OnApril 1, 2021 (the "Closing Date"),Nesco Holdings II, Inc. , a subsidiary ofCustom Truck One Source, Inc. (formerlyNesco Holdings, Inc. ), completed the acquisition ofCustom Truck One Source, L.P. in a series of transactions described below. OnApril 1, 2021 ,Nesco Holdings, Inc. ("Nesco Holdings ") changed its name to "Custom Truck One Source, Inc. " and changedThe New York Stock Exchange ticker for its shares of common stock ("Common Stock") from "NSCO" to "CTOS," and the ticker of its redeemable warrants from "NSCO.WS" to "CTOS.WS." Throughout this section, unless otherwise noted, terms such as "we," "our," "us," or "the Company" refer toNesco Holdings prior to the acquisition byNesco Holdings II, Inc. ofCustom Truck One Source, L.P. ("Custom Truck LP ") onApril 1, 2021 (the "Acquisition"), and to the combined company after the Acquisition. Unless the context otherwise requires, the terms "Nesco" or "Nesco Holdings " meanNesco Holdings and its consolidated subsidiaries prior to the Acquisition, and the term "Custom Truck LP " meansCustom Truck LP and its consolidated subsidiaries prior to the Acquisition. Acquisition ofCustom Truck LP OnDecember 3, 2020 ,Nesco Holdings andNesco Holdings II, Inc. , a subsidiary ofNesco Holdings (the "Buyer" or the "Issuer"), entered into a Purchase and Sale Agreement (as amended, the "Purchase Agreement") with certain affiliates of The Blackstone Group ("Blackstone") and other direct and indirect equity holders (collectively, "Sellers") ofCustom Truck LP ,Blackstone Capital Partners VI-NQ L.P. , andPE One Source Holdings, LLC , an affiliate ofPlatinum Equity, LLC ("Platinum"), pursuant to which Buyer agreed to acquire 100% of the partnership interests ofCustom Truck LP . In connection with the Acquisition,Nesco Holdings and certain Sellers entered into Rollover and Contribution Agreements (the "Rollover Agreements"), pursuant to which such Sellers agreed to contribute a portion of their equity interests inCustom Truck LP (the "Rollovers") with an aggregate value of$100.5 million in exchange for shares of Common Stock, valued at$5.00 per share. Also onDecember 3, 2020 ,Nesco Holdings entered into a Common Stock Purchase Agreement (the "Investment Agreement") with Platinum, relating to, among other things, the issuance and sale to Platinum (the "Subscription") of shares of Common Stock, for an aggregate purchase price in the range of$700 million to$763 million , with the specific amount calculated in accordance with the Investment Agreement based upon the total equity funding required to fund the consideration paid pursuant to the terms of the Purchase Agreement. The shares of Common Stock issued and sold to Platinum had a purchase price of$5.00 per share. In accordance with the Investment Agreement, onDecember 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, thePIPE 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 the Closing Date, in connection with (i) the Rollovers, the Company issued, in the aggregate, 20,100,000 shares of Common Stock to the parties to the Rollover Agreements, (ii) the Subscription, the Company issued 148,600,000 shares of Common Stock to Platinum, and (iii) the Supplemental Equity Financing, the Company issued, in the aggregate, 28,000,000 shares of Common Stock to thePIPE Investors . Following the completion of these transactions, as ofApril 1, 2021 , the Company had 245,919,383 shares of Common Stock issued and outstanding. The trading price of the Common Stock was$9.35 per share on the Closing Date. The 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") withBank 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. Presentation of Financial Condition and Results ofOperations Custom Truck LP became a wholly owned subsidiary of the Company onApril 1, 2021 . The Company's condensed consolidated financial statements prepared underUnited States generally accepted accounting principles ("GAAP") includeCustom Truck LP as of 30 --------------------------------------------------------------------------------June 30, 2021 and for the period fromApril 1, 2021 toJune 30, 2021 . Accordingly, information presented for the three months endedJune 30, 2021 represents the consolidated financial results ofCustom Truck LP and its subsidiaries andNesco Holdings and its subsidiaries, while information for the six months endedJune 30, 2021 represents the financial results of Nesco Holdings and its subsidiaries for that entire period and the financial results ofCustom Truck LP and its subsidiaries only fromApril 1, 2021 toJune 30, 2021 . Further, for the three and six months endedJune 30, 2020 , the financial results are those ofNesco Holdings and its subsidiaries (that is, prior to the Acquisition and inclusion ofCustom Truck LP ). Accordingly, the financial information presented under GAAP for the current periods is not comparable to those of corresponding prior periods. As a result, we have included information on a "pro forma" basis as further described below, which we believe provides for more meaningful year-over-year comparability. The discussion of results of operations in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is presented on a historical basis, as of or for the three and six months endedJune 30, 2021 and the corresponding prior periods. Pro Forma Financial Information The unaudited pro forma combined financial information presented in the section entitled "Supplemental Pro Forma Information," give effect to the Company's acquisition ofCustom Truck LP , as if the Acquisition had occurred onJanuary 1, 2020 , and are presented to facilitate comparisons with our results following the acquisition. This information has been prepared in accordance with Securities and Exchange Commission Article 11 of Regulation S-X. Such unaudited pro forma combined financial information also uses the estimated fair value of assets and liabilities on the Closing Date, and makes the following assumptions: (1) removes acquisition-related costs and charges that were recognized in the Company's condensed consolidated financial statements in the three and six months endedJune 30, 2021 and applies these costs and charges to the three and six months endedJune 30, 2020 , as if the Acquisition and Related Financing Transactions had occurred onJanuary 1, 2020 ; (2) removes the loss on the extinguishment of debt that was recognized in the Company's condensed consolidated financial statements in the three and six months endedJune 30, 2021 and applies the charge to the three and six months endedJune 30, 2020 , as if the debt extinguishment giving rise to the loss had occurred onJanuary 1, 2020 ; (3) adjusts for the impacts of purchase accounting in the three and six months endedJune 30, 2021 and 2020; (4) adjusts interest expense, including amortization of debt issuance costs, to reflect borrowings on the ABL Facility and issuance of the 2029 Secured Notes, as if the funds had been borrowed onJanuary 1, 2020 and used to repay pre-acquisition debt; and (5) adjusts for the income tax effect using a tax rate of 25%. Financial and Performance Measures Financial Measures Revenues - As a full-service equipment provider, we generate revenue through renting, selling, assembling, upfitting, and servicing new and used heavy-duty trucks and cranes, as well as the sale of related parts. We also sell and rent specialized tools on an individual basis and in kits. Rental revenue is primarily comprised of revenues from rental agreements and freight charges billed to customers. For periods afterJanuary 1, 2021 , the Company records changes in estimated collectability directly against rental revenue. Equipment sales revenue reflects the value of vocational trucks and other equipment sold to customers. Parts and service revenue is derived from maintenance and repair services, light upfit services, and parts, tools and accessories sold directly to customers. Cost of Rental Revenue - Cost of rental revenue reflects repairs and maintenance costs of rental equipment, parts costs, labor and other overheads related to maintaining the rental fleet, and freight associated with the shipping of rental equipment. Depreciation of Rental Equipment - Depreciation of rental equipment is comprised of depreciation expense on the rental fleet. We allocate the cost of rental equipment generally over the rentable life of the equipment. The depreciation allocation is based upon estimated lives ranging from five to seven years. The cost of equipment is depreciated to an estimated residual value using the straight-line method. Cost of Equipment Sales - Cost of equipment sales reflects production and inventory costs associated with new units sold, parts costs, labor and other overheads related to production, and freight associated with the shipping and receiving of equipment and parts. Cost of equipment sales also includes the net book value of rental units sold. Selling, General and Administrative Expenses - Selling, general and administrative expenses include sales compensation, fleet licensing fees and corporate expenses, including salaries, stock-based compensation expense, insurance, advertising costs, professional services, and information technology costs. Amortization and Non-Rental Depreciation - Amortization expense relates to intangible assets such as customer lists, trade names, etc. Non-rental depreciation expense reflects the depreciation of property and equipment that is not part of the rental fleet. 