Target Hospitality Corp

Previous wording

On June 10, 2024, the Company received notice that the U.S. government intends to terminate the South Texas Family Residential Center contract (“STFRC Contract”), effective in 60 days, on August 9, 2024. The STFRC Contract was based on a fixed minimum lease revenue commitment and for the year ended December 31, 2023, contributed approximately $55.9 million in total consolidated revenue, all of which is related to the Company’s Government segment. The Company will retain ownership of the South Texas Family Residential Center assets enabling the Company to continue utilizing these modular solutions to support customer demand across its existing operating segments and other potential growth opportunities. The Company’s Government segment continued to benefit from the Pecos Children’s Center (“PCC”) and the New PCC Contract that became effective November 16, 2023. The PCC Community contributed lower revenues as compared to the second quarter of 2023 driven primarily by lower non-cash revenue amortization of an advanced payment for community expansion associated with the prior contract that became fully amortized as of November 2023, and to a lesser extent, by a decrease in the minimum lease revenue component of the New PCC Contract compared to the prior contract that ended in November 2023.* *The Company generated cash inflows from operations for the six months ended June 30, 2024 of approximately $89.7 million compared to approximately $70.3 million the six months ended June 30, 2023, representing an increase in cash flows from operations of approximately $19.4 million or 28% driven by an increase in cash collections, a decrease in operating expenses, partially offset by an increase in cash paid for income taxes, and an $8.6 million decrease in cash paid for interest driven by a significant reduction in debt outstanding during the current period compared to the prior period. During the six months ended June 30, 2024, the Company also purchased 2,274,440 shares of Common Stock for an aggregate purchase price of approximately $21.1 million (exclusive of estimated excise taxes of approximately $0.1 million).

Current wording

On June 10, 2024, the Company received notice that the U.S. government intended to terminate the South Texas Family Residential Center contract (“STFRC Contract”), effective in 60 days, on August 9, 2024. As such, effective on August 9, 2024, the STFRC Contract was terminated and no longer contributed to total consolidated revenue of the Company from that termination date of August 9, 2024. The STFRC Contract was based on a fixed minimum lease revenue commitment and for the year ended December 31, 2023, contributed approximately $55.9 million in total consolidated revenue, all of which is related to the Company’s Government segment. The Company will retain ownership of the South Texas Family Residential Center assets enabling the Company to continue utilizing these modular solutions to support customer demand across its existing operating segments and other potential growth opportunities. The Company’s Government segment continued to benefit from the Pecos Children’s Center (“PCC”) and the New PCC Contract that became effective November 16, 2023. The PCC Community contributed lower revenues as compared to the third quarter of 2023 driven primarily by lower non-cash revenue amortization of an advanced payment for community expansion associated with the prior contract that became fully amortized as of November 2023, and to a lesser extent, by a decrease in the minimum lease revenue component of the New PCC Contract compared to the prior contract that ended in November 2023.* *The Company generated cash inflows from operations for the nine months ended September 30, 2024 of approximately $121.1 million compared to approximately $118.5 million for the nine months ended September 30, 2023, representing an increase in cash flows from operations of approximately $2.6 million or 2% driven by an increase in cash collections, a decrease in operating expenses, partially offset by an increase in cash paid for income taxes, an $8.7 million decrease in cash paid for interest driven by a significant reduction in debt outstanding during the current period compared to the prior period, and an increase in interest income. During the nine months ended September 30, 2024, the Company also purchased 2,424,440 shares of Common Stock for an aggregate purchase price of approximately $22.3 million (exclusive of estimated excise taxes of approximately $0.1 million).

Previous wording

We derive the majority of our revenue from specialty rental accommodations and vertically integrated hospitality services. Approximately 67% of our revenue was earned from specialty rental with vertically integrated hospitality services, specifically lodging and related ancillary services, whereas the remaining 33% of revenues were earned through leasing of lodging facilities for the six months ended June 30, 2024. Revenue is recognized in the period in which lodging and services are provided pursuant to the terms of contractual relationships with our customers. In certain of our contracts, rates may vary over the contract term, in these cases, revenue is generally recognized on a straight-line basis over the contract term. We enter into arrangements with multiple deliverables for which arrangement consideration is allocated between lodging and services based on the relative estimated standalone selling price of each deliverable. The estimated price of lodging and services deliverables is based on the prices of lodging and services when sold separately or based upon the best estimate of selling price.

Current wording

We derive the majority of our revenue from specialty rental accommodations and vertically integrated hospitality services. Approximately 68% of our revenue was earned from specialty rental with vertically integrated hospitality services, specifically lodging and related ancillary services, whereas the remaining 32% of revenues were earned through leasing of lodging facilities the nine months ended September 30, 2024. Revenue is recognized in the period in which lodging and services are provided pursuant to the terms of contractual relationships with our customers. In certain of our contracts, rates may vary over the contract term, in these cases, revenue is generally recognized on a straight-line basis over the contract term. We enter into arrangements with multiple deliverables for which arrangement consideration is allocated between lodging and services based on the relative estimated standalone selling price of each deliverable. The estimated price of lodging and services deliverables is based on the prices of lodging and services when sold separately or based upon the best estimate of selling price.

