Target Hospitality Corp. (TH)

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.

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, 2024, our network included 26 communities to better serve our customers across the US and Canada. We also operate 2 communities not owned or leased by the Company.

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Economic Update

On June 10, 2024, the Company received notice that the U.S. government intended to terminate the STFRC Contract, effective in 60 days, on August 9, 2024. As such effective on August 9, 2024, the STFRC Contract was terminated. The STFRC Contract was based on a fixed minimum lease revenue amount and for the year ended December 31, 2023, contributed approximately $55.9 million in total consolidated revenue compared to approximately $38.3 million of revenue for the year ended December 31, 2024, all of which is related to the Company’s Government segment. These assets associated with the STFRC Contract were reactivated on March  5, 2025 pursuant to the DIPC Contract. During the year ended December 31, 2024, the Company’s Government segment continued to benefit from the PCC Community and the contract (the New PCC Contract and the amendment) thereof with our NP Partner that became effective November 16, 2023 (with the exercise of the first of four one-year extension options on November 16, 2024). However, the PCC Community contributed lower revenues as compared to 2023 driven primarily by lower non-cash revenue amortization of $118.2 million related to an advanced payment for community expansion associated with the prior contract that became fully amortized as of November 2023, and to a lesser extent, by a decrease of $22 million in the minimum lease revenue component of the New PCC Contract amendment compared to the prior contract that ended in November 2023 as well as $21 million of lower variable services revenue generated by the New PCC Contract. The New PCC Contract terminated effective February 21, 2025 as discussed in Note 20 of our audited consolidated financial statements located in Part II, Item 8 within this annual report on Form 10-K.  The Company generated positive cash flows from operations of approximately $151.7 million representing a decrease in cash flows from operations of approximately $5.1 million or 3% for the year ended December 31, 2024 compared to the year ended December 31, 2023 driven by a $22.8 million increase in cash paid for income taxes, and a decrease in cash collections of $21.2 million, partially offset by a decrease in operating expenses of $24.4 million, and an $11.3 million decrease in cash paid for interest driven by a significant reduction in the average amount of debt outstanding during the current year compared to the prior year, and an increase in interest income of $3.2 million. During the year ended December 31, 2024, the Company also purchased 3,866,265 shares of Common Stock for an aggregate price of approximately $33.4 million (exclusive of estimated excise taxes of approximately $0.2 million).

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For the year ended December 31, 2024, key drivers of financial performance included:

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

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Our Government segment, including several communities in West, Texas supporting critical U.S. government efforts, deliver essential services and accommodations near the southern U.S. border where there is insufficient housing and infrastructure solutions to appropriately address immigration and deportation.

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Our proximity to customer activities influences occupancy and demand. We have built, own and operate the largest specialty rental and hospitality services network available to customers operating in the HFS – South region. 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.

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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.

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.

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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.

Public Policy

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

We are continuing to pursue an expanding pipeline of government services growth opportunities, and we believe there is significant opportunity to continue to assist the federal government. However, available government funding and economic incentives are subject to change for a variety of reasons that are beyond our control, including budget and policy initiatives and priorities of current and future administrations at the federal and state level. We cannot predict what actions the new Trump administration may take with respect to government contracts that were previously executed.

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 public health threats or outbreaks, 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 68.8% of our revenue was earned from specialty rental with vertically integrated hospitality services, specifically lodging and related ancillary services, whereas the remaining 31.2% of revenues were earned through leasing of lodging facilities for the year ended December 31, 2024. 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.

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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 segment, the consumer price index impacting government contracts, and government spending on housing programs.

Adjusted Gross Profit

We analyze our adjusted gross profit, which is a Non-GAAP measure, which we define as revenues less services and specialty rentals costs, excluding impairment, certain severance costs, 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, noncash impairment and depreciation expenses, and certain severance costs not reflective of the ongoing results of Target Hospitality. 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 two reportable business segments: HFS – South and Government:

HFS - South

The HFS – South segment reflects our facilities and operations in the HFS – South region from customers in the natural resources development industry and includes our 16 communities located across Texas and New Mexico.

Government

The Government segment includes facilities and operations provided under a lease and services agreement with our NP Partner, backed by a committed U.S. government contract, to provide a suite of comprehensive service offerings in support of their aid efforts.  As discussed in Note 20 of our audited consolidated financial statements located in Part II, Item 8 within this annual report on Form 10-K, the lease and services agreement with the NP Partner was terminated effective February 21, 2025.

Additionally, this segment includes the facilities and operations of the DIPC provided under the STFRC Contract, which was terminated effective August 9, 2024, but was reactivated under the DIPC Contract effective March 5, 2025.

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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 Canada, three communities in North Dakota, 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:

Government Segment

During the year ended December 31, 2022, the Company executed the Expanded Contract that went into effect in May 2022 to provide enhanced infrastructure and comprehensive facility services that support the critical hospitality solutions the Company provides to the NP Partner and the U.S. government in their missions. The Expanded Contract provided for a significant scope expansion and term extension for the continuation of services provided under the prior agreement that originated in March 2021. The Expanded Contract operated with similar structure to the Company’s prior government services subcontracts, which are centered around minimum revenue amounts supported by the U.S. government. Additionally, the Expanded Contract included occupancy-based variable services revenue that aligned with active community population. The minimum revenue amount, which consisted of annual lease revenue and nonrecurring infrastructure enhancement revenue, provided for a minimum annual revenue contribution of approximately $390 million and was fully committed over its initial contract term. Inclusive of all potential occupancy-based variable services revenue, the Expanded Contract provided for a maximum initial annual total contract amount of approximately $575 million. On May 15, 2023, the Company executed a six-month extension of the Expanded Contract, which extended the period of performance through November 15, 2023 and increased the contract value, with no change to contract structure or any other existing economic terms. The Expanded Contract terminated on November 15, 2023. The non-recurring infrastructure enhancement revenue was generated from an advance payment made during the year ended December 31, 2022 for the community build-out, and mobilization of asset activities related to the community expansion associated with the Expanded Contract.  The advanced payment was determined to be related to future services to be amortized to revenue over the estimated term of the Expanded Contract.  This advance payment revenue amortization ended when the Expanded Contract terminated on November 15, 2023.  As such, the prior period for the year ended December 31, 2023 included this revenue amortization in the amount of approximately $118.2 million, whereas the current period does not. Additionally, the Expanded Contract included an annual minimum lease revenue amount of approximately $196 million that impacted the prior period compared to the current period being impacted by an annual minimum lease revenue amount of approximately $178 million to $168 million under the New PCC Contract explained below.

During the year ended December 31, 2023, the Company executed the New PCC Contract, pursuant to an Indefinite Delivery, Indefinite Quantity Task Order between our NP Partner and the U.S. government, that replaced the Expanded Contract and became effective on November 16, 2023. The New PCC Contract includes a one year base period through November 15, 2024, an option to extend for up to four additional one year periods, and an option to extend for up to six months upon the conclusion of the base period or any of the option periods. Under the New PCC Contract, the Company maintains similar facility size and operational scope compared to the Expanded Contract. The New PCC Contract operates with similar structure to the Company’s prior government services subcontracts, which are centered around minimum revenue amounts supported by the U. S. government. Additionally, the New PCC Contract includes occupancy-based variable services revenue that align with active community population.  During the year ended December 31, 2024, the Company executed the first of four one-year extension options on the New PCC Contract along with an amendment, effective November 16, 2024, which supports a community capable of serving up to 6,000 individuals. The minimum revenue amount, which consist of annual lease revenue, provide for a minimum annual revenue contribution of approximately $168 million, which decreased from $178 million pursuant to the amendment of the New PCC Contract on November 16, 2024. Assuming all option periods are exercised, the 5-year cumulative minimum revenue amount of the New PCC Contract is expected to be approximately $851 million through 2028. As discussed in Note 20 of our audited

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consolidated financial statements located in Part II, Item 8 within this annual report on Form 10-K, the New PCC Contract with the NP Partner was terminated effective February 21, 2025.

Additionally, the termination of the STFRC Contract as well as the change from the prior Expanded Contract to the New PCC Contract impacts comparability between periods.

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.

Consolidated Results of Operations for the years ended December 31, 2024, 2023 and 2022($ in thousands):

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Comparison of Years Ended December 31, 2024 and 2023

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Total Revenue. Total revenue was $386.3 million for the year ended December 31, 2024 as compared to $563.6 million for the year ended December 31, 2023, and consisted of $265.9 million of services income and $120.4 million of specialty rental income. Total revenue for the year ended December 31, 2023 consisted of $365.6 million of services income and $198.0 million of specialty rental income.