31 -------------------------------------------------------------------------------- Transaction Expenses and Other - Transaction expenses and other include expenses directly related to the acquisition of businesses. These expenses generally are comprised of travel and out-of-pocket expenses and legal, accounting and valuation or appraisal fees incurred in connection with pre- and post-closure activities. We also include costs and expenses associated with post-acquisition integration activities related to the acquired businesses. Financing and Other Expense (Income) - Financing and other expense or income reflects the fees earned on customer arranged financing, financing income associated with sales-type lease activity, gains or losses resulting from insurance settlements, foreign currency gains and losses related to our Canadian operations, as well as other miscellaneous gains or losses from non-operating activities. Also included in financing and other expense/income are the unrealized remeasurement gains and losses related to our interest rate collar and redeemable warrants. Interest Expense - Interest expense consists of contractual interest expense on outstanding debt obligations, floorplan financing facilities, amortization of deferred financing costs and other related financing expenses. Income Tax Expense (Benefit) - We have net operating loss carryforward and disallowed interest deduction carryforward assets, which are generally available to be used to offset taxable income generated in future years. Due to limitations on the use of these carryforwards underU.S. federal and state income tax regulations, we record valuation allowances to reduce the carryforward assets to amounts that we estimate will be realized. Accordingly, income tax expense or benefit generally is comprised of changes to these valuation allowance estimates and does not reflect taxes on current period income (or tax benefit on current period losses). For these reasons, our effective tax rate differs from the federal statutory tax rate. Performance Measures We consider the following key operational measures when evaluating our performance and making day-to-day operating decisions: Average 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. Operating Segments Following the Acquisition, we modified our management structure and expanded from two reportable operating segments to three: Equipment Rental Solutions, Truck and Equipment Sales andAftermarket Parts and Services. Segment information provided within this Quarterly Report on Form 10-Q has been adjusted for all prior periods consistent with the current reportable segment presentation. Equipment Rental Solutions ("ERS") Segment - We own a broad range of new and used specialty equipment, including truck-mounted aerial lifts, cranes, service trucks, dump trucks, trailers, digger derricks and other machinery and equipment. As ofJune 30, 2021 , this equipment (the "rental fleet") is comprised of more than 8,800 units. The majority of our rental fleet can be used across a variety of end-markets, which coincides with the needs of many of our customers who operate in multiple end-markets. As is customary for equipment rental companies, we sell used equipment out of our rental fleet to end user customers. These sales are often made in response to specific customer requests. These sales offer customers an opportunity to buy well-maintained equipment with long remaining useful lives and enable us to effectively manage the age and mix of our rental fleet to match current market demand. We also employ Rental Purchase Options ("RPOs") on a select basis, which provide a buyout option with an established purchase price that decreases over time as rental revenue is collected. Customers are given credit against such purchase price for a portion of the 32 -------------------------------------------------------------------------------- amounts paid over the life of the rental, allowing customers the flexibility of a rental with the option to purchase at any time at a known price. Activities in our ERS segment consist of the rental and sale from the rental fleet, of the foregoing products. Truck and Equipment Sales ("TES") Segment - We offer a broad variety of new equipment for sale to be used across our end-markets, which can be modified to meet our customers' specific needs. We believe that our integrated production capabilities and extensive knowledge gained over a long history of selling equipment have established us as a trusted partner for customers seeking tailored solutions with short lead times. In support of these activities, we primarily employ a direct-to-customer sales model, leveraging our dedicated salesforce of industry and product managers, who are focused on driving national and local sales. We also opportunistically engage in the sale of used equipment purchased from third parties or received via trade-ins from new equipment sales customers. In all of these cases, we will sell used equipment directly to customers, rather than relying on auctions. Activities in our TES segment consist of the production and sale of new and used specialty equipment and vocational trucks, which includes equipment from leading original equipment manufacturers ("OEMs") across our end-markets, as well as our Load King© brand.Aftermarket Parts and Services ("APS") Segment - The APS segment includes the sale of specialized aftermarket parts, including captive parts related to our Load King© brand, used in the maintenance and repair of the equipment we sell and rent. Specialized tools, including stringing blocks, insulated hot stick, and rigging equipment, are sold or rented to customers on an individual basis or in packaged specialty kits. We also provide truck and equipment maintenance and repair services, which is executed throughout nationwide branch network and fleet of mobile technicians supported by our 24/7 call center based inKansas City, Missouri . Non-GAAP Financial Measures In this MD&A and in the Supplemental Pro Forma Information, we report certain financial measures that are not required by, or presented in accordance with, GAAP. We utilize these financial measures to manage our business on a day-to-day basis, and some of these measures are commonly used in our industry to evaluate performance. We believe these non-GAAP measures provide investors expanded insight to assess performance, in addition to the standard GAAP-based financial measures. Reconciliation of the most directly comparable GAAP measure to each non-GAAP measure that we refer to is included in this quarterly report on Form 10-Q. The following provides a description of the non-GAAP financial measures. Adjusted EBITDA Adjusted EBITDA is a non-GAAP financial performance measure that the Company uses to monitor its results 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, including the method by which the assets were acquired, and capital structures. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net loss determined in accordance with GAAP. Certain items excluded from Adjusted EBITDA are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax structure, as well as the historical costs of depreciable assets, none of which are reflected in Adjusted EBITDA. The Company's presentation of Adjusted EBITDA should not be construed as an indication that results will be unaffected by the items excluded from Adjusted EBITDA. The Company's computation of Adjusted EBITDA may not be identical to other similarly titled measures of other companies. The Company defines Adjusted EBITDA as net income or loss before interest expense, income taxes, depreciation and amortization, share-based compensation, and other items that the Company does not view as indicative of ongoing performance. The Company's Adjusted EBITDA includes an adjustment to exclude the effects of purchase accounting adjustments when calculating the cost of inventory and used equipment sold. When inventory or equipment is purchased in connection with a business combination, the assets are revalued to their current fair values for accounting purposes. The consideration transferred (i.e., the purchase price) in a business combination is allocated to the fair values of the assets as of the acquisition date, with amortization or depreciation recorded thereafter following applicable accounting policies; however, this may not be indicative of the actual cost to acquire inventory or new equipment that is added to product inventory or the rental fleets apart from a business acquisition. Additionally, the pricing of rental contracts and equipment sales prices for equipment is based on OEC, and the Company measures a rate of return from rentals and sales using OEC. The Company also includes an adjustment to remove the impact of accounting for certain of our rental contracts with customers containing a rental purchase option that are accounted for under GAAP as a sales-type lease. We include this adjustment because we believe continuing to reflect the transactions as an operating lease better reflects the economics of the transactions given our large portfolio of rental contracts. These, and other, adjustments to GAAP net income or loss that are applied to derive Adjusted EBITDA are specified by the Company's senior secured credit agreements. 33 -------------------------------------------------------------------------------- Although management evaluates and presents the Adjusted EBITDA non-GAAP measure for the reasons described herein, please be aware that this non-GAAP measure has limitations and should not be considered in isolation or as a substitute for revenue, operating income/loss, net income/loss, earnings/loss per share or any other comparable operating measure prescribed by GAAP. In addition, we may calculate and/or present this non-GAAP financial measure differently than measures with the same or similar names that other companies report, and as a result, the non-GAAP measure we report may not be comparable to those reported by others. Pro Forma Adjusted EBITDA We present Pro Forma Adjusted EBITDA as if the Acquisition had occurred onJanuary 1, 2020 . Refer to the reconciliation of pro forma combined net loss to Pro Forma Adjusted EBITDA for the three and six-month periods endedJune 30, 2021 and 2020 in the section entitled "Supplemental Pro Forma Information." Gross Profit Excluding Depreciation of Rental Equipment Gross profit excluding depreciation of rental equipment is a financial performance measure that we use to monitor our results from operations. We believe the exclusion of depreciation expense of the rental fleet provides a meaningful measure of financial performance because it provides useful information relating to profitability that reflects ongoing and direct operating expenses, such as freight costs and fleet maintenance costs, related to our rental fleet. Although management evaluates and presents this non-GAAP measure for the reasons described herein, please be aware that this non-GAAP measure has limitations and should not be considered in isolation or as a substitute for revenue, gross profit or any other comparable operating measure prescribed by GAAP. In addition, we may calculate and/or present this non-GAAP financial measure differently than measures with the same or similar names that other companies report, and as a result, the non-GAAP measure we report may not be comparable to those reported by others. Overview of Markets We continue to focus on four primary end markets: Transmission and Distribution, or T&D, Telecom, Rail, and Infrastructure. In the T&D end market, we continue to observe demand for renewable energy resulting in the development of new transmission lines as well as repair projects to address advanced-age transmission and distribution grids to replace existing lines and poles. These factors resulted in continued demand from our customers of the Company's products and services. Telecom, specifically the roll-out of 5G, has seen some positive trends over the last year and half. Our existing T&D related contactor customers are expected to deliver the roll-out, and our existing equipment portfolio aligns well with the needs of this market. Rail investment, both in the freight and commuter markets, remains robust. The existing rail infrastructure is aged and in need of maintenance. Infrastructure also provides potential growth opportunities as seen by the major road and bridge maintenance work experienced acrossthe United States . Uncertainty remains regarding emerging variant strains of COVID-19, and regarding the length of time it will take for the COVID-19 pandemic to subside, including the time it will take for vaccines to be broadly distributed and accepted inthe United States and the rest of the world, and the effectiveness of such vaccines in slowing or stopping the spread of COVID-19 and mitigating the economic effects of the pandemic. The Company serves critical infrastructure sectors that have been identified by theUnited States Cybersecurity and Infrastructure Security Agency ("CISA") as vital to theU.S. , and the Company has continued to meet the needs of 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. The unprecedented nature of the COVID-19 pandemic continues to make it difficult to predict our future business and financial performance. Consolidated Operating Results The consolidated operating results presented below for the three and six months endedJune 30, 2021 include the results ofCustom Truck LP fromApril 1, 2021 toJune 30, 2021 . The consolidated operating results for the three and six months endedJune 30, 2020 represent those ofNesco Holdings before the acquisition ofCustom Truck LP and, therefore, are not comparable. 34 --------------------------------------------------------------------------------
Three Months Ended Six Months Ended June 30, June 30, (in $000s) 2021 % of revenue 2020 % of revenue 2021 % of revenue 2020 % of revenue Rental revenue$ 98,539 26.3%$ 46,984 68.6%$ 146,828 32.4%$ 97,978 65.2% Equipment sales 247,675 66.0% 10,400 15.2% 265,662 58.6% 27,070 18.0% Parts sales and services 28,897 7.7% 11,097 16.2% 40,920 9.0% 25,176 16.8% Total revenue 375,111 100.0% 68,481 100.0% 453,410 100.0% 150,224 100.0% Cost of revenue, excluding rental equipment depreciation 285,242 76.0% 32,443 47.4% 325,478 71.8% 72,671 48.4% Depreciation of rental equipment 43,179 11.5% 19,696 28.8% 61,023 13.5% 39,808 26.5% Gross profit 46,690 12.4% 16,342 23.9% 66,909 14.8% 37,745 25.1% Operating expenses 90,122 13,823 113,395 28,430 Operating (loss) income (43,432) 2,519 (46,486) 9,315 Other expense 79,360 16,732 100,123 38,767 Loss before income taxes (122,792) (14,213) (146,609) (29,452) Income tax expense (benefit) 6,564 (1,063) 10,654 (333) Net loss$ (129,356) $ (13,150) $ (157,263) $ (29,119) Total Revenue. The increase in total revenue in the three and six months endedJune 30, 2021 compared to the same periods of the prior year was driven by the addition ofCustom Truck LP's revenues to our operating results. The acquisition ofCustom Truck LP added a new equipment production and sales line of business, which we report under our TES segment. Equipment sales revenue for the prior year includes Nesco's sales of new units in those periods, however, this