Previous wording

The Government segment includes the facilities and operations of the family residential center and the related support communities in Dilley, Texas (the “South Texas Family Residential Center”) provided under a lease and services agreement with a national provider of migrant programming (the “FRCC Partner”). As previously mentioned, the contract for the South Texas Family Residential Center with the FRCC Partner is scheduled to terminate on August 9, 2024. The Company will retain ownership of the assets associated with the South Texas Family Residential Center enabling the Company to continue utilizing these modular solutions to support customer demand across its existing operating segments and other potential growth opportunities. Additionally, this segment also includes facilities and operations provided under a lease and services agreement with our NP Partner, backed by a committed U.S. Government contract, to provide a suite of comprehensive service offerings in support of their humanitarian aid efforts.

Current wording

The Government segment includes the facilities and operations of the family residential center and the related support communities in Dilley, Texas (the “South Texas Family Residential Center”) provided under a lease and services agreement with a national provider of migrant programming (the “FRCC Partner”). As previously mentioned, the contract for the South Texas Family Residential Center with the FRCC Partner terminated on August 9, 2024. The Company retains ownership of the assets associated with the South Texas Family Residential Center enabling the Company to continue utilizing these modular solutions to support customer demand across its existing operating segments and other potential growth opportunities. Additionally, this segment also includes facilities and operations provided under a lease and services agreement with our NP Partner, backed by a committed U.S. Government contract, to provide a suite of comprehensive service offerings in support of their humanitarian aid efforts.

Previous wording

continuation of services provided under the agreement that originated in March 2021. The Expanded Humanitarian Contract operated with similar structure to the Company’s prior and existing government services subcontracts, which are centered around minimum revenue commitments supported by the United States Government. Additionally, the Expanded Humanitarian Contract included occupancy-based variable services revenue that aligned with active community population. The minimum revenue commitments, which consisted of annual recurring lease revenue and nonrecurring infrastructure enhancement revenue, provided for a minimum annual revenue contribution of approximately $390 million and was fully committed over its initial contract term. Inclusive of all potential occupancy-based variable services revenue, the Expanded Humanitarian Contract provided for a maximum initial annual total contract amount of approximately $575 million. On May 15, 2023, the Company executed a six-month extension of the Expanded Humanitarian Contract, which extended the period of performance through November 15, 2023 and increased the contract value, with no change to contract structure or any other existing economic terms. The Expanded Humanitarian Contract expired as of November 15, 2023. The non-recurring infrastructure enhancement revenue was generated from an advance payment made during the year ended December 31, 2022 for the community build-out, and mobilization of asset activities related to the community expansion associated with the Expanded Humanitarian Contract. The advanced payment was determined to be related to future services to be amortized to revenue over the estimated term of the Expanded Humanitarian Contract. This advance payment revenue amortization ended when the Expanded Humanitarian Contract expired on November 15, 2023. As such, the prior period for the three and six months ended June 30, 2023 included this revenue amortization in the amount of approximately $34.9 million and $69.4 million, respectively. whereas the current period does not. Additionally, the Expanded Humanitarian Contract included an annual minimum lease revenue commitment of approximately $196 million that impacted the prior period compared to the current period being impacted by an annual minimum lease revenue commitment of approximately $178 million under the New PCC Contract explained below.

Current wording

continuation of services provided under the agreement that originated in March 2021. The Expanded Humanitarian Contract operated with similar structure to the Company’s prior government services subcontracts, which are centered around minimum revenue commitments supported by the United States Government. Additionally, the Expanded Humanitarian Contract included occupancy-based variable services revenue that aligned with active community population. The minimum revenue commitments, which consisted of annual recurring lease revenue and nonrecurring infrastructure enhancement revenue, provided for a minimum annual revenue contribution of approximately $390 million and was fully committed over its initial contract term. Inclusive of all potential occupancy-based variable services revenue, the Expanded Humanitarian Contract provided for a maximum initial annual total contract amount of approximately $575 million. On May 15, 2023, the Company executed a six-month extension of the Expanded Humanitarian Contract, which extended the period of performance through November 15, 2023 and increased the contract value, with no change to contract structure or any other existing economic terms. The Expanded Humanitarian Contract expired as of November 15, 2023. The non-recurring infrastructure enhancement revenue was generated from an advance payment made during the year ended December 31, 2022 for the community build-out, and mobilization of asset activities related to the community expansion associated with the Expanded Humanitarian Contract. The advanced payment was determined to be related to future services to be amortized to revenue over the estimated term of the Expanded Humanitarian Contract. This advance payment revenue amortization ended when the Expanded Humanitarian Contract expired on November 15, 2023. As such, the prior period for the three and nine months ended September 30, 2023 included this revenue amortization in the amount of approximately $35.3 million and $104.8 million, respectively. whereas the current period does not. Additionally, the Expanded Humanitarian Contract included an annual minimum lease revenue commitment of approximately $196 million that impacted the prior period compared to the current period being impacted by an annual minimum lease revenue commitment of approximately $178 million under the New PCC Contract explained below.

Previous wording

As such, the change from the prior Expanded Humanitarian Contract to the New PCC Contract impacts comparability between periods.

Current wording

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

Previous wording

Total Revenue. Total revenue was $100.7 million for the three months ended June 30, 2024 and consisted of $67.5 million of services income and $33.2 million of specialty rental income. Total revenue for the three months ended June 30, 2023 was $143.6 million, which consisted of $92.5 million of services income and $51.1 million of specialty rental income.

