0001403853-19-000028.txt : 20190806 0001403853-19-000028.hdr.sgml : 20190806 20190806163504 ACCESSION NUMBER: 0001403853-19-000028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 90 CONFORMED PERIOD OF REPORT: 20190630 FILED AS OF DATE: 20190806 DATE AS OF CHANGE: 20190806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Nuverra Environmental Solutions, Inc. CENTRAL INDEX KEY: 0001403853 STANDARD INDUSTRIAL CLASSIFICATION: OIL, GAS FIELD SERVICES, NBC [1389] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33816 FILM NUMBER: 191002588 BUSINESS ADDRESS: STREET 1: 6720 N. SCOTTSDALE ROAD STREET 2: SUITE 190 CITY: SCOTTSDALE STATE: AZ ZIP: 85253 BUSINESS PHONE: 602-903-7802 MAIL ADDRESS: STREET 1: 6720 N. SCOTTSDALE ROAD STREET 2: SUITE 190 CITY: SCOTTSDALE STATE: AZ ZIP: 85253 FORMER COMPANY: FORMER CONFORMED NAME: Heckmann Corp DATE OF NAME CHANGE: 20111205 FORMER COMPANY: FORMER CONFORMED NAME: Heckmann CORP DATE OF NAME CHANGE: 20070620 10-Q 1 nes_20190630x10-q.htm 10-Q Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-Q
__________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File Number: 001-33816
_________________________________
nesimagea10.jpg
__________________________________
Delaware
26-0287117
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)

6720 N. Scottsdale Road, Suite 190, Scottsdale, AZ 85253

(602) 903-7802

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
__________________________________
    
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $0.01 par value
NES
NYSE American
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically 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  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
x
Smaller reporting company
x
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x
Indicate by check mark whether the registrant has filed all the documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan of confirmation by a court. Yes  x    No  ¨

The number of shares outstanding of the registrant’s common stock as of July 31, 2019 was 15,708,898.




TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 

3



Forward-Looking Statements
In addition to historical information, this Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, or the “Securities Act,” and Section 21E of the United States Securities Exchange Act of 1934, as amended, or the “Exchange Act.” These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including, but not limited to, statements regarding:
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 Quarterly Report and our current expectations, forecasts and assumptions, and involve a number of risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. Future performance cannot be ensured, and actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include, among others:
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 mergers, acquisitions and divestitures, successfully integrating merged or acquired business operations, and identifying and managing risks inherent in mergers, acquisitions and divestitures, as well as differences in the type and availability of consideration or financing for such mergers, 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;
risks and uncertainties associated with our completed restructuring process, including the outcome of a pending appeal of the order confirming the plan of reorganization;

4



risks associated with the reliance on third-party analysts, appraisers, engineers and other experts;
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 salt water 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 and 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 Quarterly Report or referenced from time to time in our filings with the United States Securities and Exchange Commission.
You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Quarterly Report. Except as required by law, we do not undertake any obligation to update or release any revisions to these forward-looking statements to reflect any events or circumstances, whether as a result of new information, future events, changes in assumptions or otherwise, after the date hereof.

 

5



PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
June 30,
 
December 31,
 
2019
 
2018
 
 
 
 
Assets
 
 
 
Cash and cash equivalents
$
5,978

 
$
7,302

Restricted cash
1,875

 
656

Accounts receivable, net of allowance for doubtful accounts of $1.4 million and $1.6 million at June 30, 2019 and December 31, 2018, respectively
28,777

 
31,392

Inventories
3,213

 
3,358

Prepaid expenses and other receivables
3,011

 
2,435

Other current assets
518

 
1,582

Assets held for sale
4,504

 
2,782

Total current assets
47,876

 
49,507

Property, plant and equipment, net of accumulated depreciation of $83.2 million and $73.6 million at June 30, 2019 and December 31, 2018, respectively
203,354

 
215,640

Operating lease assets
3,612

 

Equity investments
38

 
41

Intangibles, net
882

 
1,112

Goodwill
29,518

 
29,518

Other assets
99

 
118

Total assets
$
285,379

 
$
295,936

Liabilities and Shareholders’ Equity
 
 
 
Accounts payable
$
7,052

 
$
9,061

Accrued and other current liabilities
14,144

 
16,670

Current portion of long-term debt
6,664

 
38,305

Current contingent consideration
500

 
500

Derivative warrant liability
6

 
34

Total current liabilities
28,366

 
64,570

Long-term debt
30,272

 
27,628

Noncurrent operating lease liabilities
1,653

 

Deferred income taxes
293

 
181

Other long-term liabilities
7,364

 
7,130

Total liabilities
67,948

 
99,509

Commitments and contingencies

 

Shareholders’ equity:
 
 
 
   Common stock
157

 
122

   Additional paid-in capital
337,018

 
303,463

   Treasury stock
(402
)
 

   Accumulated deficit
(119,342
)
 
(107,158
)
Total shareholders’ equity
217,431

 
196,427

Total liabilities and shareholders’ equity
$
285,379

 
$
295,936

The accompanying notes are an integral part of these statements.
 

6



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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
Service revenue
$
41,238

 
$
45,320

 
$
80,239

 
$
90,847

Rental revenue
4,002

 
3,628

 
7,628

 
7,770

Total revenue
45,240

 
48,948

 
87,867

 
98,617

Costs and expenses:
 
 
 
 
 
 
 
Direct operating expenses
34,517

 
39,069

 
67,074

 
80,696

General and administrative expenses
5,280

 
6,014

 
10,755

 
25,334

Depreciation and amortization
9,277

 
11,969

 
18,412

 
26,713

    Impairment of long-lived assets

 
332

 
117

 
4,463

Other, net
(6
)
 
469

 
(6
)
 
1,068

Total costs and expenses
49,068

 
57,853

 
96,352

 
138,274

Operating loss
(3,828
)
 
(8,905
)
 
(8,485
)
 
(39,657
)
Interest expense, net
(1,297
)
 
(1,204
)
 
(2,718
)
 
(2,454
)
Other income, net
152

 
587

 
177

 
514

Reorganization items, net
13

 
(1,654
)
 
(210
)
 
(1,746
)
Loss before income taxes
(4,960
)
 
(11,176
)
 
(11,236
)
 
(43,343
)
Income tax expense
(46
)
 

 
(125
)
 

Net loss
$
(5,006
)
 
$
(11,176
)
 
$
(11,361
)
 
$
(43,343
)
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Net loss per basic common share
$
(0.32
)
 
$
(0.96
)
 
$
(0.73
)
 
$
(3.71
)
 
 
 
 
 
 
 
 
Net loss per diluted common share
$
(0.32
)
 
$
(0.96
)
 
$
(0.73
)
 
$
(3.71
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
15,704

 
11,696

 
15,627

 
11,696

Diluted
15,704

 
11,696

 
15,627

 
11,696

The accompanying notes are an integral part of these statements.





