# Target Hospitality Corp.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Target Hospitality Corp.](/companies/th.md) (CIK 1712189)
- Form: 10-Q
- Filed: 2023-11-08
- Accepted by EDGAR: Nov 8, 2023, 15:58 ET
- Period: 2023-09-30
- Accession: 0001558370-23-018253
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1712189/000155837023018253/th-20230930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1712189/000155837023018253/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $93.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $280.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $86.8m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $251.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $15.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $43.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $67.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $194.4m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $14.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $40.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $45.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $135.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.43 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.27 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.45 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.34 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 105,093,694 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 105,632,139 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $118.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-07-01 to 2023-09-30 | $5.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-09-30 | $105.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $171.6m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $696.5m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $294.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $358.3m | us-gaap:Liabilities |
| Current portion of debt | at 2023-09-30 | $208.1m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-09-30 | $338.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 69,639 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, 2023, our network included 31 communities, including 2 communities that are not owned or leased, to better serve our customers across the US.

#### Economic Update

During the three months ended September 30, 2023, the Company continued to experience increasing revenue in the HFS – South segment as compared to the third quarter of 2022. The Company’s Government segment continued to benefit from the Pecos Children’s Center (“PCC”) contract and the extension (the “Expanded PCC Community”) thereof with a leading national nonprofit organization (“NP Partner”) that became effective May 16, 2022. Although the Expanded PCC Community contract contributed lower revenues as compared to the third quarter of 2022 driven by a decrease in the variable services and leasing revenue component of the contract, such variable services and leasing revenue began to increase again in early September 2023. The Company generated cash inflows from operations for the nine months ended September 30, 2023 of approximately $118.5 million compared to approximately $257.8 million for the nine months ended September 30, 2022, representing a decrease in cash flows from operations of approximately $139.3 million or 54% driven by the prior period including a significant $194 million upfront payment for expansion efforts related to the Expanded PCC Community contract, which did not recur in the current period. The Company also reduced its outstanding debt balance on the 2024 Senior Secured Notes by $125 million or 37% during the nine months ended September 30, 2023 and reduced interest expense, net by approximately $3.9 million or 44% during the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

#### For the three months ended September 30, 2023, other key drivers of financial performance included:

- Decreased revenue of $13.6 million, or 9% compared to the same period in 2022, driven by lower revenue generated from the Government segment, partially offset by an increase in revenue from the HFS – South segment led by an increase in average daily rate, acquisition growth, and increased customer activity.
- Generated net income of approximately $45.6 million for the three months ended September 30, 2023, as compared to a net income of approximately $19.0 million for the three months ended September 30, 2022, which is primarily attributable to a decrease in service costs driven primarily by lower variable costs in the Government segment as a result of lower occupancy, a decrease in selling, general and administrative expenses driven primarily by a decrease in stock compensation expense, a decrease in interest expense, net led by a significant reduction in debt, and the change in the estimated fair value of warrant liabilities, partially offset by a decrease in revenue, an increase in depreciation of specialty rental assets, and an increase in income tax expense.
- Generated consolidated Adjusted EBITDA of $95.0 million representing an increase of $10.7 million, or 13% as compared to the same period in 2022, driven primarily by a 36% decrease in operating expenses comprised of a decrease in services costs and specialty rental costs, partially offset by the decrease in revenue.

Adjusted EBITDA is a non-GAAP measure. The GAAP measure most comparable to Adjusted EBITDA is Net Income. 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 North Dakota 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 2022 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.

#### 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 refinance on favorable terms, 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 64% of our revenue was earned from specialty rental with vertically integrated hospitality services, specifically lodging and related ancillary services, whereas the remaining 36% of revenues were earned through leasing of lodging facilities for the nine months ended September 30, 2023. Revenue is recognized in the period in which lodging, and services are provided pursuant to the terms of contractual relationships with our customers. We enter into arrangements with multiple deliverables for which arrangement consideration is allocated between lodging and services for certain applicable contracts 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 segment, the consumer price index impacting government contracts, and government spending on housing programs.

#### Adjusted Gross Profit

We analyze our adjusted gross profit, which is a Non-GAAP measure that we define as revenues less cost of sales (comprised of services and specialty rental costs), 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 budgets and 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

As discussed in Note 17 (Business Segments) of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q, as of March 31, 2023 the Company reduced the number of reportable segments from four to two as the additional two previously reportable segments (“TCPL Keystone” and “HFS – Midwest”) became quantitatively immaterial and are now combined in the “All Other” category for all periods presented.

We have identified two reportable business segments: HFS – South and Government:

#### HFS – South

The HFS – South segment reflects our facilities and operations in the HFS – South region and includes our 16 communities located across Texas and New Mexico.

#### 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 our NP Partner, backed by a committed U.S. Government contract, to provide a suite of comprehensive service offerings across several facilities in West Texas in support of their humanitarian aid efforts.

