10-K 1 nes_20181231x10-k.htm 10-K Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-K
__________________________________ 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 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
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neslogoimagea06.jpg
 (A Delaware Corporation)
 __________________________________
I.R.S. Employer Identification No. 26-0287117
6720 N. Scottsdale Road, Suite 190, Scottsdale, AZ 85253
Telephone: (602) 903-7802
 __________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.01 par value
 
NYSE American
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý

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  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ý    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

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
¨
  
Smaller reporting company
ý
 
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý

As of June 29, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $14.2 million based on the closing sale price of $12.00 on such date as reported on the NYSE American exchange. Shares held by executive officers, directors and persons owning directly or indirectly more than 10% of the outstanding common stock have been excluded from the preceding number because such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for any other purposes.

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  ý    No  ¨

The number of shares outstanding of the registrant’s common stock as of February 28, 2019 was 15,614,981.
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Documents Incorporated by Reference

Part III of this Annual Report on Form 10-K incorporates by reference information from the Definitive Proxy Statement for the registrant’s 2019 Annual Meeting of Stockholders or a Form 10-K/A to be filed with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year ended December 31, 2018.



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TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS

In addition to historical information, this Annual Report on Form 10-K (“Annual 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:
future financial performance and growth targets or expectations;
market and industry trends and developments; 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 Annual 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:
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;

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 loss of one or more of our larger customers;

difficulties in successfully executing our growth initiatives, including identifying and completing acquisitions and divestitures, successfully integrating acquired business operations, and identifying and managing risks inherent in acquisitions and divestitures, as well as differences in the type and availability of consideration or financing for such acquisitions and divestitures;

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;

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;

higher than forecasted capital expenditures to maintain and repair our fleet of trucks, tanks, equipment and disposal wells;

control of costs and expenses;

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 limited trading volume of our common stock on the NYSE American Stock Exchange, including potential fluctuation in the trading prices of our common stock;

the effects of our completed restructuring on the Company and the interest of various constituents;

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risks and uncertainties associated with our completed restructuring process, including the outcome of a pending appeal of the order confirming the plan of reorganization;

risks associated with the reliance on third-party analyst and expert market projections and data for the markets in which we operate;

present and possible future claims, litigation or enforcement actions or investigations;

risks associated with changes in industry practices and operational technologies and the impact on our business;
risks associated with the operation, construction, development and closure of saltwater disposal wells, solids and liquids transportation assets, landfills and pipelines, including access to additional locations and rights-of-way, permitting and licensing, 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, 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 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 Annual 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 Annual 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.

 

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NUVERRA ENVIRONMENTAL SOLUTIONS, INC.
PART I
Item 1. Business
When used in this Annual Report, the terms “Nuverra,” the “Company,” “we,” “our,” and “us” refer to Nuverra Environmental Solutions, Inc. and its consolidated subsidiaries, unless otherwise specified.
Overview

Nuverra is a leading provider of water logistics and oilfield services to customers focused on the development and ongoing production of oil and natural gas from shale formations in the United States. Our services include the delivery, collection, 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 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, and liquid and solid waste disposal sites. We provide a suite of solutions to customers who demand safety, environmental compliance and accountability from their service providers. Headquartered in Scottsdale, Arizona, Nuverra Environmental Solutions, Inc. was incorporated in Delaware on May 29, 2007 as “Heckmann Corporation.” On May 16, 2013, we changed our name to Nuverra Environmental Solutions, Inc.

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

Water Transfer Services: Collection and transportation of flowback and produced water from drilling and completion activities to disposal networks via trucking or a fixed pipeline system, and delivery of freshwater for drilling and completion activities via trucking, lay flat temporary line or fixed pipeline system.

Disposal Services: Disposal of liquid waste water from hydraulic fracturing operations, liquid waste water from well production, and solid drilling waste in our disposal wells and landfill.

Logistics and Wellsite Services: Rental of wellsite equipment and provision of other wellsite services including preparation and remediation.
Business Strategy
Nuverra strives to be a leader in the oilfield services sector by providing value to our customers through an integrated service offering of water management solutions. Our strategy is focused on: (1) reinvesting in our core business in order to drive organic growth and provide a stable revenue stream, (2) maximizing our attractive asset base to capitalize on favorable industry trends, and (3) continuing to develop leading service offerings as the water management industry continues to evolve.
Our produced water hauling and disposal business provides a reliable revenue stream, as produced water is generated with or without drilling rig activity. While prices fluctuate throughout each industry cycle, produced water volumes typically increase or remain relatively stable. Spears & Associates, an industry market share research firm, estimates in their October 2018 report entitled, “The US Oilfield Water Management Services Market” (the “Report”) that produced water volumes for disposal will increase anywhere between 4% to 5% annually for the years 2019 through 2023.
Our network of assets are strategically located in the Rocky Mountain, Northeast and Southern regions. We have built a strong reputation in the industry as a result of providing our customers with excellent service quality over many years. Within the oilfield service sector, there are several key buying factors that determine the value we provide to our customers, such as: commitment to health, safety and environment; service quality including regulatory compliance; price; capacity and proximity; and technology. We continue to evolve our service offerings to address the critical value drivers while adapting to the changing water management industry. The current trend of integrated gathering and disposal systems is driving increased use of water pipelines. Our saltwater disposal wells (or “SWDs”) and pipeline are an integral part of our produced water business. SWDs provide core assets that we can leverage to provide incremental offerings on existing disposal and water midstream projects. We are also evaluating additional service line growth opportunities. As we continue to refine our portfolio and footprint, we may consider opportunistic asset sales to provide additional capital to fund our growth investments.

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Market Overview
Nuverra operates in the large and fragmented market for water management. Spears & Associates estimates in their Report that the 2019 market size in the United States (or “U.S.”) for oilfield water management will be approximately $25.6 billion. The primary services in Spears & Associates’ market estimate include water hauling, water disposal, water treatment, water storage, water acquisition, water flowback, and water transfer services. Nuverra provides the majority of these services, but does not have a presence in all U.S. geographic markets. Therefore, management believes there is significant opportunity for market share gains as the Company expands its resources. Spears & Associates’ projects in their Report that the U.S. oilfield water hauling market will be approximately $8.0 billion in 2019 and is projected to reach $10.0 billion in 2023 for a compounded annual growth rate of 6% over the 2018 to 2023 timeframe.
Nuverra is well positioned to benefit from the favorable trends in the broader oilfield services industry, such as hydraulic fracturing activity, well counts and footage drilled. According to World Oil’s Forecast and Data 2019 Executive Summary Report, U.S. drilling in 2019 will increase 4.0% over 2018 to 28,065 wells, and footage drilled in 2019 will increase 5.0% over 2018 to 341 million feet of hole. There is opportunity for Nuverra to capitalize on these positive industry trends, specifically in our landfill, wellsite rentals, and water transfer services. These services deliver higher margins and provide us with the ability to enhance our profits during industry expansion cycles.
From a geographic perspective, Nuverra remains focused on being the premier service provider in our core areas of the Bakken, Marcellus, Utica, and Haynesville basins. We continue to evaluate growth opportunities in other areas. However, we do not plan to enter a market unless we believe we can generate attractive profitability and returns on invested capital. While some basins offer significant levels of activity, attractive economics for certain service providers are not assured given the amount of competition in those basins.
Advances in drilling technology and the development of unconventional North American hydrocarbon plays allow previously inaccessible or non-economical formations in the earth’s crust to be accessed by utilizing high pressure methods from water injection (or the process known as hydraulic fracturing) combined with proppant fluids (containing sand grains or ceramic beads) to create new perforation depths and fissures to extract natural gas, oil, and other hydrocarbon resources. Significant amounts of water are required for hydraulic fracturing operations, and subsequently, complex water flows, in the forms of flowback and produced water, represent a waste stream generated by these methods of hydrocarbon exploration and production. In addition to the liquid product stream involved in the hydraulic fracturing process, there are also significant environmental solid waste streams that are generated during the drilling and completion of a well. During the drilling process, a combination of the cut rock, or “cuttings,” mixed with the liquid used to drill the well, is returned to the surface and must be handled in accordance with environmental and other regulations. Historically, much of this solid waste byproduct was buried at the well site. We believe customers will increasingly focus on the offsite disposal or recycling of the solid waste byproduct. Produced water volumes, which represent water from the formation produced alongside hydrocarbons over the life of the well, are generally driven by geological considerations, combined with marginal costs of production and frequently create a multi-year demand for our services once the well has been drilled and completed.
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. However, there is no guarantee that oil and natural gas prices will remain stable or increase, drilling and completion activities in basins will continue to increase, or we will see a continuing increase in a demand for our services. Oil and natural gas prices remain volatile, with oil prices dropping more than 40% during the fourth quarter of 2018. Another prolonged downturn in oil and natural gas prices could materially adversely affect our financial condition, results of operations and cash flows in the future.
Operations

Our business consists of operations in shale basins where customers’ exploration and production (“E&P”) activities are predominantly focused on shale oil and natural gas as follows:

Oil shale areas: includes our operations in the Bakken shale area. (Our exit of the Eagle Ford shale area started March 1, 2018, and was substantially complete by June 30, 2018. See Note 11 of the Notes to Consolidated Financial Statements herein for further information on our exit of the Eagle Ford shale area.) For 2018, 66% of our revenues from continuing operations were derived from the oil shale areas.

Natural gas shale areas: includes our operations in the Marcellus, Utica, and Haynesville shale areas. During 2018, 34% of our revenues from continuing operations were derived from natural gas shale areas.


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Our business operations are comprised of three geographically distinct divisions, which are further described in Note 24 of the Notes to Consolidated Financial Statements herein:

Rocky Mountain Division: comprising the Bakken shale area;

Northeast Division: comprising the Marcellus and Utica shale areas; and

Southern Division: comprising the Haynesville shale area and Eagle Ford shale area (which we exited during the six months ended June 30, 2018).

The shale areas in which we currently operate and that comprise our operating divisions are described below. The technically recoverable resources for the shale areas noted below were obtained from the Assumptions to the Annual Energy Outlook 2019 report issued in January of 2019 by the United States Energy Information Administration with data as of January 1, 2017 (the “EIA 2019 Report”). The EIA 2019 Report notes that estimates of technically recoverable resources are highly uncertain, with early estimates tending to vary and shift significantly over time as new geological information is gained through drilling, or as long-term productivity is clarified or improved through technology and better management practices.

The Bakken and underlying Three Forks formations are the two primary reservoirs currently being developed in the Williston Basin, which covers most of western North Dakota, eastern Montana, northwest South Dakota and southern Saskatchewan. According to the EIA 2019 Report, the Bakken and Three Forks shale formations contain an estimated 16.0 billion barrels of technically recoverable oil reserves.

The Marcellus shale area is located in the Appalachian Basin in the Northeastern United States, primarily in Pennsylvania, West Virginia, New York and Ohio. The Marcellus shale area is the largest natural gas field in North America with approximately 262.5 trillion cubic feet (or “Tcf”) of technically recoverable natural gas, according to the EIA 2019 Report.

Adjacent to the Marcellus shale area is the Utica shale area, located primarily in southwestern Pennsylvania and eastern Ohio. Still in the early stages of development, the Utica shale area has three identified areas: oil, condensate and dry natural gas. According to the EIA 2019 Report, the Utica shale area is estimated to have approximately 193.9 Tcf of technically recoverable natural gas and 1.6 billion barrels of technically recoverable oil reserves.

The Haynesville shale area is located across northwest Louisiana and east Texas, and extends into Arkansas. The Haynesville shale area is the third largest natural gas-producing basin in North America, with an estimated 122.2 Tcf of technically recoverable natural gas according to the EIA 2019 Report.
As part of our environmental and logistics management solutions for water and water-related services, we serve E&P customers seeking fresh water acquisition, temporary or permanent water transmission and storage, transportation, or disposal of fresh flowback and produced water in connection with shale oil and natural gas hydraulic fracturing operations. We also provide services for water pit excavations, well site preparation and well site remediation. We own an approximately 60-mile underground twin pipeline network in the Haynesville shale for the collection of produced water and the delivery of fresh water. The pipeline network can handle volumes up to approximately 60 thousand barrels per day and is scalable up to approximately 100 thousand barrels per day. We have a fleet of approximately 525 heavy duty trucks including 55 specialty trucks and 470 water trucks used for delivery and collection, and over 2,225 storage tanks. We also own or lease 48 operating saltwater disposal wells in the Bakken, Marcellus/Utica, and Haynesville shale areas.
Within our environmental and logistics management solutions for solid materials, we provide collection, transportation, and disposal options for solid waste generated by drilling and completion activities, including an oilfield solids disposal landfill that we own and operate in the Bakken shale area. The landfill is located on a 50-acre site with current permitted capacity of more than 1.7 million cubic yards of airspace. We believe that permitted capacity at this site could be expanded up to a total of 5.8 million cubic yards in the future.
A significant part of the Company’s service offering involves trucking operations. Nuverra’s fleet of more than 520 trucks positions the Company among the top 25 in the Petroleum & Chemical sector according to Transport Topics’ 2018 Top 100 Private Carriers. The Company is experiencing the same driver shortage challenge that most U.S. trucking companies are facing. As a result of these challenges, Nuverra has successfully implemented trucking price increases and implemented a number of initiatives to increase truck driver recruitment and retention. These initiatives started to show results in the second half of 2018 with driver count increasing approximately 7.0%.

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Our fleet utilizes GPS and other automation tools that we expect to upgrade as technology progresses. Our service has long included electronic logging devices (ELDs). As a result, the new regulations from the U.S. Department of Transportation that include the requirement for electronic logs (rather than paper logs that can be adjusted) that became effective in December of 2017 did not impact our business. We believe that this new regulation has been positive for Nuverra as it has caused many of our less sophisticated competitors to bear higher compliance costs in 2018 that are more equivalent to the compliance costs that Nuverra has been incurring for some time.
Customers
Our customers include major domestic and international oil and natural gas companies, foreign national oil and natural gas companies and independent oil and natural gas production companies. For the year ended December 31, 2018, our three largest customers were Hess Corporation, Southwestern Energy and Oasis Petroleum which represented 11%, 10% and 8%, respectively, of our total consolidated revenues. The loss of any one of these three customers could have a material adverse affect on the Company.
Competition
Our competition includes small regional service providers, as well as larger companies with operations throughout the continental United States and internationally. Some of our competitors are Select Energy Services, Inc., Key Energy Services, Inc., Basic Energy Services, Inc., C&J Energy Services, Inc., Superior Energy Services, Inc., Clean Harbors, Inc., TETRA Technologies, Inc., MBI Energy Services, Inc., Stallion Oilfield Services, LLC, Waste Connections, Inc., Pinnergy, Ltd., McKenzie Energy Partners, LLC, and Buckhorn Energy Services, LLC.
Health, Safety & Environment
We are committed to excellence in health, safety and environment (“HS&E”) in our operations, which we believe is a critical characteristic of our business. Our customers in the unconventional shale basins require us to meet high standards on HS&E matters. As a result, we believe that being a leading environmental solutions company with a national presence and a dedicated focus on environmental solutions is a competitive advantage relative to smaller, regional companies, as well as companies that provide certain environmental services as ancillary offerings.
Seasonality
Certain of our business divisions are impacted by seasonal factors. Generally, our business is negatively impacted during the winter months due to inclement weather, fewer daylight hours and holidays. During periods of heavy snow, ice or rain, we may be unable to move our trucks and equipment between locations, thereby reducing our ability to provide services and generate revenue. In addition, these conditions may impact our customers’ operations, and, as our customers’ drilling and/or hydraulic fracturing activities are curtailed, our services may also be reduced.
Intellectual Property
We operate under numerous trade names and own several trademarks, the most important of which are “Nuverra,” “HWR,” “Power Fuels,” and “Heckmann Water Resources.”
Operating Risks
Our operations are subject to hazards inherent in our industry, including accidents and fires that could cause personal injury or loss of life, damage to or destruction of property, equipment and the environment, suspension of operations and litigation, as described in Note 21 of the Notes to the Consolidated Financial Statements herein, associated with these hazards. Because our business involves the transportation of environmentally regulated materials, we may also experience traffic accidents or pipeline breaks that may result in spills, property damage and personal injury. We have implemented a comprehensive HS&E program designed to minimize accidents in the workplace, enhance our safety programs, maintain environmental compliance and improve the efficiency of our operations.
Governmental Regulation, Including Environmental Regulation and Climate Change
Our operations are subject to stringent United States federal, state and local laws and regulations concerning the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Additional laws and regulations, or changes in the interpretations of existing laws and regulations, that affect our business and operations may be adopted, which may in turn impact our financial condition. The following is a summary of the more significant existing health, safety and environmental laws and regulations to which our operations are subject.

