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 ~~September~~June 30, ~~2022~~2023




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

For the transition period from to

Commission File Number: 001-38186

_______________________________

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 per share	CTOS	New York Stock Exchange
Redeemable warrants, exercisable for Common Stock, $0.0001 par value per share	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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☒

Non-accelerated filer

Smaller reporting company

☐

Emerging growth company

☐

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

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

The number of shares of common stock outstanding as of ~~November 2, 2022~~August 4, 2023 was ~~246,590,393.~~246,262,581.

Custom Truck One Source, Inc. and Subsidiaries

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

Page Number

Item 1.

Financial Statements

Unaudited Condensed Consolidated ~~Balance Sheets as~~Statements of ~~September~~Income and Comprehensive Income for the Three and Six Months Ended June 30, ~~2022~~2023 and ~~December 31, 2021~~2022

Unaudited Condensed Consolidated ~~Statements~~Balance Sheets as of ~~Operations~~June 30, 2023 and ~~Comprehensive Income (Loss) for the Three and Nine Months Ended September 30,~~December 31, 2022 ~~and 2021~~

Unaudited Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022

Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022

Notes to Unaudited Condensed Consolidated Financial Statements

Item 2.

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

2321

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

4034

Item 4.

Controls and Procedures

4136

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

4237

Item 1A.

Risk Factors

4237

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

4338

Item 3.

Defaults Upon Senior Securities

4338

Item 4.

Mine Safety Disclosures

4338

Item 5.

Other Information

4338

Item 6.

Exhibits

4439

SIGNATURES

4540

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

~~Custom Truck One Source, Inc.~~

~~Condensed Consolidated Balance Sheets (unaudited)~~
(in $000s, except share data) September 30, 2022 December 31, 2021
Assets
Current Assets
Cash and cash equivalents $ 26,174 $ 35,902
Accounts receivable, net 176,969 168,394
Financing receivables, net 32,967 28,649
Inventory 555,811 410,542
Prepaid expenses and other 9,989 13,217
Total current assets 801,910 656,704
Property and equipment, net 106,721 108,612
Rental equipment, net 865,569 834,325
Goodwill 703,411 695,865
Intangible assets, net 310,888 327,840
Operating lease assets 34,317 36,014
Other assets 30,818 24,406
Total Assets $ 2,853,634 $ 2,683,766
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 102,657 $ 91,123
Accrued expenses 70,569 60,337
Deferred revenue and customer deposits 30,660 35,791
Floor plan payables - trade 81,440 72,714
Floor plan payables - non-trade 267,480 165,239
Operating lease liabilities - current 5,514 4,987
Current maturities of long-term debt 1,588 6,354
Current portion of finance lease obligations 2,471 4,038
Total current liabilities 562,379 440,583
Long-term debt, net 1,362,926 1,308,265
Finance leases 3,265 5,109
Operating lease liabilities - noncurrent 29,630 31,514
Deferred income taxes 28,113 15,621
Derivative, warrants and other liabilities 5,291 24,164
Total long-term liabilities 1,429,225 1,384,673
Commitments and contingencies (see Note 15)
Stockholders' Equity
Common stock — $0.0001 par value, 500,000,000 shares authorized, 248,069,853 and 247,358,412 shares issued and outstanding, at September 30, 2022 and December 31, 2021, respectively 25 25
Treasury stock, at cost — 878,837 and 318,086 shares at September 30, 2022 and December 31, 2021, respectively (6,903) (3,020)
Additional paid-in capital 1,518,717 1,508,995
Accumulated other comprehensive loss (10,287) —
Accumulated deficit (639,522) (647,490)
Total stockholders' equity 862,030 858,510
Total Liabilities and Stockholders' Equity $ 2,853,634 $ 2,683,766

~~See accompanying notes to unaudited condensed consolidated financial statements.~~

Custom Truck One Source, Inc.

Condensed Consolidated Statements of ~~Operations~~Income and Comprehensive Income ~~(Loss)~~ (unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(in $000s, except per share data)	(in $000s, except per share data)	2022		2021		2022		2021		(in $000s, except per share data)	2023		2022		2023		2022
Revenue	Revenue									Revenue
Rental revenue	Rental revenue	$	115,010	$	109,108	$	336,210	$	255,936	Rental revenue	$	122,169	$	112,055	$	240,457	$	221,200
Equipment sales	Equipment sales	210,903		217,163		656,595		482,825		Equipment sales	302,117		218,506		603,407		445,692
Parts sales and services	Parts sales and services	31,867		31,034		93,557		71,954		Parts sales and services	32,544		31,545		65,129		61,690
Total revenue	Total revenue	357,780		357,305		1,086,362		810,715		Total revenue	456,830		362,106		908,993		728,582
Cost of Revenue	Cost of Revenue									Cost of Revenue
Cost of rental revenue	Cost of rental revenue	28,207		25,932		82,791		71,873		Cost of rental revenue	31,981		28,791		61,880		54,584
Depreciation of rental equipment	Depreciation of rental equipment	42,612		50,153		130,900		111,176		Depreciation of rental equipment	43,616		43,324		83,946		88,288
Cost of equipment sales	Cost of equipment sales	173,588		191,991		545,461		434,995		Cost of equipment sales	245,266		184,595		491,391		371,873
Cost of parts sales and services	Cost of parts sales and services	25,201		23,977		71,787		60,510		Cost of parts sales and services	25,348		22,638		51,496		46,586
Total cost of revenue	Total cost of revenue	269,608		292,053		830,939		678,554		Total cost of revenue	346,211		279,348		688,713		561,331
Gross Profit	Gross Profit	88,172		65,252		255,423		132,161		Gross Profit	110,619		82,758		220,280		167,251
Operating Expenses	Operating Expenses									Operating Expenses
Selling, general and administrative expenses	Selling, general and administrative expenses	49,835		48,625		152,269		111,939		Selling, general and administrative expenses	58,028		48,779		115,019		102,434
Amortization	Amortization	6,794		13,334		27,000		27,420		Amortization	6,606		6,871		13,278		20,206
Non-rental depreciation	Non-rental depreciation	1,938		873		7,302		1,845		Non-rental depreciation	2,721		2,317		5,371		5,364
Transaction expenses and other	Transaction expenses and other	6,498		7,742		17,192		42,765		Transaction expenses and other	3,689		6,046		7,149		10,694

Total operating expenses	Total operating expenses	65,065		70,574		203,763		183,969		Total operating expenses	71,044		64,013		140,817		138,698
Operating Income (Loss)		23,107		(5,322)		51,660		(51,808)
Operating Income										Operating Income	39,575		18,745		79,463		28,553
Other Expense	Other Expense									Other Expense
Loss on extinguishment of debt		—		—		—		61,695

Interest expense, net	Interest expense, net	22,887		19,045		62,324		53,674		Interest expense, net	31,625		20,281		60,801		39,437
Financing and other expense (income)		(1,747)		(3,656)		(25,905)		143
Financing and other income										Financing and other income	(5,048)		(15,078)		(8,999)		(24,158)
Total other expense	Total other expense	21,140		15,389		36,419		115,512		Total other expense	26,577		5,203		51,802		15,279
Income (Loss) Before Income Taxes		1,967		(20,711)		15,241		(167,320)
Income Before Income Taxes										Income Before Income Taxes	12,998		13,542		27,661		13,274
Income Tax Expense (Benefit)	Income Tax Expense (Benefit)	4,349		(186)		7,273		10,468		Income Tax Expense (Benefit)	1,388		(81)		2,251		2,924
Net Income (Loss)		$	(2,382)	$	(20,525)	$	7,968	$	(177,788)
Net Income										Net Income	$	11,610	$	13,623	$	25,410	$	10,350

Other Comprehensive Income (Loss):	Other Comprehensive Income (Loss):									Other Comprehensive Income (Loss):
Unrealized foreign currency translation adjustments	Unrealized foreign currency translation adjustments	$	(7,651)	$	—	$	(10,287)	$	—	Unrealized foreign currency translation adjustments	$	2,222	$	(2,636)	$	2,564	$	(2,636)
Other Comprehensive Income (Loss)	Other Comprehensive Income (Loss)	(7,651)		—		(10,287)		—		Other Comprehensive Income (Loss)	2,222		(2,636)		2,564		(2,636)
Comprehensive Income (Loss)		$	(10,033)	$	(20,525)	$	(2,319)	$	(177,788)
Comprehensive Income										Comprehensive Income	$	13,832	$	10,987	$	27,974	$	7,714

Net Income (Loss) Per Share:
Net Income Per Share:										Net Income Per Share:
Basic	Basic	$	(0.01)	$	(0.08)	$	0.03	$	(0.99)	Basic	$	0.05	$	0.05	$	0.10	$	0.04
Diluted	Diluted	$	(0.01)	$	(0.08)	$	0.03	$	(0.99)	Diluted	$	0.05	$	0.05	$	0.10	$	0.04
Weighted-Average Common Shares Outstanding:	Weighted-Average Common Shares Outstanding:									Weighted-Average Common Shares Outstanding:
Basic (in thousands)	Basic (in thousands)	247,704		244,292		247,448		179,785		Basic (in thousands)	246,130		247,745		246,090		247,403
Diluted (in thousands)	Diluted (in thousands)	247,704		244,292		247,926		179,785		Diluted (in thousands)	246,955		248,614		246,932		248,239

See accompanying notes to unaudited condensed consolidated financial statements.

Custom Truck One Source, Inc.

Condensed Consolidated ~~Statements of Cash Flows~~Balance Sheets (unaudited)

Nine Months Ended September 30,
(in $000s) 2022 2021
Operating Activities
Net income (loss) $ 7,968 $ (177,788)
Adjustments to reconcile net income (loss) to net cash flow from operating activities:
Depreciation and amortization 171,121 145,967
Amortization of debt issuance costs 3,485 3,416
Loss on extinguishment of debt — 61,695
Provision for losses on accounts receivable 5,905 8,391
Share-based compensation 9,526 12,716
Gain on sales and disposals of rental equipment (35,064) (8,636)
Change in fair value of derivative and warrants (18,013) 5,453
Deferred tax expense 6,792 10,003
Changes in assets and liabilities:
Accounts and financing receivables (17,637) (33,217)
Inventories (155,111) 79,040
Prepaids, operating leases and other 2,475 (2,115)
Accounts payable 9,900 (2,450)
Accrued expenses and other liabilities 9,397 16,955
Floor plan payables - trade, net 8,726 (12,485)
Customer deposits and deferred revenue (5,126) 5,810
Net cash flow from operating activities 4,344 112,755
Investing Activities
Acquisition of business, net of cash acquired (49,832) (1,337,686)
Purchases of rental equipment (224,002) (141,142)
Proceeds from sales and disposals of rental equipment 135,436 62,617
Other investing activities, net (15,529) (3,404)
Net cash flow from investing activities (153,927) (1,419,615)
Financing Activities
Proceeds from debt — 947,420
Proceeds from issuance of common stock — 883,000
Payment of common stock issuance costs — (6,386)
Payment of premiums on debt extinguishment — (53,469)
Share-based payments (1,250) (652)
Borrowings under revolving credit facilities 87,000 461,084
Repayments under revolving credit facilities (34,945) (307,056)
Repayments of notes payable (6,126) (497,047)
Finance lease payments (3,308) (4,382)
Repurchase of common stock (1,752) —
Acquisition of inventory through floor plan payables - non-trade 451,202 184,950
Repayment of floor plan payables - non-trade (348,961) (248,234)
Payment of debt issuance costs — (34,694)
Net cash flow from financing activities 141,860 1,324,534
Effect of exchange rate changes on cash and cash equivalents (2,005) —
Net Change in Cash and Cash Equivalents (9,728) 17,674
Cash and Cash Equivalents at Beginning of Period 35,902 3,412
Cash and Cash Equivalents at End of Period $ 26,174 $ 21,086

~~Custom Truck One Source, Inc.~~

~~Condensed Consolidated Statements of Cash Flows (unaudited) — Continued~~

Nine Months Ended September 30,
(in $000s) 2022 2021
Supplemental Cash Flow Information
Interest paid $ 44,414 $ 44,786
Income taxes paid — 217
Non-Cash Investing and Financing Activities
Non-cash consideration - acquisition of business — 187,935
Rental equipment sales in accounts receivable 747 1,429


(in $000s, except share data)	June 30, 2023		December 31, 2022
Assets
Current Assets
Cash and cash equivalents	$	42,229	$	14,360
Accounts receivable, net	151,953		193,106
Financing receivables, net	41,957		38,271
Inventory	765,424		596,724
Prepaid expenses and other	27,587		25,784
Total current assets	1,029,150		868,245
Property and equipment, net	134,358		121,956
Rental equipment, net	920,676		883,674
Goodwill	704,012		703,827
Intangible assets, net	291,053		304,132
Operating lease assets	33,495		29,434
Other assets	25,900		26,944
Total Assets	$	3,138,644	$	2,938,212
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable	$	117,104	$	87,255
Accrued expenses	67,043		68,784
Deferred revenue and customer deposits	30,088		34,671
Floor plan payables - trade	139,723		136,634
Floor plan payables - non-trade	366,092		293,536
Operating lease liabilities - current	5,442		5,262
Current maturities of long-term debt	3,550		6,940
Current portion of finance lease obligations	247		1,796
Total current liabilities	729,289		634,878
Long-term debt, net	1,425,117		1,354,766
Finance leases	3,077		3,206
Operating lease liabilities - noncurrent	28,725		24,818
Deferred income taxes	31,078		29,086
Derivative, warrants and other liabilities	1,886		3,015
Total long-term liabilities	1,489,883		1,414,891

Stockholders' Equity
Common stock — $0.0001 par value, 500,000,000 shares authorized, 249,361,351 and 248,311,104 shares issued and outstanding, at June 30, 2023 and December 31, 2022, respectively	25		25
Treasury stock, at cost — 3,153,770 and 2,241,069 shares at June 30, 2023 and December 31, 2022, respectively	(21,438)		(15,537)
Additional paid-in capital	1,530,443		1,521,487
Accumulated other comprehensive loss	(6,383)		(8,947)
Accumulated deficit	(583,175)		(608,585)
Total stockholders' equity	919,472		888,443
Total Liabilities and Stockholders' Equity	$	3,138,644	$	2,938,212

See accompanying notes to unaudited condensed consolidated financial statements.

Custom Truck One Source, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited)


	Six Months Ended June 30,
(in $000s)	2023		2022
Operating Activities
Net income	$	25,410	$	10,350
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation and amortization	107,532		117,120
Amortization of debt issuance costs	3,027		2,158

Provision for losses on accounts receivable	3,112		4,545
Share-based compensation	7,469		5,148
Gain on sales and disposals of rental equipment	(32,643)		(22,905)


Change in fair value of derivative and warrants	(1,129)		(18,822)

Deferred tax expense	1,849		2,575
Changes in assets and liabilities:

Accounts and financing receivables	27,344		(10,744)
Inventories	(166,612)		(125,021)
Prepaids, operating leases and other	(2,747)		(1,736)

Accounts payable	29,325		32,480
Accrued expenses and other liabilities	(1,545)		(8,099)
Floor plan payables - trade, net	3,089		(1,441)
Customer deposits and deferred revenue	(4,586)		(6,972)
Net cash flow from operating activities	(1,105)		(21,364)
Investing Activities
Acquisition of business, net of cash acquired	—		(49,832)
Purchases of rental equipment	(210,360)		(127,237)
Proceeds from sales and disposals of rental equipment	130,246		96,143

Purchase of non-rental property and cloud computing arrangements	(22,783)		(11,763)

Net cash flow from investing activities	(102,897)		(92,689)
Financing Activities
Proceeds from debt	13,537		—



Share-based payments	(86)		(1,247)
Borrowings under revolving credit facilities	95,082		75,000
Repayments under revolving credit facilities	(40,402)		(34,945)
Repayments of notes payable	(4,061)		(3,791)
Finance lease payments	(472)		(2,639)
Repurchase of common stock	(4,532)		—
Acquisition of inventory through floor plan payables - non-trade	398,447		293,241
Repayment of floor plan payables - non-trade	(325,891)		(218,965)


Net cash flow from financing activities	131,622		106,654
Effect of exchange rate changes on cash and cash equivalents	249		21
Net Change in Cash and Cash Equivalents	27,869		(7,378)
Cash and Cash Equivalents at Beginning of Period	14,360		35,902
Cash and Cash Equivalents at End of Period	$	42,229	$	28,524

Custom Truck One Source, Inc.

