Item 4.02(a) Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review
On April 30, 2021, the Audit Committee of the Board of Directors (the “Audit Committee”) of Target Hospitality
Corp. (the “Company”), after considering the recommendation of the Company’s management (with the assistance of the Company's legal advisors and the Company's independent valuation firm) and after discussions with Ernst & Young LLP, the
Company’s independent registered public accounting firm, concluded that the Company’s consolidated financial statements and other financial information for the years ended December 31, 2020 and 2019 and for each of the interim quarterly periods
therein (the “Non-Reliance Period”) should no longer be relied upon and the Form 10-K for the year ended December 31, 2020 will be amended to restate the consolidated financial statements contained therein due to changes in accounting for certain
previously issued warrants to conform with the SEC Staff Statement described below.
After consideration of the views expressed in the Securities and Exchange Commission (the
“SEC”) Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) dated April 12, 2021 (the “SEC Staff Statement”) in which the SEC clarified its interpretations of certain
generally accepted accounting principles related to certain terms that are common in warrants issued in connection with the initial public offerings of SPACs, the Company’s management became aware that the Company’s accounting for warrants in its
consolidated financial statements for the Non-Reliance Period was inconsistent with this new SEC Staff Statement. The SEC Staff Statement addressed certain accounting and reporting considerations related to warrants of a kind similar to those
issued by the Company. Based on Accounting Standards Codification 815-40, Contracts in an Entity’s Own Equity, warrant instruments that do
not meet the criteria to be considered indexed to an entity’s own stock shall be classified as liabilities at their estimated fair values, regardless of the likelihood that such instruments will ever be settled in cash. In periods subsequent to
issuance, changes in the estimated fair values of the derivative instruments should be reported in the consolidated statement of comprehensive income (loss).
In 2018, the Company’s legal predecessor, Platinum Eagle Acquisition Corp., issued warrants
to purchase 5,333,334 shares of its common stock in a private placement concurrently with its initial public offering (the “Private Warrants”). Each Private Warrant entitles the holder to purchase one share of the Company’s common stock at a
price of $11.50 per share. If held by the original purchasers (or their permitted transferees), the Private Warrants may be exercised on a cashless basis and are not subject to redemption by the Company. The Company had previously accounted for
these warrants as equity, consistent with common market practice, which existed prior to the SEC Staff Statement.
As a result of the above, the Company will restate its consolidated financial statements for the Non-Reliance
Period to reflect the Private Warrants as liabilities with the associated gains or losses recognized as a result of the changes in fair values and extinguishment. We expect the restatement to impact total liabilities and shareholders’ equity and
to result in incremental non-operating income (expense) related to the changes in the fair values of the Private Warrants which will impact net income (loss), and earnings
(loss) per share. We do not expect the restatement to impact other GAAP metrics, such as revenues, operating income (loss), cash and cash equivalents, assets or debt, or our previously communicated non-GAAP operating metrics, including adjusted
Gross Profit, adjusted EBITDA, or Discretionary cash flows. Further, we do not expect the restatement to impact compliance with the covenants contained in our credit facility.
The Company is working diligently with its auditors and an independent
valuation expert to finalize the valuation of the Private Warrants, and intends to file an amendment to its Annual Report on Form 10-K for the year ended December 31, 2020, originally filed with the Securities and Exchange Commission on March 31,
2021, to conform to the interpretations in the SEC Staff Statement as soon as reasonably practicable. Accordingly, investors and others should not rely on the Company’s previously released financial statements and other financial information and
disclosures for the Non-Reliance Period. Similarly, any previously furnished or filed reports, press releases, earnings releases, investor presentations or other communications describing the Company’s consolidated financial statements and other
related financial information for the Non-Reliance Period should not be relied upon.
The Company is assessing the implications of these issues on the Company's disclosure
controls and procedures and internal control over financial reporting.
The Company’s management and the Audit Committee have discussed the matters disclosed in this
Item 4.02(a) with the Company’s independent registered public accounting firm, Ernst & Young LLP.