Current wording

Total Revenue. Total revenue was $95.2 million for the three months ended September 30, 2024 and consisted of $65.8 million of services income and $29.4 million of specialty rental income. Total revenue for the three months ended September 30, 2023 was $145.9 million, which consisted of $93.5 million of services income and $52.4 million of specialty rental income.

Previous wording

Services income consists primarily of specialty rental and vertically integrated and comprehensive hospitality services, including room revenue, catering and food services, maintenance, housekeeping, grounds-keeping, security, overall workforce community management, health and recreation facilities, concierge services, and laundry service. The main driver of the decrease in services income revenue year over year was lower revenue in the Government segment in the current period from the decrease in the non-cash revenue amortization that ended in November 2023 associated with the advanced payment from the prior Expanded Humanitarian Contract that expired on November 15, 2023 and partially by lower minimum lease revenue generated by the New PCC contract in the current period, partially offset by an increase in revenue in the HFS – South segment led by an increase in average daily rate and an increase in customer activity.

Current wording

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

Previous wording

Specialty rental income consists primarily of revenues from leasing rooms and other facilities at certain communities that include contractual arrangements with customers that are considered leases under the authoritative accounting guidance for leases. Specialty rental income decreased primarily as a result of lower revenue in the Government segment from the decrease in the non-cash revenue amortization that ended in November 2023 associated with the advanced payment from the prior Expanded Humanitarian Contract that expired on November 15, 2023 and partially by lower minimum lease revenue generated by the New PCC contract in the current period.

Current wording

Specialty rental income consists primarily of revenues from leasing rooms and other facilities at certain communities that include contractual arrangements with customers that are considered leases under the authoritative accounting guidance for leases. Specialty rental income decreased primarily as a result of lower revenue in the Government segment from the decrease in the non-cash revenue amortization that ended in November 2023 associated with the advanced payment from

Previous wording

Cost of services. Cost of services was $33.6 million for the three months ended June 30, 2024 as compared to $35.7 million for the three months ended June 30, 2023. The decrease in services costs is primarily due to a decrease in services costs from the Government segment driven by operational efficiencies and reduced leasing costs associated with certain leases

Current wording

Cost of services. Cost of services was $31.3 million for the three months ended September 30, 2024 as compared to $34.0 million for the three months ended September 30, 2023. The decrease in services costs is primarily due to a decrease in services costs from the Government segment driven by operational efficiencies and reduced leasing costs associated with certain leases that were terminated at the PCC Community, including lease terminations as a result of the purchase of certain previously leased equipment and partially by the termination of the STFRC contract in the Government segment as previously discussed. These decreases were partially offset by an increase in costs of approximately $2.2 million in the HFS-South segment to support increased customer demand.

Previous wording

Specialty rental costs. Specialty rental costs were $5.5 million for the three months ended June 30, 2024 as compared to $7.5 million for the three months ended June 30, 2023. The decrease in specialty rental costs is primarily due to a decrease in costs from the Government segment driven by operational efficiencies and reduced leasing costs associated with certain leases that were terminated at the PCC Community.

Current wording

Specialty rental costs. Specialty rental costs were $4.7 million for the three months ended September 30, 2024 as compared to $7.5 million for the three months ended September 30, 2023. The decrease in specialty rental costs is primarily due to a decrease in costs from the Government segment driven by operational efficiencies and reduced leasing costs associated with certain leases that were terminated at the PCC Community, and partially by the termination of the STFRC contract in the Government segment as previously discussed.

Previous wording

Depreciation of specialty rental assets. Depreciation of specialty rental assets was $14.8 million for the three months ended June 30, 2024 as compared to $18.0 million for the three months ended June 30, 2023. The decrease in depreciation expense is primarily attributable to a decrease in depreciation on certain specialty rental assets and related leasehold improvements acquired or built in 2022 to support growth of the Government segment related to the contract that originated in May of 2022 with the NP Partner, which became fully depreciated during the year ended December 31, 2023.

Current wording

Depreciation of specialty rental assets. Depreciation of specialty rental assets was $14.1 million for the three months ended September 30, 2024 as compared to $17.7 million for the three months ended September 30, 2023. The decrease in depreciation expense is primarily attributable to a decrease in depreciation on certain specialty rental assets and related leasehold improvements acquired or built in 2022 to support growth of the Government segment related to the contract that originated in May of 2022 with the NP Partner, which became fully depreciated during the year ended December 31, 2023. Decreases in depreciation expense associated with HFS-South specialty rental assets also partially contributed to this decrease in depreciation of specialty rental assets for certain site work assets that became fully depreciated during 2024.

Previous wording

Selling, general and administrative. Selling, general and administrative was $13.5 million for the three months ended June 30, 2024 as compared to $13.5 million for the three months ended June 30, 2023. There was no net change in selling, general and administrative expense from the prior period as a result of a decrease in stock compensation expense of approximately $1.9 million led primarily by the liability-based stock appreciation right awards (“SARs”) driven by a lower number of SAR awards outstanding during the current period compared to the prior period as approximately 51% of such awards were outstanding as of June 30, 2023 compared to approximately 1% of such awards outstanding as of June 30, 2024 as the majority of these awards vested and were exercised as of June 30, 2024. This was offset by an increase in transaction fees of approximately $1.9 million associated primarily with the Proposal described in “Recent Developments” in Note 1 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q.

