10-Q 1 nesc_20170930x10-q.htm 10-Q Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-Q
__________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File Number: 001-33816
__________________________________
nesimagea08.jpg
__________________________________
Delaware
26-0287117
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
14624 N. Scottsdale Rd., Suite 300, Scottsdale, Arizona 85254
(602) 903-7802
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
__________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
x
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x
The number of shares outstanding of the registrant’s common stock as of October 31, 2017 was 11,695,580.




TABLE OF CONTENTS
 
 
 
 
 
 
 
 

2


Forward-Looking Statements
In addition to historical information, this Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, or the “Securities Act,” and Section 21E of the United States Securities Exchange Act of 1934, as amended, or the “Exchange Act.” These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including, but not limited to, statements regarding:
the expected timing and benefits of our completed restructuring under chapter 11 of the United States Bankruptcy Code to improve our long-term capital structure;
future financial performance and growth targets or expectations;
market and industry trends and developments, including statements regarding fluctuations in oil and natural gas prices; and
the potential benefits of our completed and any future merger, acquisition, disposition, restructuring, and financing transactions.
You can identify these and other forward-looking statements by the use of words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “might,” “will,” “should,” “would,” “could,” “potential,” “future,” “continue,” “ongoing,” “forecast,” “project,” “target” or similar expressions, and variations or negatives of these words.
These forward-looking statements are based on information available to us as of the date of this Quarterly Report and our current expectations, forecasts and assumptions, and involve a number of risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. Future performance cannot be ensured, and actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include, among others:
the effects of our completed restructuring on the Company and the interests of various constituents;

risks and uncertainties associated with the restructuring process, including the outcome of a pending appeal of the order confirming the plan of reorganization and our ability to execute the requirements of the plan of reorganization subsequent to the effective date;

our inability to maintain relationships with suppliers, customers, employees and other third parties as a result of our chapter 11 filing;

the bankruptcy and, as applicable, appellate, court’s rulings in our chapter 11 cases, including appeals thereof, and the outcome of our chapter 11 cases in general;

risks associated with third-party motions, objections and appeals in our chapter 11 cases, including the pending appeal of the confirmation of the plan of reorganization;

the length of time the Company will operate under chapter 11 protection;

the effects of the increased advisory costs incurred to execute the reorganization;

risks associated with our indebtedness, including changes to interest rates, deterioration in the value of our machinery and equipment or accounts receivables, our ability to manage our liquidity needs and to comply with covenants under our credit facilities;

our ability to attract, motivate and retain key executives and qualified employees in key areas of our business, including as a result of our completed chapter 11 restructuring;

financial results that may be volatile and may not reflect historical trends due to, among other things, changes in commodity prices or general market conditions, acquisition and disposition activities, fluctuations in consumer trends, pricing pressures, changes in raw material or labor prices or rates related to our business and changing regulations or political developments in the markets in which we operate;


3


risks associated with our ability to collect outstanding receivables as a result of liquidity constraints on our customers resulting from low oil and/or natural gas prices;

the availability of less favorable credit and payment terms due to the downturn in our industry, our financial condition and the chapter 11 proceeding, including more stringent or costly payment terms from our vendors and additional requirements from sureties to collateralize our performance bonds with letters of credit, which may further constrain our liquidity and reduce availability under our revolving credit facility;

risks associated with our capital structure, including our ability to access necessary funding to generate sufficient operating cash flow to meet our debt service obligations;

risks associated with the limited trading volume of our common stock on the NYSE American Stock Exchange, including fluctuations in the trading prices of our common stock;

changes in customer drilling, completion and production activities, operating methods and capital expenditure plans, including impacts due to low oil and/or natural gas prices or the economic or regulatory environment;

difficulties in identifying and completing acquisitions and divestitures, and differences in the type and availability of consideration or financing for such acquisitions and divestitures;

difficulties in successfully executing our growth initiatives, including difficulties in permitting, financing and constructing pipelines and waste treatment assets and in structuring economically viable agreements with potential customers, joint venture partners, financing sources and other parties;
fluctuations in prices, transportation costs and demand for commodities such as oil and natural gas;
risks associated with the operation, construction and development of saltwater disposal wells, solids and liquids treatment and transportation assets, landfills and pipelines, including access to additional locations and rights-of-way, environmental remediation obligations, unscheduled delays or inefficiencies and reductions in volume due to micro- and macro-economic factors or the availability of less expensive alternatives;
risks associated with new technologies and the impact on our business;
the effects of competition in the markets in which we operate, including the adverse impact of competitive product announcements or new entrants into our markets and transfers of resources by competitors into our markets;
changes in economic conditions in the markets in which we operate or in the world generally, including as a result of political uncertainty;
reduced demand for our services due to regulatory or other influences related to extraction methods such as hydraulic fracturing, shifts in production among shale areas in which we operate or into shale areas in which we do not currently have operations or the loss of key customers;
the impact of changes in laws and regulation on waste management and disposal activities, including those impacting the delivery, storage, collection, transportation, treatment and disposal of waste products, as well as the use or reuse of recycled or treated products or byproducts;
control of costs and expenses;
present and possible future claims, litigation or enforcement actions or investigations;
natural disasters, such as hurricanes, earthquakes and floods, or acts of terrorism, or extreme weather conditions, that may impact our business locations, assets, including wells or pipelines, distribution channels, or which otherwise disrupt our or our customers’ operations or the markets we serve;
the threat or occurrence of international armed conflict;
the unknown future impact on our business from legislation and governmental rulemaking, including the Affordable Care Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules to be promulgated thereunder;
risks involving developments in environmental or other governmental laws and regulations in the markets in which we operate and our ability to effectively respond to those developments including laws and regulations relating to oil

4


and natural gas extraction businesses, particularly relating to water usage, and the disposal, transportation and treatment of liquid and solid wastes; and
other risks identified in this Quarterly Report or referenced from time to time in our filings with the United States Securities and Exchange Commission.
You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Quarterly Report. Except as required by law, we do not undertake any obligation to update or release any revisions to these forward-looking statements to reflect any events or circumstances, whether as a result of new information, future events, changes in assumptions or otherwise, after the date hereof.

 

5


PART I—FINANCIAL INFORMATION
Item  1. Financial Statements.
NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
Successor
 
 
Predecessor
 
September 30,
 
 
December 31,
 
2017
 
 
2016
 
 
 
 
 
Assets
 
 
 
 
Cash and cash equivalents
$
3,248

 
 
$
994

Restricted cash
7,758

 
 
1,420

Accounts receivable, net of allowance for doubtful accounts of $1.7 and $1.7 million at September 30, 2017 and December 31, 2016, respectively
32,843

 
 
23,795

Inventories
3,933

 
 
2,464

Prepaid expenses and other receivables
4,010

 
 
3,516

Other current assets
647

 
 
107

Assets held for sale
5,730

 
 
1,182

Total current assets
58,169

 
 
33,478

Property, plant and equipment, net of accumulated depreciation of $17.1 and $148.9 million at September 30, 2017 and December 31, 2016, respectively
264,314

 
 
294,179

Equity investments
57

 
 
73

Intangibles, net
589

 
 
14,310

Goodwill
27,139

 
 

Other assets
187

 
 
564

Total assets
$
350,455

 
 
$
342,604

Liabilities and Shareholders’ Equity (Deficit)
 
 
 
 
Accounts payable
$
7,534

 
 
$
4,047

Accrued liabilities
17,601

 
 
18,787

Current contingent consideration
500

 
 

Current portion of long-term debt
2,068

 
 
465,835

Derivative warrant liability
857

 
 
4,298

Other current liabilities
3,913

 
 

Total current liabilities
32,473

 
 
492,967

Deferred income taxes
192

 
 
495

Long-term debt
38,101

 
 
5,956

Long-term contingent consideration

 
 
8,500

Other long-term liabilities
6,310

 
 
3,752

Total liabilities
77,076

 
 
511,670

Commitments and contingencies

 
 

Shareholders’ equity (deficit):
 
 
 
 
   Predecessor common stock

 
 
152

   Successor common stock
117

 
 

   Additional paid-in capital
290,255

 
 
1,407,867

   Treasury stock

 
 
(19,807
)
   Accumulated deficit
(16,993
)
 
 
(1,557,278
)
Total shareholders’ equity (deficit)
273,379

 
 
(169,066
)
Total liabilities and shareholders’ equity (deficit)
$
350,455

 
 
$
342,604

The accompanying notes are an integral part of these statements.
 

