UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q




☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR ~~15 (d)~~15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2020~~March 31, 2021




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

For the transition period from to

Commission File Number 001-38186

_______________________________

~~Nesco Holdings, Inc.~~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.)

~~6714 Pointe Inverness Way, Suite 220~~7701 Independence Ave

~~Fort Wayne, IN 46804~~Kansas City, MO 64125

(Address of principal executive offices, including zip code)

~~(800) 252-0043~~(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	~~NSCO~~CTOS	New York Stock Exchange
Redeemable warrants, exercisable for Common Stock, $0.0001 par value	~~NSCO.WS~~CTOS.WT	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 ~~x NO~~☒ 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 ~~x NO~~☒ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and ~~"emerging~~“emerging growth ~~company"~~company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☒☐

Non-accelerated filer

o☒

Smaller reporting company

☐☒

Emerging growth company

☒☐

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

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

The number of shares of common stock outstanding as of ~~October 30, 2020~~May 10, 2021 was ~~49,033,903.~~246,208,229.

~~Nesco Holdings,~~Custom Truck One Source, Inc. and Subsidiaries

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

Page Number

Item 1.

Unaudited Condensed Consolidated Financial Statements

Unaudited Condensed Consolidated Balance Sheets as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020

Unaudited Condensed Consolidated Statements of Operations for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~

Unaudited Condensed Consolidated Statements of ~~Comprehensive Income (Loss)~~Cash Flows for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~

~~Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019~~

Unaudited Condensed Consolidated Statements of Stockholders' Deficit for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~

Notes to Unaudited Condensed Consolidated Financial Statements

Item 2.

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

3433

Item 4.

Controls and Procedures

3634

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

3634

Item 1A.

Risk Factors

3634

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

3639

Item 3.

Defaults Upon Senior Securities

3639

Item 4.

Mine Safety Disclosures

3639

Item 5.

Other Information

3640

Item 6.

Exhibits

3740

SIGNATURES

3841

PART I -– FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

Custom Truck One Source, Inc.

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

Condensed Consolidated Balance Sheets (unaudited)


(in $000s, except share data)	(in $000s, except share data)	September 30, 2020		December 31, 2019		(in $000s, except share data)	March 31, 2021		December 31, 2020
Assets	Assets					Assets
Current Assets	Current Assets					Current Assets
Cash	Cash	$	1,640	$	6,302	Cash	$	3,191	$	3,412
Accounts receivable, net of allowance of $4,821 and $4,654 respectively		56,471		71,323
Accounts receivable, net of allowance of $7,770 and $6,372, respectively						Accounts receivable, net of allowance of $7,770 and $6,372, respectively	54,415		60,933
Inventory	Inventory	30,623		33,001		Inventory	33,665		31,367
Prepaid expenses and other	Prepaid expenses and other	6,170		5,217		Prepaid expenses and other	13,075		7,530
Total current assets	Total current assets	94,904		115,843		Total current assets	104,346		103,242
Property and equipment, net	Property and equipment, net	6,373		6,561		Property and equipment, net	3,756		6,269
Rental equipment, net	Rental equipment, net	348,932		383,420		Rental equipment, net	323,705		335,812
Goodwill and other intangibles, net	Goodwill and other intangibles, net	305,977		308,747		Goodwill and other intangibles, net	304,878		305,631
Deferred income taxes	Deferred income taxes	12,708		0		Deferred income taxes	13,126		16,952
Notes receivable	Notes receivable	562		713		Notes receivable	433		498
Total Assets	Total Assets	$	769,456	$	815,284	Total Assets	$	750,244	$	768,404
Liabilities and Stockholders' Deficit	Liabilities and Stockholders' Deficit					Liabilities and Stockholders' Deficit
Current Liabilities	Current Liabilities					Current Liabilities
Accounts payable	Accounts payable	$	14,826	$	41,172	Accounts payable	$	27,972	$	31,829
Accrued expenses	Accrued expenses	15,806		27,590		Accrued expenses	30,156		31,991
Deferred rent income	Deferred rent income	1,000		2,270		Deferred rent income	776		975
Current maturities of long-term debt	Current maturities of long-term debt	1,280		1,280		Current maturities of long-term debt	1,111		1,280
Current portion of capital lease obligations	Current portion of capital lease obligations	7,975		5,451		Current portion of capital lease obligations	5,059		5,276
Total current liabilities	Total current liabilities	40,887		77,763		Total current liabilities	65,074		71,351
Long-term debt, net	Long-term debt, net	733,270		713,023		Long-term debt, net	725,677		715,858
Capital leases	Capital leases	11,848		22,631		Capital leases	4,513		5,250
Deferred income taxes		0		12,288
Interest rate collar		7,858		1,709

Derivative and warrants liabilities						Derivative and warrants liabilities	23,647		7,012
Total long-term liabilities	Total long-term liabilities	752,976		749,651		Total long-term liabilities	753,837		728,120

Commitments and contingencies (see Note 11)	Commitments and contingencies (see Note 11)					Commitments and contingencies (see Note 11)	0		0

Stockholders' Deficit	Stockholders' Deficit					Stockholders' Deficit
Common stock - $0.0001 par value, 250,000,000 shares authorized, 49,033,903 shares issued and outstanding, at September 30, 2020 and December 31, 2019		5		5
Common stock – $0.0001 par value, 250,000,000 shares authorized, 49,219,383 and 49,156,753 shares issued and outstanding, at March 31, 2021 and December 31, 2020, respectively						Common stock – $0.0001 par value, 250,000,000 shares authorized, 49,219,383 and 49,156,753 shares issued and outstanding, at March 31, 2021 and December 31, 2020, respectively	5		5
Additional paid-in capital	Additional paid-in capital	434,246		432,577		Additional paid-in capital	425,224		434,917
Accumulated deficit	Accumulated deficit	(458,658)		(444,712)		Accumulated deficit	(493,896)		(465,989)

Total stockholders' deficit	Total stockholders' deficit	(24,407)		(12,130)		Total stockholders' deficit	(68,667)		(31,067)
Total Liabilities and Stockholders' Deficit	Total Liabilities and Stockholders' Deficit	$	769,456	$	815,284	Total Liabilities and Stockholders' Deficit	$	750,244	$	768,404

See accompanying notes to unaudited condensed consolidated financial statements.

Custom Truck One Source, Inc.

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

Condensed Consolidated Statements of Operations (unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(in $000s, except share and per share data)	(in $000s, except share and per share data)	2020		2019		2020		2019		(in $000s, except share and per share data)	2021		2020
Revenue	Revenue									Revenue
Rental revenue	Rental revenue	$	46,125	$	50,103	$	144,103	$	143,871	Rental revenue	$	48,289	$	50,994
Sales of rental equipment	Sales of rental equipment	5,510		3,436		19,585		15,167		Sales of rental equipment	10,485		9,093
Sales of new equipment	Sales of new equipment	6,048		1,246		19,043		8,076		Sales of new equipment	7,502		7,577
Parts sales and services	Parts sales and services	11,577		7,657		36,753		19,675		Parts sales and services	12,023		14,079
Total Revenue	Total Revenue	69,260		62,442		219,484		186,789		Total Revenue	78,299		81,743
Cost of Revenue	Cost of Revenue									Cost of Revenue
Cost of rental revenue	Cost of rental revenue	13,096		13,545		41,193		37,445		Cost of rental revenue	16,643		13,786
Depreciation of rental equipment	Depreciation of rental equipment	19,467		17,694		59,275		51,369		Depreciation of rental equipment	17,844		20,112
Cost of rental equipment sales	Cost of rental equipment sales	5,190		2,847		16,454		12,653		Cost of rental equipment sales	6,740		7,728
Cost of new equipment sales	Cost of new equipment sales	5,410		1,116		16,841		6,618		Cost of new equipment sales	6,925		6,654
Cost of parts sales and services	Cost of parts sales and services	10,255		5,600		30,839		14,921		Cost of parts sales and services	9,643		11,360
Major repair disposals	Major repair disposals	211		376		1,506		1,522		Major repair disposals	285		700
Total cost of revenue	Total cost of revenue	53,629		41,178		166,108		124,528		Total cost of revenue	58,080		60,340
Gross Profit	Gross Profit	15,631		21,264		53,376		62,261		Gross Profit	20,219		21,403
Operating Expenses	Operating Expenses									Operating Expenses
Selling, general and administrative expenses	Selling, general and administrative expenses	8,633		9,824		31,269		24,708		Selling, general and administrative expenses	11,339		11,618
Licensing and titling expenses	Licensing and titling expenses	686		690		2,243		1,926		Licensing and titling expenses	711		821
Amortization and non-rental depreciation	Amortization and non-rental depreciation	792		745		2,308		2,264		Amortization and non-rental depreciation	775		716
Transaction expenses		110		3,325		1,073		7,394
Asset impairment		0		657		0		657
Other operating expenses		451		434		2,209		1,213
Transaction and other expenses										Transaction and other expenses	10,448		1,452

Total Operating Expenses	Total Operating Expenses	10,672		15,675		39,102		38,162		Total Operating Expenses	23,273		14,607
Operating Income		4,959		5,589		14,274		24,099
Operating (Loss) Income										Operating (Loss) Income	(3,054)		6,796
Other Expense	Other Expense									Other Expense
Loss on extinguishment of debt		0		4,005		0		4,005

Interest expense, net	Interest expense, net	15,853		16,533		47,816		46,376		Interest expense, net	14,906		16,014
Other (income) expense, net	Other (income) expense, net	(559)		2,567		6,245		2,545		Other (income) expense, net	5,857		6,021
Total other expense	Total other expense	15,294		23,105		54,061		52,926		Total other expense	20,763		22,035
Loss Before Income Taxes	Loss Before Income Taxes	(10,335)		(17,516)		(39,787)		(28,827)		Loss Before Income Taxes	(23,817)		(15,239)
Income Tax Expense (Benefit)		(25,508)		494		(25,841)		1,330
Net Income (Loss)		$	15,173	$	(18,010)	$	(13,946)	$	(30,157)
Income Tax Expense										Income Tax Expense	4,090		730
Net Loss										Net Loss	$	(27,907)	$	(15,969)

Basic Earnings (Loss) Per Share		$	0.31	$	(0.45)	$	(0.28)	$	(1.09)
Basic and Diluted Net Loss Per Share										Basic and Diluted Net Loss Per Share	$	(0.57)	$	(0.33)

Weighted-Average Common Shares Outstanding	Weighted-Average Common Shares Outstanding	49,033,903		39,909,481		49,033,903		27,743,586		Weighted-Average Common Shares Outstanding	48,619,613		49,033,903

Diluted Earnings (Loss) Per Share		$	0.31	$	(0.45)	$	(0.28)	$	(1.09)

Weighted-Average Common Shares Outstanding		49,307,811		39,909,481		49,033,903		27,743,586

See accompanying notes to unaudited condensed consolidated financial statements.

Custom Truck One Source, Inc.

(Nesco Holdings, Inc.

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

Three Months Ended September 30, Nine Months Ended September 30,
(in $000s) 2020 2019 2020 2019
Net income (loss) $ 15,173 $ (18,010) $ (13,946) $ (30,157)
Other comprehensive loss:
Interest rate collar (net of taxes of $285 in the nine months ended September 30, 2019) 0 0 0 (388)
Other comprehensive loss 0 0 0 (388)
Comprehensive income (loss) $ 15,173 $ (18,010) $ (13,946) $ (30,545)

There were 0 reclassifications from accumulated other comprehensive loss reflected in the Unaudited Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2020.

During the three and nine months ended September 30, 2019, $0.8 million (net of taxes of $0.3 million) was reclassified from accumulated other comprehensive loss and recorded in the Unaudited Condensed Consolidated Statements of Operations.

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

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

Condensed Consolidated Statements of Cash Flows (unaudited)


		Nine Months Ended September 30,					Three Months Ended March 31,
(in $000s)	(in $000s)	2020		2019		(in $000s)	2021		2020
Operating Activities	Operating Activities					Operating Activities
Net loss	Net loss	$	(13,946)	$	(30,157)	Net loss	$	(27,907)	$	(15,969)
Adjustments to reconcile net loss to net cash flow from operating activities:	Adjustments to reconcile net loss to net cash flow from operating activities:					Adjustments to reconcile net loss to net cash flow from operating activities:
Depreciation	Depreciation	60,080		52,104		Depreciation	18,063		20,377
Amortization - intangibles	Amortization - intangibles	2,233		2,172		Amortization - intangibles	753		691
Amortization - financing costs	Amortization - financing costs	2,188		2,099		Amortization - financing costs	804		711
Provision for losses on accounts receivable	Provision for losses on accounts receivable	1,813		3,472		Provision for losses on accounts receivable	1,383		777
Share-based payments		1,669		463
Share-based compensation						Share-based compensation	698		559
Gain on sale of rental equipment and parts	Gain on sale of rental equipment and parts	(4,231)		(3,930)		Gain on sale of rental equipment and parts	(4,137)		(2,213)
Gain on insurance proceeds - damaged equipment	Gain on insurance proceeds - damaged equipment	(714)		(570)		Gain on insurance proceeds - damaged equipment	(2)		(120)
Major repair disposal	Major repair disposal	1,506		1,522		Major repair disposal	285		700
Loss on extinguishment of debt		0		4,005
Change in fair value of derivative		6,149		2,552
Asset impairment		0		657
Deferred tax (benefit) expense		(24,417)		816

Change in fair value of derivative and warrants						Change in fair value of derivative and warrants	5,846		5,963

Deferred tax expense (benefit)						Deferred tax expense (benefit)	3,826		652

Changes in assets and liabilities:						Changes in assets and liabilities:
Accounts receivable	Accounts receivable	9,258		(13,728)		Accounts receivable	1,520		1,207
Inventory	Inventory	(3,797)		(13,742)		Inventory	(5,081)		176
Prepaid expenses and other	Prepaid expenses and other	(953)		(2,211)		Prepaid expenses and other	(5,545)		(34)
Accounts payable	Accounts payable	(8,920)		4,792		Accounts payable	(956)		(3,352)
Accrued expenses and other liabilities	Accrued expenses and other liabilities	(11,782)		(4,770)		Accrued expenses and other liabilities	(1,437)		(12,427)
Unearned income	Unearned income	(1,270)		(4,832)		Unearned income	(199)		(517)
Net cash flow from operating activities	Net cash flow from operating activities	14,866		714		Net cash flow from operating activities	(12,086)		(2,819)
Investing Activities	Investing Activities					Investing Activities

Purchase of equipment - rental fleet		(59,197)		(77,752)
Purchase of equipment - rental equipment						Purchase of equipment - rental equipment	(11,368)		(33,347)
Proceeds from sale of rental equipment and parts	Proceeds from sale of rental equipment and parts	26,108		22,608		Proceeds from sale of rental equipment and parts	14,789		9,960
Insurance proceeds from damaged equipment	Insurance proceeds from damaged equipment	3,747		1,721		Insurance proceeds from damaged equipment	627		365
Purchase of other property and equipment	Purchase of other property and equipment	(678)		(7,166)		Purchase of other property and equipment	(141)		(4,168)
Other	Other	151		(1,671)		Other	65		0
Net cash flow from investing activities	Net cash flow from investing activities	(29,869)		(62,260)		Net cash flow from investing activities	3,972		(27,190)
Financing Activities	Financing Activities					Financing Activities
Proceeds from debt		0		475,000

Borrowings under revolving credit facilities	Borrowings under revolving credit facilities	74,042		243,000		Borrowings under revolving credit facilities	25,461		35,680
Repayments under revolving credit facilities	Repayments under revolving credit facilities	(55,019)		(259,000)		Repayments under revolving credit facilities	(16,431)		0
Repayments of notes payable	Repayments of notes payable	(964)		(527,348)		Repayments of notes payable	(182)		0
Capital lease payments	Capital lease payments	(7,718)		(3,830)		Capital lease payments	(955)		(1,737)
Proceeds from merger and recapitalization		0		147,268
Finance fees paid		0		(15,483)

Net cash flow from financing activities	Net cash flow from financing activities	10,341		59,607		Net cash flow from financing activities	7,893		33,943
Net Change in Cash	Net Change in Cash	(4,662)		(1,939)		Net Change in Cash	(221)		3,934
Cash at Beginning of Period	Cash at Beginning of Period	6,302		2,140		Cash at Beginning of Period	3,412		6,302
Cash at End of Period	Cash at End of Period	$	1,640	$	201	Cash at End of Period	$	3,191	$	10,236

(in $000s)	(in $000s)					(in $000s)
Supplemental Cash Flow Information	Supplemental Cash Flow Information					Supplemental Cash Flow Information
Cash paid for interest	Cash paid for interest	$	56,815	$	47,861	Cash paid for interest	$	26,287	$	24,977
Cash paid for income taxes	Cash paid for income taxes	156		444		Cash paid for income taxes	122		76
Non-Cash Investing and Financing Activities	Non-Cash Investing and Financing Activities					Non-Cash Investing and Financing Activities
Transfer of inventory to leased equipment		6,175		3,767
Transfer of inventory to rental equipment						Transfer of inventory to rental equipment	2,783		2,087
Rental equipment and property and equipment purchases in accounts payable	Rental equipment and property and equipment purchases in accounts payable	4,217		21,227		Rental equipment and property and equipment purchases in accounts payable	6,285		11,861
Rental equipment sales in accounts receivable	Rental equipment sales in accounts receivable	902		169		Rental equipment sales in accounts receivable	1,505		5,627

Settlement of note payable with common stock		0		25,000

Insurance recoveries accrued in accounts receivable		0		189

See accompanying notes to unaudited condensed consolidated financial statements.

