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~~2022




☐			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~~Number: 001-38186

_______________________________

CUSTOM TRUCK ONE SOURCE, INC.

(Exact name of registrant as specified in its charter)


Delaware			84-2531628
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

7701 Independence Ave

Kansas City, MO 64125

(Address of principal executive offices, including zip code)

(816) 241-4888

(Registrant’s telephone number, including area code)

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value	CTOS	New York Stock Exchange
Redeemable warrants, exercisable for Common Stock, $0.0001 par value	~~CTOS.WT~~CTOS.WS	New York Stock Exchange

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 o

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See ~~definition~~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

☒o

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 ☒

The number of shares of common stock outstanding as of ~~May 10, 2021~~April 28, 2022 was ~~246,208,229.~~247,589,922.

Custom Truck One Source, Inc. and Subsidiaries

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

Page Number

Item 1.

~~Unaudited Condensed Consolidated~~ Financial Statements

Unaudited Condensed Consolidated Balance Sheets as of March 31, ~~2021~~2022 and December 31, ~~2020~~2021

Unaudited Condensed Consolidated Statements of ~~Operations~~Net Income (Loss) for the Three Months Ended March 31, ~~2021~~2022 and ~~2020~~2021

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, ~~2021~~2022 and ~~2020~~2021

Unaudited Condensed Consolidated Statements of ~~Stockholders' Deficit~~Stockholders’ Equity (Deficit) for the Three Months Ended March 31, ~~2021~~2022 and ~~2020~~2021

Notes to Unaudited Condensed Consolidated Financial Statements

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

2221

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

3337

Item 4.

Controls and Procedures

3438

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

3447

Item 1A.

Risk Factors

3447

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

3948

Item 3.

Defaults Upon Senior Securities

3948

Item 4.

Mine Safety Disclosures

3948

Item 5.

Other Information

4048

Item 6.

Exhibits

4049

SIGNATURES

4150

PART I –- FINANCIAL INFORMATION

Item 1. ~~CONSOLIDATED FINANCIAL STATEMENTS~~Financial Statements

Custom Truck One Source, Inc.

~~(Nesco Holdings, Inc. Standalone - see Note 3)~~

Condensed Consolidated Balance Sheets (unaudited)

(in $000s, except share data) March 31, 2021 December 31, 2020
Assets
Current Assets
Cash $ 3,191 $ 3,412
Accounts receivable, net of allowance of $7,770 and $6,372, respectively 54,415 60,933
Inventory 33,665 31,367
Prepaid expenses and other 13,075 7,530
Total current assets 104,346 103,242
Property and equipment, net 3,756 6,269
Rental equipment, net 323,705 335,812
Goodwill and other intangibles, net 304,878 305,631
Deferred income taxes 13,126 16,952
Notes receivable 433 498
Total Assets $ 750,244 $ 768,404
Liabilities and Stockholders' Deficit
Current Liabilities
Accounts payable $ 27,972 $ 31,829
Accrued expenses 30,156 31,991
Deferred rent income 776 975
Current maturities of long-term debt 1,111 1,280
Current portion of capital lease obligations 5,059 5,276
Total current liabilities 65,074 71,351
Long-term debt, net 725,677 715,858
Capital leases 4,513 5,250
Derivative and warrants liabilities 23,647 7,012
Total long-term liabilities 753,837 728,120
Commitments and contingencies (see Note 11) 0 0
Stockholders' Deficit
Common stock – $0.0001 par value, 250,000,000 shares authorized, 49,219,383 and 49,156,753 shares issued and outstanding, at March 31, 2021 and December 31, 2020, respectively 5 5
Additional paid-in capital 425,224 434,917
Accumulated deficit (493,896) (465,989)
Total stockholders' deficit (68,667) (31,067)
Total Liabilities and Stockholders' Deficit $ 750,244 $ 768,404


(in $000s, except share data)	March 31, 2022		December 31, 2021
Assets
Current Assets
Cash and cash equivalents	$	23,811	$	35,902
Accounts receivable, net	174,057		168,394
Financing receivables, net	36,487		28,649
Inventory	463,722		410,542
Prepaid expenses and other	14,847		13,217
Total current assets	712,924		656,704
Property and equipment, net	107,723		108,612
Rental equipment, net	834,645		834,325
Goodwill	713,832		695,865
Intangible assets, net	314,505		327,840

Operating lease assets	35,453		36,014
Other assets	26,997		24,406
Total Assets	$	2,746,079	$	2,683,766
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable	$	108,484	$	91,123
Accrued expenses	61,963		60,337

Deferred revenue and customer deposits	25,684		35,791
Floor plan payables - trade	59,682		72,714
Floor plan payables - non-trade	220,300		165,239
Operating lease liabilities - current	5,283		4,987
Current maturities of long-term debt	4,950		6,354
Current portion of finance lease obligations	4,559		4,038
Total current liabilities	490,905		440,583
Long-term debt, net	1,324,396		1,308,265
Finance leases	2,313		5,109
Operating lease liabilities - noncurrent	30,718		31,514
Deferred income taxes	21,545		15,621
Derivative, warrants and other liabilities	17,693		24,164
Total long-term liabilities	1,396,665		1,384,673

Commitments and contingencies (see Note 14)	0		0

Stockholder's Equity
Common stock — $0.0001 par value, 500,000,000 shares authorized, 247,461,042 and 247,358,412 shares issued and outstanding, at March 31, 2022 and December 31, 2021, respectively	25		25
Treasury stock, at cost — 339,591 and 318,086 shares at March 31, 2022 and December 31, 2021, respectively	(3,307)		(3,020)
Additional paid-in capital	1,512,554		1,508,995
Accumulated deficit	(650,763)		(647,490)

Total stockholders' equity (deficit)	858,509		858,510
Total Liabilities and Stockholders' Equity	$	2,746,079	$	2,683,766

See accompanying notes to unaudited condensed consolidated financial statements.

Custom Truck One Source, Inc.

~~(Nesco Holdings, Inc. Standalone - see Note 3)~~

Condensed Consolidated Statements of ~~Operations~~Net Income (Loss) (unaudited)


		Three Months Ended March 31,					Three Months Ended March 31,
(in $000s, except share and per share data)	(in $000s, except share and per share data)	2021		2020		(in $000s, except share and per share data)		2022		2021
Revenue	Revenue					Revenue
Rental revenue	Rental revenue	$	48,289	$	50,994	Rental revenue		$	109,145	$	48,289
Sales of rental equipment		10,485		9,093
Sales of new equipment		7,502		7,577
Equipment sales						Equipment sales		227,186		17,987

Parts sales and services	Parts sales and services	12,023		14,079		Parts sales and services		30,145		12,023
Total Revenue		78,299		81,743
Total revenue						Total revenue		366,476		78,299
Cost of Revenue	Cost of Revenue					Cost of Revenue
Cost of rental revenue	Cost of rental revenue	16,643		13,786		Cost of rental revenue		25,793		16,928
Depreciation of rental equipment	Depreciation of rental equipment	17,844		20,112		Depreciation of rental equipment		44,964		17,844
Cost of rental equipment sales		6,740		7,728
Cost of new equipment sales		6,925		6,654
Cost of equipment sales						Cost of equipment sales		187,278		13,665

Cost of parts sales and services	Cost of parts sales and services	9,643		11,360		Cost of parts sales and services		23,948		9,643
Major repair disposals		285		700

Total cost of revenue	Total cost of revenue	58,080		60,340		Total cost of revenue		281,983		58,080
Gross Profit	Gross Profit	20,219		21,403		Gross Profit		84,493		20,219
Operating Expenses	Operating Expenses					Operating Expenses
Selling, general and administrative expenses	Selling, general and administrative expenses	11,339		11,618		Selling, general and administrative expenses		53,655		12,050
Licensing and titling expenses		711		821
Amortization and non-rental depreciation		775		716
Transaction and other expenses		10,448		1,452
Amortization						Amortization		13,335		754
Non-rental depreciation						Non-rental depreciation		3,047		21
Transaction expenses						Transaction expenses		4,648		10,448

Total Operating Expenses		23,273		14,607
Operating (Loss) Income		(3,054)		6,796
Total operating expenses						Total operating expenses		74,685		23,273
Operating Income (Loss)						Operating Income (Loss)		9,808		(3,054)
Other Expense	Other Expense					Other Expense

Interest expense, net	Interest expense, net	14,906		16,014		Interest expense, net		19,156		14,906
Other (income) expense, net		5,857		6,021
Financing and other expense (income)						Financing and other expense (income)		(9,080)		5,857
Total other expense	Total other expense	20,763		22,035		Total other expense		10,076		20,763
Loss Before Income Taxes		(23,817)		(15,239)
Income Tax Expense		4,090		730
Net Loss		$	(27,907)	$	(15,969)
Income (Loss) Before Income Taxes						Income (Loss) Before Income Taxes		(268)		(23,817)
Income Tax Expense (Benefit)						Income Tax Expense (Benefit)		3,005		4,090
Net Income (Loss)						Net Income (Loss)		$	(3,273)	$	(27,907)

Basic and Diluted Net Loss Per Share		$	(0.57)	$	(0.33)

Basic and Diluted Earnings (Loss) Per Share						Basic and Diluted Earnings (Loss) Per Share		$	(0.01)	$	(0.57)
Weighted-Average Common Shares Outstanding	Weighted-Average Common Shares Outstanding	48,619,613		49,033,903		Weighted-Average Common Shares Outstanding		247,057,564		48,619,613

See accompanying notes to unaudited condensed consolidated financial statements.

Custom Truck One Source, Inc.

~~(Nesco Holdings,~~Condensed Consolidated Statements of Cash Flows (unaudited)


	Three Months Ended March 31,
(in $000s)	2022		2021
Operating Activities
Net income (loss)	$	(3,273)	$	(27,907)
Adjustments to reconcile net income (loss) to net cash flow from operating activities:
Depreciation and amortization	62,500		19,905
Amortization of debt issuance costs	1,326		—

Provision for losses on accounts receivable	2,811		1,383
Share-based compensation	3,364		698
Gain on sales and disposals of rental equipment	(5,420)		(4,139)


Change in fair value of derivative and warrants	(5,767)		5,846

Deferred tax expense (benefit)	2,849		3,826
Changes in assets and liabilities:

Accounts and financing receivables	(33,520)		1,520
Inventories	(51,384)		(5,081)
Prepaids, operating leases and other	(4,637)		(5,545)

Accounts payable	29,869		(956)
Accrued expenses and other liabilities	(5,343)		(1,437)
Floor plan payables - trade, net	(13,031)		—
Customer deposits and deferred revenue	(10,115)		(199)
Net cash flow from operating activities	(29,771)		(12,086)
Investing Activities
Acquisition of business, net of cash acquired	(50,513)		—
Purchases of rental equipment	(45,945)		(11,368)
Proceeds from sales and disposals of rental equipment	49,961		15,416

Other investing activities, net	(1,961)		(76)

Net cash flow from investing activities	(48,458)		3,972
Financing Activities
Proceeds from debt	75		—



Share-based payments	(6)		—
Borrowings under revolving credit facilities	50,000		25,461
Repayments under revolving credit facilities	(34,844)		(16,431)
Repayments of notes payable	(1,872)		(182)
Finance lease payments	(2,275)		(955)
Acquisition of inventory through floor plan payables - non-trade	140,126		—
Repayment of floor plan payables - non-trade	(85,066)		—


Net cash flow from financing activities	66,138		7,893
Net Change in Cash and Cash Equivalents	(12,091)		(221)
Cash and Cash Equivalents at Beginning of Period	35,902		3,412
Cash and Cash Equivalents at End of Period	$	23,811	$	3,191

Custom Truck One Source, Inc. ~~Standalone - see Note 3)~~

Condensed Consolidated Statements of Cash Flows (unaudited) — Continued

Three Months Ended March 31,
(in $000s) 2021 2020
Operating Activities
Net loss $ (27,907) $ (15,969)
Adjustments to reconcile net loss to net cash flow from operating activities:
Depreciation 18,063 20,377
Amortization - intangibles 753 691
Amortization - financing costs 804 711
Provision for losses on accounts receivable 1,383 777
Share-based compensation 698 559
Gain on sale of rental equipment and parts (4,137) (2,213)
Gain on insurance proceeds - damaged equipment (2) (120)
Major repair disposal 285 700
Change in fair value of derivative and warrants 5,846 5,963
Deferred tax expense (benefit) 3,826 652
Changes in assets and liabilities:
Accounts receivable 1,520 1,207
Inventory (5,081) 176
Prepaid expenses and other (5,545) (34)
Accounts payable (956) (3,352)
Accrued expenses and other liabilities (1,437) (12,427)
Unearned income (199) (517)
Net cash flow from operating activities (12,086) (2,819)
Investing Activities
Purchase of equipment - rental equipment (11,368) (33,347)
Proceeds from sale of rental equipment and parts 14,789 9,960
Insurance proceeds from damaged equipment 627 365
Purchase of other property and equipment (141) (4,168)
Other 65 0
Net cash flow from investing activities 3,972 (27,190)
Financing Activities
Borrowings under revolving credit facilities 25,461 35,680
Repayments under revolving credit facilities (16,431) 0
Repayments of notes payable (182) 0
Capital lease payments (955) (1,737)
Net cash flow from financing activities 7,893 33,943
Net Change in Cash (221) 3,934
Cash at Beginning of Period 3,412 6,302
Cash at End of Period $ 3,191 $ 10,236
(in $000s)
Supplemental Cash Flow Information
Cash paid for interest $ 26,287 $ 24,977
Cash paid for income taxes 122 76
Non-Cash Investing and Financing Activities
Transfer of inventory to rental equipment 2,783 2,087
Rental equipment and property and equipment purchases in accounts payable 6,285 11,861
Rental equipment sales in accounts receivable 1,505 5,627


	Three Months Ended March 31,
(in $000s)	2022		2021
Supplemental Cash Flow Information
Interest paid	$	4,865	$	26,287
Income taxes paid	—		122
Non-Cash Investing and Financing Activities


Rental equipment and property and equipment purchases in accounts payable	—		6,285
Rental equipment sales in accounts receivable	23,551		1,505

See accompanying notes to unaudited condensed consolidated financial statements.

Custom Truck One Source, Inc.

~~(Nesco Holdings, Inc. Standalone - see Note 3)~~

Condensed Consolidated Statements of Stockholders' ~~Deficit~~Equity (Deficit) (unaudited)


					Additional Paid-in Capital				Accumulated Deficit						Total Stockholders' Deficit												Common Stock				Treasury Stock						Additional Paid-in Capital					Accumulated Deficit								Total Stockholders' Equity (Deficit)
		Common Stock											Total Stockholders' Deficit	Shares								Common Stock	Treasury Stock			Additional Paid-in Capital				Accumulated Deficit										Total Stockholders' Equity (Deficit)
(in $000s, except share data)	(in $000s, except share data)	Shares	Amount											Common				Treasury
Balance, December 31, 2020		49,156,753	$	5			$	434,917			$	(465,989)								$	(31,067)
Net loss		—	—				—				(27,907)							(27,907)
Balance, December 31, 2021																		Balance, December 31, 2021	247,358,412					(318,086)				$	25						$	(3,020)						$	1,508,995				$	(647,490)							$	858,510
Net income (loss)																		Net income (loss)	—				—				—				—						—						(3,273)								(3,273)
Share-based payments	Share-based payments	62,630	—		597				—								597		Share-based payments		102,630				(21,505)				—				(287)						3,559					—								3,272
Warrants liability reclassification (see Note 9)		—	—		(10,290)				—						(10,290)
Balance, March 31, 2021		49,219,383	$	5	$	425,224			$	(493,896)					$	(68,667)

Balance, March 31, 2022																		Balance, March 31, 2022	247,461,042				(339,591)				$	25			$	(3,307)					$	1,512,554				$	(650,763)							$	858,509

					Additional Paid-in Capital				Accumulated Deficit						Total Stockholders' Deficit
		Common Stock											Total Stockholders' Deficit									Common Stock				Treasury Stock				Additional Paid-in Capital				Accumulated Deficit											Total Stockholders' Deficit
		Shares	Amount											Shares																							Total Stockholders' Deficit

Balance, December 31, 2019		49,033,903	$	5			$	432,577			$	(444,712)											$	(12,130)
Net loss		—	—				—				(15,969)							(15,969)
(in $000s, except share data)																		(in $000s, except share data)	Common								Treasury													Common Stock					Treasury Stock				Additional Paid-in Capital				Accumulated Deficit				Total Stockholders' Deficit
Balance, December 31, 2020																		Balance, December 31, 2020	49,156,753					—																		$	(31,067)
Net income (loss)																		Net income (loss)	—				—																			(27,907)
Share-based payments	Share-based payments	—	—		559				—									559		Share-based payments		62,630				—				—				—							597					—								597

Balance, March 31, 2020		49,033,903	$	5	$	433,136			$	(460,681)					$	(27,540)
Warrants liability reclassification (see Note 12)																		Warrants liability reclassification (see Note 12)	—				—				—				—						(10,290)					—								(10,290)
Balance, March 31, 2021																		Balance, March 31, 2021	49,219,383				—				$	5			$	—					$	425,224				$	(493,896)							$	(68,667)

See accompanying notes to unaudited condensed consolidated financial statements.

Custom Truck One Source, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1: Business and Organization

Organization

Custom Truck One Source, Inc. ~~(“CTOS Inc.”)~~, formerly Nesco Holdings, Inc., a Delaware corporation, and its wholly owned subsidiaries isare engaged in the business of providing a range of ~~services~~products and ~~products~~services to customers through rentals and sales of specialty equipment, rentals and sales of aftermarket parts and services related to the specialty equipment, and repair, maintenance and ~~maintenance~~customization services related to that equipment. Immediately following the acquisition by Nesco Holdings II, Inc. of Custom Truck One Source, L.P. (“Custom Truck LP”) as discussed in Note 3, ~~Acquisition and Related Financing Transactions~~,3: Business Combinations, on April 1, 2021 (the “Acquisition”), Nesco Holdings, Inc. (“Nesco Holdings”) changed its name to “Custom Truck One Source, Inc.” and changed The New York Stock Exchange ticker for its shares of common stock (“Common Stock”) from “NSCO” to ~~“CTOS.~~“CTOS,”

As and the ticker of its redeemable warrants from “NSCO.WS” to “CTOS.WS.” Terms such as, “we,” “our,” “us,” or “the Company” refer to Nesco Holdings prior to the Acquisition, ~~closed~~and to the combined company after ~~first quarter 2021,~~ the preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) requires that these Condensed Consolidated Financial Statements and most of the disclosures in these Notes be presented on a historical basis, as of or for the three months ended March 31, 2021 or prior periods.Acquisition. Unless the context otherwise requires, the term ~~“CTOS”~~“Nesco” or “Nesco Holdings” as used in these financial statements means Nesco Holdings and its consolidated subsidiaries ~~when referring to periods prior to March 31, 2021 (prior to the Acquisition). The term “Company” refers to standalone Nesco Holdings~~ prior to the Acquisition, and to the ~~combined company post Acquisition. We may use terms such as, “we,” “our,” or “us,” to refer to standalone Nesco Holdings~~term “Custom Truck LP” means Custom Truck LP and its consolidated subsidiaries prior to and on the ~~Acquisition, and to~~date of the ~~combined company post~~ Acquisition.

We are a specialty equipment ~~rental~~ provider to the electric utility transmission and distribution, telecommunications, rail and ~~rail~~other infrastructure-related industries in North America. Our core business relates to our new equipment inventory and rental fleet of specialty ~~rental~~ equipment that is utilized by service providers in infrastructure development and improvement work. ~~Specifically, we~~We offer our specialized equipment to a diverse customer base, including utilities and ~~primarily~~ contractors, for the maintenance, repair, upgrade, and installation of critical infrastructure assets, including distribution and transmission electric lines, telecommunications networks and rail systems, as well as ~~a small percentage~~ for lighting and signage. We rent, produce, sell and ~~sell~~service a broad range of new and used equipment, including bucket trucks, digger derricks, ~~line equipment,~~dump trucks, cranes, ~~pressure diggers,~~service trucks, and ~~underground equipment, which forms~~heavy-haul trailers. Following the Acquisition, we changed our reportable segments to be consistent with how we currently manage the business, representing 3 reporting segments: Equipment Rental Solutions (“ERS”), Truck and Equipment Sales (“TES”) and Aftermarket Parts and Services (“APS”).

Equipment Rental Solutions (“ERS”) ~~segment. To complement~~Segment

We own a broad range of new and used specialty equipment, including truck-mounted aerial lifts, cranes, service trucks, dump trucks, trailers, digger derricks and other machinery and equipment. The majority of our rental fleet can be used across a variety of end-markets, which coincides with the needs of many of our customers who operate in multiple end-markets. As is customary for equipment rental companies, we sell used equipment out of our rental fleet to end user customers. These sales are often made in response to specific customer requests. These sales offer customers an opportunity to buy well-maintained equipment with long remaining useful lives and enable us to effectively manage the age and mix of our rental fleet to match current market demand. We also employ rental purchase options on a select basis, which provide a buyout option with an established purchase price that decreases over time as rental revenue is collected. Customers are given credit against such purchase price for a portion of the amounts paid over the life of the rental, allowing customers the flexibility of a rental with the option to purchase at any time at a known price. Activities in our ERS segment consist of the rental and sale from the rental fleet, of the foregoing products.

Truck and Equipment Sales (“TES”) Segment

We offer a broad variety of new equipment for sale to be used across our end-markets, which can be modified to meet our customers’ specific needs. We believe that our integrated production capabilities and extensive knowledge gained over a long history of selling equipment have established us as a trusted partner for customers seeking tailored solutions with short lead times. In support of these activities, we primarily employ a direct-to-customer sales model, leveraging our dedicated sales force of industry and product managers, who are focused on driving national and local sales. We also opportunistically engage in the sale of used equipment purchased from third parties or received via trade-ins from new equipment sales customers. In all of these cases, we will sell used equipment directly to customers, rather than relying on auctions. Activities in our TES segment consist of the production and sale of new and used specialty equipment and vocational trucks, which includes equipment from leading original equipment manufacturers (“OEMs”) across our end-markets, as well as our Load KingTM brand.

Aftermarket Parts and Services (“APS”) Segment

The APS segment includes the sale of specialized aftermarket parts, including captive parts related to our Load KingTM brand, used in the maintenance and repair of the equipment we sell and rent. Specialized tools, including stringing blocks, insulated hot stick, and rigging equipment, are sold or rented to customers on an individual basis or in packaged specialty kits. We also provide ~~a one-stop shop~~truck and equipment maintenance and repair services, which are executed throughout our nationwide branch network and fleet of mobile technicians supported by our 24/7 call center based in Kansas City, Missouri.

COVID-19 and Supply Chain

Uncertainty remains regarding emerging variant strains of the Coronavirus Disease 2019 ("COVID-19") pandemic, and regarding the length of time it will take for ~~existing~~the COVID-19 pandemic to subside, including the time it will take for vaccines to be broadly distributed and ~~prospective customers~~accepted in the ~~same end markets~~United States and the rest of ~~electric lines, telecommunications networks,~~the world, and ~~rail systems~~the effectiveness of such vaccines in slowing or stopping the spread of COVID-19 and mitigating the economic effects of the pandemic. The Company serves critical infrastructure sectors that have been identified by the United States Cybersecurity and Infrastructure Security Agency (“CISA”) as vital to ~~purchase or rent parts, tools,~~the U.S., and ~~accessories needed~~the Company has continued to ~~outfit their specialty truck fleet. These activities form~~meet the needs of customers during the pandemic. The unprecedented nature of the COVID-19 pandemic continues to make it difficult to predict our ~~Parts, Tools,~~future business and ~~Accessories (“PTA”~~financial performance. The ensuing economic impacts from restrictions put in place around the globe to address the COVID-19 pandemic, including shutdowns and workplace changes, have led to issues, broadly, in the global flow of goods and services (the “supply chain”) ~~segment.~~. The Company continues to monitor the impact of the COVID-19 pandemic and related restrictions on our supply chain, including, but not limited to, the commercial vehicle manufacturers that provide the chassis used in our production and manufacturing processes. Supply chain disruptions, such as the ongoing semiconductor shortage, could potentially limit the ability of these manufacturers to meet demand in future periods.

Note 2: Summary of Significant Accounting Policies

Basis of Presentation

Our accompanying condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and the accounting policies described below. Our consolidated financial statements include the accounts of all wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The preparation of financial statements in accordance with GAAP requires that these Unaudited Condensed Consolidated Financial Statements and most of the disclosures in these Notes be presented on a historical basis, as of or for the current interim period ended or comparable prior period. The consolidated financial position and results of operations and cash flows (including segment information) presented herein include those of Custom Truck One Source, Inc. as of March 31, 2022 and since the date of the Acquisition. Financial information presented for periods prior to the Acquisition represent those of Nesco Holdings and its subsidiaries.

The accompanying interim statements of the Company have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation ~~S-X.~~S-X, and the Condensed Consolidated Balance Sheet at December 31, 2021, has been derived from the audited consolidated financial statements of Custom Truck One Source, Inc. at that date. Accordingly, ~~they~~these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting ~~only~~ of normal recurring adjustments and disclosures necessary for a fair statement of these interim statements, have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year or for any other period. These interim statements should be read in conjunction with the ~~Company’s~~Custom Truck One Source, Inc. audited consolidated financial statements included in the ~~Company’s~~Custom Truck One Source, Inc. Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Use of Estimates

We prepare our consolidated financial statements in conformity with GAAP, which requires us to use judgment to make estimates that directly affect the amounts reported in our consolidated financial statements and accompanying notes. Significant estimates are used for items including, but not limited to, the useful lives and residual values of our rental equipment, ~~business combinations,~~ and ~~determining~~ the ~~valuation allowance~~allocation of purchase price related to ~~deferred income taxes.~~business combinations. In addition, estimates are used to test both long-lived assets, goodwill, and indefinite-lived assets for impairment, and to determine the fair value of impaired assets, if any impairment exists. These estimates are based on our historical experience and on various other assumptions we believe to be reasonable under the circumstances. We review our estimates on an ongoing basis using information currently available, and we revise our recorded

estimates as updated information becomes available, facts and circumstances change, or actual amounts become determinable. Actual results could differ from our estimates.

