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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, 2021

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.)

2170 Buckthorne Place, Suite 440

The Woodlands, TX 77380-1775

(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 Global Market

Warrants to purchase common stock

THWWW

NASDAQ Global 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 101,236,253 shares of Common Stock, par value $0.0001 per share, outstanding as of May 19, 2021.

Target Hospitality Corp.

TABLE OF CONTENTS

FORM 10-Q

March 31, 2021

PART I — FINANCIAL INFORMATION

5

Item 1. Financial Statements

5

Consolidated Balance Sheets

5

Unaudited Consolidated Statements of Comprehensive Income (Loss)

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

32

Item 3. Quantitative and Qualitative Disclosures About Market Risk

46

Item 4. Controls and Procedures

47

PART II — OTHER INFORMATION

48

Item 1. Legal Proceedings

48

Item 1A. Risk Factors

48

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

48

Item 3. Defaults upon Senior Securities

48

Item 4. Mine Safety Disclosures

48

Item 5. Other Information

48

Item 6. Exhibits

49

SIGNATURES

50

UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Target Hospitality Corp.

Unaudited Consolidated Financial Statements as of March 31, 2021 and December 31, 2020 and for the three months ended March 31, 2021 and 2020

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Target Hospitality Corp.

Consolidated Balance Sheets

($ in thousands)

March 31, 

December 31, 

    

2021

    

2020

Assets

 

(Unaudited)

 

(Restated)

Current assets:

 

  

 

  

Cash and cash equivalents

$

6,373

$

6,979

Accounts receivable, less allowance for doubtful accounts of $2,713 and $2,977, respectively

 

30,915

 

28,183

Prepaid expenses and other assets

 

6,518

 

7,195

Related party receivable

1,205

Total current assets

 

43,806

 

43,562

Specialty rental assets, net

 

302,237

 

311,487

Other property, plant and equipment, net

 

10,712

 

11,019

Goodwill

 

41,038

 

41,038

Other intangible assets, net

 

99,463

 

103,121

Deferred tax asset

 

16,914

 

15,179

Deferred financing costs revolver, net

 

3,110

 

3,422

Other non-current assets

4,987

5,409

Total assets

$

522,267

$

534,237

Liabilities

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

9,167

$

10,644

Accrued liabilities

 

15,035

 

24,699

Deferred revenue and customer deposits

 

6,696

 

6,619

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

 

2,401

 

3,571

Total current liabilities

 

33,299

 

45,533

Other liabilities:

 

  

 

  

Long-term debt (Note 8):

 

 

Principal amount

340,000

340,000

Less: unamortized original issue discount

(2,166)

(2,319)

Less: unamortized term loan deferred financing costs

(10,444)

(11,182)

Long-term debt, net

327,390

326,499

Revolving credit facility (Note 8)

60,000

48,000

Long-term capital lease and other financing obligations

79

269

Other non-current liabilities

 

518

 

479

Deferred revenue and customer deposits

 

11,033

 

11,752

Asset retirement obligations

 

2,334

 

2,284

Warrant liabilities

1,173

533

Total liabilities

 

435,826

 

435,349

Commitments and contingencies (Note 12)

 

  

 

  

Stockholders' equity:

 

  

 

  

Common Stock, $0.0001 par, 400,000,000 authorized, 105,651,020 issued and 101,236,253 outstanding as of March 31, 2021 and 105,585,682 issued and 101,170,915 outstanding as of December 31, 2020.

10

10

Common Stock in treasury at cost, 4,414,767 shares as of March 31, 2021 and December 31, 2020, respectively.

(23,559)

(23,559)

Additional paid-in-capital

 

107,261

 

106,551

Accumulated other comprehensive loss

 

(2,453)

 

(2,434)

Accumulated earnings

 

5,182

 

18,320

Total stockholders' equity

 

86,441

 

98,888

Total liabilities and stockholders' equity

$

522,267

$

534,237

See accompanying notes to the unaudited consolidated financial statements.

5

Target Hospitality Corp.

Unaudited Consolidated Statements of Comprehensive Income (Loss)

($ in thousands, except per share amounts)

For the Three Months Ended

March 31, 

    

2021

    

2020

Revenue:

 

(Restated)

Services income

$

32,938

$

53,938

Specialty rental income

 

11,620

 

16,583

Construction fee income

 

934

 

1,134

Total revenue

 

45,492

 

71,655

Costs:

 

 

Services

 

19,349

 

29,007

Specialty rental

 

2,242

 

2,604

Depreciation of specialty rental assets

 

12,440

 

12,897

Gross profit

 

11,461

 

27,147

Selling, general and administrative

 

11,332

 

9,990

Other depreciation and amortization

 

3,996

 

4,116

Other expense (income), net

 

246

 

(1,015)

Operating income (loss)

 

(4,113)

 

14,056

Interest expense, net

 

9,849

 

10,022

Change in fair value of warrant liabilities

640

(1,653)

Income (loss) before income tax

 

(14,602)

 

5,687

Income tax expense (benefit)

 

(1,464)

 

233

Net income (loss)

 

(13,138)

 

5,454

Other comprehensive loss

 

 

Foreign currency translation

 

(19)

 

(111)

Comprehensive income (loss)

$

(13,157)

$

5,343

Weighted average number shares outstanding - basic and diluted

 

96,168,425

 

95,849,854

Net income (loss) per share - basic and diluted

$

(0.14)

$

0.06

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, 2021 and 2020

($ in thousands)

Common Stock

Common Stock in Treasury

    

Shares

Amount

    

Shares

Amount

    

Additional Paid In Capital

    

Accumulated Other Comprehensive Loss

    

Accumulated Earnings

    

Total Stockholders' Equity

Balances at December 31, 2019, as restated

100,840,162

$

10

4,414,767

$

(23,559)

$

103,178

$

(2,558)

$

43,451

$

120,522

Net income

5,454

5,454

Stock-based compensation

83,831

884

884

Shares used to settle payroll tax withholding

(83)

(83)

Cumulative translation adjustment

(111)

(111)

Balances at March 31, 2020, as restated

100,923,993

$

10

4,414,767

$

(23,559)

$

103,979

$

(2,669)

$

48,905

$

126,666

Balances at December 31, 2020, as restated

101,170,915

$

10

4,414,767

$

(23,559)

$

106,551

$

(2,434)

$

18,320

$

98,888

Net loss

(13,138)

(13,138)

Shares used to settle payroll tax withholding

(51)

(51)

Cumulative translation adjustment

(19)

(19)

Stock-based compensation

65,338

761

761

Balances at March 31, 2021

101,236,253

$

10

4,414,767

$

(23,559)

$

107,261

$

(2,453)

$

5,182

$

86,441

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, 

    

2021

    

2020

Cash flows from operating activities:

 

  

 

(Restated)

Net income (loss)

$

(13,138)

$

5,454

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

  

Depreciation

 

12,777

 

13,265

Amortization of intangible assets

 

3,658

 

3,747

Accretion of asset retirement obligation

 

50

 

44

Amortization of deferred financing costs

 

1,050

 

904

Amortization of original issue discount

153

122

Change in fair value of warrant liabilities

640

(1,653)

Stock-based compensation expense

761

884

Gain on involuntary conversion

(619)

Deferred income taxes

 

(1,735)

