Target Hospitality 10Q 2022 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-38343

TARGET HOSPITALITY CORP.

(Exact name of registrant as specified in its charter)

Delaware			98-1378631
(State or other jurisdiction of			(I.R.S. Employer
incorporation or organization)			Identification No.)

9320 Lakeside Boulevard, Suite 300

The Woodlands, TX 77381

(Address, including zip code, of principal executive offices)

(800) 832-4242

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which is registered
Common stock, par value $0.0001 per share	TH	NASDAQ Capital Market
Warrants to purchase common stock	THWWW	NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☐
	Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧.

There were 97,257,392 shares of Common Stock, par value $0.0001 per share, outstanding as of November 7, 2022.

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Target Hospitality Corp.

TABLE OF CONTENTS

FORM 10-Q

September 30, 2022

PART I — FINANCIAL INFORMATION	5
Item 1. Financial Statements	5
Consolidated Balance Sheets	5
Unaudited Consolidated Statements of Comprehensive Income (Loss)	6
Unaudited Consolidated Statements of Changes in Stockholders’ Equity	7
Unaudited Consolidated Statements of Cash Flows	8
Notes to Unaudited Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3. Quantitative and Qualitative Disclosures About Market Risk	52
Item 4. Controls and Procedures	53
PART II — OTHER INFORMATION	53
Item 1. Legal Proceedings	53
Item 1A. Risk Factors	53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3. Defaults upon Senior Securities	54
Item 4. Mine Safety Disclosures	54
Item 5. Other Information	54
Item 6. Exhibits	54
SIGNATURES	55

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UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Target Hospitality Corp.

Unaudited Consolidated Financial Statements as of September 30, 2022 and December 31, 2021 and for the nine months ended September 30, 2022 and 2021

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Target Hospitality Corp.

Unaudited Consolidated Financial Statements

Contents

Consolidated Financial Statements

Consolidated Balance Sheets	5
Unaudited Consolidated Statements of Comprehensive Income (Loss)	6
Unaudited Consolidated Statements of Changes in Stockholders’ Equity	7
Unaudited Consolidated Statements of Cash Flows	8
Notes to Unaudited Consolidated Financial Statements	9

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Target Hospitality Corp.

Consolidated Balance Sheets

($ in thousands)


	September 30,		December 31,
	2022		2021
Assets		(Unaudited)
Current assets:
Cash and cash equivalents	$	176,987	$	23,406
Accounts receivable, less allowance for doubtful accounts of $205 and $43, respectively		41,737		28,780
Prepaid expenses and other assets		9,085		8,350
Total current assets		227,809		60,536

Specialty rental assets, net		348,279		291,792
Other property, plant and equipment, net		30,722		11,252
Goodwill		41,038		41,038
Other intangible assets, net		78,406		88,485
Deferred tax asset		—		14,710
Deferred financing costs revolver, net		1,213		2,159
Other non-current assets		2,231		3,420
Total assets	$	729,698	$	513,392

Liabilities
Current liabilities:
Accounts payable	$	31,914	$	11,803
Accrued liabilities		27,042		33,126
Deferred revenue and customer deposits		141,917		27,138
Current portion of capital lease and other financing obligations (Note 8)		824		729
Total current liabilities		201,697		72,796

Other liabilities:
Long-term debt (Note 8):
Principal amount		340,000		340,000
Less: unamortized original issue discount		(1,155)		(1,681)
Less: unamortized term loan deferred financing costs		(5,570)		(8,107)
Long-term debt, net		333,275		330,212
Revolving credit facility (Note 8)		—		—
Long-term capital lease and other financing obligations		919		696
Other non-current liabilities		4,544		1,465
Deferred revenue and customer deposits		19,258		7,273
Deferred tax liability		208		—
Asset retirement obligations		2,205		2,079
Warrant liabilities		21,974		1,600
Total liabilities		584,080		416,121

Commitments and contingencies (Note 12)
Stockholders' equity:
Common Stock, $0.0001 par, 400,000,000 authorized, 106,688,057 issued and 97,257,392 outstanding as of September 30, 2022 and 106,367,450 issued and 101,952,683 outstanding as of December 31, 2021.		10		10
Common Stock in treasury at cost, 9,430,665 shares as of September 30, 2022 and 4,414,767 shares as of December 31, 2021.		(23,559)		(23,559)
Additional paid-in-capital		115,620		109,538
Accumulated other comprehensive loss		(2,564)		(2,462)
Accumulated earnings		56,111		13,744
Total stockholders' equity		145,618		97,271
Total liabilities and stockholders' equity	$	729,698	$	513,392

See accompanying notes to the unaudited consolidated financial statements.

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Target Hospitality Corp.

Unaudited Consolidated Statements of Comprehensive Income (Loss)

($ in thousands, except per share amounts)


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Revenue:
Services income	$	102,996	$	57,221	$	236,041	$	143,806
Specialty rental income		56,569		22,099		113,506		54,547
Construction fee income		—		9,849		—		11,294
Total revenue		159,565		89,169		349,547		209,647
Costs:
Services		56,899		37,064		131,605		85,835
Specialty rental		8,031		4,203		18,187		11,032
Depreciation of specialty rental assets		11,864		14,294		36,525		40,642
Gross profit		82,771		33,608		163,230		72,138
Selling, general and administrative		19,153		12,827		42,014		35,835
Other depreciation and amortization		3,556		4,008		11,136		12,100
Other expense (income), net		121		91		(74)		781
Operating income		59,941		16,682		110,154		23,422
Interest expense, net		8,888		9,465		28,126		29,058
Change in fair value of warrant liabilities		20,000		(1,120)		20,374		1,600
Income (loss) before income tax		31,053		8,337		61,654		(7,236)
Income tax expense		12,031		1,662		19,287		139
Net income (loss)		19,022		6,675		42,367		(7,375)
Other comprehensive loss
Foreign currency translation		(37)		(15)		(102)		(27)
Comprehensive income (loss)	$	18,985	$	6,660	$	42,265	$	(7,402)


Weighted average number shares outstanding - basic and diluted		97,242,170		96,814,970		97,086,415		96,539,703

Net income (loss) per share - basic and diluted	$	0.20	$	0.07	$	0.44	$	(0.08)

See accompanying notes to the unaudited consolidated financial statements

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Target Hospitality Corp.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For the Three and Nine Months Ended September 30, 2022 and 2021

($ in thousands)


	Common Stock			Common Stock in Treasury
	Shares	Amount		Shares	Amount		Additional Paid In Capital		Accumulated Other Comprehensive Loss		Accumulated Earnings		Total Stockholders' Equity
Balances at December 31, 2020	101,170,915	$	10	4,414,767	$	(23,559)	$	106,551	$	(2,434)	$	18,320	$	98,888
Net loss	—		—	—		—		—		—		(13,138)		(13,138)
Stock-based compensation	65,338		—	—		—		761		—		—		761
Shares used to settle payroll tax withholding	—		—	—		—		(51)		—		—		(51)
Cumulative translation adjustment	—		—	—		—		—		(19)		—		(19)
Balances at March 31, 2021	101,236,253	$	10	4,414,767	$	(23,559)	$	107,261	$	(2,453)	$	5,182	$	86,441

Net loss	—		—	—		—		—		—		(912)		(912)
Stock-based compensation	591,284		—	—		—		697		—		—		697
Shares used to settle payroll tax withholding	—		—	—		—		(34)		—		—		(34)
Cumulative translation adjustment	—		—	—		—		—		7		—		7
Balances at June 30, 2021	101,827,537	$	10	4,414,767	$	(23,559)	$	107,924	$	(2,446)	$	4,270	$	86,199

Net income	—		—	—		—		—		—		6,675		6,675
Stock-based compensation	9,760		—	—		—		600		—		—		600
Shares used to settle payroll tax withholding	—		—	—		—		(13)		—		—		(13)
Cumulative translation adjustment	—		—	—		—		—		(15)		—		(15)
Balances at September 30, 2021	101,837,297	$	10	4,414,767	$	(23,559)	$	108,511	$	(2,461)	$	10,945	$	93,446

Balances at December 31, 2021	101,952,683	$	10	4,414,767	$	(23,559)	$	109,538	$	(2,462)	$	13,744	$	97,271
Net income	—		—	—		—		—		—		494		494
Stock-based compensation	—		—	—		—		560		—		—		560
Cancelled common stock	(5,015,898)		—	5,015,898		—		—		—		—		—
Cumulative translation adjustment	—		—	—		—		—		(18)		—		(18)
Balances at March 31, 2022	96,936,785	$	10	9,430,665	$	(23,559)	$	110,098	$	(2,480)	$	14,238	$	98,307

Net income	—		—	—		—		—		—		22,851		22,851
Stock-based compensation	291,905		—	—		—		3,494		—		—		3,494
Shares used to settle payroll tax withholding	—		—	—		—		(77)		—		—		(77)
Cumulative translation adjustment	—		—	—		—		—		(47)		—		(47)
Balances at June 30, 2022	97,228,690	$	10	9,430,665	$	(23,559)	$	113,515	$	(2,527)	$	37,089	$	124,528

Net income	—		—	—		—		—		—		19,022		19,022
Stock-based compensation	28,702		—	—		—		2,149		—		—		2,149
Shares used to settle payroll tax withholding	—		—	—		—		(44)		—		—		(44)
Cumulative translation adjustment	—		—	—		—		—		(37)		—		(37)
Balances at September 30, 2022	97,257,392	$	10	9,430,665	$	(23,559)	$	115,620	$	(2,564)	$	56,111	$	145,618

See accompanying notes to the unaudited consolidated financial statements.

