 2022 compared to $24.0 million for the nine months ended September 30, 2021. This increase was primarily related to an increase in growth capital expenditures in the Government segment.

*Cash flows used in financing activities*. Net cash flows used in financing activities was $0.6 million for the nine months ended September 30, 2022 compared to $51.8 million for the nine months ended September 30, 2021. This decrease was primarily related to a decrease in net repayments on the ABL Facility in relation to draws in the current period driven by timing of the payment of operating expenses.

### Indebtedness

#### Capital lease and other financing obligations

The Company’s capital lease and other financing obligations as of September 30, 2022 consisted of approximately $1.5 million of capital leases. The capital leases pertain to leases entered into during 2019 through 2022, for commercial-use vehicles with 36-month terms expiring through 2025 with a weighted average interest rate of approximately 3.83%.

The Company’s capital lease and other financing obligations as of December 31, 2021 consisted of approximately $1.4 million of capital leases related to commercial-use vehicles with the same terms as described above.

#### ABL Facility

On the Closing Date, in connection with the closing of the Business Combination, Topaz, Bidco, Target, Signor and each of their domestic subsidiaries entered into an ABL credit agreement that provides for a senior secured asset-based revolving credit facility in the aggregate principal amount of up to $125 million (the “ABL Facility”). Approximately $40 million of proceeds from the ABL Facility were used to finance a portion of the consideration payable and fees and expenses incurred in connection with the Business Combination. During 2021, the Company repaid a net amount of $48 million of borrowings under the ABL Facility from excess cash available which reduced the outstanding balance to $0 as of December 31, 2021. During the nine months ended September 30, 2022, $70 million was drawn and $70 million was repaid on the ABL Facility resulting in an outstanding balance of $0 as of September 30, 2022. The maturity date of the ABL Facility is September 15, 2023. Refer to Note 8 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q for additional discussion of the ABL Facility.

#### Senior Secured Notes

In connection with the closing of the Business Combination, Bidco issued $340 million in aggregate principal amount of 9.50% senior secured notes due March 15, 2024 (the “2024 Senior Secured Notes” or “Notes”) under an indenture dated March 15, 2019 (the “Indenture”). The Indenture was entered into by and among Bidco, the guarantors named therein (the “Note Guarantors”), and Deutsche Bank Trust Company Americas, as trustee and as collateral agent. Interest is payable semi-annually on September 15 and March 15 and began September 15, 2019. Refer to Note 8 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q for additional discussion of the 2024 Senior Secured Notes.

#### Cash requirements

We expect that our principal short-term (over the next 12 months) and long-term needs for cash relating to our operations will be to primarily fund (i) operating activities and working capital, (ii) maintenance and growth capital expenditures for specialty rental and other property, plant, and equipment assets, (iii) payments due under capital and operating leases, and (iv) debt service. We plan to fund such cash requirements from our existing sources of liquidity as previously discussed. The table below presents information on payments coming due under the most significant categories of our needs for cash (excluding operating cash flows pertaining to normal business operations) as of September 30, 2022:

| ​ ​ | ​ | ​ ​ Total | ​ | ​ ​ Rest of 2022 | ​ ​ | ​ ​ 2023 and 2024 |
| --- | --- | ---: | --- | ---: | --- | ---: |
| Interest Payments(1) | ​ | $48,450 | ​ | $— | ​ | $48,450 |
| 2024 Senior Secured Notes | ​ | 340,000 | ​ | — | ​ | ​ 340,000 |
| Total | ​ | $388,450 | ​ | $— | ​ | $388,450 |

(1) We will incur and pay interest expense at 9.50% of the face value of $340.0 million annually, or $32.3 million in connection with our 2024 Senior Secured Notes due March 15, 2024. Over the remaining term of the Notes, interest payments total approximately $48.5 million.

### Concentration of Risks

In the normal course of business, we grant credit to customers based on credit evaluations of their financial condition and generally require no collateral or other security. Major customers are defined as those individually comprising more than 10% of our revenues or accounts receivable. For the nine months ended September 30, 2022, we had two customers, who accounted for 58% and 12% of revenues, respectively, while no other customer accounted for more than 10% of revenues. The second largest customer accounted for 11% of accounts receivable, while no other customers accounted for more than 10% of the accounts receivable balance as of September 30, 2022.

Our two largest customers for the nine months ended September 30, 2021 accounted for 32% and 20% of revenues, while no other customer accounted for more than 10% of revenues. The largest customers accounted for 18% and 13% of accounts receivable, while no other customer accounted for more than 10% of the accounts receivable balance as of September 30, 2021.