 

(35)

Provision for loss on receivables, net of recoveries

220

530

Changes in operating assets and liabilities

 

Accounts receivable

 

(2,979)

 

(1,120)

Related party receivable

1,225

578

Prepaid expenses and other assets

 

676

 

(949)

Accounts payable and other accrued liabilities

 

(11,146)

 

(4,094)

Deferred revenue and customer deposits

 

(642)

 

(5,239)

Other non-current assets and liabilities

 

431

 

(1,268)

Net cash provided by (used in) operating activities

 

(7,999)

 

10,551

Cash flows from investing activities:

 

  

 

  

Purchase of specialty rental assets

 

(3,173)

 

(10,751)

Purchase of property, plant, and equipment

 

(29)

 

(13)

Receipt of insurance proceeds

 

 

619

Net cash used in investing activities

 

(3,202)

 

(10,145)

Cash flows from financing activities:

 

  

 

  

Principal payments on finance and capital lease obligations

 

(1,361)

 

(3)

Proceeds from borrowings on finance and capital lease obligations

733

Principal payments on borrowings from ABL

 

(6,000)

 

(22,500)

Proceeds from borrowings on ABL

 

18,000

 

27,500

Restricted shares surrendered to pay tax liabilities

(51)

(83)

Purchase of treasury stock

(5,318)

Net cash provided by financing activities

 

10,588

 

329

Effect of exchange rate changes on cash, cash equivalents and restricted cash

7

(18)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

(606)

 

717

Cash, cash equivalents and restricted cash - beginning of period

 

6,979

 

6,839

Cash, cash equivalents and restricted cash - end of period

$

6,373

$

7,556

Reconciliation of cash, cash equivalents, and restricted cash to consolidated balance sheets:

Cash and cash equivalents

$

6,373

$

7,504

Restricted cash

52

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows

$

6,373

$

7,556

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” or the “Company”) was formed on March 15, 2019 and is one of the largest vertically integrated specialty rental and hospitality services companies in the United States. 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 oil, gas, mining, alternative energy, government and immigrations sectors principally located in the West Texas, South Texas, Oklahoma and Bakken regions, as well as various large linear-construction (pipeline and infrastructure) projects in the United States.

The Company, whose securities are listed on the Nasdaq Capital Market, serves as the holding company for the businesses of Target Logistics Management, LLC and its subsidiaries (“Target”) and RL Signor Holdings, LLC and its subsidiaries (“Signor”). TDR Capital LLP (“TDR Capital” or “TDR”) owns approximately 63% 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 in Platinum Eagle’s private placement transaction completed substantially and concurrently with the Business Combination (as defined below) (the “PIPE”), and other public shareholders. Platinum Eagle was originally incorporated on July 12, 2017 as a Cayman Islands exempted company, for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization, or similar business combination with one or more businesses. References in this Quarterly Report on Form 10-Q to the Company refer to Target Hospitality for all periods at or after March 15, 2019 and Platinum Eagle for all periods prior to March 15, 2019, unless the context requires otherwise.

On November 13, 2018, PEAC entered into: (i) the agreement and plan of merger, as amended on January 4, 2019 (the “Signor Merger Agreement”), by and among PEAC, Signor Merger Sub LLC, a Delaware limited liability company and wholly-owned subsidiary of Platinum Eagle and sister company to the Holdco Acquiror (defined below as Topaz Holdings LLC) (“Signor Merger Sub”), Arrow Holdings S.a.r.l., a Luxembourg société à responsabilité limitée (the “Arrow Seller”) and Signor Parent (as defined below), and (ii) the agreement and plan of merger, as amended on January 4, 2019 (the “Target Merger Agreement” and, together with the Signor Merger Agreement, the “Merger Agreements”), by and among Platinum Eagle, Topaz Holdings LLC, a Delaware limited liability company (“Topaz”), Arrow Bidco, LLC, a Delaware limited liability company (“Bidco”), Algeco Investments B.V., a Netherlands besloten vennootschap (the “Algeco Seller”) and Target Parent (as defined below), to effect a business combination (the “Business Combination”). Pursuant to the Merger Agreements, on March 15, 2019, Platinum Eagle, through its wholly-owned subsidiary, Topaz, acquired all of the issued and outstanding equity interests of Arrow Parent Corp., a Delaware corporation (“Signor Parent”), the owner of Bidco and the owner of Signor from the Arrow Seller, and all of the issued and outstanding equity interests of Algeco US Holdings LLC, a Delaware limited liability company (“Target Parent”), the owner of Target, from the Algeco Seller, for approximately $1.311 billion. The purchase price was paid in a combination of shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”), and cash. The Arrow Seller and the Algeco Seller are hereinafter referred to as the “Sellers.”

Target Parent was formed by TDR in September 2017. Prior to the Business Combination, Target Parent was directly owned by Algeco Scotsman Global S.a.r.l. (“ASG”) which is ultimately owned by a group of investment funds managed and controlled by TDR. During 2018, ASG assigned all of its ownership interest in Target Parent to the Algeco Seller, an affiliate of ASG that is also ultimately owned by a group of investment funds managed and controlled by TDR. Target Parent acted as a holding company that included the U.S. corporate employees of ASG and certain of its affiliates and certain related administrative costs and was the owner of Target, its operating company. Target Parent received capital contributions, made distributions, and maintained cash as well as other amounts owed to and from affiliated entities. As discussed above, in connection with the closing of the Business Combination, Target Parent merged with and into Bidco, with Bidco as the surviving entity.

9

Signor Parent owned 100% of Bidco until the closing of the Business Combination in connection with which Signor Parent merged with and into Topaz with Topaz being the surviving entity. Prior to the Business Combination, Signor Parent was owned by the Arrow Seller, which is ultimately owned by a group of investment funds managed and controlled by TDR. Signor Parent was formed in August 2018 and acted as a holding company for Bidco, which was formed in September 2018, also as a holding company. Bidco acquired Signor on September 7, 2018. Neither Signor Parent nor Bidco had operating activity, but each received capital contributions, made distributions, and maintained cash as well as other amounts owed to and from affiliated entities. Signor Parent was dissolved upon consummation of the Business Combination and merger with Topaz described above on March 15, 2019.

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 the Target Hospitality Annual Report on Form 10-K/A for the year ended December 31, 2020, filed with the SEC on May 24, 2021 (the “2020 Form 10-K/A”).

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the operating results that may be expected for the full fiscal year ending December 31, 2021 or any future period.

The accompanying unaudited consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, except for the restatement discussed below, necessary for a fair statement of financial position as of March 31, 2021, and results of operations for the three months ended March 31, 2021 and 2020, and cash flows for the three months ended March 31, 2021 and 2020. The consolidated balance sheet as of December 31, 2020, was derived from the audited consolidated balance sheets of Target Hospitality Corp. but does not contain all of the footnote disclosures from those annual financial statements.

Restatement of Previously Issued Consolidated Financial Statements

The notes included herein should be read in conjunction with the Company's restated audited consolidated financial statements included in the 2020 Form 10-K/A.