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Target Hospitality Corp.

Unaudited Consolidated Statements of Cash Flows

($ in thousands)


	For the Nine Months Ended
	September 30,
	2022		2021
Cash flows from operating activities:
Net income (loss)	$	42,367	$	(7,375)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		37,582		41,774
Amortization of intangible assets		10,079		10,968
Accretion of asset retirement obligation		126		(248)
Amortization of deferred financing costs		3,483		3,220
Amortization of original issue discount		526		472
Change in fair value of warrant liabilities		20,374		1,600
Stock-based compensation expense		13,669		3,600
Gain on disposal of specialty rental assets and other property, plant and equipment		(101)		382
Deferred income taxes		14,918		(805)
Provision for loss on receivables, net of recoveries		334		1,394
Changes in operating assets and liabilities
Accounts receivable		(13,183)		(6,595)
Related party receivable		—		1,224
Prepaid expenses and other assets		(737)		1,430
Accounts payable and other accrued liabilities		490		(2,455)
Deferred revenue and customer deposits		126,764		49,472
Other non-current assets and liabilities		1,132		1,389
Net cash provided by operating activities		257,823		99,447
Cash flows from investing activities:
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)
Cash flows from financing activities:
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)

Effect of exchange rate changes on cash and cash equivalents		(22)		15

Net increase in cash and cash equivalents		153,581		23,662
Cash and cash equivalents - beginning of period		23,406		6,979
Cash and cash equivalents - end of period	$	176,987	$	30,641

Non-cash investing and financing activity:
Non-cash change in accrued capital expenditures	$	(9,019)	$	(209)
Non-cash change in capital lease obligations	$	(761)	$	—

See accompanying notes to the unaudited consolidated financial statements.

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Target Hospitality Corp.

Notes to Unaudited Consolidated Financial Statements

(Amounts in Thousands, Unless Stated Otherwise)

1. Organization and Nature of Operations, Basis of Presentation, and Summary of Significant Accounting Policies

Organization and Nature of Operations

Target Hospitality Corp. (“Target Hospitality” and, together with its subsidiaries, the “Company”) was formed on March 15, 2019 and is one of North America’s largest providers of vertically integrated specialty rental and value-added hospitality services. The Company provides vertically integrated specialty rental and comprehensive hospitality services including: catering and food services, maintenance, housekeeping, grounds-keeping, security, health and recreation services, overall workforce community management, and laundry service. Target Hospitality serves clients in energy and natural resources and government sectors principally located in the West Texas, South Texas, Oklahoma and Midwest regions.

The Company, whose securities are listed on the Nasdaq Capital Market, serves as the holding company for the businesses of Target Logistics Management, LLC and its subsidiaries (“Target”) and RL Signor Holdings, LLC and its subsidiaries (“Signor”). TDR Capital LLP (“TDR Capital” or “TDR”) indirectly owns approximately 67% of Target Hospitality and the remaining ownership is broken out among the founders of the Company’s legal predecessor, Platinum Eagle Acquisition Corp. (“Platinum Eagle” or “PEAC”), investors in Platinum Eagle’s private placement transaction completed substantially and concurrently with the Business Combination (as defined in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 11, 2022 (the “2021 Form 10-K”)), and other public shareholders.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) pertaining to interim financial information. Certain information in footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) has been condensed or omitted pursuant to those rules and regulations. The financial statements included in this report should be read in conjunction with the 2021 Form 10-K.

The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the operating results that may be expected for the full fiscal year ending December 31, 2022 or any future period.

The accompanying unaudited consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of financial position as of September 30, 2022, and results of operations for the three and nine months ended September 30, 2022 and 2021, and cash flows for the nine months ended September 30, 2022 and 2021. The consolidated balance sheet as of December 31, 2021, was derived from the audited consolidated balance sheets of Target Hospitality but does not contain all of the footnote disclosures from those annual financial statements.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. If the underlying estimates and assumptions upon which the financial statements are based change in future periods, actual amounts may differ from those included in the accompanying unaudited consolidated financial statements.

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Principles of Consolidation

The consolidated financial statements comprise the financial statements of the Company and its subsidiaries that it controls due to ownership of a majority voting interest. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the Company. All intercompany balances and transactions are eliminated.

Revenue Recognition

The Company derives revenue from specialty rental and hospitality services, specifically lodging and related ancillary services. Revenue is recognized in the period in which lodging and services are provided pursuant to the terms of contractual relationships with the customers. Certain arrangements contain a lease of lodging facilities to customers. The leases are accounted for as an operating lease under the authoritative guidance for leases and are recognized as income using the straight-line method over the term of the lease agreement.

Because performance obligations related to specialty rental and hospitality services are satisfied over time, the majority of our revenue is recognized on a daily basis, for each night a customer stays, at a contractual day rate. Our customers typically contract for accommodation services under committed contracts with terms that most often range from several months to three years. Our payment terms vary by type and location of our customer and the service offered. The time between invoicing and when payment is due is not significant.

When lodging and services are billed and collected in advance, recognition of revenue is deferred until services are rendered. Certain of the Company’s contractual arrangements allow customers the ability to use paid but unused lodging and services for a specified period. The Company recognizes revenue for these paid but unused lodging and services as they are consumed, as it becomes probable the lodging and services will not be used, or upon expiration of the specified term.

Cost of services includes labor, food, utilities, supplies, rent and other direct costs associated with operating the lodging units as well as costs associated with construction services. Cost of rental includes leasing costs and other direct costs of maintaining the lodging units. Costs associated with contracts include sales commissions which are expensed as incurred and reflected in selling, general and administrative expenses in the consolidated statements of comprehensive income (loss).

Additionally, the Company collects sales, use, occupancy and similar taxes, which the Company presents on a net basis (excluded from revenues) in the consolidated statements of comprehensive income (loss).

Recently Issued Accounting Standards

The Company meets the definition of an emerging growth company (“EGC”) as defined under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). In reliance on exemptions provided under the JOBS Act for EGCs, the Company has elected to defer compliance with new or revised financial accounting standards until a company that is not an issuer (as defined under section 2(a) of the Sarbanes-Oxley Act of 2002) is required to comply with such standards. As such, compliance dates included below pertain to non-issuers, and as permitted, early adoption dates are indicated.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This guidance revises existing practice related to accounting for leases under ASC Topic 840 Leases (ASC 840) for both lessees and lessors. The new guidance requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The lease liability will be equal to the present value of lease payments and the right-of-use asset will be based on the lease liability, subject to adjustment such as for initial direct costs. For income statement purposes, the new standard retains a dual model similar to ASC 840, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while finance leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840). While the new standard maintains similar accounting for lessors as under ASC

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840, the new standard reflects updates to, among other things, align with certain changes to the lessee model. In June 2020, the FASB issued ASU No. 2020-05 to delay the effective date for the new standard for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022 for non-issuers (including EGCs). Early application continues to be allowed. Topic 842 allows an entity to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach or to adopt under the new optional transition method that allows an entity to recognize a cumulative-effect adjustment to the opening balance of retained earnings as of the adoption date. The Company is currently evaluating the impact of the pronouncement on its consolidated financial statements and related disclosures. As part of the evaluation process, the Company is holding regular meetings with key stakeholders from across the organization to discuss the impact of the standard on its lease portfolio. The Company intends to adopt ASU No. 2016-02, Leases (Topic 842), along with its related clarifications and amendments, on the effective date of January 1, 2022, to be presented in the consolidated financial statements for the year ended December 31, 2022 in the Company's Annual Report on Form 10-K.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (ASU 2016-13 or Topic 326). This new standard changes how companies account for credit impairment for trade and other receivables as well as changing the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 will replace the current "incurred loss" model with an "expected loss" model. Under the "incurred loss" model, a loss (or allowance) is recognized only when an event has occurred (such as a payment delinquency) that causes the entity to believe that a loss is probable (i.e., that it has been "incurred"). Under the "expected loss" model, a loss (or allowance) is recognized upon initial recognition of the asset that reflects all future events that leads to a loss being realized, regardless of whether it is probable that the future event will occur. The "incurred loss" model considers past events and current conditions, while the "expected loss" model includes expectations for the future which have yet to occur. ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, was issued in November 2018 and excludes operating leases from the new guidance. In 2019, the FASB voted to delay the effective date for the new standard for financial statements issued to reporting periods beginning after December 15, 2022 and interim periods within those reporting periods. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

2. Revenue

Total revenue recognized under Topic 606 was $236.0 million and $155.1 million for the nine months ended September 30, 2022 and 2021, respectively, while specialty rental income was $113.5 million and $54.5 million subject to the guidance of ASC 840 for the nine months ended September 30, 2022 and 2021, respectively. Total revenue recognized under Topic 606 was $103.0 million and $67.1 million for the three months ended September 30, 2022 and 2021, respectively, while specialty rental income was $56.6 million and $22.1 million subject to the guidance of ASC 840 for the three months ended September 30, 2022 and 2021, respectively.