Condensed Consolidated Statements of Cash Flows (unaudited) — Continued


	Six Months Ended June 30,
(in $000s)	2023		2022
Supplemental Cash Flow Information
Interest paid	$	56,164	$	38,417
Income taxes paid	1,450		—
Non-Cash Investing and Financing Activities


Rental equipment and property and equipment purchases in accounts payable	575		30
Rental equipment sales in accounts receivable	2,294		1,145

See accompanying notes to unaudited condensed consolidated financial statements.

Custom Truck One Source, Inc.

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


																																								Common Stock					Treasury Stock				Additional Paid-in Capital					Accumulated Other Comprehensive Loss				Accumulated Deficit										Total Stockholders' Equity
																															Shares																									Total Stockholders' Equity
(in $000s, except share data)																														(in $000s, except share data)	Common				Treasury
Balance, December 31, 2022																														Balance, December 31, 2022	248,311,104				(2,241,069)							$	25								$	(15,537)						$	1,521,487				$	(8,947)				$	(608,585)			$	888,443
Net income																														Net income	—				—							—									—					—					—					13,800						13,800
Other Comprehensive Income																														Other Comprehensive Income	—				—					—					—				—					342				—										342
Common stock repurchase																														Common stock repurchase	—				(174,744)					—					(1,122)				—					—				—										(1,122)
Share-based payments																														Share-based payments	130,484				(11,582)					—					(77)				3,451��					—				—										3,374
Balance, March 31, 2023																														Balance, March 31, 2023	248,441,588				(2,427,395)					$	25				$	(16,736)			$	1,524,938				$	(8,605)			$	(594,785)									$	904,837
Net income																														Net income	—				—					—					—				—					—				11,610										11,610
Other comprehensive income																														Other comprehensive income	—				—					—					—				—					2,222				—										2,222
Share-based payments																														Share-based payments	919,763				(221,233)					—					(1,497)				5,505					—				—										4,008
Common stock repurchases																														Common stock repurchases	—				(505,142)					—					(3,205)				—					—				—										(3,205)
Balance, June 30, 2023																														Balance, June 30, 2023	249,361,351				(3,153,770)					$	25				$	(21,438)			$	1,530,443				$	(6,383)			$	(583,175)									$	919,472

				Common Stock				Treasury Stock			Additional Paid-in Capital				Accumulated Other Comprehensive Loss			Accumulated Deficit									Total Stockholders' Equity (Deficit)													Common Stock					Treasury Stock				Additional Paid-in Capital					Accumulated Other Comprehensive Loss				Accumulated Deficit										Total Stockholders' Equity
		Shares															Total Stockholders' Equity (Deficit)			Shares										Common Stock		Treasury Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Loss		Accumulated Deficit									Total Stockholders' Equity
(in $000s, except share data)	(in $000s, except share data)	Common	Treasury																	Common				Treasury
Balance, December 31, 2021	Balance, December 31, 2021	247,358,412	(318,086)			$	25						$	(3,020)				$	1,508,995			$	—						$												(647,490)								$	858,510	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)		Net income (loss)		—					—				—					—				—					—					(3,273)							(3,273)
Share-based payments	Share-based payments	102,630	(21,505)	—				(287)			3,559				—			—									3,272			Share-based payments	102,630				(21,505)					—					(287)				3,559					—				—										3,272

Balance, March 31, 2022	Balance, March 31, 2022	247,461,042	(339,591)	$	25			$	(3,307)		$	1,512,554			$	—		$	(650,763)								$	858,509		Balance, March 31, 2022	247,461,042				(339,591)					$	25				$	(3,307)			$	1,512,554				$	—			$	(650,763)									$	858,509
Net income (loss)		—	—	—				—			—				—			13,623									13,623
Net income																														Net income	—				—					—					—				—					—				13,623										13,623
Other comprehensive loss	Other comprehensive loss	—	—	—				—			—				(2,636)			—									(2,636)			Other comprehensive loss	—				—					—					—				—					(2,636)				—										(2,636)
Share-based payments	Share-based payments	607,561	(150,420)	—				(1,156)			1,785				—			—									629			Share-based payments	607,561				(150,420)					—					(1,156)				1,785					—				—										629

Balance, June 30, 2022	Balance, June 30, 2022	248,068,603	(490,011)	$	25			$	(4,463)		$	1,514,339			$	(2,636)		$	(637,140)								$	870,125		Balance, June 30, 2022	248,068,603				(490,011)					$	25				$	(4,463)			$	1,514,339				$	(2,636)			$	(637,140)									$	870,125
Net income (loss)		—	—	—				—			—				—			(2,382)									(2,382)
Other comprehensive loss		—	—	—				—			—				(7,651)			—									(7,651)
Common stock repurchases		—	(388,521)	—				(2,437)			—				—			—									(2,437)
Share-based payments		1,250	(305)	—				(3)			4,378				—			—									4,375
Balance, September 30, 2022		248,069,853	(878,837)	$	25			$	(6,903)		$	1,518,717			$	(10,287)		$	(639,522)								$	862,030

				Common Stock				Treasury Stock			Additional Paid-in Capital				Accumulated Other Comprehensive Loss			Accumulated Deficit									Total Stockholders' Equity (Deficit)
		Shares															Total Stockholders' Equity (Deficit)
(in $000s, except share data)		Common	Treasury
Balance, December 31, 2020		49,156,753	—			$	5						$	—						$	434,917				$	—						$	(465,989)					$	(31,067)
Net income (loss)		—	—	—						—					—			—				(27,907)												(27,907)
Share-based payments		62,630	—	—				—			597				—			—									597
Warrants liability		—	—	—				—			(10,290)				—			—									(10,290)
Balance, March 31, 2021		49,219,383	—	$	5			$	—		$	425,224			$	—		$	(493,896)								$	(68,667)
Net income (loss)		—	—	—				—			—				—			(129,356)									(129,356)
Share-based payments		1,118,846	(235,856)	—				(2,256)			9,618				—			—									7,362
Shares issued in business combination		196,700,000	—	20				—			1,064,529				—			—									1,064,549
Balance, June 30, 2021		247,038,229	(235,856)	$	25			$	(2,256)		$	1,499,371			$	—		$	(623,252)								$	873,888
Net income (loss)		—	—	—				—			—				—			(20,525)									(20,525)
Share-based payments		267,434	(80,590)	—				(751)			4,883				—			—									4,132

Balance, September 30, 2021		247,305,663	(316,446)	$	25			$	(3,007)		$	1,504,254			$	—		$	(643,777)								$	857,495

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., ~~formerly Nesco Holdings, Inc.,~~ a Delaware corporation, and its wholly owned subsidiaries (“we,” “our,” “us,” or “the Company”) are engaged in the business of providing a range of products and 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 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: 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,” 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, and to the combined company after the Acquisition. Unless the context otherwise requires, the term “Nesco” or “Nesco Holdings” as used in these financial statements means 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 and on the date of the Acquisition.

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

~~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. 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 King~~TM 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 our 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.

Supply Chain

The Company purchases raw materials, component parts and finished goods to be used in the manufacturing, sale and rental of its products. Uncertainty remains regarding supply chain disruptions, inflationary pressures, public health crises, and geopolitical risks that have led to issues, broadly, in the ~~global flow of goods and services (the “supply chain”).~~supply chain. Changes in the Company’s relationships with suppliers, shortages in availability of materials, production delays, regulatory restrictions, public health crises, or other supply chain disruptions, whether due to suppliers or customers, could have a material adverse effect on the Company’s ability to timely manufacture and market products. Increases in the costs of shipping and transportation, purchased raw materials, component parts or finished goods could result in manufacturing interruptions, delays, inefficiencies or the Company’s inability to market products. The unprecedented nature of the supply chain disruptions continues to make it difficult to predict the Company’s future business and financial performance. The Company continues to monitor the impact on its supply chain, including, but not limited to, the commercial vehicle manufacturers that provide the chassis used in the Company’s production and manufacturing processes and the ongoing semiconductor shortage, which 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 condensed 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 September 30, 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, and the Condensed Consolidated Balance Sheet at December 31, ~~2021,~~2022, has been derived from the audited consolidated financial statements of Custom Truck One Source, Inc. at that date. Accordingly, 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 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.~~periods. These interim statements should be read in conjunction with the Custom Truck One Source, Inc. audited consolidated financial statements included in the Custom Truck One Source, Inc. Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

Use of Estimates

~~We prepare our consolidated~~The preparation of financial statements in conformity with GAAP ~~which~~ requires ~~us to use judgment~~management to make estimates and assumptions that ~~directly~~ affect the reported amounts ~~reported in our~~of assets and liabilities and contingent assets and liabilities at the date of the consolidated financial statements and ~~accompanying notes. Significant estimates are used for items including, but not limited to,~~ the ~~useful lives~~reported amounts of revenue and ~~residual values of our rental equipment, and~~expenses during the allocation of purchase price related to 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.reporting period. Actual results could differ from ~~our~~those estimates.

Accounting Pronouncements ~~Issued Not Yet~~Recently Adopted

~~Supplier Finance Programs.~~Contract Assets and Contract Liabilities from Contracts with Customers. In ~~September 2022,~~October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. ~~2022-04, Liabilities-Supplier Finance Programs~~2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU ~~2022-04”~~2021-08”). This ASU improves the comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination and requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The amended guidance specifies for all acquired revenue contracts regardless of their timing of payment (1) the circumstances in which the acquirer should recognize contract assets and contract liabilities that are acquired in a business combination and (2) how to measure those contract assets and contract liabilities, thereby providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The ASU was effective as of January 1, 2023. The Company applies the guidance in ASU 2021-08 prospectively to any future business combinations occurring on or after the effective date.

Financing Receivables. In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments—Credit Losses (Topic 326) (“ASU 2022-02”), which requires ~~that a buyer~~an entity to disclose current period gross write-offs by year of origination for financing receivables and net investment in ~~a supplier finance program disclose sufficient~~leases. Gross write-off information about the program to allow a user of financial statements to understand the program’s nature and effects of those programs on an entity’s working capital, liquidity, and cash flows. ASU 2022-04 is effective for the Companymust be included in the ~~first quarter~~vintage disclosures, which requires that an entity disclose the amortized cost basis of ~~2023~~financing receivables by credit-quality indicator and ~~early~~class of financing receivable by year of origination. The adoption ~~is permitted. The Company plans to adopt the disclosure requirements of ASU 2022-04 in the first quarter of 2023.~~

~~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 products and services by conducting a credit review. The credit review considers expected billing exposure and timing for payment and the customer’s established credit rating. We perform a credit review of new customers at inceptionon January 1, 2023 of the ~~customer relationship and, for existing customers, when~~ASU had no impact to the ~~customer transacts new leases or product orders after a period of dormancy. We also consider contract terms and conditions, country risk and business strategy in the 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 estimate of the amount of receivables that management assesses will be unable to be collected based on historical write-off experience and, as applicable, current conditions and reasonable and supportable forecasts that affect collectability. This estimate could require change based on changing circumstances, including changes in the 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 $14.0 million and $10.8 million as of September 30, 2022 and December 31, 2021, respectively, and is included in accounts receivable, net on our Condensed Consolidated Balance Sheets.

Company’s disclosures.

Note ~~3: Business Combinations~~

2: 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., 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 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”) 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, the Company issued, in the aggregate, 20,100,000 shares of Common Stock to the parties to the Rollover Agreements, (ii) the Subscription, the Company issued 148,600,000 shares of Common Stock to Platinum, and (iii) the Supplemental Equity Financing, the Company issued, in the aggregate, 28,000,000 shares of Common Stock to the PIPE Investors.

~~Purchase Price~~

The Company issued 20,100,000 shares of Common Stock to Custom Truck LP equity interest holders, as well as paid cash and 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 purchase price 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 year ended December 31, 2021, the Company transferred an additional $3.4 million of cash consideration to the Sellers related to certain customary closing adjustments set forth in the Purchase Agreement.

~~Opening Balance Sheet~~

The acquisition of Custom Truck One Source, L.P. has been accounted for using the acquisition method of accounting, and 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 is recorded as goodwill. 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 12: 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 significant and related primarily to rental equipment and current liabilities. The measurement period adjustments, coupled with the additional cash consideration discussed above, increased goodwill by approximately $15.6 million during the year ended December 31, 2021. The final assessment of the fair value of the Custom Truck LP assets acquired and liabilities assumed was complete as of March 31, 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 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, 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 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.

Also on the Closing Date, the Buyer, its direct parent, and certain of its direct and indirect subsidiaries entered into a senior secured 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 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 and nine months ended September 30, 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 and nine months ended September 30, 2021 and applies these costs and charges as if the Acquisition and related financing transactions had occurred on January 1, 2020; (2) removes the loss on the extinguishment of debt that was recognized in the Company’s condensed consolidated financial statements in the three and nine months ended September 30, 2021 related to a special charge, which is not expected to recur; (3) adjusts for the impacts of purchase accounting in the nine months ended September 30, 2021; (4) 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 (5) 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 Nine Months Ended
(in $000s) September 30, 2021 September 30, 2021
Revenue $ 357,305 $ 1,127,186
Net income (loss) $ (14,956) $ (87,884)

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

Three Months Ended Nine Months Ended
(in $000s) September 30, 2021 September 30, 2021
Increase (decrease) net income/loss:
Impact of fair value mark-ups on inventory a $ 7,426 $ 17,752
Impact of fair value mark-ups on rental fleet depreciation b — (3,817)
Intangible asset amortization and other depreciation expense c — (3,377)
Transaction expenses d — 40,277
Interest expense and amortization of debt issuance costs e — 3,919
Loss on extinguishment of debt refinanced f — 61,695
Income tax expense g (1,857) (29,112)

a.~~Represents adjustments to cost of revenue for the run-off of the mark-up in fair value of inventory acquired and applied to the three and nine months ended September 30, 2021.~~

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

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

d.~~Represents adjustments for transaction expenses that are applied to the three and nine months ended September 30, 2021.~~

e.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.

f.~~Loss on extinguishment of debt represents a special charge, which is not expected to recur. Such charges are adjustments pursuant to our credit agreement.~~

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%. This rate may vary from the actual effective rate of the historical and combined businesses.

~~Transaction Costs~~

The Company expensed approximately $7.7 million and $42.8 million in transaction costs related to the Acquisition within Transaction expenses during the three and nine months ended September 30, 2021, respectively.

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. HiRail, including the assignment of purchase accounting goodwill (see below), is included in the Company’s ERS segment.

Purchase Price

The Company paid $51.0 million, net of working capital adjustments, to HiRail equity interest holders and to repay debt obligations as consideration for the HiRail acquisition.

Opening Balance Sheet

The ~~Acquisition~~acquisition of HiRail has been accounted for using the acquisition method of accounting. Under the acquisition method of accounting, ~~we are~~the Company was 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 iswas recorded as goodwill and iswas attributable to expanded access to markets for ~~our~~the Company’s 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 12: Fair Value Measurements).~~hierarchy.

129

The following table summarizes ~~as of~~the 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 and deferred income taxes~~ was ~~not~~ complete as of ~~September 30,~~December 31, 2022. ~~The preliminary fair values are subject to change, pending a final determination~~


(in $000s)	January 14, 2022		Changes		December 31, 2022
Current assets	$	2,891	$	956	$	3,847
Property, equipment and other assets	819		—		819
Rental equipment	34,224		—		34,224
Total identifiable assets acquired	37,934		956		38,890

Total identifiable liabilities assumed	(6,011)		(1,596)		(7,607)
Total net assets	31,923		(640)		31,283
Goodwill	8,685		(41)		8,644
Intangible assets	11,027		—		11,027
Net assets acquired (purchase price)	51,635		(681)		50,954
Less: cash acquired	(1,122)		—		(1,122)
Net cash paid	$	50,513	$	(681)	$	49,832

HiRail generated $4.1 million and $7.9 million, respectively, of revenue for the ~~fair values of assets acquired~~three and ~~liabilities assumed as more information is received about their respective values. As of September~~six months ended June 30, 2022, ~~the Company is in the process~~and $0.1 million and $0.7 million, respectively, of ~~determining the value of intangible assets acquired related to customer relationships.~~

(in $000s) January 14, 2022 Changes September 30, 2022
Current assets $ 2,891 $ 956 $ 3,847
Property, equipment and other assets 819 — 819
Rental equipment 34,224 — 34,224
Total identifiable assets acquired 37,934 956 38,890
Total identifiable liabilities assumed (6,011) (1,314) (7,325)
Total net assets 31,923 (358) 31,565
Goodwill 8,685 (323) 8,362
Intangible assets 11,027 — 11,027
Net assets acquired (purchase price) 51,635 (681) 50,954
Less: cash acquired (1,122) — (1,122)
Net cash paid $ 50,513 $ (681) $ 49,832

~~Since~~pre-tax income from January 14, 2022 ~~HiRail has generated $3.8 million~~through June 30, 2022, for the three and ~~$11.7 million of revenue and $1.6 million and $2.3 million of pre-tax income since January 14,~~six months ended June 30, 2022, which ~~are~~were included in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) ~~for the three and nine months ended September 30, 2022, respectively.~~. 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~~the Company’s financial statements.

