# Target Hospitality Corp. (TH) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Target Hospitality Corp.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1712189/000155837022003403/th-20211231x10k.htm
Accession: 0001558370-22-003403
Filing date: 2022-03-11
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/TH/
All MD&A years: /company/TH/mda/
Next year: /company/TH/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) 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 audited consolidated financial statements and notes to those statements included in Part II, Item 8 within this Annual Report on Form 10-K. References to “we,” “us,” “our”, “Target Hospitality,” or “the Company” refer to Target Hospitality Corp. and its consolidated subsidiaries.

As discussed in Note 1 of the notes to our audited consolidated financial statements included in Part II, Item 8 within this Annual Report on Form 10-K, in 2021, we adopted SEC guidance that is intended to modernize, simplify, and enhance certain disclosures throughout this MD&A.  In accordance with this guidance, we have modified the tabular disclosure of contractual obligations to provide disclosures addressing the most significant categories of our short-term and long-term needs for cash.

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  December 31, 2021, our network included 28 communities to better serve our customers across the US.

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COVID – 19 and Economic Update

The global outbreak of COVID-19 and the declaration of a pandemic by the World Health Organization on March 11, 2020 presented new risks to the Company’s business. Prior to March 2020, the Company’s results were largely in line with expectations and subsequent to March 2020, we began to experience a decline in revenues.  

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The COVID-19 pandemic has not materially impacted the Company’s ability to operate nor has it materially disrupted the Company’s supply chain, disrupted service or caused a shortage of critical products at our communities.  However, the situation surrounding COVID-19 and the decrease in global economic demand had a material adverse impact on the Company’s operating results. There have been significant changes to the global economic situation and to public securities markets as a result of COVID-19.  A lack of widespread public acceptance of vaccines, could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Further, even if vaccines are widely accepted, surfacing of virus variants has added a degree of uncertainty to the continuing global impact of COVID-19.

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The financial results for the year ended December 31, 2020 reflect the reduced customer activity in the HFS – South and Midwest segments as compared to pre-COVID levels experienced in the first quarter of 2020. However, the Company did experience increases in demand for its hospitality and accommodation services compared to the lows experienced in the second and third quarter of 2020, including demand for the Company’s HFS – South segment accommodations as customer activity levels continued to increase during 2021.  Refer to the section titled “Risk Factors” included in Part I Item 1A of this Annual Report on Form 10-K for additional discussion around COVID-19.

​

For the year ended December 31, 2021, key drivers of financial performance included:

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[[GREPCENT_TABLE]]
[["","\u25cf","Increased revenue by $66.2 million or 29% compared to the year ended 2020 primarily due to additional revenue generated from growth in the Government segment as well as increase in customer demand in the HFS \u2013 South segment."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Increased revenue in the HFS \u2013 South segment by $4.8 million or 4% as compared to the year ended December 31, 2020 as a result of increase in customer demand."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","Generated a net loss of approximately $4.6 million for the year ended December 31, 2021 as compared to a net loss of $25.1 million for the year ended December 31, 2020. This decrease in net loss is primarily attributable to an increase in gross profit driven by the increase in revenue as well as a decrease in interest expense driven by significant debt reduction, partially offset by an increase in operating expenses, an increase in the estimated fair value of warrant liabilities, and an increase in income tax expense due to improved results."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Generated consolidated Adjusted EBITDA of $119.2 million representing an increase of $40.7 million or 51.8% as compared to the year ended December 31, 2020, driven primarily by the increase in revenue."]]
[[/GREPCENT_TABLE]]

​

In addition to the above, we generated positive cash flows from operations of approximately $104.6 million representing a increase in cash flows from operations by $57.8 million or 123.6% for the year ended December 31, 2021 compared to the year ended December 31, 2020.

​

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

​

Our proximity to customer activities influences occupancy and demand. We have built, own and operate the two largest specialty rental and hospitality services networks available to customers operating in the HFS – South and HFS – Midwest regions. Our broad network often results in us having communities that are the closest to our customers’ job sites, which reduces commute times and costs, and improves the overall safety of our customers’ workforce. Our communities provide customers with cost efficiencies, as they are able to jointly use our communities and related infrastructure (i.e., power, water, sewer and IT) services alongside other customers operating in the same vicinity. Demand for our services is dependent upon activity levels, particularly our customers’ capital spending on natural resource development activities 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 elsewhere in this report. 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.  Refer to section titled “Risk Factors” in Part I Item 1A of this Annual Report on Form 10-K for further information on this situation.

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. As a result of the commodity price volatility experienced in early 2020, the Company temporarily closed and consolidated communities in the HFS – South and HFS – Midwest segments.  However, these communities began re-opening in July 2020 as conditions started to improve.

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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 compliance or environmental remediation liabilities and costs.

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 69.7% of our revenue was earned from specialty rental with vertically integrated hospitality services, specifically lodging and related ancillary services, whereas the remaining 30.3% of revenues were earned through leasing of lodging facilities (26.4%) and construction fee income (3.9%) for the year ended December 31, 2021. 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.