7



NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)



 
 
Common Stock
 
Additional
Paid-In
Capital
 
Treasury Stock
 
Accumulated
Deficit
 
Total
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2019
 
12,233

 
$
122

 
$
303,463

 

 
$

 
$
(107,158
)
 
$
196,427

Adjustment due to adoption of ASC 842, Leases
 

 

 

 

 

 
(823
)
 
(823
)
Issuance of common stock for Rights Offering
 
3,382

 
34

 
32,141

 

 

 

 
32,175

Issuance of common stock to employees
 
97

 
1

 
(1
)
 

 

 

 

Treasury stock acquired through surrender of shares for tax withholding
 

 

 

 
(34
)
 
(373
)
 

 
(373
)
Share-based compensation
 

 

 
852

 

 

 

 
852

Net loss
 

 

 

 

 

 
(6,355
)
 
(6,355
)
Balance at March 31, 2019
 
15,712

 
$
157

 
$
336,455

 
(34
)
 
$
(373
)
 
$
(114,336
)
 
$
221,903

Issuance of common stock to employees
 
34

 
$

 

 

 

 

 

Treasury stock acquired through surrender of shares for tax withholding
 

 

 

 
(3
)
 
(29
)
 

 
(29
)
Share-based compensation
 

 

 
563

 

 

 

 
563

Net loss
 

 

 

 

 

 
(5,006
)
 
(5,006
)
Balance at June 30, 2019
 
15,746

 
$
157

 
$
337,018

 
(37
)
 
$
(402
)
 
$
(119,342
)
 
$
217,431

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
 
11,696

 
$
117

 
$
290,751

 

 
$

 
$
(47,895
)
 
$
242,973

Share-based compensation
 

 

 
10,978

 

 

 

 
10,978

Net loss
 

 

 

 

 

 
(32,167
)
 
(32,167
)
Balance at March 31, 2018
 
11,696

 
$
117

 
$
301,729

 

 

 
$
(80,062
)
 
$
221,784

Stock-based compensation
 

 

 
416

 

 

 
$

 
$
416

Net loss
 

 

 

 

 

 
(11,176
)
 
(11,176
)
Balance at June 30, 2018
 
11,696

 
$
117

 
$
302,145

 

 
$

 
$
(91,238
)
 
$
211,024







8



NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended
 
June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(11,361
)
 
$
(43,343
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
   Depreciation and amortization
18,412

 
26,713

   Amortization of debt issuance costs, net
247

 

   Accrued interest added to debt principal

 
119

   Stock-based compensation
1,415

 
11,394

   Impairment of long-lived assets
117

 
4,463

   Gain on sale of UGSI

 
(75
)
   Gain on disposal of property, plant and equipment
(1,706
)
 
(254
)
   Bad debt (recoveries) expense
(9
)
 
120

   Change in fair value of derivative warrant liability
(28
)
 
(289
)
   Deferred income taxes
112

 

   Other, net
55

 
221

   Changes in operating assets and liabilities:
 
 
 
      Accounts receivable
2,724

 
(1,631
)
      Prepaid expenses and other receivables
(576
)
 
(99
)
      Accounts payable and accrued liabilities
(6,059
)
 
2,243

      Other assets and liabilities, net
1,111

 
(54
)
Net cash provided by (used in) operating activities
4,454

 
(472
)
Cash flows from investing activities:
 
 
 
   Proceeds from the sale of property, plant and equipment
4,525

 
17,649

   Purchases of property, plant and equipment
(5,019
)
 
(7,103
)
   Proceeds from the sale of UGSI

 
75

Net cash (used in) provided by investing activities
(494
)
 
10,621

Cash flows from financing activities:
 
 
 
   Payments on First and Second Lien Term Loans
(2,514
)
 
(1,597
)
   Proceeds from Revolving Facility
96,677

 
117,092

   Payments on Revolving Facility
(96,677
)
 
(117,092
)
   Payments on Bridge Term Loan
(31,382
)
 

   Proceeds from the issuance of stock
31,057

 

   Payments on finance leases and other financing activities
(1,226
)
 
(980
)
Net cash used in financing activities
(4,065
)
 
(2,577
)
Change in cash, cash equivalents and restricted cash
(105
)
 
7,572

Cash and cash equivalents, beginning of period
7,302

 
5,488

Restricted cash, beginning of period
656

 
1,296

Cash, cash equivalents and restricted cash, beginning of period
7,958

 
6,784

Cash and cash equivalents, end of period
5,978

 
12,808

Restricted cash, end of period
1,875

 
1,548

Cash, cash equivalents and restricted cash, end of period
$
7,853

 
$
14,356

 
 
 
 

9



 
Six Months Ended
 
June 30,
 
2019
 
2018
Supplemental disclosure of cash flow information:
 
 
 
   Cash paid for interest
$
2,218

 
$
1,967

   Cash paid for taxes, net
138

 
207

   Common stock issued to settle Bridge Term Loan
1,118

 


The accompanying notes are an integral part of these statements.  

10



NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying condensed consolidated financial statements of Nuverra Environmental Solutions, Inc. and its subsidiaries (collectively, “Nuverra,” the “Company,” “we,” “us,” or “our”) are unaudited, pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Our condensed consolidated balance sheet as of December 31, 2018, included herein, has been derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (or “GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In our opinion, the condensed consolidated financial statements include the normal, recurring adjustments necessary for the fair statement of the results for the interim periods. These financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 12, 2019 (the “2018 Annual Report on Form 10-K”).
All dollar and share amounts in the footnote tabular presentations are in thousands, except per share amounts and unless otherwise noted.
Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASC 842”), replacing the previous leasing standard Accounting Standards Codification 840, Leases (“ASC 840”), which requires an entity that is a lessee to recognize the assets and liabilities arising from leases with terms longer than 12 months on the balance sheet. Leases are to be classified as either operating or finance, with classification affecting the pattern of expense recognition in the statement of operations. The new standard was effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods.

We adopted this new lease standard on January 1, 2019 using a modified retrospective transition, with the cumulative-effect adjustment to the opening balance of accumulated deficit as of the effective date (the “effective date method”). Under the effective date method, financial results reported in periods prior to 2019 are unchanged. We also elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carryforward the historical lease classification. In addition, we have made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. We will continue to recognize those lease payments in the consolidated statement of operations on a straight-line basis over the lease term.