Note 4:3: Revenue

Revenue Disaggregation

Geographic Areas

The Company had total revenue in the following geographic areas:

Three Months Ended September 30, Nine Months Ended September 30,
(in $000s) 2022 2021 2022 2021
United States $ 347,093 $ 351,391 $ 1,056,324 $ 798,372
Canada 10,687 5,914 30,038 12,343
Total revenue $ 357,780 $ 357,305 $ 1,086,362 $ 810,715


	Three Months Ended June 30,				Six Months Ended June 30,
(in $000s)	2023		2022		2023		2022
United States	$	442,501	$	352,334	$	880,779	$	709,231
Canada	14,329		9,772		28,214		19,351
Total revenue	$	456,830	$	362,106	$	908,993	$	728,582

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 and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 are presented in the ~~tables~~table below.

Three Months Ended September 30, Three Months Ended September 30,
2022 2021
(in $000s) Topic 842 Topic 606 Total Topic 842 Topic 606 Total
Rental:
Rental $ 110,054 $ — $ 110,054 $ 105,165 $ — $ 105,165
Shipping and handling — 4,956 4,956 — 3,943 3,943
Total rental revenue 110,054 4,956 115,010 105,165 3,943 109,108
Sales and services:
Equipment sales 4,456 206,447 210,903 6,905 210,258 217,163
Parts and services 970 30,897 31,867 1,940 29,094 31,034
Total sales and services 5,426 237,344 242,770 8,845 239,352 248,197
Total revenue $ 115,480 $ 242,300 $ 357,780 $ 114,010 $ 243,295 $ 357,305
Nine Months Ended September 30, Nine Months Ended September 30,
2022 2021
(in $000s) Topic 842 Topic 606 Total Topic 842 Topic 606 Total
Rental:
Rental $ 322,634 $ — $ 322,634 $ 246,064 $ — $ 246,064
Shipping and handling — 13,576 13,576 — 9,872 9,872
Total rental revenue 322,634 13,576 336,210 246,064 9,872 255,936
Sales and services:
Equipment sales 20,572 636,023 656,595 13,711 469,114 482,825
Parts and services 8,949 84,608 93,557 4,740 67,214 71,954
Total sales and services 29,521 720,631 750,152 18,451 536,328 554,779
Total revenue $ 352,155 $ 734,207 $ 1,086,362 $ 264,515 $ 546,200 $ 810,715


	Three Months Ended June 30,						Three Months Ended June 30,
	2023						2022
(in $000s)	Topic 842		Topic 606		Total		Topic 842		Topic 606		Total
Rental:
Rental	$	114,620	$	—	$	114,620	$	107,445	$	—	$	107,445
Shipping and handling	—		7,549		7,549		—		4,610		4,610
Total rental revenue	114,620		7,549		122,169		107,445		4,610		112,055
Sales and services:
Equipment sales	19,603		282,514		302,117		3,879		214,627		218,506
Parts and services	6,938		25,606		32,544		5,759		25,786		31,545
Total sales and services	26,541		308,120		334,661		9,638		240,413		250,051
Total revenue	$	141,161	$	315,669	$	456,830	$	117,083	$	245,023	$	362,106

	Six Months Ended June 30,						Six Months Ended June 30,
	2023						2022
(in $000s)	Topic 842		Topic 606		Total		Topic 842		Topic 606		Total
Rental:
Rental	$	227,523	$	—	$	227,523	$	212,580	$	—	$	212,580
Shipping and handling	—		12,934		12,934		—		8,620		8,620
Total rental revenue	227,523		12,934		240,457		212,580		8,620		221,200
Sales and services:
Equipment sales	43,775		559,632		603,407		16,116		429,576		445,692
Parts and services	11,753		53,376		65,129		7,979		53,711		61,690
Total sales and services	55,528		613,008		668,536		24,095		483,287		507,382
Total revenue	$	283,051	$	625,942	$	908,993	$	236,675	$	491,907	$	728,582

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

As of June 30, 2023 and December 31, 2022, the Company had net receivables related to contracts with customers of $60.5 million and $98.0 million, respectively. As of June 30, 2023 and December 31, 2022, the Company had net receivables related to rental contracts and other of $91.5 million and $95.1 million, respectively.

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. ~~The Company recorded bad debt expense as reductions~~

Accounts receivable, net consisted of ~~rental revenue in accordance with~~ the collectability provisions of Topic 842 of $0 million and $0.7 million during the three months ended September 30, 2022 and 2021, respectively, and $1.7 million and $6.8 million during the nine months ended September 30, 2022 and 2021, respectively. The Company recorded changes in its allowances for credit losses within selling, general, and administrative expense in its Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) of $0.4 million and $0.2 million, during the three months ended September 30, 2022 and 2021, respectively, and $2.6 million and $1.5 million, during the nine months ended September 30, 2022 and 2021, respectively.following:


(in $000s)	June 30, 2023		December 31, 2022
Accounts receivables	$	168,626	$	212,347
Less: allowance for doubtful accounts	(16,673)		(19,241)
Accounts receivable, net	$	151,953	$	193,106

When customers are billed for rentals in advance of the rental period, the Company defers recognition of revenue. As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company had approximately ~~$2.1~~$2.6 million and ~~$2.9~~$3.0 million, respectively, of deferred rental revenue.

Additionally, the Company collects deposits from customers for orders placed for equipment and rentals. The Company had approximately ~~$28.6~~$27.5 million and ~~$32.9~~$29.6 million in deposits as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. Of the ~~$32.9~~$29.6 million deposit liability balance as of December 31, ~~2021, $31.7~~2022, $27.3 million was recorded as revenue during the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 due to performance obligations being satisfied. The Company’s remaining performance obligations on its equipment deposit liabilities have original expected durations of one year or less.

The Company does not have material contract assets, and as such 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 5:4: Sales-Type Leases

Revenue from sales-type leases was as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
(in $000s)	(in $000s)	2022		2021		2022		2021		(in $000s)	2023		2022		2023		2022
Equipment sales	Equipment sales	$	7,099	$	6,905	$	27,007	$	13,711	Equipment sales	$	19,603	$	7,671	$	43,775	$	19,908

Cost of equipment sales	Cost of equipment sales	5,938		6,592		23,073		11,588		Cost of equipment sales	19,415		6,765		42,640		17,135

Gross profit (loss)		$	1,161	$	313	$	3,934	$	2,123
Gross profit										Gross profit	$	188	$	906	$	1,135	$	2,773

As these transactions remained under rental contracts, ~~$5.1~~$7.9 million and ~~$3.2~~$5.2 million for the three months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively, and ~~$15.6~~$15.1 million and ~~$6.0~~$10.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively were billed under the contracts as rentals.

Interest income from financing receivables was $4.4 million and $2.2 million for the three months ended June 30, 2023 and 2022, respectively, and $7.8 million and $5.1 million, for the six months ended June 30, 2023 and 2022, respectively.

Note 6:5: Inventory

Whole goods inventory is comprised of chassis, attachments (i.e., boom cranes, serial lifts, digger derricks, dump bodies, etc.) and the in-process costs incurred in the final assembly of those units. As part of the business model, the Company sells unassembled individual whole goods and whole goods with varying levels of customization direct to consumers or dealers. Whole goods inventory also includes new equipment purchased specifically for resale to customers. Inventory consisted of the following:


(in $000s)	(in $000s)	September 30, 2022		December 31, 2021		(in $000s)	June 30, 2023		December 31, 2022
Whole goods	Whole goods	$	434,398	$	326,641	Whole goods	$	627,953	$	468,557
Aftermarket parts and services inventory	Aftermarket parts and services inventory	121,413		83,901		Aftermarket parts and services inventory	137,471		128,167

Inventory	Inventory	$	555,811	$	410,542	Inventory	$	765,424	$	596,724

Note 6: Floor Plan Financing

Floor plan payables represent financing arrangements to facilitate the Company’s purchase of new and used trucks, cranes, and construction equipment inventory. All floor plan payables are collateralized by the inventory financed. These payables become due and payable upon the sale, transfer, or reclassification of each unit of inventory. Certain floor plan arrangements require the Company to satisfy various financial ratios consistent with those under the ABL Facility. As of June 30, 2023, the Company was in compliance with these covenants.

The amounts owed under floor plan payables are summarized as follows:


(in $000s)	June 30, 2023		December 31, 2022
Trade:
Daimler Truck Financial	$	93,236	$	105,447
PACCAR Financial Services	46,487		31,187
Trade floor plan payables	$	139,723	$	136,634
Non-trade:
PNC Equipment Finance, LLC	$	366,092	$	293,536
Non-trade floor plan payables	$	366,092	$	293,536

Interest on outstanding floor plan payable balances is due and payable monthly. Floor plan interest expense was $8.1 million and $14.9 million for the three and six months ended June 30, 2023, respectively, and $2.2 million, and $3.9 million for the three and six months ended June 30, 2022, respectively.

Trade Floor Plan Financing:

Daimler Truck Financial

The Wholesale Financing Agreement with Daimler Truck Financial (the “Daimler Facility”) bears interest at a rate of U.S. Prime plus 0.80% after an initial interest free period of up to 150 days. The total borrowing capacity under the Daimler Facility is $175.0 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 U.S. Prime Rate minus 0.6%. The PACCAR agreement extends automatically each April and is subject to termination by either party through written notice. References to the prime rate in the foregoing agreements represent the rate as published in The Wall Street Journal.

Non-Trade Floor Plan Financing:

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 as of June 30, 2023, provides the Company with a $370.0 million revolving credit facility, which matures on August 25, 2023 and bears interest at a three-month term secured overnight financing rate (“SOFR”) plus 3.25%. On May 26, 2023, the Company notified PNC Equipment Finance, LLC of the Company’s intent to renew the Loan Agreement by an additional two years.

Note 7: Rental Equipment

Rental equipment, net consisted of the following:

(in $000s) September 30, 2022 December 31, 2021
Rental equipment $ 1,329,079 $ 1,247,375
Less: accumulated depreciation (463,510) (413,050)
Rental equipment, net $ 865,569 $ 834,325


(in $000s)	June 30, 2023		December 31, 2022
Rental equipment	$	1,397,414	$	1,360,205
Less: accumulated depreciation	(476,738)		(476,531)
Rental equipment, net	$	920,676	$	883,674

1513

Note 8: Long-Term Debt

Debt obligations and associated interest rates consisted of the following:


(in $000s)	(in $000s)	September 30, 2022		December 31, 2021		September 30, 2022	December 31, 2021	(in $000s)	June 30, 2023		December 31, 2022		June 30, 2023	December 31, 2022
ABL Facility	ABL Facility	$	447,000	$	394,945	4.7%	1.8%	ABL Facility	$	492,411	$	437,731	7.3%	6.1%

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

2023 Credit Facility								2023 Credit Facility	13,800		—		5.8%	—
Notes payable	Notes payable	26,575		32,619		3.1%-5.0%	3.0%-5.0%	Notes payable	27,600		31,661		3.1%-5.0%	3.1%-5.0%
Total debt outstanding	Total debt outstanding	1,393,575		1,347,564				Total debt outstanding	1,453,811		1,389,392
Deferred finance fees		(29,061)		(32,945)
Net debt		1,364,514		1,314,619
Deferred financing fees								Deferred financing fees	(25,144)		(27,686)
Total debt net of deferred financing fees								Total debt net of deferred financing fees	1,428,667		1,361,706
Less: current maturities	Less: current maturities	(1,588)		(6,354)				Less: current maturities	(3,550)		(6,940)
Long-term debt	Long-term debt	$	1,362,926	$	1,308,265			Long-term debt	$	1,425,117	$	1,354,766

As of ~~September~~June 30, ~~2022,~~2023, borrowing availability under the ABL Facility was ~~$300.1~~$254.5 million, and outstanding standby letters of credit were ~~$2.9~~$3.1 million.

ABL Facility

As of March 27, 2023, the ABL Facility was amended to change the London Interbank Offered Rate (“LIBOR”) rate to the SOFR rate. Borrowings under the ABL Facility bears interest at a floating rate, which, at Buyer’s election, could be (a) in the case of U.S. dollar denominated loans, either (i) SOFR 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 SOFR loans and CDOR rate loans, 1.50% to 2.00%.

2023 Credit Facility

On January 13, 2023, the Company entered into a new credit agreement allowing for borrowings of up to $18.0 million (the “2023 Credit Facility”). Proceeds from the credit agreement were used to finance a portion of the Company’s acquisition of real property from a related party in December 2022. A portion of the loan proceeds will be used to finance improvements to the property. In connection with entering into the agreement, the Company received net proceeds of $13.7 million with the ability to draw an additional $4.2 million upon completion of certain construction milestones. Borrowings bear interest at a fixed rate of 5.75% per annum and are required to be repaid monthly in an amount of approximately $0.1 million with a balloon payment due on the maturity date of January 13, 2028. Borrowings are secured by the real property and improvements.

Note 9: Earnings ~~(Loss)~~ Per Share

Basic earnings ~~(loss)~~ per share is computed by dividing net earnings ~~(loss)~~ by the weighted-average number of shares of Common Stock outstanding. Diluted earnings ~~(loss)~~ per share includes the effects of potentially dilutive shares of Common ~~Stock. Potentially dilutive effects include contingently issuable shares and share-based compensation.~~Stock, if dilutive. Our potentially dilutive shares aggregated ~~26.4~~29.4 million and ~~25.4~~29.3 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, respectively, and ~~25.0~~23.5 million and ~~26.0~~23.3 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, respectively, and included warrants, contingently issuable shares, and share-based compensation, and were not included in the computation of diluted earnings ~~(loss)~~ per share because they would be anti-dilutive.

The following tables set forth the computation of basic and dilutive earnings ~~(loss)~~ per share:


		Three Months Ended September 30, 2022					Three Months Ended September 30, 2021							Three Months Ended June 30, 2023					Three Months Ended June 30, 2022
(in $000s, except per share data)	(in $000s, except per share data)	Net Income (Loss)		Weighted Average Shares	Per Share Amount		Net Income (Loss)		Weighted Average Shares	Per Share Amount			(in $000s, except per share data)	Net Income		Weighted Average Shares	Per Share Amount		Net Income		Weighted Average Shares	Per Share Amount
Basic earnings (loss)		$	(2,382)	247,704	$	(0.01)	$	(20,525)	244,292	$	(0.08)
Basic earnings per share													Basic earnings per share	$	11,610	246,130	$	0.05	$	13,623	247,745	$	0.05
Dilutive common share equivalents	Dilutive common share equivalents			—					—				Dilutive common share equivalents	—		825	—		—		869	—
Diluted earnings (loss)		$	(2,382)	247,704	$	(0.01)	$	(20,525)	244,292	$	(0.08)
Diluted earnings per share													Diluted earnings per share	$	11,610	246,955	$	0.05	$	13,623	248,614	$	0.05

		Nine Months Ended September 30, 2022					Nine Months Ended September 30, 2021					Six Months Ended June 30, 2023				Six Months Ended June 30, 2022
(in $000s, except per share data)	(in $000s, except per share data)	Net Income (Loss)		Weighted Average Shares	Per Share Amount		Net Income (Loss)		Weighted Average Shares	Per Share Amount			(in $000s, except per share data)	Net Income		Weighted Average Shares	Per Share Amount		Net Income		Weighted Average Shares	Per Share Amount
Basic earnings (loss)		$	7,968	247,448	$	0.03	$	(177,788)	179,785	$	(0.99)
Basic earnings													Basic earnings	$	25,410	246,090	$	0.10	$	10,350	247,403	$	0.04
Dilutive common share equivalents	Dilutive common share equivalents			478					—	—			Dilutive common share equivalents	—		842	—		—		836	—
Diluted earnings (loss)		$	7,968	247,926	$	0.03	$	(177,788)	179,785	$	(0.99)
Diluted earnings													Diluted earnings	$	25,410	246,932	$	0.10	$	10,350	248,239	$	0.04

Note 10: Equity

Preferred Stock

As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, 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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, there were no shares of preferred stock issued or outstanding.

