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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2024

OR

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

For the transition period from           to

Commission file number 001-38343

TARGET HOSPITALITY CORP.

(Exact name of registrant as specified in its charter)

Delaware

98-1378631

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

9320 Lakeside Boulevard, Suite 300

The Woodlands, TX 77381

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

(800) 832-4242

(Registrant’s telephone number, including area code)

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which is registered

Common stock, par value $0.0001 per share

TH

NASDAQ Capital Market

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

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

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

Large accelerated filer 

Accelerated filer 

Non-accelerated filer

Smaller reporting company 

Emerging growth company 

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

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

There were 100,277,272 shares of Common Stock, par value $0.0001 per share, outstanding as of May 3, 2024.

Target Hospitality Corp.

TABLE OF CONTENTS

FORM 10-Q

March 31, 2024

PART I — FINANCIAL INFORMATION

5

Item 1. Financial Statements

5

Consolidated Balance Sheets

5

Unaudited Consolidated Statements of Comprehensive Income

6

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

7

Unaudited Consolidated Statements of Cash Flows

8

Notes to Unaudited Consolidated Financial Statements

9

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

33

Item 3. Quantitative and Qualitative Disclosures About Market Risk

49

Item 4. Controls and Procedures

49

PART II — OTHER INFORMATION

49

Item 1. Legal Proceedings

49

Item 1A. Risk Factors

50

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

50

Item 3. Defaults upon Senior Securities

50

Item 4. Mine Safety Disclosures

50

Item 5. Other Information

50

Item 6. Exhibits

51

SIGNATURES

52

UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Target Hospitality Corp.

Unaudited Consolidated Financial Statements as of March 31, 2024 and December 31, 2023 and for the three months ended March 31, 2024 and 2023

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Target Hospitality Corp.

Consolidated Balance Sheets

($ in thousands)

March 31, 

December 31, 

    

2024

    

2023

Assets

 

(Unaudited)

 

Current assets:

 

  

 

  

Cash and cash equivalents

$

124,302

$

103,929

Accounts receivable, less allowance for credit losses of $593 and $550, respectively

 

53,839

 

67,092

Prepaid expenses and other assets

 

7,927

 

9,479

Total current assets

 

186,068

 

180,500

Specialty rental assets, net

 

342,985

 

349,064

Other property, plant and equipment, net

 

35,102

 

34,631

Operating lease right-of-use assets, net

16,495

19,698

Goodwill

 

41,038

 

41,038

Other intangible assets, net

 

62,919

 

66,282

Deferred financing costs revolver, net

 

2,328

 

2,479

Other non-current assets

234

661

Total assets

$

687,169

$

694,353

Liabilities

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

17,275

$

20,926

Accrued liabilities

 

35,932

 

33,652

Deferred revenue and customer deposits

 

1,794

 

1,794

Current portion of operating lease obligations

10,240

11,914

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

 

1,574

 

1,369

Current warrant liabilities

675

Total current liabilities

 

66,815

 

70,330

Other liabilities:

 

  

 

  

Long-term debt (Note 8):

 

 

Principal amount

181,446

181,446

Less: unamortized original issue discount

(2,202)

(2,619)

Less: unamortized term loan deferred financing costs

(617)

(734)

Long-term debt, net

178,627

178,093

Long-term finance lease and other financing obligations

1,270

1,024

Long-term operating lease obligations

7,025

8,426

Deferred revenue and customer deposits

 

3,227

 

3,675

Deferred tax liability

52,200

53,074

Asset retirement obligations

 

2,471

 

2,424

Total liabilities

 

311,635

 

317,046

Commitments and contingencies (Note 12)

 

  

 

  

Stockholders' equity:

 

  

 

  

Common Stock, $0.0001 par, 400,000,000 authorized, 111,810,528 issued and 100,105,423 outstanding as of March 31, 2024 and 111,091,266 issued and 101,660,601 outstanding as of December 31, 2023.

10

10

Common Stock in treasury at cost, 11,705,105 shares as of March 31, 2024 and 9,430,665 shares as of December 31, 2023.

(44,930)

(23,559)

Additional paid-in-capital

 

141,614

 

142,379

Accumulated other comprehensive loss

 

(2,658)

 

(2,638)

Accumulated earnings

 

281,498

 

261,115

Total stockholders' equity

 

375,534

 

377,307

Total liabilities and stockholders' equity

$

687,169

$

694,353

See accompanying notes to the unaudited consolidated financial statements.