~~Recently Issued Accounting Pronouncements~~

~~Leases~~

The Financial Accounting Standards Board's ("FASB") new guidance to account for leases (“Topic 842”) by entities that are lessees, requires (1) recognition of lease assets and lease liabilities on the balance sheet, and (2) disclosure of key information about leasing arrangements. Topic 842 provides two classifications for leases: financing or operating.

~~Finance leases.~~ ~~The accounting and recognition for leases qualifying as finance leases is similar to the accounting and recognition required under ASC Topic 840,~~ ~~Leases~~ (“Topic 840”), for capital leases. As of March 31, 2021, we have capital lease obligations of approximately $9.6 million. When we make our contractually required payments under the capital leases, we allocate a portion to reduce the capital lease obligation and a portion is recognized as interest expense. The assets leased under the capital leases are included in rental equipment, and depreciation thereon is recognized in cost of rental revenue.

~~Operating leases.~~ Under Topic 842, operating leases result in the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Under Topic 842, operating lease ROU assets and liabilities are recognized at the lease commencement date and measured based on the present value of lease payments over the lease term. The operating lease ROU assets will also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease that we are reasonably certain to exercise. Lease expense under Topic 842 will be recognized on a straight-line basis over the lease term. Upon adoption of Topic 842, it is expected that operating lease ROU assets and lease liabilities that reflect the present value of these future payments related to Nesco Holdings will be in the range of $7.9 million to $8.9 million.

We will adopt Topic 842 in the second quarter of 2021 as a result of losing emerging growth company status and recognize a cumulative-effect adjustment to the opening balance of accumulated deficit in the period of adoption. A modified retrospective approach is required for adoption for all leases that exist at or commence after the date of initial application with an option to use certain practical expedients. We expect to use the package of practical expedients that allows us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) initial direct costs for any expired or existing leases.

Under Topic 842, lessor accounting will remain substantially similar to the current accounting; however, certain refinements were made to conform the standard with the recently issued revenue recognition guidance in ASC Topic 606, ~~Revenue from Contracts with Customers~~ (“Topic 606”), specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. On July 30, 2018, the FASB issued ASU 2018-11, which created a practical expedient that provides lessors an option not to separate lease and non-lease components when certain criteria are met and instead account for those components as a single lease component. We are currently in the process of evaluating whether our lease arrangements will meet the criteria under the practical expedient to account for lease and non-lease components as a single lease component, which would alleviate the requirement upon adoption of Topic 842 that we reallocate or separately present lease and non-lease components.

~~Measurement of Current Expected Credit Losses~~

~~In June 2016, the FASB issued ASU 2016-13 (the “ASU”),~~ ~~Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments~~. The ASU adds to GAAP an impairment model (known as the current expected credit loss, or “CECL,” model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which is intended to result in the more timely recognition of losses. Under the CECL model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications) from the date of initial recognition of the financial instrument. Measurement of expected credit losses are to be based on relevant forecasts that affect collectability. The scope of financial assets within the CECL methodology is broad and includes trade receivables from certain revenue transactions and certain off-balance sheet credit exposures. While our review is ongoing, we believe the ASU will only have applicability to our receivables from non-leasing revenue transactions, as the ASU does not apply to receivables arising from operating leases. At the point that non-leasing trade receivables are recorded, they become subject to the CECL model and estimates of expected credit losses on receivables over their contractual life will be required to be recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. We are currently evaluating whether the new guidance, while limited to our non-operating lease trade receivables, will have an impact on our consolidated financial statements. ASU 2016-13 must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings (deficit) in the period of adoption. We will adopt the ASU in the second quarter of 2021 as a result of losing emerging growth company status.

~~Simplifying~~Trade Receivables and Allowance for Credit Losses

We are exposed to credit losses from trade receivables generated through our leasing, sales and service businesses. We assess each customer’s ability to pay for the ~~Test~~products and services by conducting a credit review. The credit review considers expected billing exposure and timing for ~~Goodwill Impairment~~

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment~~, intended to simplify the subsequent accounting for goodwill acquired in a business combination. Prior guidance required utilizing a two-step process to review goodwill for impairment. A second step was required if there was an indication that an impairment may exist,payment and the ~~second step required calculating~~customer’s established credit rating. We perform a credit review of new customers at inception of the ~~potential impairment by comparing~~customer relationship and, for existing customers, when the ~~implied fair value~~customer transacts new leases or product orders after a period of ~~a reporting unit’s goodwill (as if purchase accounting were performed on~~dormancy. We also consider contract terms and conditions, country risk and business strategy in the ~~testing date)~~evaluation.

We monitor ongoing credit exposure through an active review of customer balances against contract terms and due dates. We may employ collection agencies and legal counsel to pursue recovery of defaulted receivables. The allowances for credit losses reflect the ~~carrying~~estimate of the amount of the goodwill. The new guidance eliminates the second step from the goodwill impairment test. Under the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount,receivables that management assesses will be unable to be collected based on historical write-off experience and, then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value (although the loss should not exceed the total amount of goodwill allocated to the reporting unit). We adopted this guidance effective January 1, 2021; however, as ~~discused in Note 5,~~ ~~Goodwill~~applicable, current conditions and ~~Intangible Assets, there was 0 impairment of goodwill~~reasonable and supportable forecasts that affect collectability. This estimate could require change based on changing circumstances, including changes in the ~~three months ended~~economy or in the particular circumstances of individual customers. Accordingly, we may be required to increase or decrease the allowances. We review the adequacy of the allowance on a quarterly basis. The allowance for doubtful accounts was $12.8 million and $10.8 million as of March 31, 2022 and December 31, 2021, respectively, and ~~2020. Accordingly, the adoption of this standard did not have a material impact~~is included in accounts receivable, net on our ~~consolidated financial statements.~~

~~Revenue Recognition~~

We recognize revenue in accordance with two different accounting standards: (1) Topic 606 and (2) Topic 840, which addresses lease accounting, for which we will adopt an update to this standard (Topic 842) using the modified retrospective approach, as described above. For the three months ended March 31, 2021 and 2020, we recognized rental revenue in accordance with Topic 840, Leases, which is the lease accounting standard.

Under Topic 606, revenue from contracts with customers is measured based on the consideration specified in the contract with the customer, and excludes any sales incentives and amounts collected on behalf of third parties. A “performance obligation” is a promise in a contract to transfer a distinct good or service to a customer, and is the unit of account under Topic 606. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for such products or services. As reflected below, most of our revenue is accounted for under Topic 840. Our contracts with customers generally do not include multiple performance obligations. The table below presents our revenue types based on the accounting standard used to determine the accounting.

Three Months Ended March 31, Three Months Ended March 31,
2021 2020
(in $000s) Topic 840 Topic 606 Total Topic 840 Topic 606 Total
Rental:
Rental revenue $ 46,186 $ 0 $ 46,186 $ 48,913 $ 0 $ 48,913
Shipping and handling 0 2,103 2,103 0 2,081 2,081
Total rental revenue 46,186 2,103 48,289 48,913 2,081 50,994
Sales and services:
Sales of rental equipment 0 10,485 10,485 0 9,093 9,093
Sales of new equipment 0 7,502 7,502 0 7,577 7,577
Parts and services 0 12,023 12,023 0 14,079 14,079
Total sales and services 0 30,010 30,010 0 30,749 30,749
Total revenue $ 46,186 $ 32,113 $ 78,299 $ 48,913 $ 32,830 $ 81,743

Rental revenue is primarily comprised of revenues from rental agreements and freight charges billed to customers, as well as charges to customers for damaged equipment, which is assessed and billed at the time a rental asset is returned to the Company.

~~Inventory~~

Parts, tools, and accessories inventory is primarily composed of items purchased for resale or rent to customers. During the second quarter ended June 30, 2020, in connection with a new inventory management system, we elected to change our method for these inventories, which were previously valued using the first-in, first-out (“FIFO”) method, to the moving average cost method. We believe the change is preferable because it better reflects movement of the inventory and the corresponding value which provides a better reflection of periodic income from operations. This change was not applied retrospectively to prior periods, as the effect of the change was not material to our consolidated financial statements, including interim periods.

Also included within parts, tools, and accessories inventory are materials and components that we carry to service our rental fleet and new equipment held for sale. These materials and components are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis.

Equipment inventory consists of equipment bought specifically for resale to customers. These new purchases are recorded directly to inventory when received. Equipment inventory is stated at the lower of cost or net realizable value, with cost determined on a specific identification basis.

~~Inventory consisted of the following:~~

(in $000s) March 31, 2021 December 31, 2020
Parts, tools, and accessories inventory $ 30,520 $ 28,091
Equipment inventory 3,145 3,276
Inventory $ 33,665 $ 31,367

~~Rental and Property and Equipment~~

~~Rental equipment consisted of the following:~~

(in $000s) March 31, 2021 December 31, 2020
Rental equipment $ 648,317 $ 654,547
Less: accumulated depreciation (324,612) (318,735)
Rental equipment, net $ 323,705 $ 335,812

~~Property and equipment consisted of the following:~~

(in $000s) March 31, 2021 December 31, 2020
Property and equipment $ 12,099 $ 11,816
Less: accumulated depreciation (8,356) (8,137)
Construction in progress 13 2,590
Property and equipment, net $ 3,756 $ 6,269
Condensed Consolidated Balance Sheets.

Note 3: ~~Acquisition and Related Financing Transactions~~Business Combinations

Acquisition of Custom Truck One Source, L.P.

On December 3, 2020, Nesco Holdings and Nesco Holdings II, Inc., a subsidiary of Nesco Holdings (the “Buyer” or the “Issuer”), entered into a Purchase and Sale Agreement (as amended, the “Purchase Agreement”) with certain affiliates of The Blackstone Group (“Blackstone”) and other direct and indirect equity holders (collectively, “Sellers”) of Custom Truck One Source, L.P. ~~(“Custom Truck”)~~, Blackstone Capital Partners VI-NQ L.P., and PE One Source Holdings, LLC, an affiliate of Platinum Equity, LLC (“Platinum”), pursuant to which Buyer agreed to acquire 100% of the partnership interests of Custom ~~Truck.~~Truck LP. In connection with the Acquisition, Nesco Holdings and certain Sellers entered into Rollover and Contribution Agreements (the “Rollover Agreements”), pursuant to which such Sellers agreed to contribute a portion of their equity interests in Custom Truck LP (the “Rollovers”) with an aggregate value of $100.5 million in exchange for shares of Common Stock, valued at $5.00 per share. We believe the Acquisition creates a leading, one-stop shop for specialty equipment, serving highly attractive and growing infrastructure end markets, including transmission and distribution, telecom, rail and other national infrastructure initiatives.

Also on December 3, 2020, Nesco Holdings entered into a Common Stock Purchase Agreement (the “Investment Agreement”) with Platinum, relating to, among other things, the issuance and sale to Platinum (the “Subscription”) ~~to Platinum~~ of shares of Common Stock, for an aggregate purchase price in the range of $700 million to $763 million, with the specific amount calculated in accordance with the Investment Agreement based upon the total equity funding required to fund the consideration paid pursuant to the terms of the Purchase Agreement. The shares of Common Stock issued and sold to Platinum had a purchase price of $5.00 per share. In accordance with the Investment Agreement, on December 21, 2020, Nesco Holdings entered into Subscription Agreements (the “Subscription Agreements”) with certain investors (the “PIPE Investors”) to finance, in part, the Acquisition. Pursuant to the Subscription Agreements, concurrently with the closing of the transactions contemplated by the Investment Agreement, the PIPE Investors agreed to purchase an aggregate of 28,000,000 shares of Common Stock at $5.00 per share for an aggregate purchase price of $140 million (the “Supplemental Equity Financing”).

On April 1, 2021 (the “Closing Date”), in connection with (i) the Rollovers, ~~CTOS Inc.~~the Company issued, in the aggregate, 20,100,000 shares of Common Stock to the parties to the Rollover Agreements, (ii) the Subscription, ~~CTOS Inc.~~the Company issued 148,600,000 shares of Common Stock to Platinum, and (iii) the Supplemental Equity Financing, ~~CTOS Inc.~~the Company issued, in the aggregate, 28,000,000 shares of Common Stock to the PIPE Investors. ~~Following the completion~~

Purchase Price

The Company issued 20,100,000 shares of ~~these transactions, as of April 1, 2021, CTOS Inc. had 245,919,383 shares of~~

Common Stock ~~issued~~to Custom Truck LP equity interest holders, as well as paid cash and ~~outstanding.~~repaid debt obligations as consideration for the Acquisition. The trading price of the Common Stock was $9.35 per share on the Closing Date. The ~~preliminary~~ purchase price ~~for~~has been determined to be as follows:


(in $000s, except share and per share data)
Common stock issued	20,100,000
Common stock per share price as of April 1, 2021	$	9.35
Fair value of common stock issued	$	187,935
Cash consideration paid to equity interest holders	790,324
Repayment of debt obligations	552,600
Total purchase price	$	1,530,859

During the ~~Acquisition is estimated at $1.5 billion and is subject~~year ended December 31, 2021, the Company transferred an additional $3.4 million of cash consideration to ~~adjustment pending~~ the ~~finalization of preliminary valuation estimates.~~Sellers related to certain customary closing adjustments set forth in the Purchase Agreement.

Opening Balance Sheet

The ~~Acquisition will be~~acquisition of Custom Truck One Source, L.P. has been accounted for using the acquisition method of accounting, and ~~CTOS Inc. will be treated as~~the Company is considered the accounting acquirer. Under the acquisition method of accounting, we are required to assign the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the Closing Date. The excess of the purchase price over those fair values ~~will be~~is recorded as goodwill. ~~CTOS Inc.~~The total purchase price has been assigned to the underlying assets acquired and liabilities assumed based upon their fair values as of the Closing Date, and the estimated fair values have been recorded based on independent valuations, discounted cash flow analysis, quoted market prices, contributory asset charges, and estimates made by management, which estimates fall under “Level 3” of the fair value hierarchy (as defined in Note 11: Fair Value Measurements).

The following table summarizes the April 1, 2021 fair values of the assets acquired and liabilities assumed. Since the Closing Date, the Company identified and recorded certain measurement period adjustments to the preliminary purchase price allocation, which are reflected in the table below. These adjustments were not ~~completed~~significant and related primarily to rental equipment and current liabilities. The measurement period adjustments, coupled with the ~~valuation analysis and calculations in sufficient detail necessary to arrive at~~additional cash consideration discussed above, increased goodwill by approximately $15.6 million during the ~~required estimates~~year ended December 31, 2021. The final assessment of the fair value of the Custom Truck LP assets acquired orand liabilities assumed ~~including estimates of fair values for inventory, rental equipment and certain intangible assets.~~

The Company expensed approximately $10.4 million in transaction costs related to the Acquisition within Transaction and other expenses for the three months ended March 31, 2021. Additionally, there were approximately $6.1 million in transaction costs related to the Acquisition that are deferred and recorded within Prepaid expenses and other on the Condensed Consolidated Balance Sheetwas complete as of March 31, ~~2021, which costs will~~2022.


(in $000s)
Accounts and financing receivables (a)	$	115,325
Inventory	431,648
Other current assets	13,201
Property and equipment (b)	104,721
Rental equipment	556,569
Intangible assets (c)	301,018
Operating lease assets	23,793
Other assets	18,223
Total identifiable assets acquired	1,564,498
Current liabilities	(410,276)
Long-term debt	(28,607)
Operating lease liabilities-noncurrent	(21,308)
Deferred tax and other liabilities	(31,261)
Total identifiable liabilities assumed	(491,452)
Total net assets	1,073,046
Goodwill (d)	457,813
Net assets acquired (purchase price)	$	1,530,859

a.The estimated fair value of accounts and financing receivables is $115.3 million, with the gross contractual amount being $122.4 million. The Company estimates approximately $7.0 million to be ~~recognized on the Closing Date.~~

~~2029 Secured Notes~~uncollectible.

b.Acquired property and equipment is primarily comprised of land, buildings and improvements with an estimated fair value of $67.9 million, and machinery, equipment and vehicles, with an estimated fair value of $31.1 million, as well as other property with an estimated fair value of $5.7 million.

c.The acquired identified intangible assets are comprised of trade names, with an estimated fair value of $151.0 million, and customer relationships, with an estimated fair value of $150.0 million. The weighted average useful lives of the trade names and the customer relationships are estimated to be 15 years and 12 years, respectively.

d.The goodwill recognized is attributable primarily to synergies and economies of scale provided by the acquired rental and new equipment sales businesses, as well as the assembled workforce of Custom Truck LP. Approximately $265.4 million of the goodwill is expected to be deductible for income tax purposes.

Goodwill attributable to the Acquisition is assigned to our Segments as follows:


(in $000s)
ERS	$	261,607
TES	167,307
APS	28,899

Financing Transactions

On the Closing Date, the Issuer issued $920 million in aggregate principal amount of 5.50% senior secured second lien notes due 2029 (the “2029 Secured Notes”). The 2029 Secured Notes were issued pursuant to an indenture, dated as of April 1, 2021, by and among the Issuer, Wilmington Trust, National Association, as trustee, and the guarantors party thereto (the “Indenture”). The Issuer will pay interest on the Notes semi-annually in arrears on April 15 and October 15 of each year, ~~commencing~~which commenced on October 15, 2021. Unless earlier redeemed, the 2029 Secured Notes will mature on April 15, 2029. The notes were offered pursuant to a private placement exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons outside of the United States in reliance on Regulation S under the Securities Act. The proceeds from the issuance and sale of the 2029 Secured Notes were used to consummate the Acquisition and to repay the Senior Secured Notes due 2024 ~~(see Note 4,~~ ~~Debt~~),previously issued by Nesco Holdings, repay certain indebtedness of Custom Truck LP and pay certain fees and expenses related to the Acquisition and financing transactions.

~~ABL Facility~~

OnAlso on the Closing Date, the Buyer, its direct parent, and certain of its direct and indirect subsidiaries entered into a senior secured ~~asset based~~asset-based revolving credit agreement (the “ABL Credit Agreement”) with Bank of America, N.A., as administrative agent and collateral agent, and certain other lenders party thereto, consisting of a $750.0 million first lien senior secured ~~asset based~~asset-based revolving credit facility with a maturity of five years (the “ABL Facility”), which includes borrowing capacity for revolving loans (with a swingline sub-facility) and the issuance of letters of credit. Proceeds from the ABL Facility were used to finance the repayment of certain indebtedness of (i) Custom Truck LP under that certain Credit Agreement, dated as of April 18, 2017 (the “Custom Truck LP Credit Facility”), by and among Custom Truck LP, the other entities party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent, and (ii) Buyer under that certain Credit Agreement, dated as of July 31, 2019 (the “2019 Credit Facility”), by and among Capitol Investment Merger Sub 2, LLC, the other entities party thereto and JPMorgan Chase Bank, N.A., as administrative agent, as well as to pay fees and expenses related to the Acquisition and the financing transactions.

Pro Forma Information

The below pro forma information is presented for the three months ended March 31, 2021 and uses the estimated fair value of assets and liabilities on the Closing Date, and makes the following assumptions: (1) removes acquisition-related costs and charges that were recognized in the Company's consolidated financial statements in the three months ended March 31, 2021 and applies these costs and charges as if the Acquisition and related financing transactions had occurred on January 1, 2020; (2) adjusts for the impacts of purchase accounting in the three months ended March 31, 2021; (3) adjusts interest expense, including amortization of debt issuance costs, to reflect borrowings on the ABL Facility and issuance of the 2029 Secured Notes, as if the funds had been borrowed and the notes had been issued on January 1, 2020 and used to repay Nesco’s 2019 Credit Facility, Nesco’s Senior Secured Notes due 2024 and the Custom Truck LP Credit Facility and term loan; and (4) adjusts for the income tax effect using a tax rate of 25%. The pro forma information is not necessarily indicative of the Company’s results of operations had the Acquisition been completed on January 1, 2020, nor is it necessarily indicative of the Company’s future results. The pro forma information does not reflect any cost savings from operating efficiencies, synergies, or revenue opportunities that could result from the Acquisition.


	Three Months Ended March 31,
(in $000s)		2021
Revenue		$	394,770
Net income (loss)		$	(15,280)

The following presents a summary of the pro forma adjustments that are directly attributable to the business combination:

Three Months Ended March 31,

(in $000s)

2021

Increase (decrease) net income/loss:

Impact of fair value mark-ups on rental fleet depreciation

(3,817)

Intangible asset amortization and other depreciation expense

(2,390)

Transaction expenses

15,702

Interest expense and amortization of debt issuance costs

3,919

Income tax expense

(3,354)

a.Represents the adjustment for depreciation of rental fleet relating to the increase in the value of the rental fleet to its fair value.

b.Represents the differential in amortization and depreciation of non-rental equipment related to the respective fair values of the assets.

c.Represents adjustments for transaction expenses that are applied to the three months ended March 31, 2021.

d.Reflects the differential in interest expense, inclusive of amortization of capitalized debt issuance costs, related to our debt structure after the Acquisition as though the following had occurred on January 1, 2020: (i) borrowings under the ABL Facility; (ii) repayment of the 2019 Credit Facility; (iii) repayment of the Senior Secured Notes due 2024; (iv) repayment of the Custom Truck LP Credit Facility; and (v) the issuance of the 2029 Secured Notes.

e.Reflects the adjustment to recognize the tax impacts of the pro forma adjustments for which a tax expense is recognized using a statutory tax rate of 25%. This rate may vary from the actual effective rate of the historical and combined businesses.

Transaction Costs

The Company expensed approximately $10.4 million in transaction costs related to the Acquisition within Transaction expenses and other expense in the three months ended March 31, 2021.

Acquisition of HiRail

On January 14, 2022, a subsidiary of the Company, CTOS Canada, Ltd., closed a Share Purchase Agreement with certain affiliates of Ontario Limited (d/b/a HiRail Leasing), Ontario Inc. (d/b/a Heavy Equipment Repairs), and Ontario Limited (d/b/a Northshore Rail Contracting) (collectively “HiRail”) to acquire 100% of the equity interests of HiRail. The acquisition of HiRail expands our presence in our strategic markets and deepens our relationships with key customers.

Purchase Price

The Company paid $51.6 million to HiRail equity interest holders and to repay debt obligations as consideration for the HiRail acquisition.

Opening Balance Sheet

The Acquisition of HiRail has been accounted for using the acquisition method of accounting. Under the acquisition method of accounting, we are required to assign the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of January 14, 2022. The excess of the purchase price over those fair values is recorded as goodwill and is attributable to expanded access to markets for our product and service offering, synergies, and broader product offerings to existing customers of HiRail. The total purchase price has been preliminarily assigned to the underlying assets acquired and liabilities assumed based upon their preliminary fair values as of January 14, 2022, and the estimated fair values have been recorded based on independent valuations, discounted cash flow analysis, quoted market prices, contributory asset charges, and estimates made by management, which estimates fall under “Level 3” of the fair value hierarchy (as defined in Note 11: Fair Value Measurements).

The following table summarizes as of January 14, 2022, fair values of the assets acquired and liabilities assumed. The final assessment of the fair value of the HiRail assets acquired and liabilities assumed, including estimates of fair values for inventory, property and equipment, rental equipment, certain intangible assets, deferred income taxes and the final assignment of goodwill to reporting units, was not complete as of March 31, 2022. The preliminary fair values are subject to change pending a final determination of the fair values of assets acquired and liabilities assumed as more information is received about their respective values. As of March 31, 2022, the Company is in the process of determining the value of intangible assets acquired including customer relationships, trade names, and other intangible assets.


(in $000s)
Current assets	$	2,891
Property, equipment and other assets	819
Rental equipment	34,224
Total identifiable assets acquired	37,934

Total identifiable liabilities assumed	(6,011)
Total net assets	31,923
Goodwill and intangible assets	19,712
Net assets acquired (purchase price)	51,635
Less: cash acquired	(1,122)
Net cash paid	$	50,513

HiRail has generated $3.8 million of revenue and $1.3 million of pre-tax loss since January 14, 2022, which are included in the Condensed Consolidated Statements of Net Income (Loss) for the three months ended March 31, 2022. Costs and expenses related to the acquisition were expensed as incurred and were not material. Additionally, pro forma information as if the acquisition of HiRail had occurred on January 1, 2021 is not being presented as the information is not considered material to our consolidated financial statements.

Note 4: Revenue

Revenue Disaggregation

Geographic Areas

The Company had total revenue in the following geographic areas:


	Three Months Ended March 31,
(in $000s)		2022		2021
United States		$	356,897	$	77,466
Canada		9,579		833

Total revenue		$	366,476	$	78,299

Major Product Lines and Services

Equipment leasing and equipment sales are the core businesses of the Company, with leasing complemented by the sale of rental units from the rental fleet. The Company’s revenue by major product and service line for the three month periods ended March 31, 2022 and 2021 are presented in the tables below.
