#### 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, four communities in North Dakota, and the catering and other services provided to communities and other workforce accommodation facilities for the natural resources development 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:

#### Government Segment Growth

A significant new contract was originated in the Government segment in March of 2021 with our NP Partner, backed by a committed U.S. Government contract, to provide a suite of comprehensive service offerings in support of their humanitarian aid efforts. During 2022, the Company executed the Expanded PCC Community contract with our NP Partner that became effective on May 16, 2022, which represented a significantly expanded lease and services agreement for the PCC community 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 PCC Community 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 PCC Community contract operates with similar structure to the Company’s existing government services contracts, which are centered around minimum revenue commitments supported by the U.S. Government. Additionally, the Expanded PCC Community contract includes variable services and leasing 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. This arrangement provides for a maximum initial annual total contract value of approximately $575 million. On May 15, 2023, the Company executed a six-month extension of the Expanded PCC Community contract, which extended the period of performance through November 15, 2023 and increased the contract value, with no change to contract structure or any other existing economic terms.

### 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, 2023 and 2022 ($ in thousands):

| ​ ​ ​ ​ Revenue: | ​ ​ ​ ​ | ​ ​ For the Three Months Ended September 30, 2023 ​ ​ | ​ ​ | ​ ​ 2022 ​ ​ | ​ ​ ​ ​ | ​ ​ Amount of Increase (Decrease) ​ ​ | ​ ​ ​ ​ | ​ Percentage Change Increase (Decrease) ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Services income | ​ | $93,538 | ​ | $102,996 | ​ | $(9,458) |  | (9)% |
| Specialty rental income | ​ | 52,401 | ​ | 56,569 | ​ | (4,168) |  | (7)% |
| Total revenue | ​ | 145,939 | ​ | 159,565 | ​ | (13,626) |  | (9)% |
| Costs: | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Services | ​ | 34,035 | ​ | 56,899 | ​ | (22,864) |  | (40)% |
| Specialty rental | ​ | 7,495 | ​ | 8,031 | ​ | (536) |  | (7)% |
| Depreciation of specialty rental assets | ​ | 17,653 | ​ | 11,864 | ​ | 5,789 |  | 49% |
| Gross Profit | ​ | 86,756 | ​ | 82,771 | ​ | 3,985 |  | 5% |
| Selling, general and administrative | ​ | 15,273 | ​ | 19,153 | ​ | (3,880) |  | (20)% |
| Other depreciation and amortization | ​ | 3,838 | ​ | 3,556 | ​ | 282 |  | 8% |
| Other expense (income), net | ​ | (71) | ​ | 121 | ​ | (192) |  | (159)% |
| Operating income | ​ | 67,716 | ​ | 59,941 | ​ | 7,775 |  | 13% |
| Interest expense, net | ​ | 4,953 | ​ | 8,888 | ​ | (3,935) |  | (44)% |
| Change in fair value of warrant liabilities | ​ | ​ 2,576 | ​ | ​ 20,000 | ​ | ​ (17,424) | ​ | (87)% |
| Income before income tax | ​ | 60,187 | ​ | 31,053 | ​ | 29,134 |  | 94% |
| Income tax expense | ​ | 14,608 | ​ | 12,031 | ​ | 2,577 |  | 21% |
| Net income | ​ | $45,579 | ​ | $19,022 | ​ | $26,557 |  | 140% |

#### For the three months ended September 30, 2023 compared to the three months ended September 30, 2022

***Total Revenue.*** Total revenue was $145.9 million for the three months ended September 30, 2023 and consisted of $93.5 million of services income and $52.4 million of specialty rental income. Total revenues for the three months ended September 30, 2022 was $159.6 million, which consisted of $103.0 million of services income and $56.6 million of specialty rental income.

Services income consists primarily of specialty rental and vertically integrated and comprehensive hospitality services, including room revenue, 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 driver of the decrease in services income revenue year over year was lower variable services revenue in the Government segment in the current period from the contract that originated in May of 2022 with the NP Partner compared to the prior period, partially offset by a continued increase in revenue in the HFS – South segment led by an increase in average daily rate and an increase in customer activity.

Specialty rental income consists primarily of revenues from leasing rooms and other facilities at certain communities that include contractual arrangements with customers that are considered leases under the authoritative accounting guidance for leases. Specialty rental income decreased primarily as a result of lower variable leasing revenue in the Government segment from the contract that originated in May of 2022 with the NP Partner compared to the prior period.

***Cost of services.*** Cost of services was $34.0 million for the three months ended September 30, 2023 as compared to $56.9 million for the three months ended September 30, 2022. The decrease in services costs is primarily due to a decrease in services costs from the Government segment driven by a decrease in occupancy, partially offset by an increase in services costs in the HFS – South segment driven by the increase in customer activity mentioned above, which led to more communities in operation during the current period, including a new community acquired in January 2023 to support growth in the HFS – South segment.

***Specialty rental costs.*** Specialty rental costs were $7.5 million for the three months ended September 30, 2023 as compared to $8.0 million for the three months ended September 30, 2022. The decrease in specialty rental costs is primarily due to a decrease in costs from the Government segment driven by a decrease in occupancy.

***Depreciation of specialty rental assets.*** Depreciation of specialty rental assets was $17.7 million for the three months ended September 30, 2023 as compared to $11.9 million for the three months ended September 30, 2022. The increase in depreciation expense is primarily attributable to an increase in depreciation on specialty rental assets acquired in 2022 to support growth of the Government segment related to the contract that originated in May of 2022 with the NP Partner.