5

Target Hospitality Corp.

Unaudited Consolidated Statements of Comprehensive Income

($ in thousands, except per share amounts)

For the Three Months Ended

March 31, 

    

2024

    

2023

Revenue:

 

Services income

$

72,398

$

94,836

Specialty rental income

 

34,274

 

52,983

Total revenue

 

106,672

 

147,819

Costs:

 

 

Services

 

36,915

 

39,700

Specialty rental

 

5,908

 

8,559

Depreciation of specialty rental assets

 

14,781

 

17,597

Gross profit

 

49,068

 

81,963

Selling, general and administrative

 

14,855

 

15,199

Other depreciation and amortization

 

3,885

 

3,803

Other expense (income), net

 

(110)

 

1,004

Operating income

 

30,438

 

61,957

Loss on extinguishment of debt

2,128

Interest expense, net

 

4,587

 

7,498

Change in fair value of warrant liabilities

(675)

(3,711)

Income before income tax

 

26,526

 

56,042

Income tax expense

 

6,143

 

12,217

Net income

 

20,383

 

43,825

Change in fair value of warrant liabilities

(3,711)

Net income attributable to common stockholders - diluted

20,383

40,114

Other comprehensive loss

 

 

Foreign currency translation

 

(20)

 

(21)

Comprehensive income

$

20,363

$

43,804

Weighted average number shares outstanding - basic

 

100,657,706

 

100,643,271

Weighted average number shares outstanding - diluted

102,362,542

106,257,448

Net income per share - basic

$

0.20

$

0.44

Net income per share - diluted

$

0.20

$

0.38

See accompanying notes to the unaudited consolidated financial statements.

6

Target Hospitality Corp.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For the three months ended March 31, 2024 and 2023

($ in thousands)

Additional

Accumulated

Total

Common Stock

Common Stock in Treasury

Paid In

Other

Accumulated

Stockholders'

    

Shares

Amount

    

Shares

Amount

    

Capital

    

Comprehensive Loss

    

Earnings

    

Equity

Balances at December 31, 2022

100,316,701

$

10

9,430,665

$

(23,559)

$

139,287

$

(2,574)

$

87,683

$

200,847

Adoption of ASC 326

(268)

(268)

Balances at January 1, 2023

100,316,701

$

10

9,430,665

$

(23,559)

$

139,287

$

(2,574)

$

87,415

$

200,579

Net income

43,825

43,825

Stock-based compensation, net

643,662

2,112

2,112

Tax withholdings related to net share settlement of equity awards

(6,177)

(6,177)

Cumulative translation adjustment

(21)

(21)

Issuance of Common Stock from exercise of warrants

2,869

42

42

Issuance of Common Stock from exercise of stock options

410,226

1,252

1,252

Balances at March 31, 2023

101,373,458

$

10

9,430,665

$

(23,559)

$

136,516

$

(2,595)

$

131,240

$

241,612

Balances at December 31, 2023

101,660,601

$

10

9,430,665

$

(23,559)

$

142,379

$

(2,638)

$

261,115

$

377,307

Net income

20,383

20,383

Stock-based compensation, net

658,659

1,579

1,579

Tax withholdings related to net share settlement of equity awards

(2,615)

(2,615)

Cumulative translation adjustment

(20)

(20)

Issuance of Common Stock from exercise of warrants

1,079

3

3

Issuance of Common Stock from exercise of stock options

59,524

268

268

Repurchase of Common Stock as part of share repurchase program

(2,274,440)

2,274,440

(21,371)

(21,371)

Balances at March 31, 2024

100,105,423

$

10

11,705,105

$

(44,930)

$

141,614

$

(2,658)

$

281,498

$

375,534

See accompanying notes to the unaudited consolidated financial statements.

7

Target Hospitality Corp.