	Three Months Ended March 31,						Three Months Ended March 31,
	2022						2021
(in $000s)	Topic 842		Topic 606		Total		Topic 840		Topic 606		Total
Rental:
Rental	$	105,135	$	—	$	105,135	$	46,186	$	—	$	46,186
Shipping and handling	—		4,010		4,010		—		2,103		2,103
Total rental revenue	105,135		4,010		109,145		46,186		2,103		48,289
Sales and services:
Equipment sales	12,237		214,949		227,186		—		17,987		17,987

Parts and services	2,220		27,925		30,145		—		12,023		12,023
Total sales and services	14,457		242,874		257,331		—		30,010		30,010
Total revenue	$	119,592	$	246,884	$	366,476	$	46,186	$	32,113	$	78,299

Rental revenue is primarily comprised of revenues from rental agreements and freight charges billed to customers. Equipment sales recognized pursuant to sales-type leases are recorded within equipment sales revenue. Charges to customers for damaged rental equipment are recorded within parts and services revenue.

Receivables, Contract Assets and Liabilities

The Company manages credit risk associated with its accounts receivable at the customer level. Because the same customers generate the revenues that are accounted for under both Topic 606 and Topic 842, the discussions below on credit risk and the Company's allowance for credit losses address the Company's total revenues.

The Company’s allowance for credit losses reflects its estimate of the amount of receivables that it will be unable to collect. The estimated losses are based upon a review of outstanding receivables, the related aging, including specific accounts if deemed necessary, and on the Company’s historical collection experience. The estimated losses are calculated using the loss rate method based upon a review of outstanding receivables, related aging, and historical collection experience. The Company's estimates reflect changing circumstances, including changes in the economy or in the particular circumstances of individual customers, and, as a result, the Company may be required to increase or decrease its allowance. During the three months ended March 31, 2022, the Company recognized bad debt expense of $1.4 million, as reductions of rental revenue in accordance with the collectability provisions of Topic 842. During the three months ended March 31, 2022, the Company recognized $1.5 million within selling, general, and administrative expense in its Condensed Consolidated Statements of Net Income (Loss), which included changes in its allowances for credit losses.

When customers are billed for rentals in advance of the rental period, the Company defers recognition of revenue. As of March 31, 2022 and 2021, the Company had approximately $1.7 million and $1.0 million, respectively, of deferred rental revenue. Additionally, the Company collects deposits from customers for orders placed for equipment and rentals. The Company had approximately $24.0 million in deposits as of March 31, 2022.

The Company does not have material contract assets, and it did not recognize any material impairments of any contract assets.

The primary costs to obtain contracts for new and rental unit sales with the Company's customers are commissions. The Company pays its sales force commissions related to the sale and rental of new and used units. For new unit and rental unit sales, the period benefited by each commission is less than one year. As a result, the Company has applied the practical expedient for incremental costs of obtaining a sales contract and expenses commissions as incurred.

Note 5: Inventory

Inventory consisted of the following:


(in $000s)	March 31, 2022		December 31, 2021
Whole goods	$	367,539	$	326,641
Aftermarket parts and services inventory	96,183		83,901

Inventory	$	463,722	$	410,542

Note 6: Rental Equipment

Rental equipment, net consisted of the following:


(in $000s)	March 31, 2022		December 31, 2021
Rental equipment	$	1,254,912	$	1,247,375
Less: accumulated depreciation	(420,267)		(413,050)
Rental equipment, net	$	834,645	$	834,325

Note 4:7: Long-Term Debt

Debt obligations and associated interest rates consisted of the following:


		March 31,		December 31,		March 31,		December 31,
(in $000s)	(in $000s)	2021		2020		2021		2020		(in $000s)	March 31, 2022		December 31, 2021		March 31, 2022	December 31, 2021
2019 Credit Facility		$	260,000	$	250,971	2.7	%	3.4	%
Senior Secured Notes due 2024		475,000		475,000		10.0	%	10.0	%
ABL Facility										ABL Facility	$	410,100	$	394,945	2.1%	1.8%

2029 Secured Notes										2029 Secured Notes	920,000		920,000		5.5%	5.5%

Notes payable	Notes payable	2,196		2,379						Notes payable	30,864		32,619		3.0%-5.0%	3.0%-5.0%
Total debt outstanding	Total debt outstanding	737,196		728,350						Total debt outstanding	1,360,964		1,347,564
Deferred finance fees	Deferred finance fees	(10,408)		(11,212)						Deferred finance fees	(31,618)		(32,945)
Net debt	Net debt	726,788		717,138						Net debt	1,329,346		1,314,619
Less current maturities		(1,111)		(1,280)
Less: current maturities										Less: current maturities	(4,950)		(6,354)
Long-term debt	Long-term debt	$	725,677	$	715,858					Long-term debt	$	1,324,396	$	1,308,265

In connection with the Acquisition and related financing transactions, on April 1, 2021, the Company entered into the ABL Facility and repaid the Custom Truck Credit Facility and the 2019 Credit Facility as described in Note 3, ~~Acquisition and Related Financing Transactions. Additionally, on April 1, 2021, the Company redeemed all~~As of ~~its Senior Secured Notes due 2024 and paid a make-whole premium of $38.5 million. The terms of the ABL Facility and 2029 Secured Notes are described below.~~

~~ABL Facility~~

In connection with the Acquisition, Buyer, as borrower, and the ABL Guarantors (as defined below) entered into the ABL Credit Agreement. The ABL Facility provides for revolving loans, in an amount equal to the lesser of the then-currentMarch 31, 2022, borrowing base (described below) and the committed maximum borrowing capacity of $750.0 million, with a $75.0 million swingline sublimit, and letters of credit in an amount equal to the lesser of (a) $50.0 million and (b) the aggregate unused amount of commitmentsavailability under the ABL Facility ~~then in effect. The ABL Facility permits the Buyer to incur additional capacity under the ABL Facility in an aggregate amount equal to the greater of (x) $200.0~~was $330.9 million, and (y) 60.0% of Consolidated EBITDA (as defined in the ABL Credit Agreement) in additional commitments. As of the Closing Date, Buyer had no commitments from any lender to provide incremental commitments.

~~Borrowings under the ABL Facility are limited by a borrowing base calculation based on the sum of, without duplication:~~

~~(a) 90.0% of book value of eligible accounts of Buyer and certain ABL Guarantors; plus~~

(b) the lesser of (i) 75.0% of book value of eligible parts inventory of Buyer and certain ABL Guarantors (subject to certain exceptions) and (ii) 90.0% of the net orderly liquidation value of eligible parts inventory of Buyer and certain ABL Guarantors; plus

(c) the sum of (i) 95.0% of the net book value of the eligible fleet inventory of Buyer and certain ABL Guarantors that has not been appraised and (ii) 85.0% of the net orderly liquidation value of the eligible fleet inventory of Buyer and certain ABL Guarantors that has been appraised; plus

~~(d) 100.0% of eligible cash of Buyer and certain ABL Guarantors; minus~~

~~(e) any reserves established by the administrative agent from time to time.~~

Borrowings under the ABL Facility will bear interest at a floating rate, which, at Buyer’s election, will be (a) in the case of U.S. dollar denominated loans, either (i) LIBOR plus an applicable margin or (ii) the base rate plus an applicable margin; or (b) in the case of Canadian dollar denominated loans, the CDOR rate plus an applicable margin. The applicable margin varies based on Average Availability (as defined in the ABL Credit Agreement) from (a) with respect to base rate loans, 0.50% to 1.00% and (b) with respect to LIBOR loans and CDOR rate loans, 1.50% to 2.00%. The ability to draw under the ABL Facility or issueoutstanding standby letters of credit thereunder is conditioned upon, among other things, delivery of prior written notice of a borrowing or issuance, as applicable, the ability to reaffirm the representations and warranties contained in the ABL Credit Agreement and the absence of any default or event of default under the ABL Facility.

Buyer is required to pay a commitment fee to the lenders under the ABL Facility in respect of the unutilized commitments thereunder at a rate equal to 0.375% per annum, which may be reduced following the first full fiscal quarter to 0.250% per annum based on average daily usage. Buyer must also pay customary letter of credit and agency fees.

The balance outstanding under the ABL Facility will be due and payable on April 1, 2026. Buyer may at any time and from time to time to prepay, without premium or penalty, any borrowing under the ABL Facility and to terminate, or from time to time reduce, the commitments under the ABL Facility.

The obligations under the ABL Facility are guaranteed by Capitol Investment Merger Sub 2, LLC, Buyer and each of Buyer’s existing and future direct and indirect wholly owned domestic restricted subsidiaries, subject to certain exceptions, as well as certain of Buyer’s material Canadian subsidiaries (the “ABL Guarantors”). The obligations under the ABL Facility and the guarantees of those obligations are secured by (subject to certain exceptions): (i) a first priority pledge by each ABL Guarantor of all of the equity interests of restricted subsidiaries directly owned by such ABL Guarantors (limited to 65% of voting capital stock in the case of foreign subsidiaries owned directly by a U.S. subsidiary and subject to certain other exceptions and subject to certain exceptions in the case of non-wholly owned subsidiaries) and (ii) a first priority security interest in substantially all of the ABL Guarantors’ present and after-acquired assets (subject to certain exceptions).

distributions; repurchase, prepay, or redeem subordinated indebtedness; make investments; create restrictions on the ability of Buyer’s restricted subsidiaries to pay dividends to Buyer; create liens; transfer or sell assets; consolidate, merge, sell, or otherwise dispose of all or substantially all of Buyer’s assets; enter into certain transactions with Buyer’s affiliates; and designate subsidiaries as unrestricted subsidiaries, in each case certain to subject exceptions, as well as a restrictive covenant applicable to each Specified Floor Plan Company (as defined in the ABL Credit Agreement) limiting its ability to own certain assets and engage in certain lines of business. In addition, the ABL Facility contains a springing financial covenant that requires Buyer and its restricted subsidiaries to maintain a Consolidated Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement) of at least 1.00 to 1.00; provided that the financial covenant shall only be tested when Specified Excess Availability (as defined in the ABL Credit Agreement) under the ABL Facility is less than the greater of (i) 10.0% of the Line Cap (as defined in the ABL Credit Agreement) and (ii) $60.0 million (the “FCCR Test Amount”), in which case it shall be tested at the end of each succeeding fiscal quarter thereafter until the date on which Specified Excess Availability has exceeded the FCCR Test Amount for 30 consecutive calendar days.

The ABL Facility provides for a number of customary events of default, including, among others, and in each case subject to an applicable grace period: payment defaults to the lenders; covenant defaults; material inaccuracies of representations and warranties; failure to pay certain other indebtedness after final maturity or acceleration of other indebtedness exceeding a specified amount; voluntary and involuntary bankruptcy proceedings; material judgments for payment of money exceeding a specified amount; and certain change of control events. The occurrence of an event of default could result in the acceleration of obligations and the termination of revolving commitments under the ABL Facility.

~~2029 Secured Notes~~

~~On the Closing Date, the Issuer issued $920 million in aggregate principal amount of 5.50% senior secured second lien notes due 2029. The 2029 Secured Notes~~ were issued pursuant to an indenture, dated as of April 1, 2021, between the Issuer, Wilmington Trust, National Association, as trustee and the guarantors party thereto. The Issuer will pay interest on the 2029 Secured Notes semi-annually in arrears on April 15 and October 15 of each year, commencing on October 15, 2021. Unless earlier redeemed, the 2029 Secured Notes will mature on April 15, 2029.

~~Ranking and Security~~

The 2029 Secured Notes are jointly and severally guaranteed on a senior secured basis by Capitol Investment Merger Sub 2, LLC and, subject to certain exceptions, each of the Issuer’s existing and future wholly owned domestic restricted subsidiaries that is an obligor under the ABL Credit Agreement or certain other capital markets indebtedness. Under the terms of the Indenture, the 2029 Secured Notes and the related guarantees rank senior in right of payment to all of the Issuer’s and the guarantors’ subordinated indebtedness and are effectively senior to all of the Issuer’s and the guarantors’ unsecured indebtedness, and indebtedness secured by liens junior to the liens securing the 2029 Secured Notes, in each case, to the extent of the value of the collateral securing the 2029 Secured Notes. The 2029 Secured Notes and the related guarantees rank equally in right of payment with all of the Issuer’s and the guarantors’ senior indebtedness, without giving effect to collateral arrangements, and effectively equal to all of the Issuer’s and the guarantors’ senior indebtedness secured on the same priority basis as the 2029 Secured Notes. The 2029 Secured Notes and the related guarantees are effectively subordinated to any of the Issuer’s and the guarantors’ indebtedness that is secured by assets that do not constitute collateral for the 2029 Secured Notes to the extent of the value of the assets securing such indebtedness, and indebtedness that is secured by a senior-priority lien, including the ABL Credit Agreement to the extent of the value of the collateral securing such indebtedness, and are structurally subordinated to the liabilities of the Issuer’s non-guarantor subsidiaries.

~~Optional Redemption Provisions and Repurchase Rights~~

At any time, upon not less than 10 nor more than 60 days’ notice, the 2029 Secured Notes are redeemable at the Issuer’s option, in whole or in part, at a price equal to 100% of the principal amount of the 2029 Secured Notes redeemed, plus a make-whole premium as set forth in the Indenture, plus accrued and unpaid interest, if any, to, but not including, the applicable redemption date. Beginning April 15, 2024, the Issuer may redeem the 2029 Secured Notes, at its option, in whole or in part, at any time, subject to the payment of a redemption price together with accrued and unpaid interest, if any, to, but not including, the applicable redemption date. The redemption price includes a call premium that varies (from 2.750% to 0.000%) depending on the year of redemption.

In addition, at any time prior to April 15, 2024, the Issuer may redeem up to 40% of the aggregate principal amount of the 2029 Secured Notes, at a redemption price equal to 105.5% of the principal amount thereof, together with accrued and unpaid interest, if any, to, but not including, the applicable redemption date, with the net cash proceeds of sales of one or more equity offerings by the Issuer or any direct or indirect parent of the Issuer, subject to certain exceptions.

In addition, at any time prior to April 15, 2024, the Issuer may redeem during each calendar year up to 10% of the aggregate principal amount of the 2029 Secured Notes at a redemption price equal to 103% of the aggregate principal amount of the 2029 Secured Notes to be redeemed, together with accrued and unpaid interest, if any, to, but not including, the applicable redemption date; provided that,

~~in any given calendar year, any amount not previously utilized in any calendar year may be carried forward to subsequent calendar years.~~

Subject to certain exceptions, the holders of the 2029 Secured Notes also have the right to require the Issuer to repurchase their 2029 Secured Notes upon the occurrence of a change in control, as defined in the Indenture, at an offer price equal to 101% of the principal amount of the 2029 Secured Notes plus accrued and unpaid interest, if any, to, but not including, the date of repurchase.

In addition, if the Issuer or any of its restricted subsidiaries sells assets, under certain circumstances, the Issuer is required to use the net proceeds to make an offer to purchase the 2029 Secured Notes at an offer price in cash equal to 100% of the principal amount of the 2029 Secured Notes plus accrued and unpaid interest to, but not including, the repurchase date.

In connection with any offer to purchase all or any of the 2029 Secured Notes (including a change of control offer and any tender offer), if holders of no less than 90% of the aggregate principal amount of the 2029 Secured Notes validly tender their 2029 Secured Notes, the Issuer or a third party is entitled to redeem any remaining 2029 Secured Notes at the price offered to each holder.

~~Restrictive Covenants~~

The Indenture contains covenants that limit the Issuer’s (and certain of its subsidiaries’) ability to, among other things: (i) incur additional debt or issue certain preferred stock; (ii) pay dividends, redeem stock, or make other distributions; (iii) make other restricted payments or investments; (iv) create liens on assets; (v) transfer or sell assets; (vi) create restrictions on payment of dividends or other amounts by the Issuer to the Issuer’s restricted subsidiaries; (vii) engage in mergers or consolidations; (viii) engage in certain transactions with affiliates; or (ix) designate the Issuer’s subsidiaries as unrestricted subsidiaries.

~~Events of Default~~

The Indenture provides for customary events of default, including non-payment, failure to comply with covenants or other agreements in the Indenture, and certain events of bankruptcy or insolvency. If an event of default occurs and continues with respect to the 2029 Secured Notes, the trustee or the holders of at least 30% in aggregate principal amount of the outstanding 2029 Secured Notes of such series may declare the entire principal amount of all the 2029 Secured Notes to be due and payable immediately (except that if such event of default is caused by certain events of bankruptcy or insolvency, the entire principal of the 2029 Secured Notes will become due and payable immediately without further action or notice).

~~Note 5: Goodwill and Intangible Assets~~

~~Goodwill and intangible assets consisted of the following:~~

(in $000s) March 31, 2021 December 31, 2020
Goodwill $ 238,052 $ 238,052
Nesco trade name 28,000 28,000
Other intangible assets:
Trade names 1,780 1,780
Non-compete agreements 520 520
Customer relationships 52,170 52,170
82,470 82,470
Less: accumulated amortization (15,644) (14,891)
Intangible assets, net 66,826 67,579
Goodwill and intangible assets $ 304,878 $ 305,631

~~Goodwill related to our ERS segment and PTA segment was $229.1 million and $9.0 million, respectively, as of March 31, 2021 and December 31, 2020.~~

We perform our annual goodwill and indefinite-lived intangible assets impairment testing as of October 1 each year. In addition to the annual impairment test, we regularly assess whether a triggering event has occurred that would require interim impairment testing. During the three months ended March 31, 2020, due to the global health pandemic and related economic uncertainty, we identified interim impairment indicators. From a qualitative assessment completed at that time, we determined that goodwill and indefinite-lived

~~intangible assets were not impaired. During the three months ended March 31, 2021, there were no triggering events necessitating an interim impairment test.~~$4.8 million.

Note ~~6: Equity and~~8: Earnings ~~per~~(Loss) Per Share

Diluted ~~net loss~~earnings (loss) per share includes the effects of potentially dilutive shares of ~~common stock.~~Common Stock. Potentially dilutive effects include the exercise of warrants, contingently issuable shares, and share-based compensation, all of which have been excluded from the calculation of diluted net ~~loss~~earnings (loss) per share for the applicable periods because earnings are at a net loss and therefore, the potentially dilutive effect would be anti-dilutive. ~~The share amounts of our~~Our potentially dilutive shares ~~excluded~~ aggregated 24.9 million and 28.0 million, ~~and 27.3 million~~respectively, for the three months ended March 31, ~~2021~~2022 and ~~2020, respectively.~~2021.

The following ~~table sets~~tables set forth the computation of basic and dilutive loss per share:


		Three Months Ended March 31, 2021					Three Months Ended March 31, 2020						Three Months Ended March 31, 2022					Three Months Ended March 31, 2021
(in $000s, except share and per share data)	(in $000s, except share and per share data)	Net Loss		Weighted Average Shares	Per Share Amount		Net Loss		Weighted Average Shares	Per Share Amount		(in $000s, except share and per share data)	Net Income (Loss)		Weighted Average Shares	Per Share Amount		Net Income (Loss)		Weighted Average Shares	Per Share Amount
Basic loss per share		$	(27,907)	48,619,613	$	(0.57)	$	(15,969)	49,033,903	$	(0.33)
Basic earnings (loss) per share												Basic earnings (loss) per share	$	(3,273)	247,057,564	$	(0.01)	$	(27,907)	48,619,613	$	(0.57)
Dilutive common share equivalents	Dilutive common share equivalents	0		0			0		0			Dilutive common share equivalents	—		—	—		—		—	—
Diluted loss per share		$	(27,907)	48,619,613	$	(0.57)	$	(15,969)	49,033,903	$	(0.33)
Diluted earnings (loss) per share												Diluted earnings (loss) per share	$	(3,273)	247,057,564	$	(0.01)	$	(27,907)	48,619,613	$	(0.57)

Note 9: Equity

Preferred Stock

As of March 31, 2022 and December 31, 2021, we were authorized to issue 10,000,000 shares of preferred stock with a par value of $0.0001 per share, respectively, with such designation, rights and preferences as may be determined from time to time by our board of directors. As of March 31, 2022 and December 31, 2021, there were no shares of preferred stock issued or outstanding.

Common Stock

As of March 31, 2022 and December 31, 2021, we were authorized to issue 500,000,000 shares of common stock with a par value of $0.0001 per share, respectively.

During the period commencing on the date of the Acquisition and ending on the date that is eighteen months following the date of the Acquisition (the “Lockup Period” ), Platinum shall not transfer any shares of common stock beneficially owned or otherwise held by it other than transfers as allowed by the Amended and Restated Stockholder’s Agreement of Custom Truck One Source, Inc.

Contingently Issuable Shares

NESCO Holdings, LP is a Delaware limited partnership holding shares of our common stock. NESCO Holdings, LP is owned and controlled by Energy Capital Partners, and has the right to receive: (1) up to an additional 1,800,000 shares of common stock through July 31, 2024, in increments of 900,000 shares, if (x) the trading price of the common stock exceeds $13.00 per share or $16.00 per

share for any 20 trading days during a 30 consecutive trading day period or (y) a sale transaction of the Company occurs in which the consideration paid per share to holders of common stock of the Company exceeds $13.00 per share or $16.00 per share, and (2) an additional 1,651,798 shares of common stock if during the seven-year period ending July 31, 2026, the trading price of common stock exceeds $19.00 per share for any 20 trading days during a 30 consecutive trading day period or if a sale transaction of the Company occurs in which the consideration paid per share to holders of common stock exceeds $19.00 per share.

Note 7:10: Share-Based Compensation

During the second quarter ended June 30, 2019, the Company’s stockholders approved the 2019 Omnibus Incentive Plan, which authorizes up to 3,150,000 shares of Common Stock for issuance in accordance with the plan’s terms, subject to certain adjustments. On June 11, 2020, the Company's stockholders approved the Amended and Restated 2019 Omnibus Incentive Plan, which increased the total authorized shares of Common Stock to 6,150,000 (the “Plan”). The purpose of the Plan is to provide the Company’s and its subsidiaries’ officers, directors, employees and consultants who, by their position, ability and diligence, are able to make important contributions to the Company’s growth and profitability, with an incentive to assist the Company in achieving its long-term corporate objectives, to attract and retain executive officers and other employees of outstanding competence and to provide such persons with an opportunity to acquire an equity interest in the Company. To accomplish these objectives, the Plan provides for awards of equity-based incentives through granting of restricted stock units, stock options, stock appreciation rights and other stock or cash based awards. At March 31, 2021, there were approximately 2,605,000 shares in the share reserve still available for issuance.

The Company records share-based compensation awards using a fair value method and recognizes compensation expense for an amount equal to the fair value of the share-based payment issued in its financial statements. The Company’s share-based compensation plans include programs for stock options, restricted stock units, ~~(“RSUs”),~~ performance share units ~~(“PSUs”)~~ and deferred compensation.

Share-based compensation expense recognized in selling, general and administrative expenses in the Condensed Consolidated Statements of Net Income (Loss) was ~~$0.7~~$3.4 million and ~~$0.6~~$0.7 million for the three months ended March 31, 2022 and 2021, ~~and 2020, respectively, and is included in Selling, general, and administrative expenses within the unaudited condensed consolidated statements of operations.~~respectively. As of March 31, ~~2021,~~2022, there was approximately ~~$7.2~~$20.8 million of total unrecognized compensation cost related to stock-based compensation arrangements under the Plan. That cost is expected to be recognized over a weighted average period of ~~2.7~~2.3 years. There were 0no share-based payment awards granted in the three months ended March 31, 2021. On the Closing Date, restricted stock awards of approximately 93,000 shares were granted to certain of the Company’s non-employee directors. Additionally, on the Closing Date in connection with the Acquisition, approximately 284,000 and 678,000 restricted stock awards and stock options, respectively, became immediately vested.2022.

Note 8:11: Fair Value Measurements

~~FASB~~The Financial Accounting Standards Board (FASB) accounting standards provide a comprehensive framework for measuring fair value and sets forth a definition of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ~~Levels within the hierarchy are defined as follows:~~

•~~Level 1 – Unadjusted quoted prices for identical assets and liabilities in active markets;~~

•Level 2 – Quoted prices for similar assets and liabilities in active markets (other than those included in Level 1) which are observable for the asset or liability, either directly or indirectly; and

•~~Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.~~

The following table sets forth the carrying values (exclusive of deferred financing fees) and fair values of our financial liabilities:

Carrying Value Fair Value
(in $000s) Level 1 Level 2 Level 3
March 31, 2021
2019 Credit Facility $ 260,000 $ 0 $ 260,000 $ 0
Senior Secured Notes due 2024 475,000 0 521,517 0
Notes Payable 2,196 0 2,196 0
Derivative and warrant liabilities 23,647 0 5,232 18,415
December 31, 2020
2019 Credit Facility $ 250,971 $ 0 $ 250,971 $ 0
Senior Secured Notes due 2024 475,000 0 519,379 0
Notes Payable 2,379 0 2,379 0
Derivative and warrant liabilities 7,012 0 7,012 0


	Carrying Value		Fair Value
(in $000s)			Level 1		Level 2		Level 3
March 31, 2022
ABL Facility	$	410,100	$	—	$	410,100	$	—
2029 Secured Notes	920,000		—		906,200		—
Other notes payable	30,864		—		30,864		—
Warrant liabilities	17,693		—		—		17,693

December 31, 2021
ABL Facility	$	394,945	$	—	$	394,945	$	—
2029 Secured Notes	920,000		—		949,900		—
Other notes payable	32,619		—		32,619		—
Derivative and warrant liabilities	24,164		—		2,388		21,776

The carrying amounts of the ABL Facility and other notes payable approximated fair value as of March 31, 2022 and December 31, 2021 based upon terms and conditions available to the Company at those dates in comparison to the terms and conditions of its outstanding debt. The estimated fair value of the 2029 Secured Notes and Senior Secured Notes due 2024 is calculated using Level 2 inputs, based on bid prices obtained from brokers. The Level 3 fair value presented above consists of the fair value of the Non-Public Warrants (as defined in Note 9, 12: Financial ~~Instruments~~)Instruments). The Company estimated the fair value using the Black-Scholes option-pricing model based on the market value of the underlying ~~common stock,~~Common Stock, the remaining contractual term of the warrant, risk-free interest rates and expected dividends, and expected volatility of the price of the underlying ~~common stock.~~Common Stock.