Custom Truck One Source, Inc.

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

Condensed Consolidated Statements of Stockholders' Deficit (unaudited)

Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders' Deficit
Common Stock
(in $000s, except share data) Shares Amount
Balance, December 31, 2019 49,033,903 $ 5 $ 432,577 $ (444,712) $ 0 $ (12,130)
Net loss — — — (15,969) — (15,969)
Share-based payments — — 559 — — 559
Balance, March 31, 2020 49,033,903 $ 5 $ 433,136 $ (460,681) $ 0 $ (27,540)
Net loss — — — (13,150) — (13,150)
Share-based payments — — 453 — — 453
Balance, June 30, 2020 49,033,903 $ 5 $ 433,589 $ (473,831) $ 0 $ (40,237)
Net income (loss) — — — 15,173 — 15,173
Share-based payments — — 657 — — 657
Interest rate collar — — — — — 0
Balance, September 30, 2020 49,033,903 $ 5 $ 434,246 $ (458,658) $ 0 $ (24,407)
Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholders' Deficit
Common Stock
Shares Amount
Balance, December 31, 2018 21,660,638 $ 2 $ 259,298 $ (417,660) $ (396) $ (158,756)
Net loss — — — (6,724) — (6,724)
Share-based payments — — 128 — — 128
Interest rate collar — — — — 88 88
Balance, March 31, 2019 21,660,638 $ 2 $ 259,426 $ (424,384) $ (308) $ (165,264)
Net loss — — — (5,423) — (5,423)
Share-based payments — — 52 — — 52
Interest rate collar — — — — (476) (476)
Balance, June 30, 2019 21,660,638 $ 2 $ 259,478 $ (429,807) $ (784) $ (171,111)
Net loss prior to reverse recapitalization — — — (10,988) — (10,988)
Net loss post reverse recapitalization — — — (7,022) — (7,022)
Reverse capitalization 27,373,265 3 172,266 — — 172,269
Share-based payments — — 283 — — 283
Interest rate collar — — — — 784 784
Balance, September 30, 2019 $ 49,033.903 $ 5 $ 432,027 $ (447,817) $ 0 $ (15,785)


				Additional Paid-in Capital		Accumulated Deficit		Total Stockholders' Deficit
	Common Stock
(in $000s, except share data)	Shares	Amount
Balance, December 31, 2020	49,156,753	$	5	$	434,917	$	(465,989)	$	(31,067)
Net loss	—	—		—		(27,907)		(27,907)
Share-based payments	62,630	—		597		—		597
Warrants liability reclassification (see Note 9)	—	—		(10,290)		—		(10,290)
Balance, March 31, 2021	49,219,383	$	5	$	425,224	$	(493,896)	$	(68,667)









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

Balance, December 31, 2019	49,033,903	$	5	$	432,577	$	(444,712)	$	(12,130)
Net loss	—	—		—		(15,969)		(15,969)
Share-based payments	—	—		559		—		559

Balance, March 31, 2020	49,033,903	$	5	$	433,136	$	(460,681)	$	(27,540)

See accompanying notes to unaudited condensed consolidated financial statements.

~~Nesco Holdings,~~Custom Truck One Source, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1: Business and Organization

Organization

Custom Truck One Source, Inc. (“CTOS Inc.”), formerly Nesco Holdings, Inc. ~~(“Holdings”)~~, a Delaware corporation, ~~serves as the parent for our primary operating company, NESCO, LLC, an Indiana limited liability company,~~ and its wholly owned subsidiaries ~~(collectively, with Holdings, “we,” “our,” “us,” “Nesco,” or the "Company"), and~~ is engaged in the business of providing a range of services and products to customers through rentals of specialty equipment, sales of parts related to the specialty equipment, and repair and maintenance services related to that equipment. Immediately following the acquisition by Nesco Holdings II, Inc. of Custom Truck One Source, L.P. as discussed in Note 3, Acquisition and Related Financing Transactions, 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.”

As the Acquisition closed after first quarter 2021, the preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) requires that these Condensed Consolidated Financial Statements and most of the disclosures in these Notes be presented on a historical basis, as of or for the three months ended March 31, 2021 or prior periods. Unless the context otherwise requires, the term “CTOS” as used in these financial statements means Nesco Holdings and its subsidiaries when referring to periods prior to March 31, 2021 (prior to the Acquisition). The ~~wholly-owned subsidiaries of~~term “Company” refers to standalone Nesco Holdings ~~include: NESCO, LLC, an Indiana limited liability~~prior to the Acquisition, and to the combined company ~~NESCO~~post Acquisition. We may use terms such as, “we,” “our,” or “us,” to refer to standalone Nesco Holdings ~~I, Inc., a Delaware corporation, NESCO Finance Corporation, a Delaware corporation, NESCO Investments, LLC, a Delaware limited liability~~prior to the Acquisition, and to the combined company ~~NESCO International, LLC, a Delaware limited liability company, and NESCO El Alquiler S. de R.L. de C.V., an operating company in Mexico.~~post Acquisition.

We are a specialty equipment rental provider to the electric utility transmission and distribution, telecommunications, and rail industries in North America. Our core business relates to our fleet of specialty rental equipment that is utilized by service providers in infrastructure improvement work. Specifically, we offer our specialized equipment to a diverse customer base, including utilities and primarily contractors, for the maintenance, repair, upgrade, and installation of critical infrastructure assets, including distribution and transmission electric lines, telecommunications networks and rail systems, as well as a small percentage for lighting and signage. We rent and sell a broad range of new and used equipment, including bucket trucks, digger derricks, line equipment, cranes, pressure diggers, and underground equipment, which forms our Equipment Rental and Sales ~~("ERS"~~(“ERS”) segment. To complement our fleet, we also provide a one-stop shop for existing and prospective ~~Nesco~~ customers in the same end markets of electric lines, telecommunications networks, and rail ~~systems;~~systems to purchase or rent parts, tools, and accessories needed to outfit their specialty truck fleet. These activities form our Parts, Tools, and Accessories (“PTA”) segment. ~~We are positioned to serve all 50 U.S. states and 13 Canadian provinces and territories via our network of over 70 locations in the United States and Canada.~~

Note 2: Summary of Significant Accounting Policies

Basis of Presentation

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. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments and disclosures necessary for a fair statement of these interim statements, have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year or for any other period. These interim statements should be read in conjunction with the ~~Company's~~Company’s audited consolidated financial statements included in the ~~Company's~~Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

Use of Estimates

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

estimates as updated information becomes available, facts and circumstances change, or actual amounts become determinable. Actual results could differ from our estimates. ~~In the opinion of management, these financial statements reflect all normal recurring adjustments necessary for a fair presentation of the interim period results.~~

Recently Issued Accounting Pronouncements

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012. Accordingly, we have elected to comply with certain reduced public company reporting requirements related to effective dates for the adoption of newly issued standards issued by theLeases

The Financial Accounting Standards ~~Board (the “FASB”~~Board's ("FASB"). An emerging growth company is permitted to apply the effective dates applicable to non-public entities, which generally are delayed in comparison to public entities that are non-emerging growth entities.

~~Leases~~

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

Finance ~~leases -~~leases. The accounting and recognition for leases qualifying as finance leases is similar to the accounting and recognition required under ASC Topic 840, "Leases (“Topic 840”)," for capital leases. As of ~~September 30, 2020,~~March 31, 2021, we have capital lease obligations of approximately ~~$19.8~~$9.6 million. When we make our contractually required payments under the capital leases, we allocate a portion to reduce the capital lease obligation and a portion is recognized as interest expense. The assets leased under the capital leases are included in rental equipment, and depreciation thereon is recognized in cost of rental revenue.

Operating ~~leases -~~leases. Under Topic 842, operating leases result in the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased asset for the lease term and lease liabilities represent our obligation to make lease payments. Under Topic 842, operating lease ROU assets and liabilities are recognized at the lease commencement date and measured based on the present value of lease payments over the lease term. The operating lease ROU assets will also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease that we are reasonably certain to exercise. Lease expense under Topic 842 will be recognized on a straight-line basis over the lease term. Upon adoption of Topic 842, ~~we expect to recognize~~it is expected that operating lease ROU assets and lease liabilities that reflect the present value of these future payments ~~which we currently estimate~~related to Nesco Holdings will be in the range of ~~$8.0~~$7.9 million to ~~$10.0~~$8.9 million.

~~The FASB issued new guidance with respect to deferring the effective date of Topic 842 by one year. Accordingly, we~~We will adopt Topic 842 ~~effective January 1, 2022, using~~in the ~~transition method that allows us to~~second quarter of 2021 as a result of losing emerging growth company status and recognize a cumulative-effect adjustment to the opening balance of accumulated deficit in the period of adoption. A modified retrospective approach is required for adoption for all leases that exist at or commence after the date of initial application with an option to use certain practical expedients. We expect to use the package of practical expedients that allows us to not reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) initial direct costs for any expired or existing leases.

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

Measurement of Current Expected Credit Losses

In June 2016, the FASB issued ASU 2016-13 "(the “ASU”), Financial Instruments -– Credit ~~Losses (Topic 326):~~Losses: Measurement of Credit Losses on Financial Instruments,". The ASU adds to ~~update~~GAAP an impairment model (known as the ~~methodology used to measure~~ current expected credit loss, or “CECL,” model) that is based on expected losses ~~(“CECL”). This ASU applies~~rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which is intended to result in the more timely recognition of losses. Under the CECL model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications) from the date of initial recognition of the financial instrument. Measurement of expected credit losses are to be based on relevant forecasts that affect collectability. The scope of financial assets ~~measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases,~~within the CECL methodology is broad and includes trade ~~accounts receivable as well as~~receivables from certain revenue transactions and certain off-balance sheet credit ~~exposures, such~~exposures. While our review is ongoing, we believe the ASU will only have applicability to our receivables from non-leasing revenue transactions, as ~~loan commitments. This~~the ASU ~~replaces~~does not apply to receivables arising from operating leases. At the point that non-leasing trade receivables are recorded, they become subject to the CECL model and estimates of expected credit losses on receivables over their contractual life will be required to be recorded at inception based on historical information, current ~~incurred loss impairment methodology with a methodology to reflect CECL~~conditions, and ~~requires consideration of a broader range of~~ reasonable and supportable ~~information~~forecasts. We are currently evaluating whether the new guidance, while limited to ~~explain credit loss estimates. The guidance~~our non-operating lease trade receivables, will have an impact on our consolidated financial statements. ASU 2016-13 must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings (deficit) in the period of adoption. ~~For~~We will adopt the ASU in the second quarter of 2021 as a result of losing emerging growth companies electing the modified transition dates of non-public entities, this ASU is effective for fiscal years beginning after December 15, 2022. We are currently evaluating the impact of this standard on our consolidated financial statements and related disclosures.

company status.

Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment ~~(Topic 350),"~~ , intended to simplify the subsequent accounting for goodwill acquired in a business combination. Prior guidance required utilizing a two-step process to review goodwill for impairment. A second step was required if there was an indication that an impairment may exist, and the second step required calculating the potential impairment by comparing the implied fair value of a reporting unit’s goodwill (as if purchase accounting were performed on the testing date) to the carrying amount of the goodwill. The new guidance eliminates the second step from the goodwill impairment test. Under the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value (although the loss should not exceed the total amount of goodwill allocated to the reporting unit). ~~The~~We adopted this guidance ~~requires prospective adoption~~effective January 1, 2021; however, as discused in Note 5, Goodwill and ~~will be effective for annual or interim~~Intangible Assets, there was 0 impairment of goodwill ~~impairment tests~~ in ~~fiscal years beginning after December 15, 2021. Early~~the three months ended March 31, 2021 and 2020. Accordingly, the adoption of this ~~guidance is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently assessing the expected~~standard did not have a material impact on our consolidated financial statements.

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Revenue Recognition

~~Following the adoption of Topic 606, as of January 1, 2018, we recognized~~We recognize revenue in accordance with two different accounting standards: 1)(1) Topic 606 and 2)(2) Topic 840, which addresses lease accounting, for which we will adopt an update to this standard (Topic 842) using the modified retrospective approach, as described ~~herein.~~above. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ we recognized rental revenue in accordance with Topic 840, Leases, which is the lease accounting standard.

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


		Three Months Ended September 30,						Three Months Ended September 30,							Three Months Ended March 31,						Three Months Ended March 31,
		2020						2019							2021						2020
(in $000s)	(in $000s)	Topic 840		Topic 606		Total		Topic 840		Topic 606		Total		(in $000s)	Topic 840		Topic 606		Total		Topic 840		Topic 606		Total
Rental:	Rental:													Rental:
Rental revenue	Rental revenue	$	44,468	$	0	$	44,468	$	47,821	$	0	$	47,821	Rental revenue	$	46,186	$	0	$	46,186	$	48,913	$	0	$	48,913
Shipping and handling	Shipping and handling	0		1,657		1,657		0		2,282		2,282		Shipping and handling	0		2,103		2,103		0		2,081		2,081
Total rental revenue	Total rental revenue	44,468		1,657		46,125		47,821		2,282		50,103		Total rental revenue	46,186		2,103		48,289		48,913		2,081		50,994
Sales and services:	Sales and services:													Sales and services:
Sales of rental equipment	Sales of rental equipment	0		5,510		5,510		0		3,436		3,436		Sales of rental equipment	0		10,485		10,485		0		9,093		9,093
Sales of new equipment	Sales of new equipment	0		6,048		6,048		0		1,246		1,246		Sales of new equipment	0		7,502		7,502		0		7,577		7,577
Parts and services	Parts and services	0		11,577		11,577		0		7,657		7,657		Parts and services	0		12,023		12,023		0		14,079		14,079
Total sales and services	Total sales and services	0		23,135		23,135		0		12,339		12,339		Total sales and services	0		30,010		30,010		0		30,749		30,749
Total revenue	Total revenue	$	44,468	$	24,792	$	69,260	$	47,821	$	14,621	$	62,442	Total revenue	$	46,186	$	32,113	$	78,299	$	48,913	$	32,830	$	81,743

		Nine Months Ended September 30,						Nine Months Ended September 30,
		2020						2019
(in $000s)		Topic 840		Topic 606		Total		Topic 840		Topic 606		Total
Rental:
Rental revenue		$	138,429	$	0	$	138,429	$	137,194	$	0	$	137,194
Shipping and handling		0		5,674		5,674		0		6,677		6,677
Total rental revenue		138,429		5,674		144,103		137,194		6,677		143,871
Sales and services:
Sales of rental equipment		0		19,585		19,585		0		15,167		15,167
Sales of new equipment		0		19,043		19,043		0		8,076		8,076
Parts and services		0		36,753		36,753		0		19,675		19,675
Total sales and services		0		75,381		75,381		0		42,918		42,918
Total revenue		$	138,429	$	81,055	$	219,484	$	137,194	$	49,595	$	186,789

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

Inventory

Parts, tools, and accessories inventory is primarily ~~comprised~~composed of items purchased for resale or rent to customers. During the second quarter ended June 30, 2020, in connection with a new inventory management system, we elected to change our method for these inventories, which were previously valued using the first-in, first-out (“FIFO”) method, to the moving average cost method. We

believe the change is preferable because it better reflects movement of the inventory and the corresponding value which provides a better reflection of periodic income from operations. This change was not applied retrospectively to prior periods, as the effect of the change was not material to our consolidated financial statements, including interim periods.