6


NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

 
Successor
 
 
Predecessor
 
Two Months Ended
 
 
One Month Ended
 
Three Months Ended
 
September 30, 2017
 
 
July 31, 2017
 
September 30, 2016
Revenue:
 
 
 
 
 
 
Non-rental revenue
$
30,620

 
 
$
13,608

 
$
32,143

Rental revenue
3,138

 
 
1,514

 
3,298

Total revenue
33,758

 
 
15,122

 
35,441

Costs and expenses:
 
 
 
 
 
 
Direct operating expenses
26,110

 
 
11,896

 
32,122

General and administrative expenses
4,928

 
 
1,326

 
6,323

Depreciation and amortization
17,321

 
 
4,003

 
15,019

    Impairment of long-lived assets
2,404

 
 

 
7,788

Total costs and expenses
50,763

 
 
17,225

 
61,252

Operating loss
(17,005
)
 
 
(2,103
)
 
(25,811
)
Interest expense, net
(778
)
 
 
(3,246
)
 
(14,656
)
Other income, net
294

 
 
7

 
2,095

Reorganization items, net
530

 
 
229,198

 

(Loss) income before income taxes
(16,959
)
 
 
223,856

 
(38,372
)
Income tax (expense) benefit
(34
)
 
 
304

 
(24
)
Net (loss) income
$
(16,993
)
 
 
$
224,160

 
$
(38,396
)
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
Net (loss) income per basic common share
$
(1.45
)
 
 
$
1.48

 
$
(0.30
)
 
 
 
 
 
 
 
Net (loss) income per diluted common share
$
(1.45
)
 
 
$
1.42

 
$
(0.30
)
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
Basic
11,696

 
 
150,951

 
129,669

Diluted
11,696

 
 
157,394

 
129,669

The accompanying notes are an integral part of these statements.

7


NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

 
Successor
 
 
Predecessor
 
Two Months Ended
 
 
Seven Months Ended
 
Nine Months Ended
 
September 30, 2017
 
 
July 31, 2017
 
September 30, 2016
Revenue:
 
 
 
 
 
 
Non-rental revenue
$
30,620

 
 
$
86,564

 
$
107,538

Rental revenue
3,138

 
 
9,319

 
8,856

Total revenue
33,758

 
 
95,883

 
116,394

Costs and expenses:
 
 
 
 
 
 
Direct operating expenses
26,110

 
 
81,010

 
101,022

General and administrative expenses
4,928

 
 
22,552

 
27,979

Depreciation and amortization
17,321

 
 
28,981

 
46,070

    Impairment of long-lived assets
2,404

 
 

 
10,452

Total costs and expenses
50,763

 
 
132,543

 
185,523

Operating loss
(17,005
)
 
 
(36,660
)
 
(69,129
)
Interest expense, net
(778
)
 
 
(22,792
)
 
(40,674
)
Other income, net
294

 
 
4,247

 
5,024

Loss on extinguishment of debt

 
 

 
(674
)
Reorganization items, net
530

 
 
223,494

 

(Loss) income from continuing operations before income taxes
(16,959
)
 
 
168,289

 
(105,453
)
Income tax (expense) benefit
(34
)
 
 
322

 
(852
)
(Loss) income from continuing operations
(16,993
)
 
 
168,611

 
(106,305
)
Loss from discontinued operations, net of income taxes

 
 

 
(1,235
)
Net (loss) income
$
(16,993
)
 
 
$
168,611

 
$
(107,540
)
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
Basic (loss) income from continuing operations
$
(1.45
)
 
 
$
1.12

 
$
(1.41
)
Basic loss from discontinued operations

 
 

 
(0.02
)
Net (loss) income per basic common share
$
(1.45
)
 
 
$
1.12

 
$
(1.43
)
 
 
 
 
 
 
 
Diluted (loss) income from continuing operations
$
(1.45
)
 
 
$
0.97

 
$
(1.41
)
Diluted loss from discontinued operations

 
 

 
(0.02
)
Net (loss) income per diluted common share
$
(1.45
)
 
 
$
0.97

 
$
(1.43
)
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
Basic
11,696

 
 
150,940

 
75,291

Diluted
11,696

 
 
174,304

 
75,291

The accompanying notes are an integral part of these statements.


8


NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Successor
 
 
Predecessor
 
Two Months Ended
 
 
Seven Months Ended
 
Nine Months Ended
 
September 30,
 
 
July 31,
 
September 30,
 
2017
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
 
 
Net (loss) income
$
(16,993
)
 
 
$
168,611

 
$
(107,540
)
Adjustments to reconcile net (loss) income to net cash used in operating activities:
 
 
 
 
 
 
   Loss on the sale of TFI

 
 

 
1,235

   Depreciation and amortization of intangible assets
17,321

 
 
28,981

 
46,070

   Amortization of debt issuance costs, net

 
 
2,135

 
4,329

   Accrued interest added to debt principal
177

 
 
11,474

 
20,240

   Stock-based compensation
181

 
 
457

 
908

   Impairment of long-lived assets
2,404

 
 

 
10,452

   Gain on sale of UGSI
(76
)
 
 

 
(1,747
)
   Loss (gain) on disposal of property, plant and equipment
687

 
 
(258
)
 
3,298

   Bad debt expense
41

 
 
788

 
(516
)
   Change in fair value of derivative warrant liability
140

 
 
(4,025
)
 
(2,574
)
   Loss on extinguishment of debt

 
 

 
674

   Deferred income taxes
34

 
 
(337
)
 
70

   Other, net
152

 
 
(11,295
)
 
5

   Reorganization items, non-cash

 
 
(218,600
)
 

   Changes in operating assets and liabilities:
 
 
 
 
 
 
      Accounts receivable
(5,349
)
 
 
(4,528
)
 
20,516

      Prepaid expenses and other receivables
(528
)
 
 
472

 
(227
)
      Accounts payable and accrued liabilities
(1,111
)
 
 
3,682

 
(14,379
)
      Other assets and liabilities, net
(152
)
 
 
3,494

 
(136
)
Net cash used in operating activities
(3,072
)
 
 
(18,949
)
 
(19,322
)
Cash flows from investing activities:
 
 
 
 
 
 
   Proceeds from the sale of property, plant and equipment
1,623

 
 
3,083

 
9,954

   Purchases of property, plant and equipment
(404
)
 
 
(3,149
)
 
(2,613
)
   Proceeds from the sale of UGSI
76

 
 

 
5,032

   Change in restricted cash
47

 
 
(6,385
)
 
3,163

Net cash provided by (used in) investing activities
1,342

 
 
(6,451
)
 
15,536

Cash flows from financing activities:
 
 
 
 
 
 
   Proceeds from Predecessor revolving credit facility

 
 
106,785

 
118,533

   Payments on Predecessor revolving credit facility

 
 
(129,964
)
 
(176,428
)
   Proceeds from Predecessor term loan

 
 
15,700

 
24,000

   Proceeds from debtor in possession term loan

 
 
6,875

 

   Proceeds from Successor First and Second Lien Term Loans

 
 
36,053

 

   Payments on Successor First and Second Lien Term Loans
(442
)
 
 

 

   Proceeds from Successor revolving facility
28,020

 
 

 

   Payments on Successor revolving facility
(28,020
)
 
 

 

   Payments for debt issuance costs

 
 
(1,053
)
 
(1,084
)
   Issuance of stock

 
 

 
5,000

   Payments on vehicle financing and other financing activities
(1,773
)
 
 
(2,797
)
 
(4,957
)
Net cash (used in) provided by financing activities
(2,215
)
 
 
31,599

 
(34,936
)
Net (decrease) increase in cash and cash equivalents
(3,945
)
 
 
6,199

 
(38,722
)
Cash and cash equivalents - beginning of period
7,193

 
 
994

 
39,309

Cash and cash equivalents - end of period
$
3,248

 
 
$
7,193

 
$
587

 
 
 
 
 
 
 

9


 
Successor
 
 
Predecessor
 
Two Months Ended
 
 
Seven Months Ended
 
Nine Months Ended
 
September 30,
 
 
July 31,
 
September 30,
 
2017
 
 
2017
 
2016
 
 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
   Cash paid for interest
$
218

 
 
$
1,568

 
$
22,290

   Cash paid for taxes, net
23

 
 
193

 
304


The accompanying notes are an integral part of these statements.
 