Unaudited Consolidated Statements of Cash Flows

($ in thousands)

For the Three Months Ended

March 31, 

    

2024

    

2023

Cash flows from operating activities:

 

  

 

Net income

$

20,383

$

43,825

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

 

 

  

Depreciation

 

15,303

 

18,065

Amortization of intangible assets

 

3,363

 

3,335

Noncash operating lease expense

2,842

4,718

Accretion of asset retirement obligation

 

46

 

43

Amortization of deferred financing costs

 

268

 

1,090

Amortization of original issue discount

417

193

Change in fair value of warrant liabilities

(675)

(3,711)

Stock-based compensation expense

2,748

5,646

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

(42)

(104)

Loss on extinguishment of debt

2,128

Deferred income taxes

 

(874)

 

7,888

Provision for credit losses on receivables, net of recoveries

43

99

Changes in operating assets and liabilities

 

Accounts receivable

 

13,253

 

(11,005)

Prepaid expenses and other assets

 

1,551

 

4,629

Accounts payable and other accrued liabilities

 

(5,281)

 

(24,294)

Deferred revenue and customer deposits

 

(448)

 

(34,985)

Operating lease obligation

(2,713)

(3,354)

Other non-current assets and liabilities

 

407

 

323

Net cash provided by operating activities

 

50,591

 

14,529

Cash flows from investing activities:

 

  

 

  

Purchase of specialty rental assets

 

(8,825)

 

(23,002)

Purchase of property, plant, and equipment

 

(135)

 

(1,015)

Acquired intangible assets

(4,547)

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

42

119

Net cash used in investing activities

 

(8,918)

 

(28,445)

Cash flows from financing activities:

 

  

 

  

Principal payments on finance and finance lease obligations

 

(407)

 

(356)

Repayment of Senior Notes

(125,000)

Repurchase of Common Stock

(21,160)

Proceeds from issuance of Common Stock from exercise of warrants

3

42

Proceeds from issuance of Common Stock from exercise of options

268

1,252

Payment of deferred financing costs

(1,263)

Net cash used in financing activities

 

(21,296)

 

(125,325)

Effect of exchange rate changes on cash and cash equivalents

(4)

6

Net increase (decrease) in cash and cash equivalents

 

20,373

 

(139,235)

Cash and cash equivalents - beginning of period

 

103,929

 

181,673

Cash and cash equivalents - end of period

$

124,302

$

42,438

Non-cash investing and financing activity:

Non-cash change in accrued capital expenditures

$

$

(7,243)

Non-cash change in accrued excise tax on repurchase of Common Stock

$

(211)

$

Non-cash change in accrual of tax withholdings for net share settlement of equity awards

$

(2,615)

$

(6,177)

Non-cash change in finance lease obligations

$

(858)

$

(562)

See accompanying notes to the unaudited consolidated financial statements.

8

Target Hospitality Corp.

Notes to Unaudited Consolidated Financial Statements

(Amounts in Thousands, Unless Stated Otherwise)

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

Organization and Nature of Operations

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

The Company, whose securities are listed on the Nasdaq Capital Market, together with its wholly owned subsidiaries, Topaz Holdings LLC, a Delaware limited liability company (“Topaz”), and Arrow Bidco, LLC, a Delaware limited liability company (“Arrow Bidco”), serve as the holding companies for the businesses of Target Logistics Management, LLC and its subsidiaries (“Target” or “TLM”) and RL Signor Holdings, LLC (“Signor”). TDR Capital LLP (“TDR Capital” or “TDR”) indirectly owns approximately 65% of Target Hospitality and the remaining ownership is broken out among the founders of the Company’s legal predecessor, Platinum Eagle Acquisition Corp. (“Platinum Eagle” or “PEAC”), investors who purchased the shares of Platinum Eagle in a private placement transaction, and other public shareholders.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) pertaining to interim financial information. Certain information in footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) has been condensed or omitted pursuant to those rules and regulations. The financial statements included in this report should be read in conjunction with Target Hospitality’s Annual Report on the Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”).

The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the operating results that may be expected for the full fiscal year ending December 31, 2024 or any future period.

The accompanying unaudited consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of financial position as of March 31, 2024, and results of operations for the three months ended March 31, 2024 and 2023, and cash flows for three months ended March 31, 2024 and 2023. The consolidated balance sheet as of December 31, 2023, was derived from the audited consolidated balance sheets of the Company, but does not contain all of the footnote disclosures from those annual financial statements.

Use of Estimates

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

9

Principles of Consolidation

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

Revenue Recognition

The Company derives revenue from specialty rental and hospitality services, specifically lodging and related ancillary services. Revenue is recognized in the period in which lodging and services are provided pursuant to the terms of contractual relationships with the customers. Certain arrangements contain a lease of lodging facilities to customers. The leases are accounted for as operating leases under the authoritative guidance for leases (“ASC 842”) and are recognized as income is earned over the term of the lease agreement.