As previously disclosed in the 2020 Form 10-K/A, we restated the Company’s previously issued consolidated financial statements as of and for the year ended December 31, 2020, as well as each of the quarters within 2020 to make the necessary accounting corrections related to warrant accounting. We have restated herein our consolidated financial statements as of and for the quarter ended March 31, 2020. We have also restated related amounts within the accompanying footnotes to the consolidated financial statements.  The impact to the quarter ended March 31, 2020 was an increase to net income of approximately $1.7 million.

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.

10

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 an operating lease under the authoritative guidance for leases and are recognized as income using the straight-line method over the term of the lease agreement.

Because performance obligations related to specialty rental and hospitality services are satisfied over time, the majority 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 three 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. Certain of the Company’s contractual arrangements allow customers the ability to use paid but unused lodging and services for a specified period. The Company recognizes revenue for these paid but unused lodging and services as they are consumed, as it becomes probable the lodging and services will not be used, or upon expiration of the specified term.

Cost of services includes labor, food, utilities, supplies, rent and other direct costs associated with operating the lodging units as well as costs associated with construction services. Cost of rental includes leasing costs 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 (loss).

The Company recognizes revenue associated with community construction using the percentage of completion method with progress towards completion measured using the cost-to-cost method as the basis to recognize revenue. Management believes this cost-to-cost method is the most appropriate measure of progress to the satisfaction of a performance obligation on the community construction. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to projected costs and revenue and are recognized in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. Factors that may affect future project costs and margins include weather, production efficiencies, availability and costs of labor, materials and subcomponents.  

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 (loss). 

Recently Issued Accounting Standards

The Company meets the definition of an emerging growth company (“EGC”) as defined under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). In reliance on exemptions provided under the JOBS Act for EGCs, the Company has elected to defer compliance with new or revised financial accounting standards until a company that is not an issuer (as defined under section 2(a) of the Sarbanes-Oxley Act of 2002) is required to comply with such standards. As such, compliance dates included below pertain to non-issuers, and as permitted, early adoption dates are indicated.

11

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This guidance revises existing practice related to accounting for leases under ASC Topic 840 Leases (ASC 840) for both lessees and lessors. The new guidance requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The lease liability will be equal to the present value of lease payments and the right-of-use asset will be based on the lease liability, subject to adjustment such as for initial direct costs. For income statement purposes, the new standard retains a dual model similar to ASC 840, requiring leases to be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current accounting by lessees for operating leases under ASC 840) while finance leases will result in a front-loaded expense pattern (similar to current accounting by lessees for capital leases under ASC 840). While the new standard maintains similar accounting for lessors as under ASC 840, the new standard reflects updates to, among other things, align with certain changes to the lessee model. In June 2020, the FASB issued ASU No. 2020-05 to delay the effective date for the new standard for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022 for non-issuers (including EGCs).  Early application continues to be allowed.  Topic 842 allows an entity to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach or to adopt under the new optional transition method that allows an entity to recognize a cumulative-effect adjustment to the opening balance of retained earnings as of the adoption date. The Company is currently evaluating the impact of the pronouncement on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (ASU 2016-13 or Topic 326). This new standard changes how companies account for credit impairment for trade and other receivables as well as changing the measurement of credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 will replace the current "incurred loss" model with an "expected loss" model. Under the "incurred loss" model, a loss (or allowance) is recognized only when an event has occurred (such as a payment delinquency) that causes the entity to believe that a loss is probable (i.e., that it has been "incurred"). Under the "expected loss" model, a loss (or allowance) is recognized upon initial recognition of the asset that reflects all future events that leads to a loss being realized, regardless of whether it is probable that the future event will occur. The "incurred loss" model considers past events and current conditions, while the "expected loss" model includes expectations for the future which have yet to occur.  ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, was issued in November 2018 and excludes operating leases from the new guidance. In 2019, the FASB voted to delay the effective date for the new standard for financial statements issued for reporting periods beginning after December 15, 2022 and interim periods within those reporting periods. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

Recent Developments – COVID-19 and Disruption in Oil and Gas Industry

On January 30, 2020, the World Health Organization declared an outbreak of a highly contagious form of an upper respiratory infection caused by the Coronavirus Disease 2019 (“COVID-19”), a novel coronavirus strain commonly referred to as “coronavirus”.  The global outbreak of COVID-19 and the declaration of a pandemic by the World Health Organization on March 11, 2020 presented new risks to the Company’s business. Further, in the first quarter of 2020, crude oil prices fell sharply, due to the spread of COVID-19 and actions by Saudi Arabia and Russia.  Prior to March 2020, the Company’s results were largely in line with expectations and subsequent to March 2020, we began to experience a decline in revenues.  Neither the Company’s ability to operate nor its supply chain have experienced material disruptions and no service disruption or shortage of critical products have been experienced at our communities. However, the situation surrounding COVID-19 and the decrease in demand for oil and natural gas, and simultaneous oversupply has had material adverse impacts on the Company’s operating results.  The economic effects of this led the Company to implement several cost containment measures primarily initiated in April of 2020, including salary reductions, reductions in workforce, furloughs, reduced discretionary spending and elimination of all non-essential travel.  In addition to these measures, the Company temporarily closed and consolidated several communities in the Permian Basin and in May of 2020, the Company temporarily closed all communities in the Bakken Basin. However, the Company began re-opening communities in both the Permian and Bakken Basin in July of 2020 as customer activity levels began to increase.  Additionally, the Company executed contract modifications with several customers in the oil and natural gas industry resulting in extended terms and reduced minimum contract commitments in 2020.  These modifications utilize multi-year contract extensions to maintain contract value and provide the Company with greater visibility on long-term revenue and cash flow.  This

12

mutually beneficial approach balanced average daily rates with contract term and positions the Company to take advantage of a more balanced market.

There have been significant changes to the global economic situation and to public securities markets as a result of  COVID-19.  A delay in wide distribution of a vaccine, or a lack of public acceptance of a vaccine, could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Further, even if a vaccine is widely distributed and accepted, there can be no assurance that the vaccine will ultimately be successful in limiting or stopping the spread of COVID-19.  It is possible that these changes could cause changes to estimates as a result of the markets in which the Company operates, the price of the Company’s publicly traded equity and debt in comparison to the Company’s carrying value. Such changes to estimates could potentially result in impacts that would be material to the Company’s consolidated financial statements, particularly with respect to the fair value of the Company’s reporting units in relation to potential goodwill impairment, the fair value of long-lived and other intangible assets in relation to potential impairment and the allowance for doubtful accounts.

As a result of the impact of COVID-19 and the disruption in the oil and gas industry, in the first quarter of 2020 we also concluded a trigger event had occurred and we tested our long-lived and intangible assets, including goodwill, for impairment.  Based upon our impairment assessments, which utilized the Company’s current long-term projections, we determined the carrying amount of these assets were not impaired.  Due to the uncertain and rapidly evolving nature of the conditions surrounding the COVID-19 pandemic as well as the decrease in demand for oil and natural gas, given that a significant portion of our customer base operates in the oil and gas industry, changes in economic outlook may change our long-term projections.  During the first quarter of 2021, we did not identify further triggers or indicators of impairment and therefore did not perform a quantitative impairment test.    

Additionally, in connection with COVID-19, on March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). The CARES Act, among other things, includes provisions relating to the 80 percent limitation of net operating loss and modifications to the business interest deduction limitations. We evaluated how the provisions in the CARES Act would impact our consolidated financial statements and concluded that the CARES Act did not have a material impact on our provision for income taxes for the three months ended March 31, 2021 and 2020.