Services income consists primarily of specialty rental and vertically integrated and comprehensive hospitality services including room revenue, catering and food services, maintenance, housekeeping, grounds-keeping, security, overall workforce community management services, health and recreation facilities, concierge services, and laundry service. The main drivers of the decrease in services income revenue year over year was lower revenue in the Government segment in the current period from the decrease in the non-cash revenue amortization that ended in November 2023 associated with the advanced payment from the prior Expanded Contract that terminated on November 15, 2023, partially by lower minimum lease revenue as well as lower variable services revenue generated by the New PCC contract and the New PCC Contract amendment in the current period, and the termination of the STFRC Contract.

Specialty rental income consists primarily of revenues from leasing rooms and other facilities at certain communities that include contractual arrangements with customers that are considered leases under the authoritative accounting guidance

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for leases. Specialty rental income decreased primarily as a result of lower revenue in the Government segment from the decrease in the non-cash revenue amortization that ended in November 2023 associated with the advanced payment from the prior Expanded Contract that terminated on November 15, 2023, partially by lower minimum lease revenue as well as lower variable services revenue generated by the New PCC contract in the current period, and the termination of the STFRC Contract.

Cost of services. Cost of services was $132.1 million for the year ended December 31, 2024 as compared to $151.6 million for the year ended December 31, 2023. The decrease in services costs is primarily due to a decrease in services costs in the Government segment driven primarily by operational efficiencies and reduced leasing costs associated with certain leases that were terminated at the PCC Community, including lease terminations as a result of the purchase of certain previously leased equipment, and partially driven by lower occupancy at the PCC Community. Approximately $1 million of this decrease was driven by a community in the All Other Category that incurred lodge removal and transportation costs in the prior period that did not recur in the current period, while approximately $3.3 million of this decrease was driven by the termination of the STFRC Contract.  These decreases were partially offset by an increase of approximately $1.9 million in the HFS-South segment related to an increase in operational costs from community expansion to support increased customer demand in the HFS-South segment, partially offset by the prior period including asset mobilization and integration costs associated with a new community acquired in January 2023 that did not recur in the current period and operational efficiencies achieved in the current period.

Specialty rental costs. Specialty rental costs were approximately $18.8 million for the year ended December 31, 2024 as compared to $30.1 million for the year ended December 31, 2023. The decrease in specialty rental costs is primarily due to a decrease in costs from the Government segment driven by operational efficiencies and reduced leasing costs associated with certain leases terminated at the PCC Community and termination of the STFRC Contract in the Government segment.

Depreciation of specialty rental assets. Depreciation of specialty rental assets was $57.2 million for the year ended December 31, 2024 as compared to $68.6 million for the year ended December 31, 2023. The decrease in depreciation expense is primarily attributable to a decrease in depreciation on certain specialty rental assets and related leasehold improvements acquired or built in 2022 to support growth of the Government segment related to the Expanded Contract, which became fully depreciated during the year ended December 31, 2023, while approximately $3 million of this decrease was driven by a decrease in depreciation of specialty rental assets in the HFS-South segment for certain assets that became fully depreciated during 2024.

Selling, general and administrative. Selling, general and administrative was $54.3 million for the year ended December 31, 2024 as compared to $56.1 million for the year ended December 31, 2023. The decrease in selling, general and administrative expenses of ($1.9) million was primarily driven by a decrease in stock compensation expense of approximately $3.9 million largely from the liability-based stock appreciation right awards (“SARs”) driven by a lower number of SAR awards outstanding during the current period compared to the prior period as approximately 50% of such awards were outstanding as of December 31, 2023 compared to 0% in the current period as there are no remaining awards outstanding as of December 31, 2024 as these awards vested and were exercised as of December 31, 2024. Amortization of system implementation costs also decreased by approximately $0.7 million from the prior year as such costs became fully amortized in May of 2024 as scheduled. Recruiting expenses also decreased by approximately $0.4 million from the prior year. These decreases were partially offset by an increase in severance of approximately $1.0 million for certain terminated employees during the year ended December 31, 2024, other compensation and benefits cost increases of approximately $0.4 million, audit fee increases of approximately $0.4 million, other professional fee increases of approximately $0.5 million, and an increase in expense for a non-cash share settlement on December 12, 2024 with a former non-employee director of the Company of approximately $0.8 million based on the value of the settlement shares on the settlement date.

Other depreciation and amortization. Other depreciation and amortization expense was $15.6 million for the year ended December 31, 2024 as compared to $15.4 million for the year ended December 31, 2023. The increase in other depreciation and amortization is primarily driven by an increase in depreciation associated with an increase in finance leases for commercial use vehicles.

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Other expense, net. Other expense (income), net was ($0.5) million for the year ended December 31, 2024 as compared to $1.2 million for the year ended December 31, 2023. This decrease in expense is primarily driven by costs incurred on the disposal of assets in the All Other segment category in the prior year, which did not recur in the current year.

Loss on extinguishment of debt. Loss on extinguishment of debt was $0 for the year ended December 31, 2024 as compared to $2.3 million for the year ended December 31, 2023. The decrease in loss on extinguishment of debt is due to the partial redemption of Arrow Bidco’s 9.50% Senior Secured Notes due 2024 (the “2024 Senior Secured Notes”) on March 15, 2023, which was accounted for as a partial extinguishment of debt and resulted in a charge of approximately $1.7 million related to the write-off of unamortized deferred financing costs and unamortized original issue discount. Approximately $0.4 million of the change related to the write-off of unamortized deferred financing costs for non-continuing lenders in connection with the First Amendment to the ABL Facility on February 1, 2023. The remainder of the change relates to the write-off of approximately $0.2 million of the remaining unamortized deferred financing costs and unamortized original issue discount associated with the redemption on November 21, 2023 of the remaining portion of the 2024 Senior Secured Notes that were not exchanged for the new 2025 Senior Secured Notes in Arrow Bidco’s offer to exchange (the “Notes Exchange Offer”) any and all of its outstanding 2024 Senior Secured Notes for cash and for the 2025 Senior Secured Notes. No such activity occurred in the current period. Refer to Note 8 of the notes to our audited consolidated financial statements in Part II, Item 8 within this Annual Report on Form 10-K for further discussion regarding extinguishment of debt and the Notes Exchange Offer.

Interest expense, net. Interest expense, net was $16.6 million for the year ended December 31, 2024 as compared to interest expense, net of $22.6 million for the year ended December 31, 2023. The change in interest expense, net was primarily driven by a decrease in interest expense on the Senior Secured Notes by approximately $2.9 million driven by a lower outstanding debt balance in current year as approximately $153.1 million of the Senior Secured Notes were paid off during the year ended December 31, 2023. Approximately $1.9 million of this decrease was driven by lower deferred financing cost amortization on the Senior Secured Notes during the current year due to the write-off of unamortized deferred financing costs during the year ended December 31, 2024 driven by the partial extinguishment of debt associated with the partial redemption of the 2024 Senior Secured Notes discussed above. Approximately $2.6 million of this decrease was driven by an increase in interest income earned on cash equivalents funded by the increase in available cash as a result of cash flows from operations. These decreases were partially offset by an increase in Senior Secured Note original issue discount amortization of approximately $1 million driven by fees incurred in connection with the Senior Note Exchange that closed on November 1, 2023 as more fully discussed in Note 8 of the notes to our audited consolidated financial statements in Part II, Item 8 within this Annual Report on Form 10-K. Additionally, these decreases were partially offset by an increase in ABL Facility deferred financing costs amortization and unused line fee expenses combined of approximately $0.3 million driven by the ABL Facility amendments completed in the prior year.

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 ($0.7) million for the year ended December 31, 2024 as compared to ($9.1) million for the year ended December 31, 2023. 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 decreased in the current year, generating an increase to income in the current year. There was also a lower number of outstanding Private Warrants in the current year compared to the prior year given the Private Warrants expired March 15, 2024 as discussed in Note 9 of the notes to our audited consolidated financial statements in Part II, Item 8 within this Annual Report on Form 10-K.

Income tax expense.  Income tax expense was $21.4 million for the year ended December 31, 2024 as compared to $51.1 million for the year ended December 31, 2023. The decrease in income tax expense is primarily attributable to a decrease in income before income tax for the year ended December 31, 2024 led by a decrease in revenue, partially offset by cost decreases previously mentioned.

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Comparison of the Years Ended December 31, 2023 and 2022

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For discussion of the comparison of our operating results for the years ended December 31, 2023 and 2022, please read the “Comparison of Years Ended December 31, 2023 and 2022” section located in the Management Discussion & Analysis section in our Annual Report on From 10-K for the year ended December 31, 2023 filed on March 13, 2024 and is incorporated herein by reference.

Segment Results

The following table sets forth our selected results of operations for each of our reportable segments for the years ended December 31, 2024, 2023 and 2022 ($ in thousands, except for Average Daily Rate amounts).

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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.

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Comparison of Years Ended December 31, 2024 and 2023

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Government

Revenue for the Government segment was $224.7 million for the year ended December 31, 2024 as compared to $403.8 million for the year ended December 31, 2023.

