10-Q 1 usws-10q_20190331.htm 10-Q usws-10q_20190331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 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 001-38025

U.S. WELL SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

81-1847117

(State or other jurisdiction of

 

(I.R.S. Employer incorporation or

organization)

 

Identification No.)

 

1360 Post Oak Boulevard, Suite 1800, Houston, TX

 

77056

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code (832) 562-3730

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 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 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.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

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 [X]No

 

As of May 9, 2019, the registrant had 54,440,374 shares of Class A Common Stock and 13,937,332 shares of Class B Common Stock outstanding.

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

CLASS A COMMON SHARES $0.0001, par value

WARRANTS

USWS

USWSW

NASDAQ Capital Market

NASDAQ Capital Market

 

 

 


TABLE OF CONTENTS

 

 

 

Page No.

PART I

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

 

 

Condensed Consolidated Balance Sheets

2

 

Condensed Consolidated Statements of Operations

3

 

Condensed Consolidated Statements of Cash Flows

4

 

Condensed Consolidated Statements of Stockholders’ Equity

6

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

Item 3.

Quantitative and Qualitative Disclosure about Market Risk

31

Item 4.

Controls and Procedures

31

 

 

 

PART II

OTHER INFORMATION

32

Item 1.

Legal Proceeding

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3.

Defaults Upon Senior Securities

32

Item 4.

Mine Safety Disclosures

32

Item 5.

Other Information

32

Item 6.

Exhibits

36

SIGNATURES

 

37

 

1


U.S. WELL SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

March 31, 2019

 

 

December 31, 2018

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,395

 

 

$

29,529

 

Restricted cash

 

 

509

 

 

 

507

 

Accounts receivable (net of allowance for doubtful accounts of

   $189 in 2019 and 2018)

 

 

84,141

 

 

 

58,026

 

Inventory, net

 

 

11,912

 

 

 

9,413

 

Prepaids and other current assets

 

 

12,169

 

 

 

16,437

 

Total current assets

 

 

128,126

 

 

 

113,912

 

Property and equipment, net

 

 

447,126

 

 

 

331,387

 

Intangible assets, net

 

 

25,991

 

 

 

27,890

 

Goodwill

 

 

4,971

 

 

 

4,971

 

Deferred financing costs, net

 

 

1,800

 

 

 

2,070

 

TOTAL ASSETS

 

$

608,014

 

 

$

480,230

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

158,475

 

 

$

89,360

 

Accrued expenses and other current liabilities

 

 

25,766

 

 

 

17,044

 

Notes payable

 

 

2,381

 

 

 

4,560

 

Current portion of long-term equipment financing

 

 

12,390

 

 

 

3,263

 

Current portion of long-term capital lease obligation

 

 

18,521

 

 

 

25,338

 

Current portion of long-term debt

 

 

-

 

 

 

900

 

Total current liabilities

 

 

217,533

 

 

 

140,465

 

Long-term equipment financing

 

 

37,550

 

 

 

8,304

 

Long-term capital lease obligation

 

 

4,210

 

 

 

-

 

Long-term debt

 

 

135,366

 

 

 

91,112

 

TOTAL LIABILITIES

 

 

394,659

 

 

 

239,881

 

Commitments and contingencies (NOTE 15)

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Class A Common Stock, par value of $0.0001 per share; 400,000,000 shares

 

 

 

 

 

 

 

 

   authorized; 52,927,034 shares issued and outstanding as of

   March 31, 2019 and 49,254,760 issued and outstanding as

   of  December 31, 2018

 

 

5

 

 

 

5

 

Class B Common Stock, par value of $0.0001 per share; 20,000,000 shares

 

 

 

 

 

 

 

 

   authorized; 13,937,332 shares issued and outstanding as of

   March 31, 2019 and December 31, 2018

 

 

1

 

 

 

1

 

Additional paid in capital

 

 

206,008

 

 

 

204,928

 

Accumulated deficit

 

 

(39,560

)

 

 

(17,383

)

Total stockholders' equity attributable to U.S. Well Services, Inc.