Common Stock

~~As of September 30, 2022 and December 31, 2021, the Company was 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.

On August 2, 2022, the Company’s Board of Directors authorized a stock repurchase program, ~~beginning in the third quarter of 2022,~~ allowing for the repurchase of up to $30 million of the Company’s ordinary common shares. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, the Company repurchased approximately ~~0.4~~0.5 million and 0.7 million shares of its common stock, respectively, which are held in treasury, for a total cost of ~~$2.4~~$3.2 million, and $4.3 million including ~~an accrual of $0.6 million and also~~ commission fees for the repurchase of its common ~~stock.~~stock for the three and six months ended June 30, 2023, respectively. At June 30, 2023, $15.2 million was available under the stock repurchase program.

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)~~if 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 11: Share-Based Compensation~~

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, performance share units and deferred compensation.

Share-based compensation expense recognized in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) was $4.4 million and $9.5 million for the three and nine months ended September 30, 2022, respectively, and $4.9 million and $12.7 million for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, there was approximately $35.9 million of total unrecognized compensation cost related to stock-based compensation arrangements under the Amended and Restated 2019 Omnibus Incentive Plan. That cost is expected to be recognized over a weighted average period of approximately 2.0 years.

Note ~~12:~~11: Fair Value Measurements

The ~~Financial Accounting Standards Board (FASB)~~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.

1715

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


		Carrying Value		Fair Value							Carrying Value		Fair Value
(in $000s)	(in $000s)			Level 1		Level 2		Level 3		(in $000s)			Level 1		Level 2		Level 3
September 30, 2022
June 30, 2023										June 30, 2023
ABL Facility										ABL Facility	$	492,411	$	—	$	492,411	$	—
2029 Secured Notes										2029 Secured Notes	920,000		—		830,300		—
2023 Credit Facility										2023 Credit Facility	13,800		—		13,800		—
Other notes payable										Other notes payable	27,600		—		27,600		—
Warrant liabilities										Warrant liabilities	1,883		—		—		1,883

December 31, 2022										December 31, 2022
ABL Facility	ABL Facility	$	447,000	$	—	$	447,000	$	—	ABL Facility	$	437,731	$	—	$	437,731	$	—
2029 Secured Notes	2029 Secured Notes	920,000		—		761,300		—		2029 Secured Notes	920,000		—		814,200		—
Other notes payable	Other notes payable	26,575		—		26,575		—		Other notes payable	31,661		—		31,661		—
Warrant liabilities	Warrant liabilities	5,291		—		—		5,291		Warrant liabilities	3,012		—		—		3,012

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, the 2023 Credit Facility and other notes payable approximated fair value as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 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 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 13: Financial Instruments).~~Warrants. The Company estimated the fair value using the Black-Scholes option-pricing model based on the market value of the underlying 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.

~~Note 13: Financial Instruments~~

In The changes 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 Holdings’ 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 sharesfair value 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 Warrantswarrant liabilities 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, onlyrecorded 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. The Company recorded Financing and other ~~(income) expense of approximately $0.8 million and $(0.9) million during~~income in the ~~three months ended September 30, 2022 and 2021, respectively, and $(16.3) million and $8.1 million during the nine months ended September 30, 2022 and 2021, respectively, in its~~ Condensed Consolidated Statements of ~~Operations~~Income and Comprehensive Income ~~(Loss) related to~~and cash flow from operating activities in the ~~fair value remeasurement.~~Condensed Consolidated Statements of Cash Flows.

Note ~~14:~~12: Income Taxes

We are subject to income taxes primarily in the U.S. and Canada. Our overall effective tax rate is affected by a number of factors, such as the relative amounts of income we earn in differing tax jurisdictions, tax law changes, certain non-deductible expenses (non-taxable income), such as compensation disallowance and mark-to-market adjustments on derivative financial instruments, and changes in the valuation allowance we establish against deferred tax assets. The rate is also affected by discrete items that may occur in any given year, such as legislative enactments and changes in our corporate structure that may occur. These discrete items may not be consistent from year to year. As a result of acquisitions and other transactions that have resulted in changes in control, certain of our federal and state net operating loss and interest expense carryforwards (collectively, “Carryforward Assets”) are subject to limitations prescribed by U.S. Internal Revenue Code Section 382 (“Section 382”) and similar rules in state and local taxing jurisdictions. We record a valuation allowance against deferred tax assets, including Carryforward 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. For interim periods, we estimate our annual effective tax rate, exclusive of discrete items, which is derived primarily by our estimate of our valuation allowance as of the end of our fiscal year. Excluding discrete items, our estimated annual effective tax rate for the year ending December 31, 2022 is approximately 14.0%. In the nine months ended September 30, 2022, discrete items, including derivative mark-to-market adjustments, transaction and integration expenses, coupled with certain tax attribute changes related to real and personal property and subsidiaries in our consolidated group, resulted in an overall effective tax rate in the period of 47.7%. The effect of these items resulted in approximately $7.3 million of tax expense being recognized in the nine months ended September 30, 2022. The Company’s effective tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2021 of negative 6.3%, which differed~~2023 and 2022 differs from the U.S. federal statutory tax rate due ~~primarily~~ to the recording of valuation allowances. We recorded an income tax expense of $2.3 million for the six months ended June 30, 2023 resulting in an effective tax rate of 8% compared to an income tax expense of $2.9 million for the comparable prior year period, at an effective tax rate of 22%. The change in the effective tax rate was primarily due to lower discrete items including mark-to-market adjustments in the six months ended June 30, 2023 as compared to discrete items recorded during the six months ended June 30, 2022.

On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IRA”), which, among other things, implements a 15% minimum tax for certain large corporations, a 1% excise tax on net stock repurchases, and several tax incentives to promote clean energy. The IRA is effective for tax years beginning after December 31, 2022. Based on our current analysis of the provisions, we do not believe this legislation will have a material effect on our consolidated financial statements. We will continue to monitor the additional guidance from the Internal Revenue Service (the “IRS”).

Note ~~15:~~13: 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~~pre-acquisition activities of Custom Truck One Source, LP. (“Custom Truck LP”), the sellers of Custom Truck LP ~~Sellers~~ have agreed to indemnify ~~Nesco and Buyer~~the Company for losses arising out of the breach of ~~Sellers’~~ pre-closing covenants in the ~~Purchase Agreement~~purchase agreement and certain indemnified tax matters discussed below, with recourse limited to a $10 million and $8.5 million escrow ~~account,~~accounts, respectively.

From time to time, the Company ismay be 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 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”).~~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 “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 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 ~~16:~~14: Related Parties

The Company has transactions with related parties as summarized below.

Rentals and Sales — Energy Capital Partners (“ECP”), a stockholder in the Company, and their affiliates have ownership interests in a broad range of 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 sells equipment and 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.

Prior to August 1, 2022, Energy Capital Partners (“ECP”), a stockholder of the Company, and its affiliates had ownership interests in PLH Group, Inc., which was a customer of the Company.

Facilities Leases and Other — The Company ~~leases~~has leased certain facilities, as well as ~~purchases~~purchased aircraft charter services, from entities owned by members of the Company’s management and their immediate families. ~~Payments~~Lease and charter services payments related to ~~the related parties for~~ these transactions are immaterial. Rent and air travel expenses are recorded in selling, general, and administrative expenses. In December 2022, the Company terminated the lease agreements and purchased the facilities and land from these related parties for a purchase price of approximately $15.4 million.

Management Fees — The Company entered into the Corporate Advisory Services Agreement with Platinum effective ~~as of the Closing Date,~~in April 2021, under which management fees are payable to Platinum quarterly. The management fees are recorded in transaction expenses and other in the Company’s Consolidated Statements of Income and Comprehensive Income.

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


		Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
(in $000s)	(in $000s)	2022		2021		2022		2021			(in $000s)	2023		2022		2023		2022
Total revenues from transactions with related parties	Total revenues from transactions with related parties	$	8,385	$	6,594	$	27,128	$	16,332		Total revenues from transactions with related parties	$	10,048	$	10,892	$	18,503	$	18,743
Expenses incurred from transactions with related parties included in cost of revenue	Expenses incurred from transactions with related parties included in cost of revenue	$	297	$	451	$	2,109	$	1,625		Expenses incurred from transactions with related parties included in cost of revenue	$	494	$	515	$	852	$	1,812
Expenses incurred from transactions with related parties included in operating expenses	Expenses incurred from transactions with related parties included in operating expenses	$	1,398	$	1,497	$	4,635	$	3,127		Expenses incurred from transactions with related parties included in operating expenses	$	1,368	$	1,606	$	2,763	$	3,237

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


(in $000s)	(in $000s)	September 30, 2022		December 31, 2021		(in $000s)	June 30, 2023		December 31, 2022
Accounts receivable from related parties	Accounts receivable from related parties	$	5,743	$	5,145	Accounts receivable from related parties	$	3,733	$	7,813
Accounts payable to related parties	Accounts payable to related parties	$	46	$	26	Accounts payable to related parties	$	1	$	1,475

Note ~~17:~~15: 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 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 three 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.~~

The Company’s segment results are presented in the tables below:

Three Months Ended September 30,
2022
(in $000s) ERS TES APS Total
Revenue:
Rental $ 112,009 $ — $ 3,001 $ 115,010
Equipment sales 37,121 173,782 — 210,903
Parts and services — — 31,867 31,867
Total revenue 149,130 173,782 34,868 357,780
Cost of revenue:
Rentals/parts and services 27,221 — 26,187 53,408
Equipment sales 27,015 146,573 — 173,588
Depreciation of rental equipment 41,776 — 836 42,612
Total cost of revenue 96,012 146,573 27,023 269,608
Gross profit $ 53,118 $ 27,209 $ 7,845 $ 88,172

Three Months Ended September 30,
2021
(in $000s) ERS TES APS Total
Revenue:
Rental $ 105,124 $ — $ 3,984 $ 109,108
Equipment sales 27,101 190,062 — 217,163
Parts and services — — 31,034 31,034
Total revenue 132,225 190,062 35,018 357,305
Cost of revenue:
Rentals/parts and services 24,622 — 25,287 49,909
Equipment sales 19,546 172,445 — 191,991
Depreciation of rental equipment 49,125 — 1,028 50,153
Total cost of revenue 93,293 172,445 26,315 292,053
Gross profit $ 38,932 $ 17,617 $ 8,703 $ 65,252


		Nine Months Ended September 30,									Three Months Ended June 30,
		2022									2023
(in $000s)	(in $000s)	ERS		TES		APS		Total		(in $000s)	ERS		TES		APS		Total
Revenue:	Revenue:									Revenue:
Rental	Rental	$	325,679	$	—	$	10,531	$	336,210	Rental	$	117,832	$	—	$	4,337	$	122,169
Equipment sales	Equipment sales	133,674		522,921		—		656,595		Equipment sales	50,694		251,423		—		302,117
Parts and services	Parts and services	—		—		93,557		93,557		Parts and services	—		—		32,544		32,544
Total revenue	Total revenue	459,353		522,921		104,088		1,086,362		Total revenue	168,526		251,423		36,881		456,830
Cost of revenue:	Cost of revenue:									Cost of revenue:
Rentals/parts and services	Rentals/parts and services	79,863		—		74,715		154,578		Rentals/parts and services	31,341		—		25,988		57,329
Equipment sales	Equipment sales	100,663		444,798		—		545,461		Equipment sales	39,802		205,464		—		245,266
Depreciation of rental equipment	Depreciation of rental equipment	128,126		—		2,774		130,900		Depreciation of rental equipment	42,805		—		811		43,616
Total cost of revenue	Total cost of revenue	308,652		444,798		77,489		830,939		Total cost of revenue	113,948		205,464		26,799		346,211
Gross profit	Gross profit	$	150,701	$	78,123	$	26,599	$	255,423	Gross profit	$	54,578	$	45,959	$	10,082	$	110,619

2118


		Nine Months Ended September 30,										Three Months Ended June 30,
		2021										2022
(in $000s)	(in $000s)	ERS			TES		APS		Total		(in $000s)	ERS		TES		APS		Total
Revenue:	Revenue:										Revenue:
Rental	Rental	$	244,935		$	—	$	11,001	$	255,936	Rental	$	108,109	$	—	$	3,946	$	112,055
Equipment sales	Equipment sales	70,141			412,684		—		482,825		Equipment sales	37,200		181,306		—		218,506
Parts and services	Parts and services	—			—		71,954		71,954		Parts and services	—		—		31,545		31,545
Total revenue	Total revenue	315,076			412,684		82,955		810,715		Total revenue	145,309		181,306		35,491		362,106
Cost of revenue:	Cost of revenue:										Cost of revenue:
Rentals/parts and services	Rentals/parts and services	67,683			—		64,700		132,383		Rentals/parts and services	27,851		—		23,578		51,429
Equipment sales	Equipment sales	60,815			374,180		—		434,995		Equipment sales	30,418		154,177		—		184,595
Depreciation of rental equipment	Depreciation of rental equipment	108,202			—		2,974		111,176		Depreciation of rental equipment	42,384		—		940		43,324
Total cost of revenue	Total cost of revenue	236,700			374,180		67,674		678,554		Total cost of revenue	100,653		154,177		24,518		279,348
Gross profit	Gross profit	$	78,376		$	38,504	$	15,281	$	132,161	Gross profit	$	44,656	$	27,129	$	10,973	$	82,758

				Six Months Ended June 30,
				2023
(in $000s)											(in $000s)	ERS		TES		APS		Total
Revenue:											Revenue:
Rental											Rental	$	231,616	$	—	$	8,841	$	240,457
Equipment sales											Equipment sales	142,830		460,577		—		603,407
Parts and services											Parts and services	—		—		65,129		65,129
Total revenue											Total revenue	374,446		460,577		73,970		908,993
Cost of revenue:											Cost of revenue:
Rentals/parts and services											Rentals/parts and services	60,401		—		52,975		113,376
Equipment sales											Equipment sales	110,883		380,508		—		491,391
Depreciation of rental equipment											Depreciation of rental equipment	82,317		—		1,629		83,946
Total cost of revenue											Total cost of revenue	253,601		380,508		54,604		688,713
Gross profit											Gross profit	$	120,845	$	80,069	$	19,366	$	220,280

												Six Months Ended June 30,
												2022
(in $000s)											(in $000s)	ERS		TES		APS		Total
Revenue:											Revenue:
Rental											Rental	$	213,670	$	—	$	7,530	$	221,200
Equipment sales											Equipment sales	96,553		349,139		—		445,692
Parts and services											Parts and services	—		—		61,690		61,690
Total revenue											Total revenue	310,223		349,139		69,220		728,582
Cost of revenue:											Cost of revenue:
Rentals/parts and services											Rentals/parts and services	52,642		—		48,528		101,170
Equipment sales											Equipment sales	73,648		298,225		—		371,873
Depreciation of rental equipment											Depreciation of rental equipment	86,350		—		1,938		88,288
Total cost of revenue											Total cost of revenue	212,640		298,225		50,466		561,331
Gross profit											Gross profit	$	97,583	$	50,914	$	18,754	$	167,251

Total assets by operating segment are not disclosed herein because asset by operating segment data is not reviewed by the 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~~income before income taxes:

Three Months Ended September 30, Nine Months Ended September 30,
(in $000s) 2022 2021 2022 2021
Gross Profit $ 88,172 $ 65,252 $ 255,423 $ 132,161
Selling, general and administrative expenses 49,835 48,625 152,269 111,939
Amortization 6,794 13,334 27,000 27,420
Non-rental depreciation 1,938 873 7,302 1,845
Transaction expenses and other 6,498 7,742 17,192 42,765
Loss on extinguishment of debt — — — 61,695
Interest expense, net 22,887 19,045 62,324 53,674
Financing and other expense (income) (1,747) (3,656) (25,905) 143
Income (Loss) Before Income Taxes $ 1,967 $ (20,711) $ 15,241 $ (167,320)


	Three Months Ended June 30,				Six Months Ended June 30,
(in $000s)	2023		2022		2023		2022
Gross Profit	$	110,619	$	82,758	$	220,280	$	167,251
Selling, general and administrative expenses	58,028		48,779		115,019		102,434
Amortization	6,606		6,871		13,278		20,206
Non-rental depreciation	2,721		2,317		5,371		5,364
Transaction expenses and other	3,689		6,046		7,149		10,694