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The following table disaggregates our revenue by our four reportable segments as well as the All Other category: Hospitality & Facilities Services – South (“HFS – South”), Hospitality & Facilities Services – Midwest (“HFS – Midwest”), Government, TCPL Keystone, and All Other for the dates indicated below:


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
HFS - South
Services income	$	31,936	$	28,732	$	93,085	$	77,729
Total HFS - South revenues		31,936		28,732		93,085		77,729

HFS - Midwest
Services income	$	1,860	$	1,266	$	4,270	$	2,593
Total HFS - Midwest revenues		1,860		1,266		4,270		2,593

Government
Services income	$	68,436	$	26,663	$	136,251	$	61,329
Total Government revenues		68,436		26,663		136,251		61,329

TCPL Keystone
Services income	$	-	$	31	$	-	$	989
Construction fee income		-		9,849		-		11,294
Total TCPL Keystone revenues		-		9,880		-		12,283

All Other
Services income	$	764	$	529	$	2,435	$	1,166
Total All Other revenues		764		529		2,435		1,166

Total revenues	$	102,996	$	67,070	$	236,041	$	155,100

On July 23, 2021, the Company executed a Termination and Settlement Agreement with TC Energy (the “Termination and Settlement Agreement”), which effectively terminated the Company’s contract with TC Energy that was originated in 2013. The Termination and Settlement Agreement also released the Company from any outstanding work performance obligations under the 2013 contract (including all change orders, limited notices to proceed, and amendments). Additionally, the Termination and Settlement Agreement resulted in an agreed upon termination fee of approximately $5 million that was collected in cash on July 27, 2021. This Termination and Settlement Agreement also resulted in the recognition of approximately $4.9 million of deferred revenue as of the effective date of the Termination and Settlement Agreement. No further revenue will be generated from the 2013 contract and as of September 30, 2022, there are no unrecognized deferred revenue amounts or costs for incomplete projects related to this contract following such termination.

The Company routinely monitors the financial stability of our customers, which involves a high degree of judgment in assessing customers’ historical time to pay, financial condition and various customer-specific factors.

Contract Assets and Liabilities

We do not have any contract assets.

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Contract liabilities primarily consist of deferred revenue that represent payments for room nights that the customer may use in the future as well as advanced payments for community builds that are being recognized over the related contract period. Activity in the deferred revenue accounts as of the dates indicated below was as follows:


	For Nine Months Ended
	September 30,
	2022		2021
Balances at Beginning of the Period	$	34,411	$	18,371
Additions to deferred revenue		173,146		125,592
Revenue recognized		(46,382)		(76,120)
Balances at End of the Period	$	161,175	$	67,843

As of September 30, 2022, for contracts greater than one year, the following table discloses the estimated revenues related to performance obligations that are unsatisfied (or partially unsatisfied) and when we expect to recognize the revenue, and only represents revenue expected to be recognized from contracts where the price and quantity of the product or service are fixed:


	For the Years Ended December 31,
	2022		2023		2024		2025		2026		Total
Revenue expected to be recognized as of September 30, 2022	$	56,304	$	179,326	$	19,068	$	18,775	$	14,044	$	287,517

The Company applied some of the practical expedients in Topic 606, including the “right to invoice” practical expedient, and does not disclose consideration for remaining performance obligations with an original expected duration of one year or less or for variable consideration related to unsatisfied (or partially unsatisfied) performance obligations for contracts without minimum revenue commitments. Due to the application of these practical expedients, the table above represents only a portion of the Company’s expected future consolidated revenues and it is not necessarily indicative of the expected trend in total revenues.

3. Specialty Rental Assets, Net

Specialty rental assets, net at the dates indicated below consisted of the following:


	September 30,		December 31,
	2022		2021
Specialty rental assets	$	608,850	$	582,527
Construction-in-process		68,604		3,557
Less: accumulated depreciation		(329,175)		(294,292)
Specialty rental assets, net	$	348,279	$	291,792

Depreciation expense related to specialty rental assets was $36.5 million and $40.6 million for the nine months ended September 30, 2022 and 2021, respectively, and is included in depreciation of specialty rental assets in the consolidated statements of comprehensive income (loss). For the three months ended September 30, 2022 and 2021, depreciation expense of specialty rental assets was $11.9 million and $14.3 million, respectively.

During the three months ended September 30, 2022, the Company purchased land and specialty rental assets (modular units, site work, and furniture & fixtures) for approximately $22.3 million, of which approximately $18.7 million is included within this assets group, to support growth of the Government segment discussed in Note 18, which was funded by cash on hand. The acquisition was accounted for as an asset acquisition. The Company allocated the total purchase price to identifiable tangible assets based on their relative fair values, which resulted in the entire purchase price being allocated to land and specialty rental assets as noted above.

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4. Other Property, Plant and Equipment, Net

Other property, plant and equipment, net at the dates indicated below, consisted of the following:


	September 30,		December 31,
	2022		2021
Land	$	28,126	$	9,163
Buildings and leasehold improvements		712		191
Machinery and office equipment		1,507		1,300
Software and other		6,183		5,347
		36,528		16,001
Less: accumulated depreciation		(5,806)		(4,749)
Total other property, plant and equipment, net	$	30,722	$	11,252

Depreciation expense related to other property, plant and equipment was $1.1 million and $1.1 million for the nine months ended September 30, 2022 and 2021, respectively, and is included in other depreciation and amortization in the consolidated statements of comprehensive income (loss). For the three months ended September 30, 2022 and 2021, depreciation expense related to other property, plant and equipment was $0.3 million and $0.4 million, respectively.

In June 2022, the Company purchased land for approximately $15.5 million to support growth of the Government segment discussed in Note 18, which was funded by cash on hand. The land is included in the other property, plant and equipment assets group in the table above.

During the three months ended September 30, 2022, the Company purchased land and specialty rental assets (modular units, site work, and furniture & fixtures) for approximately $22.3 million, of which approximately $3.6 million is included within this assets group for the land, to support growth of the Government segment discussed in Note 18, which was funded by cash on hand. The acquisition was accounted for as an asset acquisition. The Company allocated the total purchase price to identifiable tangible assets based on their relative fair values, which resulted in the entire purchase price being allocated to land and specialty rental assets as noted above.

5. Goodwill and Other Intangible Assets, net

The financial statements reflect goodwill from previous acquisitions that is all attributable to the HFS – South business segment and reporting unit.

Changes in the carrying amount of goodwill were as follows:


	HFS - South
Balance at January 1, 2021	$	41,038
Changes in Goodwill		-
Balance at December 31, 2021		41,038
Changes in Goodwill		-
Balance at September 30, 2022	$	41,038

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Intangible assets other than goodwill at the dates indicated below consisted of the following:


	September 30, 2022
	Weighted	Gross
	average	Carrying		Accumulated		Net Book
	remaining lives	Amount		Amortization		Value
Intangible assets subject to amortization
Customer relationships	4.9	$	128,907	$	(66,901)	$	62,006
Total			128,907		(66,901)		62,006
Indefinite lived assets:
Tradenames			16,400		—		16,400
Total intangible assets other than goodwill		$	145,307	$	(66,901)	$	78,406


	December 31, 2021
	Weighted	Gross
	average	Carrying		Accumulated		Net Book
	remaining lives	Amount		Amortization		Value
Intangible assets subject to amortization
Customer relationships	5.6	$	128,907	$	(56,822)	$	72,085
Total			128,907		(56,822)		72,085
Indefinite lived assets:
Tradenames			16,400		—		16,400
Total intangible assets other than goodwill		$	145,307	$	(56,822)	$	88,485

For the nine months ended September 30, 2022 and 2021, amortization expense related to intangible assets was $10.1 million and $11.0 million, respectively, and is included in other depreciation and amortization in the consolidated statements of comprehensive income (loss). For the three months ended September 30, 2022 and 2021, amortization expense related to intangible assets was $3.2 million and $3.6 million, respectively.

The estimated aggregate amortization expense as of September 30, 2022 for each of the next five years and thereafter is as follows:


Rest of 2022	$	3,223
2023		12,881
2024		12,881
2025		12,881
2026		12,285
Thereafter		7,855
Total	$	62,006

6. Other Non-Current Assets

Other non-current assets includes capitalized software implementation costs for the implementation of cloud computing systems. As of the dates indicated below, capitalized implementation costs and related accumulated amortization in other non-current assets on the consolidated balance sheets amounted to the following:


	September 30,		December 31,
	2022		2021
Cloud computing implementation costs	$	7,198	$	7,198
Less: accumulated amortization		(5,033)		(3,844)
Other non-current assets	$	2,165	$	3,354

Such systems were placed into service beginning January of 2020 at which time the Company began to amortize these capitalized costs on a straight-line basis over the period of the remaining service arrangements of between 2 and 4 years.

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Such amortization expense amounted to approximately $1.2 million and $1.6 million for the nine months ended September 30, 2022 and 2021, respectively, and is included in selling, general and administrative expense in the accompanying consolidated statements of comprehensive income (loss). For the three months ended September 30, 2022 and 2021, amortization expense related to other non-current assets was $0.3 million and $0.6 million, respectively.

7. Accrued Liabilities

Accrued liabilities as of the dates indicated below consists of the following:


	September 30,		December 31,
	2022		2021
Employee accrued compensation expense	$	8,757	$	12,473
Other accrued liabilities		16,478		11,033
Accrued interest on debt		1,807		9,620
Total accrued liabilities	$	27,042	$	33,126

Other accrued liabilities in the above table relates primarily to accrued utilities, rent, real estate and sales taxes, state income taxes, liability-based stock compensation awards (see Note 16), and other accrued operating expenses.