10


NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements of Nuverra Environmental Solutions, Inc. and its subsidiaries (collectively, “Nuverra,” the “Company,” “we,” “us,” or “our”) are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Our condensed consolidated balance sheet as of December 31, 2016, included herein, has been derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (or “GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In our opinion, the condensed consolidated financial statements include the normal, recurring adjustments necessary for the fair statement of the results for the interim periods. These financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on April 14, 2017.
All dollar and share amounts in the footnote tabular presentations are in thousands, except per share amounts and unless otherwise noted. Unless stated otherwise, any reference to statement of operations items in these accompanying condensed consolidated financial statements refers to results from continuing operations.
On May 1, 2017, the Company and certain of its material subsidiaries (collectively with the Company, the “Nuverra Parties”) filed voluntary petitions under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) to pursue prepackaged plans of reorganization (together, and as amended, the “Plan”). On July 25, 2017, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Plan. The Plan became effective on August 7, 2017 (the “Effective Date”), when all remaining conditions to the effectiveness of the Plan were satisfied or waived. Although the Nuverra Parties emerged from bankruptcy on the Effective Date, the bankruptcy cases will remain pending until closed by the Bankruptcy Court. See Note 3 on “Emergence from Chapter 11 Reorganization” for additional details.

Upon emergence, we elected to apply fresh start accounting effective July 31, 2017, to coincide with the timing of our normal accounting period close. Refer to Note 4 on “Fresh Start Accounting” for additional information on the selection of this date. As a result of the application of fresh start accounting, as well as the effects of the implementation of the Plan, a new entity for financial reporting purposes was created, and as such, the condensed consolidated financial statements on or after August 1, 2017, are not comparable with the condensed consolidated financial statements prior to that date.

References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to July 31, 2017. References to “Predecessor” or “Predecessor Company” refer to the financial position and results of operations of the Company on and prior to July 31, 2017.

Going Concern

Our consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
 
Although we had a net loss for the two months ended September 30, 2017, we believe that the successful implementation of the Plan contemplated by our Restructuring, coupled with the exit financing we entered into upon our emergence from the chapter 11 cases, has provided us with sufficient liquidity to support our operations and service our debt obligations, and therefore substantial doubt about our ability to continue as a going concern no longer exists.

The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Recently Adopted Accounting Pronouncements

We adopted the guidance in ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) as of January 1, 2017 when it became effective. Under the new standard, income tax benefits and deficiencies are recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur.  Additionally, excess tax

11


benefits are recognized regardless of whether the benefit reduces taxes payable in the current period and are classified along with other income tax cash flows as an operating activity.  Upon adopting ASU 2016-09, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. We have selected to make an entity wide accounting policy election to continue to estimate the number of awards that are expected to vest. We have adopted the other provisions of the new guidance on a prospective basis, except when the modified retrospective transition method was specifically required. The adoption of this guidance has not had a significant impact on our condensed consolidated financial statements.

There have been no other material changes or developments in our significant accounting policies or evaluation of accounting estimates and underlying assumptions or methodologies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

Note 2 - Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The amendments in this update will be added to the ASC as Topic 606, Revenue from Contracts with Customers, and replaces the guidance in Topic 605. The underlying principle of the guidance in this update is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. This new revenue standard also calls for more detailed disclosures and provides guidance for transactions that weren’t addressed completely, such as service revenue and contract modifications which may be applied retrospectively or modified retrospectively. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). The guidance in ASU 2015-14 delays the effective date for the new revenue recognition guidance outlined in ASU 2014-09 to reporting periods beginning after December 15, 2017, which for us is the reporting period starting January 1, 2018. We currently anticipate adopting the standard using the modified retrospective method. While we are still in the process of completing our analysis on the impact this guidance will have on our consolidated financial statements and related disclosures, we do not expect the impact to be material.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires an entity that is a lessee to recognize the assets and liabilities arising from leases on the balance sheet. This guidance also requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods, using a modified retrospective approach. Early adoption of ASU 2016-09 is permitted. While we are currently assessing the impact ASU 2016-02 will have on our consolidated financial statements, we expect the primary impact upon adoption will be the recognition, on a discounted basis, of our minimum commitments under non-cancelable operating leases on our consolidated balance sheets resulting in the recording of right of use assets and lease obligations. Based upon the current effective date, the new guidance would first apply to our reporting period starting January 1, 2019.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) related to the classification of certain cash receipts and cash payments on the statement of cash flows. The pronouncement provides clarification and guidance on eight specific cash flow presentation issues that have developed due to diversity in practice. The issues include, but are not limited to, debt prepayment or extinguishment costs, settlement of zero-coupon debt, proceeds from the settlement of insurance claims, and contingent consideration payments made after a business combination. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We plan to adopt this pronouncement for our fiscal year beginning January 1, 2018, and don’t believe that this new guidance will have a significant impact on the consolidated statement of cash flows.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). This guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. As a result, restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, and the new guidance is to be applied retrospectively. The adoption of this guidance is not expected to have a significant impact on our consolidated statement of cash flows, other than the classification of restricted cash within the beginning-of-period and end-of-period totals on the consolidated statement of cash flows, as opposed to being excluded from these totals.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill

12


impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. We plan to early adopt this ASU in the fourth quarter of 2017 in conjunction with our annual impairment test as of October 1st.  Previously our goodwill was tested for impairment annually at September 30th. However, upon emergence we have determined that our goodwill will be tested for impairment annually at October 1st and more frequently if events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments in this ASU will be applied on a prospective basis and the adoption is not expected to have a significant impact on the consolidated financial statements.

Note 3 - Emergence from Chapter 11 Reorganization

On May 1, 2017, the Nuverra Parties filed voluntary petitions under chapter 11 of the Bankruptcy Code in the Bankruptcy Court to pursue the Plan. On July 25, 2017, the Bankruptcy Court entered the Confirmation Order confirming the Plan. On July 26, 2017, David Hargreaves, an individual holder of our pre-Effective Date 9.875% Senior Notes due 2018 (the “2018 Notes”), appealed the Confirmation Order to the District Court for the District of Delaware (the “District Court”) and filed a motion for a stay pending appeal from the District Court. On August 3, 2017, the District Court entered an order denying the motion for a stay pending appeal. Notwithstanding the denial of the motion for stay pending appeal, Hargreaves’ appeal remains pending in the District Court.

The Nuverra Parties emerged from the bankruptcy proceedings on the Effective Date. Although the Nuverra Parties emerged from bankruptcy on the Effective Date, the bankruptcy cases will remain pending until closed by the Bankruptcy Court.