The Company originated a contract in 2013 with TC Energy Pipelines to construct, deliver, cater and manage all accommodations and hospitality services in conjunction with the planned construction of the Keystone XL pipeline project.  During the construction phase of the contract, the Company recognized revenue as costs were incurred in connection with the project under the percentage of completion method of accounting as more fully discussed in Note 1 of the notes to our audited consolidated financial statements included in Part II, Item 8 within this Annual Report on Form 10-K. One of these communities was completed and opened in September 2020 and subsequently closed in mid-December 2020.  The revenue recognized on the community post construction for the year ended December 31, 2020, is recognized in services income along with our other revenue from specialty rental with vertically integrated hospitality services. In January 2021, the 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 and no further revenue will be generated from the contract with TC Energy.

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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 intend 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, which 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 company 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 budgets and internal projections and to prior period results for a given period in order to assess our performance.

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

Segments

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

Hospitality & Facilities Services - South

The HFS – South segment reflects our facilities and operations in the HFS – South region and includes our 15 communities located across Texas and New Mexico.

Hospitality & Facilities Services - 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 our FRCC Partner. Additionally, this segment also includes facilities and operations provided under a lease and services agreement with a leading nonprofit organization, backed by a committed United States Government contract, to provide a suit of comprehensive service offerings in support of their humanitarian aid efforts.

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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.

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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, and the catering and other services provided to communities and other workforce accommodation facilities for the natural resource development industries not owned by us.

Key Factors Impacting the Comparability of Results

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

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 for the year ended December 31, 2020 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 have created significant challenges for our natural resource development end-market customers. This drove a significant reduction in our utilization in these segments during 2020, and, although we have experienced steady increases in utilization into 2021, such utilization levels have not yet reached pre-pandemic levels experienced during the first quarter of 2020. During 2020, these events also impacted the liquidity of our natural resources development end market customers resulting in a greater level of bad debt expense during 2020.

Acquisitions

On June 19, 2019, Target Logistics Management LLC (“TLM”) entered into a purchase agreement (the “Superior Purchase Agreement”) with Superior Lodging, LLC, Superior Lodging Orla South, LLC, and Superior Lodging Kermit, LLC (collectively, the “Superior Sellers”), and certain other parties named therein, pursuant to which TLM acquired substantially all of the assets in connection with the subject seller communities. This acquisition further expanded our presence in Texas within our HFS – South segment, adding 575 rooms.  Prior to the acquisition, TLM was providing management and catering services to the Superior Sellers, which was terminated upon the closing of the acquisition.

On July 1, 2019, TLM purchased a 168-room community from ProPetro Services, Inc (“ProPetro”).  On July 1, 2019, in connection with the purchase of this community, TLM and ProPetro entered into an amendment to its existing Network Lease and Services Agreement resulting in ProPetro leasing from the Company an additional 166 rooms per night for one year subject to three one-year extension options.  The extension options were not exercised and resulted in the Company earning a termination fee of approximately $0.5 million for the year ended December 31, 2020. The ProPetro acquisition further expanded the Company’s presence in the HFS – South segment.

Business Combination Costs

We incurred approximately $38.1 million in incremental costs related to the Business Combination that have been recognized as selling, general, and administrative expenses in the audited consolidated statement of comprehensive income for the year ended December 31, 2019. These costs include $8.0 million in transaction expenses relating to the consummation of the Business Combination. Additionally, certain members of the Company’s management and

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employees received bonus payments as a result of the Business Combination being consummated in the aggregate amount of $28.5 million. Finally, as part of the Business Combination being consummated, we recorded $1.6 million of compensation expense for the full loan forgiveness of certain executive members of management which has been recognized as a non-cash expense within the consolidated financial statements.

Public Company Costs

As part of becoming a public company in March 2019, we will continue to incur recurring expenses as a publicly traded company, including costs associated with the employment of additional personnel, compliance under the Exchange Act, annual and quarterly reports to common shareholders, registrar and transfer agent fees, national stock exchange fees, legal fees, audit fees, incremental director and officer liability insurance costs and director and officer compensation.  

Results of Operations

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

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Consolidated Results of Operations for the years ended December 31, 2021, 2020 and 2019:

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[[/GREPCENT_TABLE]]

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Comparison of Years Ended December 31, 2021 and 2020

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Total Revenue. Total revenue was $291.3 million for the year ended December 31, 2021 as compared to $225.1 million for the year ended December 31, 2020, and consisted of $203.1 million of services income, $76.9 million of specialty rental income and $11.3 million of construction fee income. Total revenue for the year ended December 31, 2020 consisted of $132.4 million of services income, $53.0 million of specialty rental income and $39.8 million of construction fee income.

Services income consists primarily of specialty rental and vertically integrated and comprehensive hospitality services including catering, food services, maintenance, housekeeping, grounds-keeping, security, overall workforce community management services, health and recreation facilities, concierge services and laundry service. The main driver of the

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increase in services income revenue year over year was growth in the Government segment combined with a significant increase in customer activity in the HFS – South segment. This growth was partially offset by a reduction of customer activity in the HFS – Midwest segment, due to the effects of the COVID-19 pandemic, which created a meaningful reduction in customer headcount demand when compared to the first quarter of 2020. Additionally, a reduction in activity in the TCPL Keystone segment as a result of the termination discussed below contributed to an offsetting decrease in services income during 2021.