8. Debt

Senior Secured Notes 2024

In connection with the closing of the Business Combination, Arrow Bidco, LLC, a Delaware limited liability company (“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 table below for a description of the amounts related to the Notes.


		Principal		Unamortized Original Issue Discount		Unamortized Deferred Financing Costs
9.50% Senior Secured Notes, due 2024	$	340,000	$	1,155	$	5,570

If Bidco undergoes a change of control or sells certain of its assets, Bidco may be required to offer to repurchase the Notes. On or after March 15, 2021, Bidco at its option, may redeem the Notes, in whole or part, upon not less than fifteen (15) and not more than sixty (60) days’ prior written notice to holders and not less than twenty (20) days’ prior written notice to the trustee (or such shorter timeline as the trustee may agree), at the redemption price expressed as a percentage of principal amount set forth below, plus accrued and unpaid interest thereon but not including the applicable redemption date (subject to the right of Note holders on the relevant record date to receive interest due on an interest payment date falling on or prior to the redemption date), if redeemed during the 12-month period beginning August 15 of each of the years set below.


		Redemption
Year		Price
2022		102.375%
2023 and thereafter		100.000%

The Notes are unconditionally guaranteed by Topaz Holdings LLC, a Delaware limited liability company (“Topaz”) and each of Bidco’s direct and indirect wholly-owned domestic subsidiaries (collectively, the “Note Guarantors”). Target Hospitality is not an issuer or a guarantor of the Notes. The Note Guarantors are either borrowers or guarantors under the ABL Facility. To the extent lenders under the ABL Facility release the guarantee of any Note Guarantor, such Note Guarantor is also released from obligations under the Notes. These guarantees are secured by a second priority security interest in substantially all of the assets of Bidco and the Note Guarantors (subject to customary exclusions). The

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guarantees of the Notes by TLM Equipment, LLC, a Delaware limited liability company (“TLM Equipment LLC”) which holds certain of Target Hospitality’s assets, are subordinated to its obligations under the ABL Facility (as defined below).

The Notes contain certain negative covenants, including limitations that restrict Bidco’s ability and the ability of certain of its subsidiaries, to directly or indirectly, create additional financial obligations. With certain specified exceptions, these negative covenants prohibit Bidco and certain of its subsidiaries from: creating or incurring additional debt; paying dividends or making any other distributions with respect to its capital stock; making loans or advances to Bidco or any restricted subsidiary of Bidco; selling, leasing or transferring any of its property or assets to Bidco or any restricted subsidiary of Bidco; directly or indirectly creating, incurring or assuming any lien of any kind securing debt on the collateral; or entering into any sale and leaseback transaction.

In connection with the issuance of the Notes, there was an original issue discount of approximately $3.3 million and the unamortized balance of approximately $1.2 million is presented on the face of the consolidated balance sheet as of September 30, 2022 as a reduction of the principal. The discount is amortized over the life of the Notes using the effective interest method.

Bidco’s ultimate parent, Target Hospitality, has no significant independent assets or operations except as included in the guarantors of the Senior Secured Notes, the guarantees under the Notes are full and unconditional and joint and several, and any subsidiaries of Target Hospitality that are not subsidiary guarantors of the Notes are minor. There are also no significant restrictions on the ability of Target Hospitality or any guarantor to obtain funds from its subsidiaries by dividend or loan. See discussion of certain negative covenants above. Therefore, pursuant to the SEC Rules, no individual guarantor financial statement disclosures are deemed necessary.

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”). The historical debt of Bidco, Target and their respective subsidiaries under the former ABL facility of Algeco Seller was settled at the time of the consummation of the Business Combination on the Closing Date. 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.

Borrowings under the ABL Facility, at the relevant borrower’s (the borrowers under the ABL Facility, the “ABL Borrowers”) option, bear interest at either (1) an adjusted LIBOR or (2) a base rate, in each case plus an applicable margin. The applicable margin is 2.50% with respect to LIBOR borrowings and 1.50% with respect to base rate borrowings. Commencing at the completion of the first full fiscal quarter after the Closing Date, the applicable margin for borrowings under the ABL Facility is subject to one step-down of 0.25% and one step-up of 0.25%, based on achieving certain excess availability levels with respect to the ABL Facility.

The ABL Facility provides borrowing availability of an amount equal to the lesser of (i) (a) $125 million and (b) the Borrowing Base (defined below) (the “Line Cap”).

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The Borrowing Base is, at any time of determination, an amount (net of reserves) equal to the sum of:

●

85% of the net book value of the Borrowers’ eligible accounts receivables, plus

●

the lesser of (i) 95% of the net book value of the Borrowers’ eligible rental equipment and (ii) 85% of the net orderly liquidation value of the Borrowers’ eligible rental equipment, minus

●

customary reserves

The ABL Facility includes borrowing capacity available for standby letters of credit of up to $15 million and for ‘‘swingline’’ loan borrowings of up to $15 million. Any issuance of letters of credit or making of a swingline loan will reduce the amount available under the ABL Facility.

In addition, the ABL Facility will provide the Borrowers with the option to increase commitments under the ABL Facility in an aggregate amount not to exceed $75 million plus any voluntary prepayments that are accompanied by permanent commitment reductions under the ABL Facility. The termination date of the ABL Facility is September 15, 2023.

The obligations under the ABL Facility are unconditionally guaranteed by Topaz and each existing and subsequently acquired or organized direct or indirect wholly-owned U.S. organized restricted subsidiary of Bidco (together with Topaz, the “ABL Guarantors”), other than certain excluded subsidiaries. The ABL Facility is secured by (i) a first priority pledge of the equity interests of Topaz, Bidco, Target, and Signor (the “Borrowers) and of each direct, wholly-owned US organized restricted subsidiary of any Borrower or any ABL Guarantor, (ii) a first priority pledge of up to 65% of the voting equity interests in each non-US restricted subsidiary of any Borrower or ABL Guarantor and (iii) a first priority security interest in substantially all of the assets of the Borrower and the ABL Guarantors (in each case, subject to customary exceptions).

The ABL Facility requires the Borrowers to maintain a (i) minimum fixed charge coverage ratio of 1.00:1.00 and (ii) maximum total net leverage ratio of 4.00:1.00, at any time when the excess availability under the ABL Facility is less than the greater of (a) $15.625 million and (b) 12.5% of the Line Cap.

The ABL Facility also contains a number of customary negative covenants. Such covenants, among other things, limit or restrict the ability of each of the Borrowers, their restricted subsidiaries, and where applicable, Topaz, to:

●

incur additional indebtedness, issue disqualified stock and make guarantees;

●

incur liens on assets;

●

engage in mergers or consolidations or fundamental changes;

●

sell assets;

●

pay dividends and distributions or repurchase capital stock;

●

make investments, loans and advances, including acquisitions;

●

amend organizational documents and master lease documents;

●

enter into certain agreements that would restrict the ability to pay dividends;

●

repay certain junior indebtedness; and

●

change the conduct of its business.

The aforementioned restrictions are subject to certain exceptions including (i) the ability to incur additional indebtedness, liens, investments, dividends and distributions, and prepayments of junior indebtedness subject, in each case, to compliance with certain financial metrics and certain other conditions and (ii) a number of other traditional exceptions that grant the ABL Borrowers continued flexibility to operate and develop their businesses. The ABL Facility also contains

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certain customary representations and warranties, affirmative covenants and events of default. The carrying value of debt outstanding as of the dates indicated below consist of the following:


	September 30,		December 31,
	2022		2021
Capital lease and other financing obligations	$	1,743	$	1,425
ABL Facility		—		—
9.50% Senior Secured Notes due 2024, face amount		340,000		340,000
Less: unamortized original issue discount		(1,155)		(1,681)
Less: unamortized term loan deferred financing costs		(5,570)		(8,107)
Total debt, net		335,018		331,637
Less: current maturities		(824)		(729)
Total long-term debt	$	334,194	$	330,908

Interest expense, net

The components of interest expense, net (which includes interest expense incurred) recognized in the unaudited consolidated statements of comprehensive income (loss) for the periods indicated below consist of the following:


	For the three months ended				For the nine months ended
	September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021
Interest incurred on capital lease and other financing obligations	$	15	$	5	$	43	$	51
Interest expense incurred on ABL Facility and Notes		8,599		8,201		25,166		25,315
Amortization of deferred financing costs on ABL facilities and Notes		1,186		1,097		3,483		3,220
Amortization of original issue discount on Notes		180		162		526		472
Interest capitalized		(942)		—		(942)		—
Interest income		(150)		—		(150)		—
Interest expense, net	$	8,888	$	9,465	$	28,126	$	29,058

Deferred Financing Costs and Original Issue Discount

The Company presents unamortized deferred financing costs and unamortized original issue discount as a direct deduction from the principal amount of the Notes on the consolidated balance sheets as of September 30, 2022 and December 31, 2021. Accumulated amortization expense related to the deferred financing costs was approximately $10.3 million and $7.8 million as of September 30, 2022 and December 31, 2021, respectively. Accumulated amortization of the original issue discount was approximately $2.1 million and $1.6 million as of September 30, 2022 and December 31, 2021, respectively.

