Concrete Pumping Holdings, Inc.: Form 10-Q/A for the period ended Jul 31, 2022

You should read the following management’s discussion and analysis together with Concrete Pumping Holdings, Inc.’s (the “Company”, “we”, “us”, “our” or “Successor”) Unaudited Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report.

Restatement of Previously Issued Financial Statements

As discussed in Note 2, “Summary of Significant Accounting Policies,” we have restated our previously issued consolidated financial statements for the three and nine months ended July 31, 2022. Accordingly, Management's Discussion and Analysis of Financial Condition and Results of Operations have been revised for the effects of the restatement.

Cautionary Statement Concerning Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q/A constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects, and the potential impact of the COVID-19 pandemic on our business. These forward-looking statements may be identified by terminology such as “likely,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this Report are reasonable, we cannot guarantee future results.

The forward-looking statements contained in this Report are based on our current expectations and beliefs concerning future developments and their potential effects. These statements involve known and unknown risks, uncertainties (some of which are beyond our control) and other factors that may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the items in the following:

• the adverse effects of the coronavirus ("COVID-19") pandemic on our business, the economy and the markets we serve;
• the length and severity of, and the pace of recovery following, the COVID-19 pandemic;
• general economic and business conditions, which may affect demand for commercial, infrastructure, and residential construction;
• the adverse impact of recent inflationary pressures, global economic conditions and events related to these conditions, including the ongoing war in Ukraine and the COVID-19 pandemic, on our business, including significant increases in fuel costs;
• our ability to successfully implement our operating strategy;
• our ability to successfully identify, manage and integrate acquisitions;
• the restatement of our financial statements for the quarter ended July 31, 2022 and our ability to establish and maintain effective internal control over financial reporting, including our ability to remediate the existing material weakness in our internal controls;
• governmental requirements and initiatives, including those related to mortgage lending, financing or deductions, funding for public or infrastructure construction, land usage, and environmental, health, and safety matters;
• seasonal and inclement weather conditions, which impede the installation of ready-mixed concrete;
• the cyclical nature of, and changes in, the real estate and construction markets, including pricing changes by our competitors;
• our ability to maintain favorable relationships with third parties who supply us with equipment and essential supplies;
• our ability to retain key personnel and maintain satisfactory labor relations;
• disruptions, uncertainties or volatility in the credit markets that may limit our, our suppliers’ and our customers’ access to capital;
• personal injury, property damage, results of litigation and other claims and insurance coverage issues;
• our substantial indebtedness and the restrictions imposed on us by the terms of our indebtedness;
• the effects of currency fluctuations on our results of operations and financial condition;
• other factors as described in the section entitled “Risk Factors” in our Form 10-K filed with the SEC on January 12, 2022.

Our forward-looking statements speak only as of the date of this report or as of the date they are made, and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be considered.

Business Overview

The Company is a Delaware corporation headquartered in Denver, Colorado. The unaudited consolidated financial statements included herein include the accounts of Concrete Pumping Holdings, Inc. and its wholly owned subsidiaries including Brundage-Bone Concrete Pumping, Inc. (“Brundage-Bone”), Capital Pumping, LP (“Capital”), and Camfaud Group Limited (“Camfaud”), and Eco-Pan, Inc. (“Eco-Pan”).

As part of the Company’s business growth strategy and capital allocation policy, strategic acquisitions are considered opportunities to enhance our value proposition through differentiation and competitiveness. Depending on the deal size and characteristics of the M&A opportunities available, we expect to allocate capital for opportunistic M&A utilizing cash on the balance sheet and the revolving line of credit. In recent years and as further described below, we have successfully executed on this strategy, including (1) our fiscal 2018 acquisition of Richard O’Brien Companies and its affiliates, which solidified our presence in the Colorado and Phoenix, Arizona markets, (2) our fiscal 2019 acquisition of Capital, which provided us with complementary assets and operations and significantly expanded our geographic footprint and business in Texas, (3) our fiscal 2021 acquisition of Hi-Tech Concrete Pumping Services (“Hi-Tech”), which added complementary assets in our Texas market, (4) our fiscal 2022 acquisition of Pioneer Concrete Pumping Service, Inc. (“Pioneer”), which provided us with complementary assets and operations in both Georgia and Texas, and (5) our acquisition of Coastal Carolina Concrete Pumping, Inc. ("Coastal") in August of 2022, which expanded our operations in the Carolinas and Florida.

U.S. Concrete Pumping

All businesses operating within our U.S. Concrete Pumping segment are concrete pumping service providers in the United States ("U.S."). Their core business is the provision of concrete pumping services to general contractors and concrete finishing companies in the commercial, infrastructure and residential sectors. Equipment generally returns to a “home base” nightly and these companies do not contract to purchase, mix, or deliver concrete. As of July 31, 2022, this segment collectively has approximately 95 branch locations across 20 states with their corporate headquarters in Denver, Colorado.