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

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

Inventory consisted of the following:

(in $000s) September 30, 2020 December 31, 2019
Parts, tools and accessories inventory $ 26,781 $ 30,174
Equipment inventory 3,842 2,827
Inventory $ 30,623 $ 33,001


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

Rental and Property and Equipment

Rental equipment consisted of the following:


(in $000s)	(in $000s)	September 30, 2020		December 31, 2019		(in $000s)	March 31, 2021		December 31, 2020
Rental equipment	Rental equipment	$	661,153	$	658,564	Rental equipment	$	648,317	$	654,547
Less: accumulated depreciation	Less: accumulated depreciation	(312,221)		(275,144)		Less: accumulated depreciation	(324,612)		(318,735)
Rental equipment, net	Rental equipment, net	$	348,932	$	383,420	Rental equipment, net	$	323,705	$	335,812

Property and equipment consisted of the following:

(in $000s) September 30, 2020 December 31, 2019
Property and equipment $ 11,575 $ 10,082
Less: accumulated depreciation (7,921) (7,168)
Construction in progress 2,719 3,647
Property and equipment, net $ 6,373 $ 6,561

On September 27, 2019, we commenced closure of the Company's operations in Mexico due to continued delays in contracts from the Mexican government. In the three and nine month periods ended September 30, 2019, an impairment loss of $0.7 million was recorded to reduce the carrying amount of rental equipment to its fair value, which was determined based on a recent analysis of market activity (i.e., Level 3 fair value as defined in Note 9 herein) for the equipment at these operations. This charge is included in Impairment loss on the Unaudited Condensed Consolidated Statements of Operations.


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

Note 3: ~~Segments~~Acquisition and Related Financing Transactions

~~We have 2 reportable business segments, Equipment Rental~~Acquisition of Custom Truck One Source, L.P.

On December 3, 2020, Nesco Holdings and ~~Sales~~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 (“~~ERS”~~Blackstone”) and ~~Parts, Tools,~~other direct and ~~Accessories~~indirect equity holders (collectively, “Sellers”) of Custom Truck One Source, L.P. (“~~PTA”~~Custom Truck”)~~. ERS provides rental solutions~~, Blackstone Capital Partners VI-NQ L.P., and PE One Source Holdings, LLC, an affiliate of Platinum Equity, LLC (“Platinum”), pursuant to ~~utilities~~which Buyer agreed to acquire 100% of the partnership interests of Custom Truck. In connection with the Acquisition, Nesco Holdings and ~~contractors~~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 (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 ~~multiple~~highly attractive and growing infrastructure ~~end-markets,~~end markets, including ~~electric~~ transmission and distribution, telecom, rail ~~lighting~~ and ~~signage. We rent~~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 ~~sell specialized equipment~~sale (the “Subscription”) to utilities and utility contractors that build and maintain critical transmission and distribution infrastructure. Utilizing our national platform and rental fleet, we expanded our focus on equipment rentalPlatinum 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 ~~telecom, rail, lighting~~terms of the Purchase Agreement. The shares of Common Stock issued and ~~signage end-markets. The majority~~sold to Platinum had a purchase price of ~~our existing equipment can be used across multiple end-markets~~$5.00 per share. In accordance with the Investment Agreement, on December 21, 2020, Nesco Holdings entered into Subscription Agreements (the “Subscription Agreements”) with certain investors (the “PIPE Investors”) to finance, in part, the Acquisition. Pursuant to the Subscription Agreements, concurrently with the closing of the transactions contemplated by the Investment Agreement, the PIPE Investors agreed to purchase an aggregate of 28,000,000 shares of Common Stock at $5.00 per share for an aggregate purchase price of $140 million (the “Supplemental Equity Financing”).

On April 1, 2021 (the “Closing Date”), in connection with (i) the Rollovers, CTOS Inc. issued, in the aggregate, 20,100,000 shares of Common Stock to the parties to the Rollover Agreements, (ii) the Subscription, CTOS Inc. issued 148,600,000 shares of Common Stock to Platinum, and ~~many~~(iii) the Supplemental Equity Financing, CTOS Inc. issued, in the aggregate, 28,000,000 shares of ~~our customers operate in~~Common Stock to the PIPE Investors. Following the completion of these ~~multiple end-markets. We rent and sell a broad range~~transactions, as of new and used equipment including bucket trucks, digger derricks, line equipment, cranes, pressure diggers, rail mounted equipment and underground equipment. Our PTA segment offers customers sale and rental solutions for parts, tools, and accessories to complement our specialty equipment line doing business servicing these same end-markets.April 1, 2021, CTOS Inc. had 245,919,383 shares of

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~~Our reportable segments align with the information our chief operating decision maker (“CODM”) receives on a regular basis to evaluate the performance~~Common Stock issued and outstanding. The trading price of the ~~business and to allocate resources.~~Common Stock was $9.35 per share on the Closing Date. The accounting principles applied at the operating segment level in determining gross profit are generally the same as those applied at the consolidated financial statement level. There are no inter-segment revenues, and cost allocations to operating segment cost of revenue are minimal; that is, revenue, cost of equipment and parts sold or rented, depreciation of rental equipment and gross profit are directly attributed to each of the operating segments. The following tables present our financial information by segment:

Three Months Ended September 30, Three Months Ended September 30,
2020 2019
(in $000s) ERS PTA Total ERS PTA Total
Rental revenue(1)
$ 42,615 $ 3,510 $ 46,125 $ 46,922 $ 3,181 $ 50,103
Sales of rental equipment 5,510 0 5,510 3,436 0 3,436
Sales of new equipment 6,048 0 6,048 1,246 0 1,246
Parts sales and services 0 11,577 11,577 0 7,657 7,657
Total revenues 54,173 15,087 69,260 51,604 10,838 62,442
Cost of revenue 23,342 10,820 34,162 17,091 6,393 23,484
Depreciation of rental equipment 18,530 937 19,467 16,636 1,058 17,694
Gross Profit $ 12,301 $ 3,330 $ 15,631 $ 17,877 $ 3,387 $ 21,264
Nine Months Ended September 30, Nine Months Ended September 30,
2020 2019
(in $000s) ERS PTA Total ERS PTA Total
Rental revenue(1)
$ 132,693 $ 11,410 $ 144,103 $ 134,684 $ 9,187 $ 143,871
Sales of rental equipment 19,585 0 19,585 15,167 0 15,167
Sales of new equipment 19,043 0 19,043 8,076 0 8,076
Parts sales and services 0 36,753 36,753 0 19,675 19,675
Total revenues 171,321 48,163 219,484 157,927 28,862 186,789
Cost of revenue 72,211 34,622 106,833 55,306 17,853 73,159
Depreciation of rental equipment 56,065 3,210 59,275 48,186 3,183 51,369
Gross Profit $ 43,045 $ 10,331 $ 53,376 $ 54,435 $ 7,826 $ 62,261

~~(1) Amounts for equipment rental revenue of $0.7 million and $1.9 million~~preliminary purchase price for the ~~three~~Acquisition is estimated at $1.5 billion and ~~nine months ended September 30, 2019, respectively, previously reported in the PTA segment as rental revenue have been reclassified~~is subject to ~~the ERS segment to align the reportable segment information to the information our CODM began receiving on a regular basis in 2019.~~

~~Total assets by segment are not disclosed herein because asset by operating segment data is not reviewed by the CODM to assess performance and allocate resources.~~

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

Three Months Ended September 30, Nine Months Ended September 30,
(in $000s) 2020 2019 2020 2019
Gross profit $ 15,631 $ 21,264 $ 53,376 $ 62,261
Selling, general and administrative expenses 8,633 9,824 31,269 24,708
Licensing and titling expenses 686 690 2,243 1,926
Amortization and non-rental depreciation 792 745 2,308 2,264
Transaction expenses 110 3,325 1,073 7,394
Asset impairment 0 657 0 657
Other operating expenses 451 434 2,209 1,213
Other (income) expense (559) 2,567 6,245 2,545
Loss on extinguishment of debt 0 4,005 0 4,005
Interest expense, net 15,853 16,533 47,816 46,376
Loss before income taxes $ (10,335) $ (17,516) $ (39,787) $ (28,827)

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

Three Months Ended September 30, Nine Months Ended September 30,
(in $000s) 2020 2019 2020 2019
Revenue:
United States $ 67,506 $ 60,115 $ 213,576 $ 181,248
Canada 1,754 1,918 4,121 4,599
Mexico (1)
0 409 1,787 942
$ 69,260 $ 62,442 $ 219,484 $ 186,789

(1) On September 27, 2019, the Company began commencing activities for the closure of its Mexican operations, which is part of the ERS segment. For the three and nine months ended September, 30, 2020 and 2019, operations in Mexico generated a loss before income taxes of $0.8 million and $2.0 million, and $1.9 million and $3.8 million, respectively.

(in $000s) September 30, 2020 December 31, 2019
Assets:
United States $ 763,013 $ 802,516
Canada 5,983 8,152
Mexico 460 4,616
$ 769,456 $ 815,284

~~Note 4: Business Combination~~

On September 20, 2019, we entered into a stock purchase agreement with Truck Utilities, Inc. (“Truck Utilities”). Truck Utilities is a specialty rentals, parts, tools and accessories sales, service, equipment sales and truck upfitting company serving the electric transmission, distribution, telecom, and other regional end-markets. On November 4, 2019, we closed on the acquisition for a purchase price of approximately $44.7 million (net of cash acquired of $3.1 million), prior to certain capital expenditure adjustments of approximately $3.8 million. Truck Utilities’ rentals, equipment sales and truck upfitting operations were added to our ERS segment, while its parts, tools and accessories sales and service were added to our PTA segment. The transaction was financed by drawing on the 2019 Credit Facility.

As of the date of this report, we were in the preliminary phases of preparing the valuation of the assets acquired and liabilities assumed. Accordingly, the purchase price allocation for this acquisition presented below is preliminary. Completion of the purchase price allocation, which will be completed during the fourth quarter of 2020, will encompassadjustment pending the finalization of valuations for acquisition-date working capital, intangible assets, property and equipment, as well as completion of acquisition-related income tax assessments. We have estimated the fair values of the assets acquired and liabilities assumed using the information that was available. Upon completion of thepreliminary valuation ~~process, amounts recognized could change resulting in additional expenses recognized for depreciation and amortization of long-lived assets in future periods.~~estimates.

WeThe Acquisition will be accounted for ~~the acquisitions~~ using the acquisition method of ~~accounting. The~~accounting, and CTOS Inc. will be treated as the accounting acquirer. Under the acquisition method of accounting, we are required to assign the purchase price ~~has been allocated~~ to ~~the fair value of the~~ tangible and identifiable intangible assets acquired as determined by management with the assistance of independent third parties. The results of operations of Truck Utilities has been included with the Company’s results since the date of the acquisition. Transaction costs associated with the acquisitions were expensed as incurred.

~~The fair value (which remains provisional) of the assets acquired~~ and liabilities assumed based on their fair values as of the ~~acquisition date is presented below.~~


~~(in $000s)~~
~~Current assets, net of current liabilities~~	$	~~898~~
~~Property and equipment~~	78
~~Rental equipment~~	~~38,780~~
~~Customer relationships~~	~~2,820~~
~~Total identifiable assets acquired~~	~~42,576~~
~~Goodwill~~	~~8,944~~
~~Total consideration~~	$	~~51,520~~

Closing Date. The excess of the purchase price over those fair values will be recorded as goodwill. CTOS Inc. has not completed the valuation analysis and calculations in sufficient detail necessary to arrive at the required estimates of the fair value of the Custom Truck assets acquired or liabilities assumed, including estimates of fair values for inventory, rental equipment and certain intangible assets.

The ~~preliminary values of intangible assets and goodwill~~Company expensed approximately $10.4 million in transaction costs related to the ~~acquisition of Truck Utilities consists largely of the synergies~~Acquisition within Transaction and economies of scale provided by the acquired rental equipment portion of the business, as well as additional service center locations in the central Midwestern region of the United States. During the three and nine months ended September 30, 2020 we recorded adjustments to the preliminary fair values, including the related income tax effect, assigned to certain rental equipment, which reduced goodwill. These adjustments were not significant. Goodwill has been preliminarily allocated to the ERS and PTA reporting units in the amount of $5.4 million and $3.5 million, respectively.

The operating results of the acquisition have been reflected in the Company’s consolidated financial statements since the acquisition date. Truck Utilities reported revenue of $9.0 million and pretax income of $0.7 million inother expenses for the three months ended ~~September 30, 2020 ($31.6~~March 31, 2021. Additionally, there were approximately $6.1 million in transaction costs related to the Acquisition that are deferred and ~~$1.6~~recorded within Prepaid expenses and other on the Condensed Consolidated Balance Sheet as of March 31, 2021, which costs will be recognized on the Closing Date.

2029 Secured Notes

On the Closing Date, the Issuer issued $920 million ~~respectively,~~ in ~~the nine months ended September 30, 2020)~~aggregate principal amount of 5.50% senior secured second lien notes due 2029 (the “2029 Secured Notes”). The ~~following pro forma information is presented for comparison purposes as if the Truck Utilities acquisition was completed~~2029 Secured Notes were issued pursuant to an indenture, dated as of ~~January~~April 1, ~~2019:~~2021, by and among the Issuer, Wilmington Trust, National Association, as trustee, and the guarantors party thereto (the “Indenture”). The Issuer will pay interest on the Notes semi-annually in arrears on April 15 and October 15 of each year, commencing on October 15, 2021. Unless earlier redeemed, the 2029 Secured Notes will mature on April 15, 2029. The notes were offered pursuant to a private placement exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons outside of the United States in reliance on Regulation S under the Securities Act. The proceeds from the issuance and sale of the 2029 Secured Notes were used to consummate the Acquisition and to repay the Senior Secured Notes due 2024 (see Note 4, Debt), repay certain indebtedness of Custom Truck and pay certain fees and expenses related to the Acquisition and financing transactions.

(in $000s) Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Total revenue $ 74,677 $ 220,993
Net loss (18,719) (29,631)
Basic and diluted net loss per share (0.47) (1.07)
ABL Facility

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 under that certain Credit Agreement, dated as of April 18, 2017 (the “Custom Truck Credit Facility”), by and among Custom Truck, 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.

Note 5:4: Debt

Debt obligations and associated interest rates consisted of the ~~following as of September 30, 2020 and December 31, 2019:~~following:


	March 31,		December 31,		March 31,		December 31,
(in $000s)	2021		2020		2021		2020
2019 Credit Facility	$	260,000	$	250,971	2.7	%	3.4	%
Senior Secured Notes due 2024	475,000		475,000		10.0	%	10.0	%



Notes payable	2,196		2,379
Total debt outstanding	737,196		728,350
Deferred finance fees	(10,408)		(11,212)
Net debt	726,788		717,138
Less current maturities	(1,111)		(1,280)
Long-term debt	$	725,677	$	715,858

1512

September 30, December 31, September 30, December 31,
(in $000s) 2020 2019 2020 2019
2019 Credit Facility $ 269,022 $ 250,000 4.1 % 4.2 %
Senior Secured Notes due 2024 475,000 475,000 10.0 % 10.0 %
Notes Payable 2,561 3,525
Total debt outstanding 746,583 728,525
Deferred finance fees (12,033) (14,222)
Net debt 734,550 714,303
Less current maturities (1,280) (1,280)
Long-term debt $ 733,270 $ 713,023

On March 10, 2020, we entered into an agreement (the “Incremental Agreement”) amending the 2019 Credit Facility. The Incremental Agreement amends the syndicate of banks for a new participant that increased the maximum amount of the facility by $35.0 million to a total of $385.0 million. As of September 30, 2020, there was $67.4 million (excluding cash) of availability under the 2019 Credit Facility.

On July 31, 2019, in connection with a series of transactions with Capitol Investment Corp. IV, debt obligations under a revolving credit facility, a revolving credit commitments and senior notes, were extinguished. In connection with the ~~extinguishment, unamortized deferred~~Acquisition and related financing ~~fees~~transactions, on April 1, 2021, the Company entered into the ABL Facility and repaid the Custom Truck Credit Facility and the 2019 Credit Facility as described in Note 3, Acquisition and Related Financing Transactions. Additionally, on April 1, 2021, the Company redeemed all of its Senior Secured Notes due 2024 and paid a make-whole premium of $38.5 million. The terms of the ABL Facility and 2029 Secured Notes are described below.

ABL Facility

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

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

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

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

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

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

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

Borrowings under the ABL Facility will bear interest at a floating rate, which, at Buyer’s election, will be (a) in the case of U.S. dollar denominated loans, either (i) LIBOR plus an applicable margin or (ii) the base rate plus an applicable margin; or (b) in the case of Canadian dollar denominated loans, the CDOR rate plus an applicable margin. The applicable margin varies based on Average Availability (as defined in the ABL Credit Agreement) from (a) with respect to base rate loans, 0.50% to 1.00% and (b) with respect to LIBOR loans and CDOR rate loans, 1.50% to 2.00%. The ability to draw under the ABL Facility or 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.