***Selling, general and administrative.*** Selling, general and administrative was $15.3 million for the three months ended September 30, 2023 as compared to $19.2 million for the three months ended September 30, 2022. The decrease in selling, general and administrative expense of $3.9 million was primarily driven by a decrease in stock compensation expense from the SAR awards led by a lower fair value change in the current period influenced in part by a lower change in the stock price during the current period compared to the prior period combined with a lower number of SAR awards outstanding during the current period compared to the prior period as approximately 50% of such awards were vested and exercised during the first quarter of 2023.

***Other depreciation and amortization.*** Other depreciation and amortization expense was $3.8 million for the three months ended September 30, 2023 as compared to $3.6 million for the three months ended September 30, 2022. The increase in other depreciation and amortization is primarily driven by an increase in customer-related intangible asset amortization associated with customer related intangible assets that the Company acquired in connection with the acquisition on January 18, 2023. Refer to Note 5 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q for further discussion regarding the acquisition of intangible assets. An increase in depreciation associated with an increase in finance leases also partially contributed to this increase.

***Other expense (income), net.*** Other expense (income), net was ($0.1) million for the three months ended September 30, 2023 as compared to $0.1 million for the three months ended September 30, 2022. The increase in income is primarily driven by proceeds received in connection with gains on the disposal of older assets, while the prior period contained other immaterial expenses that did not recur in the current period.

***Interest expense, net.*** Interest expense, net was $5.0 million for the three months ended September 30, 2023 as compared to $8.9 million for the three months ended September 30, 2022. The change in interest expense, net was primarily driven by a decrease in interest expense on the 2024 Senior Secured Notes driven by the lower outstanding debt balance in the current period as $125 million of the 2024 Senior Secured Notes were redeemed on March 15, 2023. This change in interest expense was also partially driven by lower interest expense associated with the ABL Facility as it had no outstanding balance in the current period compared to an average outstanding balance in the prior period. Approximately $0.9 million of this decrease was driven by interest income earned on cash equivalents funded by the increase in available cash due to growth of the business, led by the Government segment.

***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 $2.6 million for the three months ended September 30, 2023 as compared to $20.0 million for the three months ended September 30, 2022. 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 fair value of the Private Warrants have increased in the current period, generating a decrease to income in the current period. There is also a lower number of outstanding Private Warrants in the current period compared to the prior period as a result of the Warrant Exchange that closed on December 22, 2022 as discussed in our 2022 Form 10-K.

***Income tax expense.*** Income tax expense was $14.6 million for the three months ended September 30, 2023 as compared to $12.0 million for the three months ended September 30, 2022. The increase in income tax expense is primarily attributable to the increase in income before taxes for the three months ended September 30, 2023 led by cost decreases previously mentioned, partially offset by a decrease in revenue.

### Consolidated Results of Operations for the nine months ended September 30, 2023 and 2022 ($ in thousands):

| ​ ​ ​ ​ Revenue: | ​ ​ ​ ​ | ​ ​ For the Nine Months Ended September 30, 2023 ​ ​ | ​ ​ | ​ ​ 2022 ​ ​ | ​ ​ ​ ​ | ​ ​ Amount of Increase (Decrease) ​ ​ | ​ ​ ​ ​ | ​ Percentage Change Increase (Decrease) ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Services income | ​ | $280,897 | ​ | $236,041 | ​ | $44,856 |  | 19% |
| Specialty rental income | ​ | 156,491 | ​ | 113,506 | ​ | 42,985 |  | 38% |
| Total revenue | ​ | 437,388 | ​ | 349,547 | ​ | 87,841 |  | 25% |
| Costs: | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Services | ​ | 109,469 | ​ | 131,605 | ​ | (22,136) |  | (17)% |
| Specialty rental | ​ | 23,592 | ​ | 18,187 | ​ | 5,405 |  | 30% |
| Depreciation of specialty rental assets | ​ | 53,242 | ​ | 36,525 | ​ | 16,717 |  | 46% |
| Gross Profit | ​ | 251,085 | ​ | 163,230 | ​ | 87,855 |  | 54% |
| Selling, general and administrative | ​ | 43,929 | ​ | 42,014 | ​ | 1,915 |  | 5% |
| Other depreciation and amortization | ​ | 11,482 | ​ | 11,136 | ​ | 346 |  | 3% |
| Other expense (income), net | ​ | 1,244 | ​ | (74) | ​ | 1,318 |  | (1,781)% |
| Operating income | ​ | 194,430 | ​ | 110,154 | ​ | 84,276 |  | 77% |
| Loss on extinguishment of debt | ​ | ​ 2,128 | ​ | ​ — | ​ | ​ 2,128 | ​ | 100% |
| Interest expense, net | ​ | 17,726 | ​ | 28,126 | ​ | (10,400) |  | (37)% |
| Change in fair value of warrant liabilities | ​ | ​ (1,809) | ​ | ​ 20,374 | ​ | ​ (22,183) | ​ | (109)% |
| Income before income tax | ​ | 176,385 | ​ | 61,654 | ​ | 114,731 |  | 186% |
| Income tax expense | ​ | 40,528 | ​ | 19,287 | ​ | 21,241 |  | 110% |
| Net income | ​ | $135,857 | ​ | $42,367 | ​ | $93,490 |  | 221% |

#### For the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

***Total Revenue.*** Total revenue was $437.4 million for the nine months ended September 30, 2023 and consisted of $280.9 million of services income and $156.5 million of specialty rental income. Total revenues for the nine months ended September 30, 2022 was $349.5 million, which consisted of $236.0 million of services income and $113.5 million of specialty rental income.