In November 2021, the Company acquired the assets of Pioneer for the purchase consideration of $20.2 million, which added complementary assets in our Georgia and Texas markets. In September 2021, the Company acquired assets from Hi-Tech for the total purchase consideration of $12.3 million. This acquisition added complementary assets in our Texas market. In addition, the Company completed its greenfield expansion into Las Vegas during fiscal 2021.

U.S. Concrete Waste Management Services

Our U.S. Concrete Waste Management Services segment consists of our U.S. based Eco-Pan business. Eco-Pan provides industrial cleanup and containment services, primarily to customers in the construction industry. Eco-Pan uses containment pans specifically designed to hold waste products from concrete and other industrial cleanup operations. Eco-Pan has 18 operating locations across the U.S. with its corporate headquarters in Denver, Colorado.

U.K. Operations

Our U.K. Operations segment consists of our Camfaud, Premier and U.K. based Eco-Pan businesses. Camfaud is a concrete pumping service provider in the U.K. Their core business is primarily the provision of concrete pumping services to general contractors and concrete finishing companies in the commercial, infrastructure and residential sectors. Equipment generally returns to a “home base” nightly and does not contract to purchase, mix, or deliver concrete. Camfaud has approximately 30 branch locations throughout the U.K., with its corporate headquarters in Epping (near London), England. In addition, we have concrete waste management operations under our Eco-Pan brand name in the U.K. and currently operate from a shared Camfaud location.

Corporate

Our Corporate segment is primarily related to the intercompany leasing of real estate to certain of our U.S Concrete Pumping branches.

Impacts of Macroeconomic Factors and COVID-19 Recovery

Global economic challenges including the impact of the COVID-19 pandemic, the war in Ukraine, rising inflation, significant increases in fuel costs, supply-chain disruptions, and adverse labor market conditions have caused macroeconomic uncertainty and volatility in markets where we operate. For example, the COVID-19 pandemic rapidly changed market and economic conditions globally beginning in March 2020 and may continue to create significant uncertainty in the macroeconomic environment. To date, the COVID-19 pandemic has negatively impacted our revenue volumes primarily in the U.K. and certain markets in the U.S. As of the third quarter of fiscal 2022, revenue volumes have largely recovered in a number of our markets; however, the lingering impact from COVID-19 remains an issue and has contributed to a tight labor market that has impacted our operations in certain markets.

With respect to our financial condition, impairments may be recorded as a result of such events and circumstances, including those related to COVID-19 discussed above. As previously reported during fiscal 2020, the Company reported goodwill intangible charges, but no impairments were identified through July 31, 2022. The Company will continue to evaluate its goodwill and intangible assets in future quarters.

Furthermore, as referenced above, the war in Ukraine has had a global impact on the supply and price of fuel and has contributed to increased inflation around the world. While the Company has attempted to increase the rates per hour we charge for our services when possible to make up for our increased costs, rising fuel prices have had a material impact on our results of operations for the three and six-month periods ending July 31, 2022. We will continue to monitor and adapt our strategic approach as the crisis and its impacts persist.

Results of Operations

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36

Three Months Ended July 31, 2022

For the three months ended July 31, 2022, our net income was $13.0 million, as compared to net income of $4.6 million in same period a year ago. The improvement was due to (1) a 29.4% year-over-year increase in revenue due to recent acquisitions and organic growth and (2) a $7.2 million year-over-year change in fair value of warrant liabilities, which reflected a gain of $7.4 million in the third quarter of 2022 versus a gain of $0.3 million in the third quarter of fiscal 2021. These improvements were offset by increased labor costs and depreciation related to recent acquisitions, and increased fuel costs due to inflation.

Nine Months Ended July 31, 2022

For the nine months ended July 31, 2022, our net income was $20.1 million, as compared to a net loss of $18.5 million in same period a year ago. The improvement was due to (1) a 25.6% year-over-year increase in revenue due to recent acquisitions and organic growth, (2) a $15.5 million loss on extinguishment of debt recorded in the fiscal 2021 first quarter and (3) a $21.1 million year-over-year change in fair value of warrant liabilities, which reflected a gain of $9.9 million in the fiscal 2022 period as compared to expense of $11.2 million in the fiscal 2021 period. These improvements were offset by increased labor costs and depreciation related to recent acquisitions, increased fuel costs due to inflation described above as well as an income tax benefit of $2.5 million in fiscal 2022 compared to an income tax expense of $0.8 million in fiscal 2021.

Total Assets

Total assets increased from $792.7 million as of October 31, 2021 to $824.5 million as of July 31, 2022. The increase was primarily due to the acquisition of Pioneer.