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Hazardous Substances and Waste
The United States Comprehensive Environmental Response, Compensation, and Liability Act, as amended, referred to as “CERCLA” or the “Superfund” law, and comparable state laws impose liability without regard to fault or the legality of the original conduct on certain defined persons, including current and prior owners or operators of a site where a release of hazardous substances occurred and entities that disposed or arranged for the disposal of the hazardous substances found at the site. Under CERCLA, these “responsible persons” may be liable for the costs of cleaning up the hazardous substances, for damages to natural resources and for the costs of certain health studies.
In the course of our operations, we occasionally generate materials that are considered “hazardous substances” and, as a result, may incur CERCLA liability for cleanup costs. Also, claims may be filed for personal injury and property damage allegedly caused by the release of hazardous substances or other pollutants. We also generate solid wastes that are subject to the requirements of the United States Resource Conservation and Recovery Act, as amended, or “RCRA,” and comparable state statutes.
Although we use operating and disposal practices that are standard in the industry, hydrocarbons or other wastes may have been released at properties owned or leased by us now or in the past, or at other locations where these hydrocarbons and wastes were taken for disposal. Under CERCLA, RCRA and analogous state laws, we could be required to clean up contaminated property (including contaminated groundwater), or to perform remedial activities to prevent future contamination.
Air Emissions
The Clean Air Act, as amended, or “CAA,” and similar state laws and regulations restrict the emission of air pollutants and also impose various monitoring and reporting requirements. These laws and regulations may require us to obtain approvals or permits for construction, modification or operation of certain projects or facilities and may require use of emission controls.
Global Warming and Climate Change
While we do not believe our operations raise climate change issues different from those generally raised by the commercial use of fossil fuels, legislation or regulatory programs that restrict greenhouse gas emissions in areas where we conduct business or that would require reducing emissions from our truck fleet could increase our costs. From another perspective, a carbon constrained environment would likely reward hydrocarbons produced from low cost areas.
Water Discharges
We operate facilities that are subject to requirements of the United States Clean Water Act, as amended, or “CWA,” and analogous state laws for regulating discharges of pollutants into the waters of the United States and regulating quality standards for surface waters. Among other things, these laws impose restrictions and controls on the discharge of pollutants, including into navigable waters as well as the protection of drinking water sources. Spill prevention, control and counter-measure requirements under the CWA require implementation of measures to help prevent the contamination of navigable waters in the event of a hydrocarbon spill. Other requirements for the prevention of spills are established under the United States Oil Pollution Act of 1990, as amended, or “OPA”, which amended the CWA and applies to owners and operators of vessels, including barges, offshore platforms and certain onshore facilities. Under OPA, regulated parties are strictly liable for oil spills and must establish and maintain evidence of financial responsibility sufficient to cover liabilities related to an oil spill for which such parties could be statutorily responsible.
State Environmental Regulations
Our operations involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil, contaminants and other regulated substances. Various environmental laws and regulations require prevention, and where necessary, cleanup of spills and leaks of such materials and some of our operations must obtain permits that limit the discharge of materials. Failure to comply with such environmental requirements or permits may result in fines and penalties, remediation orders and revocation of permits. In Texas, we are subject to rules and regulations promulgated by the Texas Railroad Commission and the Texas Commission on Environmental Quality, including those designed to protect the environment and monitor compliance with water quality. In Louisiana, we are subject to rules and regulations promulgated by the Louisiana Department of Environmental Quality and the Louisiana Department of Natural Resources as to environmental and water quality issues, and the Louisiana Public Service Commission as to allocation of intrastate routes and territories for waste water transportation. In Pennsylvania, we are subject to the rules and regulations of the Pennsylvania Department of Environmental Protection and the Pennsylvania Public Service Commission. In Ohio, we are subject to the rules and regulations of the Ohio Department of Natural Resources and the Ohio Environmental Protection Agency. In North Dakota, we are subject to the rules and regulations of the North Dakota Department of Health, the North Dakota Industrial Commission, Oil and Gas Division, and

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the North Dakota State Water Commission. In Montana, we are subject to the rules and regulations of the Montana Department of Environmental Quality and the Montana Board of Oil and Gas.
Occupational Safety and Health Act
We are subject to the requirements of the United States Occupational Safety and Health Act, as amended, or “OSHA,” and comparable state laws that regulate the protection of employee health and safety. OSHA’s hazard communication standard requires that information about hazardous materials used or produced in our operations be maintained and provided to employees, state and local government authorities and citizens.
Saltwater Disposal Wells
We operate saltwater disposal wells that are subject to the CWA, the Safe Drinking Water Act, or “SDWA,” and state and local laws and regulations, including those established by the Underground Injection Control Program of the United States Environmental Protection Agency, or “EPA,” which establishes minimum requirements for permitting, testing, monitoring, record keeping and reporting of injection well activities. Our saltwater disposal wells are located in Louisiana, Montana, North Dakota, Ohio and Texas. Regulations in many states require us to obtain a permit to operate each of our saltwater disposal wells in those states. These regulatory agencies have the general authority to suspend or modify one or more of these permits if continued operation of one of our saltwater wells is likely to result in pollution of freshwater, tremors or earthquakes, substantial violation of permit conditions or applicable rules, or leaks to the environment. Any leakage from the subsurface portions of the saltwater wells could cause degradation of fresh groundwater resources, potentially resulting in cancellation of operations of a well, issuance of fines and penalties from governmental agencies, incurrence of expenditures for remediation of the affected resource and claims by third parties for property damages and personal injuries.
Transportation Regulations
We conduct interstate motor carrier (trucking) operations that are subject to federal regulation by the Federal Motor Carrier Safety Administration, or “FMCSA,” a unit within the United States Department of Transportation, or “USDOT.” The FMCSA publishes and enforces comprehensive trucking safety regulations, including rules on commercial driver licensing, controlled substance testing, medical and other qualifications for drivers, equipment maintenance, and drivers’ hours of service, referred to as “HOS.” The agency also performs certain functions relating to such matters as motor carrier registration (licensing), insurance, and extension of credit to motor carriers’ customers. Another unit within USDOT publishes and enforces regulations regarding the transportation of hazardous materials, or “hazmat.” The waste water and other water flows we transport by truck are generally not regulated as hazmat at this time.
Our intrastate trucking operations are also subject to various states environmental and waste water transportation regulations discussed under “Environmental Regulations” above. Federal law also allows states to impose insurance and safety requirements on motor carriers conducting intrastate business within their borders, and to collect a variety of taxes and fees on an apportioned basis reflecting miles actually operated within each state.
HOS regulations establish the maximum number of hours that a commercial truck driver may work and are intended to reduce the risk of fatigue and fatigue-related crashes and harm to driver health. Due to the specialized nature of our operations in the oil and gas industry, we qualify for an exception in the federal HOS rules (i.e., the “Oilfield Exemption”). Drivers of most property-carrying commercial motor vehicles have to take at least 34 hours off duty in order to reset their accumulated hours under the 60/70-hour rule, but drivers of property-carrying commercial motor vehicles that are used exclusively to support oil and gas activities can restart with just 24 hours off under the Oilfield Exemption. However, there are other HOS regulations that affect our operations, including the 11-Hour Driving Limit, 14-Hour On Duty Limit, 30-Minute Rest Break, 60/70-Hour Limit On Duty in 7/8 consecutive days. Compliance with these rules directly impacts our operating costs.
Employees
As of December 31, 2018, we had 715 full time employees, of whom 144 were executive, managerial, sales, general, administrative, and accounting staff, and 571 were truck drivers, service providers and field workers. We have not experienced, and do not expect, any work stoppages, and believe that we maintain a satisfactory working relationship with our employees.

Emergence from Chapter 11 Reorganization
On May 1, 2017, the Company and certain of its material subsidiaries (collectively with the Company, the “Nuverra Parties”) filed voluntary petitions under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) to pursue prepackaged plans of reorganization (together, and as amended, the “Plan”). On July 25, 2017, the Bankruptcy Court entered an order (the “Confirmation Order”)

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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. See Note 4 on “Emergence from Chapter 11 Reorganization” of the Notes to Consolidated Financial Statements herein for additional details.

Upon emergence, we elected to apply fresh start accounting effective July 31, 2017, to coincide with the timing of our normal accounting period close. Refer to Note 5 on “Fresh Start Accounting” of the Notes to Consolidated Financial Statements herein for additional information on the selection of this date. As a result of the application of fresh start accounting, as well as the effects of the implementation of the Plan, a new entity for financial reporting purposes was created, and as such, the condensed consolidated financial statements on or after August 1, 2017, are not comparable with the condensed consolidated financial statements prior to that date.

References to “Successor” or “Successor Company” refer 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.
Available Information

Information that we file with or furnish to the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to or exhibits included in these reports, are available free of charge on our website at www.nuverra.com soon after such reports are filed with or furnished to the SEC. From time to time, we also post announcements, updates, events, investor information and presentations on our website in addition to copies of all recent press releases. Our reports, including any exhibits included in such reports, that are filed with or furnished to the SEC are also available on the SEC’s website at www.sec.gov.

Neither the contents of our website nor that maintained by the SEC are incorporated into or otherwise a part of this filing. Further, references to the URLs for these websites are intended to be inactive textual references only.
Item 1A. Risk Factors
This section describes material risks to our businesses that currently are known to us. You should carefully consider the risks described below. If any of the risks and uncertainties described in the cautionary factors described below actually occur, our business, financial condition and results of operations could be materially and adversely affected. The risks and factors listed below, however, are not exhaustive. Other sections of this Annual Report on Form 10-K include additional factors that could materially and adversely impact our business, financial condition and results of operations. Moreover, we operate in a rapidly changing environment. Other known risks that we currently believe to be immaterial could become material in the future. We also are subject to legal and regulatory changes. New factors emerge from time to time and it is not possible to predict the impact of all these factors on our business, financial condition or results of operations.

Risks Related to Our Company

Our business depends on spending by our customers in the oil and natural gas industry in the United States, and this spending and our business has been, and may in the future be, adversely affected by industry and financial market conditions that are beyond our control. Continued and prolonged reductions in oil and natural gas prices and in the overall level of exploration and development may adversely affect demand and pricing for our services.

We depend on our customers’ willingness to make operating and capital expenditures to explore, develop and produce oil and natural gas in the United States. These expenditures are generally dependent on current oil and natural gas prices and the industry’s view of future oil and natural gas prices, including the industry’s view of future economic growth and the resulting impact on demand for oil and natural gas. A continued and prolonged reduction in the overall level of exploration and development activities, whether resulting from changes in oil and natural gas prices or otherwise, could materially and adversely affect us by negatively impacting utilization, demand for our services and pricing.

Industry conditions are influenced by numerous factors over which we have no control, including:

the domestic and worldwide price and supply of gas, natural gas liquids and oil, including the natural gas inventories and oil reserves of the United States;

changes in the level of consumer demand;

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the price and availability of alternative fuels;

weather conditions;

the availability, proximity and capacity of pipelines, other transportation facilities and processing facilities;

the level and effect of trading in commodity futures markets, including by commodity price speculators and others;

the nature and extent of domestic and foreign governmental regulations and taxes;

actions of the members of the Organization of the Petroleum Exporting Countries or “OPEC,” relating to oil price and production controls;

the level of excess production and projected rates of production growth;

geo-political instability or armed conflict in oil and natural gas producing regions; and

overall domestic and global economic and market conditions.

The substantial and extended decline in oil and natural gas prices beginning in the second half of 2014 and continuing into 2017 resulted in significant reductions in our customers’ operating and capital expenditures, which had a material adverse effect on our financial condition, results of operations and cash flows. The extended decline resulted in diminished demand for oilfield services and downward pressure on the prices customers were willing to pay for services such as ours. This down cycle was followed by an industry recovery that began in 2017 and continued through 2018. As a result of the increases in oil prices, average rig count, completed wells and overall production, we saw an increase in drilling and completion activities primarily in the Rocky Mountain and Northeast divisions in 2018 as compared with 2017. However, there is no guarantee that oil and natural gas prices will remain stable or increase, drilling and completion activities in basins will continue to increase, or we will see a continuing increase in a demand for our services. Oil and natural gas prices remain volatile, with oil prices dropping more than 40% during the fourth quarter of 2018. Another prolonged downturn in oil and natural gas prices could materially adversely affect our financial condition, results of operations and cash flows in the future.

We may not be able to successfully execute our growth initiatives, including through future acquisitions and divestitures, and we may not be able to effectively integrate the businesses we do acquire and identify and manage risks inherent in such acquisitions.

Our business strategy includes growth through the acquisitions of other businesses and may include divestitures of non-core businesses or assets. As disclosed in our Form 8-K filed with the SEC on October 5, 2018, in October 2018 we acquired Clearwater Three, LLC, Clearwater Five, LLC, and Clearwater Solutions, LLC (collectively, “Clearwater”), a leading operator of SWDs in the Marcellus and Utica shale areas, which more than doubled our SWD capacity in the region. We may not, however, be able to continue to identify attractive acquisition opportunities or successfully acquire identified targets. In addition, we may not be successful in integrating our current or future acquisitions into our existing operations, which may result in unforeseen operational difficulties or diminished financial performance or require a disproportionate amount of our management’s attention. Even if we are successful in integrating our current or future acquisitions into our existing operations, we may not derive the benefits, such as operational or administrative synergies, that we expected from such acquisitions, which may result in the investment of our capital resources without realizing the expected returns on such investment. Furthermore, competition for acquisition opportunities may increase our cost of making further acquisitions or cause us to refrain from making additional acquisitions. We also may be limited in our ability to incur additional indebtedness under our credit agreements in connection with or to fund future acquisitions.

Whether we realize the anticipated benefits from an acquisition depends, in part, upon our ability to integrate the operations of the acquired business, the quality and performance of the operating assets of the acquired business, the performance of the underlying product and service portfolio, and the performance of the management team and other personnel of the acquired operations. Accordingly, our financial results could be adversely affected by unanticipated performance issues, legacy liabilities, transaction-related charges, amortization of expenses related to intangibles, charges for impairment of long-term assets, indemnifications and other unforeseen events or circumstances. While we believe that we have established appropriate and adequate procedures and processes to mitigate these risks, there is no assurance that these transactions will be successful.


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We may not recognize the anticipated benefits of completed dispositions or other divestitures we may pursue in the future. We may evaluate potential divestiture opportunities with respect to portions of our business from time to time that support our growth initiatives, and may determine to proceed with a divestiture opportunity if and when we believe such opportunity is consistent with our business strategy and we would be able to realize value to our stockholders in so doing. If we do not realize the expected strategic, economic or other benefits of any divestiture transaction, it could adversely affect our financial condition and results of operation.

Our operating margins and profitability may be negatively impacted by changes in fuel and energy costs. In addition, due to certain fixed costs, our operating margins and earnings may be sensitive to changes in revenues.

Our business is dependent on availability of fuel for operating our fleet of trucks. Changes and volatility in the price of crude oil can adversely impact the prices for these products and therefore affect our operating results. The price and supply of fuel is unpredictable and fluctuates based on events beyond our control, including geopolitical developments, supply and demand for oil and natural gas, actions by OPEC and other oil and natural gas producers, war and unrest in oil producing countries, regional production patterns, and environmental concerns.
Furthermore, our facilities, fleet and personnel subject us to fixed costs, which make our margins and earnings sensitive to changes in revenues. In periods of declining demand, we may be unable to cut costs at a rate sufficient to offset revenue declines, which may put us at a competitive disadvantage to firms with lower or more flexible cost structures, and may result in reduced operating margins and/or higher operating losses. These effects could have a material adverse effect on our financial condition, results of operations and cash flows.
Future charges due to possible impairments of assets may have a material adverse effect on our results of operations and stock price.
As discussed more fully in Note 10 of the Notes to the Consolidated Financial Statements, we recorded total impairment charges of $4.8 million and $4.9 million for long-lived assets classified as held for sale during the years ended December 31, 2018 and 2017, respectively, which were included in “Impairment of long-lived assets” in the consolidated statements of operations. During the year ended December 31, 2016, we recorded total impairment charges for long-lived assets of $42.2 million. These charges were due to the carrying value of assets for certain basins not being recoverable, as well as for assets that were classified as held for sale during 2016. If there is further deterioration in our business operations or prospects, our stock price, the broader economy or our industry, including further declines in oil and natural gas prices, the value of our long-lived assets, or those we may acquire in the future, could decrease significantly and result in additional impairment and financial statement write-offs.
The testing of long-lived assets for impairment requires us to make significant estimates about our future performance and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in the composition of our reporting units; changes in economic, industry or market conditions; changes in business operations; changes in competition; or potential changes in the share price of our common stock and market capitalization. Changes in these factors, or differences in our actual performance compared with estimates of our future performance, could affect the fair value of long-lived assets, which may result in further impairment charges. We perform the assessment of potential impairment at least annually, or more often if events and circumstances require.
Should the value of our long-lived assets become impaired, we would incur additional charges which could have a material adverse effect on our consolidated results of operations and could result in us incurring additional net operating losses in future periods. We cannot accurately predict the amount or timing of any impairment of assets. Any future determination requiring the write-off of a significant portion of long-lived assets, although not requiring any additional cash outlay, could have a material adverse effect on our results of operations and stock price.
Significant capital expenditures are required to conduct our business, and our failure or inability to make sufficient capital investments could significantly harm our business prospects.
The development of our business and services, excluding acquisition activities, requires capital expenditures. During the year ended December 31, 2018, we made gross cash capital expenditures of approximately $12.2 million, which included the purchase of new water transfer trucks in the Northeast division, new water transfer equipment in the Rocky Mountain division, as well as expenditures to extend the useful life and productivity on our fleet of trucks, tanks, equipment and disposal wells. We continue to focus on finding ways to improve the utilization of our existing assets and optimizing the allocation of resources in the various shale areas in which we operate. Our capital expenditure program is subject to market conditions, including customer activity levels, commodity prices, industry capacity and specific customer needs. In addition to capital expenditures

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required to maintain our current level of business activity, we may incur capital expenditures to support future growth of our business.
We expect capital spending levels in 2019 to increase. Prolonged reductions or delays in capital expenditures could delay or diminish future cash flows and adversely affect our business and results of operations. Our planned capital expenditures for 2019 are expected to be financed through cash flow from operations, finance type leases, borrowings under our credit facility and term loan facilities, or a combination of the foregoing. Future cash flows from operations are subject to a number of risks and variables, such as the level of drilling activity and oil and natural gas production of our customers, prices of natural gas and oil, and the other risk factors discussed herein. Our ability to obtain capital from other sources, such as the capital markets, is dependent upon many of those same factors as well as the orderly functioning of credit and capital markets. To the extent we fail to have adequate funds, we could be required to further reduce or defer our capital spending, or pursue other funding alternatives which may not be as economically attractive to us, which in turn could have a materially adverse effect on our financial condition, results of operations and cash flows.
The compensation we offer our drivers is subject to market conditions, and we may find it necessary to increase driver compensation and/or modify the benefits provided to our employees in future periods.
Maintaining a staff of qualified truck drivers is critical to the success of our operations. We and other companies in the oil and natural gas industry suffer from a high turnover rate of drivers. The high turnover rate requires us to continually recruit a substantial number of drivers in order to operate existing equipment. If we are unable to continue to attract and retain a sufficient number of qualified drivers, we could be forced to, among other things, increase driver compensation and/or modify our benefit packages, or operate with fewer trucks and face difficulty meeting customer demands, any of which could adversely affect our growth and profitability. Additionally, in anticipation of or in response to geographical and market-related fluctuations in the demand for our services, we strategically relocate our equipment and personnel from one area to another, which may result in operating inefficiencies, increased labor, fuel and other operating costs and could adversely affect our growth and profitability. As a result, our driver and employee training and orientation costs could be negatively impacted. We also utilize the services of independent contractor truck drivers to supplement our trucking capacity in certain shale areas on an as-needed basis. There can be no assurance that we will be able to enter into these types of arrangements on favorable terms, or that there will be sufficient qualified independent contractors available to meet our needs, which could have a material adverse effect on our financial condition, results of operations and cash flows.
We depend on certain key customers for a significant portion of our revenues. The loss of any of these key customers or the loss of any contracted volumes could result in a decline in our business.
We rely on a limited number of customers for a significant portion of our revenues. Our three largest customers represented 11%, 10% and 8%, respectively, of our total consolidated revenues for the year ended December 31, 2018 and in total equaled 36% of our consolidated accounts receivable at December 31, 2018. The loss of all, or even a portion, of the revenues from these customers, as a result of competition, market conditions or otherwise, could have a material adverse effect on our business, results of operations, financial condition, and cash flows. A reduction in exploration, development and production activities by key customers due to the current declines in oil and natural gas prices, or otherwise, could have a material adverse effect on our financial condition, results of operations and cash flows.
Customer payment delays of outstanding receivables could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.
We often provide credit to our customers for our services, and are therefore subject to our customers delaying or failing to pay outstanding invoices. In weak economic environments, customers’ delays and failures to pay often increase due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to credit markets. If our customers delay or fail to pay a significant amount of outstanding receivables, it could reduce our availability under our revolving credit facility or otherwise have a material adverse effect on our liquidity, financial condition, results of operations and cash flows.