 

 

166,454

 

 

 

187,551

 

Noncontrolling interest

 

 

46,901

 

 

 

52,798

 

Total Stockholders' Equity

 

 

213,355

 

 

 

240,349

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

608,014

 

 

$

480,230

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


U.S. WELL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

139,772

 

 

 

$

171,606

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of services (excluding depreciation and

   amortization)

 

 

109,681

 

 

 

 

138,428

 

Depreciation and amortization

 

 

37,844

 

 

 

 

25,920

 

Selling, general and administrative expenses

 

 

8,620

 

 

 

 

4,337

 

Loss on disposal of assets

 

 

6,904

 

 

 

 

2,929

 

Loss from operations

 

 

(23,277

)

 

 

 

(8

)

Interest expense, net

 

 

(5,115

)

 

 

 

(7,401

)

Other income

 

 

27

 

 

 

 

317

 

Loss before income taxes

 

 

(28,365

)

 

 

 

(7,092

)

Income tax expense

 

 

124

 

 

 

 

-

 

Net loss

 

 

(28,489

)

 

 

 

(7,092

)

Net loss attributable to noncontrolling interest

 

 

(6,217

)

 

 

 

-

 

Net loss attributable to U.S. Well Services, Inc.

 

$

(22,272

)

 

 

$

(7,092

)

 

 

 

 

 

 

 

 

 

 

Loss per common share (See Note 11):

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.45

)

 

 

$

(0.14

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

47,398

 

 

 

 

47,940

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


U.S. WELL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(28,489

)

 

$

(7,092

)

Adjustments to reconcile net loss to cash provided by

 

 

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

37,844

 

 

 

25,920

 

Provision for losses on accounts receivable

 

 

-

 

 

 

444

 

Provision for losses on inventory obsolescence

 

 

12

 

 

 

85

 

Non-cash interest

 

 

-

 

 

 

3,525

 

Loss on disposal of assets

 

 

6,904

 

 

 

2,929

 

Amortization of discount on debt

 

 

749

 

 

 

-

 

Deferred financing costs amortization

 

 

336

 

 

 

518

 

Share-based compensation expense

 

 

1,059

 

 

 

1,012

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(26,115

)

 

 

(16,077

)

Inventory

 

 

(2,044

)

 

 

1,638

 

Prepaids and other current assets

 

 

4,702

 

 

 

(58

)

Accounts payable

 

 

9,331

 

 

 

12,954

 

Accrued liabilities

 

 

8,041

 

 

 

1,364

 

Accrued interest

 

 

683

 

 

 

-

 

Net cash provided by operating activities

 

 

13,013

 

 

 

27,162

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(52,442

)

 

 

(7,770

)

Net cash used in investing activities

 

 

(52,442

)

 

 

(7,770

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from issuance of revolving credit facility

 

 

9,025

 

 

 

-

 

Proceeds from issuance of long-term debt

 

 

35,000

 

 

 

-

 

Proceeds from issuance of note payable

 

 

-

 

 

 

1,394

 

Repayments of note payable

 

 

(2,179

)

 

 

(784

)

Repayments of amounts under equipment financing

 

 

 

 

 

 

 

 

agreements

 

 

(6,683

)

 

 

(4,066

)

Principal payments under finance lease obligation

 

 

(4,379

)

 

 

(2,273

)

Deferred financing costs

 

 

(1,487

)

 

 

-

 

Net cash provided by (used in) financing activities

 

 

29,297

 

 

 

(5,729

)

Net (decrease) increase in cash and cash equivalents

   and restricted cash

 

 

(10,132

)

 

 

13,663

 

Cash and cash equivalents and restricted cash,

   beginning of period

 

 

30,036

 

 

 

5,923

 

Cash and cash equivalents and restricted cash,

   end of period

 

$

19,904

 

 

$

19,586

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


U.S. WELL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(in thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Supplemental cash flow disclosure:

 

 

 

 

 

 

 

