0001403853-18-000015.txt : 20180807 0001403853-18-000015.hdr.sgml : 20180807 20180807163558 ACCESSION NUMBER: 0001403853-18-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 76 CONFORMED PERIOD OF REPORT: 20180630 FILED AS OF DATE: 20180807 DATE AS OF CHANGE: 20180807 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Nuverra Environmental Solutions, Inc. CENTRAL INDEX KEY: 0001403853 STANDARD INDUSTRIAL CLASSIFICATION: OIL, GAS FIELD SERVICES, NBC [1389] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33816 FILM NUMBER: 18998611 BUSINESS ADDRESS: STREET 1: 14624 N. SCOTTSDALE RD. STREET 2: SUITE 300 CITY: SCOTTSDALE STATE: AZ ZIP: 85254 BUSINESS PHONE: 602-903-7802 MAIL ADDRESS: STREET 1: 14624 N. SCOTTSDALE RD. STREET 2: SUITE 300 CITY: SCOTTSDALE STATE: AZ ZIP: 85254 FORMER COMPANY: FORMER CONFORMED NAME: Heckmann Corp DATE OF NAME CHANGE: 20111205 FORMER COMPANY: FORMER CONFORMED NAME: Heckmann CORP DATE OF NAME CHANGE: 20070620 10-Q 1 nes_20180630x10-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: June 30, 2018
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
_________________________________
nesimagea10.jpg
__________________________________
Delaware
26-0287117
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
6720 N. Scottsdale Road, Suite 190, Scottsdale, AZ 85253
(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 has filed all the documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan of confirmation by a court. Yes  x    No  ¨
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 July 31, 2018 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 benefits of our completed restructuring under chapter 11 of the United States Bankruptcy Code (“the Bankruptcy Code”) to improve our long-term capital structure;
future financial performance and growth targets or expectations;
market and industry trends and developments, including, but not limited to, statements regarding fluctuations in oil and natural gas prices and third-party projections for the markets in which we operate; 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;

the loss of one or more of our larger customers;

our ability to attract and retain key executives and qualified employees in key areas of our business;

our ability to attract and retain a sufficient number of qualified truck drivers in light of industry-wide driver shortages and high-turnover;

risks associated with our indebtedness, including changes to interest rates, decreases in our borrowing availability, our ability to manage our liquidity needs and to comply with covenants under our credit facilities;

the availability of less favorable credit and payment terms due to changes in industry condition or our financial condition, which could constrain our liquidity and reduce availability under our revolving credit facility;

difficulties in successfully executing our growth initiatives, including identifying and completing acquisitions and divestitures, and differences in the type and availability of consideration or financing for such acquisitions and divestitures;

higher than forecasted capital expenditures to maintain and repair our fleet of trucks, tanks, equipment and disposal wells;
control of costs and expenses;
risks associated with the limited trading volume of our common stock on the NYSE American Stock Exchange, including potential fluctuations in the trading prices of our common stock;
risks associated with the reliance on third-party analyst and expert market projections and data for the markets in which we operate;

3



risks associated with changes in industry practices and operational technologies and the impact on our business;
present and possible future claims, litigation or enforcement actions or investigations;
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, transportation costs, 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;
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;
risks associated with the operation, construction, development and closure 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;
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;
the unknown future 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;
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 and natural gas extraction businesses, particularly relating to water usage, and the disposal, transportation and treatment of liquid and solid wastes;
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; 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.

 

4



PART I—FINANCIAL INFORMATION
Item  1. Financial Statements.
NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
Successor
 
June 30,
 
December 31,
 
2018
 
2017
 
 
 
 
Assets
 
 
 
Cash and cash equivalents
$
12,808

 
$
5,488

Restricted cash
1,548

 
1,296

Accounts receivable, net of allowance for doubtful accounts of $2.1 million and $1.9 million at June 30, 2018 and December 31, 2017, respectively
32,476

 
30,965

Inventories
3,846

 
4,089

Prepaid expenses and other receivables
3,334

 
8,594

Other current assets
483

 
226

Assets held for sale
3,381

 
2,765

Total current assets
57,876

 
53,423

Property, plant and equipment, net of accumulated depreciation of $56.2 million and $35.8 million at June 30, 2018 and December 31, 2017, respectively
192,899

 
229,874

Equity investments
41

 
48

Intangibles, net
454

 
547

Goodwill
27,139

 
27,139

Deferred income taxes
84

 
84

Other assets
144

 
207

Total assets
$
278,637

 
$
311,322

Liabilities and Shareholders’ Equity
 
 
 
Accounts payable
$
7,889

 
$
7,946

Accrued liabilities
15,874

 
13,939

Current contingent consideration
500

 
500

Current portion of long-term debt
4,698

 
5,525

Derivative warrant liability
188

 
477

Total current liabilities
29,149

 
28,387

Long-term debt
31,870

 
33,524

Other long-term liabilities
6,594

 
6,438

Total liabilities
67,613

 
68,349

Shareholders’ equity:
 
 
 
   Common stock
117

 
117

   Additional paid-in capital
302,145

 
290,751

   Accumulated deficit
(91,238
)
 
(47,895
)
Total shareholders’ equity
211,024

 
242,973

Total liabilities and shareholders’ equity
$
278,637

 
$
311,322

The accompanying notes are an integral part of these statements.
 

5



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

 
Successor
 
Predecessor
 
Successor
 
Predecessor
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Service revenue
$
45,320

 
$
37,538

 
$
90,847

 
$
72,956

Rental revenue
3,628

 
4,000

 
7,770

 
7,805

Total revenue
48,948

 
41,538

 
98,617

 
80,761

Costs and expenses:
 
 
 
 
 
 
 
Direct operating expenses
39,069

 
34,825

 
80,696

 
69,114

General and administrative expenses
6,014

 
8,867

 
25,334

 
21,226

Depreciation and amortization
11,969

 
12,107

 
26,713

 
24,978

    Impairment of long-lived assets
332

 

 
4,463

 

Other, net
469

 

 
1,068

 

Total costs and expenses
57,853

 
55,799

 
138,274

 
115,318

Operating loss
(8,905
)
 
(14,261
)
 
(39,657
)
 
(34,557
)
Interest expense, net
(1,204
)
 
(5,338
)
 
(2,454
)
 
(19,546
)
Other income, net
587

 
5,698

 
514

 
4,240

Reorganization items, net
(1,654
)
 
(5,704
)
 
(1,746
)
 
(5,704
)
Loss before income taxes
(11,176
)
 
(19,605
)
 
(43,343
)
 
(55,567
)
Income tax benefit

 
18

 

 
18

Net loss
$
(11,176
)
 
$
(19,587
)
 
$
(43,343
)
 
$
(55,549
)
 
 
 
 
 
 
 
 
Net loss per common share:
 
 
 
 
 
 
 
Net loss per basic common share
$
(0.96
)
 
$
(0.13
)
 
$
(3.71
)
 
$
(0.37
)
 
 
 
 
 
 
 
 
Net loss per diluted common share
$
(0.96
)
 
$
(0.13
)
 
$
(3.71
)
 
$
(0.37
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
11,696

 
150,941

 
11,696

 
150,938

Diluted
11,696

 
150,941

 
11,696

 
150,938

The accompanying notes are an integral part of these statements.
 