Note 9:12: Financial Instruments

In the normal course of business, the Company uses various financial instruments, including derivative instruments, to manage the risks associated with interest rate exposure. These financial instruments are not used for trading or speculative purposes.

Warrants

Nesco Holding’s predecessor, Capitol Investment Corp. IV, an entity formed on May 1, 2017, as a special purpose acquisition company (“Capitol” or the “SPAC”), issued warrants for the purchase of approximately 7.5 million shares of the Company’s Common Stock pursuant to a private placement agreement (the “Non-Public Warrants”). In connection with the SPAC’s initial public offering, warrants for the purchase of approximately 13.4 million shares of the Company’s Common Stock were issued to public investors (the “Public Warrants”). The Public Warrants together with the Non-Public Warrants are hereafter referred to collectively as the “Warrants.”

The Warrants provide for the purchase of approximately 20.9 million shares of the Company’s Common Stock. Each Warrant entitles the holder to purchase one share of Common Stock at a price of $11.50 per share, subject to certain adjustments. The Warrants are currently exercisable and terminate on the earlier to occur of (i) July 31, 2024, and (ii) the redemption date. The Company may redeem the Public Warrants at a price of $0.01 per Public Warrant upon providing 30-days’ notice, only in the event that the last sale price of the Common Stock is at least $18.00 per share for any 20 trading days within a 30-trading day period ending on the third day prior to the date on which notice of redemption is given. If the Company elects to redeem the Public Warrants as described above, the Public Warrant may be exercised on a “cashless basis.” The redemption rights do not apply to the Non-Public Warrants if, at the time of the redemption, such Non-Public Warrants continue to be held by the initial holders as of July 31, 2019, or their affiliates or permitted transferees; however, once such Non-Public Warrants are transferred (other than to an affiliate or permitted transferee), the Company may redeem those Non-Public Warrants that have been transferred in a manner similar to any Public Warrants.

The Public Warrants are accounted for as freestanding equity-classified instruments because the Company has the ability to settle with holders of the Public Warrants either by net-share or physical settlement. Because the Non-Public Warrants do not meet the “indexed to the entity’s stock” condition, they have been accounted for as a derivative liability and remeasured at their estimated fair value each period. For the three months ended March 31, 2022, the Company recognized income of $4.1 million in Other (income) expense in its Condensed Consolidated Statements of Net Income (Loss) related to the fair value remeasurement.

Derivatives Not Designated as Hedges

On July 17, 2019, we entered into an interest rate collar (the ~~"Collar"~~“Collar”) agreement to mitigate the risk of changes in the interest rate paid during the contract period for $170.0 million of the Company’s variable rate loans. Under the Collar, we are required to pay the counterparty to the agreement an amount equal to the difference between a monthly LIBOR-based interest rate and a defined interest rate floor; conversely, we are entitled to receive from the counterparty an amount equal to the excess of a LIBOR-based interest rate and a defined interest rate cap. The required payments due to or due from the counterparty are calculated by applying the interest rate differential to the notional amount ($170.0 million) and are determined monthly through July 31, 2024. The Collar expires in July 2024 and has not been designated as a cash flow hedge. The Collar is carried at fair value and reported in Derivative and warrant liabilities on the Company's ~~consolidated balance sheets~~Consolidated Balance Sheets ($~~5.2 million and $7.0~~2.4 million as of ~~March 31, 2021 and~~ December 31, ~~2021, respectively)~~2021) as a Level 2 measurement (see Note 8, 11: Fair Value ~~Measurements~~)Measurements). The change in fair value of the Collar is recognized in Other expense (income), net in our Condensed Consolidated Statements of ~~Operations (($1.8 million)~~Net Income (Loss) and ~~$6.0~~totaled $(1.7) million ~~in the three months ended March 31, 2021~~ and ~~2020, respectively).~~

The counterparty to the Collar is an investment grade major international financial institution. The Company could be exposed to losses in the event of nonperformance by the counterparty; however, the credit rating and the concentration of risk in this financial institution are monitored on a continuous basis and present no significant credit risk to the Company.

~~Warrants~~

~~During the quarter ended March 31, 2021, the Company identified an immaterial error in its historical accounting for certain of its issued and outstanding warrants, as further described below.~~

In connection with the Company’s predecessor, Capitol Investment Corp. IV, an entity formed on May 1, 2017, as a special purpose acquisition company (“Capitol” or the “SPAC”), warrants for the purchase of approximately 7.5 million shares of the Company’s common stock were issued pursuant to a private placement agreement (the “Non-Public Warrants”). In connection with the SPAC’s initial public offering, warrants for the purchase of approximately 13.4 million shares of the Company’s common stock were issued to public investors (the “Public Warrants”). The Public Warrants together with the Non-Public Warrants may hereafter collectively be referred to as the “Warrants.”

The Warrants provide for the purchase of approximately 20.9 million shares of the Company’s common stock. Each Warrant entitles the holder to purchase one common stock at a price of $11.50 per share, subject to certain adjustments. The Warrants are currently exercisable and terminate on the earlier to occur of (i) July 31, 2024, and (ii) the redemption date. The Company may redeem the Public Warrants at a price of $0.01 per Public Warrant upon providing 30-days’ notice, only in the event that the last sale price of the common stock is at least $18.00 per share for any 20 trading days within a 30-trading day period ending on the third day prior to the date on which notice of redemption is given. If the Company elects to redeem the Public Warrants as described above, the Public Warrant may be exercised on a “cashless basis.” The redemption rights do not apply to the Non-Public Warrants if at the time of the redemption such Non-Public Warrants continue to be held by the initial holders as of July 31, 2019, or their affiliates or permitted transferees; however, once such Non-Public Warrants are transferred (other than to an affiliate or permitted transferee), the Company may redeem those Non-Public Warrants that have been transferred in a manner similar to any Public Warrants. In periods prior to the quarter ended March 31, 2021, the Company accounted for both the Public and Non-Public Warrants as freestanding equity-classified instruments.

On April 12, 2021, the Commission issued Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies ("SPACs") (the “Statement”). The Statement indicated that, if warrant agreements can provide for potential changes to the settlement amounts that depend on the characteristics of the holder of the warrant, such provisions would preclude the warrants from being indexed to the entity’s stock, and, therefore, result in classification of the warrants as a liability measured at fair value, with changes in fair value each period reported in earnings. The Company’s warrant agreement provides for a different settlement amount in a cashless exercise for holders of the Non-Public Warrants upon exercise at any time as compared to holders of the Public Warrants upon the Company's election to redeem; therefore, the Non-Public Warrants are precluded from being indexed to the Company’s stock and should have been classified as liabilities.

The Public Warrants continue to be accounted for as freestanding equity-classified instruments because the Company has the ability to settle with holders of the Public Warrants either by net-share or physical settlement. Because the Non-Public Warrants do not meet the “indexed to the entity’s stock” condition, they should have been accounted for as a derivative liability and remeasured at their estimated fair value each period. The change in fair value each period should have been reported in the Company’s consolidated statement of operations. The effect of correcting the accounting for the Non-Public Warrants from an equity-classified instrument to a liability instrument resulted in the reclassification of $10.3 million from Additional paid-in capital to Derivative and warrant liabilities on the Company’s consolidated balance sheet as of January 1, 2021, which represents the initial value of the Non-Public Warrants that should have been recognized on July 31, 2019, the date on which the Company merged with the SPAC. For the three months ended March 31, 2021, the Company recognized an expense of $7.6 million in Other (income) expense in its consolidated statement of operations related to the fair value remeasurement. Included in the first quarter 2021 remeasurement amount is an income amount of $1.4 million representing the net change in the fair value of the Non-Public Warrants from July 31, 2019 (the issue date of the Non-Public Warrants) to December 31, 2019, of $6.1 million in income, offset by $4.7 million in expense from the change in fair value for the year ended December 31, 2020. In evaluating whether the Company’s previously issued consolidated financial statements were materially misstated for the interim or annual periods prior to January 1, 2021, the Company applied the guidance of ASC 250, ~~Accounting Changes and Error Corrections, SEC Staff Accounting Bulletin (“SAB”) Topic 1.M,~~ ~~Assessing Materiality~~ ~~and SAB Topic 1.N,~~ E, and concluded that the effect of the error on prior period financial statements was not material. The Company also evaluated if the cumulative effect of correcting the prior period misstatement in its consolidated financial statements would be material to either the quarter, or annual period, in the three months ended March 31, 2021, and the forecasted year ending December 31, 2021, respectively. The guidance states that prior-year misstatements which, if corrected in the current year would materially misstate the current year’s financial statements, must be corrected by adjusting prior year financial statements, even though such correction previously was and continues to be immaterial to the prior-year financial statements. The Company concluded the impact of correcting the accounting for the Non-Public Warrants on the Company’s consolidated statement of operations for the three-months ending March 31, 2021, and the forecasted year ending December 31, 2021, is immaterial.

~~Note 10: Income Taxes~~

~~Income tax expense was $4.1~~$(1.8) million for the three months ended March 31, 2022 and 2021, ~~as compared to $0.7 million~~respectively. During the first quarter of 2022 the Company settled the Collar for ~~the same period of the prior year. Income tax expense for the current period reflects the Company's estimated overall tax rate from of the Company's~~no gain or loss.

~~estimate~~Note 13: Income Taxes

We are subject to taxation in all jurisdictions in which we operate within the United States and Canada. Substantially all of ~~full-year~~our income before income taxes for all periods presented is U.S. sourced.

We record a valuation allowance against deferred tax assets when we determine that it is more likely than not that all or a portion of a deferred tax asset will not be realized. The valuation allowance primarily relates to federal and state net operating loss carryforwards, as well as disallowed interest expense deduction carryforwards. While the Acquisition resulted in a significant increase in deferred tax liabilities, these tax liabilities, which give rise to future taxable income ~~arising from disallowed interest expense.~~against which tax carryforwards may be applied, are subject to limitations. Federal and state income tax limitation rules are expected to limit the application of our carryforwards and, accordingly, we record a valuation allowance to reduce our deferred tax assets to amounts expect to be realized. The Company's effective tax rate for the ~~current period, (17.2)%,~~three months ended March 31, 2022 and 2021 differs from the U.S. federal statutory tax rate due primarily to the recording of valuation ~~allowance for deferred~~allowances. During three months ended March 31, 2022, the tax ~~assets.~~rate also differed from the U.S. federal statutory tax rate as a result of state tax expense recorded during the period. The increase in the effective tax rate in three months ended March 31, 2022 as compared to three months ended March 31, 2021 is primarily due to the near break-even pre-tax loss in the current period.

Note ~~11:~~14: Commitments and Contingencies

We record a liability when we believe that it is both probable that a liability has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and updated information.

Legal Matters

In the normal course of business, there are various claims in process, matters in litigation, and other contingencies. At this time, no claims of these types, certain of which are covered by insurance policies, have had a material effect on the Company. Certain jurisdictions in which the Company operates do not allow insurance recoveries related to punitive damages. For matters pertaining to the pre-Acquisition activities of Custom Truck LP, Sellers have agreed to indemnify Nesco and Buyer for losses arising out of the breach of Sellers’ pre-closing covenants in the Purchase Agreement and certain indemnified tax matters, with recourse limited to a $10 million and $8.5 million escrow account, respectively.

From time to time, the Company is audited by state and local taxing authorities. These audits typically focus on the Company’s withholding of state-specific sales tax and rental-related taxes.

Custom ~~Truck’s~~Truck LP’s withholdings of federal excise taxes for each of the four quarterly periods during 2015 are currently under audit by the Internal Revenue Service (the “IRS”). The IRS issued an assessment on October 28, 2020 in an aggregate amount of $2.4 million for the 2015 periods, alleging that certain types of sold equipment are not eligible for the Mobile Machinery Exemption set forth in the Internal Revenue Code (the ~~“IRC”)~~“Code”. An appeal was filed on January 28, 2021. Based on management’s understanding of the facts and circumstances, including the relevant provisions of the ~~IRC,~~Code, and historical precedent, including previous successful appeals of similar assessments in prior years, management does not believe the likelihood of a loss resulting from the IRS assessment to be probable at this time.

While it is not possible to predict the outcome of the foregoing matters with certainty, it is the opinion of management, that the final outcome of these matters will not have a material effect on the Company’s consolidated financial condition, results of operations and cash flows.

Purchase Commitments

We enter into purchase agreements with manufacturers and suppliers of equipment for our rental fleet and inventory. All of these agreements are cancellable within a specified notification period to the supplier.

Note ~~12: Segments~~15: Related Parties

~~We have 2 reportable business segments, Equipment Rental~~The Company has transactions with related parties as summarized below.

Rentals and Sales — Energy Capital Partners (“~~ERS”~~ECP”), a stockholder in the Company, and Parts, Tools, and Accessories (“PTA”). ERS provides rental solutions to utilities and contractors serving multiple infrastructure end-markets, including electric transmission and distribution, telecom, rail, lighting and signage. We rent and sell specialized equipment to utilities and utility contractors that build and maintain critical transmission and distribution infrastructure. Utilizing our national platform and rental fleet, we expanded our focus on equipment rental to the telecom, rail, lighting and signage end-markets. The majority of our existing equipment can be used across multiple end-markets and many of our customers operatetheir affiliates have ownership interests in ~~these multiple end-markets. We rent and sell~~ a broad range of ~~new~~companies. The Company has entered into commercial transactions with subsidiaries of PLH Group, Inc., a company partially owned by an affiliate of ECP.

The Company rents and ~~used equipment including bucket trucks, digger derricks, line equipment, cranes, pressure diggers, rail mounted~~sells equipment and ~~underground equipment. Our PTA segment offers customers sale~~provides services to R&M Equipment Rental, a business partially owned by members of the Company’s management. The Company also rents equipment and purchases inventory, from R&M Equipment Rental. During the three months ended March 31, 2022, the Company purchased no rental ~~solutions~~equipment from R&M Equipment Rental.

Facilities Leases and Other — The Company leases certain facilities, as well as purchases aircraft charter services, from entities owned by members of the Company’s management and their immediate families. Payments to the related parties for ~~parts, tools,~~these transactions are immaterial. Rent and ~~accessories~~air travel expenses are recorded in selling, general, and administrative expenses.

Management Fees — The Company entered into the Corporate Advisory Services Agreement with Platinum effective as of the Closing Date, under which management fees are payable to ~~complement our specialty equipment line.~~Platinum quarterly.

A summary of the transactions with the foregoing related parties included in the Condensed Consolidated Statements of Net Income (Loss) is as follows:


	Three Months Ended March 31,
(in $000s)		2022		2021
Total revenues from transactions with related parties		$	7,851	$	2,124
Expenses incurred from transactions with related parties included in cost of revenue		$	1,297	$	—
Expenses incurred from transactions with related parties included in operating expenses		$	1,631	$	—

Amounts receivable from/payable to related parties included in the Consolidated Balance Sheets are as follows:


(in $000s)	March 31, 2022		December 31, 2021
Accounts receivable from related parties	$	7,813	$	5,145
Accounts payable to related parties	$	1,475	$	26

Note 16: Segments

Our operations are primarily organized and managed by operating segment. Operating segment performance and resource allocations are primarily based on gross profit. The accounting policies of the reportable segments ~~align~~are consistent with those described in Note 2: Summary of Significant Accounting Policies to the financial statements. Intersegment sales and any related profits are eliminated in consolidation. We manage the business in 3 reporting segments: Equipment Rental Solutions (“ERS”), Truck and Equipment Sales (“TES”) and Aftermarket Parts and Services (“APS”). The segment operations are described in Note 1: Business and Organization to these financial statements. Segment information presented below has been adjusted for all prior periods, consistent with the ~~information our chief operating decision maker (“CODM”) receives on a regular basis to evaluate~~current reportable segment presentation.

The Company’s segment results are presented in the performance of the business and to allocate resources. The accounting principles applied at the operating segment level in determining gross profit are generally the same as those applied at the consolidated financial statement level. Inter-segment revenues, and cost allocations to operating segment cost of revenue are minimal; that is, revenue, cost of equipment and parts sold or rented, depreciation of rental equipment and gross profit are directly attributed to each of the operating segments. The following tables ~~present our financial information by segment:~~below:






































	Three Months Ended March 31,
	2022
(in $000s)	ERS		TES		APS		Total
Revenue:
Rental	$	105,561	$	—	$	3,584	$	109,145
Equipment sales	59,353		167,833		—		227,186

Parts and services	—		—		30,145		30,145

Total revenue	164,914		167,833		33,729		366,476
Cost of revenue:
Rentals/parts and services	24,791		—		24,950		49,741
Equipment sales	43,230		144,048		—		187,278

Depreciation of rental equipment	43,966		—		998		44,964
Total cost of revenue	111,987		144,048		25,948		281,983
Gross profit	$	52,927	$	23,785	$	7,781	$	84,493

Three Months Ended March 31, Three Months Ended March 31,
2021 2020
(in $000s) ERS PTA Total ERS PTA Total
Rental revenue $ 44,730 $ 3,559 $ 48,289 $ 47,053 $ 3,941 $ 50,994
Sales of rental equipment 10,485 0 10,485 9,093 0 9,093
Sales of new equipment 7,502 0 7,502 7,577 0 7,577
Parts sales and services 0 12,023 12,023 0 14,079 14,079
Total revenues 62,717 15,582 78,299 63,723 18,020 81,743
Cost of revenue 29,202 11,034 40,236 27,320 12,908 40,228
Depreciation of rental equipment 16,885 959 17,844 18,976 1,136 20,112
Gross Profit $ 16,630 $ 3,589 $ 20,219 $ 17,427 $ 3,976 $ 21,403


	Three Months Ended March 31,
	2021
(in $000s)	ERS		TES		APS		Total
Revenue:
Rental	$	44,730	$	—	$	3,559	$	48,289
Equipment sales	10,485		7,502		—		17,987

Parts and services	—		—		12,023		12,023

Total revenue	55,215		7,502		15,582		78,299
Cost of revenue:
Rentals/parts and services	15,537		—		11,034		26,571
Equipment sales	6,740		6,925		—		13,665

Depreciation of rental equipment	16,885		—		959		17,844
Total cost of revenue	39,162		6,925		11,993		58,080
Gross profit	$	16,053	$	577	$	3,589	$	20,219

Total assets by operating segment are not disclosed herein because asset by operating segment data is not reviewed by the ~~CODM~~chief operating decision-maker (“CODM”) to assess performance and allocate resources.

Gross profit is the primary operating result whereby our segments are evaluated for performance and resource allocation. The following table presents a reconciliation of consolidated gross profit to consolidated loss before income taxes:

Three Months Ended March 31,
(in $000s) 2021 2020
Gross profit $ 20,219 $ 21,403
Selling, general and administrative expenses 11,339 11,618
Licensing and titling expenses 711 821
Amortization and non-rental depreciation 775 716
Transaction expenses and other 10,448 1,452
Other (income) expense 5,857 6,021
Interest expense, net 14,906 16,014
Loss before income taxes $ (23,817) $ (15,239)


	Three Months Ended March 31,
(in $000s)		2022		2021

Gross Profit		$	84,493	$	20,219
Selling, general and administrative expenses		53,655		12,050
Amortization		13,335		754
Non-rental depreciation		3,047		21
Transaction expenses		4,648		10,448


Interest expense, net		19,156		14,906
Financing and other expense (income)		(9,080)		5,857
Income (Loss) Before Income Taxes		$	(268)	$	(23,817)

~~We are positioned to serve all 50 U.S. states and 13 Canadian provinces and territories using our network of locations in North America.~~ The following ~~tables present revenue by country and~~table presents total assets by country:

Three Months Ended March 31,
(in $000s) 2021 2020
Revenue:
United States $ 77,466 $ 79,702
Canada 833 1,369
Mexico 0 672
$ 78,299 $ 81,743


(in $000s)	(in $000s)	March 31, 2021		December 31, 2020		(in $000s)	March 31, 2022		December 31, 2021

Assets:	Assets:					Assets:
United States	United States	$	744,922	$	762,696	United States	$	2,655,329	$	2,653,058
Canada	Canada	5,260		5,447		Canada	90,750		30,708
Mexico		62		261
		$	750,244	$	768,404
							$	2,746,079	$	2,683,766

2120

Item 2. ~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~

Throughout this section, unless otherwise noted “we,” “us,” “our” or “Company” refers to Nesco Holdings, Inc. (“Nesco”) and its consolidated subsidiaries prior to the acquisition of Custom Truck One Source, L.P. (“Custom Truck”) on April 1, 2021 (the “Acquisition”), and to the combined company, Custom Truck One Source, Inc. (“CTOS Inc.”) subsequent to the Acquisition. Immediately following the Acquisition, Nesco Holdings, Inc. changed its name to “Custom Truck One Source, Inc.” and also changed The New York Stock Exchange ticker symbol for its shares of common stock (“Common Stock”) from “NSCO” to “CTOS.”

~~The discussion of results of operations in this Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations ~~(“MD&A”) is presented on a historical basis, as of or for the three months ended March 31, 2021 or prior periods.~~

~~Disclosure Regarding~~ Forward-Looking Statements

Any statements made in this report that are not statements of historical fact, including statements about our beliefs and expectations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, and should be evaluated as such. ~~Forward-looking statements include information concerning possible or assumed future results of operations, including descriptions of our business plan and strategies.~~ These statements often include words such as “anticipate,” “expect,” ~~“suggests,~~“suggest,” “plan,” “believe,” “intend,” ~~“estimates,~~“estimate,” ~~“targets,~~“target,” ~~“projects,~~“project,” “should,” “could,” “would,” “may,” “will,” “forecast,” and other similar expressions. We base these forward-looking statements or projections on our current expectations, plans and assumptions that we have made in light of our experience in the industry, as well as our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances and at such time. As you read and consider this report, you should understand that these statements are not guarantees of performance or ~~results. The forward-looking statements~~results and ~~projections~~ are subject to and involve risks, uncertainties and ~~assumptions and you~~assumptions. You should not place undue reliance on these forward-looking statements or projections. Although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made, you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections. Below is a summary of risk factors applicable to us that may materially affect such forward-looking statements and projections:

•difficulty in integrating the Nesco (as defined below) and Custom Truck LP (as defined below) businesses and fully realizing the anticipated benefits of the Acquisition (as defined below), as well as significant transaction and transition costs that we will continue to incur following the Acquisition;

•material disruptions to our operation and manufacturing locations as a result of public health ~~crisis such as the~~concerns, including COVID-19, ~~pandemic;~~equipment failures, natural disasters, work stoppages, power outages or other reasons;

•the ~~cyclicality~~cyclical nature of demand for our products and services and our vulnerability to industry, regional and national ~~downturns;~~

•~~fluctuation of~~downturns, which impact, among others, our ~~revenue and operating results;~~ability to manage our rental equipment;

•our inability to obtain raw materials, component parts and/or finished goods in a timely and cost-effective ~~manner;~~

•~~competition, which may have a material adverse effect on~~manner, and our ~~business by reducing~~inability to manage our ~~ability to increase or maintain revenues or profitability;~~rental equipment in an effective manner;

•any further increase in the cost of new equipment that we purchase for use in our rental fleet or for our sales inventory;

•~~uncertainties~~disruptions in our supply chain as a result of the ~~success~~ongoing COVID-19 pandemic;

•aging or obsolescence of our ~~future acquisitions or integration~~existing equipment, and the fluctuations of ~~companies that we acquire;~~market value thereof;

•our inability to recruit and retain the experienced personnel, including skilled technicians, we need to compete in our industries;

•~~further unionization of our workforce;~~

•disruptions in our information technology systems or a compromise of our system security, limiting our ability to effectively monitor and control our operations, adjust to changing market conditions, and implement strategic initiatives;

•unfavorable conditions in the capital and credit markets and our inability to obtain additional capital as required;

•our ~~inability to renew our leases upon their expiration;~~

•~~our failure to keep pace with technological developments;~~

•~~our~~ dependence on a limited number of manufacturers and suppliers and on third-party contractors to provide us with various services to assist us with conducting our business;

•~~material disruptions to our operation and manufacturing locations as a result of public health concerns, equipment failures, natural disasters, work stoppages, power outages or other reasons;~~

•~~changes to international trade agreements, tariffs, import and excise duties, taxes or other governmental rules and regulations;~~potential impairment charges;

•our exposure to various risks related to legal proceedings or claims, and our failure to comply with relevant laws and regulations, including those related to occupational health and safety, the environment, government contracts, and ~~government contract;~~

•~~significant transaction~~data privacy and ~~transition costs that we will continue to incur following the Acquisition and related financing transactions;~~data security;

•the interest of our majority ~~shareholder,~~stockholder, which may not be consistent with the other ~~shareholders;~~stockholders;

•our significant indebtedness, which may adversely affect our financial position, limit our available cash and our access to additional capital, prevent us from growing our business and increase our risk of default;

•our inability to attract and retain highly skilled personnel and our inability to retain our senior management;

•our inability to generate cash, which could lead to a default;

•significant operating and financial restrictions imposed by the Indenture ~~(as defined below)~~ and the ABL Credit ~~Agreement (as defined below);~~Agreement;

•increases in unionization rate in our workforce;

•changes in interest rates, which could increase our debt service obligations on the variable rate indebtedness and decrease our net income and cash flows; and

•~~uncertainties related~~the phase-out of LIBOR and uncertainty as to ~~our variable rate indebtedness.~~its replacement.