The adoption of the new lease standard resulted in the recognition of operating lease assets and operating lease liabilities of approximately $4.9 million, respectively, as of January 1, 2019. Additionally, as of January 1, 2019, we recorded an adjustment of $0.8 million to accumulated deficit as a result of the re-measurement of the present value of remaining lease payments for the finance leases previously recorded as capital leases. The finance lease assets and finance lease liabilities as of January 1, 2019 were $1.8 million, respectively. We believe the adoption of the new lease standard will not materially impact our results of operations, nor have a notable impact on our liquidity. See Note 3 for further information on our leases.

There have been no other material changes or developments in our significant accounting policies or evaluation of accounting estimates and underlying assumptions or methodologies from those disclosed in our 2018 Annual Report on Form 10-K.

Note 2 - Revenues

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

11



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.

Contract Assets
 
Contract Asset
Balance at the beginning of the period (January 1, 2019)
$

Balance at the end of the period (June 30, 2019)
512

Increase/(decrease)
512


During the three months ended June 30, 2019, we recorded a contract asset as a result of a contract modification for disposal services. There were no contract assets reclassified to receivables during the three months ended June 30, 2019. The contract asset is included in “Other current assets” on the condensed consolidated balance sheet as of June 30, 2019.

Disaggregated Revenues

The following tables present our revenues disaggregated by revenue source for each reportable segment for the three and six months ended June 30, 2019 and June 30, 2018:
 
Three months ended June 30, 2019
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Water Transfer Services
$
18,448

 
$
7,296

 
$
2,726

 
$

 
$
28,470

Disposal Services
5,146

 
3,098

 
2,739

 

 
10,983

Other Revenue
1,471

 
255

 
59

 

 
1,785

    Total Service Revenue
25,065

 
10,649

 
5,524

 

 
41,238

 
 
 
 
 
 
 
 
 
 
Rental Revenue
3,928

 
71

 
3

 

 
4,002

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
28,993

 
$
10,720

 
$
5,527

 
$

 
$
45,240


 
Three months ended June 30, 2018
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Water Transfer Services
$
21,967

 
$
8,230

 
$
5,014

 
$

 
$
35,211

Disposal Services
4,540

 
955

 
1,081

 

 
6,576

Other Revenue
3,120

 
362

 
51

 

 
3,533

    Total Service Revenue
29,627

 
9,547

 
6,146

 

 
45,320

 
 
 
 
 
 
 
 
 
 
Rental Revenue
3,538

 
59

 
31

 

 
3,628

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
33,165

 
$
9,606

 
$
6,177

 
$

 
$
48,948



12



 
Six months ended June 30, 2019
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Water Transfer Services
$
34,157

 
$
15,268

 
$
6,210

 
$

 
$
55,635

Disposal Services
9,217

 
6,597

 
5,145

 

 
20,959

Other Revenue
3,017

 
557

 
71

 

 
3,645

    Total Service Revenue
46,391

 
22,422

 
11,426

 

 
80,239

 
 
 
 
 
 
 
 
 
 
Rental Revenue
7,479

 
138

 
11

 

 
7,628

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
53,870

 
$
22,560

 
$
11,437

 
$

 
$
87,867


 
Six months ended June 30, 2018
 
Rocky Mountain
 
Northeast
 
Southern
 
Corp/Other
 
Total
Water Transfer Services
$
43,227

 
$
16,249

 
$
13,125

 
$

 
$
72,601

Disposal Services
8,152

 
1,732

 
2,317

 

 
12,201

Other Revenue
5,244

 
616

 
185

 

 
6,045

    Total Service Revenue
56,623

 
18,597

 
15,627

 

 
90,847

 
 
 
 
 
 
 
 
 
 
Rental Revenue
7,312

 
122

 
336

 

 
7,770

 
 
 
 
 
 
 
 
 
 
Total Revenue
$
63,935

 
$
18,719

 
$
15,963

 
$

 
$
98,617


Water Transfer Services

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

Disposal Services

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

Other Revenue

Other revenue primarily includes revenues from the sale of fresh water, as well as the sale of “junk” or “slop” oil obtained through the skimming of disposal water. Revenue is recognized for fresh water sales and “junk” or “slop” oil sales at a point in time once the goods are transferred. Also included is revenue generated by oilfield labor services, also called “roustabout work,” provided by the Company. Revenue is recognized in other revenue for the oilfield labor services once the activity has been performed, or over time, based on the agreed upon hourly rate, depending upon the customer contract. Oilfield labor services are short-term in nature with hours tracked each day services are provided. As such, there are no remaining performance obligations outstanding at the end of each month.

13




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

Rental Revenue

We generate rental revenue from the rental of various equipment used in wellsite services. Rental rates are based upon negotiated rates with our customers and revenue is recognized over the rental service period. Revenues from rental equipment are recognized under ASC 840 for the periods prior to January 1, 2019, and under ASC 842 for the periods after January 1, 2019. As the rental service period for our equipment is very short term in nature and does not include any sales-type or direct financing leases, nor any variable rental components, the adoption of ASC 842 in 2019 did not have a material impact upon our consolidated statement of operations.

Note 3 - Leases

We lease vehicles, transportation equipment, real estate and certain office equipment. We determine if an arrangement is a lease at inception. Operating and finance lease assets represent our right to use an underlying asset for the lease term, and operating and finance lease liabilities represent our obligation to make lease payments arising from the lease. Operating and finance lease assets and liabilities are recognized at the lease commencement date based on the estimated present value of the lease payments over the lease term. Absent a documented borrowing rate from the lessor, we use our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments.

Most of our leases have remaining lease terms of less than one year to 20 years, with one lease having a term of 99 years. Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option. Leases with an initial term of 12 months or less are not recorded on the balance sheet and we recognize lease expense for these leases on a straight-line basis. Some of our vehicle leases include residual value guarantees. It is probable that we will owe approximately $2.2 million under the residual value guarantee, therefore this amount has been included in the measurement of the lease liability and leased asset.

The components of lease expense were as follows:
 
 
 
 
Three Months Ended
 
Six Months Ended
Lease Cost
 
Classification
 
June 30, 2019
 
June 30, 2019
Operating lease cost (a)
 
General and administrative expenses
 
$
729

 
$
1,453

Finance lease cost:
 
 
 
 
 
 
     Amortization of leased assets
 
Depreciation and amortization
 
679

 
1,225

     Interest on lease liabilities
 
Interest expense, net
 
177

 
240

Variable lease cost
 
General and administrative expenses
 
1,055

 
2,121

Sublease income
 
Other income, net
 
(22
)
 
(73
)
Total net lease cost
 
 
 
$
2,618

 
$
4,966


(a)
Includes short-term leases which represented $0.2 million and $0.4 million of the balance for the three and six months ended June 30, 2019, respectively.