6



NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
 
Successor
 
Predecessor
 
Six Months Ended
 
June 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(43,343
)
 
$
(55,549
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
   Depreciation and amortization
26,713

 
24,978

   Amortization of debt issuance costs, net

 
2,135

   Accrued interest added to debt principal
119

 
8,575

   Stock-based compensation
11,394

 
421

   Impairment of long-lived assets
4,463

 

   Gain on sale of UGSI
(75
)
 

   Gain on disposal of property, plant and equipment
(254
)
 
(223
)
   Bad debt expense
120

 
784

   Change in fair value of derivative warrant liability
(289
)
 
(4,025
)
   Other, net
221

 
106

   Changes in operating assets and liabilities:
 
 
 
      Accounts receivable
(1,631
)
 
(5,204
)
      Prepaid expenses and other receivables
(99
)
 
710

      Accounts payable and accrued liabilities
2,243

 
13,882

      Other assets and liabilities, net
(54
)
 
135

Net cash used in operating activities
(472
)
 
(13,275
)
Cash flows from investing activities:
 
 
 
   Proceeds from the sale of property, plant and equipment
17,649

 
3,027

   Purchases of property, plant and equipment
(7,103
)
 
(2,319
)
   Proceeds from the sale of UGSI
75

 

Net cash provided by investing activities
10,621

 
708

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

 
76,072

   Payments on Predecessor revolving credit facility

 
(79,866
)
   Proceeds from Predecessor term loan

 
15,700

   Proceeds from debtor in possession term loan

 
6,875

   Payments on Successor First and Second Lien Term Loans
(1,597
)
 

   Proceeds from Successor revolving facility
117,092

 

   Payments on Successor revolving facility
(117,092
)
 

   Payments on vehicle financing and other financing activities
(980
)
 
(2,595
)
Net cash (used in) provided by financing activities
(2,577
)
 
16,186

Change in cash, cash equivalents and restricted cash
7,572

 
3,619

Cash and cash equivalents, beginning of period
5,488

 
994

Restricted cash, beginning of period
1,296

 
1,420

Cash, cash equivalents and restricted cash, beginning of period
6,784

 
2,414

Cash and cash equivalents, end of period
12,808

 
1,205

Restricted cash, end of period
1,548

 
4,828

Cash, cash equivalents and restricted cash, end of period
$
14,356

 
$
6,033

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
   Cash paid for interest
$
1,967

 
$
1,399

   Cash paid for taxes, net
207

 
193


The accompanying notes are an integral part of these statements.
 

7



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, 2017, 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, 2017, filed with the SEC on March 16, 2018 (as amended on April 19, 2018, the “2017 Annual Report on Form 10-K”).
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 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. On June 22, 2018, the Bankruptcy Court issued a final decree and order closing the chapter 11 cases, subject to certain conditions as set forth therein.

Upon emergence, we elected to apply fresh start accounting effective July 31, 2017, to coincide with the timing of our normal accounting period close. 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.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (or “FASB”) issued Accounting Standards Update (or “ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this update will be added to the Account Standards Codification (“ASC”) as ASC 606, Revenue from Contracts with Customers, and replaces the guidance in ASC 605, Revenue Recognition. The new guidance in ASC 606 requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services.

On January 1, 2018, we adopted the guidance in ASC 606 and all the related amendments (the “new revenue standard”) and applied the new revenue standard to all contracts using the modified retrospective method. The impact of the new revenue standard was not material and there was no adjustment required to the opening balance of retained earnings. We expect the impact of the adoption of the new revenue standard to be immaterial to our net income on an ongoing basis. See Note 3 for further information on the new standard.

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

8



years, beginning after December 15, 2017, with early adoption permitted. We adopted this pronouncement for our fiscal year beginning January 1, 2018, which did not 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 is 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 and is to be applied retrospectively. The adoption of this guidance as of January 1, 2018 did not 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. We have adjusted the prior year period to reflect this new presentation as well.

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 2017 Annual Report on Form 10-K.

Note 2 - Recently Issued Accounting Pronouncements
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-cancellable 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.

Note 3 - Revenues

On January 1, 2018, we adopted the guidance in ASC 606, including all related amendments, and applied the new revenue standard to all contracts using the modified retrospective method. The impact of the new revenue standard was not material and there was no adjustment required to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under ASC 605, or the accounting guidance in effect for those periods.

Revenue Recognition

Revenues are generated upon the performance of contracted services under formal and informal contracts with customers. Revenues are recognized when the contracted services for our customers are completed in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Sales and usage-based taxes are excluded from revenues. Payment is due when the contracted services are completed in accordance with the payment terms established with each customer prior to providing any services. As such, there is no significant financing component for any of our revenues.

Some of our contracts with customers involve multiple performance obligations as we are providing more than one service under the same contract, such as water transfer services and disposal services. However, our core service offerings are capable of being distinct and also are distinct within the context of contracts with our customers. As such, these services represent separate performance obligations when included in a single contract. We have standalone pricing for all of our services which is negotiated with each of our customers in advance of providing the service. The contract consideration is allocated to the individual performance obligations based upon the standalone selling price of each service, and no discount is offered for a bundled services offering.


9



The following tables present our revenues disaggregated by revenue source for each reportable segment for the three months ended June 30, 2018 and June 30, 2017:

 
Successor
 
For the Three Months Ended June 30, 2018
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Water Transfer Services
$
21,967

 
$
8,230

 
$
5,014

 
$

 
$
35,211

Disposal Services
4,540

 
955

 
1,081

 

 
6,576

Other Revenue
3,120

 
362

 
51

 

 
3,533

    Total Service Revenue
29,627

 
9,547

 
6,146

 

 
45,320

 
 
 
 
 
 
 
 
 
 
Rental Revenue
3,538

 
59

 
31

 

 
3,628

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
33,165

 
$
9,606

 
$
6,177

 
$

 
$
48,948


 
Predecessor
 
For the Three Months Ended June 30, 2017
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Water Transfer Services
$
16,470

 
$
7,694

 
$
6,937

 
$

 
$
31,101

Disposal Services
2,932

 
655

 
668

 

 
4,255

Other Revenue
820

 
1,172

 
190

 

 
2,182

    Total Service Revenue
20,222

 
9,521

 
7,795

 

 
37,538

 
 
 
 
 
 
 
 
 
 
Rental Revenue
3,537

 
49

 
414

 

 
4,000

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
23,759

 
$
9,570

 
$
8,209

 
$

 
$
41,538


The following tables present our revenues disaggregated by revenue source for each reportable segment for the six months ended June 30, 2018 and June 30, 2017:

 
Successor
 
For the Six Months Ended June 30, 2018
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Water Transfer Services
$
43,227

 
$
16,249

 
$
13,125

 
$

 
$
72,601

Disposal Services
8,152

 
1,732

 
2,317

 

 
12,201

Other Revenue
5,244

 
616

 
185

 

 
6,045

    Total Service Revenue
56,623

 
18,597

 
15,627

 

 
90,847

 
 
 
 
 
 
 
 
 
 
Rental Revenue
7,312

 
122

 
336

 

 
7,770

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
63,935

 
$
18,719

 
$
15,963

 
$

 
$
98,617



10



 
Predecessor
 
For the Six Months Ended June 30, 2017
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Water Transfer Services
$
32,966

 
$
14,341

 
$
13,067

 
$

 
$
60,374

Disposal Services
5,526

 
976

 
1,211

 

 
7,713

Other Revenue
2,650

 
1,943

 
276

 

 
4,869

    Total Service Revenue
41,142

 
17,260

 
14,554

 

 
72,956

 
 
 
 
 
 
 
 
 
 
Rental Revenue
6,902

 
67

 
836

 

 
7,805

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
48,044

 
$
17,327

 
$
15,390

 
$

 
$
80,761


Water Transfer Services

The majority of our revenues are from the removal and disposal of flowback and produced saltwater originating from oil and natural gas wells or the transportation of fresh water and saltwater to customer sites for use in drilling and hydraulic fracturing activities by trucks or through temporary or permanent water transport pipelines. Water transfer rates for trucking are generally based upon a fixed fee per barrel of disposal water, but in certain circumstances may be based upon an hourly rate. Revenue is recognized once the water has been transferred, or over time, based upon the number of barrels transported or disposed of, or at the agreed upon hourly rate, depending upon the customer contract. Contracts for the use of our saltwater pipeline are priced at a fixed fee per disposal barrel transferred, with revenues recognized over time from when the water is injected into our pipeline until the transfer is complete. Water transfer services are all generally completed within 24 hours with no remaining performance obligation outstanding at the end of each month.

