Annual Report for Fiscal Year Ending December 31, 2024 (Form 10-K)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and accompanying notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements, based upon our current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors," "Forward-Looking Statements," and elsewhere in this Annual Report on Form 10-K.

Our Business

We are a national provider of waste and recycling services to customers from across multiple industry sectors that are typically larger, multi-location businesses. We create customer-specific programs and perform the related services for the collection, processing, recycling, disposal, and tracking of waste streams and recyclables to maximize resource utilization. Our programs and services enable our customers to address their business, sustainability and ESG goals and responsibilities.

We believe our services are comprehensive, innovative, and cost effective. Our services are designed to enable our business customers to capture the commodity value of their waste streams and recyclables, better manage their disposal and total operating costs, enhance their management of environmental risks, enhance their legal and regulatory compliance, and achieve their business and environmental goals while maximizing the efficiency of their assets. Our services currently focus on the waste streams and recyclables from big box retailers, including grocers and other specialty retailers; transportation, logistics, and fleet operators; manufacturing and industrial facilities; automotive after-market operations such as automotive maintenance, quick lube, dealerships, and collision repair; multi-family and commercial properties; restaurant chains and food operations; and construction and demolition projects. We currently concentrate on programs for recycling cardboard, pallets, metal, glass, motor oil and automotive lubricants, oil filters, scrap tires, oily water, goods destruction, food waste, meat renderings, cooking oil and grease trap waste, plastics, mixed paper, construction debris, as well as a large variety of regulated and non-regulated solid, liquid, and gas wastes. In addition, we offer products such as antifreeze and windshield washer fluid, dumpster and compacting equipment, and other minor ancillary services.

We also provide information and data that tracks and reports the detailed transactional and environmental results of our services and provides actionable data to improve business operations. The data we generate enables our customers to address their environmental

goals and responsibilities and to report to internal and external parties such as employees, investors, business partners, and governmental agencies.

Years Ended December 31, 2024 and 2023 Operating Results

Our consolidated financial statements include the operating activities of our company and our subsidiaries for the years ended December 31, 2024 and 2023.

The following table summarizes our operating results for the years ended December 31, 2024 and 2023 (in thousands):

		Years Ended December 31,
		2024				2023
Revenue		$	288,532			$	288,378
Cost of revenue			238,537				238,313
Gross profit			49,995				50,065
Operating expenses:
Selling, general, and administrative			39,543				37,669
Depreciation and amortization			9,401				9,571
Impairment loss			5,511				-
Total operating expenses			54,455				47,240
Operating income (loss)			(4,460	)			2,825
Interest expense			(10,312	)			(9,729	)
Loss before taxes			(14,772	)			(6,904	)
Income tax expense			291				387
Net loss		$	(15,063	)		$	(7,291	)

Year Ended December 31, 2024 compared with Year Ended December 31, 2023

Global Economic Trends

There has been heightened uncertainty in the macroeconomic environment, characterized by increasing unemployment, significant inflation, and decreased consumer and business spending. There are also significant geopolitical concerns, including the ongoing conflict between Ukraine and Russia, which have created extreme volatility in the global capital markets and are expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. Any such volatility and disruptions may have adverse consequences on us or the third parties on whom we rely. If the equity and credit markets deteriorate, including as a result of political unrest or war, it may make any necessary debt or equity financing more difficult to obtain in a timely manner or on favorable terms, more costly or more dilutive. Inflation can adversely affect us by increasing our costs, including salary costs. Any significant increases in inflation and related increases in interest rates could have a material adverse effect on our business, results of operations and financial condition.

Revenue

For the year ended December 31, 2024, revenue was $288.5 million, an increase of $0.1 million, or 0.1%, compared with revenue of $288.4 million for the year ended December 31, 2023.

Newly added customers in the current year contributed $18.6 million in additional revenue ($8.5 million in the fourth quarter) compared to the prior year. Additionally, overall demand was mostly strong for the remaining business which, in total, contributed $25.6 million in additional revenue, an increase of almost 13% from 2023. These increases were mostly offset by lower volumes from lost customers and services and lower volumes due to soft conditions in a certain customer's end markets. These reductions resulted in a decrease of revenues of $44.0 million, which includes lower than expected production volumes at one of our largest customers due to soft conditions in their end market. Approximately one-third of the lower revenues is associated with customers, both former and current, related to the disposal group held for sale. See Note 3 to our consolidated financial statements for further discussion.