Services income consists primarily of specialty rental and vertically integrated and comprehensive hospitality services, including room revenue, 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, primarily from fixed minimum contractual revenue commitments that are unaffected by changes in occupancy, combined with a continued increase in customer activity in the HFS – South segment.

Specialty rental income consists primarily of revenues from leasing rooms and other facilities at certain communities that include contractual arrangements with customers that are considered leases under the authoritative accounting guidance for leases. Specialty rental income increased primarily as a result of growth in the Government segment.

***Cost of services.*** Cost of services was $109.5 million for the nine months ended September 30, 2023 as compared to $131.6 million for the nine months ended September 30, 2022. The decrease in services costs is primarily due to a decrease in services costs in the Government segment driven by a decrease in occupancy, partially offset by an increase in service costs in the HFS – South segment driven by the increase in customer activity mentioned above, which also led to more communities in operation during the current period, including a new community acquired in January 2023 to support growth in the HFS-South segment. This increase in services costs was also partially driven by communities in the All Other category from an increase in customer activity.

***Specialty rental costs.*** Specialty rental costs were $23.6 million for the nine months ended September 30, 2023 as compared to $18.2 million for the nine months ended September 30, 2022. 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 $53.2 million for the nine months ended September 30, 2023 as compared to $36.5 million for the nine months ended September 30, 2022. The increase in depreciation expense is primarily attributable to an increase in depreciation on specialty rental assets acquired in 2022 to support growth of the Government segment related to the contract that originated in May of 2022 with the NP Partner.

***Selling, general and administrative.*** Selling, general and administrative was $43.9 million for the nine months ended September 30, 2023 as compared to $42.0 million for the nine months ended September 30, 2022. The increase in selling, general and administrative expenses of $1.9 million was primarily driven by a $1.1 million increase in insurance expense driven by growth of the business. The other drivers of this increase included an increase in stock compensation expense of approximately $0.4 million largely from the PSU awards as a result of an increase in the number of PSUs issued. The remaining increase was primarily attributable to a $0.5 million increase in transaction fees.

***Other depreciation and amortization.*** Other depreciation and amortization expense was $11.5 million for the nine months ended September 30, 2023 as compared to $11.1 million for the nine months ended September 30, 2022. The increase in other depreciation and amortization is primarily driven by an increase in depreciation associated with an increase in finance leases.

***Other expense (income), net.*** Other expense (income), net was $1.2 million for the nine months ended September 30, 2023 as compared to ($0.1) million for the nine months ended September 30, 2022. The increase in expense is primarily driven by costs incurred on the disposal of assets in the All Other segment category in the current period.

***Loss on extinguishment of debt.*** Loss on extinguishment of debt was $2.1 million for the nine months ended September 30, 2023 as compared to $0 for the nine months ended September 30, 2022. The increase in loss on extinguishment of debt is primarily due to the partial redemption of the 2024 Senior Secured Notes on March 15, 2023, which was accounted for as a partial extinguishment of debt and resulted in a charge of approximately $1.7 million related to the write-off of unamortized deferred financing costs and unamortized original issue discount. The remainder of the change of approximately $0.4 million related to the write-off of unamortized deferred financing costs for non-continuing lenders in connection with the amendment of the ABL Facility on February 1, 2023. Refer to Note 8 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q for further discussion regarding extinguishment of debt.

***Interest expense, net.*** Interest expense, net was $17.7 million for the nine months ended September 30, 2023 as compared to $28.1 million the nine months ended September 30, 2022. The change in interest expense, net was primarily driven by a decrease in interest expense on the 2024 Senior Secured Notes driven by the lower outstanding debt balance in the current period as $125 million of the 2024 Senior Secured Notes were redeemed on March 15, 2023. This change in interest expense was also partially driven by lower interest expense associated with the ABL Facility as it had no outstanding balance in the current period compared to an average outstanding balance in the prior period. Approximately $2.8 million of this decrease was driven by interest income earned on cash equivalents funded by the increase in available cash due to growth of the business, led by the Government segment.

***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 ($1.8) million for the nine months ended September 30, 2023 as compared to $20.4 million for the nine months ended September 30, 2022. 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 fair value of the Private Warrants have decreased in the current period, generating an increase to income in the current period. There is also a lower number of outstanding Private Warrants in the current period compared to the prior period as a result of the Warrant Exchange that closed on December 22, 2022 as discussed in our 2022 Form 10-K.