 

Interest paid

 

$

3,359

 

 

$

1,843

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Changes in accrued and unpaid capital expenditures

 

 

59,784

 

 

 

7,160

 

Assets under finance lease obligations

 

 

10,451

 

 

 

-

 

Notes payable for purchases of equipment

 

 

36,280

 

 

 

-

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 


5


U.S. WELL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, except share amounts)

(Unaudited)

 

 

 

Class A Common

Stock

 

 

Class B Common

Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Members'

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid in

 

 

Members'

 

 

Accumulated

 

 

Accumulated

 

 

Noncontrolling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Interest

 

 

Deficit

 

 

Deficit

 

 

Interest

 

 

Equity

 

Balance, December 31, 2017

 

 

-

 

 

$

-

 

 

 

-

 

 

$

-

 

 

$

-

 

 

$

137,885

 

 

$

(93,622

)

 

$

-

 

 

$

-

 

 

$

44,263

 

Deemed contribution related to

   unit-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,012

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,012

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,092

)

 

 

-

 

 

 

-

 

 

 

(7,092

)

Balance, March 31, 2018

 

 

-

 

 

$

-

 

 

 

-

 

 

$

-

 

 

$

-

 

 

$

138,897

 

 

$

(100,714

)

 

$

-

 

 

$

-

 

 

$

38,183

 

 

 

 

Class A Common

Stock

 

 

Class B Common

Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Members'

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid in

 

 

Members'

 

 

Accumulated

 

 

Accumulated

 

 

Noncontrolling

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Interest

 

 

Deficit

 

 

Deficit

 

 

Interest

 

 

Equity

 

Balance, December 31, 2018

 

 

49,254,760

 

 

$

5

 

 

 

13,937,332

 

 

$

1

 

 

$

204,928

 

 

$

-

 

 

$

-

 

 

$

(17,383

)

 

$

52,798

 

 

$

240,349

 

Adoption of ASC 606 as of

   January 1, 2019 (Note 1)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

95

 

 

 

27

 

 

 

122

 

Exercise of warrants

 

 

1,412,372

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Restricted stock granted to

   employees

 

 

2,213,027

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Class A Common stock granted

   to board members

 

 

46,875

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

331

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

87

 

 

 

418

 

Share-based compensation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

749

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

206

 

 

 

955

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(22,272

)

 

 

(6,217

)

 

 

(28,489

)

Balance, March 31, 2019

 

 

52,927,034

 

 

$

5

 

 

 

13,937,332

 

 

$

1

 

 

$

206,008

 

 

$

-

 

 

$

-

 

 

$

(39,560

)

 

$

46,901

 

 

$

213,355

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

6


 

U.S. WELL SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1 – DESCRIPTION OF BUSINESS

U.S. Well Services, Inc. (the “Company”), f/k/a Matlin & Partners Acquisition Corp (“MPAC”), is a Houston, Texas-based oilfield service provider of well stimulation services to the upstream oil and natural gas industry. The Company engages in high-pressure hydraulic fracturing in unconventional oil and natural gas basins in the United States. The fracturing process consists of pumping a specially formulated fluid into perforated well casing, tubing or open holes under high pressure, causing the underground formation to crack or fracture, allowing nearby hydrocarbons to flow more freely up the wellbore.

The Company was incorporated in Delaware in March 2016 as a special purpose acquisition company, formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar business combination with one or more target businesses.

On November 9, 2018 (the “Closing Date”), MPAC acquired USWS Holdings LLC, a Delaware limited liability company (“USWS Holdings”), pursuant to the Merger and Contribution Agreement, dated as of July 13, 2018, and subsequently amended (as amended, the “Merger and Contribution Agreement”). The acquisition, together with the other transactions contemplated by the Merger and Contribution Agreement are referred to herein as the “Transaction”. In connection with the closing of the Transaction, MPAC changed its name to U.S. Well Services, Inc.