Cost of Revenue/Gross Profit

Cost of revenue increased to $238.5 million for the year ended December 31, 2024, from $238.3 million for the year ended December 31, 2023. The changes in cost of revenues were primarily due to the changes in revenue described above. Additionally, we experienced higher cost of revenue as a percentage of revenue in 2024 due to on-boarding and ramping up of new customers which was offset by the reductions from the lower volumes described in the revenues section whose margins were lower overall than the company's average gross margin. In addition, in 2023 we recorded $1.2 million in cost of revenue related to unreconciled accounts payable from a 2021 acquisition, and in the fourth quarter of 2024, we recorded approximately $1.0 million in cost of revenues related to unreconciled accounts payable related to 2021 and 2022 payments.

Gross profit decreased $(0.1) million to $50.0 million for the year ended December 31, 2024, from $50.1 million for the year ended December 31, 2023. Our gross profit margin was 17.3% for the year ended December 31, 2024, compared with 17.4% for the year ended December 31, 2023.

Revenue, gross profit, and gross profit margins are affected period to period by the volumes of waste and recyclable materials generated by our customers, the frequency and type of services provided, the price and mix of the services provided, price changes for recyclable materials, the cost and mix of subcontracted services provided in any one reporting period, and the timing of acquisitions and integrations. Volumes of waste and recyclable materials generated by our customers are impacted period to period based on several factors including their production or sales levels, demand of their product or services in the market, supply chain reliability, and labor force stability, among other business factors.

Operating Expenses

For the year ended December 31, 2024, operating expenses increased to $54.5 million from $47.2 million for the year ended December 31, 2023.

Selling, general, and administrative expenses were $39.5 million and $37.7 million for the years ended December 31, 2024 and 2023, respectively. The increase primarily relates to increases in overall labor related expenses of $0.8 million, which includes the benefit of an approximately $0.8 million reduction in year over year bonus expense in 2024, mostly related to unearned executive bonus expense. Professional fees also increased by $0.4 million compared to the prior year. Additionally, bad debt expense increased $0.2 million compared to the prior year, which included approximately $0.5 million in additional bad debt reserve for certain customers related to the assets held for sale. Operating expenses included depreciation and amortization of $9.4 million and $9.6 million for the years ended December 31, 2024 and 2023, respectively.

We recorded a $5.5 million impairment charge for the year ended December 31, 2024 associated with an asset group classified as held for sale. See Note 3 to our consolidated financial statements for further discussion.

Interest Expense

For the year ended December 31, 2024, interest expense increased to $10.3 million from $9.7 million for the year ended December 31, 2023, primarily due to increased borrowings under our revolving credit facility and our equipment term loan in 2024. We are amortizing debt issuance costs of $4.8 million and loan discount costs of $1.8 million to interest expense over the life of the related debt arrangements as discussed in Note 7 to our consolidated financial statements.

We refinanced our credit facilities on December 30, 2024 for more favorable interest rate margins. We expect to realize the positive effect of lower interest rates in 2025. See Note 7 to our consolidated financial statements for further discussion.

Income Taxes

We recorded a provision for income taxes of $0.3 million and $0.4 million for the years ended December 31, 2024 and 2023, respectively. The provision for income taxes for both periods is primarily attributable to state tax obligations based on current estimated state tax apportionments for states with no net operating loss carryforwards and other timing differences.

We recorded a full valuation allowance against all of our deferred tax assets ("DTAs") as of both December 31, 2024 and 2023. We intend on maintaining a full valuation allowance on our DTAs until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, given our current earnings and anticipated future earnings, we believe that there is a reasonable possibility that within the next 48 to 60 months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of certain DTAs and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change based on the level of profitability that we are able to actually achieve.

Net Loss

Net loss for the year ended December 31, 2024 was $(15.1) million compared to net loss of $(7.3) million for the year ended December 31, 2023. The discussions above explain the primary changes related to the change in net results.