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Revenue

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37

U.S. Concrete Pumping

Revenue for our U.S. Concrete Pumping segment increased by 33.3%, or $19.3 million, from the fiscal 2021 third quarter to the fiscal 2022 third quarter. For the nine months ended July 31, 2022, revenue for our U.S. Concrete Pumping segment increased by 27.4%, or $45.7 million, from the nine months ended July 31, 2021. The increase in revenue for both periods was attributable to (1) the acquisitions of Hi-Tech and Pioneer, which collectively contributed $7.2 million and $20.8 million of the increase for the three and nine-month periods ended July 31, 2022, respectively, and (2) robust organic improvements in most of our other markets as a result of higher volumes and rate per hour increases.

U.K. Operations

Revenue for our U.K. Operations segment increased by 14.0%, or $1.8 million, from the fiscal 2021 third quarter to the fiscal 2022 third quarter. Excluding the impact from foreign currency translation, revenue was up 28.4% year over year. For the nine months ended July 31, 2022, revenue for our U.K. Operations segment increased by 16.6%, or $5.7 million, from the nine months ended July 31, 2021. Excluding the impact from foreign currency translation, revenue was up 23.7% year over year. The increase in revenue during both periods was attributable to the continued recovery from COVID-19, which started in the fiscal 2021 first quarter, and rate per job increases across the U.K. region.

U.S. Concrete Waste Management Services

Revenue for the U.S. Concrete Waste Management Services segment increased by 26.6%, or $2.7 million, from the fiscal 2021 third quarter to the fiscal 2022 third quarter. For the nine months ended July 31, 2022, revenue for the U.S. Concrete Waste Management Services segment increased by 25.4%, or $7.0 million, from the nine months ended July 31, 2021. The increase in revenue during both periods was primarily due to organic growth, pricing improvements and continued recovery from the impacts of the pandemic.

Corporate

There was no change in revenue for our Corporate segment for the periods presented. All activity in our Corporate segment is related to the intercompany leasing of real estate to certain of our U.S. Concrete Pumping branches. This revenue is eliminated in consolidation through the Intersegment line included above.

Gross Margin

Gross margin for the fiscal 2022 third quarter declined 600 basis points from 46.1% in the fiscal 2021 third quarter to 40.1% in the fiscal 2022 third quarter. For the nine months ended July 31, 2022, gross margin was 40.2%, down 380 basis points from 44.0% in the same period of fiscal 2021. While we have seen continued improvements in pricing per hour, inflationary pressures seen throughout the U.S. and U.K., specifically around labor and fuel costs, drove the decline in gross margin.

General and Administrative Expenses

G&A expenses for the fiscal 2022 third quarter were $27.8 million, up $2.8 million from $25.0 million in the fiscal 2021 third quarter. As a percent of revenue, G&A expenses were 26.6% for the fiscal 2022 third quarter compared to 30.9% in the fiscal 2021 third quarter. The increase in G&A expenses was primarily due to higher labor and health insurance costs due to additional personnel that joined the Company as a result of the recent acquisitions. This was offset slightly by lower amortization of intangible assets expense of $1.2 million. Excluding amortization of intangible assets and stock-based compensation expense, G&A expenses were up $4.0 million year-over-year due to higher labor and health insurance costs.

G&A expenses for the first nine months of fiscal 2022 were $83.1 million, up $9.3 million from $73.8 million in the first nine months of fiscal 2021. As a percent of revenue, G&A expenses were 29.0% for the first nine months of fiscal 2022 compared to 32.4% in the same period a year ago. The increase in G&A expenses was primarily due to (1) higher health insurance and labor costs of approximately $7.3 million primarily due to additional personnel that joined the Company as a result of recent acquisitions, (2) an additional $2.0 million related to fluctuations in the GBP, and (3) higher other G&A-related expenses of $3.3 million, which primarily is from higher automotive, travel, meals and entertainment, office and rent expense due to recent acquisitions. This was offset slightly by lower amortization of intangible assets expense of $3.6 million and lower stock-based compensation expense of $1.1 million. Excluding amortization of intangible assets and stock-based compensation expense, G&A expenses were up $14.0 million year-over-year.

Change in Fair Value of Warrant Liabilities

During each of the three and nine-month periods ended July 31, 2022, we recognized a $7.2 million gain and a $21.1 million gain, respectively, on the fair value remeasurement of our liability-classified warrants. The changes seen in the fair value remeasurement of the public warrants for all periods presented is due to changes in the Company's share price during the respective periods.

Transaction Costs & Debt Extinguishment Costs

Transaction costs include expenses for legal, accounting, and other professionals that were engaged in connection with an acquisition. There were no significant transaction costs incurred during the three and nine-month periods ended July 31, 2022.