Accumulated amortization related to revolver deferred financing costs for both the former Algeco ABL facility and ABL Facility was approximately $4.5 million and $3.7 million as of September 30, 2022 and December 31, 2021, respectively. Revolver deferred financing costs are presented on the consolidated balance sheets as of September 30, 2022 and December 31, 2021 within deferred financing costs revolver, net.

Refer to the components of interest expense in the table above for the amounts of the amortization expense related to the deferred financing costs and original issue discount recognized for each of these debt instruments for the three and nine months ended September 30, 2022 and 2021, respectively.

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Future maturities

The aggregate annual principal maturities of debt and capital lease obligations for each of the next five years and thereafter, based on contractual terms are listed in the table below. The schedule of future maturities as of September 30, 2022, consists of the following:


Rest of 2022	$	213
2023		733
2024		340,451
2025		69
Total	$	341,466

9. Warrant Liabilities

On January 17, 2018, Harry E. Sloan, Joshua Kazam, Fredric D. Rosen, the Sara L. Rosen Trust and the Samuel N. Rosen 2015 Trust, purchased from PEAC an aggregate of 5,333,334 warrants at a price of $1.50 per warrant (for an aggregate purchase price of $8.0 million) in a private placement (the “Private Warrants”) that occurred simultaneously with the completion of the Public Offering as defined in Note 15. Each Private Warrant entitles the holder to purchase one share of common stock at $11.50 per share. The purchase price of the Private Warrants was added to the proceeds from the Public Offering and was held in the Trust Account until the closing of the Business Combination. The Private Warrants (including the shares of Common Stock issuable upon exercise of the Private Warrants) were not transferable, assignable or salable until 30 days after the closing date of the Business Combination, and they may be exercised on a cashless basis and are non-redeemable so long as they are held by the initial purchasers of the Private Warrants or their permitted transferees.

The Company evaluated the Private Warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, and concluded that they do not meet the criteria to be classified in stockholders’ equity and should be classified as liabilities. Since the Private Warrants meet the definition of a derivative under ASC 815, the Company recorded the Private Warrants as liabilities on the balance sheet at their estimated fair value.

Subsequent changes in the estimated fair value of the Private Warrants are reflected in the change in fair value of warrant liabilities in the accompanying consolidated statements of comprehensive income (loss). The change in the estimated fair value of the Private Warrants resulted in a loss of approximately $20.4 million and $1.6 million for the nine months ended September 30, 2022 and 2021, respectively. For the three months ended September 30, 2022 and 2021, the change in the estimated fair value of the Private Warrants resulted in a loss (gain) of approximately $20.0 million and ($1.1) million, respectively. As of September 30, 2022 and 2021, 5,333,334 Private Warrants were outstanding, which expire no later than five years after the completion of the Business Combination (March 15, 2024) if they remain unredeemed.

The Company determined the following estimated fair values for the outstanding Private Warrants as of the dates indicated below:


	September 30,		December 31,
	2022		2021
Warrant liabilities	$	21,974	$	1,600
Total	$	21,974	$	1,600

10. Income Taxes

Income tax expense was approximately $19.3 million and $0.1 million for the nine months ended September 30, 2022 and 2021, respectively. For the three months ended September 30, 2022 and 2021, income tax expense was $12.0 million and $1.7 million, respectively. The effective tax rate for the three months ended September 30, 2022 and 2021, was 38.7% and 19.9%, respectively. The effective tax rate for the nine months ended September 30, 2022 and 2021, was 31.3% and (1.9)%, respectively. The fluctuation in the rate for the nine months ended September 30, 2022 and 2021 results primarily

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from the relationship of year-to-date income (loss) before income tax for the nine months ended September 30, 2022 and 2021.

The effective tax rates for the nine months ended September 30, 2022 and 2021, respectively, differs from the US federal statutory rate of 21% primarily due to nonrecognition of tax benefits for loss jurisdictions, the permanent add-back related to the change in fair value of warrant liabilities on the Company’s warrants, the impact of state tax expense based off of gross receipts, and a compensation deduction limitation during the nine months ended September 30, 2022.

The Company accounts for income taxes in interim periods under ASC 740-270, Income Taxes – Interim Reporting, which generally requires us to apply an estimated annual consolidated effective tax rate to consolidated pre-tax income. In addition, the guidance under ASC 740 further provides that, in establishing the estimated annual effective tax rate, the Company excludes losses from jurisdictions in which no tax benefit is expected to be recognized for such losses.

11. Fair Value of Financial Instruments

The fair value of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

The Company has assessed that the fair value of cash and cash equivalents, trade receivables, trade payables, other current liabilities, and other debt approximates their carrying amounts largely due to the short-term maturities or recent commencement of these instruments. The fair value of the ABL Facility is primarily based upon observable market data, such as market interest rates, for similar debt. The fair value of the Notes is based upon observable market data.

The Company measured the Private Warrant liabilities at fair value on a recurring basis at each reporting period end as more fully discussed below. Changes in the fair value of the Private Warrants at each reporting period end date were recognized within the accompanying consolidated statements of comprehensive income (loss) in the change in fair value of warrant liabilities.

Level 1 & 2 Disclosures:

The carrying amounts and fair values of financial assets and liabilities, which are either Level 1 or Level 2, are as follows:


	September 30, 2022				December 31, 2021
Financial Assets (Liabilities) Not Measured at Fair Value	Carrying Amount			Fair Value	Carrying Amount		Fair Value
ABL Facility (See Note 8) - Level 2	$	—	$	—	$	—	$	—
Senior Secured Notes (See Note 8) - Level 1	$	(333,275)	$	(340,615)	$	(330,212)	$	(348,075)

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Recurring fair value measurements

Level 3 Disclosures:

There were 5,333,334 Private Warrants outstanding as of September 30, 2022 and December 31, 2021. Based on the fair value assessment that was performed, the Company determined a fair value price per Private Warrant of $4.12 and $0.30 as of September 30, 2022 and December 31, 2021, respectively. The fair value is classified as Level 3 in the fair value hierarchy due to the use of pricing inputs that are less observable in the marketplace combined with management judgment required for the assumptions underlying the calculation of value. The Company determined the estimated fair value of the Private Warrants using the Black-Scholes option-pricing model. The table below summarizes the inputs used to calculate the fair value of the warrant liabilities at each of the dates indicated below:


		September 30,		December 31,
		2022		2021
Exercise Price	$	11.50	$	11.50
Stock Price	$	12.62	$	3.56
Dividend Yield	%	0.00	%	0.00
Expected Term (in Years)		1.46		2.20
Risk-Free Interest Rate	%	4.04	%	0.78
Expected Volatility	%	57.00	%	64.00
Per Share Value of Warrants	$	4.12	$	0.30

The following table presents changes in Level 3 liabilities measured at fair value for the nine months ended September 30, 2022:


	Private Placement Warrants
Balance at December 31, 2021	$	1,600
Change in fair value of warrant liabilities		1,227
Balance at March 31, 2022		2,827
Change in fair value of warrant liabilities		(853)
Balance at June 30, 2022		1,974
Change in fair value of warrant liabilities		20,000
Balance at September 30, 2022	$	21,974

There were no transfers of financial instruments between the three levels of the fair value hierarchy during the nine months ended September 30, 2022 and 2021 and the year ended December 31, 2021.

12. Commitments and Contingencies

The Company is involved in various lawsuits or claims in the ordinary course of business. Management is of the opinion that there is no pending claim or lawsuit which, if adversely determined, would have a material impact on the financial condition of the Company.

13. Related Parties

During the nine months ended September 30, 2022 and 2021, the Company incurred $0 and $0.6 million, respectively, in commissions owed to related parties, included in selling, general and administrative expense in the accompanying consolidated statements of comprehensive income (loss). For the three months ended September 30, 2022 and 2021, the Company incurred $0 and $0.2 million in commissions, respectively. The underlying agreement driving these commissions expired in September of 2021 and was not renewed; therefore, no amounts were accrued for these commissions as of September 30, 2022 and December 31, 2021.

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14. Earnings (Loss) per Share

Basic earnings (loss) per share (“EPS” or “LPS”) is calculated by dividing net income or loss attributable to Target Hospitality by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed similarly to basic net income per share, except that it includes the potential dilution that could occur if dilutive securities were exercised. During periods when net losses are incurred, potential dilutive securities would be anti-dilutive and are excluded from the calculation of diluted loss per share for that period. Net income was recorded for the three and nine months ended September 30, 2022 and for the three months ended September 30, 2021. A net loss was recorded for the nine months ended September 30, 2021. The following table presents basic and diluted EPS (LPS) for the periods indicated below ($ in thousands, except per share amounts):


	For the Three Months Ended				For the Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021
Numerator
Net income (loss) attributable to Common Stockholders	$	19,022	$	6,675	$	42,367	$	(7,375)

Denominator
Weighted average shares outstanding - basic and diluted		97,242,170		96,814,970		97,086,415		96,539,703

Net income (loss) per share - basic and diluted	$	0.20	$	0.07	$	0.44	$	(0.08)

5,015,898 shares of the 8,050,000 shares of common stock held by the Founders, were placed into escrow subject to release pursuant to the terms of the earnout agreement entered into at the closing of the Business Combination by and between Harry E. Sloan, Jeff Sagansky, Eli Baker and the Company (the “Earnout Agreement”). Upon being placed into escrow, the voting and economic rights of the shares were suspended for the period they were in escrow. Given that the Founders were not entitled to vote or participate in the economic rewards available to the other shareholders with respect to these shares, these shares were not included in the EPS calculation for the three and nine months ended September 30, 2021. In accordance with the Earnout Agreement, as of the expiration date of the earnout period (March 15, 2022), the 5,015,898 Founder Shares in escrow had not been released and were cancelled and returned to the Company to be held in treasury. As such, these cancelled shares were reclassed from common stock to common stock in treasury and continued to be excluded from the computation of EPS for the three and nine months ended September 30, 2022.