***Income tax expense.*** Income tax expense was $40.5 million for the nine months ended September 30, 2023 as compared to $19.3 million for the nine months ended September 30, 2022. The increase in income tax expense is primarily attributable to the increase in income before taxes for the nine months ended September 30, 2023 led by growth in the Government segment 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 and All Other for the three months ended September 30, 2023 and 2022 ($ in thousands, except for Average Daily Rate).

| ​ ​ ​ ​ Revenue: | ​ ​ ​ ​ | ​ ​ ​ ​ For the Three Months Ended September 30, 2023 ​ ​ | ​ ​ ​ | ​ ​ ​ ​ 2022 ​ ​ | ​ ​ ​ ​ | ​ ​ ​ Amount of Increase (Decrease) ​ ​ | ​ ​ ​ ​ | ​ Percentage Change Increase (Decrease) ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Government | ​ | $105,541 | ​ | $123,308 | ​ | $(17,767) |  | (14)% |
| HFS - South | ​ | 37,527 | ​ | 33,632 | ​ | 3,895 |  | 12% |
| All Other | ​ | 2,871 | ​ | 2,625 | ​ | 246 |  | 9% |
| Total Revenues | ​ | $145,939 | ​ | $159,565 | ​ | $(13,626) |  | (9)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Adjusted Gross Profit | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Government | ​ | $90,516 | ​ | $80,948 | ​ | $9,568 |  | 12% |
| HFS - South | ​ | 14,078 | ​ | 13,878 | ​ | 200 |  | 1% |
| All Other | ​ | (185) | ​ | (191) | ​ | 6 |  | (3)% |
| Total Adjusted Gross Profit | ​ | $104,409 | ​ | $94,635 | ​ | $9,774 |  | 10% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Average Daily Rate | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| HFS - South | ​ | $75.71 | ​ | $72.73 | ​ | $2.98 | ​ | ​ |

*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 $105.5 million for the three months ended September 30, 2023, as compared to $123.3 million for the three months ended September 30, 2022.

Adjusted gross profit for the Government segment was $90.5 million for the three months ended September 30, 2023, as compared to $80.9 million for the three months ended September 30, 2022.

Revenue decreased primarily due to less variable services and leasing revenue in the current period on the contract originated in the Government segment in May 2022. However, such variable services and leasing revenue began to increase in early September 2023.

Adjusted gross profit increased as a result of a decrease in occupancy, which drove less variable cost.

### HFS – South

Revenue for the HFS – South segment was $37.5 million for the three months ended September 30, 2023, as compared to $33.6 million for the three months ended September 30, 2022.

Adjusted gross profit for the HFS – South segment was $14.1 million for the three months ended September 30, 2023, as compared to $13.9 million for the three months ended September 30, 2022.

The increase in revenue of $3.9 million was primarily attributable to an increase in average daily rate and an increase in customer activity, which led to more communities in operation during the current period, including a new community acquired in January 2023 to support growth in the HFS – South segment.

The increase in adjusted gross profit of $0.2 million was primarily attributable to the increase in revenue discussed above, partially offset by an increase in services costs driven by the increase in customer activity and number of communities in operation as mentioned above.

### Segment Results

The following table sets forth our selected results of operations for each of our reportable segments and All Other for the nine months ended September 30, 2023 and 2022 ($ in thousands, except for Average Daily Rate).

| ​ ​ ​ ​ Revenue: | ​ ​ ​ ​ | ​ ​ ​ ​ ​ For the Nine Months Ended September 30, 2023 ​ ​ | ​ ​ ​ | ​ ​ ​ ​ 2022 ​ ​ | ​ ​ ​ ​ | ​ ​ ​ Amount of Increase (Decrease) ​ ​ | ​ ​ ​ ​ | ​ ​ Percentage Change Increase (Decrease) ​ |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Government | ​ | $316,223 | ​ | $245,013 | ​ | $71,210 |  | 29% |
| HFS - South | ​ | 112,452 | ​ | 97,828 | ​ | 14,624 |  | 15% |
| All Other | ​ | 8,713 | ​ | 6,706 | ​ | 2,007 |  | 30% |
| Total Revenues | ​ | $437,388 | ​ | $349,547 | ​ | $87,841 |  | 25% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Adjusted Gross Profit | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Government | ​ | $266,825 | ​ | $159,523 | ​ | $107,302 |  | 67% |
| HFS - South | ​ | 39,028 | ​ | 41,162 | ​ | (2,134) |  | (5)% |
| All Other | ​ | (1,526) | ​ | (930) | ​ | (596) |  | 64% |
| Total Adjusted Gross Profit | ​ | $304,327 | ​ | $199,755 | ​ | $104,572 |  | 52% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| Average Daily Rate | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ |
| HFS - South | ​ | $74.80 | ​ | $73.57 | ​ | $1.23 | ​ | ​ |

*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 $316.2 million for the nine months ended September 30, 2023, as compared to $245.0 million for the nine months ended September 30, 2022.

Adjusted gross profit for the Government segment was $266.8 million for the nine months ended September 30, 2023, as compared to $159.5 million for the nine months ended September 30, 2022.

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

### HFS – South

Revenue for the HFS – South segment was $112.5 million for the nine months ended September 30, 2023, as compared to $97.8 million for the nine months ended September 30, 2022.

Adjusted gross profit for the HFS – South segment was $39.1 million for the nine months ended September 30, 2023, as compared to $41.2 million for the nine months ended September 30, 2022.

The increase in revenue of $14.6 million was primarily attributable to an increase in utilization driven by an increase in customer demand and more communities in operation during the current period, including a new community acquired in January 2023 to support growth in the HFS – South segment. This increase in revenue was also driven by an increase in average daily rate.

The decrease in adjusted gross profit of $2.1 million was primarily attributable to an increase in occupancy and customer activity as mentioned above, which drove more variable cost, partially offset by an increase in average daily rate.