Interest expense, net	31,625		20,281		60,801		39,437
Financing and other income	(5,048)		(15,078)		(8,999)		(24,158)
Income Before Income Taxes	$	12,998	$	13,542	$	27,661	$	13,274

The following table presents total assets by country:

(in $000s) September 30, 2022 December 31, 2021
Assets:
United States $ 2,753,347 $ 2,653,058
Canada 100,287 30,708
$ 2,853,634 $ 2,683,766


(in $000s)	June 30, 2023		December 31, 2022
Assets:
United States	$	3,020,787	$	2,830,958
Canada	117,857		107,254
Total Assets	$	3,138,644	$	2,938,212

2220

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

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. These statements often include words such as “anticipate,” “expect,” “suggest,” “plan,” “believe,” “intend,” “estimate,” “target,” “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 and are subject to and involve risks, uncertainties and assumptions. You should not place undue reliance on these forward-looking statements or projections. Below is a summary of risk factors applicable to us that may materially affect such forward-looking statements and projections:

•~~difficulty~~increases 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 transitionlabor costs, ~~that we will continue to incur following the Acquisition;~~

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

•~~the cyclical nature of demand for our products and services and our vulnerability to industry, regional and national downturns, which impact, among others, our 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, and our inability to manage our 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;~~order backlog may not be indicative of the level of our future revenues;

•~~disruptions~~increases in unionization rate in our ~~supply chain as a result of the ongoing COVID-19 pandemic;~~

•~~aging or obsolescence of our existing equipment, and the fluctuations of market value thereof;~~workforce;

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

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

•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;

•potential impairment charges;

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

•aging or obsolescence of our existing equipment, and the fluctuations of market value thereof;

•disruptions in our ~~information technology systems or a compromise~~supply chain;

•our business may be impacted by government spending;

•we may experience losses in excess of our ~~system security, limiting our ability to effectively monitor and control our operations, adjust to changing market conditions, and implement strategic initiatives;~~recorded reserves for receivables;

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

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

•~~potential impairment charges;~~regulatory technological advancement, or other changes in our core end-markets may affect our customers’ spending;

•difficulty in integrating acquired businesses and fully realizing the anticipated benefits and cost savings of the acquired businesses, as well as additional transaction and transition costs that we will continue to incur following acquisitions;

•material weakness in our ~~exposure to various risks related to legal proceedings or claims, and~~internal control over financial reporting which, if not remediated, could result in material misstatements in our ~~failure to comply with relevant laws and regulations, including those related to occupational health and safety, the environment, government contracts, and data privacy and data security;~~financial statements;

•the interest of our majority stockholder, which may not be consistent with the other 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 and the ABL Credit Agreement;~~

•~~increases in unionization rate in~~ our ~~workforce;~~debt agreements;

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

•~~the phase-out~~disruptions in our information technology systems or a compromise of ~~LIBOR~~our system security, limiting our ability to effectively monitor and ~~uncertainty as~~control our operations, adjust to ~~its replacement;~~changing market conditions, and implement strategic initiatives;

•we are subject to complex laws and regulations, including environmental and safety regulations that can adversely affect cost, manner or feasibility of doing business;

•we are subject to a series of risks related to climate change; and

•~~uncertainties relating~~increased attention to, ~~macroeconomic conditions.~~and evolving expectations for, sustainability and environmental, social and governance initiatives.

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~~“Risk Factors” in Part I, Item 1A of the Annual Report for the year ended December 31, ~~2021,~~2022 and in Part II, Item 1A of this ~~Quarterly Report on Form 10-Q,~~report, for additional risks.

2321

~~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.~~a Delaware corporation, and its wholly owned subsidiaries (“Custom Truck LP”) in a series of 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 common stock (“Common Stock”) from “NSCO” to “CTOS,” and the ticker of its redeemable warrants from “NSCO.WS” to “CTOS.WS.”

~~Throughout this section, unless otherwise noted, terms such as “we,~~we,” “our,” “us,” or “the Company” ~~refer~~) are engaged in the business of providing a range of products and services to ~~Nesco Holdings prior~~customers through rentals and sales of specialty equipment, rentals and sales of aftermarket parts and services related to the ~~Acquisition~~specialty equipment, and repair, maintenance and customization services related to that equipment.

We are a specialty equipment provider to the ~~combined company after~~electric utility transmission and distribution, telecommunications, rail and other infrastructure-related industries in North America. Our core business relates to our new equipment inventory and rental fleet of specialty equipment that is utilized by service providers in infrastructure development and improvement work. We offer our specialized equipment to a diverse customer base, including utilities and contractors, for the ~~Acquisition. Unless~~maintenance, repair, upgrade, and installation of critical infrastructure assets, including distribution and transmission electric lines, telecommunications networks and rail systems, as well as for lighting and signage. We rent, produce, sell and service a broad range of new and used equipment, including bucket trucks, digger derricks, dump trucks, cranes, service trucks, and heavy-haul trailers. We manage the ~~context otherwise requires, the terms “Nesco” or “Nesco Holdings” mean Nesco Holdings~~business in three reporting segments: Equipment Rental Solutions (“ERS”), Truck 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 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 GroupEquipment Sales (“~~Blackstone”~~TES”) and ~~other direct~~Aftermarket Parts 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~~Services (“Platinum”), pursuant to which Buyer agreed to acquire 100% of the partnership interests of Custom 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 the Closing Date, in connection with (i) the Rollovers, the Company issued, in the aggregate, 20,100,000 shares of Common Stock to the parties to the Rollover Agreements, (ii) the Subscription, the Company issued 148,600,000 shares of Common Stock to Platinum, and (iii) the Supplemental Equity Financing, 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, 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 purchase price for the Acquisition was $1.5 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 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 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”). For more detail regarding the 2029 Secured Notes and the ABL Facility, see “Liquidity and Capital Resources” below.

~~Pro Forma Financial Information~~

The unaudited pro forma combined financial information presented in the section entitled “Supplemental Pro Forma Information,” give effect to the Acquisition, as if the Acquisition had occurred on January 1, 2020, and is presented to facilitate comparisons with our results following the Acquisition. This information has been prepared in accordance with Securities and Exchange Commission Article 11 of 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 Custom Truck LP and 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~~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 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.~~expenses, including amortization of capitalized cloud computing arrangements.

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. Depreciation of property used in the production of our specialized equipment is included in cost of equipment sales.

Transaction expenses and other — Transaction expenses and other expense include expenses directly related 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~~ include costs and expenses associated with post-acquisition integration activities related to the acquired businesses. Management fees pursuant to the Corporate Advisory Services Agreement with Platinum are also included in this category.

Financing and other ~~expense (income)~~income — Financing and other ~~expense (income)~~income reflects the financing ~~expense (income)~~income associated with sales-type lease activity, foreign currency gains and losses related to our Canadian operations, as well as other miscellaneous gains or losses from non-operating activities. Also included in financing and other ~~expense (income)~~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:

Ending OEC — Ending original equipment cost (“OEC”) is the original equipment cost of units at the end of the 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~~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. 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.

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.~~customized and stock equipment. 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 ~~September~~June 30, ~~2022,~~2023, this equipment (the “rental fleet”) is comprised of more than ~~9,600~~10,200 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~~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 our 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 refer to 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 of operations and 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, without regard to financing methods or capital structures. The Company excludes the items identified in the reconciliations of 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, including the method by which the assets were acquired, and capital structures. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, 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 income or loss before interest expense, income taxes, depreciation and amortization, share-based compensation, and other items that the Company does not view as indicative of ongoing performance. 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. The Company also includes an adjustment to remove the 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 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 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 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- and nine-month periods ended September 30, 2021 in the section entitled “Supplemental Pro Forma Information.”

~~Gross Profit Excluding Depreciation of Rental Equipment~~

Gross profit excluding depreciation of rental equipment is a financial performance measure that we use to monitor our results from operations. We believe the exclusion of depreciation expense of the rental fleet provides a meaningful measure of 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 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 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.

2724

Results of Operations

Three ~~months ended September 30, 2022 compared to three months ended September 30, 2021~~

~~The operating results~~ and ~~financial metrics presented below for the three months ended September 30, 2022 and 2021 and the three~~six months ended June 30, ~~2022 include~~2023 compared to the ~~results of Custom Truck LP for all~~same periods ~~presented.~~in 2022

Consolidated Results of Operations


		Three Months Ended																Three Months Ended
(in $000s)	(in $000s)	September 30, 2022		% of revenue		September 30, 2021		% of revenue		$ Change		% of change		June 30, 2022		% of revenue			(in $000s)	June 30, 2023		% of revenue	June 30, 2022		% of revenue	$ Change		% change	March 31, 2023		% of revenue
Rental revenue	Rental revenue	$	115,010	32.1	%	$	109,108	30.5	%	$	5,902	5.4	%	$	112,055	30.9	%		Rental revenue	$	122,169	26.7%	$	112,055	30.9%	$	10,114	9.0%	$	118,288	26.2%
Equipment sales	Equipment sales	210,903		58.9	%	217,163		60.8	%	(6,260)		(2.9)	%	218,506		60.3	%		Equipment sales	302,117		66.1%	218,506		60.3%	83,611		38.3%	301,290		66.6%
Parts sales and services	Parts sales and services	31,867		8.9	%	31,034		8.7	%	833		2.7	%	31,545		8.7	%		Parts sales and services	32,544		7.1%	31,545		8.7%	999		3.2%	32,585		7.2%
Total revenue	Total revenue	357,780		100.0	%	357,305		100.0	%	475		0.1	%	362,106		100.0	%		Total revenue	456,830		100.0%	362,106		100.0%	94,724		26.2%	452,163		100.0%
Cost of revenue, excluding rental equipment depreciation	Cost of revenue, excluding rental equipment depreciation	226,996		63.4	%	241,900		67.7	%	(14,904)		(6.2)	%	236,024		65.2	%		Cost of revenue, excluding rental equipment depreciation	302,595		66.2%	236,024		65.2%	66,571		28.2%	302,172		66.8%
Depreciation of rental equipment	Depreciation of rental equipment	42,612		11.9	%	50,153		14.0	%	(7,541)		(15.0)	%	43,324		12.0	%		Depreciation of rental equipment	43,616		9.5%	43,324		12.0%	292		0.7%	40,330		8.9%
Gross profit	Gross profit	88,172		24.6	%	65,252		18.3	%	22,920		35.1	%	82,758		22.9	%		Gross profit	110,619		24.2%	82,758		22.9%	27,861		33.7%	109,661		24.3%
Operating expenses	Operating expenses	65,065				70,574				(5,509)				64,013					Operating expenses	71,044			64,013			7,031		11.0%	69,773
Operating income (loss)		23,107				(5,322)				28,429				18,745
Other expense		21,140				15,389				5,751				5,203
Income (loss) before income taxes		1,967				(20,711)				22,678				13,542
Operating income																			Operating income	39,575			18,745			20,830		111.1%	39,888
Total other expense																			Total other expense	26,577			5,203			21,374		410.8%	25,225
Income before income taxes																			Income before income taxes	12,998			13,542			(544)		(4.0)%	14,663
Income tax expense (benefit)	Income tax expense (benefit)	4,349				(186)				4,535				(81)					Income tax expense (benefit)	1,388			(81)			1,469		NM	863
Net income (loss)		$	(2,382)			$	(20,525)			$	18,143			$	13,623
Net income																			Net income	$	11,610		$	13,623		$	(2,013)	(14.8)%	$	13,800


	Six Months Ended June 30,
(in $000s)	2023		% of revenue		2022		% of revenue	$ Change		% of change
Rental revenue	$	240,457	26.5	%	$	221,200	30.4%	$	19,257	8.7	%
Equipment sales	603,407		66.4	%	445,692		61.2%	157,715		35.4	%
Parts sales and services	65,129		7.2	%	61,690		8.5%	3,439		5.6	%
Total revenue	908,993		100.0	%	728,582		100.0%	180,411		24.8	%
Cost of revenue, excluding rental equipment depreciation	604,767		66.5	%	473,043		64.9%	131,724		27.8	%
Depreciation of rental equipment	83,946		9.2	%	88,288		12.1%	(4,342)		(4.9)	%
Gross profit	220,280		24.2	%	167,251		23.0%	53,029		31.7	%
Operating expenses	140,817				138,698			2,119		1.5	%
Operating income	79,463				28,553			50,910		178.3	%
Total other expense	51,802				15,279			36,523		239.0	%
Income before income taxes	27,661				13,274			14,387		108.4	%
Income tax expense (benefit)	2,251				2,924			(673)		(23.0)	%
Net income	$	25,410			$	10,350		$	15,060	145.5	%

Total Revenue - The increase in total revenue for the three and six months ended ~~September~~June 30, ~~2022~~2023 compared to the ~~three months ended September 30, 2021~~same periods in 2022 was primarily due to an increase in rental revenue and rental equipment sales, partially offset by a decline in new and used equipment sales in our TES segment. Supply headwinds continued to impact our ability to complete and deliver new equipment during the three months ended September 30, 2022 despite strong customer demand for ~~our products, as evidenced by the growth in our rentals~~new equipment and rental equipment, as wells as for parts sales and services. The rental revenue reflects our continued expansion of our rental fleet, stable utilization and pricing gains. Equipment sales increased as the continuing improvement in supply chain challenges allowed for greater order ~~backlog.~~fulfillments and our ability to replenish inventory.

Cost of Revenue, Excluding Rental Equipment Depreciation - The ~~decrease~~increase in cost of revenue, excluding rental equipment depreciation for the three and six months ended ~~September~~June 30, 2023 compared to the same periods in 2022, was driven primarily by the ~~decrease~~increase in new and rental equipment sales ~~volume versus the three months ended September 30, 2021.~~volume.

Depreciation of Rental Equipment - Depreciation of our rental fleet ~~decreased~~was flat in the three months ended ~~September~~June 30, ~~2022~~2023 as a result of the higher level of rental equipment ~~sales.~~sales offset by higher rental equipment levels. For the six months ended June 30, 2023, depreciation of our rental fleet decreased due to favorable market demand for used rental equipment.

Operating Expenses - Operating expenses ~~decreased~~increased in the three and six months ended ~~September~~June 30, 2023 compared to the same periods in 2022, primarily as a result of ~~reduced intangible asset amortization~~an increase in general and administrative expenses due to higher commissions, increased headcount and wages, and additional expense ~~from the retirement of certain trade names in the first quarter of 2022 and lower transaction and post-acquisition integration costs related to the Acquisition.~~associated with various information technology projects.

Total Other Expense - Other expense for the three and six months ended ~~September~~June 30, ~~2022~~2023 increased primarily due to the increase in interest expense from variable rate debt and floor plan financing liabilities. ~~Additionally, other expense for~~The increase is also attributable to the ~~three months ended September 30, 2022 and 2021 includes~~ mark-to-market income (loss) from the private warrants liability ~~which is accounted~~(accounted for as a derivative financial ~~instrument.~~instrument) being in an income position of $0.6 million and $1.1 million for the three and six months ended June 30, 2023, compared to a gain of $13.1 million and $18.8 million for the same periods in 2022.

Income Tax Expense (Benefit) - Our overall effective tax rate is affected by a number of factors, such as the relative amounts of income we earn in differing tax jurisdictions, tax law changes, certain non-deductible expenses (non-taxable income), such as compensation disallowance and mark-to-market adjustments on derivative financial instruments, and changes in the valuation allowance we establish against deferred tax assets. The rate is also affected by discrete items that may occur in any given year, such as legislative enactments and changes in our corporate structure that may occur. These discrete items may not be consistent from year to year. In the three and six months ended ~~September~~June 30, ~~2022,~~2023, discrete items, including derivative mark-to-market adjustments, ~~transaction and integration expenses, coupled with certain tax attribute changes related to real and personal property and subsidiaries in our~~

~~consolidated group,~~ resulted in an overall effective tax rate in the period of ~~47.7%.~~10.7% and 8.1%, respectively. The effect of these items resulted in approximately ~~$7.3~~$1.4 million and $2.3 million, respectively, of tax expense being recognized in the three and six months ended ~~September~~June 30, ~~2022.~~

Net Income ~~(Loss)~~ - The ~~change~~decrease in net income ~~(loss)~~ for the three months ended ~~September~~June 30, ~~2022~~2023 compared to the ~~three~~same period in 2022 was primarily the result of higher interest expense on variable-rate debt and variable-rate floor plan liabilities, the change in fair value of the private warrants liability from a gain to a loss position, and higher operating expenses, partially offset by gross profit expansion. The increase in net income for the six months ended ~~September~~June 30, ~~2021~~2023 was primarily the result of gross profit expansion, partially offset by higher interest expense on variable-rate debt and variable-rate floor plan ~~liabilities.~~liabilities and the change in fair value of the private warrants liability from a gain to a loss position.