We may be unable to achieve or maintain pricing to our customers at a level sufficient to cover our costs, which would negatively impact our profitability.

We may be unable to charge prices to our customers that are sufficient to cover our costs. Our pricing is subject to highly competitive market conditions, and we may be unable to increase or maintain pricing as market conditions change. Likewise, customers may seek pricing declines more precipitously than our ability to reduce costs. In certain cases, we have entered into fixed price agreements with our customers, which may further limit our ability to raise the prices we charge our customers at a rate sufficient to offset any increases in our costs. Additionally, some customers’ obligations under their agreements with us may be permanently or temporarily reduced upon the occurrence of certain events, some of which are beyond our control,

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including force majeure events. Force majeure events may include (but are not limited to) events such as revolutions, wars, acts of enemies, embargoes, import or export restrictions, strikes, lockouts, fires, storms, floods, acts of God, explosions, mechanical or physical failures of our equipment or facilities of our customers. If the amounts we are able to charge customers are insufficient to cover our costs, or if any customer suspends, terminates or curtails its business relationship with us, the effects could have a material adverse impact on our financial condition, results of operations and cash flows.

The litigation environment in which we operate poses a significant risk to our businesses.

We are occasionally involved in the ordinary course of business in a number of lawsuits involving employment, commercial, and environmental issues, other claims for injuries and damages, and various shareholder and class action litigation, among other matters. We may experience negative outcomes in such lawsuits in the future. Any such negative outcomes could have a material adverse effect on our business, liquidity, financial condition and results of operations. We evaluate litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we establish reserves and disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of judgment. Actual outcomes or losses may differ materially from such assessments and estimates. The settlement or resolution of such claims or proceedings may have a material adverse effect on our results of operations. In addition, judges and juries in certain jurisdictions in which we conduct business have demonstrated a willingness to grant large verdicts, including punitive damages, to plaintiffs in personal injury, property damage and other tort cases. We use appropriate means to contest litigation threatened or filed against us, but the litigation environment in these areas poses a significant business risk to us and could cause a significant diversion of management’s time and resources, which could have a material adverse effect on our financial condition, results of operations and cash flows.

The hazards and risks associated with the transport, storage, and handling, and disposal of our customers’ waste (such as fires, spills, explosions and accidents) may expose us to personal injury claims, property damage claims and/or products liability claims from our employees, customers or third parties. As protection against such claims and operating hazards, we maintain insurance coverage against some, but not all, potential losses. However, we may sustain losses for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. As more fully described in Note 21 of the Notes to Consolidated Financial Statements herein, due to the unpredictable nature of personal injury litigation, it is not possible to predict the ultimate outcome of these claims and lawsuits, and we may be held liable for significant personal injury or damage to property or third parties, or other losses, that are not fully covered by our insurance, which could have a material adverse effect on our financial condition, results of operations and cash flows.

We operate in competitive markets, and there can be no certainty that we will maintain our current customers or attract new customers or that our operating margins will not be impacted by competition.

The industries in which our business operates are highly competitive. We compete with numerous local and regional companies of varying sizes and financial resources. Competition intensified during the most recent downturn, and could further intensify in the future. Furthermore, numerous well-established companies are focusing significant resources on providing similar services to those that we provide that will compete with our services. We cannot assure you that we will be able to effectively compete with these other companies or that competitive pressures, including possible downward pressure on the prices we charge for our products and services, will not arise. In addition, any declines in oil and natural gas prices may result in competitors moving resources from higher-cost exploration and production areas to relatively lower-cost exploration and production areas where we are located thereby increasing supply and putting further downward pressure on the prices we can charge for our products and services, including our rental business. In the event that we cannot effectively compete on a continuing basis, or competitive pressures arise, such inability to compete or competitive pressures could have a material adverse effect on our financial condition, results of operations and cash flows.

Market projections and data are forward-looking in nature.

Our strategy is based in part on our own market projections and on third-party analyst, industry observer, and expert reports and market projections, which are forward-looking in nature and are inherently subject to numerous risks and uncertainties. This Annual Report contains forward-looking market projections based on studies and reports produced by third-party market analysts and experts. The predictions by us or such third-party market analysts or experts are subject to numerous factors that could change or emerge in the future, and any market data we rely upon, whether from third parties or otherwise, may be inaccurate or based on flawed assumptions at the time such predictions were made. The inaccuracy of any such market projections and/or market data could adversely affect our operating results and financial condition, and we urge you to carefully

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consider the validity and limitations of any such market data or projections we include in this Annual Report and in any of our other filings with the SEC.

Any interruption in our services due to pipeline ruptures or spills or necessary maintenance could impair our financial performance and negatively affect our brand.

Our water transport pipelines are susceptible to ruptures and spills, particularly during start up and initial operation, and require ongoing inspection and maintenance. We may experience difficulties in maintaining the operation of our pipelines, which may cause downtime and delays. We also may be required to periodically shut down all or part of our pipelines for regulatory compliance and inspection purposes. Any interruption in our services due to pipeline breakdowns or necessary maintenance, inspection or regulatory compliance could reduce revenues and earnings and result in remediation costs. While we have business interruption insurance coverage for our pipeline which would help mitigate lost revenues and remediation costs should a rupture, spill or other shut-down occur, there can be no assurances as to how much lost revenue or remediation costs our business interruption insurance would cover, if any. Transportation interruptions at our pipelines, even if only temporary, could severely harm our business and reputation, and could have a material adverse effect on our financial condition, results of operations and cash flows.
Our operations are subject to risks inherent in the oil and natural gas industry, some of which are beyond our control. These risks may not be fully covered under our insurance policies.
Our operations are subject to operational hazards, including accidents or equipment failures that can cause pollution and other damage to the environment. Pursuant to applicable law, we may be required to remediate the environmental impact of any such accidents or incidents, which may include costs related to site investigation and soil, groundwater and surface water cleanup. In addition, hazards inherent in the oil and natural gas industry, such as, but not limited to, accidents, blowouts, explosions, pollution and other damage to the environment, fires and hydrocarbon spills, may delay or halt operations at extraction sites which we service. These conditions can cause:
personal injury or loss of life;
liabilities from pipeline breaks and accidents by our fleet of trucks and other equipment;
damage to or destruction of property, equipment and the environment; and
the suspension of operations.
The occurrence of a significant event or a series of events that together are significant, or adverse claims in excess of the insurance coverage that we maintain or that are not covered by insurance, could have a material adverse effect on our financial condition, results of operations and cash flows. Litigation arising from a catastrophic occurrence at a location where our equipment and services are being used may result in our being named as a defendant in lawsuits asserting large claims.
We maintain insurance coverage that we believe to be customary in the industry against these hazards. We may not be able to maintain adequate insurance in the future at rates we consider reasonable. In addition, insurance may not be available to cover any or all of the risks to which we are subject, or, even if available, the coverage provided by such insurance may be inadequate, or insurance premiums or other costs could make such insurance prohibitively expensive. It is also possible that, when we renew our insurance coverages, our premiums and deductibles will be higher, and certain insurance coverage either will be unavailable or considerably more expensive, than it has been in the past. In addition, our insurance is subject to coverage limits, and some policies exclude coverage for damages resulting from environmental contamination.
Improvements in or new discoveries of alternative energy technologies or our customers’ operating methodologies could have a material adverse effect on our financial condition and results of operations.
Because our business depends on the level of activity in the oil and natural gas industry, any improvement in or new discoveries of alternative energy technologies (such as wind, solar, geothermal, fuel cells and biofuels) that increase the use of alternative forms of energy and reduce the demand for oil and natural gas could have a material adverse effect on our financial condition, results of operations and cash flows. In addition, technological changes in our customers’ operating methods could decrease the need for management of water and other wellsite environmental services or otherwise affect demand for our services.
Seasonal weather conditions and natural disasters could severely disrupt normal operations and harm our business.
Areas in which we operate are adversely affected by seasonal weather conditions, primarily in the winter and spring. During periods of heavy snow, ice or rain, our customers may curtail their operations or we may be unable to move our trucks between

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locations or provide other services, thereby reducing demand for, or our ability to provide services and generate revenues. For example, many municipalities impose weight restrictions on the roads that lead to our customers’ job sites in the spring due to the muddy conditions caused by spring thaws, limiting our access and our ability to provide service in these areas. In addition, the regions in which we operate have in the past been, and may in the future be, affected by natural disasters such as hurricanes, windstorms, floods and tornadoes. In certain areas, our business may be dependent on our customers’ ability to access sufficient water supplies to support their hydraulic fracturing operations. To the extent severe drought conditions or other factors prevent our customers from accessing adequate water supplies, our business could be negatively impacted. Future natural disasters or inclement weather conditions could severely disrupt the normal operation of our business, or our customers’ business, and have a material adverse effect on our financial condition, results of operations and cash flows.
Our financial and operating performance may be affected by the inability to renew landfill operating permits, obtain new landfills and expand existing ones.
We currently own one landfill and our ability to meet our financial and operating objectives may depend, in part, on our ability to acquire, lease, or renew landfill operating permits, expand existing landfills and develop new landfill sites. It has become increasingly difficult and expensive to obtain required permits and approvals to build, operate and expand solid waste management facilities, including landfills. Operating permits for landfills in states where we operate must generally be renewed every five to ten years, although some permits are required to be renewed more frequently. These operating permits often must be renewed several times during the permitted life of a landfill. The permit and approval process is often time consuming, requires numerous hearings and compliance with zoning, environmental and other requirements, is frequently challenged by special interest and other groups, and may result in the denial of a permit or renewal, the award of a permit or renewal for a shorter duration than we believed was otherwise required by law, or burdensome terms and conditions being imposed on our operations. We may not be able to obtain new landfill sites or expand the permitted capacity of our landfills when necessary. In addition, we may be unable to make the contingent consideration payment required upon the issuance of a second special waste disposal permit to expand the current landfill. Any of these circumstances could have a material adverse effect on our financial condition, results of operations and cash flows.

Our ability to use net operating loss and tax credit carryforwards and certain built-in losses to reduce future tax payments may be limited.

Our ability to utilize our net operating loss carryforwards to offset future taxable income and to reduce federal and state income tax liabilities is subject to certain requirements, limitations and restrictions, including Internal Revenue Code Section 382 which under certain circumstances may substantially limit our ability to offset future tax liabilities with federal net operating loss carryforwards.

Future changes in ownership could eliminate or limit our use of net operating loss carryforwards.

Pursuant to United States Internal Revenue Code Section 382, if we undergo an ownership change, the net operating loss carryforward limitations would impose an annual limit on the amount of the taxable income that may be offset by our net operating losses generated prior to the ownership change. We have determined that an ownership change occurred on April 15, 2016 as a result of the debt restructuring that occurred during fiscal 2016. In addition, another ownership change occurred on August 7, 2017 as a result of the chapter 11 reorganization described further in Note 4. The limitation under Section 382 may result in federal net operating loss carryforwards expiring unused. Subject to the impact of those rules as a result of past or future restructuring transactions, we may be unable to use all or a significant portion of our net operating loss carryforwards to offset future taxable income.
We are self-insured against many potential liabilities, and our reserves may not be sufficient to cover future claims.
We maintain high deductible or self-insured retention insurance policies for certain exposures including automobile, workers’ compensation and certain employee group health insurance plans. We carry policies for certain types of claims to provide excess coverage beyond the underlying policies and per incident deductibles or self-insured retentions. Because many claims against us do not exceed the deductibles under our insurance policies, we are effectively self-insured for a substantial portion of our claims. Our insurance accruals are based on claims filed and estimates of claims incurred but not reported. The insurance accruals are influenced by our past claims experience factors, which have a limited history, and by published industry development factors. The estimates inherent in these accruals are determined using actuarial methods that are widely used and accepted in the insurance industry. If our insurance claims increase or if costs exceed our estimates of insurance liabilities, we could experience a decline in profitability and liquidity, which would adversely affect our business, financial condition or results of operations. In addition, should there be a loss or adverse judgment or other decision in an area for which we are self-insured, then our business, financial condition, results of operations and liquidity may be adversely affected.

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We evaluate our insurance accruals, and the underlying assumptions, regularly throughout the year and make adjustments as needed. While we believe that the recorded amounts are reasonable, there can be no assurance that changes to our estimates will not occur due to limitations inherent in the estimation process. Changes in our assumptions and estimates could have a material adverse effect on our financial condition, results of operations and cash flows.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, storage, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations and the services we provide to customers, and damage our reputation, and cause a loss of confidence in our products and services, which could adversely affect our business, operating margins, revenues and competitive position. These effects could have a material adverse effect on our financial condition, results of operations and cash flows.
A failure in our operational systems, or those of third parties, may adversely affect our business.
Our business is dependent upon our operational and technological systems to process a large amount of data. If any of our financial, operational, or other data processing systems fail or have other significant shortcomings, our financial results could be adversely affected. Our financial results could also be adversely affected if an employee causes our operational systems to fail, either as a result of inadvertent error or by deliberately tampering with or manipulating our operational systems. In addition, dependence upon automated systems may further increase the risk that operational system flaws, employee tampering or manipulation of those systems could result in losses that are difficult to detect. We are heavily reliant on technology for communications, financial reporting, treasury management and many other important aspects of our business. Any failure in our operational systems could have a material adverse impact on our business. Third-party systems on which we rely could also suffer operational failures. Any of these occurrences could disrupt our business, including the ability to close our financial ledgers and report the results of our operations publicly on a timely basis or otherwise have a material adverse effect on our financial condition, results of operations and cash flows.

Risks Related to Our Indebtedness

The amount of our debt and the covenants in the agreements governing our debt could negatively impact our business operations, financial condition, results of operations, and business prospects.

Although we reduced the amount of our debt by approximately $500 million as a result of the reorganization in 2017, as of December 31, 2018, we had approximately $66.4 million of total debt. Our level of indebtedness, and the covenants contained in the agreements governing our debt, could have important consequences for our operations, including:

making it more difficult for us to satisfy our obligations under the agreements governing our indebtedness and increasing the risk that we may default on our debt obligations;

requiring us to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures and other general business activities;

limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes and other activities;

limiting management’s flexibility in operating our business;

limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

diminishing our ability to successfully withstand a downturn in our business or the economy generally;


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placing us at a competitive disadvantage against less leveraged competitors; and

making us vulnerable to increases in interest rates, because our debt has variable interest rates.

Each of our debt instruments contain certain negative covenants that impose specific restrictions on us. These restrictions include, among others, our ability to incur additional debt; operationally prepay, redeem, or purchase any indebtedness; pay dividends or make other distributions, make other restricted payments and investments; create liens; enter into certain merger, consolidation, reorganization, or recapitalization transactions; merge consolidate, or transfer or dispose of substantially all of our assets; and enter into certain types of transactions with affiliates. In addition, there are a number of affirmative covenants with which we must comply. A breach of any of these negative or affirmative covenants could result in a default under our indebtedness. If we default, our lenders will no longer be obligated to extend credit to us, and they could declare all amounts of outstanding debt, together with accrued interest, to be immediately due and payable. The results of such actions would have a significant impact on our results of operations, financial position, and cash flows. We likely would not have sufficient liquidity to repay all of our outstanding indebtedness.

Despite existing debt levels, we may still be able to incur substantially more debt, which would increase the risks associated with our indebtedness.

Even with our existing debt levels, we and our subsidiaries may be able to incur substantial amounts of additional debt in the future, some or all of which may be secured. As of February 28, 2019, we had approximately $12.7 million of borrowing availability under our revolving credit facility. Although the terms of our credit facilities limit our ability to incur additional debt, these terms do not and will not prohibit us from incurring substantial amounts of additional debt for specific purposes or under certain circumstances, some or all of which may be secured. In addition, our lenders may consent to the incurrence of additional debt. As disclosed in our Form 8-K filed with the SEC on October 5, 2018, in October 2018 we incurred additional debt from our existing lenders in conjunction with our acquisition of Clearwater. We may incur additional debt in connection with future acquisitions. If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify and could further exacerbate the risks associated with our indebtedness.

Our ability to meet our obligations under our indebtedness depends in part on our earnings and cash flows and those of our subsidiaries and on our ability and the ability of our subsidiaries to pay dividends or advance or repay funds to us.

We conduct all of our operations through our subsidiaries. Consequently, our ability to service our debt is dependent, in large part, upon the earnings from the businesses conducted by our subsidiaries. Our subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts to us, whether by dividends, loans, advances or other payments. The ability of our subsidiaries to pay dividends and make other payments to us depends on their earnings, capital requirements and general financial conditions and is restricted by, among other things, applicable corporate and other laws and regulations as well as, in the future, agreements to which our subsidiaries may be a party.