On January 28, 2021, we (1) closed on our private offering of $375.0 million in aggregate principal amount of senior secured second lien notes due 2026, (2) amended and restated our existing ABL Facility to provide up to $125.0 million (previously $60.0 million) of commitments and (3) repaid all outstanding indebtedness under our then-existing term loan agreement, dated December 6, 2018. The $15.5 million in debt extinguishment costs incurred relate to the write-off of all unamortized deferred debt issuance costs that were related to the fully paid term loan.

Interest Expense, Net

Interest expense, net for the three months ended July 31, 2022 was $6.5 million, up $0.3 million from $6.2 million in the third quarter of fiscal 2021. Interest expense, net for each of the nine month periods ended July 31, 2022 and 2021 was $19.1 million.

Income Tax (Benefit) Provision

For the third fiscal quarter ended July 31, 2022, the Company recorded income tax expense of $ 2.0 million on pretax income of $ 15.0 million. For the same quarter a year ago, the Company recorded an income tax expense of $ 1.7 million on a pretax income of $ 6.3 million. For the first nine months of fiscal 2022, the Company recorded an income tax expense of $2 .5 million on pretax income of $ 22.7 million. For the same period a year ago, the Company recorded an income tax benefit of $ 0.8 million on pretax loss of $ 19.3 million. The effective tax rate for the three and nine months ended July 31, 2022 was impacted by (1) the respective change in fair value of warrant liabilities, all of which is not recognized for tax purposes and (2) a change in unremitted earnings deferred tax liability due to foreign rate fluctuations.

Adjusted EBITDA(1) and Net Income (Loss)

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(1) Please see “Non-GAAP Measures (EBITDA and Adjusted EBITDA)” below

U.S. Concrete Pumping

Adjusted EBITDA for our U.S. Concrete Pumping segment was $20.4 million for the three months ended July 31, 2022, up 10.7% from $18.4 million for the same period in fiscal 2021. For the nine months ended July 31, 2022, Adjusted EBITDA for our U.S. Concrete Pumping segment was $54.2 million, up 8.3% from $50.0 million from the same period in fiscal 2021. The year-over-year increases for the three and nine-month periods were primarily attributable to the year-over-year increase in revenue discussed previously and was partly offset by the inflationary margin pressures discussed previously.

U.K. Operations

Adjusted EBITDA for our U.K. Operations segment was $4.0 million for the three months ended July 31, 2022, down slightly from $4.1 million for the same period in fiscal 2021. For both the nine month periods ended July 31, 2022 and July 31, 2021, Adjusted EBITDA remained flat for the U.K. Operations segment at $11.0 million. Despite the improvements in revenue, inflationary pressures, specifically for fuel and labor costs, resulted in Adjusted EBITDA declining slightly for the three month period and remaining flat for the nine month period ending July 31, 2022.

U.S. Concrete Waste Management Services

Adjusted EBITDA for our U.S. Concrete Waste Management Services segment was $5.7 million for the three months ended July 31, 2022, up 6.5% from $5.3 million for the same period in fiscal 2021. For the nine months ended July 31, 2022, Adjusted EBITDA for our U.S Concrete Waste Management Services segment was $15.2 million, up 16.8% from $13.0 million for the same period in fiscal 2021. The year-over-year increases for the three and nine-month periods were primarily attributable to the year-over-year increase in revenue discussed previously and was partly offset by the inflationary margin pressures being experienced by all of our segments.

Corporate

There was no movement in Adjusted EBITDA for our Corporate segment for both periods presented. Any year-over-year changes for our Corporate segment is primarily related to the allocation of overhead costs.

Liquidity and Capital Resources

Overview

We use our liquidity and capital resources to: (1) finance working capital requirements; (2) service our indebtedness; (3) purchase property, plant and equipment; and (4) finance strategic acquisitions, such as the acquisition of Capital, Pioneer and others. Our primary sources of liquidity are cash generated from operations, available cash and cash equivalents and access to our revolving credit facility under our ABL Facility, which provides for aggregate borrowings of up to $160.0 million, subject to a borrowing base limitation. As of July 31, 2022, we had $2.4 million of cash and cash equivalents and $131.7 million of available borrowing capacity under the ABL Facility, providing total available liquidity of $134.1 million.

Capital Resources

Our capital structure is primarily a combination of (1) permanent financing, represented by stockholders’ equity; (2) zero-dividend convertible perpetual preferred stock; (3) long-term financing represented by our Senior Notes and (4) short-term financing under our ABL Facility. We may from time to time seek to retire or pay down borrowings on the outstanding balance of our ABL Facility or Senior Notes using cash on hand. Such repayments, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

We believe our existing cash and cash equivalent balances, cash flow from operations and borrowing capacity under our ABL Facility will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements may vary materially from those currently planned and will depend on many factors, including our rate of revenue growth, potential acquisitions and overall economic conditions. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity could result in dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations.