activity was not significant relative to the current year. The increase in equipment sales revenue for the three and six months endedJune 30, 2021 of$237.3 million and$238.6 million , respectively, was driven by the contribution ofCustom Truck LP's whole goods sales business, with sales of new equipment comprising 86.9% of equipment sales revenue in the second quarter of 2021 (83.8% of equipment sales revenue for the six months ended) as compared to new sales revenue of 52.1% of equipment sales revenue in the second quarter of 2020 (48.0% for the six month period). The increase in parts and services revenue for the three and six months endedJune 30, 2021 of$17.8 million and$15.7 million , respectively, was driven by the contribution ofCustom Truck LP's parts sales and heavy equipment service business. Rental revenue, which increased$51.6 million in the second quarter of 2021 ($48.9 million for the six month period) when compared to the corresponding prior periods, is the result of the addition ofCustom Truck LP's rental fleet comprising approximately 4,300 rentable units, bringing our total rentable fleet level to more than 8,800 units. Cost of Revenue. Cost of revenue, excluding rental equipment depreciation of$43.2 million , was$285.2 million in the second quarter of 2021, representing an increase of$252.8 million compared to the second quarter of 2020. For the six months endedJune 30, 2021 , cost of revenue, excluding rental equipment depreciation of$61.0 million , was$325.5 million , representing an increase of$252.8 million compared to the same period in 2020. The primary driver of the increase in total cost of revenue of$276.3 million and$274.0 million in the three and six months endedJune 30, 2021 , respectively, was the addition ofCustom Truck LP's whole goods sales business. The cost of sales of new equipment represented approximately$194.8 million and$201.7 million of total cost of revenue in the three and six months endedJune 30, 2021 , respectively. Operating Expenses. Operating expenses for the three months endedJune 30, 2021 increased$76.3 million and for the six months endedJune 30, 2021 increased$85.0 million compared to the same periods in 2020. The primary drivers of the increases are related to additional selling, general and administrative expenses related to operating a larger business as a result of the Acquisition and the expenses related to closing the Acquisition and business integration costs. Certain expenses directly related to the Acquisition and Related Financing Transactions are not expected to recur in future periods including legal and insurance fees aggregating$10.2 million . Other Expense. Other expense for the three and six months endedJune 30, 2021 increased$62.6 million and$61.4 million , respectively, compared to the same periods in 2020. We recognized loss on extinguishment of debt in the amount of$61.7 million in the second quarter of 2021 directly related to the refinancing of Nesco's asset-based revolving credit facility and senior secured notes in connection with the Acquisition. Interest expense for the three and six months endedJune 30, 2021 increased$3.8 million (or 23.7%) and$2.7 million (or 8.3%), respectively, as a result of the Acquisition and Related Financing Transactions, which increased our consolidated debt outstanding by$754.7 million compared toJune 30, 2020 . 35 -------------------------------------------------------------------------------- Income Tax Expense (Benefit). The Company's effective tax rate for the six months endedJune 30, 2021 of negative 7.3%, differs from theU.S. federal statutory tax rate due primarily to the recording of the valuation allowance. Income tax benefit in the six months endedJune 30, 2020 relates to changes in the valuation allowance. Net Loss. Net loss was$129.4 million for the three months endedJune 30, 2021 compared to net loss of$13.2 million for the same period of the prior year. Net loss was$157.3 million for the six months endedJune 30, 2021 compared to net loss of$29.1 million for the same period of the prior year. In both periods, the addition ofCustom Truck LP and the significant expenses incurred and recognized directly related to the Acquisition and Related Financing Transactions were the primary drivers of the increases to net loss. Financial and Operating Performance The operating performance metrics presented below for the three and six months endedJune 30, 2021 include the results ofCustom Truck LP fromApril 1, 2021 toJune 30, 2021 . The operating performance metrics presented below for the three and six months endedJune 30, 2020 represent those ofNesco Holdings before the acquisition ofCustom Truck LP and, therefore, are not comparable. 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 the following measurements: average OEC on rent, fleet utilization, and OEC on rent yield. The table below presents these key measures. Three Months Ended Six Months Ended June 30, June 30, (in $000s) 2021 2020 change (%) 2021 2020 change (%) Average OEC on rent(a)$ 1,084,709 $ 461,058 $623,651 135.3%$ 792,325 $ 480,407 $311,918 64.9 Fleet utilization(b) 81% 71% 10% 14% 80% 74% 6% 8% OEC on rent yield(c) 38% 36% 2% 4% 37% 36% 1% 2% Sales order backlog (as of June 30, 2021)(d)$ 222,661 n/a (a) 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. (b) 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 OEC. (c) OEC on rent yield ("ORY") is a measure of return realized by our rental fleet during the 12-month period. ORY is calculated as rental revenue (excluding freight recovery and ancillary fees) during the stated period divided by the Average OEC on rent for the same period. For periods less than 12 months, the ORY is adjusted to an annualized basis. (d) Sales order backlog consists of purchase orders received for products expected to be shipped within the next 12 months, although shipment dates are subject to change due to design modifications or changes in other customer requirements. Order backlog should not be considered an accurate measure of future net sales. Average OEC on Rent. The increase in Average OEC on rent for the three and six months endedJune 30, 2021 compared to the same periods in 2020 was driven by the addition ofCustom Truck LP's rental fleet. Fleet Utilization. Fleet utilization improved for the three and six months endedJune 30, 2021 compared to the same periods in 2020 as project work and rental demand rebounded following the impact of the COVID-19 global health pandemic that affected rental volume in 2020. OEC on Rent Yield. The increase in ORY was driven by the addition of theCustom Truck LP rental fleet and its impact to the mix of equipment types on rent, as this fleet has lower OEC unit costs. Sales Order Backlog. Sales order backlog consists of customer orders placed for customized and stock equipment and relates to the addition ofCustom Truck LP's new equipment sales business. 36 -------------------------------------------------------------------------------- Adjusted EBITDA The Adjusted EBITDA Reconciliation presented below for the three and six months endedJune 30, 2021 include the results ofCustom Truck LP fromApril 1, 2021 toJune 30, 2021 . The Adjusted EBITDA Reconciliation for the three and six months endedJune 30, 2020 represent those ofNesco Holdings and are not comparable. Three Months Ended June 30, Six Months Ended June 30, (in $000s) 2021 2020 2021 2020 Net income (loss)$ (129,356) $ (13,150) $ (157,263) $ (29,119) Interest expense 17,602 15,949 32,508 31,963 Income tax expense 6,564 (1,063) 10,654 (333) Depreciation and amortization 60,062 21,358 79,163 43,126 EBITDA (45,128) 23,094 (34,938) 45,637 Adjustments: Non-cash purchase accounting impact (1) 21,387 178 21,440 1,095 Transaction and process improvement costs (2) 24,601 1,639 35,345 3,718 Loss on extinguishment of debt (3) 61,695 - 61,695 - Sales-type lease adjustment (4) (510) - (510) - Share-based payments (5) 7,162 453 7,860 1,012 Change in fair value of derivative and warrants (6) 1,034 804 6,880 6,767 Adjusted EBITDA$ 70,241 $ 26,168 $ 97,772 $ 58,229 (1) Represents the non-cash impact of purchase accounting, net of accumulated depreciation, on the cost of equipment and inventory sold. The equipment and inventory acquired received