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

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

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

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

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

2029 Secured Notes

On the Closing Date, the Issuer issued $920 million in aggregate principal amount of 5.50% senior secured second lien notes due 2029. The 2029 Secured Notes were ~~written-off.~~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 ~~loss~~Issuer will pay interest on ~~extinguishment~~the 2029 Secured Notes semi-annually in arrears on April 15 and October 15 of each year, commencing on October 15, 2021. Unless earlier redeemed, the 2029 Secured Notes will mature on April 15, 2029.

Ranking and Security

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

Optional Redemption Provisions and Repurchase Rights

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

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

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

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

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

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

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

Restrictive Covenants

The Indenture contains covenants that limit the Issuer’s (and certain of its subsidiaries’) ability to, among other things: (i) incur additional debt ~~aggregated $4.0 million.~~or issue certain preferred stock; (ii) pay dividends, redeem stock, or make other distributions; (iii) make other restricted payments or investments; (iv) create liens on assets; (v) transfer or sell assets; (vi) create restrictions on payment of dividends or other amounts by the Issuer to the Issuer’s restricted subsidiaries; (vii) engage in mergers or consolidations; (viii) engage in certain transactions with affiliates; or (ix) designate the Issuer’s subsidiaries as unrestricted subsidiaries.

Events of Default

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

Note 6:5: Goodwill and Intangible Assets

Goodwill and intangible assets consisted of the following:


(in $000s)	(in $000s)	September 30, 2020		December 31, 2019		(in $000s)	March 31, 2021		December 31, 2020
Goodwill	Goodwill	$	237,658	$	238,195	Goodwill	$	238,052	$	238,052
Nesco trade name	Nesco trade name	28,000		28,000		Nesco trade name	28,000		28,000
Other intangible assets:	Other intangible assets:					Other intangible assets:
Trade names	Trade names	1,030		1,030		Trade names	1,780		1,780
Non-compete agreements	Non-compete agreements	380		380		Non-compete agreements	520		520
Customer relationships	Customer relationships	52,880		52,880		Customer relationships	52,170		52,170
		82,290		82,290			82,470		82,470
Less: accumulated amortization	Less: accumulated amortization	(13,971)		(11,738)		Less: accumulated amortization	(15,644)		(14,891)
Intangible assets, net	Intangible assets, net	68,319		70,552		Intangible assets, net	66,826		67,579
Goodwill and intangible assets	Goodwill and intangible assets	$	305,977	$	308,747	Goodwill and intangible assets	$	304,878	$	305,631

Goodwill related to our ERS segment and PTA segment was ~~$228.9~~$229.1 million and ~~$8.8~~$9.0 million, respectively, as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020.

We perform our annual goodwill and indefinite-lived intangible assets impairment testing ~~in the fourth quarter~~as of October 1 each year. In addition to the annual impairment test, we regularly assess whether a triggering event has occurred ~~which~~that would require interim impairment testing. During the ~~first quarter~~three months ended March 31, 2020, due to the global health pandemic and related economic uncertainty, we ~~qualitatively assessed whether it was more likely than not~~identified interim impairment indicators. From a qualitative assessment completed at that ~~the~~time, we determined that goodwill and indefinite-lived ~~intangible assets were impaired. Based that interim impairment assessment, we determined that our goodwill and indefinite-lived~~

intangible assets were not impaired. During the three months ended ~~September 30, 2020, we did not identify any~~March 31, 2021, there were no triggering events ~~that necessitated~~necessitating an interim impairment test.

Note 7:6: Equity and Earnings per Share

As described more fully in our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, on July 31, 2019, we completed a series of transactions with Capitol Investment Corp. IV that were accounted for as a reverse recapitalization. In connection therewith, the merger and share exchange resulted in $172.3 million, net of

~~transaction costs, of contributed capital. Earnings per share has been recast for all historical periods to reflect the Company's capital structure for all comparative periods.~~

Diluted net ~~income (loss)~~loss per share includes the effects of potentially dilutive shares of common stock. Potentially dilutive effects include the exercise of warrants, contingently issuable shares, and share-based compensation, all of which have been excluded from the calculation of diluted net ~~income (loss)~~loss per share because earnings are at a net loss and therefore, the potentially dilutive effect would be anti-dilutive. The share amounts of our potentially dilutive shares excluded aggregated ~~27.8~~28.0 million and 27.3 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, respectively.

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

Three Months Ended September 30, 2020 Three Months Ended September 30, 2019
(in $000s, except share and per share data) Net Income (Loss) Weighted Average Shares Per Share Amount Net Income (Loss) Weighted Average Shares Per Share Amount
Basic earnings (loss) per share $ 15,173 49,033,903 $ 0.31 $ (18,010) 39,909,481 $ (0.45)
Dilutive common share equivalents 0 273,908 0 0
Diluted earnings (loss) per share $ 15,173 49,307,811 $ 0.31 $ (18,010) 39,909,481 $ (0.45)


		Nine Months Ended September 30, 2020					Nine Months Ended September 30, 2019						Three Months Ended March 31, 2021					Three Months Ended March 31, 2020
(in $000s, except share and per share data)	(in $000s, except share and per share data)	Net Income (Loss)		Weighted Average Shares	Per Share Amount		Net Income (Loss)		Weighted Average Shares	Per Share Amount		(in $000s, except share and per share data)	Net Loss		Weighted Average Shares	Per Share Amount		Net Loss		Weighted Average Shares	Per Share Amount
Basic earnings (loss) per share		$	(13,946)	49,033,903	$	(0.28)	$	(30,157)	27,743,586	$	(1.09)
Basic loss per share												Basic loss per share	$	(27,907)	48,619,613	$	(0.57)	$	(15,969)	49,033,903	$	(0.33)
Dilutive common share equivalents	Dilutive common share equivalents	0		0			0		0			Dilutive common share equivalents	0		0			0		0
Diluted earnings (loss) per share		$	(13,946)	49,033,903	$	(0.28)	$	(30,157)	27,743,586	$	(1.09)
Diluted loss per share												Diluted loss per share	$	(27,907)	48,619,613	$	(0.57)	$	(15,969)	49,033,903	$	(0.33)

Note 8:7: Share-Based Compensation

During the second quarter ended June 30, 2019, the ~~Company's~~Company’s stockholders approved the 2019 Omnibus Incentive Plan, which authorizes up to 3,150,000 shares of ~~common stock of Nesco Holdings, Inc.~~Common Stock for issuance in accordance with the plan’s terms, subject to certain adjustments. On June 11, 2020, the Company's stockholders approved the Amended and Restated 2019 Omnibus Incentive Plan, which increased the total authorized shares of ~~common stock of Nesco Holdings, Inc.~~Common Stock to 6,150,000 (the ~~"Plan"~~“Plan”). The purpose of the Plan is to provide the ~~Company's~~Company’s and its subsidiaries’ officers, directors, employees and consultants who, by their position, ability and diligence, are able to make important contributions to the Company’s growth and profitability, with an incentive to assist the Company in achieving its long-term corporate objectives, to attract and retain executive officers and other employees of outstanding competence and to provide such persons with an opportunity to acquire an equity interest in the Company. To accomplish these objectives, the Plan provides for awards of equity-based incentives through granting of restricted stock units, stock options, stock appreciation rights and other stock or cash based awards. At ~~September 30, 2020,~~March 31, 2021, there were ~~2,587,992~~approximately 2,605,000 shares in the share reserve still available for issuance.

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

~~Table of Contents~~

~~Compensation Expense~~

Share-based compensation expense was $0.7 million and ~~$1.7~~$0.6 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, respectively, and is included in ~~selling,~~Selling, general, and administrative expenses within the unaudited condensed consolidated statements of operations. In the nine months ended September 30, 2020, the Company's board of directors approved and awarded various share grants under the Plan, totaling approximately 1.2 million options and 0.8 million RSUs. As of ~~September 30, 2020,~~March 31, 2021, there was approximately ~~$8.0~~$7.2 million of total unrecognized compensation cost related to stock-based compensation arrangements under the Plan. That cost is expected to be recognized over a weighted average period of ~~3.4~~2.7 years. There were 0 share-based payment awards granted in the three months ended March 31, 2021. On the Closing Date, restricted stock awards of approximately 93,000 shares were granted to certain of the Company’s non-employee directors. Additionally, on the Closing Date in connection with the Acquisition, approximately 284,000 and 678,000 restricted stock awards and stock options, respectively, became immediately vested.

Note 9:8: Fair Value Measurements

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

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

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

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

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


		Carrying Value		Fair Value							Carrying Value		Fair Value
(in $000s)	(in $000s)			Level 1		Level 2		Level 3		(in $000s)			Level 1		Level 2		Level 3
September 30, 2020
March 31, 2021										March 31, 2021
2019 Credit Facility	2019 Credit Facility	$	269,022	$	0	$	269,022	$	0	2019 Credit Facility	$	260,000	$	0	$	260,000	$	0
Senior Secured Notes due 2024	Senior Secured Notes due 2024	475,000		0		497,563		0		Senior Secured Notes due 2024	475,000		0		521,517		0
Notes Payable	Notes Payable	2,561		0		2,561		0		Notes Payable	2,196		0		2,196		0
Derivative		7,858		0		7,858		0
Derivative and warrant liabilities										Derivative and warrant liabilities	23,647		0		5,232		18,415

December 31, 2019
December 31, 2020										December 31, 2020
2019 Credit Facility	2019 Credit Facility	$	250,000	$	0	$	250,000	$	0	2019 Credit Facility	$	250,971	$	0	$	250,971	$	0
Senior Secured Notes due 2024	Senior Secured Notes due 2024	475,000		0		494,000		0		Senior Secured Notes due 2024	475,000		0		519,379		0
Notes Payable	Notes Payable	3,525		0		3,650		0		Notes Payable	2,379		0		2,379		0
Derivative		1,709		0		1,709		0
Derivative and warrant liabilities										Derivative and warrant liabilities	7,012		0		7,012		0

The Level 3 fair value presented above consists of the fair value of the Non-Public Warrants (as defined in Note 9, Financial Instruments). 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 ~~10:~~9: Financial Instruments

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

~~The fair values of derivative instruments included within the Unaudited Condensed Consolidated Balance Sheets were as follows:~~

Liability Derivatives
(in $000s) September 30, 2020 December 31, 2019
Derivative instruments:
Interest rate collar $ 7,858 $ 1,709
Total derivative instruments $ 7,858 $ 1,709

Derivatives Not Designated as Hedges

On July 17, 2019, we entered into an interest rate collar (the "Collar") agreement to mitigate the risk of changes in the interest rate paid during the contract period for $170.0 million of the ~~Company's~~Company’s variable rate ~~loans under the 2019 Credit Facility.~~loans. Under the ~~terms of the interest rate collar,~~Collar, we are required to pay the counterparty to the agreement an amount equal to the difference between a monthly LIBOR-based interest rate and a defined interest rate floor; conversely, we are entitled to receive from the counterparty an amount equal to the excess of a LIBOR-based interest rate and a defined interest rate cap. The required payments due to or due from the counterparty are calculated by applying the interest rate differential to the notional amount ($170.0 million) and are determined monthly through July 31, 2024. The ~~interest rate collar~~Collar expires in July 2024 and has not been designated as a cash flow hedge. ~~Consequently,~~The Collar is carried at fair value and reported in Derivative and warrant liabilities on the Company's consolidated balance sheets ($5.2 million and $7.0 million as of March 31, 2021 and December 31, 2021, respectively) as a Level 2 measurement (see Note 8, Fair Value Measurements). The change in fair value of the ~~interest rate collar ($0.2 million~~Collar is recognized in Other expense (income), net in our Consolidated Statements of Operations (($1.8 million) and ~~$6.1~~$6.0 million in the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020, respectively).

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

Warrants

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

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

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

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

The Public Warrants continue to be accounted for as freestanding equity-classified instruments because the Company has the ability to settle with holders of the Public Warrants either by net-share or physical settlement. Because the Non-Public Warrants do not meet the “indexed to the entity’s stock” condition, they should have been accounted for as a derivative liability and remeasured at their estimated fair value each period. The change in fair value each period should have been reported in the Company’s consolidated statement of operations. The effect of correcting the accounting for the Non-Public Warrants from an equity-classified instrument to a liability instrument resulted in the reclassification of $10.3 million from Additional paid-in capital to Derivative and warrant liabilities on the Company’s consolidated balance sheet as of January 1, 2021, which represents the initial value of the Non-Public Warrants that should have been recognized ~~in our Unaudited Condensed Consolidated Statements~~on July 31, 2019, the date on which the Company merged with the SPAC. For the three months ended March 31, 2021, the Company recognized an expense of ~~Operations within~~$7.6 million in Other (income) expense ~~net.~~

~~Derivatives Instruments Designated as Hedges~~

~~When a derivative contract is entered into,~~in its consolidated statement of operations related to the Company may designate the derivative instrument as a cash flow hedge of a forecasted transaction, a cash flow hedge of a recognized asset or liability or as an undesignated derivative. When a derivative is designated, the Company formally documents its hedge relationships, including identification of the derivative instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. This process includes linking derivative instruments that are designated as hedges to specific assets, liabilities or forecasted transactions.

~~The~~ fair ~~market~~ value of derivative instruments is determined through market-based valuations and may not be representative of the actual gains or losses that will be recorded when these instruments mature due to future fluctuationsremeasurement. Included in the ~~markets in which they are traded.~~

~~The Company assesses at inception and at least quarterly thereafter, whether~~first quarter 2021 remeasurement amount is an income amount of $1.4 million representing the derivatives used in cash flow hedging transactions are effective in offsetting the changes in the cash flows of the hedged item. To the extent the derivative is deemed to be an effective hedge, the fair market value changes of the instrument are recorded to accumulated other comprehensive loss and subsequently reclassified into net ~~loss when the hedged transaction affects earnings. Changes~~change in the fair ~~market~~ value of ~~derivatives not deemed to be an effective hedge are recorded in net loss in~~ the period of change. If the hedging relationship ceases to be effective subsequent to inception, or it becomes probable that a forecasted transaction is no longer expected to occur, the hedging relationship will be undesignated and any future gains and losses on the derivative instrument will be recorded in net loss.

~~We entered into an interest rate collar on December 4, 2018, to hedge the interest rate risk associated with our previous revolving credit facility, which was repaid on the~~Non-Public Warrants from July 31, 2019 (the issue date of the ~~merger with Capitol Investment Corp. IV. The interest rate collar was designated as a cash flow hedge and had a term extending~~Non-Public Warrants) to ~~September 30, 2020. On July 17,~~December 31, 2019, ~~we terminated~~of $6.1 million in income, offset by $4.7 million in expense from the ~~interest rate collar, which resulted~~change in the hedge becoming undesignated. Accordingly, $0.8 million (net of income taxes of $0.3 million) was reclassified from accumulated other comprehensive loss to Other income (expense) net, in our Condensed Consolidated Statements of Operations duringfair value for the year ended December 31, ~~2019.~~2020. In evaluating whether the Company’s previously issued consolidated financial statements were materially misstated for the interim or annual periods prior to January 1, 2021, the Company applied the guidance of ASC 250, Accounting Changes and Error Corrections, SEC Staff Accounting Bulletin (“SAB”) Topic 1.M, Assessing Materiality and SAB Topic 1.N, E, and concluded that the effect of the error on prior period financial statements was not material. The Company also evaluated if the cumulative effect of correcting the prior period misstatement in its consolidated financial statements would be material to either the quarter, or annual period, in the three months ended March 31, 2021, and the forecasted year ending December 31, 2021, respectively. The guidance states that prior-year misstatements which, if corrected in the current year would materially misstate the current year’s financial statements, must be corrected by adjusting prior year financial statements, even though such correction previously was and continues to be immaterial to the prior-year financial statements. The Company concluded the impact of correcting the accounting for the Non-Public Warrants on the Company’s consolidated statement of operations for the three-months ending March 31, 2021, and the forecasted year ending December 31, 2021, is immaterial.

Note 10: Income Taxes

Income tax expense was $4.1 million for the three months ended March 31, 2021 as compared to $0.7 million for the same period of the prior year. Income tax expense for the current period reflects the Company's estimated overall tax rate from of the Company's

estimate of full-year taxable income arising from disallowed interest expense. The Company's effective tax rate for the current period, (17.2)%, differs from the U.S. federal statutory tax rate due primarily to the valuation allowance for deferred tax assets.