14



Supplemental balance sheet, cash flow and other information related to leases was as follows (in thousands, except lease term and discount rate):
Leases
 
Classification
 
June 30, 2019
Assets:
 
 
 
 
Operating lease assets
 
Operating lease assets
 
$
3,612

Finance lease assets
 
Property, plant and equipment, net of accumulated depreciation (a)
 
7,166

Total leased assets
 
 
 
$
10,778

 
 
 
 
 
Liabilities:
 
 
 
 
Current
 
 
 
 
     Operating lease liabilities
 
Accrued and other current liabilities
 
$
1,980

     Finance lease liabilities
 
Current portion of long-term debt
 
2,040

Noncurrent
 
 
 
 
     Operating lease liabilities
 
Noncurrent operating lease liabilities
 
1,653

     Finance lease liabilities
 
Long-term debt
 
5,614

Total lease liabilities
 
 
 
$
11,287


(a)
Finance lease assets are recorded net of accumulated amortization of $1.2 million as of June 30, 2019.

Lease Term and Discount Rate
 
June 30, 2019
Weighted-average remaining lease term (in years):
 
 
     Operating leases
 
20.5

     Finance leases
 
4.5

 
 
 
Weighted-average discount rate:
 
 
     Operating leases
 
7.86
%
     Finance leases
 
6.68
%

Supplemental Disclosure of Cash Flow Information and Other Information
 
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
     Operating cash flows from operating leases
 
$
1,453

     Operating cash flows from finance leases
 
240

     Financing cash flows from finance leases
 
824

 
 
 
Leased assets obtained in exchange for new operating lease liabilities
 
$

Leased assets obtained in exchange for new finance lease liabilities
 
6,674



15



Maturities of lease liabilities were as follows:
 
June 30, 2019
 
Operating Leases (a)
 
Finance Leases (b)
2019
$
1,522

 
$
1,170

2020
1,530

 
1,980

2021
430

 
1,270

2022
290

 
1,270

2023
164

 
2,113

Thereafter
6,759

 
1,750

     Total lease payments
10,695

 
9,553

Less amount representing executory costs (c)
(114
)
 

     Net lease payments
10,581

 
9,553

Less amount representing interest
(6,948
)
 
(1,899
)
Present value of total lease liabilities
3,633

 
7,654

Less current lease liabilities
(1,980
)
 
(2,040
)
Long-term lease liabilities
$
1,653

 
$
5,614


(a)
Operating lease payments include $0.0 million related to options to extend lease terms that are reasonably certain of being exercised.
(b)
Finance lease payments include $0.0 million related to options to extend lease terms that are reasonably certain of being exercised.
(c)
Represents executory costs for all leases. We included executory costs in lease payments under ASC 840, and have elected to continue to include executory costs for both leases that commenced before and after the effective date of ASC 842.

As of June 30, 2019, we have additional finance lease commitments that have not yet commenced of approximately $3.3 million for 20 water transfer trucks to be delivered in the third quarter of 2019 with lease terms of four years.

Disclosures related to periods prior to adoption of ASC 842

Lease expense under operating leases was approximately $1.2 million and $2.4 million during the three and six months ended June 30, 2018. As of December 31, 2018, future minimum lease payments, by year and in the aggregate, under all noncancellable leases were as follows:
 
December 31, 2018
 
Operating Leases
 
Capital Leases
2019
$
2,415

 
$
1,287

2020
1,453

 
718

2021
431

 

2022
294

 

2023
164

 

Thereafter
6,755

 

     Total lease payments
$
11,512

 
2,005

Less amount representing executory costs
 
 
(30
)
     Net lease payments
 
 
1,975

Less amount representing interest
 
 
(90
)
Present value of net lease payments
 
 
$
1,885


Note 4 - Acquisition of Clearwater
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

16



adjustments (the “Clearwater 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 not only by providing additional disposal capacity, but also by providing synergies for trucking.
Consideration consisted of $42.3 million in cash which was funded primarily by a $32.5 million bridge loan (the “Bridge Term Loan”) that was repaid with proceeds from an offering to our shareholders to purchase shares of our common stock on a pro rata basis with an aggregate offering price of $32.5 million (the “Rights Offering”). The Bridge Term Loan was extended pursuant to the Bridge Term Loan Agreement, entered October 5, 2018 (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 (“Wilmington”). In addition, our credit agreement lenders provided us with an additional term loan under the First Lien Credit Agreement, entered August 7, 2017, by and among the lenders party thereto, ACF FinCo I, LP, as administrative agent, and the Company (the “Credit Agreement”) in the amount of $10.0 million which was used to finance a portion of the Clearwater Acquisition (the “First Lien Term Loan”). See Note 5 for further discussion on the Rights Offering.
During the three months ended March 31, 2019, we recorded an adjustment for the backstop fee for the Rights Offering (see Note 5) to additional paid-in-capital which was previously expensed and resulted in a credit of $0.3 million to general and administrative costs in the accompanying condensed consolidated statements of operations. Total adjusted transaction costs for the Clearwater Acquisition were $1.1 million, the majority of which were recorded during the year ended December 31, 2018.
Under the acquisition method of accounting, the total purchase price was allocated to the identifiable assets acquired and the liabilities assumed based on our preliminary valuation estimates of the fair values as of the acquisition date. The final working capital was agreed upon during the three months ended March 31, 2019, which resulted in no changes to the purchase price allocation. As such, we believe that the purchase price allocation is final.
The final allocation of the purchase price is summarized as follows:
Accounts receivable
$
1,897

Intangible assets
799

Property, plant and equipment
37,589

Goodwill
2,379

Accounts payable and accrued expenses
(372
)
Total
$
42,292

The purchase price allocation requires subjective estimates that, if incorrectly estimated, could be material to our condensed consolidated financial statements including the amount of depreciation and amortization expense. The fair value of the tangible assets, which are primarily comprised of the three salt water disposal wells, was estimated using the discounted cash flow method, a form of the income approach. This method estimates the fair value of the assets based upon the present value of the expected cash flows. Estimates that impact the measurement of the tangible assets using the discounted cash flow method are the discount rate and the timing and amount of cash flows. The intangible assets acquired, which primarily consists of the trade name, were valued using the relief from royalty method. The value of the trade name encompasses all items necessary to generate revenue utilizing the trade name. Estimates that impact the measurement of the intangible assets acquired are net sales projections, and the discount and royalty rates used. The entire goodwill balance resulting from the Clearwater Acquisition is expected to be deductible for tax purposes and is all related to the Northeast division. The estimated fair value of the assets acquired and the liabilities assumed represents a nonrecurring Level 3 fair value estimate.

Pro forma financial information is not presented as the revenues and earnings of the Clearwater Acquisition are not material to our consolidated statement of operations.
    
Note 5 - Equity

Rights Offering

In connection with the Clearwater Acquisition, we agreed, pursuant to our Bridge Term Loan Credit Agreement, to use our reasonable best efforts to effectuate and close a Rights Offering. 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

17



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. This fee was recorded to additional paid-in-capital during the three months ended March 31, 2019.