Following the completion of the Transaction, substantially all of the Company’s assets and operations are held and conducted by U.S. Well Services, LLC (“USWS LLC”), a wholly owned subsidiary of USWS Holdings, and the Company’s only assets are equity interests representing 79.2% ownership of USWS Holdings as of March 31, 2019.

Unless the context otherwise requires, “the Company”, “USWS”, “we,” “us,” and “our” refer, for periods prior to the completion of the Transaction, to USWS Holdings and its subsidiaries and, for periods upon or after the completion of the Transaction, to US Well Services, Inc. and its subsidiaries, including USWS Holdings and its subsidiaries.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements were prepared using generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, these financial statements do not include all information or notes required by generally accepted accounting principles for annual financial statements and should be read in conjunction with the annual financial statements included in the Company's 2018 Annual Report on Form 10-K (the “Annual Report”).

The accompanying unaudited condensed consolidated financial statements and accompanying notes present the consolidated financial position, results of operations, cash flows, and equity of the Company as of and for the three months ended March 31, 2019 and 2018. The interim data includes all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim period. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results of operations expected for the entire fiscal year ended December 31, 2019.

Principles of Consolidation

The condensed consolidated financial statements comprise the financial statements of the Company its wholly owned subsidiaries, and its subsidiaries that it controls due to ownership of a majority voting interest. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the Company. All significant intercompany balances and transactions are eliminated upon consolidation.

 

 

7


 

Business Combinations

The Company accounts for business combinations under the acquisition method of accounting. Under this method, acquired assets, including separately identifiable intangible assets, and any assumed liabilities are recorded at their acquisition date estimated fair value. The excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. Determining the fair value of assets acquired and liabilities assumed involves the use of significant estimates and assumptions.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We regularly evaluate estimates and judgments based on historical experience and other relevant facts and circumstances. Significant estimates included in these financial statements primarily relate to allowance for doubtful accounts, allowance for inventory obsolescence, estimated useful lives and valuation of property and equipment and intangibles, impairment assessments of goodwill and other intangibles, Level 2 inputs used in fair value estimation of term loans, accounting for business combination, and the assumptions used in our Black-Scholes and Monte Carlo option pricing models associated with the valuation of share-based compensation. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash equivalents are highly liquid investments with an original maturity at the date of acquisition of three months or less. Cash and cash equivalents consist of cash on deposit with domestic banks and, at times, may exceed federally insured limits.

Restricted Cash

Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded in restricted cash in our condensed consolidated balance sheets. The restricted cash in our condensed consolidated balance sheet represents cash transferred into a trust account to support our workers’ compensation obligations.

 

The following table provides a reconciliation of the amount of cash and cash equivalents reported on the condensed consolidated balance sheets to the total of cash and cash equivalents and restricted cash shown on the consolidated statements of cash flows (in thousands):

 

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Cash and cash equivalents

 

$

19,395

 

 

$

29,529

 

Restricted cash

 

 

509

 

 

 

507

 

Cash and cash equivalents and restricted cash

 

$

19,904

 

 

$

30,036

 

 

 

Inventory

Inventory consists of proppant, chemicals, and other consumable materials and supplies used in our high-pressure hydraulic fracturing operations. Inventories are stated at the lower of cost or net realizable value. Cost is determined principally on a first-in-first-out cost basis. All inventories are purchased and used by the Company in the delivery of its services with no inventory being sold separately to outside parties. Inventory quantities on hand are reviewed regularly and write-downs for obsolete inventory are recorded based on our forecast of the inventory item demand in the near future. As of March 31, 2019 and December 31, 2018, the Company had inventory reserves of $0.6 million for obsolete and slow-moving inventory.

On certain contracts with our proppant vendors, we take ownership of proppant as it leaves the sand mines. These in transit inventories are recognized as part of Inventory in our condensed consolidated balance sheets. As of March 31, 2019 and December 31, 2018, in transit inventories were nil and $0.3 million, respectively.