Upon lease commencement, the Company evaluates leases to determine if they meet criteria set forth in lease accounting guidance for classification as sales-type leases or direct financing leases; if a lease meets none of these criteria, the Company classifies the lease as an operating lease. As previously mentioned, the arrangements that contain a lease of the Company’s lodging facilities are accounted for as operating leases, whereby the underlying asset remains on our balance sheet and is depreciated consistently with other owned assets, with income recognized as it is earned over the term of the lease agreement. For contracts that contain both a lease component and a services or non-lease component, the Company has adopted an accounting policy to account for and present the lease component under ASC 842 and the non-lease component under the authoritative guidance for revenue recognition (“ASC 606” or “Topic 606”). Refer to Note 2 for the breakout of revenue under each standard. The Company recognizes minimum rents on operating leases over the term of the customer operating lease. A lease term commences when: (1) the customer has control of the leased space (legal right to use the property); and (2) the Company has delivered the premises to the customer as required under the terms of the lease. The term of a lease includes the noncancellable periods of the lease along with periods covered by: (1) a customer option to extend the lease if the customer is reasonably certain to exercise that option; (2) a customer option to terminate the lease if the customer is reasonably certain not to exercise that option; and (3) an option to extend (or not to terminate) the lease in which exercise of the option is controlled by the Company as the lessor. When assessing the expected lease end date, judgment is required in contemplating the significance of: any penalties a customer may incur should it choose not to exercise any existing options to extend the lease or exercise any existing options to terminate the lease; and economic incentives for the customer in the lease. Furthermore, when assessing the expected end date of a contract under ASC 606 with an extension option, judgment is required to determine whether the option contains a material right.

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

When lodging and services are billed and collected in advance, recognition of revenue is deferred until services are rendered.

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

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

10

Recently Issued Accounting Standards

Improvements to Reportable Segment Disclosures. In November 2023, the FASB issued ASU 2023-07, which expands reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in the ASU require, among other things, disclosure of significant segment expenses that are regularly provided to an entity's chief operating decision maker (“CODM”) and a description of other segment items (the difference between segment revenue less the segment expenses disclosed under the significant expense principle and each reported measure of segment profit or loss) by reportable segment, as well as disclosure of the title and position of the CODM, and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. Annual disclosures are required for fiscal years beginning after December 15, 2023 and interim disclosures are required for periods within fiscal years beginning after December 15, 2024. Retrospective application is required, and early adoption is permitted. These requirements are not expected to have an impact on our financial statements, but will result in expanded reportable segment disclosures. The Company does not intend to early adopt ASU 2023-07.

Improvements to Income Tax Disclosures. In December 2023, the FASB issued ASU 2023-09, which requires disclosure of disaggregated income taxes paid, prescribes standard categories for the components of the effective tax rate reconciliation, and modifies other income tax-related disclosures. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, may be applied prospectively or retrospectively, and allows for early adoption. These requirements are not expected to have an impact on our financial statements, but will impact our income tax disclosures. The Company does not intend to early adopt ASU 2023-09.

Recent Developments

On March 25, 2024, the Company announced that the Board of Directors of the Company (“the Board”) received an unsolicited non-binding proposal from Arrow Holdings S.à r.l. (“Arrow”), an affiliate of TDR, to acquire all of the outstanding shares of Common Stock of the Company that are not owned by any of Arrow, any investment fund managed by TDR or any of their respective affiliates, for cash consideration of $10.80 per share (the “Proposal”).

The Board has established a special committee of independent directors (the "Special Committee"), and the Special Committee has retained Centerview Partners LLC and Ardea Partners LP as its financial advisors and Cravath, Swaine & Moore LLP as its legal advisor. The Special Committee has commenced its review and evaluation of the Proposal.

The Special Committee has made no decision at this time with respect to the Proposal, and the Company does not undertake any obligation to provide any updates with respect to the Proposal or any other transaction, except as required by applicable law or other regulatory requirements. There can be no assurance that any transaction will result from the Special Committee’s evaluation of the Proposal, or, if so, the timing, terms and conditions of such transaction.

2. Revenue

Total revenue recognized under contracts recognized under ASC 606 was approximately $72.4 million and $94.8 million for the three months ended March 31, 2024 and 2023, respectively, while specialty rental income was $34.3 million and $53.0 million subject to the guidance of ASC 842 for the three months ended March 31, 2024 and 2023, respectively.