a purchase accounting step-up in basis, which is a non-cash adjustment to the equipment cost pursuant to our credit agreement. (2) Represents transaction costs related to acquisitions of businesses. These expenses are comprised of professional consultancy, legal, tax and accounting fees. Also included are expenses associated with the integration of acquired businesses. (3) Loss on extinguishment of debt represents special charges, which are not expected to recur. Such charges are adjustments pursuant to our credit agreement. (4) Represents the impact of sales-type lease accounting for certain leases containing rental purchase options ("RPOs"), as the application of sales-type lease accounting is not deemed to be representative of the ongoing cash flows of the underlying rental contracts. The adjustments are made pursuant to our credit agreement. (5) Represents non-cash share-based compensation expense associated with the issuance of stock options and restricted stock units. (6) Represents the charge to earnings for our interest rate collar and the change in fair value of the liability for warrants. Operating Results by Segment The operating results by segment information presented below for the three and six months endedJune 30, 2021 includeCustom Truck LP fromApril 1, 2021 toJune 30, 2021 . The operating results by segment information for the three and six months endedJune 30, 2020 include only those ofNesco Holdings and are not comparable. Equipment Rental Solutions (ERS) Segment Three Months Ended Six Months Ended June 30, June 30, (in $000s) 2021 2020 2021 2020 Rental revenue$ 95,081 $ 43,025 $ 139,811 $ 90,078 Equipment sales 32,555 4,982 43,040 14,075 Total revenue 127,636 48,007 182,851 104,153 Cost of rental revenue 27,524 13,236 43,061 26,174 Cost of equipment sales 34,529 3,536 41,269 11,264 Depreciation of rental equipment 42,192 18,559 59,077 37,535 Total cost of revenue 104,245 35,331 143,407 74,973 Gross profit$ 23,391 $ 12,676 $ 39,444 $ 29,180 Total Revenue. Rental revenue increased in the second quarter of 2021 and for the six month period, when compared to the corresponding prior periods, as a result of the addition ofCustom Truck LP's rental fleet comprising approximately 4,300 rentable units. Additionally, rental revenue was impacted by the adoption of ASU 2016-02, Leases ("Topic 842"), effectiveJanuary 1, 2021 . In 37 -------------------------------------------------------------------------------- accordance with the collectability provisions of Topic 842, effectiveJanuary 1, 2021 , rental revenue for both the three and six months endedJune 30, 2021 includes$6.0 million in estimated losses related to operating lease receivables from rental customers. During the three and six months endedJune 30, 2020 , the Company recognized bad debt expense of$0.6 million and$1.3 million , respectively, within selling, general and administrative expenses in its consolidated statements of operations that would have been recorded as reductions to rental revenue had the provisions of Topic 842 been applied to those periods. Sales of rental equipment increased due to the greater number of customer requested buys in the period, driven in part by the addition ofCustom Truck LP and sales of units from its rental fleet. Additionally, we continued to make selective divestitures of under-utilized and aging fleet equipment. Cost of Revenue. The increase in cost of revenue, excluding depreciation, in the second quarter of 2021 and for the six month period when compared to the corresponding prior periods is primarily due to costs related to increased sales of rental equipment. Depreciation. Depreciation of our rental fleet increased in the second quarter of 2021 and for the six month period when compared to the corresponding prior periods as a direct result of the addition of the rental fleet fromCustom Truck LP , compared to the same periods in 2020. Gross Profit. Rental gross profit excluding depreciation of rental equipment of$42.2 million , was$67.6 million for the three months endedJune 30, 2021 , which represents a rental gross profit margin improvement of 1.9% compared to the second quarter of 2020. Rental gross profit excluding depreciation of rental equipment of$59.1 million , was$96.8 million , for the six months endedJune 30, 2021 , which represents a rental gross profit margin decline of 1.7% compared to the prior year period. Gross profit from sales of rental equipment for the three and six months endedJune 30, 2021 was negative$2.0 million and$1.8 million , respectively, and was impacted by purchase accounting for the mark-up to fair values of certainCustom Truck LP rental fleet units sold. The factors discussed above resulted in gross profit in our ERS segment of$23.4 million and$39.4 million for the three and six months endedJune 30, 2021 , respectively. Truck and Equipment Sales (TES) Segment Three Months Ended Six Months Ended June 30, June 30, (in $000s) 2021 2020 2021 2020 Equipment sales$ 215,120 $ 5,418 $ 222,622 $ 12,995 Cost of equipment sales 194,810 4,777 201,735 11,431 Gross profit$ 20,310 $ 641 $ 20,887 $ 1,564 Total Revenues. The acquisition ofCustom Truck LP added a new equipment production and sales line of business. Revenue for the prior year periods represents Nesco's sales of new units in those periods. The sale of new units was not a significant component of the Company's business prior to theCustom Truck LP acquisition. Cost of Equipment Sales. Cost of equipment sales increased in line with the addition ofCustom Truck LP's whole goods production and sale business. Gross Profit. Gross margin for the three and six months endedJune 30, 2021 was 9.4%. This compares to gross margin for the comparable prior periods of 11.8% and 12.0%, respectively. Gross margins in the second quarter of 2021 and year-to-date 2021 were impacted by higher than expected freight costs, as well as purchase accounting for the mark-up ofCustom Truck LP's new equipment inventory to fair value. The factors discussed above resulted in gross profit in our TES segment of$20.3 million and$20.9 million for the three and six months endedJune 30, 2021 , respectively. 38 --------------------------------------------------------------------------------
Three Months Ended Six Months Ended June 30, June 30, (in $000s) 2021 2020 2021 2020 Rental revenue$ 3,458 $ 3,959 $ 7,017 $ 7,900 Parts and services revenue 28,897 11,097 40,920 25,176 Total revenue 32,355 15,056 47,937 33,076 Cost of revenue 28,379 10,894 39,413 23,802 Depreciation of rental equipment 987 1,137 1,946 2,273 Total cost of revenue 29,366 12,031 41,359 26,075 Gross profit$ 2,989 $ 3,025 $ 6,578 $ 7,001 Total Revenues. The increase in APS segment revenue in the second quarter of 2021 and for the six month period when compared to the corresponding prior periods, is the result of the addition ofCustom Truck LP's aftermarket parts and distribution and aftermarket repair services business. Rentals of parts, tools and accessories decreased$0.5 million (12.7%) in the second quarter of 2021 and$0.9 million (11.2%) in the six month period in 2021 compared to the corresponding prior periods due to the impact of severe heat acrossNorth America impacting new project starts. Cost of Revenue. Cost of revenue increased in line with the addition ofCustom Truck LP's aftermarket parts distribution and aftermarket repair services business. Gross Profit. Total segment gross profit was impacted by the effect of purchase accounting for the mark-up ofCustom Truck LP's parts inventories to fair value. The factors discussed above resulted in gross profit in our APS segment of$3.0 million and$6.6 million for the three and six months endedJune 30, 2021 , respectively. 39 -------------------------------------------------------------------------------- Supplemental Pro Forma Information As result of the Acquisition and Related Financing Transactions, we believe presenting supplemental pro forma financial information is beneficial to the readers of our financial statements. The following table sets forth key metrics used by management to run our business on a pro forma and combined basis as if the Acquisition and Related Financing Transactions had occurred onJanuary 1, 2020 . Refer to the information below for a full reconciliation of the statements of operations. Summary Pro Forma and Operational Data Three Months Ended Six Months Ended June 30, June 30, (in $000s) 2021 2020 2021 2020 Revenue$ 375,111 $ 294,506 $ 769,881 $ 648,345 Gross profit$ 56,078 $ 43,716 $ 139,406 $ 102,815 Net loss$ (57,613) $ (18,602) $ (51,284) $ (117,196) Adjusted EBITDA$ 70,241 $ 63,998 $ 143,106 $ 137,547 Fleet and Operational Metrics: Average OEC on rent$ 1,084,709 $ 956,589 $ 1,066,318 $ 1,007,173 Fleet utilization 81 % 71 % 80 % 74 % OEC on rent yield 38 % 38 % 37 % 38 %