On the Effective Date, the Company:

Adopted a Second Amended and Restated Certificate of Incorporation and Third Amended and Restated Bylaws of the Company;
Appointed three new members to the Company’s Board of Directors to replace the directors of the Company who were deemed to have resigned on the Effective Date;
Entered into a new $45.0 million First Lien Credit Agreement by and among the lenders party thereto (the “Credit Agreement Lenders”), ACF FinCo I, LP, as administrative agent (“Credit Agreement Agent”), and the Company, pursuant to which the Credit Agreement Lenders agreed to extend the Company a $30.0 million senior secured revolving credit facility (the “Successor Revolving Facility”) and a $15.0 million senior secured term loan facility (the “Successor First Lien Term Loan”);
Entered into a new $26.8 million Second Lien Term Loan Credit Agreement by and among the lenders party thereto (the “Second Lien Term Loan Lenders”), Wilmington Savings Fund Society, FSB (“Wilmington”), as administrative agent (the “Second Lien Term Loan Agent”), and the Company, pursuant to which the Second Lien Term Loan Lenders extended the Company a $26.8 million second lien term loan facility (the “Successor Second Lien Term Loan”);
Issued 7,900,000 shares of common stock of the reorganized Company to the holders of the Company’s 12.5%/10.0% Senior Secured Second Lien Notes due 2021 (the “2021 Notes”);
Issued 100,000 shares of common stock of the reorganized Company to the Affected Classes (as defined in the Plan);
Issued 3,695,580 shares of common stock of the reorganized Company to holders of Supporting Noteholder Term Loan Claims (as defined in the Plan) and to the Credit Agreement Lenders for the Exit Financing Commitment Fee (as defined in the Plan);
Issued 118,137 warrants to purchase common stock of the reorganized Company, with an exercise price of $39.82 per share and an exercise term expiring seven years from the Effective Date;
Entered into a Registration Rights Agreement with certain holders of the reorganized Company’s common stock party thereto;
Entered into a Warrant Agreement with American Stock Transfer & Trust Company LLC, the Company’s transfer agent;
Paid in full in cash all administrative expense claims, priority tax claims, priority claims, and debtor in possession revolving credit facility claims;
Paid all undisputed, non-contingent customer, vendor, or other obligations not specifically compromised under the Plan; and
Assumed Mark D. Johnsrud’s, the Company’s Chairman and Chief Executive Officer, Second Amended and Restated Employment Agreement, dated April 28, 2017 and entered into an Amended and Restated Employment Agreement with Joseph M. Crabb, the Company’s Executive Vice President and Chief Legal Officer.


13


On the Effective Date, all of the following agreements, and all outstanding interests and obligations thereunder, were terminated:

Amended and Restated Credit Agreement, as amended through the Fourteenth Amendment thereto, dated as of February 3, 2014, by and among Wells Fargo Bank, National Association (“Wells Fargo”), the lenders named therein, and the Company (the “Predecessor Revolving Facility”);
Term Loan Credit Agreement, as amended through the Ninth Amendment thereto, dated as of April 15, 2016, by and among Wilmington, the lenders named therein, and the Company (the “Predecessor Term Loan”);
Indenture governing the Company’s 2018 Notes, dated April 10, 2012, among the Company, its subsidiaries, and The Bank of New York Mellon, N.A.;
Indenture governing the Company’s 2021 Notes, dated April 15, 2016, among the Company, Wilmington, and the guarantors party thereto;
Debtor-in-Possession Credit Agreement, dated as of April 30, 2017 and effective as of May 3, 2017, by and among the Company, the lenders party thereto, Wells Fargo, and other agents party thereto; and
Debtor-in-Possession Term Loan Credit Agreement, dated as of April 30, 2017, by and among the Company, the lenders party thereto, and Wilmington.

In addition, on the Effective Date, pursuant to the Plan, (i) all shares of the Company’s pre-Effective Date common stock and all other previously issued and outstanding equity interests in the Company, and any rights of any holder in respect thereof, were canceled and discharged and (ii) all agreements, instruments, and other documents evidencing, relating to or connected with the Company’s pre-Effective Date common stock and all other previously issued and outstanding equity interests of the Company, and any rights of any holder in respect thereof, were canceled and discharged and of no further force or effect.

As a result of the cancellation of the Company’s pre-Effective Date common stock on the Effective Date, the Company’s pre-Effective Date common stock ceased trading on the OTC Pink Marketplace under the symbol “NESCQ.” On October 12, 2017, the Company’s post-Effective Date common stock was listed and began trading on the NYSE American Stock Exchange under the symbol “NES.” See “Risks Related to our Common Stock” on page 58 of this Quarterly Report.

The foregoing is a summary of the substantive provisions of the Plan and the transactions related to and contemplated thereunder and is not intended to be a complete description of, or a substitute for, a full and complete reading of, the Plan and the other documents referred to above.

Note 4 - Fresh Start Accounting

In connection with our emergence from chapter 11 on the Effective Date, we applied the provisions of fresh start accounting, pursuant to FASB ASC 852, Reorganizations (“ASC 852”), to our consolidated financial statements. We qualified for fresh start accounting as (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the emerging entity and (ii) the reorganization value of our assets immediately prior to confirmation was less than the post-petition liabilities and allowed claims. ASC 852 requires that fresh start accounting be applied when the Bankruptcy Court enters the Confirmation Order confirming the Plan, or as of a later date when all material conditions precedent to the effectiveness of the Plan are resolved, which for us was August 7, 2017. We elected to apply fresh start accounting effective July 31, 2017, to coincide with the timing of our normal accounting period close. We evaluated the events between July 31, 2017 and August 7, 2017 and concluded that the use of an accounting convenience date of July 31, 2017 did not have a material impact on our results of operations or financial position.

The implementation of the Plan and the application of fresh start accounting materially changed the carrying amounts and classifications reported in our condensed consolidated financial statements and resulted in a new entity for financial reporting purposes. As a result, the financial statements after July 31, 2017 are not comparable with the financial statements on and prior to July 31, 2017.

Fresh start accounting reflects the value of the Successor Company as determined in the confirmed Plan. Under fresh start accounting, asset values are remeasured and allocated based on their respective fair values in conformity with the purchase method of accounting for business combinations in FASB ASC 805, Business Combinations. Liabilities existing as of the Effective Date, other than deferred taxes, were recorded at the present value of amounts expected to be paid using appropriate risk adjusted interest rates. Deferred taxes were determined in conformity with applicable accounting standards. Predecessor accumulated depreciation, accumulated amortization, and accumulated deficit were eliminated. Reorganization value represents the fair value of the Successor Company’s assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets is reported as goodwill.

14



Reorganization Value

Under ASC 852, the Successor Company must determine a value to be assigned to the equity of the emerging company as of the date of adoption of fresh start accounting. To facilitate this calculation, we estimated the enterprise value of the Successor Company by relying equally on a discounted cash flow (or “DCF”) analysis under the income approach and the guideline public company method under the market approach. Enterprise value represents the fair value of an entity’s interest-bearing debt and stockholders’ equity.

To estimate enterprise value utilizing the DCF method, we established an estimate of future cash flows for the period ranging from 2017 to 2023 and discounted the estimated future cash flows to present value. The expected cash flows for the period 2017 to 2021 were based on the financial projections and assumptions utilized in the disclosure statement. The expected cash flows for the period 2022 to 2023 were derived from earnings forecasts and assumptions regarding growth and margin projections, as applicable. A terminal value was included based on the cash flow of the final year of the forecast period.

The discount rate of 11.3% was estimated based on an after-tax weighted average cost of capital (or “WACC”) reflecting the rate of return that would be expected by a market participant. The WACC also takes into consideration a company specific risk premium reflecting the risk associated with the overall uncertainty of the financial projections used to estimate future cash flows.

The guideline public company analysis identified a group of comparable companies that have operating and financial characteristics comparable in certain respects to us, including comparable lines of business, business risks and market presence. Under this methodology, certain financial multiples and ratios that measure financial performance and value are calculated for each selected company and then compared to the implied multiples from the DCF analysis. We considered enterprise value as a multiple of each selected company for which there was publicly available earnings before interest, taxes, depreciation and amortization (or “EBITDA”).

In the disclosure statement associated with the Plan, which was confirmed by the Bankruptcy Court, we estimated a range of enterprise values between $270.0 million and $335.0 million, with a midpoint of $302.5 million. We deemed it appropriate to use the midpoint between the low end and high end of the range to determine the final enterprise value of $302.5 million utilized for fresh start accounting.

The estimated enterprise value and the equity value are highly dependent on the achievement of the future financial results contemplated in the projections that were set forth in the Plan. The estimates and assumptions made in the valuation are inherently subject to significant uncertainties. The primary assumptions for which there is a reasonable possibility of occurrence of a variation that would have significantly affected the reorganization value include the assumptions regarding revenue growth, operating expenses, the amount and timing of capital expenditures and the discount rate utilized.