11

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

For the Three Months Ended

March 31, 

2024

2023

HFS – South

$

35,713

$

34,288

Government

$

34,553

$

58,004

All Other

$

2,132

$

2,544

Total services revenues

$

72,398

$

94,836

Allowance for Credit Losses

The Company maintains allowances for credit losses. These allowances reflect our estimate of the amount of our receivables that we will be unable to collect based on historical write-off experience and, as applicable, current conditions and reasonable and supportable forecasts that affect collectability. Our estimate could require a change based on changing circumstances, including changes in the economy or in the circumstances of individual customers.

Contract Assets and Liabilities

We do not have any contract assets.

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

For Three Months Ended

March 31, 

    

2024

2023

Balances at Beginning of the Period

$

5,469

$

125,519

Revenue recognized

 

(448)

 

(34,985)

Balances at End of the Period

$

5,021

$

90,534

As of March 31, 2024, the following table discloses the estimated revenues under ASC 606 related to performance obligations that are unsatisfied (or partially unsatisfied) and when we expect to recognize the revenue, and only represents revenue expected to be recognized from contracts where the price and quantity of the product or service are fixed:

For the Years Ended December 31,

    

2024

    

2025

2026

    

Total

Revenue expected to be recognized as of March 31, 2024

$

86,218

$

21,931

$

14,328

$

122,477

The Company applied some of the practical expedients in ASC 606, including the “right to invoice” practical expedient, and does not disclose consideration for remaining performance obligations for contracts without minimum revenue commitments or for variable consideration related to unsatisfied (or partially unsatisfied) performance obligations. Due to the application of these practical expedients as well as excluding rental income revenue subject to the guidance included in ASC 842, the table above represents only a portion of the Company’s expected future consolidated revenues and it is not necessarily indicative of the expected trend in total revenues.    

12

3. Specialty Rental Assets, Net

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

    

March 31, 

December 31,

2024

    

2023

Specialty rental assets

$

757,673

$

751,181

Construction-in-process

 

5,364

 

3,665

Less: accumulated depreciation

 

(420,052)

 

(405,782)

Specialty rental assets, net

$

342,985

$

349,064

For the three months ended March 31, 2024 and 2023, depreciation expense of specialty rental assets was $14.8 million and $17.6 million, respectively, and is included in depreciation of specialty rental assets in the consolidated statements of comprehensive income. During the three months ended March 31, 2024, the Company disposed of assets with accumulated depreciation of approximately $0.2 million along with the related gross cost of approximately $0.2 million. During the three months ended March 31, 2024, there was also a non-cash change in specialty rental assets and related accumulated depreciation due to the effect of exchange rate changes in the amount of approximately $0.3 million with no net impact to specialty rental assets, net. During the three months ended March 31, 2023, the Company disposed of assets with accumulated depreciation of approximately $8.6 million along with the related gross cost of approximately $8.6 million. These disposals were associated with fully depreciated asset retirement costs as well as a sale of assets.  The asset disposal resulted in disposal costs of approximately $1.2 million while the sale resulted in a gain on sale of assets of approximately $0.1 million and is reported within other expense (income), net in the accompanying consolidated statement of comprehensive income for the three months ended March 31, 2023.

4. Other Property, Plant and Equipment, Net

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

    

March 31, 

December 31,

2024

    

2023

Land

$

31,111

$

31,111

Buildings and leasehold improvements

 

905

 

901

Machinery and office equipment

 

1,972

 

1,820

Other

 

9,426

 

8,589

 

43,414

 

42,421

Less: accumulated depreciation

 

(8,312)

 

(7,790)

Total other property, plant and equipment, net

$

35,102

$

34,631

For the three months ended March 31, 2024 and 2023, depreciation expense related to other property, plant and equipment was $0.5 million and $0.5 million, respectively, and is included in other depreciation and amortization in the consolidated statements of comprehensive income.