Senior Notes and ABL Facility

On July 29, 2022, the ABL Facility was amended to, among other changes, increase the maximum revolver borrowings available to be drawn thereunder from $125.0 million to $160.0 million and increase the letter of credit sublimit from $7.5 million to $10.5 million. The ABL Facility also provides for an uncommitted accordion feature under which the ABL Borrowers can, subject to specified conditions, increase the ABL Facility by up to an additional $75.0 million. The $35.0 million in incremental commitments was provided by JPMorgan Chase Bank, N.A.

Senior Notes

Summarized terms of the senior secured notes are as follows:

• Provides for an original aggregate principal amount of $375.0 million;
• The Senior Notes will mature and be due and payable in full on February 1, 2026;
• The Senior Notes bear interest at a rate of 6.000% per annum, payable on February 1st and August 1st each year;
• The Senior Notes are jointly and severally guaranteed on a senior secured basis by the Company, Concrete Pumping Intermediate Acquisition Corp. and each of the Issuer’s domestic, wholly-owned subsidiaries that is a borrower or a guarantor under the ABL Facility (collectively, the "Guarantors"). The Senior Notes and the guarantees are secured on a second-priority basis by all the assets of the Issuer and the Guarantors that secure the obligations under the ABL Facility, subject to certain exceptions. The Senior Notes and the guarantees will be the Issuer’s and the Guarantors’ senior secured obligations, will rank equally with all of the Issuer’s and the Guarantors’ existing and future senior indebtedness and will rank senior to all of the Issuer’s and the Guarantors’ existing and future subordinated indebtedness. The Senior Notes are structurally subordinated to all existing and future indebtedness and liabilities of the Company’s subsidiaries that do not guarantee the Senior Notes;
• The Indenture includes certain covenants that limit, among other things, the Issuer’s ability and the ability of its restricted subsidiaries to: incur additional indebtedness and issue certain preferred stock; make certain investments, distributions and other restricted payments; create or incur certain liens; merge, consolidate or transfer all or substantially all assets; enter into certain transactions with affiliates; and sell or otherwise dispose of certain assets.

The outstanding principal amount of Senior Notes as of July 31, 2022 was $375.0 million and as of that date, the Company was in compliance with all covenants under the Indenture.

ABL Facility

Summarized terms of the ABL Facility, as amended, are as follows:

• Borrowing availability in U.S. Dollars and GBP up to a maximum aggregate principal amount of $160.0 million and an uncommitted accordion feature under which the Company can increase the ABL Facility by up to an additional $75.0 million;
• Borrowing capacity available for standby letters of credit of up to $10.5 million and for swing loan borrowings of up to $10.5 million. Any issuance of letters of credit or making of a swing loan will reduce the amount available under the ABL Facility;
• All loans advanced will mature and be due and payable in full on January 28, 2026;
• Amounts borrowed may be repaid at any time, subject to the terms and conditions of the agreement;
• Through September 30, 2021, borrowings in GBP bore interest at either (1) an adjusted LIBOR rate or (2) a base rate, in each case plus an applicable margin of 1.25%. After September 30, 2021, borrowings in GBP bear interest at the SONIA rate plus an applicable margin currently set at 2.0326%. The applicable margins for SONIA are subject to a step down of 0.25% based on excess availability levels;
• Through June 29, 2022, borrowings in U.S. Dollars bore interest at either (1) an adjusted LIBOR rate or (2) a base rate, in each case plus an applicable margin of 2.25%. After June 29, 2022, borrowings in U.S. Dollars bear interest at the SOFR rate plus an applicable margin currently set at 2.0000%. The applicable margins for SOFR are subject to a step down of 0.25% based on excess availability levels;
• The unused line fee percentage is 25 basis points if the quarterly average amount drawn is greater than 50% of the borrowing availability; 50 basis points if the quarterly average amount drawn is less than 50% of borrowing availability;
• US ABL Facility obligations are secured by a first-priority perfected security interest in substantially all the assets of the Issuer, together with Brundage-Bone Concrete Pumping, Inc., Eco-Pan, Inc., Capital Pumping LP (collectively, the "US ABL Borrowers") and each of the Company's wholly-owned domestic subsidiaries (the "US ABL Guarantors"), subject to certain exceptions;
• UK ABL Facility obligations are secured by a first priority perfected security interest in substantially all assets of Camfaud Concrete Pumps Limited and Premier Concrete Pumping Limited, each of the Company's wholly-owned UK subsidiaries, and by each of the US ABL Borrowers and the US ABL Guarantors, subject to certain exceptions; and
• The ABL Facility also includes (i) a springing financial covenant (fixed charges coverage ratio) based on excess availability levels that the Company must comply with on a quarterly basis during required compliance periods and (ii) certain non-financial covenants.