2. Revenue

Total revenue recognized under Topic 606 was $33.9 million and $55.1 million for the three months ended March 31, 2021 and 2020, respectively, while specialty rental income was $11.6 million and $16.6 million subject to the guidance of ASC 840 for the three months ended March 31, 2021 and 2020, respectively.

The following table disaggregates our revenue by our four reportable segments as well as the All Other category: Permian Basin, Bakken Basin, Government, TCPL Keystone, and All Other for the dates indicated below:

13

For Three Months Ended

March 31, 

2021

2020

Permian Basin

Services income

$

23,202

$

43,286

Total Permian Basin revenues

23,202

43,286

Bakken Basin

Services income

$

597

$

4,185

Total Bakken Basin revenues

597

4,185

Government

Services income

$

8,310

$

5,854

Total Government revenues

8,310

5,854

TCPL Keystone

Services income

$

537

$

-

Construction fee income

934

1,134

Total TCPL Keystone revenues

1,471

1,134

All Other

Services income

$

292

$

613

Total All Other revenues

292

613

Total revenues

$

33,872

$

55,072

As a result of the current market environment discussed in Note 1 Recent Developments – COVID-19 and Disruption in Oil and Gas Industry”, the Company considered the increased risk of delayed customer payments and payment defaults associated with customer liquidity issues and bankruptcies. The Company routinely monitors the financial stability of our customers, which involves a high degree of judgment in assessing customers’ historical time to pay, financial condition and various customer-specific factors.

To date, there has been deterioration in the collectability of our receivables as mentioned above, and we are likely to experience additional challenges in collections due to uncertainties around the continued impact of the COVID-19 global pandemic and decrease in demand for oil and natural gas as discussed in Note 1.  

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 an advanced payment for a community build that is being recognized over the related contract period, and advanced payments for TCPL Keystone in the amount of approximately $5.4 million that have been deferred in connection with the suspension of the project.  Activity in the deferred revenue accounts as of the dates indicated below was as follows:

For Three Months Ended

March 31, 

    

2021

2020

Balances at Beginning of the Period

$

18,371

$

26,199

Additions to deferred revenue

 

614

 

Revenue recognized

 

(1,256)

 

(5,239)

Balances at End of the Period

$

17,729

$

20,960

14

As of March 31, 2021, for contracts greater than one year, the following table discloses the estimated revenues 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,

    

2021

    

2022

    

2023

2024

2025

2026

    

Total

Revenue expected to be recognized as of March 31, 2021

$

98,839

$

48,284

$

18,699

$

18,748

$

18,699

$

13,987

$

217,256

The Company applied some of the practical expedients in Topic 606, including the “right to invoice” practical expedient, and does not disclose consideration for remaining performance obligations with an original expected duration of one year or less or for variable consideration related to unsatisfied (or partially unsatisfied) performance obligations.  Due to the application of these practical expedients, 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.    

3. Specialty Rental Assets, Net

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

    

March 31, 

December 31,

2021

    

2020

Specialty rental assets

$

549,300

$

547,375

Construction-in-process

 

7,275

 

5,828

Less: accumulated depreciation

 

(254,338)

 

(241,716)

Specialty rental assets, net

$

302,237

$

311,487

Depreciation expense related to specialty rental assets was $12.4 million and $12.9 million for the three months ended March 31, 2021 and 2020, respectively, and is included in depreciation of specialty rental assets in the consolidated statements of comprehensive income (loss).

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,

2021

    

2020

Land

$

9,163

$

9,163

Buildings and leasehold improvements

 

115

 

115

Machinery and office equipment

 

1,099

 

1,072

Software and other

 

3,754

 

3,752

 

14,131

 

14,102

Less: accumulated depreciation

 

(3,419)

 

(3,083)

Total other property, plant and equipment, net

$

10,712

$

11,019

Depreciation expense related to other property, plant and equipment was $0.3 million and $0.3 million for the three months ended March 31, 2021 and 2020, respectively, and is included in other depreciation and amortization in the consolidated statements of comprehensive income (loss). 

5. Goodwill and Other Intangible Assets, net

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

15

Changes in the carrying amount of goodwill were as follows:

    

Permian Basin

Balance at January 1, 2020

$

41,038

Changes in Goodwill

-

Balance at December 31, 2020

41,038

Changes in Goodwill

-

Balance at March 31, 2021

$

41,038

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

March 31, 2021

Weighted

Gross

average

Carrying

Accumulated

Net Book

    

remaining lives

    

Amount

    

Amortization

    

Value

Intangible assets subject to amortization

    

  

    

  

    

  

    

  

Customer relationships

 

6.2

$

128,907

$

(45,844)

$

83,063

Total

128,907

(45,844)

83,063

Indefinite lived assets:

 

  

 

  

 

  

 

  

Tradenames

 

  

 

16,400

 

 

16,400

Total intangible assets other than goodwill

 

  

$

145,307

$

(45,844)

$

99,463

December 31, 2020

Weighted

Gross

average

Carrying

Accumulated

Net Book

    

remaining lives

    

Amount

    

Amortization

    

Value

Intangible assets subject to amortization

Customer relationships

    

6.4

    

$

128,907

    

$

(42,186)

    

$

86,721

Total

128,907

(42,186)

86,721

Indefinite lived assets:

 

  

 

  

 

  

 

  

Tradenames

 

  

 

16,400

 

 

16,400

Total intangible assets other than goodwill

 

  

$

145,307

$

(42,186)

$

103,121

For the three months ended March 31, 2021 and 2020, amortization expense related to intangible assets was $3.7 million and $3.7 million, respectively, and is included in other depreciation and amortization in the consolidated statements of comprehensive income (loss).

The estimated aggregate amortization expense as of March 31, 2021 for each of the next five years and thereafter is as follows:

Rest of 2021

    

$

10,997

2022

13,302

2023

12,881

2024

12,881

2025

12,881

Thereafter

20,121

Total

$

83,063

6. Other Non-Current Assets

Other non-current assets include 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: 

16

    

March 31, 

December 31, 

2021

    

2020

Cloud computing implementation costs

$

7,198

$

7,094

Less: accumulated amortization

(2,211)

(1,685)

Other non-current assets

$

4,987

$

5,409

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 $0.6 million and $0.4 million for the three months ended March 31, 2021 and 2020, respectively and is included in selling, general and administrative expense in the accompanying consolidated statements of comprehensive income (loss).

7. Accrued Liabilities

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

    

March 31, 

December 31, 

2021

    

2020

Employee accrued compensation expense

$

4,596

$

6,177

Other accrued liabilities 

 

8,656

 

8,873

Accrued interest on debt

1,783

9,649

Total accrued liabilities 

$

15,035

$

24,699

Other accrued liabilities in the above table relates primarily to accrued utilities, rent, real estate and sales taxes, state income taxes, and other accrued operating expenses.

8. Debt

Senior Secured Notes 2024

In connection with the closing of the Business Combination, 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 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 beginning September 15, 2019. Refer to table below for a description of the amounts related to the Notes.