Construction fee income consists primarily of revenue from the construction phase of the TCPL contract with the current year consisting almost exclusively of revenue related to the Termination and Settlement Agreement. The decrease in construction fee income in 2021 compared to 2020 was due to the project being suspended at the end of January 2021, subsequently cancelled in June 2021, and finally resulted in the contract being terminated in July 2021 pursuant to the Termination and Settlement Agreement.

Specialty rental income consists primarily of revenues from renting rooms at facilities leased or owned. Specialty rental income increased as a result of growth in the Government segment as a result of the leasing revenue generated by the new Government contract entered into in March 2021.

Cost of services. Cost of services was $120.2 million for the year ended December 31, 2021 as compared to $109.2 million for the year ended December 31, 2020. The increase in services costs is primarily due to an increase related to growth in the Government segment as mentioned above. Additionally, there was also a slight increase in services costs in the HFS – South segment driven by the increase in customer activity mentioned above.  These increases were significantly 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 driven by the Presidential Permit being revoked. Pursuant to the Termination and Settlement Agreement, the underlying contract with TC Energy was terminated in July 2021. Additionally, there was also a decrease in the costs in the HFS – Midwest segment driven by a slight decrease in customer activity.

Specialty rental costs. Specialty rental costs were approximately $16.2 million for the year ended December 31, 2021 as compared to $8.8 million for the year ended December 31, 2020. The increase in specialty rental costs is primarily due to costs related to growth in the Government segment. This increase was partially offset with a decrease in specialty rental costs due to a modification of a contract for one of our HFS customers, which resulted in all such costs and related revenue now being recognized in services income and costs, as it no longer meets the definition of a lease.

Depreciation of specialty rental assets. Depreciation of specialty rental assets was $53.6 million for the year ended December 31, 2021 as compared to $50.0 million for the year ended December 31, 2020. The increase in depreciation expense is primarily attributable to growth in the Government segment as noted above offset by a decrease in the HFS – South segment due to transfer of assets from the HFS – South segment to the Government segment to service the new Government segment contract. In addition, the increase in depreciation expense is also partially offset by 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 $46.5 million for the year ended December 31, 2021 as compared to $38.1 million for the year ended December 31, 2020. The increase in selling, general and administrative expense of $8.4 million was primarily driven by increases in labor costs, advisory and other professional fees attributable to corporate development activities, and to a lesser extent, outside services, travel, amortization of system implementation costs, marketing and advertising, and insurance expense. The increase in labor costs are driven primarily by an increase in bonus expense, stock based compensation, and to a lesser extent commissions as there have been no material increases to corporate headcount. These increases were partially offset by a decrease in bad debt expense as economic conditions improved.

Other depreciation and amortization. Other depreciation and amortization expense was $16.9 million for the year ended December 31, 2021 as compared to $15.6 million for the year ended December 31, 2020. The increase in other depreciation and amortization expense is due primarily to an increase in depreciation expense associated with an increase in depreciable capital expenditures.

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Other expense (income), net. Other expense (income), net was $0.9 million for the year ended December 31, 2021 as compared to ($0.7) million for the year ended December 31, 2020. The increase in expense was primarily driven by the prior year including insurance proceeds received for an involuntary asset conversion attributable to storm damage, which did not recur in the current year, as well as related party reimbursement income whereby the agreement ended on December 31, 2020 and was not renewed.

Interest expense, net. Interest expense, net was $38.7 million for the year ended December 31, 2021 as compared to interest expense, net of $40.0 million for the year ended December 31, 2020. The change in interest expense is driven by a reduction of the interest on the ABL facility as a result of a lower outstanding balance during 2021 as the amount was completely paid off in July 2021.

Change in fair value of warrant liabilities. Change in fair value of warrant liabilities represents the fair value adjustments to the outstanding Private Warrant liabilities based on the change in their estimated fair value at each reporting period end. The change in fair value of the warrant liabilities was $1.1 million for the year ended December 31, 2021 as compared to ($2.4) million for the year ended December 31, 2020. 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 year, generating a reduction to income in the current year.

Income tax expense (benefit).  Income tax expense (benefit) was $1.9 million for the year ended December 31, 2021 as compared to ($8.5) million for the year ended December 31, 2020. The increase in income tax expense is primarily attributable to the decrease in loss before taxes for the year ended December 31, 2021 as well as an increase in state tax expense based off of gross receipts as a result of the increase in revenues.

​

Comparison of the Years Ended December 31, 2020 and 2019

​

For discussion of the comparison of our operating results for the years ended December 31, 2020 and 2019, please read the “Comparison of Years Ended December 31, 2020 and 2019” section located in the Management Discussion & Analysis section in our 2020 Annual Report on From 10-K/A filed on May 24, 2021 and is incorporated herein by reference.

57

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Segment Results

The following table sets forth our selected results of operations for each of our reportable segments for the years ended December 31, 2021, 2020 and 2019.