Current wording

Selling, general and administrative. Selling, general and administrative was $13.3 million for the three months ended September 30, 2024 as compared to $15.3 million for the three months ended September 30, 2023. The decrease in selling, general and administrative expense from the prior period as a result of a decrease in stock compensation expense of approximately $3.2 million led primarily by the liability-based stock appreciation right awards (“SARs”) driven by a lower number of SAR awards outstanding during the current period compared to the prior period as approximately 50% of such awards were outstanding as of September 30, 2023 compared to 0% in the current period as there are no remaining awards outstanding as of September 30, 2024 as these awards vested and were exercised as of September 30, 2024. This was offset by an increase in transaction fees of approximately $1.5 million associated primarily with the Proposal described in “Recent Developments” in Note 1 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q. The remaining change was primarily driven by a decrease in non-cash amortization of capitalized system implementation costs that became fully amortized during 2024.

Previous wording

Other expense (income), net. Other expense (income), net was less than $(0.1) million for the three months ended June 30, 2024 as compared to $0.3 million for the three months ended June 30, 2023. The decrease in expense was primarily driven by the prior period including loss on the disposal of older assets in the HFS-South segment, which didn’t recur in the current period.

Current wording

Other expense (income), net. Other expense (income), net was less than $(0.1) million for the three months ended September 30, 2024 as compared to ($0.1) million for the three months ended September 30, 2023.

Previous wording

Interest expense, net. Interest expense, net was $4.3 million for the three months ended June 30, 2024 as compared to $5.3 million for the three months ended June 30, 2023. The change in interest expense, net was primarily driven by an increase in interest income earned on cash equivalents funded by the increase in available cash as a result of cash flows from operations.

Current wording

Interest expense, net. Interest expense, net was $3.8 million for the three months ended September 30, 2024 as compared to $5.0 million for the three months ended September 30, 2023. The change in interest expense, net was primarily driven by an increase in interest income earned on cash equivalents funded by the increase in available cash as a result of cash flows from operations.

Previous wording

Change in fair value of warrant liabilities. Change in fair value of warrant liabilities represents the fair value adjustments to the outstanding Private Warrant liabilities based on the change in their estimated fair value at each reporting period end. The change in fair value of the warrant liabilities was $0 for the three months ended June 30, 2024 as compared to $(0.7) million for the three months ended June 30, 2023 as a result of the Private Warrants expiring unredeemed on March 15, 2024 as discussed in Note 9 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q.

Current wording

The change in fair value of the warrant liabilities was $0 for the three months ended September 30, 2024 as compared to $2.6 million for the three months ended September 30, 2023 as a result of the Private Warrants expiring unredeemed on March 15, 2024 as discussed in Note 9 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q.

Previous wording

Income tax expense. Income tax expense was $6.9 million for the three months ended June 30, 2024 as compared to $13.7 million for the three months ended June 30, 2023. The decrease in income tax expense is primarily attributable to the decrease in income before taxes for the three months ended June 30, 2024 led by a decrease in revenue, partially offset by cost decreases previously mentioned.

Current wording

Income tax expense. Income tax expense was $4.1 million for the three months ended September 30, 2024 as compared to $14.6 million for the three months ended September 30, 2023. The decrease in income tax expense is primarily attributable to the decrease in income before taxes for the three months ended September 30, 2024 led by a decrease in revenue, partially offset by cost decreases previously mentioned.

Previous wording

Total Revenue. Total revenue was $207.4 million for the six months ended June 30, 2024 and consisted of $139.9 million of services income and $67.5 million of specialty rental income. Total revenue was $291.4 million for the six months ended June 30, 2023 and consisted of $187.4 million of services income and $104.1 million of specialty rental income.

Current wording

Total Revenue. Total revenue was $302.6 million for the nine months ended September 30, 2024 and consisted of $205.7 million of services income and $96.9 million of specialty rental income. Total revenue was $437.4 million for the nine months ended September 30, 2023 and consisted of $280.9 million of services income and $156.5 million of specialty rental income.

Previous wording

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

Current wording

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

Previous wording

Specialty rental income consists primarily of revenues from leasing rooms and other facilities at certain communities that include contractual arrangements with customers that are considered leases under the authoritative accounting guidance for leases. Specialty rental income decreased primarily as a result of lower revenue in the Government segment from the decrease in the non-cash revenue amortization that ended in November 2023 associated with the advanced payment from the prior Expanded Humanitarian Contract that expired on November 15, 2023 and partially by lower minimum lease revenue generated by the New PCC contract in the current period.

Current wording

Specialty rental income consists primarily of revenues from leasing rooms and other facilities at certain communities that include contractual arrangements with customers that are considered leases under the authoritative accounting guidance for leases. Specialty rental income decreased primarily as a result of lower revenue in the Government segment from the decrease in the non-cash revenue amortization that ended in November 2023 associated with the advanced payment from the prior Expanded Humanitarian Contract that expired on November 15, 2023, partially by lower minimum lease revenue as well as lower variable services revenue generated by the New PCC contract in the current period, and the termination of the STFRC Contract.