The outstanding balance under the ABL Facility as of July 31, 2022 was $16.9 million and the Company was in compliance with all debt covenants thereunder.

Cash Flows

Cash generated from operating activities typically reflects net income, as adjusted for non-cash expense items such as depreciation, amortization and stock-based compensation, and changes in our operating assets and liabilities. Generally, we believe our business requires a relatively low level of working capital investment due to low inventory requirements and customers paying the Company as invoices are submitted daily for many of our services.

Net cash provided by operating activities generally reflects the cash effects of transactions and other events used in the determination of net income or loss. Net cash provided by operating activities during the nine months ended July 31, 2022 was $53.7 million. The Company had net income of $20.1 million that included a decrease of $2.2 million in our net deferred income taxes, a gain on sale of assets of $1.5 million, and significant non-cash charges totaling $38.2 million as follows: (1) depreciation of $25.5 million, (2) amortization of intangible assets of $17.0 million, (3) amortization of deferred financing costs of $1.4 million, (4) stock-based compensation expense of $4.2 million, and (5) a $9.9 million decrease in the fair value of warrant liabilities. In addition, we had cash inflows primarily related to an increase of $9.4 million in accrued payroll, accrued expenses and other current liabilities. This was offset by net cash outflows primarily related to (1) an increase of $10.8 million in trade receivables, (2) a $1.2 million increase in prepaid expenses and other current assets and (3) a decrease of $2.3 million in accounts payable.

We used $76.2 million to fund investing activities during the nine months ended July 31, 2022. The Company used $81.0 million for the purchase of property, plant and equipment and $1.5 million for the purchase of intangible assets, which was partially offset by proceeds from the sale of property, plant and equipment of $6.2 million.

Net cash provided by financing activities was $14.4 million for the nine months ended July 31, 2022. Financing activities during this period primarily included $16.1 million in net borrowings under the Company’s ABL Facility in addition to $1.4 million in outflows for the purchase of treasury stock from stock award vesting activity.

Net cash provided by operating activities during the nine-month period ended July 31, 2021 was $60.3 million. The Company had a net loss of $18.5 million that included an increase of $1.4 million in our net deferred income taxes, a gain on sale of assets of $1.1 million, and significant non-cash charges totaling $75.6 million as follows: (1) depreciation of $21.2 million, (2) amortization of intangible assets of $20.5 million, (3) amortization of deferred financing costs of $1.9 million, (4) loss on extinguishment of debt expense of $15.5 million, (5) stock-based compensation expense of $5.3 million, and (6) an $11.2 million increase in the fair value of warrant liabilities. In addition, we had cash inflows primarily related to the following activity: (1) a decrease of $0.5 million in trade receivables, (2) an increase of $5.9 million in accrued payroll, accrued expenses and other current liabilities and (3) an increase of $0.8 million in income taxes payable. These amounts were partially offset by net cash outflows primarily related to a $1.3 million increase in prepaid expenses and other current assets.

We used $29.5 million to fund investing activities during the nine-month period ended July 31, 2021. The Company used $34.6 million for the purchase of property, plant and equipment, which was partially offset by proceeds from the sale of property, plant and equipment of $5.1 million.

Net cash used in financing activities was $16.9 million for the nine-month period ended July 31, 2021. Financing activities during this period included $1.9 million in net borrowings under the Company’s ABL Facility, $375.0 million in proceeds from the issuance of Senior Notes, $381.2 million in payments made to extinguish the Term Loan Agreement and $8.5 million in debt issuance costs.

Non-GAAP Measures (EBITDA and Adjusted EBITDA)

We calculate EBITDA by taking GAAP net income and adding back interest expense, income taxes, depreciation and amortization. Adjusted EBITDA is calculated by taking EBITDA and adding back transaction expenses, loss on debt extinguishment, stock-based compensation, other income, net, goodwill and intangibles impairment, and other adjustments. We believe these non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends related to our financial condition and results of operations, and as a tool for investors to use in evaluating our ongoing operating results and trends and in comparing our financial measures with competitors who also present similar non-GAAP financial measures. In addition, these measures (1) are used in quarterly and annual financial reports prepared for management and our board of directors and (2) help management to determine incentive compensation. EBITDA and Adjusted EBITDA have limitations and should not be considered in isolation or as a substitute for performance measures calculated under GAAP. These non-GAAP measures exclude certain cash expenses that we are obligated to make. In addition, other companies in our industry may calculate EBITDA and Adjusted EBITDA differently or may not calculate it at all, which limits the usefulness of EBITDA and Adjusted EBITDA as comparative measures. Transaction expenses represent expenses for legal, accounting, and other professionals that were engaged in the completion of various acquisitions. Transaction expenses can be volatile as they are primarily driven by the size of a specific acquisition. As such, we exclude these amounts from Adjusted EBITDA for comparability across periods. Other adjustments include reversal of intercompany allocations (in consolidation these net to zero), severance expenses, director fees, expenses related to being a publicly traded company and other non-recurring costs.