Adjusted gross profit for the Government segment was $185.3 million for the year ended December 31, 2024 as compared to $332.5 million for the year ended December 31, 2023.

Revenue decreased primarily due to the decrease in the non-cash revenue amortization of approximately $118.2 million that ended in November 2023 associated with the advanced payment from the prior Expanded Contract that terminated on November 15, 2023 and partially by lower minimum lease revenue of approximately $22 million as well as lower variable services revenue of approximately $21 million generated by the New PCC contract in the current year. This was also partially driven by a decrease in revenue of approximately $18 million from the South Texas Family Residential Center led by the STFRC Contract termination as previously discussed.

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Adjusted gross profit decreased as a result of the decrease in revenue mentioned above, partially offset by lower costs due to operational efficiencies and reduced leasing costs associated with certain leases that were terminated at the PCC Community, including lease terminations as a result of the purchase of certain previously leased equipment. This was also partially offset by a decrease in costs of approximately $6.4 million from the South Texas Family Residential Center led by the STFRC Contract termination previously discussed.

Hospitality & Facilities Services - South

Revenue for the HFS – South segment was $149.9 million for the year ended December 31, 2024, as compared to $148.7 million for the year ended December 31, 2023.

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Adjusted gross profit for the HFS – South segment was $50.8 million for the year ended December 31, 2024, as compared to $51.4 million for the year ended December 31, 2023.

The increase in revenue of approximately $1.3 million was primarily attributable to an increase in customer demand and more communities in operation during the year ended December 31, 2024.

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The decrease in adjusted gross profit of approximately $0.6 million was primarily attributable to an increase in operational costs from community expansion to support increased customer demand, partially offset by a decrease in service costs driven by the prior year including asset mobilization and integration costs associated with the new community acquired in January 2023 that did not recur in the current year and by operational efficiencies achieved in the current year. The increase in revenue noted above also partially offset this decrease.

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Comparison of the Years Ended December 31, 2023 and 2022

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For discussion of the comparison of our operating results for the years ended December 31, 2023 and 2022, please read the “Comparison of Years Ended December 31, 2023 and 2022” section located in the Management Discussion & Analysis section in our Annual Report on Form 10-K for the year ended December 31, 2023 filed on March 13, 2024 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, principal debt payments, debt service requirements, and capital expenditures. As of December 31, 2024, the ABL Facility had unused available borrowing capacity of $175 million. 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, acquisition, and diversification strategy discussed in Item 1, “Business” of this Annual Report on Form 10-K, 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 continue to review available acquisition opportunities with the awareness that any such acquisition may require us to incur additional debt to finance the acquisition and/or to issue shares of our Common Stock or other equity securities as acquisition consideration or as part of an overall financing plan. We will continue to evaluate alternatives to optimize our capital structure, which could include the issuance or repurchase of additional unsecured and secured debt, equity securities and/or equity-linked securities.  There can be no assurance as to the timing of any such issuance or repurchase.  From time to time, we may also seek to streamline our capital structure and improve our financial position through refinancing or restructuring our existing debt or retiring certain of our securities for cash or other consideration. For additional discussion of risks related to our liquidity and capital resources, refer to the section titled “Risk Factors” in Part I Item 1A of this Annual Report on Form 10-K.

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Capital Requirements

During the year ended December 31, 2024, we incurred approximately $32.5 million in capital expenditures, which decreased by approximately $33.1 million compared to the year ended December 31, 2023 largely driven by lower growth capital expenditures, led by the HFS-South segment and partially driven by the Government segment, partially offset by higher maintenance capital expenditures of approximately $6.5 million, and an increase in finance lease assets of approximately $1 million. Our total annual 2024 capital spending included approximately $15.8 million of capital expenditures driven by the HFS-South segment and approximately $15.5 million driven by the Government segment, most of which was comprised of maintenance capital expenditures. In 2022, capital expenditures incurred increased from 2021, primarily driven by growth projects to increase community capacity, mainly in the Government segment.  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 5.4% of annual revenue between 2020 and 2024, with an average cost of approximately 2.9% of annual revenue. Maintenance capital expenditures for specialty rental assets amounted to approximately $20.7 million, $14.2 million, and $12.3 million for the years ended December 31, 2024, 2023 and 2022, 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:

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Comparison of Years Ended December 31, 2024 and 2023

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Cash flows provided by operating activities. Net cash provided by operating activities was $151.7 million for the year ended December 31, 2024 compared to $156.8 million for the year ended December 31, 2023. This decrease in net cash provided by operating activities relates primarily to a $22.8 million increase in cash paid for income taxes, and a decrease in cash collections of $21.2 million, partially offset by a decrease in operating expenses of $24.4 million driven by a decrease of approximately $3.9 million in cash payments for the vested SAR awards, and by a decrease in operating expenses led by the Government segment driven by operational efficiencies and reduced leasing costs associated with certain leases that were terminated at the PCC Community, including lease terminations as a result of the purchase of certain previously leases equipment, and partially driven by lower occupancy at the PCC Community as well as the termination of the STFRC Contract, and an $11.3 million decrease in cash paid for interest driven by a significant reduction in the average amount of debt outstanding during the current year compared to the prior year, and an increase in interest income of $3.2 million.

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Cash flows used in investing activities. Net cash used in investing activities was $28.8 million for the year ended December 31, 2024 compared to $68.2 million for the year ended December 31, 2023. This decrease in net cash used in investing activities was primarily related to a decrease in growth capital expenditures in the HFS – South segment with the largest single driver being the $18.6 million acquisition of community assets and related intangibles in January 2023,

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supporting continued customer demand. To a lesser extent, the net decrease was related to a $5.0 million acquisition of community assets in April 2023 and $1.3 million worth of land acquisitions during the year ended December 31, 2023, supporting Government segment growth. The remainder of the decrease was driven by a decrease in other growth capital expenditures in the Government segment as the prior period included expansion related activities associated with the Expanded Contract that became effective on May 16, 2022 and drove a significant amount of capital expenditure spend into 2023.

Cash flows used in financing activities. Net cash used in financing activities was $36.1 million for the year ended December 31, 2024 compared to $166.4 million for the year ended December 31, 2023. The decrease in net cash used in financing activities was driven primarily by the prior year including approximately $153.1 million of combined repayments related to the 2024 Senior Secured Notes on March 15, 2023 and November 21, 2023. The prior year also included payments of deferred financing costs of approximately $5.2 million associated with the ABL Facility amendments and the issuance of the 2025 Senior Secured Notes on November 1, 2023 in connection with the Notes Exchange Offer, whereas the current year had no such payments. The decrease in net cash used in financing activities was also driven by the prior year including the payment of accrued issuance costs from the warrant exchange of $1.5 million that closed in December of 2022, and taxes paid related to net share settlement of equity awards of approximately $6.8 million. These decreases in net cash used in financing activities were partially offset by the current year increase in net cash used in financing activities of approximately $33.4 million for the repurchase of Common Stock as part of the share repurchase program, combined with taxes paid related to net share settlement of equity awards of $2.6 million in the current year.

Comparison of the Years Ended December 31, 2023 and 2022

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For discussion of the comparison of our operating results for the years ended December 31, 2023 and 2022, please read the “Comparison of Years Ended December 31, 2023 and 2022” section located in the Management Discussion & Analysis section in the our Annual Report on Form 10-K for the year ended December 31, 2023 filed on March 13, 2024 and is incorporated herein by reference.

Indebtedness

The Company’s finance lease and other financing obligations as of December 31, 2024 consisted of $3.3 million of finance leases. The finance leases pertain to leases entered into during 2022 through December 31, 2024, for commercial-use vehicles with 48 to 36-month terms (and continue on a month-to-month basis thereafter) expiring through 2028. Refer to Notes 1, 8, and 13 of the notes to our audited consolidated financial statements included in Part II, Item 8 within this Annual Report on Form 10-K for further discussion regarding finance leases.

The Company’s finance lease and other financing obligations as of December 31, 2023, consisted of approximately $2.4 million of finance leases related to commercial-use vehicles with the same terms as described above.

ABL Facility

On March 15, 2019, as amended on February 1, 2023, August 10, 2023, and October 12, 2023, 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 $175 million (the “ABL Facility”) with a termination date of February 1, 2028, which termination date is subject to a springing maturity that will accelerate the maturity of the ABL Facility if any of the 2025 Senior Secured Notes remain outstanding on the date that is ninety-one days prior to the stated maturity date thereof.  During the year ended December 31, 2022, $70 million was drawn and $70 million was repaid on the ABL Facility.  During the years ended December 31, 2024 and 2023, respectively no amounts were drawn or repaid on the ABL Facility resulting in an outstanding balance of $0 as of December 31, 2024 and 2023, respectively. Refer to Note 8 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.