Previous wording

Cost of services. Cost of services was $70.5 million for the six months ended June 30, 2024 as compared to $75.4 million for the six months ended June 30, 2023.

Current wording

Cost of services. Cost of services was $101.7 million for the nine months ended September 30, 2024 as compared to $109.5 million for the nine months ended September 30, 2023.

Previous wording

Community, including lease terminations as a result of the purchase of certain previously leased equipment. Approximately $0.8 million of this decrease was driven by a community in the All Other category that incurred lodge removal and transportation costs in the prior period that didn’t recur in the current period, while approximately $0.5 million of this decrease was driven by the HFS-South segment related to the prior period including asset mobilization and integration costs associated with a new community acquired in January 2023 that didn’t recur in the current period and operational efficiencies achieved in the current period, partially offset by an increase in operational costs from community expansion to support increased customer demand in the HFS-South segment.

Current wording

The decrease in services costs is primarily due to a decrease in services costs in the Government segment driven by operational efficiencies and reduced leasing costs associated with certain leases that were terminated at the PCC Community, including lease terminations as a result of the purchase of certain previously leased equipment. Approximately $1 million of this decrease was driven by a community in the All Other category that incurred lodge removal and transportation costs in the prior period that didn’t recur in the current period, while approximately $0.3 million of this decrease was driven by the termination of the STFRC Contract. These decreases were partially offset by an increase of approximately $1.7 million in the HFS-South segment related to an increase in operational costs from community expansion to support increased customer demand in the HFS-South segment, partially offset by the prior period including asset mobilization and integration costs associated with a new community acquired in January 2023 that didn’t recur in the current period and operational efficiencies achieved in the current period.

Previous wording

Specialty rental costs. Specialty rental costs were $11.4 million for the six months ended June 30, 2024 as compared to $16.1 million for the six months ended June 30, 2023. The decrease in specialty rental costs is primarily due to a decrease in costs from the Government segment driven by operational efficiencies and reduced leasing costs associated with certain leases that were terminated at the PCC Community and partially by operational efficiencies achieved in the current period in the HFS-South segment.

Current wording

Specialty rental costs. Specialty rental costs were $16.1 million for the nine months ended September 30, 2024 as compared to $23.6 million for the nine months ended September 30, 2023. The decrease in specialty rental costs is primarily due to a decrease in costs from the Government segment driven by operational efficiencies and reduced leasing costs associated with certain leases that were terminated at the PCC Community, termination of the STFRC Contract in the Government segment, and partially by operational efficiencies achieved in the current period in the HFS-South segment.

Previous wording

Depreciation of specialty rental assets. Depreciation of specialty rental assets was $29.6 million for the six months ended June 30, 2024 as compared to $35.6 million for the six months ended June 30, 2023. The decrease in depreciation expense is primarily attributable to a decrease in depreciation on certain specialty rental assets and related leasehold improvements acquired or built in 2022 to support growth of the Government segment related to the contract that originated in May of 2022 with the NP Partner, which became fully depreciated during the year ended December 31, 2023.

Current wording

Depreciation of specialty rental assets. Depreciation of specialty rental assets was $43.6 million for the nine months ended September 30, 2024 as compared to $53.2 million for the nine months ended September 30, 2023. The decrease in depreciation expense is primarily attributable to a decrease in depreciation on certain specialty rental assets and related leasehold improvements acquired or built in 2022 to support growth of the Government segment related to the contract that originated in May of 2022 with the NP Partner, which became fully depreciated during the year ended December 31, 2023, while approximately $1.8 million of this decrease was driven by a decrease in depreciation of specialty rental assets in the HFS-South segment for certain assets that became fully depreciated during 2024.

Previous wording

Selling, general and administrative. Selling, general and administrative was $28.4 million for the six months ended June 30, 2024 as compared to $28.7 million for the six months ended June 30, 2023. The decrease in selling, general and administrative expense of $(0.3) million was primarily driven by a decrease in stock compensation expense of approximately $5 million led primarily by the liability-based stock appreciation right awards (“SARs”) driven by a lower number of SAR awards outstanding during the current period compared to the prior period as approximately 51% of such awards were outstanding as of June 30, 2023 compared to approximately 1% of such awards outstanding as of June 30, 2024 as the majority of these awards vested and were exercised as of June 30, 2024. Other corporate costs (i.e. recruiting, market research, and outside services) also decreased by approximately $0.2 million from the prior period. These decreases were partially offset by an increase in severance of approximately $1 million for certain terminated employees during the six months ended June 30, 2024, other compensation and benefits cost increases of approximately $0.9 million, audit fee increases of approximately $0.4 million, other professional fee increases of approximately $0.3 million, insurance expense increase of approximately $0.2 million, and an increase in transaction fees of approximately $2.1 million associated with certain transactions, including primarily the Proposal described in “Recent Developments” in Note 1 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q.