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 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 cash proceeds from the Rights Offering of $31.4 million. Additionally, one of the Backstop Parties elected to satisfy the backstop commitment by converting $1.1 million of the Bridge Term Loan to common stock. The aggregate cash proceeds from the Rights Offering were used to repay the remaining $31.4 million balance of the Bridge Term Loan, satisfying 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.

Other Equity Issuances

During the six months ended June 30, 2019, we issued common stock for our share-based compensation program which is discussed further in Note 15.

Note 6 - Earnings Per Common Share
Net loss per basic and diluted common share have been computed using the weighted average number of shares of common stock outstanding during the period. For the three and six months ended June 30, 2019 and June 30, 2018, no shares of common stock underlying stock options, restricted stock or warrants were included in the computation of diluted earnings per common share because the inclusion of such shares would be anti-dilutive based on the net losses reported for those periods.
The following table presents the calculation of basic and diluted net loss per common share, as well as the anti-dilutive stock-based awards that were excluded from the calculation of diluted loss per share for the periods presented:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Numerator: Net loss
$
(5,006
)
 
$
(11,176
)
 
$
(11,361
)
 
$
(43,343
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares—basic
15,704

 
11,696

 
15,627

 
11,696

Common stock equivalents

 

 

 

Weighted average shares—diluted
15,704

 
11,696

 
15,627

 
11,696

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Net loss per basic common share
$
(0.32
)
 
$
(0.96
)
 
$
(0.73
)
 
$
(3.71
)
 
 
 
 
 
 
 
 
Net loss per diluted common share
$
(0.32
)
 
$
(0.96
)
 
$
(0.73
)
 
$
(3.71
)
 
 
 
 
 
 
 
 
Anti-dilutive stock-based awards excluded:
559

 
1,131

 
513

 
1,227



18



Note 7 - Goodwill and Intangible Assets

Goodwill

There were no changes in the carrying value of goodwill during the six months ended June 30, 2019. Of the $29.5 million reported as goodwill as of June 30, 2019, and December 31, 2018, respectively, $21.9 million relates to the Northeast division, $4.9 million relates to the Rocky Mountain division, and $2.7 million relates to the Southern division.

Intangible Assets

Intangible assets consist of the following:
 
June 30, 2019
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Remaining Useful Life (Years)
Disposal permits
$
581

 
$
(232
)
 
$
349

 
5.2
Trade name
799

 
(266
)
 
533

 
1.5
Total intangible assets
$
1,380

 
$
(498
)
 
$
882

 
3.0
 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Remaining Useful Life (Years)
Disposal permits
$
581

 
$
(180
)
 
$
401

 
5.5
Trade name
799

 
(88
)
 
711

 
2.0
Total intangible assets
$
1,380

 
$
(268
)
 
$
1,112

 
3.2

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

Note 8 - Assets Held for Sale and Impairment
During 2019, management approved plans to sell real property located in both the Northeast and Rocky Mountain divisions. As a result, we began to actively market these assets, which we expect to sell within one year. In accordance with applicable accounting guidance, the real property was recorded at the lower of net book value or fair value less costs to sell and reclassified to “Assets held for sale” on the condensed consolidated balance sheet during the six months ended June 30, 2019. As the fair value of the real property reclassified as held for sale in the Northeast division was lower than its net book value, we recorded an impairment charge of $0.1 million during the six months ended June 30, 2019 which is included in “Impairment of long-lived assets” on our condensed consolidated statements of operations.

During the three months ended March 31, 2018, management approved a plan to sell certain assets located in the Southern division as a result of exiting the Eagle Ford Shale area. See Note 13 for additional details on the exit of the Eagle Ford Shale area. In addition, during the three months ended March 31, 2018, management approved the sale of certain assets, primarily frac tanks, located in the Northeast division, that were expected to sell within one year. These assets qualified to be classified as assets held for sale and as a result were recorded at the lower of net book value or fair value less costs to sell, which resulted in a long-lived asset impairment charge of $4.1 million during the three months ended March 31, 2018. Of the $4.1 million recorded, $4.0 million related to the Southern division for the Eagle Ford exit and $0.1 million related to the Northeast division, and is included in “Impairment of long-lived assets” on our condensed consolidated statements of operations.

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


19



Note 9 - Fair Value Measurements
Measurements
Fair value represents an exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 — Observable inputs such as quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Liabilities measured at fair value on a recurring basis and the fair value hierarchy of the valuation techniques we utilized to determine such fair value included significant unobservable inputs (Level 3) and were as follows:
 
June 30, 2019
 
December 31, 2018
Derivative warrant liability
$
6

 
$
34

Derivative Warrant Liability
Upon emergence from chapter 11 on August 7, 2017 (the “Effective Date”), pursuant to the prepackaged plan of reorganization (the “Plan”), we issued to the holders of our pre-Effective Date 9.875% Senior Notes due 2018 (the “2018 Notes”) and holders of certain claims relating to the rejection of executory contracts and unexpired leases 118,137 warrants with an exercise price of $39.82 and a term expiring seven years from the Effective Date. Each warrant is exercisable for one share of our common stock, par value $0.01. The warrants issued were determined to be derivative liabilities.
Our derivative warrant liability is adjusted to reflect the estimated fair value at each quarter end, with any decrease or increase in the estimated fair value recorded in “Other income, net” in the condensed consolidated statements of operations. We used Level 3 inputs for the valuation methodology of the derivative liabilities. The estimated fair values were computed using a Monte Carlo simulation model. The key inputs in determining our derivative warrant liability typically include our stock price, the volatility of our stock price, and the risk free interest rate. Future changes in these factors could have a significant impact on the computed fair value of the derivative warrant liability. As such, we expect future changes in the fair value of the warrants could vary significantly from quarter to quarter.
The following table provides a reconciliation of the beginning and ending balances of the “Derivative warrant liability” presented in the condensed consolidated balance sheet during the six months ended June 30, 2019, and the year ended December 31, 2018.
 
Six Months Ended
 
Year Ended
 
June 30, 2019
 
December 31, 2018
Balance at beginning of period
$
34

 
$
477

Adjustments to estimated fair value
(28
)
 
(443
)
Balance at end of period
$
6

 
$
34

Other

Assets acquired and liabilities assumed in business combinations are also measured at fair value on a nonrecurring basis using Level 3 inputs. See Note 4 for further discussion on the measurement of the assets and liabilities acquired in the Clearwater Acquisition.