Our borrowings under our revolving credit facility and first lien term loan facility expose us to interest rate risk.

Our earnings are exposed to interest rate risk associated with borrowings under our revolving credit facility and first lien term loan facility. Our revolving credit facility and first lien term loan facility carry a floating interest rate; therefore, as interest rates increase, so will our interest costs, which may have a material adverse effect on our financial condition, results of operations and cash flows. In 2018, the United States Federal Reserve raised interest rates four times.

Risks Related to Our Restructuring

Upon our emergence from chapter 11, the composition of our shareholder base and concentration of equity ownership changed significantly. As a result, the future strategy and plans of the Company may differ materially from those of the past.

Due to a severe industry downturn beginning in late 2014, 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. The Plan became effective on 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 our emergence from chapter 11, two shareholder groups beneficially own approximately 90% (the “Significant Shareholders”) of our issued and outstanding common stock and, therefore, have significant control on the outcome of matters

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submitted to a vote of shareholders, including, but not limited to, electing directors and approving corporate transactions. As a result, the future strategy and plans of the Company may differ materially from those of the past. Circumstances may occur in which the interests of the Significant Shareholders could be in conflict with the interests of other shareholders, and the Significant Shareholders would have substantial influence to cause us to take actions that align with their interests. Should conflicts arise, we can provide no assurance that the Significant Shareholders would act in the best interests of other shareholders or that any conflicts of interest would be resolved in a manner favorable to our other shareholders.

The effects of the pending appeal of the Confirmation Order are difficult to predict.

On July 26, 2017, David Hargreaves, an individual holder of our pre-Effective Date 9.875% Senior Notes due 2018 (the “2018 Notes”), appealed the Confirmation Order to the District Court of the District of Delaware (the “District Court”) and filed a motion for a stay pending appeal from the District Court. Although the motion for a stay pending appeal was denied, the appeal remained pending and the District Court heard oral arguments on May 14, 2018. On August 21, 2018 the District Court issued an order dismissing the appeal. Hargreaves subsequently appealed the District Court’s decision to the United States Court of Appeals for the Third Circuit. The parties filed appellate briefs in December 2018 and January 2019, and as a result the appeal remains pending with the United States Court of Appeals for the Third Circuit. 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 final disposition of this appeal will not affect the validity, enforceability or finality of the Confirmation Order.

Information contained in our historical financial statements will not be comparable to the information contained in our financial statements after the application of fresh start accounting.

This Annual Report on Form 10-K reflects the consummation of the Plan and the adoption of fresh start accounting. As a result, our financial statements from and after the Effective Date will not be comparable to our financial statements for prior periods. This will make it difficult for shareholders to assess our performance in relation to prior periods. Please see Note 5 on “Fresh Start Accounting” in the Notes to Consolidated Financial Statements for further information.

There is no guarantee that the warrants issued by us in accordance with the Plan will become in the money, and unexercised warrants may expire worthless.

As long as our stock price is below $39.82 per share, the warrants will have limited economic value, and they may expire worthless. Additionally, no warrant holder has, by virtue of holding or having a beneficial interest in the warrants, the right to vote, consent, receive any cash dividends, allotments or rights or other distributions paid, allotted or distributed or distributable to the holders of common stock, or to exercise any rights whatsoever as a stockholder unless, until, and only to the extent such warrant holder becomes a holder of record of shares of common stock issued upon settlement of warrants.

Risk Factors Related To Our Common Stock

We cannot assure you that an active trading market for our common stock will develop or be maintained, and the market price of our common stock may be volatile, which could cause the value of your investment to decline.

We cannot assure you that an active public market for our common stock will develop or, if it develops, be sustained. We currently have a limited trading volume of our common stock. In the absence of an active public trading market, it may be difficult to liquidate your investment in our common stock. The trading price of our common stock on the NYSE American may fluctuate significantly. Numerous factors, including many over which we have no control, may have a significant impact on the market price of our common stock. These risks include, among other things:

our operating and financial performance and prospects;

our ability to repay our debt;

investor perceptions of us and the industry and markets in which we operate;

future sales, or the availability for sale, of equity or equity-related securities;

changes in earnings estimates or buy/sell recommendations by analysts;

limited trading volume of our common stock; and

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general financial, domestic, economic and other market conditions.

The trading price of our common stock may not reflect accurately the value of our business.

As a result of our completed restructuring, ownership of our common stock is highly concentrated, and there are a limited number of shares available for trading on the NYSE American or any other public market. As a result, reported trading prices for our common stock at any given time may not reflect accurately the underlying economic value of our business at that time. Reported trading prices could be higher or lower than the price a shareholder would be able to receive in a sale transaction, and there can be no assurance that there will be sufficient public trading in our common stock to create a liquid trading market that accurately reflects the underlying economic value of our business.

The resale of shares of our common stock, including shares issuable upon exercise of our warrants, may adversely affect the market price of our common stock.

At the time of our emergence from bankruptcy, we granted registration rights to certain stockholders. The shares of our outstanding common stock held by these stockholders were registered pursuant to a registration statement filed pursuant to the Securities Act and declared effective by the SEC on May 3, 2018. In addition, on January 3, 2019, an additional 3,220,330 shares were issued to these stockholders pursuant to our recently completed rights offering. The shares held by these stockholders constitute approximately 90% of our outstanding common stock as of February 28, 2019, all of which may be sold in the public markets.

Furthermore, as of February 28, 2019, there were 118,137 warrants outstanding, which were issued to the holders of our pre-Effective Date 2018 Notes and holders of certain claims relating to the rejection of executory contracts and unexpired leases. The exercise price of the warrants is $39.82. To the extent such warrants are exercised, additional shares of our common stock will be issued, which will result in dilution to the holders of our common stock and increase the number of shares eligible for resale in the public market.

The sale of a significant number of shares of our common stock, including shares issuable upon exercise of our warrants, or substantial trading in our common stock or the perception in the market that substantial trading in our common stock will occur, may adversely affect the market price of our common stock.

Our stock price may be volatile, which could result in substantial losses for investors in our securities.

The stock markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. The market price of our common stock may also fluctuate significantly in response to the following factors, some of which are beyond our control:

variations in our quarterly operating results and changes in our liquidity position;

changes in securities analysts’ estimates of our financial performance;

inaccurate or negative comments about us on social networking websites or other media channels;

changes in market valuations of similar companies;

announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, capital commitments, new products or product enhancements, as well as our or our competitors’ success or failure in successfully executing such matters;

announcements by us of strategic plans to restructure our indebtedness or of a bankruptcy filing;

changes in the price of oil and natural gas;

loss of a major customer or failure to complete significant transactions; and

additions or departures of key personnel.


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If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our stock could decline.

The trading market for our shares of common stock could rely in part on the research and reporting that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrades our stock, the price of our stock could decline. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

Future sales by us or our existing shareholders could depress the market price of our common stock.

If we or our existing shareholders sell a large number of shares of our common stock, the market price of our common stock could decline significantly. Further, even the perception in the public market that we or our existing shareholders might sell shares of common stock could depress the market price of the common stock.

We may issue a substantial number of shares of our common stock in the future and shareholders may be adversely affected by the issuance of those shares.

We may raise additional capital by issuing shares of common stock, or other securities convertible into common stock, which will increase the number of shares of common stock outstanding and may result in substantial dilution in the equity interest of our current shareholders and may adversely affect the market price of our common stock. On January 3, 2019, an additional 3,381,894 shares were issued to stockholders pursuant to our recently completed rights offering, bringing our total outstanding shares to 15,614,981 as of February 28, 2019. The issuance, and the resale or potential resale, of shares of our common stock could adversely affect the market price of our common stock and could be dilutive to our shareholders.

We currently do not intend to pay any dividends on our common stock.

We currently do not intend to pay any dividends on our common stock, and restrictions and covenants in our debt agreements may prohibit us from paying dividends now or in the future. While we may declare dividends at some point in the future, subject to compliance with such restrictions and covenants, we cannot assure you that you will ever receive cash dividends as a result of ownership of our common stock and any gains from investment in our common stock may only come from increases in the market price of our common stock, if any.

Certain of our charter and bylaw provisions and Delaware law, as well as the substantial ownership of our common stock by a small number of shareholders, could subject us to anti-takeover effects or could have a material negative impact on our business.

Provisions of our certificate of incorporation and bylaws, each as amended and restated, and Delaware law may discourage, delay or prevent a merger or acquisition that shareholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. In addition, these provisions may frustrate or prevent any attempts by our shareholders to replace or remove our management and board of directors. These provisions include:

authorizing the issuance of “blank check” preferred stock without any need for action by shareholders;

establishing a classified board of directors, so that only approximately one-third of our directors are elected each year;

providing our board of directors with the ability to set the number of directors and to fill vacancies on the board of directors occurring between shareholder meetings;

providing that directors may only be removed for “cause” and only by the affirmative vote of the holders of at least a majority in voting power of our issued and outstanding capital stock; and

limiting the ability of our shareholders to call special meetings.

We are also subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for three years following the date the beneficial owner acquired at least 15% of our stock, unless various conditions are met, such as approval of the transaction by our board of directors. Together, these charter and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.

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The existence of the foregoing provisions and anti-takeover measures, as well as the significant percentage of common stock beneficially owned by our Significant Shareholders, could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our Company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

Risks Related to Environmental and Other Governmental Regulation
We are subject to United States federal, state and local laws and regulations relating to health, safety, transportation, and protection of natural resources and the environment. Under these laws and regulations, we may become liable for significant penalties, damages or costs of remediation. Any changes in laws and regulations could increase our costs of doing business.
Our operations, and those of our customers, are subject to United States federal, state and local laws and regulations relating to health, safety, transportation and protection of natural resources and the environment and worker safety, including those relating to waste management and transportation and disposal of produced water and other materials. For example, we are subject to environmental regulation relating to disposal into injection wells, which can pose some risks of environmental liability, as well as liability for property damage and personal injuries. In addition, federal, state and local laws and regulations could increase costs to our customers and possibly decrease demand for our services. For example, many of our customers have intrastate pipeline operations that are subject to regulation by various agencies of the states in which they are located. If new laws and/or regulations that further regulate intrastate pipelines are adopted in response to equipment failures, spills, negative environmental effects, or public sentiment, our customers may face increased costs of compliance, and thus reduce demand for our services.
Our business involves the use, handling, storage, and contracting for recycling or disposal of environmentally sensitive materials. Accordingly, we are subject to health and environmental regulations established by federal, state, and local authorities. We also are subject to laws, ordinances, and regulations governing the investigation and remediation of contamination at facilities we operate or to which we send hazardous or toxic substances or wastes for recycling or disposal. In particular, the federal Comprehensive Environmental Response, Compensation & Liability Act (“CERCLA”) imposes strict joint and several liability on owners and operators of facilities at, from, or to which a release of hazardous substances has occurred; on parties that generated hazardous substances that were released at such facilities; and on parties that transported or arranged for the transportation of hazardous substances to such facilities. A majority of states have adopted comparable statutes. Under CERCLA or a similar state statute, we could be held liable for all investigative and remedial costs associated with addressing such contamination. Claims alleging personal injury or property damage also could be brought against us based on alleged exposure to hazardous substances resulting from our operations.
Failure to comply with these laws and regulations could result in the assessment of significant administrative, civil or criminal penalties, imposition of cleanup and site restoration costs and liens, revocation of permits, and orders to limit or cease certain operations. Additionally, future events, such as the discovery of currently unknown matters, spills caused by future pipeline ruptures, changes in existing environmental laws and regulations or their interpretation, and more vigorous enforcement policies by regulatory agencies, may give rise to expenditures or liabilities, which could impair our operations and could have a material adverse effect on our financial condition, results of operations and cash flows.
Although we believe that we are in substantial compliance with all applicable laws and regulations, legal requirements change frequently and are subject to interpretation. New laws, regulations and changing interpretations by regulatory authorities, together with uncertainty regarding adequate testing and sampling procedures, new pollution control technology and cost benefit analysis based on market conditions are all factors that may increase our future capital expenditures to comply with environmental requirements. Accordingly, we are unable to predict the ultimate cost of future compliance with these requirements or their effect on our operations.
Increased regulation of hydraulic fracturing, including regulation of the quantities, sources and methods of water use and disposal, could result in reduction in drilling and completing new oil and natural gas wells or minimize water use or disposal, which could adversely impact the demand for our services.
Demand for our services depends, in large part, on the level of exploration and production of oil and natural gas and the oil and natural gas industry’s willingness to purchase our services. Most of our customer base uses hydraulic fracturing to drill new oil and natural gas wells. Hydraulic fracturing is used to release hydrocarbons, particularly natural gas, from certain geological formations. The process involves the injection of water (typically mixed with significant quantities of sand and small quantities of chemical additives) under pressure into the formation to fracture the surrounding rock and stimulate movement of hydrocarbons through the formation. The process is typically regulated by state oil and natural gas commissions and since 2005

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has been exempt from federal regulation under the SDWA, except when the fracturing fluids or propping agents contain diesel fuels.
The EPA has been reviewing the potential environmental impacts of hydraulic fracturing activities. On February 11, 2014, the EPA released a revised underground injection control (“UIC”) program permitting guidance for wells that use diesel fuels during hydraulic fracturing activities to clarify how companies can comply with a 2005 federal law that exempts hydraulic fracturing operations from the UIC permit requirement, except where diesel fuel is used as a fracturing fluid. On July 16, 2015, the EPA’s Inspector General (IG) issued a report entitled “Enhanced EPA Oversight and Action Can Further Protect Water Resources From the Potential Impacts of Hydraulic Fracturing” stating that the EPA should enhance its oversight of permit issuance for hydraulic fracturing by state and develop a plan for responding to concerns about chemicals used in hydraulic fracturing. On May 19, 2014, the EPA issued an Advance Notice of Proposed Rulemaking announcing its intention to develop a rule under the Toxic Substances Control Act (“TSCA”) to require disclosure of chemicals used in hydraulic fracturing. While the EPA’s regulatory agenda previously estimated that the EPA would issue a proposed TSCA rule in June 2018, the agency withdrew the action in March 2018. The EPA’s regulatory agenda stated, however, that the withdrawal does not preclude the EPA from developing a similar action in the future. On October 15, 2012, new EPA regulations under the CAA went into effect that require reductions in certain criteria and hazardous air pollutant emissions from hydraulic fracturing wells. In May 2016, the EPA issued new CAA regulations to reduce methane emissions from oil and gas operations, including hydraulic fracturing, although in September 2018 the EPA proposed revisions to limit certain provisions of the regulations.
On June 13, 2016, the EPA finalized regulations under the CWA to prohibit wastewater discharges from hydraulic fracturing and other natural gas production to municipal sewage plants (called publicly owned treatment works (“POTWs”)). The regulations went into effect on August 29, 2016 for most facilities, but the EPA extended the compliance date to August 29, 2019 for facilities that had been lawfully discharging extraction wastewater to POTWs prior to June 28, 2016. In December 2016, the EPA issued a final report entitled “Hydraulic Fracturing for Oil and Gas: Impacts from the Hydraulic Fracturing Water Cycle on Drinking Water Resources in the United States” that concluded that hydraulic fracturing can impact drinking water resources under some circumstances, but stated that the national frequency of impacts on drinking water could not be estimated due to significant data gaps and uncertainties in the available data. In March 2015, the Department of the Interior (“DOI”) issued regulations imposing stringent requirements on hydraulic fracturing wells constructed on federal lands, but DOI rescinded the regulations in December 2017. Legislation was introduced during the last Congress to provide for federal regulation of hydraulic fracturing, including, requiring disclosure of chemicals used in the fracturing process and potentially repealing the SWDA exemption. Similar legislation may be proposed in the future. If adopted, such legislation would add another level of regulation and permitting at the federal level for wells using hydraulic fracturing. Laws and regulations restricting hydraulic fracturing have been adopted or are being considered in several states, including certain states in which we operate. In November 2017, the Delaware River Basin Commission issued proposed regulations that would ban “high volume hydraulic fracturing” in certain areas of Pennsylvania, New York, New Jersey and Delaware. Those regulations may be finalized this year. Some local governments have also sought to restrict drilling.
Some regulators have adopted or are considering additional requirements for hydraulic fracturing related to seismic activities. For example, in April 2014, the Ohio Department of Natural Resources issued new guidelines that require companies to install seismic monitors for any horizontal drilling within 3 miles of a known fault or area of seismic activity greater than 2.0 magnitude and allow regulators to halt drilling in the event of an earthquake greater than 1.0 magnitude. In Texas, the Texas Railroad Commission (the “RRC”) amended its existing oil and natural gas disposal well regulations to require applicants for new disposal wells to conduct seismic activity searches utilizing the U.S. Geological Survey to assess whether the RRC should impose limits on existing wells, including a temporary injection ban. Arkansas has prohibited waste-water injection in certain areas of the state due to concerns that hydraulic fracturing may be related to increased earthquake activity. Such laws and regulations could delay or curtail production of oil and natural gas by our customers, and thus reduce demand for our services.
Future United States federal, state or local laws or regulations could significantly restrict, or increase costs associated with hydraulic fracturing and make it more difficult or costly for producers to conduct hydraulic fracturing operations, which could result in a decline in exploration and production. New laws and regulations, and new enforcement policies by regulatory agencies, could also expressly restrict the quantities, sources and methods of water use and disposal in hydraulic fracturing and otherwise increase our costs and our customers’ cost of compliance, which could minimize water use and disposal needs even if other limits on drilling and completing new wells were not imposed. Any decline in exploration and production or any restrictions on water use and disposal could result in a decline in demand for our services and have a material adverse effect on our business, financial condition, results of operations and cash flows.

