# Target Hospitality Corp. (TH) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Target Hospitality Corp.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1712189/000155837023003440/th-20221231x10k.htm
Accession: 0001558370-23-003440
Filing date: 2023-03-10
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/TH/
All MD&A years: /company/TH/mda/
Previous year: /company/TH/mda/fy2021/ (FY 2021)
Next year: /company/TH/mda/fy2023/ (FY 2023)

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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[[GREPCENT_TABLE]]
[["","\u25cf","Increased consolidated revenue by $210.6 million or 72% compared to the year ended 2021 primarily due to additional revenue generated from growth in the Government segment as well as increase in customer demand in the HFS \u2013 South segment."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Increased revenue in the HFS \u2013 South segment by $15.4 million or 13% as compared to the year ended December 31, 2021 as a result of increase in customer demand."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Generated net income of approximately $73.9 million for the year ended December 31, 2022 as compared to a net loss of approximately $4.6 million for the year ended December 31, 2021. This increase in net income is primarily attributable to an increase in gross profit driven by the increase in revenue as well as a decrease in interest expense driven by significant debt reduction, partially offset by an increase in operating expenses, an increase in the estimated fair value of warrant liabilities, and an increase in income tax expense due to improved results."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Generated consolidated Adjusted EBITDA of $264.7 million representing an increase of $145.5 million or 122% as compared to the year ended December 31, 2021, driven primarily by the increase in revenue, partially offset by the increase in operating expenses mentioned above."]]
[[/GREPCENT_TABLE]]

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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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[[/GREPCENT_TABLE]]

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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).

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","For the Years Ended December 31,","\u200b","\u200b","Amount of Increase (Decrease)","\u200b","Percentage Change Increase (Decrease)","\u200b","","Amount of Increase (Decrease)","\u200b","Percentage Change Increase (Decrease)"],["Revenue:","2022","\u200b","2021","\u200b","2020","\u200b","\u200b","2022 vs. 2021","\u200b","2022 vs. 2021","\u200b","\u200b","2021 vs. 2020","\u200b","2021 vs. 2020"],["Government","$","360,294","\u200b","$","156,250","\u200b","$","63,259","\u200b","$","204,044","\u200b","131%","\u200b","$","92,991","\u200b","147%"],["Hospitality & Facilities Services - South","\u200b","132,373","\u200b","\u200b","116,958","\u200b","\u200b","112,126","\u200b","\u200b","15,415","\u200b","13%","\u200b","\u200b","4,832","\u200b","4%"],["Hospitality & Facilities Services - Midwest","\u200b","6,168","\u200b","\u200b","4,150","\u200b","\u200b","6,605","\u200b","\u200b","2,018","\u200b","49%","\u200b","\u200b","(2,455)","\u200b","(37)%"],["TCPL Keystone","\u200b","-","\u200b","\u200b","12,283","\u200b","\u200b","41,911","\u200b","\u200b","(12,283)","\u200b","(100)%","\u200b","\u200b","(29,628)","\u200b","(71)%"],["All Other","\u200b","3,150","\u200b","\u200b","1,696","\u200b","\u200b","1,247","\u200b","\u200b","1,454","\u200b","86%","\u200b","\u200b","449","\u200b","36%"],["Total revenues","$","501,985","\u200b","$","291,337","\u200b","$","225,148","\u200b","$","210,648","\u200b","72%","\u200b","$","66,189","\u200b","29%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Adjusted Gross Profit","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Government","$","246,598","\u200b","$","94,801","\u200b","$","47,523","\u200b","$","151,797","\u200b","160%","\u200b","$","47,278","\u200b","99%"],["Hospitality & Facilities Services - South","\u200b","54,558","\u200b","\u200b","52,344","\u200b","\u200b","51,518","\u200b","\u200b","2,214","\u200b","4%","\u200b","\u200b","826","\u200b","2%"],["Hospitality & Facilities Services - Midwest","\u200b","(258)","\u200b","\u200b","(711)","\u200b","\u200b","161","\u200b","\u200b","453","\u200b","(64)%","\u200b","\u200b","(872)","\u200b","(543)%"],["TCPL Keystone","\u200b","-","\u200b","\u200b","9,161","\u200b","\u200b","8,617","\u200b","\u200b","(9,161)","\u200b","(100)%","\u200b","\u200b","544","\u200b","6%"],["All Other","\u200b","(937)","\u200b","\u200b","(636)","\u200b","\u200b","(699)","\u200b","\u200b","(301)","\u200b","47%","\u200b","\u200b","63","\u200b","(9)%"],["Total Adjusted Gross Profit","$","299,961","\u200b","$","154,959","\u200b","$","107,120","\u200b","$","145,002","\u200b","94%","\u200b","$","47,839","\u200b","45%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Average Daily Rate","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Hospitality & Facilities Services - South","$","73.39","\u200b","$","74.64","\u200b","$","81.67","\u200b","$","(1.25)","\u200b","\u200b","\u200b","$","(7.03)","\u200b","\u200b"],["Hospitality & Facilities Services - Midwest","$","61.20","\u200b","$","68.91","\u200b","$","79.69","\u200b","$","(7.71)","\u200b","\u200b","\u200b","$","(10.78)","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