The following table reconciles the enterprise value to the estimated fair value of the Successor common stock, par value of $0.01 per share, as of the Effective Date:
Enterprise value
 
$
302,500

Plus: Cash and cash equivalents and restricted cash
 
14,998

Plus: Non-operating assets
 
14,400

Fair value of invested capital
 
331,898

Less: Fair value of First and Second Lien Term Loans
 
(36,053
)
Less: Fair value of capital leases
 
(5,654
)
Shareholders’ equity of Successor Company
 
$
290,191

 
 
 
Shares outstanding of Successor Company
 
11,696

Implied per share value
 
$
24.81



15


The following table reconciles the enterprise value to the estimated reorganization value as of the Effective Date:
Enterprise value
 
$
302,500

Plus: Cash and cash equivalents and restricted cash
 
14,998

Plus: Other non-operating assets
 
14,400

Fair value of invested capital
 
331,898

Plus: Current liabilities, excluding current portion of long-term debt
 
32,011

Plus: Non-current liabilities, excluding long-term debt
 
6,441

Reorganization value of Successor Assets
 
$
370,350


Warrants

Pursuant to the Plan, on the Effective Date, we issued to the holders of the 2018 Notes and holders of certain claims relating to the rejection of executory contracts and unexpired leases 118,137 warrants with an exercise price of $39.82 and a term expiring seven years from the Effective Date. Each warrant is exercisable for one share of our common stock, par value $0.01.

The warrants were recorded as derivative liabilities on the “Derivative warrant liability” line in the condensed consolidated balance sheet. At issuance, the warrants were recorded at fair value, which was computed using a Monte Carlo simulation model (Level 3). Future changes in these factors could have a significant impact on the computed fair value of the derivative warrant liability. As such, we expect future changes in the fair value of the warrants could vary significantly from quarter to quarter. See Note 8 and Note 11 for further discussion on the warrants and the assumptions used to calculate the fair value.

Personal Property

To estimate the fair value of personal property, such as machinery and equipment, we utilized a combination of the cost and market approaches. For assets valued via the cost approach, we applied trend indices from published sources to estimate reproduction cost if the asset was new. We then assigned valuation lives specific to each category of asset based on industry sources and our experience to assess physical and functional depreciation. For the assets valued via the market approach, such as trucks and tanks, we researched market values from published sources and reviewed comparable sales data and sales offers received to estimate fair value.

Real Property
  
The real property consists of land, buildings, and disposal wells. Real property was valued considering the three generally accepted approaches to value: cost, sales comparison and income capitalization. Due to the special-use nature of most of the real property, we relied on the cost and sales comparison approaches. To estimate the replacement cost if the real property was new and determine the economic life of the improvements, we utilized data provided by a valuation service. Depreciation estimates of the improvements were based on information obtained during physical inspections, discussions with building engineers, and general observations of the improvements’ condition. Land was valued as if it were vacant and available through application of the sales comparison approach. For commercial office properties that have leasing potential, we also utilized the income approach to estimate the values. Comparable rents and listing properties were researched an analyzed and adjusted to estimate market rents with the values derived from direct capitalization analysis.

Intangible Assets

The intangible assets were valued with a combination of the income and cost approach. In order to estimate the fair value of the customer relationships, we determined that the excess earnings method under the income approach was appropriate since the inherent value of this intangible asset lies in its ability to generate current and future income, as well as the fact that identifiable revenue streams could be estimated. We utilized the cost approach to value the other intangibles such the assembled workforce and disposal well permits.





  

16


Consolidated Statement of Financial Position

The following fresh start condensed consolidated balance sheet presents the implementation of the Plan and adoption of fresh start accounting as of July 31, 2017. The “Reorganization Adjustments” have been recorded within the condensed consolidated balance sheet to reflect the effects of the Plan, including discharge of liabilities subject to compromise. The “Fresh Start Adjustments” reflect the estimated fair value adjustments as a result of the adoption of fresh start accounting.

 
Predecessor
 
Reorganization
 
Fresh Start
 
Successor
 
Company
 
Adjustments
 
Adjustments
 
Company
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
2,728

 
$
4,465

A
$

 
$
7,193

Restricted cash
8,011

 
(206
)
B

 
7,805

Accounts receivable, net
27,535

 

 

 
27,535

Inventories
3,935

 

 

 
3,935

Prepaid expenses and other receivables
3,200

 
282

C

 
3,482

Other current assets
924

 
(500
)
C

 
424

Assets held for sale
631

 
3,913

D

 
4,544

Total current assets
46,964

 
7,954

 

 
54,918

Property, plant and equipment, net
265,097

 
(8,678
)
D
30,869

P
287,288

Equity investments
59

 

 

 
59

Intangibles, net
13,093

 
(763
)
D
(11,723
)
Q
607

Goodwill

 

 
27,139

R
27,139

Other assets
339

 

 

 
339

Total assets
$
325,552

 
$
(1,487
)
 
$
46,285

 
$
370,350

 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity (Deficit)
Accounts payable
$
6,331

 
$
1,967

E
$

 
$
8,298

Accrued liabilities
30,549

 
(12,168
)
F
(298
)
S
18,083

Current contingent consideration

 
1,000

G

 
1,000

Current portion of long-term debt
41,007

 
(37,665
)
H

 
3,342

Derivative warrant liability

 
717

I

 
717

Other current liabilities

 
3,913

J

 
3,913

Total current liabilities
77,887

 
(42,236
)
 
(298
)
 
35,353

Deferred income taxes
472

 

 
(314
)
T
158

Long-term debt
2,312

 
35,000

K
1,053

 
38,365

Long-term contingent consideration

 

 

 

Other long-term liabilities
3,694

 
(461
)
L
3,050

U
6,283

Liabilities subject to compromise
480,595

 
(480,595
)
M

 

Total liabilities
564,960

 
(488,292
)
 
3,491

 
80,159

Commitments and contingencies
 
 
 
 
 
 
 
Shareholders’ deficit:
 
 
 
 
 
 
 
   Common stock (Successor)

 
117

N

 
117

   Additional paid-in-capital (Successor)

 
290,074

N

 
290,074

   Common stock (Predecessor)
152

 

 
(152
)
V

   Additional paid-in capital (Predecessor)
1,408,324

 

 
(1,408,324
)
V

   Treasury stock (Predecessor)
(19,810
)
 

 
19,810

V

   (Accumulated deficit) retained earnings
(1,628,074
)
 
196,614

O
1,431,460

W

Total shareholders’ equity (deficit)
(239,408
)
 
486,805

 
42,794

 
290,191

Total liabilities and shareholders’ equity (deficit)
$
325,552

 
$
(1,487
)
 
$
46,285

 
$
370,350




17


Reorganization Adjustments

A. Reflects the cash receipts (payments) from implementation of the Plan:
Receipt of Successor First Lien Term Loan and Successor Second Lien Term Loan Proceeds
 
$
35,000

Payment of debtor in possession revolving facility, including accrued interest and fees
 
(30,461
)
Payment of debtor in possession term loan interest
 
(90
)
Cash payment in association with settlement of the 2018 Notes
 
(350
)
Release of restricted cash to unrestricted cash
 
206

Refund of professional fees
 
160

Net Cash Receipts
 
$
4,465


B. Reflects the release of restricted cash to unrestricted cash.

C. Reflects the reclassification of a rental security deposit to prepaid rent (or “Prepaid expenses and other receivables”) from
“Other current assets” in connection with settlement of lease claims. Also included in “Other current assets” is the settlement for the lease rejection damages, see below:
Reclassification of a rental security deposit to prepaid rent
 
$
(282
)
Settlement for the lease rejection damages
 
(218
)
Adjustment to Other current assets
 
$
(500
)

D. As part of the Plan and settlement of claims, the $7.4 million note payable (or “the AWS Note”) that arose in connection with Appalachian Water Services, LLC (“AWS”), will be settled in exchange for the return of the water treatment facility in the Marcellus Shale area, including all assets related to the operations of the water treatment facility in “as-is, where-is” condition, together with $75,000 for reimbursement of certain costs and deferred maintenance. The adjustments reflect the reclassification of property, plant and equipment exchanged for the release of claims related to the AWS Note from “Property, plant and equipment, net” to “Assets held for sale,” as well as the write-off of intangibles associated with AWS.
Elimination of property, plant and equipment related to AWS settlement
 
$
(8,678
)
Elimination of intangible assets related to AWS settlement
 
(763
)
Recognition of assets held for sale on the AWS settlement
 
3,913

Accrual of cash payment in connection with the AWS settlement (See F)
 
(75
)
Loss on settlement of the AWS note payable
 
$
(5,603
)

E. The reorganization adjustment to “Accounts payable” represents the reinstatement of the pre-petition accounts payable that was previously classified as “Liabilities subject to compromise.”