Property and Equipment

Property and equipment are carried at cost, with depreciation provided on a straight-line basis over their estimated useful lives. Expenditures for renewals and betterments that extend the lives of the assets are capitalized. Amounts spent for maintenance and repairs, which do not improve or extend the life of the related asset, are charged to expense as incurred.

8


 

Impairment of Long-lived Assets

Long-lived assets, such as property and equipment and amortizable identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When making this assessment, the following factors are considered: current operating results, trends and prospects, as well as the effects of obsolescence, demand, competition and other economic factors. We determine recoverability by evaluating whether the undiscounted estimated future net cash flows of the asset or asset group are less than its carrying value. When impairment is indicated, we proceed to Step 2 of the impairment test and measure the impairment as the amount by which the assets carrying value exceeds its fair value. Management considers a number of factors such as estimated future cash flows, appraisals and current market value analysis in determining fair value. Assets are written down to fair value if the concluded current fair value is below the net carrying value.

Goodwill

Goodwill is not amortized, but is reviewed for impairment annually, or more frequently when events or changes in circumstances indicate that the carrying value may not be recoverable. Judgements regarding indicators of potential impairment are based on market conditions and operational performance of the business.

As of December 31, or as required, the Company performs an impairment analysis of goodwill. The Company may assess its goodwill for impairment initially using a qualitative approach (“step zero”) to determine whether conditions exist that indicate it is more likely than not that a reporting unit’s carrying value is greater than its fair value, and if such conditions are identified, then a quantitative analysis will be performed to determine if there is any impairment. The Company may also elect to initially perform a quantitative analysis instead of starting with step zero. The quantitative assessment for goodwill is a two-step assessment. “Step one” requires comparing the carrying value of a reporting unit, including goodwill, to its fair value, which the Company estimates using the income approach. The income approach uses a discounted cash flow model, which involves significant estimates and assumptions, including preparation of revenue and profitability growth forecasts, selection of a discount rate, and selection of a terminal year multiple. If the fair value of the respective reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and no further testing is required. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is to measure the amount of impairment loss, if any. “Step two” compares the implied fair value of goodwill to the carrying amount of goodwill. The implied fair value of goodwill is determined by a hypothetical purchase price allocation using the reporting unit’s fair value as the purchase price. If the carrying amount of goodwill exceeds the implied fair value, an impairment charge is recorded to write down goodwill to its implied fair value.

Deferred Financing Costs

Costs incurred to obtain financing are capitalized and amortized to interest expense using the effective interest method over the contractual term of the debt. At the balance sheet date, deferred financing costs related to the term loans are presented as a direct deduction from the debt liability, while deferred financing costs related to the revolver facility are presented as deferred financing costs, net, on the condensed consolidated balance sheets.

Fair Value of Financial Instruments

Fair value is defined under Accounting Standards Codification (ASC) 820, Fair Value Measurement, as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels are defined as follows:

Level 1–inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2–inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3–inputs are unobservable for the asset or liability.

9


 

The following is a summary of the carrying amounts and estimated fair values of our financial instruments as of March 31, 2019 and December 31, 2018:

Cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses and other current liabilities. These carrying amounts approximate fair value because of the short maturity of the instruments or because the carrying value is equal to the fair value of those instruments on the balance sheet dates.

Second Lien Term Loan. The carrying value of the Second Lien Term Loan approximates fair value as its terms are consistent with and comparable to current market rates as of March 31, 2019 and December 31, 2018.

Revenue Recognition

Effective January 1, 2019, the Company adopted a comprehensive new revenue recognition standard, ASC 606, Revenue from Contracts with Customers. The details of the significant changes to accounting policies resulting from the adoption of the new standard are set out below. The Company adopted the standard using a modified retrospective method, allowing the Company to apply the cumulative effect of the standard in the most current period presented as an adjustment to retained earnings. As a result of the change in accounting principle, the Company recorded a $0.1 million increase in retained earnings due to the timing of expense recognition related to certain sales commissions considered to be costs of acquiring customer contracts.