    

Principal

    

Unamortized Original Issue Discount

    

Unamortized Deferred Financing Costs

9.50% Senior Secured Notes, due 2024

$

340,000

$

2,166

$

10,444

If Bidco undergoes a change of control or sells certain of its assets, Bidco may be required to offer to repurchase the Notes. On or after March 15, 2021, Bidco at its option, may redeem the Notes, in whole or part, upon not less than fifteen (15) and not 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 price expressed as a percentage of principal amount set forth below, plus accrued and unpaid interest thereon but not including the applicable redemption date (subject to the right of Note 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 12-month period beginning August 15 of each of the years set below.

17

Redemption

Year

Price

2021

104.750%

2022

102.375%

2023 and thereafter

100.000%

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

The Notes contain certain negative covenants, including limitations that restrict Bidco’s ability and the ability of certain of its subsidiaries, to directly or indirectly, create additional financial obligations. With certain specified exceptions, these negative covenants prohibit Bidco and certain of its subsidiaries from: creating or incurring additional debt; paying dividends or making any other distributions with respect to its capital stock; making loans or advances to Bidco or any restricted subsidiary of Bidco; selling, leasing or transferring any of its property or assets to Bidco or any restricted subsidiary of Bidco; directly or indirectly creating, incurring or assuming any lien of any kind securing debt on the collateral; or entering into any sale and leaseback transaction.

In connection with the issuance of the Notes, there was an original issue discount of $3.3 million and the unamortized balance of $2.2 million is presented on the face of the consolidated balance sheet as of March 31, 2021 as a reduction of the principal. The discount is amortized over the life of the Notes using the effective interest method.

Bidco’s ultimate parent, Target Hospitality, has no significant independent assets or operations except as included in the guarantors of the Senior Secured Notes, the guarantees under the Notes are full and unconditional and joint and several, and any subsidiaries of Target Hospitality that are not subsidiary guarantors of the 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.

Capital Lease and Other Financing Obligations

The Company’s capital lease and other financing obligations as of March 31, 2021 consisted of approximately $0.6 million of capital leases related primarily to vehicles and approximately $1.8 million related to insurance financing obligations. In December 2019, the Company entered into a lease for certain equipment with a lease term expiring November 2022 and an effective interest rate of 4.3%. The Company’s lease relates to commercial-use vehicles. In November 2020, the Company entered into an insurance financing arrangement in an amount of approximately $3.3 million at an interest rate of 3.84%.  The insurance financing arrangement requires 9 monthly payments of approximately $0.4 million that began on December 1, 2020. 

The Company’s capital lease and other financing obligations as of December 31, 2020 consisted of approximately $0.9 million of capital leases and $2.9 million related to insurance financing obligations.

New ABL Facility

On the Closing Date, in connection with the closing of the Business Combination, Topaz, 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 “New ABL Facility”). The historical debt of

18

Bidco, Target and their respective subsidiaries under the ABL facility of Algeco Seller was settled at the time of the consummation of the Business Combination on the Closing Date. Approximately $40 million of proceeds from the New ABL Facility were used to finance a portion of the consideration payable and fees and expenses incurred in connection with the Business Combination.

Borrowings under the New ABL Facility, at the relevant borrower’s (the borrowers under the New ABL Facility, the “ABL Borrowers”) option, bear interest at either (1) an adjusted LIBOR or (2) a base rate, in each case plus an applicable margin. The applicable margin is 2.50% with respect to LIBOR borrowings and 1.50% with respect to base rate borrowings. Commencing at the completion of the first full fiscal quarter after the Closing Date, the applicable margin for borrowings under the New ABL Facility is subject to one step-down of 0.25% and one step-up of 0.25%, based on achieving certain excess availability levels with respect to the New ABL Facility.

The New ABL Facility provides borrowing availability of an amount equal to the lesser of (i) (a) $125 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 New ABL Facility includes borrowing capacity available for standby letters of credit of up to $15 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 New ABL Facility.

In addition, the New ABL Facility will provide the Borrowers with the option to increase commitments under the New ABL Facility in an aggregate amount not to exceed $75 million plus any voluntary prepayments that are accompanied by permanent commitment reductions under the New ABL Facility. The termination date of the New ABL Facility is September 15, 2023.

The obligations under the New 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 Bidco (together with Topaz, the “ABL Guarantors”), other than certain excluded subsidiaries. The New ABL Facility is secured by (i) a first priority pledge of the equity interests of Topaz, 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).

The New ABL Facility requires the Borrowers to maintain a (i) minimum fixed charge coverage ratio of 1.00:1.00 and (ii) maximum total net leverage ratio of 4.00:1.00, at any time when the excess availability under the New ABL Facility is less than the greater of (a) $15.625 million and (b) 12.5% of the Line Cap.

The New 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;

19

amend organizational documents and master lease documents;
enter into certain agreements that would restrict the ability to pay dividends;
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 ABL Borrowers continued flexibility to operate and develop their businesses. The New 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,

2021

    

2020

Capital lease and other financing obligations

$

2,480

$

3,840

ABL facilities

 

60,000

 

48,000

9.50% Senior Secured Notes due 2024, face amount

340,000

340,000

Less: unamortized original issue discount

(2,166)

(2,319)

Less: unamortized term loan deferred financing costs

(10,444)

(11,182)

Total debt, net

 

389,870

 

378,339

Less: current maturities

 

(2,401)

 

(3,571)

Total long-term debt

$

387,469

$

374,768

Interest expense, net

The components of interest expense, net (which includes interest expense incurred) recognized in the unaudited consolidated statements of comprehensive income (loss) for the periods indicated below consist of the following:

For the three months ended

    

March 31, 

March 31, 

2021

    

2020

Interest incurred on capital lease and other financing obligations

$

30

$

16

Interest expense incurred on ABL facilities and Notes

8,615

8,980

Amortization of deferred financing costs on Notes

738

589

Amortization of deferred financing costs on New ABL facility

212

214

Amortization of deferred financing costs on Algeco ABL facility

 

101

101

Amortization of original issue discount on Notes

 

153

122

Interest expense, net

$

9,849

$

10,022

Deferred Financing Costs and Original Issue Discount

The Company presents unamortized deferred financing costs and unamortized original issue discount as a direct deduction from the principal amount of the Notes on the unaudited consolidated balance sheet as of March 31, 2021. Accumulated amortization expense related to the deferred financing costs was approximately $5.5 million and $4.7 million as of March 31, 2021 and December 31, 2020, respectively. Accumulated amortization of the original issue discount was approximately $1.1 million and $1.0 million as of March 31, 2021 and December 31, 2020, respectively.

Accumulated amortization related to revolver deferred financing costs for both the Algeco ABL facility and New ABL Facility was approximately $2.6 million and $2.4 million as of March 31, 2021 and December 31, 2020, respectively.

Refer to the components of interest expense in the table above for the amounts of the amortization expense related to the deferred financing costs and original issue discount recognized for each of these debt instruments for the three months ended March 31, 2021 and 2020, respectively.