Note 11: 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

WeIn the normal course of business, there are ~~subject to~~ various claims in process, matters in litigation, and ~~legal actions~~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.

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

Custom Truck’s withholdings of federal excise taxes for each of the four quarterly periods during 2015 are currently under audit by the Internal Revenue Service (the “IRS”). The IRS issued an assessment on October 28, 2020 in an aggregate amount of $2.4 million for the 2015 periods, alleging that ~~arise primarily~~certain types of sold equipment are not eligible for the Mobile Machinery Exemption set forth in the ~~ordinary course~~Internal Revenue Code (the “IRC”). An appeal was filed on January 28, 2021. Based on management’s understanding of ~~business. These~~the facts and circumstances, including the relevant provisions of the IRC, 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 include, but are not limited to, general liability claims (including personal injury, product liability, property, and auto claims), indemnification and guarantee obligations, employee injuries and employment-related claims, and contract and real estate matters. We maintain insurance coverage for our operations and employees. Our major policies include coverage for property, general liability, auto, directors and officers, health, and workers’ compensation insurances. The ultimate legal and financial liability with respect to such matters generally cannot be estimated with certainty, ~~and requires~~it is the ~~use~~opinion of estimates in recording liabilities for potential litigation settlements against us. Estimates for losses from litigation are made after consultation with outside legal counsel. In our opinion, after consultation with legal counsel,management, that the ~~disposition or ultimate resolution~~final outcome of ~~such claims and actions~~these matters will not have a material ~~adverse~~ effect on ~~our~~the Company’s consolidated financial ~~position,~~condition, results of operations orand cash flows.

Purchase Commitments

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

Note 12: ~~Income Taxes~~Segments

We have 2 reportable business segments, Equipment Rental and Sales (“ERS”) and Parts, Tools, and Accessories (“PTA”). ERS provides rental solutions to utilities and contractors serving multiple infrastructure end-markets, including electric transmission and distribution, telecom, rail, lighting and signage. We rent and sell specialized equipment to utilities and utility contractors that build and maintain critical transmission and distribution infrastructure. Utilizing our national platform and rental fleet, we expanded our focus on equipment rental to the telecom, rail, lighting and signage end-markets. The Tax Cuts and Jobs Act of 2017 included new rules created to limit the deductibility of interest expense in certain circumstances. Historically, we had maintained a valuation allowance against our deferred tax assets related to federal and state net operating loss carryforwards as well as disallowed interest expense deduction carryforwards under those rules. During the three and nine months ended September 30, 2020, we recorded a reductionmajority of our ~~deferred tax valuation allowance, which resulted~~existing equipment can be used across multiple end-markets and many of our customers operate in ~~an increase in income tax benefit~~these multiple end-markets. We rent and sell a broad range of ~~approximately $5.0 million. The reduction represents~~new and used equipment including bucket trucks, digger derricks, line equipment, cranes, pressure diggers, rail mounted equipment and underground equipment. Our PTA segment offers customers sale and rental solutions for parts, tools, and accessories to complement our specialty equipment line.

Our reportable segments align with the information our chief operating decision maker (“CODM”) receives on a ~~correction of valuation allowances recorded in prior annual periods. These valuation allowances were recognized based on our prior interpretation~~regular basis to evaluate the performance of the ~~manner~~business and to allocate resources. The accounting principles applied at the operating segment level in ~~which~~determining gross profit are generally the ~~interest limitation rules impact~~same as those applied at the ~~realizability~~consolidated financial statement level. Inter-segment revenues, and cost allocations to operating segment cost of ~~certain deferred tax assets. In our revised assessment, we estimate we~~revenue are ~~more likely than not~~minimal; that is, revenue, cost of equipment and parts sold or rented, depreciation of rental equipment and gross profit are directly attributed to ~~realize certain of our federal and state deferred tax assets within the period that the carryforwards expire.~~

In addition, in March 2020, the United States Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) reduced the amount of disallowed interest expense which resulted in a greater amount of interest deduction. Consistent with our historical practice, we had recognized a deferred tax valuation allowance against the incremental net operating loss carryforwards generated as a resulteach of the ~~CARES Act during~~operating segments. The following tables present our financial information by segment:


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

Total assets by segment are not disclosed herein because asset by operating segment data is not reviewed by the ~~first half~~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 ~~2020. As a result of our revised assessment described in the previous paragraph, during the three and nine months ended September 30, 2020, we recorded an~~consolidated gross profit to consolidated loss before income tax benefit of approximately $8.7 million to correct the deferred tax valuation allowance recorded in prior 2020 interim periods. We determined that the effects of the misstatements, both on an individual and cumulative basis, were not material to our consolidated financial statements for any interim or annual period.taxes:

Further, on July 27, 2020, the United States Department of Treasury and Internal Revenue Service issued final regulations that provided guidance on the determination of disallowed interest expense. This guidance also resulted in net operating loss carryforwards that are estimated to be realized. As a result, during the three and nine months ended September 30, 2020, we recorded an income tax benefit of approximately $11.8 million.


	Three Months Ended March 31,
(in $000s)	2021		2020

Gross profit	$	20,219	$	21,403
Selling, general and administrative expenses	11,339		11,618
Licensing and titling expenses	711		821
Amortization and non-rental depreciation	775		716
Transaction expenses and other	10,448		1,452


Other (income) expense	5,857		6,021

Interest expense, net	14,906		16,014
Loss before income taxes	$	(23,817)	$	(15,239)

~~Note 13: COVID-19~~

During the on-going COVID-19 pandemic, we have undertaken efforts intended to maintain the health and safety of our employees and their families and to ensure the Company's continued financial and operational viability, especially in relation to our position as a supplier to critical industries. Employees whose tasks can be completed offsite have been instructed to work from home. Our service locations remain operational, and we are maintaining social distancing and enhanced cleaning protocols and usage of personal protective equipment, where appropriate.

While Nesco’s business is considered critical, we are unable to predict the impact that COVID-19 will have on our financial position and operating results in the future due to numerous uncertainties. Some of our customers are delaying projects, deferring future capital equipment purchases and eliminating in-person sales meetings. As a result, our business has been and will continue to be adversely impacted by the pandemic. Since the pandemic began, management has been focused on delivering for our customers and managing our costs and cash flows while preparing for a future recovery. We have reduced our capital spending, our working capital balances and undertaken cost reduction efforts including limited headcount reductions. At the same time, we have continued to make opportunistic investments in the fleet, systems and personnel to position the Company for long-term growth. We are ~~continually monitoring the markets~~positioned to serve all 50 U.S. states and 13 Canadian provinces and territories using our network of locations in ~~which we operate~~North America. The following tables present revenue by country and ~~will take additional actions we believe are appropriate as the situation continues to develop.~~total assets by country:


	Three Months Ended March 31,
(in $000s)	2021		2020

Revenue:
United States	$	77,466	$	79,702
Canada	833		1,369
Mexico	0		672
	$	78,299	$	81,743


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

Assets:
United States	$	744,922	$	762,696
Canada	5,260		5,447
Mexico	62		261
	$	750,244	$	768,404

2021

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

Throughout this section, unless otherwise noted “we,” “us,” ~~“our,” “Company,”~~“our” or ~~"Nesco”~~“Company” refers to Nesco Holdings, Inc. (“Nesco”) and its consolidated ~~subsidiaries.~~

The following discussion contains forward-looking statements. Actual results could differ materially from such forward-looking statements as a result of various risk factors, including those that may not be in the control of management. For further information on items that could impact our future operating performance or financial condition, see the section herein entitled “Disclosure Regarding Forward-Looking Statements” and the section entitled "Risk Factors" in our Annual Report on Form 10-K, filed with the SEC on March 16, 2020, and our Quarterly Report filed with the SEC on May 7, 2020.

~~Overview of Markets and Related Industry Performance~~

Nesco continued to be negatively impacted by the COVID-19 pandemic during the third quarter of 2020, particularly during July and August and began to see a normal seasonal uptick take hold starting in late August and continuing past the end of the quarter. While Nesco has not yet reached the same levels as a year ago, and remains cautious about the continuing impact of the COVID-19 pandemic, OEC on rent improved significantly from the beginning of the quarter to the end of the quarter.

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

Starting in March, we saw a decline in demand from customers as planned projects were delayed in response to the uncertainty caused by the onset of the pandemic. These delays were most pronounced in electric distribution customers close to population centers in efforts to promote social distancing. Electric transmission customers also delayed planned new project starts. This led to a decline in OEC on rent during the second quarter and into the beginning of the third quarter. As projects ended or were delayed, equipment was returned and there was little offsetting demand from new projects. This trend began to reverse starting in late August. Nesco started to service new electric distribution projects and then benefited from a normal seasonal uptick of new electric transmission projects in August that has continued through September and October. Electric distribution and transmission customers continue to have large backlogs of projects that must be undertaken to maintain an aged grid, to reduce fire hazards, to ensure the uninterrupted supply of electricity and to meet growing electricity demands of the future tied to increased household usages and vehicle electrification. We have experienced relative stability in the rail and telecom sectors. Telecom end-customers have announced intentions to continue to invest in 5G infrastructure and additional network enhancements designed to address deficiencies that became apparent with increased traffic during pandemic stay-at-home orders.

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

At the onset of the pandemic, our focus was on delivering upon the needs of our customers, managing costs and cash flows, and preparing for a future recovery. We reduced our capital spending, our working capital balances and undertook cost reduction efforts including limited headcount reductions. As part of these efforts we reduced our service costs by limiting repairs on equipment coming off-rent to levels required to meet demand. We are now beginning to pivot towards a recovery. In the near-term, this will drive service cost increases as we seek to rapidly deploy equipment to meet customer demand. As we look ahead to 2021 we are formulating a disciplined capital investment strategy that will support long term growth. At the same time, we are focused on maintaining a financial position and liquidity level that provides flexibility in the face of ongoing uncertainty.

~~FINANCIAL OVERVIEW~~

We use a variety of operational and financial metrics, including non-GAAP financial measures, such as Adjusted EBITDA, to enable us to analyze our performance and financial condition. We utilize these financial measures to manage our business on a day-to-day basis and believe that they are the most relevant measures of performance. Some of these measures are commonly used in our industry to evaluate performance. We believe these non-GAAP measures provide expanded insight to assess performance, in addition to the standard GAAP-based financial measures. There are no specific rules or regulations for determining non-GAAP measures, and as such, our non-GAAP financial measures may not be comparable to measures used by other companies within the industry.

The presentation of non-GAAP financial information should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. You should read this discussion and analysis of our results of operations and financial condition together with the consolidated financial statements and the related notes thereto also included within.

~~Measures Related to our Fleet~~

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

~~Equipment on rent~~ - Equipment on rent is the original equipment cost (“OEC”) of units rented to customers at a given point in time. Average equipment on rent is calculated as the weighted-average equipment on rent during the stated period. OEC represents the original equipment cost, exclusive of the effect of adjustments to rental equipment fleet acquired in business combinations. 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.

~~Fleet count- Fleet count represents the average or period end (defined as either) equipment units held in our rental fleet over any period.~~

~~Fleet utilization~~- Fleet utilization, with respect to the average equipment units held in our rental fleet over any period, is defined as the total number of days the rental equipment was rented during the period divided by the total number of days such rental equipment could have been rented during the same period, assuming that each piece of equipment could have been rented every day in the period (i.e. no maintenance or planned downtime is included in the calculation).

~~Rental rate per day- Rental rate per day for the period is calculated as total rental revenue excluding freight and billings to customers for damaged equipment divided by the total billed rental days.~~

~~Fleet age~~- Fleet age represents the number of years from the manufacturer chassis year of the rental equipment unit through the current year end. We evaluate fleet age for each equipment type and our fleet as a whole. In order to calculate average fleet age by type and average total fleet age, we weight the fleet age by the number of units within the relevant group.

~~Gross Profit, Income from Operations and Cash Flow from Operations~~

Gross profit, income from operations and cash flow from operations are financial performance measures that we use to monitor our results from operations and to measure our performance against our debt covenants.

~~Adjusted EBITDA~~

Adjusted EBITDA is also a non-GAAP financial performance measure that we use to monitor our results from operations, to measure our performance against our debt covenants and in measuring our performance relative to that of our competitors.

We believe the presentation of Adjusted EBITDA enhances an investor’s understanding of our financial performance because it is a useful financial metric to assess our operating performance from period to period by excluding certain items that we believe are not representative of our core business. Such items are excluded pursuant to the definition of Adjusted EBITDA in the 2019 Credit Facility and the Indenture Adjusted EBITDA is the basis for several financial loan covenants contained in the 2019 Credit Facility. We believe that Adjusted EBITDA provides investors with a useful tool for assessing the comparability between periods of our ability to generate cash from operations sufficient to pay taxes, service debt and undertake capital expenditures. We use these financial measures for business planning purposes, for loan compliance purposes, and in measuring our performance relative to that of our competitors.

Our use of the terms EBITDA and Adjusted EBITDA may vary from that of others in its industry and therefore are limited in their usefulness as comparative measures. These financial measures should not be considered as alternatives to net income (loss), operating

income (loss) or any other performance measures derived in accordance with GAAP as measures of operating performance, operating cash flows or as measures of liquidity. Non-GAAP financial measures should not be relied upon to the exclusion of U.S. GAAP financial measures. We encourage investors to review our non-GAAP financial measures together with our U.S. GAAP results and historical consolidated financial statements, and not in isolation. Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Accordingly, our non-GAAP financial measures may not be comparable to similar measures used by other companies.

Adjusted EBITDA includes an adjustment to exclude the effects of purchase accounting adjustments when calculating the cost of used equipment sold. When equipment is purchased in connection with a business combination, the equipment is revalued to its then current fair value for accounting purposes. The consideration transferred (i.e., the purchase price) in a business combination is allocated to the fair value of equipment as of the acquisition date, with depreciation recorded thereafter following our accounting policies; however, this may not be indicative of our actual cost to acquire new equipment that we add to our fleet apart from a business acquisition. 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. As indicated above, the agreements governing our indebtedness define this adjustment to EBITDA, as such, and we believe this metric is a better indication of our true cost of equipment sales due to the removal of the purchase accounting adjustments.

~~Consolidated Operating Results Three and Nine Months Ended September 30, 2020 and 2019~~

(in $000s) Three Months Ended September 30, 2020 % of revenue Three Months Ended September 30, 2019 % of revenue Nine Months Ended September 30, 2020 % of revenue Nine Months Ended September 30, 2019 % of revenue
Rental revenue $ 46,125 66.6% $ 50,103 80.2% $ 144,103 65.7% $ 143,871 77.0%
Sales of rental equipment 5,510 8.0% 3,436 5.5% 19,585 8.9% 15,167 8.1%
Sales of new equipment 6,048 8.7% 1,246 2.0% 19,043 8.7% 8,076 4.3%
Parts sales and services 11,577 16.7% 7,657 12.3% 36,753 16.7% 19,675 10.5%
Total Revenue 69,260 100.0% 62,442 100.0% 219,484 100.0% 186,789 100.0%
Cost of revenue 34,162 49.3% 23,484 37.6% 106,833 48.7% 73,159 39.2%
Depreciation of rental equipment 19,467 28.1% 17,694 28.3% 59,275 27.0% 51,369 27.5%
Gross Profit 15,631 22.6% 21,264 34.1% 53,376 24.3% 62,261 33.3%
Operating expenses 10,672 15,675 39,102 38,162
Operating Income 4,959 5,589 14,274 24,099
Other Expense 15,294 23,105 54,061 52,926
Loss Before Income Taxes (10,335) (17,516) (39,787) (28,827)
Income Tax Expense (Benefit) (25,508) 494 (25,841) 1,330
Net Income (Loss) $ 15,173 $ (18,010) $ (13,946) $ (30,157)

~~Total Revenue.~~ Total revenue for the third quarter of 2020, increased by $6.8 million, or 10.9%, compared to the third quarter of 2019. Rental revenue for the third quarter of 2020 decreased $4.0 million, or 7.9%, compared to the same period in 2019. The reduction in rental revenue was primarily a result of units coming off rent and a lack of new project starts during July and August as customers delayed projects in response to COVID-19, leading to a decrease in average equipment on rent of 4.1% to $464.3 million in the current quarter from $484.3 million in the same quarter of 2019. This trend reversed beginning in late August and equipment on rent ended the third quarter of 2020 at $489.1 million, an increase of more than 10% from the start of the quarter. Sales of rental equipment, which can vary from quarter to quarter, increased $2.1 million, or 60.4%, as we selectively divested underutilized and aging equipment. Sales of new equipment, which also varies from quarter to quarter, increased $4.8 million, or more than 3.5x, compared to the same period in 2019. Parts sales and service revenue increased $3.9 million, or 51.2%, compared to the same period in 2019 primarily duesubsidiaries prior to the acquisition of Custom Truck ~~Utilities.~~

~~Total revenue for the nine months ended September 30, 2020, increased by $32.7 million, or 17.5%~~One Source, L.P. (“Custom Truck”) on April 1, 2021 (the “Acquisition”), ~~compared~~and to the ~~same period in 2019. Rental revenue increased $0.2 million, or 0.2%, compared~~combined company, Custom Truck One Source, Inc. (“CTOS Inc.”) subsequent to the ~~same period in 2019 driven by investments made in 2019~~Acquisition. Immediately following the Acquisition, Nesco Holdings, Inc. changed its name to “Custom Truck One Source, Inc.” and ~~partially offset by delays in projects resulting~~also changed The New York Stock Exchange ticker symbol for its shares of common stock (“Common Stock”) from ~~the COVID-19 pandemic in the second and third quarters. Sales of rental equipment increased $4.4 million, or 29.1%, and sales of new equipment increased $11.0 million, or 135.8%, compared~~“NSCO” to ~~the same~~

~~period in 2019. Parts sales and service revenue increased $17.1 million, or 86.8%, compared to the same period in 2019 primarily due to the acquisition of Truck Utilities.~~

~~Cost of Revenue.~~ Cost of revenue, excluding depreciation of $19.5 million, for the three months ended September 30, 2020, increased by $10.7 million, or 45.5%, compared to the same period in 2019 ($12.5 million, or 30.2%, including depreciation).