Major suppliers are defined as those individually comprising more than 10% of the annual goods purchased by the Company. For the nine months ended September 30, 2022, we had one major supplier representing 14.4% of goods purchased. For the nine months ended September 30, 2021, there were four major suppliers that represented 21.6%, 19.3%, 15.8%, and 12.7% of goods purchased, respectively.

We provide services almost entirely to customers in the government and natural resource industries and as such, are almost entirely dependent upon the continued activity of such customers.

### Commitments and Contingencies

We lease certain land, community units, and real estate under non-cancelable operating leases, the terms of which vary and generally contain renewal options. Total rent expense under these leases is recognized ratably over the initial term of the lease. Any difference between the rent payment and the straight-line expense is recorded as a liability.

Rent expense included in services costs in the unaudited consolidated statements of comprehensive income (loss) for cancelable and non-cancelable leases was $14.7 million and $9.8 million for the nine months ended September 30, 2022 and 2021, respectively. Rent expense included in services costs in the unaudited consolidated statements of comprehensive income (loss) for cancelable and non-cancelable leases was $6.5 million and $4.0 million for the three months ended September 30, 2022 and 2021, respectively. Rent expense included in the selling, general, and administrative expenses in the unaudited consolidated statements of comprehensive income (loss) for cancelable and non-cancelable leases was $0.4 million and $0.3 million for the nine months ended September 30, 2022 and 2021, respectively. Rent expense included in the selling, general, and administrative expenses in the unaudited consolidated statements of comprehensive income (loss) for cancelable and non-cancelable leases was $0.1 million and $0.1 million for the three months ended September 30, 2022 and 2021, respectively.

Future minimum lease payments at September 30, 2022 by year and in the aggregate for each of the next five years and thereafter, under non-cancelable operating leases are as follows:

| ​ | ​ | ​ ​ |
| --- | --- | ---: |
| Rest of 2022 | ​ | $2,227 |
| 2023 | ​ | 6,442 |
| 2024 | ​ | 4,524 |
| 2025 | ​ | 3,999 |
| 2026 | ​ | ​ 3,280 |
| Thereafter | ​ | ​ 608 |
| Total | ​ | $21,080 |

### Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our unaudited consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”).

For a discussion of the critical accounting policies and estimates that we use in the preparation of our audited consolidated financial statements, refer to Note 1 of the notes to our audited consolidated financial statements included in Part II, Item 8 of our 2021 Form 10-K. Additionally, refer to Note 1 of our notes to our unaudited consolidated financial statements included in this Form 10-Q for additional discussion of our summary of significant accounting policies and use of estimates. These estimates require significant judgments and assumptions. There have been no material changes during the three and nine months ended September 30, 2022 to the judgments, assumptions and estimates upon which our critical accounting estimates are based.

#### Principles of Consolidation

Refer to Note 1 of the notes to our unaudited consolidated financial statements included in this Form 10-Q for a discussion of principles of consolidation.

### Recently Issued Accounting Standards

Refer to Note 1 of the notes to our unaudited consolidated financial statements included in this Form 10-Q for our assessment of recently issued and adopted accounting standards.

### Non-GAAP Financial Measures

We have included Adjusted gross profit, EBITDA, Adjusted EBITDA, and Discretionary cash flows which are measurements not calculated in accordance with US GAAP, in the discussion of our financial results because they are key metrics used by management to assess financial performance. Our business is capital-intensive and these additional metrics allow management to further evaluate our operating performance.

Target Hospitality defines Adjusted gross profit, as gross profit plus depreciation of specialty rental assets and loss on impairment, and certain severance costs.

Target Hospitality defines EBITDA as net income (loss) before interest expense and loss on extinguishment of debt, income tax expense (benefit), depreciation of specialty rental assets, and other depreciation and amortization.

Adjusted EBITDA reflects the following further adjustments to EBITDA to exclude certain non-cash items and the effect of what management considers transactions or events not related to its core business operations:

- ***Other (income) expense, net:*** Other (income) expense, net includes miscellaneous cash receipts, gains and losses on disposals of property, plant, and equipment, involuntary asset conversion gains and losses, COVID-19 related expenses, and other immaterial non-cash charges.
- ***Transaction expenses:*** Target Hospitality incurred certain transaction costs during 2021 and 2022, including legal and professional fees, associated with the Proposal in 2021 as well as other immaterial items in 2022.
- ***Stock-based compensation:*** Charges associated with stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy.
- ***Change in fair value of warrant liabilities:*** Non-cash change in estimated fair value of warrant liabilities.
- ***Other adjustments:*** System implementation costs, including primarily non-cash amortization of capitalized system implementation costs, claim settlement, business development, accounting standard implementation costs and certain severance costs.

We define Discretionary cash flows as cash flows from operations less maintenance capital expenditures for specialty rental assets.