Current wording

Selling, general and administrative. Selling, general and administrative was $41.6 million for the nine months ended September 30, 2024 as compared to $43.9 million for the nine months ended September 30, 2023. The decrease in selling, general and administrative expense of $(2.3) million was primarily driven by a decrease in stock compensation expense of approximately $8.3 million led primarily by the liability-based stock appreciation right awards (“SARs”) driven by a lower number of SAR awards outstanding during the current period compared to the prior period as approximately 50% of such awards were outstanding as of September 30, 2023 compared to 0% in the current period as there are no remaining awards outstanding as of September 30, 2024 as these awards vested and were exercised as of September 30, 2024. Other corporate costs (i.e. recruiting, market research, and outside services) also decreased by approximately $0.5 million from the prior period. These decreases were partially offset by an increase in severance of approximately $1 million for certain terminated employees during the nine months ended September 30, 2024, other compensation and benefits cost increases of approximately $0.8 million, audit fee increases of approximately $0.4 million, other professional fee increases of approximately $0.5 million, insurance expense increase of approximately $0.3 million, and an increase in transaction fees of approximately $3.5 million associated with certain transactions, including primarily the Proposal described in “Recent

Previous wording

Other depreciation and amortization. Other depreciation and amortization expense was $7.8 million for the six months ended June 30, 2024 as compared to $7.6 million for the six months ended June 30, 2023. The increase in other depreciation and amortization is primarily driven by an increase in depreciation associated with an increase in finance leases for commercial use vehicles.

Current wording

Other depreciation and amortization. Other depreciation and amortization expense was $11.7 million for the nine months ended September 30, 2024 as compared to $11.5 million for the nine months ended September 30, 2023. The increase in other depreciation and amortization is primarily driven by an increase in depreciation associated with an increase in finance leases for commercial use vehicles.

Previous wording

Other expense (income), net. Other expense (income), net was $(0.2) million for the six months ended June 30, 2024 as compared to $1.3 million for the six months ended June 30, 2023. The decrease in expense is primarily driven by costs incurred on the disposal of assets in the All Other segment category in the prior period, which didn’t recur in the current period.

Current wording

Other expense (income), net. Other expense (income), net was $(0.2) million for the nine months ended September 30, 2024 as compared to $1.2 million for the nine months ended September 30, 2023. The decrease in expense is primarily driven by costs incurred on the disposal of assets in the All Other segment category in the prior period, which didn’t recur in the current period.

Previous wording

Loss on extinguishment of debt. Loss on extinguishment of debt was $0 for the six months ended June 30, 2024 as compared to $2.1 million for the six months ended June 30, 2023. The decrease in loss on extinguishment of debt is due to the partial redemption of the 2024 Senior Secured Notes on March 15, 2023, which was accounted for as a partial extinguishment of debt and resulted in a charge of approximately $1.7 million related to the write-off of unamortized deferred financing costs and unamortized original issue discount. Approximately $0.4 million of the change related to the write-off of unamortized deferred financing costs for non-continuing lenders in connection with the First Amendment to the ABL Facility on February 1, 2023. No such activity occurred in the current period.

Current wording

Loss on extinguishment of debt. Loss on extinguishment of debt was $0 for the nine months ended September 30, 2024 as compared to $2.1 million for the nine months ended September 30, 2023. The decrease in loss on extinguishment of debt is due to the partial redemption of the 2024 Senior Secured Notes on March 15, 2023, which was accounted for as a partial extinguishment of debt and resulted in a charge of approximately $1.7 million related to the write-off of unamortized deferred financing costs and unamortized original issue discount. Approximately $0.4 million of the change related to the write-off of unamortized deferred financing costs for non-continuing lenders in connection with the First Amendment to the ABL Facility on February 1, 2023. No such activity occurred in the current period.

Previous wording

Interest expense, net. Interest expense, net was $8.9 million for the six months ended June 30, 2024 as compared to $12.8 million for the six months ended June 30, 2023. The change in interest expense, net was primarily driven by a decrease in interest expense on the Senior Secured Notes of approximately $2.6 million driven by the lower outstanding debt balance in the current period as approximately $153.1 million of the Senior Secured Notes were paid off during the year ended December 31, 2023. Approximately $1.3 million of this decrease was driven by lower deferred financing cost amortization on the Senior Secured Notes during the current period due to the write-off of unamortized deferred financing costs during the six months ended June 30, 2023 driven by the partial extinguishment of debt associated with the partial redemption of the 2024 Senior Secured Notes on March 15, 2023 discussed above. Approximately $0.8 million of this decrease was driven by an increase in interest income earned on cash equivalents funded by the increase in available cash as a result of cash flows from operations. These decreases were partially offset by an increase in Senior Secured Note original issue discount amortization of approximately $0.5 million driven by fees incurred in connection with the Senior Note Exchange that closed on November 1, 2023 as more fully discussed in Note 8 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q. Additionally, these decreases were partially offset by an increase in ABL Facility deferred financing costs amortization and unused line fee expenses combined of approximately $0.2 million driven by the ABL Facility amendments completed in the prior year as more fully discussed in Note 8 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q.