These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this report. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law. See “Risk Factors” in Part I, Item 1A of the ~~Company’s~~ Annual Report ~~on Form 10-K~~ for the year ended December 31, ~~2020~~2021, and in Part II, Item 1A of this ~~report,~~Quarterly Report, for additional risks.

~~Overview of Markets and Related Industry Performance~~

Beginning in late March 2020, the Company began to be negatively impacted by the COVID-19 pandemic, which continued into the second quarter of 2020. We began to see a normal seasonal uptick in demand starting in late August and our original equipment cost (“OEC”) on rent also started to improve in late August. While we are encouraged by the trend, the Company’s results of operations have not yet fully recovered to the same levels prior to the pandemic, and we remain cautious about the continuing impact of the COVID-19 pandemic.

The Company serves critical infrastructure sectors that have been identified by the United States Cybersecurity and Infrastructure Security Agency (“CISA”) as vital to the U.S. Accordingly, we have continued to meet the needs of our customers during the pandemic. We continue to adhere to protocols designed to maintain the health and safety of our employees and their families, as well as our customers, vendors and communities. These protocols have allowed the Company to keep all business and service locations operational throughout the pandemic with little to no disruption.

In late March 2020, we saw a decline in demand from customers as planned projects were delayed in response to the uncertainty caused by the onset of the COVID-19 pandemic. These delays were most pronounced in electric distribution customers close to population centers in efforts to promote social distancing. Electric transmission customers also delayed planned new project starts. This led to a decline in OEC on rent during the second quarter of 2020 and into the beginning of the third quarter of 2020. As projects ended or were delayed, equipment was returned and there was little offsetting demand from new projects. This trend began to reverse starting in late August 2020 as “shelter-in-place” restrictions were relaxed across the country. Electric distribution and transmission customers continue to have large backlogs of projects that must be undertaken to maintain an aged grid, to harden the grid against the impact of severe weather events, to ensure the uninterrupted supply of electricity and to meet growing electricity demands from increased household usage and vehicle electrification. We have experienced relative stability in the rail and telecom sectors. Telecom end-customers have announced intentions to continue to invest in 5G infrastructure and additional network enhancements designed to address deficiencies that became apparent with increased traffic during pandemic stay-at-home orders.

The unprecedented nature of the COVID-19 pandemic continues to make it difficult to predict our future business and financial performance. However, our customers continue to reiterate record or near-record backlogs and capital investment plans. We are not aware of any significant project cancellations by our customers during the pandemic at this time. Customer projects that we are aware of were merely delayed. Many projects that were previously delayed have now been rescheduled. Following the project delays discussed above, we are now experiencing an increase in demand as customers work to fulfill backlogs. Like us, our customers have become more adept at working safely within the pandemic environment.

At the onset of the pandemic, our focus was on delivering upon the needs of our customers, managing costs and cash flows, and preparing for a future recovery. We reduced our capital spending, our working capital balances and undertook cost reduction efforts

2321

~~including limited headcount reductions~~On April 1, 2021 (the “Closing Date”), Nesco Holdings II, Inc., a subsidiary of Custom Truck One Source, Inc. (formerly Nesco Holdings, Inc.), completed the acquisition of Custom Truck One Source, L.P. (“Custom Truck LP”) in ~~2020. As part~~a series of ~~these efforts we reduced our service costs through most~~transactions described below (the “Acquisition”). On April 1, 2021, Nesco Holdings, Inc. (“Nesco Holdings”) changed its name to “Custom Truck One Source, Inc.” and changed The New York Stock Exchange ticker for its shares of ~~2020 by limiting repairs on equipment coming off-rent~~common stock (“Common Stock”) from “NSCO” to ~~those~~“CTOS,” and the ticker of its redeemable warrants from “NSCO.WS” to ~~be re-deployed based on customer orders. This will drive up service cost through second quarter 2021~~“CTOS.WS.”

Throughout this section, unless otherwise noted, terms such as ~~we seek~~“we,” “our,” “us,” or “the Company” refer to ~~rapidly deploy equipment~~Nesco Holdings prior to ~~meet customer demand.~~the Acquisition and to the combined company after the Acquisition. Unless the context otherwise requires, the terms “Nesco” or “Nesco Holdings” mean Nesco Holdings and its consolidated subsidiaries prior to the Acquisition, and the term “Custom Truck LP” means Custom Truck LP and its consolidated subsidiaries prior to the Acquisition.

Acquisition of Custom Truck ~~One Source, L.P.~~LP

On December 3, 2020, Nesco Holdings and Nesco Holdings II, Inc., a subsidiary of Nesco Holdings (the “Buyer” or the “Issuer”), entered into a Purchase and Sale Agreement (as amended, the “Purchase Agreement”) with certain affiliates of The Blackstone Group (“Blackstone”) and other direct and indirect equity holders (collectively, “Sellers”) of Custom Truck LP, Blackstone Capital Partners VI-NQ L.P., and PE One Source Holdings, LLC, an affiliate of Platinum Equity, LLC (“Platinum”), pursuant to which Buyer agreed to acquire 100% of the partnership interests of Custom ~~Truck.~~Truck LP. In connection with the Acquisition, Nesco Holdings and certain Sellers entered into Rollover and Contribution Agreements (the “Rollover Agreements”), pursuant to which such Sellers agreed to contribute a portion of their equity interests in Custom Truck LP (the “Rollovers”) with an aggregate value of $100.5 million in exchange for shares of Common Stock, valued at $5.00 per share.

On ~~April 1, 2021 (the “Closing Date”),~~the Closing Date, in connection with (i) the Rollovers, ~~CTOS Inc.~~the Company issued, in the aggregate, 20,100,000 shares of Common Stock to the parties to the Rollover Agreements, (ii) the Subscription, ~~CTOS Inc.~~the Company issued 148,600,000 shares of Common Stock to Platinum, and (iii) the Supplemental Equity Financing, ~~CTOS Inc.~~the Company issued, in the aggregate, 28,000,000 shares of Common Stock to the PIPE Investors. Following the completion of these transactions, as of April 1, 2021, ~~CTOS Inc.~~the Company had 245,919,383 shares of Common Stock issued and outstanding. The trading price of the Common Stock was $9.35 per share on the Closing Date. The ~~preliminary~~ purchase price for the Acquisition ~~is estimated at~~was $1.5 ~~billion and is subject to adjustment pending the finalization of preliminary valuation estimates.~~billion.

On the Closing Date, the Issuer issued $920 million in aggregate principal amount of 5.50% senior secured second lien notes due 2029 (the “2029 Secured Notes”) and, together with its direct parent, and certain of its direct and indirect subsidiaries, entered into a senior secured ~~asset based~~asset-based revolving credit agreement (the “ABL Credit Agreement”) with Bank of America, N.A., as administrative agent and collateral agent, and certain other lenders party thereto, consisting of a $750.0 million first lien senior secured ~~asset based~~asset-based revolving credit facility with a maturity of five years (the “ABL Facility,” together with the offering of the 2029 Secured Notes, the Acquisition, the Rollover, the Subscription and the Supplemental Equity Financing, the “Acquisition and ~~related financing transactions”~~Related Financing Transactions”). For more detail regarding the 2029 Secured Notes and the ABL Facility, see “Liquidity and Capital Resources” below.

Pro Forma Financial Information

~~FINANCIAL OVERVIEW~~

~~We use a variety of operational and~~The unaudited pro forma combined financial metrics, including non-GAAP financial measures, such as Adjusted EBITDA, to enable us to analyze our performance and financial condition. We utilize these financial measures to manage our business on a day-to-day basis and believe that they areinformation presented in the most relevant measures of performance. Some of these measures are commonly used in our industry to evaluate performance. We believe these non-GAAP measures provide expanded insight to assess performance, in additionsection entitled “Supplemental Pro Forma Information,” give effect to the ~~standard GAAP-based financial measures. There are no specific rules or regulations for determining non-GAAP measures,~~Acquisition, as if the Acquisition had occurred on January 1, 2020, and ~~as such,~~is presented to facilitate comparisons with our ~~non-GAAP financial measures may not be comparable to measures used by other companies within~~results following the ~~industry.~~

~~The presentation of non-GAAP financial~~Acquisition. This information ~~should not be considered in isolation or as a substitute for, or superior to, the financial information~~has been prepared ~~and presented~~ in accordance with ~~GAAP. You should read this discussion~~Securities and ~~analysis~~Exchange Commission Article 11 of ~~our results~~Regulation S-X. Such unaudited pro forma combined financial information is presented on a pro forma basis to give effect to the following as if they occurred on January 1, 2020: (i) the acquisition of ~~operations~~Custom Truck LP and ~~financial condition together~~related impacts of purchase accounting, (ii) borrowings under the new debt structure and (iii) repayment of previously existing debt of Nesco Holdings and Custom Truck LP.

Financial and Performance Measures

Financial Measures

Revenue — As a full-service equipment provider, we generate revenue through renting, selling, assembling, upfitting, and servicing new and used heavy-duty trucks and cranes, as well as the sale of related parts. We also sell and rent specialized tools on an individual basis and in kits. Rental revenue is primarily comprised of revenues from rental agreements and freight charges billed to customers. For periods after January 1, 2021, the Company records changes in estimated collectability directly against rental revenue. Equipment sales revenue reflects the value of vocational trucks and other equipment sold to customers. Parts and service revenue is derived from maintenance and repair services, light upfit services, and parts, tools and accessories sold directly to customers.

Cost of rental revenue — Cost of rental revenue reflects repairs and maintenance costs of rental equipment, parts costs, labor and other overheads related to maintaining the rental fleet, and freight associated with the ~~consolidated financial statements~~shipping of rental equipment.

Depreciation of rental equipment — Depreciation of rental equipment is comprised of depreciation expense on the rental fleet. We allocate the cost of rental equipment generally over the rentable life of the equipment. The depreciation allocation is based upon estimated lives ranging from five to seven years. The cost of equipment is depreciated to an estimated residual value using the straight-line method.

Cost of equipment sales — Cost of equipment sales reflects production and inventory costs associated with new units sold, parts costs, labor and other overheads related to production, and freight associated with the shipping and receiving of equipment and parts. Cost of equipment sales also includes the net book value of rental units sold.

Selling, general and administrative expenses — Selling, general and administrative expenses include sales compensation, fleet licensing fees and corporate expenses, including salaries, stock-based compensation expense, insurance, advertising costs, professional services, fees earned on customer arranged financing, gains or losses resulting from insurance settlements, and information technology costs.

Amortization and non-rental depreciation — Amortization expense relates to intangible assets such as customer lists, trade names, etc. Non-rental depreciation expense reflects the depreciation of property and equipment that is not part of the rental fleet.

Transaction expenses — Transaction expenses and other expense include expenses directly related ~~notes thereto~~to the acquisition of businesses. These expenses generally are comprised of travel and out-of-pocket expenses and legal, accounting and valuation or appraisal fees incurred in connection with pre- and post-closure activities. We also ~~included within.~~include costs and expenses associated with post-acquisition integration activities related to the acquired businesses.

~~Measures Related~~Financing and other expense (income) — Financing and other expense (income) reflects the financing expense (income) associated with sales-type lease activity, foreign currency gains and losses related to our ~~Fleet~~Canadian operations, as well as other miscellaneous gains or losses from non-operating activities. Also included in financing and other expense (income) are the unrealized remeasurement gains and losses related to our interest rate collar and redeemable warrants.

Interest expense — Interest expense consists of contractual interest expense on outstanding debt obligations, floorplan financing facilities, amortization of deferred financing costs and other related financing expenses.

Income Tax Expense (Benefit) — We have net operating loss carryforward and disallowed interest deduction carryforward assets, which are generally available to be used to offset taxable income generated in future years. Due to limitations on the use of these carryforwards under U.S. federal and state income tax regulations, we record valuation allowances to reduce the carryforward assets to amounts that we estimate will be realized. Accordingly, income tax expense or benefit generally is comprised of changes to these valuation allowance estimates and does not reflect taxes on current period income (or tax benefit on current period losses). For these reasons, our effective tax rate differs from the federal statutory tax rate.

Performance Measures

We consider the following key operational measures when evaluating our performance and making day-to-day operating decisions:

~~Average~~Ending OEC ~~on rent~~ — ~~Original~~Ending original equipment cost (“OEC”) ~~on rent~~ is the original equipment cost of units ~~rented to customers~~ at ~~a given point in time. Average OEC on rent is calculated as~~ the ~~weighted-average OEC on rent during~~end of the ~~stated~~measurement period. OEC represents the original equipment cost, exclusive of the effect of adjustments to rental equipment fleet acquired in business combinations, and is the basis for calculating certain of the measures set forth below. This adjusted measure of OEC is used by our creditors pursuant to our credit agreements, wherein this is a component of the basis for determining compliance with our financial loan covenants. Additionally, the pricing of our rental contracts and equipment sales prices for our equipment is based upon OEC, and

we measure a rate of return from our rentals and sales using OEC. OEC is a widely used industry metric to compare fleet dollar value independent of depreciation.

Average OEC on rent — Average OEC on rent is calculated as the weighted-average OEC on rent during the stated period.

Fleet utilization — Fleet utilization is defined as the total numbers of days the rental equipment was rented during a specified period of time divided by the total number of days available during the same period and weighted based on OEC. Utilization is a measure of fleet efficiency expressed as a percentage of time the fleet is on rent and is considered to be an important indicator of the revenue generating capacity of the fleet.

OEC on rent yield — OEC on rent yield (“ORY”) is a measure of return realized by our rental fleet during a period. ORY is calculated as rental revenue (excluding freight recovery and ancillary fees) during the stated period divided by the average OEC on rent for the same period. For periods less than 12 months, ORY is adjusted to an annualized basis.

~~Gross Profit~~

~~Gross profit~~Sales order backlog — Sales order backlog consists of purchase orders received for products expected to be shipped within the next 12 months, although shipment dates are subject to change due to design modifications or changes in other customer requirements. Sales order backlog should not be considered an accurate measure of future net sales.

Operating Segments

We operate in three reportable operating segments: Equipment Rental Solutions, Truck and Equipment Sales and Aftermarket Parts and Services.

Equipment Rental Solutions (“ERS”) Segment — We own a broad range of new and used specialty equipment, including truck-mounted aerial lifts, cranes, service trucks, dump trucks, trailers, digger derricks and other machinery and equipment. As of March 31, 2022, this equipment (the “rental fleet”) is comprised of more than 9,000 units. The majority of our rental fleet can be used across a variety of end-markets, which coincides with the needs of many of our customers who operate in multiple end-markets. As is customary for equipment rental companies, we sell used equipment out of our rental fleet to end user customers. These sales are often made in response to specific customer requests. These sales offer customers an opportunity to buy well-maintained equipment with long remaining useful lives and enable us to effectively manage the age and mix of our rental fleet to match current market demand. We also employ rental purchase options (“RPOs”) on a select basis, which provide a buyout option with an established purchase price that decreases over time as rental revenue is collected. Customers are given credit against such purchase price for a portion of the amounts paid over the life of the rental, allowing customers the flexibility of a rental with the option to purchase at any time at a known price. Activities in our ERS segment consist of the rental and sale from the rental fleet, of the foregoing products.

Truck and Equipment Sales (“TES”) Segment — We offer a broad variety of new equipment for sale to be used across our end-markets, which can be modified to meet our customers’ specific needs. We believe that our integrated production capabilities and extensive knowledge gained over a long history of selling equipment have established us as a trusted partner for customers seeking tailored solutions with short lead times. In support of these activities, we primarily employ a direct-to-customer sales model, leveraging our dedicated salesforce of industry and product managers, who are focused on driving national and local sales. We also opportunistically engage in the sale of used equipment purchased from third parties or received via trade-ins from new equipment sales customers. In all of these cases, we will sell used equipment directly to customers, rather than relying on auctions. Activities in our TES segment consist of the production and sale of new and used specialty equipment and vocational trucks, which includes equipment from leading original equipment manufacturers (“OEMs”) across our end-markets, as well as our Load KingTM brand.

Aftermarket Parts and Services (“APS”) Segment — The APS segment includes the sale of specialized aftermarket parts, including captive parts related to our Load KingTM brand, used in the maintenance and repair of the equipment we sell and rent. Specialized tools, including stringing blocks, insulated hot stick, and rigging equipment, are sold or rented to customers on an individual basis or in packaged specialty kits. We also provide truck and equipment maintenance and repair services, which are executed throughout our nationwide branch network and fleet of mobile technicians supported by our 24/7 call center based in Kansas City, Missouri.

Non-GAAP Financial Measures

In this MD&A and in the Supplemental Pro Forma Information, we report certain financial measures that are not required by, or presented in accordance with, GAAP. We utilize these financial measures to manage our business on a day-to-day basis, and some of these measures are commonly used in our industry to evaluate performance. We believe these non-GAAP measures provide investors with expanded insight to assess performance, in addition to the standard GAAP-based financial measures. Reconciliation of the most directly comparable GAAP measure to each non-GAAP measure that we ~~use~~refer to ~~monitor our results from operations.~~is included in this Quarterly Report on Form 10-Q. The following provides a description of the non-GAAP financial measures.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial performance measure that the Company uses to monitor its results ~~from~~of operations, to measure performance against debt covenants and performance relative to competitors. The Company believes Adjusted EBITDA is a useful performance measure because it allows for an effective evaluation of operating performance when compared to peers, without regard to financing methods or capital structures. The Company excludes the items identified in the reconciliations of ~~Net loss~~net income (loss) to Adjusted EBITDA because these amounts are either non-recurring or can vary substantially within the industry depending upon accounting methods and book values of assets, ~~capital structures,~~ including the method by which the assets were ~~acquired.~~acquired, and capital structures. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, ~~Net loss~~net income (loss) determined in accordance with GAAP. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as the historical costs of depreciable assets, none of which are reflected in Adjusted EBITDA. The Company's presentation of Adjusted EBITDA should not be construed as an indication that results will be unaffected by the items excluded from Adjusted EBITDA. The Company’s computation of Adjusted EBITDA may not be identical to other similarly titled measures of other companies.

The Company defines Adjusted EBITDA as ~~Net~~net income or loss before interest expense, income taxes, depreciation and amortization, ~~equity-based~~share-based compensation, and other items that ~~The~~the Company does not view as indicative of ongoing performance. ~~Additionally, the~~The Company’s Adjusted EBITDA includes an adjustment to exclude the effects of purchase accounting adjustments when calculating the cost of inventory and used equipment sold. When inventory or equipment is purchased in connection with a business combination, the assets are revalued to their current fair values for accounting purposes. The consideration transferred (i.e., the purchase price) in a business combination is allocated to the fair values of the assets as of the acquisition date, with amortization or depreciation recorded thereafter following applicable accounting policies; however, this may not be indicative of the actual cost to acquire inventory or new equipment that is added to product inventory or the rental fleets apart from a business acquisition. Additionally, the pricing of rental contracts and equipment sales prices for equipment is based on OEC, and the Company measures a rate of return from rentals and sales using OEC. ~~As indicated above,~~The Company also includes an adjustment to remove the ~~agreements governing~~impact of accounting for certain of our rental contracts with customers containing a rental purchase option that are accounted for under GAAP as a sales-type lease. We include this adjustment because we believe continuing to reflect the transactions as an operating lease better reflects the economics of the transactions given our large portfolio of rental contracts. These, and other, adjustments to GAAP net income or loss that are applied to derive Adjusted EBITDA are specified by the Company’s ~~indebtedness define~~senior secured credit agreements.

Although management evaluates and presents the Adjusted EBITDA non-GAAP measure for the reasons described herein, please be aware that this ~~adjustment~~non-GAAP measure has limitations and should not be considered in isolation or as a substitute for revenue, operating income/loss, net income/loss, earnings/loss per share or any other comparable operating measure prescribed by GAAP. In addition, we may calculate and/or present this non-GAAP financial measure differently than measures with the same or similar names that other companies report, and, as a result, the non-GAAP measure we report may not be comparable to those reported by others.

Pro Forma Adjusted EBITDA

We present Pro Forma Adjusted EBITDA as ~~such, this metric~~if the Acquisition had occurred on January 1, 2020. Refer to the reconciliation of pro forma combined net income (loss) to Pro Forma Adjusted EBITDA for the three-month period ended March 31, 2021 in the section entitled “Supplemental Pro Forma Information.”

Gross Profit Excluding Depreciation of Rental Equipment

Gross profit excluding depreciation of rental equipment is ~~an indication~~a financial performance measure that we use to monitor our results from operations. We believe the exclusion of depreciation expense of the ~~cost~~rental fleet provides a meaningful measure of ~~equipment sales from~~financial performance because it provides useful information relating to profitability that reflects ongoing and direct operating expenses, such as freight costs and fleet maintenance costs, related to our rental fleet. Although management evaluates and presents this non-GAAP measure for the ~~removal of~~reasons described herein, please be aware that this non-GAAP measure has limitations and should not be considered in isolation or as a substitute for revenue, gross profit or any other comparable operating measure prescribed by GAAP. In addition, we may calculate and/or present this non-GAAP financial measure differently than measures with the ~~purchase accounting adjustments.~~same or similar names that other companies report, and as a result, the non-GAAP measure we report may not be comparable to those reported by others.

~~Operating~~ Results of Operations

(in $000s) Three Months Ended March 31, 2021 % of revenue Three Months Ended March 31, 2020 % of revenue
Rental revenue $ 48,289 61.7% $ 50,994 62.4%
Sales of rental equipment 10,485 13.4% 9,093 11.1%
Sales of new equipment 7,502 9.6% 7,577 9.3%
Parts sales and services 12,023 15.4% 14,079 17.2%
Total revenue 78,299 100.0% 81,743 100.0%
Cost of revenue 40,236 51.4% 40,228 49.2%
Depreciation of rental equipment 17,844 22.8% 20,112 24.6%
Gross profit 20,219 25.8% 21,403 26.2%
Operating expenses 23,273 14,607
Operating (loss) income (3,054) 6,796
Other expense 20,763 22,035
Loss before income taxes (23,817) (15,239)
Income tax expense 4,090 730
Net loss $ (27,907) $ (15,969)

~~Total Revenue.~~ ~~Total revenue for the first quarter of 2021, decreased by $3.4 million, or 4.2%,~~Three months ended March 31, 2022 compared to ~~the first quarter of 2020. Rental revenue for the first quarter of~~three months ended December 31, 2021 decreased $2.7 million, or 5.3%, compared to the same period in 2020 as a result of rental fleet mix. Sales of rental equipment, which can vary from quarter to quarter, increased $1.4 million, or 15.3%, as we continued to selectively divest underutilized

The operating results and aging equipment. Sales of new equipment, which also varies from quarter to quarter, held flat decreasing $0.1 million, or 1%, compared to the same period in 2020. Parts sales and service revenue decreased $2.1 million, or 14.6%, compared to the same period in 2020 as a result of a decline in upfit work under the PTA segment.

~~Cost of Revenue.~~ ~~Cost of revenue, excluding depreciation of $17.8 million,~~financial metrics presented below for the three months ended March 31, 2022 and the three months ended December 31, 2021 ~~was flat compared to~~include the ~~same period in 2020 ($2.3 million, or 3.7%, including depreciation).~~results of Custom Truck LP for all periods presented.

Consolidated Results of Operations


	Three Months Ended
(in $000s)	March 31, 2022		December 31, 2021		$ Change		% Change
Rental revenue	$	109,145	$	114,131	$	(4,986)	(4.4)	%
Equipment sales	227,186		212,509		14,677		6.9	%

Parts sales and services	30,145		29,799		346		1.2	%
Total revenue	366,476		356,439		10,037		2.8	%
Cost of revenue, excluding rental equipment depreciation	237,019		232,653		4,366		1.9	%
Depreciation of rental equipment	44,964		45,934		(970)		(2.1)	%
Gross profit	84,493		77.852		6,641		8.5	%
Operating expenses	74,685		68,011		6,674		9.8	%
Operating income (loss)	9,808		9,841		(33)		(0.3)	%
Other expense	10,076		19,597		(9,521)		(48.6)	%
Income (loss) before income taxes	(268)		(9,756)		9,488		(97.3)	%
Income tax expense (benefit)	3,005		(6,043)		9,048		(149.7)	%
Net income (loss)	$	(3,273)	$	(3,713)	$	440	(11.9)	%

~~Operating Expenses.~~ Total Revenue -~~Operating expenses~~ The increase in total revenue for the three months ended March 31, ~~2021 increased $8.7 million, or 59.3%,~~2022 compared to the ~~same period~~three months ended December 31, 2021 was driven primarily by continued strong equipment sales due to high demand related to infrastructure investments in ~~2020.~~T&D and Telecom.

Cost of Revenue, Excluding Depreciation - The increase in cost of revenue, excluding rental equipment depreciation for the ~~first quarter is~~three months ended March 31, 2022 was driven primarily by the increase in equipment sales revenue versus the three months ended December 31, 2021. The increase in gross profit when compared to the three months ended December 31, 2021 was largely driven by rising equipment sales prices for the period.

Depreciation of Rental Equipment - Depreciation of our rental fleet remained consistent in the three months ended March 31, 2022.

Operating Expenses - Operating expenses increased in the three months ended March 31, 2022 as a result of variable pay programs and other expenses, offset by lower transaction ~~expenses~~and post-acquisition integration costs related to the Acquisition.