F. The reorganization adjustment to “Accrued liabilities” are noted in the table below.
Accrual of the $75,000 related to the AWS settlement
 
$
75

Write-off of short-term deferred rent related to the Scottsdale Headquarters lease
 
(330
)
Write-off of accrued interest related to the 2018 and 2021 Notes
 
(11,650
)
Decrease in accrued interest for DIP Facilities due to cash payment
 
(263
)
Net decrease in Accrued liabilities
 
$
(12,168
)

G. Reflects the contingent consideration due for the Ideal Oilfield Disposal LLC (“Ideal”) settlement. Of the remaining $1.0 million balance due, $0.5 million was paid in August 2017 subsequent to the Effective Date and the other $0.5 million is payable upon delivery of the required permits.

H. Reflects the payment or conversion to equity of the Predecessor Company’s asset based lending facility and debtor in possession credit facilities in connection with emergence on the Effective Date.


18


I. Reflects the recognition of the derivative warrant liability for the warrants issued in connection with the Plan. See Note 8 and Note 11 for further discussion on the warrants and the assumptions used to calculate the fair value.

J. Reflects the reclassification of the AWS debt pending the surrender of the AWS assets classified as “Assets held for sale” pursuant to the Plan.

K. Represents the new Successor First Lien Term Loan and Successor Second Lien Term Loan at fair value, net of debt issuance costs:
Successor First Lien Term Loan at fair value
 
$
15,000

Successor Second Lien Term Loan at fair value
 
21,053

Debt issuance costs associated with the Successor Second Lien Term Loan
 
(1,053
)
Fair Value of the Successor First Lien Term Loan and Successor Second Lien Term Loan, net of debt issuance costs
 
$
35,000


L. Reflects the write-off of long-term deferred rent associated with the Scottsdale headquarters lease which was rejected and settled as part of the chapter 11 filing.

M. Liabilities subject to compromise were settled as follows in accordance with the Plan:
Outstanding principal amount of 2018 Notes, net of discounts/premiums and debt issuance costs
 
$
(40,020
)
Outstanding principal amount of 2021 Notes, net of discounts/premiums and debt issuance costs
 
(347,658
)
Outstanding principal amount of Term Loan, net of discounts/premiums and debt issuance costs
 
(78,264
)
Outstanding principal amount on the AWS note payable
 
(3,913
)
Ideal original contingent consideration
 
(8,500
)
Pre-petition accounts payable
 
(1,967
)
Derivative warrant liability
 
(273
)
Balance of Liabilities subject to compromise
 
$
(480,595
)
 
 
 
Reinstatement of pre-petition accounts payable
 
$
1,967

Reinstatement of a portion of the Ideal contingent consideration pursuant to the settlement agreement
 
1,000

Reinstatement of the AWS note payable pursuant to the settlement agreement
 
3,913

Payment to the 2018 Noteholders pursuant to the Plan
 
350

Write-off of accrued interest related to the 2018 and 2021 Notes
 
(11,650
)
Record the issuance of Successor common equity
 
290,191

Recoveries pursuant to the Plan
 
$
285,771

 
 
 
Net gain on debt discharge
 
$
(194,824
)

N. Distribution of 11,695,580 Successor shares of common stock at a par value of $0.01 per share:
Record issuance of shares of Successor common stock at par value of $0.01 per share
 
$
117

Record additional paid-in capital from the issuance of Successor common stock
 
290,074

Fair value of Successor common equity
 
$
290,191



19


O. Reflects the cumulative impact of the reorganization adjustments on “(Accumulated deficit) retained earnings” discussed above:
Net gain on debt discharge
 
$
194,824

Loss on settlement of the AWS note payable
 
(5,603
)
Write-off of a portion of the Ideal contingent consideration due to settlement
 
7,500

Settlement of the lease rejection claim associated with the Scottsdale Headquarters lease
 
(218
)
Write-off of the deferred rent associated with the Scottsdale Headquarters lease
 
790

Issuance of warrants to the 2018 Noteholders and other parties pursuant to the Plan
 
(717
)
Refund of professional fees
 
160

Professional fees related to the reorganization under the Plan
 
(122
)
Net retained earnings impact resulting from implementation of the Plan
 
$
196,614


Fresh Start Adjustments

P. Reflects the increase in net book value of property, plant and equipment to estimated fair value. The following table summarizes the components of property, plant and equipment, net as of July 31, 2017 of the Predecessor Company and the Successor Company:
 
 
Successor
 
Predecessor
Land
 
$
10,779

 
$
11,495

Buildings
 
29,349

 
27,145

Building, leasehold and land improvements
 
8,690

 
10,724

Pipelines
 
66,962

 
58,533

Disposal wells
 
41,195

 
20,872

Landfill
 
4,500

 
20,539

Machinery and equipment
 
16,724

 
20,169

Equipment under capital leases
 
10,045

 
6,499

Motor vehicles and trailers
 
55,333

 
34,069

Rental equipment
 
36,748

 
46,300

Office equipment
 
3,046

 
1,954

Construction in process
 
3,917

 
6,798

Property, plant and equipment, net
 
$
287,288

 
$
265,097


Q. Reflects the reduction in net book value of intangible assets to estimated fair value.

R. The adjustment represents the reorganization value of assets in excess of amounts allocated to identified tangible and intangible assets as follows:
Reorganization value of Successor assets
 
$
370,350

Less: Fair value of Successor assets (excluding goodwill)
 
343,211

Reorganization value of Successor assets in excess of fair value - Successor Goodwill
 
$
27,139


The Successor goodwill by segment is $4.9 million for the Rocky Mountain division, $19.5 million for the Northeast division, and $2.7 million for the Southern division. Upon emergence, we have determined that our goodwill will be tested for impairment annually at October 1st and more frequently if events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

S. Reflects an adjustment to Accrued liabilities to adjust the environmental liabilities to estimated fair value.

T. Reflects the impact of the reorganization and fresh start adjustments on deferred taxes.


20


U. Reflects the adjustment to increase the net book value of asset retirement obligations to estimated fair value.

V. Reflects the cancellation of Predecessor equity to (Accumulated deficit) retained earnings.

W. Reflects the cumulative impact of the fresh start accounting adjustments discussed above on (Accumulated deficit) retained earnings as follows:
Property, plant and equipment fair value adjustment
 
$
30,869

Intangible assets fair value adjustment
 
(11,723
)
Reorganization value in excess of amounts allocable to identified assets - Successor goodwill
 
27,139

Asset retirement obligation fair value adjustment
 
(3,050
)
Environmental liability fair value adjustment
 
298

Recording the fair value of debt issuance costs for the new Successor First Lien Term Loan and Successor Second Lien Term Loan
 
(1,053
)
Adjustment to deferred income taxes
 
314

Change in assets and liabilities resulting from fresh start adjustments
 
$
42,794

 
 
 
Elimination of Predecessor common stock to (accumulated deficit) retained earnings
 
$
152

Elimination of Predecessor additional paid-in capital to (accumulated deficit) retained earnings
 
1,408,324

Elimination of Predecessor treasury stock to (accumulated deficit) retained earnings
 
(19,810
)
Net impact of fresh start adjustments on (accumulated deficit) retained earnings
 
$
1,431,460


Reorganization Items, net

Reorganization items, net represents liabilities settled, net of amounts incurred subsequent to the chapter 11 filing as a direct result of the Plan and are classified as “Reorganization items, net” in our Condensed Consolidated Statement of Operations. The following table summarizes reorganization items, net for the two months ended September 30, 2017, and the one and seven months ended July 31, 2017:
 