Cost of revenue, excluding depreciation of $59.3 million, for the nine months ended September 30, 2020, increased by $33.7 million, or 46.0%, compared to the same period in 2019 ($41.6 million, or 33.4%, including depreciation). The majority of the increase in cost of revenue for both the three and nine months ended September 30, 2020 is attributed to incremental costs aligned with the increases in parts sales and service revenue and in equipment sales revenue.

~~Operating Expenses.~~ Operating expenses for the three months ended September 30, 2020 decreased $5.0 million, or 31.9%, and increased $0.9 million, or 2.5%, for the nine months ended September 30, 2020, compared to the same periods in 2019. The decrease in the third quarter is a result of cost reductions taken by the Company as a result of the COVID-19 pandemic and reduced transaction expenses. The increase for the nine month period is partially due to increased selling, general and administrative expenses as a result of increased headcount with the expansion of the organization and additional expenses incurred as a result of being a public company. Offsetting the increase is a reduction in transaction expenses of $6.3 million for the nine month period ended September 30, 2020 compared to the same period in 2019, which were directly related to the merger with Capitol in 2019.

~~Other Expense.~~ Other expense for the three months ended September 30, 2020 decreased $7.8 million, or 33.8%, and increased $1.1 million, or 2.1%, for the nine months ended September 30,2020, compared to the same periods in 2019. Other expense in the three and nine months ended September 30, 2019 includes loss of extinguishment of debt of $4.0 million directly related to the transactions with Capitol, which closed on July 31, 2019. Additionally, the changes in fair value of an interest rate collar, which is an undesignated hedging instrument, resulted in income in the current quarter of approximately $0.6 million ($6.1 million expense for the nine month period ended September 30, 2020). Net interest expense in the current quarter decreased by $0.7 million.

~~Income Tax Expense.~~ Income tax expense was a benefit of $25.5 million and $25.8 million for the three and nine months ended September 30, 2020, respectively. We recorded a reduction of our deferred tax valuation allowance related to federal and state net operating loss carryforwards as well as disallowed interest expense deduction carryforwards. Final regulations issued by the US Treasury and Internal Revenue Service prompted a reassessment of how we had established valuation allowances in prior interim and annual periods, which were based on interpretations regarding the impacts of the interest limitation rules . In our revised assessment, we estimate that we are more likely than not, able to realize certain of our federal and state deferred tax assets within the period that the carryforwards expire.

~~Financial Performance~~

We believe that our operating model, together with our highly variable cost structure, enables us to sustain high margins, strong cash flow generation and stable financial performance throughout various economic cycles. We are able to generate free cash flow through our earnings, as well as sales of used 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 five measurements: Adjusted EBITDA, equipment dollars ("OEC") on rent, fleet count, fleet utilization and rental rate per day. The following table summarizes these operating metrics.“CTOS.”

The ~~presentation~~discussion of ~~non-GAAP financial information should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.~~

~~Financial performance for the three and nine months ended September 30, 2020 and 2019:~~

Three Months Ended September 30, Nine Months Ended September 30,
(in $000s, except fleet count and rate per day) 2020 2019 change (%) 2020 2019 change (%)
Adjusted EBITDA (a)
$28,020 $30,654 $(2,634) (8.6) $86,249 $91,900 $(5,651) (6.1)
Average equipment on rent (b)
$464,302 $484,305 $(20,003) (4.1) $475,038 $467,178 $7,860 1.7
Average fleet count 4,542 4,221 321 7.6 4,595 4,075 520 12.8
Average fleet utilization (c)
72.1% 79.1% (7.0)% (8.8) 73.1% 80.4% (7.3)% (9.1)
Average rental rate per day (d)
$137.16 $138.11 $(0.95) (0.7) $137.23 $137.42 $(0.19) (0.1)

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

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

(c) Average fleet utilization for the period is calculated as the total number of invoiced days divided by the total number of available equipment days. This metric has been adjusted to exclude Mexico, which the Company commenced exit activities in the third quarter of 2019.

(d) Average rental rate per day for the period is calculated as total rental revenue excluding freight and damaged billings divided by the total rental days, which represents the number of billable days in the period aggregated across all units in the fleet. This metric has been adjusted to exclude Mexico, which the Company commenced exit activities in the third quarter of 2019.

~~Adjusted EBITDA.~~ Adjusted EBITDA decreased $2.6 million, or 8.6%, to $28.0 million for the three months ended September 30, 2020 compared to the same period in 2019. This decrease can primarily be attributed to a $3.9 million decline in gross profit, excluding depreciation of $19.5 million, partially offset by a decrease in operating expenses.

Adjusted EBITDA decreased $5.7 million, or 6.1%, to $86.2 million for the nine months ended September 30, 2020 compared to the same period in 2019. This decrease is primarily due to the increase in selling, general and administrative expenses, partially offset by a $1.0 million decrease in gross profit, excluding depreciation of $59.3 million.

~~The following is a reconciliation from U.S. GAAP net loss to Adjusted EBITDA for the three and nine months ended September 30, 2020 and 2019.~~

Three Months Ended September 30, Nine Months Ended September 30,
(in $000s) 2020 2019 2020 2019
Net income (loss) $ 15,173 $ (18,010) $ (13,946) $ (30,157)
Interest expense 15,853 16,533 47,816 46,376
Income tax expense (benefit) (25,508) 494 (25,841) 1,330
Depreciation expense 19,711 17,928 60,080 52,104
Amortization expense 771 724 2,233 2,172
EBITDA 26,000 17,669 70,342 71,825
   Adjustments:
   Non-cash purchase accounting impact (1)
390 126 1,485 862
   Transaction and process improvement costs (2)
1,380 9,648 5,098 14,676
   Major repairs (3)
211 376 1,506 1,522
   Share-based payments (4)
657 283 1,669 463
Change in fair value of derivative (5)
(618) 2,552 6,149 2,552
Adjusted EBITDA $ 28,020 $ 30,654 $ 86,249 $ 91,900

~~The following is a reconciliation from Adjusted EBITDA to net cash flow from operating activities for the nine months ended September 30, 2020 and 2019.~~

Nine Months Ended September 30,
(in $000s) 2020 2019
Adjusted EBITDA $ 86,249 $ 91,900
Adjustments:
Change in fair value of derivative (5)
(6,149) (2,552)
Share-based payments (4)
(1,669) (463)
Major repairs (3)
(1,506) (1,522)
Transaction and process improvement costs (2)
(5,098) (14,676)
Non-cash purchase accounting impact (1)
(1,485) (862)
EBITDA 70,342 71,825
Add:
Interest expense (47,816) (46,376)
Income tax benefit (expense) 25,841 (1,330)
Amortization - financing costs 2,188 2,099
Share-based payments 1,669 463
Loss (gain) on sale of rental equipment and parts (4,231) (3,930)
Gain on insurance proceeds - damaged equipment (714) (570)
Major repair disposal 1,506 1,522
Loss on extinguishment of debt — 4,005
Change in fair value of derivative 6,149 2,552
Asset impairment — 657
Deferred tax (benefit) expense (24,417) 816
Provision for losses on accounts receivable 1,813 3,472
Changes in assets and liabilities:
Accounts receivable 9,258 (13,728)
Inventory (3,797) (13,742)
Prepaid expenses and other (953) (2,211)
Accounts payable (8,920) 4,792
Accrued expenses (11,782) (4,770)
Deferred rental income (1,270) (4,832)
Net cash flow from operating activities $ 14,866 $ 714

~~Notes to EBITDA and Adjusted EBITDA reconciliations:~~

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

(2) 2020: Represents transaction costs related to Nesco’s acquisition of Truck Utilities (which include post-acquisition integration expenses incurred during the current quarterly and nine month periods); 2019: Represents transaction expenses related to merger activities associated with the transaction with Capitol that was consummated on July 31, 2019. These expenses are comprised of professional consultancy, legal, tax and accounting fees. Also included are costs of startup activities (which include training, travel, and process setup costs) associated with the rollout of new PTA locations that occurred throughout the prior year into the current periods. Finally, the expenses associated with the Company's closure of its Mexican operations, which closure activities commenced in the third quarter of 2019, are included for the current quarterly and nine month periods. Pursuant to Nesco’s credit agreement, the cost of undertakings to affect such cost savings, operating expense reductions and other synergies, as well as any expenses incurred in connection with acquisitions, are amounts to be included in the calculation of Adjusted EBITDA.

(3) Represents the undepreciated cost of replaced vehicle chassis and components from heavy maintenance, repair and overhaul activities associated with our fleet, which is an adjustment pursuant to our credit agreement.

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

~~(5) Represents the charge to earnings for our interest rate collar (which is an undesignated hedge) in the three and nine months ended September 30, 2020.~~

~~Equipment on Rent.~~ Average equipment on rent was $464.3 million for the three months ended September 30, 2020, a decrease of $20.0 million or 4.1% over the same period in 2019. The decrease is primarily due to COVID-19 related customer project delays during the second and third quarters. This trend began to reverse in late August 2020 and equipment on rent was $489.1 million on September 30, 2020.

Average equipment on rent for the nine months ended September 20, 2020 was $475.0 million up from $467.2 million for the same period in 2019. The increase is due to fleet investments made in 2019 and continued demand from customers during the first quarter, offset by project delays related to COVID-19 in the second and third quarters.

~~Fleet Count.~~ Average fleet count was 4,542 for the three months ended September 30, 2020, an increase of 321 units from an average fleet count of 4,221 over the same period in 2019. Sequentially, our fleet count declined by 73 units from the second quarter of 2020 as a result of the selective sale of under-utilized and aging assets, which were not offset by the acquisition of new equipment due to COVID-related capital investment curtailments. Average fleet count for the nine months ended September 30, 2020 was 4,595, an increase of 520 from an average fleet count of 4,075 over the same period in 2019. Bucket trucks represented the largest category of our year over year capital expenditures for the three and nine months ended September 30, 2020, driven by strong demand in 2019 and the first quarter of 2020 that has been offset by project delays resulting from the COVID-19 pandemic.

~~Fleet Utilization.~~ Fleet utilization was 72.1% for the three months ended September 30, 2020, compared to 79.1% the same period of 2019. Fleet utilization was 73.1% for the nine months ended September 30, 2020, compared to 80.4% the same period of 2019. The decrease in both periods is primarily due to COVID-19 related customer project delays.

~~Rental Rate Per Day.~~ Average rental rate per day was $137.16 for the three months ended September 30, 2020, a decrease of 0.7% from $138.11 for the same period in 2019. Average rental rate per day was $137.23 for the nine months ended September 30, 2020, a 0.1% decrease from $137.42 for the same period in 2019. Consolidated rate remained steady year over year.

~~Fleet Age.~~ We use fleet age by type to assist in our decision to sell or purchase a fleet category to ensure our fleet age remains competitive. Our overall average fleet age was 3.9 years as of September 30, 2020, compared to 3.6 years at September 30, 2019. We believe the current age of our fleet is young and gives us flexibility from a capital allocation and sales perspective.

~~Fleet Composition.~~ We own a diverse selection of equipment in order to meet the needs of our customers. Bucket trucks, digger derricks, line equipment and rail-mounted equipment make up a significant percentage of our fleet portfolio. We also carry cranes, pressure diggers, underground equipment, and other miscellaneous fleet items, making us a full service specialty equipment provider. All of our equipment is available for rent and our used equipment sales and new equipment purchases are partially driven by our desire to keep an optimal product mix and maintain a competitive fleet age.

~~The OEC of our ERS fleet was $638.3 million as of September 30, 2020, a $44.6 million, or 7.5%, increase from $593.7 million at September 30, 2019.~~

~~Operating Results by Segment - Three and Nine Months Ended September 30, 2020 and 2019~~

The Company manages its operations through two business segments: rental and sale of fleet and equipment along with repair and maintenance related to those assets (ERS), and the rental and sale of parts, tools, and accessories (PTA). See Note 3, ~~Segments, to our unaudited condensed consolidated financial statements for additional information.~~

~~Equipment Rental and Sales Segment~~

Three Months Ended September 30, Nine Months Ended September 30,
(in $000s) 2020 2019 $ change % change 2020 2019 $ change % change
Rental revenue $ 42,615 $ 46,922 $ (4,307) (9.2) % $ 132,693 $ 134,684 $ (1,991) (1.5) %
Sales of rental equipment 5,510 3,436 2,074 60.4 % 19,585 15,167 4,418 29.1 %
Sales of new equipment 6,048 1,246 4,802 385.4 % 19,043 8,076 10,967 135.8 %
Total revenues 54,173 51,604 2,569 5.0 % 171,321 157,927 13,394 8.5 %
Cost of revenue 23,342 17,091 6,251 36.6 % 72,211 55,306 16,905 30.6 %
Depreciation of rental equipment 18,530 16,636 1,894 11.4 % 56,065 48,186 7,879 16.4 %
Gross Profit $ 12,301 $ 17,877 $ (5,576) (31.2) % $ 43,045 $ 54,435 $ (11,390) (20.9) %

~~Total Revenues.~~ Revenue in our ERS segment represented 78.2% and 82.6% of our consolidated revenues for the three months ended September 30, 2020 and 2019, respectively. ERS segment revenue increased by $2.6 million for the three months ended September 30, 2020 compared to the same period in 2019. Rental revenue decreased $4.3 million primarily as a result of COVID-19 project delays. Sales of rental and new equipment, which can vary from quarter to quarter, increased $6.9 million due in part to the selective divestiture of under-utilized and aging fleet equipment.

ERS segment revenue increased by $13.4 million or 8.5%, for the nine months ended September 30, 2020 compared to the same period last year. Rental revenue decreased by $2.0 million over the prior period primarily due to pandemic-related project delays in the second and third quarters. New equipment sales increased by $11.0 million, or 135.8%, compared to the same period in 2019. Used equipment sales increased by $4.4 million due in part to disposals of aged and under-utilized units.

~~Cost of Revenue.~~ The $6.3 million increase in cost of revenue, excluding depreciation, for the three months ended September 30, 2020 compared to the prior year is primarily due to costs related to increased sales of rental and new equipment.

Cost of revenue, excluding depreciation, increased by $16.9 million year over year for the nine months ending September 30, 2020, primarily due to an increase in cost of sales of new and rental equipment.

~~Depreciation.~~ Depreciation of our rental fleet increased by $1.9 million and $7.9 million for the three and nine months ended September 30, 2020, compared to the same periods in 2019, primarily due to growth in fleet equipment value.

~~Gross Profit.~~ ~~Gross profit for the three months ended September 30, 2020, excluding depreciation of $18.5 million, decreased by $3.7 million compared to the same period in 2019.~~

Gross profit for the nine months ended September 30, 2020, excluding depreciation of $56.1 million decreased by $3.5 million in the first three quarters of 2020 compared to the first three quarters of 2019. The decrease in both the three and nine month periods ended September 30, 2020 was due primarily to a reduction in high margin rental revenue.