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Delays or restrictions in obtaining permits by our customers for their operations or by us for our operations could impair our business.
In most states, our customers are required to obtain permits from one or more governmental agencies in order to perform drilling and completion activities and we may be required to procure permits for construction and operation of our disposal wells and pipelines. Such permits are typically required by state agencies, but they can be required by federal and local governmental agencies as well. The requirements for such permits vary, but with all governmental permitting processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit to be issued, and the conditions that may be imposed by the permit. Delays or restrictions in obtaining saltwater disposal well permits could adversely impact our growth, which is dependent in part on new disposal capacity.
Our customers have been affected by moratoriums that have been imposed on the issuance of permits for drilling and completion activities in certain jurisdictions. For example, in December 2014, the State of New York announced a ban on hydraulic fracturing in the state. A moratorium has been in place within the Delaware River Basin pending finalization of regulations by the Delaware River Basin Commission that would permanently ban high volume hydraulic fracturing in the Basin. Other states, including California, Texas, Arkansas, Pennsylvania, Wyoming and Colorado, have enacted laws and regulations applicable to our business activities, including disclosure of information regarding the substances used in hydraulic fracturing. On January 9, 2014, the EPA issued a revised CWA permit requiring oil and natural gas companies using hydraulic fracturing off the coast of California to disclose the chemicals they discharge into the ocean. Some drilling and completion activities by our customers may take place on federal land, requiring leases from the federal government to conduct such drilling and completion activities. In some cases, federal agencies have canceled oil and natural gas leases on federal lands. Consequently, our operations in certain areas of the country may be interrupted or suspended for varying lengths of time, causing a loss of revenue and potentially having a materially adverse effect on our financial condition, results of operations and cash flows.
We are subject to the trucking safety regulations, which are likely to be amended, and made stricter, as part of the initiative known as Compliance, Safety, Accountability, or “CSA.” If our current USDOT safety rating of “Satisfactory” is downgraded in connection with this initiative, our business and results of our operations may be adversely affected.
As part of the CSA initiative, the FMCSA is continuously revising its safety rating methodology and implementation of the same. These revisions will likely link safety ratings more closely to roadside inspection and driver violation data gathered and analyzed from month to month under the FMCSA’s new Safety Measurement System, or “SMS” and may place increased scrutiny on carriers transporting significant quantities of hazardous material. This linkage could result in greater variability in safety ratings than the current system. Preliminary studies by transportation consulting firms indicate that “Satisfactory” ratings (or any equivalent under a new SMS-based system) may become more difficult to achieve and maintain under such a system. If our operations lose their current “Satisfactory” rating, which is the highest and best rating under this initiative, we may lose some of our customer contracts that require such a rating, adversely affecting our financial condition, results of operations and cash flows.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease our corporate headquarters in Scottsdale, Arizona and we own or lease numerous facilities including administrative offices, sales offices, truck yards, maintenance and warehouse facilities, and a landfill facility in seven other states. We also own or lease 48 saltwater disposal wells in Louisiana, Montana, North Dakota, Ohio and Texas as of December 31, 2018. We believe that we have satisfactory title to the properties owned and used in our businesses, subject to liens for taxes not yet payable, liens incident to minor encumbrances, liens for credit arrangements (including liens under our credit facility) and easements and restrictions that do not materially detract from the value of these properties, our interests in these properties, or the use of these properties in our businesses.
We believe all properties that we currently occupy are suitable for their intended uses. We believe that we have sufficient facilities to conduct our operations. However, we continue to evaluate the purchase or lease of additional properties or the consolidation of our properties, as our business requires.
Item 3. Legal Proceedings
We are party to legal proceedings and potential claims arising in the ordinary course of our business, including, but not limited to, claims related to employment matters, contractual disputes, personal injuries and property damage. In addition, various legal

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actions, claims and governmental inquiries and proceedings are pending or may be instituted or asserted in the future against us and our subsidiaries. See “Legal Matters” section in Note 21 of the Notes to the Consolidated Financial Statements herein for a description of our legal proceedings.
Item 4. Mine Safety Disclosures
None.

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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the NYSE American under the symbol “NES” and has been trading on the NYSE American since October 12, 2017. Prior to the commencement of our voluntarily chapter 11 proceedings, our pre-Effective Date common stock was trading on the OTCQB U.S. Market (the “OTCQB”) beginning on January 20, 2016 under the symbol “NESC.”

As an issuer may not be listed on the OTCQB if it is subject to bankruptcy or reorganization proceedings, upon filing the Plan with the Bankruptcy Court, our pre-Effective Date common stock was removed from the OTCQB and began trading on the OTC Pink Open Market (the “OTC Pink”) under the symbol “NESCQ” beginning on May 2, 2017. As a result of the cancellation of the pre-Effective Date common stock pursuant to the Plan, the Company ceased trading on the OTC Pink on the Effective Date. From the Effective Date until our listing on the NYSE American on October 12, 2017, there was no active public trading market for our common stock.
Holders
As of February 28, 2019, there were three shareholders of record of our common stock. The majority of the shares are held by CEDE & CO., a nominee of The Depository Trust Company. This number of record holders does not include beneficial holders whose shares are held in “street name,” meaning that the shares are held for their accounts by brokers or other nominees.  In these instances, the brokers or other nominees are included in the number of record holders, but the underlying beneficial holders of the common stock held in “street name” are not.
Dividends
We have not paid any dividends on our common stock to date, and we currently do not intend to pay dividends in the future. The payment of dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any dividends will be within the discretion of our board of directors and will be subject to other limitations as may be contained in our agreements governing our indebtedness. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future.
Unregistered Sales of Equity Securities

There were no unregistered sales of our equity securities during the fiscal year ended December 31, 2018.
Repurchases of Equity Securities

During the three months ended December 31, 2018, there were no repurchases of our common stock.
Recent Performance
The following performance graph and related information shall not be deemed “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.
Stock Performance Graph
The following performance graph compares the performance of our common stock to the Russell 2000 Index and our peer group. The peer group, established by management and selected based upon an industry and/or line-of-business basis, consists of the following companies: Select Energy Services, Inc., Key Energy Services, Inc., Basic Energy Services, Inc., C&J Energy Services, Inc., Superior Energy Services, Inc., Clean Harbors, Inc., and TETRA Technologies, Inc. We feel that the Russell 2000 Index and the peer group provides a reasonable comparison to our common stock's performance.
The graph below compares the cumulative total return to holders of our common stock following our listing with the NYSE American with the cumulative total returns of the listed Russell 2000 Index and our peer group. The graph assumes that the value of the investment in each index (including reinvestment of dividends) was $100 at October 12, 2017 and tracks the return on the investment through December 31, 2018.

27



chart-a867e524c3695343a74.jpg
Company / Index
 
October 12, 2017
 
December 31, 2017
 
March 31,
2018
 
June 30,
2018
 
September 30, 2018
 
December 31, 2018
Nuverra
 
$
100.00

 
$
120.24

 
$
152.98

 
$
79.37

 
$
73.54

 
$
54.23

Russell 2000 Index
 
100.00

 
102.27

 
100.87

 
108.81

 
112.69

 
89.82

Peer Group
 
100.00

 
98.78

 
86.46

 
95.52

 
117.19

 
79.04


28



Item 6. Selected Financial Data
The following table presents selected consolidated financial information and other operational data for our business. You should read the following information in conjunction with Item 7 of this Annual Report on Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
Statement of Operations Data
 
 
Successor
 
 
Predecessor
 
 
Year Ended December 31,
 
Five Months Ended December 31,
 
 
Seven Months Ended July 31,
 
Years Ended December 31,
 
 
2018
 
2017
 
 
2017
 
2016
 
2015
 
2014
($ in thousands except per share data)
 
 
 
 
 
 
 
 
 
Total revenue
 
$
197,474

 
$
80,188

 
 
$
95,883

 
$
152,176

 
$
356,699

 
$
536,282

Operating loss (2)(3)(4)
 
(52,300
)
 
(40,959
)
 
 
(36,660
)
 
(117,388
)
 
(144,839
)
 
(417,654
)
(Loss) income from continuing operations (1)(2)(3)(4)
 
(59,263
)
 
(47,895
)
 
 
168,611

 
(167,621
)
 
(195,167
)
 
(457,178
)
(Loss) income from discontinued operations, net of income taxes (4)
 

 

 
 

 
(1,235
)
 
(287
)
 
(58,426
)
Net (loss) income
 
(59,263
)
 
(47,895
)
 
 
168,611

 
(168,856
)
 
(195,454
)
 
(515,604
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Basic
 
11,829

 
11,696

 
 
150,940

 
90,979

 
27,681

 
26,090

  Diluted
 
11,829

 
11,696

 
 
174,304

 
90,979

 
27,681

 
26,090

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic (loss) income from continuing operations
 
$
(5.01
)
 
$
(4.09
)
 
 
$
1.12

 
$
(1.84
)
 
$
(7.05
)
 
$
(17.52
)
Basic loss from discontinued operations
 

 

 
 

 
(0.01
)
 
(0.01
)
 
(2.24
)
Net (loss) income per basic common share
 
$
(5.01
)
 
$
(4.09
)
 
 
$
1.12

 
$
(1.85
)
 
$
(7.06
)
 
$
(19.76
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted (loss) income from continuing operations
 
$
(5.01
)
 
$
(4.09
)
 
 
$
0.97

 
$
(1.84
)
 
$
(7.05
)
 
$
(17.52
)
Diluted loss from discontinued operations
 

 

 
 

 
(0.01
)
 
(0.01
)
 
(2.24
)
Net (loss) income per diluted common share
 
$
(5.01
)
 
$
(4.09
)
 
 
$
0.97

 
$
(1.85
)
 
$
(7.06
)
 
$
(19.76
)
 
(1)
Income from continuing operations for the seven months ended July 31, 2017 included $223.5 million of “Reorganization items, net,” which included the $194.8 million net gain on debt discharge as a result the chapter 11 filing and fresh start accounting. See Note 5 in the Notes to the Consolidated Financial Statements herein for further information.
(2)
Operating loss and loss from continuing operations for the year ended December 31, 2016 included long-lived asset impairment charges of $42.2 million.
(3)
Operating loss and loss from continuing operations for the year ended December 31, 2015 included a goodwill impairment charge of $104.7 million.
(4)
Operating loss and loss from continuing operations for the year ended December 31, 2014 included a goodwill impairment charge of $304.0 million, and a long-lived asset impairment charge of $112.4 million. Additionally, included within “Loss from discontinued operations, net of income taxes” are impairment charges of $74.4 million that were incurred as part of the sale of Thermo Fluids Inc. (“TFI”).

29



Balance Sheet Data
 
 
 
Successor
 
 
Predecessor
 
 
As of December 31,
 
 
As of December 31,
 
 
2018
 
2017
 
 
2016
 
2015
 
2014
($ in thousands)
 
 
 
 
 
 
 
 
 
 
 
Consolidated balance sheet data:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
7,302

 
$
5,488

 
 
$
994

 
$
39,309

 
$
13,367

Total current assets
 
49,507

 
53,423

 
 
33,478

 
94,481

 
154,672

Property, plant and equipment, net
 
215,640

 
229,874

 
 
294,179

 
406,188

 
475,982

Goodwill (1)
 
29,518

 
27,139

 
 

 

 
104,721

Total assets (1)
 
295,936

 
311,322

 
 
342,604

 
522,619

 
871,572

Current portion of long-term debt (2)
 
38,305

 
5,525

 
 
465,835

 
499,709

 
4,863

Current liabilities
 
64,570

 
28,387

 
 
492,967

 
545,087

 
96,193

Long-term debt (2)
 
27,628

 
33,524

 
 
5,956

 
11,758

 
592,455

Total liabilities (2)
 
99,509

 
68,349

 
 
511,670

 
560,890

 
718,625

Total shareholders’ equity (deficit)
 
196,427

 
242,973

 
 
(169,066
)
 
(38,271
)
 
152,947


(1)
The goodwill balance as of December 31, 2018 is the result of an acquisition made during 2018 and the fresh start accounting upon emergence from chapter 11 in 2017. See Note 5 and Note 7 in the Notes to the Consolidated Financial Statements herein for further information.
Previously, goodwill was reduced to zero in 2015 as a result of a goodwill impairment charge of $104.7 million. The 2014 decrease in goodwill and total assets related to a goodwill and intangible asset impairment charge of $304.0 million and $112.4 million, respectively. Total assets as of December 31, 2014 also reflect a reduction in goodwill relating to impairment charges for TFI of $48.0 million, which were included in assets held for sale at year end.
(2)
The current portion of long-term debt as of December 31, 2018 includes $32.5 million for a bridge term loan which was used to fund an acquisition made during 2018. On January 2, 2019, we received aggregate gross proceeds of $32.5 million from a rights offering and repaid the bridge term loan in full. See Note 13 and Note 16 in the Notes to the Consolidated Financial Statements herein for further information.
The decrease in the current portion of long-term debt, long-term debt and total liabilities as of December 31, 2017 is a result of approximately $470.0 million in debt obligations being settled as part of the reorganization adjustments under fresh start accounting upon emergence from chapter 11. See Note 4 and Note 5 in the Notes to the Consolidated Financial Statements herein for further information.
For the years ended December 31, 2016 and December 31, 2015, the carrying value of the Predecessor Company’s asset-based lending facility, 2018 Notes and Predecessor Company’s 12.5%/10.0% Senior Secured Second Lien Notes due 2021 (the “2021 Notes”) were presented as current as a result of either breaching or the probability of breaching one of the financial covenants.

30



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Consolidated Financial Statements, and the Notes and Schedules related thereto, which are included in this Annual Report.
Company Overview

Nuverra is a leading provider of water logistics and oilfield services to customers focused on the development and ongoing production of oil and natural gas from shale formations in the United States. Our services include the delivery, collection, 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 areas: includes our operations in the Bakken shale area. (Our exit of the Eagle Ford shale area started March 1, 2018, and was complete by June 30, 2018. See Note 11 of the Notes to Consolidated Financial Statements herein for further information on our exit of the Eagle Ford 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:

Water Transfer Services: Collection and transportation of flowback and produced water from drilling and completion activities to disposal network via trucking or a fixed pipeline system, and delivery of freshwater for drilling and completion activities via trucking, lay flat temporary line or fixed pipeline system.

Disposal Services: Disposal of liquid waste water from hydraulic fracturing operations, liquid waste water from well production, and solid drilling waste in our disposal wells and landfill.

Logistics and Wellsite Services: Rental of wellsite equipment and provision of other wellsite services including preparation and remediation.
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, and liquid and solid waste disposal sites. We continue to expand our suite of solutions to customers who demand safety, environmental compliance and accountability from their service providers.

On October 5, 2018, we completed the acquisition of Clearwater Three, LLC, Clearwater Five, LLC, and Clearwater Solutions, LLC (collectively, “Clearwater”) for an initial purchase price of $42.3 million, subject to customary working capital adjustments (the “Acquisition”). Clearwater is a supplier of waste water disposal services used by the oil and gas industry in the Marcellus and Utica shale areas. Clearwater has three salt water disposal wells in service, all of which are located in Ohio. This acquisition expands our service offerings in the Marcellus and Utica shale areas in our Northeast division. Refer to Note 7 in the Notes to Consolidated Financial Statements for additional information.

In order to address our liquidity issues due to the prolonged depression in oil and natural gas prices, on May 1, 2017, the Company and certain of its material subsidiaries (collectively with the Company, the “Nuverra Parties”) filed voluntary petitions under chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) to pursue prepackaged plans of reorganization (together, and as amended, the “Plan”). On July 25, 2017, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Plan. The Plan became effective on August 7, 2017 (the “Effective Date”), when all remaining conditions to the effectiveness of the Plan were satisfied or waived. 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.


31



Upon emergence, we elected to apply fresh start accounting effective July 31, 2017, to coincide with the timing of our normal accounting period close. Refer to Note 5 on “Fresh Start Accounting” in the Notes to the Consolidated Financial Statements for additional information on the selection of this date. As a result of the application of fresh start accounting, as well as the effects of the implementation of the Plan, a new entity for financial reporting purposes was created, and as such, the condensed consolidated financial statements on or after August 1, 2017, are not comparable with the condensed consolidated financial statements prior to that date.

References to “Successor” or “Successor Company” refer 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 water and 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.

We saw improvement in West Texas Intermediate crude oil prices in 2018, with average oil prices of $65.23 as compared to $50.80 in 2017, while the average Henry Hub natural gas price in 2018 increased to $3.15 from $2.99 in 2017. According to Baker Hughes, average rig count in our active basins increased 15.9% year over year to 181 in 2018, and completed wells in those basins increased 28.8% year over year to 3,496 from 2,714 in 2017. (Average rig count and completed wells in our active basins no longer includes those in the Eagle Ford shale area as we have exited that basin as of June 30, 2018.) Per the US Energy Information Association, both oil production and natural gas production in the basins in which we operate were up during 2018 as compared to the prior year, with an 18.4% increase in oil production and a 21.8% increase in natural gas production. As a result of the increases in oil prices, average rig count, completed wells and overall production, we saw an increase in drilling and completion activities primarily in the Rocky Mountain and Northeast divisions in 2018 as compared with 2017. However, there is no guarantee that oil and natural gas prices will remain stable or increase, drilling and completion activities in basins will continue to increase, or we will see a continuing increase in a demand for our services. Oil and natural gas prices remain volatile, with oil prices dropping more than 40% during the fourth quarter of 2018. Another prolonged downturn in oil and natural gas prices could materially adversely affect our financial condition, results of operations and cash flows in the future.
Our results are also driven by a number of other factors, including (i) availability of our equipment, which we have built 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, Haynesville, Marcellus, and Utica shale basins, (v) labor costs, (vi) changes in governmental laws and regulations at the federal, state and local levels, (vii) seasonality and weather events (viii) pricing and (ix) our health, safety and environmental performance record.