Disposal Services

Revenues for disposal services are generated through fees charged for disposal of oilfield wastes in our landfill and disposal of fluids in our disposal wells. Disposal rates are generally based on a fixed fee per barrel of disposal water, with revenues recognized once the disposal has occurred. The performance obligation for disposal services is considered complete once the disposal occurs. Therefore, disposal services revenues are recognized at a point in time.

Other Revenue

Other revenue primarily includes revenues from the sale of “junk” or “slop” oil obtained through the skimming of disposal water. Under the new revenue standard, revenue is recognized for “junk” or “slop” oil at a point in time once the goods are transferred.

Other revenue also historically included small-scale construction or maintenance projects, however we exited that business during the three months ended June 30, 2018. Under the new revenue standard, revenue for construction and maintenance projects, which generally spanned approximately two to three months, was recognized over time under the milestone method which is considered an output method. Since our construction contracts were short term in nature, the contractual milestone dates occurred close together over time such that there was no risk that we would not recognize revenue for goods or services transferred to the customer. All construction costs were expensed as incurred.

Rental Revenue

We generate rental revenue from the rental of various equipment used in wellsite services. Rental rates are based upon negotiated rates with our customers and revenue is recognized over the rental service period. Revenues from rental equipment are not within the scope of the new revenue standard, but rather are recognized under ASC 840, Leases. When ASC 842, Leases, becomes effective on January 1, 2019, the Company will continue to recognize the revenues from rental equipment under this new standard as a lessor.


11



Practical Expedients

The new revenue standard requires the transaction price to exclude amounts collected on behalf of third parties. However, the new revenue standard also provides a practical expedient to allow entities to make an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority. Upon implementing the new revenue standard we adopted this practical expedient and have excluded sales and usage-based taxes from the transaction price, rather than making a jurisdiction-by-jurisdiction assessment.

Note 4 - Earnings Per Common Share
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 three and six months ended June 30, 2018 and 2017, no shares of common stock, underlying stock options, restricted stock or warrants were included in the computation of diluted earnings per common share because the inclusion of such shares would be anti-dilutive based on the net losses reported for those periods.
The following table presents 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
 
Successor
 
Predecessor
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net loss
$
(11,176
)
 
$
(19,587
)
 
$
(43,343
)
 
$
(55,549
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares—basic
11,696

 
150,941

 
11,696

 
150,938

Common stock equivalents

 

 

 

Weighted average shares—diluted
11,696

 
150,941

 
11,696

 
150,938

 
 
 
 
 
 
 
 
Net loss per common share:
 
 
 
 
 
 
 
Net loss per basic common share
$
(0.96
)
 
$
(0.13
)
 
$
(3.71
)
 
$
(0.37
)
 
 
 
 
 
 
 
 
Net loss per diluted common share
$
(0.96
)
 
$
(0.13
)
 
$
(3.71
)
 
$
(0.37
)
 
 
 
 
 
 
 
 
Potentially dilutive stock-based awards excluded:
 
 
 
 
 
 
 
Stock options

 

 

 

Restricted stock awards and units
537

 

 

 

Warrants

 
20,450

 

 
23,610

   Total
537

 
20,450

 

 
23,610

 
 
 
 
 
 
 
 
Anti-dilutive stock-based awards excluded:
1,131

 
593

 
1,227

 
593

 

12



Note 5 - Intangible Assets

Intangible assets consist of the following:
 
Successor
 
June 30, 2018
 
Gross Carrying Amount
 
Additions/(Disposals)
 
Accumulated Amortization
 
Net
 
Remaining Useful Life (Years)
Disposal permits
$
594

 
$
(12
)
 
$
(128
)
 
$
454

 
5.7
Total intangible assets
$
594

 
$
(12
)
 
$
(128
)
 
$
454

 
5.7
 
 
 
 
 
 
 
 
 
 
 
Successor
 
December 31, 2017
 
Gross Carrying Amount
 
Additions/(Disposals)
 
Accumulated Amortization
 
Net
 
Remaining Useful Life (Years)
Disposal permits
$
594

 
$

 
$
(47
)
 
$
547

 
6.2
Total intangible assets
$
594

 
$

 
$
(47
)
 
$
547

 
6.2
 
 
 
 
 
 
 
 
 
 

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

Note 6 - Assets Held for Sale and Impairment
During the three months ended March 31, 2018, management approved a plan to sell certain assets located in the Southern division as a result of exiting the Eagle Ford Shale area. As a result, we began to actively market these assets, which we expect to sell within one year. See Note 11 for additional details on the exit of the Eagle Ford Shale area. In addition, during the three months ended March 31, 2018, management approved the sale of certain assets, primarily frac tanks, located in the Northeast division, that are expected 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 and reclassified to “Assets held for sale” on the condensed consolidated balance sheet during the three months ended March 31, 2018. Upon reclassification we ceased to recognize depreciation expense on the assets. As the fair value of the assets reclassified as held for sale was lower than its net book value, we recorded an impairment charge of $4.1 million during the three months ended March 31, 2018. Of the $4.1 million recorded, $4.0 million related to the Southern division for the Eagle Ford exit and $0.1 million related to the Northeast division, and is included in “Impairment of long-lived assets” on our condensed consolidated statements of operations for the six months ended June 30, 2018.

During the three months ended June 30, 2018, we recorded an impairment charge of $0.3 million for the Corporate division to “Impairment of long-lived assets” on our condensed consolidated statements of operations related to the sale of certain real property in Texas as the fair value was lower than the net book value. The real property was approved to be sold as part of the Eagle Ford closure.

Note 7 - 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;
Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

13



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
 
June 30, 2018
 
December 31, 2017
Derivative warrant liability
$
188

 
$
477

Contingent consideration
500

 
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 expense, 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 include 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 our pre-Effective Date 9.875% Senior Notes due 2018 (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 by the Successor Company were also determined to be derivative liabilities.
The following table provides a reconciliation of the beginning and ending balances of the Successor “Derivative warrant liability” presented in the condensed consolidated balance sheet during the six months ended June 30, 2018, and the five months ended December 31, 2017.
 
Successor
 
Six Months Ended
 
Five Months Ended
 
June 30, 2018
 
December 31, 2017
Balance at beginning of period
$
477

 
$

Issuance of warrants

 
717

Adjustments to estimated fair value
(289
)
 
(240
)
Balance at end of period
$
188

 
$
477

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.
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 Oilfield Disposal LLC 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 $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 five months ended December 31, 2017. The remaining $0.5 million due when the counterparties deliver the required permits and

14



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, 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 six months ended June 30, 2018, and five months ended December 31, 2017, were as follows:

 
 
Successor
 
 
Six Months Ended
 
Five Months Ended
 
 
June 30, 2018
 
December 31, 2017
Balance at beginning of period
 
$
500

 
$
1,000

Cash payments
 

 
(500
)
Balance at end of period
 
500

 
500

Less: current portion
 
(500
)
 
(500
)
Long-term contingent consideration
 
$

 
$


Note 8 - Accrued Liabilities
Accrued liabilities consisted of the following at June 30, 2018 and December 31, 2017:
 
Successor
 
June 30, 2018
 
December 31, 2017
Accrued payroll and employee benefits
$
6,437

 
$
3,304

Accrued insurance
2,285

 
2,701

Accrued legal
1,126

 
1,749

Accrued taxes
1,769

 
2,362

Accrued interest
141

 
161

Accrued operating costs
3,992

 
2,663

Accrued other
124

 
999

Total accrued liabilities
$
15,874

 
$
13,939


Note 9 - Debt
Debt consisted of the following at June 30, 2018 and December 31, 2017:
 
 
 
 
 
Successor
 
 
 
 
 
June 30, 2018
 
December 31, 2017
 
Interest Rate
 
Maturity Date
 
Fair Value of Debt (d)
 