 
Successor
 
 
Predecessor
 
 
Two Months Ended
 
 
One Month Ended
 
Seven Months Ended
 
 
September 30,
 
 
July 31,
 
July 31,
 
 
2017
 
 
2017
 
2017
Net gain on debt discharge
 
$

 
 
$
194,824

 
$
194,824

Change in assets and liabilities resulting from fresh start adjustments
 

 
 
42,794

 
42,794

Settlement of the AWS note payable
 

 
 
(5,603
)
 
(5,603
)
Fair value of warrants issued to the 2018 Noteholders and other parties pursuant to the Plan
 

 
 
(717
)
 
(717
)
Professional and insurance fees
 
(2,026
)
 
 
(4,979
)
 
(9,090
)
DIP credit agreement financing costs
 
3,962

 
 
(4,657
)
 
(5,702
)
Retention bonus payments
 
(1,406
)
 
 
(258
)
 
(806
)
Other costs
 

 
 
7,794

 
7,794

Reorganization items, net
 
$
530

 
 
$
229,198

 
$
223,494


Note 5 - Earnings Per Common Share
Basic and diluted loss per common share from continuing operations, basic and diluted loss per common share from discontinued operations and net loss per basic and diluted common share have been computed using the weighted average number of shares of common stock outstanding during the period.
For the two months ended September 30, 2017, and the three and nine months ended September 30, 2016, no shares of common stock underlying stock options, restricted stock, or warrants were included in the computation of diluted earnings per common

21


share (“EPS”) from continuing operations because the inclusion of such shares would be anti-dilutive based on the net losses from continuing operations reported for those periods. Accordingly, for the two months ended September 30, 2017, and the three and nine month periods ended September 30, 2016, no shares of common stock underlying stock options, restricted stock, or warrants were included in the computations of diluted EPS from income from discontinued operations or diluted EPS from net loss per common share, because such shares were excluded from the computation of diluted EPS from continuing operations for those periods.
The following tables present the calculation of basic and diluted net loss per common share, as well as the potentially dilutive stock-based awards that were excluded from the calculation of diluted loss per share for the periods presented:
 
Successor
 
 
Predecessor
 
Two Months Ended
 
 
One Month Ended
 
Three Months Ended
 
September 30, 2017
 
 
July 31, 2017
 
September 30, 2016
Numerator:
 
 
 
 
 
 
Net (loss) income
$
(16,993
)
 
 
$
224,160

 
$
(38,396
)
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
Weighted average shares—basic
11,696

 
 
150,951

 
129,669

Common stock equivalents

 
 
6,443

 

Weighted average shares—diluted
11,696

 
 
157,394

 
129,669

 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
Net (loss) income per basic common share
$
(1.45
)
 
 
$
1.48

 
$
(0.30
)
 
 
 
 
 
 
 
Net (loss) income per diluted common share
$
(1.45
)
 
 
$
1.42

 
$
(0.30
)
 
 
 
 
 
 
 
Dilutive stock-based awards excluded:
 
 
 
 
 
 
Stock options

 
 

 

Restricted stock awards and units

 
 

 

Warrants

 
 

 
21,304

   Total

 
 

 
21,304

 
 
 
 
 
 
 
Anti-dilutive stock-based awards excluded:
828

 
 
576

 
880



22


 
Successor
 
 
Predecessor
 
Two Months Ended
 
 
Seven Months Ended
 
Nine Months Ended
 
September 30, 2017
 
 
July 31, 2017
 
September 30, 2016
Numerator:
 
 
 
 
 
 
(Loss) income from continuing operations
$
(16,993
)
 
 
$
168,611

 
(106,305
)
Loss from discontinued operations

 
 

 
(1,235
)
Net (loss) income
$
(16,993
)
 
 
$
168,611

 
$
(107,540
)
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
Weighted average shares—basic
11,696

 
 
150,940

 
75,291

Common stock equivalents

 
 
23,364

 

Weighted average shares—diluted
11,696

 
 
174,304

 
75,291

 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
Basic (loss) income from continuing operations
$
(1.45
)
 
 
$
1.12

 
$
(1.41
)
Basic loss from discontinued operations

 
 

 
(0.02
)
Net (loss) income per basic common share
$
(1.45
)
 
 
$
1.12

 
$
(1.43
)
 
 
 
 
 
 
 
Diluted (loss) income from continuing operations
$
(1.45
)
 
 
$
0.97

 
$
(1.41
)
Diluted loss from discontinued operations

 
 

 
(0.02
)
Net (loss) income per diluted common share
$
(1.45
)
 
 
$
0.97

 
$
(1.43
)
 
 
 
 
 
 
 
Dilutive stock-based awards excluded:
 
 
 
 
 
 
Stock options

 
 

 

Restricted stock awards and units

 
 

 

Warrants

 
 

 
10,065

   Total

 
 

 
10,065

 
 
 
 
 
 
 
Anti-dilutive stock-based awards excluded:
828

 
 
593

 
987


Note 6 - Intangible Assets

Intangible assets consist of the following:
 
Successor
 
 
Predecessor
 
September 30, 2017
 
 
December 31, 2016
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Remaining Useful Life (Years)
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Remaining Useful Life (Years)
Customer relationships
$

 
$

 
$

 
0
 
 
$
11,731

 
$
(8,229
)
 
$
3,502

 
5.7
Disposal permits
608

 
(19
)
 
589

 
6.4
 
 
1,269

 
(612
)
 
657

 
4.1
Customer contracts

 

 

 
0
 
 
17,352

 
(7,201
)
 
10,151

 
9.8
 
$
608

 
$
(19
)
 
$
589

 
6.4
 
 
$
30,352

 
$
(16,042
)
 
$
14,310

 
8.5

The remaining weighted average useful lives shown are calculated based on the net book value and remaining amortization period of each respective intangible asset.


23


Note 7 - Assets Held for Sale and Impairment
Assets Held for Sale

During the two months ended September 30, 2017, management approved plans to sell certain underutilized assets located in the Rocky Mountain and Southern divisions. We began to actively market these assets, which we expect to sell within one year. In accordance with applicable accounting guidance, the assets were recorded at the lower of net book value or fair value less costs to sell. Upon reclassification we ceased to recognize depreciation expense on the assets. As the fair value of the assets reclassified as held for sale during the quarter was lower than its net book value, an impairment charge of $2.4 million was recognized during the two months ended September 30, 2017, and is included in “Impairment of long-lived assets” on our condensed consolidated statements of operations. Of the $2.4 million recorded during the two months ended September 30, 2017, $2.2 million related to the Rocky Mountain division and $0.2 million related to the Southern division.

As the AWS Note settlement, which was referenced in Note 4 and is discussed in more detail in Note 15, was not consummated as of September 30, 2017, approximately $3.9 million of assets for AWS are included in the assets held for sale balance as of September 30, 2017. We expect to complete the settlement, including the transfer of assets, during the fourth quarter of 2017.

During the nine months ended September 30, 2016, management approved plans to sell certain assets located in both the Northeast and Southern divisions, including trucks, tanks, and a parcel of land, which we expected to sell within one year. The assets were recorded at the lower of net book value or fair value less costs to sell which resulted in an impairment charge of $2.1 million during the three months ended September 30, 2016, and is included in “Impairment of long-lived assets” on our condensed consolidated statements of operations. The $2.1 million recorded during the three months ended September 30, 2016 related to the Southern division.

As a result of classifying assets as held for sale in 2016, we recorded total impairment charges of $4.8 million during the nine months ended September 30, 2016, which included $2.7 million recorded during the three months ended June 30, 2016, with $2.4 million for the Northeast division and $0.3 million for the Southern division. The fair value of the assets was measured using third party quoted prices for similar assets (Level 3).

Impairment of Long-Lived Assets

Long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Due to sales of underutilized or non-core assets as a result of lower oil prices and decreased activities by our customers, in addition to lower capital spending over the last several years, there were indicators that the carrying value of our assets may not be recoverable during the three months ended September 30, 2016. There were no impairment indicators as of September 30, 2017.