The Public and Private Warrants representing a total of 16,166,650 shares of the Company’s common stock for the three and nine months ended September 30, 2022 and 2021, respectively, were excluded from the computation of EPS and LPS because they are considered anti-dilutive.

As discussed in Note 16, stock-based compensation awards were outstanding for the three and nine months ended September 30, 2022 and 2021. These stock-based compensation awards were excluded from the computation of EPS because either their effect would have been anti-dilutive or their effect had no impact on EPS for the applicable periods.

Shares of treasury stock have been excluded from the computation of EPS.

15. Stockholders’ Equity

Common Stock

As of September 30, 2022 and December 31, 2021, Target Hospitality had 106,688,057 and 106,367,450 shares of Common Stock, par value $0.0001 per share issued with 97,257,392 and 101,952,683 outstanding, respectively. Each share of Common Stock has one vote, except the voting rights related to the 5,015,898 of Founder Shares that were placed in escrow which were suspended subject to release pursuant to the terms of the Earnout Agreement. As of the expiration date of the earnout period (March 15, 2022), the 5,015,898 Founder Shares in escrow had not been released and were cancelled and returned to the Company to be held in treasury pursuant to the terms of the Earnout Agreement. As such, these cancelled Founder Shares were reclassed from common stock to common stock in treasury during the nine months

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ended September 30, 2022 as presented in the accompanying unaudited consolidated statements of changes in stockholders’ equity.

Preferred Shares

Target Hospitality is authorized to issue 1,000,000 preferred shares at $0.0001 par value. As of September 30, 2022, no preferred shares were issued and outstanding.

Public Warrants

On January 17, 2018, PEAC sold 32,500,000 units at a price of $10.00 per unit (the “Units”) in its initial public offering (the “Public Offering”), including the issuance of 2,500,000 Units as a result of the underwriters’ partial exercise of their overallotment option. Each Unit consisted of one Class A ordinary share of PEAC, par value $0.0001 per share (the “Public Shares”), and one-third of one warrant to purchase one ordinary share (the “Public Warrants”).

Each Public Warrant entitles the holder to purchase one share of the Company’s Common Stock at a price of $11.50 per share. No fractional shares will be issued upon exercise of the Public Warrants. If upon exercise of the Public Warrants, a holder would be entitled to receive a fractional interest in a share, the Company will upon exercise, round down to the nearest whole number, the number of shares to be issued to the Public Warrant holder. Each Public Warrant became exercisable 30 days after the completion of the Business Combination.

As of September 30, 2022, the Company had 10,833,316 Public Warrants issued and outstanding.

16. Stock-Based Compensation

On February 24, 2022, the Compensation Committee (the “Compensation Committee”) of the Company’s Board of Directors adopted a new form Executive Restricted Stock Unit Agreement (the “RSU Agreement”) and a new form Executive Performance Stock Unit Agreement (the “PSU Agreement” and together with the RSU Agreement, the “Award Agreements”) with respect to the granting of restricted stock units (“RSUs”) and performance restricted stock units (“PSUs”), respectively, under the Target Hospitality Corp. 2019 Incentive Plan (the “Plan”). The new Award Agreements will be used for all awards to executive officers made on or after February 24, 2022.

The RSU Agreement has material terms that are substantially similar to those in the form Executive Restricted Stock Unit Agreement last approved by the Compensation Committee and previously disclosed by the Company, except for the following: (x) the RSUs will vest in four equal installments on each of the first four anniversaries of the grant date and (y) if approval by the Company’s shareholders of the proposed increase in the number of shares available for issuance under the Plan at the 2022 annual meeting of the Company’s shareholders is not received, then all payments under the RSU Agreement will be made in cash.

Each PSU awarded under the PSU Agreement represents the right to receive one share of the Company’s common stock, par value $0.0001 per share, or, at the Compensation Committee’s sole discretion, cash or part cash and part common stock with the cash amount equal to the fair market value of the common stock as of the date on which the restricted period ends. PSUs vest and become unrestricted on the third anniversary of the grant date. The number of PSUs that vest range from 0% to 150% of the Target Level (as defined in the PSU Agreement) depending upon the achievement of specified three-year cumulative operating cash flow amounts as determined based on the net cash flow from operations disclosed in the Company’s Annual Reports on Form 10-K for the period from January 1, 2022 through December 31, 2024. Vesting of PSUs is contingent upon the executive’s continued employment through the vesting date, unless the executive’s employment is terminated by reason of death, without Cause, for Good Reason, or in the event of a Change in Control (each term as defined in the Plan).

On May 19, 2022, the Company’s stockholders approved an amendment to the Plan to increase the number of shares authorized under the plan by 4,000,000 shares. As a result of this, the Company reclassified all of the outstanding liability-based RSUs and PSUs from accrued liabilities and other non-current liabilities to additional paid-in capital based on the change in the ability to settle these awards in shares upon vesting as a result of the additional shares added to the Plan. The

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reclassified amount of these awards at the date of this change was approximately $2.4 million and is included in the accompanying unaudited consolidated statements of changes in stockholders’ equity for the nine months ended September 30, 2022.

Restricted Stock Units

On January 3, 2022, the Compensation Committee awarded 10,861 time-based RSUs to one of the Company’s non-employee directors, which vested in full during the six months ended June 30, 2022.

On February 24, 2022, the Compensation Committee awarded an aggregate of 1,085,548 time-based RSUs to certain of the Company’s executive officers and other employees, which vest ratably over a four-year period.

On May 19, 2022, the Compensation Committee awarded an aggregate of 159,766 time-based RSUs to the Company’s non-employee directors, which vest in full on May 19, 2023 or, if earlier, the date of the first Annual Meeting of the Stockholders of the Company following the Grant Date.

On September 6, 2022, the Compensation Committee awarded 4,969 time-based RSUs to an employee of the Company, which vests ratably over a four-year period.

During the three months ended March 31, 2022, as approved by the Compensation Committee, 116,837 of the employee related vested RSUs shown in the below table were paid in cash in the amount of approximately $0.4 million based on the closing stock price on the vesting date.

The table below represents the changes in RSUs:


	Number of Shares		Weighted Average Grant Date Fair Value per Share
Balance at December 31, 2021	1,862,590	$	3.00
Granted	1,261,144		3.42
Vested	(433,653)		4.09
Balance at September 30, 2022	2,690,081	$	3.02

Stock-based compensation expense for these RSUs recognized in selling, general and administrative expense in the consolidated statement of comprehensive income (loss) for the nine months ended September 30, 2022 and 2021, was approximately $4.3 million and $2.1 million, respectively, with an associated tax benefit of approximately $1.7 million and $0.5 million, respectively. For the three months ended September 30, 2022 and 2021, stock-based compensation expense for RSUs was approximately $1.3 million and $0.8 million, respectively, with an associated tax benefit of $1.1 million and $0.2 million, respectively. At September 30, 2022, unrecognized compensation expense related to RSUs totaled approximately $8.4 million and is expected to be recognized over a remaining term of approximately 2.66 years.

Under the authoritative guidance for stock-based compensation, a portion of the RSUs outstanding at December 31, 2021 were considered liability-based awards due to an insufficient number of shares available under the plan to service these awards upon vesting. As such, the Company recognized a liability associated with these RSUs of approximately $0.8 million as of December 31, 2021, of which approximately $0.5 million was included in accrued liabilities and approximately $0.3 million was included in other non-current liabilities in the accompanying consolidated balance sheet as of December 31, 2021. The estimated fair value of these liability-based awards was $3.56/RSU as of December 31, 2021. As noted above, all such liability-based RSUs were reclassified to additional paid-in-capital, a component of total stockholders’ equity, during the nine months ended September 30, 2022, and are no longer included in liabilities as of September 30, 2022.

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Performance Stock Units

On February 24, 2022, the Company awarded an aggregate of 245,017 time and performance-based PSUs to certain of the Company’s executive officers and management, which vest upon satisfaction of continued service with the Company until the third anniversary of the Grant Date and attainment of Company cash flow performance criteria.