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","For the Years Ended December 31,","\u200b","\u200b","Amount of Increase (Decrease)","\u200b","Percentage Change Increase (Decrease)","\u200b","","Amount of Increase (Decrease)","\u200b","Percentage Change Increase (Decrease)"],["Revenue:","2021","\u200b","2020","\u200b","2019","\u200b","\u200b","2021 vs. 2020","\u200b","2021 vs. 2020","\u200b","\u200b","2020 vs. 2019","\u200b","2020 vs. 2019"],["Government","$","156,250","\u200b","$","63,259","\u200b","$","66,972","\u200b","$","92,991","\u200b","147%","\u200b","$","(3,713)","\u200b","(6)%"],["Hospitality & Facilities Services - South","\u200b","116,958","\u200b","\u200b","112,126","\u200b","\u200b","214,464","\u200b","\u200b","4,832","\u200b","4%","\u200b","\u200b","(102,338)","\u200b","(48)%"],["Hospitality & Facilities Services - Midwest","\u200b","4,150","\u200b","\u200b","6,605","\u200b","\u200b","20,620","\u200b","\u200b","(2,455)","\u200b","(37)%","\u200b","\u200b","(14,015)","\u200b","(68)%"],["TCPL Keystone","\u200b","12,283","\u200b","\u200b","41,911","\u200b","\u200b","15,744","\u200b","\u200b","(29,628)","\u200b","(71)%","\u200b","\u200b","26,167","\u200b","166%"],["All Other","\u200b","1,696","\u200b","\u200b","1,247","\u200b","\u200b","3,296","\u200b","\u200b","449","\u200b","36%","\u200b","\u200b","(2,049)","\u200b","(62)%"],["Total revenues","$","291,337","\u200b","$","225,148","\u200b","$","321,096","\u200b","$","66,189","\u200b","29%","\u200b","$","(95,948)","\u200b","(30)%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Adjusted Gross Profit","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Government","$","94,801","\u200b","$","47,523","\u200b","$","49,203","\u200b","$","47,278","\u200b","99%","\u200b","$","(1,680)","\u200b","(3)%"],["Hospitality & Facilities Services - South","\u200b","52,344","\u200b","\u200b","51,518","\u200b","\u200b","128,424","\u200b","\u200b","826","\u200b","2%","\u200b","\u200b","(76,906)","\u200b","(60)%"],["Hospitality & Facilities Services - Midwest","\u200b","(711)","\u200b","\u200b","161","\u200b","\u200b","8,511","\u200b","\u200b","(872)","\u200b","(543)%","\u200b","\u200b","(8,350)","\u200b","(98)%"],["TCPL Keystone","\u200b","9,161","\u200b","\u200b","8,617","\u200b","\u200b","3,060","\u200b","\u200b","544","\u200b","6%","\u200b","\u200b","5,557","\u200b","182%"],["All Other","\u200b","(636)","\u200b","\u200b","(699)","\u200b","\u200b","1,236","\u200b","\u200b","63","\u200b","(9)%","\u200b","\u200b","(1,935)","\u200b","(157)%"],["Total Adjusted Gross Profit","$","154,959","\u200b","$","107,120","\u200b","$","190,434","\u200b","$","47,839","\u200b","45%","\u200b","$","(83,314)","\u200b","(44)%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Average Daily Rate","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Government","$","76.04","\u200b","$","70.60","\u200b","$","74.89","\u200b","$","5.44","\u200b","\u200b","\u200b","$","(4.29)","\u200b","\u200b"],["Hospitality & Facilities Services - South","$","74.64","\u200b","$","81.67","\u200b","$","84.69","\u200b","$","(7.03)","\u200b","\u200b","\u200b","$","(3.02)","\u200b","\u200b"],["Hospitality & Facilities Services - Midwest","$","68.91","\u200b","$","79.69","\u200b","$","77.67","\u200b","$","(10.78)","\u200b","\u200b","\u200b","$","2.02","\u200b","\u200b"],["Total Average Daily Rate","$","75.31","\u200b","$","77.40","\u200b","$","81.26","\u200b","$","(2.09)","\u200b","\u200b","\u200b","$","(3.86)","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

​

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.

​

Comparison of Years Ended December 31, 2021 and 2020

​

Government

Revenue for the Government segment was $156.3 million for the year ended December 31, 2021 as compared to $63.3 million for the year ended December 31, 2020.

Adjusted gross profit for the Government segment was $94.8 million for the year ended December 31, 2021 as compared to $47.5 million for the year ended December 31, 2020.

Revenue and adjusted gross profit increased as a result of the new contract originated in the Government segment in March 2021 as previously mentioned. This increase was partially offset by lower non-cash deferred revenue amortization on a legacy contract, driven by a contract extension modification, which extended the term through September 2026 compared to the previous term through September 2021.

Hospitality & Facilities Services - South

Revenue for the HFS – South segment was $117.0 million for the year ended December 31, 2021, as compared to $112.1 million for the year ended December 31, 2020.

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​

Adjusted gross profit for the HFS – South segment was $52.3 million for the year ended December 31, 2021, as compared to $51.5 million for the year ended December 31, 2020.