32



The following table summarizes our total revenues by type of basin for year ended December 31, 2018, five months ended December 31, 2017, the seven months ended July 31, 2017, and the year ended December 31, 2016 (in thousands):
 
Successor
 
 
Predecessor
 
Year Ended December 31,
 
Five Months Ended December 31,
 
 
Seven Months Ended July 31,
 
Year Ended December 31,
 
2018
 
2017
 
 
2017
 
2016
Revenue - from predominantly oil-rich basins (a)
$
129,898

 
$
51,207

 
 
$
62,302

 
$
92,650

Revenue - from predominantly natural gas-rich basins (b)
67,576

 
28,981

 
 
33,581

 
59,526

Total revenue
$
197,474

 
$
80,188

 
 
$
95,883

 
$
152,176

_________________________
(a)
Represents revenues that are derived from predominantly oil-rich basins consisting of the Bakken shale area and the Eagle Ford shale area (which we substantially exited during the six months ended June 30, 2018).
(b)
Represents revenues that are derived from predominantly natural gas-rich basins consisting of the Marcellus, Utica, and Haynesville shale areas.
Results of Operations: Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017
The following table sets forth for each of the periods indicated our statements of operations data (dollars in thousands):
 
Successor
 
 
Predecessor
 
 
 
 
 
Year Ended December 31,
 
Five Months Ended December 31,
 
 
Seven Months Ended July 31,
 
Increase (Decrease)
 
2018
 
2017
 
 
2017
 
2018 vs 2017 (Combined)
Service revenue
$
181,793

 
$
72,395

 
 
$
86,564

 
$
22,834

 
14.4
 %
Rental revenue
15,681

 
7,793

 
 
9,319

 
$
(1,431
)
 
(8.4
)%
Total revenue
197,474

 
80,188

 
 
95,883

 
$
21,403

 
12.2
 %
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
Direct operating expenses
158,896

 
67,077

 
 
81,010

 
$
10,809

 
7.3
 %
General and administrative expenses
38,510

 
10,615

 
 
22,552

 
$
5,343

 
16.1
 %
Depreciation and amortization
46,434

 
38,551

 
 
28,981

 
$
(21,098
)
 
(31.2
)%
Impairment of long-lived assets
4,815

 
4,904

 
 

 
$
(89
)
 
(1.8
)%
Other, net
1,119

 

 
 

 
$
1,119

 
100.0
 %
Total costs and expenses
249,774

 
121,147

 
 
132,543

 
$
(3,916
)
 
(1.5
)%
Operating loss
(52,300
)
 
(40,959
)
 
 
(36,660
)
 
$
(25,319
)
 
(32.6
)%
Interest expense, net
(5,973
)
 
(2,187
)
 
 
(22,792
)
 
$
(19,006
)
 
(76.1
)%
Other income, net
896

 
411

 
 
4,247

 
$
(3,762
)
 
(80.8
)%
Reorganization items, net
(1,679
)
 
(5,507
)
 
 
223,494

 
$
(219,666
)
 
(100.8
)%
(Loss) income before income taxes
(59,056
)
 
(48,242
)
 
 
168,289

 
$
179,103

 
149.2
 %
Income tax (expense) benefit
(207
)
 
347

 
 
322

 
$
876

 
130.9
 %
Net (loss) income
$
(59,263
)
 
$
(47,895
)
 
 
$
168,611

 
$
179,979

 
149.1
 %
Service Revenue
Service revenue consists of fees charged to customers for the removal and disposal of flowback and produced water originating from oil and natural gas wells or the transportation of fresh water and saltwater to customer sites for use in drilling and completion activities by truck or through temporary or permanent water transport pipelines. Service revenue also includes fees charged for disposal of oilfield wastes in our landfill and disposal of fluids in our disposal wells. Service revenue for the year ended December 31, 2018 was $181.8 million, up $22.8 million, or 14.4%, from $159.0 million for the year ended

33



December 31, 2017. Service revenue growth was driven primarily by increased customer demand for our disposal services in all divisions as average operating drilling rigs increased 16% over the prior year in the basins we serve. Additionally, we saw improvements in activity levels for water transfer services in the Rocky Mountain and Northeast divisions, offset by a decrease in activity levels for water transfer services, including our permanent disposal water pipeline, in the Southern division. Pricing increases in all divisions also contributed to the increase in service revenue during the current year. Due to management’s decision to exit the Eagle Ford shale area as of March 1, 2018, only $1.8 million in revenues associated with the Eagle Ford shale area were included in service revenues for the year ended December 31, 2018, while $8.8 million was included in service revenue during the prior year.
Rental Revenue
Rental revenue consists of fees charged to customers over the term of the rental for use of equipment owned by us, as well as other fees charged to customers for items such as delivery and pickup. Rental revenue for the year ended December 31, 2018 was $15.7 million, down $1.4 million, or 8.4%, from $17.1 million for the year ended December 31, 2017. However, the prior year included $1.7 million of rental revenues from the Eagle Ford shale area, while the year ended December 31, 2018 only included $0.3 million of rental revenues due to management’s decision to exit the Eagle Ford shale area as of March 1, 2018.
Direct Operating Expenses
Direct operating expenses for the year ended December 31, 2018 were $158.9 million, compared to $148.1 million for the year ended December 31, 2017, an increase of 7.3%. The increase in direct operating expenses is primarily a result of higher revenues resulting from increased demand for our services. Direct operating expenses improved to 80.5% of revenues from 84.1% in 2017 as a result of fixed cost leverage and pricing increases, which was partially offset by the increased usage of higher cost third party drivers to satisfy increased customer demand, particularly in the Rocky Mountain division.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2018 were $38.5 million, up $5.3 million from $33.2 million for the year ended December 31, 2017. The increase in general and administrative expenses is primarily attributable to higher compensation costs, including $15.3 million related to the departure of our former Chief Executive Officer and Chief Financial Officer, offset by decreases in legal and professional fees. Additionally, general and administrative expenses in 2018 included $1.3 million in transaction fees for the acquisition of Clearwater. General and administrative expense for the year ended December 31, 2017 included $8.8 million in legal and professional fees for our chapter 11 filing that were incurred prior to the May 1, 2017 filing date. The legal and professional fees for our chapter 11 filing incurred after the May 1, 2017 filing date have been included in “Reorganization items, net” for the year ended December 31, 2017.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2018 was $46.4 million, down $21.1 million from $67.5 million for the year ended December 31, 2017. The decrease is primarily the result of higher depreciation recorded during the year ended December 31, 2017 as a result of a higher depreciable asset base with shorter useful lives due to the new fair values applied by fresh start accounting upon emergence from chapter 11. This primarily impacted depreciation expense for the first six months after the application of fresh start accounting as of July 31, 2017.
Impairment of Long-Lived Assets

During the year ended December 31, 2018, management approved plans to sell certain assets located in the Southern division as a result of exiting the Eagle Ford shale area. In addition, management approved the sale of certain assets, primarily frac tanks, located in the Northeast division, that were also expected to sell within one year. These assets qualified to be classified as assets held for sale and as the fair value of the assets was lower than the net book value, we recorded an impairment charge of $4.8 million, of which $4.4 million related to the Southern division for the Eagle Ford exit, $0.3 million related to the Corporate division for the sale of certain real property in Texas approved to be sold as part of the Eagle Ford exit, and $0.1 million related to the Northeast division.
During the year ended December 31, 2017, management approved plans to sell certain assets located in both the Rocky Mountain and Southern divisions, including trucks and tanks. These assets qualified to be classified as assets held for sale and as a result the assets were recorded at the lower of net book value or fair value less costs to sell. This resulted in a long-lived asset impairment charge of $4.9 million for the year ended December 31, 2017.
See also Note 10 in the Notes to the Consolidated Financial Statements herein for further discussion.

34



Other, net
On March 1, 2018, the Board of Directors (the “Board”) determined it was in the best interest of the Company to cease our operations in the Eagle Ford shale area. In making this determination, the Board considered a number of factors, 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 business operations, and recommendations from management. We substantially exited the Eagle Ford shale area as of June 30, 2018. The total costs related to the exit recorded during the year ended December 31, 2018 were $1.1 million.
Interest Expense, net
Interest expense, net during the year ended December 31, 2018 was $6.0 million compared to $25.0 million for the year ended December 31, 2017. The decrease is primarily due to the reduction in our outstanding debt balance during 2017 as a result of the consummation of the Plan. Our average debt balance during the year ended December 31, 2018 was $52.5 million, compared to an average debt balance of $255.4 million during the year ended December 31, 2017.
Other Income, net
Other income, net was $0.9 million for the year ended December 31, 2018 compared to $4.7 million for the year ended December 31, 2017. The decrease is primarily attributable to a $0.4 million gain associated with the change in the fair value of the derivative warrant liability during the year ended December 31, 2018, compared to a $4.3 million gain during the year ended December 31, 2017. We issued warrants with derivative features upon our emergence from chapter 11 during 2017, and in connection with our debt restructuring during 2016. These instruments are accounted for as derivative liabilities with any decrease or increase in the estimated fair value recorded in “Other income, net.” See Note 14 and Note 15 in the Notes to the Consolidated Financial Statements for further details on the warrants.
Reorganization Items, net
Expenses, gains and losses directly associated with the chapter 11 proceedings are reported as “Reorganization items, net” in the consolidated statements of operations for the years ended December 31, 2018 and 2017, which includes the net gain on debt discharge, professional and insurance fees, debtor in possession credit agreement financing costs, retention payments, and other chapter 11 related items. Included in Reorganization items, net for the year ended December 31, 2018 was $1.3 million in chapter 11 fees paid to the US Trustee. See Note 5 in the Notes to the Consolidated Financial Statements herein for further details.
Income Taxes
The income tax expense for the year ended December 31, 2018 was $0.2 million (a (0.4%) effective rate) compared to a benefit of $0.7 million (a (0.6%) effective rate) in the prior year. The effective tax rate in 2018 is primarily the result of the change in the deferred tax liability attributable to long-lived assets. See Note 19 in the Notes to the Consolidated Financial Statements herein for additional information on income taxes.


35



Segment Operating Results: Years Ended December 31, 2018 and 2017

The following table shows operating results for each of our segments for the year ended December 31, 2018 and 2017:
 
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Year ended December 31, 2018 (1)
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
127,758

 
$
43,564

 
$
26,152

 
$

 
$
197,474

Direct operating expenses
 
101,855

 
37,660

 
19,381

 

 
158,896

Operating loss
 
(2,782
)
 
(9,059
)
 
(11,396
)
 
(29,063
)
 
(52,300
)
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31, 2017 (2)
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
103,033

 
$
37,985

 
$
35,053

 
$

 
$
176,071

Direct operating expenses
 
87,073

 
35,953

 
25,061

 

 
148,087

Operating loss
 
(29,295
)
 
(17,209
)
 
(10,579
)
 
(20,536
)
 
(77,619
)

(1)
Successor period.
(2)
Represents the combined results from the five months ended December 31, 2017 (Successor) and the seven months ended July 31, 2017 (Predecessor).

Rocky Mountain

Revenues for the Rocky Mountain division increased during the year ended December 31, 2018 as compared to the year ended December 31, 2017 due primarily to increased activity for water transfer and disposal services. Specifically, water transfer service volumes have increased due to increasing the driver force by 7% to service more active operating rigs in the Rocky Mountain division during the year ended December 31, 2018 as compared to the prior year. Revenue improvement also came from the purchase and deployment of additional temporary water transport pipelines in early 2018. Further, volumes at the landfill and the disposal wells also increased over the prior year. For the Rocky Mountain division, direct operating costs improved as a percentage of revenue from 84.5% in 2017 to 79.7% in 2018 as a result of fixed cost leverage and pricing increases.

Northeast

Revenues for the Northeast division increased during the year ended December 31, 2018 as compared to the year ended December 31, 2017 due to a 19% increase in truck drivers to service higher activity levels for water transfer and disposal services. Additionally, the acquisition of Clearwater in the fourth quarter of 2018 and pricing increases for disposal services also contributed to the increase in revenues. For the Northeast division, direct operating costs improved to 86.4% as a percentage of revenues in 2018 as compared to 94.7% in 2017 due to fixed cost leverage and pricing increases.

Southern

Revenues for the Southern division decreased during the year ended December 31, 2018 as compared to the year ended December 31, 2017 due primarily to management’s decision to exit the Eagle Ford shale area as of March 1, 2018. As a result, only $2.1 million in revenues associated with the Eagle Ford shale area were included for the year ended December 31, 2018, while $10.5 million was included during the prior year. Additionally, activity levels for water transfer services, including our permanent disposal water pipeline, were down in the Southern division during the year ended December 31, 2018. In the Southern division, direct operating costs decreased during the year ended December 31, 2018 as compared to the year ended December 31, 2017 primarily due to the exit of the Eagle Ford shale area and lower activity levels on our permanent disposal water pipeline.

Corporate/Other

The costs associated with the Corporate/Other division are primarily general and administrative costs. The Corporate general and administrative costs for the year ended December 31, 2018 were higher than those reported for the year ended December 31, 2017 due primarily to higher compensation costs related to the departure of our former Chief Executive Officer in the first quarter of 2018 and our former Chief Financial Officer in the fourth quarter of 2018.

36



Results of Operations: Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016
The following table sets forth for each of the periods indicated our statements of operations data (dollars in thousands):  
 
Successor
 
 
Predecessor
 
 
 
 
 
Five Months Ended December 31,
 
 
Seven Months Ended July 31,
 
Year Ended December 31,
 
Increase (Decrease)
 
2017
 
 
2017
 
2016
 
2017 (Combined) vs 2016
Service revenue
$
72,395

 
 
$
86,564

 
$
139,886

 
$
19,073

 
13.6
 %
Rental revenue
7,793

 
 
9,319

 
12,290

 
4,822

 
39.2
 %
Total revenue
80,188

 
 
95,883

 
152,176

 
23,895

 
15.7
 %
Costs and expenses:
 
 
 
 
 
 
 


 


Direct operating expenses
67,077

 
 
81,010

 
129,624

 
18,463

 
14.2
 %
General and administrative expenses
10,615

 
 
22,552

 
37,013

 
(3,846
)
 
(10.4
)%
Depreciation and amortization
38,551

 
 
28,981

 
60,763

 
6,769

 
11.1
 %
Impairment of long-lived assets
4,904

 
 

 
42,164

 
(37,260
)
 
(88.4
)%
Total costs and expenses
121,147

 
 
132,543

 
269,564

 
(15,874
)
 
(5.9
)%
Operating loss
(40,959
)
 
 
(36,660
)
 
(117,388
)
 
(39,769
)
 
(33.9
)%
Interest expense, net
(2,187
)
 
 
(22,792
)
 
(54,530
)
 
(29,551
)
 
(54.2
)%
Other income, net
411

 
 
4,247

 
5,778

 
(1,120
)
 
(19.4
)%
Loss on extinguishment of debt

 
 

 
(674
)
 
(674
)
 
(100.0
)%
Reorganization items, net
(5,507
)
 
 
223,494

 

 
217,987

 
100.0
 %
(Loss) income from continuing operations before income taxes
(48,242
)
 
 
168,289

 
(166,814
)
 
(286,861
)
 
(172.0
)%
Income tax benefit (expense)
347

 
 
322

 
(807
)
 
(1,476
)
 
(182.9
)%
(Loss) income from continuing operations
(47,895
)
 
 
168,611

 
(167,621
)
 
(288,337
)
 
(172.0
)%
Loss from discontinued operations, net of income taxes

 
 

 
(1,235
)
 
(1,235
)
 
(100.0
)%
Net (loss) income
$
(47,895
)
 
 
$
168,611

 
$
(168,856
)
 
$
(289,572
)
 
(171.5
)%
Service Revenue
Service revenue for the year ended December 31, 2017 was $159.0 million, up $19.1 million, or 13.6%, from $139.9 million for the year ended December 31, 2016. Increases in drilling and completion activities in all divisions during 2017 led to higher service revenue for the year ended December 31, 2017 as compared to the year ended December 31, 2016. The primary driver of the increase in demand in the basins we operate was a 72% increase in average operating drilling rigs from those operating in the prior year.
Rental Revenue
Rental revenue for the year ended December 31, 2017 was $17.1 million, up $4.8 million, or 39.2%, from $12.3 million for the year ended December 31, 2016. The increase was the result of higher utilization of our rental fleet in all divisions in conjunction with the increase in drilling and completion activities in 2017 due to higher oil prices.
Direct Operating Expenses
Direct operating expenses for the year ended December 31, 2017 were $148.1 million, compared to $129.6 million for the year ended December 31, 2016, an increase of 14.2%. The increase in direct operating expenses is attributable to higher revenues as a result of increased activities in all divisions. Additionally, direct operating expenses during the years ended December 31, 2017 and December 31, 2016, included a loss on the sale of assets of $5.7 million and $3.5 million, respectively.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2017 were $33.2 million, down $3.8 million from $37.0 million for the year ended December 31, 2016. The decrease in general and administrative expenses is primarily attributable to

37



lower legal and professional fees as the costs relating to the chapter 11 filing are included in “Reorganization items, net” on the consolidated statement of operations, while the costs incurred with the restructuring of our indebtedness in 2016 were included in general and administrative expenses. Offsetting the lower legal and professional fees were increased payroll costs.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2017 was $67.5 million, up $6.8 million from $60.8 million for the year ended December 31, 2016. The increase is primarily attributable to an increase in our depreciable base as a result of fresh start accounting after emerging from chapter 11. The overall value of property, plant and equipment increased as a result of the valuations completed in coordination with fresh start accounting. Additionally, the assets were assigned shorter useful lives during the valuation process, thus increasing depreciation expense.
Impairment of Long-Lived Assets
During the year ended December 31, 2017, management approved plans to sell certain assets located in both the Rocky Mountain and Southern divisions, including trucks and tanks. These assets qualified to be classified as assets held for sale and as a result the assets were recorded at the lower of net book value or fair value less costs to sell. This resulted in a long-lived asset impairment charge of $4.9 million for the year ended December 31, 2017.
During the year ended December 31, 2016, management approved plans to sell certain assets located in both the Northeast and Southern divisions, which resulted in a long-lived asset impairment charge of $4.8 million for the year ended December 31, 2016. Additionally, long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. During the year ended December 31, 2016, there were indicators that the assets in the Bakken, Eagle Ford, Haynesville and Marcellus/Utica basins were not recoverable and as a result we recorded long-lived asset impairment charges of $37.4 million.
See also Note 10 in the Notes to the Consolidated Financial Statements herein for further discussion.
Interest Expense, net
Interest expense, net during the year ended December 31, 2017 was $25.0 million compared to $54.5 million for the year ended December 31, 2016. The decrease is primarily due to the reduction in our outstanding debt balance during 2017 as a result of the consummation of the Plan. As of December 31, 2017, our outstanding debt balance was $39.0 million, while as of December 31, 2016, outstanding debt was $487.6 million. The significant decrease in debt has dramatically lowered our annual interest expense. See Note 13 in the Notes to the Consolidated Financial Statements herein for further details.
Other Income, net
Other income, net was $4.7 million for the year ended December 31, 2017 compared to $5.8 million for the year ended December 31, 2016. The decrease is primarily attributable to the gain on the sale of Underground Solutions Inc. (or “UGSI”) of $1.7 million during the year ended December 31, 2016 (see Note 23 in the Notes to the Consolidated Financial Statements). During the years ended December 31, 2017 and 2016, we recorded gains of $4.3 million and $3.3 million, respectively, associated with the change in fair value of the derivative warrant liability. We issued warrants with derivative features upon our emergence from chapter 11 during the year ended December 31, 2017, and in connection with our debt restructuring during the year ended December 31, 2016. These instruments are accounted for as derivative liabilities with any decrease or increase in the estimated fair value recorded in “Other income, net.” See Note 14 and Note 15 in the Notes to the Consolidated Financial Statements for further details on the warrants.
Loss on Extinguishment of Debt
During the year ended December 31, 2016, we executed two amendments to our Predecessor asset-based lending facility and as a result wrote-off $0.7 million of unamortized debt issuance costs associated with the Predecessor asset-based lending facility.
Reorganization Items, net
Expenses, gains and losses directly associated with the chapter 11 proceedings are reported as “Reorganization items, net” in the consolidated statement of operations for the year ended December 31, 2017, which includes the net gain on debt discharge, professional and insurance fees, debtor in possession credit agreement financing costs, retention bonus payments, and other chapter 11 related items. See Note 5 in the Notes to the Consolidated Financial Statements herein for further details.