Our operating results, including revenue, operating expenses, and operating margins, vary from period to period depending on commodity prices of recycled materials, the volumes and mix of services provided, as well as customer mix during the reporting period, and the timing of acquisitions and integrations.

Loss per Share

Net loss per basic and diluted share attributable to common stockholders was $(0.73) and ($0.36) for the years ended December 31, 2024 and 2023, respectively. The basic and diluted weighted average number of shares of Common Stock outstanding was approximately 20.6 million for the year ended December 31, 2024, compared to basic and diluted weighted average number of shares of Common Stock outstanding of approximately 20.1 million for the year ended December 31, 2023.

Adjusted EBITDA

For the year ended December 31, 2024, Adjusted EBITDA, a non-GAAP financial measure, decreased (10.7)% to $14.5 million from $16.2 million for the year ended December 31, 2023.

We use the non-GAAP measurement of earnings before interest, taxes, depreciation, amortization, stock-related compensation charges, acquisition-related costs, and other adjustments, or "Adjusted EBITDA," to evaluate our performance. Adjusted EBITDA is a non-GAAP measure that is also frequently used by analysts, investors and other interested parties to evaluate the market value of companies considered to be in similar industries. We suggest that Adjusted EBITDA be viewed in conjunction with our reported financial results or other financial information prepared in accordance with accounting principles generally accepted in the United States ("GAAP").

The following table reflects the reconciliation of net loss to Adjusted EBITDA for the years ended December 31, 2024 and 2023 (in thousands):

		As Reported
		Years Ended December 31,
		2024				2023
Net loss		$	(15,063	)		$	(7,291	)
Depreciation and amortization			10,272				9,948
Interest expense			10,312				9,729
Stock-based compensation expense			1,563				1,312
Acquisition, integration and related costs			112				1,624
Impairment loss			5,511				-
Other adjustments			1,471				501
Income tax expense			291				387
Adjusted EBITDA		$	14,469			$	16,210

For the year ended December 31, 2024, other adjustments included certain professional fees as well as certain administrative fees related to borrowings. For the year ended December 31, 2023, other adjustments included an earn-out adjustment, severance and project costs, and certain administrative fees related to borrowings.

Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Diluted Share

Adjusted net income (loss), a non-GAAP financial measure, for the year ended December 31, 2024, was $(0.7) million compared with $3.4 million for the year ended December 31, 2023. We present adjusted net income (loss) and adjusted net income (loss) per diluted share, both non-GAAP financial measures, supplementally because they are widely used by investors as a valuation measure in the solid waste industry. Management uses adjusted net income (loss) and adjusted net income (loss) per diluted share as one of the principal measures to evaluate and monitor the ongoing financial performance of our operations. We provide adjusted net income (loss) to exclude the effects of items management believes impact the comparability of operating results between periods. Adjusted net income (loss) has limitations due to the fact that it excludes items that have an impact on our financial condition and results of operations. Adjusted net income (loss) and adjusted net income (loss) per diluted share are not a substitute for, and should be used in conjunction with, GAAP financial measures. Other companies may calculate these non-GAAP financial measures differently. Our adjusted net income (loss) and adjusted net income (loss) per diluted share for the years ended December 31, 2024 and 2023, are calculated as follows (in thousands except per share amounts):

		Years Ended December 31,
		2024				2023
Reported net loss (a)		$	(15,063	)		$	(7,291	)
Adjustments:
Amortization of intangibles (b)			8,787				8,864
Acquisition, integration and related costs (c)			112				1,624
Impairment loss			5,511				-
Other adjustments (d)			-				205
Adjusted net income (loss)		$	(653	)		$	3,402
Diluted earnings per share:
Reported net loss		$	(0.73	)		$	(0.36	)
Adjusted net income (loss)		$	(0.03	)		$	0.15
Weighted average number of common shares outstanding:
Diluted (e)			20,617				22,362
(a)Applicable to common stockholders
(b)Reflects the elimination of the non-cash amortization of acquisition-related intangible assets
(c)Reflects the add back of acquisition/integration related transaction costs
(d)Reflects adjustments to earn-out fair value
(e)Reflects adjustment for dilution when adjusted net income is positive

Liquidity and Capital Resources

As of December 31, 2024, we had working capital of $30.7 million, including $0.4 million of cash and cash equivalents, compared with working capital of $15.7 million, including cash and cash equivalents of $0.3 million, as of December 31, 2023.