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Jobs Act

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for qualifying public companies. As we are an emerging growth company, we have qualified for and have previously elected to delay the adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. The Company will no longer be an emerging growth company as of October 31, 2022 and will have to adopt and comply with accounting and legal standards for non-emerging growth companies at the filing of our fiscal 2022- 10-K.

Critical Accounting Policies and Estimates

In presenting our financial statements in conformity with U.S. GAAP, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. However, events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions. If there is a significant unfavorable change to current conditions, it could result in a material impact to our consolidated and combined results of operations, financial position and liquidity. We believe that the estimates and assumptions we used when preparing our financial statements were the most appropriate at that time. Presented below are those accounting policies that we believe require subjective and complex judgments that could potentially affect reported results. However, the majority of our business activities are in environments where we are paid a fee for a service performed, and therefore the results of the majority of our recurring operations are recorded in our financial statements using accounting policies that are not particularly subjective, nor complex.

Listed below are those estimates that we believe are critical and require the use of complex judgment in their application.

Goodwill and Intangible Assets

In accordance with ASC Topic 350, *Intangibles–Goodwill and Other (“*ASC 350”), the Company evaluates goodwill for possible impairment annually, generally as of August 31st, or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company uses a two-step process to assess the realizability of goodwill. The first step is a qualitative assessment that analyzes current economic indicators associated with a particular reporting unit. For example, the Company analyzes changes in economic, market and industry conditions, business strategy, cost factors, and financial performance, among others, to determine if there are indicators of a significant decline in the fair value of a particular reporting unit. If the qualitative assessment indicates a stable or improved fair value, no further testing is required. If a qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company will proceed to the quantitative second step where the fair value of a reporting unit is calculated based on weighted income and market-based approaches. If the fair value of a reporting unit is lower than its carrying value, an impairment to goodwill is recorded, not to exceed the carrying amount of goodwill in the reporting unit.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates and market factors. Estimating fair value of individual reporting units and indefinite-lived intangible assets requires us to make assumptions and estimates regarding out future plans, as well as industry and economic conditions including those relating to the duration and severity of COVID-19. These assumptions and estimates include projected revenue, royalty rate, discount rate, tax amortization benefit and other market factors outside of our control. The Company elects to perform a qualitative assessment for the other quarterly reporting periods throughout the fiscal year.

When we perform any goodwill impairment test, the estimated fair value of our reporting units are determined using an income approach that utilizes a discounted cash flow (“DCF”) model and a market approach that utilizes the guideline public company method (“GPC”), both of which are weighted for each reporting unit and are discussed below in further detail. In accordance with ASC Topic 820, Fair Value Measurement ("ASC 820"), we evaluated the methods for reasonableness and reliability and assigned weightings accordingly. A mathematical weighting is not prescribed by ASC 820, rather it requires judgement. As such, each of the valuation methods were weighted by accounting for the relative merits of each method and considered, among other things, the reliability of the valuation methods and the inputs used in the methods. In addition, in order to assess the reasonableness of the fair value of our reporting units as calculated under both approaches, we also compare the Company’s total fair value to its market capitalization and calculate an implied control premium (the excess sum of the reporting unit’s fair value over its market capitalization). We evaluate the implied control premium by comparing it to control premiums of recent comparable market transactions, as applicable.

Under the income approach, the DCF model is based on expected future after-tax operating cash flows of the reporting unit, discounted to a present value using a risk-adjusted discount rate. Estimates of future cash flows require management to make significant assumptions concerning (i) future operating performance, including future sales, long-term growth rates, operating margins, variations in the amount and timing of cash flows and the probability of achieving the estimated cash flows, (ii) the probability of regulatory approvals, and (iii) future economic conditions, including the extent and duration of the COVID-19 pandemic, all of which may differ from actual future cash flows. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The discount rate, which is intended to reflect the risks inherent in future cash flow projections, used in the DCF model, is based on estimates of the weighted average cost of capital (“WACC”) of market participants relative to our reporting unit. Financial and credit market volatility can directly impact certain inputs and assumptions used to develop the WACC. Any changes in these assumptions may affect our fair value estimate and the result of an impairment test. The discount rates and other inputs and assumptions are consistent with those that a market participant would use.

