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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, 2023

OR

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 101,661,411 shares of Common Stock, par value $0.0001 per share, outstanding as of November 3, 2023.

Target Hospitality Corp.

TABLE OF CONTENTS

FORM 10-Q

September 30, 2023

PART I — FINANCIAL INFORMATION

5

Item 1. Financial Statements

5

Consolidated Balance Sheets

5

Unaudited Consolidated Statements of Comprehensive Income

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

51

Item 4. Controls and Procedures

51

PART II — OTHER INFORMATION

51

Item 1. Legal Proceedings

51

Item 1A. Risk Factors

52

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

52

Item 3. Defaults upon Senior Securities

52

Item 4. Mine Safety Disclosures

52

Item 5. Other Information

52

Item 6. Exhibits

53

SIGNATURES

54

UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Target Hospitality Corp.

Unaudited Consolidated Financial Statements as of September 30, 2023 and December 31, 2022 and for the nine months ended September 30, 2023 and 2022

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Target Hospitality Corp.

Consolidated Balance Sheets

($ in thousands)

September 30, 

December 31, 

    

2023

    

2022

Assets

 

(Unaudited)

 

Current assets:

 

  

 

  

Cash and cash equivalents

$

105,104

$

181,673

Accounts receivable, less allowance for doubtful accounts of $253 and $4, respectively

 

59,459

 

42,153

Prepaid expenses and other assets

 

6,994

 

12,553

Total current assets

 

171,557

 

236,379

Specialty rental assets, net

 

360,164

 

357,129

Other property, plant and equipment, net

 

34,590

 

31,898

Operating lease right-of-use assets, net

16,924

27,298

Goodwill

 

41,038

 

41,038

Other intangible assets, net

 

69,655

 

75,182

Deferred financing costs revolver, net

 

1,591

 

896

Other non-current assets

1,005

1,907

Total assets

$

696,524

$

771,727

Liabilities

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

21,247

$

17,563

Accrued liabilities

 

31,461

 

39,642

Deferred revenue and customer deposits

 

15,273

 

120,040

Current portion of operating lease obligations

8,857

12,516

Current portion of finance lease and other financing obligations (Note 8)

 

1,302

 

1,135

Current warrant liabilities

7,927

Current portion of long-term debt, net (Note 8)

208,126

Total current liabilities

 

294,193

 

190,896

Other liabilities:

 

  

 

  

Long-term debt (Note 8):

 

 

Principal amount

334,500

Less: unamortized original issue discount

(971)

Less: unamortized term loan deferred financing costs

(4,681)

Long-term debt, net

328,848

Long-term finance lease and other financing obligations

1,049

1,088

Long-term operating lease obligations

8,095

11,104

Other non-current liabilities

 

 

6,309

Deferred revenue and customer deposits

 

4,134

 

5,479

Deferred tax liability

48,403

15,172

Asset retirement obligations

 

2,379

 

2,247

Warrant liabilities

9,737

Total liabilities

 

358,253

 

570,880

Commitments and contingencies (Note 12)

 

  

 

  

Stockholders' equity:

 

  

 

  

Common Stock, $0.0001 par, 400,000,000 authorized, 111,091,266 issued and 101,660,601 outstanding as of September 30, 2023 and 109,747,366 issued and 100,316,701 outstanding as of December 31, 2022.

10

10

Common Stock in treasury at cost, 9,430,665 shares as of September 30, 2023 and as of December 31, 2022.

(23,559)

(23,559)

Additional paid-in-capital

 

141,169

 

139,287

Accumulated other comprehensive loss

 

(2,621)

 

(2,574)

Accumulated earnings

 

223,272

 

87,683

Total stockholders' equity

 

338,271

 

200,847

Total liabilities and stockholders' equity

$

696,524

$

771,727

See accompanying notes to the unaudited consolidated financial statements.

5

Target Hospitality Corp.

Unaudited Consolidated Statements of Comprehensive Income

($ in thousands, except per share amounts)

For the Three Months Ended

For the Nine Months Ended

September 30, 

September 30, 

    

2023

    

2022

2023

    

2022

Revenue:

 

Services income

$

93,538

$

102,996

$

280,897

$

236,041

Specialty rental income

 

52,401

 

56,569

 

156,491

 

113,506

Total revenue

 

145,939

 

159,565

 

437,388

 

349,547

Costs:

 

 

 

 

Services

 

34,035

 

56,899

 

109,469

 

131,605

Specialty rental

 

7,495

 

8,031

 

23,592

 

18,187

Depreciation of specialty rental assets

 

17,653

 

11,864

 

53,242

 

36,525

Gross profit

 

86,756

 

82,771

 

251,085

 

163,230

Selling, general and administrative

 

15,273

 

19,153

 

43,929

 

42,014

Other depreciation and amortization

 

3,838

 

3,556

 

11,482

 

11,136

Other expense (income), net

 

(71)

 

121

 

1,244

 

(74)

Operating income

 