Carrying Value of Debt
 
Carrying Value of Debt
Successor Revolving Facility (a)
7.25%
 
Aug. 2020
 
$

 
$

 
$

Successor First Lien Term Loan (b)
9.25%
 
Aug. 2020
 
13,214

 
13,214

 
14,285

Successor Second Lien Term Loan (b)
11.00%
 
Feb 2021
 
20,593

 
20,593

 
21,000

Vehicle financings (c)
5.01%
 
Various
 
2,761

 
2,761

 
3,764

Total debt
 
 
 
 
$
36,568

 
36,568

 
39,049

Less: current portion of long-term debt
 
 
(4,698
)
 
(5,525
)
Long-term debt
 
 
 
 
 
 
$
31,870

 
$
33,524

_____________________

15



(a)
The interest rate presented represents the interest rate on the $30.0 million Successor Revolving Facility as of June 30, 2018.
(b)
Interest on the Successor First Lien Term Loan accrues at an annual rate equal to the LIBOR Rate plus 7.25%. Interest on the Successor Second Lien Term Loan accrues at both an annual rate equal to 11.0%, with 5.5% payable in cash and 5.5% payable in kind prior to February 7, 2018, and on or after February 7, 2018, at an annual rate equal to 11.0%, payable in cash, in arrears, on the first day of each month.
(c)
Vehicle financings consist of capital lease arrangements related to fleet purchases with a weighted-average annual interest rate of approximately 5.01%, which mature in varying installments between 2018 and 2020.
(d)
Our Successor Revolving Facility, Successor First Lien Term Loan, Successor Second Lien Term Loan, and vehicle financings bear interest at rates commensurate with market rates and therefore their respective carrying values approximate fair value.
For a discussion of material changes and developments in our debt and its principal terms, see our discussion below.
Indebtedness
As of June 30, 2018, we had $36.6 million of indebtedness outstanding, consisting of $13.2 million under the Successor First Lien Term Loan (as defined herein), $20.6 million under the Successor Second Lien Term Loan (as defined herein), and $2.8 million of capital leases for vehicle financings.
First Lien Credit Agreement
On the Effective Date, pursuant to the Plan, the Company entered into a $45.0 million First Lien Credit Agreement (the “Credit Agreement”) by and among the lenders party thereto (the “Credit Agreement Lenders”), ACF FinCo I, LP, as administrative agent (the “Credit Agreement Agent”), and the Company. Pursuant to the Credit Agreement, the Credit Agreement Lenders agreed to extend to 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”) (i) to repay obligations outstanding under the Predecessor asset-based lending facility and debtor in possession asset-based lending facility, (ii) to make certain payments as provided in the Plan, (iii) to pay costs and expenses incurred in connection with the Plan, and (iv) for working capital, transaction expenses, and other general corporate purposes. The Credit Agreement also contains an accordion feature that provides for an increase in availability of up to an additional $20.0 million, subject to the satisfaction of certain terms and conditions contained in the Credit Agreement.
The Successor Revolving Facility and the Successor First Lien Term Loan mature on August 7, 2020, at which time the Company must repay the outstanding principal amount of the Successor Revolving Facility and the Successor First Lien Term Loan, together with interest accrued and unpaid thereon. The Successor Revolving Facility may be repaid and, subject to the terms and conditions of the Credit Agreement, reborrowed at any time during the term of the Credit Agreement. The principal amount of the Successor First Lien Term Loan shall be repaid in installments of $178.6 thousand beginning on September 1, 2017 and the first day of each calendar month thereafter prior to maturity. Interest on the Successor Revolving Facility accrues at an annual rate equal to the LIBOR Rate (as defined in the Credit Agreement) plus 5.25%, and interest on the Successor First Lien Term Loan accrues at an annual rate equal to the LIBOR Rate plus 7.25%; however, if there is an Event of Default (as defined in the Credit Agreement), the Credit Agreement Agent, in its sole discretion, may increase the applicable interest rate at a per annum rate equal to three percentage points above the annual rate otherwise applicable thereunder.
The Credit Agreement also contains certain affirmative and negative covenants, including a fixed charge coverage ratio covenant, as well as other terms and conditions that are customary for revolving credit facilities and term loans of this type. As of June 30, 2018, we were in compliance with all covenants.

Second Lien Term Loan Credit Agreement
On the Effective Date, pursuant to the Plan, the Company also entered into a Second Lien Term Loan Credit Agreement (the “Second Lien Term Loan Agreement”) by and among the lenders party thereto (the “Second Lien Term Loan Lenders”), Wilmington Savings Fund Society, FSB, as administrative agent (the “Second Lien Term Loan Agent”) and the Company. Pursuant to the Second Lien Term Loan Agreement, the Second Lien Term Loan Lenders agreed to extend to the Company a $26.8 million second lien term loan facility (the “Successor Second Lien Term Loan”), of which $21.1 million was advanced on the Effective Date and up to an additional $5.7 million (“Delayed Draw Term Loan”) is available at the request of the Company after the closing date subject to the satisfaction of certain terms and conditions specified in the Second Lien Term Loan Agreement. The Second Lien Term Loan Lenders extended the Successor Second Lien Term Loan, among other things, (i) to

16



repay obligations outstanding under the Predecessor asset-based lending facility and debtor in possession asset-based revolving facility, (ii) to make certain payments as provided in the Plan, (iii) to pay costs and expenses incurred in connection with the Plan, and (iv) for working capital, transaction expenses and other general corporate purposes.
The Successor Second Lien Term Loan matures on February 7, 2021, at which time the Company must repay all outstanding obligations under the Successor Second Lien Term Loan. The principal amount of the Successor Second Lien Term Loan shall be repaid in installments of $263.2 thousand beginning on October 1, 2017, and the first day of each fiscal quarter thereafter prior to maturity, with such amount to be proportionally increased as the result of the incurrence of a Delayed Draw Term Loan. Interest on the Successor Second Lien Term Loan accrues at an annual rate equal to 11.0%, with 5.5% payable in cash and 5.5% payable in kind prior to February 7, 2018 (or such later date as the Company may select in accordance with the terms of the Second Lien Term Loan Agreement) and, on or after February 7, 2018 (or such later date) at an annual rate equal to 11.0%, payable in cash, in arrears, on the first day of each month. However, upon the occurrence and during the continuation of an Event of Default (as defined in the Second Lien Term Loan Agreement) due to a voluntary or involuntary bankruptcy filing, automatically, or any other Event of Default, at the election of the Second Lien Term Loan Agent, the Successor Second Lien Term Loan and all obligations thereunder shall bear interest at an annual rate equal to three percentage points above the annual rate otherwise applicable thereunder.
The Second Lien Term Loan Agreement also contains certain affirmative and negative covenants, including a fixed charge coverage ratio covenant, as well as other terms and conditions that are customary for term loans of this type. As of June 30, 2018, we were in compliance with all covenants.

Note 10 - Derivative Warrants
Predecessor Warrants
During the year ended December 31, 2016, we issued 26.4 million warrants, with 17.5 million warrants for the exchange of the 2018 Notes for new 12.5%/10.0% Senior Secured Second Lien Notes due 2021 (the “2021 Notes”), 0.1 million warrants for the exchange of the 2018 Notes for common stock, and 8.8 million warrants to the lenders under the Predecessor Term Loan. All warrants were issued with an exercise price of $0.01 and had a term of ten years.
Upon emergence from chapter 11 on the Effective Date, all existing warrants outstanding under the Predecessor Company were canceled under the Plan. The following table shows the Predecessor warrant activity for the six months ended June 30, 2017:
 
 
Predecessor
 
 
Six Months Ended
 
 
June 30, 2017
Outstanding at the beginning of the period
 
25,283

Issued
 

Exercised
 
(2
)
Outstanding at the end of the period
 
25,281


Successor 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 warrants to purchase an aggregate of 118,137 shares of common stock, par value $0.01, at an exercise price of $39.82 per share and with a term expiring seven years from the Effective Date.