The increase in revenue of $4.8 million and increase in adjusted gross profit of $0.8 million is primarily attributable to an increase in utilization driven by a significant increase in customer demand.

​

Hospitality & Facilities Services - Midwest

Revenue for the HFS – Midwest segment was $4.2 million for the year ended December 31, 2021, as compared to $6.6 million for the year ended December 31, 2020.

​

Adjusted gross profit for the HFS – Midwest segment was ($0.7) million for the year ended December 31, 2021, as compared to $0.2 million for the year ended December 31, 2020.

​

The decrease in revenue of $2.5 million and decrease in adjusted gross profit of $0.9 million was primarily driven by a decrease in utilization and ADR due to the impacts of the COVID-19 pandemic, which created a meaningful reduction in customer headcount demand when compared to the first quarter of 2020. The HFS – Midwest segment was shut down in early May of 2020 but began to reopen in July of 2020. However, this segment experienced a slight increase in customer demand toward the end of 2021.

​

TCPL Keystone

​

Revenue for the TCPL Keystone segment was $12.3 million for the year ended December 31, 2021, as compared to $41.9 million and $15.7 million for the years ended December 31, 2020 and 2019, respectively.  

​

Adjusted gross profit for the TCPL Keystone segment was $9.2 million for the year ended December 31, 2021, as compared to $8.6 million and $3.1 million for the years ended December 31, 2020 and 2019, respectively.  

​

The decrease in revenue in 2021 compared to 2020 was due to the project being suspended at the end of January 2021, subsequently cancelled in June 2021, and finally resulted in the TC Energy contract being terminated in July 2021 with the current year consisting almost exclusively of revenue related to the Termination and Settlement Agreement executed in July 2021. We anticipate activity in this segment to be eliminated as no further revenue is expected as a result of the Termination and Settlement Agreement.

​

Comparison of the Years Ended December 31, 2020 and 2019

​

For discussion of the comparison of our operating results for the years ended December 31, 2020 and 2019, please read the “Comparison of Years Ended December 31, 2020 and 2019” section located in the Management Discussion & Analysis section in our Annual Report on Form 10-K/A for the year ended December 31, 2020 filed on May 24, 2021 and is incorporated herein by reference.

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 our cash on hand, along with 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 may from time

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to time seek to purchase our equity and debt securities for cash or other consideration in open market purchases, privately-negotiated transactions, exchange offers or otherwise.  Any such transactions will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

For additional discussion of risks related to our liquidity and capital resources, including the impact of COVID-19, refer to the section titled “Risk Factors” in Part I Item 1A of this Annual Report on Form 10-K.

Capital Requirements

During the year ended December 31, 2021, we incurred approximately $36.8 million in capital expenditures, which increased by approximately $27.7 million compared to the year ended December 31, 2020. Our total annual 2021 capital spending included growth projects to increase community capacity, mainly in the Government segment. In 2020, in response to anticipated lower utilization levels resulting from the impact of commodity price volatility and COVID-19, as previously discussed, the Company reduced its anticipated 2020 capital expenditures by 50%. In 2021, capital expenditures incurred increased from 2020. This increase was primarily driven by growth in the Government segment and maintenance capital expenditures that were delayed in 2020 to conserve cash. Although growth capital expenditures are largely discretionary, our long-lived specialty rental assets require a certain level of maintenance capital expenditures, which have ranged from approximately 0.4% to 4% of annual revenue between 2018 and 2021, with an average cost of approximately 1.6% of annual revenue. Maintenance capital expenditures for specialty rental assets amounted to approximately $11.7 million and $0.9 million for the years ended December 31, 2021 and 2020, respectively.  As we pursue growth, 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 a reduction in future capital spending. We cannot assure you that operations and other needed capital will be available on acceptable terms or at all. In the event we make additional acquisitions and the amount of capital required is greater than the amount we have available for acquisitions at that time, we could be required to 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 audited consolidated statements of cash flows:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","For the Years Ended"],["\u200b","\u200b","December 31,"],["\u200b","","2021","","2020","\u200b","2019"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net cash provided by operating activities","\u200b","$","104,599","\u200b","$","46,781","\u200b","$","60,495"],["Net cash used in investing activities","\u200b","","(35,915)","\u200b","","(10,949)","\u200b","\u200b","(112,705)"],["Net cash provided by (used in) financing activities","\u200b","","(52,271)","\u200b","","(35,683)","\u200b","\u200b","46,652"],["Effect of exchange rate changes on cash, cash equivalents and restricted cash","\u200b","\u200b","14","\u200b","\u200b","(9)","\u200b","\u200b","(54)"],["Net increase (decrease) in cash, cash equivalents and restricted cash","\u200b","$","16,427","\u200b","$","140","\u200b","$","(5,612)"]]
[[/GREPCENT_TABLE]]

​

Comparison of Years Ended December 31, 2021 and 2020

​

Cash flows provided by operating activities. Net cash provided by operating activities was $104.6 million for the year ended December 31, 2021 compared to $46.8 million for the year ended December 31, 2020. This increase in cash provided by operating activities relates primarily to to an increase in cash collections of approximately $125.9 million resulting from growth in the Government segment, partially offset by a decrease in cash collections from TC Energy of approximately $24.2 million as a result of the termination of that contract, a decrease in cash collections of approximately $28.6 million  in the first quarter of 2021 when compared to the first quarter of 2020 as a result of the impact of COVID-19, as well as a decrease in other cash collections of approximately $0.2 million. This net increase in cash collections of approximately $72.9 million was partially offset by an increase in cash payments for operating expenses and payroll of approximately $16.3 million resulting from growth and increased activity year-over-year, partially offset by a decrease in interest payments of approximately $1.8 million year-over-year driven by a reduction in debt.