20

Future maturities

The aggregate annual principal maturities of debt and capital lease obligations for each of the next five years and thereafter, based on contractual terms are listed in the table below. The schedule of future maturities as of March 31, 2021, consists of the following:

Rest of 2021

    

$

2,401

2022

 

79

2023

 

60,000

2024

 

340,000

Total

$

402,480

9. Warrant Liabilities

On January 17, 2018, Harry E. Sloan, Joshua Kazam, Fredric D. Rosen, the Sara L. Rosen Trust and the Samuel N. Rosen 2015 Trust, purchased from PEAC an aggregate of 5,333,334 warrants at a price of $1.50 per warrant (for an aggregate purchase price of $8.0 million) in a private placement (the “Private Warrants”) that occurred simultaneously with the completion of the Public Offering as defined in Note 15. Each Private Warrant entitles the holder to purchase one share of common stock at $11.50 per share. The purchase price of the Private Warrants was added to the proceeds from the Public Offering and was held in the Trust Account until the closing of the Business Combination. The Private Warrants (including the shares of Common Stock issuable upon exercise of the Private Warrants) were not transferable, assignable or salable until 30 days after the closing date of the Business Combination, and they may be exercised on a cashless basis and are non-redeemable so long as they are held by the initial purchasers of the Private Warrants or their permitted transferees.

The Company evaluated Private Warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, and concluded that they do not meet the criteria to be classified in stockholders’ equity and should be classified as liabilities. Since the Private Warrants meet the definition of a derivative under ASC 815, the Company recorded the Private Warrants as liabilities on the balance sheet at their estimated fair value.

Subsequent changes in the estimated fair value of the Private Warrants are reflected in the change in fair value of warrant liabilities in the accompanying consolidated statement of comprehensive income (loss). The change in the estimated fair value of the Private Warrants resulted in a loss (gain) of approximately $0.6 million and ($1.7) million for the three months ended March 31, 2021 and 2020, respectively.  As of March 31, 2021 and 2020, the Company had 5,333,334 Private Warrants issued and outstanding.

The Company determined the following estimated fair values for the outstanding Private Warrants as of the dates indicated below:

March 31,

December 31,

2021

2020 (Restated)

Warrant liabilities

$

1,173

$

533

Total

$

1,173

$

533

10. Income Taxes

Income tax expense (benefit) was approximately ($1.5) million and $0.2 million for the three months ended March 31, 2021 and 2020, respectively. The effective tax rate for the three months ended March 31, 2021 and 2020, was 10.0% and 4.1%, respectively. The fluctuation in the rate for the three months ended March 31, 2021 and 2020 results primarily from the relationship of year-to-date income (loss) before income tax for the three months ended March 31, 2021 and 2020.

21

The Company accounts for income taxes in interim periods under ASC 740-270, Income Taxes – Interim Reporting, which generally requires us to apply an estimated annual consolidated effective tax rate to consolidated pre-tax income. In addition, the guidance under ASC 740 further provides that, in establishing the estimated annual effective tax rate, the Company excludes losses from jurisdictions in which no tax benefit is expected to be recognized for such losses.

11. Fair Value of Financial Instruments

The fair value of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

The Company has assessed that the fair value of cash and cash equivalents, trade receivables, related party receivables, trade payables, other current liabilities, and other debt approximates their carrying amounts largely due to the short-term maturities or recent commencement of these instruments. The fair value of the ABL Revolver is primarily based upon observable market data, such as market interest rates, for similar debt. The fair value of the Notes is based upon observable market data.

The Company measured the Private Warrant liabilities at fair value on a recurring basis at each reporting period end as more fully discussed below. Changes in the fair value of the Private Warrants at each reporting period end date were recognized within the accompanying consolidated statement of comprehensive income (loss) in the change in fair value of warrant liabilities.

Level 1 & 2 Disclosures:

The carrying amounts and fair values of financial assets and liabilities, which are either Level 1 or Level 2, are as follows:

 

March 31, 2021

 

December 31, 2020

Financial Assets (Liabilities) Not Measured at Fair Value

    

Carrying
Amount

    

Fair Value

    

Carrying
Amount

    

Fair Value

ABL facilities (See Note 8) - Level 2

$

(60,000)

$

(60,000)

$

(48,000)

 

$

(48,000)

Senior Secured Notes (See Note 8) - Level 1

$

(327,390)

$

(337,450)

$

(326,499)

$

(300,900)

Recurring fair value measurements

Level 3 Disclosures:

There were 5,333,334 Private Warrants outstanding as of March 31, 2021 and December 31, 2020. Based on the fair value assessment that was performed, the Company determined a fair value price per Private Warrant of $0.22 and $0.10 as of March 31, 2021 and December 31, 2020, respectively. The fair value is classified as Level 3 in the fair value hierarchy due to the use of pricing inputs that are less observable in the marketplace combined with management judgment required for the assumptions underlying the calculation of value. The Company determined the estimated fair value of the Private Warrants using the Black-Scholes option-pricing model. The table below summarizes the inputs used to calculate the fair value of the warrant liabilities at each of the dates indicated below:

March 31,

December 31,

2021

2020

Exercise Price

$

11.50

$

11.50

Stock Price

$

2.51

$

1.58

Dividend Yield

%

0.00

%

0.00

Expected Term (in Years)

2.96

3.20

Risk-Free Interest Rate

%

0.34

%

0.19

Expected Volatility

%

65.00

%

68.00

Per Share Value of Warrants

$

0.22

$

0.10

22

The following table presents changes in Level 3 liabilities measured at fair value for the three months ended March 31, 2021:

Private Placement Warrants

Balance at December 31, 2020 (as Restated)

$

533

Change in fair value of warrant liabilities

640

Balance at March 31, 2021

$

1,173

There were no transfers of financial instruments between the three levels of the fair value hierarchy during the three months ended March 31, 2021 and 2020 and the year ended December 31, 2020.

12. Commitments and Contingencies

The Company is involved in various lawsuits or claims in the ordinary course of business. Management is of the opinion that there is no pending claim or lawsuit which, if adversely determined, would have a material impact on the financial condition of the Company.

13. Related Parties

During the three months ended March 31, 2021 and 2020 the Company incurred $0.2 million and $0.2 million, respectively, in commissions owed to related parties, included in selling, general and administrative expense in the accompanying consolidated statements of comprehensive income (loss). At March 31, 2021 and December 31, 2020, the Company accrued $0.3 million and $0.3 million, respectively, for these commissions.  

Prior to the closing of the Business Combination, Mr. Diarmuid Cummins (the “Advisor”) provided certain consulting and advisory services (the “Services”) to Target Parent and certain of its affiliated entities (collectively, “Algeco”), including Target. The Advisor was compensated for these Services by Algeco.  Following the closing of the Business Combination, the Advisor continued to provide these Services to Algeco and to the Company and is serving as an observer on the board of directors of the Company. The Advisor is currently compensated for these services by Chard Camp Catering Services Ltd. (“Chard”), a wholly owned subsidiary of the Company. In June 2019, Chard and Algeco Global Sarl (“Algeco Global”) entered into a reimbursement agreement, as amended in July 2019, (the “Agreement”), pursuant to which Algeco Global agreed to reimburse Chard for 100% of the total compensation paid by it to the Advisor, from and after January 1, 2019, with such amounts to be paid monthly.  The initial term of the Agreement ran through December 31, 2019 and automatically extended for an additional 12-month term. The Company and Algeco Global are each majority owned by TDR Capital.  No reimbursement income amounts related to this agreement were incurred during the three months ended March 31, 2021 as the agreement terminated on December 31, 2020.  In addition, the related party receivable on the consolidated balance sheet as of December 31, 2020 was paid in full during the three months ended March 31, 2021.  