17



The following table shows the Successor warrant activity for the six months ended June 30, 2018:
 
 
Successor
 
 
Six Months Ended
 
 
June 30, 2018
Outstanding at the beginning of the period
 
118

Issued
 

Exercised
 

Outstanding at the end of the period
 
118

Fair Value of Warrants
We account for warrants in accordance with the accounting guidance for derivatives, which sets forth a two-step model to be applied in determining whether a financial instrument is indexed to an entity’s own stock which would qualify such financial instruments for a scope exception. This scope exception specifies that a contract that would otherwise meet the definition of a derivative financial instrument would not be considered as such if the contract is both (i) indexed to the entity’s own stock and (ii) classified in the shareholders’ equity section of the entity’s balance sheet. We determined that the Predecessor warrants are ineligible for equity classification due to the anti-dilution provisions in the contract. The Successor warrants are also ineligible for equity classification as the warrants are not indexed to our common stock. As such, both the Predecessor and Successor warrants are recorded as derivative liabilities at fair value in the condensed consolidated balance sheets. The warrants are classified as a current liability in the condensed consolidated balance sheets as they could be exercised by the holders at any time.
As discussed previously in Note 7, the fair value of the derivative warrant liability is estimated using a Monte Carlo simulation model on the date of issue and is re-measured at each quarter end until expiration or exercise of the underlying warrants with the resulting fair value adjustment recorded in “Other expense, net” in the condensed consolidated statements of operations.

The fair value of the derivative warrant liability as of June 30, 2018 and December 31, 2017 was estimated using the following model inputs:
 
 
Successor
 
Successor
 
 
As of June 30,
 
As of December 31,
 
 
2018
 
2017
Exercise price
 
$
39.82

 
$
39.82

Closing stock price
 
$
12.00

 
$
18.18

Risk free rate
 
2.75
%
 
2.29
%
Expected volatility
 
42.26
%
 
40.59
%

Note 11 - Restructuring and Exit Costs
Eagle Ford Shale Area
On March 1, 2018, the Board of Directors (the “Board”) determined it was in the best interests of the Company to cease our operations in the Eagle Ford Shale area in order to focus on other opportunities. The Board considered a number of factors in making this determination, including among other things, the historical and projected financial performance of our operations in the Eagle Ford Shale area, pricing for our services, capital requirements and projected returns on additional capital investment, competition, scope and scale of our operations, and recommendations from management. As a result, we have substantially exited the Eagle Ford Shale area during the six months ended June 30, 2018. We continue to incur minimal related costs while the remaining assets previously used in the operation of our business in that basin are divested.

The total costs of the exit recorded during the three and six months ended June 30, 2018 were $0.5 million and $1.1 million, respectively. We previously recorded $0.6 million of exit related charges during the three months ended March 31, 2018. The charges are characterized as “Other, net” in the condensed consolidated statement of operations for the three and six months ended June 30, 2018. Such costs consisted of the following and all related to the Southern operating segment:


18



 
Successor
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2018
Severance and termination benefits
$
10

 
$
236

Contract termination costs and exit costs
459

 
832

   Total restructuring and exit costs for Eagle Ford
$
469

 
$
1,068


The remaining liability, shown below, totaled approximately $0.1 million as of June 30, 2018 and is included in “Accrued liabilities” in the condensed consolidated balance sheet. A rollforward of the liability from December 31, 2017 through June 30, 2018 is as follows:
 
Employee Termination Costs (a)
 
Lease Exit Costs (b)
 
Other Exit Costs (c)
 
Total
Balance accrued at beginning of period - Successor
$

 
$

 
$

 
$

Restructuring and exit-related costs
236

 
63

 
769

 
1,068

Cash payments
(215
)
 
(39
)
 
(742
)
 
(996
)
Balance accrued at end of period - Successor
$
21

 
$
24

 
$
27

 
$
72

_____________________
(a)
Employee termination costs consist primarily of severance and related costs.
(b)
Lease exit costs consist primarily of costs that will continue to be incurred under non-cancellable operating leases for their remaining term without benefit to the Company.
(c)
Other exit costs include costs related to the movement of vehicles, tanks and rental fleet in connection with the exit from the Eagle Ford Shale area.
Mississippian Shale Area and Tuscaloosa Marine Shale Logistics Business
In March 2015, we initiated a plan to restructure our business in certain shale basins and reduce costs, including an exit from the Mississippian shale area and the Tuscaloosa Marine Shale logistics business. Additionally, we closed certain yards within the Northeast and Southern divisions and transferred many of the related assets to our other operating locations. The total costs of the restructuring recognized in 2015 were approximately $7.1 million, and included severance and termination benefits, lease exit costs, other exits costs related to the movement of vehicles and rental fleet, and an asset impairment charge.
The remaining liability for the restructuring and exit costs incurred represents lease exit costs under non-cancellable operating leases and totaled approximately $0.1 million as of June 30, 2018, which is included in “Accrued liabilities” in the condensed consolidated balance sheet. A rollforward of the liability from December 31, 2017 through June 30, 2018 is as follows:
 
 
Lease Exit Costs
Balance accrued at beginning of period - Successor
 
$
82

Cash payments
 
(25
)
Balance accrued at end of period - Successor
 
$
57

Note 12 - Income Taxes
 
We recorded no income tax benefit or expense for the three or six months ended June 30, 2018. As a result, our effective income tax rate for the three and six months ended June 30, 2018 was zero, which differs from the federal statutory benefit rate of 21.0%. The difference is primarily due to the increase in the valuation allowance on deferred tax assets resulting from current year losses.

The effective income tax rate for the three and six months ended June 30, 2017 was near zero, which differs from the federal statutory rate of 35.0% primarily due to the increase in the valuation allowance on deferred tax assets resulting from current year losses.


19



On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act tax reform legislation. This legislation makes significant changes in U.S. tax law including a reduction in the corporate statutory income tax rate from 35% to 21%, changes to net operating loss (“NOL”) carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. As a result of the enacted law, we were required to revalue deferred tax assets and liabilities as of December 22, 2017 using the new statutory rate and have reflected this revaluation in our effective tax rate reconciliation. As we are subject to a valuation allowance, there was no material impact to our tax provision at either June 30, 2018 or December 31, 2017.

We have significant deferred tax assets, consisting primarily of NOLs, which have a limited life, generally expiring between the years 2031 and 2038, and capital losses, which have a five year carryforward expiring in 2020. We regularly assess the positive and negative evidence available to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative losses incurred in recent years. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future taxable income.

In light of our continued ordinary losses, at June 30, 2018 we determined that our deferred tax liabilities were not sufficient to fully realize our deferred tax assets. Accordingly, a valuation allowance continues to be required against the portion of our deferred tax assets that is not offset by deferred tax liabilities. We expect our effective income tax rate to be near zero for the remainder of 2018.

Note 13 - Share-based Compensation
Successor Share-based Compensation
The Second Amended and Restated Employment Agreement of Mr. Mark D. Johnsrud, our former Chairman and Chief Executive Officer, which was assumed by the Company on the Effective Date, provided for the issuance to Mr. Johnsrud of two tranches of options to purchase (i) 2.5% of the outstanding equity securities of the reorganized Company, on a fully diluted basis, at a premium exercise price equal to the value of a share of the reorganized Company’s common stock at an enterprise valuation of $475.0 million and (ii) 2.5% of the outstanding equity securities of the reorganized Company, on a fully diluted basis, at a premium exercise price equal to the value of a share of the reorganized Company’s common stock at an enterprise valuation of $525.0 million. Each tranche of options vests in substantially equal installments on the first three anniversaries following the Effective Date. Pursuant to Mr. Johnsrud’s Second Amended and Restated Employment Agreement and the Plan, the grant of stock options to Mr. Johnsrud was effective as of the Effective Date. On February 23, 2018, following the approval of the form of option agreement by the Compensation and Nominating Committee of the Board (the “Compensation Committee”), the Company and Mr. Johnsrud entered into a Notice of Grant of CEO Stock Options and Stock Option Award Agreement (the “Award Agreement”) to provide for the terms and conditions of Mr. Johnsrud’s stock option grant. Pursuant to the Award Agreement, Mr. Johnsrud was awarded 354,411 options to purchase common stock, with an exercise price of $37.03 per share, in Tranche 1, and 354,411 options to purchase common stock, with an exercise price of $41.31 per share, in Tranche 2. The stock options in Tranche 1 and Tranche 2 were scheduled to vest in three equal installments on the first three anniversaries of the Effective Date.