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Cash flows used in investing activities. Net cash used in investing activities was $35.9 million for the year ended December 31, 2021 compared to $10.9 million for the year ended December 31, 2020. This increase in cash used in investing activities primarily relates to the increase in capital expenditures driven by growth in the Government segment.

Cash flows provided by financing activities. Net cash used in financing activities was $52.3 million for the year ended December 31, 2021 compared to $35.7 million for the year ended December 31, 2020. The increase in cash used in financing activities primarily reflects the decrease in cash received from borrowings on finance and capital lease obligations and the increase in principal payments on borrowings from the ABL Facility in the current period as the ABL Facility was completely paid off by July of 2021 and has no outstanding balance as of December 31, 2021.  As of December 31, 2021, the ABL Facility has an undrawn capacity of $125 million available to fund the various cash needs of the Company.

Comparison of the Years Ended December 31, 2020 and 2019

​

For discussion of the comparison of our operating results for the years ended December 31, 2020 and 2019, please read the “Comparison of Years Ended December 31, 2020 and 2019” section located in the Management Discussion & Analysis section in the our Annual Report on Form 10-K/A for the year ended December 31, 2020 filed on May 24, 2021 and is incorporated herein by reference.

Indebtedness

The Company’s capital lease and other financing obligations as of December 31, 2021 consisted of $1.4 million of capital leases. The capital leases pertain to leases entered into during 2019 through 2021, for commercial-use vehicles with 36-month terms expiring through 2024 with a weighted average interest rate of approximately 3.83%. In November 2020, the Company entered into an insurance financing arrangement in an amount of approximately $3.3 million at an interest rate of 3.84%. The insurance financing arrangement required 9 monthly payments of approximately $0.4 million that began on December 1, 2020 and ended on August 1, 2021 when the obligation was completely paid off.

The Company’s capital lease and other financing obligations as of December 31, 2020 consisted of approximately $0.9 million of capital leases related to commercial-use vehicles with the same terms as described above, and $2.9 million related to the insurance financing obligation described above.

ABL Facility

On the Closing Date, in connection with the closing of the Business Combination, Topaz, Arrow 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 the year ended December 31, 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. The maturity date of the ABL Facility is September 15, 2023.  Refer to Note 11 of the notes to our audited consolidated financial statements located in Part II, Item 8 within this Annual Report on Form 10-K for additional information on the ABL Facility.

​

Senior Secured Notes

In connection with the closing of the Business Combination, Arrow 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 Arrow 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 11 of the notes to our audited consolidated financial statements located in Part II, Item 8 within this Annual Report on Form 10-K for additional discussion of the 2024 Senior Secured Notes.

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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 capital expenditures for specialty rental 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 December 31, 2021:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","Total","","2022","\u200b","2023 and 2024"],["Interest Payments(1)","\u200b","$","80,750","\u200b","$","32,300","\u200b","$","48,450"],["2024 Senior Secured Notes","\u200b","","340,000","\u200b","","\u2014","\u200b","\u200b","340,000"],["Total","\u200b","$","420,750","\u200b","$","32,300","\u200b","$","388,450"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(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 $80.8 million."]]
[[/GREPCENT_TABLE]]

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 audited consolidated statements of comprehensive income (loss) for cancelable and non-cancelable leases was $13.9 million, $5.6 million, and $12.5 million for the years ended December 31, 2021, 2020, and 2019, respectively. Rent expense included in selling, general, and administrative expenses in the audited consolidated statements of comprehensive income (loss) for cancelable and non-cancelable leases was $0.4 million, $0.5 million and $0.6 million for the years ended December 31, 2021, 2020, and 2019, respectively.

Future minimum lease payments at December 31, 2021 by year and in the aggregate for each of the next five years and thereafter, under non-cancelable operating leases are as follows:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b"],["2022","\u200b","$","5,003"],["2023","\u200b","","4,514"],["2024","\u200b","","4,118"],["2025","\u200b","","3,593"],["2026","\u200b","\u200b","2,874"],["Thereafter","\u200b","\u200b","376"],["Total","\u200b","$","20,478"]]
[[/GREPCENT_TABLE]]

​

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our audited 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, including assumptions and estimates used to test goodwill and other intangible assets for impairment, refer to Note 1 of the notes to our audited consolidated financial statements included in Part II, Item 8 within this Annual Report on Form 10-K.  