Under the new standard, revenue recognition is based on the customer’s ability to benefit from the services rendered in an amount that reflects the consideration expected to be received in exchange for those services. Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore excluded from revenues in the Company’s financial statements.

 

The Company’s revenues consist of providing hydraulic fracturing services for either a pre-determined term or number of stages/wells to exploration and production (E&P) companies operating in the onshore oil and natural gas basins of the United States. Revenues are earned as services are rendered, which is generally on a per stage or fixed monthly rate basis. Customers are invoiced according to contract terms either upon the completion of a stage, the completion of a well or monthly with payment due typically 30 days from invoice date.

 

Hydraulic fracturing is a well-stimulation technique intended to optimize hydrocarbon flow paths during the completion phase of wellbores. The process involves the injection of water, sand and chemicals under high pressure into shale formations. The Company’s performance obligations are satisfied over time, typically measured in number of stages completed or the number of pumping days a fleet is available to pump for a customer in a month. A field ticket is created for each stage completed that records all services performed, including any chemicals and proppant consumed in completing the stage. The field ticket is signed by a customer representative and evidences the amounts to which the Company has a right to invoice and thus to recognize as revenue. All revenue is recognized when a contract with a customer exists, collectability of amounts subject to invoice is probable, the performance obligations under the contract have been satisfied over time, and the amount to which the Company has the right to invoice has been determined. Contract fulfillment costs, such as mobilization costs and shipping and handling costs, are expensed as incurred and are recorded in cost of services in the unaudited condensed consolidated statements of operations. A portion of the Company’s contracts contain variable consideration; however, this variable consideration is typically unknown at the time of contract inception, and is not known until the job is complete, at which time the variability is resolved. Examples of variable consideration include the amount of consumables (such as chemicals and proppants) that will be used to complete a job.

 

The Company has elected to use the “as invoiced” practical expedient to recognize revenue based upon the amount it has a right to invoice upon the completion of each performance obligation per the terms of the contract. The practical expedient permits an entity to recognize revenue in the amount to which it has a right to invoice the customer if that amount corresponds directly with the value to the customer of the entity’s performance completed to date. The Company believes that this is an accurate reflection of the value transferred to the customer as each incremental obligation is performed.

 

The Company has elected to expense sales commissions paid upon the successful signing of a new customer contract as incurred if the related contract will be fully satisfied within one year. For contracts that will not be fully satisfied within one year, these incremental costs of obtaining a contract with a customer will be recognized as a contract asset and amortized on a straight-line basis over the life of the contract.

10


 

Accounts Receivable

Accounts receivable are recorded at their outstanding balances adjusted for an allowance for doubtful accounts. The allowance for doubtful accounts is determined by analyzing the payment history and credit worthiness of each debtor. Receivable balances are charged off when they are considered uncollectible by management. Recoveries of receivables previously charged off are recorded as income when received. The Company held a reserve for doubtful accounts amounting to $0.2 million as of March 31, 2019 and December 31, 2018.

Major Customer and Concentration of Credit Risk

The concentration of our customers in the oil and natural gas industry may impact our overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic and industry conditions. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables.

The following table shows the percentage of revenues from our significant customers for the three months ended March 31, 2019 and 2018:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Customer A

 

15.5%

 

 

29.0%

 

Customer B

 

*

 

 

21.2%

 

Customer C

 

12.0%

 

 

12.6%

 

Customer D

 

20.0%

 

 

12.6%

 

Customer E

 

10.9%

 

 

*

 

Customer F

 

10.2%

 

 

*

 

 

An asterisk indicates that revenue is less than ten percent.

 

The following table shows the percentage of trade receivables from our significant customers as of March 31, 2019 and December 31, 2018:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Customer A

 

11.4%

 

 

18.4%

 

Customer B

 

*

 

 

17.7%

 

Customer C

 

*

 

 

10.8%

 

Customer D

 

22.4%

 

 

26.1%

 

Customer E

 

14.7%

 

 

*

 

Customer F

 

*

 

 

13.0%

 

Customer G

 

11.6%

 

 

*

 

 

An asterisk indicates that trade receivable is less than ten percent.