Other ~~Expense.~~ Expense -Other expense for the three months ended March 31, ~~2021~~2022 decreased ~~$1.3 million, or 5.8%, compared~~primarily due to ~~the same period~~financing income related to growth in 2020. The decrease is attributable to the change in fair value of an interest rate collar, which is an undesignated hedging instrument, which resulted in income in the current quarter of approximately $1.8 million ($6.0 million expensecustomer rental contracts accounted for ~~the first quarter ended March 31, 2020), coupled with reduced interest expense~~ as a result of lower borrowings from the revolving credit facility (net interest expense in the current quarter decreased by $1.1 million). The decrease was offset by a charge for the change in fair value of the liability for warrants of $7.6 million during the period.sales-type leases.

Income Tax ~~Expense.~~Expense (Benefit) - ~~Income~~The Company's effective tax ~~expense was $4.1 million~~rate for the three months ended March 31, 2021 as compared to $0.7 million for the same period of the prior year. Income tax expense for the current period reflects the Company's estimated overall tax rate from of the Company's estimate of full-year taxable income arising from disallowed interest expense. The Company's effective tax rate for the current period, (17.2)%,2022 differs from the U.S. federal statutory tax rate due primarily to the recording of valuation ~~allowance for~~allowances against deferred tax assets.

Net ~~Loss.~~Income (Loss) - ~~Net loss was $27.9 million~~The decrease in our net income (loss) for the three months ended March 31, ~~2021~~2022 compared to ~~net loss of $16.0 million for~~ the ~~same period of the prior year. The Company recognized transaction~~three months ended December 31, 2021 was driven primarily by an increase in operating expenses related to the Acquisition of approximately $10.4 million, as well as a non-cash charge of $7.6 million related to privately placed warrants stemming from its 2019 merger with Capitol Investment Corp. IV.and other expense offset by an increase in gross profit.

~~Financial~~Key Performance Measures

thereby reducing our costs to match our revenue. We principally evaluate financial performance based on the following measurements: ~~Adjusted EBITDA,~~average OEC on rent, fleet utilization, and OEC on rent yield. The ~~following~~ table ~~summarizes~~below presents these ~~operating metrics.~~key measures.

~~The presentation~~


	Three Months Ended
(in $000s)	March 31, 2022			December 31, 2021			Change			(%)
Ending OEC(a)	$	1,364,660		$	1,363,451		$	1,209		0.1	%
Average OEC on rent(b)	$	1,119,100		$	1,151,959		$	(32,859)		(2.9)	%
Fleet utilization(c)	82.5		%	83.7		%	(1.2)		%	(1.4)	%
OEC on rent yield(d)	39.1		%	39.1		%	—		%	—	%
Sales order backlog(e)	$	586,368		$	411,636		$	174,732		42.4	%

(a) Ending original equipment cost (“OEC”) on rent is the original equipment cost of ~~non-GAAP financial information should not be considered in isolation or as a substitute for, or superior~~units rented to customers at the ~~financial information prepared and presented in accordance with GAAP.~~

Three Months Ended March 31,
(in $000s) 2021 2020 change (%)
Adjusted EBITDA(a)
$ 27,531 $ 32,061 $ (4,530) (14.1) %
Average OEC on rent(b)
$ 499,725 $ 499,756 $ (31) — %
Fleet utilization(c)
78.5 % 77.3 % 1.2 % 1.6 %
OEC on rent yield(d)
35.0 % 36.5 % (1.5) % (4.1) %

(a) EBITDA represents Net loss before interest, provision for income taxes, depreciation, and amortization. Adjusted EBITDA is defined as EBITDA as further adjusted for (1) non-cash purchase accounting impact, (2) transaction and process improvement costs, including the effectend of the ~~cessation of operations in Mexico, (3) major repairs, (4) share-based payments, and (5) the change in fair value of derivative instruments. These metrics are subject to certain limitations. See~~ “~~Financial Overview – Adjusted EBITDA” and the reconciliation of Adjusted EBITDA to U.S. GAAP Net loss below.~~measurement period.

(b) Average OEC on rent is the average original equipment cost of units on rent during the period. The measure provides a value dimension to the fleet utilization statistics. ~~This metric has been adjusted to exclude Mexico, which the Company commenced exit activities in the third quarter of 2019.~~

(c) Fleet utilization ~~for~~— total number of days the rental equipment was rented during a specified period ~~is calculated by dividing the amount~~ of time ~~an asset is on rent~~divided by the ~~amount~~total number of ~~time the asset has been owned~~days available during the ~~period. Time~~same period and weighted based on ~~rent is weighted by original equipment cost. This metric has been adjusted to exclude Mexico, which the Company commenced exit activities in the third quarter of 2019.~~OEC.

(d) OEC on rent yield (“ORY”) is a measure of return realized by our on rental fleet during the 12-month period. ORY is calculated as rental revenue (excluding freight recovery and ancillary fees) during the stated period divided by the Average OEC on rent for the same period. For periods less than 12 months, the ORY is adjusted to an annualized basis.

(e) Sales order backlog consists of purchase orders received for products expected to be shipped within the next 12 months, although shipment dates are subject to change due to design modifications or changes in other customer requirements. Sales order backlog should not be considered an accurate measure of future net sales.

~~Adjusted EBITDA.~~Ending OEC - The decrease in Ending OEC was driven by higher rental fleet sales in the current quarter.

Average OEC on Rent - The decrease in Average OEC on rent was driven by higher rental fleet sales.

Fleet Utilization - Fleet utilization declined modestly due to typical seasonal slowdowns in project work.

OEC on Rent Yield - ORY was flat reflective of the impact of continued pricing increases.

Sales Order Backlog - Sales order backlog consists of customer orders placed for customized and stock equipment. The increase in sales order backlog was driven by continued strong customer demand.

Adjusted EBITDA ~~decreased $4.5 million, or 14.1%,~~

The following table provides a reconciliation of net income (loss) to ~~$27.5 million~~Adjusted EBITDA for the three months ended March 31, 2021 compared to the same period in 2020. This decrease can primarily be attributed to a $3.5 million decline in gross profit, excluding depreciation of $17.8 million, caused by lower rental yield resulting from a slower ramp in transmission projects compared to distribution projects2022 and ~~a shift in revenue mix, with sales of equipment making up approximately 23.0% of total revenue. Reduced servicing volume in the PTA segment also contributed to the decline in~~December 31, 2021. As previously noted, Adjusted ~~EBITDA.~~

~~The following~~EBITDA is a ~~reconciliation from U.S. GAAP~~non-GAAP financial measure and should not be considered in isolation or as a substitute for revenue, operating income/loss, net ~~loss to Adjusted EBITDA.~~income (loss), earnings (loss) per share or any other comparable operating measure prescribed by GAAP.


		Three Months Ended March 31,				Three Months Ended
(in $000s)	(in $000s)	2021		2020			(in $000s)	March 31, 2022		December 31, 2021	$ Change		% Change
Net income (loss)	Net income (loss)	$	(27,907)	$	(15,969)		Net income (loss)	(3,273)		(3,713)	$	440	(11.9)	%
Interest expense	Interest expense	14,906		16,014			Interest expense	17,445		17,778	(333)		(1.9)	%
Income tax expense		4,090		730
Depreciation expense		18,063		20,377
Amortization expense		753		691
Income tax expense (benefit)							Income tax expense (benefit)	3,005		(6,043)	9,048		(149.7)	%
Depreciation and amortization							Depreciation and amortization	62,500		63,106	(606)		(1.0)	%

EBITDA	EBITDA	9,905		21,843			EBITDA	79,677		71,128	8,549		12.0	%
Adjustments:	Adjustments:						Adjustments:
Non-cash purchase accounting impact (1)	Non-cash purchase accounting impact (1)	53		917			Non-cash purchase accounting impact (1)	9,026		6,468	2,558		39.5	%
Transaction and process improvement costs (2)		10,744		2,079
Major repairs (3)		285		700
Transaction and integration costs (2)							Transaction and integration costs (2)	4,648		8,900	(4,252)		(47.8)	%

Sales-type lease adjustment (3)							Sales-type lease adjustment (3)	529		3,757	(3,228)		(85.9)	%
Share-based payments (4)	Share-based payments (4)	698		559			Share-based payments (4)	3,364		4,597	(1,233)		(26.8)	%

Change in fair value of derivative and warrants (5)	Change in fair value of derivative and warrants (5)	5,846		5,963			Change in fair value of derivative and warrants (5)	(5,767)		739	(6,506)		(880.4)	%
Adjusted EBITDA	Adjusted EBITDA	$	27,531	$	32,061		Adjusted EBITDA	$	91,477	95,589	$	(4,112)	(4.3)	%

(1) Represents the non-cash impact of purchase accounting, ~~from past acquisitions of businesses,~~ net of accumulated depreciation, on the cost of equipment and inventory sold. The equipment and inventory acquired received a purchase accounting step-up in basis, which is a non-cash adjustment to the equipment cost pursuant to our credit agreement.

(2) Represents transaction costs related to ~~the acquisition~~acquisitions of ~~Custom Truck One Source (2021) and Truck Utilities (2020) (which include post-acquisition integration~~businesses, which are recognized within operating expenses ~~incurred)~~in our Condensed Consolidated Statements of Net Income (Loss). These expenses are comprised of professional consultancy, legal, tax and accounting fees. Also included are ~~costs of startup activities (which include training, travel, and process setup costs)~~expenses associated with the ~~rollout~~integration of ~~PTA locations that occurred throughout~~acquired businesses.

(3) Represents the ~~prior year. Finally,~~impact of sales-type lease accounting for certain leases containing rental purchase options ("RPOs"), as the ~~expenses~~application of sales-type lease accounting is not deemed to be representative of the ongoing cash flows of the underlying rental contracts. The adjustments are made pursuant to our credit agreement.

(4) Represents non-cash share-based compensation expense associated with the issuance of stock options and restricted stock units.

(5) Represents the charge to earnings for our interest rate collar and the change in fair value of the liability for warrants.

Operating Results by Segment

Equipment Rental Solutions (ERS) Segment


	Three Months Ended
(in $000s)	March 31, 2022		December 31, 2021		$ Change		% Change
Rental revenue	$	105,561	$	109,622	$	(4,061)	(3.7)	%
Equipment sales	59,353		35,294		24,059		68.2	%



Total revenue	164,914		144,916		19,998		13.8	%

Cost of rental revenue	24,791		26,961		(2,170)		(8.0)	%
Cost of equipment sales	43,230		29,605		13,625		46.0	%

Depreciation of rental equipment	43,966		43,752		214		0.5	%
Total cost of revenue	111,987		100,318		11,669		11.6	%
Gross profit	$	52,927	$	44,598	$	8,329	18.7	%

Total Revenue - On a sequential quarter basis, the increase in total revenue for the ERS segment was driven by an increase in equipment sales revenue, offset by a seasonal decline revenues for rental equipment. The increase in equipment sales revenue for the three months ended March 31, 2022 was driven by continued demand related to infrastructure investments in T&D and Telecom.

Cost of Revenue - The increase in cost of revenue for the three months ended March 31, 2022 was largely due to the increase in equipment sales.

Depreciation - Depreciation of our rental fleet was materially unchanged period over period.

Gross Profit - The increase in gross profit on a sequential quarter basis is due to the increase in equipment sales for the period, and improved margins on those sales. The improvement in margins on sales of used rental equipment was a function of the age and condition of the unit sold, and a lower mix of units subject to a rental purchase option.

Truck and Equipment Sales (TES) Segment


	Three Months Ended
(in $000s)	March 31, 2022		December 31, 2021		$ Change		% Change

Equipment sales	$	167,833	$	177,215	$	(9,382)	(5.3)	%






Cost of equipment sales	144,048		153,844		(9,796)		(6.4)	%



Gross profit	$	23,785	$	23,371	$	414	1.8	%

Equipment Sales - Equipment sales declined on a sequential quarter basis as a result of supply chain challenges related to the segment's inventory suppliers. Despite the reduction in equipment sales for the three months ended March 31, 2022, we continue to see strong customer demand for our products, as evidenced by the growth in our sales order backlog versus the end of the fourth quarter of 2021.

Cost of Equipment Sales - Cost of equipment sales decreased in line with the decrease in equipment sales revenue for the three months ended March 31, 2022.

Gross Profit - The increase in gross profit on a sequential quarter basis was not material.

Aftermarket Parts and Services (APS) Segment


	Three Months Ended
(in $000s)	March 31, 2022		December 31, 2021		$ Change		% Change
Rental revenue	$	3,584	$	4,509	$	(925)	(20.5)	%


Parts and services revenue	30,145		29,799		346		1.2	%

Total revenue	33,729		34,308		(579)		(1.7)	%

Cost of revenue	24,950		22,243		2,707		12.2	%


Depreciation of rental equipment	998		2,182		(1,184)		(54.3)	%
Total cost of revenue	25,948		24,425		1,523		6.2	%
Gross profit	$	7,781	$	9,883	$	(2,102)	(21.3)	%

Total Revenue - Revenue was materially unchanged for the three months ended March 31, 2022 on a sequential quarter basis.

Cost of Revenue - On a sequential quarter basis, cost of revenue increased for the three months ended March 31, 2022 due primarily to higher distribution and fulfillment costs.

Gross Profit - The decline in gross profit was primarily due to a change in mix of product and service line revenues.

Results of Operations

Three Months Ended March 31, 2022 compared to three months ended March 31, 2021

The consolidated operating results for the three months ended March 31, 2021 represent those of Nesco Holdings before the acquisition of Custom Truck LP and, therefore, are not comparable.

Consolidated Results of Operations


	Three Months Ended March 31,
(in $000s)	2022		2021
Rental revenue	$	109,145	$	48,289
Equipment sales	227,186		17,987

Parts sales and services	30,145		12,023
Total revenue	366,476		78,299
Cost of revenue, excluding rental equipment depreciation	237,019		40,236
Depreciation of rental equipment	44,964		17,844
Gross profit	84,493		20,219
Operating expenses	74,685		23,273
Operating income (loss)	9,808		(3,054)
Other expense	10,076		20,763
Income (loss) before income taxes	(268)		(23,817)
Income tax expense (benefit)	3,005		4,090
Net income (loss)	$	(3,273)	$	(27,907)

Total Revenue - The increase in revenue for the three months ended March 31, 2022, both in total and for each of our individual revenue streams, was driven by the addition of Custom Truck LP’s revenues to our operating results. The Acquisition significantly increased the size of our rental fleet and added a new equipment production and sales line of business (which we report under our TES segment) and a parts sales and heavy equipment service business.

Cost of Revenue, Excluding Depreciation - Consistent with the increase in revenue versus the prior year period, the increase in cost of revenue was driven by the addition of Custom Truck LP’s cost of revenue, to our operating results.

Operating Expenses - The primary drivers of the increase in operating expenses for the three months ended March 31, 2022 are the addition of Custom Truck, LP’s operating expenses to our operating results.

Other Expense - The decrease inother expense for the three months ended March 31, 2022 was largely driven by charges related to mark-to-market charges related to our private warrants, which are accounted for a liability derivative instrument, offset by a reduction to net interest expense.

Income Tax Expense (Benefit) - The Company's ~~closure~~effective tax rate differs from the U.S. federal statutory tax rate due primarily to the recording of ~~its Mexican operations, which closure activities commenced~~valuation allowances against deferred tax assets.

Net Income (Loss) - The change in net income (loss) for the three months ended March 31, 2022 is due to the addition of Custom Truck LP to our operating results.

Key Performance Measures

We believe that our operating model, together with our highly variable cost structure, enables us to sustain high margins, strong cash flow generation and stable financial performance throughout various economic cycles. We are able to generate cash flow through our earnings. Our highly variable cost structure adjusts with the utilization of our equipment, thereby reducing our costs to match our revenue. We principally evaluate financial performance based on the following measurements: ending OEC, average OEC on rent, fleet utilization, OEC on rent yield, and sales backlog. The table below presents these key measures.


	Three Months Ended March 31,
(in $000s)	2022			2021			Change			% Change
Ending OEC(a)	$	1,364,660		$	1,326,000		$	38,660		2.9	%
Average OEC on rent(b)	$	1,119,100		$	1,047,310		$	71,790		6.9	%
Fleet utilization(c)	82.5		%	78.2		%	4.3		%	5.5	%
OEC on rent yield(d)	39.1		%	37.8		%	1.3		%	3.4	%
Sales order backlog(e)	$	586,368		$	193,973		$	392,395		202.3	%

(a) Ending original equipment cost (“OEC”) on rent is the original equipment cost of units rented to customers at the end of the measurement period.

(b) Average OEC on rent is the average original equipment cost of units on rent during the period. The measure provides a value dimension to the fleet utilization statistics.

(c) Fleet utilization — total number of days the rental equipment was rented during a specified period of time divided by the total number of days available during the same period and weighted based on OEC.

(d) OEC on rent yield (“ORY”) is a measure of return realized by our rental fleet during the 12-month period. ORY is calculated as rental revenue (excluding freight recovery and ancillary fees) during the stated period divided by the Average OEC on rent for the same period. For periods less than 12 months, the ORY is adjusted to an annualized basis.

Ending OEC - The decrease in Ending OEC was driven by higher rental fleet sales in the ~~third~~current quarter.

Average OEC on Rent - The increase in Average OEC on rent by higher demand in the current year quarter relative to the prior year period.

Fleet Utilization - Fleet utilization increased reflective of ~~2019, are included~~the impact of continued pricing increases.

OEC on Rent Yield - ORY increased reflective of the impact of continued pricing increases.

Sales Order Backlog - Sales order backlog consists of customer orders placed for customized and stock equipment. The increase in sales order backlog was driven by continued strong customer demand.

Adjusted EBITDA

The following table provides a reconciliation of net income (loss) to Adjusted EBITDA for the ~~periods. Pursuant to our credit agreement,~~three months ended March 31, 2022 and 2021. As previously noted, Adjusted EBITDA is a non-GAAP financial measure and should not be considered in isolation or as a substitute for revenue, operating income/loss, net income/loss, earnings/loss per share or any other comparable operating measure prescribed by GAAP.


	Three Months Ended March 31,
(in $000s)	2022		2021
Net income (loss)	$	(3,273)	(27,907)
Interest expense	17,445		14,906
Income tax expense (benefit)	3,005		4,090
Depreciation and amortization	62,500		19,101

EBITDA	79,677		10,190
Adjustments:
Non-cash purchase accounting impact (1)	9,026		53
Transaction and integration costs (2)	4,648		10,744


Sales-type lease adjustment (3)	529		—
Share-based payments (4)	3,364		698
Change in fair value of derivative and warrants (5)	(5,767)		5,846
Adjusted EBITDA	$	91,477	$	27,531

(1) Represents the non-cash impact of purchase accounting, net of accumulated depreciation, on the cost of ~~undertakings~~equipment and inventory sold. The equipment and inventory acquired received a purchase accounting step-up in basis, which is a non-cash adjustment to ~~affect such~~the equipment cost ~~savings,~~pursuant to our ABL Credit Agreement.

(2) Represents transaction costs related to acquisitions of businesses, including the Acquisition, which are recognized within operating ~~expense reductions~~expenses in our Condensed Consolidated Statements of Net Income (Loss). These expenses are comprised of professional consultancy, legal, tax and ~~other synergies, as well as any~~accounting fees. Also included are expenses ~~incurred in connection~~associated with ~~acquisitions, are amounts to be included in~~ the ~~calculation~~integration of ~~Adjusted EBITDA.~~acquired businesses.

(3) Represents the ~~undepreciated cost~~impact of ~~replaced vehicle chassis and components from heavy maintenance, repair and overhaul activities associated with our fleet, which~~sales-type lease accounting for certain leases containing RPOs, as the application of sales-type lease accounting is ~~an adjustment~~not deemed to be representative of the ongoing cash flows of the underlying rental contracts. The adjustments are made pursuant to our ~~credit agreement.~~ABL Credit Agreement.

(4) Represents non-cash ~~stock~~share-based compensation expense associated with the issuance of stock options and restricted stock units.

(5) Represents the charge to earnings for our interest rate collar ~~(which is an undesignated hedge)~~ and the change in fair value of the liability for ~~warrants~~warrants.

Operating Results by Segment

Equipment Rental Solutions (ERS) Segment


	Three Months Ended March 31,
(in $000s)	2022		2021
Rental revenue	$	105,561	$	44,730
Equipment sales	59,353		10,485



Total revenue	164,914		55,215

Cost of rental revenue	24,791		15,537
Cost of equipment sales	43,230		6,740

Depreciation of rental equipment	43,966		16,885
Total cost of revenue	111,987		39,162
Gross profit	$	52,927	$	16,053

Total Revenue - For the three months ended March 31, 2022, the increase in total revenue for the ERS segment was driven by the Acquisition.

Cost of Revenue - The increase in cost of revenue for the three months ended March 31, 2022 was largely the result of the Acquisition.

Depreciation - Depreciation of our rental fleet increased in the three months ended March 31, ~~2021.~~

~~Average OEC on Rent.~~ ~~Average OEC on rent was $499.7 million for the three months ended March 31, 2021, remaining flat compared~~2022 due to the ~~same period in 2020, reflecting the slow recovery following the COVID-19 related project delays that negatively impacted OEC on rent beginning with the second quarter of the prior year.~~

~~Fleet Utilization.~~ Fleet utilization was 78.5% for the three months ended March 31, 2021, compared to 77.3% over the same period of 2020. Both periods were impacted by COVID-19 related customer project delays and the increase of 1.2% was primarily due to gains in rail and telecom.

~~OEC On Rent Yield.~~ ORY was 35.0% for the three months ended March 31, 2021, compared to 36.5% over the same period of 2020. Relatively flat ORY was driven by the mix of equipment types on rent and rental fleet mix and lower rental yield from a slower ramp in transmission projects as compared to distribution projects.

~~Operating Results by Segment~~

The Company manages its operations through two business segments: rental and sale of fleet and equipment (ERS), and the rental and sale of parts, tools, and accessories and maintenance, repair and upfit services of new and used heavy duty trucks and cranes (PTA). See Note 12, ~~Segments,~~ ~~to our unaudited condensed consolidated financial statements for additional information.~~

~~Equipment Rental and Sales Segment~~

Three Months Ended March 31,
(in $000s) 2021 2020 $ change % change
Rental revenue $ 44,730 $ 47,053 $ (2,323) (4.9) %
Sales of rental equipment 10,485 9,093 1,392 15.3 %
Sales of new equipment 7,502 7,577 (75) (1.0) %
Total revenues 62,717 63,723 (1,006) (1.6) %
Cost of revenue 29,202 27,320 1,882 6.9 %
Depreciation of rental equipment 16,885 18,976 (2,091) (11.0) %
Gross Profit $ 16,630 $ 17,427 $ (797) (4.6) %

~~Total Revenues.~~ Revenue in our ERS segment represented 80.1% and 78.0% of our consolidated revenues for the three months ended March 31, 2021 and 2020, respectively. ERS segment revenue decreased by $1.0 million for the three months ended March 31, 2021 compared to the same period in 2020. Rental revenue decreased $2.3 million as a result of rental fleet mix and lower rental yield from a slower ramp in transmission projects as compared to distribution projects. Sales of rental and new equipment, which can vary from quarter to quarter, increased $1.3 million due in part to the selective divestiture of under-utilized and aging fleet equipment.

~~Cost of Revenue.~~ The $1.9 million increase in cost of revenue, excluding depreciation, for the three months ended March 31, 2021 compared to the prior year is primarily due to costs related to increased sales of rental and new equipment.

~~Depreciation.~~ ~~Depreciation of our rental fleet decreased by $2.1 million for the three months ended March 31, 2021, compared to the same period in 2020, primarily due to sales of used equipment.~~Acquisition.

Gross ~~Profit.~~Profit - ~~Gross~~The increase in gross profit for the three months ended March 31, ~~2021, excluding depreciation of $16.9 million, decreased by $2.9 million compared~~2022 is due to the ~~same period in 2020 as a result of the greater mix of equipment sales.~~

Acquisition.

2831

~~Parts, Tools,~~Truck and ~~Accessories~~Equipment Sales (TES) Segment

Three Months Ended March 31,
(in $000s) 2021 2020 $ change % change
Rental revenue $ 3,559 $ 3,941 $ (382) (9.7) %
Parts sales and services 12,023 14,079 (2,056) (14.6) %
Total revenues 15,582 18,020 (2,438) (13.5) %
Cost of revenue 11,034 12,908 (1,874) (14.5) %
Depreciation of rental equipment 959 1,136 (177) (15.6) %
Gross Profit $ 3,589 $ 3,976 $ (387) (9.7) %


	Three Months Ended March 31,
(in $000s)	2022		2021

Equipment sales	$	167,833	$	7,502






Cost of equipment sales	144,048		6,925



Gross profit	$	23,785	$	577

~~Total Revenues.~~Equipment Sales - ~~PTA segment revenue decreased $2.4 million or 13.5%~~Equipment sales increased for the three months ended March 31, ~~2021 compared to same period in 2020. The PTA segment continued to experience some headwinds from COVID-19 in the first quarter of 2021. Also contributing~~2022 due to the ~~decline was a reduction in service and upfit volumes at the segment's Truck Utilities division.~~Acquisition.

Cost of ~~Revenue.~~Equipment Sales - Cost of ~~revenue, excluding depreciation,~~equipment sales increased in line with the ~~PTA segment decreased $1.9 million~~increase in equipment sales revenue for the three months ended March 31, ~~2021 as a result of increased repair costs as a result of deferred maintenance in response to COVID-19 during 2020.~~2022.

Gross ~~Profit.~~Profit - ~~PTA~~The increase in gross profit ~~excluding $1.0 million of depreciation, decreased $0.6 million, or 11.0%,~~ for the three months ended March 31, ~~2021, compared~~2022 is primarily a function of the increase in equipment sales revenue.