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Senior Secured Notes

On March 15, 2019, Arrow Bidco issued $340 million in aggregate principal amount of 2024 Senior Secured Notes under an indenture dated March 15, 2019 (the “2024 Notes Indenture”). The 2024 Notes Indenture was entered into by and among Arrow Bidco, the guarantors named therein (the “2024 Senior Secured Note Guarantors”), and Deutsche Bank Trust Company Americas, as trustee and as collateral agent. Interest was payable semi-annually on September 15 and March 15 and began September 15, 2019. During the year ended December 31, 2022, the Company made an elective repayment of approximately $5.5 million on the 2024 Senior Secured Notes, reducing the principal balance outstanding to $334.5 million from an original principal balance of $340 million. On March 15, 2023, Arrow Bidco redeemed $125 million in aggregate principal amount of the outstanding 2024 Senior Secured Notes. The redemption was accounted for as a partial extinguishment of debt. In connection with the Notes Exchange Offer, on November 1, 2023 (the “Notes Exchange Offer Settlement Date”), approximately $181.4 million of 2024 Senior Secured Notes were exchanged by Arrow Bidco and Arrow Bidco issued approximately $181.4 million in aggregate principal amount of the 2025 Senior Secured Notes pursuant to an indenture, dated November 1, 2023, by and among Arrow Bidco, the guarantors from time to time party thereto and Deutsche Bank Trust Company Americas, as trustee and collateral agent (the “2025 Senior Secured Notes Indenture”). Interest is payable semi-annually on March 15 and September 15 of each year, beginning March 15, 2024. Following this issuance and related transactions, approximately $28.1 million aggregate principal amount of 2024 Senior Secured Notes remained outstanding, which were subsequently redeemed on November 21, 2023 resulting in an outstanding balance of $0. As of December 31, 2024, none of the 2024 Senior Secured Notes remain outstanding and the 2025 Senior Secured Notes had an outstanding principal balance of $181.4 million. Refer to Note 8 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, the Notes Exchange Offer, and the 2025 Senior Secured Notes.

Cash requirements

We expect that our principal short-term (over the next 12 months) and long-term needs for cash relating to our operations will be to primarily fund (i) operating activities and working capital, (ii) maintenance capital expenditures for specialty rental assets, (iii) payments due under finance and operating leases, and (iv) debt service interest payments. We plan to fund such cash requirements from our existing sources of liquidity as previously discussed. The table below presents information on payments coming due under the most significant categories of our needs for cash (excluding operating cash flows pertaining to normal business operations, other than operating lease obligations) as of December 31, 2024 ($ in thousands):

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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.

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, 2023, our network included 28 communities to better serve our customers across the US and Canada.

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Economic Update

During the year ended December 31, 2023, the Company continued to experience increasing revenue in the HFS – South segment due to continued improving customer demand and increasing activity in the HFS – South segment as compared to the year ended December 31, 2022. The Company’s Government segment continued to benefit from the Pecos Children’s Center (“PCC”) contract and the new contracts (the Expanded Humanitarian Contract and the New PCC Contract) thereof with our NP Partner that became effective May 16, 2022 and November 16, 2023, respectively. The Company generated positive cash flows from operations of approximately $156.8 million representing a decrease in cash flows from operations of approximately $148.8 million or 49% for the year ended December 31, 2023 compared to the year ended December 31, 2022 driven by the prior period including a significant $194 million upfront payment for expansion efforts related to the Expanded Humanitarian Contract, which did not recur in the current period. The Company also reduced its outstanding debt balance on the Senior Secured Notes by $153.1 million or 46% during the year ended December 31, 2023 and reduced interest expense, net by approximately $13.7 million or 38% during the year ended December 31, 2023 compared to the year ended December 31, 2022. The Company executed amendments to the ABL Facility which extended the termination date on the ABL Facility from September 15, 2023 to February 1, 2028 and increased the capacity of the ABL Facility from $125 million to $175 million. Additionally, the Company conducted the Notes Exchange Offer (as defined in Note 8 of the notes to our audited consolidated financial statements in Part II) and issued approximately $181.4 million in  2025 Senior Secured Notes to eligible holders whose 2024 Senior Secured Notes (as defined below) were accepted for exchange in the Notes Exchange Offer on November 1, 2023. Following the Notes Exchange Offer, approximately $28.1 million aggregate principal amount of 2024 Senior Secured Notes remained outstanding, which were subsequently redeemed on November 21, 2023.

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For the year ended December 31, 2023, key drivers of financial performance included:

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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.

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Our Government segment, including the South Texas Family Residential Center and several communities in West, Texas supporting critical United States government humanitarian aid efforts, deliver essential services and accommodations near the southern United States border where there is insufficient housing and infrastructure solutions to appropriately care for asylum-seeking families and unaccompanied minor immigrants.  Demand for these communities and services is influenced by immigration activity, where continued increases in migrant populations has increased government spending and demand for appropriate government supported solutions.

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Our proximity to customer activities influences occupancy and demand. We have built, own and operate the largest specialty rental and hospitality services network available to customers operating in the HFS – South region. 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.

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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.

Supply and Demand for Natural Resources

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

Availability and Cost of Capital

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

Regulatory Compliance

We are subject to extensive federal, state, local, and foreign environmental, health and safety laws and regulations concerning matters such as air emissions, wastewater discharges, solid, and hazardous waste handling and disposal and

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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.

Public Policy

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

Natural Disasters or Other Significant Disruption

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

Overview of Our Revenue and Operations

We derive the majority of our revenue from specialty rental accommodations and vertically integrated hospitality services. Approximately 64.9% of our revenue was earned from specialty rental with vertically integrated hospitality services, specifically lodging and related ancillary services, whereas the remaining 35.1% of revenues were earned through leasing of lodging facilities for the year ended December 31, 2023. 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.  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.

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

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for our services. Key drivers to change in revenues may include average utilization of existing beds, levels of development activity in the HFS – South segment, the consumer price index impacting government contracts, and government spending on housing programs.

Adjusted Gross Profit

We analyze our adjusted gross profit, which is a Non-GAAP measure, 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

As discussed in Note 20 (Business Segments) of the notes to our audited consolidated financial statements included in Part II, Item 8 within this Annual Report on Form 10-K, during 2023 the Company reduced the number of reportable segments from four to two as the additional two previously reportable segments (“TCPL Keystone” and “HFS – Midwest”) became quantitatively immaterial and are now combined in the “All Other” category for all periods presented.

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

HFS - South

The HFS – South segment reflects our facilities and operations in the HFS – South region from customers in the natural resources development industry and includes our 16 communities located across Texas and New Mexico.

Government

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

All Other

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

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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:

Termination of the TCPL Keystone Contract

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

Government Segment Growth

A significant new contract was originated in the Government segment in March of 2021 with our NP Partner, backed by a committed United States Government contract, to provide a suite of comprehensive service offerings in support of their humanitarian aid efforts. During the year ended December 31, 2022, the Company executed the Expanded Humanitarian Contract to provide enhanced infrastructure and comprehensive facility services that support the critical hospitality solutions the Company provides to the NP Partner and the U.S. Government in their humanitarian aid missions. The Expanded Humanitarian Contract provided for a significant scope expansion and term extension for the continuation of services provided under the agreement that originated in March 2021. The Expanded Humanitarian Contract operated with similar structure to the Company’s prior and existing government services subcontracts, which are centered around minimum revenue commitments supported by the United States Government. Additionally, the Expanded Humanitarian Contract included occupancy-based variable services revenue that aligned with active community population. The minimum revenue commitments, which consisted of annual recurring lease revenue and nonrecurring infrastructure enhancement revenue, provided for a minimum annual revenue contribution of approximately $390 million and was fully committed over its initial contract term. Inclusive of all potential occupancy-based variable services revenue, the Expanded Humanitarian Contract provided for a maximum initial annual total contract amount of approximately $575 million. On May 15, 2023, the Company executed a six-month extension of the Expanded Humanitarian Contract, which extended the period of performance through November 15, 2023 and increased the contract value, with no change to contract structure or any other existing economic terms. The Expanded Humanitarian Contract terminated as of November 15, 2023. During the year ended December 31, 2023, the Company executed the New PCC Contract, pursuant to an Indefinite Delivery, Indefinite Quantity Task Order between our NP Partner and the U.S. Government, that replaced the Expanded Humanitarian Contract and became effective on November 16, 2023. The New PCC Contract includes a one year base period through November 15, 2024, an option to extend for up to four additional one year periods, and an option to extend for up to six months upon the conclusion of the base period or any of the option periods. Under the New PCC Contract, the Company will maintain similar facility size and operational scope compared to the Expanded Humanitarian Contract. The New PCC Contract operates with similar structure to the Company’s prior and existing government services subcontracts, which are centered around minimum revenue commitments supported by the United States Government. Additionally, the New PCC Contract includes occupancy-based variable services revenue that will align with active community population. The minimum revenue commitments, which consist of annual recurring lease revenue, provide for a minimum annual revenue contribution of approximately $178 million. Assuming all option periods are exercised, the 5-year cumulative minimum revenue commitment of the New PCC Contract is expected to be approximately $892 million through 2028. Inclusive of the minimum revenue commitment and all potential occupancy-based variable services revenue, the New PCC Contract provides for a maximum total contract amount of approximately $1.8 billion through 2028, assuming all option periods are exercised.