20



Note 10 - Accrued and Other Current Liabilities
Accrued and other current liabilities consisted of the following at June 30, 2019 and December 31, 2018:
 
June 30, 2019
 
December 31, 2018
Accrued payroll and employee benefits
$
4,102

 
$
6,975

Accrued insurance
3,416

 
2,664

Accrued legal
91

 
733

Accrued taxes
1,036

 
2,229

Accrued interest
293

 
520

Accrued operating costs
2,833

 
3,424

Accrued other
393

 
125

Current operating lease liabilities
1,980

 

Total accrued and other current liabilities
$
14,144

 
$
16,670


Note 11 - Debt
Debt consisted of the following at June 30, 2019 and December 31, 2018:
 
 
 
 
 
June 30, 2019
 
December 31, 2018
 
Interest Rate
 
Maturity Date
 
Unamortized Debt Issuance Costs
 
Fair Value of Debt (e)
 
Carrying Value of Debt
 
Carrying Value of Debt
Revolving Facility (a)
7.68%
 
Feb. 2021
 
$

 
$

 
$

 
$

First Lien Term Loan (b)
9.68%
 
Feb. 2021
 
175

 
19,654

 
19,654

 
21,905

Second Lien Term Loan (b)
11.00%
 
Oct. 2021
 

 
9,803

 
9,803

 
10,066

Bridge Term Loan (c)
11.00%
 
Apr. 2019
 

 

 

 
32,500

Finance leases (d)
6.68%
 
Various
 

 
7,654

 
7,654

 
1,885

Total debt
 
 
 
 
$
175

 
$
37,111

 
37,111

 
66,356

Debt issuance costs presented with debt (f)
 
 
 
 
 
(175
)
 
(423
)
Total debt, net
 
 
 
 
 
 
 
 
36,936

 
65,933

Less: current portion of long-term debt
 
 
 
(6,664
)
 
(38,305
)
Long-term debt
 
 
 
 
 
 
 
 
$
30,272

 
$
27,628

_____________________
(a)
The interest rate presented represents the interest rate as of June 30, 2019 on the $30.0 million revolving facility extended to the Company pursuant to the Credit Agreement (the “Revolving Facility”).
(b)
Interest on the First Lien Term Loan accrues at an annual rate equal to the LIBOR Rate plus 7.25%. Interest on the Second Lien Term Loan (as defined below) accrues at an annual rate equal to 11.0%, payable in cash, in arrears, on the first day of each month.
(c)
The Bridge Term Loan Credit Agreement has an interest rate of 11.0% per annum, payable in cash, in arrears, on the first day of each month. The obligations under the Bridge Term Loan Credit Agreement were repaid in full on January 2, 2019.
(d)
Our finance leases include finance lease arrangements related to fleet purchases and real property with a weighted-average annual interest rate of approximately 6.68%, which mature in varying installments between 2019 and 2029.
(e)
Our Revolving Facility, First Lien Term Loan, Second Lien Term Loan, and finance leases bear interest at rates commensurate with market rates and therefore their respective carrying values approximate fair value.

21



(f)
The debt issuance costs resulted from an amendment to the First Lien Term Loan during the three months ended December 31, 2018, done in connection with the Clearwater Acquisition.
See below for a discussion of material changes and developments in our debt and its principal terms from those described in Note 13 to the consolidated financial statements in our 2018 Annual Report on Form 10-K.
Indebtedness
As of June 30, 2019, we had $37.1 million of indebtedness outstanding, consisting of $19.7 million under the First Lien Term Loan, $9.8 million under the second lien term loan facility (the “Second Lien Term Loan”) pursuant to the Second Lien Term Loan Agreement, dated August 7, 2017, by and among the lenders party thereto, Wilmington, and the Company (the “Second Lien Term Loan Agreement”), and $7.7 million of finance leases for vehicle financings and real property leases. Our Revolving Facility, First Lien Term Loan and Second Lien Term Loan contain certain affirmative and negative covenants, including a fixed charge coverage ratio covenant, as well as other terms and conditions that are customary for revolving credit facilities and term loans of this type. As of June 30, 2019, we were in compliance with all covenants.

Bridge Term Loan Credit Agreement

In connection with the Clearwater Acquisition on October 5, 2018, we entered into the Bridge Term Loan Credit Agreement. 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 the $32.5 million Bridge Term Loan, of which $22.5 million was used to finance the Clearwater Acquisition and the remaining $10.0 million was used to pay down certain amounts outstanding under the 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 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 in Note 5, on January 2, 2019, we received the aggregate cash proceeds from the Rights Offering of $31.4 million. Additionally, one of the Backstop Parties elected to satisfy the backstop commitment by converting $1.1 million of the Bridge Term Loan to common stock. The aggregate cash proceeds from the Rights Offering were used to repay the remaining $31.4 million balance of the Bridge Term Loan, satisfying the obligations under the Bridge Term Loan Credit Agreement, and thereby terminating the Bridge Term Loan Credit Agreement.

Note 12 - Derivative Warrants

Upon emergence from chapter 11 on the Effective Date, pursuant to the Plan, we issued to the holders of the 2018 Notes and holders of certain claims relating to the rejection of executory contracts and unexpired leases warrants to purchase an aggregate of 118,137 shares of common stock, par value $0.01, at an exercise price of $39.82 per share and with a term expiring seven years from the Effective Date.
The following table shows the warrant activity for the six months ended June 30, 2019 and June 30, 2018:
 
Six Months Ended
 
June 30,
 
2019
 
2018
Outstanding at the beginning of the period
118

 
118

Issued

 

Exercised

 

Outstanding at the end of the period
118

 
118

Fair Value of Warrants
We account for warrants in accordance with the accounting guidance for derivatives, which sets forth a two-step model to be applied in determining whether a financial instrument is indexed to an entity’s own stock which would qualify such financial instruments for a scope exception. This scope exception specifies that a contract that would otherwise meet the definition of a derivative financial instrument would not be considered as such if the contract is both (i) indexed to the entity’s own stock and (ii) classified in the shareholders’ equity section of the entity’s balance sheet. We determined that warrants are ineligible for equity classification as the warrants are not indexed to our common stock and are recorded as derivative liabilities at fair value

22



in the condensed consolidated balance sheets. The warrants are classified as a current liability in the condensed consolidated balance sheets as they could be exercised by the holders at any time.
As discussed previously in Note 9, the fair value of the derivative warrant liability is estimated using a Monte Carlo simulation model on the date of issue and is re-measured at each quarter end until expiration or exercise of the underlying warrants with the resulting fair value adjustment recorded in “Other (income) expense, net” in the condensed consolidated statements of operations.