14. Earnings (Loss) per Share

Basic earnings (loss) per share (“EPS” or “LPS”) is calculated by dividing net income or loss attributable to Target Hospitality by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed similarly to basic net earnings per share, except that it includes the potential dilution that could occur if dilutive securities were exercised. During periods when net losses are incurred, potential dilutive securities would be anti-dilutive and are excluded from the calculation of diluted loss per share for that period. A net loss was recorded for the three months

23

ended March 31, 2021, while net income was recorded for the three months ended March 31, 2020. The following table presents basic and diluted EPS for the periods indicated below ($ in thousands, except per share amounts):

For Three Months Ended

March 31, 

March 31, 

    

2021

    

2020

Numerator

(Restated)

Net income (loss) attributable to Common Stockholders

$

(13,138)

$

5,454

Denominator

Weighted average shares outstanding - basic and diluted

96,168,425

95,849,854

Net income (loss) per share - basic and diluted

$

(0.14)

$

0.06

5,015,898 shares of the 8,050,000 shares of common stock held by the Founders, were placed into escrow concurrent with the Business Combination. Upon being placed into escrow, the voting and economic rights of the shares were suspended for the period they are in escrow. Given that the Founders are not entitled to vote or participate in the economic rewards available to the other shareholders with respect to these shares, these shares are not included in the EPS or LPS calculations.

The Public Warrants and Private Warrants representing a total of 16,166,650 shares of the Company’s common stock for the three months ended March 31, 2021 and 2020 were excluded from the computation of EPS and LPS because they are considered anti-dilutive as the exercise price exceeds the average market price of the common stock during the applicable periods.

As discussed in Note 16, RSUs and stock options were outstanding for the three months ended March 31, 2021.  These RSUs and stock options were excluded from the computation of EPS because their effect would have been anti-dilutive.

Shares of treasury stock have been excluded from the computation of EPS.

15. Stockholders’ Equity

Common Stock

As of March 31, 2021, and December 31, 2020, Target Hospitality had 105,651,020 and 105,585,682 shares of Common Stock, par value $0.0001 per share issued while 101,236,253 and 101,170,915 were outstanding, respectively. Each share of Common Stock has one vote, except the voting rights related to the 5,015,898 of Founder Shares placed in escrow have been suspended subject to release pursuant to the terms of the earnout agreement entered into at the closing of the Business Combination by and between Harry E. Sloan, Jeff Sagansky, Eli Baker and the Company.

Preferred Shares

Target Hospitality is authorized to issue 1,000,000 preferred shares at $0.0001 par value. As of March 31, 2021, no preferred shares were issued and outstanding.

Public Warrants

On January 17, 2018, PEAC sold 32,500,000 units at a price of $10.00 per unit (the “Units”) in its initial public offering (the “Public Offering”), including the issuance of 2,500,000 Units as a result of the underwriters’ partial exercise of their overallotment option. Each Unit consisted of one Class A ordinary share of PEAC, par value $0.0001 per share (the “Public Shares”), and one-third of one warrant to purchase one ordinary share (the “Public Warrants”).

Each Public Warrant entitles the holder to purchase one share of the Company’s Common Stock at a price of $11.50 per share. No fractional shares will be issued upon exercise of the Public Warrants. If upon exercise of the Public Warrants, a holder would be entitled to receive a fractional interest in a share, the Company will upon exercise, round down to the

24

nearest whole number, the number of shares to be issued to the Public Warrant holder. Each Public Warrant became exercisable 30 days after the completion of the Business Combination.

As of March 31, 2021, the Company had 10,833,316 Public Warrants issued and outstanding.

16. Stock-Based Compensation

On March 15, 2019, in connection with the Business Combination, the Company’s Board of Directors approved the adoption of the Target Hospitality Corp. 2019 Incentive Award Plan (the “Plan”), under which 4,000,000 of the Company’s shares of Common Stock were reserved for issuance pursuant to future grants of share awards. The expiration date of the Plan, on and after which date no awards may be granted, is March 15, 2029.  

On February 25, 2021, the Compensation Committee (the “Compensation Committee”) of the Company’s Board of Directors adopted a new form Executive Restricted Stock Unit Agreement (the “RSU Agreement”) and a form Executive Stock Appreciation Rights Award Agreement (the “SAR Agreement” and together with the RSU Agreement, the “Award Agreements”) with respect to the granting of restricted stock units and stock appreciation rights, respectively, under the Target Hospitality Corp. 2019 Incentive Plan (the “Plan”). The new Award Agreements will be used for all awards to executive officers made on or after February 25, 2021.

 

The RSU Agreement has material terms that are substantially similar to those in the form Executive Restricted Stock Unit Agreement last approved by the Compensation Committee and previously disclosed by the Company, except for the following: (x) 50% of the restricted stock units (“RSUs”) will vest on the second grant date anniversary and 50% of the RSUs will vest on the third grant date anniversary and (y) if the participant’s employment or service terminates due to Retirement (as defined in the Plan), and the participant has been continuously employed by the Company for at least twelve months following the grant date, then a pro-rata portion of the participant’s RSUs scheduled to vest on the next following vesting date shall vest on his or her termination date based on completed calendar months since either (a) the grant date or (b) the initial vesting date, as applicable.

The SAR Agreement has material terms that are substantially similar to those in the form Executive Nonqualified Stock Option Award Agreement last approved by the Compensation Committee and previously disclosed by the Company, except for the following: (x) the change in the equity instrument to a stock appreciation right (“SAR”), which may be settled in shares or cash, (y) 50% of the SARs will vest on the second grant date anniversary and 50% of the SARs will vest on the third grant date anniversary, and (z) if the participant’s employment or service terminates due to Retirement (as defined in the Plan), then (a) if the participant has been continuously employed by the Company for at least twelve months following the grant date, then a pro-rata portion of the SARs scheduled to become vested on the next vesting date shall be vested on the participant’s termination date based on completed calendar months since either (i) the grant date or (ii) the initial vesting date, as applicable; (b) following the application of clause (a), the unvested portion of the SARs shall expire upon such termination of employment or service and (c) the participant may exercise the vested portion of the SARs, but only within such period of time ending on the earlier of (i) two years following such termination of employment or service, or (ii) the Expiration Date (as defined in the SAR Agreement).

Restricted Stock Units

On February 25, 2021, the Compensation Committee granted time-based RSUs to certain of the Company’s executive officers and other employees.  Each RSU represents a contingent right to receive, upon vesting, one share of the Company’s Common Stock or its cash equivalent, as determined by the Company. The number of RSUs granted to certain named executive officers and certain other employees totaled 1,134,524.

For the three months ended March 31, 2021, certain of the Company's employees surrendered RSUs owned by them to satisfy their statutory minimum federal and state tax obligations associated with the vesting of RSUs issued under the Plan.

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The table below represents the changes in RSUs:

    

Number of
Shares

    

Weighted
Average Grant
Date Fair Value
per Share

Balance at December 31, 2020

1,124,762

$

4.21

Granted

1,134,524

1.79

Vested

(120,058)

4.67

Balance at March 31, 2021

2,139,228

$

2.90

Stock-based compensation expense for these RSUs recognized in selling, general and administrative expense in the consolidated statement of comprehensive income (loss) for the three months ended March 31, 2021 and 2020, was approximately $0.6 million and $0.1 million, respectively, with an associated tax benefit of $0.1 million and less than $0.1 million, respectively. At March 31, 2021, unrecognized compensation expense related to RSUs totaled approximately $4.9 million and is expected to be recognized over a remaining term of approximately 2.66 years.