We derive our primary sources of funds for conducting our business activities from operating revenues; borrowings under our credit facilities; and the placement of our equity securities to investors. We require working capital primarily to carry accounts receivable, service debt, purchase capital assets, fund operating expenses, address unanticipated competitive threats or technical problems, withstand adverse economic conditions, fund potential acquisition transactions, and pursue goals and strategies.

We believe our existing cash and cash equivalents of $0.4 million, our borrowing availability under our $45.0 million ABL Facility (as defined and discussed in Note 7 to our consolidated financial statements), and cash expected to be generated from operations will be sufficient to fund our operations for the next 12 months and thereafter for the foreseeable future. Our known current- and long-term uses of cash include, among other possible demands, capital expenditures, lease payments and repayments to service debt and other long-term obligations. We have no agreements, commitments, or understandings with respect to any such placements of our securities and any such placements could be dilutive to our stockholders.

Our Credit Agreement (as described in Note 7 to our consolidated financial statements) provides for, among other things, a senior secured term loan facility in the principal amount of $54.0 million as of December 31, 2024. The maturity date of the term loan facility is June 28, 2030 (the "Maturity Date"). The senior secured term loan will amortize in aggregate annual amounts equal to 1.00% of the original principal amount of the senior secured term loan facility with the balance payable on the Maturity Date. The Credit Agreement also contains a delayed draw term loan facility in the maximum principal amount of $25.0 million. Loans under the delayed draw term loan facility may be requested at any time until December 30, 2026. Proceeds of the delayed draw term loan are permitted to be used for Permitted Acquisitions (as defined in the Credit Agreement).

Certain of the Company's subsidiaries are the borrowers under the Credit Agreement. The Company is the guarantor under the Credit Agreement. As security for the obligations of the borrowers under the Credit Agreement, (i) the borrowers under the Credit Agreement have granted a first priority lien on substantially all of their tangible and intangible personal property, including a pledge of the capital stock and membership interests, as applicable, of certain of the Company's direct and indirect subsidiaries, and (ii) the guarantors under the Credit Agreement have granted a first priority lien on the capital stock and membership interests, as applicable, of the Company's direct and indirect subsidiaries.

The Credit Agreement contains certain financial covenants, including a minimum fixed charge coverage ratio and a senior net leverage ratio. In addition, the Credit Agreement contains negative covenants limiting, among other things, additional indebtedness, transactions with affiliates, additional liens, sales of assets, dividends, investments and advances, prepayments of debt, mergers and acquisitions, and other matters customarily restricted in such agreements. The Credit Agreement also contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, events of bankruptcy and insolvency, change of control, and failure of any guaranty or security document supporting the Credit Agreement to be in full force and effect. Upon the occurrence of an event of default, the outstanding obligations under the Credit Agreement may be accelerated and become immediately due and payable. The foregoing is a summary only and does not purport to be a complete description of all the terms,

provisions, covenants and agreements contained in the Credit Agreement and is subject to and qualified in its entirety by reference to the full text of the Credit Agreement.

Cash Flows

The following discussion relates to the major components of our cash flows.

Cash Flows from Operating Activities

Net cash used in operating activities was $(6.1) million for the year ended December 31, 2024, compared with net cash used in operating activities of $(1.4) million for the year ended December 31, 2023.

Net cash used in operating activities for the year ended December 31, 2024 related primarily to the net effect of the following:

Net cash used in operating activities for the year ended December 31, 2023 related primarily to the net effect of the following:

Our business, including revenue, operating expenses, and operating margins, may vary depending on the blend of services we provide to our customers, the terms of customer contracts, recyclable materials contracts, and our business volume levels. Fluctuations in net accounts receivable are generally attributable to a variety of factors including, but not limited to, the timing of cash receipts from customers, and the inception, increase, modification, or termination of customer relationships. Our operating activities may require additional cash in the future from our debt facilities and/or equity financings depending on the level of our operations.