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, 2023, 2022 and 2021($ in thousands):

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Comparison of Years Ended December 31, 2023 and 2022

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Total Revenue. Total revenue was $563.6 million for the year ended December 31, 2023 as compared to $502.0 million for the year ended December 31, 2022, and consisted of $365.6 million of services income and $198.0 million of specialty rental income. Total revenue for the year ended December 31, 2022 consisted of $333.7 million of services income and $168.3 million of specialty rental income.

Services income consists primarily of specialty rental and vertically integrated and comprehensive hospitality services including catering and food services, maintenance, housekeeping, grounds-keeping, security, overall workforce community management services, health and recreation facilities, concierge services, and laundry service. The main drivers of the increase in services income revenue year over year was the growth in the Government segment, primarily from fixed minimum contractual revenue commitments that are unaffected by changes in occupancy, combined with a continued increase in customer activity in the HFS – South segment as well as a slight increase in the All Other segment.

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

Cost of services. Cost of services was $151.6 million for the year ended December 31, 2023 as compared to $174.2 million for the year ended December 31, 2022. The decrease in services costs is primarily due to a decrease in services costs in the Government segment driven by a decrease in occupancy, partially offset by an increase in service costs in the HFS – South segment driven by the increase in customer activity mentioned above, which also led to more communities in operation during the current period, including a new community acquired in January 2023 to support growth in the HFS –South segment. This increase in services costs was also partially driven by communities in the All Other category from an increase in customer activity.

Specialty rental costs. Specialty rental costs were approximately $30.1 million for the year ended December 31, 2023 as compared to $27.8 million for the year ended December 31, 2022. The increase in specialty rental costs is primarily due to an increase in costs related to growth in the Government segment.

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Depreciation of specialty rental assets. Depreciation of specialty rental assets was $68.6 million for the year ended December 31, 2023 as compared to $52.8 million for the year ended December 31, 2022. The increase in depreciation expense is primarily attributable to an increase in depreciation on specialty rental assets acquired in 2022 to support growth of the Government segment related to the Expanded Humanitarian Contract.

Selling, general and administrative. Selling, general and administrative was $56.1 million for the year ended December 31, 2023 as compared to $57.9 million for the year ended December 31, 2022. The decrease in selling, general and administrative expenses of $1.8 million was primarily driven by a decrease in stock compensation expense of approximately $8 million largely from the liability-based stock appreciation right awards (“SARs”) led primarily by vesting and exercises of approximately 50% of the prior period outstanding awards that occurred during March 2023, which reduced the number of liability-based SAR awards outstanding in the current year and generated lower expense, while a portion of this decrease was driven by a reduction in the estimated value of the SARs year over year.  This was partially offset by a $4.6 million increase in transaction fees led by the Notes Exchange Offer, and a $1.3 million increase in insurance expense driven by growth of the business.

Other depreciation and amortization. Other depreciation and amortization expense was $15.4 million for the year ended December 31, 2023 as compared to $14.8 million for the year ended December 31, 2022. The increase in other depreciation and amortization is primarily driven by an increase in depreciation associated with an increase in finance leases.

Other expense, net. Other expense, net was $1.2 million for the year ended December 31, 2023 as compared to less than $0.1 million for the year ended December 31, 2022. This increase in expense is primarily driven by costs incurred on the disposal of assets in the All Other segment category in the current period.

Loss on extinguishment of debt. Loss on extinguishment of debt was $2.3 million for the year ended December 31, 2023 as compared to $0 for the year ended December 31, 2022. The increase in loss on extinguishment of debt is primarily due to the partial redemption of the 2024 Senior Secured Notes on March 15, 2023, which was accounted for as a partial extinguishment of debt and resulted in a charge of approximately $1.7 million related to the write-off of unamortized deferred financing costs and unamortized original issue discount. Approximately $0.4 million of the change related to the write-off of unamortized deferred financing costs for non-continuing lenders in connection with the First Amendment to the ABL Facility on February 1, 2023. The remainder of the change relates to the write-off of approximately $0.2 million of the remaining unamortized deferred financing costs and unamortized original issue discount associated with the redemption on November 21, 2023 of the remaining portion of the 2024 Senior Secured Notes that were not exchanged for the new 2025 Senior Secured Notes in the Notes Exchange Offer. Refer to Note 8 of the notes to our audited consolidated financial statements in Part II, Item 8 within this Annual Report on Form 10-K for further discussion regarding extinguishment of debt and the Notes Exchange Offer.

Interest expense, net. Interest expense, net was $22.6 million for the year ended December 31, 2023 as compared to interest expense, net of $36.3 million for the year ended December 31, 2022. The change in interest expense, net was primarily driven by a decrease in interest expense on the Senior Secured Notes driven by a lower average outstanding debt balance in current year compared to the prior year as approximately $153.1 million of the Senior Secured Notes were paid off during the year ended December 31, 2023, whereas approximately $5.5 million of the Senior Secured Notes were repaid during the year ended December 31, 2022. This change in interest expense was also partially driven by lower interest expense associated with the ABL Facility as it had no outstanding balance in the current year compared to an average outstanding balance in the prior year.  Approximately $2.6 million of this decrease was driven by interest income earned on cash equivalents funded by the increase in available cash due to growth of the business, led by the Government segment. These decreases were partially offset by approximately $1.0 million of interest that was capitalized during the year ended December 31, 2022 in connection with capital project activity driven by the expansion in the Government segment associated with the Expanded Humanitarian Contract.  Interest was not capitalized during the year ended December 31, 2023 as there were no such expansion activities during that period.

Change in fair value of warrant liabilities. Change in fair value of warrant liabilities represents the fair value adjustments to the outstanding Private Warrant liabilities based on the change in their estimated fair value at each reporting period end. The change in fair value of the warrant liabilities was ($9.1) million for the year ended December 31, 2023 as compared

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to $31.7 million for the year ended December 31, 2022. The change in the fair value of the warrant liabilities is the result of changes in market prices deriving the value of the financial instruments. The estimated value of the Private Warrants decreased in the current year, generating an increase to income in the current year. There was also a lower number of average outstanding Private Warrants throughout the current year compared to the prior year as a result of the Warrant Exchange that closed on December 22, 2022 as discussed in Note 17 of the notes to our audited consolidated financial statements in Part II, Item 8 within this Annual Report on Form 10-K.

Income tax expense.  Income tax expense was $51.1 million for the year ended December 31, 2023 as compared to $32.4 million for the year ended December 31, 2022. The increase in income tax expense is primarily attributable to an increase in income before income tax as well as an increase in state tax expense based off of gross receipts as a result of the increase in revenues due to improvements in overall operations and growth in the business from the Government segment.

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Comparison of the Years Ended December 31, 2022 and 2021

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For discussion of the comparison of our operating results for the years ended December 31, 2022 and 2021, please read the “Comparison of Years Ended December 31, 2022 and 2021” section located in the Management Discussion & Analysis section in our Annual Report on From 10-K for the year ended December 31, 2022 filed on March 10, 2023 and is incorporated herein by reference.

Segment Results

The following table sets forth our selected results of operations for each of our reportable segments for the years ended December 31, 2023, 2022 and 2021 ($ in thousands, except for Average Daily Rate amounts).

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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.

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Comparison of Years Ended December 31, 2023 and 2022

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Government

Revenue for the Government segment was $403.8 million for the year ended December 31, 2023 as compared to $360.3 million for the year ended December 31, 2022.

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Adjusted gross profit for the Government segment was $332.5 million for the year ended December 31, 2023 as compared to $246.6 million for the year ended December 31, 2022.

Revenue and adjusted gross profit increased as a result of the contracts originated in the Government segment in May of 2022 and November of 2023 as previously mentioned.

Hospitality & Facilities Services - South

Revenue for the HFS – South segment was $148.7 million for the year ended December 31, 2023, as compared to $132.4 million for the year ended December 31, 2022.

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Adjusted gross profit for the HFS – South segment was $51.4 million for the year ended December 31, 2023, as compared to $54.6 million for the year ended December 31, 2022.

The increase in revenue of approximately $16.3 million was primarily attributable to an increase in customer demand and more communities in operation during the current period, including a new community acquired in January 2023 to support growth in the HFS – South segment. This increase in revenue was also driven by an increase in average daily rate.

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The decrease in adjusted gross profit of approximately $3.2 million was primarily attributable to asset mobilization and integration costs associated with the new community acquired in January 2023, and partially driven by an increase in occupancy and customer activity as mentioned above, which drove more variable cost. This decrease was partially offset by an increase in average daily rate.