The fair value of the derivative warrant liability as of June 30, 2019 and December 31, 2018 was estimated using the following model inputs:
 
As of June 30,
 
As of December 31,
 
2019
 
2018
Exercise price
$
39.82

 
$
39.82

Closing stock price
$
4.11

 
$
8.20

Risk free rate
1.75
%
 
2.51
%
Expected volatility
43.47
%
 
36.87
%

Note 13 - Restructuring and Exit Costs
Eagle Ford Shale Area
On March 1, 2018, the Board of Directors (the “Board”) determined it was in the best interests of the Company to cease our operations in the Eagle Ford Shale area in order to focus on other opportunities. The Board considered a number of factors in making this determination, including among other things, the historical and projected financial performance of our operations in the Eagle Ford Shale area, pricing for our services, capital requirements and projected returns on additional capital investment, competition, scope and scale of our operations, and recommendations from management. We substantially exited the Eagle Ford Shale area as of June 30, 2018. The total costs recognized in the restructuring during 2018 were approximately $1.1 million, and included severance and termination benefits, lease exit costs, and other exit costs related to the movement of vehicles, tanks and rental fleet.

There is no remaining liability for the Eagle Ford exit as of June 30, 2019. A rollforward of the liability from December 31, 2018 through June 30, 2019 is as follows:
 
Lease Exit Costs
Balance accrued at beginning of period
$
19

Cash payments
(13
)
Adjustments to accrued balance
$
(6
)
Balance accrued at end of period
$

Mississippian Shale Area and Tuscaloosa Marine Shale Logistics Business
In March 2015, we initiated a plan to restructure our business in certain shale basins and reduce costs, including an exit from the Mississippian Shale area and the Tuscaloosa Marine Shale logistics business. Additionally, we closed certain yards within the Northeast and Southern divisions and transferred many of the related assets to our other operating locations. The total costs of the restructuring recognized in 2015 were approximately $7.1 million, and included severance and termination benefits, lease exit costs, other exits costs related to the movement of vehicles and rental fleet, and an asset impairment charge.
The remaining liability for the restructuring and exit costs incurred represents lease exit costs under non-cancellable operating leases and totaled approximately $8.0 thousand as of June 30, 2019, which is included in “Accrued and other current liabilities” in the condensed consolidated balance sheet. A rollforward of the liability from December 31, 2018 through June 30, 2019 is as

23



follows:
 
Lease Exit Costs
Balance accrued at beginning of period
$
33

Cash payments
(25
)
Balance accrued at end of period
$
8


Note 14 - Income Taxes
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Current income tax expense
$
(4
)
 
$

 
$
(13
)
 
$

Deferred income tax expense
(42
)
 

 
(112
)
 

Total income tax expense
$
(46
)
 
$

 
$
(125
)
 
$

The effective income tax rate for the three and six months ended June 30, 2019 was (0.9)% and (1.1)%, respectively, which differs from the federal statutory rate of 21.0%. The difference is primarily due to the increase in the valuation allowance on deferred tax assets resulting from current year losses.

We recorded no income tax expense during the three and six months ended June 30, 2018. As a result, the effective income tax rate for the three and six months ended June 30, 2018 was 0.0%, which differed from the federal statutory rate of 21.0%. The difference is primarily due to the increase in the valuation allowance on deferred tax assets resulting from current year losses.

We have significant deferred tax assets, consisting primarily of net operating losses, which have a limited life, generally expiring between the years 2032 and 2037, and capital losses, which begin to expire in 2020. We regularly assess the evidence available to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative losses incurred in recent years. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future taxable income.

In light of our continued ordinary losses, at June 30, 2019 we determined that our deferred tax liabilities were not sufficient to fully realize our deferred tax assets. Accordingly, a valuation allowance continues to be required against the portion of our deferred tax assets that is not offset by deferred tax liabilities. We expect our effective income tax rate to be near zero for the remainder of 2019.

Note 15 - Share-based Compensation
The Nuverra Environmental Solutions, Inc. 2017 Long Term Incentive Plan (the “Incentive Plan”) is intended to provide for the grant of equity-based awards to designated members of the Company’s management and employees. The maximum number of shares of the Company’s common stock that is available for the issuance of awards under the Incentive Plan is 1,772,058. As of June 30, 2019, approximately 720,000 shares were available for issuance under the Incentive Plan.

The 2018 Restricted Stock Plan for Directors (the “Director Plan”) provides for the grant of restricted stock to the non-employee directors of the Company. The Director Plan limits the shares that may be issued thereunder to 100,000 shares of common stock. As of June 30, 2019, approximately 75,000 shares were available for issuance under the Director Plan.

The total grants awarded under both the Incentive Plan and the Director Plan during the three and six months ended June 30, 2019 and June 30, 2018 are presented in the table below:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Stock option grants

 

 

 

Restricted stock grants (1)
23

 
6

 
142

 
1,331

   Total grants in the period
23

 
6

 
142

 
1,331


24




(1)
Includes restricted stock awards, performance-based restricted stock units, and time-based restricted stock units granted under the Incentive Plan and the Director Plan.

The total share-based compensation expense, net of estimated forfeitures, included in “General and administrative expenses” in the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2019 and June 30, 2018 was as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Stock options
$

 
$

 
$

 
$
(788
)
Restricted stock (1)
563

 
416

 
1,415

 
12,182

   Total expense
$
563

 
$
416

 
$
1,415

 
$
11,394

 
(1)
Includes expense related to restricted stock awards, performance-based restricted stock units, and time-based restricted stock units granted under the Incentive Plan and the Director Plan.

Note 16 - Commitments and Contingencies

Environmental Liabilities

We are subject to the environmental protection and health and safety laws and related rules and regulations of the United States and of the individual states, municipalities and other local jurisdictions where we operate. Our operations are subject to rules and regulations promulgated by the Texas Railroad Commission, the Texas Commission on Environmental Quality, the Louisiana Department of Natural Resources, the Louisiana Department of Environmental Quality, the Ohio Department of Natural Resources, the Pennsylvania Department of Environmental Protection, the North Dakota Department of Health, the North Dakota Industrial Commission, Oil and Gas Division, the North Dakota State Water Commission, the Montana Department of Environmental Quality and the Montana Board of Oil and Gas, among others. These laws, rules and regulations address environmental, health and safety and related concerns, including water quality and employee safety. We have installed safety, monitoring and environmental protection equipment such as pressure sensors and relief valves, and have established reporting and responsibility protocols for environmental protection and reporting to such relevant local environmental protection departments as required by law.

We believe we are in material compliance with all applicable environmental protection laws and regulations in the United States and the states in which we operate. We believe that there are no unrecorded liabilities as of the periods reported herein in connection with our compliance with applicable environmental laws and regulations. The condensed consolidated balance sheet at June 30, 2019 and December 31, 2018 did not include any accruals for environmental matters.