### 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. As of September 30, 2023, the ABL Facility had unused available borrowing capacity of $125 million. As discussed in Note 18 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q, the ABL Facility was amended on October 12, 2023 to, among other things, increase the size of the available borrowing capacity to $175 million. Under the terms of the ABL Facility, if any of the 2024 Senior Secured Notes remain outstanding on the date ninety-one days prior to their stated maturity date of March 15, 2024, the ABL Facility will mature on December 15, 2023. Even if we are required to borrow under the ABL Facility to partially fund a redemption of some or all of the 2024 Senior Secured Notes that remain outstanding following the Notes Exchange Offer, we currently believe that these sources of funds will provide sufficient liquidity to fund debt service requirements, 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 nine months ended September 30, 2023, we incurred approximately $60.8 million in capital expenditures, excluding acquisition of intangibles, largely driven by growth capital expenditures in the HFS – South segment, with approximately $27.8 million driven by 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:

*($ in thousands)*

| ​ ​ ​ ​ | ​ ​ ​ | ​ ​ For the Nine Months Ended September 30, 2023 ​ ​ | ​ ​ | ​ ​ 2022 ​ ​ |
| --- | --- | ---: | --- | ---: |
| Net cash provided by operating activities | ​ | $118,512 | ​ | $257,823 |
| Net cash used in investing activities | ​ | (60,909) | ​ | (103,657) |
| Net cash used in financing activities | ​ | (134,177) | ​ | (563) |
| Effect of exchange rate changes on cash and cash equivalents | ​ | ​ 5 | ​ | ​ (22) |
| Net (decrease) increase in cash and cash equivalents | ​ | $(76,569) | ​ | $153,581 |

#### For the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

*Cash flows provided by operating activities*. Net cash provided by operating activities was $118.5 million for the nine months ended September 30, 2023 compared to $257.8 million for the nine months ended September 30, 2022.

The current period is down by approximately $139.3 million when compared to 2022 driven by a decrease in cash collections from customers of approximately $146.5 million led by the prior period including a significant $194 million upfront payment for expansion efforts related to the Expanded PCC Community contract, which did not recur in the current period, and a net increase in payments for operating expenses and payroll of approximately $4.2 million driven by growth and recovery of the business as well as the cash payments for the vested SAR awards made during the nine months ended September 30, 2023, partially offset by a decrease in operating expenses from the Government segment as a result of lower occupancy, which drove lower variable operating expenses. These net operating cash flow decreases were partially offset by an increase in interest received of approximately $2.8 million, a decrease in interest payments of approximately $5.7 million driven by lower debt, and a decrease in cash paid for income taxes of $2.6 million.

*Cash flows used in investing activities*. Net cash used in investing activities was $60.9 million for the nine months ended September 30, 2023 compared to $103.7 million for the nine months ended September 30, 2022. This decrease in net cash used in investing activities was primarily related to a decrease in growth capital expenditures in the Government segment compared to the prior period. The prior period included expansion related activities associated with the Expanded PCC Community contract that became effective on May 16, 2022 and drove a significant amount of capital expenditure spend, which was largely incurred and paid by the end of the third quarter in 2022 as the Company received the upfront payment for the construction in August 2022. This decrease was partially offset by an increase in growth capital expenditures in the HFS – South segment with the largest single driver being the $18.6 million acquisition of community assets and related intangibles in January 2023, supporting continued customer demand. To a lesser extent, the decrease was partially offset by a $5.0 million acquisition of community assets in April 2023 and $1.3 million worth of land acquisitions during the three months ended September 30, 2023, supporting Government segment growth.

*Cash flows used in financing activities*. Net cash used in financing activities was $134.2 million for the nine months ended September 30, 2023 compared to $0.6 million for the nine months ended September 30, 2022. This increase in net cash used in financing activities was primarily driven by the $125 million partial redemption of the 2024 Senior Secured Notes on March 15, 2023 combined with payment of deferred financing costs of $1.4 million associated with the ABL Facility amendment and modification on February 1, 2023, taxes paid related to net share settlement of equity awards of approximately $6.8 million, payment of accrued issuance costs from the warrant exchange that closed on December 22, 2022 of approximately $1.5 million, and increased principal payments on vehicle finance leases. These increases were partially offset by the current period including proceeds from the issuance of Common Stock from the exercise of warrants and options of approximately $1.6 million.

### Indebtedness

#### Finance lease and other financing obligations

The Company’s finance lease and other financing obligations as of September 30, 2023 consisted of approximately $2.4 million of finance leases. The finance leases pertain to leases entered into during 2019 through September 30, 2023, for commercial-use vehicles with 36-month terms (and continue on a month-to-month basis thereafter) expiring through 2026.

The Company’s finance lease and other financing obligations as of December 31, 2022 consisted of approximately $2.2 million of finance leases related to commercial-use vehicles with the same terms as described above.

#### ABL Facility

During the nine months ended September 30, 2023, no amounts were drawn or repaid on the ABL Facility resulting in an outstanding balance of $0 as of September 30, 2023. The maturity date of the ABL Facility is February 1, 2028, which extended termination date is subject to a springing maturity that will accelerate the maturity of the ABL Facility if any of the 2024 Senior Secured Notes remain outstanding on the date that is ninety-one days prior to the stated maturity date thereof. Refer to Note 8 and Note 18 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q for additional discussion of the ABL Facility.