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Comparison of the Years Ended December 31, 2022 and 2021

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For discussion of the comparison of our operating results for the years ended December 31, 2022 and 2021, please read the “Comparison of Years Ended December 31, 2022 and 2021” section located in the Management Discussion & Analysis section in our Annual Report on Form 10-K for the year ended December 31, 2022 filed on March 10, 2023 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. As of December 31, 2023, the ABL Facility had unused available borrowing capacity of $175 million. 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, acquisition, and diversification strategy discussed in Item 1, “Business” of this Annual Report on Form 10-K, 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 continue to review available acquisition opportunities with the awareness that any such acquisition may require us to incur additional debt to finance the acquisition and/or to issue shares of our Common Stock or other equity securities as acquisition consideration or as part of an overall financing plan. We will continue to evaluate alternatives to optimize our capital structure, which could include the issuance or repurchase of additional unsecured and secured debt, equity securities and/or equity-linked securities.  There can be no assurance as to the timing of any such issuance or repurchase.  From time to time, we may also seek to streamline our capital structure and improve our financial position through refinancing or restructuring our existing debt or retiring certain of our securities for cash or other consideration. For additional discussion of risks related to our liquidity and capital resources, refer to the section titled “Risk Factors” in Part I Item 1A of this Annual Report on Form 10-K.

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Capital Requirements

During the year ended December 31, 2023, we incurred approximately $65.6 million in capital expenditures, which decreased by approximately $75.3 million compared to the year ended December 31, 2022 as the prior period included growth projects to increase community capacity, mainly in the Government segment, which was largely completed in the prior year. Our total annual 2023 capital spending, excluding acquired intangibles, was largely driven by growth capital expenditures in the HFS-South segment, with approximately $30.4 million driven by capital expenditures in the Government segment. 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 4.0% of annual revenue between 2019 and 2023, with an average cost of approximately 2% of annual revenue. Maintenance capital expenditures for specialty rental assets amounted to approximately $14.2 million, $12.3 million, and $11.7 million for the years ended December 31, 2023, 2022 and 2021, 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:

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Comparison of Years Ended December 31, 2023 and 2022

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Cash flows provided by operating activities. Net cash provided by operating activities was $156.8 million for the year ended December 31, 2023 compared to $305.6 million for the year ended December 31, 2022. This decrease in net cash provided by operating activities relates primarily to a decrease in cash collection from customers of approximately $156.5 million led by the prior period including a significant $194 million upfront payment for expansion efforts related to the Expanded Humanitarian Contract, which did not recur in the current period, and an increase in cash paid for income taxes of approximately $1.1 million. These net operating cash flow decreases were partially offset by a decrease in interest payments of approximately $3.4 million driven by lower debt, an increase in interest received of approximately $2.5 million, and a net decrease in cash payments for operating expenses and payroll of approximately $3.2 million driven by a decrease in operating expenses from the Government segment as a result of lower occupancy, which drove lower variable operating expenses, partially offset by growth and recovery of the business as well as the cash payments for vested SAR awards made during the year ended December 31, 2023.

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Cash flows used in investing activities. Net cash used in investing activities was $68.2 million for the year ended December 31, 2023 compared to $140.2 million for the year ended December 31, 2022. This decrease in net cash used in investing activities was primarily related to a decrease in growth capital expenditures in the Government segment compared to the prior period. The prior period included expansion related activities associated with the Expanded Humanitarian Contract that became effective on May 16, 2022 and drove a significant amount of capital expenditure

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spend, which was largely incurred and paid by the end of the third quarter in 2022 as the Company received the upfront payment for the construction in August 2022. This decrease in net cash used in investing activities was partially offset by an increase in growth capital expenditures in the HFS – South segment with the largest single driver being the $18.6 million acquisition of community assets and related intangibles in January 2023, supporting continued customer demand. To a lesser extent, the net decrease in net cash used in investing activities was partially offset by a $5.0 million acquisition of community assets in April 2023 and $1.3 million worth of land acquisitions during 2023, supporting Government segment growth.

Cash flows used in financing activities. Net cash used in financing activities was $166.4 million for the year ended December 31, 2023 compared to $7.1 million for the year ended December 31, 2022. The increase in net cash used in financing activities was driven primarily by approximately $153.1 million of combined repayments related to the 2024 Senior Secured Notes on March 15, 2023 and November 21, 2023, whereas the prior period only included an elective $5.5 million repayment of the 2024 Senior Secured Notes. The current period had payment of deferred financing costs of approximately $5.2 million associated with the First Amendment and Third Amendment to the ABL Facility on February 1, 2023 and October 12, 2023, respectively, and the issuance of the 2025 Senior Secured Notes on November 1, 2023 in connection with the Notes Exchange Offer, whereas the prior period had no such payments. The increase in net cash used in financing activities was also driven by an increase in taxes paid related to net share settlement of equity awards of approximately $6.7 million, an increase in payment of accrued issuance costs from the warrant exchange that closed on December 22, 2022 of approximately $0.7 million, and increased principal payments on vehicle finance leases of approximately $0.4 million.  These increases in net cash used in financing activities were partially offset by higher cash proceeds in the current period from the issuance of Common Stock from the exercise of warrants and options of approximately $1.3 million.

Comparison of the Years Ended December 31, 2022 and 2021

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For discussion of the comparison of our operating results for the years ended December 31, 2022 and 2021, please read the “Comparison of Years Ended December 31, 2022 and 2021” section located in the Management Discussion & Analysis section in the our Annual Report on Form 10-K for the year ended December 31, 2022 filed on March 10, 2023 and is incorporated herein by reference.

Indebtedness

The Company’s finance lease and other financing obligations as of December 31, 2023 consisted of $2.4 million of finance leases. The finance leases pertain to leases entered into during 2019 through 2023, for commercial-use vehicles with 36-month terms (and continue on a month-to-month basis thereafter) expiring through 2026. Refer to Notes 1, 8, and 13 of the notes to our audited consolidated financial statements included in Part II, Item 8 within this Annual Report on Form 10-K for further discussion regarding finance leases.

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

ABL Facility

On March 15, 2019, as amended on February 1, 2023, August 10, 2023, and October 12, 2023, 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 $175 million (the “ABL Facility”) with a termination date of February 1, 2028, which termination date is subject to a springing maturity that will accelerate the maturity of the ABL Facility if any of the 2025 Senior Secured Notes remain outstanding on the date that is ninety-one days prior to the stated maturity date thereof.  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. During the year ended December 31, 2022, $70 million was drawn and $70 million was repaid on the ABL Facility resulting in an outstanding balance of $0 as of December 31, 2022. During the year ended December 31, 2023, no amounts were drawn or repaid on the ABL Facility resulting in an outstanding balance of $0 as of

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December 31, 2023. Refer to Note 8 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

On March 15, 2019, Arrow Bidco issued $340 million in aggregate principal amount of 9.50% senior secured notes due March 15, 2024 (the “2024 Senior Secured Notes”) under an indenture dated March 15, 2019 (the “2024 Notes Indenture”). The 2024 Notes Indenture was entered into by and among Arrow Bidco, the guarantors named therein (the “2024 Senior Secured Note Guarantors”), and Deutsche Bank Trust Company Americas, as trustee and as collateral agent. Interest was payable semi-annually on September 15 and March 15 and began September 15, 2019.  During the year ended December 31, 2022, the Company made an elective repayment of approximately $5.5 million on the 2024 Senior Secured Notes, reducing the principal balance outstanding to $334.5 million from an original principal balance of $340 million. On March 15, 2023, Arrow Bidco redeemed $125 million in aggregate principal amount of the outstanding 2024 Senior Secured Notes. The redemption was accounted for as a partial extinguishment of debt. In connection with the Notes Exchange Offer, on November 1, 2023 (the “Notes Exchange Offer Settlement Date”), approximately $181.4 million of 2024 Senior Secured Notes were exchanged by Arrow Bidco and Arrow Bidco issued approximately $181.4 million in aggregate principal amount of the 2025 Senior Secured Notes pursuant to an indenture, dated November 1, 2023, by and among Arrow Bidco, the guarantors from time to time party thereto and Deutsche Bank Trust Company Americas, as trustee and collateral agent (the “2025 Senior Secured Notes Indenture”). Interest is payable semi-annually on March 15 and September 15 of each year, beginning March 15, 2024. Following this issuance and related transactions, approximately $28.1 million aggregate principal amount of 2024 Senior Secured Notes remained outstanding, which were subsequently redeemed on November 21, 2023 resulting in an outstanding balance of $0 as of December 31, 2023. Refer to Note 8 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, the Notes Exchange Offer, and the 2025 Senior Secured Notes.