Current wording

Interest expense, net. Interest expense, net was $12.7 million for the nine months ended September 30, 2024 as compared to $17.7 million for the nine months ended September 30, 2023. The change in interest expense, net was primarily driven by a decrease in interest expense on the Senior Secured Notes of approximately $2.7 million driven by the lower outstanding debt balance in the current period as approximately $153.1 million of the Senior Secured Notes were paid off during the year ended December 31, 2023. Approximately $1.7 million of this decrease was driven by lower deferred financing cost amortization on the Senior Secured Notes during the current period due to the write-off of unamortized deferred financing costs during the nine months ended September 30, 2023 driven by the partial extinguishment of debt associated with the partial redemption of the 2024 Senior Secured Notes on March 15, 2023 discussed above. Approximately $1.8 million of this decrease was driven by an increase in interest income earned on cash equivalents funded by the increase in available cash as a result of cash flows from operations. These decreases were partially offset by an increase in Senior Secured Note original issue discount amortization of approximately $0.9 million driven by fees incurred in connection with the Senior Note Exchange that closed on November 1, 2023 as more fully discussed in Note 8 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q. Additionally, these decreases were partially offset by an increase in ABL Facility deferred financing costs amortization and unused line fee expenses combined of approximately $0.3 million driven by the ABL Facility amendments completed in the prior year as more fully discussed in Note 8 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q.

Previous wording

Change in fair value of warrant liabilities. Change in fair value of warrant liabilities represents the fair value adjustments to the outstanding Private Warrant liabilities based on the change in their estimated fair value at each reporting period end. The change in fair value of the warrant liabilities was $(0.7) million for the six months ended June 30, 2024 as compared to $(4.4) million for the six months ended June 30, 2023. The change in the fair value of the warrant liabilities is the result of changes in market prices deriving the value of the financial instruments. The estimated value of the Private Warrants have decreased in the current period, generating an increase to income in the current period. There is also a lower number of outstanding Private Warrants in the current period compared to the prior period given the Private Warrants expired on March 15, 2024 as discussed in Note 9 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q.

Current wording

Change in fair value of warrant liabilities. Change in fair value of warrant liabilities represents the fair value adjustments to the outstanding Private Warrant liabilities based on the change in their estimated fair value at each reporting period end. The change in fair value of the warrant liabilities was $(0.7) million for the nine months ended September 30, 2024 as compared to $ (1.8) million for the nine months ended September 30, 2023. The change in the fair value of the warrant liabilities is the result of changes in market prices deriving the value of the financial instruments. The estimated value of the Private Warrants decreased in the current period, generating an increase to income in the current period. There is also a lower number of outstanding Private Warrants in the current period compared to the prior period given the Private Warrants expired on March 15, 2024 as discussed in Note 9 of the notes to our unaudited consolidated financial statements included elsewhere within this Form 10-Q.

Previous wording

Income tax expense. Income tax expense was $13.0 million for the six months ended June 30, 2024 as compared to $25.9 million for the six months ended June 30, 2023. The decrease in income tax expense is primarily attributable to the decrease in income before taxes for the six months ended June 30, 2024 led by a decrease in revenue, partially offset by cost decreases previously mentioned.

Current wording

Income tax expense. Income tax expense was $17.1 million for the nine months ended September 30, 2024 as compared to $40.5 million for the nine months ended September 30, 2023. The decrease in income tax expense is primarily attributable to the decrease in income before taxes for the nine months ended September 30, 2024 led by a decrease in revenue, partially offset by cost decreases previously mentioned.

Previous wording

Revenue decreased primarily due to the decrease in the non-cash revenue amortization that ended in November 2023 associated with the advanced payment from the prior Expanded Humanitarian Contract that expired on November 15, 2023 and partially by lower minimum lease revenue generated by the New PCC contract in the current period. This was partially offset by an increase in revenue of approximately $1.7 million from the South Texas Family Residential Center led primarily by accelerated non-cash deferred revenue amortization from the early termination of the STFRC Contract as previously mentioned, and partially by an increase of approximately $0.4 million in other ancillary revenue driven by an increase in occupancy.

Current wording

Revenue decreased primarily due to the decrease in the non-cash revenue amortization that ended in November 2023 associated with the advanced payment from the prior Expanded Humanitarian Contract that expired on November 15, 2023 and partially by lower minimum lease revenue as well as lower variable services revenue generated by the New PCC contract in the current period. This was also partially driven by a decrease in revenue of approximately $5.4 million from the South Texas Family Residential Center led by the STFRC Contract termination as previously discussed.

Previous wording

Adjusted gross profit decreased as a result of the decrease in revenue mentioned above, partially offset by lower costs due to operational efficiencies and reduced leasing costs associated with certain leases that were terminated at the PCC Community, including lease terminations as a result of the purchase of certain previously leased equipment.

Current wording

Adjusted gross profit decreased as a result of the decrease in revenue mentioned above, partially offset by lower costs due to operational efficiencies and reduced leasing costs associated with certain leases that were terminated at the PCC Community, including lease terminations as a result of the purchase of certain previously leased equipment. This was also partially offset by a decrease in costs of approximately $2.4 million from the South Texas Family Residential Center led by the STFRC Contract termination previously discussed.

Previous wording

The decrease in adjusted gross profit of approximately $(0.2) million was primarily attributable to the decrease in revenue discussed above, partially offset by a decrease in service costs driven by operational efficiencies achieved in the current period.

Current wording

The decrease in adjusted gross profit of approximately $ (1.7) million was primarily attributable to an increase in operational costs to support increased customer demand.

Previous wording

The following table sets forth our selected results of operations for each of our reportable segments and All Other for the six months ended June 30, 2024 and 2023 ($ in thousands, except for Average Daily Rate).

Current wording

The following table sets forth our selected results of operations for each of our reportable segments and All Other for the nine months ended September 30, 2024 and 2023 ($ in thousands, except for Average Daily Rate).