#### 2024 Senior Secured Notes

On March 15, 2019, Arrow Bidco issued $340 million in aggregate principal amount of 2024 Senior Secured Notes under the Indenture by and among Arrow Bidco, 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. As of September 30, 2023, the 2024 Senior Secured Notes had an outstanding principal balance of $209.5 million. Refer to Note 8 and Note 18 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) principal payments on the 2024 Senior Secured Notes, (iv) debt service interest payments, and (v) payments due under finance and operating leases. 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, other than operating lease obligations) as of September 30, 2023:

*($ in thousands)*

| ​ | ​ | ​ ​ Total | ​ | ​ ​ Rest of 2023 | ​ ​ | ​ ​ 2024 | ​ ​ | ​ ​ 2025 | ​ ​ | ​ ​ 2026 | ​ ​ | ​ ​ 2027 |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Interest Payments(1) | ​ | $9,951 | ​ | $— | ​ | $9,951 | ​ | $— | ​ | $— | ​ | $— |
| 2024 Senior Secured Notes | ​ | 209,500 | ​ | — | ​ | ​ 209,500 | ​ | ​ — | ​ | ​ — | ​ | ​ — |
| Operating lease obligations, including imputed interest(2) | ​ | ​ 18,370 | ​ | ​ 4,190 | ​ | ​ 6,277 | ​ | ​ 4,012 | ​ | ​ 3,283 | ​ | ​ 608 |
| Total | ​ | $237,821 | ​ | $4,190 | ​ | $225,728 | ​ | $4,012 | ​ | $3,283 | ​ | $608 |

(1) We will incur and pay interest expense at 9.50% of the remaining face value of $209.5 million annually, or $19.9 million in connection with our 2024 Senior Secured Notes. Over the remaining term of the Notes, interest payments total approximately $10.0 million.

(2) Represents interest on operating lease obligations calculated using the appropriate discount rate for each lease.

### 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, 2023, we had one customer, who accounted for 63% of revenues, while no other customers accounted for more than 10% of revenues. The largest customer accounted for 21% of accounts receivable, respectively, while no other customers accounted for more than 10% of the accounts receivable balance as of September 30, 2023.

Our two largest customers for the nine months ended September 30, 2022 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, respectively, while no other customers accounted for more than 10% of the accounts receivable balance as of September 30, 2022.

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, 2023, we had one major supplier representing 16.6% of goods purchased. For the nine months ended September 30, 2022, we had one major supplier that represented 14.4% of goods purchased.

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.

The failure of Silicon Valley Bank and other banks in the U.S. during the nine months ended September 30, 2023 has given rise to uncertainty in the security of amounts in deposit accounts uninsured by the Federal Deposit Insurance Corporation. Although we do not have banking relationships with such banks, we continue to monitor these events and the potential impact on our business.

### Commitments and Contingencies

The Company leases certain land, buildings, offices, modular units, and equipment under non-cancellable operating leases, the terms of which vary and generally contain renewal options. Such operating lease obligations are recognized in the Company’s accompanying consolidated balance sheet as of September 30, 2023 as current portion of operating lease obligations and long-term operating lease obligations. Refer to the Company’s unaudited consolidated balance sheet included elsewhere in this Quarterly Report on Form 10-Q for the amounts recognized as current portion of operating lease obligations and long-term operating lease obligations as of September 30, 2023.

Rent expense included in services costs in the unaudited consolidated statements of comprehensive income for cancelable and non-cancelable leases was $18.0 million and $14.7 million for the nine months ended September 30, 2023 and 2022, respectively. Rent expense included in services costs in the unaudited consolidated statements of comprehensive income for cancellable and non-cancellable leases was $5.6 million and $6.5 million for the three months ended September 30, 2023 and 2022, respectively. Rent expense included in the selling, general, and administrative expenses in the unaudited consolidated statements of comprehensive income for cancelable and non-cancelable leases was $0.4 million and $0.4 million for the nine months ended September 30, 2023 and 2022, respectively. Rent expense included in the selling, general, and administrative expenses in the unaudited consolidated statements of comprehensive income for cancelable and non-cancelable leases was $0.1 million and $0.1 million for the three months ended September 30, 2023 and 2022, respectively.

### 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, refer to the “Critical Accounting Policies and Estimates” section in Part II, Item 7 of our 2022 Form 10-K. There have been no material changes during the three and nine months ended September 30, 2023 to the judgments, assumptions and estimates upon which our critical accounting estimates are based.

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.