Cash requirements

We expect that our principal short-term (over the next 12 months) and long-term needs for cash relating to our operations will be to primarily fund (i) operating activities and working capital, (ii) maintenance capital expenditures for specialty rental assets, (iii) payments due under finance and operating leases, and (iv) debt service interest payments. We plan to fund such cash requirements from our existing sources of liquidity as previously discussed. The table below presents information on payments coming due under the most significant categories of our needs for cash (excluding operating cash flows pertaining to normal business operations, other than operating lease obligations) as of December 31, 2023 ($ in thousands):

[[GREPCENT_TABLE]]

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.

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, 2022, our network included 29 communities to better serve our customers across the US and Canada.

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Economic Update

During the year ended December 31, 2022, the Company continued to experience significant growth in the Government segment due to the origination of a significantly expanded lease and services agreement in the second quarter of 2022 with an existing Government segment customer to provide enhanced infrastructure and comprehensive facility services that support the critical hospitality solutions the Company provides. This growth generated positive cash flows from operations of approximately $305.6 million representing a increase in cash flows from operations of approximately $201 million or 192% for the year ended December 31, 2022 compared to the year ended December 31, 2021.

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The financial results for the year ended December 31, 2022 also reflect continued improving customer demand and increasing activity in the HFS – South and Midwest segments as compared to the year ended December 31, 2021 as global activity and economic demand continue to strengthen from lows experienced during the height of the COVID-19 pandemic.

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For the year ended December 31, 2022, key drivers of financial performance included:

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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.

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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 information technology) 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.

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

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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 66.5% of our revenue was earned from specialty rental with vertically integrated hospitality services, specifically lodging and related ancillary services, whereas the remaining 33.5% of revenues were earned through leasing of lodging facilities for the year ended December 31, 2022. Revenue is recognized in the period in which lodging and services are provided pursuant to the terms of contractual relationships with our customers. In certain of our contracts, rates may vary over the contract term, in these cases, revenue is generally recognized on a straight-line basis over the contract term. We enter into arrangements with multiple deliverables for which arrangement consideration is allocated between lodging and services based on the relative estimated standalone selling price of each deliverable. The estimated price of lodging and services deliverables is based on the prices of lodging and services when sold separately or based upon the best estimate of selling price.

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.

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.

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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 14 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 3 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 our NP Partner, backed by a committed United States Government contract, to provide a suit of comprehensive service offerings in support of their humanitarian aid efforts.

TCPL Keystone

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

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

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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 created significant challenges for our natural resource development end-market customers during the year ended December 31, 2020. This drove a significant reduction in our utilization in these segments during 2020, and, although we have experienced steady increases in utilization into 2022, 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. However, total Company consolidated results have exceeded pre-pandemic levels driven primarily by Government segment growth and expansion.

Termination of the TCPL Keystone Contract

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

Government Segment Growth

A significant new contract was originated in the Government segment in March of 2021 with our NP Partner, backed by a committed United States Government contract, to provide a suite of comprehensive service offerings in support of their humanitarian aid efforts. During the year ended December 31, 2022, the Company executed the Expanded Humanitarian Contract to provide enhanced infrastructure and comprehensive facility services that support the critical hospitality solutions the Company provides to the NP Partner and the U.S. Government in their humanitarian aid missions. The Expanded Humanitarian Contract provides for significant scope expansion and term extension for the continuation of services provided under the agreement that originated in March 2021.  The Expanded Humanitarian Contract operates with similar structure to the Company’s existing government services contracts, which are centered around minimum revenue commitments supported by the United States Government.  Additionally, the Expanded Humanitarian Contract includes variable services revenue that will align with monthly community population.  The minimum revenue commitments, which consist of annual recurring lease revenue and nonrecurring infrastructure enhancement revenue, provide for a minimum annual revenue contribution of approximately $390 million and is fully committed over its initial contract term. The services revenue component provides for a maximum initial annual total contract value of approximately $575 million.

Results of Operations

The period to period comparisons of our results of operations have been prepared using the historical periods included in our 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, 2022, 2021 and 2020 ($ in thousands):

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Comparison of Years Ended December 31, 2022 and 2021

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Total Revenue. Total revenue was $502.0 million for the year ended December 31, 2022 as compared to $291.3 million for the year ended December 31, 2021, and consisted of $333.7 million of services income and $168.3 million of specialty income. Total revenue for the year ended December 31, 2021 consisted of $203.1 million of services income, $76.9 million of specialty rental income and $11.3 million of construction fee income.

Services income consists primarily of specialty rental and vertically integrated and comprehensive hospitality services including catering, 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 increase in services income revenue year over year was growth in the Government segment combined with an increase in customer activity in the HFS – South segment as well as a slight increase in HFS – Midwest, along with increased customer demand at one community in Canada included within the All Other segment. This growth was partially offset by 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 of approximately $1.0 million during 2022. The net increase was also partially offset by a decrease of approximately $0.7 million from one community in the All Other segment driven by the shutdown of that community in February 2022.

Construction fee income consists primarily of revenue from the construction phase of the TCPL contract with the prior year consisting almost exclusively of revenue related to the Termination and Settlement Agreement. The decrease in construction fee income in 2022 compared to 2021 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 revenue generated by the new Government contracts entered into in March 2021 and May 2022.

Cost of services. Cost of services was $174.2 million for the year ended December 31, 2022 as compared to $120.2 million for the year ended December 31, 2021. The increase in services costs is primarily due to an increase related to growth in

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the Government segment as mentioned above. Additionally, there was also an increase in services costs in HFS – South, HFS – Midwest, and one community in Canada included in the All Other segment driven by the increase in customer activity mentioned above.  These increases were partially offset by the suspension of the TCPL 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.

Specialty rental costs. Specialty rental costs were approximately $27.8 million for the year ended December 31, 2022 as compared to $16.2 million for the year ended December 31, 2021. The increase in specialty rental costs is primarily due to an increase in costs related to growth in the Government segment.

Depreciation of specialty rental assets. Depreciation of specialty rental assets was $52.8 million for the year ended December 31, 2022 as compared to $53.6 million for the year ended December 31, 2021. The decrease in depreciation expense is primarily attributable to a decrease for a location within the Government segment as a result of site work being fully depreciated as of September 30, 2021. This decrease was partially offset by an increase in depreciation expense driven by growth in the Government segment related to the contract that originated in March of 2021 and the new subcontract that originated in May of 2022 with the NP Partner.

Selling, general and administrative. Selling, general and administrative was $57.9 million for the year ended December 31, 2022 as compared to $46.5 million for the year ended December 31, 2021. The increase in selling, general and administrative expense of $11.4 million was primarily attributable to an increase in stock compensation expense of approximately $14.0 million largely from RSUs and liability-based SARs driven by an increase in the Company’s stock price during the current year. Marketing and advertising, office costs, and other corporate costs (including public company costs) increased by approximately $0.5 million, $0.7 million, and $0.5 million, respectively. These increases were partially offset by a decrease of approximately $2.1 million led primarily by commissions, bonus, and severance expenses, as there has been no material changes in corporate head count from the prior period.   Legal and professional fees are also down from the prior period by approximately $0.8 million driven largely by the prior period including an advisory fee associated with corporate development activity experienced during the year ended December 31, 2021 that did not recur during the year ended December 31, 2022.  Additionally, there was a decrease in other legal and advisory fees of approximately $0.9 million primarily related to the previously announced non-binding proposal made by Arrow Holdings S.à r.l. (“Arrow”), an affiliate of TDR Capital LLP (“TDR”), to acquire all of the outstanding shares of Common Stock of Target Hospitality not owned by Arrow or its affiliates for cash consideration of $1.50 per share (the “Proposal”).  On March 29, 2021, this Proposal was withdrawn and the Company did not incur any further costs related to this Proposal. Bad debt expense also decreased by approximately $1.2 million, which was driven in part by net recoveries of previously reserved bad debt amounts.

Other depreciation and amortization. Other depreciation and amortization expense was $14.8 million for the year ended December 31, 2022 as compared to $16.9 million for the year ended December 31, 2021. The decrease in other depreciation and amortization is primarily driven by a decrease in customer related intangible asset amortization associated with customer related intangible assets that became fully amortized in March 2022.

Other expense, net. Other expense, net was less than $0.1 million for the year ended December 31, 2022 as compared to $0.9 million for the year ended December 31, 2021. The decrease in expense was primarily driven by an increase in gains generated from the sale of assets and the reduction of COVID-19 procedure related expenses in the current year.

Interest expense, net. Interest expense, net was $36.3 million for the year ended December 31, 2022 as compared to interest expense, net of $38.7 million for the year ended December 31, 2021. The change in interest expense is driven by approximately $0.9 million of interest that was capitalized during the year ended December 31, 2022 in connection with capital project activity driven by the expansion in the Government segment associated with the Expanded Humanitarian Contract.  Interest was not capitalized during the year ended December 31, 2021 as there were no such expansion activities during that period. Additionally, the decrease in interest expense, net is driven by an increase in interest income earned.