Order backlog (as of period end)
Pro Forma Financial Statements The following pro forma information has been prepared in accordance with Article 11 of Regulation S-X, "Pro Forma Financial Information," as amended by theSecurities and Exchange Commission's Final Rule Release No. 33-10786, "Amendments to Financial Disclosures About Acquired and Disposed Businesses," as adopted onMay 21, 2020 ("Article 11"). The amended Article 11 became effective onJanuary 1, 2021 . The pro forma combined statements of operations for the three months endedJune 30, 2020 and the six months endedJune 30, 2021 and 2021 combine the consolidated statements of operations ofNesco Holdings andCustom Truck LP , giving effect to the following items as if they had occurred onJanuary 1, 2020 : i.the sale of the Company's common stock, proceeds from which were used for the Acquisition; ii.the extinguishment of Nesco's asset-based revolving credit facility (the "2019 Credit Facility") and its 10% Senior Secured Second Lien Notes due 2024 (the "2024 Secured Notes") and the contemporaneous issuance of the 2029 Secured Notes and borrowings under the ABL Facility, proceeds from which were used for the Acquisition; and iii.the estimated effects of the acquisition ofCustom Truck LP , inclusive of the estimated effects of debt repaid. The adjustments presented in the following pro forma financial information have been identified and presented to provide relevant information necessary for an accurate understanding of the combined company following the transactions and events described above. The pro forma financial information set forth below is based upon available information and assumptions that we believe are reasonable and is for illustrative purposes only. The financial results may have been different if the transactions described above had been completed sooner. You should not rely on the pro forma financial information as being indicative of the historical results that would have been achieved if these transactions and events had been completed as ofJanuary 1, 2020 . The pro forma combined financial information below should be read in conjunction with the condensed consolidated financial statements and related notes of the Company included elsewhere in this Quarterly Report on Form 10-Q. All pro forma adjustments and their underlying assumptions are described more fully below. During the preparation of these pro forma combined financial statements, we assessed whether there were any material differences between the accounting policies of the Company andCustom Truck LP . The assessment performed did not identify any material differences and, as such, these pro forma combined financial statements do not adjust for or assume any differences in accounting policies between the two entities. 40 -------------------------------------------------------------------------------- The following pro forma combined financial information and associated notes are based on the historical financial statements ofNesco Holdings andCustom Truck LP . The pro forma combined statements of operations for periods indicated below are based on, derived from, and should be read in conjunction with, the Company's historical financial statements. Pro Forma Combined Statements of Operations - Three Months EndedJune 30, 2021 Custom Truck One Source, Pro Forma Pro Forma (in $000s) Inc. Adjustmentsa Combined Rental revenue$ 98,539 $ -$ 98,539 Equipment sales 247,675 - 247,675 Parts sales and services 28,897 - 28,897 Total revenue 375,111 - 375,111 Cost of revenue 285,242 (9,388) b 275,854 Depreciation of rental equipment 43,179 - 43,179 Total cost of revenue 328,421 (9,388) 319,033 Gross profit 46,690 9,388 56,078 Selling, general and administrative 51,264 - 51,264 Amortization 13,332 - 13,332 Non-rental depreciation 951 - 951 Transaction expenses and other 24,575 (24,575) c - Total operating expenses 90,122 (24,575) 65,547 Operating income (loss) (43,432) 33,963 (9,469) Loss on extinguishment of debt 61,695 (61,695) d - Interest expense, net 19,723 - 19,723 Finance and other expense (income) (2,058) - (2,058) Total other expense 79,360 (61,695) 17,665 Income (loss) before taxes (122,792) 95,658 (27,134) Taxes 6,564 23,915 e 30,479 Net income (loss)$ (129,356) $ 71,743 $ (57,613) a.The pro forma adjustments give effect to the following as if they occurred onJanuary 1, 2020 : (i) the Acquisition and (ii) extinguishment ofNesco Holdings' 2019 Credit Facility and the 2024 Secured Notes repaid in connection with the Acquisition. The adjustments also give effect to transaction expenses directly attributable to the Acquisition. b.Represents the elimination from cost of revenue, of the run-off of the estimated step-up in fair value of inventory acquired that was recognized in the Company's consolidated financial statements for the three months endedJune 30, 2021 . The impact of the step-up is reflected as an adjustment to the comparable prior period (e.g.June 30, 2020 ) as if the Acquisition had occurred onJanuary 1, 2020 . c.Represents the elimination of transaction expenses recognized in the Company's consolidated financial statements for the three months endedJune 30, 2021 . The expenses were directly attributable to the Acquisition and are reflected as adjustments to the comparable prior period (e.g.June 30, 2020 ) as if the Acquisition had occurred onJanuary 1, 2020 . d.Represents the elimination of the loss on extinguishment of debt recognized in the Company's consolidated financial statements for the three months endedJune 30, 2021 as though the repayment of the 2019 Credit Facility and the 2024 Secured Notes had occurred onJanuary 1, 2020 . e.Reflects the adjustment to recognize the tax impacts of the pro forma adjustments for which a tax expense is recognized using a statutory tax rate of 25%. 41
-------------------------------------------------------------------------------- Pro Forma Combined Statements of Operations - Three Months EndedJune 30, 2020 Custom Truck Pro Forma Pro Forma (in $000s) Nesco Holdings LP Adjustmentsa Combined
Rental revenue$ 46,984 $ 49,103 $ -$ 96,087 Equipment sales 10,400 157,392 - 167,792 Parts sales and services 11,097 19,530 - 30,627 Total revenue 68,481 226,025 - 294,506 Cost of revenue 32,443 163,219 8,858 b 204,520 Depreciation of rental equipment 19,696 24,442 2,132 c 46,270 Total cost of revenue 52,139 187,661 10,990 250,790 Gross profit 16,342 38,364 (10,990) 43,716 Selling, general and administrative 11,754 27,341 - 39,095 Amortization 772 1,985 3,595 d 6,352 Non-rental depreciation 28 1,190 (354) d 864 Transaction expenses and other 1,269 - - 1,269 Total operating expenses 13,823 30,516 3,241 47,580 Operating income (loss) 2,519 7,848 (14,231) (3,864) Loss on extinguishment of debt - - - - Interest expense, net 15,949 13,237 (10,529) e 18,657 Finance and other expense (income) 783 (2,713) - (1,930) Total other expense 16,732 10,524 (10,529) 16,727 Income (loss) before taxes (14,213) (2,676) (3,702) (20,591) Taxes (1,063) - (926) f (1,989) Net income (loss)$ (13,150) $ (2,676) $ (2,776) $ (18,602) a.The pro forma adjustments give effect to the following as if they occurred onJanuary 1, 2020 : (i) the Acquisition, (ii) the extinguishment ofNesco Holdings' 2019 Credit Facility the 2024 Secured Notes repaid in connection with the Acquisition and (iii) the extinguishment of the outstanding borrowings ofCustom Truck LP's credit facility and term loan that was repaid on the closing of the Acquisition. b.Represents adjustments to cost of revenue for (i) the run-off of the estimated step-up in fair value of inventory acquired and (ii) a reduction to depreciation expense for the difference between historical depreciation and estimated depreciation of the preliminary fair value of the property and equipment. c.Represents the adjustment for depreciation of rental fleet relating to the estimated mark-up to fair value from purchase accounting as a result of the Acquisition. d.Represents the differential in other amortization and depreciation related to the estimated fair value of the identified intangible assets and non-rental property and equipment from purchase accounting as a result of the Acquisition. e.Reflects the differential in interest expense, inclusive of amortization of capitalized debt issuance costs, related to the Company's debt structure after the Acquisition as though the following had occurred onJanuary 1, 2020 : (i) borrowings under the ABL Facility; (ii) repayment of the 2019 Credit Facility; (iii) repayment of the 2024 Secured Notes; (iv) repayment ofCustom Truck LP's borrowings under its revolving credit and term loan facility; and (v) borrowing under the 2029 Secured Notes. f.Reflects the adjustment to recognize the tax impacts of the pro forma adjustments for which a tax expense is recognized using a statutory tax rate of 25%. 42