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Income Taxes
The income tax benefit for the year ended December 31, 2017 was $0.7 million (a (0.6%) effective rate) compared to expense of $0.8 million (a (0.5%) effective rate) in the prior year. The effective tax rate in 2017 is primarily the result of federal alternative minimum tax and the change in valuation allowance attributable to long-lived assets. See Note 19 in the Notes to the Consolidated Financial Statements herein for additional information on income taxes.
Loss from Discontinued Operations

Loss from discontinued operations in the years ended December 31, 2016 represents the final closing adjustments of TFI, our industrial solutions business, which was sold in April of 2015. Such loss, which is presented net of income taxes, was $1.2 million for the year ended December 31, 2016. See Note 25 in the Notes to the Consolidated Financial Statements herein for additional information.

Segment Operating Results: Years Ended December 31, 2017 and 2016
The following table shows operating results for each of our segments for the years ended December 31, 2017 and 2016:
 
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Year ended December 31, 2017 (1)
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
103,033

 
$
37,985

 
$
35,053

 
$

 
$
176,071

Direct operating expenses
 
87,073

 
35,953

 
25,061

 

 
148,087

Operating loss
 
(29,295
)
 
(17,209
)
 
(10,579
)
 
(20,536
)
 
(77,619
)
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31, 2016 (2)
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
82,564

 
$
36,446

 
$
33,166

 
$

 
$
152,176

Direct operating expenses
 
65,066

 
36,673

 
27,885

 

 
129,624

Operating loss
 
(51,663
)
 
(24,330
)
 
(15,656
)
 
(25,739
)
 
(117,388
)
(1)
Represents the combined results from the five months ended December 31, 2017 (Successor) and the seven months ended July 31, 2017 (Predecessor).
(2)
Predecessor period.

Rocky Mountain

Revenues for the Rocky Mountain division increased during the year ended December 31, 2017 as compared to the year ended December 31, 2016 due primarily to increases in drilling and completion activities during the year, as well as pricing increases. For the Rocky Mountain division, direct operating costs increased during the year ended December 31, 2017 as compared to the year ended December 31, 2016 due primarily to higher activity levels.

Northeast

Revenues for the Northeast division increased during the year ended December 31, 2017 as compared to the due to year ended December 31, 2016 due to an increase in drilling and completion activities in addition to pricing increases. For the Northeast division, direct operating costs decreased as a percentage of revenue during the during the year ended December 31, 2017 as compared to the year ended December 31, 2016 due to reductions in construction and insurance expenses.

Southern

Revenues for the Southern division increased during the year ended December 31, 2017 as compared to the year ended December 31, 2016 due primarily due to increases in drilling and completion activities. In the Southern division, direct operating costs decreased as a percentage of revenue during the year ended December 31, 2017 as compared to the year ended December 31, 2016 due to environmental expenses that were incurred in 2016 that did not repeat in 2017.

Corporate/Other
The costs associated with the Corporate/Other division are primarily general and administrative costs. The Corporate general

39



and administrative costs for the year ended December 31, 2017 were lower than those reported for the year ended December 31, 2016 due primarily to lower legal and professional fees as the costs relating to the chapter 11 filing were included in “Reorganization items, net” on the consolidated statement of operations, while the costs incurred with the restructuring of our indebtedness in 2016 were included in general and administrative expenses.
Liquidity and Capital Resources
Cash Flows and Liquidity

Our consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. Our primary sources of capital for 2018 have included cash generated by our operations and asset sales, Successor first lien term loan, Successor second lien term loan, Successor bridge term loan, and Successor revolving facility. At December 31, 2018, our total indebtedness was $66.4 million and total liquidity was $25.5 million consisting of cash and restricted cash of $8.0 million, $11.8 million of net availability under the Successor revolving facility and $5.7 million available as a delayed draw under the Successor second lien term loan.
The following table summarizes our sources and uses of cash and restricted cash for the year ended December 31, 2018, five months ended December 31, 2017, seven months ended July 31, 2017, and the year ended December 31, 2016 (in thousands):
 
 
Successor
 
 
Predecessor
 
 
Year Ended December 31,
 
Five Months Ended December 31,
 
 
Seven Months Ended
July 31,
 
Year Ended December 31,
Net cash provided by (used in):
 
2018
 
2017
 
 
2017
 
2016
Operating activities
 
$
9,449

 
$
(6,461
)
 
 
$
(18,949
)
 
(26,251
)
Investing activities
 
(35,318
)
 
1,879

 
 
(66
)
 
11,902

Financing activities
 
27,043

 
(3,632
)
 
 
31,599

 
(26,796
)
Change in cash and restricted cash
 
$
1,174

 
$
(8,214
)
 
 
$
12,584

 
$
(41,145
)
Operating Activities
Net cash provided by operating activities was $9.4 million for the year ended December 31, 2018. The net loss from continuing operations, after adjustments for non-cash items, provided cash and restricted cash of $3.9 million as compared to the use of $15.6 million in 2017, as described below. Changes in operating assets and liabilities provided $5.6 million primarily due to an increase in accounts payable and accrued liabilities, as well as a decrease in prepaid expenses and other receivables. The non-cash items and other adjustments included $46.4 million of depreciation expense and amortization of intangible assets, stock-based compensation expense of $12.7 million, $4.8 million for impairment of long-lived assets, and a $0.3 million change in deferred income taxes, offset by a $0.9 million gain on the disposal of property, plant and equipment, a $0.4 million gain resulting from the change in the fair value of the derivative warrant liability, and bad debt recoveries of $0.3 million.
Net cash used in operating activities was $25.4 million for the year ended December 31, 2017. The net income from continuing operations, after adjustments for non-cash items, used cash and restricted cash of $15.6 million. Changes in operating assets and liabilities used $9.8 million primarily due to an increase in accounts receivable as a result of higher activity levels and billings in the current year, offset by lower accrued liabilities. The non-cash items and other adjustments included the non-cash reorganization items of $218.6 million arising primarily from the gain on debt discharge due to the consummation of the Plan, a $4.3 million gain resulting from the change in the fair value of the derivative warrant liability, and a $0.6 million change in deferred income taxes, all offset by $67.5 million of depreciation expense and amortization of intangible assets, $11.9 million in accrued interest added to debt principal, a $5.4 million loss on the disposal of property, plant and equipment, $4.9 million in impairment of long-lived assets, amortization of debt issuance costs of $2.1 million, stock-based compensation of $1.1 million, and bad debt expense of $0.9 million.
Net cash used in operating activities was $26.3 million for the year ended December 31, 2016. The net loss from continuing operations, after adjustments for non-cash items, used cash of $31.1 million. Changes in operating assets and liabilities provided $4.8 million primarily due to a decrease in accounts receivable as a result of lower activity levels and billings in the current year, offset by a decrease in accounts payable and accrued liabilities. The non-cash items and other adjustments resulted in $60.8 million of depreciation and amortization of intangible assets, $42.2 million in impairment of long-lived assets, $26.7 million in accrued interest added to debt principal, amortization of debt issuance costs of $6.2 million, a $3.5 million loss on the disposal of property, plant and equipment, stock-based compensation of $1.1 million, and the write-off of debt issuance costs of

40



$0.7 million, partially offset by a $3.3 million gain resulting from the change in the fair value of the derivative warrant liability and a $1.7 million gain on the sale of UGSI.
Investing Activities
Net cash used in investing activities was $35.3 million for the year ended December 31, 2018, and consisted primarily of $42.3 million in cash paid for the acquisition of Clearwater (which is discussed further in Note 7 in the Notes to the Consolidated Financial Statements herein), $12.2 million for purchases of property, plant and equipment, offset by $19.1 million of proceeds from the sale of property, plant and equipment.
Net cash provided by investing activities was $1.8 million for the year ended December 31, 2017, which primarily consisted of $7.1 million of proceeds from the sale of property, plant and equipment, offset by $5.4 million of purchases of property, plant and equipment.
Net cash provided by investing activities was $11.9 million for the year ended December 31, 2016, which consisted primarily of $10.7 million of proceeds from the sale of property, plant and equipment, $5.0 million in proceeds from the sale of UGSI, offset by $3.8 million of purchases of property, plant and equipment.
Financing Activities
Net cash provided by financing activities was $27.0 million for the year ended December 31, 2018, and was primarily comprised of $32.5 million in proceeds from the Successor bridge term loan, $10.0 million in additional proceeds under the Successor first lien term loan, offset primarily by payments of $13.4 million on the Successor second lien term loan and $1.9 million in payments under capital leases and other financing activities. The Successor bridge term loan proceeds were primarily related to the acquisition of Clearwater and were repaid on January 2, 2019 from the proceeds raised in the Rights Offering.
Net cash provided by financing activities was $28.0 million for the year ended December 31, 2017, and was primarily comprised of $36.1 million of proceeds from the Successor first and second lien term loans, $15.7 million in proceeds from the Predecessor term loan, $6.9 million in proceeds from the debtor in possession term loan, offset by $23.2 million in net repayments on our Predecessor asset-based lending facility and $5.2 million in payments under capital leases and other financing activities.
Net cash used in financing activities was $26.8 million for the year ended December 31, 2016, and was primarily due to $79.2 million of net repayments on the Predecessor asset-based lending facility, offset by $55.0 million in proceeds from the issuance of the Predecessor term loan.
Capital Expenditures
Cash required for capital expenditures (related to continuing operations) for the year ended December 31, 2018 totaled $12.2 million compared to $5.4 million for the year ended December 31, 2017. Capital expenditures for the year ended December 31, 2018 included the purchase of new water transfer trucks in the Northeast division, new water transfer equipment in the Rocky Mountain division, as well as expenditures to extend the useful life and productivity on our existing fleet of trucks, tanks, equipment and disposal wells. The 2018 capital expenditures expanded our productive capacity, facilitating revenue growth during the year. Although we did not enter into any new capital leases during the year ended December 31, 2018, historically, a portion of our transportation-related capital requirements were financed through capital leases, which are excluded from the capital expenditures figures cited in the preceding sentences. We continue to focus on improving the utilization of our existing assets and optimizing the allocation of resources in the various shale basins in which we operate. Our capital expenditures program is subject to market conditions, including customer activity levels, commodity prices, industry capacity and specific customer needs. Our planned capital expenditures for 2019, which include the planned purchase of additional new water transfer trucks, are expected to be financed through cash flow from operations, financing leases, borrowings under our Successor credit facility and term loan facilities, or a combination of the foregoing.

41



Indebtedness
As of December 31, 2018, we had $66.4 million of indebtedness outstanding, consisting of $21.9 million under the Successor First Lien Term Loan (as defined below), $10.1 million under the Successor Second Lien Term Loan (as defined below), $32.5 million under the Successor Bridge Term Loan (as defined below) and $1.9 million of capital leases for vehicle financings.

Bridge Term Loan Credit Agreement, Guaranty Agreement, and Subordination Agreement

In connection with the Acquisition, on October 5, 2018, we entered into a Bridge Term Loan Credit Agreement (the “Bridge Term Loan Credit Agreement”) with the lenders party thereto (the “Bridge Term Loan Lenders”) and Wilmington Savings Fund Society, FSB, as administrative agent. The Bridge Term Loan Lenders are our two largest shareholders that, in the aggregate, hold approximately 90% of our stock. Pursuant to the Bridge Term Loan Credit Agreement, the Bridge Term Loan Lenders provided a term loan to us in the aggregate amount of $32.5 million (the “Successor Bridge Term Loan”), of which $22.5 million was used to finance the Acquisition and the remaining $10.0 million was used to pay down certain amounts outstanding under the Second Lien Term Loan Agreement (as defined below). The Bridge Term Loan Credit Agreement matures on April 5, 2019 and has an interest rate of 11.0% per annum, payable in cash, in arrears, on the first day of each month. Under the terms of the Bridge Term Loan Credit Agreement, the outstanding amounts may be accelerated upon the occurrence of an Event of Default (as defined in the Bridge Term Loan Credit Agreement), including as a result of a payment default under the Credit Agreement (as defined below) or Second Lien Term Loan Agreement after expiration of a ten day cure period or a default resulting in acceleration of the obligations due under the Credit Agreement or Second Lien Term Loan Agreement.

The Bridge Term Loan Credit Agreement required us to use our reasonable best efforts to effectuate and close the Rights Offering (as defined below) as soon as reasonably practicable following October 5, 2018. Upon the completion of the Rights Offering, we were required to prepay all outstanding amounts under the Bridge Term Loan Credit Agreement in cash in an amount equal to the net cash proceeds received from the Rights Offering. As discussed further below in the “Rights Offering in 2018” section, on January 2, 2019, we received the aggregate gross proceeds from the Rights Offering of $32.5 million and repaid in full the obligations under the Bridge Term Loan Credit Agreement thereby terminating the Bridge Term Loan Credit Agreement.

Amendment to First Lien Credit Agreement and Joinder to First Lien Guaranty and Security Agreement

On October 5, 2018, in connection with the Acquisition, we entered into a First Amendment to the Credit Agreement (the “First Amendment to the Credit Agreement”) with the Credit Agreement Lenders (as defined below) party thereto and ACF FinCo I LP, as administrative agent (the “Credit Agreement Agent”), which amends the $45.0 million First Lien Credit Agreement dated August 7, 2017 (the “Credit Agreement”), by and among the lenders party thereto (the “Credit Agreement Lenders”), the Credit Agreement Agent and the Company. Pursuant to the First Amendment to the Credit Agreement, the Credit Agreement Lenders provided us with an additional term loan under the Credit Agreement in the amount of $10.0 million, which was used to finance a portion of the Acquisition. The First Amendment to the Credit Agreement also amended the Credit Agreement to extend the maturity date from August 7, 2020 to February 7, 2021, in addition to allowing for the Acquisition and providing us with additional flexibility under the Credit Agreement, including certain availability, mandatory prepayment and financial reporting provisions thereunder.

On October 5, 2018, in connection with the First Amendment to the Credit Agreement, Nuverra Ohio Disposal LLC and Clearwater (collectively, the “New Grantors”) entered into a Joinder to the First Lien Guaranty and Security Agreement, pursuant to which the New Grantors agreed to become party to that First Lien Guaranty and Security Agreement by and among the Company, the other grantors party thereto, and the Credit Agreement Agent.

First Lien Credit Agreements
On the Effective Date, pursuant to the Plan, the Company entered into the Credit Agreement. 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 Amended and Restated Credit Agreement, as amended through the Fourteenth Amendment thereto, dated as of February 3, 2014, by and among Wells Fargo Bank, National Association, the lenders named therein, and the Company (the “Predecessor Revolving 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.

42



The Successor Revolving Facility and the Successor First Lien Term Loan mature on February 7, 2021, 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. Upon execution of the First Amendment to the Credit Agreement on October 5, 2018, the principal amount of the Successor First Lien Term Loan shall be repaid in installments of $297.6 thousand on November 1, 2018 and on 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 December 31, 2018, we were in compliance with all covenants.

Amendment to Second Lien Credit Agreement and Joinder to the Second Lien Guaranty and Security Agreement

On October 5, 2018, in connection with the Acquisition, we entered into a First Amendment to the Second Lien Term Loan Credit Agreement (the “First Amendment to the Second Lien Term Loan Agreement”) with the Second Lien Term Loan Lenders (as defined below) party thereto and Wilmington Savings Fund Society, FSB, as administrative agent (the “Second Lien Term Loan Agent”), which amends the Second Lien Term Loan Agreement, dated August 7, 2017 (the “Second Lien Term Loan Agreement”), by and among the lenders party thereto (the “Second Lien Term Loan Lenders”), the Second Lien Term Loan Agent and the Company. Pursuant to the First Amendment to Second Lien Term Loan Agreement, the Second Lien Term Loan Lenders agreed to certain conforming amendments to the Credit Agreement to allow for the funding of the additional term loan in the amount of $10.0 million under the First Amendment to the Credit Agreement and the term loans pursuant to the Bridge Term Loan Credit Agreement. The First Amendment to the Second Lien Term Loan Agreement also extended the maturity date from February 7, 2021 to October 7, 2021.

On October 5, 2018, in connection with the First Amendment to Second Lien Term Loan Agreement, the New Grantors entered into the Second Lien Guaranty and Security Agreement Joinder, pursuant to which the New Grantors agreed to become party to that Second Lien Guaranty and Security Agreement by and among the Company, the other grantors party thereto, and the Second Lien Term Loan Agent.