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 $31.7 million for the year ended December 31, 2022 as compared to

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$1.1 million for the year ended December 31, 2021. The change in the fair value of the warrant liabilities is the result of changes in market prices deriving the value of the financial instruments. The estimated value of the Private Warrants have increased in both the prior and current year, generating a reduction to income in both years.

Income tax expense.  Income tax expense was $32.4 million for the year ended December 31, 2022 as compared to $1.9 million for the year ended December 31, 2021. The increase in income tax expense is primarily attributable to an increase in income before income tax as well as an increase in state tax expense based off of gross receipts as a result of the increase in revenues due to improvements in overall operations and growth in the business from the Government segment.

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Comparison of the Years Ended December 31, 2021 and 2020

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For discussion of the comparison of our operating results for the years ended December 31, 2021 and 2020, please read the “Comparison of Years Ended December 31, 2021 and 2020” section located in the Management Discussion & Analysis section in our 2021 Annual Report on From 10-K filed on March 11, 2022 and is incorporated herein by reference.

Segment Results

The following table sets forth our selected results of operations for each of our reportable segments for the years ended December 31, 2022, 2021 and 2020 ($ in thousands, except for Average Daily Rate amounts).

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​

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.

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Comparison of Years Ended December 31, 2022 and 2021

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Government

Revenue for the Government segment was $360.3 million for the year ended December 31, 2022 as compared to $156.3 million for the year ended December 31, 2021.

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Adjusted gross profit for the Government segment was $246.6 million for the year ended December 31, 2022 as compared to $94.8 million for the year ended December 31, 2021.

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

Hospitality & Facilities Services - South

Revenue for the HFS – South segment was $132.4 million for the year ended December 31, 2022, as compared to $117.0 million for the year ended December 31, 2021.

​

Adjusted gross profit for the HFS – South segment was $54.6 million for the year ended December 31, 2022, as compared to $52.3 million for the year ended December 31, 2021.

The increase in revenue of $15.4 million and increase in adjusted gross profit of approximately $2.3 million was primarily attributable to an increase in utilization driven by a significant increase in customer demand.

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Hospitality & Facilities Services - Midwest

Revenue for the HFS – Midwest segment was $6.2 million for the year ended December 31, 2022, as compared to $4.1 million for the year ended December 31, 2021.

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Adjusted gross profit for the HFS – Midwest segment was ($0.3) million for the year ended December 31, 2022, as compared to ($0.7) million for the year ended December 31, 2021.

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The increase in revenue of $2.0 million and increase in adjusted gross profit of $0.5 million was primarily attributable to an increase in utilization driven by an increase in customer demand.

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TCPL Keystone

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Revenue for the TCPL Keystone segment was $0 million for the year ended December 31, 2022, as compared to $12.3 million and $41.9 million for the years ended December 31, 2021 and 2020, respectively.

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Adjusted gross profit for the TCPL Keystone segment was $0 million for the year ended December 31, 2022, as compared to $9.2 million and $8.6 million for the years ended December 31, 2021 and 2020, respectively.

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

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Comparison of the Years Ended December 31, 2021 and 2020

​

For discussion of the comparison of our operating results for the years ended December 31, 2021 and 2020, please read the “Comparison of Years Ended December 31, 2021 and 2020” section located in the Management Discussion & Analysis section in our Annual Report on Form 10-K for the year ended December 31, 2021 filed on March 11, 2022 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

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assure you that we will be able to obtain future debt or equity financings adequate for our future cash requirements on commercially reasonable terms or at all.

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

We will continue to evaluate alternatives to optimize our capital structure, which could include the issuance or repurchase of additional unsecured and secured debt, equity securities and/or equity-linked securities.  There can be no assurance as to the timing of any such issuance or repurchase.  From time to time, we may also seek to streamline our capital structure and improve our financial position through refinancing or restructuring our existing debt or retiring certain of our securities for cash or other consideration. For additional discussion of risks related to our liquidity and capital resources, 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, 2022, we incurred approximately $140.9 million in capital expenditures, which increased by approximately $104.1 million compared to the year ended December 31, 2021. Our total annual 2022 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 2022, with an average cost of approximately 1.8% of annual revenue. Maintenance capital expenditures for specialty rental assets amounted to approximately $12.5 million, $11.7 million, and $0.9 million for the years ended December 31, 2022, 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:

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Comparison of Years Ended December 31, 2022 and 2021

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Cash flows provided by operating activities. Net cash provided by operating activities was $305.6 million for the year ended December 31, 2022 compared to $104.6 million for the year ended December 31, 2021. This increase in cash provided by operating activities relates primarily to an increase in cash collections of approximately $277.5 million, of

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which approximately $291.1 million resulted from growth in the Government segment, partially offset by advance collection on approximately $24.9 million of revenue recognized in the current year. Such revenue was collected in cash during the year ended December 31, 2021, which partially offset the increase in cash flows from operations for the year ended December 31, 2022. The additional change was driven by an increase in cash collections of approximately $26.9 million from our other segments, partially offset by a decrease in cash collections from TC Energy of approximately $14.5 million, and a decrease in cash collections associated with a related party receivable of approximately $1.2 million. This net increase in cash collections of approximately $277.5 million was partially offset by an increase in cash paid for income taxes of approximately $4.1 million and an increase in cash payments for operating expenses and payroll of approximately $76.7 million resulting from growth and increased activity year-over-year. The remaining change was driven primarily by a decrease in cash paid for interest of approximately $1.1 million and an increase in cash received for interest of approximately $1.3 million.

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Cash flows used in investing activities. Net cash used in investing activities was $140.2 million for the year ended December 31, 2022 compared to $35.9 million for the year ended December 31, 2021. 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 used in financing activities. Net cash used in financing activities was $7.1 million for the year ended December 31, 2022 compared to $52.3 million for the year ended December 31, 2021. The decrease in cash used in financing activities was driven primarily by a $48 million decrease in net repayments on the ABL Facility driven by a higher net outstanding balance on the ABL Facility in the prior year prior to it being fully paid. The prior period also includes $2.9 million in cash outflows related to an insurance financing arrangement fully paid off in the prior period that did not recur in the current period as the insurance was paid in cash upon renewal. These decreases in cash used in financing activities were partially offset by the current period including an elective $5.5 million repayment of the 2024 Senior Secured Notes.

Comparison of the Years Ended December 31, 2021 and 2020

​

For discussion of the comparison of our operating results for the years ended December 31, 2021 and 2020, please read the “Comparison of Years Ended December 31, 2021 and 2020” section located in the Management Discussion & Analysis section in the our Annual Report on Form 10-K for the year ended December 31, 2021 filed on March 11, 2022 and is incorporated herein by reference.

Indebtedness

The Company’s finance lease and other financing obligations as of December 31, 2022 consisted of $2.2 million of finance leases. The finance leases pertain to leases entered into during 2019 through 2022, for commercial-use vehicles with 36-month terms expiring through 2025. Refer to Notes 1, 8, and 13 of the notes to our audited consolidated financial statements included in Part II, Item 8 within this Annual Report on Form 10-K for further discussion regarding finance leases.

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

ABL Facility

On the Closing Date, in connection with the closing of the Business Combination, Topaz, 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. During the year ended December 31, 2022, $70 million was drawn and $70 million was repaid on the ABL Facility resulting in an outstanding balance of $0 as of December 31, 2022. As of December 31, 2022, the maturity date of the ABL Facility was September 15, 2023.  On February 1, 2023, the ABL

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Facility was amended to, among other things, extend the maturity date to February 1, 2028.  Refer to Note 21 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 this amendment.  Refer to Note 8 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.  During the year ended December 31, 2022, the Company made an elective repayment of approximately $5.5 million on the Notes, reducing the principal balance outstanding to $334.5 million from an original principal balance of $340 million.  Refer to Note 8 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.

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 finance and operating leases, (iv) debt service, (v) elective repayments on our 2024 Senior Secured Notes. We plan to fund such cash requirements from our existing sources of liquidity as previously discussed. The table below presents information on payments coming due under the most significant categories of our needs for cash (excluding operating cash flows pertaining to normal business operations, other than operating lease obligations) as of December 31, 2022 ($ in thousands):

[[GREPCENT_TABLE]]

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.

​

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.

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

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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.

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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.

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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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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.

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Comparison of the Years Ended December 31, 2020 and 2019

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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.

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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.

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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.

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Comparison of Years Ended December 31, 2021 and 2020

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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.

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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.

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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.

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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.

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TCPL Keystone

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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.

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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.

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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.

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Comparison of the Years Ended December 31, 2020 and 2019

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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:

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Comparison of Years Ended December 31, 2021 and 2020

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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

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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.

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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:

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:

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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.

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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

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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.

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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.

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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:

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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.

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:

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