-------------------------------------------------------------------------------- Pro Forma Combined Statements of Operations - Six Months EndedJune 30, 2021 Custom Truck Pro Forma Pro Forma (in $000s) Nesco Holdings LP Adjustmentsa Combined
Rental revenue$ 90,561 $ 108,240 $ -$ 198,801 Equipment sales 27,572 484,045 - 511,617 Parts sales and services 23,226 36,237 - 59,463 Total revenue 141,359 628,522 - 769,881 Cost of revenue 74,924 470,387 (1,342) b 543,969 Depreciation of rental equipment 33,358 45,891 7,257 c 86,506 Total cost of revenue 108,282 516,278 5,915 630,475 Gross profit 33,077 112,244 (5,915) 139,406 Selling, general and administrative 29,943 67,798 - 97,741 Amortization 8,508 1,990 9,170 d 19,668 Non-rental depreciation 42 2,241 (894) d 1,389 Transaction expenses and other 28,539 11,738 (40,277) e - Total operating expenses 67,032 83,767 (32,001) 118,798 Operating income (loss) (33,955) 28,477 26,086 20,608 Loss on extinguishment of debt 61,695 - (61,695) f - Interest expense, net 32,054 12,567 (9,042) g 35,579 Finance and other expense (income) 6,929 (5,476) - 1,453 Total other expense 100,678 7,091 (70,737) 37,032 Income (loss) before taxes (134,633) 21,386 96,823 (16,424) Taxes 10,084 570 24,206 h 34,860 Net income (loss)$ (144,717) $ 20,816 $ 72,617 $ (51,284) a.The pro forma adjustments give effect to the following as if they occurred onJanuary 1, 2020 : (i) the Acquisition, (ii) the extinguishment ofNesco Holdings' 2019 Credit Facility the 2024 Secured Notes repaid in connection with the Acquisition and (iii) the extinguishment of the outstanding borrowings ofCustom Truck LP's credit facility and term loan that was repaid on the closing of the Acquisition. b.Represents adjustments to cost of revenue for a reduction to depreciation expense for the difference between historical depreciation and estimated depreciation of the preliminary fair value of the property and equipment. c.Represents the adjustment for depreciation of rental fleet relating to the estimated mark-up to fair value from purchase accounting as a result of the Acquisition. d.Represents the differential in other amortization and depreciation related to the estimated fair value of the identified intangible assets and non-rental property and equipment from purchase accounting as a result of the Acquisition. e.Represents the elimination of transaction expenses recognized in the Company's consolidated financial statements for the six months endedJune 30, 2021 . The expenses were directly attributable to the Acquisition and are reflected as adjustments to the comparable prior period (e.g.June 30, 2020 ) as if the Acquisition had occurred onJanuary 1, 2020 . f.Represents the elimination of the loss on extinguishment of debt recognized in the Company's consolidated financial statements for the six months endedJune 30, 2021 as though the repayment of the 2019 Credit Facility and the 2024 Secured Notes had occurred onJanuary 1, 2020 . g.Reflects the differential in interest expense, inclusive of amortization of capitalized debt issuance costs, related to the Company's debt structure after the Acquisition as though the following had occurred onJanuary 1, 2020 : (i) borrowings under the ABL Facility; (ii) repayment of the 2019 Credit Facility; (iii) repayment of the 2024 Secured Notes; (iv) repayment ofCustom Truck LP's borrowings under its revolving credit and term loan facility; and (v) borrowing under the 2029 Secured Notes. h.Reflects the adjustment to recognize the tax impacts of the pro forma adjustments for which a tax expense is recognized using a statutory tax rate of 25%. 43
-------------------------------------------------------------------------------- Pro Forma Combined Statements of Operations - Six Months EndedJune 30, 2020 Custom Truck Pro Forma Pro Forma (in $000s) Nesco Holdings LP Adjustmentsa Combined
Rental revenue$ 97,978 $ 104,738 $ -$ 202,716 Equipment sales 27,070 354,537 - 381,607 Parts sales and services 25,176 38,846 - 64,022 Total revenue 150,224 498,121 - 648,345 Cost of revenue 72,671 362,184 17,719 b 452,574 Depreciation of rental equipment 39,808 49,568 3,580 c 92,956 Total cost of revenue 112,479 411,752 21,299 545,530 Gross profit 37,745 86,369 (21,299) 102,815 Selling, general and administrative 24,193 59,170 - 83,363 Amortization 1,463 4,398 6,762 d 12,623 Non-rental depreciation 53 2,375 (706) d 1,722 Transaction expenses and other 2,721 - 40,277 e 42,998 Total operating expenses 28,430 65,943 46,333 140,706 Operating income (loss) 9,315 20,426 (67,632) (37,891) Loss on extinguishment of debt - - 61,695 f 61,695 Interest expense, net 31,963 32,937 (24,676) g 40,224 Finance and other expense (income) 6,804 (2,922) - 3,882 Total other expense 38,767 30,015 37,019 105,801 Income (loss) before taxes (29,452) (9,589) (104,651) (143,692) Taxes (333) - (26,163) h (26,496) Net income (loss)$ (29,119) $ (9,589) $ (78,488) $ (117,196) a.The pro forma adjustments give effect to the following as if they occurred onJanuary 1, 2020 : (i) the Acquisition, (ii) the extinguishment ofNesco Holdings' 2019 Credit Facility and the 2024 Secured Notes repaid in connection with the Acquisition and (iii) the extinguishment of the outstanding borrowings ofCustom Truck LP's credit facility and term loan that was repaid on the closing of the Acquisition. b.Represents adjustments to cost of revenue for (i) the run-off of the estimated step-up in fair value of inventory acquired and (ii) a reduction to depreciation expense for the difference between historical depreciation and estimated depreciation of the preliminary fair value of the property and equipment. c.Represents the adjustment for depreciation of rental fleet relating to the estimated mark-up to fair value from purchase accounting as a result of the Acquisition. d.Represents the differential in other amortization and depreciation related to the estimated fair value of the identified intangible assets and non-rental property and equipment from purchase accounting as a result of the Acquisition. e.Represents transaction expenses directly attributable to the Acquisition as if the Acquisition had occurred onJanuary 1, 2020 . f.Represents the loss on extinguishment of debt as though the repayment of the 2019 Credit Facility and the 2024 Secured Notes had occurred onJanuary 1, 2020 . g.Reflects the differential in interest expense, inclusive of amortization of capitalized debt issuance costs, related to the Company's debt structure after the Acquisition as though the following had occurred onJanuary 1, 2020 : (i) borrowings under the ABL Facility; (ii) repayment of the 2019 Credit Facility; (iii) repayment of the 2024 Secured Notes; (iv) repayment ofCustom Truck LP's borrowings under its revolving credit and term loan facility; and (v) borrowing under the 2029 Secured Notes. h.Reflects the adjustment to recognize the tax impacts of the pro forma adjustments for which a tax expense is recognized using a statutory tax rate of 25%. 44 --------------------------------------------------------------------------------