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 also believe that our vertical integration of rental equipment production as the principal supplier of our rental fleet provides us a cost advantage relative to other specialty rental companies. We are able to generate cash flow through our earnings, as well as sales of used and rental equipment. 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: average OEC on rent, fleet utilization, and OEC on rent yield. We also report sales order backlog related to our customers’ orders for new vocational heavy duty trucks as an indicator of the demand environment for our products. The table below presents these key measures.


		Three Months Ended																Three Months Ended
(in $000s)	(in $000s)	September 30, 2022			September 30, 2021			Change			% Change		June 30, 2022			% Change			(in $000s)	June 30, 2023			June 30, 2022			Change			% Change		March 31, 2023			% Change
Ending OEC	Ending OEC	$	1,428,800		$	1,371,746		$	57,054		4.2	%	$	1,399,500		2.1	%		Ending OEC	$	1,467,779		$	1,399,500		$	68,279		4.9	%	$	1,457,870		0.7	%
Average OEC on rent	Average OEC on rent	$	1,182,500		$	1,103,562		$	78,938		7.2	%	$	1,150,400		2.8	%		Average OEC on rent	$	1,203,855		$	1,150,400		$	53,455		4.6	%	$	1,214,300		(0.9)	%
Fleet utilization	Fleet utilization	83.8		%	81.4		%	2.4		%	2.9	%	82.8		%	1.2	%		Fleet utilization	81.7		%	82.8		%	(1.1)		%	(1.3)	%	83.6		%	(2.3)	%
OEC on rent yield	OEC on rent yield	38.5		%	38.0		%	0.5		%	1.3	%	39.2		%	(1.8)	%		OEC on rent yield	40.1		%	39.2		%	0.9		%	2.3	%	39.6		%	1.3	%
Sales order backlog	Sales order backlog	$	709,180		$	338,457		$	370,723		109.5	%	$	663,619		6.9	%		Sales order backlog	$	863,757		$	663,619		$	200,138		30.2	%	$	855,049		1.0	%


	Six Months Ended June 30,
(in $000s)	2023			2022			Change			% Change
Ending OEC	$	1,467,779		$	1,399,500		$	68,279		4.9	%
Average OEC on rent	$	1,209,111		$	1,150,800		$	58,311		5.1	%
Fleet utilization	82.6		%	82.6		%	—		%	—	%
OEC on rent yield	39.8		%	39.1		%	0.7		%	1.8	%
Sales order backlog	$	863,757		$	663,619		$	200,138		30.2	%

Ending OEC - The increase in Ending OEC for the three and six months ended June 30, 2023 compared to the ~~three months ended September 30, 2021~~same periods in 2022, was driven by positive net rental fleet additions insince the second quarter of 2022, partially offset by our continued focus on selling older equipment from our rental fleet at current ~~quarter and the acquisition of HiRail in the first quarter 2022.~~advantageous residual values.

Average OEC on Rent - The increase in Average OEC on rent for the three and six months ended June 30, 2023 compared to the ~~three months ended September 30, 2021~~same periods in 2022, was driven by fleet growth and continued strong rental demand.

Fleet Utilization - Fleet utilization ~~increased~~decreased compared to the three months ended ~~September~~June 30, ~~2021 as a result~~2022 due to project delays related to transmission and distribution work caused by elevated temperatures in North America. For the six months ended June 30, 2023, fleet utilization remained flat compared to the same period of ~~the factors noted above.~~2022.

OEC on Rent Yield - OEC on Rent Yield increased for the three and six months ended June 30, 2023 compared to the ~~three months ended September 30, 2021~~same periods of 2022, as a result of the impact of ~~continued~~the favorable pricing ~~increases,~~environment for our rental products, reflective of strong demand.

Sales Order Backlog - ~~Sales order backlog consists of customer orders placed for customized and stock equipment.~~ The increase in sales order backlog for the three and six months ended June 30, 2023 compared to the ~~three months ended September 30, 2021~~same periods in 2022 was driven by continued strong customer demand.

Adjusted EBITDA

The following table provides a reconciliation of net income ~~(loss)~~ to Adjusted ~~EBITDA for the three months ended September 30, 2022 and 2021 and the three months ended June 30, 2022.~~EBITDA. 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,~~income, net income, ~~(loss),~~ earnings ~~(loss)~~ per share or any other comparable ~~operating measure~~measures prescribed by GAAP.


		Three Months Ended													Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31, 2023
(in $000s)	(in $000s)	September 30, 2022		September 30, 2021		$ Change		% Change		June 30, 2022		$ Change		(in $000s)	2023		2022		2023		2022
Net income (loss)		$	(2,382)	$	(20,525)	$	18,143	88.4	%	$	13,623	$	(16,005)
Net income														Net income	$	11,610	$	13,623	$	25,410	$	10,350	$	13,800
Interest expense	Interest expense	19,338		17,324		2,014		11.6	%	18,050		1,288		Interest expense	23,575		18,050		45,938		35,495		22,363
Income tax expense (benefit)	Income tax expense (benefit)	4,349		(186)		4,535		2,438.2	%	(81)		4,430		Income tax expense (benefit)	1,388		(81)		2,251		2,924		863
Depreciation and amortization	Depreciation and amortization	54,001		66,804		(12,803)		(19.2)	%	54,620		(619)		Depreciation and amortization	55,441		54,620		107,531		117,120		52,090
EBITDA	EBITDA	75,306		63,417		11,889		18.7	%	86,212		(10,906)		EBITDA	92,014		86,212		181,130		165,889		89,116
Adjustments:	Adjustments:													Adjustments:
Non-cash purchase accounting impact (1)	Non-cash purchase accounting impact (1)	3,408		6,046		(2,638)		(43.6)	%	2,367		1,041		Non-cash purchase accounting impact (1)	469		2,367		7,668		11,393		7,199
Transaction and integration costs (2)	Transaction and integration costs (2)	6,501		7,748		(1,247)		(16.1)	%	6,043		458		Transaction and integration costs (2)	3,689		6,043		7,149		10,691		3,460

Sales-type lease adjustment (3)	Sales-type lease adjustment (3)	1,232		3,783		(2,551)		(67.4)	%	2,032		(800)		Sales-type lease adjustment (3)	3,293		2,032		6,096		2,561		2,803
Share-based payments (4)	Share-based payments (4)	4,378		4,856		(478)		(9.8)	%	1,784		2,594		Share-based payments (4)	4,322		1,784		7,469		5,148		3,147
Change in fair value of derivative and warrants (5)	Change in fair value of derivative and warrants (5)	809		(1,427)		2,236		156.7	%	(13,055)		13,864		Change in fair value of derivative and warrants (5)	(604)		(13,055)		(1,129)		(18,822)		(525)
Adjusted EBITDA	Adjusted EBITDA	$	91,634	$	84,423	$	7,211	8.5	%	$	85,383	$	6,251	Adjusted EBITDA	$	103,183	$	85,383	$	208,383	$	176,860	$	105,200

(1) Represents the non-cash impact of purchase accounting, 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 and process improvement costs related to acquisitions of businesses, including post-acquisition integration costs, which are recognized within operating expenses in our Condensed Consolidated Statements of ~~Operations~~Income and Comprehensive ~~Income (Loss).~~Income. These expenses are comprised of professional consultancy, legal, tax and accounting ~~fees.~~fees, and management fees to Platinum. Also included are expenses associated with the integration of acquired businesses. These expenses are presented as adjustments to net income pursuant to our ABL Credit Agreement.

(3) Represents the adjustment for the impact of sales-type lease accounting for certain leases containing rental purchase options ("RPOs"), as the 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. The components of this adjustment are presented in the table below.


		Three Months Ended				Three Months Ended June 30, 2022			Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31, 2023
(in $000s)	(in $000s)	September 30, 2022		September 30, 2021				(in $000s)	2023		2022		2023		2022
Equipment sales	Equipment sales	$	(7,099)	$	(6,905)	$	(7,671)	Equipment sales	$	(19,603)	$	(7,671)	$	(43,775)	$	(19,908)	$	(24,172)
Cost of equipment sales	Cost of equipment sales	5,938		6,592		6,765		Cost of equipment sales	19,415		6,765		42,640		17,135		23,225
Gross profit	Gross profit	(1,161)		(313)		(906)		Gross profit	(188)		(906)		(1,135)		(2,773)		(947)
Interest (income) expense		(2,719)		897		(2,220)
Interest income								Interest income	(4,406)		(2,220)		(7,834)		(5,108)		(3,428)
Rentals invoiced	Rentals invoiced	5,112		3,199		5,158		Rentals invoiced	7,887		5,158		15,065		10,442		7,178
Sales-type lease adjustment	Sales-type lease adjustment	$	1,232	$	3,783	$	2,032	Sales-type lease adjustment	$	3,293	$	2,032	$	6,096	$	2,561	$	2,803

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

(5) Represents the credit to earnings for the change in fair value of the liability for private warrants.

Operating Results by Segment

Equipment Rental Solutions (ERS) Segment


		Three Months Ended										Three Months Ended
(in $000s)	(in $000s)	September 30, 2022		September 30, 2021		$ Change		% Change		June 30, 2022			% Change		(in $000s)	June 30, 2023		June 30, 2022		$ Change		% Change		March 31, 2023		% Change
Rental revenue	Rental revenue	$	112,009	$	105,124	$	6,885	6.5	%	$	108,109		3.6	%	Rental revenue	$	117,832	$	108,109	$	9,723	9.0	%	$	113,784	3.6	%
Equipment sales	Equipment sales	37,121		27,101		10,020		37.0	%	37,200			(0.2)	%	Equipment sales	50,694		37,200		13,494		36.3	%	92,136		(45.0)	%
Total revenue	Total revenue	149,130		132,225		16,905		12.8	%	145,309			2.6	%	Total revenue	168,526		145,309		23,217		16.0	%	205,920		(18.2)	%
Cost of rental revenue	Cost of rental revenue	27,221		24,622		2,599		10.6	%	27,851			(2.3)	%	Cost of rental revenue	31,341		27,851		3,490		12.5	%	29,060		7.8	%
Cost of equipment sales	Cost of equipment sales	27,015		19,546		7,469		38.2	%	30,418			(11.2)	%	Cost of equipment sales	39,802		30,418		9,384		30.9	%	71,081		(44.0)	%
Depreciation of rental equipment	Depreciation of rental equipment	41,776		49,125		(7,349)		(15.0)	%	42,384			(1.4)	%	Depreciation of rental equipment	42,805		42,384		421		1.0	%	39,512		8.3	%
Total cost of revenue	Total cost of revenue	96,012		93,293		2,719		2.9	%	100,653			(4.6)	%	Total cost of revenue	113,948		100,653		13,295		13.2	%	139,653		(18.4)	%
Gross profit	Gross profit	$	53,118	$	38,932	$	14,186	36.4	%	$	44,656		18.9	%	Gross profit	$	54,578	$	44,656	$	9,922	22.2	%	$	66,267	(17.6)	%


	Six Months Ended June 30,
(in $000s)	2023		2022		$ Change		% Change
Rental revenue	$	231,616	$	213,670	$	17,946	8.4	%
Equipment sales	142,830		96,553		46,277		47.9	%
Total revenue	374,446		310,223		64,223		20.7	%

Cost of rental revenue	60,401		52,642		7,759		14.7	%
Cost of equipment sales	110,883		73,648		37,235		50.6	%
Depreciation of rental equipment	82,317		86,350		(4,033)		(4.7)	%
Total cost of revenue	253,601		212,640		40,961		19.3	%
Gross profit	$	120,845	$	97,583	$	23,262	23.8	%

Total Revenue - The increase in total revenue for the ERS segment for the three and six months ended ~~September~~June 30, ~~2022~~2023, compared to the ~~three months ended September 30, 2021~~same periods in 2022, was driven by an increase in revenues for rental equipment and equipment sales revenue.

Continued demand across our infrastructure end-markets coupled with positive net fleet acquisition in the current year resulted in greater levels of ~~fleet utilization.~~equipment on rent and equipment purchasing from customers.

Cost of Revenue - The increase in total cost of revenue for the three and six months ended ~~September~~June 30, ~~2022~~2023, compared to the ~~three months ended September 30, 2021~~same periods in 2022, was largely due to the increase in cost of equipment sales, resulting from an increase in demand for rental equipment purchases by our customers. The increase is also due to higher levels of fleet maintenance due to the mix of rental returns.

Depreciation - Depreciation of our rental fleet remained flat for the three months ended June 30, 2023, compared to the same period in 2022. For the six months ended June 30, 2023, depreciation of our rental fleet decreased ~~resulting from~~compared to the ~~higher level of~~same period in 2022, primarily due to favorable market demand for used rental ~~equipment sales in the current year.~~equipment.

Gross Profit - The increase in gross profit for the three and six months ended ~~September~~June 30, ~~2022~~2023, compared to the ~~three months ended September 30, 2021~~same periods in 2022, was due to the increase in rental revenues and equipment sales for the period.

Truck and Equipment Sales (TES) Segment


		Three Months Ended								Three Months Ended
(in $000s)	(in $000s)	September 30, 2022		September 30, 2021		$ Change		% Change			June 30, 2022		% Change		(in $000s)	June 30, 2023		June 30, 2022		$ Change		% Change		March 31, 2023		% Change
Equipment sales	Equipment sales	$	173,782	$	190,062	$	(16,280)	(8.6)	%		$	181,306	(4.1)	%	Equipment sales	$	251,423	$	181,306	$	70,117	38.7	%	$	209,154	20.2	%
Cost of equipment sales	Cost of equipment sales	146,573		172,445		(25,872)		(15.0)	%		154,177		(4.9)	%	Cost of equipment sales	205,464		154,177		51,287		33.3	%	175,044		17.4	%
Gross profit	Gross profit	$	27,209	$	17,617	$	9,592	54.4	%		$	27,129	0.3	%	Gross profit	$	45,959	$	27,129	$	18,830	69.4	%	$	34,110	34.7	%


	Six Months Ended June 30,
(in $000s)	2023		2022		$ Change		% Change
Equipment sales	$	460,577	$	349,139	$	111,438	31.9	%


Cost of equipment sales	380,508		298,225		$	82,283	27.6	%

Gross profit	$	80,069	$	50,914	$	29,155	57.3	%

Equipment Sales - Equipment sales ~~decreased~~increased for the three and six months ended ~~September~~June 30, ~~2022~~2023, compared to the ~~three months ended September 30, 2021~~same periods of 2022, due to the continued supply chain ~~challenges~~improvements related to the segment's inventory ~~suppliers. However, we continue to see~~suppliers, which allowed for greater order fulfillments and sustained strong customer ~~demand for our products, as evidenced by the growth in our sales order backlog versus the end of the third quarter of 2021.~~demand.

Cost of Equipment Sales - Cost of equipment sales ~~decreased~~increased for the three and six months ended ~~September~~June 30, ~~2022~~2023, compared to the ~~three months ended September 30, 2021 primarily~~same periods of 2022, due to the ~~decrease in equipment sales, partially offset by an~~ increase in equipment ~~sales prices for the period.~~sales.

Gross Profit - The increase in gross profit for the three and six months ended ~~September~~June 30, ~~2022~~2023, compared to the ~~three months ended September 30, 2021~~same periods of 2022, is reflective of the positive demand and pricing environment for our products.