 

11


 

Share-Based Compensation

The Company measures share-based compensation costs at the award’s fair value on the grant date. Employee share-based compensation is recognized as an expense over the requisite service period which is typically the period over which the award vests, or upon the occurrence of certain vesting events. Forfeitures are recognized as they occur. Non-employee share-based compensation is recognized over the period in which the related services are rendered.

Income Taxes

Prior to the completion of the Transaction, the Company was a limited liability company and was treated as a partnership for federal and certain state income tax purposes. As such, the results of operations were allocated to the members for inclusion in their income tax returns and therefore no provision or benefit for federal or certain state income taxes was included in our financial statements prior to the completion of the Transaction.

The Company under ASC 740 uses the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized for the future tax consequences of (i) temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and (ii) operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are based on enacted tax rates applicable to the future period when those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the rate change is enacted. A valuation allowance is provided for deferred tax assets when it is more likely than not the deferred tax assets will not be realized.

ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties at March 31, 2019. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.

NOTE 3 – ACCOUNTING STANDARDS

Recently Adopted Accounting Pronouncements

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, (the “Securities Act”), as modified by the Jumpstart our Business Startups Act of 2012, (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

12


 

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU No. 2014-09, Revenue from Contracts with Customers and subsequent amendments thereto. This pronouncement requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods and services. In August 2015, the FASB deferred the effective date of ASU 2014-09. Since the original issuance of ASU 2014-09, the FASB has issued several amendments and updates to this guidance, and additional amendments and updates are currently being considered by the FASB. The Company adopted the guidance on January 1, 2019. The adoption of this ASU did not have a material impact on the condensed consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance will be effective for emerging growth companies for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company adopted the guidance as of January 1, 2019 and did not experience any impact on the condensed consolidated financial statements.

 

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 704): Balance Sheet Classification of Deferred Taxes. ASU No. 2015-17 eliminated the current requirement for organizations to present deferred tax liabilities and assets as current and non-current in a classified balance sheet. Instead, companies are required to classify all deferred tax assets and liabilities as non-current. The standard is effective for interim and annual periods beginning after December 15, 2016. The Company adopted this new guidance as of December 31, 2018, the first period in which the Company had deferred taxes. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. The new guidance will be effective for emerging growth companies for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019; however early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842). Topic 842 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. We expect to adopt Topic ASC 842 using the effective date of January 1, 2020 as the date of our initial application of the standard. Consequently, financial information for the comparative periods will not be updated. We are currently evaluating the impact of our pending adoption of Topic 842 on our consolidated financial statements. We currently expect that most of our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon our adoption of Topic 842, which will increase our total assets and total liabilities that we report relative to such amounts prior to adoption. The Company chose to use the modified retrospective with applied transition method upon adoption of the standard. Under this adoption method, all leases that are in effect and in existence as of, and subsequent to transition date will be applied as of the transition date, with a cumulative impact to retained earnings in that period. Prior period financial statements would be stated under the old guidance ASC 840 with no change to prior periods or disclosures associated with prior period.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the second step of the previous two-step quantitative test of goodwill impairment. Under the new guidance, the quantitative test consists of a single step in which the carrying amount of the reporting unit is compared to its fair value. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the amount of the impairment would be limited to the total amount of goodwill allocated to the reporting unit. The guidance does not affect the existing option to perform the qualitative assessment for a reporting unit to determine whether the quantitative impairment test is necessary. The new guidance will be effective for emerging growth companies for fiscal years beginning after December 15, 2021; however, early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

13


 

NOTE 4 – PREPAIDS AND OTHER CURRENT ASSETS

 

Prepaids and other current assets as of March 31, 2019 and December 31, 2018 consisted of the following (in thousands):

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Prepaid insurance

 

$

4,176

 

 

$

6,011

 

Recoverable costs from insurance

 

 

456

 

 

 

3,540

 

Sales tax receivable

 

 

1,987

 

 

 