​

Note: Adjusted gross profit for the chief operating decision maker’s (“CODM”) analysis includes the services and rental costs recognized in the financial statements and excludes depreciation on specialty rental assets, certain severance costs, and loss on impairment. Average daily rate is calculated based on specialty rental income and services income received over the period indicated, divided by utilized bed nights.

​

Comparison of Years Ended December 31, 2022 and 2021

​

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.

​

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.

​

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.

​

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.

​

TCPL Keystone

​

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.  

​

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.  

​

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.

​

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:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","For the Years Ended"],["($ in thousands)","\u200b","December 31,"],["\u200b","","2022","","2021","\u200b","2020"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net cash provided by operating activities","\u200b","$","305,612","\u200b","$","104,599","\u200b","$","46,781"],["Net cash used in investing activities","\u200b","","(140,228)","\u200b","","(35,915)","\u200b","\u200b","(10,949)"],["Net cash used in financing activities","\u200b","","(7,098)","\u200b","","(52,271)","\u200b","\u200b","(35,683)"],["Effect of exchange rate changes on cash and cash equivalents","\u200b","\u200b","(19)","\u200b","\u200b","14","\u200b","\u200b","(9)"],["Net increase in cash and cash equivalents","\u200b","$","158,267","\u200b","$","16,427","\u200b","$","140"]]
[[/GREPCENT_TABLE]]

​

Comparison of Years Ended December 31, 2022 and 2021

​

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.

​

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]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","Total","","2023","\u200b","2024","\u200b","2025","\u200b","2026","\u200b","2027"],["Interest Payments on 2024 Senior Secured Notes(1)","\u200b","$","47,667","\u200b","$","31,778","\u200b","$","15,889","\u200b","$","\u2014","\u200b","$","\u2014","\u200b","$","\u2014"],["2024 Senior Secured Notes","\u200b","","334,500","\u200b","","\u2014","\u200b","\u200b","334,500","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014"],["Operating lease obligations, including imputed interest(2)","\u200b","\u200b","25,499","\u200b","\u200b","12,942","\u200b","\u200b","4,654","\u200b","\u200b","4,012","\u200b","\u200b","3,283","\u200b","\u200b","608"],["Total","\u200b","$","407,666","\u200b","$","44,720","\u200b","$","355,043","\u200b","$","4,012","\u200b","$","3,283","\u200b","$","608"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","We will incur and pay interest expense at 9.50% of the remaining face value of $334.5 million annually, or $31.8 million in connection with our 2024 Senior Secured Notes due March 15, 2024. Over the remaining term of the Notes, interest payments total approximately $47.7 million."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]