Contingent Consideration for Ideal Settlement

On June 28, 2017, the Company and certain of its material subsidiaries (collectively with the Company, the “Nuverra Parties”) filed a motion with the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) seeking authorization to resolve unsecured claims related to the $8.5 million contingent consideration from the Ideal Oilfield Disposal LLC acquisition (the “Ideal Settlement”). On July 11, 2017, the Bankruptcy Court entered an order authorizing the Ideal Settlement. Pursuant to the approved settlement terms, the $8.5 million contingent claim was replaced with an obligation on the part of the applicable Nuverra Party to transfer $0.5 million to the counterparties to the Ideal Settlement upon emergence from chapter 11, and $0.5 million when the Ideal Settlement counterparties deliver the required permits and certificates necessary for the issuance of the second special waste disposal permit. The $0.5 million due upon emergence from chapter 11 was paid during the five months ended December 31, 2017. The remaining $0.5 million, due when the counterparties deliver the required permits and certificates necessary for the issuance of the second special waste disposal permit, has been classified as current and is reported in “Current contingent consideration” as of June 30, 2019, as these permits and certificates are expected to be received within one year.

State Sales and Use Tax Liabilities


25



During the year ended December 31, 2017, the Pennsylvania Department of Revenue (or “DOR”) completed an audit of our sales and use tax compliance for the period January 1, 2012 through May 31, 2017. As a result of the audit, we were assessed by the DOR for additional state and local sales and use tax plus penalties and interest. During the years ended December 31, 2017 and 2018, we disputed various claims in the assessment made by the DOR through the appropriate boards of appeal and were able to obtain relief for many of the contested claims. However, in January of 2019, the final appeals board upheld an assessment of sales tax and interest that relates to one material position. We have appealed this decision to the Commonwealth of Pennsylvania as we continue to believe that the transactions involved are exempt from sales tax in Pennsylvania, and therefore we have not recorded an accrual as of June 30, 2019. If we lose this appeal, which could take several years to settle, we estimate that we would be required to pay between $1.0 million and $1.5 million to the DOR.

Note 17 - Legal Matters
Litigation
There are various lawsuits, claims, investigations and proceedings that have been brought or asserted against us, which arise in the ordinary course of business, including actions with respect to securities and shareholder class actions, personal injury, vehicular and industrial accidents, commercial contracts, legal and regulatory compliance, securities disclosure, labor and employment, and employee benefits and environmental matters, the more significant of which are summarized below. We record a provision for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any provisions are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information and events pertinent to a particular matter.
We believe that we have valid defenses with respect to legal matters pending against us. Based on our experience, we also believe that the damage amounts claimed in pending lawsuits are not necessarily a meaningful indicator of our potential liability. Litigation is inherently unpredictable, and it is possible that our results of operations or cash flow could be materially affected in any particular period by the resolution of one or more of the legal matters pending against us. We do not expect that the outcome of other current claims and legal actions not discussed below will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Chapter 11 Proceedings
On May 1, 2017, the Nuverra Parties filed voluntary petitions under chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court to pursue the Plan. On July 25, 2017, the Bankruptcy Court entered an order (the “Confirmation Order”) confirming the Plan. The Plan became effective on the Effective Date, when all remaining conditions to the effectiveness of the Plan were satisfied or waived. On June 22, 2018, the Bankruptcy Court issued a final decree and order closing the chapter 11 cases, subject to certain conditions as set forth therein.
Confirmation Order Appeal
On July 26, 2017, David Hargreaves, an individual holder of 2018 Notes, appealed the Confirmation Order to the District Court of the District of Delaware (the “District Court”) and filed a motion for a stay pending appeal from the District Court.  Although the motion for a stay pending appeal was denied, the appeal remained pending and the District Court heard oral arguments in May 2018, and in August 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.

Note 18 - Related Party and Affiliated Company Transactions

There have been no significant changes to the other related party transactions as described in Note 23 to the consolidated financial statements in our 2018 Annual Report on Form 10-K.

Note 19 - Segments
We evaluate business segment performance based on income (loss) before income taxes exclusive of corporate general and administrative costs and interest expense, which are not allocated to the segments. Our business is comprised of three operating divisions, which we consider to be operating and reportable segments of our operations: (1) the Northeast division comprising the Marcellus and Utica Shale areas, (2) the Southern division comprising the Haynesville Shale area and (3) the Rocky

26



Mountain division comprising the Bakken Shale area. Corporate/Other includes certain corporate costs and certain other corporate assets.
Financial information for our reportable segments related to operations is presented below.
 
Rocky Mountain
 
Northeast
 
Southern (b)
 
Corporate/ Other
 
Total
Three months ended June 30, 2019
 
 
 
 
 
 
 
 
 
Revenue
$
28,993

 
$
10,720

 
$
5,527

 
$

 
$
45,240

Direct operating expenses
22,354

 
8,607

 
3,556

 

 
34,517

General and administrative expenses
1,206

 
729

 
354

 
2,991

 
5,280

Depreciation and amortization
4,307

 
2,821

 
2,136

 
13

 
9,277

Operating income (loss)
1,126

 
(1,437
)
 
(513
)
 
(3,004
)
 
(3,828
)
Income (loss) before income taxes
1,041

 
(1,560
)
 
(576
)
 
(3,865
)
 
(4,960
)
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2019
 
 
 
 
 
 
 
 
 
Revenue
53,870

 
22,560

 
11,437

 

 
87,867

Direct operating expenses
42,182

 
18,322

 
6,570

 

 
67,074

General and administrative expenses
2,252

 
1,575

 
753

 
6,175

 
10,755

Depreciation and amortization
8,606

 
5,485

 
4,296

 
25

 
18,412

Operating income (loss)
830

 
(2,939
)
 
(176
)
 
(6,200
)
 
(8,485
)
Income (loss) before income taxes
683

 
(3,155
)
 
(285
)
 
(8,479
)
 
(11,236
)
 
 
 
 
 
 
 
 
 
 
As of June 30, 2019
 
 
 
 
 
 
 
 
 
Total assets (a)
$
107,762

 
$
90,881

 
$
77,705

 
$
9,031

 
$
285,379

Total assets held for sale
2,876

 
850

 

 
778

 
4,504

 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2018
 
 
 
 
 
 
 
 
Revenue
33,165

 
9,606

 
6,177

 

 
48,948

Direct operating expenses
25,599

 
8,510

 
4,960

 

 
39,069

General and administrative expenses
1,882

 
518

 
251

 
3,363

 
6,014

Depreciation and amortization
5,923

 
3,283

 
2,750

 
13

 
11,969

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

 
18,719

 
15,963

 

 
98,617

Direct operating expenses
51,945

 
16,324

 
12,427

 

 
80,696

General and administrative expenses
3,158

 
1,280

 
829

 
20,067

 
25,334

Depreciation and amortization
12,212

 
7,589

 
6,874

 
38

 
26,713

Operating loss
(3,380
)
 
(6,543
)
 
(9,297
)
 
(20,437