Cash Flows from Investing Activities

Cash used in investing activities for the year ended December 31, 2024, was $(6.0) million and primarily related to the purchase of compactors and related equipment. Cash used in investing activities for the year ended December 31, 2023, was $(1.9) million. Other investing activities are primarily from intangible assets such as software development costs and purchases of other property and equipment.

Cash Flows from Financing Activities

Net cash provided by financing activities was $12.1 million for the year ended December 31, 2024, primarily from net borrowings of $9.9 million on our ABL Facility, $2.9 million borrowings from our PNC equipment term loan, and $1.4 million proceeds from stock option exercises and shares issued under our 2014 Employee Stock Purchase Plan ("2014 ESPP"), partially offset by $1.3 million repayments of long term debt. Net cash used in financing activities was $(6.0) million for the year ended December 31, 2023, primarily from $8.1 million repayment of notes payable, which was partially offset by net borrowings of $1.0 million on our ABL Facility and $1.1 million proceeds from stock option exercises and shares issued under our 2014 ESPP. See Note 7 to our consolidated financial statements for a discussion of the ABL Facility and other notes payable.

Inflation

Although the overall economy has experienced some inflationary pressures, we do not believe that inflation had a material impact on us during the years ended December 31, 2024 and 2023. We believe that current inflationary increases in costs, such as fuel, labor, and certain capital items, can be addressed by our flexible pricing structures and cost recovery fees allowing us to recover certain of the cost of inflation from our customer base. Consistent with industry practice, many of our contracts allow us to pass through certain costs to our customers or adjust pricing. While we believe that we should be able to offset many cost increases that result from inflation in the ordinary course of business, we may be required to absorb at least part of these costs increases due to competitive pressures or delays in timing of rate increases. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected in the future by higher rates of inflation and increases in interest rates.

Critical Accounting Estimates and Policies

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles ("GAAP"). The preparation of our consolidated

financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. These areas include carrying amounts of accounts receivable, goodwill and other intangible assets, deferred taxes and the fair value of assets and liabilities acquired in business acquisitions, assets held for sale, and stock-based compensation expense. We base our estimates on historical experience, our observance of trends in particular areas, and information or valuations and various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources. Actual amounts could differ significantly from amounts previously estimated.

We believe that of our significant accounting policies, the following may involve a higher degree of judgment and complexity.

Collectability of Accounts Receivable

Our accounts receivable consists primarily of amounts due from customers for the performance of services, and we record the amount net of an allowance for doubtful accounts. To record our accounts receivable at their net realizable value, we assess their collectability, which requires a considerable amount of judgment. We perform a detailed analysis of the aging of our receivables, the creditworthiness of our customers, our historical bad debts, and other adjustments. If economic, industry, or customer specific business trends worsen, we increase the allowance for uncollectible accounts by recording additional expense in the period in which we become aware of the new conditions.

Held for Sale

Assets and liabilities to be disposed of by sale ("disposal groups") are reclassified into assets and liabilities held for sale on our consolidated balance sheets. The reclassification occurs when all the held for sale criteria have been met. Disposal groups are measured at the lower of carrying value or fair value less costs to sell. Assets held for sale are not depreciated or amortized. We assess the recoverability of disposal groups each reporting period they remain classified as held for sale.

Impairment of Goodwill and Other Intangible Assets

In accordance with Accounting Standards Codification ("ASC") Topic 350, Intangibles - Goodwill and Other,we perform goodwill impairment testing at least annually during the third quarter, unless indicators of impairment exist in interim periods. Our test of goodwill impairment included assessing qualitative factors and the use of judgment in evaluating economic conditions, industry and market conditions, cost factors, and entity-specific events such as market capitalization as compared to book value. The impairment test for goodwill compares the estimated fair value of a reporting unit with goodwill to its carrying value. If the carrying amount of a reporting unit's goodwill exceeds the fair value of its goodwill, we recognize an impairment loss equal to the excess, not to exceed the total amount of recorded goodwill. We performed our most recent goodwill impairment analysis in the third quarter of 2024 with no impairment recorded. In addition, we reevaluated goodwill in the fourth quarter of 2024, when management identified a disposal group designated as held for sale and assigned $5.2 million of goodwill to the disposal group. The remaining goodwill of $81.1 million was assessed for impairment with no impairment recorded. See Note 3 to our consolidated financial statements for further discussion.