On May 24, 2022, the Company and the Company’s President and Chief Executive Officer, James B. Archer, entered into the Executive Performance Stock Unit Agreement (the “Archer PSU Agreement”) in connection with Mr. Archer’s previously disclosed intention to continue to serve as President and Chief Executive Officer of the Company and as a member of the Company’s Board of Directors. Each PSU awarded under the Agreement represents the right to receive one share of the Company’s common stock. The PSUs awarded pursuant to the Archer PSU Agreement vest and become unrestricted on June 30, 2025. The number of PSUs that vest are determined based upon the achievement of specified share prices over the period between the grant date and June 30, 2025 (the “Performance Period”). Mr. Archer will earn a corresponding number of PSUs upon the achievement of specified share price thresholds, the first of which is $12.50 per share. If all Performance Goals (as defined in the Archer PSU Agreement) are met during the Performance Period, Mr. Archer will be entitled to receive a maximum of 500,000 PSUs. Vesting is contingent upon Mr. Archer’s continued employment through the vesting date, unless Mr. Archer’s employment is terminated by reason of death or Disability, without Cause, for Good Reason, or in the event of a Qualifying Termination in connection with a Change in Control (each term as defined in the Plan, as amended, or Mr. Archer’s employment agreement with the Company, as amended). These PSUs were valued using a Monte Carlo simulation with the following assumptions on the grant date: the expected volatility was approximately 53.82%, the term was 3.10 years, the dividend rate was 0.0% and the risk-free interest rate was approximately 2.65%, which resulted in a calculated fair value of approximately $2.21 per PSU as of the grant date.

On July 12, 2022, the Compensation Committee granted 750,000 PSUs aimed at retaining, motivating and incentivizing certain of the Company’s executive officers, including its named executive officers (“NEOs”), under and pursuant to the Plan.

The form of agreement with respect to the granting of the PSUs has material terms that are substantially similar to those in the Archer PSU Agreement. Such PSU represents the right to receive one share of the Company’s common stock, par value $0.0001 per share. PSUs vest and become unrestricted on June 30, 2025. The number of PSUs that vest is determined based upon the achievement of specified share prices over the Performance Period. The executives will each earn a corresponding number of PSUs upon the achievement of specified share price thresholds, the first of which is $12.50 per share. If all Performance Goals (as defined in the applicable award agreement) are met during the Performance Period, the executives will be entitled to receive the maximum PSUs granted to them. Vesting is contingent upon the applicable executive’s continued employment through the vesting date, unless the applicable executive’s employment is terminated by reason of death or Disability, without Cause, for Good Reason, or in the event of a Qualifying Termination in connection with a Change in Control (each term as defined in the Plan, or each executive’s employment agreement, as amended, with the Company). These PSUs were valued using a Monte Carlo simulation with the following assumptions on the grant date: the expected volatility was approximately 55.76%, the term was 2.97 years, the dividend rate was 0.0% and the risk-free interest rate was approximately 3.05%, which resulted in a calculated fair value of approximately $6.96 per PSU as of the grant date.

The table below represents the changes in PSUs:


	Number of Shares		Weighted Average Grant Date Fair Value per Share
Balance at December 31, 2021	—	$	—
Granted	1,495,017		5.22
Forfeited	—		—
Vested	—		—
Balance at September 30, 2022	1,495,017	$	5.22

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Stock-based compensation expense for these PSUs recognized in selling, general and administrative expense in the consolidated statement of comprehensive income (loss) for the nine months ended September 30, 2022 was approximately $0.8 million with an associated tax benefit of $0.2 million. For the three months ended September 30, 2022, stock-based compensation expense for PSUs was approximately $0.6 million with an associated tax benefit of $0.1 million. At September 30, 2022, unrecognized compensation expense related to PSUs totaled approximately $7.1 million and is expected to be recognized over a remaining term of approximately 2.64 years.

Stock Option Awards

During the nine months ended September 30, 2022, there were stock options exercised as shown in the following table.

The table below represents the changes in stock options:


	Options		Weighted Average Exercise Price Per Share	Weighted Average Contractual Life (Years)		Intrinsic Value
Outstanding Options at December 31, 2021	1,643,135	$	6.11	7.95	$	-
Granted	-		-	-		-
Forfeited	-		-	-		-
Exercised	(19,842)		4.51	-		177
Vested and Expired	-		-	-		-
Outstanding Options at September 30, 2022	1,623,293	$	6.12	7.12	$	10,413

934,405 stock options were exercisable at September 30, 2022.

Stock-based compensation expense for these stock option awards recognized in selling, general and administrative expense in the unaudited consolidated statement of comprehensive income (loss) for the nine months ended September 30, 2022 and 2021, was approximately $0.6 million and $0.6 million, respectively, with an associated tax benefit of approximately $0.1 million and $0.1 million, respectively. For the three months ended September 30, 2022 and 2021, stock-based compensation expense was approximately $0.2 million and $0.2 million, respectively, with an associated tax benefit of less than $0.1 million and less than $0.1 million, respectively. At September 30, 2022, unrecognized compensation expense related to stock options totaled $0.8 million and is expected to be recognized over a remaining term of approximately 1.19 years.

The fair value of each option award at the grant date was estimated using the Black-Scholes option-pricing model with the following assumptions:


		Assumptions
Weighted average expected stock volatility (range)	%	25.94 - 30.90
Expected dividend yield	%	0.00
Expected term (years)		6.25
Risk-free interest rate (range)	%	0.82 - 2.26
Exercise price (range)	$	4.51 - 10.83
Weighted-average grant date fair value	$	1.42

The volatility assumption used in the Black-Scholes option-pricing model is based on peer group volatility as the Company does not have a sufficient trading history as a stand-alone public company to calculate volatility. Additionally, due to an insufficient history with respect to stock option activity and post vesting cancellations, the expected term assumption is based on the simplified method permitted under SEC rules, whereby, the simple average of the vesting period for each tranche of award and its contractual term is aggregated to arrive at a weighted average expected term for the award. The risk-free interest rate used in the Black-Scholes model is based on the implied US Treasury bill yield curve at the date of

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grant with a remaining term equal to the Company’s expected term assumption. The Company has never declared or paid a dividend on its shares of common stock.

Stock-based payments are subject to service-based vesting requirements and expense is recognized on a straight-line basis over the vesting period. Forfeitures are accounted for as they occur. No stock options were forfeited during the nine months ended September 30, 2022.

Stock Appreciation Right Awards

On February 25, 2021 and August 5, 2021, the Compensation Committee granted Stock Appreciation Rights (“SARs”) to certain of the Company’s executive officers and other employees. Each SAR represents a contingent right to receive, upon vesting, payment in cash or the Company’s Common Stock, as determined by the Compensation Committee, in an amount equal to the difference between (a) the fair market value of a Common Share on the date of exercise, over (b) the grant date price. The number of SARs granted to certain named executive officers and certain other employees totaled 1,578,537.

During the nine months ended September 30, 2022, there were no new grants or changes in the SARs outstanding.

Under the authoritative guidance for stock-based compensation, these SARs are considered liability-based awards. The Company recognized a liability, associated with its SARs of approximately $9.0 million as of September 30, 2022, of which approximately $4.5 million is included in accrued liabilities and approximately $4.5 million is included in other non-current liabilities in the accompanying consolidated balance sheet as of September 30, 2022. The liability associated with these SAR awards recognized as of December 31, 2021, was approximately $1.2 million, all of which was included in other non-current liabilities in the accompanying consolidated balance sheet as of December 31, 2021. These SARs were valued using the Black-Scholes option pricing model with the following assumptions on the grant date: the expected volatility was approximately 43.5%, the term was 6.25 years, the dividend rate was 0.0% and the risk-free interest rate was approximately 1.07%, which resulted in a calculated fair value of approximately $0.78 per SAR as of the grant date. The estimated weighted-average fair value of each SAR as of December 31, 2021 and September 30, 2022 was $2.69 and $10.87, respectively. The fair value of these liability awards will be remeasured at each reporting period until the date of settlement. Increases and decreases in stock-based compensation expense are recognized over the vesting period, or immediately for vested awards. For the nine months ended September 30, 2022 and 2021, the Company recognized compensation expense related to these awards of approximately $7.9 million and $0.9 million, respectively, in selling, general and administrative expense in the unaudited consolidated statements of comprehensive income (loss). For the three months ended September 30, 2022 and 2021, the Company recognized compensation expense related to these awards of approximately $6.3 million and $0.4 million, respectively. At September 30, 2022, unrecognized compensation expense related to SARs totaled approximately $7.9 million and is expected to be recognized over a remaining weighted-average term of approximately 1.41 years. At September 30, 2022, the intrinsic value of the SARs was $16.6 million.

The volatility assumption used in the Black-Scholes option-pricing model is based on peer group volatility as the Company does not have a sufficient trading history as a stand-alone public company to calculate volatility. Additionally, due to an insufficient history with respect to stock appreciation right activity and post vesting cancellations, the expected term assumption is based on the simplified method permitted under SEC rules, whereby, the simple average of the vesting period for each tranche of award and its contractual term is aggregated to arrive at a weighted average expected term for the award. The risk-free interest rate used in the Black-Scholes model is based on the implied US Treasury bill yield curve at the date of grant with a remaining term equal to the Company’s expected term assumption. The Company has never declared or paid a dividend on its shares of common stock.

Stock-based payments are subject to service-based vesting requirements and expense is recognized on a straight-line basis over the vesting period. Forfeitures are accounted for as they occur. No SARs were forfeited during the nine months ended September 30, 2022.

17. Retirement plans

We offer a defined contribution 401(k) retirement plan to substantially all of our U.S. employees. Participants may contribute from 1% to 90% of eligible compensation, inclusive of pretax and/or Roth deferrals (subject to Internal Revenue

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Service limitations), and we make matching contributions under this plan on the first 6% of the participant’s compensation (100% match of the first 3% employee contribution and 50% match on the next 3% contribution). Our matching contributions vest at a rate of 20% per year for each of the employee’s first five years of service and then are fully vested thereafter. For the nine months ended September 30, 2022 and 2021, we recognized expense of $0.7 million and $0.7 million, respectively, related to these matching contributions. For the three months ended September 30, 2022 and 2021, we recognized expense of $0.3 million and $0.2 million, respectively.