​

Income Taxes. We recognize deferred tax assets and liabilities for certain future deductible or taxable temporary differences expected to be reported in our income tax returns. These deferred tax assets and liabilities are computed using the tax rates that are expected to apply in the periods when the related future deductible or taxable temporary difference is

62

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expected to be settled or realized. In the case of deferred tax assets, the future realization of the deferred tax assets are determined with consideration to historical profitability, projected future taxable income, the reversals of existing taxable temporary differences, and tax planning strategies. After consideration of all these factors, we recognize deferred tax assets when we believe that it is more likely than not that we will realize them. The Company’s deferred tax assets include a significant amount of tax loss carryforwards.  Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, the Company believes it is more likely than not that all of the deferred tax asset will be realized. A significant positive evidence factor that we consider in the recognition of deferred tax assets is a positive earnings history and cumulative income position.  The Company has had a stable earning history prior to the impacts of COVID-19 and the energy and natural resource price volatility as experienced during 2020 and has not lost any tax attributes in the past.  The amount of the deferred tax asset considered realizable, however, could be reduced if estimates of future taxable income during the carryforward period are reduced.  Refer to Note 14 – Income Taxes included in the notes to our audited consolidated financial statements included in Part II, Item 8 within this Annual Report on Form 10-K for additional information on our deferred tax assets and liabilities.

​

Principles of Consolidation

Refer to Note 1 of the notes to our audited consolidated financial statements included in Part II, Item 8 within this Annual Report on Form 10-K for a discussion of principles of consolidation.

​

Recently Issued Accounting Standards

Refer to Note 1 of the notes to our audited consolidated financial statements included in Part II, Item 8 within this Annual Report on Form 10-K 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, 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:

[[GREPCENT_TABLE]]
[["","\u25cf","Other expense, net: Other expense, net includes losses from the sale of certain land parcels, consulting expenses related to certain projects, 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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Restructuring costs: Target Parent incurred certain costs associated with restructuring plans designed to streamline operations and reduce costs."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Currency gains, net: Foreign currency transaction gains."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Transaction bonus amounts: Target Parent paid certain transaction bonuses to certain executives and employees related to the closing of the Business Combination. As discussed in Note 3 of our notes to our"]]
[[/GREPCENT_TABLE]]

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consolidated financial statements located in Part II, Item 8 within this Annual Report on Form 10-K, these bonuses were fully funded by a cash contribution from Algeco Seller in March of 2019.

[[GREPCENT_TABLE]]
[["","\u25cf","Transaction expenses: Target Hospitality incurred certain transaction costs, including legal and professional fees, associated primarily with the Business Combination in 2019 as well as other transactions unrelated to the Company\u2019s core business operations. Such amounts in 2019 related to the Business Combination were funded by proceeds from the Business Combination."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Acquisition-related expenses: Target Hospitality incurred certain transaction costs associated with the acquisition of Superior."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Officer loan expense: Non-cash charge associated with loans to certain executive officers of the Company that were forgiven and recognized as selling, general, and administrative expense upon consummation of the Business Combination. Such amounts are not expected to recur in the future."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Target Parent selling, general and administrative costs: Target Parent incurred certain costs in the form of legal and professional fees as well as transaction bonus amounts, primarily associated with a restructuring transaction that originated in 2017."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Change in fair value of warrant liabilities: Non-cash change in estimated fair value of warrant liabilities."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","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."]]
[[/GREPCENT_TABLE]]

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

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

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

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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 (loss) 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 believe that Adjusted gross profit, EBITDA, Adjusted EBITDA, and Discretionary cash flows 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:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","For the Years Ended"],["\u200b","\u200b","December 31,"],["\u200b","\u200b","2021","\u200b","2020","","2019"],["Gross Profit","\u200b","$","101,350","\u200b","$","57,155","\u200b","$","147,013"],["Depreciation of specialty rental assets","\u200b","\u200b","53,609","\u200b","\u200b","49,965","\u200b","\u200b","43,421"],["Adjusted gross profit","\u200b","$","154,959","\u200b","$","107,120","\u200b","$","190,434"]]
[[/GREPCENT_TABLE]]