~~Parts, Tools, and Accessories Segment~~

Three Months Ended September 30, Nine Months Ended September 30,
(in $000s) 2020 2019 $ change % change 2020 2019 $ change % change
Rental revenue $ 3,510 $ 3,181 $ 329 10.3 % $ 11,410 $ 9,187 $ 2,223 24.2 %
Parts sales and services 11,577 7,657 3,920 51.2 % 36,753 19,675 17,078 86.8 %
Total revenues 15,087 10,838 4,249 39.2 % 48,163 28,862 19,301 66.9 %
Cost of revenue 10,820 6,393 4,427 69.2 % 34,622 17,853 16,769 93.9 %
Depreciation of rental equipment 937 1,058 (121) (11.4) % 3,210 3,183 27 0.8 %
Gross Profit $ 3,330 $ 3,387 $ (57) (1.7) % $ 10,331 $ 7,826 $ 2,505 32.0 %

~~Total Revenues.~~ PTA segment revenue increased $4.2 million or 39.2% for the three months ended September 30, 2020 compared to same period in 2019. For the nine months ended September 30, 2020, PTA segment revenue increased by $19.3 million, or 66.9%. The increases in revenue are primarily due to the acquisition of Truck Utilities. The PTA segment experienced headwinds from COVID-19 social distancing measures in the last part of the first quarter and throughout the second and third quarters as a result of new project delays. Similar to ERS, PTA began to see a positive increase in sales and services revenue starting late in the third quarter.

~~Cost of Revenue.~~ Cost of revenue, excluding depreciation, in the PTA segment increased $4.4 million and $16.8 million for the three and nine months ended September 30, 2020, respectively. As a direct result of the increase in parts sales volume, as well as the expansion of operations from two PTA locations to seven over the course of 2019 with an eighth location partially opening during the second quarter of 2020. This expanded footprint was designed to service growth that has not yet eventuated due to COVID-19. Similar to ERS, as a recovery takes hold, we have significant capacity in place within the PTA segment to support growth with limited new investments.

~~Gross Profit.~~ PTA gross profit, excluding $0.9 million and $3.2 million of depreciation, decreased $0.2 million, or 4.0%, and increased $2.5 million, or 23.0%, for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. The changes in gross profit were driven by higher revenue in the segment, but offset by higher costs as a result of expanded geographic footprint.

~~Liquidity and Capital Resources~~

~~Historical Liquidity~~

Our principal sources of liquidity include cash generated by operating activities and borrowings under our 2019 Credit Facility. We believe that our liquidity sources and operating cash flows are sufficient to address our operating, debt service and capital requirements over the next twelve months, however, we are continuing to monitor the impact of COVID-19 on our business and the financial markets. We have proactively reduced our planned 2020 net capital expenditures (which we define to be purchases of rental and other property and equipment, net of proceeds from disposals of such assets) to help manage liquidity and optimize utilization. As of September 30, 2020, we had $1.6 million in cash compared to $6.3 million as of December 31, 2019. As of September 30, 2020, we had $269.0 million of outstanding borrowings under our 2019 Credit Facility with an additional $67.4 million in availability (subject to a borrowing base) compared to $250.0 million of outstanding borrowing under the 2019 Credit Facility as of December 31, 2019.

~~2019 Credit Facility~~

On July 31, 2019, we entered into the 2019 Credit Facility, which provides us with $350.0 million in aggregate principal amount of commitments pursuant to a first lien senior secured asset based revolving credit facility. On March 10, 2020, we entered into an agreement (the “Incremental Agreement”) that amended the syndicate of banks for a new participant that increased the maximum amount of the 2019 Credit Facility by $35.0 million to a total of $385.0 million.

The 2019 Credit Facility has a five-year term and a floating rate of interest based on either the federal funds rate plus a margin ranging between 50 and 100 basis points or LIBOR plus a margin ranging between 150 and 200 basis points, in each case, depending on excess availability under the facility. Our availability under the 2019 Credit Facility is a percentage of the value of our accounts receivable, our parts inventory, our fleet inventory, and our cash, in each case, subject to certain eligibility criteria and periodic collateral evaluations. A portion of the 2019 Credit Facility may be used for the issuance of letters of credit. The 2019 Credit Facility is guaranteed by our wholly owned domestic subsidiaries, subject to customary exceptions, and is secured by substantially all of our assets and the guarantors. We can reduce the aggregate commitments under the 2019 Credit Facility without premium or penalty. The 2019 Credit Facility contains covenants which, among other things, limit the occurrence of additional indebtedness (including acquired indebtedness), issuance of certain preferred stock, the payment of dividends, making restricted payments and investments, the purchase or acquisition or retirement for value of any equity interests, the provision of loans or advances to restricted subsidiaries, the sale or lease or transfer of any properties to any restricted subsidiaries, the transfer or sale of assets, and the creation of certain liens. In addition, the 2019 Credit Facility requires the Company to comply with a financial maintenance covenant requiring the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00; provided that this covenant shall only be tested if availability under the 2019 Credit Facility is less than the greater of (i) 10% of the Line Cap and (ii) $30 million, and shall be tested until availability is no longer less than such amounts for 20 consecutive calendar days.

~~Senior Secured Notes due 2024~~

In connection with the closing of the merger and related transactions, on July 31, 2019 we completed a private offering for Senior Secured Second Lien Notes due 2024 (the "Senior Secured Notes") issued by Capitol Investment Merger Sub 2, LLC, our wholly owned and indirect subsidiary (the "Issuer"). The aggregate principal amount of the Senior Secured Notes was $475.0 million. The Senior Secured Notes bear interest at a rate of 10.0% per annum payable semi-annually, in cash in arrears, on February 1 and August 1 of each year, commencing on February 1, 2020. The Senior Secured Notes do not have registration rights.

~~A summary of the key provisions are as follows:~~

~~Guarantors~~ -The Senior Secured Notes are guaranteed (the “Guarantees”) by Capitol Intermediate Holdings, LLC, our wholly owned subsidiary ("Holdings") and the wholly owned domestic subsidiaries of the Issuer (together, "Guarantors") that guarantee obligations under the 2019 Credit Facility or any future debt of Nesco or any other Guarantors.

~~Security~~ ~~- The Senior Secured Notes and the Guarantees are secured on a second-priority basis by all of our assets and the Guarantors that secure our obligations under the 2019 Credit Facility.~~

~~Ranking~~ - The Senior Secured Notes and the Guarantees are general senior secured obligations. The Senior Secured Notes rank equally in right of payment with all of our existing and future senior debt and rank senior in right of payment to all of our future subordinated obligations. The Guarantees rank equally in right of payment with all of the Guarantors’ existing and future senior obligations and rank senior in right of payment to all of the Guarantors’ existing and future subordinated obligations. The Senior Secured Notes and the Guarantees rank effectively subordinated to all of the Guarantors’ and our first-priority secured debt, including borrowings under the 2019 Credit Facility.

~~Redemption and Repurchase~~ - The Senior Secured Notes are redeemable, in whole or in part, at any time on or after the Closing Date at specified redemption prices. At any time prior to August 1, 2021, we may redeem all or part of the notes at a redemption price equal to 100.0% of the principal amount, plus an applicable premium, plus accrued and unpaid interest, if any, to the redemption date. We may also redeem some or all of the notes: from August 1, 2021, but before July 31, 2022, at a redemption price of 105.0% of the principal amount plus accrued and unpaid interest, if any, to the redemption date; from August 1, 2022, but before July 31, 2023, at a redemption price of 102.5% of the principal amount plus accrued and unpaid interest, if any, to the redemption date; and after August 1, 2023, at a redemption price of 100.0% of the principal amount plus accrued and unpaid interest, if any, to the redemption date. In addition, we may redeem up to 40.0% of the Senior Secured Notes until August 1, 2021, at a redemption price of 110.0% of the principal amount plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds from one or more equity offerings. In addition, we may be required to make an offer to purchase the Senior Secured Notes upon the sale of certain assets and upon a change of control.

~~Covenants~~ ~~- The Senior Secured Notes contain various restrictive covenants.~~

As of September 30, 2020, we were in compliance with all of the covenants and other provisions of the 2019 Credit Facility and the indenture governing the Senior Secured Notes disclosed above. Any failure to be in compliance with any material provision or covenant of these agreements could have a material adverse effect on our liquidity and operations.

Due to the condition and relatively young age of our fleet, we have the ability to significantly reduce or suspend capital expenditures during difficult economic times, to generate additional cash flow during these periods. We believe that cash generated by our rental operations and cash received from the sale of equipment, as well as funds available under the 2019 Credit Facility will be adequate to meet our operating, investing and financing needs for the foreseeable future. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds. Our ability to meet our operating, investing and financing needs depends to a significant extent on our future financial performance, which will be subject in part to general economic, competitive, financial, regulatory and other factors that are beyond our control. In addition to these general economic and industry factors, the principal factors in determining whether our cash flows will be sufficient to meet our liquidity requirements will be changes in governmental regulations for the electric utility transmission and distribution industry, weather, and our customers’ ability to secure materials. In the event that we need access to additional cash, we may not be able to access the credit markets on commercially acceptable terms or at all. We expect to continually assess our performance, the economic environment and market conditions to guide our decisions regarding our uses of cash, including capital expenditures.

We may, from time to time, refinance, reprice, extend, retire or otherwise modify our outstanding debt to lower our interest payments, reduce our debt or otherwise improve our financial position. These actions may include repricing amendments, extensions, and/or opportunistic refinancing of debt. The amount of debt that may be refinanced, re-priced, extended, retired or otherwise modified, if any, will depend on market conditions, trading levels of our debt, our cash position, compliance with debt covenants and other considerations.

~~Historical Cash Flows~~

~~The following table summarizes our sources and uses of cash for the nine months ended September 30, 2020 and 2019:~~

Nine Months Ended September 30,
(in $000s) 2020 2019
Net cash flow from operating activities $ 14,866 $ 714
Net cash flow from investing activities (29,869) (62,260)
Net cash flow from financing activities 10,341 59,607
Net change in cash $ (4,662) $ (1,939)

As of September 30, 2020, we had cash of $1.6 million, a decrease of $4.7 million from December 31, 2019. Generally, we manage our cash flow by using any excess cash, after considering our working capital and capital expenditure needs, to pay down the outstanding balance under our 2019 Credit Facility.

~~Cash Flows from Operating Activities~~

Net cash provided by operating activities was $14.9 million for the nine months ended September 30, 2020, as compared to net cash provided by operating activities of $0.7 million in same period of 2019. The increase in cash from operations was driven by prudent working capital management.

~~Cash Flows from Investing Activities~~

Net cash used in investing activities was $29.9 million for the nine months ended September 30, 2020, as compared to cash used in investing activities of $62.3 million in 2019. The decrease in net cash used in investing activities is primarily due to decreased property and equipment investments, increased proceeds from the sale of rental equipment and parts and from increased insurance recoveries, partially offset by increased investments in rental equipment during the first quarter.

~~Cash Flows from Financing Activities~~

Net cash provided by financing activities was $10.3 million for the nine months ended September 30, 2020, as compared to cash provided by financing activities of $59.6 million in 2019. Financing activities in the prior year reflect the refinancing of long-term debt in connection with the transactions with Capitol that closed on July 31, 2019.

~~Off-Balance Sheet Financing Arrangements~~

We have no obligations, assets, or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any nonfinancial assets.

~~Critical Accounting Policies~~

~~For a discussion of our critical accounting policies and estimates, see “Critical Accounting Policies” under “Management’s~~Management's Discussion and Analysis of Financial Condition and Results of ~~Operations”~~Operations (“MD&A”) is presented on a historical basis, as of ~~our Annual Report on Form 10-K~~or for the ~~year~~three months ended ~~December~~March 31, ~~2019. For a summary of our significant accounting policies, see Note 2,~~ ~~Summary of Significant Accounting Policies, to the referenced Annual Report on Form 10-K. There have been no significant changes in our critical accounting policies and estimates during the quarterly period ended September 30, 2020.~~

2021 or prior periods.

~~Recent Accounting Pronouncements~~

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

~~DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS~~Disclosure Regarding Forward-Looking Statements

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

•difficulty in integrating Nesco and Custom Truck businesses and fully realizing the anticipated benefits of the Acquisition;

•public health crisis such as the COVID-19 pandemic;

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

•~~the risk associated with the COVID-19 health pandemic on our business operations and the global economy in general;~~

~~• fluctuations in~~fluctuation of our revenue and operating results;

• ~~unfavorable conditions~~ our inability to obtain raw materials, component parts and/or ~~further disruptions~~finished goods in ~~the capital~~a timely and ~~credit markets;~~cost-effective manner;

•competition, which may have a material adverse effect on our business by reducing our ability to ~~generate cash, service our indebtedness and incur additional indebtedness;~~increase or maintain revenues or profitability;

• ~~competition from existing and new competitors;~~

~~• our relationships with equipment suppliers and dependence on key suppliers to obtain adequate or timely equipment;~~

~~• increases~~any further increase in the cost of new equipment ~~and~~that we purchase for use in our ~~ability to procure such equipment~~rental fleet or for our sales inventory;

•uncertainties in ~~a timely fashion;~~

~~• our ability to pass on increased operating costs related to~~ the ~~aging~~success of our ~~fleet;~~

~~• our ability to integrate any businesses~~future acquisitions or integration of companies that we acquire;

•our ~~ability~~inability to recruit and retain the experienced ~~personnel;~~personnel we need to compete in our industries;

• ~~the effect~~further unionization of our workforce;

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

• ~~risks related~~unfavorable conditions in the capital and credit markets and our inability to ~~legal proceedings or claims, including liability claims;~~obtain additional capital as required;

•our inability to renew our leases upon their expiration;

•our failure to keep pace with technological developments;

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

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

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

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

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

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

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

• ~~laws~~significant operating and ~~regulatory developments that may fail~~financial restrictions imposed by the Indenture (as defined below) and the ABL Credit Agreement (as defined below); and

•uncertainties related to ~~result in increased demand for~~ our ~~services;~~variable rate indebtedness.

~~• safety and environmental requirements that may subject us to unanticipated liabilities; and~~

• other factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2020.

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

Overview of Markets and Related Industry Performance

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

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

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

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

including limited headcount reductions in 2020. As part of these efforts we reduced our service costs through most of 2020 by limiting repairs on equipment coming off-rent to those to be re-deployed based on customer orders. This will drive up service cost through second quarter 2021 as we seek to rapidly deploy equipment to meet customer demand.

Acquisition of Custom Truck One Source, L.P.

On December 3, 2020, Nesco and Nesco Holdings II, Inc., a subsidiary of Nesco (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, 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. In connection with the Acquisition, Nesco 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 (the “Rollovers”) with an aggregate value of $100.5 million in exchange for shares of Common Stock, valued at $5.00 per share.

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

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

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.

FINANCIAL OVERVIEW

Measures Related to our Fleet

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

Average OEC on rent — Original equipment cost (“OEC”) on rent is the original equipment cost of units rented to customers at a given point in time. Average OEC on rent is calculated as the weighted-average OEC on rent during the stated 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.

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

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

Gross Profit

Gross profit is a financial performance measure that we use to monitor our results from operations.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial performance measure that the Company uses to monitor its results from operations, to measure performance against debt covenants and performance relative to competitors. The Company believes Adjusted EBITDA is a useful performance measure because it allows for an effective evaluation of operating performance when compared to peers, without regard to financing methods or capital structures. The Company excludes the items identified in the reconciliations of Net loss to Adjusted EBITDA because these amounts are either non-recurring or can vary substantially within the industry depending upon accounting methods and book values of assets, capital structures, including the method by which the assets were acquired. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, Net 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 loss before interest expense, income taxes, depreciation and amortization, equity-based compensation, and other items that The Company does not view as indicative of ongoing performance. Additionally, the Company’s Adjusted EBITDA includes an adjustment to exclude the effects of purchase accounting adjustments when calculating the cost of inventory and used equipment sold. When inventory or equipment is purchased in connection with a business combination, the assets are revalued to their current fair values for accounting purposes. The consideration transferred (i.e., the purchase price) in a business combination is allocated to the fair values of the assets as of the acquisition date, with amortization or depreciation recorded thereafter following applicable accounting policies; however, this may not be indicative of the actual cost to acquire inventory or new equipment that is added to product inventory or the rental fleets apart from a business acquisition. Additionally, the pricing of rental contracts and equipment sales prices for equipment is based on OEC, and the Company measures a rate of return from rentals and sales using OEC. As indicated above, the agreements governing the Company’s indebtedness define this adjustment to EBITDA, as such, this metric is an indication of the cost of equipment sales from the removal of the purchase accounting adjustments.