5. Goodwill and Other Intangible Assets, net

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

13

Changes in the carrying amount of goodwill were as follows:

    

HFS - South

Balance at January 1, 2023

$

41,038

Changes in Goodwill

-

Balance at December 31, 2023

41,038

Changes in Goodwill

-

Balance at March 31, 2024

$

41,038

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

March 31, 2024

Weighted

Gross

average

Carrying

Accumulated

Net Book

    

remaining lives

    

Amount

    

Amortization

    

Value

Intangible assets subject to amortization

    

  

    

  

    

  

    

  

Customer relationships

 

3.6

$

133,105

$

(86,851)

$

46,254

Non-compete agreement

3.8

349

(84)

265

Total

133,454

(86,935)

46,519

Indefinite lived assets:

 

  

 

  

 

  

 

  

Tradenames

 

  

 

16,400

 

 

16,400

Total intangible assets other than goodwill

 

  

$

149,854

$

(86,935)

$

62,919

December 31, 2023

Weighted

Gross

average

Carrying

Accumulated

Net Book

    

remaining lives

    

Amount

    

Amortization

    

Value

Intangible assets subject to amortization

Customer relationships

    

3.9

    

$

133,105

    

$

(83,505)

    

$

49,600

Non-compete agreement

4.1

349

(67)

282

Total

133,454

(83,572)

49,882

Indefinite lived assets:

 

  

 

  

 

  

 

  

Tradenames

 

  

 

16,400

 

 

16,400

Total intangible assets other than goodwill

 

  

$

149,854

$

(83,572)

$

66,282

For the three months ended March 31, 2024 and 2023, amortization expense related to intangible assets was $3.4 million and $3.3 million, respectively and is included in other depreciation and amortization in the consolidated statements of comprehensive income.

The estimated aggregate amortization expense as of March 31, 2024 for each of the next five years and thereafter is as follows:

Rest of 2024

    

$

10,112

2025

13,475

2026

12,879

2027

8,270

2028

778

Thereafter

1,005

Total

$

46,519

14

6. Other Non-Current Assets

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

    

March 31, 

December 31, 

2024

    

2023

Cloud computing implementation costs

$

7,434

$

7,428

Less: accumulated amortization

(7,200)

(6,767)

Other non-current assets

$

234

$

661

The majority of such systems were placed into service beginning January of 2020 at which time the Company began to amortize these capitalized costs on a straight-line basis over the period of the remaining service arrangements of between 2 and 4 years. Such amortization expense amounted to approximately $0.4 million and $0.3 million for the three months ended March 31, 2024 and 2023, respectively, and is included in selling, general and administrative expense in the accompanying consolidated statements of comprehensive income.

7. Accrued Liabilities

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

    

March 31, 

December 31, 

2024

    

2023

Employee accrued compensation expense

$

7,221

$

9,583

Other accrued liabilities 

 

27,678

 

20,656

Accrued interest on debt

1,033

3,413

Total accrued liabilities 

$

35,932

$

33,652

Other accrued liabilities in the above table relates primarily to accrued utilities, real estate and sales taxes, state and federal income taxes, liability-based stock compensation awards (see Note 15), and other accrued operating expenses.

8. Debt

Senior Secured Notes 2024

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. 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 (defined in the Company’s 2023 Form 10-K), approximately $181.4 million of 2024 Senior Secured Notes were exchanged by Arrow Bidco on November 1, 2023 for new 10.75% Senior Secured Notes due 2025 (the “2025 Senior Secured Notes”). Following this exchange 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. As such, none of the 2024 Senior Secured Notes remain outstanding. Refer to the “Notes Exchange Offer” section within Note 8 of the Company’s 2023 Form 10-K for further discussion regarding the exchange and subsequent pay off of the remaining 2024 Senior Secured Notes.

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Senior Secured Notes 2025

In connection with the Notes Exchange Offer, as previously mentioned, 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”). The 2025 Senior Secured Notes will mature on June 15, 2025. Interest on the 2025 Senior Secured Notes will accrue at 10.75% per annum, payable semi-annually on March 15 and September 15 of each year, and began March 15, 2024.

Refer to the table below for a description of the amounts related to the 2025 Senior Secured Notes, which are recognized within long-term debt, net in the accompanying consolidated balance sheet as of March 31, 2024.

    

March 31, 

2024

Principal amount of 10.75% Senior Secured Notes, due 2025

$

181,446

Less: unamortized original issue discount

(2,202)

Less: unamortized term loan deferred financing costs

(617)