#### 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 and Adopted 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 expense (income), net:*** Other expense (income), net includes miscellaneous cash receipts, gains and losses on disposals of property, plant, and equipment, COVID-19 related expenses, and other immaterial expenses and non-cash items.
- ***Transaction expenses:*** Target Hospitality incurred certain advisory fees associated with certain transactions during the periods presented.
- ***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, 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 or disposal 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 or disposal 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 flows provides 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:

*($ in thousands)*

| ​ ​ ​ | ​ ​ For the Three Months Ended September 30, 2023 | ​ ​ | ​ ​ 2022 | ​ ​ ​ ​ | ​ ​ For the Nine Months Ended September 30, 2023 | ​ ​ | ​ ​ 2022 |
| --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| **Gross Profit** | **$86,756** | **​** | **$82,771** | **​** | **$251,085** | **​** | **$163,230** |
| Depreciation of specialty rental assets | ​ 17,653 | ​ | ​ 11,864 | ​ | ​ 53,242 | ​ | ​ 36,525 |
| **Adjusted gross profit** | **$104,409** | **​** | **$94,635** | **​** | **$304,327** | **​** | **$199,755** |

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

*($ in thousands)*

| ​ ​ ​ | ​ ​ | ​ ​ For the Three Months Ended September 30, 2023 | ​ | ​ ​ 2022 | ​ ​ | ​ ​ For the Nine Months Ended September 30, 2023 | ​ ​ | ​ ​ 2022 |
| --- | --- | ---: | --- | ---: | --- | --- | --- | --- |
| **Net income** | ​ | **$45,579** | **​** | **$19,022** | **​** | **$135,857** | **​** | **$42,367** |
| Income tax expense | ​ | 14,608 | ​ | 12,031 | ​ | ​ 40,528 | ​ | ​ 19,287 |
| Interest expense, net | ​ | 4,953 | ​ | 8,888 | ​ | ​ 17,726 | ​ | ​ 28,126 |
| Loss on extinguishment of debt | ​ | ​ — | ​ | ​ — | ​ | ​ 2,128 | ​ | ​ — |
| Other depreciation and amortization | ​ | 3,838 | ​ | 3,556 | ​ | ​ 11,482 | ​ | ​ 11,136 |
| Depreciation of specialty rental assets | ​ | 17,653 | ​ | 11,864 | ​ | ​ 53,242 | ​ | ​ 36,525 |
| **EBITDA** | ​ | **86,631** | **​** | **55,361** | ​ | ​ **260,963** | **​** | **​** **137,441** |
| **​** | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| **Adjustments** | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Other expense (income), net | ​ | (71) | ​ | 121 | ​ | ​ 1,244 | ​ | ​ (74) |
| Transaction expenses | ​ | 504 | ​ | 34 | ​ | ​ 593 | ​ | ​ 91 |
| Stock-based compensation | ​ | ​ 4,835 | ​ | ​ 8,398 | ​ | ​ 13,948 | ​ | ​ 13,548 |
| Change in fair value of warrant liabilities | ​ | ​ 2,576 | ​ | ​ 20,000 | ​ | ​ (1,809) | ​ | ​ 20,374 |
| Other adjustments | ​ | ​ 569 | ​ | ​ 469 | ​ | ​ 1,619 | ​ | ​ 2,509 |
| **Adjusted EBITDA** | ​ | **$95,044** | **​** | **$84,383** | ​ | **$276,558** | **​** | **$173,889** |

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

*($ in thousands)*

| ​ ​ ​ | ​ ​ ​ ​ | ​ ​ For the Nine Months Ended September 30, 2023 | ​ ​ | ​ ​ 2022 |
| --- | --- | --- | --- | --- |
| **Net cash provided by operating activities** | ​ | $118,512 | **​** | $257,823 |
| Less: Maintenance capital expenditures for specialty rental assets | ​ | ​ (10,725) | ​ | ​ (9,952) |
| **Discretionary cash flows** | ​ | $107,787 | ​ | $247,871 |
| **​** | ​ | ​ ​ | ​ | ​ ​ |
| Purchase of specialty rental assets | ​ | ​ (53,662) | ​ | ​ (84,244) |
| Purchase of property, plant and equipment | ​ | ​ (2,941) | ​ | ​ (20,028) |
| Acquired intangible assets | ​ | ​ (4,547) | ​ | ​ — |
| Proceeds from sale of specialty rental assets and other property, plant and equipment | ​ | ​ 241 | ​ | ​ 615 |
| **Net cash used in investing activities** | ​ | $(60,909) | ​ | $(103,657) |
| **​** | ​ | ​ ​ | ​ | ​ ​ |
| Principal payments on finance and finance lease obligations | ​ | ​ (1,037) | ​ | ​ (442) |
| Principal payments on borrowings from ABL Facility | ​ | ​ — | ​ | ​ (70,000) |
| Proceeds from borrowings on ABL Facility | ​ | ​ — | ​ | ​ 70,000 |
| Repayment of Senior Notes | ​ | ​ (125,000) | ​ | ​ — |
| Payment of issuance costs from warrant exchange | ​ | ​ (1,504) | ​ | ​ — |
| Proceeds from issuance of Common Stock from exercise of warrants | ​ | ​ 209 | ​ | ​ — |
| Proceeds from issuance of Common Stock from exercise of options | ​ | ​ 1,396 | ​ | ​ — |
| Payment of deferred financing costs | ​ | ​ (1,423) | ​ | ​ — |
| Taxes paid related to net share settlement of equity awards | ​ | ​ (6,818) | ​ | ​ (121) |
| **Net cash used in financing activities** | ​ | $(134,177) | **​** | $(563) |

## Market risk

As filed, 1,262 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, 2023, 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, 2023.

### 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, 2023, 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 2022 Form 10-K, which have not materially changed.

Filed Nov 8, 2023.
Source: SEC EDGAR, the filing index for accession 0001558370-23-018253. Last ingested by Listed: Oct 26, 2026, 16:16 ET. No prices; not investment advice.