1,987

 

Other receivables

 

 

-

 

 

 

895

 

Income tax receivable

 

 

810

 

 

 

810

 

Other current assets

 

 

4,740

 

 

 

3,194

 

Total prepaid expenses and other current assets

 

$

12,169

 

 

$

16,437

 

 

In March 2017, some of our turbine equipment that we use to operate our Clean Fleets was damaged in an accident. As a result, we incurred costs primarily to rent replacement equipment in order to continue our operations. Recoverable costs from insurance included costs of $2.9 million we incurred as of December 31, 2018, which was recovered from the insurance company in January 2019.

NOTE 5 – INTANGIBLE ASSETS

A summary of intangible assets as of March 31, 2019 and December 31, 2018 consisted of the following (in thousands):

 

 

 

Estimated

Useful

Life (in

years)

 

Gross

Carrying

Value

 

 

Accumulated

Amortization

 

 

Net Book

Value

 

As of March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Order backlog

 

3

 

$

15,345

 

 

$

12,277

 

 

$

3,068

 

Trademarks

 

10

 

 

3,132

 

 

 

678

 

 

 

2,454

 

Patents

 

20

 

 

22,955

 

 

 

2,486

 

 

 

20,469

 

Covenants not to compete

 

2

 

 

1,524

 

 

 

1,524

 

 

 

-

 

Customer relationship

 

1

 

 

132

 

 

 

132

 

 

 

-

 

 

 

 

 

$

43,088

 

 

$

17,097

 

 

$

25,991

 

As of December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Order backlog

 

3

 

$

15,345

 

 

$

10,742

 

 

$

4,603

 

Trademarks

 

10

 

 

3,132

 

 

 

600

 

 

 

2,532

 

Patents

 

20

 

 

22,955

 

 

 

2,200

 

 

 

20,755

 

Covenants not to compete

 

2

 

 

1,524

 

 

 

1,524

 

 

 

-

 

Customer relationship

 

1

 

 

132

 

 

 

132

 

 

 

-

 

 

 

 

 

$

43,088

 

 

$

15,198

 

 

$

27,890

 

 

The intangible assets are amortized over the period the Company expects to receive the related economic benefit. Amortization expense related to amortizable intangible assets was $1.9 million and $2.1 million, for the three months ended March 31, 2019 and 2018, respectively, and is included as part of depreciation and amortization in the consolidated statements of operations.

 

14


 

The estimated amortization expense for future periods is as follows (in thousands):

 

Fiscal Year

 

Estimated

Amortization

Expense

 

Remainder of 2019

 

$

4,165

 

2020

 

 

1,461

 

2021

 

 

1,461

 

2022

 

 

1,461

 

2023

 

 

1,461

 

Thereafter

 

 

15,982

 

Total

 

$

25,991

 

 

NOTE 6– PROPERTY AND EQUIPMENT, NET

Property and equipment as of March 31, 2019 and December 31, 2018 consisted of the following (in thousands):

 

 

 

Estimated

Useful

Life (in years)

 

March 31, 2019

 

 

December 31, 2018

 

Fracturing equipment

 

1.5 to 10 years

 

$

562,018

 

 

$

449,685

 

Light duty vehicles

 

5 years

 

 

7,279

 

 

 

6,455

 

Furniture and fixtures

 

5 years

 

 

277

 

 

 

231

 

IT equipment

 

3 years

 

 

5,694

 

 

 

5,339

 

Auxiliary equipment

 

2 to 20 years

 

 

38,892

 

 

 

24,118

 

Leasehold improvements

 

Term of lease

 

 

411

 

 

 

335

 

 

 

 

 

 

614,571

 

 

 

486,163

 

Less: Accumulated depreciation and amortization

 

 

 

 

(167,445

)

 

 

(154,776

)

Property and equipment, net

 

 

 

$

447,126

 

 

$

331,387

 

 

Depreciation and amortization expense was $35.9 million and $23.8 million for the three months ended March 31, 2019 and 2018, respectively.