​

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

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","For the Years Ended"],["\u200b","\u200b","December 31,"],["\u200b","\u200b","2021","\u200b","2020","","2019"],["Net income (loss)","\u200b","$","(4,576)","\u200b","$","(25,131)","\u200b","$","11,972"],["Income tax expense (benefit)","\u200b","\u200b","1,904","\u200b","\u200b","(8,455)","\u200b","\u200b","7,607"],["Interest expense, net","\u200b","\u200b","38,704","\u200b","\u200b","40,034","\u200b","\u200b","33,401"],["Loss on extinguishment of debt","\u200b","\u200b","-","\u200b","\u200b","-","\u200b","\u200b","907"],["Other depreciation and amortization","\u200b","\u200b","16,910","\u200b","\u200b","15,649","\u200b","\u200b","15,481"],["Depreciation of specialty rental assets","\u200b","\u200b","53,609","\u200b","\u200b","49,965","\u200b","\u200b","43,421"],["EBITDA","\u200b","\u200b","106,551","\u200b","\u200b","72,062","\u200b","\u200b","112,789"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Adjustments","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Other expense, net","\u200b","\u200b","878","\u200b","\u200b","416","\u200b","\u200b","8,031"],["Restructuring costs","\u200b","\u200b","-","\u200b","\u200b","-","\u200b","\u200b","168"],["Currency gains, net","\u200b","\u200b","-","\u200b","\u200b","-","\u200b","\u200b","(123)"],["Transaction bonus amounts","\u200b","\u200b","-","\u200b","\u200b","-","\u200b","\u200b","28,519"],["Transaction expenses","\u200b","\u200b","1,198","\u200b","\u200b","979","\u200b","\u200b","10,022"],["Acquisition-related expenses","\u200b","\u200b","-","\u200b","\u200b","-","\u200b","\u200b","370"],["Officer loan expense","\u200b","\u200b","-","\u200b","\u200b","-","\u200b","\u200b","1,583"],["Target Parent selling, general, and administrative costs","\u200b","\u200b","-","\u200b","\u200b","-","\u200b","\u200b","246"],["Stock-based compensation","\u200b","\u200b","5,082","\u200b","\u200b","3,592","\u200b","\u200b","1,527"],["Change in fair value of warrant liabilities","\u200b","\u200b","1,067","\u200b","\u200b","(2,347)","\u200b","\u200b","(5,920)"],["Other adjustments","\u200b","\u200b","4,400","\u200b","\u200b","3,786","\u200b","\u200b","1,976"],["Adjusted EBITDA","\u200b","$","119,176","\u200b","$","78,488","\u200b","$","159,188"]]
[[/GREPCENT_TABLE]]

​

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

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","For the Years Ended"],["\u200b","\u200b","December 31,"],["\u200b","\u200b","2021","\u200b","2020","","2019"],["Net cash provided by operating activities","\u200b","$","104,599","\u200b","$","46,781","\u200b","$","60,495"],["Less: Maintenance capital expenditures for specialty rental assets","\u200b","\u200b","(11,659)","\u200b","\u200b","(888)","\u200b","\u200b","(2,029)"],["Discretionary cash flows","\u200b","$","92,940","\u200b","$","45,893","\u200b","$","58,466"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Purchase of specialty rental assets","\u200b","\u200b","(35,488)","\u200b","\u200b","(12,177)","\u200b","\u200b","(84,732)"],["Purchase of property, plant and equipment","\u200b","\u200b","(427)","\u200b","\u200b","(381)","\u200b","\u200b","(441)"],["Purchase of business, net of cash acquired","\u200b","\u200b","-","\u200b","\u200b","-","\u200b","\u200b","(30,000)"],["Receipt of insurance proceeds","\u200b","\u200b","-","\u200b","\u200b","619","\u200b","\u200b","386"],["Proceeds from sale of specialty rental assets and other property, plant and equipment","\u200b","\u200b","-","\u200b","\u200b","990","\u200b","\u200b","1,444"],["Repayments from affiliates","\u200b","\u200b","-","\u200b","\u200b","-","\u200b","\u200b","638"],["Net cash used in investing activities","\u200b","$","(35,915)","\u200b","$","(10,949)","\u200b","$","(112,705)"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Proceeds from borrowings on Senior Secured Notes, net of discount","\u200b","\u200b","-","\u200b","\u200b","-","\u200b","\u200b","336,699"],["Proceeds from borrowings on finance and capital lease obligations","\u200b","\u200b","-","\u200b","\u200b","13,437","\u200b","\u200b","-"],["Principal payments on finance and capital lease obligations","\u200b","\u200b","(4,172)","\u200b","\u200b","(11,581)","\u200b","\u200b","(2,331)"],["Principal payments on borrowings from ABL","\u200b","\u200b","(76,000)","\u200b","\u200b","(74,500)","\u200b","\u200b","(48,790)"],["Proceeds from borrowings on ABL","\u200b","\u200b","28,000","\u200b","\u200b","42,500","\u200b","\u200b","108,240"],["Repayment of affiliate note","\u200b","\u200b","-","\u200b","\u200b","-","\u200b","\u200b","(3,762)"],["Contributions from affiliate","\u200b","\u200b","-","\u200b","\u200b","-","\u200b","\u200b","39,107"],["Recapitalization","\u200b","\u200b","-","\u200b","\u200b","-","\u200b","\u200b","218,752"],["Recapitalization - cash paid to Algeco Seller","\u200b","\u200b","-","\u200b","\u200b","-","\u200b","\u200b","(563,134)"],["Payment of deferred financing costs","\u200b","\u200b","-","\u200b","\u200b","-","\u200b","\u200b","(19,798)"],["Purchase of treasury stock","\u200b","\u200b","-","\u200b","\u200b","(5,318)","\u200b","\u200b","(18,241)"],["Restricted shares surrendered to pay tax liabilities","\u200b","\u200b","(99)","\u200b","\u200b","(221)","\u200b","\u200b","(90)"],["Net cash provided by (used in) financing activities","\u200b","$","(52,271)","\u200b","$","(35,683)","\u200b","$","46,652"]]
[[/GREPCENT_TABLE]]

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