Second Lien Term Loan Credit Agreement
On the Effective Date, pursuant to the Plan, the Company also entered into the Second Lien Term Loan Agreement. 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 repay obligations outstanding under the Predecessor Revolving 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 October 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 on the first day of each fiscal quarter 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 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. 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

43



coverage ratio covenant, as well as other terms and conditions that are customary for term loans of this type. As of December 31, 2018, we were in compliance with all covenants.

First Amendment to Intercreditor Agreement and Joinder to Intercompany Subordination Agreement

On October 5, 2018, in connection with the First Amendment to the Credit Agreement, we acknowledged the terms and conditions under a First Amendment to the Intercreditor Agreement, dated October 5, 2018, by and between the Credit Agreement Agent and the Second Lien Term Loan Agent, which amends the Subordination and Intercreditor Agreement, dated as of August 7, 2017, by and between the Credit Agreement Agent and the Second Lien Term Loan Agent. On October 5, 2018, the New Grantors also entered into the Joinder to Intercompany Subordination Agreement, pursuant to which the New Grantors agreed to become party to that Intercompany Subordination Agreement by and among the persons originally party thereto as an “Obligor”, the Credit Agreement Agent and the Second Lien Term Loan Agent.
Rights Offering in 2018
As discussed above, we agreed, pursuant to the Bridge Term Loan Credit Agreement, to use our reasonable best efforts to effectuate and close a rights offering as soon as reasonably practicable following October 5, 2018, whereby we would dividend to our holders of common stock subscription rights to purchase shares of our common stock on a pro rata basis with an aggregate offering price of $32.5 million (the “Rights Offering”). Holders who subscribed for all of their basic subscription rights also could elect to subscribe for additional shares pursuant to an over-subscription privilege.

In connection with the Rights Offering, we entered into a Backstop Commitment Letter on October 5, 2018 (the “Backstop Commitment Letter”) with certain backstop parties named therein (the “Backstop Parties”), pursuant to which the Backstop Parties agreed, subject to the terms and conditions in the Backstop Commitment Letter, to participate in the Rights Offering and agreed to acquire all unsubscribed shares remaining after stockholders exercised their over-subscription privilege. The Backstop Parties are our two largest shareholders that, in the aggregate, hold approximately 90% of our stock. In exchange for the commitments under the Backstop Commitment Letter, we paid to the Backstop Parties, in the aggregate, a nonrefundable cash payment equal to 1.0% of the full amount of the Rights Offering.

Pursuant to the Backstop Commitment Letter, we were required to file a registration statement with the SEC within 20 days following October 5, 2018. This initial Registration Statement on Form S-1 was filed with the SEC on October 25, 2018, with amendments to the Form S-1 filed on December 4, 2018 and December 7, 2018. The Registration Statement on Form S-1 respecting the Rights Offering was declared effective by the SEC on Friday, December 7, 2018. The Rights Offering launched at the close of business on December 10, 2018 and terminated, as to unexercised rights, at 5:00 p.m. New York City time on December 28, 2018.

We sold an aggregate of 3,381,894 shares of common stock at a purchase price of $9.61 per share in the Rights Offering. On January 2, 2019, we received the aggregate gross proceeds from the Rights Offering of $32.5 million and repaid in full the obligations under the Bridge Term Loan Credit Agreement. The shares of common stock subscribed for in the Rights Offering were distributed to applicable offering participants through our transfer agent or through the clearing systems of the Depository Trust Company, which commenced on January 2, 2019. Immediately after the issuance of the 3,381,894 shares for the Rights Offering which commenced on January 2, 2019, the Company had 15,614,981 common shares outstanding.

44



Contractual Obligations
The following table details our contractual cash obligations as of December 31, 2018 (in thousands). See Note 20 in the Notes to the Consolidated Financial Statements for additional information.
 
 
Payments due by Period
 
 
Less than
1 Year
 
1-3 Years
 
3-5 Years
 
More than
5 Years
 
Total
Debt obligations including capital leases (1)
 
$
38,305

 
$
28,051

 
$

 
$

 
$
66,356

Interest on debt and capital leases (2)
 
3,594

 
3,324

 

 

 
6,918

Operating leases (3)
 
2,415

 
1,884

 
458

 
6,755

 
11,512

Contingent consideration (4)
 
500

 

 

 

 
500

Asset retirement obligation (5)
 

 
1,975

 
1,180

 
3,973

 
7,128

Total
 
$
44,814

 
$
35,234

 
$
1,638

 
$
10,728

 
$
92,414

(1)
Principal payments are reflected when contractually required.
(2)
Estimated interest on debt for all periods presented is calculated using interest rates available as of December 31, 2018 and includes fees for the unused portion of our Successor Revolving Facility.
(3)
Represents operating leases primarily for facilities, vehicles and rental equipment.
(4)
Represents the $0.5 million due related to the acquisition of Ideal Oilfield Disposal LLC (“Ideal”), which is payable when the Ideal settlement counterparties deliver the required permits and certificates necessary for the issuance of the second special waste disposal permit. See Note 14 to the Consolidated Financial Statements for further information on the settlement.
(5)
Represents estimated future costs related to the closure and/or remediation of our disposal wells and landfill. As we are uncertain as to when these future costs will be paid, the majority of the obligation has been presented in the more than five years column.
Off Balance Sheet Arrangements
As of December 31, 2018, we did not have any material off-balance-sheet arrangements other than operating leases, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results, however, may materially differ from our calculated estimates.
We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements and changes in these judgments and estimates may impact future results of operations and financial condition. For additional discussion of our accounting policies see Note 3 in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Allowance for Doubtful Accounts
Accounts receivable are recognized and carried at the original invoice amount less an allowance for doubtful accounts. We provide an allowance for doubtful accounts to reflect the expected uncollectibility of trade receivables for both billed and unbilled receivables on our service and rental revenues. We perform ongoing credit evaluations of prospective and existing customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by a review of their current credit information. In addition, we continuously monitor collections and payments from customers and maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customer’s willingness or ability to pay, our compliance with customer invoicing requirements, the effect of general economic conditions and the ongoing relationship with the customer. Additionally, if the financial condition of

45



a specific customer or our general customer base were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Accounts receivable are presented net of allowances for doubtful accounts of approximately $1.6 million, $1.9 million, and $1.7 million at December 31, 2018, 2017 and 2016 respectively.
Impairment of Long-Lived Assets and Intangible Assets with Finite Useful Lives
We review long-lived assets including intangible assets with finite useful lives for impairment whenever events or changes in circumstances indicate the carrying value of a long-lived asset (or asset group) may not be recoverable. If an impairment indicator is present, we evaluate recoverability by comparing the estimated future cash flows of the asset group, on an undiscounted basis, to their carrying values. The asset group represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the undiscounted cash flows exceed the carrying value, no impairment is present. If the undiscounted cash flows are less than the carrying value, the impairment is measured as the difference between the carrying value and the fair value of the long-lived asset (or asset group). Our determination that an event or change in circumstance has occurred potentially indicating the carrying amount of an asset (or asset group) may not be recoverable generally includes but is not limited to one or more of the following: (1) a deterioration in an asset’s financial performance compared to historical results, (2) a shortfall in an asset’s financial performance compared to forecasted results, (3) changes affecting the utility and estimated future demands for the asset, (4) a significant decrease in the market price of an asset, (5) a current expectation that a long-lived asset will be sold or disposed of significantly before the end of its previously estimated useful life, (6) a significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition, and (7) declining operations and severe changes in projected cash flows.
We recorded total impairment charges of $4.8 million for long-lived assets classified as held for sale during the year ended December 31, 2018, which was included in “Impairment of long-lived assets” in the consolidated statement of operations. During the year ended December 31, 2017, we recorded total impairment charges for long-lived assets of $4.9 million for long-lived assets classified as held for sale. During the year ended December 31, 2016, we recorded total impairment charges for long-lived assets of $42.2 million. These charges were due to the carrying value of assets for certain basins not being recoverable, as well as for assets that were classified as held for sale during 2016. We could recognize future impairments to the extent adverse events or changes in circumstances result in conditions in which long-lived assets are not recoverable. See Note 10 in the Notes to the Consolidated Financial Statements for additional information on our impairment charges.
Income Taxes and Valuation of Deferred Tax Assets
We are subject to federal income taxes and state income taxes in those jurisdictions in which we operate. We exercise judgment with regard to income taxes in interpreting whether expenses are deductible in accordance with federal income tax and state income tax codes, estimating annual effective federal and state income tax rates and assessing whether deferred tax assets are, more likely than not, expected to be realized. The accuracy of these judgments impacts the amount of income tax expense we recognize each period.
With regard to the valuation of deferred tax assets, we record valuation allowances to reduce net deferred tax assets to the amount considered more likely than not to be realized. All available evidence is considered to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. See Note 19 to our Consolidated Financial Statements herein for further information regarding the valuation of our deferred tax assets and the impact of new legislation.
Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character (for example ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. We have had significant pretax losses in recent years. Accordingly, we do not have income in carryback years. These cumulative losses also present significant negative evidence about the likelihood of income in carryforward periods.    
Future reversals of existing taxable temporary differences are another source of taxable income that is used in this analysis. As a result, deferred tax liabilities in excess of deferred tax assets generally will provide support for recognition of deferred tax assets. However, most of our deferred tax assets are associated with net operating loss (“NOL”) carryforwards, many of which statutorily expire after a specified number of years; therefore, we compare the estimated timing of these taxable timing difference reversals with the scheduled expiration of our NOL carryforwards, considering any limitations on use of NOL carryforwards, and record a valuation allowance against deferred tax assets for which realization is not more likely than not. In addition, as a result of limitations on the use of our NOLs due to prior ownership changes, we have reduced our deferred tax asset and corresponding valuation allowance by the NOLs that will likely expire unused.
As a matter of law, we are subject to examination by federal and state taxing authorities. We have estimated and provided for income taxes in accordance with settlements reached with the Internal Revenue Service in prior audits. Although we believe that the amounts reflected in our tax returns substantially comply with the applicable federal and state tax regulations, both the

46



IRS and the various state taxing authorities can take positions contrary to our position based on their interpretation of the law. A tax position that is challenged by a taxing authority could result in an adjustment to our income tax liabilities and related tax provision.
We measure and record tax contingency accruals in accordance with GAAP which prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a return. Only positions meeting the “more likely than not” recognition threshold at the effective date may be recognized or continue to be recognized. A tax position is measured at the largest amount that is greater than 50% likely of being realized upon ultimate settlement.
Revenue Recognition

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.

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.
Environmental and Legal Contingencies
We have established liabilities for environmental and legal contingencies. We record a loss contingency for these matters when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In determining the liability, we consider a number of factors including, but not limited to, the jurisdiction of the claim, related claims, insurance coverage when insurance covers the type of claim and our historic outcomes in similar matters, if applicable. A significant amount of judgment and the use of estimates are required to quantify our ultimate exposure in these matters. The determination of liabilities for these contingencies is reviewed periodically to ensure that we have accrued the proper level of expense. The liability balances are adjusted to account for changes in circumstances for ongoing issues, including the effect of any applicable insurance coverage for these matters. While we believe that the amount accrued is adequate, future changes in circumstances could impact these determinations.
We record obligations to retire tangible, long-lived assets on our balance sheet as liabilities, which are recorded at a discount when we incur the liability. A certain amount of judgment is involved in estimating the future cash flows of such obligations, as well as the timing of these cash flows. If our assumptions and estimates on the amount or timing of the future cash flows change, it could potentially have a negative impact on our earnings.
Recently Issued Accounting Pronouncements

See the “Recently Issued Accounting Pronouncements” section of Note 3 on Significant Accounting Policies in the Notes to the Consolidated Financial Statements herein for a complete description of recent accounting standards which may be applicable to our operations. The significant accounting standards that have been adopted during the year ended December 31, 2018 are described in Note 2 on Basis of Presentation in the Notes to the Consolidated Financial Statements herein.


47



Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Inflation

Inflationary factors, such as increases in our cost structure, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of sales revenue if the selling prices of our products do not increase with these increased costs.

Commodity Risk

We are subject to market risk exposures arising from declines in oil and natural gas drilling activity in unconventional areas, which is primarily a function of the market price for oil and natural gas. Various factors beyond our control affect the market prices for oil and natural gas, including but not limited to the level of consumer demand, governmental regulation, the price and availability of alternative fuels, political instability in foreign markets, weather-related factors and the overall economic environment. Market prices for oil and natural gas historically have been volatile and unpredictable, and we expect this volatility to continue in the future. Prolonged declines in the market price of oil and/or natural gas could contribute to declines in drilling activity and accordingly would reduce demand for our services. We attempt to manage this risk by strategically aligning our assets with those areas where we believe demand is highest and market conditions for our services are most favorable. If there is further deterioration in our business operations or prospects, our stock price, the broader economy or our industry, including further declines in oil and natural gas prices, the value of our long-lived assets, or those we may acquire in the future, could decrease significantly and result in additional impairment and financial statement write-offs which could have a material adverse effect on our financial condition, results of operations and cash flows.
Interest Rates
As of December 31, 2018 the outstanding principal balance on Successor Revolving Facility was $0.0 million, while the outstanding principal balance on the Successor First Lien Term Loan was $21.9 million. 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%. The weighted average interest rate for the year ended December 31, 2018 was 7.2% for the Successor Revolving Facility and 9.2% for the Successor First Lien Term Loan. We have assessed our exposure to changes in interest rates on variable rate debt by analyzing the sensitivity to our earnings assuming various changes in market interest rates. Assuming a hypothetical increase of 1% to the interest rates on the average outstanding balance of our variable rate debt portfolio during the year ended December 31, 2018, our net interest expense for year ended December 31, 2018 would have increased by an estimated $0.3 million.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by Regulation S-X are included in Item 15. “Exhibits, Financial Statement Schedules” contained in Part IV, Item 15 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountant on Accounting and Financial Disclosure

None.
Item 9A. Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of our disclosure controls and procedures was performed under the supervision of, and with the participation of, management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

48



Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2018.
Due to our aggregate market value of the voting and non-voting common equity held by non-affiliates falling below $75.0 million as of June 30, 2018, and our corresponding status as a smaller reporting company, our independent registered public accounting firm, Moss Adams LLP, was not required to issue an audit report on the effectiveness of our internal control over financial reporting for the year ended December 31, 2018.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended December 31, 2018 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this item will be contained in, and is incorporated by reference to, the Definitive Proxy Statement for our 2019 Annual Meeting of Stockholders or a Form 10-K/A which, in either case, we will file with the Securities and Exchange Commission within 120 days after our fiscal year ended December 31, 2018.

Item 11. Executive Compensation

The information required by this item will be contained in, and is incorporated by reference to, the Definitive Proxy Statement for our 2019 Annual Meeting of Stockholders or a Form 10-K/A which, in either case, we will file with the Securities and Exchange Commission within 120 days after our fiscal year ended December 31, 2018.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item will be contained in, and is incorporated by reference to, the Definitive Proxy Statement for our 2019 Annual Meeting of Stockholders or a Form 10-K/A which, in either case, we will file with the Securities and Exchange Commission within 120 days after our fiscal year ended December 31, 2018.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item will be contained in, and is incorporated by reference to, the Definitive Proxy Statement for our 2019 Annual Meeting of Stockholders or a Form 10-K/A which, in either case, we will file with the Securities and Exchange Commission within 120 days after our fiscal year ended December 31, 2018.

Item 14. Principal Accounting Fees and Services

The information required by this item will be contained in, and is incorporated by reference to, the Definitive Proxy Statement for our 2019 Annual Meeting of Stockholders or a Form 10-K/A which, in either case, we will file with the Securities and Exchange Commission within 120 days after our fiscal year ended December 31, 2018.

50



PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)
The following documents are filed as part of this Annual Report on Form 10-K:
1. Audited Consolidated Financial Statements:
 
 
Page
  
  
  
  
  
  
2. Financial Statement Schedules: All financial statement schedules have been omitted since they are not required, not applicable, or the information is otherwise included in the audited consolidated financial statements.
(b)
The exhibits listed on the “Exhibit Index” set forth below are filed with this Annual Report on Form 10-K or incorporated by reference as set forth therein.

Exhibit Number
 
Description
 
 
 
 
 
2.1

 
 
 
 
 
 
 
 
2.2

 
 
  
 
 
 
 
 
3.1

 
 
  
 
 
 
 
 
3.2

 
 
  
 
 
 
 
 
4.1

 
 
  
 
 
 
 
 
4.2

 
 
 
 
 
 
 
 
4.3

 
 
  
 
 
 
 
 
4.4

 
 
  
 
 
 
 
 

51



Exhibit Number
 
Description
4.5

 
 
 
 
 
 
 
 
10.1

 
 
 

 
 
 
 
 
10.1

A
 
 

 
 
 
 
 
10.1

B
 
 
 
 
 
 
 
10.1

C
 
 
 
 
 
 
 
10.1

D
 
 
 
 
 
 
 
 
 
 
 
 
10.2

 
 
 
 
 
 
 
10.3

 
 
 
 
 
 
 
10.4

 
 
 
 
 
 
 
 
10.4

A
 
 
 
 
 
 
 
10.4

B
 
 
 
 
 
 
 
10.5

 
 
 
 
 
 
 
 
10.5

A
 
 
 
 
 
 
 
10.5

B
 
 
 
 
 
 
 
10.5

C
 
 
 
 
 
 
 
10.5

D
 
 
 
 
 
 
 

52



Exhibit Number
 
Description
10.6

 
 
 
 
 
 
 
10.7

 
 
 

 
 
 
 
 
10.8

 
 
 
 
 
 
 
 
10.9

 
 
 
 
 
 
 
 
10.10

 
 
 
 
 
 
 
 
10.10

A
 
 
 
 
 
 
 
10.10

B
 
 
 
 
 
 
 
10.11

 
 
 
 
 
 
 
 
10.11

A
 
 
 
 
 
 
 
10.11

B
 
 
 
 
 
 
 
10.12

 
 
 
 
 
 
 
 
10.13

 
 
 
 
 
 
 
 
10.14

 
 
 
 
 
 
 
10.15

 
 
 
 
 
 
 
10.16

 
 
 
 
 
 
 

53



Exh