67,716

 

59,941

 

194,430

 

110,154

Loss on extinguishment of debt

2,128

Interest expense, net

 

4,953

 

8,888

 

17,726

 

28,126

Change in fair value of warrant liabilities

2,576

20,000

(1,809)

20,374

Income before income tax

 

60,187

 

31,053

 

176,385

 

61,654

Income tax expense

 

14,608

 

12,031

 

40,528

 

19,287

Net income

 

45,579

 

19,022

 

135,857

 

42,367

Change in fair value of warrant liabilities

(1,809)

Net income attributable to common stockholders - diluted

45,579

19,022

134,048

42,367

Other comprehensive loss

 

 

 

 

Foreign currency translation

 

(21)

 

(37)

 

(47)

 

(102)

Comprehensive income

$

45,558

$

18,985

$

135,810

$

42,265

Weighted average number shares outstanding - basic

 

101,620,537

 

97,242,170

 

101,246,546

 

97,086,415

Weighted average number shares outstanding - diluted

105,093,694

97,242,170

105,632,139

97,086,415

Net income per share - basic

$

0.45

$

0.20

$

1.34

$

0.44

Net income per share - diluted

$

0.43

$

0.20

$

1.27

$

0.44

See accompanying notes to the unaudited consolidated financial statements.

6

Target Hospitality Corp.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For the Three and Nine months ended September 30, 2023 and 2022

($ in thousands)

Additional

Accumulated

Total

Common Stock

Common Stock in Treasury

Paid In

Other

Accumulated

Stockholders'

    

Shares

Amount

    

Shares

Amount

    

Capital

    

Comprehensive Loss

    

Earnings

    

Equity

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, net

291,905

3,494

3,494

Tax withholdings related to net share settlement of equity awards

(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

Tax withholdings related to net share settlement of equity awards

(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

Balances at December 31, 2022

100,316,701

$

10

9,430,665

$

(23,559)

$

139,287

$

(2,574)

$

87,683

$

200,847

Adoption of ASC 326 (Note 1)

(268)

(268)

Balances at January 1, 2023

100,316,701

$

10

9,430,665

$

(23,559)

$

139,287

$

(2,574)

$

87,415

$

200,579

Net income

43,825

43,825

Stock-based compensation, net

643,662

2,112

2,112

Tax withholdings related to net share settlement of equity awards

(6,177)

(6,177)

Cumulative translation adjustment

(21)

(21)

Issuance of Common Stock from exercise of warrants

2,869

42

42

Issuance of Common Stock from exercise of stock options

410,226

1,252

1,252

Balances at March 31, 2023

101,373,458

$

10

9,430,665

$

(23,559)

$

136,516

$

(2,595)

$

131,240

$

241,612

Net income

46,453

46,453

Stock-based compensation, net

207,288

2,337

2,337

Tax withholdings related to net share settlement of equity awards

(241)

(241)

Cumulative translation adjustment

(5)

(5)

Issuance of Common Stock from exercise of warrants

14,500

167

167

Balances at June 30, 2023

101,595,246

$

10

9,430,665

$

(23,559)

$

138,779

$

(2,600)

$

177,693

$

290,323

Net income

45,579

45,579

Stock-based compensation, net

19,967

2,646

2,646

Tax withholdings related to net share settlement of equity awards

(400)

(400)

Cumulative translation adjustment

(21)

(21)

Issuance of Common Stock from exercise of stock options

45,388

144

144

Balances at September 30, 2023

101,660,601

$

10

9,430,665

$

(23,559)

$

141,169

$

(2,621)

$

223,272

$

338,271

See accompanying notes to the unaudited consolidated financial statements.

7

Target Hospitality Corp.

Unaudited Consolidated Statements of Cash Flows

($ in thousands)

For the Nine Months Ended

September 30, 

    

2023

    

2022

Cash flows from operating activities:

 

  

 

Net income

$

135,857

$

42,367

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

  

Depreciation

 

54,648

 

37,582

Amortization of intangible assets

 

10,076

 

10,079

Noncash operating lease expense

13,878

Accretion of asset retirement obligation

 

131

 

126

Amortization of deferred financing costs

 

2,441

 

3,483

Amortization of original issue discount

437

526

Change in fair value of warrant liabilities

(1,809)

20,374

Stock-based compensation expense

13,948

13,669

(Gain) loss on disposal of specialty rental assets and other property, plant and equipment

137

(101)

Loss on extinguishment of debt

2,128

Deferred income taxes

 

33,231

 

14,918

Provision for loss on receivables, net of recoveries

90

334

Changes in operating assets and liabilities

 

Accounts receivable

 

(17,677)

 

(13,183)

Prepaid expenses and other assets

 

5,565

 

(737)

Accounts payable and other accrued liabilities

 

(19,138)

 

490

Deferred revenue and customer deposits

 

(106,112)

 

126,764

Operating lease obligation

(10,172)

Other non-current assets and liabilities

 