Aftermarket Parts and Services (APS) Segment


		Three Months Ended								Three Months Ended
(in $000s)	(in $000s)	September 30, 2022		September 30, 2021		$ Change		% Change			June 30, 2022		% Change		(in $000s)	June 30, 2023		June 30, 2022		$ Change		% Change		March 31, 2023		% Change
Rental revenue	Rental revenue	$	3,001	$	3,984	$	(983)	(24.7)	%		$	3,946	(23.9)	%	Rental revenue	$	4,337	$	3,946	$	391	9.9	%	$	4,504	(3.7)	%
Parts and services revenue	Parts and services revenue	31,867		31,034		833		2.7	%		31,545		1.0	%	Parts and services revenue	32,544		31,545		999		3.2	%	32,585		(0.1)	%
Total revenue	Total revenue	34,868		35,018		(150)		(0.4)	%		35,491		(1.8)	%	Total revenue	36,881		35,491		1,390		3.9	%	37,089		(0.6)	%
Cost of revenue	Cost of revenue	26,187		25,287		900		3.6	%		23,578		11.1	%	Cost of revenue	25,988		23,578		2,410		10.2	%	26,987		(3.7)	%
Depreciation of rental equipment	Depreciation of rental equipment	836		1,028		(192)		(18.7)	%		940		(11.1)	%	Depreciation of rental equipment	811		940		(129)		(13.7)	%	818		(0.9)	%
Total cost of revenue	Total cost of revenue	27,023		26,315		708		2.7	%		24,518		10.2	%	Total cost of revenue	26,799		24,518		2,281		9.3	%	27,805		(3.6)	%
Gross profit	Gross profit	$	7,845	$	8,703	$	(858)	(9.9)	%		$	10,973	(28.5)	%	Gross profit	$	10,082	$	10,973	$	(891)	(8.1)	%	$	9,284	8.6	%


	Six Months Ended June 30,
(in $000s)	2023		2022		$ Change		% Change
Rental revenue	$	8,841	$	7,530	$	1,311	17.4	%
Parts and services revenue	65,129		61,690		3,439		5.6	%
Total revenue	73,970		69,220		4,750		6.9	%

Cost of revenue	52,975		48,528		4,447		9.2	%
Depreciation of rental equipment	1,629		1,938		(309)		(15.9)	%
Total cost of revenue	54,604		50,466		4,138		8.2	%
Gross profit	$	19,366	$	18,754	$	612	3.3	%

Total Revenue - Total revenue ~~decreased~~increased for the three and six months ended ~~September~~June 30, ~~2022~~2023, compared to the ~~three months ended September 30, 2021, driven by a decrease~~same periods of 2022. Growth in ~~project starts affecting~~demand for parts, tools and accessories ~~rentals.~~sales was augmented by increased tools and accessories rentals in the Parts, Tools and Accessories (“PTA”) division.

Cost of Revenue - Cost of revenue increased for the three and six months ended ~~September~~June 30, ~~2022~~2023, compared to the ~~three months ended September 30, 2021 due to product mix~~same periods of 2022, commensurate with the increase in volume of parts sales and ~~expenses related to facilities maintenance.~~rental activity.

Gross Profit - The decrease in gross profit ~~was primarily due~~for the three months ended June 30, 2023, compared to the ~~increased supply chain costs and product mix.~~

~~Results of Operations~~

~~Nine Months Ended September 30, 2022 compared to nine months ended September 30, 2021~~

The consolidated operating results for the nine months ended September 30, 2021 include Custom Truck LP from April 1, 2021 to September 30, 2021 and, therefore, are not comparable to the nine months ended September 30, 2022.

~~Consolidated Results of Operations~~

Nine Months Ended September 30,
(in $000s) 2022 % of revenue 2021 % of revenue $ Change % of change
Rental revenue $ 336,210 30.9 % $ 255,936 31.6% $ 80,274 31.4 %
Equipment sales 656,595 60.4 % 482,825 59.6% 173,770 36.0 %
Parts sales and services 93,557 8.6 % 71,954 8.9% 21,603 30.0 %
Total revenue 1,086,362 100.0 % 810,715 100.0% 275,647 34.0 %
Cost of revenue, excluding rental equipment depreciation 700,039 64.4 % 567,378 70.0% 132,661 23.4 %
Depreciation of rental equipment 130,900 12.0 % 111,176 13.7% 19,724 17.7 %
Gross profit 255,423 23.5 % 132,161 16.3% 123,262 93.3 %
Operating expenses 203,763 183,969 19,794
Operating income (loss) 51,660 (51,808) 103,468
Other expense 36,419 115,512 (79,093)
Income (loss) before income taxes 15,241 (167,320) 182,561
Income tax expense (benefit) 7,273 10,468 (3,195)
Net income (loss) $ 7,968 $ (177,788) $ 185,756

~~Total Revenue -~~ ~~The increase~~same period in revenue for the nine months ended September 30, 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 Rental Equipment Depreciation -~~ Consistent with the increase in revenue versus the prior year period, the increase in cost of revenue, excluding rental equipment depreciation, 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 nine months ended September 30, 2022 was the addition of Custom Truck, LP’s operating expenses to our operating results.~~

~~Other Expense -~~ ~~The decrease in~~other expense for the nine months ended September 30, 2022 was largely driven by charges related to mark-to-market charges related to our private warrants, which are accounted for as a liability derivative instrument. Expenses for a loss on extinguishment of debt related to the closing of the Acquisition are included in the nine months ended September 30, 2021.

~~Income Tax Expense (Benefit) -~~ Our overall effective tax rate is affected by a number of factors, such as the relative amounts of income we earn in differing tax jurisdictions, tax law changes, certain non-deductible expenses (non-taxable income), such as compensation disallowance and mark-to-market adjustments on derivative financial instruments, and changes in the valuation allowance we establish against deferred tax assets. The rate is also affected by discrete items that may occur in any given year, such as legislative enactments and changes in our corporate structure that may occur. These discrete items may not be consistent from year to year. In the nine months ended September 30, 2022, discrete items, including derivative mark-to-market adjustments, transaction and integration expenses, coupled with certain tax attribute changes related to real and personal property and subsidiaries in our consolidated group, resulted in an overall effective tax rate in the period of 47.7%. The effect of these items resulted in approximately $7.3 million of tax expense being recognized in the nine months ended September 30, 2022.

~~Net Income (Loss) -~~ ~~The change in net income (loss) for the nine months ended September 30,~~ 2022, was due to ~~the addition of Custom Truck LP to our operating results, as well as significant transaction expenses included in the nine months ended September 30, 2021 connected to the closing of the Acquisition.~~

~~Key Performance Measures~~

Nine Months Ended September 30,
(in $000s) 2022 2021 Change % Change
Ending OEC $ 1,428,800 $ 1,371,746 $ 57,054 4.2 %
Average OEC on rent $ 1,161,400 $ 1,078,947 $ 82,453 7.6 %
Fleet utilization 83.0 % 80.4 % 2.6 % 3.2 %
OEC on rent yield 38.9 % 37.5 % 1.4 % 3.7 %
Sales order backlog $ 709,180 $ 338,457 $ 370,723 109.5 %

~~Ending OEC -~~ product mix changes. The increase in ~~Ending OEC was driven by positive net rental fleet additions in~~gross profit for the ~~current~~six months ended June 30, 2023, compared to the same period ~~and the acquisition~~ of ~~HiRail in the first quarter 2022.~~

~~Average OEC on Rent -~~ ~~The increase in Average OEC on rent was driven by fleet growth and continued strong rental demand.~~

~~Fleet Utilization -~~ ~~Fleet utilization increased as a result of the factors noted above.~~

~~OEC on Rent Yield -~~ ~~OEC on rent yield increased as a result of the impact of continued pricing increases, reflective of strong demand.~~

~~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.~~2022, is primarily volume driven.

~~Adjusted EBITDA~~

The following table provides a reconciliation of net income (loss) to Adjusted EBITDA for the nine months ended September 30, 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.

Nine Months Ended September 30,
(in $000s) 2022 2021 $ Change % Change
Net income (loss) $ 7,968 $ (177,788) $ 185,756 104.5 %
Interest expense 54,833 49,832 5,001 10.0 %
Income tax expense (benefit) 7,273 10,468 (3,195) (30.5) %
Depreciation and amortization 171,121 145,967 25,154 17.2 %
EBITDA 241,195 28,479 212,716 746.9 %
   Adjustments:
   Non-cash purchase accounting impact (1)
14,801 27,486 (12,685) (46.2) %
   Transaction and integration costs (2)
17,192 43,093 (25,901) (60.1) %
   Loss on extinguishment of debt (3)
— 61,695 (61,695) (100.0) %
   Sales-type lease adjustment (4)
3,793 3,273 520 15.9 %
   Share-based payments (5)
9,526 12,716 (3,190) (25.1) %
Change in fair value of derivative and warrants (6)
(18,013) 5,453 (23,466) (430.3) %
Adjusted EBITDA $ 268,494 $ 182,195 $ 86,299 47.4 %

(2) Represents transaction costs related to acquisitions of businesses, including the Acquisition, which are recognized within operating expenses in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). These expenses are comprised of professional consultancy, legal, tax and accounting fees. Also included are expenses associated with the integration of acquired businesses.

~~(3) Loss on extinguishment of debt represents special charges, which are not expected to recur. Such charges are adjustments pursuant to our credit agreement.~~

(4) Represents the impact of sales-type lease accounting for certain leases containing RPOs, as the 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 ABL Credit Agreement.

3331

Nine Months Ended September 30,
(in $000s) 2022 2021
Equipment sales $ (27,007) $ (13,711)
Cost of equipment sales 23,073 11,588
Gross profit (3,934) (2,123)
Interest (income) expense (7,827) (622)
Rentals invoiced 15,554 6,018
Sales-type lease adjustment $ 3,793 $ 3,273

~~(5) Represents non-cash share-based compensation expense associated with the issuance of stock options and restricted stock units.~~

~~(6) 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~~

The following segment information compares results by segment for the nine months ended September 30, 2022 to the nine months ended September 30, 2021. The information for the period ended September 30, 2022 includes results of Custom Truck LP for the entire period, while information for the period ended September 30, 2021 include results of Custom Truck LP from April 1, 2021 to September 30, 2021. Accordingly, the year-over-year changes in all financial statement line items within each segment is attributable to the addition of Custom Truck LP on April 1, 2021. Refer to the Supplemental Pro Forma Information section in this filing that presents the consolidated results of the Company and Custom Truck LP for the nine months ended September 30, 2021.

~~Equipment Rental Solutions (ERS) Segment~~

Nine Months Ended September 30,
(in $000s) 2022 2021
Rental revenue $ 325,679 $ 244,935
Equipment sales 133,674 70,141
Total revenue 459,353 315,076
Cost of rental revenue 79,863 67,683
Cost of equipment sales 100,663 60,815
Depreciation of rental equipment 128,126 108,202
Total cost of revenue 308,652 236,700
Gross profit $ 150,701 $ 78,376

~~Truck and Equipment Sales (TES) Segment~~

Nine Months Ended September 30,
(in $000s) 2022 2021
Equipment sales $ 522,921 $ 412,684
Cost of equipment sales 444,798 374,180
Gross profit $ 78,123 $ 38,504

~~Aftermarket Parts and Services (APS) Segment~~

Nine Months Ended September 30,
(in $000s) 2022 2021
Rental revenue $ 10,531 $ 11,001
Parts and services revenue 93,557 71,954
Total revenue 104,088 82,955
Cost of revenue 74,715 64,700
Depreciation of rental equipment 2,774 2,974
Total cost of revenue 77,489 67,674
Gross profit $ 26,599 $ 15,281

~~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 Operations and Comprehensive Income (Loss).

~~Summary Pro Forma Financial Information and Operational Data~~

Three Months Ended September 30, Nine Months Ended September 30,
(in $000s) 2022 Actual 2021 Pro Forma 2022 Actual 2021 Pro Forma
Revenue $ 357,780 $ 357,305 $ 1,086,362 $ 1,127,186
Gross profit $ 88,172 $ 72,678 $ 255,423 $ 199,132
Net income (loss) $ (2,382) $ (14,956) $ 7,968 $ (87,884)
Adjusted EBITDA $ 91,634 $ 84,423 $ 268,494 $ 227,529
Fleet and Operational Metrics:
Ending OEC $ 1,428,800 $ 1,371,746 $ 1,428,800 $ 1,371,746
Average OEC on rent $ 1,182,500 $ 1,103,562 $ 1,161,400 $ 1,066,318
Fleet utilization 83.8 % 81.4 % 83.0 % 80.4 %
OEC on rent yield 38.5 % 38.0 % 38.9 % 37.5 %
Sales order backlog $ 709,180 $ 338,457 $ 709,180 $ 338,457

~~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 Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2021 combine the Condensed Consolidated Statements of Operations and Comprehensive 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 an accurate 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 condensed consolidated financial statements and related notes of the Company included elsewhere in this Quarterly Report on Form 10-Q. 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 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 the 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 Statement of Net Income (Loss) — Three Months Ended September 30, 2021~~

(in $000s) Custom Truck One Source, Inc.
Pro Forma Adjustmentsa
Pro Forma Combined
Rental revenue $ 109,108 $ — $ 109,108
Equipment sales 217,163 — 217,163
Parts sales and services 31,034 — 31,034
Total revenue 357,305 — 357,305
Cost of revenue 241,900 (7,426) b 234,474
Depreciation of rental equipment 50,153 — 50,153
Total cost of revenue 292,053 (7,426) 284,627
Gross profit 65,252 7,426 72,678
Selling, general and administrative 48,625 — 48,625
Amortization 13,334 — 13,334
Non-rental depreciation 873 — 873
Transaction expenses and other 7,742 — 7,742
Total operating expenses 70,574 — 70,574
Operating income (loss) (5,322) 7,426 2,104
Interest expense, net 19,045 — 19,045
Finance and other expense (income) (3,656) — (3,656)
Total other expense 15,389 — 15,389
Income (loss) before taxes (20,711) 7,426 (13,285)
Taxes (186) 1,857 c 1,671
Net income (loss) $ (20,525) $ 5,569 $ (14,956)

a.The pro forma adjustments give effect to the following as if they occurred on January 1, 2020: (i) the Acquisition, and (ii) the extinguishment of Nesco Holdings’ 2019 Credit Facility and the 2024 Secured Notes repaid in connection with the Acquisition. The adjustments also give effect to transaction expenses directly attributable to the Acquisition.

b.Represents the elimination from cost of revenue of the run-off of the estimated step-up in fair value of inventory acquired that was recognized in the Company’s consolidated financial statements for the three months ended September 30, 2021. The impact of the step-up is reflected as an adjustment to the comparable prior period ended September 30, 2020 as if the Acquisition had occurred on January 1, 2020.

c.~~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%.~~

~~Pro Forma Combined Condensed Consolidated Statement of Net Income (Loss) — Nine Months Ended September 30, 2021~~

(in $000s) Custom Truck One Source, Inc. Custom Truck LP
(Three Months Ended March 31, 2021)
Pro Forma Adjustmentsa
Pro Forma Combined
Rental revenue $ 255,936 $ 51,973 $ — $ 307,909
Equipment sales 482,825 245,955 — 728,780
Parts sales and services 71,954 18,543 — 90,497
Total revenue 810,715 316,471 — 1,127,186
Cost of revenue 567,378 240,678 (17,752) b 790,304
Depreciation of rental equipment 111,176 22,757 3,817 c 137,750
Total cost of revenue 678,554 263,435 (13,935) 928,054
Gross profit 132,161 53,036 13,935 199,132
Selling, general and administrative 111,939 34,428 — 146,367
Amortization 27,420 1,990 3,590 d 33,000
Non-rental depreciation 1,845 1,151 (213) d 2,783
Transaction expenses and other 42,765 5,254 (40,277) e 7,742
Total operating expenses 183,969 42,823 (36,900) 189,892
Operating income (loss) (51,808) 10,213 50,835 9,240
Loss on extinguishment of debt 61,695 — (61,695) f —
Interest expense, net 53,674 9,992 (3,919) g 59,747
Finance and other expense (income) 143 (2,346) — (2,203)
Total other expense 115,512 7,646 (65,614) 57,544
Income (loss) before taxes (167,320) 2,567 116,449 (48,304)
Taxes 10,468 — 29,112 h 39,580
Net income (loss) $ (177,788) $ 2,567 $ 87,337 $ (87,884)

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 and 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 a 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 nine months ended September 30, 2021. The expenses were directly attributable to the Acquisition and are reflected as adjustments to the comparable prior period ended September 30, 2020 as if the Acquisition had occurred on January 1, 2020.

f.Represents the elimination of the loss on extinguishment of debt recognized in the Company’s consolidated financial statements for the nine months ended September 30, 2021 as though the repayment of the 2019 Credit Facility and the 2024 Secured Notes had occurred on January 1, 2020.

g.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.

h.~~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) or Pro Forma Net Income (Loss) (2021) to Actual or Pro Forma Adjusted EBITDA~~

~~The following table provides a reconciliation of actual or pro forma net income (loss) to actual or pro forma Adjusted EBITDA, as applicable:~~

Three Months Ended September 30, Nine Months Ended September 30,
(in $000s) 2022 Actual 2021 Pro Forma 2022 Actual 2021 Pro Forma
Net income (loss) $ (2,382) $ (14,956) $ 7,968 $ (87,884)
Interest expense 19,338 17,324 54,833 53,426
Income tax expense 4,349 1,671 7,273 39,580
Depreciation and amortization 54,001 66,804 171,121 180,514
EBITDA 75,306 70,843 241,195 185,636
Adjustments:
Non-cash purchase accounting impact 3,408 (1,380) 14,801 10,672
Transaction and process improvement costs 6,501 7,748 17,192 8,067
Sales-type lease adjustment 1,232 3,783 3,793 4,428
Share-based payments 4,378 4,856 9,526 13,273
Change in fair value of derivative and warrants 809 (1,427) (18,013) 5,453
Adjusted EBITDA $ 91,634 $ 84,423 $ 268,494 $ 227,529

Liquidity and Capital Resources

Our principal sources of liquidity include cash generated by operating activities and borrowings under revolving credit 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, including investments in our rental fleet, over the next 12 ~~months; however, we are continuing to monitor the impact of the macro-economic environment, including the on-going supply chain issues on our business~~months and ~~the financial markets.~~beyond. As of ~~September~~June 30, ~~2022,~~2023, we had ~~$26.2~~$42.2 million in cash and cash equivalents compared to ~~$35.9~~$14.4 million as of December 31, ~~2021.~~2022. As of ~~September~~June 30, ~~2022,~~2023, we had ~~$447.0~~$492.4 million of outstanding borrowings under our ABL Facility compared to ~~$394.9~~$437.7 million of outstanding borrowing under the ABL Facility as of December 31, ~~2021.~~2022.