Operating Results


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

Total Revenue. Total revenue for the first quarter of 2021, decreased by $3.4 million, or 4.2%, compared to the first quarter of 2020. Rental revenue for the first quarter of 2021 decreased $2.7 million, or 5.3%, compared to the same period in 2020 as a result of rental fleet mix. Sales of rental equipment, which can vary from quarter to quarter, increased $1.4 million, or 15.3%, as we continued to selectively divest underutilized and aging equipment. Sales of new equipment, which also varies from quarter to quarter, held flat decreasing $0.1 million, or 1%, compared to the same period in 2020. Parts sales and service revenue decreased $2.1 million, or 14.6%, compared to the same period in 2020 as a result of a decline in upfit work under the PTA segment.

Cost of Revenue. Cost of revenue, excluding depreciation of $17.8 million, for the three months ended March 31, 2021, was flat compared to the same period in 2020 ($2.3 million, or 3.7%, including depreciation).

Operating Expenses. Operating expenses for the three months ended March 31, 2021 increased $8.7 million, or 59.3%, compared to the same period in 2020. The increase in the first quarter is a result of transaction expenses related to the Acquisition.

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

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

Net Loss. Net loss was $27.9 million for the three months ended March 31, 2021 compared to net loss of $16.0 million for the same period of the prior year. The Company recognized transaction expenses related to the Acquisition of approximately $10.4 million, as well as a non-cash charge of $7.6 million related to privately placed warrants stemming from its 2019 merger with Capitol Investment Corp. IV.

Financial Performance

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


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

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

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

(c) Fleet utilization for the period is calculated by dividing the amount of time an asset is on rent by the amount of time the asset has been owned during the period. Time on rent is weighted by original equipment cost. This metric has been adjusted to exclude Mexico, which the Company commenced exit activities in the third quarter of 2019.

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

Adjusted EBITDA. Adjusted EBITDA decreased $4.5 million, or 14.1%, to $27.5 million for the three months ended March 31, 2021 compared to the same period in 2020. This decrease can primarily be attributed to a $3.5 million decline in gross profit, excluding depreciation of $17.8 million, caused by lower rental yield resulting from a slower ramp in transmission projects compared to distribution projects and a shift in revenue mix, with sales of equipment making up approximately 23.0% of total revenue. Reduced servicing volume in the PTA segment also contributed to the decline in Adjusted EBITDA.

The following is a reconciliation from U.S. GAAP net loss to Adjusted EBITDA.


	Three Months Ended March 31,
(in $000s)	2021		2020
Net income (loss)	$	(27,907)	$	(15,969)
Interest expense	14,906		16,014
Income tax expense	4,090		730
Depreciation expense	18,063		20,377
Amortization expense	753		691
EBITDA	9,905		21,843
Adjustments:
Non-cash purchase accounting impact (1)	53		917
Transaction and process improvement costs (2)	10,744		2,079
Major repairs (3)	285		700
Share-based payments (4)	698		559

Change in fair value of derivative and warrants (5)	5,846		5,963
Adjusted EBITDA	$	27,531	$	32,061

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

(2) Represents transaction costs related to the acquisition of Custom Truck One Source (2021) and Truck Utilities (2020) (which include post-acquisition integration expenses incurred). These expenses are comprised of professional consultancy, legal, tax and accounting fees. Also included are costs of startup activities (which include training, travel, and process setup costs) associated with the rollout of PTA locations that occurred throughout the prior year. Finally, the expenses associated

with the Company's closure of its Mexican operations, which closure activities commenced in the third quarter of 2019, are included for the periods. Pursuant to our credit agreement, the cost of undertakings to affect such cost savings, operating expense reductions and other synergies, as well as any expenses incurred in connection with acquisitions, are amounts to be included in the calculation of Adjusted EBITDA.

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

(5) Represents the charge to earnings for our interest rate collar (which is an undesignated hedge) and the change in fair value of the liability for warrants in the three months ended March 31, 2021.

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

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

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

Operating Results by Segment

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

Equipment Rental and Sales Segment


	Three Months Ended March 31,
(in $000s)	2021		2020		$ change		% change
Rental revenue	$	44,730	$	47,053	$	(2,323)	(4.9)	%
Sales of rental equipment	10,485		9,093		1,392		15.3	%
Sales of new equipment	7,502		7,577		(75)		(1.0)	%

Total revenues	62,717		63,723		(1,006)		(1.6)	%
Cost of revenue	29,202		27,320		1,882		6.9	%
Depreciation of rental equipment	16,885		18,976		(2,091)		(11.0)	%
Gross Profit	$	16,630	$	17,427	$	(797)	(4.6)	%

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

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

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

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

Parts, Tools, and Accessories Segment


	Three Months Ended March 31,
(in $000s)	2021		2020		$ change		% change
Rental revenue	$	3,559	$	3,941	$	(382)	(9.7)	%


Parts sales and services	12,023		14,079		(2,056)		(14.6)	%
Total revenues	15,582		18,020		(2,438)		(13.5)	%
Cost of revenue	11,034		12,908		(1,874)		(14.5)	%
Depreciation of rental equipment	959		1,136		(177)		(15.6)	%
Gross Profit	$	3,589	$	3,976	$	(387)	(9.7)	%

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

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

Gross Profit. PTA gross profit, excluding $1.0 million of depreciation, decreased $0.6 million, or 11.0%, for the three months ended March 31, 2021, compared to the same period in 2020 as a result of lower rental revenue and higher repair costs.

Liquidity and Capital Resources

Historical Liquidity

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

ABL Facility

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

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

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

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

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

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

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

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

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

2029 Secured Notes

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

Ranking and Security

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

Optional Redemption Provisions and Repurchase Rights

Restrictive Covenants

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

Events of Default

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

Historical Cash Flows

The following table summarizes our sources and uses of cash:


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

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

Cash Flows from Operating Activities

Net cash used in operating activities was $12.1 million for the three months ended March 31, 2021, as compared to $2.8 million in same period of 2020. The decrease in cash flow was driven by costs and expenses related to the Acquisition.

Cash Flows from Investing Activities

Net cash provided by investing activities was $4.0 million for the three months ended March 31, 2021, as compared to cash used in investing activities of $27.2 million in 2020. The increase in cash flow is primarily due to decreased rental equipment purchasing, increased proceeds from the sale of rental equipment and parts and from increased insurance recoveries.

Cash Flows from Financing Activities

Net cash provided by financing activities was $7.9 million for the three months ended March 31, 2021, as compared to $33.9 million in 2020. Improvements in working capital management resulted in reduced levels of net borrowings on our revolving credit facility.

Critical Accounting Policies

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

Recent Accounting Pronouncements

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

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

Interest rate risk

We are subject to interest rate market risk in connection with our long-term debt. Our principal interest rate exposure relates to outstanding amounts under ~~the~~revolving credit facilities. The Company’s 2019 Credit Facility ~~which provides~~provided for variable rate borrowings of up to $385.0 million, subject to a borrowing base. 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. ~~Assuming the~~The 2019 Credit Facility ~~is fully drawn,~~was repaid in full, and all commitments thereunder were terminated, on April 1, 2021. Assuming we had completed the Acquisition and related financing transactions and applied the proceeds as of December 31, 2020, we would have had $415.0 million aggregate principal amount of variable rate debt, consisting of that $415.0 million that will be outstanding under the ABL Facility. Holding other variables constant, each one-eighth percentage point increase or decrease in the applicable interest rates would correspondingly ~~change~~changed our interest expense on the ~~2019 Credit~~ABL Facility by approximately ~~$0.3~~$0.5 million per year. AsThis amount does not reflect the impact of ~~September 30, 2020, we had $269.0 million of outstanding borrowings against~~ the ~~2019 Credit Facility.~~interest rate collar currently in place.

We manage a portion of our risks from exposures to fluctuations in interest rates as part of our risk management program through the use of derivative financial instruments. The objective of controlling these risks is to limit the impact on earnings and cash flows caused by fluctuations, and our primary exposure is from our variable-rate debt. We currently have an interest rate collar agreement in place as a hedge against fluctuations in the required interest payments due on ~~our 2019 Credit Facility.~~variable rate debt. All of our derivative activities are for purposes other than trading.

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

Our interest rate collar contract (currently our only derivative contract) was executed under a standard master agreement that contains a cross-default provision to our borrowing agreement with the counterparty, which provides the ability of the counterparty to terminate the interest rate collar agreement upon an event of default under the borrowing agreement.

~~Exchange rate risk~~

During the three and nine months ended September 30, 2020, we generated $1.8 million and $4.1 million of U.S. dollar denominated revenues in Canadian dollars, respectively, and $1.8 million Mexican pesos during the nine months ended September 30, 2020. Each 100 basis point increase or decrease in the average Canadian dollar to U.S. dollar exchange rate or Mexican peso to U.S. dollar exchange rate for the year would have correspondingly changed our revenues by less than $0.1 million. We do not currently hedge our exchange rate exposure.

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

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ~~("the Exchange Act"~~(the “Exchange Act”). Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of ~~September 30, 2020,~~March 31, 2021, the end of the period covered by this quarterly report, our disclosure controls and procedures were designed to provide and were effective to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarterly period ended ~~September 30, 2020,~~March 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. ~~Legal Proceedings~~LEGAL PROCEEDINGS

InWe may, at any given time, be named as a defendant in certain lawsuits, investigations and claims arising in the ~~normal~~ordinary course of ~~business,~~business. While the outcome of these potential lawsuits, investigations and claims cannot be predicted with certainty, we ~~are involved in a variety of lawsuits, claims and legal proceedings. In our opinion, pending legal~~do not expect these matters ~~are not expected~~ 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, ~~liquidity~~cash flows or ~~cash flows.~~results of operations.

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

~~Factors that could cause our actual results to differ materially from those in this Quarterly Report are any of~~The risk factors presented below amend and restate the ~~risks in the section entitled “Risk Factors”~~risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2019 and our Quarterly Report for~~2020. In addition to the ~~three months ended March 31, 2020.~~other information contained in this Form 10-Q, the following risk factors should be considered carefully in evaluating the Company. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

•worldwide and domestic demands for used equipment;

•the supply of used equipment on the market; and

•general economic conditions.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

•increasing our cost of borrowing.

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

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

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

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

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

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

•incur additional indebtedness;

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

•make certain investments or other restricted payments;

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

•engage in transactions with stockholders or affiliates;

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

•prepay or modify the terms of our other indebtedness;

•guarantee indebtedness; and

•create liens.

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

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

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

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

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

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

Item 5. OTHER INFORMATION

None.

Item 6. ~~Exhibits~~EXHIBITS

Exhibit No.

Description

2.1 *

~~31.1~~ +Purchase and Sale Agreement, dated as of December 3, 2020, by and among Blackstone Energy Partners NQ L.P., Blackstone Energy Family Investment Partnership SMD L.P., Blackstone Energy Family Investment Partnership NQ ESC L.P., Blackstone Capital Partners VI-NQ L.P., Blackstone Family Investment Partnership VI-NQ ESC L.P., Fred M. Ross, Jr. Irrevocable Trust, BEP UOS Feeder Holdco L.P., BCP VI UOS Feeder Holdco L.P., Blackstone Energy Management Associates NQ L.L.C., Blackstone Management Associates VI-NQ L.L.C., Nesco Holdings II, Inc., Nesco Holdings, Inc., Blackstone Capital Partners VI-NQ L.P., solely in its capacity as the representative of Sellers, and PE One source Holdings, LLC, solely with respect to Section 9.04 (Incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on December 4, 2020)

3.1

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

3.2

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

4.1

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

4.2

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

10.1

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

10.2 *

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

10.3 *

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

10.4

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

10.5 *

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

10.6

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

21.1 +

Subsidiaries of the Company.

31.1 +

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 +

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~~

~~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 Document~~

+ Filed or furnished herewith.

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

3640

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.




		~~NESCO HOLDINGS,~~CUSTOM TRUCK ONE SOURCE, INC. (Registrant)

Date:	~~11/9/2020~~May 17, 2021	/s/ ~~Lee Jacobson~~Fred Ross
		~~Lee Jacobson,~~Fred Ross, Chief Executive Officer

Date:	~~11/9/2020~~May 17, 2021	/s/ ~~Joshua A. Boone~~Bradley Meader
		~~Joshua A. Boone,~~Bradley Meader, Chief Financial Officer ~~and Secretary~~

3741


					Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders' Deficit
	Common Stock
(in $000s, except share data)	Shares		Amount
Balance, December 31, 2019	49,033,903		$	5	$	432,577	$	(444,712)	$	0	$	(12,130)
Net loss	—		—		—		(15,969)		—		(15,969)
Share-based payments	—		—		559		—		—		559

Balance, March 31, 2020	49,033,903		$	5	$	433,136	$	(460,681)	$	0	$	(27,540)
Net loss	—		—		—		(13,150)		—		(13,150)
Share-based payments	—		—		453		—		—		453
Balance, June 30, 2020	49,033,903		$	5	$	433,589	$	(473,831)	$	0	$	(40,237)
Net income (loss)	—		—		—		15,173		—		15,173
Share-based payments	—		—		657		—		—		657
Interest rate collar	—		—		—		—		—		0
Balance, September 30, 2020	49,033,903		$	5	$	434,246	$	(458,658)	$	0	$	(24,407)


					Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders' Deficit
	Common Stock
	Shares		Amount

Balance, December 31, 2018	21,660,638		$	2	$	259,298	$	(417,660)	$	(396)	$	(158,756)
Net loss	—		—		—		(6,724)		—		(6,724)
Share-based payments	—		—		128		—		—		128
Interest rate collar	—		—		—		—		88		88
Balance, March 31, 2019	21,660,638		$	2	$	259,426	$	(424,384)	$	(308)	$	(165,264)
Net loss	—		—		—		(5,423)		—		(5,423)
Share-based payments	—		—		52		—		—		52
Interest rate collar	—		—		—		—		(476)		(476)
Balance, June 30, 2019	21,660,638		$	2	$	259,478	$	(429,807)	$	(784)	$	(171,111)
Net loss prior to reverse recapitalization	—		—		—		(10,988)		—		(10,988)
Net loss post reverse recapitalization	—		—		—		(7,022)		—		(7,022)
Reverse capitalization	27,373,265		3		172,266		—		—		172,269
Share-based payments	—		—		283		—		—		283
Interest rate collar	—		—		—		—		784		784
Balance, September 30, 2019	$	49,033.903	$	5	$	432,027	$	(447,817)	$	0	$	(15,785)


(in $000s)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Total revenue	$	74,677	$	220,993
Net loss	(18,719)		(29,631)
Basic and diluted net loss per share	(0.47)		(1.07)


	September 30,		December 31,		September 30,		December 31,
(in $000s)	2020		2019		2020		2019
2019 Credit Facility	$	269,022	$	250,000	4.1	%	4.2	%
Senior Secured Notes due 2024	475,000		475,000		10.0	%	10.0	%



Notes Payable	2,561		3,525
Total debt outstanding	746,583		728,525
Deferred finance fees	(12,033)		(14,222)
Net debt	734,550		714,303
Less current maturities	(1,280)		(1,280)
Long-term debt	$	733,270	$	713,023


	Three Months Ended September 30, 2020					Three Months Ended September 30, 2019
(in $000s, except share and per share data)	Net Income (Loss)		Weighted Average Shares	Per Share Amount		Net Income (Loss)		Weighted Average Shares	Per Share Amount
Basic earnings (loss) per share	$	15,173	49,033,903	$	0.31	$	(18,010)	39,909,481	$	(0.45)
Dilutive common share equivalents	0		273,908			0		0
Diluted earnings (loss) per share	$	15,173	49,307,811	$	0.31	$	(18,010)	39,909,481	$	(0.45)


	Liability Derivatives
(in $000s)	September 30, 2020		December 31, 2019
Derivative instruments:
Interest rate collar	$	7,858	$	1,709
Total derivative instruments	$	7,858	$	1,709


	Three Months Ended September 30,				Nine Months Ended September 30,
(in $000s, except fleet count and rate per day)	2020	2019	change	(%)	2020	2019	change	(%)
Adjusted EBITDA (a)	$28,020	$30,654	$(2,634)	(8.6)	$86,249	$91,900	$(5,651)	(6.1)
Average equipment on rent (b)	$464,302	$484,305	$(20,003)	(4.1)	$475,038	$467,178	$7,860	1.7
Average fleet count	4,542	4,221	321	7.6	4,595	4,075	520	12.8
Average fleet utilization (c)	72.1%	79.1%	(7.0)%	(8.8)	73.1%	80.4%	(7.3)%	(9.1)
Average rental rate per day (d)	$137.16	$138.11	$(0.95)	(0.7)	$137.23	$137.42	$(0.19)	(0.1)