Our impairment review during the three months ended September 30, 2016 concluded that the carrying value of the Haynesville and Marcellus asset groups were not recoverable as the carrying value exceeded our estimate of future undiscounted cash flows for these two basins. As a result, we recorded an impairment charge for the Marcellus asset group (Northeast division) of $5.7 million during the three months ended September 30, 2016 as the carrying value exceeded fair value. No impairment charge was necessary for the Haynesville asset group as the fair value was greater than the carrying value. The fair value of our asset groups was determined primarily using the cost and market approaches (Level 3).

If the decrease in demand for our services continues for a prolonged period of time, or if we make downward adjustments to our projections, our actual cash flows could be less than our estimated cash flows, which could result in future impairment charges for long-lived assets.

Note 8 - Fair Value Measurements
Measurements
Fair value represents an exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 — Observable inputs such as quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;

24


Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value on a recurring basis and the fair value hierarchy of the valuation techniques we utilized to determine such fair value included significant unobservable inputs (Level 3) and were as follows:
 
Successor
 
 
Predecessor
 
September 30, 2017
 
 
December 31, 2016
Derivative warrant liability
$
857

 
 
$
4,298

Contingent consideration
500

 
 
8,500

Derivative Warrant Liability
Our derivative warrant liability is adjusted to reflect the estimated fair value at each quarter end, with any decrease or increase in the estimated fair value recorded in “Other income, net” in the condensed consolidated statements of operations. We used Level 3 inputs for the valuation methodology of the derivative liabilities. The estimated fair values were computed using a Monte Carlo simulation model. The key inputs in determining our derivative warrant liability typically includes our stock price, the volatility of our stock price, and the risk free interest rate. Future changes in these factors could have a significant impact on the computed fair value of the derivative warrant liability. As such, we expect future changes in the fair value of the warrants could vary significantly from quarter to quarter.
Upon emergence from chapter 11 on the Effective Date, all existing warrants outstanding under the Predecessor Company were canceled under the Plan. Additionally, on the Effective Date, pursuant to the Plan we issued to the holders of the 2018 Notes and holders of certain claims relating to the rejection of executory contracts and unexpired leases 118,137 warrants with an exercise price of $39.82 and a term expiring seven years from the Effective Date. Each warrant is exercisable for one share of our common stock, par value $0.01. The warrants issued under the Successor Company were also determined to be derivative liabilities.
The following table provides a reconciliation of the beginning and ending balances of the “Derivative warrant liability” presented in the condensed consolidated balance sheet as of September 30, 2017 and December 31, 2016.
 
Successor
 
 
Predecessor
 
September 30, 2017
 
 
December 31, 2016
Balance at beginning of period
$

 
 
$

Issuance of warrants
717

 
 
7,838

Exercise of warrants

 
 
(229
)
Adjustments to estimated fair value
140

 
 
(3,311
)
Balance at end of period
$
857

 
 
$
4,298

Contingent Consideration
We are liable for contingent consideration payments in connection with an acquisition. The fair value of the contingent consideration obligation was determined using a probability-weighted income approach at the acquisition date and is revalued at each reporting date or more frequently if circumstances dictate based on changes in the discount periods and rates, changes in the timing and amount of the revenue estimates and changes in probability assumptions with respect to the likelihood of achieving the performance measurements upon which the obligation is based.
We had previously determined that it would be unlikely that the required permits and certificates necessary for the issuance of a second special waste disposal permit to Ideal would be issued within one year, and as such presented the $8.5 million contingent consideration liability related to the Ideal acquisition as “Long-term contingent consideration” in the condensed consolidated balance sheet as of December 31, 2016.
On June 28, 2017, certain of the Nuverra Parties filed a motion with the Bankruptcy Court seeking authorization to resolve unsecured claims related to the $8.5 million contingent consideration from the Ideal acquisition (the “Ideal Settlement”). On July 11, 2017, the Bankruptcy Court entered an order authorizing the Ideal Settlement. Pursuant to the approved settlement terms, the $8.5 million contingent claim was replaced with an obligation on the part of the applicable Nuverra Party to transfer

25


$0.5 million to the counterparties to the Ideal Settlement upon emergence from chapter 11, and $0.5 million when the Ideal Settlement counterparties deliver the required permits and certificates necessary for the issuance of the second special waste disposal permit. The $0.5 million due upon emergence from chapter 11 was paid during the two months ended September 30, 2017. The remaining $0.5 million due when the counterparties deliver the required permits and certificates necessary for the issuance of the second special waste disposal permit has been classified as current, as these permits and certificates are expected to be received within one year.

Changes to the fair value of contingent consideration are recorded as “Other (expense) income, net” in the condensed consolidated statements of operations. The fair value measurement is based on significant inputs not observable in the market, which are referred to as Level 3 inputs. Changes to contingent consideration obligations during the two months ended September 30, 2017, seven months ended July 31, 2017, and the year ended December 31, 2016 were as follows:

 
Successor
 
 
Predecessor
 
Two Months Ended
 
 
Seven Months Ended
 
Year Ended
 
September 30, 2017
 
 
July 31, 2017
 
December 31, 2016
Balance at beginning of period
$
1,000

 
 
$
8,500

 
$
8,628

Cash payments
(500
)
 
 

 

Changes in fair value of contingent consideration, net

 
 

 
(128
)
Write-off contingent consideration due to settlement in chapter 11

 
 
(7,500
)
 

Balance at end of period
500

 
 
1,000

 
8,500

Less: current portion
(500
)
 
 
(1,000
)
 

Long-term contingent consideration
$

 
 
$

 
$
8,500


Note 9 - Accrued Liabilities
Accrued liabilities consisted of the following at September 30, 2017 and December 31, 2016:
 
Successor
 
 
Predecessor
 
September 30, 2017
 
 
December 31, 2016
Accrued payroll and employee benefits
$
2,136

 
 
$
2,432

Accrued insurance
2,746

 
 
3,887

Accrued legal and environmental costs
5,360

 
 
3,570

Accrued taxes
1,804

 
 
1,458

Accrued interest
232

 
 
4,699

Accrued operating costs
4,312

 
 
1,255

Accrued other
1,011

 
 
1,486

Total accrued liabilities
$
17,601

 
 
$
18,787



26


Note 10 - Debt
Debt consisted of the following at September 30, 2017 and December 31, 2016:
 
 
 
 
 
Successor
 
 
Predecessor
 
 
 
 
 
September 30, 2017
 
 
December 31, 2016
 
Interest Rate
 
Maturity Date
 
Fair Value of Debt (h)
 
Carrying Value of Debt
 
 
Carrying Value of Debt
Predecessor Revolving Facility (a)
6.15%
 
Mar. 2017
 
$

 
$

 
 
$
22,679

Successor Revolving Facility (b)
6.57%
 
Aug. 2020
 

 

 
 

2018 Notes (c)
9.875%
 
Apr. 2018
 

 

 
 
40,436

2021 Notes (d)
10.00%
 
Apr. 2021
 

 

 
 
351,294

Predecessor Term Loan (e)
13.00%
 
Apr. 2018
 

 

 
 
60,711

Successor First Lien Term Loan (j)
8.57%
 
Aug. 2020
 
14,821

 
14,821

 
 

Successor Second Lien Term Loan (j)
11.00%
 
Feb 2021
 
20,967

 
20,967

 
 

Vehicle financings (f)
4.30%
 
Various
 
4,381

 
4,381

 
 
7,699

Note payable (g)
4.25%
 
Apr. 2019
 

 

 
 
4,778

Total debt
 
 
 
 
$
40,169

 
40,169

 
 
487,597

Original issue discount and premium for 2018 Notes
 
 

 
 
(27
)
Original issue discount and premium for 2021 Notes
 
 

 
 
(282
)
Debt issuance costs presented with debt
 
 
 

 
 
(8,998
)
Debt discount for issuance of warrants (i)
 
 
 

 
 
(6,499
)
Total debt, net
 
 
 
 
 
 
40,169

 
 
471,791

Less: current portion of long-term debt
 
 
(2,068
)
 
 
(465,835
)
Long-term debt