Long-term debt, net

$

178,627

If Arrow Bidco undergoes a change of control or sells certain of its assets, Arrow Bidco may be required to offer to repurchase the 2025 Senior Secured Notes. Prior to September 15, 2024, the 2025 Senior Secured Notes will be redeemable at Arrow Bidco’s option at a redemption price equal to 100% of the principal amount, plus a customary make whole premium for the 2025 Senior Secured Notes being redeemed, plus accrued and unpaid interest, if any, up to but not including the redemption date. The customary make whole premium, with respect to the 2025 Senior Secured Notes on any applicable redemption date, as calculated by Arrow Bidco, is the greater of (1) 1.00% of the then outstanding principal amount of the Note; and (2) the excess of (a) the present value at such redemption date of (i) the redemption price at September 15, 2024 plus (ii) all required interest payments due on the 2025 Senior Secured Note through September 15, 2024, excluding accrued but unpaid interest to the redemption date, in each case, computed using a discount rate equal to the Treasury Rate as of such redemption date plus 50 basis points; over (b) the then outstanding principal amount of the 2025 Senior Secured Notes. On and after September 15, 2024, Arrow Bidco, at its option, may redeem any outstanding 2025 Senior Secured Notes, in whole or in part, upon not less than fifteen (15) nor more than sixty (60) days’ prior written notice to holders and not less than twenty (20) days’ prior written notice to the Trustee (or such shorter timeline as the Trustee may agree), at the redemption prices (expressed as percentages of the principal amount of the 2025 Senior Secured Notes to be redeemed) set forth below, plus accrued and unpaid interest, if any, to but not including the applicable redemption date (subject to the right of holders on the relevant record date to receive interest due on an interest payment date falling on or prior to the redemption date), if redeemed during the 6-month period beginning on the dates set forth below at the redemption prices listed below:

Redemption

Date

    

Price

September 15, 2024

102.000%

March 15, 2025 and thereafter

101.000%

The 2025 Senior Secured Notes are unconditionally guaranteed by Topaz and each of Arrow Bidco’s direct and indirect wholly-owned domestic subsidiaries (collectively, the “2025 Note Guarantors”). Target Hospitality is not an issuer or a guarantor of the 2025 Senior Secured Notes. The 2025 Note Guarantors are either borrowers or guarantors under the ABL Facility. To the extent lenders under the ABL Facility release the guarantee of any 2025 Note Guarantor, such 2025 Note Guarantor is also released from obligations under the 2025 Senior Secured Notes. These guarantees are secured by a second priority security interest in substantially all of the assets of Arrow Bidco and the 2025 Note Guarantors (subject to customary exclusions). The guarantees of the 2025 Senior Secured Notes by TLM Equipment, LLC, a Delaware limited liability company which holds certain of Target Hospitality’s assets, are subordinated to its obligations under the ABL Facility (as defined below).

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The 2025 Senior Secured Notes Indenture contains covenants that limit Arrow Bidco’s and its subsidiaries’ ability to, among other things, (i) incur or guarantee additional debt and issue certain types of stock, (ii) create or incur certain liens, (iii) make certain payments, including dividends or other distributions, (iv) prepay or redeem junior debt, (v) make certain investments or acquisitions, including participating in joint ventures, (vi) engage in certain transactions with affiliates and (vii) sell assets, consolidate or merge with or into other companies. These covenants are subject to a number of important limitations and exceptions. In addition, upon the occurrence of specified change of control events, Arrow Bidco must offer to repurchase the 2025 Senior Secured Notes at 101% of the principal amount, plus accrued and unpaid interest, if any, but excluding, the applicable repurchase date. The 2025 Senior Secured Notes Indenture also provides for events of default, to which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all of the then outstanding 2025 Senior Secured Notes to be due and payable immediately.

Arrow Bidco’s ultimate parent, Target Hospitality, has no significant independent assets or operations except as included in the guarantors of the 2025 Senior Secured Notes, the guarantees under the 2025 Senior Secured Notes are full and unconditional and joint and several, and any subsidiaries of Target Hospitality that are not subsidiary guarantors of the 2025 Senior Secured Notes are minor. There are also no significant restrictions on the ability of Target Hospitality or any guarantor to obtain funds from its subsidiaries by dividend or loan. See discussion of certain negative covenants above. Therefore, pursuant to the SEC Rules, no individual guarantor financial statement disclosures are deemed necessary.  

In connection with the issuance of the 2025 Senior Secured Notes, there was an original issue discount of approximately $2.7 million and the unamortized balance of approximately $2.2 million is presented on the face of the consolidated balance sheet as of March 31, 2024 as a reduction of the principal. The discount is amortized over the life of the 2025 Senior Secured Notes using the effective interest method.

Finance Lease and Other Financing Obligations

The Company’s finance lease and other financing obligations as of March 31, 2024 consisted of approximately $2.8 million of finance leases. The finance leases pertain to leases entered into during 2017 through March 31, 2024, for commercial-use vehicles with 36-month terms (and continue on a month-to-month basis thereafter) expiring through 2027.