EBITDA reflects net income (loss) excluding the impact of interest expense and loss on extinguishment of debt, provision for income taxes, depreciation, and amortization. We believe that EBITDA is a meaningful indicator of operating performance because we use it to measure our ability to service debt, fund capital expenditures, and expand our business. We also use EBITDA, as do analysts, lenders, investors, and others, to evaluate companies because it excludes certain items that can vary widely across different industries or among companies within the same industry. For example, interest expense can be dependent on a company’s capital structure, debt levels, and credit ratings. Accordingly, the impact of interest expense on earnings can vary significantly among companies. The tax positions of companies can also vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the jurisdictions in which they operate. As a result, effective tax rates and provision for income taxes can vary considerably among companies. EBITDA also excludes depreciation and amortization expense, because companies utilize productive assets of different ages and use different methods of both acquiring and depreciating productive assets. These differences can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies.

Target Hospitality also believes that Adjusted EBITDA is a meaningful indicator of operating performance. Our Adjusted EBITDA reflects adjustments to exclude the effects of additional items, including certain items, that are not reflective of the ongoing operating results of Target Hospitality. In addition, to derive Adjusted EBITDA, we exclude gains or losses on the sale of depreciable assets and impairment losses because including them in EBITDA is inconsistent with reporting the ongoing performance of our remaining assets. Additionally, the gain or loss on sale of depreciable assets and impairment losses represents either accelerated depreciation or excess depreciation in previous periods, and depreciation is excluded from EBITDA.

Target Hospitality also presents Discretionary cash flows because we believe it provides useful information regarding our business as more fully described below. Discretionary cash flows indicate the amount of cash available after maintenance capital expenditures for specialty rental assets for, among other things, investments in our existing business.

Adjusted gross profit, EBITDA, Adjusted EBITDA, and Discretionary cash flows are not measurements of Target Hospitality’s financial performance under GAAP and should not be considered as alternatives to gross profit, net income or other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as measures of Target Hospitality’s liquidity. Adjusted gross profit, EBITDA, Adjusted EBITDA, and Discretionary cash flows should not be considered as discretionary cash available to Target Hospitality to reinvest in the growth of our business or as measures of cash that is available to it to meet our obligations. In addition, the measurement of Adjusted gross profit, EBITDA, Adjusted EBITDA, and Discretionary cash flows may not be comparable to similarly titled measures of other companies. Target Hospitality’s management believes that Adjusted gross profit, EBITDA, Adjusted EBITDA, and Discretionary cash flow provide useful information to investors about Target Hospitality and its financial condition and results of operations for the following reasons: (i) they are among the measures used by Target Hospitality’s management team to evaluate its operating performance; (ii) they are among the measures used by Target Hospitality’s management team to make day-to-day operating decisions, (iii) they are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results across companies in Target Hospitality’s industry.

The following table presents a reconciliation of Target Hospitality’s consolidated gross profit to Adjusted gross profit:

| ​ ​ ​ ​ | ​ ​ For the Three Months Ended September 30, 2022 | ​ ​ | ​ ​ 2021 | ​ ​ ​ ​ | ​ ​ For the Nine Months Ended September 30, 2022 | ​ ​ | ​ ​ 2021 |
| --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| **Gross Profit** | **$82,771** | **​** | **$33,608** | **​** | **$163,230** | **​** | **$72,138** |
| Depreciation of specialty rental assets | ​ 11,864 | ​ | ​ 14,294 | ​ | ​ 36,525 | ​ | ​ 40,642 |
| **Adjusted gross profit** | **$94,635** | **​** | **$47,902** | **​** | **$199,755** | **​** | **$112,780** |

The following table presents a reconciliation of Target Hospitality’s consolidated net income (loss) to EBITDA and Adjusted EBITDA:

| ​ ​ ​ ​ | ​ ​ | ​ ​ For the Three Months Ended September 30, 2022 | ​ | ​ ​ 2021 | ​ ​ | ​ ​ For the Nine Months Ended September 30, 2022 | ​ ​ | ​ ​ 2021 |
| --- | --- | ---: | --- | ---: | --- | --- | --- | --- |
| **Net income (loss)** | ​ | **$19,022** | **​** | **$6,675** | **​** | **$42,367** | **​** | **$(7,375)** |
| Income tax expense | ​ | 12,031 | ​ | 1,662 | ​ | ​ 19,287 | ​ | ​ 139 |
| Interest expense, net | ​ | 8,888 | ​ | 9,465 | ​ | ​ 28,126 | ​ | ​ 29,058 |
| Other depreciation and amortization | ​ | 3,556 | ​ | 4,008 | ​ | ​ 11,136 | ​ | ​ 12,100 |
| Depreciation of specialty rental assets | ​ | 11,864 | ​ | 14,294 | ​ | ​ 36,525 | ​ | ​ 40,642 |
| **EBITDA** | ​ | **55,361** | **​** | **36,104** | ​ | ​ **137,441** | **​** | **​** **74,564** |
| **​** | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| **Adjustments** | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Other expense (income), net | ​ | 121 | ​ | 91 | ​ | ​ (74) | ​ | ​ 781 |
| Transaction expenses | ​ | 34 | ​ | 49 | ​ | ​ 91 | ​ | ​ 1,198 |
| Stock-based compensation | ​ | ​ 8,398 | ​ | ​ 1,362 | ​ | ​ 13,548 | ​ | ​ 3,598 |
| Change in fair value of warrant liabilities | ​ | ​ 20,000 | ​ | ​ (1,120) | ​ | ​ 20,374 | ​ | ​ 1,600 |
| Other adjustments | ​ | ​ 469 | ​ | ​ 1,048 | ​ | ​ 2,509 | ​ | ​ 3,697 |
| **Adjusted EBITDA** | ​ | **$84,383** | **​** | **$37,534** | ​ | **$173,889** | **​** | **$85,438** |

The following table presents a reconciliation of Target Hospitality’s Net cash provided by operating activities to Discretionary cash flows:

| ​ ​ ​ ​ | ​ ​ ​ ​ | ​ ​ For the Nine Months Ended September 30, 2022 | ​ ​ | ​ ​ 2021 |
| --- | --- | --- | --- | --- |
| **Net cash provided by operating activities** | ​ | $257,823 | **​** | $99,447 |
| Less: Maintenance capital expenditures for specialty rental assets | ​ | ​ (9,952) | ​ | ​ (8,407) |
| **Discretionary cash flows** | ​ | $247,871 | ​ | $91,040 |
| **​** | ​ | ​ ​ | ​ | ​ ​ |
| Purchase of specialty rental assets | ​ | ​ (84,244) | ​ | ​ (23,707) |
| Purchase of property, plant and equipment | ​ | ​ (20,028) | ​ | ​ (301) |
| Proceeds from sale of specialty rental assets and other property, plant and equipment | ​ | ​ 615 | ​ | ​ — |
| **Net cash used in investing activities** | ​ | $(103,657) | ​ | $(24,008) |
| **​** | ​ | ​ ​ | ​ | ​ ​ |
| Principal payments on finance and capital lease obligations | ​ | ​ (442) | ​ | ​ (3,693) |
| Principal payments on borrowings from ABL Facility | ​ | ​ (70,000) | ​ | ​ (76,000) |
| Proceeds from borrowings on ABL Facility | ​ | ​ 70,000 | ​ | ​ 28,000 |
| Restricted shares surrendered to pay tax liabilities | ​ | ​ (121) | ​ | ​ (99) |
| **Net cash used in financing activities** | ​ | $(563) | **​** | $(51,792) |

## Market risk

As filed, 1,261 characters.

Our principal market risks are our exposure to interest rates and commodity risks.

### Interest Rates

We are exposed to interest rate risk through our ABL Facility which is subject to the risk of higher interest charges associated with increases in interest rates. As of September 30, 2022, we had $0 of outstanding floating-rate obligations under our credit facilities. These floating-rate obligations expose us to the risk of increased interest expense in the event of increases in short-term interest rates. If floating interest rates increased by 100 basis points, our consolidated interest expense would not be impacted, however, based on our floating-rate debt obligations, which had no outstanding balances as of September 30, 2022.

### Commodity Risk

Commodity price fluctuations also indirectly influence our activities and results of operations over the long-term because they may affect production rates and investments by natural resource development companies in the development of commodity reserves.

We have limited direct exposure to risks associated with fluctuating commodity prices. However, both our profitability and our cash flows are affected by volatility in commodity prices. We do not currently hedge our exposure to commodity prices.

## Controls and procedures

As filed, 1,110 characters.

As of the end of the period covered by this report, the Company’s management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, the Company’s management and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2022, at the reasonable assurance level.

## Risk factors

As filed, 437 characters.

The Company’s financial position, results of operations and cash flows are subject to various risks, many of which are not exclusively within the Company’s control and which may cause actual performance to differ materially from historical or projected future performance. For additional information about our risk factors, you should carefully consider the risk factors included in the 2021 Form 10-K, which have not materially changed.

Filed Nov 9, 2022.
Source: SEC EDGAR, the filing index for accession 0001558370-22-017098. Last ingested by Listed: Nov 12, 2026, 17:34 ET. No prices; not investment advice.