Pursuant to the requirements of the Plan, on February 22, 2018, the Board approved the Nuverra Environmental Solutions, Inc. 2017 Long Term Incentive Plan (the “Incentive Plan”). The Incentive Plan is intended to provide for the grant of equity-based awards to designated members of the Company’s management and employees. Pursuant to the terms of the Plan, the Incentive Plan became effective on the Effective Date. The maximum number of shares of the Company’s common stock that is available for the issuance of awards under the Incentive Plan is 1,772,058.

On February 22, 2018, the Compensation Committee authorized the grant of performance-based restricted stock units (“PRSUs”) and time-based restricted stock units (“TRSUs”) under the Incentive Plan to Mr. Johnsrud, Edward A. Lang, the Company’s Executive Vice President and Chief Financial Officer, and Joseph M. Crabb, the Company’s Executive Vice President and Chief Legal Officer. On or after the applicable vesting date, the PRSUs and TRSUs will be settled for shares of common stock if all applicable conditions have been met. Mr. Johnsrud received 531,618 PRSUs, which initially were scheduled to vest in equal installments on the first two anniversaries of the Effective Date, but which partially vested on his Separation Date (as described below). Mr. Lang and Mr. Crabb each received an award of 62,022 PRSUs, which are scheduled to vest in three equal installments on December 31, 2018, December 31, 2019, and December 31, 2020. Vesting of the PRSUs is subject to the achievement of pre-established performance targets during the applicable performance measurement periods. Mr. Johnsrud received 531,618 TRSUs, which were scheduled to vest in three equal installments on the date of grant, which was February 23, 2018, and the first two anniversaries of the Effective Date, but which vested in full on his Separation Date (as described below). Mr. Lang and Mr. Crabb each received an award of 62,022 TRSUs, which are scheduled to vest in three equal installments on December 31, 2018, December 31, 2019, and December 31, 2020.


20



Further, the Compensation Committee on February 22, 2018 adopted the 2018 Restricted Stock Plan for Directors (the “Restricted Stock Plan”), which is subject to ratification by the Company’s shareholders at the Company’s 2018 Annual Meeting. The Restricted Stock Plan provides for the grant of restricted stock to the non-employee directors of the Company. The Restricted Stock Plan limits the shares that may be issued thereunder to 100,000 shares of common stock.

In coordination with the adoption of the Restricted Stock Plan, the Compensation Committee also authorized award grants of restricted stock to the current non-employee directors of the Company, which were granted on March 16, 2018 subject to ratification of the Restricted Stock Plan by the Company’s shareholders at the Company’s 2018 annual meeting. Each non-employee director was granted 4,688 shares of restricted stock for service during part of fiscal year 2017 and for fiscal 2018, all of which will fully vest on the first anniversary of the grant date.

On May 29, 2018, the Compensation Committee authorized the grant of 5,889 shares of restricted stock to the Company’s interim Chief Executive Officer, Mr. Charles K. Thompson. Per the terms of the grant agreement, the shares immediately vested in full on the date of grant.

The total grants awarded during the three and six months ended June 30, 2018 are presented in the table below:
 
 
Successor
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2018
 
June 30, 2018
Stock option grants
 

 

Restricted stock grants
 
6

 
20

Restricted stock unit grants
 

 
1,311

   Total grants in the Successor period
 
6

 
1,331


On March 2, 2018, the Company announced that Mr. Johnsrud was leaving the Company, effective as of March 2, 2018 (the “Separation Date”). Pursuant to a Separation Agreement and Mutual Release entered into between Mr. Johnsrud and the Company on the Separation Date, Mr. Johnsrud vested in the following: (a) 354,412 unvested TRSUs that were granted on February 22, 2018; and (b) 708,822 unvested stock options that were granted on February 23, 2018, which will remain exercisable through the first anniversary of the Separation Date. Vested restricted stock units subject to time based vesting will be settled in accordance with the terms and conditions set forth in the Nuverra Environmental Solutions, Inc. 2017 Long Term Incentive Plan and any applicable award agreement(s). Additionally, Mr. Johnsrud continued to hold 88,603 PRSUs that were granted on February 22, 2018, with a performance period that began on January 1, 2018 and ended on June 30, 2018. As the pre-established performance target was not met as of June 30, 2018, Mr. Johnsrud’s 88,603 PRSUs were canceled during the three months ended June 30, 2018. All other unvested equity awards granted to Mr. Johnsrud under the Incentive Plan were canceled as of the Separation Date.

The total share-based compensation expense, net of estimated forfeitures, included in “General and administrative expenses” in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2018 was as follows:
 
 
Successor
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2018
 
June 30, 2018
Stock options
 
$

 
$
(788
)
Restricted stock
 
160

 
160

Restricted stock units
 
256

 
12,022

   Total expense
 
$
416

 
$
11,394


Predecessor Share-based Compensation
Prior to the Effective Date, we granted stock options, stock appreciation rights, restricted common stock and restricted stock units, performance shares and units, other share-based awards and cash-based awards to our employees, directors, consultants and advisors pursuant to the Nuverra Environmental Solutions, Inc. 2009 Equity Incentive Plan (as amended, the “2009 Plan”).

21



On the Effective Date pursuant to the Plan, all of the pre-Effective Date share-based compensation awards issued and outstanding under the 2009 Plan were canceled.
There were no grants awarded during the three or six months ended June 30, 2017 under the 2009 Plan. The total share-based compensation expense, net of estimated forfeitures, included in “General and administrative expenses” in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2017 was as follows:
 
 
Predecessor
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30, 2017
 
June 30, 2017
Stock options
 
$
32

 
$
97

Restricted stock
 
65

 
131

Restricted stock units
 
15

 
193

   Total expense
 
$
112

 
$
421


Note 14 - Legal Matters
Environmental Liabilities
We are subject to the environmental protection and health and safety laws and related rules and regulations of the United States and of the individual states, municipalities and other local jurisdictions where we operate. Our operations are subject to rules and regulations promulgated by the Texas Railroad Commission, the Texas Commission on Environmental Quality, the Louisiana Department of Natural Resources, the Louisiana Department of Environmental Quality, the Ohio Department of Natural Resources, the Pennsylvania Department of Environmental Protection, the North Dakota Department of Health, the North Dakota Industrial Commission, Oil and Gas Division, the North Dakota State Water Commission, the Montana Department of Environmental Quality and the Montana Board of Oil and Gas, among others. These laws, rules and regulations address environmental, health and safety and related concerns, including water quality and employee safety. We have installed safety, monitoring and environmental protection equipment such as pressure sensors and relief valves, and have established reporting and responsibility protocols for environmental protection and reporting to such relevant local environmental protection departments as required by law.
We believe we are in material compliance with all applicable environmental protection laws and regulations in the United States and the states in which we operate. We believe that there are no unrecorded liabilities as of the periods reported herein in connection with our compliance with applicable environmental laws and regulations. The condensed consolidated balance sheet at June 30, 2018 and December 31, 2017 did not include any accruals for environmental matters.
Litigation
There are various lawsuits, claims, investigations and proceedings that have been brought or asserted against us, which arise in the ordinary course of business, including actions with respect to securities and shareholder class actions, personal injury, vehicular and industrial accidents, commercial contracts, legal and regulatory compliance, securities disclosure, labor and employment, and employee benefits and environmental matters, the more significant of which are summarized below. We record a provision for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any provisions are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information and events pertinent to a particular matter.
We believe that we have valid defenses with respect to legal matters pending against us. Based on our experience, we also believe that the damage amounts claimed in pending lawsuits are not necessarily a meaningful indicator of our potential liability. Litigation is inherently unpredictable, and it is possible that our results of operations or cash flow could be materially affected in any particular period by the resolution of one or more of the legal matters pending against us. We do not expect that the outcome of other current claims and legal actions not discussed below will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Chapter 11 Proceedings
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. The Plan became effective on the Effective Date, when all remaining conditions to the effectiveness of the Plan were satisfied or

22



waived. On June 22, 2018, the Bankruptcy Court issued a final decree and order closing the chapter 11 cases, subject to certain conditions as set forth therein.
Confirmation Order Appeal

On July 26, 2017, David Hargreaves, an individual holder of 2018 Notes, appealed the Confirmation Order to the District Court of the District of Delaware (the “District Court”) and filed a motion for a stay pending appeal from the District Court. The Company and the unsecured creditors’ committee opposed the stay in 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 District Court heard oral arguments for the pending appeal on May 14, 2018. The ultimate outcome of this appeal and its effects on the Confirmation Order are impossible to predict with certainty. No assurance can be given that the appeal will not affect the finality, validity and enforceability of the Confirmation Order.