Previous wording

Revenue decreased primarily due to the decrease in the non-cash revenue amortization that ended in November 2023 associated with the advanced payment from the prior Expanded Humanitarian Contract that expired on November 15, 2023 and partially by lower minimum lease revenue generated by the New PCC contract in the current period. This was partially offset by an increase in revenue of approximately $1.9 million from the South Texas Family Residential Center led primarily by accelerated non-cash deferred revenue amortization from the early termination of the STFRC Contract as previously mentioned, and partially by an increase of approximately $0.6 million in other ancillary revenue driven by an increase in occupancy.

Current wording

Revenue decreased primarily due to the decrease in the non-cash revenue amortization that ended in November 2023 associated with the advanced payment from the prior Expanded Humanitarian Contract that expired on November 15, 2023 and partially by lower minimum lease revenue as well as lower variable services revenue generated by the New PCC contract in the current period. This was also partially driven by a decrease in revenue of approximately $3.5 million from the South Texas Family Residential Center led by the STFRC Contract termination as previously discussed.

Previous wording

Adjusted gross profit decreased as a result of the decrease in revenue mentioned above, partially offset by lower costs due to operational efficiencies and reduced leasing costs associated with certain leases that were terminated at the PCC Community, including lease terminations as a result of the purchase of certain previously leased equipment.

Current wording

Adjusted gross profit decreased as a result of the decrease in revenue mentioned above, partially offset by lower costs due to operational efficiencies and reduced leasing costs associated with certain leases that were terminated at the PCC

Previous wording

The increase in revenue of $0.2 million was primarily attributable to an increase in average daily rate and an increase in customer activity, which led to more communities in operation during the current period, including a new community acquired in January 2023 to support growth in the HFS – South segment.

Current wording

The increase in revenue of $0.7 million was primarily attributable to an increase in customer activity, which led to more communities in operation during the current period, including a new community acquired in January 2023 to support growth in the HFS – South segment.

Previous wording

The increase in adjusted gross profit of $1.0 million was primarily attributable to a decrease in service costs driven by the prior period including asset mobilization and integration costs associated with the new community acquired in January 2023 that didn’t recur in the current period and by operational efficiencies achieved in the current period. Additionally, the increase in revenue noted above partially contributed to this increase.

Current wording

The decrease in adjusted gross profit of $ (0.8) million was primarily attributable to an increase in operational costs from community expansion to support increased customer demand, partially offset by a decrease in service costs driven by the prior period including asset mobilization and integration costs associated with the new community acquired in January 2023 that didn’t recur in the current period and by operational efficiencies achieved in the current period. The increase in revenue noted above also partially offset this decrease.

Previous wording

We continue to review available acquisition opportunities with the awareness that any such acquisition may require us to incur additional debt to finance the acquisition and/or to issue shares of our Common Stock or other equity securities as acquisition consideration or as part of an overall financing plan. We will continue to evaluate alternatives to optimize our capital structure, which could include the issuance or repurchase of additional unsecured and secured debt, equity securities and/or equity-linked securities. There can be no assurance as to the timing of any such issuance or repurchase. From time to time, we may also seek to streamline our capital structure and improve our financial position through refinancing or restructuring our existing debt or retiring certain of our securities for cash or other consideration.

Current wording

We continue to review available acquisition opportunities with the awareness that any such acquisition may require us to incur additional debt to finance the acquisition and/or to issue shares of our Common Stock or other equity securities as acquisition consideration or as part of an overall financing plan. We will continue to evaluate alternatives to optimize our capital structure, which could include the issuance or repurchase of unsecured and secured debt, equity securities and/or equity-linked securities. There can be no assurance as to the timing of any such issuance or repurchase. From time to time, we may also seek to streamline our capital structure and improve our financial position through refinancing or restructuring our existing debt or retiring certain of our securities for cash or other consideration.

Previous wording

During the six months ended June 30, 2024, we incurred approximately $18.3 million in capital expenditures, with approximately $9.3 million driven by capital expenditures in the Government segment. Maintenance capital expenditures for specialty rental assets amounted to approximately $9.4 million for the six months ended June 30, 2024. As we pursue growth, we monitor which capital resources, including equity and debt financings, are available to us to meet our future financial obligations, planned capital expenditure activities and liquidity requirements. However, future cash flows are subject to a number of variables, including the ability to maintain existing contracts, obtain new contracts and manage our operating expenses. The failure to achieve anticipated revenue and cash flows from operations could result in a reduction in future capital spending. We cannot assure you that operations and other needed capital will be available on acceptable terms or at all. In the event we make additional acquisitions and the amount of capital required is greater than the amount

Current wording

During the nine months ended September 30, 2024, we incurred approximately $28.1 million in capital expenditures, with approximately $14.3 million driven by capital expenditures in the Government segment. Maintenance capital expenditures for specialty rental assets amounted to approximately $18 million for the nine months ended September 30, 2024. As we pursue growth, we monitor which capital resources, including equity and debt financings, are available to us to meet our future financial obligations, planned capital expenditure activities and liquidity requirements. However, future cash flows are subject to a number of variables, including the ability to maintain existing contracts, obtain new contracts and manage our operating expenses. The failure to achieve anticipated revenue and cash flows from operations could result in a