18. Business Segments

The Company is organized primarily on the basis of geographic region and customer industry group and operates in four reportable segments.

Our remaining operating segments have been consolidated and included in an “All Other” category.

The following is a brief description of our reportable segments and a description of business activities conducted by All Other.

HFS – South — Segment operations consist primarily of specialty rental and vertically integrated hospitality services revenue from customers located primarily in Texas and New Mexico.

HFS – Midwest — Segment operations consist primarily of specialty rental and vertically integrated hospitality services revenue from customers located primarily in North Dakota.

Government — Segment operations consist primarily of specialty rental and vertically integrated hospitality services revenue from customers with Government contracts located in Texas.

TCPL Keystone – Segment operations consist primarily of revenue from the construction phase of the contract with TCPL. As a result of the Termination and Settlement Agreement discussed in Note 2, no further activity is expected in this segment.

All Other — Segment operations consist primarily of revenue from specialty rental and vertically integrated hospitality services revenue from customers located outside of the HFS – South and HFS – Midwest segments.

The table below presents information about reported segments for the three and nine months ended September 30 (except for asset information for 2021 that is presented as of December 31):

2022


	HFS - South		HFS - Midwest		Government		TCPL Keystone		All Other			Total
For the Nine Months Ended September 30, 2022
Revenue	$	97,828	$	4,270	$	245,013	$	-	$	2,436	(a)	$	349,547
Adjusted gross profit	$	41,162	$	(315)	$	159,523	$	-	$	(615)		$	199,755
Total Assets	$	181,640	$	30,866	$	201,482	$	3,007	$	1,679		$	418,674

For the Three Months Ended September 30, 2022
Revenue	$	33,632	$	1,860	$	123,308	$	-	$	765	(a)	$	159,565
Adjusted gross profit	$	13,878	$	77	$	80,948	$	-	$	(268)		$	94,635

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2021


	HFS - South		HFS - Midwest		Government		TCPL Keystone		All Other			Total
For the Nine Months Ended September 30, 2021
Revenue	$	84,350	$	2,593	$	109,255	$	12,283	$	1,166	(a)	$	209,647
Adjusted gross profit	$	38,219	$	(854)	$	66,649	$	9,140	$	(374)		$	112,780
Total Assets (as of December 31, 2021)	$	206,774	$	43,504	$	87,308	$	3,007	$	2,412		$	343,005

For the Three Months Ended September 30, 2021
Revenue	$	31,066	$	1,266	$	46,428	$	9,880	$	529	(a)	$	89,169
Adjusted Gross Profit	$	13,945	$	(56)	$	25,823	$	8,329	$	(139)		$	47,902

(a)

Revenues from segments below the quantitative thresholds are attributable to three operating segments of the Company and are reported in the “All Other” category previously described.

A reconciliation of total segment adjusted gross profit to total consolidated income (loss) before income taxes for the dates indicated below, is as follows:


	For the Three Months Ended				For the Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021

Total reportable segment adjusted gross profit	$	94,903	$	48,041	$	200,370	$	113,154
Other adjusted gross profit		(268)		(139)		(615)		(374)
Depreciation and amortization		(15,420)		(18,302)		(47,661)		(52,742)
Selling, general, and administrative expenses		(19,153)		(12,827)		(42,014)		(35,835)
Other expense (income), net		(121)		(91)		74		(781)
Interest expense, net		(8,888)		(9,465)		(28,126)		(29,058)
Change in fair value of warrant liabilities		(20,000)		1,120		(20,374)		(1,600)
Consolidated income (loss) before income taxes	$	31,053	$	8,337	$	61,654	$	(7,236)

A reconciliation of total segment assets to total consolidated assets as of the dates indicated below, is as follows:


	September 30, 2022		December 31, 2021
Total reportable segment assets	$	416,995	$	340,593
Other assets		3,044		3,489
Other unallocated amounts		309,659		169,310
Total Assets	$	729,698	$	513,392

Other unallocated assets consist of the following as reported in the consolidated balance sheets of the Company as of the dates indicated below:


	September 30, 2022		December 31, 2021
Total current assets	$	227,809	$	60,536
Other intangible assets, net		78,406		88,485
Deferred tax asset		—		14,710
Deferred financing costs revolver, net		1,213		2,159
Other non-current assets		2,231		3,420
Total other unallocated amounts of assets	$	309,659	$	169,310

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19. Subsequent Events

Stock Repurchase Program

On November 3, 2022, the Company’s Board of Directors approved a stock repurchase program that authorizes the Company to repurchase up to $100 million of its outstanding shares of common stock. The stock repurchase program does not obligate the Company to purchase any particular number of shares, and the timing and exact amount of any repurchases will depend on various factors, including market pricing and conditions, business, legal, accounting, and other considerations.

The Company may repurchase its shares in open market transactions from time to time or through privately negotiated transactions in accordance with federal securities laws, at the Company's discretion. The repurchase program, which has no expiration date, may be increased, suspended, or terminated at any time. The program is expected to be implemented over the course of several years and is conducted subject to the covenants in the agreements governing the Company's indebtedness.

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Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for the post-combination business. Specifically, forward-looking statements may include statements relating to:

●

the duration of the COVID-19 pandemic or any future public health crisis, related economic repercussions and the resulting negative impact to global economic demand;

●

operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees and customers, government imposed mandates, and contract and supply chain disruptions;

●

operational, economic, including inflation, political and regulatory risks;

●

our ability to effectively compete in the specialty rental accommodations and hospitality services industry;

●

effective management of our communities;

●

natural disasters and other business disruptions including outbreaks of epidemic or pandemic disease;

●

the effect of changes in state building codes on marketing our buildings;

●

changes in demand within a number of key industry end-markets and geographic regions;

●

our reliance on third party manufacturers and suppliers;

●

failure to retain key personnel;

●

increases in raw material and labor costs;

●

the effect of impairment charges on our operating results;

●

our future operating results fluctuating, failing to match performance or to meet expectations;

●

our exposure to various possible claims and the potential inadequacy of our insurance;

●

unanticipated changes in our tax obligations;

●

our obligations under various laws and regulations;

●

the effect of litigation, judgments, orders, regulatory or customer bankruptcy proceedings on our business;

●

our ability to successfully acquire and integrate new operations;

●

global or local economic and political movements, including any changes in policy under the Biden administration;

●

federal government budgeting and appropriations;

●

our ability to effectively manage our credit risk and collect on our accounts receivable;

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●

our ability to fulfill our public company obligations;

●

any failure of our management information systems;

●

fluctuations in the fair value of warrant liabilities;

●

our ability to meet our debt service requirements and obligations; and

●

risks related to Arrow Bidco’s obligations under the Notes.

These forward-looking statements are based on information available as of the date of this Form 10-Q and our management’s current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. We undertake no obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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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

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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.

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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

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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.

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


	For the Three Months Ended				Amount of		Percentage Change
	September 30,				Increase		Increase
	2022		2021		(Decrease)		(Decrease)
Revenue:
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.

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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.

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


	For the Nine Months Ended				Amount of		Percentage Change
	September 30,				Increase		Increase
	2022		2021		(Decrease)		(Decrease)
Revenue:
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.

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

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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.

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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.


							Percentage
	For the Three Months Ended September 30,				Amount of Increase		Change Increase
	2022		2021		(Decrease)		(Decrease)
Revenue:
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.

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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.

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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.



		For the Nine Months Ended September 30,			Amount of Increase		Percentage Change Increase
	2022		2021		(Decrease)		(Decrease)
Revenue:
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)

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.

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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.

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

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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

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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.

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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.

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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

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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				For the Nine Months Ended
	September 30,				September 30,
	2022		2021		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

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


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2022		2021		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)

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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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.

Item 4. Controls and Procedures

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.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in various lawsuits, claims and legal proceedings, the majority of which arise out of the ordinary course of business. The nature of the Company’s business is such that disputes occasionally arise with vendors including suppliers and subcontractors, and customers over contract specifications and contract interpretations among other things. The company assesses these matters on a case-by-case basis as they arise. Reserves are established, as required, based on its assessment of exposure. We have insurance policies to cover general liability and workers’ compensation related claims. In the opinion of management, the ultimate amount of liability not covered by insurance, if any, under such pending lawsuits, claims and legal proceedings will not have a material adverse effect on its financial condition or results of operations. Because litigation is subject to inherent uncertainties including unfavorable rulings or developments, it is possible that the ultimate resolution of our legal proceedings could involve amounts that are different from our currently recorded accruals, and that such differences could be material.

Item 1A. Risk Factors

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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

The Company did not sell any securities during the quarter ended September 30, 2022 that were not registered under the Securities Act of 1933, as amended (the "Securities Act").

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Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit No.		Exhibit Description
31.1*		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

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101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File––the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

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* Filed herewith

** The certifications furnished in Exhibit 32.1 and 32.2 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Target Hospitality Corp.

Dated: November 9, 2022	By:	/s/ ERIC T. KALAMARAS
		Eric T. Kalamaras
		Executive Vice President and Chief Financial Officer

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Target Hospitality (TH) 10-Q2022 Q3 Quarterly report

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