Note 15 - Related Party and Affiliated Company Transactions
There have been no significant changes to the other related party transactions as described in Note 21 to the consolidated financial statements in our 2017 Annual Report on Form 10-K.
Note 16 - Segments
We evaluate business segment performance based on income (loss) before income taxes exclusive of corporate general and administrative costs and interest expense, which are not allocated to the segments. Our shale solutions business is comprised of three operating divisions, which we consider to be operating and reportable segments of our operations: (1) the Northeast division comprising the Marcellus and Utica Shale areas, (2) the Southern division comprising the Haynesville Shale area and the Eagle Ford Shale area (which we substantially exited during the six months ended June 30, 2018) and (3) the Rocky Mountain division comprising the Bakken Shale area. Corporate/Other includes certain corporate costs and certain other corporate assets.
Financial information for our reportable segments related to operations is presented below.
 
Rocky Mountain
 
Northeast
 
Southern (b)
 
Corporate/ Other
 
Total
Three months ended June 30, 2018 - Successor
 
 
 
 
 
 
 
 
 
Revenue
$
33,165

 
$
9,606

 
$
6,177

 
$

 
$
48,948

Direct operating expenses
25,599

 
8,510

 
4,960

 

 
39,069

General and administrative expenses
1,882

 
518

 
251

 
3,363

 
6,014

Depreciation and amortization
5,923

 
3,283

 
2,750

 
13

 
11,969

Operating loss
(239
)
 
(2,705
)
 
(2,253
)
 
(3,708
)
 
(8,905
)
Loss before income taxes
(203
)
 
(2,780
)
 
(2,295
)
 
(5,898
)
 
(11,176
)
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2018 - Successor
 
 
 
 
 
 
 
 
 
Revenue
63,935

 
18,719

 
15,963

 

 
98,617

Direct operating expenses
51,945

 
16,324

 
12,427

 

 
80,696

General and administrative expenses
3,158

 
1,280

 
829

 
20,067

 
25,334

Depreciation and amortization
12,212

 
7,589

 
6,874

 
38

 
26,713

Operating loss
(3,380
)
 
(6,543
)
 
(9,297
)
 
(20,437
)
 
(39,657
)
Loss before income taxes
(3,405
)
 
(6,679
)
 
(9,406
)
 
(23,853
)
 
(43,343
)
 
 
 
 
 
 
 
 
 
 
As of June 30, 2018 - Successor
 
 
 
 
 
 
 
 
 
Total assets (a)
125,679

 
47,707

 
89,346

 
15,905

 
278,637

Total assets held for sale

 
116

 
2,487

 
778

 
3,381

 
 
 
 
 
 
 
 
 
 

23



 
Rocky Mountain
 
Northeast
 
Southern (b)
 
Corporate/ Other
 
Total
Three months ended June 30, 2017 - Predecessor
 
 
 
 
 
 
 
 
Revenue
23,759

 
9,570

 
8,209

 

 
41,538

Direct operating expenses
19,171

 
9,831

 
5,823

 

 
34,825

General and administrative expenses
1,505

 
817

 
650

 
5,895

 
8,867

Depreciation and amortization
6,803

 
2,182

 
3,068

 
54

 
12,107

Operating loss
(3,720
)
 
(3,260
)
 
(1,332
)
 
(5,949
)
 
(14,261
)
Loss before income taxes
(4,209
)
 
(3,325
)
 
(1,406
)
 
(10,665
)
 
(19,605
)
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2017 - Predecessor
 
 
 
 
 
 
 
 
Revenue
48,044

 
17,327

 
15,390

 

 
80,761

Direct operating expenses
40,403

 
17,788

 
10,923

 

 
69,114

General and administrative expenses
3,452

 
1,586

 
1,681

 
14,507

 
21,226

Depreciation and amortization
13,588

 
4,695

 
6,587

 
108

 
24,978

Operating loss
(9,399
)
 
(6,742
)
 
(3,801
)
 
(14,615
)
 
(34,557
)
Loss before income taxes
(9,910
)
 
(6,927
)
 
(3,933
)
 
(34,797
)
 
(55,567
)
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017 - Successor
 
 
 
 
 
 
 
 
 
Total assets (a)
137,213

 
54,218

 
111,457

 
8,434

 
311,322

Total assets held for sale
2,765

 

 

 

 
2,765

_____________________
(a)
Total assets exclude intercompany receivables eliminated in consolidation.

(b)
The Southern division includes the Eagle Ford Shale area which we substantially exited during the six months ended June 30, 2018. See Note 11 for further discussion.

Note 17 - Subsidiary Guarantors
The 2018 Notes and the 2021 Notes of the Predecessor Company were registered securities. As a result of these registered securities, we are required to present the following condensed consolidating financial information for the Predecessor periods pursuant to Rule 3-10 of SEC Regulation S-X, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. Our Successor Revolving Facility, Successor First Lien Term Loan, and Successor Second Lien Term Loan are not registered securities. Therefore, the presentation of condensed consolidating financial information is not required for the Successor period.
The following tables present consolidating financial information for Nuverra Environmental Solutions, Inc. (“Parent”) and its 100% wholly owned subsidiaries (the “Guarantor Subsidiaries”) for the three and six months ended June 30, 2017.

24



CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2017
(Unaudited)
 
Predecessor
 
Parent
 
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$

 
$
41,538

 
$

 
$
41,538

Costs and expenses:
 
 
 
 
 
 
 
Direct operating expenses

 
34,825

 

 
34,825

General and administrative expenses
5,895

 
2,972

 

 
8,867

Depreciation and amortization
54

 
12,053

 

 
12,107

Total costs and expenses
5,949

 
49,850

 

 
55,799

Operating loss
(5,949
)
 
(8,312
)
 

 
(14,261
)
Interest expense, net
(5,178
)
 
(160
)
 

 
(5,338
)
Other income, net
5,643

 
63

 

 
5,706

(Loss) income from equity investments
(8,940
)
 
(8
)
 
8,940

 
(8
)
Reorganization items, net
(5,181
)
 
(523
)
 

 
(5,704
)
(Loss) income before income taxes
(19,605
)
 
(8,940
)
 
8,940

 
(19,605
)
Income tax benefit
18

 

 

 
18

Net (loss) income
$
(19,587
)
 
$
(8,940
)
 
$
8,940

 
$
(19,587
)



CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2017
(Unaudited)
 
Predecessor
 
Parent
 
Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$

 
$
80,761

 
$

 
$
80,761

Costs and expenses:
 
 
 
 
 
 
 
Direct operating expenses

 
69,114

 

 
69,114

General and administrative expenses
14,507

 
6,719

 

 
21,226

Depreciation and amortization
108

 
24,870

 

 
24,978

Total costs and expenses
14,615

 
100,703

 

 
115,318

Operating loss
(14,615
)
 