ABL Facility

As of ~~September~~June 30, ~~2022,~~2023, borrowing availability under the ABL Facility was ~~$300.1~~$254.5 million, and outstanding standby letters of credit were ~~$2.9~~$3.1 million. Borrowings under the ABL Facility ~~will~~ bear interest at a floating rate, which, at Buyer’s election, ~~will~~could be (a) in the case of U.S. dollar denominated loans, either (i) the ~~London Interbank Offered Rate (“LIBOR”)~~SOFR plus an applicable margin or (ii) the base rate plus an applicable margin or (b) in the case of Canadian dollar denominated loans (“CDOR”), 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~~SOFR 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.

2029 Secured Notes

~~On the Closing Date, the Issuer~~The Company issued $920.0 million in aggregate principal amount of 5.50% senior secured second lien notes due ~~2029.~~2029 (the “2029 Secured Notes”). 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~~pays interest on the 2029 Secured Notes semi-annually in arrears on April 15 and October 15 of each ~~year, commencing on October 15, 2021.~~year. Unless earlier redeemed, the 2029 Secured Notes will mature on April 15, 2029.

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”)~~Prime plus 0.80% after an initial interest free period of up to 150 days. The total borrowing capacity under the Daimler Facility is $175.0 million. As of ~~September~~June 30, 2023 and December 31, 2022, borrowings on the Daimler Facility were ~~$61.2 million.~~$93.2 million and $105.4 million, respectively. 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%~~U.S. Prime Rate minus 0.6%. ~~As of September 30, 2022, borrowings on the PACCAR line of credit were $20.2 million.~~ The PACCAR agreement extends automatically each

April and is subject to termination by either party through written notice. As of June 30, 2023 and December 31, 2022, borrowings on the PACCAR line of credit were $46.5 million and $31.2 million, respectively.

References to the Prime Rate in the foregoing agreements represent the rate as published in the Wall Street Journal.

PNC Equipment Finance, LLC

The Company has an Inventory Loan, Guaranty and Security Agreement (the “Loan Agreement”) with PNC Equipment Finance, LLC. ~~The~~As of June 30, 2023, the Loan Agreement provides the Company with a ~~$295.0~~$370.0 million revolving credit facility, which matures on August 25, 2023 and bears interest at a ~~rate of~~ three-month term ~~SOFR~~secured overnight financing rate (“SOFR”) plus 3.25%. As of ~~September~~June 30, 2023 and December 31, 2022, borrowings on the Loan Agreement were ~~$267.5 million.~~$366.1 million and $293.5 million, respectively. On May 26, 2023, the Company notified PNC Equipment Finance, LLC of the Company’s intent to renew the Loan Agreement by an additional two years.

Notes Payable

Our notes payable require the Company to pay monthly and quarterly interest payments and have maturities ~~beginning in 2022~~from 2023 through 2026. Notes payable include (i) debt assumed from ~~the Acquisition~~a past business 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~~The Company consolidated certain notes payable assumed from ~~the Acquisition~~past business acquisitions 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.

2023 Credit Facility

On January 13, 2023, the Company entered into a new credit agreement allowing for borrowings of up to $18.0 million (the “2023 Credit Facility”). Proceeds from the credit agreement were used to finance a portion of the Company’s acquisition of real property from a related party in December 2022. A portion of the loan proceeds will be used to finance improvements to the property. In connection with entering into the agreement, the Company received proceeds of $13.7 million with the ability to draw an additional $4.2 million upon completion of certain construction milestones. Borrowings bear interest at a fixed rate of 5.75% per annum and are required to be repaid monthly in an amount of approximately $0.1 million with a balloon payment due on the maturity date of January 13, 2028. Borrowings are secured by the real property and improvements.

Historical Cash Flows

The following table summarizes our sources and uses of cash:


		Nine Months Ended September 30,						Six Months Ended June 30,
(in $000s)	(in $000s)		2022		2021		(in $000s)		2023		2022
Net cash flow from operating activities	Net cash flow from operating activities		$	4,344	$	112,755	Net cash flow from operating activities		$	(1,105)	$	(21,364)
Net cash flow used in investing activities	Net cash flow used in investing activities		(153,927)		(1,419,615)		Net cash flow used in investing activities		(102,897)		(92,689)
Net cash flow from financing activities	Net cash flow from financing activities		141,860		1,324,534		Net cash flow from financing activities		131,622		106,654
Effect of exchange rate changes	Effect of exchange rate changes		(2,005)		—		Effect of exchange rate changes		249		21
Net change in cash and cash equivalents	Net change in cash and cash equivalents		$	(9,728)	$	17,674	Net change in cash and cash equivalents		$	27,869	$	(7,378)

As of ~~September~~June 30, ~~2022,~~2023, we had cash and cash equivalents of ~~$26.2~~$42.2 million, ~~a decrease~~an increase of ~~$9.7~~$27.9 million from December 31, ~~2021.~~2022. Generally, we manage our cash flow by using any excess cash, after considering our working capital and capital expenditure needs, including paying down the outstanding balance under our ABL Facility.

Cash Flows from Operating Activities

Net cash ~~provided~~used by operating activities was ~~$4.3~~$1.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, as compared to ~~net cash provided by operating activities of $112.8~~$21.4 million in the same period of ~~2021.~~2022. The use of cash in the current period is the result of our increased levels of inventory purchases and production.

Cash Flows from Investing Activities

Net cash used in investing activities was ~~$153.9~~$102.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, as compared to $92.7 million in the same period of 2022. The increase in cash used infor investing activities is due to an increase in purchases for rental and non-rental equipment and cloud computing arrangements of ~~$1,419.6~~$94.1 million, ~~in 2021. The~~partially offset by an increase of proceeds from sales and disposals of rental equipment of $34.1 million and decrease ~~is attributable~~due to the HiRail acquisition in prior year, net of cash ~~paid to acquire Custom Truck LP on April 1, 2021.~~acquired of $49.8 million.

Cash Flows from Financing Activities

Net cash provided by financing activities was ~~$141.9~~$131.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, as compared to ~~$1,324.5~~$106.7 million in ~~2021.~~2022. The ~~decrease is attributable to the~~increase in cash ~~proceeds~~ provided by financing activities is due to an increase of net borrowings under the ~~sale~~revolving credit facilities of ~~our~~$14.6 million and an increase in proceeds from debt of $13.5 million. These increases were partially offset by the Company’s repurchases of common stock ~~and placement~~ of ~~new debt, the funds from which were used to acquire Custom Truck LP on April 1, 2021.~~$4.5 million.

Item 3. 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 ~~facility.~~facility and our floor plan financing arrangements. 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. As of ~~September~~June 30, ~~2022,~~2023, we had ~~$447.0~~$492.4 million aggregate principal amount of variable rate debt, consisting of 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 change our interest expense on the ABL Facility by approximately $0.6 million on an annual basis.

We, from time to time, may 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~~in the interest rates of our variable-rate debt. 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.

Foreign currency exchange rate risk

During the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, we generated ~~$30.0~~$28.2 million of ~~U.S. dollar~~revenues denominated ~~revenues~~ in Canadian dollars. Each 100-basis point increase or decrease in the average Canadian dollar to U.S. dollar exchange rate for the year would have correspondingly changed our revenues by approximately ~~$0.1 million.~~$0.6 million on an annual basis. We do not currently hedge our exchange rate exposure.

4035

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this 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 ~~September~~June 30, ~~2022,~~2023, the Company’s disclosure controls and procedures were not effective because of the material ~~weaknesses~~weakness in our internal control over financial reporting 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 a significant change in the Company’s internal control over financial reporting. We are in the process of completing the integration of policies, processes, people, technology and operations for the combined company. As part of this integration, we identified deficiencies in the design and operating effectiveness of internal controls associated with the control activities component of the ~~COSO~~Committee of Sponsoring Organizations of the Treadway Commission (“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~~information technology general controls (“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 a material ~~weaknesses.~~weakness. The material ~~weaknesses~~weakness 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~~Weakness 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~~ITGCs 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 encompassed implementation of our new ~~ERP~~enterprise resource planning (“ERP”) system, which was completed in the second quarter of 2022. The new ERP system ~~will allow~~allows 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~~weakness 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 quarter ended ~~September~~June 30, ~~2022~~2023 that have materially affected, or are 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.

4136

PART II - OTHER INFORMATION

Item 1. 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

~~Reference is made~~No material changes occurred to ~~Part I, Item 1A. Risk Factors~~the indicated risk factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, which sets forth information relating to important risks and uncertainties that could materially adversely affect our business, financial condition or operating results. Except as set forth below, there have been no material changes to the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2021.

Uncertainty relating to macroeconomic conditions may reduce demand for our products and services, resulting in non-performance of contracts by our lessees, limit our ability to obtain additional capital to finance new investments, or have other unforeseen negative effects.

Uncertainty and negative trends in general economic conditions in the United States and abroad, including significant tightening of credit markets and commodity price volatility, may create difficult operating environments for our lessees and also for our industry. Many factors, including factors that are beyond our control, may impact our operating results or financial condition and/or affect the lessees that form our customer base. A number of governments have implemented, or are considering implementing, a broad variety of governmental actions or new regulations for the financial markets. In addition, limitations on the availability of capital, higher costs of capital or financing expenditures or the desire to preserve liquidity, may cause our current or prospective customers to make reductions in future capital budgets and spending.2022.

4237

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

Issuer Purchases of Equity Securities

On August 2, 2022, our Board of Directors authorized a stock repurchase program for up to ~~$30.0~~$30 million of the Company’s common stock. This authorization does not have an expiration date. Repurchases under the program may be made in the open market, in privately negotiated transactions or otherwise, with the amount and timing of repurchases depending on market conditions and corporate needs.

The following table contains information regarding our purchases of our common stock during the three months ended ~~September~~June 30, ~~2022:~~2023:

ISSUER PURCHASES OF EQUITY SECURITIES
Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
(in $000s)
July 1, 2022 - July 31, 2022 — $ — — $ —
August 1, 2022 - August 31, 2022 — $ — — $ 30,000
September 1, 2022 - September 30, 2022 274,595 $ 6.38 274,595 $ 28,248
Total 274,595 $ 6.38 274,595


ISSUER PURCHASES OF EQUITY SECURITIES
Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in $000s)
April 1, 2023 - April 30, 2023	486,958	$	6.56	265,725	$	16,698
May 1, 2023 - May 31, 2023	237,590	$	6.30	237,590	$	15,201
June 1, 2023 - June 30, 2023	1,827	$	6.52	1,827	$	15,189
Total	726,375	$	6.47	505,142

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

4338

Item 6. Exhibits

Exhibit No.

Description

~~10.1*+~~3.1

~~Form~~Third Amended and Restated Certificate of ~~Performance Stock Agreement~~Incorporation of Custom Truck One Source, Inc. (Incorporated herein by reference to Annex A to Custom Truck One Source, Inc.’s Definitive Proxy Statement on Schedule 14A (File No. 001-38186) filed on April 28, 2023).

~~10.2*+~~10.1

Second Amended and Restated Stockholders’ Agreement, dated as of April 14, 2023, among Custom Truck One Source, Inc. and certain holders identified therein (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form ~~of Amended Performance Stock Agreement~~8-K (File No. 001-38186) filed on April 14, 2023).

10.2

31.1*Amendment No. 1 to Revolving Credit Agreement and U.S. ABL Security Agreement, dated as of July 1, 2021, by and among Capitol Investment Merger Sub 2, LLC, NESCO Holdings II, Inc., the other grantors party thereto, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent

10.3*

Amendment No. 2 to Revolving Credit Agreement, dated as of March 27, 2023, by and among Capitol Investment Merger Sub 2, LLC, NESCO Holdings II, Inc., the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent

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~~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 ~~furnished~~attachment to the SEC upon request.

** Furnished herewith.

~~+Management contract or compensatory plan.~~

4439

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:	~~November~~August 8, ~~2022~~2023	/s/ ~~Fred Ross~~Ryan McMonagle
		~~Fred Ross,~~Ryan McMonagle, Chief Executive Officer

Date:	~~November~~August 8, ~~2022~~2023	/s/ Christopher J. Eperjesy
		Christopher J. Eperjesy, Chief Financial Officer


	Three Months Ended		Nine Months Ended
(in $000s)	September 30, 2021		September 30, 2021
Revenue	$	357,305	$	1,127,186
Net income (loss)	$	(14,956)	$	(87,884)


(in $000s)	Custom Truck One Source, Inc.		Pro Forma Adjustmentsa			Pro Forma Combined
Rental revenue	$	109,108	$	—		$	109,108
Equipment sales	217,163		—			217,163
Parts sales and services	31,034		—			31,034
Total revenue	357,305		—			357,305
Cost of revenue	241,900		(7,426)		b	234,474
Depreciation of rental equipment	50,153		—			50,153
Total cost of revenue	292,053		(7,426)			284,627
Gross profit	65,252		7,426			72,678
Selling, general and administrative	48,625		—			48,625
Amortization	13,334		—			13,334
Non-rental depreciation	873		—			873
Transaction expenses and other	7,742		—			7,742
Total operating expenses	70,574		—			70,574
Operating income (loss)	(5,322)		7,426			2,104

Interest expense, net	19,045		—			19,045
Finance and other expense (income)	(3,656)		—			(3,656)
Total other expense	15,389		—			15,389
Income (loss) before taxes	(20,711)		7,426			(13,285)
Taxes	(186)		1,857		c	1,671
Net income (loss)	$	(20,525)	$	5,569		$	(14,956)


(in $000s)	Custom Truck One Source, Inc.		Custom Truck LP (Three Months Ended March 31, 2021)		Pro Forma Adjustmentsa			Pro Forma Combined
Rental revenue	$	255,936	$	51,973	$	—		$	307,909


Equipment sales	482,825		245,955		—			728,780
Parts sales and services	71,954		18,543		—			90,497
Total revenue	810,715		316,471		—			1,127,186
Cost of revenue	567,378		240,678		(17,752)		b	790,304
Depreciation of rental equipment	111,176		22,757		3,817		c	137,750
Total cost of revenue	678,554		263,435		(13,935)			928,054
Gross profit	132,161		53,036		13,935			199,132
Selling, general and administrative	111,939		34,428		—			146,367
Amortization	27,420		1,990		3,590		d	33,000
Non-rental depreciation	1,845		1,151		(213)		d	2,783
Transaction expenses and other	42,765		5,254		(40,277)		e	7,742

Total operating expenses	183,969		42,823		(36,900)			189,892
Operating income (loss)	(51,808)		10,213		50,835			9,240
Loss on extinguishment of debt	61,695		—		(61,695)		f	—
Interest expense, net	53,674		9,992		(3,919)		g	59,747
Finance and other expense (income)	143		(2,346)		—			(2,203)
Total other expense	115,512		7,646		(65,614)			57,544
Income (loss) before taxes	(167,320)		2,567		116,449			(48,304)
Taxes	10,468		—		29,112		h	39,580
Net income (loss)	$	(177,788)	$	2,567	$	87,337		$	(87,884)