Stock Option Awards

During three months ended March 31, 2021 there were no new grants or other changes in the stock options outstanding. 

410,787 stock options were exercisable at March 31, 2021.

Stock-based compensation expense for these stock option awards recognized in selling, general and administrative expense in the unaudited consolidated statement of comprehensive income (loss) for the three months ended March 31, 2021 and 2020, was approximately $0.3 million and $0.1 million, respectively, with an associated tax benefit of $0.1 million and less than $0.1 million, respectively. At March 31, 2021, unrecognized compensation expense related to stock options totaled $2.0 million and is expected to be recognized over a remaining term of approximately 2.60 years.

The fair value of each option award at the grant date was estimated using the Black-Scholes option-pricing model with the following assumptions: 

    

Assumptions

Weighted average expected stock volatility (range)

%

25.94 - 30.90

Expected dividend yield

%

0.00

Expected term (years)

6.25

Risk-free interest rate (range)

%

0.82 - 2.26

Exercise price (range)

$

4.51 - 10.83

Weighted-average grant date fair value

$

1.42

The volatility assumption used in the Black-Scholes option-pricing model is based on peer group volatility as the Company does not have a sufficient trading history as a stand-alone public company to calculate volatility.   Additionally, due to an insufficient history with respect to stock option activity and post vesting cancellations, the expected term assumption is based on the simplified method permitted under SEC rules, whereby, the simple average of the vesting period for each tranche of award and its contractual term is aggregated to arrive at a weighted average expected term for the award.  The risk-free interest rate used in the Black-Scholes model is based on the implied US Treasury bill yield curve at the date of grant with a remaining term equal to the Company’s expected term assumption.  The Company has never declared or paid a dividend on its shares of common stock.

Stock-based payments are subject to service based vesting requirements and expense is recognized on a straight-line basis over the vesting period.  Forfeitures are accounted for as they occur. No stock options were forfeited for the three months ended March 31, 2021.

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Stock Appreciation Right Awards

On February 25, 2021, the Compensation Committee granted SARs to certain of the Company’s executive officers and other employees.  Each SAR represents a contingent right to receive, upon vesting, payment in cash or the Company’s Common Stock, as determined by the Compensation Committee, in an amount equal to the difference between (a) the fair market value of a Common Share on the date of exercise, over (b) the grant date price. The number of SARs granted to certain named executive officers and certain other employees totaled 1,551,631.

The following table summarizes SARs outstanding at March 31, 2021:

Number of Units

Weighted-Average Exercise Price

Weighted-Average Remaining Contractual Term (Years)

Outstanding SARs at December 31, 2020

-

$

-

-

Granted

1,551,631

1.79

10.00

Outstanding SARs at March 31, 2021

1,551,631

$

1.79

10.00

Under the authoritative guidance for stock-based compensation, these SARs are considered liability-based awards.  The Company recognized a liability, which is included in other non-current liabilities in the consolidated balance sheets, associated with its SARs of approximately $0.04 million as of March 31, 2021. These SARs were valued using the Black-Scholes option pricing model, the expected volatility was approximately 43.5%, the term was 6.25 years, the dividend rate was 0.0% and the risk-free interest rate was approximately 1.07%, which resulted in a calculated fair value of approximately $0.78 per SAR. The fair value of these liability awards will be remeasured at each reporting period until the date of settlement. Increases and decreases in stock-based compensation expense are recognized over the vesting period, or immediately for vested awards. For the three months ended March 31, 2021, the Company recognized compensation expense related to these awards of approximately $0.04 million in selling, general and administrative expense in the unaudited consolidated statement of comprehensive income (loss). At March 31, 2021, unrecognized compensation expense related to SARs totaled approximately $1.2 million and is expected to be recognized over a remaining term of approximately 2.9 years.

The volatility assumption used in the Black-Scholes option-pricing model is based on peer group volatility as the Company does not have a sufficient trading history as a stand-alone public company to calculate volatility.   Additionally, due to an insufficient history with respect to stock option activity and post vesting cancellations, the expected term assumption is based on the simplified method permitted under SEC rules, whereby, the simple average of the vesting period for each tranche of award and its contractual term is aggregated to arrive at a weighted average expected term for the award.  The risk-free interest rate used in the Black-Scholes model is based on the implied US Treasury bill yield curve at the date of grant with a remaining term equal to the Company’s expected term assumption.  The Company has never declared or paid a dividend on its shares of common stock.

Stock-based payments are subject to service based vesting requirements and expense is recognized on a straight-line basis over the vesting period.  Forfeitures are accounted for as they occur. No SARs were forfeited for the three months ended March 31, 2021.

17. Retirement plans

We offer a defined contribution 401(k) retirement plan to substantially all of our U.S. employees. Participants may contribute from 1% to 90% of eligible compensation, inclusive of pretax and/or Roth deferrals (subject to Internal Revenue Service limitations), and we make matching contributions under this plan on the first 6% of the participant’s compensation (100% match of the first 3% employee contribution and 50% match on the next 3% contribution). Our matching contributions vest at a rate of 20% per year for each of the employee’s first five years of service and then are fully vested thereafter. For the three months ended March 31, 2021 and 2020, we recognized expense of $0.2 million and $0.1 million, respectively, related to these matching contributions.

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18. Business Segments

The Company is organized primarily on the basis of geographic region, customer industry group and operates primarily in four reportable segments.

Our remaining operating segments have been consolidated and included in an “All Other” category.

The following is a brief description of our reportable segments and a description of business activities conducted by All Other.

Permian Basin — Segment operations consist primarily of specialty rental and vertically integrated hospitality services revenue from customers in the oil and gas industry located primarily in Texas and New Mexico.

Bakken Basin — Segment operations consist primarily of specialty rental and vertically integrated hospitality services revenue from customers in the oil and gas industry located primarily in North Dakota.

Government — Segment operations consist primarily of specialty rental and vertically integrated hospitality services revenue from customers with Government contracts located in Texas.

TCPL Keystone – Segment operations consist primarily of revenue from the construction phase of the contract with TCPL.

All Other — Segment operations consist primarily of revenue from specialty rental and vertically integrated hospitality services revenue from customers in the Oil and Gas industry located outside of the Permian and Bakken Basins.

The table below presents information about reported segments for the three months ended March 31 (except for asset information for 2020 that is presented as of December 31):

2021

    

Permian Basin

    

Bakken Basin

    

Government

    

TCPL Keystone

All Other

    

Total

For the Three Months Ended March 31, 2021

Revenue

$

25,093

$

597

$

18,039

$

1,471

$

292

(a)

$

45,492

Adjusted gross profit

$

10,658

$

(549)

$

13,802

$

208

$

(218)

$

23,901

Total Assets

$

225,475

$

50,503

$

71,240

$

3,511

$

3,258

$

353,987

2020

    

Permian Basin

    

Bakken Basin

    

Government

    

TCPL Keystone

All Other

    

Total

For the Three Months Ended March 31, 2020