853

 

1,132

Net cash provided by operating activities

 

118,512

 

257,823

Cash flows from investing activities:

 

  

 

  

Purchase of specialty rental assets

 

(53,662)

 

(84,244)

Purchase of property, plant, and equipment

 

(2,941)

 

(20,028)

Acquired intangible assets

(4,547)

Proceeds from sale of specialty rental assets and other property, plant and equipment

241

615

Net cash used in investing activities

 

(60,909)

 

(103,657)

Cash flows from financing activities:

 

  

 

  

Principal payments on finance and finance lease obligations

 

(1,037)

 

(442)

Principal payments on borrowings from ABL Facility

(70,000)

Proceeds from borrowings on ABL Facility

 

 

70,000

Repayment of Senior Notes

(125,000)

Payment of issuance costs from warrant exchange

(1,504)

Proceeds from issuance of Common Stock from exercise of warrants

209

Proceeds from issuance of Common Stock from exercise of options

1,396

Payment of deferred financing costs

(1,423)

Taxes paid related to net share settlement of equity awards

(6,818)

(121)

Net cash used in financing activities

 

(134,177)

 

(563)

Effect of exchange rate changes on cash and cash equivalents

5

(22)

Net (decrease) increase in cash and cash equivalents

 

(76,569)

 

153,581

Cash and cash equivalents - beginning of period

 

181,673

 

23,406

Cash and cash equivalents - end of period

$

105,104

$

176,987

Non-cash investing and financing activity:

Non-cash change in accrued capital expenditures

$

(2,987)

$

(9,019)

Non-cash change in finance lease obligations

$

(1,223)

$

(761)

See accompanying notes to the unaudited consolidated financial statements.

8

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 the natural resources development and government sectors principally located in the West Texas, South Texas, New Mexico and Midwest regions.

The Company, whose securities are listed on the Nasdaq Capital Market, together with its wholly owned subsidiaries, Topaz Holdings LLC, a Delaware limited liability company (“Topaz”), and Arrow Bidco, LLC, a Delaware limited liability company (“Arrow Bidco”), serve as the holding companies for the businesses of Target Logistics Management, LLC and its subsidiaries (“Target”) and RL Signor Holdings, LLC (“Signor”). TDR Capital LLP indirectly owns approximately 64% 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 who purchased the shares of Platinum Eagle in a private placement transaction, 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 Target Hospitality’s Annual Report on the Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the operating results that may be expected for the full fiscal year ending December 31, 2023 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 September 30, 2023, and results of operations for the three and nine months ended September 30, 2023 and 2022, and cash flows for the nine months ended September 30, 2023 and 2022. The consolidated balance sheet as of December 31, 2022, 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.

9

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 is earned 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 evenly over the contractual term of the arrangement, based on a contractual fixed minimum amount and defined period of performance. Some 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.

Cost of services includes labor, food, utilities, supplies, leasing and other direct costs associated with operating the lodging units as well as repair and maintenance expenses. Cost of rental includes leasing costs, utilities, 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.

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. 

Recently Adopted Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (ASU 2016-13, Topic 326, or ASC 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 replaced the prior "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 adopted ASC 326, along with its related clarifications and amendments, on the effective date of January 1, 2023, using the modified retrospective approach for trade accounts receivable, which resulted in a cumulative-effect adjustment resulting in a decrease to accumulated earnings of approximately $0.3 million. Results for reporting periods prior to 2023 continue to be presented in accordance with previously applicable GAAP, while results for subsequent reporting periods are presented under ASC 326.

10

The following table presents the impact of the adoption of ASC 326 on the consolidated balance sheet as of January 1, 2023:

Balance

Balance

    

Pre-Adoption

Adjustments

    

Post-Adoption

Accounts receivable, less allowance for doubtful accounts

$

42,153

$

(268)

$

41,885

Accumulated earnings

$

87,683

$

(268)

$

87,415

2. Revenue

Total revenue recognized under ASC 606 was $280.9 million and $236.0 million for the nine months ended September 30, 2023 and 2022, respectively, while specialty rental income was $156.5 million and $113.5 million subject to the guidance of ASC 842 for the nine months ended September 30, 2023 and 2022, respectively. Total revenue recognized under ASC 606 was $93.5 million and $103.0 million for the three months ended September 30, 2023 and 2022, respectively, while specialty rental income was $52.4 million and $56.6 million subject to the guidance of ASC 842 for the three months ended September 30, 2023 and 2022, respectively.

The following table disaggregates our services income by our two reportable segments as well as the All Other category: Hospitality and Facility Services – South (“HFS – South”), Government, and All Other for the dates indicated below:

For the Three Months Ended

For the Nine Months Ended

September 30, 

September 30, 

2023

2022

2023

2022

HFS – South

$

36,004

$

31,936

$

107,938

$

93,085

Government

$

54,662

$

68,436

$

164,245

$

136,251

All Other

$

2,872

$

2,624

$

8,714

$

6,705