(19,942
)
 

 
(34,557
)
Interest expense, net
(19,126
)
 
(420
)
 

 
(19,546
)
Other income, net
4,125

 
129

 

 
4,254

(Loss) income from equity investments
(20,770
)
 
(14
)
 
20,770

 
(14
)
Reorganization items, net
(5,181
)
 
(523
)
 

 
(5,704
)
(Loss) income before income taxes
(55,567
)
 
(20,770
)
 
20,770

 
(55,567
)
Income tax benefit
18

 

 

 
18

Net (loss) income
$
(55,549
)
 
$
(20,770
)
 
$
20,770

 
$
(55,549
)
 
 

25



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2017
(Unaudited)
 
Predecessor
 
Parent
 
Guarantor Subsidiaries
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
Net cash used in operating activities
$
(12,952
)
 
$
(323
)
 
$
(13,275
)
Cash flows from investing activities:
 
 
 
 
 
Proceeds from the sale of property and equipment

 
3,027

 
3,027

Purchase of property, plant and equipment

 
(2,319
)
 
(2,319
)
Net cash provided by investing activities

 
708

 
708

Cash flows from financing activities:
 
 
 
 
 
Proceeds from Predecessor revolving credit facility
76,072

 

 
76,072

Payments on Predecessor revolving credit facility
(79,866
)
 

 
(79,866
)
Proceeds from Predecessor term loan
15,700

 

 
15,700

Proceeds from debtor in possession term loan
6,875

 

 
6,875

Payments on vehicle financing and other financing activities
(2,595
)
 

 
(2,595
)
Net cash provided by financing activities
16,186

 

 
16,186

Net increase in cash
3,234

 
385

 
3,619

Cash, cash equivalents and restricted cash - beginning of period
1,388

 
1,026

 
2,414

Cash, cash equivalents and restricted cash - end of period
$
4,622

 
$
1,411

 
$
6,033

 


26



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Special Note about Forward-Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and related notes thereto. See “Forward-Looking Statements” on page 3 of this Quarterly Report and “Risk Factors” included in our 2017 Annual Report on Form 10-K and in our other filings with the SEC for a description of important factors that could cause actual results to differ from expected results.
Company Overview

Nuverra is a leading provider of comprehensive, full-cycle environmental solutions to customers focused on the development and ongoing production of oil and natural gas from shale formations in the United States. We provide total environmental solutions and wellsite logistics management, including delivery, collection, treatment and disposal of solid and liquid materials that are used in and generated by the drilling, completion, and ongoing production of shale oil and natural gas.
We operate in shale basins where customer exploration and production (“E&P”) activities are predominantly focused on shale oil and natural gas as follows:
Oil shale area: includes our operations in the Bakken Shale area.
Natural gas shale areas: includes our operations in the Marcellus, Utica, and Haynesville Shale areas.
We support our customers’ demand for diverse, comprehensive and regulatory compliant environmental solutions required for the safe and efficient drilling, completion and production of oil and natural gas from shale formations.

Our service offering focuses on providing comprehensive environmental and logistics management solutions within three primary groups:

Logistics and Wellsite Services: Delivery of freshwater to wellsites, freshwater procurement and transfer services, staging and storage of equipment and materials and rental of wellsite equipment.

Water Midstream: Collection and transportation of produced and flowback water from wellsites to disposal network via truck or fixed pipeline system; supply of freshwater for drilling and completion via pipeline system; provision and operation of gathering systems for collection and transportation of produced and flowback water to disposal wells.

Disposal Wells and Landfill: Disposal of liquid waste water from well completion operations and well production; disposal of solid drilling waste.
We utilize a broad array of assets to meet our customers’ logistics and environmental management needs. Our logistics assets include trucks and trailers, temporary and permanent pipelines, temporary and permanent storage facilities, ancillary rental equipment, treatment facilities, and liquid and solid waste disposal sites. We continue to optimize our suite of solutions for customers who demand safety, environmental compliance and accountability from their service providers. While we have agreements in place with certain of our customers to establish pricing for our services and various other terms and conditions, these agreements typically do not contain minimum volume commitments or otherwise require the customer to use us to provide covered services.  Accordingly, our customer agreements generally provide the customer the ability to change the relationship by either insourcing some or all services historically provided or by contracting with other service providers.  As a result, even with respect to customers with which we have an agreement to establish pricing, the revenue we ultimately receive from that customer, and the mix of revenue among lines of services provided, is unpredictable and subject to significant variation over time.

In order to address our liquidity issues due to the prolonged depression in oil and natural gas prices that began in 2014, 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”) on May 1, 2017 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. On June 22, 2018, the Bankruptcy Court issued a final decree and order closing the chapter 11 cases, subject to certain conditions as set forth therein.

27




Upon emergence, we elected to apply fresh start accounting effective July 31, 2017, to coincide with the timing of our normal accounting period close. 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.
Trends Affecting Our Operating Results
Our results are driven by demand for our services, which are in turn affected by E&P spending trends in the shale basins in which we operate, in particular the level of drilling and completion activities (which impacts the amount of environmental waste products being managed) and active wells (which impacts the amount of produced water being managed). In general, drilling and completion activities in the oil and natural gas industry are affected by the market prices (or anticipated prices) for those commodities.

Oil prices improved throughout 2017 and continued to improve in the first half of 2018. Average rig count in our active basins increased 21.6% year over year to 187 in the second quarter of 2018 and completed wells in those basins increased 22.4% year over year to 878. (Average rig count and completed wells in our active basins no longer includes those in the Eagle Ford Shale area as we have substantially exited that basin as of June 30, 2018.) We saw an increase in drilling and completion activities primarily in the Rocky Mountain division with stable activity in the Northeast and Southern divisions in the second quarter of 2018 as compared with the second quarter of 2017. We would expect continued stability in oil prices or further price growth to lead to level drilling and completion activities by our customer base throughout the remainder of 2018 as compared with 2017.
Our results are also driven by a number of other factors, including (i) availability of our equipment, which we have assembled through acquisitions and capital expenditures, (ii) transportation costs, which are affected by fuel costs, (iii) utilization rates for our equipment, which are also affected by the level of our customers’ drilling and production activities and competition, and our ability to relocate our equipment to areas in which oil and natural gas exploration and production activities are growing, (iv) the availability of qualified drivers (or alternatively, subcontractors) in the areas in which we operate, particularly in the Bakken, Marcellus, and Utica shale basins, (v) labor costs, (vi) developments in governmental regulations, (vii) seasonality and weather events, (viii) pricing and (ix) our health, safety and environmental performance record.

The following table summarizes our total revenues, loss before income taxes, and net loss by oil and natural gas shale area for the three and six months ended June 30, 2018 and June 30, 2017 (in thousands):
 
Successor
 
Predecessor
 
Successor
 
Predecessor
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenue - from predominantly oil shale areas (a)
$
33,173

 
$
26,490

 
$
66,075

 
$
52,882

Revenue - from predominantly natural gas shale areas (b)
15,775

 
15,048

 
32,542

 
27,879

Total revenue
$
48,948

 
$
41,538

 
$
98,617

 
$
80,761

 
 
 
 
 
 
 
 
Loss before income taxes
$
(11,176
)
 
$
(19,605
)
 
(43,343
)
 
(55,567
)
Net loss
(11,176
)
 
(19,587
)
 
(43,343
)
 
(55,549
)

(a)
Represents revenues that are derived from predominantly oil-rich areas consisting of the Bakken Shale area and Eagle Ford Shale area (which we substantially exited during the six months ended June 30, 2018).
(b)
Represents revenues that are derived from predominantly gas-rich areas consisting of the Marcellus, Utica and Haynesville Shale areas.
The results reported in the accompanying condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in our 2017 Annual Report on Form 10-K.

28




Results of Operations
Three Months Ended June 30, 2018 Compared to the Three Months Ended June 30, 2017
The following table sets forth for each of the periods indicated our statements of operations data (dollars in thousands):  
<