The GPC method provides an estimate of value using multiples derived from the stock prices of publicly traded companies. This method requires a selection of comparable publicly traded companies on major exchanges and involves a certain degree of judgment, as no two companies are entirely alike. These companies should be engaged in the same or a similar line of business as the reporting units be evaluated. Once comparable companies are selected, the application of the GPC method includes (i) analysis of the guideline public companies' financial and operating performance, growth, intangible asset's value, size, leverage, and risk relative to the respective reporting unit, (ii) calculation of valuation multiples for the selected guideline companies, and (iii) application of the valuation multiples to each reporting unit's selected operating metrics to arrive at an indication of value. Market multiples for the selected guideline public companies are developed by dividing the business enterprise value of each guideline public company by a measure of its financial performance (e.g., earnings). The business enterprise value is calculated taking the market value of equity (share price times fully-diluted shares outstanding) plus total interest bearing debt net of cash, preferred stock and minority interest. The market value of equity is based upon the stock price of equity as of the valuation date, and the debt figures are taken from the most recently available financial statements as of the valuation date. In selecting appropriate multiples to apply to each reporting unit, we perform a comparative analysis between the reporting units and the guideline public companies. In making a selection, we consider the revenue growth, profitability and the size of the reporting unit compared to the guideline public companies, and the overall EBITDA multiples implied from the transaction price. In addition, we consider a control premium for purposes of estimating the fair value of our reporting units as we believe that a market participant buyer would be required to pay a premium for control of our business. The control premium utilized is based on control premiums observed in recent comparable market transactions.

The impairment charges were primarily due to COVID-19, which negatively impacted our market capitalization, drove an increase in the discount rate that is utilized in our DCF models, and negatively impacted near-term cash flow expectations.

Income Taxes

We are subject to income taxes in the U.S., U.K. and other jurisdictions. Significant judgment is required in determining our provision for income tax, including evaluating uncertainties in the application of accounting principles and complex tax laws.

Income taxes include federal, state and foreign taxes currently payable and deferred taxes arising from temporary differences between income for financial reporting and income tax purposes. Deferred tax assets and liabilities are determined based on the differences between the financial statement balances and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to amounts expected to be realized.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act). Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our certifying officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

At the time of our quarterly filing of Form 10-Q which was filed on September 8, 2022, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of July 31, 2022. Subsequent to the restatement described in Note 2 — “Restatement of Previously Issued Condensed Consolidated Financial Statements”, we have re-evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2022. The re-evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on this re-evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of July 31, 2022, due to the material weakness described below, the disclosure controls and procedures were not effective.

As a result of the material weakness, management performed additional procedures to ensure that our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). Accordingly, we believe that the financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q/A fairly present in all material respects our financial condition, results of operations and cash flows.

Material Weakness

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

In connection with the restatement of the Company’s financial statements as of July 31, 2022, we identified the following material weakness in our internal control over financial reporting:

We did not maintain effective internal control over financial reporting related to the review of manual journal entries within the financial statement close process.

Remediation Plan

The Company and its Board of Directors are committed to maintaining an effective internal control environment. Management, with the oversight of the Audit Committee, has evaluated the material weakness described above and designed a remediation plan to address the material weakness and enhance the Company’s internal control environment. The remediation plan is being implemented and includes implementing incremental controls, enhancing training, and improving the schedules used to prepare more complex journal entries.

Changes in Internal Control Over Financial Reporting

Except as noted above, there was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q/A that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Except as noted below, there have been no material changes to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended October 31, 2021 filed with the SEC on January 12, 2022 (the “Form 10-K”). For a detailed discussion of the other risks that affect our business, please refer to the entire section entitled “Risk Factors” in the Form 10-K.

We have identified a material weakness in our internal control over financial reporting and have restated our financial statements for the quarter ended July 31, 2022. If we are unable to remediate this material weakness and maintain effective controls in the future, our stock price may suffer.

We have identified a material weakness in our internal control over financial reporting and have restated our financial statements for the quarter ended July 31, 2022. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The restatement of our financial statements for the quarter ended July 31, 2022 and the related material weakness may adversely affect our stock price, and the measures we take to remediate the deficiency in our internal control over financial reporting and to implement and maintain effective controls in the future may not be sufficient to satisfy our obligations as a public company and produce reliable financial reports, which may result in additional material misstatements of our consolidated financial statements and adverse impacts on our business, financial condition, and results of operations.

Section 404 of the Sarbanes-Oxley Act requires any company subject to the reporting requirements of the U.S. securities laws to do a comprehensive evaluation of its and its consolidated subsidiaries’ internal control over financial reporting. To comply with this statute, we are currently required to document, test and report on our internal control over financial reporting. In addition, starting with our 2022 fiscal year, our independent auditors are required to issue an opinion on our audit of our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation to meet the detailed standards under the rules. The effectiveness of our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the possibility of human error, and the risk of fraud.