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 (the “Closing Date”), Topaz, Arrow Bidco, Target, Signor and each of their domestic subsidiaries entered into an ABL credit agreement that provided for a senior secured asset based revolving credit facility in the aggregate principal amount of up to $125 million (the “ABL Facility”), which was increased to $175 million with the Third Amendment discussed below. During the three months ended March 31, 2024, no amounts were drawn or repaid on the ABL Facility resulting in an outstanding balance of $0 as of March 31, 2024.

In accordance with the First Amendment to the ABL Facility on February 1, 2023 (the “First Amendment”), the reference interest rate for LIBOR borrowings changed from LIBOR to Term SOFR (commencing as of the effective date of the First Amendment).

Borrowings under the ABL Facility, at the relevant borrower’s (the borrowers under the ABL Facility, the “Borrowers”) option, bear interest at either (1) Term SOFR or (2) a base rate, in each case plus an applicable margin. The applicable margin is 4.25% to 4.75% with respect to Term SOFR borrowings and 3.25% to 3.75% with respect to base rate borrowings based on achieving certain excess availability levels. The rates of the applicable margin were determined in connection with the Third Amendment to the ABL Facility on October 12, 2023 (the “Third Amendment”).

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Pursuant to the Third Amendment, the ABL Facility provides borrowing availability of an amount equal to the lesser of (a) $175 million and (b) the Borrowing Base (defined below) (the “Line Cap”).

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

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

The ABL Facility includes borrowing capacity available for standby letters of credit of up to $25 million and for ‘‘swingline’’ loan borrowings of up to $15 million. Any issuance of letters of credit or making of a swingline loan will reduce the amount available under the ABL Facility.

In addition, the ABL Facility will provide the Borrowers with the option to increase commitments under the ABL Facility in an aggregate amount not to exceed $25 million plus any voluntary prepayments that are accompanied by permanent commitment reductions under the ABL Facility. As a result of the First Amendment, the termination date of the ABL Facility was extended from September 15, 2023 to February 1, 2028, which extended termination date was subject to a springing maturity that would have accelerated the maturity of the ABL Facility. On August 10, 2023, Arrow Bidco and certain of the Company’s other subsidiaries entered into a second amendment (the “Second Amendment”) to the ABL Facility. The Second Amendment amended the ABL Facility to, among other things, modify the springing maturity that would have accelerated the maturity of the ABL Facility if any of the 2024 Senior Secured Notes remained outstanding from the date that was six months prior to the stated maturity date thereof to the date that was ninety-one days prior to the stated maturity date thereof.  Finally, the Third Amendment amended the ABL Facility to, among other things, set the termination date of the ABL Facility to February 1, 2028, subject to springing maturity triggers that will accelerate the maturity of the ABL Facility if: (i) any of the 2024 Senior Secured Notes remain outstanding on the date that is ninety-one days prior to the stated maturity date thereof or (ii) any of the 2025 Senior Secured Notes remain outstanding on the date that is ninety-one days prior to the stated maturity date thereof. As previously mentioned, none of the 2024 Senior Secured Notes remain outstanding.

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

As stated in the Third Amendment, the ABL Facility requires the Borrowers to maintain a (i) minimum fixed charge coverage ratio of not less than 1.00:1.00 and (ii) maximum total leverage ratio of 2.50:1.00.

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

incur additional indebtedness, issue disqualified stock and make guarantees;
incur liens on assets;
engage in mergers or consolidations or fundamental changes;
sell assets;
pay dividends and distributions or repurchase capital stock;
make investments, loans and advances, including acquisitions;
amend organizational documents and master lease documents;
enter into certain agreements that would restrict the ability to pay dividends;

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repay certain junior indebtedness; and
change the conduct of its business.

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

The carrying value of debt outstanding as of the dates indicated below consist of the following:

    

March 31, 

December 31,

2024

    

2023

Finance lease and other financing obligations

$

2,844

$

2,393

10.75% Senior Secured Notes due 2025, face amount

 

181,446

 

181,446

Less: unamortized original issue discount

(2,202)

(2,619)

Less: unamortized term loan deferred financing costs

(617)

(734)

Total debt, net

 

181,471

 

180,486

Less: current maturities

 

(1,574)

 

(1,369)

Total long-term debt

$

179,897

$

179,117