Reconciliation of Pro Forma Net Loss to Pro Forma Adjusted EBITDA The following table provides a reconciliation of pro forma net loss to pro forma Adjusted EBITDA:
Three Months Ended Six Months Ended June 30, June 30, (in $000s) 2021 2020 2021 2020 Net income (loss)$ (57,613) $ (18,602) $ (51,284) $ (117,196) Interest expense 17,602 13,939 30,979 29,442 Income tax expense 30,479 (1,989) 34,860 (26,496) Depreciation and amortization 60,062 55,957 111,887 112,223 EBITDA 50,530 49,305 126,442 (2,027) Adjustments: - Non-cash purchase accounting impact 11,999 9,781 313 20,387 Transaction and process improvement costs 26 2,307 409 48,548 Loss on extinguishment of debt - - - 61,695 Sales-type lease adjustment (510) 886 645 256 Share-based payments 7,162 915 8,417 1,921 Change in fair value of derivative and warrants 1,034 804 6,880 6,767 Adjusted EBITDA$ 70,241 $ 63,998 $ 143,106 $ 137,547 45
-------------------------------------------------------------------------------- Liquidity and Capital Resources Our principal sources of liquidity include cash generated by operating activities and borrowings under revolving credit facilities as described below. We believe that our liquidity sources and operating cash flows are sufficient to address our operating, debt service and capital requirements over the next 12 months; however, we are continuing to monitor the impact of COVID-19 on our business and the financial markets. As ofJune 30, 2021 , we had$27.2 million in cash and cash equivalents compared to$3.4 million as ofDecember 31, 2020 . As ofJune 30, 2021 , we had$385.0 million of outstanding borrowings under our ABL Facility compared to$251.0 million of outstanding borrowing under the 2019 Credit Facility as ofDecember 31, 2020 . ABL Facility In connection with the Acquisition on the Closing Date 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 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. As ofJune 30, 2021 , borrowing availability under the ABL Facility was$355.2 million , and outstanding standby letters of credit were$3.7 million . Borrowings under the ABL Facility will bear interest at a floating rate, which, at Buyer's election, will be (a) in the case ofU.S. dollar denominated loans, either (i) the London Interbank Offered Rate ("LIBOR") plus an applicable margin or (ii) the base rate plus an applicable margin or (b) in the case of Canadian dollar denominated loans, the CDOR rate plus an applicable margin. The applicable margin varies based on Average Availability (as defined in the ABL Credit Agreement) from (x) with respect to base rate loans, 0.50% to 1.00% and (y) with respect to LIBOR loans and CDOR rate loans, 1.50% to 2.00%. The ability to draw under the ABL Facility or issue letters of credit thereunder is conditioned upon, among other things, delivery of prior written notice of a borrowing or issuance, as applicable, the ability to reaffirm the representations and warranties contained in the ABL Credit Agreement and the absence of any default or event of default under the ABL Facility. 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 onApril 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. The obligations under the ABL Facility are guaranteed byCapitol 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 aU.S. subsidiary and subject to certain other exceptions and to certain exceptions in the case of non- 46 -------------------------------------------------------------------------------- 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 eachSpecified 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$920.0 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 ofApril 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 onApril 15 andOctober 15 of each year, commencing onOctober 15, 2021 . Unless earlier redeemed, the 2029 Secured Notes will mature onApril 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. BeginningApril 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 toApril 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 47 -------------------------------------------------------------------------------- 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 toApril 15, 2024 , the Issuer may redeem during each calendar year up to 10% of the aggregate principal amount of the 2029 Secured Notes at a redemption price equal to 103% of the aggregate principal amount of the 2029 Secured Notes to be redeemed, together with accrued and unpaid interest, if any, to, but not including, the applicable redemption date; provided that in any given calendar year, any amount not previously utilized in any calendar year may be carried forward to subsequent calendar years. Subject to certain exceptions, the holders of the 2029 Secured Notes also have the right to require the Issuer to repurchase their 2029 Secured Notes upon the occurrence of a change in control, as defined in the Indenture, at an offer price equal to 101% of the principal amount of the 2029 Secured Notes plus accrued and unpaid interest, if any, to, but not including, the date of repurchase. In addition, if the Issuer or any of its restricted subsidiaries sells assets, under certain circumstances, the Issuer is required to use the net proceeds to make an offer to purchase the 2029 Secured Notes at an offer price in cash equal to 100% of the principal amount of the 2029 Secured Notes plus accrued and unpaid interest to, but not including, the repurchase date. In connection with any offer to purchase all or any of the 2029 Secured Notes (including a change of control offer and any tender offer), if holders of no less than 90% of the aggregate principal amount of the 2029 Secured Notes validly tender their 2029 Secured Notes, the Issuer or a third party is entitled to redeem any remaining 2029 Secured Notes at the price offered to each holder. Restrictive Covenants The Indenture contains covenants that limit the Issuer's (and certain of its subsidiaries') ability to, among other things: (i) incur additional debt or issue certain preferred stock; (ii) pay dividends, redeem stock or make other distributions; (iii) make other restricted payments or investments; (iv) create liens on assets; (v) transfer or sell assets; (vi) create restrictions on payment of dividends or other amounts by the Issuer to the Issuer's restricted subsidiaries; (vii) engage in mergers or consolidations; (viii) engage in certain transactions with affiliates; or (ix) designate the Issuer's subsidiaries as unrestricted subsidiaries. Events of Default The Indenture provides for customary events of default, including non-payment, failure to comply with covenants or other agreements in the Indenture and certain events of bankruptcy or insolvency. If an event of default occurs and continues with respect to the 2029 Secured Notes, the trustee or the holders of at least 30% in aggregate principal amount of the outstanding 2029 Secured Notes of such series may declare the entire principal amount of all the 2029 Secured Notes to be due and payable immediately (except that if such event of default is caused by certain events of bankruptcy or insolvency, the entire principal of the 2029 Secured Notes will become due and payable immediately without further action or notice). Floor Plan Financing Daimler Truck Financial The Company is party to the Wholesale Financing Agreement with Daimler Truck Financial (the "Daimler Facility") which bears interest at a rate of Prime plus 0.80% after an initial interest free period of up to 150 days. The total capacity under the Daimler Facility is$175.0 million . PACCAR The Company has an Inventory Financing Agreement withPACCAR Financial Corp that provides the Company with a line of credit of$50.0 million to finance inventory purchases of newPeterbilt and/or Kenworth trucks, tractors, and chassis. Amounts borrowed against this line of credit incur interest at a rate of LIBOR plus 2.4%.PNC Equipment Finance, LLC The Company has an Inventory Loan, Guaranty and Security Agreement (the "Loan Agreement") withPNC Equipment Finance, LLC . The Loan Agreement provides the Company with a$295.0 million revolving credit facility, which matures onAugust 25, 2022 and bears interest at a rate of LIBOR plus 3.05%. 48
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