Aftermarket Parts and Services (APS) Segment


	Three Months Ended March 31,
(in $000s)	2022		2021
Rental revenue	$	3,584	$	3,559


Parts and services revenue	30,145		12,023

Total revenue	33,729		15,582

Cost of revenue	24,950		11,034


Depreciation of rental equipment	998		959
Total cost of revenue	25,948		11,993
Gross profit	$	7,781	$	3,589

Total Revenue - The increase in revenue for the three months ended March 31, 2022 was driven by the acquisition of Custom Truck L.P.

Cost of Revenue - Compared to the ~~same period in 2020 as a result~~prior year, cost of ~~lower rental~~ revenue ~~and higher repair costs.~~increased due to the Acquisition.

Gross Profit - Total segment gross profit was impacted by increased revenue in the period.

2932

Supplemental Pro Forma Information

As result of the Acquisition and Related Financing Transactions, we believe presenting supplemental pro forma financial information is beneficial to the readers of our financial statements. The following table sets forth key metrics used by management to run our business on a pro forma and combined basis as if the Acquisition and Related Financing Transactions had occurred on January 1, 2020. Refer to the information below for a full reconciliation of the Condensed Consolidated Statements of Net Income (Loss).

Summary Pro Forma Financial Information and Operational Data


	Three Months Ended March 31,
(in $000s)	2022 Actual			2021 Pro Forma
Revenue	$	366,476		$	394,770
Gross profit	$	84,493		$	70,425
Net income (loss)	$	(3,273)		$	(15,280)
Adjusted EBITDA	$	91,477		$	72,866
Fleet and Operational Metrics:
Ending OEC	$	1,364,660		$	1,326,000
Average OEC on rent	$	1,119,100		$	1,047,310
Fleet utilization	82.5		%	78.2		%
OEC on rent yield	39.1		%	37.8		%
Sales order backlog	$	586,368		$	193,973

Pro Forma Financial Statements

The following pro forma information has been prepared in accordance with Article 11 of Regulation S-X, "Pro Forma Financial Information," as amended by the Securities and Exchange Commission's Final Rule Release No. 33-10786, "Amendments to Financial Disclosures About Acquired and Disposed Businesses," as adopted on May 21, 2020 ("Article 11"). The amended Article 11 became effective on January 1, 2021. The pro forma combined Condensed Consolidated Statements of Net Income (Loss) for the years ended December 31, 2021 and 2020 combine the Condensed Consolidated Statements of Net Income (Loss) of Nesco Holdings and Custom Truck LP, giving effect to the following items as if they had occurred on January 1, 2020:

i.the sale of the Company’s Common Stock, proceeds from which were used for the Acquisition;

ii.the extinguishment of Nesco’s asset-based revolving credit facility (the "2019 Credit Facility") and its 10% Senior Secured Second Lien Notes due 2024 (the "2024 Secured Notes") and the contemporaneous issuance of the 2029 Secured Notes and borrowings under the ABL Facility, proceeds from which were used for the Acquisition; and

iii.the estimated effects of the Acquisition of Custom Truck LP, inclusive of the estimated effects of debt repaid.

The adjustments presented in the following pro forma financial information have been identified and presented to provide relevant information necessary for a comprehensive understanding of the combined company following the transactions and events described above. The pro forma financial information set forth below is based upon available information and assumptions that we believe are reasonable and is for illustrative purposes only. The financial results may have been different if the transactions described above had been completed sooner. You should not rely on the pro forma financial information as being indicative of the historical results that would have been achieved if these transactions and events had been completed as of January 1, 2020. The pro forma combined financial information below should be read in conjunction with the consolidated financial statements and related notes of the Company included elsewhere in this Annual Report on Form 10-K. All pro forma adjustments and their underlying assumptions are described more fully below.

During the preparation of these pro forma combined financial statements, we assessed whether there were any material differences between the accounting policies of the Company and Custom Truck LP. The assessment we performed did not identify any material differences and, as such, these pro forma combined financial statements do not adjust for or assume any differences in accounting policies between the two entities.

The following pro forma combined financial information and associated notes are based on the historical financial statements of Nesco Holdings and Custom Truck LP prior to the Acquisition. The pro forma combined Condensed Consolidated Statements of Net Income

(Loss) for periods indicated below are based on, derived from, and should be read in conjunction with, the Company’s historical financial statements.

Pro Forma Combined Condensed Consolidated Statements of Net Income (Loss) — Three Months Ended March 31, 2021


(in $000s)	Nesco Holdings		Custom Truck LP		Pro Forma Adjustmentsa			Pro Forma Combined
Rental revenue	$	48,289	$	51,973	$	—		$	100,262


Equipments sales	17,987		245,955		—			263,942
Parts sales and services	12,023		18,543		—			30,566
Total revenue	78,299		316,471		—			394,770
Cost of revenue	40,236		240,678		(987)		b	279,927
Depreciation of rental equipment	17,844		22,757		3,817		c	44,418
Total cost of revenue	58,080		263,435		2,830			324,345
Gross profit	20,219		53,036		(2,830)			70,425
Selling, general and administrative	12,050		34,428		—			46,478
Amortization	754		1,990		3,590		d	6,334
Non-rental depreciation	21		1,151		(213)		d	959
Transaction expenses and other	10,448		5,254		(15,702)		e	—

Total operating expenses	23,273		42,823		(12,325)			53,771
Operating income (loss)	(3,054)		10,213		9,495			16,654

Interest expense, net	14,906		9,992		(3,919)		f	20,979
Finance and other expense (income)	5,857		(2,346)		—			3,511
Total other expense	20,763		7,646		(3,919)			24,490
Income (loss) before taxes	(23,817)		2,567		13,414			(7,836)
Taxes	4,090		—		3,354		g	7,444
Net income (loss)	$	(27,907)	$	2,567	$	10,060		$	(15,280)

a.The pro forma adjustments give effect to the following as if they occurred on January 1, 2020: (i) the Acquisition, (ii) the extinguishment of Nesco Holdings’ 2019 Credit Facility the 2024 Secured Notes repaid in connection with the Acquisition and (iii) the extinguishment of the outstanding borrowings of Custom Truck LP’s credit facility and term loan that was repaid on the closing of the Acquisition.

b.Represents adjustments to cost of revenue for the reduction to depreciation expense for the difference between historical depreciation and depreciation of the fair value of the property and equipment.

c.Represents the adjustment for depreciation of rental fleet relating to the mark-up to fair value from purchase accounting as a result of the Acquisition.

d.Represents the differential in other amortization and depreciation related to the fair value of the identified intangible assets from purchase accounting as a result of the Acquisition.

e.Represents the elimination of transaction expenses recognized in the Company’s consolidated financial statements for the three months ended March 31, 2021. The expenses were directly related to the Acquisition and are reflected as adjustments, as if the Acquisition had occurred on January 1, 2020.

f.Reflects the differential in interest expense, inclusive of amortization of capitalized debt issuance costs, related to the Company’s debt structure after the Acquisition as though the following had occurred on January 1, 2020: (i) borrowings under the ABL Facility; (ii) repayment of the 2019 Credit Facility; (iii) repayment of the 2024 Secured Notes; (iv) repayment of Custom Truck LP’s borrowings under its revolving credit and term loan facility; and (v) the issuance of the 2029 Secured Notes.

g.Reflects the adjustment to recognize the tax impacts of the pro forma adjustments for which a tax expense is recognized using a statutory tax rate of 25%.

Reconciliation of Actual (2022) and Pro Forma Net Income (Loss) (2021) to Pro Forma Adjusted EBITDA

The following table provides a reconciliation of actual and pro forma net income (loss) to actual and pro forma Adjusted EBITDA:


	Three Months Ended March 31,
(in $000s)		2022 Actual		2021 Pro Forma
Net income (loss)		$	(3,273)	$	(15,280)
Interest expense		17,445		18,500
Income tax expense		3,005		7,444
Depreciation and amortization		62,500		53,599
EBITDA		79,677		64,263
Adjustments:
Non-cash purchase accounting impact		9,026		54
Transaction and process improvement costs		4,648		293

Impairment of long-lived assets		—		—
Sales-type lease adjustment		529		1,155
Share-based payments		3,364		1,255
Change in fair value of derivative and warrants		(5,767)		5,846
Adjusted EBITDA		$	91,477	$	72,866

Liquidity and Capital Resources

~~Historical Liquidity~~

Our principal sources of liquidity include cash generated by operating activities and borrowings under revolving credit ~~facilities.~~facilities as described below. We believe that our liquidity sources and operating cash flows are sufficient to address our operating, debt service and capital requirements over the next 12 months; however, we are continuing to monitor the impact of COVID-19 and associated on-going supply chain issues on our business and the financial markets. As of March 31, ~~2021,~~2022, we had ~~$3.2~~$23.8 million in cash and cash equivalents compared to ~~$3.4~~$35.9 million as of December 31, ~~2020.~~2021. As of March 31, ~~2021,~~2022, we had ~~$260.0~~$410.1 million of outstanding borrowings under our ~~2019 Credit~~ABL Facility compared to ~~$251.0~~$394.9 million of outstanding borrowing under the ~~2019 Credit~~ABL Facility as of December 31, ~~2020. In connection with the Acquisition, our debt structure changed significantly. Our debt structure effective as of April 1, 2021 is described below.~~2021.

ABL Facility

In connection with the Acquisition that closed on April 1, 2021 (the “Closing Date”), Nesco Holdings II, Inc., the buyer, as borrower, and the ABL Guarantors (as defined in the ABL Credit Agreement) entered into the ABL Credit Agreement. The ABL Facility provides for revolving loans, in an amount equal to the lesserAs of ~~the then-current~~March 31, 2022, borrowing base (described below) and the committed maximum borrowing capacity of $750.0 million, with a $75.0 million swingline sublimit, and letters of credit in an amount equal to the lesser of (a) $50.0 million and (b) the aggregate unused amount of commitmentsavailability under the ABL Facility ~~then in effect. The ABL Facility permits Buyer to incur additional capacity under the ABL Facility in an aggregate amount equal to the greater of (x) $200.0~~was $330.9 million, and ~~(y) 60.0%~~outstanding standby letters of ~~Consolidated EBITDA (as defined in the ABL Credit Agreement) in additional commitments. As of the Closing Date, Buyer will have no commitments from any lender to provide incremental commitments.~~

~~Borrowings under the ABL Facility will be limited by a borrowing base calculation based on the sum of, without duplication:~~

~~(a) 90.0% of book value of eligible accounts of Buyer and certain ABL Guarantors; plus~~

~~(d) 100.0% of eligible cash of Buyer and certain ABL Guarantors; minus~~

~~(e) any reserves established by the administrative agent from time to time.~~

credit were $4.8 million. Borrowings under the ABL Facility will bear interest at a floating rate, which, at Buyer’s election, will be (a) in the case of U.S. dollar denominated loans, either (i) ~~LIBOR~~the London Interbank Offered Rate (“LIBOR”) plus an applicable margin or (ii) the base rate plus an applicable margin or (b) in the case of Canadian dollar denominated loans, the CDOR rate plus an applicable margin. The applicable margin varies based on Average Availability (as defined in the ABL Credit Agreement) from (x) with respect to base rate loans, 0.50% to 1.00% and (y) with respect to LIBOR loans and CDOR rate loans, 1.50% to 2.00%. The ability to draw under the ABL Facility or issue letters of credit thereunder is conditioned upon, among other things, delivery of prior written notice of a borrowing or issuance, as applicable, the ability to reaffirm the representations and warranties contained in the ABL Credit Agreement and the absence of any default or event of default under the ABL Facility.

The balance outstanding under the ABL Facility will be due and payable on April 1, 2026. Buyer may at any time and from time to time prepay, without premium or penalty, any borrowing under the ABL Facility and terminate, or from time to time reduce, the commitments under the ABL Facility.

subsidiaries owned directly by a U.S. subsidiary and subject to certain other exceptions and subject to certain exceptions in the case of non-wholly owned subsidiaries) and (ii) a first priority security interest in substantially all of the ABL Guarantors’ present and after-acquired assets (subject to certain exceptions).

The ABL Facility contains customary negative covenants for transactions of this type, including covenants that, among other things, limit Buyer’s and its restricted subsidiaries’ ability to: incur additional indebtedness; pay dividends, redeem stock or make other distributions; repurchase, prepay or redeem subordinated indebtedness; make investments; create restrictions on the ability of Buyer’s restricted subsidiaries to pay dividends to Buyer; create liens; transfer or sell assets; consolidate, merge, sell or otherwise dispose of all or substantially all of Buyer’s assets; enter into certain transactions with Buyer’s affiliates; and designate subsidiaries as unrestricted subsidiaries, in each case subject to certain exceptions, as well as a restrictive covenant applicable to each Specified Floor Plan Company (as defined in the ABL Credit Agreement) limiting its ability to own certain assets and engage in certain lines of business. In addition, the ABL Facility contains a springing financial covenant that requires Buyer and its restricted subsidiaries to maintain a Consolidated Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement) of at least 1.00 to 1.00; provided that the financial covenant shall only be tested when Specified Excess Availability (as defined in the ABL Credit Agreement) under the ABL Facility is less than the greater of (i) 10.0% of the Line Cap (as defined in the ABL Credit Agreement) and (ii) $60.0 million (the “FCCR Test Amount”), in which case it shall be tested at the end of each succeeding fiscal quarter thereafter until the date on which Specified Excess Availability (as defined in the ABL Credit Agreement) has exceeded the FCCR Test Amount for 30 consecutive calendar days.

2029 Secured Notes

On the Closing Date, the Issuer issued $920.0 million in aggregate principal amount of 5.50% senior secured second lien notes due 2029. The 2029 Secured Notes were issued pursuant to an indenture, dated as of April 1, 2021, between the Issuer, Wilmington Trust, National Association, as trustee and the guarantors party thereto (the “Indenture”). The Issuer will pay interest on the 2029 Secured Notes semi-annually in arrears on April 15 and October 15 of each year, commencing on October 15, 2021. Unless earlier redeemed, the 2029 Secured Notes will mature on April 15, 2029.

~~Ranking and Security~~

The 2029 Secured Notes are jointly and severally guaranteed on a senior secured basis by Capitol Investment Merger Sub 2, LLC and, subject to certain exceptions, each of the Issuer’s existing and future wholly owned domestic restricted subsidiaries that is an obligor under the ABL Credit Agreement or certain other capital markets indebtedness. Under the terms of the Indenture, the 2029 Secured Notes and the related guarantees rank senior in right of payment to all of the Issuer’s and the guarantors’ subordinated indebtedness and are effectively senior to all of the Issuer’s and the guarantors’ unsecured indebtedness and indebtedness secured by liens junior to the liens securing the 2029 Secured Notes, in each case, to the extent of the value of the collateral securing the 2029 Secured Notes. The 2029 Secured Notes and the related guarantees rank equally in right of payment with all of the Issuer’s and the guarantors’ senior indebtedness, without giving effect to collateral arrangements, and effectively equal to all of the Issuer’s and the guarantors’ senior indebtedness secured on the same priority basis as the 2029 Secured Notes. The 2029 Secured Notes and the related guarantees are effectively subordinated to any of the Issuer’s and the guarantors’ indebtedness that is secured by assets that do not constitute collateral for the 2029 Secured Notes to the extent of the value of the assets securing such indebtedness, and indebtedness that is secured by a senior-priority lien, including the ABL Credit Agreement to the extent of the value of the collateral securing such indebtedness, and are structurally subordinated to the liabilities of the Issuer’s non-guarantor subsidiaries.

~~Optional Redemption Provisions and Repurchase Rights~~

Restrictive Covenants

The Indenture contains covenants that limit the Issuer’s (and certain of its subsidiaries’) ability to, among other things: (i) incur additional debt or issue certain preferred stock; (ii) pay dividends, redeem stock or make other distributions; (iii) make other restricted payments or investments; (iv) create liens on assets; (v) transfer or sell assets; (vi) create restrictions on payment of dividends or other amounts by the Issuer to the Issuer’s restricted subsidiaries; (vii) engage in mergers or consolidations; (viii) engage in certain transactions with affiliates; or (ix) designate the Issuer’s subsidiaries as unrestricted subsidiaries.

Events of Default

The Indenture provides for customary events of default, including non-payment, failure to comply with covenants or other agreements in the Indenture and certain events of bankruptcy or insolvency. If an event of default occurs and continues with respect to the 2029 Secured Notes, the trustee or the holders of at least 30% in aggregate principal amount of the outstanding 2029 Secured Notes of such series may declare the entire principal amount of all the 2029 Secured Notes to be due and payable immediately (except that if such event of default is caused by certain events of bankruptcy or insolvency, the entire principal of the 2029 Secured Notes will become due and payable immediately without further action or notice).

Floor Plan Financing

Daimler Truck Financial

The Company is party to the Wholesale Financing Agreement with Daimler Truck Financial (the “Daimler Facility”) which bears interest at a rate of the Federal Funds Rate (“Prime”) plus 0.80% after an initial interest free period of up to 150 days. The total capacity under the Daimler Facility is $175.0 million. As of March 31, 2022, borrowings on the Daimler Facility were $39.0 million. The Daimler agreement is evergreen and is subject to termination by either party through written notice.

PACCAR

The Company has an Inventory Financing Agreement with PACCAR Financial Corp that provides the Company with a line of credit of $75.0 million to finance inventory purchases of new Peterbilt and/or Kenworth trucks, tractors, and chassis. Amounts borrowed against this line of credit incur interest at a rate of LIBOR plus 2.4%. As of March 31, 2022, borrowings on the PACCAR line of credit were $20.7 million. The PACCAR agreement extends automatically each April and is subject to termination by either party through written notice.

PNC Equipment Finance, LLC

The Company has an Inventory Loan, Guaranty and Security Agreement (the “Loan Agreement”) with PNC Equipment Finance, LLC. The Loan Agreement provides the Company with a $295.0 million revolving credit facility, which matures on August 25, 2022 and bears interest at a rate of LIBOR plus 3.05%. As of March 31, 2022, borrowings on the Loan Agreement were $220.3 million.

Notes Payable

Our notes payable require the Company to pay monthly and quarterly interest payments and have maturities beginning in 2022 through 2026. Notes payable includes (i) debt assumed from the Acquisition related to borrowings for facilities renovations and to support general business activities, (ii) notes payable related to past businesses acquired, and (iii) term loans. Subsequent to the Acquisition, the Company consolidated certain notes payable assumed from the Acquisition into a $23.9 million loan agreement with Security Bank of Kansas City (“SBKC”) that bears interest at a rate of 3.125% per annum, and a $3.5 million loan agreement with SBKC that bears interest at a rate of 3.5% per annum.

Historical Cash Flows

The following table summarizes our sources and uses of cash:

Three Months Ended March 31,
(in $000s) 2021 2020
Net cash flow from operating activities $ (12,086) $ (2,819)
Net cash flow from investing activities 3,972 (27,190)
Net cash flow from financing activities 7,893 33,943
Net change in cash $ (221) $ 3,934


	Three Months Ended March 31,
(in $000s)		2022		2021
Net cash flow used in operating activities		$	(29,771)	$	(12,086)
Net cash flow (used in) provided by investing activities		(48,458)		3,972
Net cash flow provided by financing activities		66,138		7,893
Net change in cash and cash equivalents		$	(12,091)	$	(221)

As of March 31, ~~2021,~~2022, we had cash and cash equivalents of ~~$3.2~~$23.8 million, a decrease of ~~$0.2~~$12.1 million from December 31, ~~2020.~~2021. Generally, we manage our cash flow by using any excess cash, after considering our working capital and capital expenditure needs, ~~to pay~~including paying down the outstanding balance under our ~~revolving credit facility, and we intend to do the same with respect to our~~ ABL Facility.

Cash Flows from Operating Activities

Net cash used in operating activities was ~~$12.1~~$29.8 million for the three months ended March 31, ~~2021,~~2022, as compared to ~~$2.8~~$12.1 million in the same period of ~~2020.~~2021. The ~~decrease~~increase in cash ~~flow~~used was driven by ~~costs~~increases in cash used in accounts and ~~expenses related to~~financing receivables ($35.0 million), inventory ($46.3 million), floor plan payables - trade, net ($13.1 million) and customer deposits and deferred revenue ($9.9 million) offset by increases in cash provided by accounts payable ($28.9 million), depreciation and amortization ($42.6 million) and net losses ($23.1 million) in the ~~Acquisition.~~

current period.

Cash Flows from Investing Activities

Net cash ~~provided by~~used in investing activities was ~~$4.0~~$48.5 million for the three months ended March 31, ~~2021,~~2022, as compared to cash ~~used in~~provided by investing activities of ~~$27.2~~$4.0 million in ~~2020.~~2021. The increase in cash ~~flow is primarily due to decreased rental equipment purchasing, increased proceeds from~~used was driven by the ~~sale~~acquisition of HiRail ($50.5 million) and an increase in cash used in purchases of rental equipment ($34.5 million) offset by cash provided by proceeds from sales and ~~parts and from increased insurance recoveries.~~disposals of rental equipment ($34.6 million).

Cash Flows from Financing Activities

Net cash provided by financing activities was ~~$7.9~~$66.1 million for the three months ended March 31, ~~2021,~~2022, as compared to ~~$33.9~~$7.9 million in ~~2020. Improvements~~2021. The increase in ~~working capital management resulted~~cash provided was driven by the acquisition of inventory through floor plan financing - non trade, net of repayments, ($55.0 million) and an increase in ~~reduced levels of net~~cash provided by borrowings ~~on our~~under revolving credit ~~facility.~~facilities, net of repayments ($6.1 million).

~~Critical Accounting Policies~~

For a discussion of our critical accounting policies and estimates, see “Critical Accounting Policies” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2020. For a summary of our significant accounting policies, see Note 2, ~~Summary of Significant Accounting Policies, to the referenced Annual Report on Form 10-K. There have been no significant changes in our critical accounting policies and estimates during the quarterly period ended March 31, 2021.~~

~~Recent Accounting Pronouncements~~

~~See Note 2,~~ ~~Summary of Significant Accounting Policies, to our Annual Report on Form 10-K for a discussion of recently issued and adopted accounting pronouncements.~~

Item 3. ~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~Quantitative and Qualitative Disclosures About Market Risk

Interest rate risk

We are subject to interest rate market risk in connection with our long-term debt. Our principal interest rate exposure relates to outstanding amounts under our asset-based revolving credit ~~facilities. The Company’s 2019 Credit Facility provided for variable rate borrowings of up to $385.0 million, subject to a borrowing base.~~facility. Interest rate changes generally impact the amount of our interest payments and, therefore, our future net income and cash flows, assuming other factors are held constant. ~~The 2019 Credit Facility was repaid in full, and all commitments thereunder were terminated, on April 1, 2021. Assuming~~As of March 31, 2022, we had ~~completed the Acquisition and related financing transactions and applied the proceeds as of December 31, 2020, we would have had $415.0~~$410.1 million aggregate principal amount of variable rate debt, consisting of ~~that $415.0 million that will be~~the balance outstanding under the ABL Facility. Holding other variables constant, each one-eighth percentage point increase or decrease in the applicable interest rates would correspondingly ~~changed~~change our interest expense on the ABL Facility by approximately $0.5 million ~~per year.~~on an annual basis. This amount does not reflect the impact of the interest rate collar currently in place.

We manage a portion of our risks from exposures to fluctuations in interest rates as part of our risk management program through the use of derivative financial instruments. The objective of controlling these risks is to limit the impact on earnings and cash flows caused by fluctuations, and our primary exposure is from our variable-rate debt. ~~We currently have~~During the three months ended March 31, 2022, we settled an interest rate collar agreement in place as a hedge against fluctuations in the required interest payments due on variable rate debt. All of our derivative activities are for purposes other than trading.

Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our standard master agreements) on an individual counterparty basis.

~~Our interest~~During the three months ended March 31, 2022, we generated $9.6 million of U.S. dollar denominated revenues in Canadian dollars. Each 100 basis point increase or decrease in the average Canadian dollar to U.S. dollar exchange rate ~~collar contract (currently~~for the year would have correspondingly changed our ~~only derivative contract) was executed under a standard master agreement that contains a cross-default provision to~~revenues by approximately $0.1 million. We do not currently hedge our ~~borrowing agreement with the counterparty, which provides the ability of the counterparty to terminate the interest~~exchange rate ~~collar agreement upon an event of default under the borrowing agreement.~~exposure.

3337

Item 4. ~~CONTROLS AND PROCEDURES~~Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

~~We carried out an evaluation, under the supervision and with the participation~~As of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2021, the end of the period covered by this ~~quarterly report,~~Quarterly Report on Form 10-Q we carried out an evaluation with the participation of our Chief Executive Officer and Chief Financial Officer. Based on that assessment, the Chief Executive Officer and Chief Financial Officer concluded as of March 31, 2022, the Company’s disclosure controls and procedures were ~~designed to provide and were~~not effective ~~to provide reasonable assurance that~~because of the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

~~Changes in Internal Control over Financial Reporting~~

~~No change~~material weaknesses in our internal control over financial reporting ~~(as defined~~described below.

Inadequate General Information Technology Controls and Business Process Controls

On April 1, 2021, we completed the acquisition of Custom Truck LP, which resulted in ~~Rules 13a-15(f)~~a significant change in the Company’s internal control over financial reporting. We are in the process of integrating policies, processes, people, technology and ~~15d-15(f) under~~operations for the ~~Exchange Act)~~combined company. As part of this integration, we have identified deficiencies in the design and operating effectiveness of internal controls associated with the control activities component of the COSO framework. These include:

1.During the third quarter ended September 30, 2021, we identified a material weakness in the design and operation of information technology general controls (“ITGCs”) related to an enterprise resource planning (“ERP”) system that supports the processes related to the preparation of our consolidated financial statements. Specifically, we did not maintain adequate control over user access to the ERP system to ensure appropriate segregation of duties and to restrict access to financial applications and data to appropriate Company personnel.