In addition to the required goodwill impairment analysis, we also review the recoverability of our net intangible assets with finite lives when an indicator of impairment exists. Based on our analysis of estimated undiscounted future cash flows expected to result from the use of these net intangibles with finite lives, we determine if we will recover their carrying values as of the test date. If not recoverable, we record an impairment charge.

Stock Options

We estimate the fair value of stock options using the Black-Scholes-Merton valuation model. Significant assumptions used in the calculation were determined as follows:

Deferred Stock Units

Non-employee directors can elect to receive all or a portion of their annual retainers in the form of DSUs. The DSUs are recognized at their fair value on the date of grant. Director fees deferred into stock units are calculated and expensed each month by taking fees earned during the month and dividing by the closing price of our common stock on the last trading day of the month, rounded down to the nearest whole share. In addition, certain executive compensation expense is also granted in the form of DSUs. Each DSU represents the right to receive one share of our common stock following the completion of a grantee's service.

Restricted Stock Units

Non-employee directors receive a portion of their annual board compensation in the form of RSUs. In addition, certain employee compensation is also granted in the form of RSUs. The RSUs are recognized at their fair value on the date of grant. Each RSU represents the right to receive one share of our common stock once fully vested.

Performance Stock Units

Beginning in 2024, certain employees were granted performance stock units ("PSUs") under our incentive compensation plan. PSUs vest in a range between 0% and 200% based upon certain performance criteria in a three-year period. The PSUs are recognized at their fair value on the date of grant and compensation expense is based on the probable issuance of units at the end of the performance period.

Income Taxes

We use the asset and liability method to account for income taxes. We use significant judgment in determining the provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against net deferred tax assets. We then assess the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent that recovery is not likely or there is insufficient operating history, we establish a valuation allowance. To the extent we establish or increase a valuation allowance in a period, we include an adjustment within the tax provision of our consolidated statements of operations. As of December 31, 2024 and 2023, we had established a full valuation allowance for all deferred tax assets.

As of December 31, 2024 and 2023, we did not recognize any assets or liabilities relative to uncertain tax positions, nor do we anticipate any significant unrecognized tax benefits will be recorded during the next 12 months. We recognize any interest or penalties related to unrecognized tax benefits in income tax expense. Since there are no unrecognized tax benefits as a result of tax positions taken, there are no accrued penalties or interest.

Business Combinations

We account for acquisitions in accordance with ASC Topic 805, Business Combinations. In purchase accounting, identifiable assets acquired and liabilities assumed are recognized at their estimated fair values at the acquisition date, and any remaining purchase price is recorded as goodwill. In determining the fair values of assets acquired and liabilities assumed, we make significant estimates and assumptions, particularly with respect to long-lived tangible and intangible assets. Critical estimates used in valuing tangible and intangible assets include, but are not limited to, future expected cash flows, discount rates, market prices and asset lives.

Our consolidated financial statements include the results of operations from the date of the acquisition.

We expense all acquisition-related costs as incurred in selling, general and administrative expenses in the consolidated statements of operations.

Financial Instruments

Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, deferred revenue, and notes payable. We do not believe that we are exposed to significant currency or credit risks arising from these financial instruments. Our variable rate indebtedness subjects us to interest rate risk as all of the borrowings under the senior secured credit facilities bear interest at variable rates. The fair values of these financial instruments approximate their carrying values using Level 3 inputs, based on their short maturities or, for long-term portions of notes payable, based on borrowing rates currently available to us for loans with similar terms and maturities.

Recently Issued Accounting Pronouncements

See Note 2 to our consolidated financial statements.

Off-Balance Sheet Arrangements

We have no off-balance sheet debt or similar obligations. We have no transactions or obligations with related parties that are not disclosed, consolidated into, or reflected in our reported results of operations or financial position. We do not guarantee any third-party debt.