2.During the fourth quarter ended December 31, 2021, we identified control deficiencies related to overall ITGCs for both user access and program change-management for systems supporting all of the Company’s internal control processes and controls, controls over the completeness and accuracy of information used in business process controls and management review controls. Our business process controls (automated and manual) and management review controls were also deemed ineffective because they are adversely impacted by ineffective ITGCs. These control deficiencies could result in misstatements potentially impacting all financial statement accounts and disclosures that may not be prevented or detected.

Accordingly, these deficiencies constitute material weaknesses. The material weaknesses did not result in any identified misstatements to our consolidated financial statements, and there were no changes to previously released financial results.

(b) Remediation of the Material Weaknesses in Internal Control Over Financial Reporting

The Company is in the process of implementing changes associated with the design, implementation, and monitoring information technology general controls in the areas of user access and program change-management for systems supporting all of the Company’s internal control processes to ensure that internal controls are designed and operating effectively. A significant portion of our remediation plan to address the control deficiencies encompass the completion of our new ERP system implementation planned for the second and third quarters of 2022. The new ERP system will allow us to address segregation of duties by establishing user roles specific to the nature of each job function. We are also establishing controls to ensure appropriate authorization of new user access requests, including performance of routine reviews of user access, and controls over program-change management. Additionally, we are in the process of enhancing relevant process level controls that are relevant to the preparation of consolidated financial statements. The material weaknesses cannot be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Other than the ongoing remediation plans described above, there were no changes to our internal control over financial reporting that occurred during the ~~quarterly period~~quarter ended March 31, ~~2021,~~2022 that ~~has~~have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting. On January 14, 2022, we completed the acquisition of Hi-Rail Leasing, Inc. (“Hi-Rail”). In conducting our evaluation of effectiveness of our internal control over financial reporting, we have elected to exclude Hi-Rail from our evaluation, as permitted under existing SEC rules.

PART II - OTHER INFORMATION

Item 1. ~~LEGAL PROCEEDINGS~~Legal Proceedings

We may, at any given time, be named as a defendant in certain lawsuits, investigations and claims arising in the ordinary course of business. While the outcome of these potential lawsuits, investigations and claims cannot be predicted with certainty, we do not expect these matters to have a material adverse impact on our business, results of operations, cash flows or financial condition. In the opinion of management, there are no pending litigations, disputes or claims against the Company that, if decided adversely, would have a material adverse effect on its consolidated financial condition, cash flows or results of operations.

Item 1A. ~~RISK FACTORS~~Risk Factors

~~The~~No material changes occurred to the indicated risk factors ~~presented below amend and restate the risk factors previously~~as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020. In addition to the other information contained in this Form 10-Q, the following risk factors should be considered carefully in evaluating the Company. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.2021.

Effective management of our rental equipment is vital to our business and inability to obtain raw materials, component parts and/or finished goods in a timely and cost-effective manner would adversely affect our ability to manufacture and market our products.

Our rental equipment has a long economic life and managing this equipment is a critical element to our business. We must successfully maintain and repair our equipment cost-effectively to maximize the economic life of our products and the level of proceeds from the sale of such products. As the needs of our customers change, we may need to incur costs to relocate or remanufacture our assets to better meet shifts in demand. If the distribution of our assets is not aligned with regional demand, we may be unable to take advantage of opportunities despite excess inventory in other regions. If we are not able to successfully manage our assets, our business, results of operations and financial condition may be materially adversely affected.

We purchase raw materials, component parts and finished goods to be used in the manufacturing and sale of our products. In addition, we may incorporate vehicle chassis provided directly by our customers in our production process. Although the vast majority of our raw materials and component parts are sourced domestically, certain of our suppliers are based overseas, and certain of our domestic suppliers may source subcomponents from overseas. Outbreaks of communicable diseases have been known to occur in certain of these international regions, resulting in public health crises. Changes in our relationships with suppliers, shortages in availability of materials, production delays, regulatory restrictions, public health crises, or other supply chain disruptions, whether due to our suppliers or customers, could have a material adverse effect on our ability to timely manufacture and market products. Increases in the costs of purchased raw materials, component parts or finished goods could result in manufacturing interruptions, delays, inefficiencies or our inability to market products. In addition, our profit margins would decrease if prices of purchased raw materials, component parts or finished goods increase and we are unable to pass on those increases to our customers.

3447

A small portion of our workforce is unionized, and more of our workforce could become unionized in the future, which could negatively impact the stability of our production, materially reduce our profitability and increase the risk of work stoppages.

Our employees have the right at any time under the National Labor Relations Act to form or affiliate with a union, and unions may conduct organizing activities in this regard. If our employees choose to form or affiliate with a union and the terms of a union collective bargaining agreement are significantly different from our current compensation and job assignment arrangements with our employees, these arrangements could negatively impact the stability of our production, materially reduce our profitability and increase the risk of work stoppages. In addition, even if our managed operations remain non-union, our business may still be adversely affected by work stoppages at any of our suppliers that are unionized. The stoppage of work for a prolonged period of time at one, or several, of our principal manufacturing facilities resulting from union or non-union matters, could materially adversely affect our business.

As a small portion of our workforce is unionized, we are subject to risk of work stoppages and other labor relations matters. As of December 31, 2020, approximately 4% of the U.S. hourly workers of Custom Truck One Source, L.P. were represented by a labor union and were covered by a collective bargaining agreement. Any strikes, threats of strikes or other organized disruptions in connection with the negotiation of new labor agreements or other negotiations could materially adversely affect our business as well as impair our ability to implement further measures to reduce costs and improve production efficiencies.

~~A material disruption to one of our operation and manufacturing locations could adversely affect our ability to generate revenue.~~

We have several significant production and manufacturing locations. If operations at any of these production and manufacturing locations were disrupted as a result of public health concerns, equipment failures, natural disasters, work stoppages, power outages or other reasons, our business, financial conditions and results of operations could be adversely affected. Interruptions in production could increase costs and delay delivery of units in production. Production capacity limits could cause us to reduce or delay sales efforts until production capacity is available.

Subsequent to the completion of the Acquisition, we may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition and results of operations, which could cause you to lose some or all of your investment.

Although we have conducted due diligence in connection with the Acquisition, we cannot assure you that this diligence will surface all material issues that may arise as a result of the consummation of the Acquisition. As a result of these factors, we may be forced to later write down or write off assets, restructure operations, or incur impairment or other charges that could result in losses. Even if our due diligence successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with our preliminary risk analysis. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about the post-combination company or its securities.

The cost of new equipment that we purchase for use in our rental fleet or for our sales inventory may increase and therefore we may spend more for such equipment, and in some cases, we may not be able to procure equipment on a timely basis due to supplier constraints.

The cost of new equipment from manufacturers that we purchase for use in our rental fleet may increase as a result of factors beyond our control, such as inflation, higher interest rates and increased raw material costs, including increases in the cost of steel, which is a primary material used in most of the equipment we use. Such increases could materially impact our financial condition or results of operations in future periods if we are not able to pass such cost increases through to our customers in the form of higher prices. In addition, based on changing demands of our customers, the types of equipment we rent to our customers may become obsolete resulting in a negative impact to our financial condition based on the increased capital expenditures required to replace the obsolete equipment, and our potential inability to sell the obsolete equipment in the used equipment market. In addition, we may incur losses upon dispositions of our rental fleet due to residual value risk.

If the average age of our fleet of rental equipment were to increase, the cost of maintaining our equipment, if not replaced within a certain period of time, will likely increase. If our operating costs increase as our rental equipment fleet ages and we are unable to pass along such costs, our earnings will decrease. As of December 31, 2020, the average age of our rental equipment fleet excluding Mexico was approximately 4.0 years, compared to 3.6 years at December 31, 2019, and 3.7 years at December 31, 2018. As of December 31, 2020, the average age of Custom Truck’s rental fleet was approximately 2.8 years. The costs of maintenance may materially increase in the future. Any significant increase in such costs could have a material adverse effect on our business, financial condition or results of operations.

In addition, the market value of any given piece of rental equipment could be less than its depreciated value at the time it is sold. The market value of used rental equipment depends on several factors, including:

•~~the market price for new equipment of a like kind;~~

•~~wear and tear on the equipment relative to its age;~~

•~~the time of year that it is sold (prices are generally higher during the construction seasons);~~

•~~worldwide and domestic demands for used equipment;~~

•~~the supply of used equipment on the market; and~~

•~~general economic conditions.~~

We include in operating income the difference between the sales price and the depreciated value of equipment sold. Changes in our assumptions regarding depreciation could change our depreciation expense, as well as the gains or losses realized upon disposal of equipment. We cannot assure that used equipment selling prices will not decline. Any significant decline in the selling prices for used equipment could have a material adverse effect on our business, financial condition or results of operations.

~~The combined company will continue to incur significant transaction and transition costs following the Acquisition and related financing transactions.~~

Nesco and Custom Truck have incurred and the combined company expects to continue to incur significant, non-recurring costs in connection with the Acquisition and related financing transactions, including integrating and coordinating the two businesses, operations, policies and procedures. The combined company may also incur additional costs to retain key employees. While we have assumed that a certain level of transaction-related expenses will be incurred, factors beyond our control could affect the total amount or the timing of these expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately. These expenses could exceed the costs historically borne by us and adversely affect our financial condition and results of operations.

Integration of the Nesco and Custom Truck businesses may be difficult, costly and time-consuming, and the anticipated benefits and cost savings of the Acquisition and related financing transactions may not be realized or may be less than expected.

Our ability to realize the anticipated benefits of the Acquisition and related financing transactions will depend, to a large extent, on our ability to integrate the two businesses. The combination of two independent businesses is a complex, costly and time-consuming process and we cannot assure you that we will be able to successfully integrate Nesco and Custom Truck or, if the integration is successfully accomplished, that the integration will not be more costly or take longer than presently contemplated. If we cannot successfully integrate and manage the two businesses within a reasonable time following the Acquisition and related financing transactions, we may not be able to realize the potential and anticipated benefits of the Acquisition and related financing transactions, which could have a material adverse effect on our business, financial condition and operating results.

Our ability to realize the expected synergies and benefits of the Acquisition and related financing transactions is subject to a number of risks and uncertainties, many of which are outside of our control. These risks and uncertainties could adversely impact our business, financial condition and operating results, and include, among other things:

•our ability to complete the timely integration of operations and systems, organizations, standards, controls, procedures, policies and technologies, as well as the harmonization of differences in the business cultures of Nesco and Custom Truck;

•~~our ability to minimize the diversion of management attention from ongoing business concerns during the integration process;~~

•~~our ability to retain the service of key management and other key personnel;~~

•~~our ability to preserve customer, supplier and other important relationships and resolve potential conflicts that may arise;~~

•the risk that certain customers and suppliers will opt to discontinue business with the combined business or exercise their right to terminate their agreements as a result of the Acquisition and related financing transactions pursuant to change of control provisions in their agreements or otherwise;

•~~the risk that Custom Truck may have liabilities that we failed to or were unable to discover in the course of performing due diligence;~~

•~~difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the combination; and~~

•~~difficulties in managing the expanded operations of a significantly larger and more complex combined business.~~

We may encounter additional integration-related costs, fail to realize all of the benefits anticipated in the Acquisition and related financing transactions or be subject to other factors that adversely affect preliminary estimates. In addition, even if the operations of the two businesses are integrated successfully, the full benefits of the Acquisition and related financing transactions may not be realized, including the synergies, cost savings or sales or growth opportunities that we expect. The occurrence of any of these events, individually or in combination, could have a material adverse effect on the combined business’ financial condition and operating results.

We expect to achieve pro forma cost synergies totaling approximately $50 million within two years of the closing date of the Acquisition. We also expect to incur integration and restructuring costs of approximately $50 million to achieve these synergies, with $40 million of these costs incurred in the first two years following the closing date. The anticipated synergies are based upon assumptions about our ability to implement integration measures in a timely fashion and within certain cost parameters. Our ability to achieve the planned synergies is dependent upon a significant number of factors, many of which are beyond our control, such as our ability to integrate businesses that we acquire (including the integration of Nesco and Custom Truck), operating difficulties, increased operating costs, delays in implementing initiatives and general economic, competitive or industry conditions. For example, we may be unable to eliminate duplicative costs in a timely fashion or at all. Additionally, achieving these benefits may require certain related one-time costs, charges and expenses, which may be material. We can provide no assurance that we will be successful in generating growth, maintaining or increasing our cash flows or profitability or achieving cost savings and revenue enhancements in connection with the items reflected by these adjustments, and our inability to do so could have a material adverse effect on our business, cash flows, results of operations and financial position.

The assumptions and estimates underlying the pro forma cost synergies are inherently uncertain and, although considered reasonable by Nesco management as of the date of this report, are subject to significant business, economic and competitive risks and uncertainties that could cause actual results to differ materially from those contained in the financial projections, including, among others, risks and uncertainties due to general business, economic, regulatory, market and financial conditions, as well as changes in the combined company’s businesses, financial condition or results of operations, and other risks and uncertainties described in this “Risk Factors” section.

~~Platinum owns the majority of our equity, and its interests may not be aligned with yours.~~

Subsequent to the consummation of the Acquisition and related financing transactions, Platinum now owns the majority of our fully diluted shares and, therefore, has the power to control our affairs and policies. Platinum also controls, to a large degree, the election of directors, the appointment of management, the entry into mergers, sales of substantially all of our assets, and other extraordinary transactions. The directors so elected have authority, subject to the terms of our indebtedness, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions. The interests of Platinum could conflict with your interests; for example, it is in the business of making investments in companies and, from time to time in the future, may acquire interests in businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. Platinum may also pursue acquisition opportunities that may be complementary to our business and, as a result, these acquisition opportunities may not be available to us.

We have, and may incur, significant indebtedness and may be unable to service our debt. This indebtedness could adversely affect our financial position, limit our available cash and our access to additional capital and prevent us from growing our business.

We have a significant amount of indebtedness and may incur additional indebtedness in the future, including in connection with our growth capital expenditure plan. As of December 31, 2020, after giving effect to the Acquisition and related financing transactions, our total indebtedness would have been $1,377 million, consisting of $920.0 million in aggregate principal amount of the 2029 Secured Notes, $400 million of borrowings under our ABL Facility and capital lease and other debt obligations of $57 million (excluding approximately 360.7 million of indebtedness under our floorplan financing agreements). Although the Indenture and the ABL Credit Agreement contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant exceptions and qualifications, and the additional indebtedness incurred in compliance with these restrictions could be substantial. Moreover, the Indenture does not impose any limitation on our incurrence of certain liabilities or obligations that are not considered “Indebtedness” under the Indenture (such as operating leases), nor does it impose any limitation on the amount of liabilities incurred by our subsidiaries, if any, that might be designated as “unrestricted subsidiaries” under such Indenture. Similarly, the ABL Credit Agreement does not impose any limitation on our incurrence of certain liabilities or obligations that are not considered “Indebtedness” under the agreement (such as operating leases).

~~The level of our indebtedness could have important consequences, including:~~

•~~a portion of our cash flow from operations is dedicated to debt service and may not be available for other purposes;~~

•~~limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;~~

•limiting our ability to obtain financing in the future for working capital, capital expenditures and general corporate purposes, including acquisitions, and potentially impeding our ability to secure favorable lease terms;

•~~exposing us to the risk of increased interest rates as borrowings under our ABL Facility will be subject to variable rates of interest;~~

•~~making us more vulnerable to economic downturns and industry conditions and possibly limiting our ability to withstand competitive pressures;~~

•~~placing us at a competitive disadvantage compared to our competitors with less indebtedness;~~

•~~making it more difficult for us to satisfy our obligations with respect to our debt;~~

•~~limiting our flexibility in planning for and reacting to changes in the industry in which we compete; and~~

•~~increasing our cost of borrowing.~~

~~If new debt is added to our current debt levels, the risks that we now face would intensify.~~

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors, some of which are beyond our control. An inability to service our indebtedness could lead to a default under the Indenture or ABL Credit Agreement, which may result in an acceleration of our indebtedness.

To service our indebtedness, we will require a significant amount of cash. Our ability to pay interest and principal in the future on our indebtedness and to fund our capital expenditures and acquisitions will depend upon our future operating performance and the availability of refinancing indebtedness, which will be affected by prevailing economic conditions, the availability of capital, as well as financial, business and other factors, some of which are beyond our control.

Our future cash flow may not be sufficient to meet our obligations and commitments. If we are unable to generate sufficient cash flow from operations in the future to service our indebtedness and to meet our other commitments, we will be required to adopt one or more alternatives, such as refinancing or restructuring our indebtedness, selling material assets or operations or seeking to raise additional debt or equity capital. These actions may not be effected on a timely basis or on satisfactory terms or at all, and these actions may not enable us to continue to satisfy our capital requirements. In addition, our existing debt agreements, including the Indenture and the ABL Credit Agreement, contain, or future debt agreements may contain, restrictive covenants prohibiting us from adopting any of these alternatives. Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness.

The Indenture and the ABL Credit Agreement impose significant operating and financial restrictions on our company and our subsidiaries, which may prevent us from capitalizing on business opportunities.

~~The Indenture and the ABL Credit Agreement impose significant operating and financial restrictions on us. These restrictions will limit our ability, among other things, to:~~

•~~incur additional indebtedness;~~

•~~pay dividends or certain other distributions on our capital stock or repurchase our capital stock;~~

•~~make certain investments or other restricted payments;~~

•~~place restrictions on the ability of subsidiaries to pay dividends or make other payments to us;~~

•~~engage in transactions with stockholders or affiliates;~~

•~~sell certain assets or merge with or into other companies, reorganize our companies, or suspend or dispose of a substantial portion of our business;~~

•~~prepay or modify the terms of our other indebtedness;~~

•~~guarantee indebtedness; and~~

•~~create liens.~~

There are limitations on our ability to incur the full $750.0 million of commitments under the ABL Facility. Availability will be limited to the lesser of a borrowing base and $750.0 million. The borrowing base is calculated on a monthly (or more frequent under

certain circumstances) valuation of our parts inventory, fleet inventory accounts receivable and unrestricted cash (in each case, subject to customary reserves). As a result, our access to credit under the ABL Facility is potentially subject to significant fluctuations, depending on the value of the borrowing base-eligible assets as of any measurement date. With respect to the ABL Facility, we expect we will also be required by a springing financial covenant to, on any date when Availability (as such term shall be defined in the ABL Credit Agreement) is less than the greater of (i) 10% of the lesser of (A) the aggregate revolving commitments under the ABL Facility at such time and (B) the borrowing base at such time (such lesser amount, the “Line Cap”) and (ii) 60 million, maintain a minimum fixed charge coverage ratio of 1.00 to 1.00, tested for the four fiscal quarter period ending on the last day of the most recently ended fiscal quarter for which financials have been delivered, and at the end of each succeeding fiscal quarter thereafter until the date on which Availability has been equal to or greater than the greater of (x) 10% of the Line Cap, and (y) $56 million for 5 consecutive business days. Our ability to meet the financial covenant could be affected by events beyond our control. The inability to borrow under the ABL Facility may adversely affect our liquidity, financial position and results of operations.

These restrictions could limit our ability to obtain future financing, make strategic acquisitions or needed capital expenditures, withstand economic downturns in our business or the economy in general, conduct operations or otherwise take advantage of business opportunities that may arise. A failure to comply with the restrictions in the Indenture and the ABL Credit Agreement could result in an event of default under such instruments or credit agreement. Our future operating results may not be sufficient to enable compliance with the covenants in the Indenture or ABL Credit Agreement or to remedy any such default. In addition, in the event of an acceleration, we may not have or be able to obtain sufficient funds to refinance our indebtedness or make any accelerated payments, including those under the notes and under our ABL Facility. Also, we may not be able to obtain new financing. Even if we were able to obtain new financing, we cannot guarantee that the new financing will be on commercially reasonable terms or terms that are acceptable to us. If we default on our indebtedness, our business, financial condition or results of operations could be materially and adversely affected. If we fail to maintain compliance with these covenants in the future, we cannot assure you that we will be able to obtain waivers from the lenders and/or amend the covenants.

~~Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.~~

Borrowings under our ABL Facility are at variable rates of interest and will expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Assuming we had completed the Acquisition and related financing transactions and applied the proceeds as of December 31, 2020, we would have had $415.0 million aggregate principal amount of variable rate debt, consisting of that $415.0 million that will be outstanding under the ABL Facility. Holding other variables constant, each one-eighth percentage point increase or decrease in the applicable interest rates would correspondingly change our interest expense on the ABL Facility by approximately $0.5 million per year. This amount does not reflect the impact of the interest rate collar currently in place. In the future, we may enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to any of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk.

Item 2. ~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~Unregistered Sales of Equity Securities and Use of Proceeds

On April 1, 2021, CTOS Inc. issued 176,600,000 shares of Common Stock, in the aggregate, to the parties to the Rollover Agreements, Platinum and the PIPE Investors. Such shares of Common Stock were issued at a price of $5.00 per share, for $883.0 million in the aggregate. This issuance was made pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act and/or Rule 506(c) of Regulation D of the Securities Act. The issuance was completed to finance the acquisition of the partnership interests of Custom Truck One Source, L.P. on April 1, 2021.None.

Item 3. ~~DEFAULTS UPON SENIOR SECURITIES~~Defaults Upon Senior Securities

None.

Item 4. ~~MINE SAFETY DISCLOSURES~~Mine Safety Disclosures

Not applicable.

Item 5. ~~OTHER INFORMATION~~Other Information

None.

Item 6. ~~EXHIBITS~~Exhibits

Exhibit No.

Description

2.1 *

Purchase and Sale Agreement, dated as of December 3, 2020, by and among Blackstone Energy Partners NQ L.P., Blackstone Energy Family Investment Partnership SMD L.P., Blackstone Energy Family Investment Partnership NQ ESC L.P., Blackstone Capital Partners VI-NQ L.P., Blackstone Family Investment Partnership VI-NQ ESC L.P., Fred M. Ross, Jr. Irrevocable Trust, BEP UOS Feeder Holdco L.P., BCP VI UOS Feeder Holdco L.P., Blackstone Energy Management Associates NQ L.L.C., Blackstone Management Associates VI-NQ L.L.C., Nesco Holdings II, Inc., Nesco Holdings, Inc., Blackstone Capital Partners VI-NQ L.P., solely in its capacity as the representative of Sellers, and PE One source Holdings, LLC, solely with respect to Section 9.04 (Incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on December 4, 2020)

~~3.1~~

~~Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on April 2, 2021)~~

~~3.2~~

~~Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed on April 2, 2021)~~

~~4.1~~

Indenture, dated as of April 1, 2021, by and among Nesco Holdings II, Inc., Wilmington Trust, National Association, as Trustee and Collateral Agent, and the Guarantors party thereto from time to time (Incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on April 2, 2021)

~~4.2~~

~~Form of 5.50% Senior Note due 2029 (included in Exhibit 4.1 hereto) (Incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on April 2, 2021)~~

~~10.1~~

~~Form of Rollover and Contribution Agreement (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on December 4, 2020)~~

10.2 *

Common Stock Purchase Agreement, dated as of December 3, 2020, by and between Nesco Holdings, Inc. and PE One Source Holdings, LLC (Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on December 4, 2020)

10.3 *

Revolving Credit Agreement, dated as of April 1, 2021, by and among Capitol Investment Merger Sub 2, LLC, NESCO Holdings II, Inc., the various lenders and issuing banks party thereto and Bank of America, N.A., as administrative agent, collateral agent and swingline lender (Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on April 2, 2021)

~~10.4~~

Registration Rights Agreement, dated as of April 1, 2021, between Custom Truck One Source, Inc. and certain holders identified therein (Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed on April 2, 2021)

10.5 *

Amended and Restated Stockholders’ Agreement, dated as of April 1, 2021, among Custom Truck One Source, Inc. and certain holders identified therein (Incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed on April 2, 2021)

~~10.6~~

Corporate Advisory Services Agreement, dated as of April 1, 2021, between Custom Truck One Source, Inc. and Platinum Equity Advisors, LLC (Incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K filed on April 2, 2021)

~~21.1 +~~

~~Subsidiaries of the Company~~.

~~31.1 +~~31.1*

Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

~~31.2 +~~31.2*

Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32 +*

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

XBRL Taxonomy Extension Schema Document.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase.

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

+* Filed or furnished herewith.

* Schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish a supplemental copy of any omitted schedule or attachment to the SEC upon request.

4049

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




		CUSTOM TRUCK ONE SOURCE, INC. (Registrant)

Date:	May ~~17, 2021~~10, 2022	/s/ Fred Ross
		Fred Ross, Chief Executive Officer

Date:	May ~~17, 2021~~10, 2022	/s/ Bradley Meader
		Bradley Meader, Chief Financial Officer


(in $000s)	Three Months Ended March 31, 2021		% of revenue	Three Months Ended March 31, 2020		% of revenue
Rental revenue	$	48,289	61.7%	$	50,994	62.4%
Sales of rental equipment	10,485		13.4%	9,093		11.1%
Sales of new equipment	7,502		9.6%	7,577		9.3%
Parts sales and services	12,023		15.4%	14,079		17.2%
Total revenue	78,299		100.0%	81,743		100.0%
Cost of revenue	40,236		51.4%	40,228		49.2%
Depreciation of rental equipment	17,844		22.8%	20,112		24.6%
Gross profit	20,219		25.8%	21,403		26.2%
Operating expenses	23,273			14,607
Operating (loss) income	(3,054)			6,796
Other expense	20,763			22,035
Loss before income taxes	(23,817)			(15,239)
Income tax expense	4,090			730
Net loss	$	(27,907)		$	(15,969)